Court of Appeal rejects new 'relativity' model for residential leasehold valuations

Leaseholder Adrian Mundy had challenged the valuation method currently in use on his Chelsea flat, which was commissioned on behalf of the Grosvenor Estate more than 20 years ago. He had argued that the mathematical models used on the so-called 'relativity graphs', which set the value of short leases relative to the freehold, awarded too much to the freeholder and that a valuation model proposed by Parthenia Valuations should be used instead.

The Court of Appeal's rejection of the case confirms a 2016 decision of the Upper Tribunal (Lands Chamber) (UT). The appeal court also backed the UT's finding that the Parthenia model should not be used in future cases, finding that it was "well within the scope of its functions in ruling out future use of the Parthenia model in its current form".

"One of the functions of the UT is to provide definitive guidance to tribunals on valuation matters," said Lord Justice Lewison, giving the judgment of the court.

The case "has attracted a great deal of attention because how best to determine relativity has been a contentious question for quite some time", according to property disputes expert Nicola Charlton of Pinsent Masons, the law firm behind Out-Law.com.

"Over the years a number of methods of determining relativities have been considered by tribunals, but none of them have proved to be without flaws. The Court of Appeal admits that the Gerald Eve graph is not perfect, but it has been accepted as the least unreliable method to determine relativity and the 'holy grail' in the words of Lord Justice Lewison - a method of determining relativity which is both reliable and easy to apply - is yet to be found," she said.

"The result of this case is that valuers should follow the approach to leasehold relativity suggested by the UT which is good news, because this is likely to lead to more consistent valuations. Also, the decision is likely to dispose of all cases currently before the UT where the tenants rely only on the Parthenia model," she said.

The 1993 Leasehold Reform Act gives a leaseholder the right to acquire a new long lease at a peppercorn rent on payment of a premium. The dispute in this case related to how one part of that premium, known as the 'marriage value', should be calculated towards the end of a long lease. The UT considered a number of 'relativity graphs' as part of its calculation, including the "industry standard" graph produced by Gerald Eve for the Grosvenor Estate but now made publicly available. While the UT had "concerns" about the suitability of this graph, it found it infinitely preferable to the Parthenia model.

The Parthenia model was subjected to "sustained criticism" by various industry experts during the UT's hearings. When applied by the UT to a test case in front of it, in which the value of the lease had been agreed, it produced an "impossible result". When applied to the three test cases, the model came out with values far removed from those calculated by the UT on the evidence. The Gerald Eve graph and another graph, developed by Savills, were, however, broadly in the same range.

The Court of Appeal ultimately concluded that whether to accept or reject the Parthenia model was "a question of fact for the UT", rather than a question of law.

"In view of the sustained criticism of the Parthenia model by the experts called on behalf of the landlord, there was ample evidence upon which the UT could rely," Lord Justice Lewison said.

Campaigners had claimed that a ruling in favour of the leaseholder which backed the use of the Parthenia model could have effectively halved the cost of a leasehold extension, Nicola Charlton said.

"The decision will undoubtedly come as a blow to leaseholders who feel that they have to pay a higher price than they should to extend their leases," she said.

"However, this is unlikely to be the end of the story as the government confirmed in its response to its consultation on tackling unfair leasehold practices that it will be working with the Law Commission to make the process of purchasing a freehold or extending a lease 'much easier, faster and cheaper'. This is still very much a watch this space," she said.