The news is that the seismic shift in leasehold enfranchisement some forecast has been cancelled, or possibly postponed – if there is a further appeal or quick legislation to reverse the result – because the Court of Appeal has dismissed the appeal in Mundy v Sloane Stanley Estates from the decision of the Upper Tribunal [2016] UKUT 223 (LC).

Had the appeal succeeded, the amount of premium payable for extended leases under the Leasehold Reform, Housing and Urban Development Act 1993 Sch.13 would have been reduced in most cases. The argument centred on whether the premium should have been calculated according to relativity graphs which have been in widespread use or the Parthenia model which sought to employ data which originated from the “pre-Act market – that is the market before the enfranchisement legislation was passed – using “hedonic regression” – an expression which, no doubt, will be readily understood by almost everybody (!).

For those behind the curve (!), it was a system which sought to identify the salient features of pre-Act valuation figures for premiums so that they could be applied and used to calculate premiums in the current day.

Subject to one qualification, dealt with below, the principle was (and is) a good one because the legislation effectively abolished the market from which any real-world data could be abstracted but required valuations to be conducted on the basis that the right to enfranchise did not apply to the property being enfranchised, so it is only pre-Act data that could give actual, as opposed to hypothetical, values for premiums paid for enfranchisement in a market to which the legislation did not apply.

In most cases the valuation of premiums would have been significantly reduced (some speculated that they could have been halved) but the Parthenia model was rejected on the basis that in one of the cases before the Upper Tribunal it had produced a higher valuation than the usual relativity graphs. It was thus branded “a clock that strikes 13” and the Upper Tribunal said it should not be used in any future cases.

The relativity graphs did not come away unscathed because they failed various tests designed to check statistical reliability but the Upper Tribunal did not brand them broken clocks notwithstanding that it might have done so. Rather the Upper Tribunal urged parties to rely on “real world data” where it was available. This could be viewed as being akin to Pontius Pilate’s washing of his hands, because no-one could seriously doubt that premiums which have been agreed “in the real world” will have been based on negotiations in which freeholders will have sought premiums based on the very relativity graphs which the Upper Tribunal had criticised. At best the “real world data” will have some measure of discount factored into it but the outright rejection of the Parthenia model (which the Court of Appeal has just endorsed) will mean that it will be hard to use it as leverage in future negotiations, so, unless some other better measure which favours leaseholders is devised, real world data is likely to gravitate towards the relativity graph values in any event.

There is likely to be comment about greedy freeholders and put-upon leaseholders but if there is a villain in the piece, look to Parliament. As Lewison LJ observed at 49 of the Court of Appeal’s judgment “In front of the UT it was expressly conceded that the “no-Act” assumption was confined to the building containing the tenant’s flat and did not extend to the whole world”, and it follows from that. that the pre-Act data upon which the Parthenia model was based was also not comparable to the basis of valuation Parliament had imposed.

Parliament’s valuation required consideration of an entirely hypothetical market; a market which will never exist – and has never existed, save in the imaginations of those who have had to try and apply the basis of valuation Parliament has imposed.

One might question whether that particular construction of the act should have been conceded but, reading the legislation, it is very hard to suggest that an argument in favour of a different “strained” construction would have succeeded.

At paragraph 50 of the Court of Appeal’s judgment, Lewison LJ said: “…we were told by Mr Jourdan QC that at the invitation of the Government the Law Commission is to consider the simplification of valuations under the Act. It may be, therefore, that the holy grail will one day be found.” One can only hope Parliament gets it right this time.

© Rawdon Crozier 2018