UK's Property Market braces for Fall Out from Landmark Leasehold Case
By Maria Thermann

UK's Property Market braces for Fall Out from Landmark Leasehold Case

This week an appeal court ruling could result in the cost of extending leases being halved and buying freeholds for 2.1 million households in Wales and England could also become considerably cheaper. One thing first time buyers often overlook in their calculations if they can afford a UK apartment, house or flat in Britain is how much ground rent is payable and what monthly or annual maintenance charges are being applied. When householders feel they are being held to ransom by freeholders over the application of unreasonable maintenance charges, they often decide buying the freehold might be cheaper than continuing to pay maintenance. At this point, they discover that landlords apply totally archaic methods to calculate just how much the freehold is worth.

The Duke of Westminster is one of the nation's richest men. If the landmark legal challenge should prove successful, he could see the value of his estates drop sharply.

The court of appeal was going to rule on 16th January 2018 in the case of Mundy v. the Sloane Stanley Estate in a long-running legal battle over the calculation basis for extending a lease. So far nothing has been published about what the court has decided, but if the decision goes against rich freeholders like the Duke, then he could see a significant fall in the value of his assets, while 2.1 million households across England and Wales could buy their freehold for some 31% less than before.

This number of households reflects the leases with less than 80 years remaining, of which there are 490,000 in London alone. Extending leases back to 99 or 125 years could cost on average 31% less if the legal challenge is successful.

The Sloane Estate v Mundy case involves a small flat in Chelsea where the lease has fallen to less than 23 years - the freeholder is looking for £420,000 to agree an extension. In the background of the case is surveyor James Wyatt, who is challenging a system of lease valuation commissioned on behalf of the Duke of Westminster more than 20 years ago.

His Grosvenor estate in central London includes the freeholds to some of the most expensive real estate in the world, making the current Duke of Westminster, 26-year-old Hugh Grosvenor, one of the richest men in the UK with a fortune estimated at £9.5bn. Hugh Grosvenor owns 300 acres of prime central London land in Mayfair and Belgravia, including Grosvenor Square named after his ancestors.

At the heart of the case are the so-called "relativity graphs" used by real estate experts that set the value of short leases relative to the freehold.

James Wyatt said: "In 1996 the Grosvenor estate commissioned (the surveying firms) Gerald Eve and John D Wood to draw up graphs of relativity to set the price for lease extensions and buying freeholds. No one has had the time, effort or money to challenge them since. It’s a much bigger scandal than the ground rents issue, and a real David and Goliath battle."

Wyatt was formerly head of valuations at John D Wood. He left to set up his own consultancy, Parthenia Valuation, and argues that the mathematical models currently in use wrongly award too much to the freeholder.

"The big London estates will be particularly hit, but it’s not just about the London market. I hear from lots of people, many of them pensioners, who are trapped in declining leases and can’t afford to extend them. For example, I know one where the lease extension should be £30,000 but the freeholders want £50,000 and the pensioners can’t afford it," Wyatt said.

He estimates that leaseholders are currently being overcharged by £480m a year. In his opinion, nothing has changed because a "gravy train" of surveyors and solicitors are earning huge fees, and they are thus in favour or maintaining the existing system.

Not all of the freeholders are aristocratic individuals. Some are major charities, such as the Wellcome Trust, a big landowner around South Kensington. The Trust uses any surpluses to invest in cancer research.

Jo Darbyshire, of the National Leasehold Campaign, explained: "The Mundy case is a landmark moment in leasehold reform. If the appeal is successful all leaseholders will benefit by being able to pay less for lease extensions and freehold purchases."

She added: "Over the last 12 months the National Leasehold Campaign has been pushing for reform to leasehold law and an end to the leasehold scandal. It’s time to see if the establishment are ready to listen to a logical, balanced argument and level the playing field for leaseholders."

If the Mundy case goes in favour of the leaseholder, it is expected to go to the supreme court on appeal. But even if the case is unsuccessful, leasehold valuations are expected to drop significantly after a government review into the sector.

In December the Department for Communities and Local Government said it would be "working with the Law Commission to make the process of purchasing a freehold or extending a lease much easier, faster and cheaper". Among the valuation models believed to be among those under consideration by the department's reform is the one proposed by Parthenia Valuations.

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