Flat owners exercising their right to a new longer lease must pay a premium to the landlord

Winckworth Sherwood Partner, Mark Vinall, discusses how flat owners exercising their right to a new longer lease may be paying a premium to the landlord. This is made up of the reduction in the landlord’s interest that flows from the extension and, where the outstanding term of the lease is below 80 years, the landlord’s 50% share of marriage value. To estimate the marriage value, the worth of the flat on its existing short lease and with the extended lease needs to be evaluated. The comparative values are known as “relativity”. Buyers previously used to primarily base their calculation of relativity, and so the price they were prepared to pay for a flat held on a short lease on graphs (such as the 1996 Gerald Eve graph).  Recent cases have demonstrated that there is a need to look for evidence of relativity before relying on graphs and that the evidence needs to be sufficiently ‘fresh’. It is also important to note that these graphs are applicable outside the Prime Central London too.
 

Flat owners exercising their right to a new longer lease must pay a premium to the landlord.  That is made up of the diminution in the landlord’s interest that flows from the extension and, where the remaining term of the lease is below 80 years, the landlord’s 50% share of marriage value.

To calculate the marriage value element the value of the flat on its existing short lease and with the extended lease needs to be assessed.  The comparative values are known as “relativity”.

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Buyers of short lease flats used to base their calculation of relativity and so the cost of obtaining an extension (that they would then work out what they were prepared to bid for the short leasehold flat) on graphs generated by valuer’s expert in the area i.e. the 1996 Gerald Eve graph.

The Upper Tribunal (UT) guidance decision in Trustees of the Sloane Stanley Estate v Mundy [2016] UKUT223 (LC) discredited some of the existing graphs and directed valuers to firstly look for comparable market evidence as to the price payable for a like flat on a short lease. and where that cannot be foundto use the most reliable without Act rights graph or use a with Act rights graph, then making an appropriate deduction for the benefit of the Act. Further graphs have been developed.

Over the past year or so there have been a number of Upper Tribunal decisions fleshing this out further.

In Reiss and Ironhawk Limited the UT:

  1. Clarified that the reference in the Mundy decision to needing reliable market transaction evidence concerning the existing lease with rights “at or near the valuation date” meant a sale  that was more recent than 2.81 years before the relevant valuation date.
  2. Reminded that positive evidence is required that a prior sale is not reliable (Windward Properties Limited).
  3. Reiterated the preference for market evidence (Mallory v Orchidbase Limited [2016] UKUT468) andMundy’s reference to greater weight rate being given to a comparable that requires a fewer adjustments and that valuers needed to consider adopting one of the above graph approaches where there were no transactions of the subject property close enough to the valuation date to take a relativity reading from.
  4. Clarified Mundy’s preference for transactional evidence read in light of the Orchidbase decision where flats sold in the same block within a few months of the valuation date were found to be satisfactory to this end means there is a low hurdle to relying on a graph.
  5. Gave guidance as to the graphs that can be relied upon; the landlord’s valuer was found to be reasonable to use the Savills 2002 Enfranchiseable Graph where that was broadly supported by the relativity derived from relevant market transactions for which it looked to the comparables it had discounted for other purposes in the same decision. Nesbitt & Co’s graph was trumped by the relativity derived in this way supported by Savills’ graph. Savills Enfranchiseable 2015 Graph was also referred to as approved.
     

In the case of Mrs O Oliyide and Elmbirch Properties Plc the UT:

  1. Did not accept that relativity determined by the Tribunal in another matter could act as the foundation in another case (there the earlier decision was an uncontested appeal based on limited evidence where the Tribunal had expressly stated it shouldn’t be relied upon as a precedent for relativity levels or other adjustments in other cases but which should continue to be determined on the evidence adduced in those cases).
  2. Stated that in the absence of market evidence it was acceptable to rely on graphs.  The valuers referred to the 1996 Gerald Eve graph and the Savills Unenfranchiseable graph 2015 of which the Savills graph was preferred on the basis that the more recent 2016 Gerald Eve graph showed a relativity close to it.
  3. These graphs were approved for use for a property outside London, in this case in the West Midlands.
     

In the case of the Trustees of the Barry and Peggy High Foundation and C Zucconi and M Zanre again there was an absence of transactional evidence of the sale of comparable flats and so the UT had to determine which graph reliance could be placed on.

  • The Tribunal at first instance had preferred the five RICS Greater London and England graphs (so ignoring the London based graphs produced by Gerald Eve and Savills) as the property was not located in prime Central London.
  • The UT rejected the argument that the Tribunal in the first instance had taken account of an irrelevant consideration by placing reliance on the average of the five relativity graphs for Greater London and England produced by the 2009 RICS report.  It pointed to seven graphs having been used in the case of Kosta v Trustees of the Philimore Estate [2014] UKUT0319 and referred to Mundy finding that on the valuation date in question (2014) a prospective purchaser would have referred to the Gerald Eve 1996 graph over and above the RICS graphs so it would be led by what the market placed reliance upon rather than leading the market by saying what it should follow.
  • Consequently,  the UT found that while the Tribunal in the first instance “did not err by having regard to the average of relativities in the relevant RICS graphs they were wrong not to have considered the Gerald Eve and Savills graphs as well solely because the property was not located in prime Central London”.
  • Therefore  a graph based on Prime Central London evidence didn’t preclude its use outside that area.  It pointed to the case of Midland Freehold Limited’s and Speedwell Estates Limited’s appeals [2017] relating to flats in Northfield and Sutton Coldfield where the Upper Tribunal determined that the Savills 2015 (Enfranchiseable) and 2016 (Unenfranchiseable) graphs could be used in those appeals.
  • It referred with approval to the Ironhawk decision and the Tribunal’s determination there that the most reliable method of valuation was to use the Savills 2015 Enfranchiseable graph.  It added to that the Savills 2016 Unenfranchiseable graph and the Gerald Eve 2016 (Unenfranchiseable) table and graph.
     

Conclusion

These cases demonstrate that there is a high bar to find transactional evidence of sufficient freshness and weight to stand as a comparable and so avoid having to fall back on graphs instead and that where graphs are to be used then the three London graphs referred to are of application for properties outside Prime Central London too.

There has been anecdotal evidence that the relative value of short leasehold interests outside prime Central London is significantly lower so producing a greater marriage value figure payable to the landlord on extension.  If that is the case then the direction of travel referred to above may operate to assist flat owners in their claims.

Read the full article on Winckworth Sherwood’s website

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