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News & opinion

6 MAR 2018

Risk in leasehold: the fallout from recent courts and tribunals

Over the past months there has been some high-profile cases in relation to leasehold homes. Kerry Bretherton QC of Tanfield Chambers provides an update on the implications of these cases.

Sloane and Mundy case – lease extension costs

In Mundy v Sloane Stanley Estate Trustees [2018] EWCA Civ 35 the Court of Appeal clarified the basis on which the marriage value was to be calculated for the purpose of determining the premium to be paid for the acquisition of a new lease under the Leasehold Reform, Housing and Urban Development Act 1993 (“the Act”). This case, read with the decision of the Upper Tribunal has provided a great deal of certainty of the correct methodology to be adopted future.

The case

The issue concerned relativity; the relationship between the real-world value of a leasehold interest and the value of the same interest on the basis that the Act did not confer a right to acquire an interest in premises containing the flat as set out by paragraph 4A(1)(b) of Schedule 13 of the Act. The tenant argued that it was not correct to compare the lease’s real world value with its value without rights as shown by the Parthenia model. The catch is that the statutory rights enjoyed by leaseholders affect the calculation, but there are no real world comparators from a no-rights world, and the calculation has to be hypothetical.

The verdict

Rejecting the arguments of the tenant, the Court of Appeal held that the question of whether to accept Parthenia was a matter of fact for the Tribunal and that it had been entitled to proceed on the evidence based by comparison with appropriate adjustments, as set out in Earl Cadogan v Sportelli [2007] EWCA Civ 1042; [2008] 1 W.L.R. 2142. The correct comparable was the same lease sold very near to the valuation date and the only adjustment required was to reflect the difference between a lease with rights under the Act and those without rights. There was no prohibition against considering real world assumptions, and it was an overstatement to say that the market had been corrupted by relativity graphs.

However, the Tribunal was also critical of relativity graphs and of the assumptions used by valuers in general, stating that more emphasis should be placed on actual, contemporaneous market transactions and that the role of a valuer is to weigh up, and perhaps use several different, methodologies in their work.

Impact of the verdict

The approach of the Court of Appeal in upholding the decision of the Upper Tribunal means that the guidance given by the Upper Tribunal will be followed. The Parthenia model should not be put forward in future cases. The Tribunal will focus on the state of the market at the valuation date, which may include reliance on a particular relativity graph used by the market at that time, at around the valuation date. Where, as in this case, a very similar lease had been sold that was an ideal starting point from which to determine the value of the existing lease without rights under the 1993 Act and where there is no reliable comparable market transaction, valuers will need to consider adopting more than one approach, using good sense where those approaches produce different figures.

Fresh Apartments, Salford case – fire safety and cost liability in leasehold

E&J Estates sought at First Tier Tribunal to recover service charges from residents in the Fresh Apartments building arising from costs in the region of £100,000 for fire wardens staffing the building on a 24 hour basis until unsafe cladding was replaced. The issue was whether the lease enabled the landlord to recover the costs through the service charge and if so whether the costs of providing the service were to be taken into account having regard to s19 Landlord & Tenant Act 1985 (“the Act”) and whether the watch was a Qualifying Long-term Agreement for the purpose of s20 of the Act.

The case

The Tribunal held that the action taken to comply with the Fire Safety Order 2005 (“the Fire Safety Order”) and the DCLG guidance fell within the obligation under the lease to “comply with the requirements and directions of any competent authority and with the provisions of all statutes regulation orders and bye laws…” and so was, in principle recoverable. Further, it was necessary in order to comply with the covenant to keep the building insured. Those costs were reasonable in light of the cladding test results, the expert advice provided by DCLG, duties under the Fire Safety Order and the obligations of the lease. The Tribunal were influenced by the absence of any other alternative suggested by the tenants. The transient nature of the contract and the fact that it was renewed on a month by month basis meant it was not a rollover contract but rather a fresh contract each month.

Leaseholders feeling the pinch

Reports are that the service charges for residents have trebled; one resident had an increased service charge fee from £125 per month to £360 per month. There are also reports that the value of the flats in the building have decreased. In 2016 a first time buyer paid £129,000 for a two bedroom flat in the building but, in October 2017, soon after the cladding issue was discovered, a flat sold for £100,000. The position appears unlikely to improve as it is the next issue will be the removal of cladding.

Thoughts for RICS professionals

This issue is likely to be one which is will involve much work for RICS professionals and property managers in 2018. The recovery of the costs of interim measures and of the removal of cladding may be resented by many residents and the variation in lease terms are such that there are likely to be many challenges. 

A key to the success for E&J Estates in this case was the evidence it produced and the absence of alternatives. Cases in which the residents direct the Tribunal to viable alternatives which are more economic are likely to be more finely balanced on the question of whether the costs are reasonable.