Leasehold enfranchisement – Leasehold Reform, Housing and Urban Development Act 1993 – Lease extension – Deferment rate – Flats – Properties outside prime central London area – LVT applying deferment rate of 6.5% – Whether evidence to justify departure from generic 5% rate applicable to flats – Appeal allowed
The respondents were tenants of four two-bedroom flats in purpose-built blocks in Hounslow, which were let by the appellant landlord. They applied to the leasehold valuation tribunal (LVT), under section 42 of the Leasehold Reform, Housing and Urban Development Act 1993, for a determination of the price payable by them for lease extensions to be granted under the leasehold enfranchisement provisions of that Act. The LVT determined the price payable as £2,150 for the first flat and £2,075 for the other three; in doing so, it determined the deferment rate to be applied as 6.5%. The LVT considered it appropriate to depart from the 5% generic deferment rate for flats fixed by the Lands Tribunal in Earl Cadogan and another v Sportelli and another [2007] 1 EGLR 153 (confirmed by the Court of Appeal [2007] EWCA Civ 1042; [2008] 1 EGLR 137) in the light of the outer London location of the properties and other factors including: (i) a continuing history of litigation between the landlord and tenants over service charges; (ii) the 50:50 split of owner-occupiers and tenants, the latter of which it considered to be poor tenants in the light of the state of the block; (iii) the poor external condition of the premises; (iv) the noise from the nearby A3006 and an overhead flight path; and (v) the fact that the premises were flanked by the access road to an industrial estate at the rear.
On appeal against that decision, the appellant contended that the factors relied upon by the LVT did not amount to exceptional circumstances that could justify an adjustment to the Sportelli rate.
Decision: The appeal was allowed.
(1) The starting point was the 5% deferment rate for flats as determined in Sportelli, comprising a risk-free element of 2.25%, from which a rate of real growth was deducted and to which a risk premium of 4.75% was added. It then fell to be determined whether, on the evidence, any of those elements required adjustment. The outer London location of the respondents’ properties did not, in itself, self-evidently affect the deferment rate; the question was whether, notwithstanding that the location was reflected in the vacant possession freehold value, the notional purchaser of the reversion would make an additional allowance for it in deciding what he would pay. That might be so if there was evidence that the prices of flats in that area appreciated more slowly over the long-term than those of properties in the prime central London (PCL) area; that could justify deducting a lesser growth rate than 2% from the risk-free premium. Similarly, if there was evidence to show that prices in that area were significantly more volatile than in the PCL area, that could justify an adjustment to the risk premium. A long period would need to be looked at to establish such differential growth rates and a series of statistics with different starting dates would need to be considered in order to ensure that an unrepresentative period was not relied upon: Hildron Finance Ltd v Greenhill Hampstead Ltd [2008] 1 EGLR 179 applied; Daejan Investments Ltd v The Holt (Freehold) Ltd [2008] PLSCS 146 considered. There was no such evidence in the instant case.
(2) With regard to the other factors identified by the LVT as justifying an adjustment to the deferment rate, the correct approach was to ask whether they were fully reflected in the vacant possession value; if they were not, an adjustment might be made. There was no reason in principle why the factors cited by the LVT should not be reflected in the vacant possession value, and there was no evidence to suggest that they were not. All of them were pre-eminently matters in respect of which a purchaser of the freehold with vacant possession would make some appropriate allowance in determining how much he was prepared to pay. There was no reason why a purchaser, using that vacant possession value, would make an addition to the deferment because of those factors. Accordingly, there was no justification for departing from a deferment rate of 5% in the instant case.
Andrew Kasriel (instructed by Clarke Mairs LLP, of Newcastle upon Tyne) appeared for the appellant; Paul Boswood appeared in person on behalf of himself and the other respondents.
Sally Dobson, barrister
