The Court of Appeal has just dismissed the eagerly awaited appeal of the decision in Mundy v The Trustees of the Sloane Stanley Estate. Consequently, valuers should continue following the guidance set out in the Upper Tribunal’s decision. Leaseholders with less than 80 years remaining on their lease will feel the pinch but landlords should see a benefit following the dismissal.
Mundy concerned the valuation of a lease extension under the Leasehold Reform Housing and Urban Development Act 1993, specifically the value of “no act rights” when determining relativity. In leases which have less than 80 years remaining, leaseholders are required to pay 50% of the “marriage value” (namely, the difference between the value of the short lease and the value of the new extended lease) to their landlord when extending the lease.
Relativity is the word used to describe the relative value of a leasehold property, to its freehold value. One assumption that valuers are required to make is that the property has no “act rights”, namely it should be valued as if it were not eligible for any of the rights afforded to the leaseholder by the Leasehold Reform Housing and Urban Development Act 1993 (including the right to an extended lease).
Many valuers have attempted to codify relativity leaving us with the well known “graphs of relativity”. There are numerous graphs in existence which have been used by valuers and tribunals alike to determine the value of lease extensions, since the early 2000s with very little by way of substantive challenge. Two of the main graphs are the Gerald Eve graph and the Savills 2002 graph, both of which have been scrutinised to a degree by Mundy.
Parthenia Valuations however established an alternative valuation method for relatively known as the “Parthenia” model, which uses a statistical technique called hedonic regression. Parthenia claimed to have been able to isolate the effect of lease length in respect of the value of a property and was used by the leaseholders in the Mundy case to argue a higher relativity (and consequently, a lower premium).
Parthenia’s USP was that it analysed sales data from pre-1993, the logic being that this would more accurately predict relativity as there need be no subjective interference with the value of “Act rights”. As the data used was all “pre-Act” it followed that the value of act rights was naturally ignored. The issue in Mundy however was that the Parthenia model determined that the value of the property without act rights, was more valuable than the agreed market value (evidenced by a sale of the subject property at virtually the same time as the valuation date). The tribunal notoriously referred to the model, following this absurdity, as the “clock that strikes 13”. The tribunal held that the Parthenia model should be disregarded but also called the existing graphs into question, leaving us with the position that the Tribunal prefers real world evidence of relativity where it is available.
The Upper Tribunal in their judgment recognised that relativity is a “fruitful source of disagreement” and expressed regret at not being able to settle on an agreed method however did give some useful guidance in the 2016 case. It confirmed that it could not support the Parthenia model. It also confirmed that recent sales evidence of the subject flat is a useful starting point for determining the value of the existing lease without Act rights. Where there is no recent sales evidence valuers will need to consider adopting more than one approach, by referencing reliable graphs and for the valuer to use good sense in determining the strengths and weaknesses of the methods given the specific factual circumstances.
The leaseholders affected by this case appealed and the appeal has now been dismissed.
If you have any concerns or queries about the Mundy case and how this might affect you, please do not hesitate to get in touch.
Sarah Goodall, Solicitor at Bolt Burdon