Lease extensions: Is the clock about to stop for Parthenia?

In a widely anticipated decision, the Court of Appeal gave an unexpectedly swift judgment in Mundy v Trustees of Sloane Stanley Estate [2018] EWCA Civ 35; [2018] PLSCS 12. It unanimously rejected a leaseholder’s appeal against the decision of the Upper Tribunal (Property Chamber) (UT) on issues on assessing “relativity”. In particular it concluded that the so-called Parthenia model – described so memorably by the UT as a “clock which strikes 13” – had been correctly rejected by it, and should not be used in future valuation disputes. It was common ground that using the Parthenia model produced higher relativities and, in consequence, significantly lower premiums to be paid by leaseholders. Parthenia and relativity In Mundy the Upper Tribunal (Property Chamber) determined the premiums to be paid in three claims for new leases (under the Leasehold Reform, Housing and Urban Development Act 1993). The main issue, and the one which attracts most attention, is whether the Parthenia approach to assessing relativity can be used. The UT decided that the Parthenia model was flawed and that it could not be relied on; in its present form at least. The UT determined the premiums payable on the basis of the other valuation evidence. Leasehold relativity may be defined as the value of the current lease divided by the freehold value of the same dwelling with vacant possession (this is expressed as a percentage of freehold value). Part of the process for measuring relativity requires a valuation of the current lease as if it has no rights under the Act. As most, if not all, flats held on long leases enjoy rights under the Act it is virtually impossible to find market evidence of sales of flats that lack statutory rights. Over the years, valuers have compiled graphs of relativity, which started with the “Gerald Eve” graph based on transactions of leasehold houses with rights under the Leasehold Reform Act 1967. Since the enactment of the Leasehold Reform, Housing and Urban Development Act 1993 it and other graphs have been developed as an aid to assess relativities. These graphs (which show the percentage relativity at different lease lengths) are themselves based on settlements and other information. As they are ultimately an expression of a valuer’s opinion, their utility has often been criticised, though in other cases the UT (previously the Lands Tribunal) has concluded that they can be used (doing one’s best) along with any other market evidence a valuer may have (see: Nailrile Ltd v Earl Cadogan [2009] 2 EGLR 151). This brings one to the Parthenia model. It is based on empirical research into transactions in London during the period 1987 to 1991, when flat leases had no rights. Using a statistical technique known as hedonic regression, the research sought to identify specific market factors, such as unexpired lease lengths, and their effect on values. The research calculated or generated relativities based on transactions where the properties had no statutory rights. Parthenia model in the tribunal Despite its intellectual appeal, the Parthenia model has not attracted universal acclaim. It was criticised in an earlier decision of the UT (Kosta v Trustees of the Phillimore Estate [2014] UKUT 0319 (LC); [2014] PLSCS 242) as the claimant leaseholder failed to adduce “valuation evidence” in addition to using the Parthenia approach. The UT also concluded that the model suffered from methodological flaws. Nevertheless, some leaseholders continued to rely on the Parthenia approach and, as a result, a further application to the UT was inevitable. In Mundy three claims were transferred by the First-tier Tribunal (Property Chamber) to the UT for a determination. One of the main criticisms of the Parthenia model made by the UT is that the parties, having agreed the market value for one of the leases based on transaction evidence, then applied the model, which produced a figure above the market value even though it was treated as having no rights. It suggested that the value of a lease without 1993 Act rights was worth more than the lease was actually sold for with Act rights. This was described as “an impossible result” – and, indeed, “the clock which strikes 13”. The appeal The court reviewed the way in which the UT had valued the premium payable. It rejected the leaseholder’s chief submission that it was incorrect to compare the values of the lease with and without statutory rights. The decision whether to accept or reject the Parthenia model (unless perverse) was a question of fact for the UT. It had carefully examined the Parthenia model following a nine-day hearing, with extensive expert evidence, and concluded that it was defective. In view of the sustained criticism of the Parthenia model by the experts, there was ample evidence on which the UT could rely and to support the tribunal’s rejection of the model. The search for the holy grail Giving judgment, Lewison LJ said: “The holy grail would be a method of determining relativity which is both reliable and simple to apply.” One of the tasks for the Law Commission in its review of residential leasehold law is to consider ways of making valuation fairer. Will it be able to produce a formula that meets these admirable goals? James Driscoll is a solicitor and writer