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Averaging and Weighting—The Treatment of Comparable Evidence in Valuing the Premium Payable on a Lease Extension Claim
Nicola Muir analyses the Upper Tribunal’s decision in Deritend Investments (Birkdale) Ltd v Fung Tai Engineering Co Ltd and its implications for lease extension valuation practice, including the averaging and weighting of comparable evidence, relativity, and valuation methodology under the 1993 Act.
The case of Deritend Investments (Birkdale) Ltd v Fung Tai Engineering Co Ltd [2025] UKUT 324 (LC); [2026] 1 P. & C.R. DG9 concerned the premium to be paid for an extended lease under the Leasehold Reform, Housing and Urban Development Act 1993. The flat in question was an unexceptional property in a relatively busy market but the two expert valuers came up with wildlydifferent valuations. In its decision, the First-tier Tribunal (FTT) did not endorse either expert’s figure but came up with its own valuation which was nearer that proposed by the tenant’s valuer. Permission to appeal was granted to the landlord on the grounds that the adjustments to the comparable evidence used to reach FTT’s determination gave rise to some very surprising results. The Upper Tribunal (UT) in essence agreed that something had gone awry but ultimately determined that it was not satisfied that the FTT had wrongly applied the relevant principles of valuation practice or erred in its appreciation of the valuation evidence. The appeal wasdismissed; the landlord had won the battle but lost the war.
Although the appeal in Deritend Investments (Birkdale) Ltd v Fung Tai Engineering Co Ltd [2025] UKUT 324 (LC) was unsuccessful, the case gives some interesting guidance on the proper approach to comparable evidence and, in particular, the practice of averaging adjusted comparables to obtain a price per square foot for the subject property. Before looking at this, it isuseful to remind ourselves of how the price to be paid for a lease extension is calculated under the Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act).
How to value the premium for a Lease Extension under the 1993 Act
The 1993 Act entitles a long lessee of a flat to claim a 90-year extension to his existing lease at a peppercorn rent. In very simple terms, Sch.13, para.2 of the Act provides that the price to be paid for this extension comprises three elements:
(1) the diminution in the value of the landlord’s interest in the tenant’s flat resulting from the grant of the new longer lease.
(2) the landlord’s 50% share of the marriage value arising from the grant of the extended This is only payable if the existing lease has less than 80 years to run; and
(3) any compensation payable in respect of any loss suffered by the landlord to other property. This rarely arises and did not arise in this case.
The diminution in the landlord’s interest includes a sum representing the loss of capital value (the reversion) and a sum representing the capitalised loss of rent as a result of the existing rent being replaced by a peppercorn (the term). In Deritend, there was no dispute as to the calculation of the capitalised ground rent.
“Marriage value” is the sum which reflects the fact that the value of owning a flat both on a freehold basis and on a leasehold basis is worth more than the sum of the two interests being owned separately. The analogy used by the Law Commission in its Consultation Paper on reform was that of a pair of matching Chinese vases. The pair is worth more than the two vases individually.
The existing lease in Deritend had an unexpired term of 54.71 years which meant the new lease would be for a term of 144.71years. It was, therefore, necessary to calculate the market value of the landlord’s interest in the property subject to a 54.71 year leaseand deduct from that the market value of the landlord’s interest subject to a 144.71 year lease. This involved working out what the flat would be worth if it was freehold and (1) deferring that value for 54.71 years and (2) deferring that value for 144.71 years. The diminution in value is calculated by deducting (2) from (1). Once these two figures are known, the marriage value can be calculated. It is ascertained by deducting the combined value of the landlord’s interest in the flat once the new lease is granted plus the value of the tenant’s interest under the new lease from the combined value of the landlord’s interest prior to the grant of the new lease and the tenant’s interest under his existing lease.
The first step, therefore, is to work out what the market value of the flat would be if it was freehold. As flats are not usually sold ona freehold basis, the practice has arisen of starting with the value of the flat on a long lease and adding 1%. The usual way ofdetermining the long lease value is to look at what the flat itself was purchased for, or if there was no purchase near the valuation date, what similar flats in the area sold for at around that date. This is referred to as “comparable evidence”. As no two flats areidentical, it is usually necessary to make adjustments to the each of the comparable sales to account for factors such as the size ofthe flat, date of sale, floor level, condition and so on to arrive at a value per square foot then apply that to the square footage of the subject flat.
Once the long lease value has been determined, it is then necessary to work out what the market value of the subject flat is on its existing 54.71 year lease. Awkwardly, the 1993 Act imposes an artificial assumption that the leaseholder does not have a right toextend his lease. As leaseholders do, as a result of the 1993 Act, have a right to extend, this means that any market evidence has to be adjusted to deduct the value of “Act Rights”. The shorter the lease the more valuable the Act Rights are. In Daejan Investments Ltd v Collins [2024] UKUT 26 (LC); [2024] R.V.R. 291, the UT endorsed a list of percentages for the value of Act Rights which was derived from previous decisions. This provides a useful starting point for valuing Act Rights.
Reliance on comparable evidence for short lease sales is usually more difficult than for long lease sales because not many comparable flats are sold on a 54.71 year lease. The market for short leases tends to be more restricted as it attracts mainly cash buyers. Although the leading case of Sloane Stanley Estate Trustees v Mundy [2016] UKUT 223 (LC); [2016] L. & T.R. 32 emphasises that in determining value it is necessary to focus on the state of the market at the relevant date, sometimes no (or little) useful comparableevidence is available. If this is the case, valuers can resort to “relativity graphs” to work out what the short lease value of the flat is. These graphs have been produced by various estate agents and are based on substantial bodies of settlement evidence and tribunal decisions which show a trend in how much more a purchaser is likely to pay for a long lease than for a short lease. The graphsexpress what a flat on a 54.71 year lease would be worth as a percentage of what the same flat would be worth if it sold as a freehold with vacant possession (FHVP). The relativity graphs currently in favour with the UT are the average of the rates produced by the Savills 2016 graph and the Gerald Eve 2016 graph: see, Trustees of Barry and Peggy High Foundation v Zucconi [2019] UKUT 242 (LC)—“the Zucconi Rate”. These graphs can provide a useful cross check on the relativity figure derived by any market evidence.
Working out what “relativity” applies is part of the valuer’s mysterious art. However, one thing is clear—a flat on a shortlease is worth less than the same flat on a long lease. In Deritend, some of the adjustments made by the FTT resulted in the subject flat on its existing lease having a value which was greater than the adjusted valuations of the comparable evidence on a long lease. This could not be right and suggested that the adjustments had been over enthusiastic.
Adjustments in Deritend
The subject flat comprised five rooms (three or four bedrooms with one or two reception rooms) on the first floor of a large Victorian mansion block near Edgware Road station. The FTT considered that the sales of six flats in the same block were usefulcomparables from which to determine the value of the subject flat on a freehold with vacant possession basis (“FHVP”). It made various adjustments to each of the sales to arrive at a price per square foot for each flat. The FTT then took the average of each of these adjusted figures to arrive at a price per square foot for the subject flat. On appeal, the landlord’s basic case was that the FTT’s determination of the FHVP must have been wrong because it resulted in a relativity of 81.85% which was substantially out of step with the 74.37% relativity produced by the approved relativity graphs. As the UT stated in Daejan Investments Ltd v Collins [2024] UKUT 26 (LC) at [71]:
“… if the value calculated without the use of graphs is adrift from the value in the tables then something may have gone awry and it may be worth looking again at the adjustments.”
It was the landlord’s case that something had gone awry in this case with the adjustments which were, by their nature subjective and, in some cases, were very large. For example, an adjustment of 20% was made to the price achieved for a fourth floor flat to take account of the fact that it did not have a lift. Most tellingly, the adjustments made by the FTT resulted in two of the comparable properties having an adjusted sale price on a FHVP basis which was lower than the agreed value of the subject flat on a 54.71 year lease. This could not be right. The UT agreed that where the difference between the relativity produced from adjusted comparable sales evidence issubstantially out of the norm, there should be pause for thought. The Deputy President, Martin Rodger KC and Mrs Diane Martin MRICS FAAV stated:
“47. Where that outcome had been arrived at by giving equal weight to transactions in properties which were so different from the subject that it was necessary to apply multiple adjustments, one of as much as 20%, the need to question the utility of the transactional evidence and the reliability of the FTT’s own adjustments was acute. In short, a simple cross check based on the published graphs ought to have rung alarm bells and, as a matter of good valuation practice, ought to have prompted a more critical examination of the evidence.”
The UT then reviewed the schedule of adjusted comparable evidence which had been included in the FTT’s decision and noted thatthe resulting range of adjusted prices was very large. It then gave some useful guidance on the proper approach to averaging:
“49. Good practice should encourage an effort to understand or explain evidence at the outer edges of the range. If there is no obvious explanation, or if an outlier is significantly different from the subject so as to require significant adjustment, it may be appropriate to give it no weight, or less weight than other more transparent or more directly comparable pieces of evidence.
50. The technique of averaging values indicated by a number of pieces of evidence is convenient and unobjectionable where the evidence is of sales of very similar properties which require few adjustments to render them comparable. Salesof adjacent properties of similar size, style and condition will often transact at different prices within a range accounted forsimply by incidental circumstances or preferences rather than by substantive differences in value. There is no reason why a number of such pieces of evidence may not safely be combined to produce an average figure which can then be applied in valuing the subject property. But where there are more substantial differences between pieces of evidence, such as significant variances in condition, specification, or location, the technique of averaging evidence can be a dangeroussubstitute for a more considered valuation approach. A wide spread of sales prices is more likely to reflect the different characteristics of the property than the different preferences or negotiating positions of the buyer and seller. It is, of course,possible to make adjustments for particular features or characteristics, but there is often little or no evidence to support such adjustments, which instead depend only on the skill and subjective judgment of the valuer. Where a number of adjustments are required to enable comparison, the adjusted values may become increasingly remote from real world evidence.”
The UT concluded that, where the comparable properties do not share significant features, subjective adjustments to address particular characteristics can dilute the overall picture. It asserted that by giving more weight to the better pieces of evidence (i.e., those requiring the least adjustment), the risk of dilution is diminished.
Conclusion
Going forward, valuers should resist the temptation to simply produce an average price per square foot from a table of adjustedcomparable sales. If those adjustments result in a wide range of figures, some thought should be given to whether the comparable sales need to be weighted. The most relevant sales will be those of flats which share the same characteristics with the subject flat and these should be given the most weight.
This article first appeared in Landlord & Tenant Review (2026), Volume 30, Issue 2 and is reproduced here with the permission of the publisher, Thomson Reuters.
This content is provided free of charge for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Tanfield or by Tanfield as a whole.
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