Lease extensions and premiums – not a point of law at all, says the Court of Appeal - Dewar Hogan

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Lease Extensions And Premiums

Not A Point Of Law At All, Says The Court Of Appeal

Lease extensions and premiums – not a point of law at all, says the Court of Appeal

Lease extensions and premiums – not a point of law at all, says the Court of Appeal

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Yesterday the Court of Appeal delivered its judgment in the case of Mundy –v- The Trustees of the Sloane Stanley Estate (see our earlier post here).

It’s a bit of a damp squib, since, predictably, those who examined the puffs of white smoke and predicted victory for the big battalions have been proven correct.

Indeed, Lord Justice Lewison gave short shrift to the tenant’s argument. First, he described it as ‘not a point of law at all’ – which, for the uninitiated, is a pretty severe slapdown in the Court of Appeal’s language, second only to the deadly ‘with all due respect to Mr/Ms X’s ingenious arguments’. Second, he demolished it anyway.

However, the point at stake does illustrate what one might consider some serious issues with the 1993 Act, so it’s still worth discussing.

So what was this point of non-law? Well, in our previous blog we said that valuing leases under the 1993 Act regime was complicated by a statutory twist. The twist is that the Act requires leases (and indeed freeholds) to be valued as if the Act did not exist – or at least, did not apply to the building in question.

So the unfortunate valuer is required not just to operate in a world where what he has to value has had no true comparables since 1993, but also to assume that the building he is valuing is the only one in the whole of London (indeed the whole of England and Wales) where the tenant does not have the right to extend his lease and where the freeholder can still demand whatever price he likes for lease extensions  – in other words to assume a market which has never existed and in the nature of things never will.

The Tribunal thought that in order to obtain the value of an imaginary 42-year lease in this rather remarkable market it was sufficient to obtain the value of an actual 42-year lease with the 1993 Act rights and deduct 10%. This particular author, safe in the knowledge that his theory will never be tested, would venture to guess that if there were only one 42-year lease in London which couldn’t be extended and every other 42-year lease could, the one lease would be pretty hard to sell, and the difference more than 10%. Still, just a guess.

Another point of the tenant was that the real-world lease values the estates were relying upon had been corrupted by the successful efforts of the estates over a long period to persuade the market that the graphs for relativity values prepared by the estates were accurate. The court dealt with this argument with brutal simplicity: maybe the market had been affected by that, but so what? The market is the market and is driven by what it’s driven by, not by some other factors which the court might think it ought to have been driven by.

But the real point the tenant wanted to argue was about the relativity rate – the relationship between the value of a 42-year lease and the freehold. The landlords derive this from graphs they have maintained over the years, which chart the prices paid for actual 42-year leases against the prices paid for actual freeholds. There are some difficulties with this approach – for instance the fact that freeholds of individual flats are virtually never sold and the great estates very seldom sell the freeholds of the buildings they are interested in, and the fact that the relativity doesn’t seem to have changed since 1996 or so, which most observers consider that it ought to have done with the changing social conditions (its not clear why this should be so, but it seems that this is a popular view).

It is also a quaint feature that the Tribunal considered that the problem with the landlord’s approach was that it tended to overvalue leases relative to freeholds, which on the face of it wouldn’t do the landlord any good.

The tenant, however, maintained that the only true way to approach relativity was to look at the ratios from 1989 to 1993, back when there actually were leases without 1993 Act rights. The most obvious problem with that, of course, is that back then there weren’t any freeholds unburdened by 1993 Act rights, so that what one was gaining on the swings one was losing on the roundabouts.

The second and most significant problem was that this method manifestly didn’t work, since the 42-year lease in question had actually been sold in the market with its rights for a price of £x, thus (since the freehold value was agreed) fixing a relativity rate (at least if we ignore the fact the lease had to be assumed not to have any rights for the purposes of the Act). When one applied the Method to the agreed freehold value, however, one came up with a figure of £x = 200,000, so that the lease without rights was more valuable than with rights, a result which the Tribunal vividly characterised, channelling its inner George Orwell, as ‘the clock which struck 13’.

It’s really not apparent from the judgment how the tenant intended to get round this last point.

Anyway, having first said that this wasn’t a point of law at all, the court rapidly concluded that the Tribunal was quite entitled to say that valuers should use the landlords’ graphs if valuers thought that was the best they could do, and that was the end of that.

What does perhaps come out of this particular teacup is this – is it really sensible for valuers to have to perform this sort of mental gymnastics? Especially since reality will never, ever, offer any actual cross-check to the result. Isn’t it time for the section of the Act which requires values to be fixed on the assumption that the subject property is the only one in the UK without 93 Act rights to be, well, revisited?

Happily, it seems that the Law Commission is investigating this issue and is due to report at some point in the future with a view to simplifying the valuation process, so perhaps, as Lord Justice Lewison concluded his characteristically lucid judgment, the holy grail may yet be found.