In January 2018, the Court of Appeal upheld the decision of the Upper Tribunal in Mundy v Trustees of the Sloane Stanley Estate which rejected the Parthenia model as a means of calculating marriage value to determine the premium payable for a lease extension under the Leasehold Reform Housing and Urban Development Act 1993.
Background
Under the Leasehold Reform, Housing and Urban Development Act 1993 (the "Act"), upon payment of a premium, long leasehold owners of flats have a right to acquire a new lease of the flat for a term of 90 years plus the residue of the existing lease, at a peppercorn rent. The premium consists of three components, one of which is the landlord's share of 'marriage value'.
Marriage value represents the difference between the value of the landlord's and the tenant's respective interests in the flat, before and after the grant of the new lease.
Relativity is a valuation concept used in the calculation of marriage value which measures the relationship between the value of a lease with and without the benefit of rights under the Act. The most common method of determining relativities has been to use relativity graphs which are produced by a number of surveyors' firms plotting the relationship between the value of a lease compared to the value of the freehold based on market data.
In this case, the Upper Tribunal considered a number of different relativity graphs, including the Gerald Eve graph which the Upper Tribunal regarded as the 'industry standard'.
In addition to the relativity graphs, the Upper Tribunal also considered an alternative model known as the Parthenia model. The Parthenia model was a piece of computer software which used a statistical technique known as hedonic regression analysis to determine the value of a lease.
The decision
The Upper Tribunal found that the Parthenia model produced an impossible result. It was agreed that rights under the Act are valuable but, when the Parthenia model was applied to the agreed value of the real world lease in this case (i.e. a lease with rights under the Act), it produced a higher value for the lease without rights under the Act than the same lease with rights. The Upper Tribunal commented that the Parthenia model is "a clock which strikes 13".
The tenant argued that it was illegitimate to compare the value of the lease with rights under the Act to the value of the lease without such rights. It contended that the relevant assumptions under the Act preclude the valuer from having regard to any leasehold transactions in the real world where the lease attracts rights under the Act.
The Court of Appeal found that the tenant's submission did not raise a point of law. The question of whether to accept or reject the Parthenia model was a question of fact and there was ample evidence upon which the Upper Tribunal could rely to reject the Parthenia model.
The tenant went on to argue that the reason why the value of the lease in the real world is an illegitimate comparator is because the market itself has been corrupted by the influence of the Gerald Eve graph. The Court of Appeal found that this was an overstatement and confirmed that market evidence should be considered, even if the market is not perfect.
The tenant sought permission to appeal to contend that the Act requires the valuer to assume that there is a 'no Act world' – i.e. that the market is one in which no one has rights under the Act - rather than a 'no Act building'. The Court of Appeal rejected this argument and refused permission to appeal. The Act cannot be construed in this way and the court noted that it was expressly conceded before the Upper Tribunal that the 'no Act' assumption is confined to the building within which the flat is situated and does not extend to the whole world.
The Court of Appeal agreed with the Upper Tribunal that the Parthenia model should not be used in future cases in its current form.
The Court of Appeal concluded by noting that the Government has invited the Law Commission to consider the simplification of valuations under the Act and so there is hope that the "Holy Grail will one day be found".
The article first appeared in our Real Estate Bulletin - June 2018.
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