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The 'hedonic regression' cases: Sloane Stanley Estate v Mundy

Mon 16 May 2016

The 'hedonic regression' cases: Sloane Stanley Estate v Mundy

At lunchtime on Wednesday 11th May 2016, Morgan J and Mr Trott FRICS in The Upper Tribunal (Lands Chamber) handed down their eagerly awaited decision as to how relativity should be assessed in leasehold enfranchisement matters. The cases concern a dispute on relativity in lease extension claims under the Leasehold Reform, Housing and Urban Development Act 1993 ('the 1993 Act'). The central issue in both cases was the correct way to value an existing lease of a flat without statutory rights under the 1993 Act, which is key to valuation purposes under the 1993 Act.

Whilst the decision itself is some 80 pages long, some highlights are set out below:

The lessees had argued for relativity in the valuations to be determined by reference to a model('the Parthenia model') using a statistical technique known as 'hedonic regression'.

The tribunal found that the Parthenia model was not compatible with market evidence which showed that it produced an impossible result. It was described by the tribunal as 'a clock that strikes 13'.

Its use was therefore rejected mainly because the model was constructed using a large amount of data from market transactions between 1987 and 1991, at a time when the market was not influenced by the 1993 Act, and applied so as to isolate from that data the effect on value of lease length.

Whilst the tribunal rejected the Parthenia model it also criticised all the existing relativity graphs. The Tribunal held that the WA Ellis and CEM Graphs are 'not useful' and the Gerald Eve Graph is the 'industry standard' despite its shortcomings.

The tribunal suggested the preferred method of establishing relativity is not to use graphs at all. Where there is a recent real world sale of the lease, as there often will be, it suggests you should take that price and deduct for Act rights based on experience.

An alternative method is to use the Savills 2002 enfranchiseable graph to find the real world leasehold value, and make a deduction for rights based on experience.

If these methods throw up different figures the lowest figure should be used because relativity must logically have fallen since both 1996 (date of the GE Graph) or 2002 (date of the Savills 2002 Graph).

QUESTION: Has the Tribunal really set out a clear framework for valuers on the approach to be adopted to relativity in future cases? Or is the position still un-clear?

For advice and further information on leasehold law, please contact Yashmin Mistry - ymistry@jpclaw.co.uk

 

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