11 August 2014

Landlord wins relativity appeal

Enfranchisement practitioners have been eagerly awaiting a decision of the Upper Tribunal in the appeal Latifa Kosta v The Trustees of the Phillimore Estate [2014] UKUT 0319(LC) which concerns the issue of relativity.

The tenant of premises known as 47 Phillimore Gardens, Latifa Kosta served a notice under the Leasehold Reform Act 1967 ("the Act") to acquire the freehold in October 2011 when her lease had 52.45 years unexpired. As the lease had less than 80 years left to run the premium payable included an element of marriage value, which is the uplift in value which results from the leasehold and freehold interests being joined. In order to calculate marriage value it is necessary to value the 52.45 year lease at the valuation date. To do this, a percentage is applied to the freehold vacant possession value. This percentage is known as the relativity. The Act requires that this valuation is carried out on the assumption that the Act confers no rights on the tenant to acquire the freehold.

The appeal is of interest because the tenant has been seeking to rely on the expert evidence of an economist, Dr Bracke in arguing the appropriate relativity rather than following the more traditional method adopted by valuers of relying on relativity graphs. In doing so he was contending for a relativity of 87.04% which was much higher than the 76% contended for by the Landlord’s surveyor, Oliver French of Savills.

In a Judgment handed down this week the Upper Tribunal dismissed the tenant's appeal and adopted the relativity determined by the LVT of 76% which was based on the landlord’s relativity. As a result, the tenant failed to reduce the total premium payable for the freehold which remains at £2,763,890.

The economist Dr Bracke who gave evidence in this case on behalf of the tenant is also involved in a number of other claims all of which are awaiting the outcome of this appeal. He has been advancing an argument that relativity should be determined differently from the conventional approach which requires valuers to rely on the various graphs published by the RICS as laid down in the case of Arrowdell Ltd v Coniston Court (North) Hove Limited 2006. Dr Bracke relies on hedonic regression analysis of sales data compiled from transactions that took place before the 1993 Act came into force.

Although the Upper Tribunal found Dr Bracke's work commendable and impressive they concluded that his work was unable to provide any reliable assistance in determining the existing lease value at the valuation date. In particular, they were critical of the fact that there was no supporting evidence from a valuer. They concluded that since the relativity graphs were clearly in existence and relied upon by valuers at the valuation date any hypothetical purchaser would have considered these graphs in deciding what relativity to apply. As a result, they dismissed the tenant's appeal.

Natasha Rees, head of property litigation at Forsters LLP who acted for the landlord commented "Although it is not the definitive decision that everyone had hoped for, it does clarify some important issues relating to relativity. It is clear that the so called "no Act world" is a misnomer. The Upper Tribunal have ruled that the Act actually requires you to assume a tenant with no statutory rights to acquire the freehold in a world where other tenants do have such rights. The use of pre-1993 Act sales data set does not, therefore, appear to have the advantages claimed by Dr Bracke. The Upper Tribunal said in their decision that the landlord should have done more to substantiate the relativity graphs it relied on because it was clear that the tenant was mounting an attack on the conventional method. It remains to be seen whether any of the tenants relying on Dr Bracke's methodology will mount a further offensive by producing the supporting valuation evidence that the Upper Tribunal said was lacking. If they do it does seem that further work will have to be done to substantiate the conventional graphs of relativity."


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