With residential leasehold law in the spotlight, landlords should be aware of a recent court case which focused upon the method of calculating the premium payable for a residential lease extension.

Whether it is the controversy over escalating ground rents, concerns over the quality of rented property or the demands for tenants to fund improvement works in light of the Grenfell Tower tragedy, it is clear that residential leasehold law is in the spotlight at the moment. The government too appears focused on reform in this area – as demonstrated by the consultation last year on unfair practices in the leasehold market.

One of the new measures identified by the government following that consultation was a joint initiative with the Law Commission to make the process of purchasing a freehold or extending a lease easier, faster and cheaper.

Against that backdrop, it is no surprise that the outcome of the recent case of Mundy v Trustees of the Sloane Stanley Estate [2018] EWCA Civ 35 was much anticipated. The case itself focused upon the method of calculating the premium payable for a residential lease extension under the Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA).

The law

LRHUDA entitles owners of long residential leases to acquire a new lease of their flat for a term of 90 years (plus the residue of their current lease) at a peppercorn rent and on the payment of a premium.

One of the essential components of that premium calculation is the marriage value – the difference between the value of the landlord’s and tenant’s interests in the flat, before and after the grant of the new lease. As part of this calculation, the valuer needs to consider the relationship between the value of lease with and without the benefit of the rights of LRHUDA – this is known as relativity. Historically, valuers have relied upon relativity graphs produced by companies such as Gerald Eve in order to determine the relevant values.

The Parthenia model

In this case, Mr Mundy sought to rely on an alternative method of calculation, known as the “Parthenia model” which is based upon a mathematical construct known as “hedonic regression", which calculates relativity by reference to transactions that pre-dated LRHUDA in a bid to eliminate the impact of the Act on subsequent valuations.

Had the court found in Mr Mundy’s favour, the impact on large estate holders could have been significant, as it may have led to substantial decreases in the premiums payable for future lease extensions.

The outcome

The Parthenia model was, however, decisively rejected by both the Upper Tribunal (UT) at first instance and then unanimously by the Court of Appeal in their judgement on 24 January 2018.

While both the UT and the Court of Appeal acknowledged that none of the current methods were perfect, they found that the Parthenia model should be rejected as it produced an impossible result (where the value of the lease without statutory rights was worth more than the price the lease had actually sold for, with the benefit of those rights). On that basis, the Parthenia model should not, in its current guise, be used in future cases.

What does this case mean for landlords?

In the short term, landlords will continue to use the existing relativity graphs and will be reassured that the Parthenia model has been conclusively rejected in its current form. However, the graphs were not exempt from criticism and the Law Commission have been asked by the government to review how the valuation process under LRHUDA can be simplified. Accordingly, we may anticipate further scrutiny (and potentially reform) in this area in the near future.