Tenant loses landmark lease extension test case

The Court of Appeal today backed landlords in a landmark case in which a tenant is arguing in favour of a new way of valuing the premiums to be paid for lease extensions and collective enfranchisements. If the appeal had been allowed, the case could have affected more than a million leasehold properties, with billions of pounds said to be at stake. The dispute involves the complex valuation process involved when it comes to valuing the sums that must be paid by tenants to landlords in cases of lease extension applications and collective enfranchisement. At a hearing last week, leaseholder Adrian Mundy claimed that the traditional method used has meant that landlords have been overpaid for years, but the Upper Tribunal (Lands Chamber) (UT) banned use of the Parthenia model he says is a fairer way of calculating premiums. However, landlord, the Trustees of the Sloane Stanley Estate, said that the UT was correct to reject the Parthenia model, and ban its use in all future cases. In today’s ruling the Court of Appeal dismissed Mundy’s case and refused him permission to appeal to the Supreme Court. “In my opinion, the Upper Tribunal was well within the scope of its functions in ruling out the future use of the Parthenia model in its current form,” appeal court judge Mr Justice Lewison wrote in the ruling. Holy Grail However, in his ruling  Lewison acknowledged that the Leashold Reform Housing and Urban Development Act of 1993, the act at the heart of this claim, may need to be changed. “We were told by [counsel to the landlord] that at the invitation of the Government the Law Commission is to consider the simplification of values under the Act,” he wrote. “It may be, therefore, that the holy grail will one day be found,” he said. “The case for law reform has focused largely on perceived unfair ground rents, but the timing of the Mundy appeal has thrown the spotlight on whether the processes by which valuers determine the price to be paid for a lease extension are skewed unfairly in landlords’ favour,” said Tim Reid, a senior associate in real estate disputes at Hogan Lovell’s LLP. Their firm didn’t work on the case. “It was going to be an uphill struggle to obtain the Court of Appeal’s blessing,” he said. “The tribunals and courts have repeated at every opportunity that data drawn from the real world is much preferable to data drawn from mechanical and mathematical models.” Far-reaching consequences While the amount in dispute between the parties is said to only be £58,000, the far-reaching consequences of the case mean far greater sums were potentially at stake across the country. Before the Upper Tribunal there were three combined applications, only one of which was under appeal. It found that the Parthenia model was a “clock that strikes 13” because, in one of the applications, it produced a result where the flat concerned had a higher hypothetical value without rights of extension under the 1993 Act rights than it had with them, which it considered was an impossible result. At last week’s hearing Edwin Johnson QC, on behalf of the leaseholder,  said that the case involves a “serious problem” that affects all new lease claims and collective enfranchisements under the Leasehold Reform, Housing and Urban Development Act 1993. In this appeal, the leaseholder claims that the graphs of relativity – including the “industry standard” known as the Gerald Eve graph – usually used are unreliable, and instead the Parthenia model should be applied in this and future cases. Therefore, they say a new mathematical model should be applied which demonstrates that the value of a key factor in the calculation has been consistently underpriced over the years, favouring landlords. Johnson said that the search for a solution to the valuation problem has been going on for years, and is one that has “so far engaged thousands of hours of time of the tribunal, and millions of pounds in professional costs”. He said he was asking the court to remit the case back to the Upper Tribunal for the redetermination of the hypothetical value of the leaseholder’s flat. In written arguments before the court, Stephen Jourdan QC, representing landlord the Trustees of the Sloane Stanley Estate, maintains that the UT’s decision was correct and should be upheld. Business as usual In a statement the solicitor representing the landlord welcomed the ruling. “This case shows… that until the ‘holy grail for determining relativity is found, the courts and tribunals will tend to favour a valuation approach which is based as closely as possible on relevant market evidence and the application of valuation judgment and experience in applying appropriate adjustments”, said Kerry Glanville, Senior Partner and Head of Real Estate Dispute Resolution at Pemberton Greenish LLP “Enfranchisement has been specifically included in the Law Commission’s 13th Programme of Law Reform. This may well lead to changes in the way in which premiums payable by tenants for extended leases are assessed but until the Government, after due consultation, decides what legislative changes are to be made we are pretty much back to business as usual.” Even so, Jeremy Hudson, a partner at law firm Charles Russell Speechlys LLP, said that the judgment added some clarity to a complicated situation.  “Tenants may be disappointed that the Parthenia model, so favourable to them, has been decisively rejected by the Court of Appeal,” he said.    “However, both landlord and tenants will have cause to be grateful for the clarification of the ‘no-Act’ statutory assumption, and the way in which this should be approached by valuers.  It is expected that the Law Commission will soon be considering possible simplification of valuations under the 1993 Act which, in the Court’s view, would be a ‘holy grail’.  No doubt many landlord, tenants and their valuers will say ‘Amen’ to that.” Charles Russell Speechlys wasn’t involved in the case.  Adrian Howard Mundy and The Trustees of the Sloane Estate The Court of Appeal, on appeal from the Upper Tribunal (Lands Chamber). (Arden LJ, Lewison LJ, Peter Jackson LJ) 24 January 2018. Edwin Johnson QC (instructed by Bircham Dyson Bell LLP) for the Appellant. Stephen Jourdan QC and Anthony Radevsky (instructed by Pemberton Greenish LLP) for the respondent.