Since May 2016, the top end of the relative premium range we have quoted in lease extension cases has often been higher because of an Upper Lands Tribunal case involving three properties in Prime Central London (known as Mundy) which, amongst other issues, set a precedent for how to assess ‘relativity’ (the difference between short lease and long lease values) using relevant market evidence where available (instead of the established method of using ‘relativity graphs’). This way of assessing relativity was not a new concept but Mundy was the stand out case in endorsing this method. This way of assessing relativity potentially can benefit either party although in our experience to date it overwhelmingly has benefited freeholders, enabling them to claim a higher premium for lease extensions, in certain circumstances (where the existing lease terms are under 80 years). Certain aspects of the Mundy case were referred to the Court of Appeal but the Court of Appeal (in January 2018) has dismissed the appeal on all grounds.
Over the last year or so there has been growing momentum/pressure on the Government (particularly in light of the ‘Ground Rent Scandal’ involving high ground rents on new build leasehold houses) to review the leasehold market in the UK and to consider making changes, probably by statute, to provide more protection to lessees. In December 2017 the Department for Communities and Local Government said it would be “working with the Law Commission to make the process of purchasing a freehold or extending a lease much easier, faster and cheaper.”
We just do not know at this time to what extent there will be changes or when. With the Mundy appeal being dismissed it is likely that the Government will be reviewing the way relativity is assessed as part of the review process.
Some 10 years ago the Lands Tribunal asked the RICS (Royal Institution of Chartered Surveyors) to try to develop a satisfactory, fair model that could be used as an accepted industry standard for assessing Relativity. They were not successful – the RICS Research Report produced in 2009 provided some guidance with the use of additional relativity graphs (for the first time graphs covering Greater London and England ie. excluding Prime Central London where the market can be very different to the rest of the country) but all of these graphs were open to technical criticisms. The property market in the UK has experienced so many changes in the last 10 years and it is generally accepted in the industry that the graphs included in the 2009 Research Report do not reflect current market conditions.
There is no question that there has to be changes to leasehold tenure, particularly covering Onerous Ground Rents, costs/procedures in the leasehold tribunal process and adopting a much clearer process on assessing relativity, whether market evidence-based or standardised graphs (a well specified Hedonic Regression model could still be the way forward).
On the relativity point, it has defeated the RICS, the Tribunals and everyone else – the Government has its work cut out!