Leasehold enfranchisement — Leasehold Reform Act 1967 — Appeal from leasehold valuation tribunal — Whether appeal a rehearing — Determination of freehold and leasehold values — Appropriate yield rate — Whether yields derived from settlements reliable guide
The respondent tenants held a lease with an
unexpired term of nearly 38 years of a cottage-style house at an annual ground
rent of £200. The tenants served a notice of claim to acquire the freehold
under the Leasehold Reform Act 1967. The leasehold valuation tribunal
determined the enfranchisement price under section 9(1C) of the Act at
£459,000. The landlords appealed and the tenants cross-appealed, the tenants
contending that the landlords were not entitled to a rehearing. The issues before
the Lands Tribunal were the freehold vacant possession value of the house, the
value of the existing lease on the assumption that there was no right to
enfranchise, and the yield rates for the capitalisation of the ground rent and
deferring the value of the reversion.
was allowed and the cross-appeal was dismissed. The enfranchisement price was
£519,000. The right to appeal to the tribunal is given to a person who is
dissatisfied with the decision of the leasehold valuation tribunal. Because the
right of appeal is unqualified, it would clearly never be right, other than in
exceptional circumstances, for the tribunal to dismiss an appeal despite being
satisfied that the decision of the leasehold valuation tribunal was wrong. The
appeal was a rehearing on evidence and the tribunal was not concerned to see
whether the leasehold valuation tribunal was right, on the evidence before it,
to decide as it did. The freehold interest with vacant possession was worth
£2.4m on the valuation date of 8 May 1996. The value of the existing lease was
£1.6m, which was 66.67% of the freehold value. It was accepted that, in relying
on graphs of the relationship between freehold and leasehold values, neither
valuer suggested that such a graph was more than a check on valuations arrived
at by different routes. The yield rates used in the settlement of
enfranchisement claims in the St John’s Wood area of London gave a reliable
guide to the value of houses at the valuation date. Having regard to the
specific characteristics of the subject property, the single yield rate for
valuing the term and reversion was 6.25%.
The following cases are
referred to in this report.
Cadogan Estates Ltd v Hows [1989] 2 EGLR 216; [1989] 48 EG 167; [1991] RVR 132,
LT
Cadogan Estates Ltd v Shahgholi [1999] 1 EGLR 189, LT
Cadogan v Sharp
LRA/33 & 35/1997, unreported
Daejan Properties Ltd v Weeks [1998] 3 EGLR 125; [1998] 36 EG 146
Free Grammar School of John Lyon v Brett LRA/16/1997, unreported
Lloyd-Jones v Church
Commissioners for England [1982] 1 EGLR 209; (1981) 261 EG 471, LT
London & Winchester Properties Ltd’s
Appeal, Re (1983) 45 P&CR 429; [1983] 2 EGLR
201; 267 EG 685
Verkan & Co Ltd v Byland Close (Winchmore Hill) Ltd [1998] 2 EGLR 139;
[1998] 28 EG 118
Anthony Radevsky (instructed
by Lee & Pembertons) appeared for the landlords; Jonathan Small (instructed
by Black & Graf) represented the tenants.
Giving his decision, MR NORMAN J ROSE FRICS said: This is an appeal by the
Trustees of the Eyre Estate, the freeholders of a house known as 85 Avenue
Road, London NW8 (the subject property), and a cross-appeal by the lessees,
Mr
Tribunal for the London Rent Assessment Panel (the LVT) determining the price
to be paid for the freehold interest under the provisions of section 9(1C) of
the Leasehold Reform Act 1967 (as amended) (the 1967 Act), at £459,000. By
order of this tribunal the appeal and cross-appeal were consolidated, and
before me the freeholders, treated here as the appellants, contended for a
price of £610,363. The primary case of the lessees, as respondents, was that
the decision of the LVT should be upheld and the appellants’ request for a
rehearing of the appeal should be refused. Alternatively, if there were to be a
rehearing, the lessees contended for a price of £335,000.
Mr Anthony Radevsky, counsel for the appellants,
called Mr
Mr Jonathan Small, counsel for the respondents, called Mr Peter Beckett FRICS.
Duty of the Lands Tribunal
At the commencement of the hearing I heard
argument on the respondents’ submission that the appellants were not entitled
to a rehearing. Mr Small relied on what the then president, Judge Marder QC,
said in Verkan & Co Ltd v Byland Close (Winchmore Hill) Ltd
[1998] 2 EGLR 139 at p144F-G:
In my judgment, where, as in this case, a
competent leasehold valuation tribunal (which is assumed to have local market
knowledge) has decided matters of fact and value on the opinion evidence of
valuers and an inspection of the subject premises, then on a subsequent appeal
to the Lands Tribunal, at least where there is no suggestion of any dispute as
to matters of law or of valuation principle, the Lands Tribunal should be slow
to disturb the decision of the leasehold valuation tribunal unless satisfied
that the decision is clearly wrong.
I was also referred to Re London &
Winchester Properties Ltd’s Appeal (1983) 45 P&CR 429*, Daejan
Properties Ltd v Weeks [1998] 36 EG 146†, Cadogan Estates Ltd
v Shahgholi (LRA/26/1996, unreported)‡ and Free Grammar School of
John Lyon v Brett (LRA/16/1997, unreported).
*Editor’s note: Also reported at [1983] 2 EGLR
201
†Editor’s note: Also reported at [1998] 3 EGLR
125
‡Editor’s note: Reported at [1999] 1 EGLR 189
The right of appeal to the Lands Tribunal, which
is given to a person who is ‘dissatisfied’ with the decision of a leasehold
valuation tribunal by para 2 of Schedule 22 to the Housing Act 1980, as applied
by section 91(10) of the Leasehold Reform, Housing and Urban Development Act
1993, is unqualified in its terms. In my judgment, it gives rise to an appeal
by way of rehearing. In my view, the basic duty of the tribunal on such appeal
can be stated simply. If the tribunal is satisfied on such evidence as may be
before it that the decision of the LVT was wrong, it must allow the appeal;
otherwise it must dismiss the appeal. In expressing himself in the way he did
in Verkan, the then president could not have been intending, in my
opinion, to be suggesting that this was not the duty of the tribunal. Because
the right of appeal that is given is unqualified, it would clearly never be
right, other than perhaps in some wholly exceptional circumstances, for the
tribunal to dismiss an appeal despite being satisfied that the decision of the
LVT was wrong.
I therefore propose to approach my decision in the
present case by asking myself: does the evidence before me satisfy me that the
decision of the LVT was wrong? I would only add that since this is not a review
but a rehearing, with evidence called on both sides, I am not concerned to see
whether the LVT was right, on the evidence that it had before it, to decide as
it did. That would add a very time-consuming dimension to the case and one that
is unnecessary.
Facts
The subject property is a detached cottage-style
house under a tiled roof. The front elevation is timbered in black with white
and there is a substantial extension protruding at the front of the house, also
of brick and tiled-roof construction. It is located on the western side and
towards the northern end of Avenue Road, which is a prestigious street
containing many substantial detached houses. It is also an important, busy
thoroughfare for traffic, leading roughly north-west from Regent’s Park to
Swiss Cottage. In contrast to the position in the southern section of Avenue
Road, there were no parking restrictions outside the property on 8
1996, the agreed valuation date.
The subject property is not in a conservation
area. Its entrance is almost directly opposite the entrance to a school and it
is overlooked by high-rise flats at the rear and the side. At the valuation
date the adjoining house was a construction site. The plot is substantial,
being approximately 22m wide and 61m deep. The area at the front, with plenty
of turning space, is an especially good feature. The house benefits from a rear
garden, a garage, providing two parking spaces, and a carriage driveway,
providing a further four off-street parking spaces.
The accommodation comprises five bedrooms, four
bathrooms, shower room, reception room, dining room, study, kitchen/breakfast
room, playroom, utility room, cloakroom, staff bedroom, sitting room, kitchen
and bathroom. The total effective floor area is 278.23m2. The
condition of the property at the valuation date was fair to good and the
arrangement and fittings rather old‑fashioned.
The subject property is held by the respondents
under a full repairing and insuring lease dated 17
a term of 99 years from 25
fixed for the residue of the term. Thus, at the relevant date the unexpired
term was approximately 37.7 years. On 1 April 1973 the rateable value of the
house was £2,930. This was amended on 17
parties agree that the value of tenants’ improvements was £97,250 for both freehold
and leasehold interests and that the marriage value should be shared equally
between the two parties.
Issues
Apart from the preliminary point, the issues in
dispute before me can be summarised as follows:
1. The freehold vacant possession value of the
house.
2. The value of the existing lease, on the
assumption that there was no right to enfranchise.
3. The yield rate to be adopted in capitalising
the rental income under the lease and deferring the value of the reversion.
The differences between Mr Briant’s valuation
(Annex 1) and Mr
table, which also includes the determination of the LVT upon these issues:
|
Freehold value |
Mr Briant |
Mr Beckett |
LVT |
Freehold value
Both surveyors approached the valuation of the
freehold with vacant possession by considering the prices paid for six freehold
houses in St
term of 96.5 years (41
various dates between July 1995 and August 1997.
For the respondents, Mr Beckett considered that
the most reliable approach to the analysis of this evidence was by reference to
floor area. He did not suggest that one should value blindly on this basis nor
that differences in the locality within St John’s Wood or the state and
condition of the house were to be disregarded, but that floor area was the best
starting point for comparing like with like.
Both the tribunal and the parties’ valuers had
special difficulties in valuing the subject premises, said Mr
Neither the tribunal nor the valuers had inspected the comparable properties at
the time of the transaction or, for the most part, even today, when they may
well be in a different state. Moreover, good residential areas were commonly
ones where purchasers were simply interested in the shell of the house. Even
those who were not often carried out extensive alterations after they had
purchased the property. Therefore, a comparison of houses in St John’s Wood by
reference to floor area, if consistently applied, should produce a good guide
to value at any particular date.
Before making such a comparison, Mr Beckett made
an adjustment to reflect the movement in prices between the date of the
comparable transaction and the relevant valuation date. An analysis of the
seven comparables by floor area, adjusted for time differences, produced the
following values, before allowing for the amount of work required or adjusting
for location:
|
Property |
Time-Adjusted Rate (£/m2) |
|
25 Queen’s Grove |
6271 |
Since he first had occasion to think about the
matter, in preparing for the LVT, Mr Beckett had come to the conclusion that to
attempt a detailed analysis to include the work required to each house was
likely to be futile for several reasons. First, the valuers did not know how
much work was actually done to the houses, still less the cost of that work.
Second, they did not know what the preferences of the purchasers were or to
what extent the work influenced the price they paid. Even if they had that
information, the valuers could not say how much of the work subsequently done
was simply a matter of preference. Most purchasers in St John’s Wood had a
habit of doing extensive work, even to houses in reasonable condition. In some
cases, even where the house was perfectly capable of being refurbished, the
purchasers demolished and reconstructed it.
It followed that, apart from simply noting whether
or not work was obviously and objectively needed, it was better to make any
adjustment when looking at the schedule of comparables as a whole. The first
properties in the table needed work. The time-adjusted rates per m2 shown up by
these comparables were below the pattern of the others. 23
also needed at least some work. Furthermore, extensive work was done to 33
Elsworthy Road, although it was not known whether this work was objectively
necessary. The only two comparables where work may not have been required were
41 and 123
This pattern of values suggested that the range of
rates lay between £7,500 and £8,000 per m2. In making this
comparison, Mr Beckett bore in mind that, for the purposes of the 1967 Act, the
lessees were assumed to have no obligation to repair. The subject property was
in fair condition, but there had been a history of problems with cracking. More
importantly, the arrangement and fitment of the house was old‑fashioned
by many people’s standards.
Although it was against his clients to take the
upper boundary of these rates, namely £8,000 per m2, he did so. This
allowed for the possibility that the subject property might be better regarded
(per m2) than the typical comparable, and also for the possibility that the
range of rates per m2 should be somewhat higher to account for the extent of work
required in the comparables. In short, Mr Beckett considered that the answer
produced by the mathematics of this approach (278m2 at £8,000 per m2 =
£2,224,000, say £2.2m) was reliable.
For the appellants, Mr Briant adopted a different
approach from that of Mr Beckett when adjusting the comparables to reflect
their different characteristics compared with the subject property. He accepted
that some of these differences would be difficult to quantify. Accordingly, his
adjustments should not be seen as ‘set in stone’, but rather as providing a
helpful framework for comparing different properties. Mr
adjustments reflected differences in transaction date, location, size, style,
layout, condition, parking facilities and gardens, although only some of these
adjustments were necessary in each case.
Mr Briant disagreed with Mr Beckett’s approach of
valuing by reference to floor area. All the comparable houses were different
and an approach based only on floor area was too superficial to reflect
accurately the value effects of important factors such as, for example, style,
number and layout of rooms. He accepted that a floor area comparison might well
be appropriate in blocks of flats, where the
many factors to take into account when valuing houses in St John’s Wood that it
was necessary to consider each of the various elements affecting value in order
to obtain the right answer.
Mr Briant was also critical of Mr Beckett’s
approach to condition. In particular, he disagreed with the assumption that
since most purchasers in St John’s Wood carried out extensive work irrespective
of the condition of the property, it was not necessary to make a specific
adjustment to each comparable to reflect the vendor’s expenditure on
improvements. He accepted that it did not matter to many purchasers whether
immediate refurbishment was necessary or simply a matter of personal
preference. If the purchaser wished to modernise the house throughout, then,
apart from structural items, the expenditure required might well be the same
irrespective of condition. But it was also necessary to take the vendor’s
position into account. A house owner who had incurred considerable expenditure
on improving his property would wish to quote a higher price to reflect that
expenditure. Mr Briant was aware of cases where the price paid reflected
improvements carried out by the vendor, even though they were of no use to the
purchaser, simply because the vendor would not sell at a lower price. This
situation was not uncommon, particularly in a strong market. Whether or not
particular improvements would affect value depended on a variety of factors
which made people want to buy a particular house, especially at the upper end
of the housing market.
I have inspected the subject property internally
and externally and viewed the comparables from the outside. Having considered
the evidence of the two experts on the correct approach to assessing the
freehold vacant possession value, I have come to the conclusion that, in the
particular circumstances of this appeal, that of Mr
preferred. If correctly applied, both methods of valuation should produce the
same figure. However, I agree with Mr Briant that his approach is more likely
to reflect accurately the value effect of a house’s condition. Mr Briant’s
method of adjusting for size, which takes into account the number and layout of
the rooms as well as their overall floor area, is also, in my view, more accurate.
The only qualification I would make is that the various adjustments are much
more likely to be reliable if the valuer has been able to inspect the
comparable property, both internally and externally, in its condition at the
time of sale.
Mr Beckett did not inspect any of the freehold
comparables internally. Mr Briant did inspect four of them in their sale
condition. His adjustments to the sale prices of these properties resulted in
the following equivalent figures for the subject premises:
|
57 Hamilton Terrace |
£2,467,500 |
I am satisfied that Mr Briant’s freehold vacant
possession valuation of the subject property at £2.5m is reliable on the
specific assumption upon which it was prepared. That assumption is that the
value was not adversely affected by the property’s location opposite a school,
with high-rise flats to the side and rear and fronting a quite busy, noisy
road. In the light of the evidence and my own inspection, I find that these
factors did have a depressing effect on value and that, in consequence, the
freehold interest with vacant possession was worth £2.4m.
Leasehold value
Mr Briant and Mr Beckett referred to three
transactions as providing comparable evidence for the value of the leasehold
interest in the subject property. They agreed that the most useful of these
were 39 and 41 Queen’s Grove.
As with the freehold comparables, Mr Beckett
analysed these comparables on the basis of floor area. This analysis produced
figures of £6,075 to £6,135 per m2 (actual) and £5,738 to £5,794
(time-adjusted), or a round figure of, say, £6,000 per m2. He adjusted
this upwards by about 10% to reflect the superior characteristics of the
subject property and arrived at a leasehold value of £1.85m.
This value reflected transactions where the
purchasers would enjoy the benefit of the 1967 Act. That Act, however, obliged
the valuer to assume that the lessees had no right to enfranchise. Mr Beckett
produced a complicated calculation to assess the ‘premium’ that a purchaser of
the leasehold might pay for the prospect of acquiring the freehold compulsorily
under the Act in due course. Having regard to what he described as the
‘tentative’ nature of this calculation, Mr
being within the range of £100,000 to £150,000. These figures represented,
respectively, 5.4% and 8.1% of the leasehold value. To adjust for the premium,
therefore, Mr Beckett reduced his £1.85m valuation for the leasehold to £1.7m.
Mr Briant adjusted the sale prices of 39 and 41
Queen’s Grove in the same way as he had dealt with the freehold comparables. He
also made an allowance to reflect the benefit of the 1967 Act. He assessed this
at 10% in the case of 39 and 15% in the case of 41, which was sold with the
benefit of a valid notice of claim. These calculations produced equivalent
valuations for the subject property of £1,583,721 (39) and £1,561,119 (41). His
existing leasehold valuation was £1.5m.
When discussing the additional value attributable
to the right to enfranchise, Mr Briant referred to the history of 58 Hamilton
Terrace, where a lease with approximately 53 years unexpired was sold twice in
1995. The first sale was on 31 January 1995, notice having been served 12 days
previously. The price achieved was £1.408m. The landlord successfully disputed
the validity of the notice, one reason being that the rent payable exceeded the
statutory limit. The purchaser resold the property on 17 November 1995 for
£1.31m. Prima facie these transactions indicated a difference of
approximately 7% between a property with the expectation of a valid notice and
one without the right to enfranchise. However, this fall in value took place
over a period of nine months, at a time when the evidence shows that confidence
was returning to the residential property market in St John’s Wood. Moreover,
the unexpired lease term of 58 Hamilton Terrace was some 40% longer than that
of the subject property. It is to be expected that a right to enfranchise will
become more attractive as the unexpired term diminishes in length.
While not conclusive, I find the evidence of
58
‘tentative’ calculation, and I accept Mr
effect of the 1967 Act. However, on the basis of Mr Briant’s analyses of 39 and
41 Queen’s Grove, I find that, based on Mr Briant’s assumptions, the equivalent
value for the subject premises is £1.575m and not £1.5m.
I consider that two further adjustments should be
made to this equivalent value. First, as in the case of his freehold valuation,
Mr
not affected by the overlooking flats, the school opposite and the busy, noisy
road. I have found that assumption to be unjustified, and the valuation should
accordingly be reduced. I have assessed the difference in the freehold value to
reflect location at £100,000. The effect on the (lower) leasehold value would
be less, and I find it to be £65,000.
Second, Mr Briant has not made an allowance for
the different quality of 39 and 41 Queen’s Grove compared with the subject
property. In the light of my inspection and the evidence, I consider that the
external appearance of 85 Avenue Road is more attractive than either 39 or 41.
I bear in mind that Mr Briant had inspected all three properties internally and
that at one stage he expressed the view that there was no real difference in
the quality of the three houses; a value comparison between the respective
properties would simply depend on the subjective judgment of the particular
purchaser. However, it was put to him in cross-examination that the LVT
considered that both 39 and 41 appeared inferior to the subject property, and he
indicated that he had ‘no difficulty’ with that view.
I find that, in order to reflect the superior
quality of the subject property to that of the comparables, the value of
£1.575m derived from 39 and 41 Queen’s Grove should be increased by £100,000.
Applying this adjustment, together with the reduction for location of £65,000,
produces a leasehold value of £1.61m, say £1.6m.
Both valuers indicated that it was useful to check
the accuracy of the leasehold and the freehold valuations by considering the
relationship between the two. My determination of £1.6m for the leasehold is
66.67% of my freehold figure of £2.4m. Mr Briant produced a graph, which
purported to show the relationship between the value of the two interests as
reflected in various settlements and tribunal decisions on the Eyre and John
Lyon’s Charity estates. This showed an average relationship of approximately 60%
for a lease with some 37 or 38 years unexpired. I pointed out that the average
line on the graph did not seem to be accurately drawn and that the range of
settlements suggested that the average was somewhat in excess of 60%. Mr Briant
did not disagree, but he was adamant that the ratios of values suggested by the
LVT (70.8%) and by Mr Beckett (77.2%) were both well in excess of any other
settlements or tribunal decisions.
Mr Beckett produced two graphs showing suggested
relationships between leasehold and freehold values at any particular unexpired
lease term. They were based on different valuation tables and were purely
theoretical. Mr
give only lightweight support to the evidence of the real world. He also
produced five indices of leasehold to freehold ratios at 35 years unexpired,
derived from a variety of sources, including one based on the same data as Mr
Briant’s graph. Apart from the latter, they showed ratios varying from 64% to
74%. Mr Beckett considered that such statistics were only of assistance in the
absence of open market evidence, indicating the value of the freehold and
leasehold interests in a particular house. Since such superior comparable
evidence was available in this case, Mr Beckett placed no reliance on any of
the indices.
I have carefully considered the various
percentages indicated on Mr
determinations is at the top of the range of percentages agreed or determined
elsewhere, it is within a bracket that I can properly accept. Moreover, neither
valuer suggested that such a graph was more than a method of checking
valuations arrived at by different routes.
Yield
Mr Briant considered that, in arriving at the
value of the freeholder’s present interest, ground rental income should be
capitalised at 6% and the unimproved freehold value should be discounted at the
same rate. In Mr Briant’s opinion, the yield depended entirely on location and
capital value. The better the location and the higher the capital value, the
lower the yield to be adopted when valuing the freeholder’s present investment
value. With the exception of properties in marginal locations, the yield was
not influenced by the period of time for which the ground rent was fixed. The
normal method of valuation meant that an earlier reversion was necessarily
reflected in a higher price. There was no justification in such a case for
reducing the yield as well.
Mr Briant produced a schedule listing relevant
enfranchisement settlements and LVT decisions in respect of houses in St John’s
Wood, where the freeholders were the Eyre Estate or the John Lyon’s Charity. He
or his firm had acted for the landlords in all cases. The schedule contained
details of 92 properties, and in each case the parties had reached an amicable
settlement or had accepted the decision of the LVT. Of the settlements on the
schedule, 73 (or 79.3%) were settled at 6% and 9 (or 9.8%) were settled at 7%,
the remaining 10 houses being settled at varying rates between 6% and 7%. All
cases in Avenue Road had been settled at 6%. In Mr Briant’s opinion, the
subject property was located in one of the prime residential areas in London
and was of a high capital value. He considered that 6% was the correct yield.
Mr Briant said that there had been two Lands
Tribunal decisions in St John’s Wood. The first related to 43
Terrace, where a yield of 6% was determined. Although the member had requested
that the decision should not be treated as a precedent as the lessee had taken
no part in the appeal, it had formed the basis for a number of settlements at
6% on other claims in the St John’s Wood area. The second Lands Tribunal
decision, relating to 139 Hamilton Terrace, was fully contested: Free
Grammar School of John Lyon v Brett (ibid). In that case the
tribunal had again determined a yield of 6% on a property where the freehold
value was £1.9m, the leasehold value £1.5m and the ground rent £1,000 pa rising
after 20.6 years to 0.25% of the then capital value of the lease. Mr Briant
said that many of the factors that had influenced the tribunal in that case
were similar to the factors that applied to the subject property, which was
situated in one of a number of streets in St
evidence of settled and accepted prices showed a 6% yield.
Both of Mr Briant’s clients, the Eyre Estate and
John Lyon’s Charity, had maintained an open policy of providing details of
completed transactions to encourage settlements generally in the St
Wood area. Lessees could see what had been paid for the freeholds of houses
under the 1967 Act in their own street. They could see why there were
differences. For instance, an earlier notice date might have resulted in lower
capital values and therefore a lower enfranchisement price than would be
appropriate for their own house. There may have been improvements that should
be disregarded. Lease length could vary, as could the differential in value
between the leasehold and freehold interests.
Mr Briant referred to the following cases where
the Lands Tribunal had accepted settlement evidence as providing evidence of
the correct yield to be applied: Cadogan Estates Ltd v Hows
[1989] 2 EGLR 216; Cadogan v Sharp (LRA 33 & 35/1997,
unreported); Free Grammar School of John Lyon v Brett (ibid);
Lloyd-Jones v Church Commissioners for England [1982] 1 EGLR 209.
The Eyre Estate and John Lyon’s Charity had
accepted yields in excess of 6% where properties were located in inferior parts
of St
growth was likely to be less than in prime locations. The 7% settlements all
related to modern town houses with relatively long unexpired terms, low capital
values for the St John’s Wood area generally and fixed ground rents. 7 and 8
Queensmead, which were agreed at 7%, were severely overlooked by flats. Naseby
Close — also 7% — was a Swiss Cottage address with lower capital values than
St
Mr Briant was aware of a number of settlements by
the Marylebone Cricket Club (MCC) in Grove End Road and Elm Tree Road at 7%.
These settlements had apparently been reached following one of the early Eyre
Estate cases before the LVT, which had based its decision on a 7% yield. The
MCC properties tended to be in an inferior location. Grove End Road was a busy
thoroughfare and a mixed road, with some houses but mostly substantial
purpose-built blocks of flats. This had been accepted in the Lands Tribunal decision
on 139
Briant was satisfied that the subject property would be considered to be a
higher quality residential investment, which would attract a 6% yield.
Mr Briant considered that weight should be given
to the settlements and decisions in recent cases in the vicinity of the subject
property. With so many properties agreed at 6%, 15 properties with tacit
agreements at 6%, and a further 17 properties where his breakdown showed a 6%
yield, he considered the evidence fully supported a yield of 6% for the subject
property.
Mr Beckett considered that, in principle, the
yield rates to be adopted when valuing the term and reversion should be
considered separately. In the present case, however, he was prepared to follow
the convention of a single yield that had been adopted for houses on the Eyre
and John Lyon’s estates. This was because the rental income was so low and the
reversion and marriage values so high that to change the yield on the income
alone would make, at most, a marginal difference to the valuation. It followed,
said Mr Beckett, that one had to adopt a higher yield for both elements of the
valuation, because the low fixed income for so many years affected the whole
character of the investment, including the investor’s attitude to the
reversion.
As an indication of a ‘possible benchmark’ for
yield, Mr Beckett produced details of 30 investments sold by auction on 27 June
1996. All were secured on banking premises in London and the South East and in
each case the vendor bank had taken a leaseback for 15 years without option to
break. The prices paid for the freehold investments represented yields ranging
from 7.3% to 9.91%. The mean yield was
reversion in the subject property would be different from the average yield on
such investments, for several reasons. The latter were generally suburban or
small‑town properties, not in central London; residential investments
were more popular than commercial investments at the relevant date; what would
happen at reversion after 15 years was uncertain; the banks did not have the
special scarcity value of central London residential freeholds and they
produced a highly secure cash income, whereas a freehold reversion was more
speculative.
Mr Beckett considered that the appropriate yield
for the subject property should be below the ‘bank level’ of, say, 8.5%. On the
other hand, there was a case for convergence between yields on good,
medium-cost investments and the gap should not be too large. In deciding
precisely which yield to apply, Mr Beckett suggested that there were three
determining factors. First, whether the ground rent was reviewable. A freehold
reversion combined with a low, fixed ground rent was never likely to be as
popular with investors as a freehold reversion combined with a high and
reviewable ground rent. Second, the period to reversion. An investor expecting
a reversion in 10 years’ time would apply a lower rate to it than someone
buying a reversion that would not fall in for, say, 75 years. The further away
the reversion, the greater the uncertainty. Third, the quality of the location
and the building. A purchaser buying a freehold reversion in a poor part of London
would discount it more heavily than the same person buying such an investment
in a better part of town. In this connection, although St John’s Wood was an
excellent location, he doubted whether it would be quite as attractive a
location to investors as, say, Regent’s Park, Knightsbridge or Mayfair, where
somewhat lower yields might be expected. Even in St John’s Wood, there may be
variations in yield.
If 6% were the right rate, as Mr Briant’s schedule
of settlements indicated, for houses in St John’s Wood with reviewable ground
rents, that rate could not be right where the ground rent was fixed all the way
to reversion. In the first case the investor would know that his income would
be significant and would keep up with inflation (albeit at infrequent
intervals) over the years. He was in quite a different position from the
hypothetical investor in the present case, who would know that his income,
until reversion at least, would be at a level that was barely worth collecting,
and fixed.
In Mr Beckett’s view, 7% was probably the right
rate to reflect three fundamental factors. First, the ground rent was fixed.
Second, the reversion lay in the medium term, when investors of his age (52)
would be at or past the end of their working lives. This was not a case of an
investment for one’s own retirement, but only for that of one’s children or
grandchildren. Third, the location of the property was, in St John’s Wood
terms, only medium. It was yet more inferior to the best residential locations
in central London.
Mr Beckett produced a note containing his
proposals for ascertaining the appropriate yields in leasehold enfranchisement
cases for central London houses. Notwithstanding his own reservations, this
note was based on the convention that the term yield was always the same as the
reversionary yield. His proposed scheme started from the principle that where
there were frequent ground rent reviews, the appropriate yield might be 5%,
whatever the length of the unexpired term. Where the quality of the income stream
was less attractive, the yield should be shaded upwards, perhaps towards 9%
where there was no review and the reversion was distant. Everything in between
was ‘a matter of finding the right spot, allowing for various bands of review
frequency and unexpired term’. Logically, there should be a third dimension to
the table, to deal with the question of quality of location. Mr Beckett thought
that St John’s Wood was probably very close to the highest quality, although it
may well be exceeded by Mayfair, Belgravia, Knightsbridge and Regent’s Park. He
suggested that the minimum yield for unusually frequent reviews might be 4.5%
there, with a similar shading downwards at every point on the table. By
contrast, locations such as Battersea might justify yields 1% higher throughout
the table than those suggested for St John’s Wood.
Mr Beckett felt that it would be helpful for the
tribunal to give some guidance to valuers approving, however tentatively, a
rough template of such yields. He made this suggestion because of the
difficulty that arose from the absence of a market in central London
residential house reversions, which had existed possibly ever since the passing
of the 1967 Act. As a result, there was no market-derived evidence of yields.
Decisions and settlements were necessarily based upon settlement evidence,
where each result ‘piggybacked’ the previous one, other tribunal decisions and
sales of ground rents in blocks of flats, usually outside central London. In
normal situations, these three forms of evidence would be hopelessly
lightweight compared to good market evidence. Mr Beckett therefore considered
that it would be useful for the tribunal tentatively to approve some scheme of
yields such as that which he had produced. He conceded that, where there was meaningful,
arms-length market evidence, the tribunal would be bound to disregard any
scheme it had so tentatively approved.
Mr Beckett’s proposed scheme of yields covered a
range from 5% to 9%. It indicated that, for a house in St John’s Wood such as
the subject property, with an unexpired lease term of between 21 and 40 years
without review, the appropriate rate for valuing the ground rent and devaluing
the reversion would be 7%.
Before deciding the appropriate yield to be
adopted in this case, I refer to Mr Beckett’s suggestion that, in principle,
the yields applied to the term and reversion should be considered separately.
This matter was recently considered by the tribunal when deciding the price to
be paid for the freehold interest in 139 Hamilton Terrace, to which I referred
earlier. In his decision the member, Mr
Different considerations apply to the yield rate
to be adopted to capitalise the rent payable during the unexpired term of the
lease and that to be adopted to defer the reversion. Mr Briant said that the
existence of rent review provisions exercised a downward pressure on yields and
Mr Buchanan said that, other things being equal, yield rates would be lower
where there was a very short unexpired lease and higher where it was very long
and I think Mr Johnson was right to imply that one might expect there to be
some difference in the yield rates adopted for capitalising rents fixed for
very long periods and those fixed for a relatively short unexpired term or
subject to significant increase during longer unexpired terms. It is perfectly
possible that the risks and attractions of income during the unexpired lease
term and the value of the reversion may justify the adoption of the same yield
rate for both, although I do not think this was the reason for Mr Briant’s
practice. It is equally perfectly possible to express the differing risks and
attractions of the right to receive the rental income during the unexpired term
of the lease and the benefit of the reversion by way of a single yield rate,
but this appears to me to make the already difficult choice of a yield rate, in
the absence of open market evidence, more difficult.
I would respectfully agree. Since, however, in
this case both valuers gave their evidence on the basis of a single yield rate,
I base my decision on a similar approach.
I now turn to the range of single yields that is
appropriate for houses in St John’s Wood. Mr Briant’s evidence was to the
effect that such yields varied between 6% and 7%. Mr Beckett’s proposed scheme
of yields ranged from 5% to 9%. Mr Briant relied entirely on evidence of
settlements and tribunal decisions. Mr
evidence carried very little weight. However, the only open market yield
evidence he produced related to commercial premises let at a rack-rent for 15
years. I agree with Mr Briant that such evidence is of little assistance in
valuing the subject property, where the rental income receivable during the
term represents a small proportion of the total value of the freehold, which is
likely to be of principal interest to investors seeking long-term capital
growth.
Mr Beckett criticised settlement evidence on the
basis that it tended to be self-perpetuating. I agree with him that the paucity
of open market evidence makes the task of any surveyor who seeks to depart from
the established settlement range of 6% to 7% difficult. Having considered the
matter at some length, however, I have come to the conclusion, with the
possible exception of marginal cases, that the established yield range does
give a reliable guide to the value of houses in St John’s Wood at the relevant
valuation date.
There are, no doubt, other surveyors apart from
Mr
in St John’s Wood, and I accept Mr Briant’s evidence that lessees in the area
take a keen interest in the methodology and calculations adopted in arriving at
enfranchisement prices. Mr
anxious to ensure consistency of sale prices paid for different properties
within their estates. If, however, investment market conditions were to change
to such an extent that the established yield range was no longer appropriate, I
am satisfied that tenants’ surveyors would be able to produce persuasive
evidence to that effect. In reaching that conclusion, I do not overlook the
difficulty of the task facing such surveyors, given the lack of truly open
market evidence that has resulted from the enfranchisement legislation.
However, should it not be possible to persuade Mr Briant or his clients that a
general change in yield levels had occurred, I am sure that tenants in St
John’s Wood would not shrink from pursuing appeals to the LVT and, if
necessary, to this tribunal.
Of course, in this case Mr Beckett has himself
sought to persuade me that the established yield range is unreliable. He is an
experienced surveyor, who had clearly taken great care in preparing his report
and who gave his evidence in a straightforward manner. On his own admission, however,
he has had little previous experience of the residential market in St John’s
Wood. I intend no disrespect to him when I say that more cogent evidence than
he has produced would be required to persuade me that the appropriate yield
range in St John’s Wood was between 5% and 9%, rather than 6% to 7% which has
been established by settlements and tribunal decisions.
That said, I am not satisfied that, within the
established yield range, every settlement has accurately reflected all the
circumstances of the particular property in question. It seems to me to be most
unlikely that, in an area where there are considerable differences between
individual houses and streets and in the terms of the unexpired leases, nearly
80% of all settlements should fall at one end of the range. In this connection,
it is worthy of note that the cases settled at 6% include examples where the
rent is fixed for 10 months (74 Maida Vale) and 94 years (97 Hamilton Terrace).
They also include a rent of £75 fixed for 35 years (50 Acacia Road) and a rent
of £200 subject to review to £28,000 in just over one year (22 Carlton Hill).
While in many cases the proportion of the total
enfranchisement price attributable to the term is relatively small, it seems to
me to be improbable that these very considerable differences should have
absolutely no effect on yield. Mr Small may well have been right to suggest
that, faced with a landlord understandably anxious to adhere to a 6%
capitalisation rate if at all possible, many surveyors would have concentrated
their negotiating efforts on other elements of the calculation, in order to
achieve a satisfactory compromise that would also be acceptable to the
freeholders as not setting an undesirable precedent elsewhere.
In deciding where the subject property falls
within the established yield range, I bear in mind that it suffers from certain
locational disadvantages and also that the ground rent is low and fixed for a
substantial period. It is important, however, not to exaggerate these
disadvantages. Avenue Road is one of the most valuable streets in St John’s
Wood. I think the LVT was right to describe the subject property as being just
‘a rung down from properties in rather better locations’. Moreover, only a
small part of the freehold value is attributable to the ground rent. Taking all
relevant matters into account, I find that the appropriate yield rate is 6.25%.
The appeal is therefore allowed and the
cross-appeal is dismissed. I find that the price payable by the respondents to
the appellants for the freehold interest in the subject property under the
terms of section 9(1C) of the 1967 Act is £519,000, as calculated in Annex 3.
This decision determines the substantive issues
raised between the parties, and the tribunal’s award is final. The parties are
invited to make such submissions 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 as to costs
I have considered the submissions on costs made by
the parties. I have not been persuaded by the respondents’ suggestion that the
appellants cannot be said to have ‘won’ this appeal. Accordingly, I order that
the respondents shall pay to the appellants their costs of the appeal, such
costs, if not agreed, to be taxed by the Registrar of the Lands Tribunal on the
High Court standard basis.
ANNEX 1
85 Avenue Road, London NW8 —
Valuation of Mr Briant
|
Values |
Improved value |
|
Unimproved value |
|
|
|||
|
FHVP |
£2,500,000 £97,250 |
|
£2,402,750 |
60.46% |
|
|||
|
VALUE OF FREEHOLD PRESENT INTEREST |
|
|
|
|
||||
|
Term |
Ground |
37.66 years @ |
6.00% |
£200 |
£2,962 |
|
||
|
|
||||||||
|
|
||||||||
|
Reversion |
FHVP |
37.66 years @ |
6.00% |
£2,402,750 |
£267,764 |
|
||
|
|
||||||||
|
|
||||||||
|
|
|
Lessor’s interest |
£270,726 |
|
||||
|
MARRIAGE VALUE |
|
|
|
|
||||
|
FHVP |
|
£2,402,750 £270,726 |
£339,637 |
|
||||
|
|
||||||||
|
|
||||||||
|
|
||||||||
|
|
||||||||
|
|
||||||||
|
|
|
|
|
TOTAL |
|
£610,363 |
||
|
|
|
|
|
|||||
ANNEX 2
85 Avenue Road, London NW8 —
Valuation of Mr Beckett
|
Value of landlord’s present interest |
£ |
£ |
£ |
|
Rental income |
200 2,200,000 |
2,634 |
|
|
Deferred for 37.63 yrs |
0.0784 |
164,856 |
|
|
|
|
|
167,490 |
|
Calculate marriage value, which is the difference |
|
||
|
A. Interests after enfranchisement |
2,200,000 |
|
|
|
2. Value of Landlord’s interest |
|
2,102,750 |
|
|
Combined value of the interests after enfranchisement |
|
2,102,750 |
|
|
B. Interests at present 2. Value of landlord’s existing interest, as above |
1,700,000 |
1,602,750 |
1,770,240 |
|
C. The difference is the marriage value arising on |
332,510 |
||
|
D. The landlord’s share of this value is |
|
50% |
£166,255 |
|
Compensation payable to landlord |
|
|
£0 |
|
Valuation Summary |
|||
|
Value of Landlord’s interest |
|
|
£167,490 |
|
Enfranchisement |
333,745 |
||
ANNEX 3
85 AVENUE ROAD, LONDON NW8 — DETERMINATION OF THE LANDS TRIBUNAL
|
|
Improved |
Unimproved |
|
|
|
|
|
|
|
Freehold vacant possession |
£2,400,000 |
£2,302,750 |
|
|
Value of freeholder’s present interest Reversion to freehold VP |
£ 2,302,750 |
£ 2,874 234,880 |
£ 237,754 |
|
Marriage value Freeholder’s share @ 50% |
237,754 |
2,302,750 1,740,504 say |
281,123 |
