In what must be another first in the London enfranchisement market, the premium on my client’s July 2016 freehold claim on his house in St John’s Wood was settled at nearly £500,000 lower than the landlords initial quoting premium and some £145,000 lower than the premium the landlord’s valuers would recommend based on an earlier April 2015 where the unexpired lease would have been approximately one and a quarter years longer.
Rather than pay a higher premium for the freehold on assignment of the lease, my client decided to take the risk and ask the vendor to serve a fresh notice prior to completion in order to argue to a lower premium based on a post Brexit valuation date.
Analysis
The previous offer, if it had been accepted, would show a relativity of approx. 29.63% for the hitherto unexpired lease of about 16.68 years in line with the Upper Tribunal’s determination in Mundy that lowered acceptable relativity across the lease spectrum and as a result made the cost to enfranchise more expensive.
However given the new July 2016 claim resulted in a reduced unexpired lease length of approx.15.43 years – adjusting for house price deflation (0.73%) [Brexit per se having no effect]; a relativity of 41% is needed to produce the reduced premium that the landlord subsequently accepted.
The 41% differential is reached based on the purchase price paid for the existing lease at the same time as the assignment (and where there were 3 bids on the table following formal marketing by an international and highly regarded agent and where my client’s offer was not the highest bid but successful as he was the quickest to exchange) of the new (and accepted) freehold claim but duly discounted for the right to the freehold based on experience (per evidence of other Upper Tribunal determinations as to the discount for rights of similar unexpired lease lengths) as directed by the same tribunal in Mundy.
This is a remarkable result given the new Gerald Eve 2016 graph would indicate now a reduced relativity of about 28.83% (from this firms hitherto 1996 graph of 35.69%) let alone the new Savills 2015 unenfranchiseable graph indicating about 32.82%.
The landlords valuers of course will deny this is the case by no doubt adjusting the freehold value down in order to produce the same result based on a lower chosen relativity. But this cannot be right as they of course argued for a higher freehold rate £psf for the house than was settled based on 41% relativity!
So the relativity argument is far from dead. Watch this space!