[2025] UKUT 00324 (LC)

Chapter II of Part I of the Leasehold Reform, Housing and Urban Development Act 1993 (“the Act”) confers on the tenant of a flat who satisfies specified conditions the right to acquire a new lease for an additional term of 90 years beginning on the expiry of the current lease on payment of a premium calculated in accordance with Schedule 13 (sections 39(1) and 56(1) of the Act).

Under paragraph 2 of Schedule 13, the premium payable for the new lease is the aggregate of three sums: the diminution in the value of the landlord’s interest in the tenant’s flat resulting from the grant, calculated in accordance with paragraph 3; the landlord’s 50% share of the marriage value arising from the grant of the extended lease, calculated in accordance with paragraph 4; and any amount of compensation payable to the landlord under paragraph 5 (not applicable in this case).

Ascertaining the diminution in value of the landlord’s interest in the tenant’s flat under paragraph 3 of Schedule 13 requires a comparison between the current value of the landlord’s interest and its value after the acquisition of the new lease. The current value of the landlord’s interest comprises the current value of the right to receive the ground rent for the remainder of the term plus the current value of the freehold interest in the flat with vacant possession at the end of the current term in 54.71 years. No ground rent is payable under the new lease, so the value of the landlord’s interest after the acquisition of that lease is simply the current value of the freehold interest in the flat with vacant possession deferred for 144.71 years (the original unexpired term plus the additional 90 years under the new lease).

The ascertainment of the landlord’s share of the marriage value, calculated in accordance with paragraph 4, requires that the combined value of the freehold and leasehold interests before the acquisition of the new lease be deducted from the combined value of the freehold and leasehold interests as it will be after the grant of the new lease.

To determine each of the two components of the premium it is therefore necessary to know both the current value of the tenant’s interest in the flat, which is a lease with 54.71 years unexpired, and the value of the freehold interest in the flat unencumbered by the lease and with vacant possession (the freehold vacant possession value, or “FHVP”). As flats are not generally sold freehold, and as a freeholder enjoys advantages which a leaseholder does not, FHVP is usually arrived at by adjusting the value of the extended lease upwards (often by 1%).

Both FHVP and the value of the tenant’s interest in the unextended lease are determined by reference to the value which they would realise on a sale in the open market, subject to certain assumptions specified in the Act (one such assumption being that the Act does not confer any right to acquire a new lease of the flat or any other premises in the same building). The determination of those values requires the application of valuation judgment to evidence of transactions in the market, making the adjustments necessary to take account of differences between those real world transactions and the terms of the hypothetical sale required by the Act.

The relationship between the value of a short lease and FHVP is referred to in the jargon of enfranchisement valuation as “relativity”. Relativity can be a useful tool in determining the value of a short leasehold interest where there is reliable evidence of the value of long leases of comparable properties, from which FHVP can be derived. A number of graphs of relativity are published, based on substantial bodies of settlement evidence in which premiums payable for extended leases have been agreed, and the smaller number of tribunal decisions in which premiums have been determined. The relativity shown by such graphs has been referred to in these proceedings as the “Zucconi rate”, a reference to the Savills 2016 and Gerald Eve 2016 graphs of relativity which were endorsed by the Tribunal (Mr Andy Trott FRICS) in The Trustees of Barry and Peggy High Foundation v Claudio Zucconi & Anor [2019] UKUT 242 (LC).

Under section 48 of the Act, the terms of the acquisition of the new lease, including the amount of the premium, are determined by the FTT in the event of a dispute.