Last week the Upper Tribunal handed down its decision on a case that is known as ‘Hedonic Regression’.
Due to its complex nature only a small number of people seemed interested in it and fewer still understood the importance of the decision. It is no exaggeration to say that the implications and fallout will trigger the biggest transfer of wealth from leaseholders to freeholders since 1066.
Once the lease length of a property has fallen below 80 years it is said to be worth less than its full value. For every year the lease length continues to fall it loses even more of its value. This is known as ‘relativity’.
When a leaseholder extends their lease, they are directed – by law – to pay 50% of the resulting uplift in the property’s value; the lower the relativity, the more money the freeholder receives, so it has always been in their interests to ‘prove’ low relativity.
Some two decades ago, a number of London’s landed estates decided to commission the development of their own relativity graphs. These graphs, produced by chartered surveyors and estate agents (no, really!), would offer ‘evidence’ from lease extension cases with which they had dealt, but which obviously ‘proved’ low values on flats with low leases. This ‘evidence’ and the resulting ‘methodology’ would then ensure they were able to squeeze much more from their leaseholders.
These mighty freeholders had the wealth and power to ensure that their flawed graphs were used at the Lands Tribunal time and time again until such time that they were ‘accepted’ as viable methods or even ‘industry standard’.
For example, the Gerald Eve Graph (GE) is widely considered to be the ’industry standard’ even though the ‘Hedonic Regression’ decision says of it:
“The GE graph was adjusted subjectively” (65, p78); that it was “directed to the particular requirements of the Grosvenor Estate” (65); and the “Grosvenor Estate had received relatively favourable settlements” because of it(8, p67)”.
So, no proof offered, no evidence given, subjectively altered to suit the pockets of the central London estates but at the same time accepted as the ‘industry standard’.
This clearly means that leaseholders have been railroaded into paying more for their lease extensions than they would have if a less subjective way of calculating the real fall in the value of a property with a short lease were in place.
Parthenia, headed by James Wyatt FRICS, produced a graph that did that very thing, that was less subjective and based on real evidence. It used real evidence from the sale of flats in Prime Central London and by using nearly 8,000 pieces of evidence, tried to calculate this loss of value scientifically and remove the subjectivity of wholly partisan practitioners.
Once the freeholders had sight of the results of this statistical analysis, two things became immediately apparent. Firstly, leaseholders had been paying already bloated freeholders considerably too much for their lease extensions for decades. Secondly, these freeholders would be prepared to do anything in their power to stop this new relativity graph ever from being accepted, as it would wipe billions off the value of their property portfolios. So stop it they did.
The decision, an 80-page tome, was handed down last week and it must be singularly the most partisan, hypocritical and disingenuous legal decision for decades.
In a further overreaching pronouncement (which in gravity matched the orders to destroy the city of Tyre) they state “[the HR model] should not be put forward in a future case as a method of valuing [a lease extension] (165,p43)”. They wanted to exterminate this valuation model that was not only fair, but favoured leaseholders.
It examined the Parthenia model in eye-watering detail, with experts lining up to disprove it; the Wellcome Trust alone is rumoured to have spent many hundreds of thousands of pounds on its legal defence, even though the total disputed amount of this case was only £180,000. The judges subsequently rejected Parthenia’s model for ever for having some technical errors, which they stated could never be righted. This was experts gleefully ruled against its use on the basis that it was “unscientific” and it failed some of the tribunal’s ‘necessary technical tests’. This was setting very high standards indeed for relativity graphs. They helpfully reviewed all other existing graphs in Appendix C (p66) so how did the others fair?
In Appendix C, the judges cheerfully assassinate all the other ‘accepted’ relativity graphs the sector on which the sector relies.
The GE graph was “altered subjectively” (63, p77); achieving “favourable settlements”(8,p67) for the freeholders who funded the graph; of the College of Estate Management (CEM) graph, “there was no evidence that …had used it” (67, p79); John D Wood was based on LVT decisions and where there had been “concerns expressed over whether the LVT decisions always produce a correct valuation”(43,p74); The WA Ellis graph just reflected “the opinion of three of that firm’s partners” (69, p79); Charles Boston’s graph would “reflect any personal bias” and the Cluttons graph was “a moving average” (70, P79)!
The staggering hypocrisy, circular logic and Kafkaesque reasoning of the decision is right here; although all of the above graphs are proven to be unscientific, subjectively altered to suit their freeholder clients, and based on opinions and personal bias and nothing else.
Nowhere does this decision say that these flawed graphs a “should not be put forward in a future case”, no that judgment is reserved just for Parthenia’s model alone!
Worse still is the fact the failings of these graphs are mentioned as some dry mathematical calculation, which are undeniably slanted to favour freeholders. No mention is made of the fact that it is leaseholders who have had to pay inflated prices for lease extensions because of these graphs – and to the tune of many millions of pounds. The human cost of these subjectively altered graphs is a scandal, which is completely ignored by this case.
If, for example, a building firm had overcharged a little old lady for roof repairs to the same degree, they would have several episodes of Rogue Traders dedicated to them and a two-page spread in the Daily Mail, not to mention a special place in a police cell reserved for them!
If we can’t use the Partnenia model, nor any of the other fabricated relativity graphs we have relied on, how do we calculate relativity from now on?
Here comes the next inexplicable part of this decision, which, again, favours the freeholders and makes sure leaseholders pay for it.
There are two types of evidence used when trying to plot relativity data for leasehold properties. The Leasehold Reform Housing and Urban Development Act 1993 states the values should take place in a ‘no Act world’ arguing that once the Act come into being it affected the values of short lease properties. Therefore, the pure sales data used should come from before 1993. These are referred to ‘without rights’ properties.
The second type of data is ‘with rights’ (post-1993 evidence). Once this data is collated, it then needs to be adjusted down to guestimate the percentage difference between ‘with rights’ and ‘without rights’ values.
Remember, the lower the relativity percentage the more money the freeholder makes.
Well, the judges in this case seem to indicate that we should use a ‘with rights’ graph and then someone with a fancy London office, who represents the freeholder, uses their considerable experience to guess how low the percentage should be.
What could possibly go wrong with that method?
Although the judges mention the Savills 2002 graph as flawed but good (it has very low relativity rates) it seems they and the freeholders are all waiting expectantly for the new, improved Savills 2015 ‘with rights’ graph. This is also a relativity graph based on the Hedonic Regression method of valuation. Although this model, like Parthenia’s model, currently has technical faults, the judges for some reason do not proclaim that this graph should be cast out forever.
It may be worth mentioning at this point that the Savills 2015 graph “was produced specifically to be part of the Wellcome Trust’s evidence in relation to flat 5 [of this case]” (54, p75).
This is really bad news for leaseholders as this graph agues even lower relativity than the Gerald Eve graph, etc. and the rates can be argued down by an ‘experienced valuer’ to calculate how much lower this should be to account for the ‘no act’ world.
It is, however, good news for freeholders and good news for valuers, solicitors and barristers as this will lead to more litigation, which just like this judgment will come down in favour of the billionaire freeholders.
This case has been a dream result for the Wellcome Trust. If the court room was situated in Wellcome’s offices and the judges were salaried employees of theirs, they could not have got a more favourable result! They disproved the Parthenia Model, got it banned ever from being put forward in the tribunal again. They won the actual case on the three disputed flats and they got their mates, Savills, to produce a relativity graph that the judges loved and recommended we all use from now on, which lowers relativity even more in their favour. That really was a good day at the office.
Can it really be acceptable that two part-time judges who preside over the humble Upper Tribunal have the authority to make a judgment which affects property values across the whole country without political debate or the need for legislation?
Can it be fair that the methods used to ‘prove’ that this transfer of wealth from leaseholders to the establishment is based, by their own admission, on flawed evidence?
Can there be no redress to this decision? It irresponsibly casts doubt on the current flawed method of valuation while offering no viable alternative, thus opening the door to prodigious amounts of litigation to establish valuations which almost always favour billionaire freeholders?
Surely we need a judicial review as a matter of urgency before the ridiculously unfair and antiquated leasehold system we have in this country takes on a new more sinister twist.
This decision on relativity, which has just been fixed even further to favour freeholders is the LIBOR scandal of the property world.
©Barcode1966 – 2016