Earlier in January, a landmark legal case over leasehold valuation methods failed to slash leasehold costs when the court of appeal ruled in favour of a major freeholder.
The case, Mundy v. the Sloane Stanley Estate, held significant stakes for the leasehold sector – as it concerned ‘relativity graphs’ – methods by which the value of lease extensions, or freehold acquisitions, are calculated.
The ruling meant that the standard valuation method currently in use, the Gerald Eve model, will continue to be employed despite concerns that it may excessively favour freeholders.
Sir Peter Bottomley, Conservative MP for Worthing told Mortgage Solutions that the ruling was a frustrating outcome for current leaseholders, and represents a cue for parliament to “introduce justice”.
“It will cost every leaseholder in the country,” said Bottomley.
“Whenever a lease needs extending, there’s a potential impact of this judgment in a way which parliament never intended, and which parliament cannot allow to continue.”
Uncivilised
Bottomley is co-chair of a 136-member strong all-party parliamentary group formed to fight leasehold abuse, such as the scandal involving escalating ground rents or developers reaping high profits from selling freeholds.
“On the particular point about the price of leasehold extension in England and Wales,” Bottomley continued, “These problems don’t happen in Northern-Ireland, and they don’t happen in Scotland.
“I can’t think of any other country in the civilised world where such uncivilised extortion is allowed to continue.”
By ruling in favour of the freeholder, the court of appeal upheld a previous Upper Tribunal decision – meaning that an alternative relativity graph developed by James Wyatt of Parthenia Valuation cannot be used in leasehold calculations.
Experts say this model, had it been adopted, could have significantly lowered costs in cases where the remaining lease length had dropped below 80 years.
The Gerald Eve model was developed in the mid-1990s at the instruction of the Grosvenor Estate, but property management company, Leasehold Solutions, said the model overcharges leaseholders by an estimated £480m a year.
An estimated 2.1m homes in England and Wales have leases of fewer than 80 years, with 490,000 in London.
“My view is that the Parthenia model is more right [than Gerald Eve],” said Bottomley, who added that while the Parthenia alternative may not be the best conceivable method, it would have been a considerable improvement upon the Gerald Eve model.
Commenting upon the outcome of the appeal, John Stephenson, head of leasehold enfranchisement at Bircham Dyson Bell, whose firm represented Mundy, said: “For the moment it appears that the Gerald Eve graph will remain in use until a more accurate method of valuation is tested in the Tribunal or the government intercedes with an amendment to the legislation.
“Unless and until this happens, leaseholders will have to pay a higher price than some of them feel they should for extending their leases or buying their freeholds,” he added.
However, Stephenson declined to say whether they will try to move the case up to the supreme court.
Prescription by statute
A number of initiatives are already underway to address concerns over the leasehold market.
Following a period of consultation in 2017 on tackling unfair practices in the leasehold market, communities secretary Sajid Javid announced in July a series of measures to be introduced which will cut out the “feudal practices” in the sector, including a ban on leaseholds for almost all new build houses, and ensuring that ground rents on new long leases are set to zero.
A spokesperson for the Ministry of Housing, Communities and Local Government said: “Legislation to introduce the measures that crack down on unfair leasehold practices will be subject to parliamentary time, but we intend for this to be as soon as possible.
They added that further details will be “set out in due course”.
Moreover, in December 2017, the Ministry announced that it was working with the Law Commission to “make the process of purchasing a freehold or extending a lease much easier, faster, and cheaper”.
Mortgage Solutions also contacted the Ministry for comment on how the ruling might affect its leasehold reform efforts, but the spokesperson declined to comment on individual cases.
Meanwhile, Justin Madders, Labour MP of Ellesmere Port and Neston, introduced a leasehold reforms bill last year.
If passed into law, the bill would, among other provisions, create a system for establishing the maximum charge for purchasing freeholds, as well as establishing a compensation scheme where leaseholders were misled into agreement.
The bill is due for its second reading shortly on 2 February.
Bottomley said that he expects the government to propose and parliament to enact the necessary reforms within the next two to three years, but added that leaseholders are vulnerable in the meantime.
“The problem is, every year, leaseholders will feel pressure to settle at a price that is too high, with transaction costs which are too great,” he said.
“We will push government and the Law Commission to change the system so it’s fairer to residential leaseholders.”
