Hedonic Regression – an even worse deal for leaseholders

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On 11th May 2016 the Upper Tribunal (Lands Chamber) (UTLC) handed down its 80 page decision in Sloane Stanley Estate v. Munday (2016). The decision may turn out to be one of the most significant decisions for leaseholders in the history of leasehold enfranchisement. And it is not good news for leaseholders.

The premium paid for a lease extension under the provisions of the Leasehold Reform Housing and Urban Development Act 1993 (the Act) is based on a statutory formula which qualified specialist valuers seek to apply to the particular facts of a matter. The Sloane Stanley case focuses on the correct way to value a flat with a lease assuming that leaseholder has no statutory right to extend it. This is a key part of valuing the premium as a whole.

Relativity is the term used to describe the difference in the value of a flat with and without an extended lease. Relativity is usually determined by reference to graphs and there are many available for use.

The lessees in this case argued that relativity should be determined by reference to the “Parthenia” model which uses a statistical technique known as Hedonic Regression. The UTLC chamber approved the use of the hedonic regression technique in principle but rejected the Parthenia model as not being compatible with market evidence. In fact the UTLC went so far as to say that the Parthenia model must not be referred to in any future case.

The UTLC went on to assault all other well used relativity graphs. The Tribunal preferred the use of taking an actual real-world sale price of the lease and deducting an amount to take account of Act rights based on experience. However, this does not assist where there has been no recent actual sale of the flat. In that alternative, the UTLC held that the Savills 2002 graph should be used to determine the real-world value of the lease and then make a deduction to take account of Act rights based on experience. The “industry standard” Gerard Eve graph (which the UTLC criticised for its shortcomings) could be used to cross-check.

The upshot of this, for non-lawyers and non-valuers, is that it has just become a lot more expensive for leaseholders. The UTLC preferred Savills 2002 graph generally results in a higher premium than even the Gerald Eve graph determined. Leaseholders are now in an even worse position than they were a week ago.

Practitioners in this area of law eagerly await news of a potential appeal by the leaseholders of this case and in the meantime valuers are having to reassess the whole basis of the way they value lease extension premiums.

It is therefore now, more important than ever that leases are extended well before they drop below 80 years so relativity does not need to be considered.

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Emily Fitzpatrick

Partner, Head of Leasehold Enfranchisement

Emily is a Partner and Head of Leasehold Enfranchisement. She previously worked at a law firm in Sussex and started out as a Trainee Solicitor...

Partner, Head of Leasehold Enfranchisement

Emily Fitzpatrick

Emily is a Partner and Head of Leasehold Enfranchisement. She previously worked at a law firm in Sussex and started out as a Trainee Solicitor from 2005-2007.

She is a member of the Association of Leasehold Enfranchisement Practitioners (ALEP) with professional qualifications in Management courses 1 and 2. She is also a member of the Institute of Advanced Motorists, the RSPCA and the Rabbit Welfare Association.

Here are Emily's answers to a brief interview about her personal interests:

First single purchase:
Something by Take That

Favourite TV programme:
Holby City

High point in legal career:
Winning Regional Professional of the Year in the Enfranchisement and Right to Manage Awards 2015.