The case of Mundy v The Trustees of the Sloane Stanley Estate has confirmed the approach that should be taken in determining valuation calculations for leases with fewer than 80 years remaining, rejecting a more leaseholder-friendly approach to valuations.
Mundy concerned the valuation of a lease extension and specifically the value of “no act rights” under the Leasehold Reform Housing and Urban Development Act 1993, when determining relativity.
Marriage value in long leases
Where the lease has less than 80 years remaining, leaseholders are required to pay 50% of the marriage value to their landlord when extending the lease. The marriage value is the difference between the value of the short lease and the value of the new extended lease.
So valuation becomes the key and relativity is the word used to describe the relative value of a leasehold property, to its freehold value.
There have been a number of attempts over the years to assess the relative value using graphs to determine value. The Gerald Eve graph, which was developed by the Grosvenor Estates valuers, was pitched in Mundy against an assessment called the Parthenia model, developed by Parthenia Valuations, which argued a higher relativity and a lower premium for leaseholders.
The Court of Appeal rejected the leaseholder-friendly Parthenia model but there was also general criticism of the methodology of the other models. The received wisdom is that the process is in dire need of a reliable and easily applicable method of determining relativity that can also work across our varied regional property markets.
The Mundy decision has been received with much disappointment by leaseholder-led commentators and there is no doubt it creates a feeling that the current valuation methodology is not appropriate – and that there is not currently another easily accepted and forecastable option.
Who will feel the impact of the Mundy decision?
It is however important to note who the decision could specifically affect. Where a lease has more than 80 years remaining and is outside prime central London, then one could argue that, despite the decision being beneficial for a freeholder, the valuation impact is diminished.
However – for leaseholders with fewer than 80 years or with a leasehold property in a prime residential area, the impact of the Mundy case will be more keenly felt.
The question now is will the Government step in to set a new statutory framework as part of current leasehold reform proposals? Philip Rainey QC commented in a recent IRPM bulletin: “Governments usually do not wish to amend laws which are the subject of a pending appeal. So (whatever one thinks of the result) the appeal decision opens the way.”
Specialist lease extension expertise is essential
In the meantime a period of lack of clarity is likely and it makes the negotiation considerably more balanced towards the freeholder. As we have always maintained at Brady Solicitors it is crucial when considering a lease extension to use a specialist lease extension solicitor and valuer.
We would also recommend applying to extend your lease before it hits the 80 year point.
Read more about Brady Solicitors specialist and successful lease extension services.