The hotly awaited decision in Mundy v Sloane Stanley Estate is here – and has not revolutionised the valuation of lease extensions as many leaseholders were hoping it might. Instead, the Court of Appeal has reaffirmed that the current method of valuation used to determine the premium payable for a statutory lease extension is the most appropriate method and should continue to be used. Housing Litigation and Management specialist Karl Anders explains.
The price of extending your lease
The Leasehold Reform, Housing and Urban Development Act 1993 (the Act) provides a mechanism whereby a flat-owner with a long lease has the right to acquire, on the payment of a premium, a new lease for an additional 90 years after expiry of the term of their current lease, at a peppercorn rent (known as ‘enfranchisement rights’). In Mundy v The Trustees of Sloane Stanley Estate  Mundy challenged the system used to calculate the premium payable.
The decision has been keenly awaited by landlords and long leaseholders alike because, had the challenge succeeded, long leaseholders could have seen the premiums payable for lease extensions being very significantly reduced, while some of the largest landowning estates in the country could have seen their portfolio valuations slashed in one fell swoop.
The Mundy case related to the ‘marriage value’ and ‘relativity’ elements of the premium calculation, which are applicable in long lease extensions under the Act where the remaining lease term has fallen below 80 years. The Act requires that a number of assumptions are made when determining the marriage value payable. ‘Relativity’, broadly speaking, is the relationship between the valuation of the interest as it actually is and the valuation using the required assumptions. One of those assumptions is that the Act does not give the leaseholder any right to extend their leasehold interest.
The current method to determine relativity is by way of the current industry standard ‘Gerald Eve Graph’. The leaseholder in this case argued that a different method, namely the ‘Parthenia model’ should be used. At first instance, the Upper Tribunal (UT)  undertook detailed calculations and compared figures produced using the Gerald Eve Graph and the Parthenia model. The UT decided that the Parthenia model produced an “impossible” result, as it calculated the value of the lease without rights under the Act as being more valuable than a lease with rights under the Act – there was no dispute that a lease with enfranchisement rights would be more valuable than the same lease disregarding those rights. The leaseholder argued that the Act precluded a valuer from having any regard to the lease attracting rights under the Act and permission to appeal to the Court of Appeal was given on this point.
Keenly awaited, controversial decision
The Court of Appeal found that the above point did not raise a point of law. Which model to use was a question of fact and there was ample evidence of the shortcomings of the Parthenia model for its use to be rejected by the UT.
The Court of Appeal disagreed with the leaseholder and stated that a valuer should look for an analogy as close as possible to that which he has to value. In this scenario, the closest analogy is the lease as it currently is (i.e. with enfranchisement rights). Adjustment should then be made to take into account any relevant facts or assumptions and the court reiterated that there is nothing in the Act prohibiting a valuer from looking at a real world lease to assist in determining value on the required assumptions. (The Court continued that if leasehold transactions in the real world were eliminated, then there would be no evidence to demonstrate the value of any interest and nothing to which even the Parthenia model could be applied. Clearly, that would be so impractical as to be unworkable.)
The Court of Appeal ultimately confirmed that the UT decision remains binding authority that it is not appropriate to use the Parthenia model to calculate marriage value under the Act.
Unfortunately for long lease flat-owners, there is no change to how extension premiums are calculated at present. However, whilst the ruling in this case is a significant victory for freehold owners of large leasehold estates, the Department for Communities and Local Government recently said that it would be working with the Law Commission to make the process of extending a lease much easier, faster and cheaper. Coupled with the intention of the claimant to appeal the decision, it seems that the spotlight will remain on this issue in the near future. In addition the UT and the Court of Appeal did refer to the shortcomings of the Gerald Eve Graph and noted that the valuation method can produce an inflated premium figure. The Court of Appeal commented that “[i]t may be, therefore that the holy grail [for valuations] will one day be found“.
Walker Morris will continue to monitor and report on developments.
  EWCA Civ 35
  UKUT 223 (LC)