The Mundy decision what does it mean?
The decision in Mundy deals with the question of relativity. This begs the question as to what relativity means in the context of a lease extension or buying your freehold.
The first thing to say in answer to this question is that it is only relevant in practical terms if your lease has less than 80 years to run on it.
This is because it will only be needed if marriage value is payable as part of the compensation payable to the landlord and this only applies if the lease has less than 80 years to run at the ‘valuation date’ (the date of the notice of claim).
So what is it? Well, as you might expect it is a ‘relative’ measure – effectively the ‘gap’ between the short lease and long lease value.
Why is it important?
In working out what needs to be paid to the landlord the valuer needs to assess two things – firstly the value of the tenant’s interests and secondly the value of the landlord’s interests both before and after the transaction has taken place.
Obviously you can’t know both of these things at the same time and hence, over time valuers have developed a way of working out from any given lease length and stated flat value a percentage of the ‘freehold value’ of the flat that the current lease value represents.
There is a certain circularity in this approach as ultimately the percentage adopted needs to refer back to something as an opinion of the freehold value.
Over time, this has been assessed by various graphs of relativity and these have been hotly contested because a few points up or down the scale makes a big difference to the amount that the tenant pays.
In Munday a new approach was tried to calculating relativity which ultimately failed – however it did raise some very interesting questions – not least of which was a criticism of the underlying accuracy of many of the graphs.
Some of The graphs have been effectively statements of opinion based on ‘sampling’ of the value of a notional ‘basket’ of properties by estate agents – not completed transactions.
In Munday, Parthenia research for the tenant sought to argue that a more appropriate and statistically robust way of dealing with the matter would be to use what is known as ‘hedonic regression’ to effectively determine the impact of lease length on value for a sample of pre- act 1993 Act properties, based on data obtained from one Prime Central London estate agent, John D Wood and Company.
The ‘hedonic regression’ model is a statistical analytical tool that is used in economics and market analysis to enable a reasearcher to ‘strip out’ the impact of a particular variable on the price of an item. A suitable example might be in a market for cars, where it should be possible by analysing sufficient transactions to determine the impact that say, colour has on price (for instance, it might be said that red cars sell at a premium, when all other factors are the same). The approach that was tried here was to look at the impact of lease length as a variable when considering the relative impact on pricing of short lease property, and by doing so to arrive at a ‘new’ way of calculating relativity.
So why didn’t this work?
The Upper Tribunal was not persuaded by the fact that the data set related to only pre-act transactions. Whilst the 1993 Act requires analysis in a ‘no-act world’ it was held that this is not the same thing as a pre-act world and in fact, the correct treatment in the valuation schedules is to assume that the tenant has ‘no right’ to extend or buy the freehold under the statute, thereby increasing the amount due to the freeholder.
In other words, one of the problems, was not with hedonic regression itself but also with the data set that was analysed to try to produce the results.
It could also be said that the outcome was too radical a departure from the accepted ‘norms’ of relativity (althought this was not a reason given).
The result – a victory for landlords and a windfall for many owners of reversions outside of Central London.
Mark Chick
Mark Chick is a solicitor dealing with leasehold issues. This note (being very general in its nature) is not a complete statement of the law in this area. It is therefore not a substitute for legal advice from a suitably qualified professional and should not be relied upon as such. No liability can therefore be accepted for any actions based on reliance upon it.
If you require legal advice please visit www.bishopandsewell.co.uk