The 47 Philimore Gardens decision raises some interesting questions about relativity and they are discussed in some more detail here. As mentioned earlier the website www.graphsofrelativity.co.uk can be used to show the impact that differing percentage relativities will have and is worth a look if you are interested in this issue, or a valuer looking at the comparable impacts of choice of relativities in a calculation.
As the Kosta decision shows however, graphs are not necessarily the last word in relativity.
The debate about relativity rages on as can be seen from the decision of the Upper Tribunal in this case…
1.1 The single biggest variable factor that will determine the price that the enfranchising tenant will pay to buy their freehold or extend their lease in a valuation calculation with marriage value is the so-called ‘relativity.’ This percentage represents the proportion of the freehold vacant possession value of the property that the existing (short) lease bears to it and can only be calculated by estimating or looking at accepted trends based on market evidence of the likely differential.
1.2 The traditional way to assess this is by the use of graphs of relativity which show the trend as lease length diminishes and the likely percentage of the freehold value that the short lease represents. The graphs in general follow a similar shape, but traditionally landlord advisors have preferred graphs that tend to a lower level of relativity and tenants the reverse. It is worth bearing in mind in this discussion that the higher the relativity, the better the outcome for the tenant as the ‘gap’ that then must be divided between landlord and tenant on a 50/50 basis when assessing the marriage value is thereby diminished.
1.3 For a view of the various competing graphs of relativity the website www.graphsofrelativity.co.uk shows very visibly the general trend of the relativity curve but also allows valuers to compare the impact of different graphs, given varying lease lengths. A picture of a comparison of the various relativity graphs applicable to Prime Central London (plotted on the same axes) appears in the image below. The figure shows the general trend, but the debate rages as to which graph is ‘correct.’
1.4 see in particular the overall graph that appears on the home page of www.graphsofrelativity.co.uk
1.5 Because of its significance and the difficulty in pinning it down exactly (matters of valuation are as the tribunal itself said in this case ‘an art not a science’), the question of relativity has been under debate for some time and there have been numerous examinations of the best approach to calculating relativity, including the decision in Nailrile v Cadogan [2009] 2 E.G.L.R. 151 in which the Lands Tribunal clearly stated that graphs of relativity should not be used in preference to reliable open market evidence. In other words the concept of relativity can be very much case specific. Indeed, following the decision in Arrowdell Limited v Coniston Court (North) Hove Ltd (LRA/72/2005) the Lands Tribunal expressed the hope that it might be possible to produce standardised graphs of relativity. Indeed, following on from this the RICS produced a study on relativities, however, it was not possible to for the RICS working party to agree upon definitive graphs and professional views on how relativity should be calculated remain disparate.
1.6 The facts in 47 Phillimore Gardens concerned an enfranchisement under the Leasehold Reform Act 1967, of a house with 52.45 years unexpired on the lease as at the valuation date. The LVT had determined that the enfranchisement price to be £16,138,743. The valuation being carried out under Section 9(1D).
1.7 The case concerned in particular the expert evidence of Dr Bracke (a professor of economics), who also now has his own research company dedicated specifically to research in this area. He deployed a detailed and significant statistical analysis of data held by the Central London agents John D Wood relating to transactions prior to the 1993 Act, in an attempt to find a methodology of calculating relativity and evidence of it that was truly from a ‘no act world’ – as this is one of the valuation assumptions when assessing this.
1.8 Dr Bracke had carried out significant research and deployed a ‘hedonic regression’ model to the data to produce, what he said was an accurate means of determining relativity for a lease of 52.45 years unexpired term at the valuation date. His figure was some 87%.
1.9 The Respondents (the Phillimore Estate), perhaps unsurprisingly preferred the relativity figures that would be arrived at by use of the more traditional graphs of relativity such as the Gerald Eve, Knight Frank and Cluttons graphs which led to a relativity figure of some 76%.
1.10 Because of the technical nature of Dr Bracke’s arguments, the Respondents also called an economics and statistical expert, Professor Lizieri. The tribunal considered the matter and the evidence and remarked that whilst it was bound to decide the matter on the arguments before it, neither side had adduced valuation evidence in the Upper Tribunal and had instead confined in the main their arguments solely to the consideration of the means by which relativity should be calculated.
1.11 After considering the matter at some length the Upper Tribunal declined to interfere with the decision of the LVT (as it then was) at first instance that the relativity figure in this case should be 76%.
MARK CHICK
This article being general in nature is not a substitute for legal advice. If you require legal advice please visit www.bishopandsewell.co.uk or email: leasehold@bishopandsewell.co.uk