Lease extension - calculating the premium

The Court of Appeal has held that when calculating the premium to be paid for an extended lease regard can be given to real world transactions to determine value.

Background

Under the Leasehold Reform, Housing and Urban Development Act 1993 Part 1 (the Act) certain tenants with long leases of flats have the right to extend their lease. The Act states that the new lease will be for a term of 90 years in addition to the current unexpired term of the existing lease and with a peppercorn (zero) ground rent. A premium is payable for the new lease and that is calculated in accordance with methodology outlined by the Act.

The premium is the total of three elements:

• The amount by which the open market value of the landlord's interest in the flat is reduced as a result of the grant of the new lease;
• 50% of the 'Marriage Value' (where the existing lease has an unexpired term of less than 80 years). The marriage value is essentially the potential for increase in the value of the flat arising from the grant of the new lease; and
• Compensation for any other loss that the landlord will suffer due to the grant of the new lease, such as the lowering of the value of any other property the landlord owns.

To arrive at the marriage value, relativity has to be considered. Relativity measures the difference between the value of the lease with and without the right to renew under the Act. The value of the lease with the right to renew is the 'real world' value.

The facts

In Adrian Howard Mundy v Trustees of the Sloane Stanley Estate [2018] EWCA Civ 35, Mr Mundy appealed against a finding of the Upper Tribunal about how the premium for his new lease was calculated. His existing lease had an unexpired term of 23 years.

The original dispute concerned the calculation of the landlord's share of the marriage value.

The real world value of the existing lease was agreed between the parties.

It was the value of the hypothetical interest to be granted that was disputed. The Upper Tribunal had considered various methods of calculating this value, including the Gerald Eve relativity graph and the Parthenia model (types of mathematical constructs traditionally used by valuers). These produced different values. In particular, the Parthenia model calculated the hypothetical lease without the right to renew as being more valuable than the actual lease with the right to renew, which was a nonsense. It was therefore rejected by the tribunal in favour of a comparable-based approach, where actual properties similar to the property to be valued were compared.

Mr Mundy appealed the Upper Tribunal's decision.

Decision

The Court of Appeal dismissed the appeal. It agreed with the Upper Tribunal that the Parthenia model should not be used and that real world transactions could be looked at to determine value.

It said that: 

• Whether to accept the Parthenia model was a question of fact; 
• Property valuation was usually done by comparing similar properties to the property to be valued, with appropriate adjustments - the fewer differences between the comparable and the property being valued, the more weight could be given to the comparable; 
• The comparable in this case was the same form of lease sold almost exactly before the valuation date; the only adjustment made had been to reflect the difference between a lease with rights under the Act and a lease without rights; 
• Nothing in the relevant parts of the Act said that valuers could not look at real world transactions to determine value on the assumptions required under the Act.

Comment

This ruling will be a disappointment for leaseholders seeking new leases under the Act as the Parthenia model would have resulted in a significant saving on the premium. This is a niche and complex area of law and valuation practice. The Law Commission is currently looking at how valuations under the Act can be simplified and it is hoped that this will bear fruit in due course in order to provide more certainty in valuation practice for both tenants and landlords.