Lease relativity – A new theology?

Lease extension theology

The 1993 Act made certain that freeholders would not lose out on being forced to agree statutory lease extensions. This is perhaps ironic given how many freeholders have since the Act encouraged leaseholders to pursue the ‘informal’ route. Cynically, it might be interpreted that, however generous the 1993 Act left matters, there never can be enough profit in the leasehold caper.

Court created law?

No better a place to start considering the law on lease extensions than with someone who really knows their stuff:-

Another problem is caused by court-created law. I cannot explain this issue off the cuff because it goes beyond me, but I can refer to a recent upper tribunal lands chamber decision, whose neutral citation number for 2016 is UKUT 0223 (LC), case Nos. LRA 20, 21 and 35/2015. The case was between the trustees of the Sloane Stanley estate and Adrian Howard Mundy; between the trustees of the Sloane Stanley estate and Arnaud Lagesse; and between Sophie Nathalie Jeanne Aaron and the Wellcome Trust Ltd. A decision of 160-odd clauses was reached about the value that applies when people are trying to get a leasehold extension.”

“[…] the judgment has transformed the valuations of expiring leases. No consideration was undertaken in Parliament, yet this upturns what was believed to be the way to approach these valuations for the last 10 years,...”

“[…] I challenge most people to look through the document and find the actual judgment—I tried to do so in 10 minutes but could not; it took me 20 minutes. This is wrong.

“[…]Our job in Parliament is to stand up, without making wild accusations, and to be persistent about issues until either the law or practice changes.”

This was not some rabid street protester but Sir Peter Bottomley, conservative MP, in a speech on THE LOYAL ADDRESS on 19 May 2016.

A new theology?

The 1993 Act, and the case law that has built up around it, has created virtually a new theology for the 21st century. You might know theology? Theology is that ‘science’ about something nobody can prove. Nevertheless it is true.

Here are the words of a UK judgement in an Upper Tribunal (Lands Chamber) appeal in Elmbirch Properties Plc [2017] UKUT 0314 (LC), dated 27 July 2017:-

not encountered in reality

the sale which the statute requires must be assumed is not one encountered in reality. (24)”

The valuation exercise must be carried out on the basis of an artificial assumption. Chapter II of the Act provides that qualifying tenants may claim the right to a new lease, but paragraph 3(2)(b) of Schedule 13 requires that in determining the diminution in value of the landlord’s interest as a result of the exercise of that right it must be assumed that no such right exists. (29)”

Here is another ‘theological treatise’ from a UT case concerning Contactreal Limited and Ms Hannah M Smith [2017] UKUT 0178 (LC) dated 16 May 2017:-

The First Tier Tribunal had preferred the lessee’s evidence that there should be no adjustment for “the benefit of the Act” on the argument that purchasers would not distinguish between a lease with or without Act rights (and hence pay more for the former) since they did not know about or understand such matters.

The UT pounced:

to all intents and purposes hypothetical

Sales of leases without the benefit of the Act are, to all intents and purposes, hypothetical so there can be no direct comparison between sale prices with and without Act rights. But it has long been recognised by the Tribunal that having Act rights is a valuable benefit…”

“The amount of that benefit increases as the unexpired term reduces.”

But beyond doubt

It is beyond doubt that Act rights confer a benefit which is reflected in the value of leases in the actual market and which falls to be disregarded…” (31)

This is true theology. Something cannot be proved, is merely hypothetical and even admitted to be an artificial assumption that cannot be tested, but it is beyond doubt?

Welcome to the metaphysical world of lease extension valuations where the leaseholder pays real money for hypothetical assertions that cannot be tested at the time made. The last point is the important one. Nobody it seems cares to research whether any of these valuations eventually led to a real world sale at or around the valuation.

In the Elmbirch case, the Upper Tribunal at one point sounded resolute:

“19. The issues which arise in this appeal are matters of valuation principle. It is important that a uniform and predictable approach is taken by first-tier tribunals to such issues, and (as the Supreme Court has recently reiterated in BPP Holdings Ltd v HMRC [2017] UKSC 55, at [26]) it is an important part of the function of this Tribunal to develop guidance so as to achieve consistency in the FTT, so that different practices are not adopted in different parts of the country.”

But then later in the judgment said this:

63. Our conclusions in this unopposed appeal and on this limited evidence should not be relied upon as a precedent for relativity levels, or other adjustments, in other cases which should continue to be determined on the evidence adduced in those cases.”

Goodness forbid a higher court should accidently establish a consistent precedent for lease extension valuations.

In fact, Nelson’s patch is immediately applied to ward off any danger of the real world interfering with this new theology.

In the Elmbirch case, one lessee had served an extension notice and ON THE SAME DAY achieved a real world sale for £128,500for the existing lease.This sale completed.

Bear in mind that the valuation date is the date of the Tenant’s Notice and the Mundy case had insisted that real world ‘comparables’ should have priority over ‘theological’ assumptions (my words…Mundy referred not to theology but to “relativity graphs”).

The First Tier Tribunal rejected this real world slam dunk valuation by arguing:

28. The Tribunal is of the opinion that in reality any purchaser would be nervous in taking on a short lease with simply the promise of being able to extend the lease and this will inevitably be reflected in the bid for the property.”

The UT was having none of this:

65. The notion that the value of a leasehold interest may be depressed if it is offered for sale with the benefit of a notice of claim does not withstand scrutiny, and the opposite is clearly the case.”

The UT went on…

69. An open market transaction in which the property to be valued has changed hands at or around the valuation date must be the starting point for a valuation…”

Only a starting point?

70. It is therefore necessary to consider whether there is any other evidence which would suggest that the sale price was not “a true reflection of market value”.”

Actual sale of the flat the same day not enough?  The UT went into a confident, but entirely theoretical, treatise on ‘comparable’ sales in the vicinity and landed on a sale in the same block three months after the case in hand, then used local land registry indices to, again entirely theoretically, backdate some calculations to arrive at:

83. Taking all of this evidence into account we consider that an appropriate value for the short leasehold interest in No. 85 at the valuation date is £140,000, or say £135,000 allowing 3.5% for Act rights.”

Recall that what the leaseholder got in the real world was £128,500? The expert Tribunal seemingly with theological conviction felt it not only necessary but reasonable to ignore the real world price achieved and, having done so, apply another entirely hypothetical deduction.

Perhaps Sir Peter Bottomley’s comments about ‘court based law’ were prophetic?

After all, don’t theologians love a good prophet?

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