Leasehold enfranchisement – Lease extension – Premium – Respondent tenants seeking extension of lease – Property being sold twice in short succession – Issue arising concerning premium payable for extension – First-tier Tribunal (FTT) determining premium – Appellant landlord appealing – Whether FTT entitled to conclude that open market sale at auction was best evidence of value – Appeal allowed
The appellant was the landlord of a purpose built first-floor flat within a two-storey block on Kenton Lane, Harrow. Accessed from a communal area shared with three other flats, it had an entrance hall, two bedrooms, reception room, bathroom and kitchen, in around 600 sq ft. It was held under a lease for a term of 99 years less three days from 29 September 1936. The annual rent was fixed at £12.60.
The unexpired leasehold interest of some 16 years was marketed between March and June 2019 at a guide price of £129,950. On 4 July 2019, the vendors served a notice under section 42 of the Leasehold Reform, Housing and Urban Development Act 1993, as amended, claiming a new lease extending the term by 90 years. In the notice, the vendors suggested a premium of £49,950.
On the same day, the short leasehold interest subject to the notice was sold to a property company (B) for £112,000. B immediately put the property into an auction on 18 July 2019, at a guide price of £80,000. The respondents were the successful bidder, at £175,000. On 18 November 2019, the appellant served a counter-notice under section 45 of the 1993 Act, contending for a premium of £198,620.
The First-tier Tribunal (FTT) determined that the premium payable for the new lease should be £128,774. The appellant appealed. The question was, where a property had been sold twice within the space of two weeks at radically different sale prices, which transaction, if either, presented a more reliable indication of its market value.
Held: The appeal was allowed.
(1) The value of a tenant’s existing leasehold interest formed part of the calculation in assessing the premium payable by the tenant claiming a new extended lease under the 1993 Act. The tenant was required to pay a sum made up of: (i) the diminution in the value landlord’s existing interest; (ii) the landlord’s 50% share of the marriage value created; and (iii) compensation for any other loss the landlord would suffer (not relevant here).
To calculate the marriage value, the aggregate of the landlord’s and tenants’ interests before the extension was deducted from the aggregate value of those interests after extension. The value of the tenant’s existing interest was required as it formed part of those calculations. Any effect on value of tenant’s improvements was ignored.
(2) There were generally two methods used to value the tenant’s existing leasehold interest. The first was by reference to comparable evidence of sales of short leases in the subject block or nearby. In order to claim a new lease, the tenant had to have been a qualifying tenant for two years, but a notice given by a qualifying tenant to claim a new lease could be transferred to a new buyer. So, the market operated by the selling tenant, as in this case, serving a section 42 notice to claim a new lease shortly before selling the lease to the buyer, who inherited the benefit of the notice.
However, paragraph 4A of schedule 13 to the Act imposed an artificial assumption that the tenant’s right to enfranchise had to be ignored (Act rights). Thus, the values produced by any real-world sales of comparable short leasehold interests had to be adjusted to remove the element of Act rights: Trustees of the Sloane Stanley Estate v Mundy [2016] UKUT 223 (LC); [2016] EGLR 38 considered.
The second method was by reference to graphs of relativity produced by leading firms. In that context, relativity meant the relationship between the value of a leasehold interest in a property compared with its notional freehold value; the shorter the unexpired term of the lease, the lower the relativity.
(3) For the purposes of this appeal, the two most helpful graphs were those produced in 2016 by Savills and by Gerald Eve, each providing indications of relativity at differing lease lengths. When the two methods threw up different figures, it was for the good sense of the experienced valuer to determine what figure best reflected the strengths and weaknesses of the two methods which had been used: Deritend Investments (Birkdale) Ltd v Treskonova [2020] UKUT 164 (LC); [2020] PLSCS 145 considered.
As regards the short leasehold value, the FTT found that a contemporaneous bona fide auction sale was the best evidence of value and was preferable to an analysis based on graphs. After allowing £2,500 for tenant’s improvements, the FTT adjusted the auction sale price by 21.49% for Act rights, to arrive at a short leasehold value of £135,430. The resulting premium was therefore determined at £128,774: Allen v Leicester City Council [2013] UKUT 16 (LC) followed.
(4) This was a review of the FTT’s decision, confined to its determination of the value of the existing leasehold interest. In carrying out a valuation, it was necessary to have regard all available evidence, and then stand back and consider how it all fitted together. More weight might be given to the elements of evidence which seemed to fit a pattern, especially when, as here, some pieces of the jigsaw were blurry.
In the present case, neither of the sales, in isolation, was reliable. There was insufficient evidence before the FTT to illuminate the circumstances of either. The FTT fell into error in focusing solely on the auction sale, The auction price and the sale price were so far apart that any attempt to find a middle ground would be arbitrary. However, there was the additional evidence of the graphs produced by two separate specialist firms, and the consistency of the first sale price with the graphs indicated that the first sale price was more likely to reflect the market value than the auction sale.
The FTT should have used the first sale, and adjusted it for tenant’s improvements and Act rights, then checked against the enfranchisement graphs, as a better method of determining the existing lease value for the purposes of the enfranchisement calculation.
There was sufficient material before the Upper Tribunal to carry out that exercise. The tribunal would determine the premium payable at £153,498, and substitute that for the figure of £128,774 decided by the FTT.
Carl Fain (instructed by Wallace LLP) appeared for the appellant. Robert Denman (of Holden and Co LLP) appeared for the respondents.
Eileen O’Grady, barrister
Click here to read a transcript of Brickfield Properties Ltd v Ullah and others
