Leasehold Relativity in Enfranchisement Valuations

In very simple terms

Marriage value is equal to :

A – (B+C)

where

A = vacant possession Value,

B = freeholders current value

and

C = existing lease value.

As the leaseholder : A is what you end up with and C is what you start with. Both the Leasehold Reform Act 1967 (the “1967 Act”) and the Leasehold Reform Housing and Urban Development Act 1993 (the “1993 Act”) require the valuer carrying out the enfranchisement valuation to assume that the relevant Act does not confer the right to acquire the freehold or extend the lease. This means the valuer must assume that the Act does not apply to each of A, B and C above. It is common ground among valuers that A is not impacted by the presence of the Act. It is also common ground that C, the existing leasehold value, is impacted by the presence of the Act.

This produces an interesting valuation problem in that the statutory frameworks require the valuer to assess the value of a lease without rights and, almost without exception, there is no current evidence of such interests in the market. One can take this further and say there has been no evidence of leasehold sales which do not factor in the purchaser’s ability to share marriage value under the Acts, since those Acts provided for the leaseholder to share marriage value with the freeholder. It is easy to understand this when one considers the way in which buyers in the market approach leasehold acquisitions.

Buyers tend to look at the price they must pay for the lease at a given term as a step to the ultimate goal which is almost inevitably the extended lease or freehold acquisition. This has served to inflate leasehold values for a given term relative to the freehold value as the market has priced into the leasehold the share of marriage value conveyed to the leaseholder by the Act.

As time passed from the inception of the Acts the ability to see untainted evidence reduced to the point when the usual approach of valuers to assess the leasehold value was to derive the extended lease or freehold value and apply a relativity.

The Upper Tribunal recognised the evidential difficulties in fitting the correct relativity to the correct investment in Arrowdell Ltd v Coniston Court (North) Hove Ltd and requested illumination from the RICS. RICS commissioned a working group who produced in October 2009 an agreement on what the various graphs that had been in circulation to that point comprised or explained.

The latest consideration from the Upper Tribunal is Coolrace Ltd & Ors, Re, which has referred the question of the appropriateness of averaging the various graphs back to the RICS.

Leaseholders seeking to take advantage of the Act to extend their lease or buy their freehold should appoint an experienced Leasehold Reform Act practitioner to give them the best advice on this and other aspects of this complicated legislation.