New Precedent: Upper Tribunal Rejects Parthenia Model in Leasehold Enfranchisement Cases Under the Leasehold Reform, Housing and Urban Development Act 1993

Introduction

The case The Trustees Of The Sloane Stanley Estate v. Mundy ([2016] UKUT 223 (LC)) encompasses three separate judicial decisions rendered by the Upper Tribunal (Lands Chamber). The cases involve applications under section 48 of the Leasehold Reform, Housing and Urban Development Act 1993 to determine the premium payable for extended leases by lessees. The primary contention in each case revolves around the appropriate valuation method for calculating the existing lease's value, particularly evaluating the suitability of the Parthenia model.

The appellants are The Trustees of the Sloane Stanley Estate and Sophie Nathalie Jeanne Aaron, representing lessees, while the respondents are Adrian Howard Mundy, Arnaud Lagesse, and Wellcome Trust Limited, the freeholders.

The crux of the dispute lies in determining the premium amount payable by the lessees for extending their leases, specifically debating whether the Parthenia model offers a reliable method for valuing existing leases without rights under the 1993 Act.

Summary of the Judgment

The Upper Tribunal presided over three related cases to evaluate the appropriateness of using the Parthenia model in determining the premium payable for extended leases under the 1993 Act. The Parthenia model, a hedonic regression-based statistical tool, was scrutinized for its reliability in predicting the value of existing leases without rights under the 1993 Act.

In each of the three cases – involving Flats 3, 11, and 5 respectively – the Tribunal conducted an extensive analysis of the valuation methodologies presented. The Parthenia model's estimates were found to be inconsistent and, in some instances, presented impossible values, such as exceeding the agreed market value for leases with rights under the Act.

Consequently, the Tribunal rejected the Parthenia model as an unreliable method for lease valuation and instead endorsed traditional valuation approaches. For Flat 5, for instance, a 10% deduction from the agreed market value with Act rights was accepted as appropriate for determining the value without rights, resulting in a value of £1.8 million.

Analysis

Precedents Cited

The Tribunal referenced several key cases, including Kosta v Carnwath (re: 47 Phillimore Gardens) ([2014] UKUT 0319 (LC)), Earl Cadogan v Sportelli [2007] 1 EGLR 153 (LT) and [2008] 1 WLR 2142 (CA), and Lalvani v Earl Cadogan, reported as Nailrile Ltd v Earl Cadogan [2009] RVR 95. These precedents primarily dealt with the valuation of leasehold interests and the appropriate relativities to apply when determining lease premiums under the Leasehold Reform Acts. Notably, the decision in Kosta did not support reliance on the Parthenia model, lending weight to the Tribunal's stance against it.

Legal Reasoning

The Tribunal critically examined the Parthenia model, highlighting its inability to consistently mirror market realities. For example, the model's valuation for Flat 5's lease without rights under the Act was £2.232 million, surpassing the agreed market value of £2 million for the same lease with rights – an illogical outcome. Such discrepancies undermined the model's factual basis and reliability.

Further, the Tribunal assessed the technical robustness of the Parthenia model, noting poor performance in standard statistical diagnostic tests such as normality of residuals, homoscedasticity, and absence of multicollinearity. Additionally, significant criticisms from experts about the model's construction and applicability in the evolved economic context post-1987-1991 weakened its credibility.

Given the model's failure to provide plausible and consistent valuations, the Tribunal concluded that it was unsuitable for determining premiums in leasehold enfranchisement cases. Instead, it endorsed established valuation practices, incorporating agreed percentage deductions from Freehold Vacant Possession (FHVP) values to determine the value of existing leases without rights under the Act, ensuring that the deductions appropriately reflected the absence of such rights.

Impact

This landmark decision reinforces the necessity for reliable and empirically sound valuation methodologies in leasehold enfranchisement cases. By rejecting the Parthenia model, the Tribunal upholds traditional approaches, such as applying percentage deductions from agreed FHVP values, which offer greater predictability and fairness in premium calculations. This stance is expected to streamline future tribunals' proceedings, reducing disputes over valuation methodologies and fostering greater confidence among lessees and freeholders in the enfranchisement process.

Complex Concepts Simplified

Freehold Vacant Possession (FHVP) Value: The market value of a property if it were to be sold with the freehold (absolute ownership) and without any tenants or occupants.

Leasehold Enfranchisement: The process by which a leaseholder (tenant) acquires additional rights, such as extending their lease or purchasing the freehold, under the Leasehold Reform Acts.

Relativity: This refers to the comparative value of a leasehold property relative to its freehold counterpart, often expressed as a percentage. Relativity helps determine the premium payable for lease extensions.

Marriage Value: The increase in a property's value resulting from the lease extension. Under the 1993 Act, this value is shared equally between the landlord and tenant.

Conclusion

Key Takeaways:

The Upper Tribunal has set a new precedent by rejecting the Parthenia model as an unreliable method for leasehold enfranchisement valuations.
Traditional valuation methods, involving agreed percentage deductions from FHVP values, are upheld as more accurate and fair.
Precedents and extensive market evidence were crucial in affirming the credibility of the Tribunal's decision.
This decision is poised to enhance the consistency and reliability of premium calculations in future leasehold enfranchisement cases.

Significance: The Tribunal's ruling ensures that lessees and freeholders engage in a more predictable and equitable enfranchisement process. By endorsing established valuation practices over the Parthenia model, the decision mitigates the potential for flawed valuations that could unfairly inflate or deflate premiums payable, thereby supporting the integrity of the Leasehold Reform, Housing and Urban Development Act 1993.