Ruling on leasehold relativity is bad news for flat owners

Ruling on leasehold relativity is bad news for flat owners

In May the Upper Tribunal (Lands Chamber) handed down its landmark decision on leasehold relativity (Sloane Stanley Estate v. Munday, 2016). In what may turn out to be one of the most significant decisions in the history of leasehold enfranchisement, the Upper Tribunal ruled against a new relativity graph proposed by Parthenia Valuation, which would have reduced the cost of lease extension for flat owners, in the event that their lease drops below 80 years.

Once the lease length of a property has fallen below 80 years it is said to be worth less than its full value. The property continues to lose value as the lease length falls – the difference in the value of a flat with and without an extended lease is known as ‘relativity’. When a flat owner then extends their lease, they are legally obliged to pay 50% of the resulting uplift in the property’s value, which is calculated using a relativity graph.

Louie Burns, Managing Director at Leasehold Solutions, said: “The lower the relativity, the more money the freeholder receives so low relativity generally works in the freeholders’ interests. As a result of the Upper Tribunal’s decision, leaseholders will now be forced to pay even more for their lease extensions – to the tune of many millions of pounds.”

The Upper Tribunal was ruling on a new relativity graph proposed by Parthenia Valuation, which used nearly 8,000 pieces of evidence from the sale of flats in central London to calculate the loss of value scientifically and remove subjectivity. 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 a relativity graph which recommends even lower relativity. As a result, leaseholders are now in a worse position than they were before the tribunal’s decision.

Louie Burns concluded: “The decision is really bad news for flat owners because, in the event that their lease falls below the 80 year mark, they will now end up paying even more to freeholders. It is vital that flat owners extend their lease before the all-important 80 year mark; it has never been more true to say that now is always the best time to extend your lease.”