Leasehold enfranchisement — Leasehold Reform, Housing and Urban Development Act 1993 — New lease — Determination of price — Discount for 1954 Act rights — Apportionment of marriage value
The appellant landlord was the owner of a
reversion to a ground-floor flat let to the respondent tenant; the lease
expired on 25 September 1995. The flat was formed by the conversion of a
substantial detached house. Following the tenant’s claim in March 1995, the
leasehold valuation tribunal determined the price payable for a new 90-year
lease to be £143,800. The landlord appealed; the matters in issue were the
vacant possession value and the apportionment of the marriage value.
allowed. Although the Lands Tribunal had the benefit of hearing the same evidence
that was before the LVT, the evaluation of that evidence by the LVT, with its
advantage of local knowledge, was part of the material properly before the
Lands Tribunal on which to found the latter’s decision. The vacant possession
value of the flat on the valuation date was £215,000. 40% was deducted to
reflect the risk of 1954 Act rights; the diminution in the landlord’s interest
was £128,000. Under para 4 of Schedule 13 to the 1993 Act, one assumes a ‘sale’
in relation to the apportionment of the marriage value; the tribunal is
required to imagine the landlord and the tenant both being willing to offer in
the market the statutory 90-year lease (together with the tenant’s subsisting
lease at a true value because, otherwise, the marriage value would not be
released) and agreeing together, for that purpose, the apportionment of the
marriage value that will thereby be released. It is not necessary to exclude
either the landlord or the tenant from such a hypothetical market; it would be
wrong to assess the apportionment on the assumption that the market is
exclusive to the landlord and tenant. In a haggle between such parties a
bracket would be arrived at of a share in 2:1 or 3:1 proportions. 72.5% of the
marriage value was appropriate for the landlord.
The following case is
referred to in this report:
Cadogan Estates Ltd v Shahgholi, [1999] 1 EGLR 189
Anthony Radevsky (instructed by Tibber
Beauchamp-Ward) appeared for the landlord; Iain Ross (instructed by Jennifer
Israel & Co) represented the tenant.
Giving his decision, JUDGE MICHAEL RICH QC said: The appellant landlord
appeals against the decision of the leasehold valuation tribunal (the LVT)
dated 4 July 1996, given after a hearing on 9 May and an inspection of the
subject premises and one other comparable flat, whereby it determined the price
of a new 90-year lease of the raised ground-floor flat at 27 Belsize Park
Gardens under the Leasehold Reform, Housing and Urban Development Act 1993 (the
1993 Act) to be £143,800. By order of the tribunal, dated 16 February 1998, the
respondent was given leave to file a cross-appeal out of time.
Agreed facts
The parties have agreed a statement of facts for
the purposes of the appeal as follows:
1. Location
The property is located on the south side of
Belsize Park Gardens approximately midway between its junctions with Belsize
Avenue and Englands Lane in a sought-after residential area known generally as
Belsize Park.
2. Description
The subject property comprises a raised ground
floor otherwise known as the hall floor flat created as a result of the
conversion of a substantial semi-detached house, which itself is planned on
ground, raised ground, first, second and third floors.
3. Accommodation
The subject flat comprises the following
accommodation:
|
Living room: |
30’9′ (9.37m) into |
|
Master bedroom: |
26’6′ (8.08m) into |
|
Second bedroom: |
18’2′ (5.54m) x 11’4′ |
|
Kitchen: |
10’1′ (3.07m) x 7’1′ |
|
Bathroom: |
Containing WC with high level cistern, |
4. Soil/waste line in master bedroom
A soil/waste line was installed by the landlord
under the floor of the master bedroom to facilitate the construction of an
en-suite bathroom if required.
5. The subject lease
The lease is dated April 9 1974 and was made
between Lionel Goldstein (the lessor) and Lionel Melville Friedland who has
subsequently assigned the same to Ronald Martin Conley (the lessee).
The term of the subject lease is 213/4 years (less the last
three days thereof) commencing on December 25 1973 and therefore expired on
September 25 1995. The ground rent payable under the terms of the subject lease
was £18.25 pa payable quarterly in advance.
The subject lease obliges the lessee to keep the
flat, including the windows and glass contained within, as well as all
appliances, in repair. The lease also obliges the tenant to pay to the lessor a
service charge equal to a quarter share of the lessor’s expenses in keeping the
house in which the flat is situated in repair and insured.
6. Proceedings under the Leasehold Reform
Housing and Urban Development Act 1993
The lessee served a notice dated March 27 1995
requesting the grant of a new lease under the provisions of section 42 of the
1993 Act. The lessee proposed a premium of £90,000 to be paid in return for a
new lease.
The lessor’s counternotice under section 45 was
served on May 24 1995. The lessor’s counternotice proposed that the premium for
the grant of a new lease should be £185,000…
7. Date of valuation
Both parties have now agreed that the date of
valuation should be the date of the lessor’s counternotice being May 24 1995 as
decided by the leasehold valuation tribunal.
8. The lessee’s current interest
Both parties have agreed that the lessee’s
current interest has no value.
9. Valuation yield
Both parties have agreed that a 7% yield should
be used throughout the relevant valuation calculations.
It is therefore to be noted that at the valuation
date the tenant’s lease had just three months to run. It was however accepted
before the tribunal that the lease was one that would continue until terminated
in accordance with Part I of the Landlord and Tenant Act 1954 (the 1954 Act),
and that the effect of the notice under section 42 of the 1993 Act was that any
notice already served, or to be served under the Act, was of no effect.
LVT’s valuation
The valuation as made by the LVT in their decision
was as set out below. I have added the three letters in brackets to the words
used by the LVT in order to identify the following elements of their valuation
that are most material to the present appeals:
(a) the vacant possession value of the flat
whether on a freehold or 90-year lease;
(b) the discount from that value to arrive at the
value of the landlord’s reversion subject to the tenant’s statutory rights
under Part I of the 1954 Act;
(c) the landlord’s share of marriage value as
determined in accordance with para 4(1) of Schedule 13 to the 1993 Act.
The LVT’s valuation was as follows:
|
Diminution in value of the landlord’s interest in accordance with |
|||
|
(a) |
|
|
|
|
Ground |
|
de |
|
|
Reversion |
|
£180,000(a) |
|
|
Less |
|
£72,000(b) |
|
|
|
|
£108,000 |
|
|
Less |
|
|
|
|
(b) |
|
|
|
|
Unencumbered |
£180,000 |
|
|
|
PV |
0.002267 |
£408 |
|
|
|
|
|
£107,592 |
|
Marriage |
|
|
|
|
(a) |
|
|
|
|
(i) |
£180,000 |
|
|
|
(ii) |
£408 |
£180,408 |
|
|
(b) |
|
|
|
|
(i) |
Nil |
|
|
|
(ii) |
£108,000 |
£108,000 |
|
|
Difference |
£72,408 |
||
|
Landlord’s |
|
|
£ 36,204 |
|
|
|
|
£143,796 |
|
|
|
|
|
|
Premium |
|
|
£143,800 |
Grounds of appeal
The appellant’s grounds of appeal were set out in
the statement of case filed on his behalf as follows:
1. The LVT did not give sufficient weight and
attention to the comparable information provided on behalf of the appellant
regarding the vacant possession value of the subject flat and consequently
arrived at a vacant possession value that was significantly below the true
value relating to the property.
2. The LVT’s decision to award only 50% of the
marriage value to the appellant landlord was incorrect.
3. In reaching the tribunal’s decision with regard
to what discount to attach to the vacant possession value to take into account
the tenant’s statutory rights to occupy the same and his intention to do so in
the future, the tribunal took into account the tenant’s evidence that he
regarded the subject flat as his family home and contemplated continuing in
possession for an indefinite period.
In support of the third ground of appeal the
appellant attached to the statement of case a copy of a letter written to a
third party by a companion of the tenant who shares occupation with him, which,
it was to be suggested, implied that he was proposing to sell his interest in
the new lease to which he was entitled under the 1993 Act.
The respondent’s cross-appeal was on the ground that
the LVT erred in awarding a discount on the vacant possession value of 40% and
that it should have been 60%.
Issues
The issues thus raised were therefore directed to
the three elements of the LVT’s valuation that I have identified, the vacant
possession value, the apportionment of marriage value and the discount for the
1954 Act rights.
Appearances
Mr Anthony Radevsky, on behalf of the landlord,
called, with leave, two expert witnesses, Mr Anthony Silver bsc (Est Man), arics, who had given evidence and conducted the landlord’s
case before the LVT, and Miss Alicia Casingena, an experienced negotiator in
the sale of property in the Belsize Park area. Mr Iain Ross, on behalf of the
tenant, called Mr Peter Berger frics,
who had also given evidence before the LVT. The tenant also had leave to call a
second expert, but his evidence was primarily directed to the discount for 1954
Act rights, and, in the event, was not necessary.
Discount for 1954 Act rights
In respect of the third ground of appeal as
formulated in the statement of case, Mr Radevsky, on behalf of the landlord,
accepted, in answer to a question from me in the course of his opening, that
the amount of the discount must be based on knowledge that might reasonably be
available in the market. This, at the least, cast doubt on the relevance of the
letter relied on in the statement of case, but the landlord wished to rely on
the decision of the Lands Tribunal in Cadogan Estates Ltd v Shahgholi*
(LRA/26/1996, 8 July 1998) and the evidence given in that case to support a
discount of only 15%. This required the leave of the tribunal under r 36 of the
Lands Tribunal Rules. It appears to me that it is necessary, in order to make
the system of hearing before the LVT and appeal to the Lands Tribunal by way of
a rehearing with evidence, workable, that the Lands Tribunal should do all in
its power to prevent new matters being raised for the first time in the Lands
Tribunal. Mr Silver before the LVT had contended for a discount of 40%. Mr
Berger had given evidence in support of a discount of 60%. The LVT accepted Mr
Silver’s figure. Mr Radevsky sought to persuade me that it was fair to allow
the matter to be reopened because the 40% figure was based on the existence of
a statutory tenancy whereas at the valuation date there was merely a risk of
such a tenancy. I would comment:
(i) whatever the valuation date there can never be
more than a risk: the claim for a new lease cannot be pursued after the tenant
has actually become a statutory tenant;
(ii) the valuation date should have been known at
the date of the LVT hearing; and
(iii) it certainly was known when the statement of
case was filed.
*Editor’s note: Reported at [1999] 1 EGLR 189
I therefore indicated that I was minded to refuse
leave, subject to the position that might arise on the cross-appeal.
The tenant’s cross-appeal would have made it
appropriate to reopen all valuation evidence as to the appropriate rate of
discount. I therefore indicated to Mr Ross, for the tenant, that, if the
cross-appeal filed, albeit with leave, some 18 months after the LVT’s decision,
was to be pursued, it must be right for me to hear all evidence as to the
appropriate rate of discount, and if I was satisfied that the LVT was wrong, whether
because the discount was too low or too high, to be free to correct it
accordingly. On this indication Mr Ross withdrew the cross-appeal, and Mr
Radevsky did not further pursue the appeal in regard to the discount for 1954
Act rights.
Agreement as to other valuation matters
Mr Silver’s valuation, prepared for the appeal,
differed from the LVT’s valuation in a number of minor respects other than the
three figures that I annotated at the outset of this decision. Particularly, he
took account, as I think must be correct, of the fact that the landlord’s
freehold reversion with vacant possession on 25 September 1995 (even
disregarding 1954 Act rights) is not an identical interest to a 90-year lease
at a peppercorn rent from 24 May 1995, nor is its value as at that date
necessarily identical to the leasehold’s value. Very sensibly, however, the
parties have agreed, for the purposes of this appeal:
(i) to treat any rent due to the expiry of the
lease as de minimis;
(ii) to treat the value of the freehold deferred
for three months as equal to the value of the 90-year lease under the 1993 Act;
and
(iii) to adopt a figure of £500 for the value of
the landlord’s interest once the new lease is granted.
Thus they accepted Mr
Silver’s revised valuation submitted after the withdrawal of the cross-appeal
as the basis for this tribunal’s decision, the tribunal merely being required
to arrive at its determination of the value of the 90-year lease, and its
determination of the apportionment of the marriage value.
Vacant possession value of 90-year term
Mr Berger and Mr Silver referred before the LVT to
the same comparables as have been relied on before me in support of the same
valuations as they spoke to before me, namely £180,000 and £240,000
respectively. The LVT accepted Mr Berger’s figure, for reasons that I will
rehearse. Although I have had the benefit of hearing the same evidence, and the
advantage of hearing it tested in cross-examination, I regard the evaluation of
that evidence by the LVT, with its advantage of local knowledge, as part of the
material properly before this tribunal, on which to found my decision. I would
not, therefore, substitute my own judgment for that of the LVT unless I was
satisfied, on the evidence, that the LVT’s decision was wrong. In this case the
LVT had the advantage of inspecting internally the subject property and one
comparable, upon which, as I think at least in part for that reason, it placed
special reliance. Since the essence of the landlord’s appeal is that the LVT
had insufficient regard to other comparable evidence, I did not think that I
would be assisted by inspection of the subject property only or even of the
subject property and one other comparable. With this indication, I was not pressed
to conduct any view.
The LVT recorded Mr Berger’s evidence as to vacant
possession value as follows:
Mr Berger described the subject flat as a
three-room unmodernised flat, located on the raised ground floor of a
five-storey semi-detached Victorian house of imposing appearance. In support of
his freehold vacant possession value he produced two schedules of comparable
properties; one relating to 5 Belsize Park Gardens and 24 and 26 Belsize Park
where prices of £177,500, £150,000 and £200,000 were achieved respectively in
transactions before the valuation date of May 1995; and the second, relating to
41 and 50 Belsize Park Gardens and 51 and 66 Belsize Park where prices ranging
from £180,000 to £229,000 had been achieved after May 1995. All of the comparables
were raised ground-floor flats in houses of similar date and construction as
the subject house, but enjoying differing degrees of modernisation and layout.
The subject flat was totally unmodernised, with no central heating, or changed
layout for the bathroom and kitchen. Assuming good-quality bathroom and kitchen
fittings, Mr Berger estimated the cost of refurbishment as £50,000, which would
enhance the value of the flat by some £75,000… Mr Berger said that he had
examined the freeholder’s schedule of comparables and noted that there were
wide variations in price, in part dependent on the degree of modernisation, and
also on individual purchaser’s taste. The price of £310,000 achieved in May
1995 for Belsize Park Gardens was exceptional and paid by a TV personality.
Some of the comparables included an area of the rear garden, which he would
value at an additional £40,000.
The LVT referred to Mr Silver’s evidence that his
valuation of £240,000 was supported by eight transactions between January 1995
and the hearing, of which he produced a schedule and particulars, ‘with prices
ranging from £260,000 and £310,000’ and went on to describe what it saw on
inspection as follows:
The subject flat was a raised ground-floor
conversion with high ceilings, approximately 12 ft 6 ins, and in the two main
reception rooms with highly ornate cornices and ceiling roses. The full-height
windows, including curved French windows in the main room, together with
period-style marble fireplaces, provided well-proportioned, well-lit rooms,
albeit disproportionate in size for occupation as a flat. The third reception
room was less attractive and the very high ceilings ill suited the somewhat
small kitchen and bathroom. The kitchen was basic in the extreme, with an
ancient wooden structure supporting a different sized sink unit with surface
plumbing and taps projecting over the sink. There were no other fixed kitchen
units. The bathroom was unimproved with a claw foot cast-iron bath, WC with
rusted high-level cistern but a more modern pedestal wash-hand basin. There was
no central heating.
The modest degree of modernisation, apart from
central heating, and the unsatisfactory layout of the only comparable that they
inspected internally is disclosed by the following description:
Our internal inspection of 5 Belsize Park Gardens
showed that, like the subject flat, the accommodation comprised a reception
room, two bedrooms, a kitchen and a bathroom with WC. The large front bedroom
had a galleried area creating a separate sleeping space over a part of the
room. This was reached by an open tread and rail staircase. The headroom below
this galleried area was rather limited [and, I interpolate, Mr Berger accepted
added nothing to the value of number 5]. The rear reception room had modern
casement windows, which were not in character with the style of the building,
and the second bedroom led directly off this room, with no other access. The
kitchen had a good range of modern fitted cupboards, but was a very dark room.
The bath/WC had part-tiled walls, a fairly modern suite of fittings and a
cupboard for a washing machine. Central heating was provided by radiators.
Overall we considered this flat lacked some of
the original features found in the two large rooms of the subject flat, but
provided good modernised living accommodation. The sale in October 1994 for
£177,500 included furniture throughout.
Although the LVT had been able to inspect only 5
Belsize Park Gardens it recognised the wealth of comparable evidence and dealt
with it in their reasons for their decision as follows:
There was no shortage of transactions relating to
comparable raised ground-floor flats in Belsize Park Gardens and the adjacent
roads of Belsize Park and Belsize Grove. The freeholder’s representative sought
to support his figure of £240,000 by reference to eight transactions of
modernised or fully modernised flats at raised ground-floor level, some with
gardens. From our internal inspection we found the subject flat to be very
different, being wholly unmodernised, without any resiting or alteration in the
shape of the rooms as originally constructed for the purposes of occupation as
a house; we also had the benefit of internal inspection of number 5 Belsize
Park Gardens, which indicated to us the potential for improvement. The tribunal
also noted that, for the freeholder, it was suggested that the subject flat in
a fully modernised state would let for around £350 per week, whereas in its
present condition it would let for about £180 per week. No specific evidence
was provided to support these values, nor was any correlation with capital
values advanced; however, this opinion of the wide difference in rental values
between improved and unimproved property did underline the significance of full
modernisation in attaining top value. More assistance was, therefore, in our
view, to be found in the comparables, numbers 24 and 26 Belsize Park and number
5 Belsize Park Gardens, put forward by the tenant’s representative to support a
figure of £180,000 for the subject flat in its totally unmodernised condition.
The transaction at number 5 seemed to us particularly relevant, taking place
some
£180,000 put forward by the tenant.
To regard the fact that the transaction at 5
Belsize Park Gardens was only seven months old as a reason for treating it as
‘particularly relevant’, when the LVT had the advantage of at any rate five
transactions in the landlord’s schedule that were closer in time, including
one, 41 Belsize Park Gardens, that was virtually contemporaneous, is clearly
unjustifiable.
There were, in fact, other reasons why the LVT
should not have placed the reliance it did on the three pre-May 1995
transactions referred to by Mr Berger. One, I think, would have been known to
the LVT, namely that prices for residential property had been rising steadily
from the date of the transaction regarding 24 Belsize Park (October 1993) till
the valuation date, whereafter prices remained flat. The LVT should not
therefore have relied on transactions even seven months before the valuation
date without adjustment.
The second reason depends on the reliability of
the evidence as to the facts of these transactions. Here I have great sympathy
for the LVT. It is entitled to receive hearsay evidence and strives to avoid
unnecessary formality. Nevertheless, I do think that it is desirable, at least
where both sides are represented by valuers, that the LVT should insist on the
facts as to comparables being agreed, by each surveyor confirming the facts
with the source, and if they cannot be so agreed some documentary evidence
being obtained.
Mr Berger partially identified his sources in
regard to his schedule of comparables, but did not produce any confirmation
from those sources. Perhaps, with some benefit of hindsight, it is possible to
identify some material before the LVT that might have indicated the
desirability of ascertaining more of the actual facts relating to these three
comparables. In regard to 24 Belsize Park, Mr Berger’s particulars did not
include the length of the lease the subject of the transaction: this makes the
value of the price as a comparable speculative. In regard to 5 Belsize Park
Gardens, the source of information was given, unusually, as ‘purchaser’s
solicitor’ rather than an agent. This might well have indicated some unusual
feature about the transaction, as indeed investigation for the purposes of the
appeal has shown: I am satisfied on the evidence before me that the furniture
was included because the purchaser stepped into the shoes of a previous
purchaser who had withdrawn and required an improved bargain in return for
completion on the day of the contract from vendors, who had by that time gone
abroad. There are at least as many special circumstances surrounding this
transaction as may be attributed to the fact that 41 Belsize Park Gardens (the
contemporaneous transaction that the LVT chose to disregard) was bought ‘by a
TV personality’. For myself, I would, in the circumstances, have placed more
reliance on the latter and contemporaneous transaction, but I think I can go so
far as to say that the LVT was wrong to place primary weight on the earlier
transaction, also of a partially modernised flat, which ought to have appeared
out of line with the generality of the more contemporaneous evidence.
In order to save costs Mr Berger used his client
to obtain the particulars that he included in his schedule. He tells me that he
did speak to the relevant agents himself, but, however it arose, I accept Miss
Casingena’s evidence that Hadleigh’s, the agent referred to by Mr Berger, have
no record of the transaction in regard to 26 Belsize Park that he put before
the LVT. For the purposes of this appeal, I will treat it as unproved.
The LVT record Mr Berger’s evidence as being that
all his comparables were of raised ground-floor flats. There is no issue that
flats at this level have a value that makes them directly comparable in a way
that other flats on other floors are not. In fact, Mr Berger’s schedule before
the LVT made clear that the transaction in July 1995 to which he referred at 41
Belsize Park Gardens was a sale of the second-floor flat, so it is difficult to
understand how it was misled. Mr Berger told me that he referred to this
transaction because of its proximity to the valuation date. I fear that I must
doubt the objectivity of his evidence, when he did not think it appropriate
also to refer to the May 1995 transaction of the raised ground-floor flat in
the same building, although he accepts that it was known to him.
I can understand that the LVT may more readily
have been misled into thinking that the sale of 51 Belsize Park in April 1996
at £180,000 was of a raised ground-floor flat, although Mr Berger did describe
it merely as ‘ground-floor flat’. In respect of this transaction, he produced
the particulars of the agency, which happens to be Keith Cardale Groves, for
whom Miss Casingena works. Those were illustrated by a picture of the raised
ground-floor flat. It seems to me to be silly, rather than dishonest, of agents
to seek to attract interest in properties in this way, but Miss Casingena’s
ready acceptance that such misleading particulars were not uncommonly used by
her firm significantly undermined the confidence that I would be willing to
place on her evidence if controversial. For the most part, however, she gave
useful information as to the circumstances of sales and history of properties,
which, if it were necessary to reconcile the apparent range of prices achieved
for similar flats in the area, might be of assistance. In fact, I have no
difficulty in concluding that the LVT placed particular reliance on two
transactions as to which insufficient facts are established to make them
acceptable as comparables at all, at least where good evidence of comparables
is available, and placed excessive reliance on a third, which was not only less
contemporaneous than was readily available but also had special features of
which it was not informed. I think it was further misled by its
misunderstanding that all the properties to which it had been referred were of
raised ground-floor flats.
With the wealth of transactions in Belsize Park
Gardens, there seems to be no need to refer specifically to the transactions in
adjoining roads. There were seven transactions concerning leases with not less
than 80 years to run or shared freeholds of raised ground-floor flats in
Belsize Park Gardens within eight months either side of the valuation date:
three before and four after. Mr Silver has analysed all except number 50 in
terms of rates per square foot of living space. They are, however, all so
similar in size that I do not think that this device for adjustment is of more
than marginal value. The essential adjustments that need to be made in order to
arrive at a valuation of the subject property are in regard to the effect of
improvements (all the comparables having been to some extent modernised or
improved) or the availability of gardens (numbers 77 and 41 having gardens
attached).
In fact, an adjustment for the availability of a garden
is not seriously controversial. Mr Silver would apply a percentage that would
produce a figure of about £30,000, Miss Casingena suggested a spot figure of
£35,000, and Mr Berger says £40,000. For the purposes of adjustment, I think
that it is safe to adopt Mr Berger’s figures and see the result: thus I treat
the sale of number 77 in January 1995 as being the equivalent of £260,000
without garden and of number 41 as equating to £270,000. Thus, one can produce
a schedule of transactions in chronological order together with some other
material information, as follows:
|
Property |
Date |
Price |
Features |
Baths |
|
Nº 5 |
October |
£177,000 |
No |
1 |
|
Nº 77 |
January |
£260,000 |
No |
2 |
|
Nº 41 |
May |
£270,000 |
Preserved |
Potential |
|
Nº 10 |
August |
£300,000 |
Preserved, |
1 |
|
Nº 66 |
October |
£260,000 |
Barrelled |
1 + |
|
Nº 26 |
January |
£275,000 |
‘Original |
1 |
|
Nº 50 |
January |
£229,000 |
Cornicing |
1 |
Notwithstanding the evidence, which I accept, that
the transaction in regard to number 41 involved gazumping, it appears to be in
line with the other four middle transactions: the £330,000 for number 10 is
no doubt explicable by the third bedroom. It is the transactions at numbers 5
and 50 which seem to be out of line. Although the LVT thought that the work at
number 5 showed the potential for improvement, its description of the resulting
layout seems to indicate a very inconveniently arranged flat, denuded of those
features that appear to have commanded high prices elsewhere, and I conclude
that this explains its low price. This is confirmed by the indication of the
agents’ particulars that number 50 enjoyed fewer of the grand features of the
original house (ceiling roses and fireplaces) than are preserved at the subject
property.
I was told by all the experts who gave evidence
that improvement or modernisation could not only add to value more than the
costs of works, it could also produce value less than cost. Mr Silver thinks
that a suitable refurbishment could be achieved at the subject flat for
£30,000, and he has produced to this tribunal builders’ estimates that give
some support for that figure, although I think that a full refurbishment of
this flat would include taking advantage of the opportunity to enlarge the
kitchen, which the demise makes possible but which Mr Silver’s pricing does not
include. Mr Berger put forward a spot figure of £50,000 for unspecified works.
The comparables have had work done, whose extent, except in regard to the
number of bathrooms and availability of central heating, it is not possible to
evaluate precisely. If I treat number 50 as having been partially modernised
and the five that fetched from £260,000 to £275,000 as being significantly
refurbished, I am led to the conclusion that a flat with all its original
features with the opportunity for a full refurbishment, creating a reasonable
kitchen and a second bathroom, would, in May 1995, have achieved a price of say
£210,000 to £220,000 and that for purposes of my determination I value it with
vacant possession at that date at £215,000.
Calculation of diminution in value of
landlord’s interest and of marriage value
The determination of the vacant possession value
of the flat whether (as agreed for the purposes of this appeal is the same) as
a freehold or on a 90-year lease, makes it possible to calculate the first
element in the statutory purchase price, namely the diminution in the value of
the landlord’s interest as follows:
Value of freehold
unencumbered £215,000
Deduct 40% for
1954 Act rights £
86,000
£129,000
Less agreed value of landlord’s proposed interest £500
Diminution in
landlord’s interest £128,500
The only other
element in the statutory purchase price in this case is the landlord’s share of
the marriage value as defined in para 4(2) of Schedule 13 to the 1993 Act as:
(i) the value of
the tenant’s new lease £215,000
plus
(ii) the value of
the landlord’s proposed interest £500
£215,500
Less value of landlord’s existing interest
(the tenant’s
interest being agreed at nil) £129,000
£
86,500
It is to be noted that this marriage value, as so
defined, is the difference between the aggregate value of the interests of
landlord and tenant in the situation before and after the grant of the 90-year
lease, but by bringing the value of the landlord’s proposed interest into
account in assessing the marriage value, the formula produces a figure equal to
the difference between the value of the tenant’s new lease and the sum he must
pay for it by way of compensation for the diminution in the value of the
landlord’s interest. In the particular circumstances of this case it
approximates to the amount of the diminution of the landlord’s freehold
interest by the tenant’s 1954 Act rights, which are superseded by the grant of
the new lease. In a case where the tenant had a substantial interest under the
lease, it is likely that marriage value would arise, because the limited period
of the lease would reduce the value of the tenant’s interest and the
postponement of the landlord’s reversion would reduce the value of his interest
so that, in combination, they would be less than the full freehold value with
vacant possession to which the tenant’s interest under a 90-year lease approximates,
certainly when combined with the landlord’s reversionary interest on such
lease. Thus one may compare marriage value as defined for the circumstances of
a statutory lease to that identified to arise in the case of a sale of the
freehold, where the ‘marriage value arising by virtue of the coalescence of the
freehold and leasehold interests’ on the sale of a house under the Leasehold
Reform Act 1967 is referred to in section 9(1C). This subsection was introduced
into the 1967 Act by section 66 of the 1993 Act. It appears to me that both
provisions are dealing with the same concept, but its definition in the case of
the grant of a 90-year lease has necessarily become artificial.
Apportionment of marriage value
Para 4(1) of Schedule 13 to the 1993 Act provides
that the landlord’s share of the marriage value so identified should be the
greater of 50% and:
such proportion of such amount [as may be
determined by agreement between the landlord and the tenant, or, in default of
agreement,] as is determined by the… tribunal to be the proportion which in its
opinion would have been determined by an agreement made at the valuation date
between the parties on a sale on the open market by a willing seller.
I have placed the words referring to an agreement
of the apportionment in square brackets, because of course they do not apply,
but the tribunal has to determine instead what ‘would have been agreed between
the parties [which must, I think, clearly mean the same parties, that is the
landlord and the tenant] on a sale on the open market by a willing seller’.
Thus the hypothetical circumstance that the tribunal must consider as giving
rise to an agreement, when the actual circumstances have not yielded an
agreement, is ‘a sale on the open market by a willing seller’. Counsel for both
parties say that these words mean no more than that I am to assume that both
landlord and tenant enter into the statutory transaction of the grant of a
90-year lease unconstrained to do so by the Act, but willingly. I accept that
this is probably the intention of the provision and its effect, but I find it
impossible to extract that meaning from the words of the Act, and I find
difficulty in translating that concept into any sure guide as to how to
determine the terms of the assumed voluntary agreement.
The concept of an ‘open market’ seems to me to
indicate the possibility of more than one purchaser entering the market and
competing to purchase the property of ‘the willing seller’. I accept that for
some purposes the concept of a willing seller imports a willing buyer, but if
the assumption required is no more than that landlord and tenant are
both willing to grant and take a lease whose effect is to release value,
largely to be held by the tenant, I do not see why they should assume a payment
by the tenant for that advantage at all, or certainly not a payment in excess
of equality.
What the Act requires, however, is the assumption
of ‘a sale’. The only sale that I can imagine where the parties would need to
agree an apportionment between themselves is one where both combine to bring
that which is to be sold to the market. In my judgment, what the tribunal is
required to imagine is the landlord and the tenant both being willing to offer
in the market the statutory 90-year lease (together, no doubt, with the
tenant’s subsisting lease at a true value because otherwise the marriage value
would not be released) and agreeing together, for that purpose, the
apportionment of the marriage value that will thereby be released. In such a
hypothetical negotiation it is possible for a tribunal to reach a conclusion as
to how the parties would agree to share out a value that both want to release,
but which neither could release without the co-operation of the other. It is
not necessary to exclude either the landlord or the tenant from such a
hypothetical market. What is, I think,
exclusive to the landlord and the tenant.
As in the case of a hypothetical negotiation for a
share of development value to be released by access, the tribunal’s decision as
to apportionment will be dependent on the relative position of the parties and
the value and cost of the alternative courses open to them if they do not make
the bargain that in principle they are willing to make.
In the Shahgholi case, the president said
at p22, line 36:
it is clear… that what is to be determined, in
the absence of agreement, is the proportion which would have been agreed at the
valuation date between the parties on an open market sale by a willing seller,
and further that a landlord’s share of 50% is stipulated as the minimum. As it
seems to me, the only significant component in this notional agreement which
would govern the variable share is the respective bargaining power of the
parties.
For the reasons that I have attempted to give, I
accept this approach; I, however, find it necessary to identify, more closely
than the president spelt out, what is the transaction upon which the parties
are engaged and in respect of which they could exercise their respective
bargaining powers.
Before the LVT and this tribunal Mr Berger
contended for a landlord’s share of 50%, but I hope I am not unfair to him to
say he made no attempt to relate that figure to the terms of the Act. It was
sufficient for him that it was what he thought to be fair.
Mr Silver proposed a landlord’s share of marriage
value at 80% by reference to the share of the total freehold value that a
regulated tenant can obtain, either in return for giving vacant possession or
by way of discount on taking a long lease at a premium. He produced a schedule
said to indicate the percentage of vacant possession value paid by regulated
tenants for long leases granted by Dorrington Investment Ltd, but as this gave
no details of any of the transactions and in any case is more indicative of the
effect of a regulated tenancy on the reversionary value than it is helpful in
determining the landlord’s share of marriage value as defined by the Act, I
have placed no reliance upon it.
In his evidence before me Mr Silver again
approached the matter by reference to the fact that the tenant had no saleable
interest and concluded that the only reason why the landlord should not get
100% of the marriage value is because the Act deems him to be willing. He was
therefore prepared to accept the 72.5% arrived at in the Shahgholi case.
It was, however, essential to this assessment that the tenant should also be
deemed to be ‘willing’ and so this kind of analysis is, in my judgement,
unhelpful, unless one brings back into mind what it is that he is willing for
and what he is bargaining about.
If the tenant were able to purchase the leasehold
interest worth £215,000 for the amount of the diminution in the value of the
landlord’s interest, namely £128,500, he would get a windfall of £86,500. This
is a sum that could be realised on the open market by the parties jointly
agreeing to grant such an interest with vacant possession. The tenant must be
seen as having that opportunity to turn an interest without value into a share
of such figure whereas, as I think the willing landlord may bargain for his
share on the basis that he would retain at any rate the present value of his
interest, namely £129,000 if no transaction proceeded. The deal would add about
two-thirds to the present value of the landlord’s interest, by in effect
allowing its immediate realisation, but any share that the tenant obtained
would, on this analysis, by pure windfall. Trying to imagine the haggle between
such parties, I can see a bracket being arrived at of a share in say 2:1 or 3:1
proportions. A mean figure between those round figures corresponds closely with
the 72.5% figure for which Mr Silver now contends and, using my own judgement
as best I may, without further assistance either as to relevant market
practice, which probably does not exist, or as to market valuation practice, I
adopt that figure.
Award
I therefore determine the premium to be paid as
the sum of the diminution in the value of the landlord’s interest, which I have
determined as £128,000 and 72.5% of the marriage value, which I have assessed
at £86,500 that is £62,712.50, namely a total of £191,212.50. Since the premium
so arrived at is a matter of calculation I see no justification for rounding,
and so determine the premium payable in that precise sum.
It was accepted between the parties that if the
landlord was successful on both issues, as he has been, costs should follow the
event. I therefore award the landlord the costs of the appeal and cross-appeal
to be taxed on the High Court scale, if not agreed, but since the tenant is
legally aided such costs are not to be enforced without leave of the tribunal.
I order taxation of the tenant’s costs in accordance with regulation 107 of the
Civil Legal Aid (General) Regulations 1989.
Additional note
Since publication of my decision dated 13 August
1998, it has been pointed out to me that it is the landlord and not the tenant
that is the legally aided party. Accordingly, my decision as to costs is that I
award the landlord the costs of the appeal and cross-appeal, to be taxed on the
High Court scale if not agreed. I further order taxation of the landlord’s
costs in accordance with regulation 107 of the Civil Legal Aid (General)
Regulations 1989.
The tenant has taken the opportunity created by my
error to make submissions as to the appropriateness of this order. The order,
however, follows the agreement as to costs made by the parties at the end of
the hearing, which I have recorded in my decision, and I see no proper grounds
for reopening this matter; the agreement in any case seems to me properly to
reflect what I would myself have decided.
Appeal allowed.
