A landmark Court of Appeal ruling that could be critical in determining the value of over two million homes in England and Wales with leases of under 80 years is a “devastating outcome” for leaseholders.
That was the view of leasehold enfranchisement specialist Leasehold Solutions, which was commenting on the case of Mundy vs the Sloane Stanley Estate.
The Court of Appeal ruled in favour of the trustees of the Sloane Stanley Estate, which owns numerous freeholds in London’s Chelsea.
It upholds a previous verdict by the Upper Tribunal (Lands Chamber) in May 2016.
Leaseholders claimed they have been over-paying by up to 50% for lease extensions and freeholds but Leasehold Solutions claimed the Court of Appeal’s verdict meant that leaseholders would now be forced to pay even more for lease extensions and freehold acquisitions.
The outcome means that an alternative relativity graph developed by James Wyatt of Parthenia Valuations, which would have lowered the costs for lease extensions where the remaining lease length has dropped below 80 years, cannot be used to calculate the value of a lease extension.
Louie Burns, managing director of Leasehold Solutions, said: “This verdict is an absolutely devastating outcome for leaseholders up and down the country, not just those living in prime central London. It is so disappointing to see that yet again the courts have backed the interests of wealthy freeholders.
“The court’s decision to uphold a lower relativity in leasehold valuations means that freeholders will receive even more money from leaseholders, as leaseholders will now be forced to pay more for their lease extensions – to the tune of many millions of pounds.
“The valuations model at the heart of this case estimates that leaseholders are currently being overcharged by £480m a year. Over the past two decades that’s a staggering £9.6bn that has been taken from householders due to flawed valuation methods that have favoured freeholders at the expense of leaseholders.
“The Government has recently said that it is willing to tackle unfair practices in the leasehold market, so it is extremely disappointing that the courts have yet again ruled in favour of wealthy freeholders and their lackeys, all of whom have a vested interest in maintaining the unjust status quo.”
I agree with Louie this is confirmation of one rule for the rich and one for the poor.
The government must act now.
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I’m firmly of the opinion that the Government have no choice but to step in and change the law for lease extensions, etc.
The method used to value a lease extension is not intrinsically unfair, although most people who own a leasehold property might disagree with that. The problem is that most people do not understand that buying a property with a lease comes with a couple of basic assumptions that nobody EVER talks about:
1. You’re on the hook to pay ground rent for the duration of the lease.
2. At the end of the lease you give the keys back to the freeholder and walk away with NOTHING.
If you want a lease extension then you have to pay to get rid of the ground rent (for example 50 years at £200 per annum is worth between £2,760 and £3,150 in today’s money) and because you would be giving the flat back to the freeholder at the end you have to compensate them for putting it off by 90 years. You might think that the second of these is properly unfair, but it is what leasehold means – if you don’t like it then don’t buy it.
These two things should mean that a leasehold property is always worth less than an equivalent freehold property, however with the housing shortage in the UK coupled with the fact that nobody ever talks about the meaning of “leasehold” – the value, for example, of two flats converted from one house is usually considerably more than the value of the original house.
In the fairly short term we may actually find that this is a great result for leaseholders.
The Upper Tribunal (UT) determined against the Parthenia valuation model that the leaseholder’s surveyor used because it gave a result that was unjustifiable for one of the three flats in the original case.
The Court of Appeal is only allowed to decide on points of law, not on the valuation techniques employed by the surveyors at the UT.
In fact, the Court of Appeal had no choice but to dismiss the case because the appeal did not challenge a point of law.
You might even say that it should not have gone to appeal in the first place.
It looks likely now that the Government will now enforce amounts to be applied in the lease extension formula that everyone has been using from the Leasehold Reform Housing & Urban Development Act 1993.
The most important of these is Relativity, which the Parthenia model was trying to address. It is a measure of the relative difference in value between a flat with a long lease and a flat with a short lease.
Relativity is the issue that takes up the vast majority of tribunal cases and is essentially pointless because it is almost impossible to pin down.
The tribunals prefer immediate market evidence – but one or two flat sales cannot be considered statistically relevant and therefore basing the premium for a lease extension on thousands of transactions that have been “adjusted” to take account of things like size and condition seems a logical thing to do.
As I say, in the fairly short term this may actually work out in leaseholders’ favour because it is absolutely obvious that the current system is definitely broken and needs fixing urgently.
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Sloane Stanley also recharge via leases hefty buildings insurance premiums onto leaseholders …the other estates are probably doing the same as they all share information and club together.
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