This month, the Upper Tribunal (Lands Chamber) made what could potentially be one of the most controversial and significant rulings on 'leasehold relativity' to date (Sloane Stanley Estate v. Munday, 2016). The Lands Chamber - one of four chambers of the Upper Tribunal which settles legal disputes, structured around particular areas of land and property law - ruled against a new relativity graph which would have reduced the cost of lease extension for flat owners in the event that the marriage fee becomes applicable (i.e. when their lease drops below 80 years).
In short, a property is said to be worth less than its full value once its lease length has fallen below 80 years. The impending 'marriage fee' payable upon the extension of the lease or, in contrast, the fall in the property value if the lease is not extended, means that leaseholders must pay out large sums of capital to protect their investments. The difference in the value of a flat with and without an extended lease is known as ‘relativity’. The basic concept of 'relativity' is that a flat with a 99 year lease or more will have a relativity of 99-100% of the value of the freehold reversion in the same flat. As the lease gets shorter the percentage relativity decreases. For example, a flat with a lease of 70 years unexpired may have a relativity of approximately 91-92% or lower, depending on which particular graph you refer to, and if the lease had only 50 years remaining the relativity could be reduced to around 75%.
Currently, when a flat owner extends their lease <80 years, they are legally obliged to pay 50% of the resulting uplift in the property’s value to the freeholder; which is calculated using a relativity graph. For example, if the extension of one's lease with a lease length of <80 years causes their property value to rise by £15,000, then the freeholder would be entitled to £7,500. In the event that a lease with a lower lease length is extended, the resulting uplift in the property’s value would be greater; meaning low leasehold relativity is in the freeholders’ interests.
As a result of the Upper Tribunal’s recent decision, leaseholders will now be forced to pay even more for their lease extensions. Despite a new relativity graph proposed by Parthenia Valuation, which was constructed using almost 8,000 different case studies from the sale of flats in central London, the Upper Tribunal ruled that Parthenia’s model contained “technical errors" that made it unsuitable, despite finding that all the other relativity graphs, which are accepted as industry standard, were unscientific and “altered subjectively” to suit the needs of freeholders.
Unfortunately for leaseholders, the Upper Tribunal ruled in favour of another relativity graph which recommends even lower relativity and, as a result, leaseholders are now in a worse position than they were before the tribunal’s decision. Freeholders will be able to further exploit leaseholders protecting their investments and demand larger fees for the extension of their lease or freehold purchase.