In a time of universal deceit – telling the truth is a revolutionary act

The launch of our new relativity graph

fullsizeoutput_82aI am very pleased to launch our new relativity graph for 2017. This is the first graph every produced working on behalf solely of leaseholders.

What follows is a technical examination of our graph and some of the issues we have to overcome when trying to establish a fair price for a lease extension or freehold acquisition.

1.1 What is Relativity?

According to the RICS, ‘leasehold relativity’ is the value of a dwelling held on an existing lease divided by the value of the same dwelling in possession to the freeholder, expressed as a percentage’.

Following the introduction of the Leasehold Reform, Housing and Urban Development Act 1993 (as amended), ‘the Act’, the declining lease of any flat (or dwelling that cannot be described as a ‘house’) subject to a statutory lease extension is likely to increase in value.

The value of a flat held on an existing lease is determined by the application of a ‘relativity’ percentage and this amount is deducted from the proposed extended lease value of the flat, together with the freeholder’s reversionary and ground rent interests. The result is known as ‘marriage value’ and when a lease has fallen below 80 years unexpired, 50% is payable to the freeholder (and/or any intermediate leaseholder). Typically, valuers use averages of established relativity graphs, together with their own experience, to ascertain what the relativity percentage should be at any given number of years remaining on a lease.

1.2 The Use of Relativity Graphs

It is worth considering the evolution of these graphs and why they are now partly used in determining how much leaseholders should pay.

Relativity graphs have been accepted for many years as a justifiable means of deciding relativity, but it is widely acknowledged that a high degree of scepticism and subjectivity surrounds these graphs. Some valuers choose to use one or two in isolation, whereas some use an average of graphs (a practice which has more recently become known as ‘Kosta averaging’ii). However, most of the graphs were created many years ago and predate the property market crash of 2007/8.

There is no regulating body overseeing the compilation of these graphs. Subsequently, various methods are used to create them – most commonly by freeholders or valuers representing them – and the variance in data means these graphs are largely incongruent. One could therefore argue that none of the graphs available to practitioners are entirely accurate.

It is fair to say that the vast majority of relativity graphs favour the interests of freeholders, as leaseholders’ valuers have never invested in the compilation of a graph that better represents their own perspective.

Also, the majority of these graphs use data from the Prime Central London (PCL) market, which is not suitable to be used for a Greater London demographic.

This was highlighted even further in a recent Upper Tribunal (Lands Chamber) decision following the case of Sloane Stanley Estate v Mundy (2016). In this decision, the most frequently used relativity graphs were examined by the judges and each received criticism.

In this decision the judges expressed an opinion that much of the evidence used to compile these graphs had been “altered subjectively” and achieved “favourable settlements” for their retained freeholder clients. It was suggested that many of these graphs, which have been used for decades, were out of date and no longer relevant.

In the Mundy decision, it was suggested that the Gerald Eve (1996) graph, which was compiled by valuers retained by freeholders and using data from PCL properties, may be the most likely ‘go-to’ graph when advising potential purchasers. However, this is not the only graph adopted by valuers. A more reliable graph is required in order to redress this balance.


1.3 Real World Evidence (RWE)

RWE can be established by looking at thefullsizeoutput_827.jpeg sale price of a property with either a long or short lease and using that evidence to project what the relativity should be. This has become the favoured method used by freeholders’ valuers since the Mundy decision was released.

In the Mundy decision, it was suggested that RWE could be the best method to calculate relativity, as follows: “In some (perhaps many) cases in the future, it is likely that there will have been a market transaction around the valuation date”; it was then stated, “If the price paid was a true reflection of the market value for that interest, then the market value would be a very useful starting point for determining the value of an existing lease.”

This one paragraph has added considerable uncertainty to the Greater London market with regards to calculating relativity.

Even though the Mundy decision says RWE would just be a “very useful starting point” , the majority of valuers representing freeholders have been quick to adopt this suggestion as a cast-iron direction from the Upper Tribunal to put forward anomalous ‘evidence’ of sales of flats held on short, unextended, leases. This has enabled them to ask for much higher premiums on behalf of their clients.

Leasehold Valuers is finding that freeholders’ valuers are increasingly asking for disproportionately low relativities (and consequently much higher premiums for their clients), disregarding any reference to the existing graphs whatsoever.

On the face of it, using RWE seems like a common-sense approach to establishing relativity. However, this method is as subjective – or possibly even more so – than using the graphs to determine the likely value of a flat held on a lease having a given number of years unexpired.

The best-case scenario for RWE may be to consider and compare the sale price of three flats held on unextended leases (having the relevant unexpired term) and the sale price of three flats held on extended, or ‘long’, leases, each being of the same condition and ‘flat type’ within the same block and having sold close to the valuation date.

Furthermore, it could be proved each sale took place as per the RICS’s definition of Market Value; i.e. that it was ‘between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.’

In our experience, it is very rare to find examples of two or more flats that have sold within the same block, one (or more) having sold on an unextended lease (of the required unexpired term) and the other(s) having sold on an extended, or ‘long’, lease, which match in terms of size (number of rooms and/or gross internal floor area), floor level, aspect, layout, general condition, and having the same proportion of outside space, and so on.

If these ingredients are not available, the valuer might search for ‘comparable’ flats nearby and/or in similar blocks. In our experience sales evidence that does not support a valuer’s position is then often omitted. Subjective adjustments are also made for flat size, location, date of sale, improvements, and so on. The result is often evidence that conveniently supports an often unrealistic position on relativity.

Furthermore, information about sales of flats held on unextended or ‘short’ leases is likely to be deeply flawed in the first place. Even though those working in the residential leasehold sector cannot agree upon a particular graph, dataset or method to determine the value of a lease of a particular length, it is assumed sellers and purchasers of flats have a real understanding of relativity and have made an informed decision on value based upon the unexpired term at the point of sale. This is not the case.

fullsizeoutput_82bReferring back to the definition of Market Value, where both parties were not advised and/or represented by a special- ist (enfranchisement) valuer when the sale price was agreed, it could be argued they did not act knowledgeably or prudently. Also, there may have been an element of compulsion on the part of the seller (perhaps influenced by their estate agent) to accept a lower price based on fear of losing the purchaser and/or the purchaser’s over-estimation of the likely costs of extending the lease, due to their own fear or manipulation.

Furthermore, it can also be difficult to be obtain enough information to be certain of the genuine circumstances behind each sale. For example:

Was the flat sold below Market Value to a connected party, such as an associated company or a family member?

Was the flat marketed properly with a realistic guide price?
Were the seller and/or purchaser poorly advised?
Did the seller accept a lower price because they were desperate to move or dispose of the flat?

Did they sell below Market Value because they were in financial difficulty or it was a distress sale?

Was the purchaser a non-UK national and therefore less likely to understand the leasehold system?

Did they become emotionally attached to the flat and were therefore willing to pay more for it?

Was the sale a cash purchase?

There are multiple scenarios that can affect the sale price of a property, let alone a flat held on a ‘short’ lease. These are unlikely to be obvious to an estate agent, let alone a valuer representing a third party in respect of a lease extension.

RWE evidence also highlights other potential anomalies regarding the relativity percentages being suggested by freeholders’ valuers. Leasehold Valuers has seen proposed relativities at particular lease lengths that differ significantly between neighbouring locations within the Greater London area, and even some that vary significantly in the same blocks or in blocks situated close to one another.

Leasehold Valuers questions whether each flat size, block, street or borough should really have a different relativity. The Act has now been in place since 1993 and tens of thousands of statutory lease extensions have been completed since then. Given the vast amount of data available, there is no justification for sporadically calculating relativity on a block-by-block or flat-by-flat basis.

The Mundy decision seems to have divided opinion on relativity like never before and generated an increase in variation and inconsistency between practitioners. This subjectivity is frequently being used by freeholders’ valuers as a means of demanding significantly higher premiums from leaseholders for lease extensions. This subjectivity also seems to have given freeholders the ability to ‘hold leaseholders to ransom’, using the threat of the costs of litigation to force them to agree to increasingly lower relativities and subsequently higher premiums.

There is, however, increasing evidence to suggest the First-tier Tribunal (Property Chamber), or the ‘FtT’, is rejecting the advice given in the Mundy decision to use RWE.

Two recent decisions, which have been released post-Mundy for flats in Greater London, indicate FtT judges do not blindly subscribe to the view that RWE is always the best method to use.

One of Leasehold Valuers’ FtT cases, which was in respect of 84 Morieux Road, London E10 (LON/OOBH/2016/1321), decided in favour of the leaseholder whereby the Kosta-averaging method was applied (using three graphs), over a proposed RWE method adopted by the intermediate leaseholder. In their decision, the judges wrote “we consider that the most appropriate method of establishing relativity in this case is to utilise the graphs.”

In a separate case, FtT judges came to a similar conclusion in favouring the averaging of five graphs to determine a fair relativity over flawed RWE. In this case, which was in respect of Flat 31 at Anerley Court, London SE20 (LON/00AF/ OLR/2016/0706), the judges concluded that they “agree with the reasoning put forward…for not abandoning the RICS research document, and the evidence of the graphs contained therein”.

Of course, those victories came with a price tag; namely the litigation costs of the litigation borne by the leaseholders.

The arbitrary use of RWE has another aspect to it, which also needs to be taken into account. Once the relativity percentage at the given unexpired term has been established, a further adjustment needs to be considered to account for a ‘no-Act world’.


1.4 ‘No-Act World’ Adjustment

The Act provides that the calculation fullsizeoutput_826of the lease extension premium must disregard the existence of the rights provided by the legislation itself. This is because granting flat owners the legal right to extend their leases in 1993 is said to have affected the Market Value of flats held on ‘short’ leases (in relative terms). Essentially, this stipulation requires a hypothetical adjustment to whichever existing lease value is determined. Therefore, to comply with the legislation, valuers are required to determine the Market Value of the existing lease in a ‘no-Act world’.

By the same virtue, it has also been suggested that a flat held on a lease with legal rights to a lease extension or to collective enfranchisement (known as ‘enfranchiseable leases’) should be worth more than the same flat held on a lease without such rights. This would mean when establishing the ‘value’ of the legal right of a lease extension (or collective enfranchisement), the valuer is required to research sales of properties held on ‘enfranchiseable leases’ and then compare them with sales prices of comparable properties held on ‘unenfranchiseable leases’ (of the same length).

This is a virtually impossible task, given there is an extremely small number of ‘unenfranchiseable’ leases in the real world, which change hands very rarely; therefore, there is no way such a difference in value may be determined. The Mundy decision suggests ‘a competent valuer should be able to make this [no-Act world] deduction based on their experience’.x Therefore, the ‘no-Act world’ deduction is an arbitrary one, which has no unopposed evidence whatsoever that can be used to help justify what this deduction should be.

A valuer representing a freeholder is likely to “make this deduction based on their experience” and propose the largest ‘no-Act world’ deduction to reduce the relativity percentage even further, whilst a valuer representing a leaseholder will do the opposite.

It has been suggested the amendment to the Act following the implementation of the Commonhold and Leasehold Reform Act 2002 may have decreased existing lease values. This legislation introduced the 80-year threshold for the addition of 50% marriage value as part of the lease extension premium. Prior to 2002, an 80-year lease was not widely considered a ‘short’ lease. However, since 2002 more and more buyers, estate agents and solicitors have begun to place an emphasis on the ‘risks’ of sub-80 year leases and lower prices have been paid for them, potentially having a domino effect on the cost of a lease extension. Prior to the implementation of the 1993 legislation, freeholders were granting brand new leases of 60 or 65 years, which buyers were seemingly unconcerned about. Accordingly, existing lease values may actually be higher in the minds of those in the ‘no-Act world’.

The use of RWE was not particularly commonplace prior to the Mundy decision. It has been suggested this may have been because the difference between sales prices of unextended leases and extended, or ‘long’, leases within some blocks used to be fairly narrow and freeholders’ valuers preferred the lower relativities represented by certain graphs. A gradual depression of unextended lease sale prices following the introduction of the 80-year threshold, however, might be the reason RWE is now of greater assistance than the graphs to which freeholders’ valuers once referred; especially after they have chosen a subjective ‘no-Act world’ deduction.

Surely, in the 21st century, there must be a more scientific and consistent method of determining relativity in a ‘no-Act world’?

1.5 Hedonic Regression

In recent years there have been attempts to use the accepted hedonic regression method in an attempt to scientifically establish what relativity in the ‘no-Act world’ should be. Most recently, this method was adopted by Parthenia Research to do just that in the Mundy case.

The method was comprehensively rejected by the judges in the Mundy decision, notoriously concluding Parthenia’s hedonic regression model “the clock that strikes thirteen”.

1.5.1 What is Hedonic Regression?

Hedonic regression breaks down the item being researched into its constituent characteristics, in this case the number of bedrooms, location and lease length, and so on, and produces estimates of the value of each characteristic. From this data, a curve can be deduced on the appropriate relativity percentage and a graph can be produced.

Leasehold Valuers supports the principles of hedonic regression and looks forward to a time when an unpartisan scientific relativity graph will be produced using this method.

LeaseholdValuersopenlycriticisedthedecisioninMundy.ItunconditionallyrejectedthePartheniamodel,whilstatthesame time proposing the Savills 2015 (hedonic regression) graph could be adopted in the PCL market, even though we understand the Savills graph has the same technical issues the judges had misgivings about with the Parthenia model.

1.6 The Delaforce Effect?

It has been suggested when a freeholder is faced with a group of leaseholders collectively taking action against them, they will agree lower extension premiums to avoid the costs of representation at a hearing of the FtT. Therefore, it may be argued the relativity achieved is not an accurate reflection of what it ‘should be’. However, it is clear that, overall, the Delaforce effect benefits freeholders and prejudices individual leaseholders.

The vast majority of freeholders are of greater financial means than the average leaseholder (certainly in Greater London) and therefore do not fear tribunal fees as much as leaseholders. Furthermore, the costs of tribunal representation are tax-deductible for freeholders, but generally not so for leaseholders.

Freeholders will invest money to establish a valuation ‘principle’ for their portfolio to ensure future lease extensions achieve higher premiums, so they are prepared to go to the FtT do just that (and appeal any FtT decision that goes against them). Leaseholders are not usually inclined to take such action, as their sole interest is likely be represented by a single flat within a block or development and their stance might be less aggressive.

Any influence of the Delaforce effect has been excluded from our graph and any settlements involving small or ‘accidental’ freeholders have been omitted. All the freeholders of the settlements in our graph are commercial, institutional freeholders.

That said, we have produced a secondary graph to demonstrate how the Delaforce effect might impact relativity (Appendix 5), in order to act as a straightforward comparison with LV 2017. The Leasehold Valuers Delaforce Graph has been compiled using settlement data gathered whilst acting on the behalf of clients of Leasehold Solutions. As Leasehold Solutions is an intermediary instructed by groups of leaseholders to project manage lease extensions of flats within a particular block or development, any lease extension completed by them has been part of a group action. The average group size within this collection of data is 7.4 leaseholders.

The Leasehold Valuers Delaforce Graph is comprised of the relativities from 1,213 settlements and shows that the relativities agreed are, on average, 0.8% higher than the Leasehold Valuers Graph 2017. Accordingly, it may be determined that by taking group action, leaseholders may achieve a relativity 0.8% higher compared to acting individually.

2.1 The Data and Methodology

fullsizeoutput_828The Leasehold Valuers Graph 2017 is based on settlements agreed between leaseholders and freeholders. As Leasehold Valuers acts solely on behalf of leaseholders and the dataset is compiled wholly from settlements where the company has acted on behalf of the leaseholder of a statutory lease extension claim.

From the 3,000 transactions carried out by Leasehold Valuers, this dataset is derived from 2,356 settlements reached during the two-year period from January 2015 to December 2016.

Each and every settlement has been scrutinised in order to respond to the criticism levelled at settlement graphs and to ensure all possible anomalies have been removed.

Any mitigating circumstances that might skew the result have been removed. These include all relativities from all lease extension claims that were:

Subject to a hearing of the FtT or the Upper Tribunal (Lands Chamber);

In PCL or outside the M25 orbital motorway;
Part of a group of claims, in order to eliminate any Delaforce effect;
Subject to onerous or anomalous ground rents;

Subject to capitalisation rates and/or deferment rates not mutually agreed by each party;
Where the freeholder was a small or ‘accidental’ freeholder; all the settlements are with professional ground rent investors; • In respect of leases having less than 30 years unexpired, where there was a paucity of settlement evidence.

This process reduced the dataset from 2,356 settlements to 503, incorporating no opinion at 30 years unexpired and above. Between 30 and 79.9 years unexpired, the graph is based on pure, untainted, settlement evidence of 503 statutory lease extensions of flats within Greater London during the period from January 2015 to December 2016. There are no leasehold houses included in the dataset.

Geographically, each of the 503 settlements is outside what is regarded to be PCL (Prime Central London), but within the M25 orbital motorway. The settlements are fairly equally spread across Greater London and no one borough or area is disproportionately represented.

The Leasehold Valuers Graph 2017 includes relativities at 79.9 years down to 30 years unexpired. The relativities below 30 years are merely Leasehold Valuers’ opinion and are only included on the graph for continuity purposes. Accordingly, the graph should only be referred to for leases having 30 to 79.9 years unexpired.

Once the dataset was cleansed and the 1,853 settlements that might skew the graph removed, it was sent to Anna Louise Schroder of the Department of Statistics at the London School of Economics. Ms Schroder then plotted our graph “using spline smoothing and interpolate values to generate a price decay curve”.

LV 2017, being solely derived from relativities collated from over 500 settlements achieved from January 2015 to December 2016, represents the fairest and most accurate way to determine relativity for flats in the Greater London area.

Schedule 6 to the Act requires the valuation of the freeholder’s interest by assessing “the amount which at the valuation date that interest might be expected to realise if sold on the open market by a willing seller.”

These settlements were achieved between two willing parties, without the need to attend the First-tier Tribunal (Property Chamber) or pursue any other form of litigation to ‘force’ an agreement.

Leasehold Valuers considers that using data from recent settlements between a willing cogent seller and an informed buyer is the fairest and least subjective graph currently in use.


In conclusion, we believe this graph will redress the balance for leaseholders in the determination of premiums payable for lease extensions. In preparing this graph, we have eliminated as much subjectivity as possible by only using data from transactions where the leaseholders acted both alone and against professional freeholders who were represented by enfranchisement experts. It also disregards tribunal decisions.

Of the 503 settlements analysed, which were for leases of flats having between 30 and 79.9 years unexpired, a relativity percentage had been expressly deter- mined or all other factors had been previously agreed and the only component remaining in dispute was the relativity to apply.

Taking the above into account, we are confident that the LV graph 2017 is one of the least subjective relativity graphs now available to practitioners.


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The truth about legalese in leasehold

Why do we get more legal protection as consumers when we buy a cheap mobile phone for £10 a month than we do when we buy a flat for four million pounds?

6a016306ae679a970d016769195101970bWhy is it so difficult to read and understand the terms of a lease?

Does anyone else find it odd that the leases which lay down the details for leasehold property ownership, the terms and regulations on how we can live in the property and the very important small print that can
have significant financial implications, are all purposefully written in a way meant to obscure their meaning?

In every other area of our consumer lives the laws protecting us are tightening up, culminating in the recent Consumer Rights Act 2015, as legislation looks to legally protect the consumer from unscrupulous business practices and see that they not tricked confused mislead or ripped off when signing a contract.

One of the few types of contracts being excluded from the draconian Consumer Rights Act 2015 is the lease of a property which seems odd. The Act states that the only contracts that are legally excluded from being protected by the Act are contract that relate to ‘the creation or transferal of property’.

Why is that?

Why is the contract, that involves the biggest and most important purchases of our lives, purposefully excluded from legislation that is designed to protect us from the crooks?

Let’s look at a real example of this.

Imagine you have bought a flat and you want to look at your lease to see how much your ground is, how much it will rise to and when, which should be a pretty straightforward thing to do surely?

All these details are contained in your lease so you settle down with a cup of tea and a copy of your lease and start to read.

It may firstly take you a few seconds to establish if you are the lessor, landlord, lessee or tenant. Once that is done you can proceed.  18m9x8

(The details below come from an actual lease which I had on my desk at the time of writing, I didn’t choose it because it was overly complicated it was just one that had been printed out, I’ve seen more complex ones than this)

So remember you are looking for how much your ground rent is, what it will increase to and when. Here is what the lease says:

“Schedule Four

Rent payable hereunder by the tenant

  • “The rent shall be fixed for each of the following periods:

First period                 First 25 years

Second period            26th to 50th years

Third period                51st to 75th years

Fourth period              76th to 100th years

Fifth period                  101th to 125th years”

So that is the timing for your ground rent schedule, a little convoluted but it isn’t impossible to comprehend.

So first bit done, now much is the rent? The lease continues to explain it for us.

“For the first period the rent shall be two hundred and fifty pounds per annum”

Crystal clear! That’s not difficult to follow at all! What’s all the fuss about? This lease reading business is a doddle!

What happens after the first 25 years though?

“For each subsequent period the rent shall be the value of the ‘current rent guide’ (which is defined below) on the last day of the previous period

  1. Initially the current rent guide shall be computed by the formula

                                                             250.00 x          A


Where A is the most recently published value of the general index of retail prices complied before the 1st of June 1988

The said formula shall continue to be used notwithstanding that its name be changed or that it be published by a different department so long as the government for the time being continues to compile and publish it on substantially the same basis as the date hereof”

All you want to know is how much is your ground rent is going to increase by in the future. What is all this A over B nonsense?

It now looks a tad confusing but have no fear it looks like number 3 Is going to shed light on the whole issue.

“3. If in circumstances set out below the index used for calculating the current rent guide shall be changed it shall therefore be computed by the formula

                                                            R x       C


 Where R is the most recent value of the current rent guide at the date of the change of index:

 C is the most recently published value of the new index


D is the value of the new index on the date of the change of that index.”

I hope that is now clear to you all, it’s as easy as RDC.

I know what you are all worrying about now though, I can worryingly hear you all asking the question collectively “What happens if Retail Prices are recalibrated?

Well don’t worry about it for a second as the lease makes it very clear what you need do!

“4. If the General Index of Retail Prices shall be recalibrated it shall be deemed to be a change of index for the purpose of foregoing paragraph”

If you are thinking that could possibly have been explained a little clearer then worry ye not, as the lease includes a rather helpful example.

“Explanatory Example

If on the last day of October 1990, when the index stands at 425, the Department of Employment resets the Index to 100, the current rent guide will be

                                                            250.00 x          100 equals 58.82


so that immediately thereafter it will become

                                                            58.82 x            C


where C is the current value of the (recalibrated) index”

Pretty clear I’m sure you will agree. You now know your ground rent timings, how much it will rise by per schedule and what will happen if the Retail Prices are changed or recalibrated.

Wait! good God man! What will we do if the Retails Price Index is cancelled? Like me, you probably wouldn’t be able to sleep tonight if we don’t find an answer to this burning question but once again the lease comes to our rescue.

“5. If the index currently being used for the purpose of computing the current rent guide shall cease, then both the Lessor and Lessee shall use the new index of the closing middle price of gold sovereigns of the weight and fineness set out in Schedule 1 of the Coinage Act 1971. The said closing middle price shall be the price quoted at, and published with the authority, the London Stock Exchange”

20150820-Legalese-is-optional-you-can-write-a-contract-400x532I can’t help feeling that the terms of the lease are a little slapdash as they do not explain how the ground rent uplift should be calculated if the London Stock Exchange is ever closed or if England were to sink into the sea or we are taken over by aliens from another planet who replace our current currency with monkey nuts but I’m afraid it’s all we have to go on.

What nonsense this all is. Why is it allowed to continue like it has? Why can’t leases and legal documents be protected by the same consumer laws that protect why we sign up for a loan? Why can’t they be written in clear understandable way that anyone can understand?

The average leaseholder would probably feel compelled to take some sort of legal and valuation advice on the above terms, and have to pay handsomely for the privilege, to feel secure in their decision to purchase the property.

A MORI poll published in May 2016 found that 21% of people paying for legal advice sought advice on issues surrounding property ownership (excluding conveyancing). That’s a good little earner for solicitors right there, how much do these obfuscated legal terms found in leases contribute to this figure?

We all seem happy to accept the fact that the lawyers we pay to write lease terms in legalese are the only people who can translate these terms back into English for us, for a fee. It’s ludicrous.

How would we all react if suddenly all mobile phone contracts were written in Klingon and we had to pay a Klingon expert £300 per hour to translate the contract into English for us? (With a small print caveat to say that “Although we have retained to translate this mobile phone contract from Klingon into English for you, we cannot be held financially accountable if in fact it turns out that our advice is in Betacrypt as we acted in good faith blah blah blah)

How much easier would it be for the leaseholder if the terms of the lease were written in a no-nonsense way designed to be understood by all? For example:

“1. The ground rent schedule for your property is as follows:

Your Ground rent is £250 per annum for the first 25 years of the lease. This increases every 25 years in line with the Retail Price Index.

If the Retail Price Index is recalibrated, then we will divide the new rate with the old rate to ensure that the ground rent increase is fair and proportional”

Imagine if all the terms of your lease were written in the same, clear manner and were written in such a way that everyone could understand their meaning and be able to make informed decisions as to property ownership and the small print that governs leasehold life.

One of those conspiracy theorists people would say that this is all done on purpose to ensure that flat owners don’t understand what they are signing up for and so get ripped off by predatory billionaire freeholders who use legalese to their financial advantage on a daily basis.

Of course, I am wearing a tin foil hat to protect my brain from these conspiracies and so I don’t subscribe to this view at all.

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Upper Tribunal takes billions away from leaseholders and gives it to freeholders on ‘flawed relativity’

Banner-LogoLast week the Upper Tribunal handed down its decision on a case that is known as ‘Hedonic Regression’.

Due to its complex nature only a small number of people seemed interested in it and fewer still understood the importance of the decision. It is no exaggeration to say that the implications and fallout will trigger the biggest transfer of wealth from leaseholders to freeholders since 1066.

Once the lease length of a property has fallen below 80 years it is said to be worth less than its full value. For every year the lease length continues to fall it loses even more of its value. This is known as ‘relativity’.

When a leaseholder extends their lease, they are directed – by law – to pay 50% of the resulting uplift in the property’s value; the lower the relativity, the more money the freeholder receives, so it has always been in their interests to ‘prove’ low relativity.

Some two decades ago, a number of London’s landed estates decided to commission the development of their own relativity graphs. These graphs, produced by chartered surveyors and estate agents (no, really!), would offer ‘evidence’ from lease extension cases with which they had dealt, but which obviously ‘proved’ low values on flats with low leases. This ‘evidence’ and the resulting ‘methodology’ would then ensure they were able to squeeze much more from their leaseholders.

These mighty freeholders had the wealth and power to ensure that their flawed graphs were used at the Lands Tribunal time and time again until such time that they were ‘accepted’ as viable methods or even ‘industry standard’.

For example, the Gerald Eve Graph (GE) is widely considered to be the ’industry standard’ even though the ‘Hedonic Regression’ decision says of it:

 “The GE graph was adjusted subjectively” (65, p78); that it was “directed to the particular requirements of the Grosvenor Estate” (65); and the “Grosvenor Estate had received relatively favourable settlements” because of it(8, p67)”.

So, no proof offered, no evidence given, subjectively altered to suit the pockets of the central London estates but at the same time accepted as the ‘industry standard’.

This clearly means that leaseholders have been railroaded into paying more for their lease extensions than they would have if a less subjective way of calculating the real fall in the value of a property with a short lease were in place.

Parthenia, headed by James Wyatt FRICS, produced a graph that did that very thing, that was less subjective and based on real evidence. It used real evidence from the sale of flats in Prime Central London and by using nearly 8,000 pieces of evidence, tried to calculate this loss of value scientifically and remove the subjectivity of wholly partisan practitioners.

Once the freeholders had sight of the results of this statistical analysis, two things became immediately apparent. Firstly, leaseholders had been paying already bloated freeholders considerably too much for their lease extensions for decades. Secondly, these freeholders would be prepared to do anything in their power to stop this new relativity graph ever from being accepted, as it would wipe billions off the value of their property portfolios. So stop it they did.

The decision, an 80-page tome, was handed down last week and it must be singularly the most partisan, hypocritical and disingenuous legal decision for decades.

In a further overreaching pronouncement (which in gravity matched the orders to destroy the city of Tyre) they state “[the HR model] should not be put forward in a future case as a method of valuing [a lease extension] (165,p43)”. They wanted to exterminate this valuation model that was not only fair, but favoured leaseholders.

It examined the Parthenia model in eye-watering detail, with experts lining up to disprove it; the Wellcome Trust alone is rumoured to have spent many hundreds of thousands of pounds on its legal defence, even though the total disputed amount of this case was only £180,000. The judges subsequently rejected Parthenia’s model for ever for having some technical errors, which they stated could never be righted. This was experts gleefully ruled against its use on the basis that it was “unscientific” and it failed some of the tribunal’s ‘necessary technical tests’. This was setting very high standards indeed for relativity graphs. They helpfully reviewed all other existing graphs in Appendix C (p66) so how did the others fair?

In Appendix C, the judges cheerfully assassinate all the other ‘accepted’ relativity graphs the sector on which the sector relies.

The GE graph was “altered subjectively” (63, p77); achieving “favourable settlements”(8,p67) for the freeholders who funded the graph; of the College of Estate Management (CEM) graph, “there was no evidence that …had used it” (67, p79); John D Wood was based on LVT decisions and where there had been “concerns expressed over whether the LVT decisions always produce a correct valuation”(43,p74); The WA Ellis graph just reflected “the opinion of three of that firm’s partners” (69, p79); Charles Boston’s graph would “reflect any personal bias” and the Cluttons graph was “a moving average” (70, P79)!

The staggering hypocrisy, circular logic and Kafkaesque graph-011reasoning of the decision is right here; although all of the above graphs are proven to be unscientific, subjectively altered to suit their freeholder clients, and based on opinions and personal bias and nothing else.

Nowhere does this decision say that these flawed graphs a “should not be put forward in a future case”, no that judgment is reserved just for Parthenia’s model alone!

Worse still is the fact the failings of these graphs are mentioned as some dry mathematical calculation, which are undeniably slanted to favour freeholders. No mention is made of the fact that it is leaseholders who have had to pay inflated prices for lease extensions because of these graphs – and to the tune of many millions of pounds. The human cost of these subjectively altered graphs is a scandal, which is completely ignored by this case.

If, for example, a building firm had overcharged a little old lady for roof repairs to the same degree, they would have several episodes of Rogue Traders dedicated to them and a two-page spread in the Daily Mail, not to mention a special place in a police cell reserved for them!

If we can’t use the Partnenia model, nor any of the other fabricated relativity graphs we have relied on, how do we calculate relativity from now on?

Here comes the next inexplicable part of this decision, which, again, favours the freeholders and makes sure leaseholders pay for it.

There are two types of evidence used when trying to plot relativity data for leasehold properties. The Leasehold Reform Housing and Urban Development Act 1993 states the values should take place in a ‘no Act world’ arguing that once the Act come into being it affected the values of short lease properties. Therefore, the pure sales data used should come from before 1993. These are referred to ‘without rights’ properties.

The second type of data is ‘with rights’ (post-1993 evidence). Once this data is collated, it then needs to be adjusted down to guestimate the percentage difference between ‘with rights’ and ‘without rights’ values.

Remember, the lower the relativity percentage the more money the freeholder makes.

Well, the judges in this case seem to indicate that we should use a ‘with rights’ graph and then someone with a fancy London office, who represents the freeholder, uses their considerable experience to guess how low the percentage should be.

What could possibly go wrong with that method?

Although the judges mention the Savills 2002 graph as flawed but good (it has very low relativity rates) it seems they and the freeholders are all waiting expectantly for the new, improved Savills 2015 ‘with rights’ graph. This is also a relativity graph based on the Hedonic Regression method of valuation. Although this model, like Parthenia’s model, currently has technical faults, the judges for some reason do not proclaim that this graph should be cast out forever.

It may be worth mentioning at this point that the Savills 2015 graph “was produced specifically to be part of the Wellcome Trust’s evidence in relation to flat 5 [of this case]” (54, p75).

This is really bad news for leaseholders as this graph agues even lower relativity than the Gerald Eve graph, etc. and the rates can be argued down by an ‘experienced valuer’ to calculate how much lower this should be to account for the ‘no act’ world.

It is, however, good news for freeholders and good news for valuers, solicitors and barristers as this will lead to more litigation, which just like this judgment will come down in favour of the billionaire freeholders.

This case has been a dream result for the Wellcome Trust. If the court room was situated in Wellcome’s offices and the judges were salaried employees of theirs, they could not have got a more favourable result! They disproved the Parthenia Model, got it banned ever from being put forward in the tribunal again. They won the actual case on the three disputed flats and they got their mates, Savills, to produce a relativity graph that the judges loved and recommended we all use from now on, which lowers relativity even more in their favour. That really was a good day at the office.

Can it really be acceptable that two part-time judges who preside over the humble Upper Tribunal have the authority to make a judgment which affects property values across the whole country without political debate or the need for legislation?

Can it be fair that the methods used to ‘prove’ that this transfer of wealth from leaseholders to the establishment is based, by their own admission, on flawed evidence?

1528622_10152538665934745_1047791817_n1-150x150Can there be no redress to this decision? It irresponsibly casts doubt on the current flawed method of valuation while offering no viable alternative, thus opening the door to prodigious amounts of litigation to establish valuations which almost always favour billionaire freeholders?

Surely we need a judicial review as a matter of urgency before the ridiculously unfair and antiquated leasehold system we have in this country takes on a new more sinister twist.

This decision on relativity, which has just been fixed even further to favour freeholders is the LIBOR scandal of the property world.

©Barcode1966 – 2016


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