Gazou
02-10-2009, 13:55 PM
I was prompted to research relativity. The literature is typically not of much help. Hague ("Leasehold Enfranchisement" 4th. edition updated by Anthony Radevsky and Damian Greenish) offers very little (the calculations therein as elsewhere ignore the issue of deriving "no Act" world prices); as does D. N. Clarke in "Leasehold enfranchisement: the new law", Francis Davey and Justin Bates in "Leasehold Disputes - a guide to Leasehold Valuation Tribunals".
Clarke makes the interesting observation that, "Privately negotiated lease extensions (outside the Act) would be reflected in "no Act" pricing" (page 252). It is also the case that the 1967 Act would have an impact on "real world" pricing and this may account in part for the rejection of the Savills graph (see below) as a reliable source.
Some research from 1998 by Leasehold Enfranchisement Limited's Timothy Curran based on Leasehold Valuation Tribunal decisions shows a disparity between term and relativity although typically leases with terms of more than 80 years see a relativity in the high 90s, those of more than 70 years the mid-90s, those of more than 60 years the low 90s, and the few of more than 50 years from mid-70s to mid-80s.
Anthony Radevsky has stated (March 2009) (see http://www.pla.org.uk/__data/assets/pdf_file/0005/75182/Anthony_Radevsky_paper.pdf ) at page 9: -
"Unfortunately, given that, in the open market, all long flat lessees have 1993 Act rights, and given that these must be ignored in carrying out a valuation under the Act, the evidential exercise is particularly difficult."
and at page 10: -
The problem of having to value while ignoring 1993 Act rights now runs throughout the valuation process in enfranchisement cases. The Lands Tribunal has developed a formula for determining the deferment rate based on financial evidence, having rejected the approach of looking at market evidence because it is tainted. In assessing marriage value, market transactions of shorter leases are similarly affected by 1993 Act rights and are regarded as unreliable as a result. This seems unfortunate, given the amount of market evidence of the sale of ground rent portfolios available. All that is required is a notional adjustment for statutory enfranchisement rights, which can sometimes be agreed by valuers.
Radevsky then also refers to the Lands Tribunal view in the Nailrile and Cadogan case: -
In Nailrile v Cadogan [2009] PLSCS 31, the Lands Tribunal had to consider relativity. The Tribunal’s conclusion was not entirely helpful for future cases. Graphs of relativity may be used, as may evidence of transactions (doing the best one can, given that they take place in the real world). There is no firm guidance as to the correct adjustment to make to real world transactions to reflect 1993 Act rights, nor as to which graph is preferable. The RICS has set up a working party. It has not yet reported, and seems unlikely to produce a single graph, given the different views of experts in the field. One may hope, however, that it will provide clear evidence as to how the various graphs and tables in circulation were compiled, so that their reliability can be taken into account.
A table and graph of relativities produced by Savills before the 1993 Act was used at one time (see for example from 2004 http://www.lease-advice.org/decisions/67pdf/286_Dir/286_Page1.htm where at paragraph 59 where is stated "FPDSavills' Table of Leasehold Values as a Proportion of Freehold is, of course, subject to adjustment for rights under the Act, for which Mr Roberts had made a reduction of 10% at 52.61 years. At 52 years the FPDSavills Table indicates a relativity of 81.7%, and a 10% reduction would have reduced this figure to 71.7% - slightly below Mr Roberts' relativity".)
The Savills 1992 data has, however, now been rejected as a reliable source such that in a 2009 LVT case (http://www.lease-advice.org/decisions/pdf/1827.pdf it was reported of a Cluttons' chartered surveyor (Mr. Hamilton), "In particular he said that the Savills 1992 graph was "hopeless". He considered that the Savills graph was based on the wrong methodology as it depended on random interviews".
In that same LVT case Mr. Hamilton stated: -
At 77 years unexpired he said that a wide range of relativity was shown, from 85% (Savills) to 96% (LEASE). Relying on "instinct and experience" he said that one reaches a "plausible range". Looking between 90% and 100% he fixed on about 95% which he said was supported by the Arrowdell decision, LEASE and the withdrawn Moss Kaye graph. He adopted Arrowdell at 95.4% as being the best he could do. He conceded in cross examination that his graph was largely conjectural and had not been followed by LVTs subsequent to Arrowdell.
Contrary views were expressed: -
Mr. Radevsky submitted that Cluttons graph, which Mr Hamilton relied on,
should not be accepted as it was based on settlements, was one sided and without details
of the settlement.
and for the other side Mr. Beckett (he of Beckett & Kay) stated: -
Mr Beckett went on to say that he did not think that the benefit of the Act was
very obvious when the Lease term unexpired was between 70 and 80 years, at which the
marriage value was relatively small. He considered 1% was realistically the lowest that
could be adopted to reflect the Act.
This 1% adjustment for the impact of the benefit of the 1993 Act was supported in the Decision (at paragraph 37): -
We have already decided in uplifting the leasehold sales evidence tofreehold on a real world relativity of 92.4% and both Mr Hamilton and Mr Beckett view the effect of the Act on the leasehold sale prices in this case being about 1%. Doing the best we can with the graphs and other evidence we determine a relativity of 92%.
Accordingly, I conclude: -
1. The relativity to apply to properly reflect the "no Act" world pricing is a matter of judgement and hence of negotiation and there is not much help available as to what may be appropriate in any particular case.
2. The application where unexpired lease terms are between 70 and 80 years appears to be only some 1 per cent. or so. Given the fairly wide disparity in relativity percentages as between different sources, the greater difference in relativity will arise from the choice of source rather than the extent of the adjustment to reflect the "no Act" world.
3. Where the unexpired lease terms are shorter, and especially where less than 60 years, the scope for negotiation is all the greater.
There is a lack of literature on this point (so far as my researches have unearthed) and if anyone can point to fresh that can contribute some better understanding, then I at least and no doubt others would be grateful.
Clarke makes the interesting observation that, "Privately negotiated lease extensions (outside the Act) would be reflected in "no Act" pricing" (page 252). It is also the case that the 1967 Act would have an impact on "real world" pricing and this may account in part for the rejection of the Savills graph (see below) as a reliable source.
Some research from 1998 by Leasehold Enfranchisement Limited's Timothy Curran based on Leasehold Valuation Tribunal decisions shows a disparity between term and relativity although typically leases with terms of more than 80 years see a relativity in the high 90s, those of more than 70 years the mid-90s, those of more than 60 years the low 90s, and the few of more than 50 years from mid-70s to mid-80s.
Anthony Radevsky has stated (March 2009) (see http://www.pla.org.uk/__data/assets/pdf_file/0005/75182/Anthony_Radevsky_paper.pdf ) at page 9: -
"Unfortunately, given that, in the open market, all long flat lessees have 1993 Act rights, and given that these must be ignored in carrying out a valuation under the Act, the evidential exercise is particularly difficult."
and at page 10: -
The problem of having to value while ignoring 1993 Act rights now runs throughout the valuation process in enfranchisement cases. The Lands Tribunal has developed a formula for determining the deferment rate based on financial evidence, having rejected the approach of looking at market evidence because it is tainted. In assessing marriage value, market transactions of shorter leases are similarly affected by 1993 Act rights and are regarded as unreliable as a result. This seems unfortunate, given the amount of market evidence of the sale of ground rent portfolios available. All that is required is a notional adjustment for statutory enfranchisement rights, which can sometimes be agreed by valuers.
Radevsky then also refers to the Lands Tribunal view in the Nailrile and Cadogan case: -
In Nailrile v Cadogan [2009] PLSCS 31, the Lands Tribunal had to consider relativity. The Tribunal’s conclusion was not entirely helpful for future cases. Graphs of relativity may be used, as may evidence of transactions (doing the best one can, given that they take place in the real world). There is no firm guidance as to the correct adjustment to make to real world transactions to reflect 1993 Act rights, nor as to which graph is preferable. The RICS has set up a working party. It has not yet reported, and seems unlikely to produce a single graph, given the different views of experts in the field. One may hope, however, that it will provide clear evidence as to how the various graphs and tables in circulation were compiled, so that their reliability can be taken into account.
A table and graph of relativities produced by Savills before the 1993 Act was used at one time (see for example from 2004 http://www.lease-advice.org/decisions/67pdf/286_Dir/286_Page1.htm where at paragraph 59 where is stated "FPDSavills' Table of Leasehold Values as a Proportion of Freehold is, of course, subject to adjustment for rights under the Act, for which Mr Roberts had made a reduction of 10% at 52.61 years. At 52 years the FPDSavills Table indicates a relativity of 81.7%, and a 10% reduction would have reduced this figure to 71.7% - slightly below Mr Roberts' relativity".)
The Savills 1992 data has, however, now been rejected as a reliable source such that in a 2009 LVT case (http://www.lease-advice.org/decisions/pdf/1827.pdf it was reported of a Cluttons' chartered surveyor (Mr. Hamilton), "In particular he said that the Savills 1992 graph was "hopeless". He considered that the Savills graph was based on the wrong methodology as it depended on random interviews".
In that same LVT case Mr. Hamilton stated: -
At 77 years unexpired he said that a wide range of relativity was shown, from 85% (Savills) to 96% (LEASE). Relying on "instinct and experience" he said that one reaches a "plausible range". Looking between 90% and 100% he fixed on about 95% which he said was supported by the Arrowdell decision, LEASE and the withdrawn Moss Kaye graph. He adopted Arrowdell at 95.4% as being the best he could do. He conceded in cross examination that his graph was largely conjectural and had not been followed by LVTs subsequent to Arrowdell.
Contrary views were expressed: -
Mr. Radevsky submitted that Cluttons graph, which Mr Hamilton relied on,
should not be accepted as it was based on settlements, was one sided and without details
of the settlement.
and for the other side Mr. Beckett (he of Beckett & Kay) stated: -
Mr Beckett went on to say that he did not think that the benefit of the Act was
very obvious when the Lease term unexpired was between 70 and 80 years, at which the
marriage value was relatively small. He considered 1% was realistically the lowest that
could be adopted to reflect the Act.
This 1% adjustment for the impact of the benefit of the 1993 Act was supported in the Decision (at paragraph 37): -
We have already decided in uplifting the leasehold sales evidence tofreehold on a real world relativity of 92.4% and both Mr Hamilton and Mr Beckett view the effect of the Act on the leasehold sale prices in this case being about 1%. Doing the best we can with the graphs and other evidence we determine a relativity of 92%.
Accordingly, I conclude: -
1. The relativity to apply to properly reflect the "no Act" world pricing is a matter of judgement and hence of negotiation and there is not much help available as to what may be appropriate in any particular case.
2. The application where unexpired lease terms are between 70 and 80 years appears to be only some 1 per cent. or so. Given the fairly wide disparity in relativity percentages as between different sources, the greater difference in relativity will arise from the choice of source rather than the extent of the adjustment to reflect the "no Act" world.
3. Where the unexpired lease terms are shorter, and especially where less than 60 years, the scope for negotiation is all the greater.
There is a lack of literature on this point (so far as my researches have unearthed) and if anyone can point to fresh that can contribute some better understanding, then I at least and no doubt others would be grateful.