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Challenge to established thinking on relativity fails. Kosta -v- Carnwath and others (Trustees of the Phillimore Estate). Upper Tribunal [2014] UKUT 0319 (LC)

Brief Facts

This decision of the Upper Tribunal relates to a claim to purchase the freehold of a house in London W8 under the Leasehold Reform Act 1967.  The price was disputed.  One part of the formula for calculating the price is to ascertain the freehold vacant possession value of the property and then to decide what proportion expressed as a percentage the existing lease value bears to the freehold possession value.  This proportion is known as the relativity.  Traditionally, valuers and tribunals have relied upon graphs of relativity such as those prepared by Gerald Eve and  John D. Wood.  This reliance is greater where there is limited or no real comparative valuation evidence in the market.  Here the appellant tenant sought to challenge the established thinking by relying upon evidence from a Dr Bracke, an academic and research economist.  Dr Bracke presented a relativity theory based on what was described as a “hedonic regression model” to predict relativity for different lease lengths.

Finding

The Upper Tribunal found that whilst Dr Bracke’s report on the work was interesting and a lot of effort had gone into it, they concluded that his work was unable to provide any reliable assistance in relation to the existing lease value as at the valuation date.  That no valuation evidence was submitted to explain and support the proposition that his work produced reliable guidance for relativities and that his work which studied relativities between 1987 and 1991 could not give reliable guidance for calculating the existing value of the property as at the valuation date which was in 2011. 

As an interesting aside, the Upper Tribunal confirmed that when assessing the existing lease value for a property there was an assumption that the existing lease has no enfranchisement rights but that other leaseholds available in the open market at the valuation date did have such rights.  The proposition that the assumption is to be based on other leaseholds in the open market also having ‘no Act’ rights was conceded as incorrect by the appellant’s counsel.

Comment

It is always difficult to challenge established thinking and practice.  The standard relativity graphs have been relied upon for many years.   Despite the fact that these graphs are themselves not without fault, the real problem with Dr Bracke’s work was that it was very theoretical and in some cases produced results which simply could not be correct as a matter of commercial market reality.  Relativity, particularly in high value cases, will continue to be hotly contested.  The established relativity graphs themselves have significant differences between them.  Whilst the RICS publishes these graphs, it does not endorse them.  Attempts to produce and agree a definitive graph has failed, due in part to the practical difficulties in gathering appropriate empirical data and interpreting it.

Christopher Sykes
Sykes Anderson Perry Limited
Follow Chris on Twitter ChrisSykes_SAP
October 2014