Leasehold Enfranchisement Update
Case name and reference
Latifa Kosta v Francis Anthony Armstrong Carnwarth CBE  UKUT 0319 (LC)
The Upper Tribunal rejected a theoretical approach to relativity based on historical pre-Act evidence which had been analysed using the hedonic regression technique.
The case concerned the purchase of the freehold of 47 Phillimore Gardens pursuant to the terms of the Leasehold Reform Act 1967. The tenant held the property from the landlord upon a long lease which at the valuation date (13 October 2011) had 52.45 years unexpired. Before the LVT the tenant contended for a relativity of 87.04% and the landlord contended for a relativity of 75.5%. In the result, the LVT adopted a relativity of 76%.
The only issue was relativity. The tenant relied on a statistical study prepared by Dr Bracke by way of a hedonic regression analysis of many market transactions in 1987 to 1991. The landlord relied upon graphs published by RICS.
The Appellant tenant’s main argument was that the landlord had produced no comparable based valuation evidence, but instead merely relied upon graphs prepared by others and that those graphs were much less reliable than the study prepared by Dr Bracke.
The landlord argued that the approach of Dr Bracke was itself unreliable that his study was only evidence of the state of the marked in 1987-1991 and there were grounds to believe that it did not reflect the current state of the market.
The Tribunal observed that one of the main problems with Dr Bracke’s work was that in certain instances it produced results which were contrary to common sense:
“124. As regards the macro criticisms these principally consist of the argument that one must stand back and look at the results of Dr Bracke's work and must ask whether they make sense as a matter of economics and valuation. . . The point estimates of relativity given for certain periods of unexpired lease are unrealistically (and in some cases impossibly - more than 100%) high. Dr Bracke says that this may happen from a statistical model but what is important is the trend as shown by the curve which he has fitted through the various data points. However the curve brings with it its own problems. The Model 1 curve shows relativity peaking at around 80 years and then dipping, which is contrary to expectations. The Model 2 and 3 curves seem to be almost horizontal between about 50 years and 80 years. Dr Bracke suggested that the reason some of his results were contrary to expectations was that there was a general misconception as to what the results should be – in other words our expectations were wrong and his results were right rather than vice versa. Mr French as a valuer says that these results cannot be right. We agree with Mr French that these point results cannot be right and we further agree that an effectively flat graph between 50 and 80 years (suggesting that the value of a 50 year lease is equal to the value of an 80 year lease) also cannot be right. It does not follow from this that no weight can be placed on Dr Bracke's work, but it is clearly a matter of substantial concern.”
Notwithstanding that criticism the Tribunal did accept that so far as concerns the market in 1987/91, Dr Bracke’s work established on the balance of probabilities that the value of a 52.45 year lease in that market would have reflected a relativity somewhat higher than the average relativity shown for such a lease by the graphs subsequently published by the RICS, but they did not accept that was a sound basis for valuing as at the valuation date.
The arguments which persuaded the Tribunal to hold that Dr Bracke’s evidence of relativity as at 1987-91 could not be reliably used as at the valuation date were as follows:
(i) In Dr Bracke’s study all the relativities derived were for a lease without Act rights offered for sale in a market where all other leases also lacked Act rights. But the statute requires there to be assessed the amount which the property, if sold on the open market by a willing seller at the valuation date, might be expected to realise assuming that the existing lease carried with it no Act rights but that the market in which it was being offered for sale included other leaseholds which would carry with them Act rights.
(ii) The market in 1987/91 was different to the market on the valuation date in two ways:
(a) the mix of properties available with short leases forming a much higher proportion of properties on the market at the earlier dates as compared with the valuation date.
(b) The make-up of the pool of potential purchasers in the market, and the aspirations of such purchasers, are different at the valuation date as compared with the earlier dates.
The Tribunal then went on to consider the well-known drawbacks of the graphs published by the RICS in its report into relativity. The Tribunal pointed out that the trump card in favour of the graphs was that despite their drawbacks they were well known at the valuation date and would have constituted an important ingredient in the decision of potential hypothetical purchasers of the existing lease at the valuation date as to how much to bid for the existing lease.
 This is a criticism which can be made of any real world evidence derived from the period of time prior to the Act coming into effect. It would presumably therefore taint the graphs commonly relied upon.