Mundy v Trustees of the Sloane Stanley Estate: Court of Appeal rules in favour of landlords
Landlords and tenants alike have been eagerly awaiting the Court of Appeal’s decision in Mundy v Trustees of the Sloane Stanley Estate.
The case centres on the method of valuing the premiums to be paid by tenants to landlords for lease extensions and collective enfranchisements under the Leasehold Reform Housing and Urban Development Act 1993 (“the 1993 Act”). It is felt by campaigners that the current method of calculation of the premium can lead to landlords receiving an inflated premium.
The alternative method of calculating the premium for lease extensions and collective enfranchisements proposed in this case, if endorsed by the Court of Appeal, would have affected over a million leasehold properties, putting billions of pounds at stake and affecting landlords throughout the country. The decision is out; the Court of Appeal has upheld the decision of the Upper Tribunal, dismissing the alternative method of calculation.
Landlords everywhere can finally breathe a sigh of relief.
The 1993 Act provides tenants with less than 80 years remaining on their lease with a statutory right to extend their lease at a fair price. Tenants pay a premium to the competent landlord in return for the landlord granting an extension of their lease. The process for calculating the premium is complex, but broadly speaking it is based on the difference between the value of the lease before and after being granted an extension, known as the ‘marriage value’. Therefore, the increase in value of the lease is shared between the landlord and the tenant.
Mr Mundy was the long leaseholder of a flat in Elm Park Road, London, SW3. He had 23 years remaining on this lease, and applied to the landlord to extend his lease under the 1993 Act. The parties having failed to agree the premium, the matter came before the Upper Tribunal in 2016.
Mr Mundy argued that the current method used for calculating premiums results in landlords being effectively overpaid, and is therefore an inappropriate method of calculation. To alleviate the alleged unfairness to tenants, Mr Mundy proposed to the Upper Tribunal an alternative model for calculating the premium, known as the ‘Parthenia model’. The Parthenia model calculates the marriage value based on sales data between 1987 and 1991, the idea being that relying on data from pre-1993 would give a figure for the true value of the extension without the impact of the 1993 Act, thereby eliminating the effect of the 1993 Act on relativity.
The Parthenia model was rejected by the Upper Tribunal in May 2016 on the basis that it failed to satisfy economic and market logic. They held that the model did not distinguish between the relativities of longer leases and that consequently it produced results that were out of line with “real world” transactional evidence and market practice. They held that, although the model might be theoretically sound, due to reliance on archived data, it failed to match current market values, producing an impossible figure. Mr Mundy was granted permission to appeal to the Court of Appeal.
On 24 January 2018 the Court of Appeal gave its verdict, dismissing Mr Mundy’s appeal and refusing permission to appeal to the Supreme Court.
It was held that the Upper Tribunal had been right to hold that the Parthenia model was a “clock which strikes 13” and produced an impossible result. It suggested that the value of a lease without 1993 Act rights was worth more than the lease was actually sold for with 1993 Act rights. The Court of Appeal found that the Upper Tribunal, having carefully examined the Parthenia model at a 9-day hearing with extensive expert evidence, was entitled to conclude that it was defective. In view of the sustained criticism of the Parthenia model by the experts, the Court of Appeal supported the Upper Tribunal’s rejection of the model and banned its use in future 1993 Act cases.
However, it was noted by the Court of Appeal that the Law Commission has been asked by the Government to consider the simplification of values under the Act, and that the “holy grail” may one day be found.
What this means for you
This decision will undoubtedly come as a relief to landlords, who can now proceed with negotiations safe in the knowledge that the calculation of the premium remains the same for the time being.
This is decisive blow for campaigners, particularly given that permission to appeal to the Supreme Court has been refused. However, they may take comfort in the fact that enfranchisement under the 1993 Act has been specifically included in the Law Commission’s 13th Programme of Law Reform with the aim of simplifying valuations.
Watch this space …