Private Eye reports challenge to ‘scandal’ of lease extension values

Private Eye today published reports of the legal challenge to the “scandal” of lease extension valuations mounted by chartered surveyor James Wyatt.

Wyatt, a former head of valuations at John D Wood, is urging the adoption of a more mathematically robust method to value short leases: that is leasehold properties, usually flats, that have less than 80 years left.

This is estimated to amount to around two million flats around the country.

If successful, Wyatt’s case will significantly reduce the costs of extending leases. It will also slice off millions of pounds in revenues for freeholders. Private Eye mentions the Grovesnor and Cadogan estates and Samantha Cameron’s half-brother Will Astor, who has been building up a £700 million residential freehold portfolio.

Wyatt believes the current valuation methodology is skewed in favour of freeholders – all have been drawn up by the grander chartered surveyor firms – and amount to the “biggest scandal of the leasehold world”.

Wyatt, who owns lease extension specialist Parthenia Valuations, employed two mathematicians to come up with a new methodology, including Dr Philippe Bracke, of the London School of Economics and now with the Bank of England. The hedonic regression calculations involved in the Parthenia model also formed the basis of a PhD for a research student.

Earlier this year, Wyatt headed into the property tribunal to challenge the freeholders’ costs of lease extensions at three prime London flats.

Two were in Chelsea where the freeholder was the aristocratic Sloane Stanley estate, which involved extensions costing £37,000 each. The other was in Cranley Gardens, in South Kensington, where the disputed cost was £200,000 and the freeholder was the Wellcome Trust.

The result was a nine-day legal show down in the Upper Tribunal in February – the ruling was in May – that cost the freeholders an estimated £750,000 to £1 million in legal muscle and professional witnesses. In contrast, Wyatt’s clients paid around £150,000.

The Gerald Eve graph that has been used to calculate lease extensions since 1996 – and which, as a matter of pure coincidence, was commissioned by the Grovesnor Estate – went up in a puff of smoke.

“In our view, the graph was to a large degree based upon subjective, albeit informed, opinion directed to the particular requirement of the Grosvenor Estate to espouse what it considered to be ‘defensible’ relativities,” the tribunal ruled.

“We accept that the GE [Gerald Eve] graph has had a very significant effect on settlements.”

In other words, the Grovesnor Estate had benefited mightily from its adoption.

Unfortunately for Wyatt, his Parthenia graph was also rejected as a “clock that strikes thirteen”: its lease extension calculations are based on valuations that are, in fact, higher than the market price actually paid for the flat.

In vain, did Wyatt argue that short lease term property in London has been wrongly valued for 20 years, and under-sold. This means that anyone who has bought a short lease in that time has little to complain about because they have paid too little (according to Parthenia). But anyone who has sold a short lease flat in this period has lost money irrevocably.

The case so rattled freehold owning interests that Savills has stepped in to the rescue. It has come up with another mathematical model for short lease valuations that is even less favourable to leaseholders than the Gerald Eve original.

The reason being that the Savills calculations are based on the flawed transactions that took place during the last 20 years when the Gerald Eve relativity graph was distorting the market, according to Wyatt’s view.

Under the new Savills system short lease flats have been devalued by a further 2-5 per cent.

Private Eye quotes Louie Burns, of Leasehold Solutions, who has carried out 200 lease extensions since the case was heard in February. All the freeholders involved have cited the Savills graph.

“It is absolutely disgraceful and must be challenged,” said Burns. “Unfortunately, only a handful of people understand this stuff, but the profits for freehold interests amount to millions a year.”

But the fight is not over for Wyatt.

One of his leaseholders is venture capitalist Adrian Mundy, who is prepared to fund the case at the Court of Appeal, and Wyatt is looking for other investors.

If his mathematical model were accepted by the courts, it would have considerable commercial value for Parthenia – as well as bringing in far cheaper lease extensions for two million flat owners.

First, however, he needs to get leave to appeal, about which he is optimistic with a decision expected by December.

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