New leasehold relativity graph offers flat owners a fairer deal in lease extensions

  • Leasehold Valuers launches new leasehold relativity graph to provide flat owners with a fairer and more reliable valuation for lease extensions
  • LV 2017 is the first graph to be developed to accurately represent flat owners’ perspective
  • New graph addresses the problems with existing relativity graphs used by enfranchisement professionals, which often favour the interests of freeholders 
  • The new graph aims to save leaseholders thousands of pounds on the cost of extending the lease on their flat

A leading leasehold enfranchisement valuation specialist has launched a new relativity graph which will provide leasehold flat owners with a fairer and more reliable valuation for their lease extensions.  

The new LV 2017 Relativity Graph, which has been produced by Leasehold Valuers in conjunction with a statistics specialist at the London School of Economics, is the first relativity graph developed by valuation specialists to better represent the perspective of flat owners. 

Leasehold relativity is important because it determines how much a leaseholder must pay to their freeholder to extend the lease on their flat.  

Leasehold Valuers believes that existing relativity graphs favour the interests of freeholders, at the expense of leaseholders, because they estimate lower relativities and consequently demand that flat owners pay a higher premium for their lease extension. The new LV 2017 graph addresses the problems with existing leasehold relativity graphs and has been made available to professionals working in the enfranchisement sector. 

Steve Jones, Director of Valuation at Leasehold Valuers, said: “Relativity graphs have been accepted for many years as a justifiable means of calculating relativity. However, it is widely acknowledged that a high degree of scepticism and subjectivity surrounds these graphs, not least because many of them use data from the Prime Central London market, which is not suitable to be used for a Greater London demographic, and most of the graphs pre-date the property market crash of 2007/8, and are therefore said to be out of date.  

“The vast majority of relativity graphs have been created by freeholders and the valuers that represent them; as such, they can favour the interests of freeholders at the expense of leaseholders, as leaseholders’ valuers have never seemingly got together and invested in the compilation of a graph that better represents their clients’ perspective. None of the existing graphs available to valuation practitioners can be entirely accurate, and our new relativity graph, LV 2017, seeks to redress this balance. 

“LV 2017 represents the fairest and most accurate way to determine relativity for flats, as it uses recent data solely derived from relativities collated from over 500 settlements in the Greater London area achieved from January 2015 to December 2016.” 

Leasehold Valuers’ graph is based on 503 settlement agreements achieved by the company over the last two years in the Greater London area. The settlements are equally spread across Greater London, with no one borough or area being disproportionately represented.  

Each settlement has been scrutinised in order to respond to the criticism levelled at existing relativity graphs and to ensure that all possible anomalies have been removed.  

The data was then reviewed by Anna Louise Schröder of the Department of Statistics at the London School of Economics, who was responsible for plotting the LV 2017 Relativity Graph. 

 What does the LV 2017 graph mean for leaseholders? 

Leasehold Valuers hopes that the new method will reduce the costs faced by leasehold flat owners when they need to extend the lease of their property. 

For example, using the LV 2017 Relativity Graph to calculate the premium payable to extend the lease on a property worth £250,000 with 72 years remaining on the lease, the average leaseholder would pay £11,205 to extend their lease. By comparison, leaseholders would face charges of £16,715 if the Gerald Eve graph was used and £20,090 if the Savills relativity graph was applied, which were both compiled using Prime Central London data. 

 What is relativity? 

Once the lease length of a property has fallen below 80 years it is said to be worth less than its full value. The property continues to lose value as the lease length falls. Leaseholders have a statutory right to extend their lease – once the lease has been extended the value of the property generally increases again. 

Generally-speaking, the difference in the value of a flat with an extended lease compared to one without is known as its ‘relativity’. When a flat owner then extends their lease, they are legally obliged to pay 50% of the resulting uplift in the property’s value (the ‘marriage value’), which is calculated using a relativity graph. 

 

Relativity is expressed as a percentage. A higher relativity means that once the lease length is extended, the corresponding increase in the property’s value will be less, compared to a lower relativity being applied. By using a lower relativity percentage, freeholders attempt to support the existence of greater marriage value and (because they receive 50% of the marriage value) therefore receive greater compensation from the leaseholder for the lease extension.  

 

What are the problems with existing relativity graphs? 

The recent Upper Tribunal (Lands Chamber) decision in the case of Sloane Stanley Estate v Mundy (2016) criticised each of the most frequently used relativity graphs, and found that much of the evidence used to compile them had been “altered subjectively” to achieve “favourable settlements” for freeholders. 

In the case of Mundy, the Upper Tribunal further suggested that Real World Evidence (RWE) could be used to calculate relativity. RWE uses evidence of recent market transactions around the valuation date to provide a useful starting point for determining the value of an existing lease. However, in practice it is very rare to find examples of the sale of similar properties to underpin the use of RWE, and this method is at least as subjective as using graphs to determine the likely value of a flat. 

Steve Jones continued: “The Mundy decision has divided opinion on relativity like never before and generated an increase in variation and inconsistency between practitioners.  

 

“Our experience shows that freeholders’ valuers have been increasingly using this uncertainty to demand disproportionately low relativities (and consequently much higher premiums) from leaseholders for lease extensions, by using anomalous RWE ‘evidence’ of sales of flats held on short, unextended leases to manipulate relativity calculations in their clients’ favour.” 

 

“We hope that the LV 2017 graph will set a new benchmark for relativity valuations in the residential leasehold sector and redress the balance for leaseholders in the determination of premiums payable for lease extensions.  

 

“We are confident that our graph is one of the least subjective and fairest relativity graphs now available to practitioners, and we hope that valuers will consider referring to our alternative graph when calculating leasehold relativity.” 

 

A copy of the Leasehold Valuers LLP Relativity Graph 2017 is available to download here: http://leasehold-valuers.com/relativity/  

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