On Wednesday 24 January, the Court of Appeal upheld the decision of the Upper Tribunal (Property Chamber) to reject an alternative way of calculating the premium payable for lease extensions (the so-called "Parthenia model"), landing a blow to residential tenants but providing some clarity (for now at least) for all involved in lease extensions and collective enfranchisement valuations.
The owners of long residential leases have a statutory right under the Leasehold Reform, Housing and Urban Development Act 1993 to acquire a new lease of their flat for a term 90 years longer than the residue of their current lease. Ascertaining the price that a leaseholder has to pay in return for the extension is complicated but it is calculated primarily by reference to the loss suffered by the landlord as a result of losing ground rent income and postponing their right to possession, together with (in certain circumstances) half the marriage value, which is a comparison of the value of the landlord and tenants' interests before and after the transaction.
Valuation of the tenant's existing lease, both with and without the benefit of the statutory right to renew, is an integral part of calculating the price of the lease extension. Value has to be adjusted by reference to the relative value of the existing long lease compared to the value of the freehold. Where the market cannot provide the necessary data, valuers have turned to long-established "relativity graphs" based on data collected over a number of years, to ascertain the relevant market relativity.
In Mundy v Trustees of the Sloane Stanley Estate  EWCA Civ 35, Mr Mundy, a tenant looking to extend his lease, sought the court's blessing for a relativity model based on a mathematical construct known as "hedonic regression", or the Parthenia model, named after Parthenia Valuations who created it. This would have had the effect of lowering the premium payable for lease extensions where the existing lease has less than 80 years to run. However, the Court of Appeal agreed with the Upper Tribunal that the Parthenia model should not be used in future cases, at least in its current form. When applied to the facts and data in the Mundy case, the Parthenia model produced an impossible result that bore no resemblance to reality, and that seemed to leave the Upper Tribunal with no choice but to reject it.
The principle of hedonic regression was not rejected out of hand, and the court levelled criticism at all of the major relativity graphs too, but this will have been small comfort to tenants who might have hoped that the Parthenia model might usurp Gerald Eve's graph as the most widely accepted means for assessing relativity. A successful appeal might have led to a general rise in relativity rates, and so a significant decrease in the premiums payable for future lease extensions under the 1993 Act (at least for leases with less than 80 years left to run).
This is unlikely to be the end of the story, with reform of leasehold property law already a hot topic in parliament. Sir Peter Bottomley MP has suggested that if the decision went against Mr Mundy he will push for parliament to intervene through statutory reform. Together with tackling perceived unfair residential ground rents, reform of leasehold valuation may also be on its way.