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The Court of Appeal has today handed down its decision in the Mundy -v- The Trustees of the Sloane Stanley Estate [2018] EWCA Civ 35 on the issue of premiums for statutory residential lease extensions.

The point to be determined by the Court of Appeal was the issue of “relativity” when calculating the premium payable for the lease extension.  Relativity has two aspects to it, the first is for the determination of the value of the freehold with vacant possession, and the second is the relationship between the value of a leasehold interest and the value of that interest on the assumption that the 1993 Act confers no right to acquire any interest in any premises containing the flat nor any new lease (in other words, that there is no right to a lease extension nor to participate in enfranchisement to acquire the freehold of the building). The Judgment recognises that the problem with relativity arises because in the real world most sales of leasehold flats are sales of leases which have the right to a lease extension pursuant to the Leasehold Reform, Housing and Urban Development Act 1993, but the 1993 Act specifies that such rights are to be disregarded.

It is well known that the common method of determining relativity is by the use of graphs produced by chartered surveyors, although a number of different methods have been considered in the past.  In the present case however, the Upper Tribunal considered the Parthenia Model, which is based on a statistical technique which begins with the proposition that the lease has a value which is made up of many component parts (including size, location and length of lease). It isolates each characteristic and gives a value to it. When the Parthenia Model was applied in this case, it  gave a value for the lease without rights under the 1993 Act which was higher than the value of the same lease with 1993 Act rights. The Court of Appeal said that was an impossible result, and agreed with the Upper Tribunal that the Parthenia Model should be rejected. The Court of Appeal also agreed with the Upper Tribunal that the Parthenia Model should not be used in future cases.

As recorded in the Court of Appeal’s decision, the Law Commission have been asked to consider the simplification of valuations under the 1993 Act and perhaps “the holy grail will one day be found”.

Simon Tucker, litigation solicitor at Debenhams Ottaway LLP, comments

“Whilst the Court of Appeal is hopeful of a resolution to the confusion in the future, it seems that the Law Commission has a difficult task ahead of it.   Indeed, the Court of Appeal’s decision comments that the RICS’ working group was unable to produce a definitive graph in the past.  It would therefore seem that substantive reform or definitive guidance is required.  In the meantime, leaseholders and landlords alike are advised to obtain valuation advice from specialist surveyors and solicitors to ensure that they are given a range of realistic premium figures so as to be satisfied that the correct premium figure is arrived at.”

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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