Reassuringly expensive: Court of Appeal rules on residential leasehold premiums

Reassuringly expensive: Court of Appeal rules on residential leasehold premiums

It seems landlords of residential long-leasehold properties can rest easy following the Court of Appeal’s decision in Mundy v Sloane Stanley Estate Trustees, for the time being…

Mundy concerned the method for calculating the premium payable by a tenant on the grant of a new lease under the Leasehold Reform, Housing and Urban Development Act 1993 Pt I (“the 1993 Act”). 

Under the 1993 Act a tenant with less than 80 years left to run on their lease is entitled to a lease extension subject to paying a fair premium.  The rationale behind the level of premium is that it should reflect a share of the increased value of the lease following the extension (known as the ‘marriage value’).

Mr Mundy argued that the calculation method, which includes a requirement to compare values both with and without the benefit of the 1993 Act, was unfair because real world market values contained in the widely-used Gerald Eve graph had been corrupted by the effect of the 1993 Act itself.  In other words, it was not possible to come up with a real-world valuation that truly disregarded the 1993 Act.  This he argued was leading to landlord’s getting higher premiums than they should.  Instead, Mr Mundy argued for the use of an alternative model, named Parthenia, which attempted a real-world valuation based on projections using valuation figures predating the 1993 Act.  The Upper Tribunal rejected this argument and Mr Mundy appealed.

The Court of Appeal rejected the appeal and upheld the Upper Tribunal’s original finding that the Parthenia model produced an impossible result which saw a hypothetical lease without the right to extend being worth more than an actual lease with the right to extend. The Upper Tribunal had plenty of time to consider the Parthenia model over a 9 day hearing in reaching its conclusions and deciding that the model should not be relied upon in future cases.

Permission to appeal to the Supreme Court was refused.  However, whilst this provides clarity for both landlords and tenants for now the Law Commission is currently looking at simplifying valuations under the Act so we may not have heard the last of this saga.

A full transcript of the Court of Appeal’s decision can be found here.