Relativity Percentage Rate for Lease Extensions
The Zucconi Relativity Rate for a lease of 70 years is
What Relativity Rate Is Applied?
The FTT (tribunal) primarily base the relativity rate on the Zucconi Case, backed up by the Deritend Investments case, to calculate the relativity rate as an average of both the Gerald Eve 2016 graph and the Savills Unenfranchisable rate. This blended approach provides a well-established benchmark when direct evidence is lacking, allowing the tribunal to use recognised methodologies to determine the appropriate relativity for lease extensions. In the majority of cases the relativity given in the chart above can be used.
Extracts from Deritend Invesments:
The guidance given by this Tribunal endorses the use of the Savills and Gerald Eve 2016 graphs where there is no transaction evidence, notwithstanding that the subject of the valuation is outside PCL
We are satisfied that the outcome justified by the evidence provided to the FTT was a determination based on the average of the two 2016 PCL graphs. For the reasons we have already explained we do not endorse Mr Sharp’s averaging of the resulting relativity figure by reference to the Beckett and Kay 2017 graph.
Real world evidence
In the vast majority of lease extension valuation cases, the tribunal often relies on these established methods described above. However, the tribunal may depart from these standard models and look at real-world evidence when it is compelling enough to establish a more accurate relativity. In the context of cases such as the Mundy Case, the tribunal has indicated that while modeled approaches provide a useful starting point, multiple consistent transactions reflecting real-world conditions can carry more weight if they show a clear market trend. Isolated or one-off sales are generally insufficient on their own, as they may be influenced by specific circumstances that do not reflect the broader market conditions.
If real-world evidence is sufficient and reliable, it may override the standard Zucconi/Deritend approach. As established in the Mundy Case, the tribunal places significant weight on multiple consistent transactions that can establish a clear market pattern. Isolated transactions may not be enough to displace the modeled relativity rates, but a range of comparable evidence reflecting the market's view can justify an adjustment to the standard blended rate.
The case law has established that while graphs and modeled approaches like Zucconi / Deritend provide useful benchmarks, they are not absolute. In particular:
- Transactional Evidence Preference: If real-world sales evidence of leasehold properties with similar unexpired terms is available, the tribunal or court will often prefer this over a modeled approach. This is because actual transactions can more accurately reflect the market’s view of leasehold value in a specific location and time.
- Number of Transactions Required: While one real-world transaction can be relevant, tribunals typically look for multiple pieces of evidence to establish a pattern and ensure reliability. A single transaction may not always represent a market trend and could be an outlier due to unique circumstances of the sale. Multiple transactions help to establish consistency and credibility in the market's valuation.
- Weight Given to Evidence: The tribunal will assess the quality of the transactional evidence, considering factors such as the location, condition, comparability of properties, and market context. If the evidence is found to be robust, it can override the Zucconi / Deritend approach.
Case Law
FTT Decisions
A decision from the First-Tier Tribunal, Property Chamber (Residential Property) is not binding on other cases. It serves as a determination specific to the facts and evidence presented in that particular case. However, such decisions can be persuasive in future cases, meaning that they may be considered by other tribunals or parties as a point of reference or guidance.
The degree of persuasiveness depends on factors such as the reasoning used in the decision, the quality of the evidence, and how closely the facts align with subsequent cases. While not authoritative, First-Tier Tribunal decisions can still influence outcomes, especially when addressing recurring issues or interpreting common principles, like relativity in lease extension cases.
In the Arrowdell Case (Arrowdell v. Coniston Court) case, the Tribunal addressed the limitations of relying on individual transactions for determining relativity. The Tribunal noted that while examining certain real-world transactions could provide some guidance, it could not draw precise conclusions due to the lack of comprehensive details about the properties involved, such as their condition. This is highlighted in the quote:
"While it is not possible to draw any precise conclusions, not least because there is no evidence on the condition of any of the flats... We do not obtain assistance from the comparisons... which lack the firmer basis."
This indicates the Tribunal's preference for having multiple pieces of evidence or more robust data to support a reliable relativity rate, rather than relying on a single transaction or comparisons that lack detailed information. The decision implies that, when real-world evidence is used, it should be backed by consistent and substantial data to influence the final valuation.
A single transaction is insufficient evidence
In thecase concerning 45 Columbus Square, the tribunal had to determine the appropriate relativity rate for calculating the lease extension premium. The parties disagreed on the rate, with the applicant proposing 90.5% and the respondent suggesting 82.86%.
Paragraph 17 addressed the challenge of using real-world evidence to establish relativity. Mr. Holden, the respondent’s expert, acknowledged that the only potentially reliable real-world comparator was the sale of 30 Columbus Square, a short-lease sale on the open market. However, he did not consider it adequate to base relativity on a single transaction. The tribunal found this reasoning persuasive, recognising the limitations of relying on isolated sales, which may not accurately represent the broader market.
Given the lack of sufficient and conclusive transactional evidence, the tribunal decided to use relativity graphs, specifically the average of the Savills (2016) and Gerald Eve (2016) graphs, which resulted in a relativity rate of 82.86%. This approach was consistent with Upper Tribunal guidance, which endorsed the use of these graphs when direct market evidence is limited or unreliable.
In the case concerning 6 Westfield, London, the tribunal had to decide on the appropriate relativity rate for the lease extension. The applicant's expert, Mr. Chapman Burnett, initially considered real-world sales evidence, but found it inconclusive due to the lack of consistent short-lease sales data. While some transactions from the local area were presented, there were issues related to differences in property conditions, layouts, and sale circumstances, making direct comparisons problematic.
As discussed in paragraph 38, due to the absence of credible short-lease evidence, Mr. Chapman Burnett ultimately relied on relativity graphs. He used a combination of relativity graphs such as Savills Unenfranchisable and Gerald Eve. These graphs were considered more reliable for determining relativity, especially for properties outside of prime central London, compared to the limited transactional data.
In paragraph 59, the tribunal accepted Mr. Chapman Burnett's approach, agreeing that the real-world evidence presented was not conclusive enough to establish a reliable relativity rate. Using the combination of relativity graphs provided a more accurate method for calculating the premium under the circumstances. This decision emphasised the tribunal's preference for graphs over inconsistent real-world evidence when determining relativity.
Upper Land Tribunal Decisions
Decisions made by the Upper Tribunal (Lands Chamber) are binding on future cases in the First-Tier Tribunal (Property Chamber). The Upper Tribunal serves as a higher court of appeal for decisions from the First-Tier Tribunal, and its rulings establish legal precedents that must be followed by the First-Tier Tribunal in similar cases.
These decisions provide authoritative guidance on the interpretation and application of the law, including matters like valuation principles and leasehold enfranchisement. Consequently, tribunals and parties involved in future cases must adhere to the principles established in Upper Tribunal decisions unless they are overturned by a higher court, such as the Court of Appeal.
RICS Research Report
In Richard Murphy's 2019 report, the discussion around calculating relativity acknowledges that while the Upper Tribunal has shown a preference for real-world evidence over relativity graphs when such evidence is available, there are significant limitations in relying solely on transactional data. The report presents a nuanced view of this preference, emphasizing that real-world evidence is not always ideal or straightforward to use in practice.
The report highlights several key issues with using real-world sales data, especially for short leases:
1. Scarcity of Short-Lease Sales: There is limited evidence of short lease sales because most lessees, once eligible, choose to extend their leases before selling. This scarcity makes it difficult to gather a comprehensive and reliable dataset of short-lease transactions.
2. Quality of Short-Lease Evidence: When short lease sales do occur, they might reflect special circumstances rather than typical market behavior. For instance, sales may happen because the lessee is unaware of the lease extension process or because the sale is distress-driven. These situations can skew the data, making it less representative of the market.
3. Volatility in Analysis: Murphy points out that analyzing short lease evidence is particularly challenging because it often requires simultaneous adjustments to comparables with both short and long leases. Short lease comparables may not fully reflect issues like poor property condition, while long lease comparables may not adequately adjust for improvements. This can lead to unrealistic or inconsistent relativities when calculating the premium.
4. Relativity Graphs as a Necessary Tool: Given these challenges, the report suggests that graphs remain a valuable tool for determining relativity, especially in the absence of robust and reliable market evidence. However, it also acknowledges the limitations of graphs, including data gaps, reliance on historical transactions, and potential anomalies at certain lease lengths.
Overall, the report presents a balanced view, indicating that while real-world evidence is considered useful, its limitations often necessitate the use of relativity graphs, with neither approach being free from challenges.
A blended approach between Zucconi and Real World?
In situations where there is some transactional evidence, but it is scarce or inconclusive (for example only two or three cases), the Tribunal recommended drawing from a variety of sources, such as expert opinions and graphs, with careful consideration given to their limitations. The Tribunal adopted a combined approach to determine a relativity figure, highlighting the need to use multiple forms of evidence together rather than depending solely on a single transaction. Again, the tribunal would still be looking for a range of transactions, rather than relying on a single transaction. Photo evidence of the condition of the properties would help to carry more weight, as well as time on the market to provide any evidence of the transaction being a stresed sale.
In the case concerning 5 St James Court, the tribunal addressed how to calculate relativity, emphasizing the significance of relativity graphs. Although the Mundy decision suggests using real-world sales evidence when available, the tribunal found that in this instance, relying solely on two comparable sales was insufficient to disregard the graphs entirely. The tribunal highlighted that relativity graphs are a crucial tool for establishing a reliable baseline when transactional evidence is limited or inconclusive.
1. Blended Relativity Approach: In this case, the tribunal considered sales of two similar flats (27 and 50 St James Court), adjusting their prices for factors such as time and lease length. However, the tribunal noted that using only two sales did not provide a sufficiently robust dataset to establish relativity on its own. To achieve a balanced outcome, the tribunal blended the calculated relativity with the average of the Savills and Gerald Eve graphs (71.36%), resulting in a final relativity figure of 65.13%.
2. Importance of Relativity Graphs: The tribunal emphasised that relativity graphs continue to be a key reference in determining relativity, especially when real-world evidence is limited or requires significant adjustments. In this case, the graphs provided a reliable framework that helped to validate the adjustments made to the sales evidence.
The tribunal's decision illustrates the value of using a blended approach, incorporating both transactional evidence and established relativity graphs. While some real-world evidence was present, it was not sufficient to entirely override the use of graphs, which remained a critical component of the valuation process. This approach ensured a more comprehensive and proportionate determination of the lease extension premium.
In the Upper Lands Tribunal 207 Ashley Gardens case, it was determined that a single transaction could be relied upon as real-world evidence when the property in question had only recently been purchased. In this instance, the sale of 207 Ashley Gardens shortly before the valuation date was used as a primary reference for calculating relativity. However, the tribunal still combined this evidence with relativity graphs for validation. It is unlikely that the tribunal would have considered a single transaction if it had not been the same property in question. Being a recent decision in 2024 by the Upper Lands Tribunal, this carries significant weight in setting a precedent for similar cases.
"Relativity can then be used as a cross-check, although we reject the use of the 1996 graph which is too old to be of use."
"The relativity we have arrived at compares reasonably to the outcomes from the 2016 graphs, which are 74% and 73.68%."
Auction Sale is Not Sufficient Evidence
In the case of 42 Queens Court, the Upper Lands Tribunal evaluated different approaches to calculating relativity. The respondents' valuer, Mr. Neil Miller, argued that the auction sale price of £175,000 provided a reasonable starting point for calculating the existing lease value, as it reflected competitive bidding and a reliable indication of market value. He made two adjustments to the auction price: deducting £22,000 for tenant's improvements and applying a 21.49% adjustment for Act rights, arriving at a value of £120,100, equating to a relativity of 45.96% of the freehold value.
In contrast, the appellant's valuer, Mr. Robin Sharp, dismissed the auction sale as unreliable due to the property's marketing history and the fact that the price exceeded graph-based evidence. He relied on an average of the Savills and Gerald Eve graphs to establish a relativity of 32.1%, given the lack of comparable sales in the development.
The tribunal concluded that the auction sale alone was not a reliable indicator of the property's value, due to uncertainties about the circumstances of the sale. It determined that the first sale, adjusted for tenant’s improvements and Act rights, was a better reflection of market value. This adjusted value aligned more consistently with the enfranchisement graphs, leading the tribunal to base its final determination on this evidence rather than relying solely on the auction sale.
Summary on relativity
In conclusion, calculating the appropriate relativity rate for lease extensions typically relies heavily on established graphs, such as the Savills and Gerald Eve 2016 graphs, in line with the Zucconi and Deritend approaches. These models provide a consistent and recognised benchmark that tribunals use, especially when direct transactional evidence is limited. It is rare for an Upper Lands Tribunal or First-Tier Tribunal to completely disregard the graphs and rely solely on real-world evidence. The use of graphs offers a reliable framework, ensuring valuations remain consistent across cases.
While real-world evidence can influence the final relativity rate, it is only likely to override graph-based approaches when there is a large amount of unequivocal, non-auction evidence that clearly indicates a market trend. Cases such as 5 St James Court and 42 Queens Court have demonstrated that even when some real-world transactions are available, tribunals often still incorporate graph data to validate or adjust the calculations. The consistent application of graph-based relativity helps ensure a balanced approach to valuation, maintaining fairness and accuracy in lease extension premiums.
Relativity - impact on marriage value
I analysed an example flat valued at £400,000 with a fixed ground rent of £200 per annum. I examined the marriage value, ground rent compensation, and freehold reversion compensation. These three figures were then extrapolated over a period of 1 to 79 years to determine the percentage contribution of each component to the overall premium.
Since marriage value and relativity are directly proportional, the relativity percentage has the most significant impact on the premium at year 71, peaking at 59%. However, by further extrapolating the data based on the flat's value, I discovered that the year in which the relativity impact reaches its peak varies depending on the flat's price. The graph below illustrates how the flat's value influences the year in which relativity contributes the most to the premium.
You can see in the example of a £100k flat, the impact peaked with 58 years unexpired term at 45% weighting on premium.
Upon the enactment of the Leasehold and Freehold Reform Act 2024, freeholders managing portfolios of higher-valued flats are projected to incur more substantial capital losses on their assets compared to those overseeing lower-valued flat portfolios. At that time relativity will become a memory of the past for leasehold enfranchisment practioners.
