Eyre Estate Trustees v Shack

Leasehold Reform Act 1967 — Determination of price for freehold under section 9(1)(A) — Whether reduction in freehold value for risk of tenant remaining in possession under Part I of the Landlord and Tenant Act 1954 The respondent, who held a lease with an unexpired term of nearly 69 years of premises in St John’s Wood Park, London NW8, served a notice of enfranchisement on July 24 1992 under the Leasehold Reform Act 1967. That was admitted by the applicant trustees, who then applied to the tribunal for the determination of the price to be paid for the freehold interest. Although the parties agreed the freehold vacant possession value of £433,000, the trustees claimed £59,000 using a 6% capitalisation rate. The tenant put forward a price of £18,400 using an 8% capitalisation rate and reduced the freehold value by 10% to reflect the risk of the tenant claiming the protection of Part I of the Landlord and Tenant Act 1954 as in Lloyd-Jones v Church Commissioners for England [1982] 1 EGLR 209; (1981) 261 EG 471. Decision: The enfranchisement price was determined at £39,250. Part I of the Landlord and Tenant Act 1954 has been amended by the Local Government and Housing Act 1989, section 189 and Schedule 10; at the term date the tenant’s entitlement will be to an assured tenancy at a market rent and not a secure tenancy at a fair rent. Having regard also to the unexpired term of nearly 69 years, no deduction was appropriate for a contingency which may not take place. The leasehold value was £360,000 based on the tribunal’s knowledge and experience and a capitalisation rate of 7% was appropriate. The following case is referred to in this report. Lloyd-Jones v Church Commissioners for England [1982] 1 EGLR 209; (1981) 261 EG 471, LT This was an application by the trustees of the Eyre Estate for the determination of the price payable by the tenant, Mrs B R Shack, for the enfranchisement of the freehold of premises under section 9(1)(A) of the Leasehold Reform Act 1967. J Shack appeared for the tenant and called Martyn G Allen arics; Julian E Briant arics appeared for the trustees and called Richard P Dalton arics. Giving the decision of the tribunal, Lady Fox QC said: This is a decision made on an application on the part of the freeholder, the trustees of the Eyre Estate under section 9(1)(A) of the Leasehold Reform Act 1967 (hereinafter called the Act) as amended, for the determination of the price to be paid for the freehold interest in the house and garden at 7 Queensmead, St John’s Wood Park, London NW8, hereinafter called the subject premises. The tenant, Mrs B R Shack, holds under a lease dated April 22 1963 from the intermediate landlord, CPK Construction Ltd, for a term of 99 years commencing on March 25 1962 at a ground rent of £95pa. Notice to enfranchise the subject premises was served by the tenant on July 24 1992 on the freeholder and the intermediate landlord and admitted by the freeholder on January 11 1993. Accordingly, the date of valuation is July 24 1992 at which date the unexpired term was almost 68¾ years. Mr Julian Briant arics, partner in Daniel Smith, chartered surveyors, gave evidence on behalf of the freeholder and intermediate landlord in accordance with a written proof. He stated that he acted as surveyor for the Eyre Estate and the John Lyons Charity Estate in respect of leasehold enfranchisements in St John’s Wood. He had also dealt with enfranchisements for Alleyn’s College in Dulwich, New Hampstead Garden Trust, Ashdale Land & Property Co and Letchworth Garden City Corporations. Mr Briant said he had instructions to represent CPK Construction Ltd, the intermediate landlord, as well as the freeholder in the present application. Valuation of Mr J E C Briant arics on behalf of the freeholder and intermediate landlord Freehold present interest Term £ £ £ Rent receivable 95pa YP 68¾ years @ 6% 16.36 1,554 Reversion Freehold entirety value 433,000 Present value of £1 in 68¾ years @ 6% 0.2 8,660 10,214 Say 10,250 Calculation of ‘marriage’ value Value of freehold with vacant possession 433,000 Less Value of freehold interest excluding ‘marriage’ value 10,250 Value of leasehold interest excluding ‘marriage’ value 325,000 335,250 Gain on ‘marriage’ of interest 97,750 Lessors’ share at 50% 48,875 59,125 Say 59,000 Valuation of Mr G M Allen and Mr S J Martin on behalf of the tenant Freehold present interest Term £ £ £ Ground rent 95pa YP for 68 years @ 8% 12.433 Term value 1,181 214 Reversion Freehold vacant possession 433,500 Less 10% Landlord and Tenant Act 1954 risk 43,350 390,150 PV £1 for 68 years @ 8% 0.00534 Reversion value 2,082 Freehold value 3,263 Marriage value Freehold vacant possession 433,500 Less sum of freehold present interest 3,263 Leasehold interest 400,000 403,263 Marriage value 30,237 Marriage share (50% each) 15,119 Freeholders enfranchisement price 18,382 Say 18,400 He described the location of the subject property, a town house in a terrace of four in a 1960s developed private estate and its accommodation. He said that the parties had agreed the freehold vacant possession value of the subject premises at £433,000 based on the sale of the freehold of 5 Queensmead, a similar house on the same private estate for £438,000 in July 1994. The parties differed as to the value of the leasehold interest. He put forward evidence of transactions in respect of comparable houses in the locality and the allowances he would make for difference to the subject premises to support the figure of £325,000 as follows: 6 Henstridge Place, London NW8 A three-storey end-of-terrace house sold for £310,000 in October 1992. £15,000 should be added to allow for the lack of a garage and shorter term of 62 years. 3 Acacia Gardens, London NW8 A three-storey mid-terrace house sold for £280,000 in May 1994. £45,000 should be added to allow for the quieter location, better quality development and longer lease of the subject premises. 32 The Marlowes, London NW8 A three-storey mid-town terrace house sold for £370,000 in January 1994. Deductions totalling £45,000 were made for the poorer quality development, architectural style and lack of off-street parking of the subject property. He had adopted a capitalisation rate of 6% as the rate always agreed by the Eyre Estate on settlements for sales of long leases under the Act. He considered it an appropriate rate for properties in a good location where larger sums were involved. He made no reduction in the value of the freehold interest for the risk of a tenant claiming under Part I of the Landlord and Tenant Act 1954 as he considered it inappropriate, following the introduction of Schedule 10 to the Local Government and Housing Act 1989. Schedule 10 would apply as the reversion would arise after January 1999 and the tenant was much less likely to remain in occupation at a market rent, than at a fair rent, as was the situation in Lloyd-Jones v Church Commissioners for England [1982] 1 EGLR 209; (1981) 261 EG 471. Mr Martyn Allen arics, director of Steadman Allen Ltd, chartered surveyors, gave evidence on behalf of the tenant with Mr S J Martin. Mr Allen stated that he had considerable evidence as a expert witness for private clients, the Company Fraud Department, Metropolitan Police and Crown Prosecution Service, in relation to mortgage and other valuations on residential commercial and licensed premises. In cross-examination he said he had no previous experience in leasehold enfranchisement work. Mr Martin stated that he was a research consultant, working with the property research unit of the Department of Land Economy Cambridge University and had advised Magdalen College Cambridge, Halifax Building Society and other clients. He specialised in investment valuation, financial viability in housing associations and housing affordability. The tenant’s representatives disputed the figure of £325,000 put forward by the landlord as the value of the leasehold interest. They maintained that due to the rarity of freehold transactions, there was a high demand for leaseholds in the exclusive neighbourhood of St John’s Wood and asking prices for leasehold of 50 years or more were at a similar level to freeholds. In support of their figure of £400,000 for the leasehold interest of the subject premises, they referred to 17 Queensmead, which had been on the market at a quoted price of £445,000 in 1994, but was withdrawn unsold. They drew attention to the different dimensions of the reception and bedrooms of the subject property to the comparable properties relied on by the landlord. Taking these and other differences into account they would make the following adjustments. 6 Henstridge Place £75,000 addition for smaller size (£20,000), inferior architectural style (£20,000), state of repair (£20,000) and inferior location (£10,000). 3 Acacia Gardens £90,000 addition for noisier location, less good quality development, lack of repair and no integral garage. 32 The Marlowes £25,000 addition for better location, condition and longer lease. They put forward 8% as the appropriate rate for capitalisation, on the basis that past decisions of the leasehold valuation tribunals indicated that the longer the unexpired term the higher the yield should be. They also applied a 10% discount to reflect the risk of tenants exercising their rights under the Landlord and Tenant Act 1954 (Part 1), this discount being in line with past decisions. In answer to questions of the tribunal put to the representatives of both parties, Mr Briant, on behalf of the freeholder, stated that he was not prepared to accept that the agreed freehold price itself reflected all the differences in the comparables, which he had applied to the leasehold value. He accepted that the amounts of the differentials applied to the comparables were subjective, but in the absence of freehold sales said the parties had no alternative but to value the leasehold interest by reference to comparable leasehold sales. He made no distinction in the market for sales whether transacted at the valuation date or at 1994 and Mr Allen on behalf of the tenant did not dissent from this view. Mr Allen, on behalf of the tenant, accepted the subjectivity of valuing differences between properties; he maintained that there was a difference in freehold and leasehold values, but much less than that put forward by the freeholder’s representative. In the present case the tenant had strong personal reasons, independent of financial advantage, in acquiring the freehold and he called on the tenant’s husband, Mr J Shack, who confirmed this fact. Inspection The tribunal inspected the subject property externally and internally on the day of the hearing. It is located on the north side of St John’s Wood Park in a 1960s development of four substantial purpose-built blocks of flats and 17 town houses. The subject property is set back in the centre of the development behind the two large blocks of 11 flats known as Wymontham Court and Walsingham. The subject property is a mid-terraced town house in a row of four, constructed on three floors under a pitched roof. The front elevation has facing bricks to the upper-two floors and stucco to the ground floor. There is a balcony to the first floor. Internally the accommodation comprises: Ground floor Entrance, open-plan reception/dining area, kitchen, lobby leading to cloakroom, boiler room. First floor Reception room, bedroom with en-suite bathroom/wc. Second floor Two bedrooms (one previously two rooms), bathroom/wc. 215 The house has gas-fired central heating with radiators throughout. Outside to the rear there is an enclosed patio area leading to a brick-built garage and a service road. To the front the house has a pleasant outlook on to landscaped gardens that are attractively planted and well maintained. There are a number of parking spaces which appeared to be available for residents and visitors. Although the development was dominated by the multi-storey blocks of flats, the subject property was set back from these blocks and thereby they did not appear to have an overwhelmingly dominant effect on the house. The subject property appeared to enjoy a measure of security and seclusion. We also inspected externally, 5 and 17 Queensmead, 6 Henstridge Gardens, 3 Acacia Gardens and 32 The Marlowes, London NW8. Decision and reasons In the present case the parties have agreed the value of the freehold interest with vacant possession of the subject property at £433,000, but disagree as to the rate of interest to be applied to the capitalisation of the ground rent and the deferment of the reversion, the deduction, if any, to be made to the freehold interest for the tenants’ right under Part I of the Landlord and Tenant Act 1954 and the value of the leasehold interest in the subject premises. Although the landlord’s representative contended for 6% as the rate appropriate to the superior location of the subject property, we saw no reason to depart from the 7% which is supported by the general practice adopted by leasehold valuation tribunals. The tenant’s representative invited the tribunal to apply the decision in Lloyd-Jones v Church Commissioners for England (1981) 261 EG 471 and to make a 10% deduction for the risk of the tenant taking a tenancy under Part I of the Landlord and Tenant Act 1954. However, both parties accepted that the 1954 Act had been amended by the Local Government and Housing Act 1989, section 189 and Schedule 10, with the result that the tenant’s entitlement was to an assured tenancy at a market rent, rather than a regulated tenancy at a fair rent, where the long lease at a low rent subsisted after 1999. It therefore seems to us that, with regard to an unexpired term of 68 years (unlike the 12-year unexpired term in the Lloyd-Jones case) and having regard to the change in the law, which gives protection only on payment of a market rent, no deduction should be made for a contingency which may not take effect and in any event is too remote in time to enable any present quantification. Accordingly, we make no deduction from the value of the freehold reversion for this possibility. Finally, in regard to the value of the leasehold interest the parties presented three transactions relating to leasehold sales of comparable properties in the locality and we have inspected them all, having regard to the differences in size, aspect, architectural design, location, environment, parking and garage facilities referred to by the parties. We have to say, however, that we are of the view that all these considerations are already reflected in the agreed freehold price. Accordingly, it seems to us that the real issue between the parties is the difference in value between a freehold and a leasehold interest in the subject property. However, due to the rarity of transactions relating to the freehold interest, the parties were unable to produce any evidence as to what that differential might be. Having regard to differentials arrived at by leasehold valuation tribunals, based on evidence produced by the parties in other section 9(1)(A) applications, coupled with our own knowledge and experience we determine the value of the leasehold interest to be £360,000. Accordingly, our value of the freehold interest is as follows: Term £ £ £ Rent receivable 95pa 68¾ YP @ 7% 14.15 1,344 Reversion Agreed value of unencumbered freehold interest 433,000 Present value of £1 in 68¾ years @ 7% .00955 4,135 5,479 Say 5,500 Lessor’s share of marriage value Agreed value of unencumbered freehold interest 433,000 Less: (1) Value of lessee’s interest excluding prospects of ‘marriage’ 360,000 (2) Value of lessor’s interest excluding prospects of ‘marriage’ 5,500 365,500 Gain on marriage 67,500 50% to the lessor Enfranchisement price 33,750 39,250 The tribunal, therefore, determines the sum to be paid for the freehold interest in 7 Queensmead, St John’s Wood Park, London NW8, pursuant to section 9(1)(A) of the Act as amended is £39,250 (thirty nine thousand, two hundred and fifty pounds).