Leasehold enfranchisement specialists are eagerly awaiting the outcome of a case being heard by the Upper Tribunal (Lands Chamber) (“UT”) that could transform the way valuations are carried out in future.
The tribunal will conclude the hearing early next week, with a ruling anticipated later this year that will focus on the complex issue of “relativity” – the relationship, expressed as a percentage, between the value of the existing lease of each flat and its freehold vacant possession value. Relativity is an essential component in determining the premium payable for the grant of a new long lease.
The case involves claims made by tenants of three central London flats for the grant of new long leases of those flats under Chapter II of Part I of the Leasehold Reform Housing and Urban Development Act 1993. Because of the significance of the issue common to all three, and many similar applications, it was fast-tracked to the UT.
Piers Harrison, a barrister at Tanfield Chambers, explained that the issue raised is how the relativity of short leases to long leases is to be calculated under the Act.
He said: “Consequently the decision will affect every enfranchisement calculation.
“Until now, the guidance from the Upper Tribunal has been to do the best one can with the existing graphs of relativity and adjusting real world evidence by making a discount for the existence of the right in the real world to extend the lease.”
However, in this case, the tribunal is being asked to determine the value of the “hedonic regression method”.
Harrison continued: “That method seeks to derive a relativity graph from the statistical sifting of historic sales data. But it is not only that method that was under scrutiny. An essential part of the case for the validation and use of that method was an attack on the statistical reliability and construction of the existing graphs.
“The main argument in favour of the graphs is that they are used by the market and the valuation one is obliged to carry out under the Act is a sale ‘on the open market’. One difficulty for the claimants is that at some lease lengths the relativity derived from the hedonic regression method is above real world relativity. That is counter intuitive as one would always expect that a lease without the right to extend (which is what is valued under the Act) would be less than the equivalent lease in the real world (where the tenant has the right to extend).
“The tenant’s rebuttal to that point is a ‘chicken and egg’ argument i.e. that this was only so because the market relied on the existing graphs and would continue to do so until the hedonic method was validated. As the hedonic method was more rigorous and reliable than the existing graphs the tribunal should supply that validation.”
“The possible outcomes appear to be as follows: that hedonic regression is preferred to the graphs; that it is ranked equally with the graphs as an approach that ought to be taken into account; that it is rejected in this case because it was not widely known to the market as at the valuation date; or that it is rejected as an unsound approach.
“If it were rejected in this particular case because it was not widely known about but the judge made positive noises about the methodology that would leave the door open to its use in the future.”
Trustees of the Sloane Stanley Estate v Lagesse and Munday, Aaron v The Wellcome Trust Upper Tribunal (Lands Chamber) 12 February 2016
