Leasehold enfranchisement — Leasehold Reform Act 1967 — Determination of enfranchisement price — Effect of rent review provision — Meaning of ‘current open market ground rent levels’
By a lease dated 25 August 1977 the appellant
tenant held a 99-year term of a dwelling-house at an initial rent of £35 pa.
The lease provided for rent reviews in 2008 and 2041 to an annual rent ‘as
shall be ascertained by reference to current open market ground rent levels’.
Following the service of a notice to acquire the freehold under the Leasehold Reform
Act 1967, the leasehold valuation tribunal determined the price under section
9(1) of the Act to be £5,800. The tenant appealed, contending that the meaning
of the rent review clause required the review rent to be ascertained by
reference to the level of rent customarily reserved when a house is let on a
long lease at a premium. On this basis, the valuation under section 9(1) should
be £758. The respondent landlord submitted that the review rent was to be
ascertained by reference to the annual return available on the open market to
an owner of land who lets it for building purposes, excluding any return from
improvement of the land or building; the purchase price would then be £5,800.
was allowed. On the true construction of the rent review provision in the
lease, the review rents were nominal grounds rents, that is to say they were to
be ascertained by reference to the level of rent customarily reserved when a
house is let at a premium at a long lease. The purchase price was £758.
The following cases are referred to in this
decision.
Baker v Severn
Trent Water Authority unreported decision of West Midlands LVT (ref
1989/WM/244)
Bartlett v Salmon
(1855) 6 De GM&G 33
Basingstoke and Deane Borough Council v Host Group Ltd [1988] 1 WLR 348; [1988] 1 All ER 824;
(1987) 56 P&CR 31; [1987] 2 EGLR 147; 284 EG 1587, CA
Brown v CEFN
Estates Ltd unreported decision of West Midlands LVT (ref 1992/WM/456)
Burford Estates & Property Co Ltd v Lee unreported decision of West Midlands LVT (ref 1993/WM/558)
Cummings v Severn
Trent Water Authority unreported decision of West Midlands LVT (ref
1985/WM/114)
Delaforce v Evans
(1970) 22 P&CR 770; 215 EG 315, LT
Gajewski v Anderton
[1971] EGD 127; (1971) 217 EG 885, LT
Jenkins v Bevan-Thomas
(1972) 221 EG 640 & 1346, LT
Shutt v Phillips
(1973) 227 EG 1186
Stewart v Alliston
(1815) 1 Mer 26
This was an appeal by
Dennis Terence Jarrett from a decision of West Midlands Leasehold Valuation
Tribunal, which had made a determination under the Leasehold Reform Act 1967 in
proceedings against the respondent, Burford Estates & Property Co Ltd.
Douglas Readings (instructed by Lawrence &
Wightmans, surveyors of Birmingham) appeared for the appellant; Michael J
Dudley (instructed by Harris Cooper Taylor, of Solihull) represented the
respondent.
Giving the decision of the tribunal, MR PETER H CLARKE FRICS said: This
is an appeal by the tenant of a long leasehold house in Redditch against the
decision of a leasehold valuation tribunal fixing the purchase price on
enfranchisement under the Leasehold Reform Act 1967 at £5,800.
Mr Douglas Readings of counsel appeared for the
appellant and called Mr EJ Rutledge FRICS
IRRV ACIArb; Mr Michael J Dudley of counsel appeared for the respondent
and called Mr KF Davis FRICS.
Facts
The parties have helpfully prepared a statement of
agreed facts, and I find the following facts:
1. By a lease dated 25 August 1977 (the lease of
the appeal property) the land and dwelling-house known as 23 Lindridge Close,
Redditch (the appeal property) was let for 99 years from 25 December 1975 at an
initial rent of £35 pa and in consideration of a premium or £11,350. The
landlord is now Burford Estates & Property Co Ltd, the respondent, and the
tenant is now Dennis Terence Jarrett, the appellant.
2. The lease or the appeal property provides for
reviews of the rent on 25 December 2008 and 2041 to an annual rent (being not
less than the initial rent) ‘as shall be ascertained by reference to current
open market ground rent levels’, such rent to be agreed by the parties or, in
default or agreement, determined by an expert nominated by the president of the
RICS (the rent review provision).
3. On 26 January 1994 Lawrence & Wightmans,
agent for Mr Jarrett, served notice on Burford under the Leasehold Reform Act
1967 (the 1967 Act) stating that he desired to have the freehold of the appeal
property. The price was not agreed and was referred to a leasehold valuation
tribunal of the West Midlands Rent Assessment Panel. By a decision dated 3
August 1994 the tribunal determined the price under section 9(1) of the 1967
Act to be £5,800. On 10 August 1994 Lawrence & Wightmans appealed against
that decision to this tribunal.
4. The appeal property is situated in Winyates
Green, an attractive residential area on the eastern outskirts of Redditch in
Hereford and Worcester. Redditch is situated about 12 miles south of Birmingham
and was designated a new town in 1964 for the relief of congestion in the West
Midlands conurbation.
5. The appeal property is a Wimpey Homes chalet-style
semi-detached house constructed of brick, with a pitched tiled roof and dormer
windows to the front elevation at first-floor level. The accommodation
comprises a lobby entrance, through lounge/dining room and kitchen on the
ground floor and three bedrooms and a bathroom on the first floor. There is a
single-storey garage and gardens front and rear. The house is on a corner site
at the entrance to a cul-de-sac. The plot has a frontage of 26 ft 6 in, a depth
of 103 ft and an area of about 300 sq yds (250 sq m).
6. The appeal property had a rateable value of
£207 at 26 January 1991.
7. The appeal property is within band C for
council tax purposes (£52,000 to £68,000).
8. The following facts regarding comparable sales
are agreed:
(i) There is no useful evidence of the sales of
individual sites within approximately half-a-mile radius of the appeal
property.
(ii) On 30 October 1990 the Commission for the New
Towns sold to Burford some 660 freehold residential ground rents in Winyates
Green for a total consideration of £391,695. This represents £593.47 per
property. The commission’s agent was Debenham Tewson Cheshire, of Birmingham.
(iii) In May 1991 the Commission for the New Towns
sold by tender to Shenstone Properties (Redditch) Ltd a parcel of some 3,791
freehold residential ground rents. This sale included a smaller parcel of 1,208
properties comprising 741 with rent reviews to fixed rising ground rents and
467 with open market reviews. The average sale price for the 1,208 properties
was £378.67 per property.
(iv) On 22 July 1991 Allsop Cottons, of
Birmingham, sold by auction some 11 freehold residential ground rents in
Hollyberry Close, Winyates Green, Redditch. Each property was held on a 99-year
lease from June 1977 and had about 85 years unexpired at the date of auction.
The total ground rent income was £426 pa subject to fixed upward rent reviews
in June 2010 and 2043. The total consideration was £4,000, representing about
£363.64 per property.
9. The following facts are agreed regarding the
value of the appeal property at the date of valuation (26 January 1994, the
date of the tenant’s notice to enfranchise):
(i) The capital value of the initial rent to the
first review was £318.77, representing the rent of £35 pa capitalised for 15
years at 7%.
(ii) The standing house value was £55,000.
(iii) The site value was £15,125.
(iv) The modern ground rent under section 15 of
the 1967 Act was £1,058.75 pa.
Issues
The principal issue in this appeal is the meaning
of the words ‘as shall be ascertained by reference to current open market
ground rent levels’ in the rent review provision.
The appellant says that these words require the
review rent to be ascertained by reference to the level or rent customarily
reserved when a house is let on a long lease at a premium. I will call this ‘a
nominal ground rent’. On this basis, the appellant says that the rent at the
first rent review would be £85 pa and the price payable under section 9 (1) or
the 1967 Act is £758. The respondent says that these words require the review
rent to be ascertained by reference to the annual return available on the open
market to an owner of land who lets it for building purposes, excluding any
return from improvement of the land or building. I will call this ‘a full
ground rent’. On this basis, the respondent says that the rent at the first
rent review would be the same as a modern ground rent under section 15 of the
1967 Act, £1,058.75 pa, and the price payable under section 9(1) of the 1967
Act, £5,800. This was the decision of the leasehold valuation tribunal that is
the subject of this appeal.
Appellant’s case
Mr Readings submitted that the rent review
provision in the lease of the appeal property refers to a nominal ground rent.
The leasehold valuation tribunal was wrong to hold that this rent is a full
ground rent equivalent to a modern ground rent under section 15 of the 1967
Act. He said that the underlying principles or construction of rent review
clauses are contained in the judgment of Nicholls LJ in Basingstoke and
Deane Borough Council v Host Group Ltd [1988] 1 WLR 348* at p353.
These are: first, that the meaning depends upon the particular language used,
interpreted in the context of the whole document and the matrix of material
surrounding circumstances; and second, that the purpose of a rent review is to
provide the landlords with a measure of relief for falls in the real value of
money and increases in property values by updating the rent at each review. Mr
Readings also referred to Clarke and Adams, Rent Reviews and Variable Rents (3rd
ed) at p309.
*Editor’s note: Also reported at [1987] 2 EGLR
147; (1987) 284 EG 1587
The term ‘ground rent’, said Mr Readings, can have
two meanings. It can mean ‘the sum paid by the owner or builder of houses for
the use of land to build’ (see Bartlett v Salmon (1855) 6 De
GM&G 33at p41), that is to say a full ground rent; or it can mean the rent
reserved when a building is let at a premium on a long lease, that is to say a
nominal ground rent. The decision in Stewart v Alliston (1815) 1
Mer 26 illustrates the difficulty of giving a precise meaning to the words
‘ground rent’. Mr Readings said that in the rent review provision the draftsman
had in mind the second meaning of this term, a nominal ground rent. He could
not have meant a full ground rent because he linked the expression ‘ground
rent’ to the words ‘open market’ and ‘levels’ and the evidence shows that a
market for full ground rents did not exist when the lease was granted. There
were only levels of nominal ground rents. The rent review provision must be
construed in the context of the matrix of material surrounding circumstances.
On the evidence, this comprises four matters:
1. The purpose of the leasehold system in
development, particularly in a new town, was good estate management and not the
maximisation of rent. The rent should be high enough to be worth collection and
to cover overheads, but no more than the ground rents payable for other
leasehold houses and not so high that it affects the sale price or
mortgageability of the house. Furthermore, in order to preserve the tenant’s
right to enfranchise, the initial rent must not exceed the limits under the
1967 Act. With these matters in mind, the original parties to the lease of the
appeal property fixed the initial rent at the nominal sum of £35 pa and
provided for future rent reviews to meet the fall in the value of money. This
was then unknown but the parties agreed a formula to allow them to do in 2008
and 2041 what they found difficult to do in 1977. If the parties had fixed the
future rents, they would probably have chosen £52 pa and £79 pa from 25
December 2008 and 2041 respectively.
2. The initial ground rent of £35 pa was a nominal
ground rent. A full ground rent would have been in the region of £218-£231 pa.
This would have put the house above the enfranchisement limit and would have
been unacceptable to purchasers and mortgagees. Mr Readings said that the
initial rent was intended to be a nominal sum and the reviews in 2008 and 2041
were intended to raise that rent to the then nominal ground rent levels. Mr
Readings said that the rent review provision in the lease of the appeal
property differs from the reviews in commercial ground leases granted by
Redditch Development Corporation, where the intention was clearly to raise the
rent on review to the full market ground rent.
3. The ordinary understanding of vendors and
purchasers of leasehold houses is that the payment of a lump sum price secures
the payment of a nominal rent throughout the lease. If the respondent is
correct, said Mr Readings, the initial capital payment would secure a low rent
for the first 33 years only of the lease. The rent would then rise to a full
ground rent and the effect of the initial payment would be exhausted. The
transaction might fairly be described as the payment of £11,350 for a 33-year
lease at £35 pa with options to renew for subsequent periods on payment of the
full market rent of the land. In the absence of any evidence that the purchaser
agreed to such a disadvantageous transaction, it is unlikely that the
respondents’ interpretation is correct.
4. If it had been the purpose of the rent review
to secure to the landlord the full market rent of the land, then the lease
would have provided for more frequent reviews. The widely spaced reviews
suggest that the parties intended the payment of customary nominal rents,
rather than full ground rents.
Mr Readings said that the application of the
principles of construction set out in Basingstoke, in the context of the
matrix of material surrounding circumstances, produces the result that the
words ‘open market ground rent levels’ mean the level of rent customarily
reserved when a house is let at a premium on a long lease, ie a nominal ground
rent. On the evidence, this is £85 pa. There was, and is, a market for lettings
and sales on this leasehold basis, which is seen to be essentially a premium
transaction with a nominal rent.
Mr Edward James Rutledge FRICS IRRV ACIArb is a
partner in Lawrence & Wightmans and has been in general practice in
Birmingham and the West Midlands for the past 20 years. He is regularly
involved in negotiations under the 1967 Act. He presented the appellant’s case before
the leasehold valuation tribunal and acted for the tenant in Burford Estates
& Property Co Ltd v Lee, a determination by the leasehold
valuation tribunal in respect of another house in Winyates Green with an
identical rent review provision. He put forward a valuation of £758 for the
freehold interest in the appeal property under section 9(1) of the 1967 Act.
Mr Rutledge
said that the leasehold valuation tribunal in the related case of Lee made
a fundamental error when they decided that the purpose of the rent review ‘is
to enable the landlord to obtain, from time to time, the market ground rent
which the site would command if let on the open market at the review date’.
This was not the intention of the parties when the lease was granted. If
Redditch Development Corporation had intended to obtain a full ground rent at
the start of the lease then the initial rent would have been in the region of
£218-£231 pa and not £35 pa. He referred to Clarke and Adams Rent Reviews
and Variable Rents at pp6-7, where variable rents are stated to be a method
of maintaining the original bargain struck by the parties by restoring their
position in the light of changes in money values and the property market. The
development corporation recognised that the house would have been unsaleable at
a high ground rent and therefore fixed a nominal rent of £35 pa, that is to say
approximately 15% of the full rental value derived from the capital value of
the site.
Mr Rutledge
said that there is a clear distinction in Redditch between the long leases
granted by the development corporation on industrial and commercial properties
and those granted on houses. In the former, the initial rents are the maximum
achieveable open market ground rents and the reviews clearly provide for
increases to the full ground rental value, thus allowing the corporation to
recover some of the future growth in values created by the new town. The ground
rent provisions in residential leases, however, refer only to nominal ground
rents. The overriding reason for selling houses on a leasehold basis was good
estate management, not to obtain the maximum rent.
Mr Rutledge said that it may be that a number of
residential freeholds had been sold to occupying tenants by Burford at
excessive prices. These sales would have been carried out in the face of
professional advice or under duress (the Delaforce effect). In contrast,
Redditch Development Corporation sold approximately 1,474 freeholds to
occupying tenants between 1970 and 1990 at prices representing 16 years’ purchase
of the ground rent. These sales were continued on the same basis by the
Commission for the New Towns with no distinction between leases with fixed
reviews and those with open market reviews. No distinction was made between
these properties because the landlord did not differentiate between the two
types of leases as to the ground rent that would become payable at future
reviews and therefore as to the price payable. Furthermore, both the
development corporation and the commission sold at higher prices to
non-qualifying tenants. There is no evidence that there was an exceptionally
positive or over-eager attitude with regard to sales. If 16 years’ purchase is
applied to the appeal property, the price would be £560. These sales are a
major consideration in determining the price payable for the freehold of the
appeal property.
Mr Rutledge referred to the sales of blocks of
ground rents summarised in para 8(iii) and (iv) of the agreed facts. He said
that the sale to Shenstone represented an average price per property of
£378.67, or about £273 for fixed ground rent leases and £546 for each of the
market review leases, on the assumption that the latter are worth double the
fixed-rent leases. A bulk sale may not be conclusive evidence but in the
absence of better market transactions it should be given careful weight. Mr
Rutledge said that he recognises that a discount applies to bulk purchases,
compared to individual transactions, but it would be unreasonable to expect
such a sale to justify more than a 100% mark‑up.
The second
relevant market transaction is the sale by auction of 11 freehold ground rents
in Hollyberry Close, Redditch, for £4,000 or £363.64 per property. Mr Rutledge
analysed this transaction by capitalising the rents on a 7% basis to produce a
total price of £7,064 as individual sales. He then compared this figure to the
actual price of £4,000 on the bulk purchase, which shows either a 75% uplift
for individual sales or a 43% discount for a bulk purchase. The tenant’s bid
would not arise on a bulk purchase.
With reference to the purchase of 660 freehold
ground rents in Winyates Green by Burford, Mr Rutledge said that it clearly
took a view on the ambiguous rent review provisions and saw an opportunity for
profit on sales to tenants. He also commented on the general particulars for
this sale, which state that the ground leases ‘were typically granted for 99
years at a low ground rent reviewable every 33 years either to a fixed sum or
to a modern ground rent”. He said that the phrase ‘a modern ground rent’ has
been put in inverted commas in the particulars because it is shorthand for a
revised ground rent and is not intended to indicate a rent under section 15 of
the 1967 Act.
Mr Rutledge
said that the approach of Burford to the ground rent review would produce an
unrealistic result. The independent expert required to fix the rent in the
absence or agreement would be required to answer the question: what ground rent
bids would be received for the land, with planning permission for one house, on
a lease for a term of 66 years? Mr Rutledge said that he has written to several
building societies asking whether a house offered for sale on this basis at a
ground rent of £1,950 pa (subject to review after 33 years) would be saleable
and/or mortgageable? The replies, said Mr Rutledge, indicate that such a house
would not be saleable to anyone requiring a mortgage. Nobody would therefore
bid anything like this level of ground rent because the house would be
unsaleable on the open market.
Mr Rutledge said that if a full ground rent is to
be paid on review, this would require the tenant to pay twice for part of the
land value: initially in the purchase price of £11,350 and again in the full
ground rent on review. This cannot have been the intention of the parties. This
was to provide for reviews to rents in line with those in leases of houses in
Redditch containing fixed increases at the review dates; He said that at the
start of the lease these rents would have been £52 pa in December 2008 and £79
pa in December 2041. Thus, it was the intention of the parties when the lease
was granted that the total consideration for house and land should be a capital
sum of £11,350 plus an initial rent of £35
in December 2008 and 2041 respectively. Mr Rutledge supported these figures by
two categories of evidence.
The first is the policy of Redditch Development
Corporation from about 1978 of granting residential ground leases at fixed
rents and converting open rent reviews in existing leases to fixed figures. He
put in evidence a standard letter dated 17 February 1978 from the chief estates
officer to the development corporation. This stales that the corporation has
recently reviewed its policies on housing sales and has decided to fix at the
start of the lease the ground rents payable at the 33rd and 66th years in all
new leases. Existing owners can change to fixed ground rents at the review
dates. The letter says that ‘a list showing the ground rents at the review
dates related to the current ground rents is attached to this letter’. This
list was not put in evidence, but Mr Rutledge said that the fixed review rents
relating to an initial ground rent of £35 pa are £52 pa and £79 pa at the first
and second reviews respectively. No consideration was required by the
corporation for this change in the lease.
The second category of evidence used by Mr
Rutledge to support his nominal ground rent figures comprises the customary
level of ground rents on leasehold sales in the West Midlands. He referred to a
letter dated 21 December 1994 from Barratt, the housebuilders, stating that the
present level or annual ground rents charged for leasehold houses in Worcester,
Walsall and Burton-on-Trent are £75, £150 and £300 for two-bedroom
semi-detached houses and £85, £170 and £340 for three-bedroom semi-detached
houses. The rent reviews are at 33-year intervals. Mr Rutledge also put in
evidence details of fixed ground rents on other Barratt estates at Rowley
Regis, Wythall, Edgbaston, Coseley and Wordsley. The leases were granted
between June 1991 and 1993 and have fixed ground rents for each 33-year period
of the lease of either £75 pa, £150 pa and £300 pa or £85 pa, £170 pa and £340
pa.
Mr Rutledge said that the rents in the lease of
the appeal property were intended to be nominal ground rents for reasons of
good estate management. He referred to two papers produced by the estates
division of the former Ministry of Housing and Local Government, which he dated
by intrinsic evidence to about 1970. Paper number l, The use of the
leasehold system in development emphasises that this method or disposal ‘is
preferable where uniformity of estate control is desirable’. Mr Rutledge said
that his conclusion from this paper is that the principal objective of
development corporations in selling houses on a leasehold basis was to provide
for good estate management. Paper number 2, The rise in land values. Methods
by which Development Corporations have benefited from improved values is
particularly relied upon by Mr Rutledge. On pp3 and 4 it states that the major
part of the consideration for a leasehold residential disposal is a premium
with a relatively small annual payment. This will become progressively out of
step with current values, but the disposal is primarily a capital transaction
using the leasehold machinery to ensure the maintenance of environmental
amenities. Mr Rutledge said that this summarises the appellant’s case regarding
the intention of the parties to the lease of the appeal property. The following
considerations must have been in their minds when fixing the initial ground
rent:
1. The rent must be high enough to justify
collection and to cover part of the estate management costs within the area of
Redditch Development Corporation.
2. The rent must be low enough to protect the
tenant’s right to enfranchise.
3. A leasehold disposal at a low ground rent
allowed the house to be sold at an attractive price, marginally lower than a
freehold sale.
4. The effect that the ground rent would have on
the price payable on enfranchisement.
Mr Rutledge
said that he has made inquiries of officers who worked for Redditch Development
Corporation between 1960 and the 1980s and they have confirmed that the
original intention of the corporation was good estate management on residential
estates and to provide for a marginal adjustment in the price of new houses to
make them attractive at a time when the new town was not well established.
Mr Rutledge said that the maximum ground rent
payable upon review was intended to be, and still is, the highest rent the
market will stand. The housing market in the West Midlands shows that no more
than £200 pa is sustainable without seriously reducing the marketability of the
property. The intention of the parties to the lease was clearly to review the
ground rent to a nominally increased figure. Having regard to the fixed rent
increases in development corporation leases and the general level of ground
rents in the West Midlands, Mr Rutledge said that the level of review rent for
the appeal property at the date of valuation was between £60 and £85 pa. He
adopted the latter figure as the review rent at 25 December 2008. The parties
have agreed that the capital value of the initial rent to the first review is
£318, based on a capitalisation yield of 7%. Mr Rutledge used the same yield to
capitalise in perpetuity his review ground rent of £85 pa from December 2008.
He did not include in his valuation a reversion to a review rent in 2041 nor to
a modern ground rent at the end of the lease. Mr Rutledge’s valuation of £758
is as follows:
|
|
£ |
£ |
|
Initial |
35 |
|
|
YP 15 |
9.1079 |
318 |
|
Review |
85 |
|
|
YP perp |
5.1778 |
440 |
|
|
|
758 |
Mr Rutledge did not put forward an alternative
valuation on the respondent’s basis. In answer to questions from me Mr Rutledge
said that, when the lease of the appeal property was granted, there was a
market for nominal ground rents in the West Midlands but not for full ground
rents. He has no experience of full ground rents for residential property,
except in the form of modern ground rents under section 15 of the 1967 Act.
Respondent’s case
Mr Dudley said that the appellant acquired his
leasehold in September 1986 in full knowledge of the terms of the lease. The
decision of the leasehold valuation tribunal was correct in principle and in
line with current authority. The words ‘open market ground rent levels’ mean
the annual return available in the open market to an owner of land who lets for
building purposes, excluding any return for improvement of the land by
building. This is a full ground rent which is the same as a modern ground rent
under section 15 of the 1967 Act.
Mr Dudley said that the task of the Lands Tribunal
is to ascertain the freehold price on enfranchisement under section 9(1) of the
1967 Act, having regard to the meaning of the rent review provision. It is the
words used that are important and that fall to be construed. They must be given
their natural and ordinary meaning. It does not help to look at the vagaries of
past housing policies, which show clear changes of policy. The intention of the
original parties to the lease was to draft a rent review provision that would
enable them to take into account changes in policy, future land and money
values and the economy. The purpose was to provide for a flexibility that would
not leave the parties in an unusual position in the future. It is always clear
that, when a housing estate has been developed and sold, the landlord’s
interests may well be different.
Mr Dudley said that the initial ground rent of £35
pa was fixed at an artificially low level to make the development attractive to
potential purchasers. The rents of £52 and £79 pa for the first and second
reviews, referred to in Mr Rutledge’s evidence are unhelpful because they are
derived from rents fixed at some time in the past for some time in the future.
In other words, they are figures that, by definition, take no account of future
economic changes and that reflect a rigid policy that could well leave the
parties in an unreal position. As part of the valuation process, said Mr
Dudley, the valuer must project himself forward to the year 2008 and estimate
what would be a proper ground rent to set at that time for the site of the
appeal property. He must put himself in the position of the independent expert
under the rent review provision. He said that Mr Rutledge’s rent of £85 pa must
be wrong because it is a current figure and not a figure projected forward to
the review date. The task of looking into the future is not easy and it makes
sense to seek assistance in section 15 of the 1967 Act. Owing to a lack of
evidence of full ground rents, it is sensible to equate the review rent in the
lease of the appeal property to a modern ground rent. This approach was adopted
by the leasehold valuation tribunal in this and in similar cases: see the
unreported decisions of West Midlands Leasehold Valuation Tribunal Cummings
v Severn Trent Water Authority 1985/WM/114, Baker v Severn
Trent Water Authority 1989/WM/244, Brown v CEFN Estates Ltd 1992/WM/456
and Burford Estates & Property Co Ltd v Lee 1993/WM/558.
The correct valuation approach, in accordance with the rent review provision,
is to assume a reversion at the first review to a section 15 modern ground rent
of £1,058 pa and not to a nominal rent of £85 pa.
Mr Kenneth Frederick Davis FRICS is a consultant
to Allsop Cotton, part of Property Leeds (UK) Ltd, in Birmingham. He is
involved in property management and has been advising on leasehold
enfranchisement since 1976. He gave evidence before the leasehold valuation
tribunal in Lee and in this case.
Mr Davis put in evidence a valuation of £5,800 for
the freehold interest in the appeal property under section 9(1) of the 1967 Act
calculated as follows:
|
|
£ |
£ |
|
Initial |
35 |
|
|
YP 15 |
9.1079 |
318 |
|
Review |
1058 |
|
|
YP perp |
5.1778 |
5,482 |
|
|
|
5,800 |
Mr Davis did not put forward an alternative
valuation on the appellant’s basis. He criticised Mr Rutledge’s valuation for
not providing for further increases in rent at the second review and at the end
of the lease.
Mr Davis said that when the lease of the appeal
property was granted, Redditch Development Corporation insisted on the
inclusion of the rent review provision. When developers sell houses on a
leasehold basis, it is usual for the initial rent to be a nominal amount to
encourage sales. He said that this could be interpreted as the 19/11 syndrome.
A developer wishing to sell a property at (say) £50,500 on a freehold basis
would, to encourage a sale, adopt a price or £49,995 on a leasehold basis and
retain an interest in the land to realise a capital appreciation. Mr Davis said
that these circumstances existed for the development that includes the appeal
property.
Mr Davis
said that his experience of the rent review provision in the lease of the
appeal property is limited, although there are several pockets of this type of
ground rent in the West Midlands. He has therefore considered previous
decisions of leasehold valuation tribunals and this tribunal. In Cummings and
Baker there were open-ended rent review clauses, although in Cummings
there was a reference to land values and not ground rent levels. Mr Davis
said that these cases are of limited assistance and they are a little dated. In
Gajewski v Anderton (1971) 217 EG 885 this tribunal observed that
in section 15(2)(a) of the 1967 Act the expression ‘ground rent’ is
defined as the letting value of the site and that this casts doubt on the value
as comparisons of many ground rents ‘which represent nothing more than ad
hoc financial arrangements whereby some developers obtain a return on their
investments, partly by capital payments and partly by income’. Mr Davis said
that the reference to ‘current open market ground rent levels’ in the lease of
the appeal property is clearly not a reference to an ad hoc financial
arrangement. In Brown v CEFN Estates Ltd the lease contained an
identical rent review provision relating to a property at Great Barr,
Birmingham, and, following consideration of representations by experienced
surveyors, the leasehold valuation tribunal found in favour of the freeholders.
Mr Davis has adopted this approach in this appeal. Finally, in Burford
Estates & Property Co Ltd v Lee, which concerned a house in
Winyates Green with an identical rent review provision, the tribunal decided
that the words in issue in this appeal indicate a modern ground rent. Mr Davis
said that, because there is little evidence of ‘open market ground rent
levels’, he has looked at the decisions referred to above for guidance and
these have led him to a modern ground rent under section 15 of the 1967 Act.
He said
that the letter from Redditch Development Corporation of 17 February 1978,
regarding the substitution of fixed future ground rents in place of open-ended
reviews, was a change of policy.
Mr Davis
referred to the purchase by Burford of the block of ground rents in Winyates
Green and the other bulk purchases set out in para 8 of the agreed facts. He
said that the two portfolios of ground rents were extensively marketed prior to
sale. Investors had to be of substantial means to purchase such large
portfolios and these sales should be disregarded as evidence of value for a
single property. He referred to the reference to a ‘modern ground rent’ in the
general particulars of the Winyates Green portfolio and said that these words
indicate an open-ended review with a rent equivalent to a section 15 modern
ground rent.
Mr Davis referred to the sales of freehold ground rents
by Redditch Development Corporation and the Commission for the New Towns. He
said that the freeholders wished to sell, and therefore took a positive
attitude to price to generate sales. The question of open-ended rent reviews
was ignored in the policy decision to sell. In the larger portfolios sold by
the Development Corporation there were a number of estates with fixed reviews.
Any surveyor acting for a tenant with an open-ended review would strongly
recommend his client to buy.
Mr Davis said that he was reminded by one of his
colleagues that, several years ago when undertaking a mortgage valuation, he
was made aware of the open-endedness of the rent review clause. He pointed this
out to the building society, which insisted on the freehold being purchased.
Mr Davis
said that he has adopted the conclusion of the leasehold valuation tribunal in Lee,
namely that the language of the rent review provision should be considered; a
section 15 modern ground rent is sustainable as this is an open market review;
and that the evidence of bulk transactions and rateable value limits should be
rejected.
In
cross-examination Mr Davis conceded that: ground rents of £35
common; sales of houses let at nominal ground rents are common; he did not
disagree with Mr Rutledge’s bracket of nominal ground rents of £60-£85 pa for
the West Midlands at the date of valuation; and there is a lack of market
evidence of full ground rents. In answer to questions from me, Mr Davis
confirmed that: the initial rent of £35 pa represented a nominal ground rent
when the lease was granted; there was a market in nominal ground rents at that
time but no market in full ground rents; and, although he did not rule out a
market in full ground rents, he has no experience of the letting or sale of
houses at, or subject to full ground rents other than under the 1967 Act.
Decision
I have inspected the appeal property and the
surrounding area.
I am required to determine the price payable for
the freehold interest in the appeal property following a notice to enfranchise,
dated 26
price is defined in section 9(1) of the 1967 Act as ‘the amount which at the
relevant time the house and premises, if sold in the open market by a willing
seller (with the tenant and members of the family who reside in the house not
buying or seeking to buy) might be expected to realise’ on certain assumptions.
The most important of these is that the current tenancy will be extended under
the 1967 Act. The long lease held by Mr
33-year intervals and the principal issue in this appeal centres on the amount
of the review rent. This, in turn, is governed by the true meaning of the rent
review provision. The appellant says that the review is to a nominal ground
rent of £85 pa and that the purchase price should be £758. The respondent says
that the review is to a full ground rent, which is equal to a modern ground
rent under section 15 of the 1967 Act of £1,058 pa, and the price should be
£5,800. The leasehold valuation tribunal found for the respondent and it is
against that decision that Mr Jarrett appeals to this tribunal.
I was told that there are about 1,500 long leases
in Redditch with the same rent reviews and that this appeal is in the nature of
a test case. I will therefore set out the reasons for my decision in some
detail.
I start with part of the judgement of Nicholls LJ
in Basingstoke where he explains the principles of construction of rent
review clauses. He said at p353D:
The question raised on this appeal is one of
construction of a rent review clause in a lease. In answering that question it
is axiomatic that what the court is seeking to identify and declare is the
intention of the parties to the lease expressed in that clause. Thus, like all
points of construction, the meaning of this rent review clause depends on the
particular language used interpreted having regard to the context provided by
the whole document and the matrix of the material surrounding circumstances. We
recognise, therefore, that the particular language used will always be of
paramount importance. Nonetheless it is proper and only sensible, when construing
a rent review clause, to have in mind what normally is the commercial purpose
of such a clause.
Thus, I am required to construe the rent review
provision by reference to: (a) the words used considered in their context; (b)
the matrix of material surrounding circumstances; and (c) the normal commercial
purpose of a rent review. The matrix of material surrounding circumstances is
of particular importance in this appeal.
Nicholls LJ then explained the purpose of a rent
review. He said at p353F:
That purpose has been referred in several recent
cases, and is not in doubt. Sir Nicholas Browne-Wilkinson V-C expressed it in
these terms in British Gas Corporation v Universities Superannuation
Scheme Limited [1986] 1 WLR 398, 401:
‘There is really no dispute that the general
purpose of a provision for rent review is to enable the landlord to obtain from
time to time the market rental which the premises would command if let on the
same terms on the open market at the review dates. The purpose is to reflect the
changes in the value of money and real increases in the value of the property
during a long term.’
To the same effect Dillon LJ said in Equity
& Law Life Assurance Society plc v Bodfield Ltd [1987] 1 EGLR
124 at p125:
‘There is no doubt that the general object to a
rent review clause, which provides that the rent cannot be reduced on a review,
is to provide the
falls in the real value of money in an inflationary period, a fixed rent has
become out of date and unduly favourable to the tenant. The exact measure of
relief depends on the true construction of the particular rent review clause.’
Nicholls LJ then explained how the purpose of a
rent review is achieved at p353H:
The means by which rent review clauses afford
landlords relief in respect of increases in property values or falls in the
value of money is by providing, normally, for a valuer, in default of
agreement, to assess the up-to-date rent for the demised premises at successive
review dates. In making that assessment the valuer will be achieving the
intended purpose of keeping the rent in line with current property values
having regard to the current value of money if, but only if, he assesses the
up-to-date rent on the same terms (other than as to quantum of rent) as the
terms still subsisting between the parties under the actual, existing lease.
Against
this background of principle, I turn to the lease of the appeal property. The
rent review provision is contained in the reddendum, which provides for
two rents. First, an initial rent of £35 pa from 25
December 2008. Second, during the periods from this last date to 25 December
2041 and from that date to the expiry of the lease in 2074 ‘such annual rents
(being not less than the rent firstly hereinbefore reserved) as shall be
ascertained by reference to current open market ground rent levels’.
I must
construe this rent review provision in the context of the matrix of the
material surrounding circumstances (the matrix of facts) at the time when the
lease was granted. This requires some findings of fact. On the evidence I find
that the following facts constitute the matrix of material surrounding
circumstances at the grant of the lease:
1. The initial rent of £35 pa was a nominal ground
rent. This is common ground between the valuers and I accept Mr Rutledge’s
evidence that a full ground rent at the start of the lease would have been in
the region of £218 to £235 pa.
2. It was common practice for new town development
corporations to sell houses on a leasehold basis for reasons of good estate
management and not to maximise the rental income. This is seen in Ministry of
Housing and Local Government papers 1 and 2. The latter states at pp3 and 4:
Rent reviews have normally only been included in
industrial or commercial leases where the consideration consists wholly of an
annual payment by way of rent and the values can be expected to rise
considerably during the lease. Rent reviews had not been incorporated in
residential ground leases because the major part of the consideration has been
a premium and the annual payment is relatively small. Although this payment
will become progressively out of step with values as the lease proceeds, the
disposal is primarily a capital .transaction using the leasehold machinery to
ensure the maintenance of environmental amenities through the covenants of the
lease.
3. There was, and still is, a market in nominal
ground rents of residential properties in Redditch. It was the practice of the
development corporation to grant long leases for a capital premium and a
nominal ground rent, and these properties were bought and sold in the market
with mortgages from building societies. This is not in dispute between the
valuers.
4. Conversely, there was, and is, no market in
full ground rents of residential property in Redditch, either for letting or
for sale. Again, this is not in dispute between the valuers. I put this point
to both Mr
full ground rents, that is to say there were no lettings of residential land at
a full ground rent and residential properties were not bought and sold in the
market on a full ground rent basis. Mr Davis went further and said that lack of
market evidence of full ground rents has forced him to calculate his review
rent by adopting a modern ground rent approach under section 15 of the 1967
Act. This was, of course, at the valuation date, some 17 years after the lease
of the appeal property was granted, but he also accepted that a market in full
ground rents did not exist at the grant of the lease.
The words
that I must construe against this background of fact are ‘current open market
ground rent levels’. No dispute emerged during the hearing regarding the
meaning of ‘current’. In my view, it means that the review rent is to be
determined by reference to the level of ground rents current at the date of
review. I now look at the remaining words, first by considering the term
‘ground rent’, then ‘open market’ and finally ‘levels’.
The term
‘ground rent’ has no precise meaning. It must be interpreted in its context
against the background of the matrix or material surrounding circumstances. Mr
Readings referred to two 19th‑century authorities: Stewart v Alliston
(1815) 1 Mer 26 and Bartlett v Salmon (1855) 6 De
GM&G 33. I do not find them helpful as to the meaning of ‘ground rent’ but
they illustrate the need to look at this term in its context. Much closer in
time is the decision of this tribunal in Gajewski v Anderton in
1971. Here, the member (JH Emlyn-Jones) referred to the difference between
nominal and full ground rents. He said at p891:
(the tenant’s valuer) quotes ground rents of £60
and £100 pa paid on new leasehold houses selling for £18,000 and £20,000 within
about half a mile of the subject property. It is significant, however, that in
section 15(2)(a) the expression ground rent is not used simpliciter
but is defined ‘in the sense that it shall represent the letting value of the
site (without including anything for the value of buildings on the site).’ In
my view this definition casts doubts on the value as comparisons of many
so-called ground rents which represent nothing more than ad hoc
financial arrangements whereby some developers obtain a return on their
investments; partly by capital payments and partly by income. The ground rents
quoted by (the tenant’s valuer) therefore beg the question — do they represent
the letting value of the site concerned? I have not been supplied with the
answer.
The term ‘ground rent’ in the rent review
provision could therefore refer to a nominal ground rent or a full ground rent.
To find the true meaning, these words must be construed in the context of the
remainder of the rent review provision and in the matrix of material
surrounding circumstances.
The words before and after ‘ground rent’ are ‘open
market’ and ‘levels’ respectively, and placed in this context, and in the
matrix of facts, it is, in my view, clear that the draftsman of the lease was
referring to a nominal ground rent. It is common ground, and I have found it as
a fact, that when the lease was granted there was no market in full ground
rents. It is also common ground, and I have found it as a fact, that there was
a market in nominal ground rents. Then, and now, residential land was not let
in the market at full ground rents but leasehold houses were, and are, let and
sold in the market on long leases at nominal ground rents. Whatever may have
been the position in the residential market in the last century when Stewart
and Bartlett were decided, the letting of residential property at full
ground rents, in the sense of a rent reflecting the value of the land for
building purposes, had, at least in Redditch and the West Midlands, ceased.
These rents were, and are, only to be found in the statutory world of the 1967
Act where they are referred to as modern ground rents and where, due to a lack
of open market evidence, they are calculated by artificial methods, such as the
standing house or the site value approach. Furthermore, it is important to
remember that my task in this appeal is to fix a review rent, which is the key
ingredient in the enfranchisement price, and which exists in the real world of
open market rent reviews and not in the artificial world of the modern ground
rent, which only exists in the different statutory world of the 1967 Act.
In my view, the draftsman of the lease intended to
refer to a nominal ground rent and indicated this intention by qualifying the
term ‘ground rent’ with the words ‘open market’. He was aware that a market
existed for nominal ground rents, but not for full ground rents, and he
therefore used these qualifying words to indicate the form of ground rent on
review. It is unlikely that he would have referred to a full ground rent by
reference to the open market when a market for those rents did not exist.
This
construction of the rent review provision is reinforced by the word ‘levels’
placed after ‘ground rent’. The draftsman realised that nominal ground rent
comparables would be levels of rent prevailing at
the site, which could be analysed and applied to the appeal property. The
direction in the review is therefore to look at general levels of (nominal)
ground rents. Mr Rutledge’s evidence was that these levels of rent can be found
in the market and he gave some examples. It is unlikely that the word ‘levels’
would have been applied to full ground rent comparables had they existed in the
open market.
My conclusion is, therefore, that the words
‘current open market ground levels’, construed in their context in the lease
and in the matrix of material surrounding circumstances, refer to a nominal
ground rent.
I am reinforced in this view by the application of
the second principle of construction of rent reviews referred to by Nicholls LJ
in Basingstoke. The purpose of the first review is to consider the
initial rent of £35 pa in the light of ‘current open market ground levels’ and,
if these indicate a higher figure, to increase the rent to that figure for the
next 33 years. Expressed simply, the initial rent is, in a rising market, to be
increased to the equivalent of that rent in December 2008, having regard to
increases in property values and the effects of inflation. Important factors in
this review are the nature of the initial rent (whether it is a nominal or a
full ground rent) and the current level of equivalent ground rents (nominal or
full) at the review date. I have found that the initial rent of £35 pa was a
nominal ground rent at the grant of the lease. It follows, therefore, that the
revised rent at review should also be a nominal ground rent, namely the initial
rent increased for changes in values and inflation since the commencement of
the lease. The parties and independent expert are directed to assess that rent
by reference to nominal ground rent levels at that time. The respondent argues
that the lease provides for a low initial rent rising to the full ground rent
at the first review. I do not agree. The terms of the lease should normally
remain unaltered at the review dates. I could only agree with the respondent’s
argument if it is expressly stated in the lease, or it arises by necessary
implication, that the basis of review is to change at the first review from a
nominal ground rent to a full ground rent. There are no such express or implied
provisions in the lease and therefore the review rent must be assessed on the
same basis as the initial rent, namely as a nominal ground rent. This
conclusion is reinforced by five matters arising out of the evidence.
The first
is the letter from Redditch Development Corporation, dated 17 February 1978,
inviting residential tenants to change their market based reviews to fixed
reviews. I accept the evidence of Mr
at review. They are nominal ground rents. The explanation of this letter seems
to be that the corporation changed its policy of granting long leases at
nominal ground rents with open market reviews, to a policy of granting leases
at initial and then fixed nominal ground rents. In my view, it is unlikely that
this policy change was from one of granting leases at nominal and then full
ground rents at review (as suggested by the respondent), to one based on
nominal ground rents throughout. It seems unlikely that the development
corporation would reduce the value of its property holding by suggesting
(without consideration) that the review rents should be fixed at a much lower
rent than would have otherwise been payable.
Second, I refer to the sales to tenants by
Redditch Development Corporation and the Commission for the New Towns. Mr
Rutledge said that about 1,474 freeholds were sold to sitting tenants between
1970 and 1990 with no differentiation in price between fixed and open reviews.
The prices represented 16 years’ purchase of the rent. It is helpful to compare
this figure with the analysed figures of years’ purchase in this appeal. Mr
Rutledge’s valuation of £758 represents 21.65 years’ purchase of the rent; Mr
Davis’ valuation of £5,800 is 167.7 years’ purchase of the rent. I do not
attach a great deal of weight to this analysis but the close relationship
between 16 years’ purchase used on the sales and the figure of years’ purchase
represented by Mr Rutledge’s valuation gives some indication that the sales
were on the basis of nominal ground rent reviews. This value evidence supports
Mr Rutledge’s figure. Mr Davis’ years’ purchase, however, bears no relationship
whatever to the 16 years’ purchase on sales.
Third, I look at the sales of ground rents in
bulk, summarised in para
Mr Davis that these bulk transactions are not good comparables for the sale of
a single ground rent, but an analysis of these sales is of some assistance in
this appeal. The three bulk transactions may be analysed as follows:
|
|
Price |
Ground |
YP |
Price |
|
Winyates |
£391,695 |
not |
– |
£593 |
|
Redditch |
£457,187 |
not |
– |
£379 |
|
Hollyberry Close, Winyates Green (11) |
£4,000 |
£426 pa |
9.4 |
£364 |
The prices per property (£364 to £593) are much
closer to Mr
I accept that there will be a discount for a bulk purchase (or conversely an
increase from a bulk purchase price to an individual sale price) and that this
is not therefore a true comparison, but I also accept Mr Rutledge’s opinion
that more than a 100% mark-up from a bulk purchase price is unlikely. The only
figure of years’ purchase that can be extracted from these transactions (9.4YP)
is closer to Mr Rutledge’s figure of 21.65 years’ purchase than to Mr Davis’
figure of 167.7. These are straws in the wind but they are another pointer to
the correctness of the appellant’s nominal ground rent basis of valuation. The
inference can be drawn from these bulk sales that the parties were buying and
selling on the assumption that, where open market reviews existed in the
leases, these are to nominal ground rents. The purchasers may have hoped to
sell on to sitting tenants at high prices based on a full ground rent
interpretation of the review provisions, but they do not appear to have
included this element of speculative value in the prices they were willing to
pay.
This is a convenient point to deal with the
reference to a modern ground rent in the particulars of the sale to Burford of
freehold ground rents in Winyates Green (para 8(ii) of the agreed facts). The
vendor’s agent was Debenham Tewson Cheshire, of Birmingham. The general
particulars contain the statement:
Ground leases of individual plots were typically
granted for 99 years, at a low ground rent reviewable every 33 years to either
a fixed sum or to a ‘modern ground rent’.
The inverted commas around words ‘modern ground
rent’ are in the printed particulars. Mr Rutledge said that these indicate that
‘modern ground rent’ is intended to be a shorthand term for a revised ground
rent and is not a reference to a section 15 rent. Mr Davis said that this is a
reference to an open-ended rent equivalent to a section 15 ground rent. I agree
with Mr Rutledge. In my view, the use of inverted commas was to indicate to
prospective purchasers that some rents are to be reviewed to a current (a
modern) ground rent at the review date and not to a fixed sum. I think it
unlikely that the person who drafted these particulars read the review
provision and decided that it referred to a rent equivalent to a modern ground
rent under section 15 of the 1967 Act.
Fourth, I refer to the evidence from building
societies as to the saleability and mortgageability of a leasehold house on a
66-year lease at a ground rent of £1,250 pa with a review at the 33rd year (Mr
Rutledge’s example, which he put to them). These terms do not match the
respondent’s figures, but the replies that Mr Rutledge received give useful
indications of the leasehold residential market in Redditch and the West
Midlands. The letters have dates in January 1994.
Mr A Cole FRICS
of Britannia wrote that his society will only consider a property for
mortgage if it becomes a freehold on completion and that ‘prices of the
freehold seem to vary quite considerably although figures of between £5,000 and
£8,000 and even more are presently being quoted within the Redditch area’. He
went on to say that, if the ground rent is so high that the applicant cannot
enfranchise, then the property would be unmortgageable with Britannia. Mr
Rutledge particularly relies on a letter from Mr P Ellis FRICS of Leeds
Permanent. He wrote:
I would advise the Society that a brand new
property being sold with an unexpired leasehold term of 66 years at a ground
rent of £1,250 pa would not be a suitable security for a mortgage advance on
the basis that both the length of lease and the amount of the ground rent are
out of line with modern conventional levels.
One would expect a lease term of 90 plus years
generally and the ground rent within the range of £75-£150 for the type of
property you describe, these as I am sure you are aware are generally the
current terms upon which modern speculative development is sold.
Mr MJ Smith bsc
arics, regional valuer of
Bradford & Bingley, said that his society would be unlikely to accept Mr
Rutledge’s example as security for a mortgage due to the excessive ground rent
and the reviews. These would seriously affect the saleability of the property.
Finally, Mr D Glynn, branch manager of the Woolwich, wrote that he has discussed
Mr Rutledge’s hypothetical example with his chief surveyor who is of the
opinion that the property would be unsaleable to anyone requiring a mortgage.
Furthermore, a rent of £1,250 pa would be a prohibitive amount and the society
would be extremely cautious about a ground rent that is subject to further
review.
This evidence is, of course, hearsay (although no
objection was made to it), and must be treated with caution. No evidence was
given as to whether these views would have been the same when the lease of the
appeal property was granted. The ground rent in the example (£1,250 pa) is
higher than the figure of £1,058 pa put forward at the hearing by Mr Davis.
However, these indications of the concern expressed by building societies at
high ground rents and open reviews is a further pointer towards a nominal
ground rent interpretation of the rent review provision. It seems unlikely that
the draftsman of the lease could have intended this provision to make the house
unsaleable and unmortgageable and to take away the tenant’s right to
enfranchise. I should add, in fairness to the respondent’s case, that Mr Cole,
of Britannia, referred to prices of £5,000 to £8,000 and even more being quoted
for freeholds in Redditch. This supports Mr Davis’ figure of £5,800. Mr Cole,
however, refers to asking prices and I suspect that this is a reference to the
prices being quoted by Burford and perhaps other purchasers of blocks of
freehold ground rents, who, having purchased at low prices per plot, are now
attempting to sell on to the sitting tenants at much higher prices, causing the
local concern behind this appeal.
Fifth, I refer to the rent review clause in
commercial leases granted by Redditch Development Corporation. Mr Rutledge drew
my attention to the fundamental difference between the wording of this clause
and the rent review provision in residential leases. He said that the former
clearly refers to a full ground rent and is expressed in a different form to
the rent review provision in this appeal. The commercial ground leases provide
for an initial rent, reviewable at seven-year intervals, the rent on review to
be the initial rent plus ‘the additional rent’. This latter is the amount by
which ‘the yearly ground rent value’ exceeds the initial rent. In other words, in
an upward market, each review will be to the yearly ground rent value (as
defined). This is:
(a) the best yearly rent obtainable in the open
market on the relevant date for the piece of land hereby demised on the ground
rent value assumptions.
(b) the ground rent value assumptions are that
the demised premises are let as one unit in the open market (without taking any
fine or premium or attributing any value to the buildings or other erections
standing on the said piece of land at the time) as a building site for use for
light industrial purposes and warehousing with ancillary offices or in the
event of any other development being then planned or having taken place on the
land as a building site for such development whichever assumption shall produce
the greater yearly ground rent value and for a term of ninety-nine years and
subject to covenants on the part or the Tenant similar to those contained
herein.
I agree with Mr Rutledge that the above wording
refers to a full ground rent, representing the letting value of the land as a
building site. It is entirely different from the words under consideration in
this appeal. This is another pointer to the correctness of the appellant’s
interpretation of the rent review provision in the lease of the appeal property.
Finally, I consider Mr Davis’ equation of this
rent review provision with a modern ground rent under section 15 of the 1967
Act. He said that, due to a lack or evidence in the market, he has looked at
decisions of the leasehold valuation tribunal and then to a modern ground rent
to provide the measure of rent on review. In other words, the review rent is a
modern ground rent. I do not agree. A comparison of the definition of a modern
ground rent with the rent review provision in this appeal shows considerable
differences. Section 15(2)(a) of the 1967 Act states that the rent
payable on the assumed extension of the lease (the modern ground rent) shall
be:
a ground rent in the sense that it shall
represent the letting value of the site (without including anything for the
value of buildings on the site) for the uses to which the house and premises
have been put since the commencement of the existing tenancy, other than uses
which by the terms of the new tenancy are not permitted or are permitted only
with the landlord’s consent.
Clearly this is a full ground rent. These words
are entirely different from ‘current open market ground rent levels’. This is
another indication that these latter words refer to a different form of ground
rent. This tribunal in Gajewski, in the extract from the decision set
out above, clearly saw the difference between a modern ground rent and what the
member described as ‘so-called ground rents’ or ‘ad hoc financial
arrangements’, and I have called in this appeal nominal ground rents.
For the reasons set out above, I have reached the
conclusion that the words ‘current open market ground rent levels’ mean a
nominal ground rent and I accept Mr Rutledge’s figure of £85 pa, with which Mr
Davis did not disagree. He did, however, make two criticisms of
Mr
First, he said that Mr Rutledge should have
included a further increase in rent at the second review in 2041. I do not
agree. Both surveyors have used the conventional approach to valuation by
valuing the property at the date of valuation at prices current at that date.
Mr
date of valuation, not the date of review. It follows therefore that the amount
of the nominal ground rent at the second review will also be £85
prices current at the date of valuation, and no further increase is necessary
in the valuation. This is not a situation where there are fixed rents on
review, which should, of course, be taken into account in a valuation at an
earlier date.
Second, Mr Davis said that Mr Rutledge has not
included the increase in rent to a modern ground rent at the end of the lease.
There is some substance in this criticism but I also reject it. The definition
of price in section 9(1) of the 1967 Act includes the assumption that the
current lease would be extended under the Act for a further 50 years at a
modern ground rent with a review at the 25th year. Theoretically, therefore, Mr
Rutledge’s valuation should incorporate a reversion to the agreed modern ground
rent of £1,058 pa at 25 December 2074. This reversion is, however, about 80
years away and it is current practice for valuers to ignore such a long
reversion and to capitalise the rent in perpetuity. This approach has been
accepted by the Lands Tribunal many times: see eg Jenkins v Bevan-Thomas
(1972) 221 EG 640 and Shutt v Phillips (not cited). To
incorporate an increase in 80 years’ time would make little difference to the
valuation and I reject this criticism. I accept Mr Rutledge’s valuation of
£758. Mr Davis did not put in evidence an alternative valuation on the
appellant’s basis.
The value in dispute in this appeal is dependent
upon a point of law and I am required by r 54(3) of the Lands Tribunal Rules
1975 to make an alternative award. If I had accepted the respondent’s argument
that the rent review provision in the lease of the appeal property provides for
a full ground rent on review, I would, in the absence of alternative evidence
on this basis, have accepted Mr Davis’ ground rent of £1,058
enfranchisement price of £5,800. Under these circumstances, the appeal would
have been dismissed and the decision of the leasehold valuation tribunal
confirmed.
I have, however, found for the appellant. I hold
that, on the true construction of the rent review provision in the lease of the
appeal property, the review rents are nominal ground rents, that is to say they
are to be ascertained by reference to the level of rent customarily reserved
when a house is let at a premium on a long lease. On this basis, I accept the
valuation of Mr Rutledge of £758. The appeal is allowed. I direct that the
decision of the leasehold valuation tribunal, dated 3 August 1994, shall be set
aside and that the purchase price payable under section 9(1) of the 1967 Act
for the freehold interest in the appeal property shall be the sum of £758.
This decision determines the substantive issues
raised between the parties and the award of the tribunal is final. The parties
are invited to make such submission as they are advised as to the costs of the
hearing and a letter accompanies this decision as to the procedure for
submissions in writing. The tribunal will, in due course, incorporate an order
as to costs in an addendum to this decision. Rights of appeal under
section 3(4) of the Lands Tribunal Act 1949 and Rules of the Supreme Court Ord
61 will not accrue until the decision has been thus completed, ie from the date
of the addendum.
Addendum
I have received written submissions on costs. I
order that the respondent shall pay the appellant’s costs of this appeal, such
costs, if not agreed, to be taxed by the Registrar of the Lands Tribunal on the
High Court standard basis.
Appeal allowed.
