DECISION
Introduction
1. This is an appeal by the leaseholders against a decision of the Leasehold Valuation Tribunal of the Midland Rent Assessment Panel, determining the premiums payable in respect of the grant of eleven lease extensions pursuant to Chapter II of Part I of the Leasehold Reform, Housing and Urban Development Act 1993. Permission to appeal was granted by the LVT. The properties in question are flats 1, 2, 5, 6, 19, 21, 31, 33, 34, 35 and
2. It was agreed at the LVT that the capitalisation rate to be applied to the ground rent was the same as the deferment rate to be applied to the value of the extended lease and the latter was the only point in dispute. The LVT decided that the deferment rate should be 5%, the figure suggested by the freeholder, the Trustees of the Calthorpe Estates. Before me the LVT’s decision was supported by the respondent freeholder and the appellants contended for a deferment (and capitalisation) rate of 6.5%, resulting in premiums of £7,569 (£7,594 in the case of flat 33).
3. The appellants are:
| Flat No. | Leaseholder(s) |
| 1 | Mr D Zuckerman |
| 2 | Ms S Patel |
| 5 | Mr and Mrs A C Collins |
| 6 | Mr B Nair |
| 19 | Mr J W Hutton |
| 21 | Mr and Mrs T J Clives |
| 31 | Mr and Mrs R Soni |
| 33 | Mr A J Adam |
| 34 | Dr O’Klein |
| 35 | Mrs J M Good |
| 36 | Mr J Kail |
4. Mr Douglas Readings of counsel appeared for the appellants and called expert evidence from E J Rutledge FRICS, a partner in Messrs Lawrence and Wightman, chartered valuation and building surveyors of
5. I was told that there are outstanding appeals to this Tribunal in respect of approximately 20 other flats in Edgbaston, which have been stayed pending the decision on this appeal.
Facts
6. In the light of the evidence and my inspection I find the following facts. The appeal properties are on the Calthorpe Estate, comprising appropriately 1,500 acres in Edgbaston and Harborne,
7. The appeal properties are located within the Edgbaston conservation area, in an established residential area on the south side of
8. Each flat is held on an underlease for a term expiring on 26 September 2071 at current ground rents of £75 per annum, increasing to £100 in September 2022 and £125 in September 2047. The landlord is responsible for insuring the premises and recovers the appropriate premium from each lessee as part of the service charge. The landlord’s responsibilities include maintenance of the structure and the common areas of the flats and garages, the private roads and amenity areas. The lessees contribute to a service charge to meet the cost of these items. The use of each flat is restricted to that of a private residence of a single family only, such family to comprise not more than four persons.
9. It is agreed that, for the purposes of valuing all the flats except No.33, the unexpired lease term is 64 years. The notice of claim for flat 33 was served on 28 January 2008, when there were approximately 63.75 years unexpired. The head lease was surrendered on 19 May 1981, since when the appellants have held their properties directly from the respondent.
Evidence
10. Mr Rutledge has worked in
11. It would therefore remain cost effective to rebuild, repair or refurbish high value PCL properties for an almost infinitely longer period than flats such as those at
12. Turning to changes in property values, Mr Rutledge said that he had tried to find reliable, long term statistics relating to PCL and
13. He produced a graph, incorporating house price information obtained from various published statistics, together with the available information on sale prices in
14. Mr Rutledge also compared the attributes of investments in flats and houses. He said that the liquidity of the freehold interest in any flats development had always been lower and more of a problem than the equivalent freehold investment in houses. The right of first refusal granted by the Landlord and Tenant Act 1987 had been in place for over 20 years and those procedural requirements had had a clear effect on the ability of any freehold investor to deal freely with his assets.
15. In addition, the gradual introduction of the various sections of the Commonhold and Leasehold Reform Act 2002 (the 2002 Act) had placed more significant management burdens on investors in flats and maisonettes. The need to consult lessees on qualifying long term agreements, administration charges and major expenditure had increased the risk that landlords could be tripped up and challenged. Freeholders then faced the real prospect of having to pay for certain significant items of expenditure without any chance of recovering the cost from lessees. Such legislation applied equally to property in PCL and to
16. The number of cases brought before LVTs in connection with disputed service charges, and in particular the consultation requirements contained in section 20 of the Landlord and Tenant Act 1985 (as amended by the 2002 Act), were very significant. He produced statistics obtained from the Residential Property Tribunal Service website which showed that, in 2007, there were 411 service charge disputes in
17. In Mr Rutledge’s opinion, there should be added to the 5% starting point for flats adopted in Sportelli, between 0.5% and 0.75% for the higher rate of obsolescence/deterioration at Kelton Court compared to PCL; between 0.5% and 1.0% to reflect investors’ concern as to whether the growth rate in capital values would be as high in Birmingham as in PCL, and 0.25% to reflect the increased gap between houses and flats resulting from recent legislative changes. Cumulatively this produced a minimum deferment rate of 6.25% and a maximum of 7%. In his view the appropriate rate for the appeal properties should be 6.5%. This assessment did not include a specific allowance for increased volatility. In the course of his evidence in chief Mr Rutledge said that, although he had suggested at the LVT hearing that volatility was greater in the
18. Between 1984 and 1997 Mr Willson was employed by the respondent, dealing with a range of commercial and residential estate management matters, including responsibility for all freehold sales. He worked as a surveyor in the
19. The difficulties of using indices were illustrated in the average prices data compiled by the Department for Communities and Local Government and National Statistics. This data was broken down by property type, including purpose built flats. The data was, however, compiled by region and presumably included a very diverse range of properties, both type and location. Two separate tables were compiled, with some variation in the make up of the regions and different start dates. The first table showed the changes in average prices for purpose built flats in different parts of the
20. The two tables did not show real growth. In order to strip out the effects of inflation Mr Willson deducted the inflation rate, based on the retail price index, from the annual growth rate for the West Midlands and
21. Any attempt to use indices to determine rates of growth in different areas presented considerable difficulties. Such evidence as was available did not generally establish any sustained differences in growth rates over the long term. Moreover, such indices only showed past performance. Although they might assist a potential investor in deciding the likely rate of future growth, it was far from certain that they would be a decisive influence on the price he would be prepared to pay for the reversion.
22. Mr Willson did not agree with Mr Rutledge’s view that obsolescence and deterioration would be greater at
23. Mr Willson considered that the relatively high level of repair costs in
24. The state of repair did not determine whether a building was obsolete. Obsolescence had more to do with function than condition. A building became obsolete, either because it no longer met the requirements for which it was built, or because it no longer met the needs of occupiers, or because the use for which it was designed no longer existed, or was no longer appropriate. Nearly all buildings, even new ones, had a degree of obsolescence. Many houses in the PCL area, for example, were built before the era of almost universal car ownership and had no parking spaces and nowhere to create one. They therefore had a degree of obsolescence, which could normally not be remedied without redevelopment. As a result, properties with off-street parking usually sold for higher prices than comparable properties without parking. The degree of obsolescence, in this case, was reflected in the vacant possession value of the property. Mr Willson considered that that was the correct approach.
25. The extensive redevelopment of properties in
26. Paradoxically, many properties that would have been thought to be obsolete in the past had been retained. When
27. The nature of property was such that it would deteriorate over time. Provided leases were adequate to ensure suitable standards of repair this should be mitigated. Both building quality and design had an impact upon the speed with which a building became obsolete and would potentially have an effect on condition. Factors such as type and quality of construction, however, were reflected in the vacant possession value of the property. This approach had been endorsed by the Lands Tribunal in Sportelli.
28. Mr Willson then considered the distinction between the treatment of houses and flats. In Arbib v Cadogan [2005] 3 EGLR 139 the Tribunal concluded that there should be a general addition to the deferment rate to reflect the differences between the two classes of property. This was largely because of a perceived difference in management requirements. However, provided leases were properly drafted, were comprehensive in their requirements and allowed for the full recovery of management costs, the actual cost to the landlord of a block of flats should be no greater than for any other property investment. All residential property had been subject to increased statutory intervention in the relationship between landlord and tenant over the years. Changes to consultation requirements were introduced by the 2002 Act and came into force prior to the decision in Sportelli. The requirement for consultation applied to houses as well as flats. Mr Willson did not consider there was any reason why the impact in
29. In Mr Willson’s opinion, the length of the lease and the extent of the landlord’s management obligations could influence the value of the landlord’s reversion and lead to an adjustment to the deferment rate. Matters such as expectations of future growth, location, obsolescence and condition, however, would influence the value of all interests in the property, not just the freehold reversion. Mr Willson considered that such factors were already reflected in the vacant possession value. Only in the most exceptional cases would they justify a change in the deferment rate.
30. In a supplementary report issued in the light of comments made in para 33 of my decision in Re Mansal Securities Ltd and others’ appeals [2009] 20 EG 104, Mr Willson made the following additional points. He was not aware of any general evidence to suggest that there were widespread problems in recovering service charge contributions. It did not follow from the fact that people lived in high value properties that they had substantial incomes from which to meet repair costs. Pensioners, for example, might be “asset rich” but still have modest disposable incomes. A number of factors needed to be borne in mind when attempting to use house price data to assess variations in growth rates. In Hildron Finance Ltd v Greenhill (Hampstead) Ltd [2008] 1EGLR 179, the Tribunal (HH Judge Reid QC and N J Rose FRICS) suggested that periods in the region of 50 years, with different starting dates, should be looked at in order to obtain a reliable indication of the long term movement in residential values. This analysis could not be undertaken in practice. The Nationwide UK House Price Index was the only one which covered a 50 year period and this looked only at the national picture. In the 1970s the Nationwide and the
31. Mr Willson drew attention to the fact that the way the Nationwide UK House Price Index was calculated had been changed four times. It was not clear whether this made any difference, but it highlighted the difficulties of using such data, particularly for non-statisticians. The Lands Tribunal had expressed a desire to see a comparison of different indices over different periods. It was difficult to make that comparison, even when the indices existed, because it was not clear how they had been compiled and what data had been used. The Nationwide and Halifax West Midlands indices showed very different rates of change for the same region and property types.
32. Mr Willson concluded that all these factors tended to undermine the usefulness of such statistical information. At best, they presented an unreliable picture of the past and were not a useful guide to future performance.
33. Dealing with Mr Rutledge’s reference to changes in legislation, Mr Willson said that the Residential Property Tribunal Service website indicated that there had been only six service charge disputes in
34. In his supplementary report Mr Rutledge said that he had spent much time seeking an experienced expert witness who might be willing to give further evidence before the Tribunal in relation to the PCL investment market. In preliminary informal conversations with senior partners/directors of many of the largest firms in the country, it was clear that they shared his general view that the property investment market in PCL was unlike that in any other part of the country. However, in every case the individual concerned had been unable or unwilling to appear before the Tribunal because of conflicts of interest with clients owning properties outside
35. Mr Rutledge said that he had made further extensive enquiries to discover whether there were other relevant sources of statistical information. He had obtained clarification from the compilers of the Nationwide and
36. Although Mr Rutledge was not an expert statistician, he felt that the striking feature of the statistics summarised in his first expert report and as illustrated in his comparative property price graph was that in the long term both the
37. Mr Rutledge pointed out that the LVT had found that “the growth rate in PCL probably has exceeded that in the
38. Mr Rutledge said that he had given further careful thought to the comments of the Tribunal in Hildron and in particular in paragraph 39. He did not know why a 50 year period had been highlighted as particularly important when looking at statistics for movements in property prices. There was no comprehensive set of figures or statistics for property prices going back 50 years from the valuation date to 1958 except for the Nationwide UK House Price Index. That overall
39. Looking at the available information, whether one started with figures in 1952 or any other date over that decade, the conclusion was very much the same. The first point at which different figures were available for
Conclusions
40. Sportelli was concerned with residential properties in PCL. As Carnwath LJ pointed out in the course of his judgment in the appeal, [2008] 1 WLR 2142 at para 102:
“The issues within the PCL were fully examined in a fully contested dispute between directly interested parties. The same cannot be said in respect of other areas. The judgment that the same deferment rate should apply outside the PCL area was made, and could only be made, on the evidence then available. That must leave the way open to the possibility of further evidence being called by other parties in other cases directly concerned with different areas. The deferment rate adopted by the tribunal will no doubt be the starting point; and their conclusions on the methodology, including the limitations of market evidence, are likely to remain valid. However, it is possible to envisage other evidence being called, for example, on issues relevant to the risk premium for residential property in different areas. That will be a matter for those advising future parties, and for the tribunals, to consider as such issues arise.”
41. Thus the starting point when considering the appropriate deferment rate to be adopted in this appeal is the 5% determined in Sportelli for flats in PCL. This rate was arrived at as follows:
Risk free rate 2.25%, minus
Real growth rate 2.00%, plus
Risk premium 4.5%, plus
Increased management risks for flats 0.25%
42. In its decision dated 7 September 2009 in Culley v Daejan Properties Ltd (LRA/82/2007, unreported) the Tribunal was required to determine the appropriate deferment rate for a block of flats in Eastcote, Middlesex. The Members (George Bartlett QC, President and P R Francis FRICS) quoted the remarks of Carnwath LJ at paragraph 102. They continued:
“35. Thus evidence of valuers as to whether a higher risk premium should be taken because of the features of the property under consideration, including its location, is of undoubted relevance, and if a tribunal is satisfied on the evidence before it that such features justify the application of a higher deferment rate then, of course, it ought to apply such higher rate. In determining whether a higher rate is appropriate it will need to bear in mind the considerations that led the Tribunal in Sportelli to adopt the approach that it did, and the primary question will always be whether there are particular features that are not fully reflected in the vacant possession value and thus should be reflected in a higher risk premium. Moreover – and this is a matter that may not, or may not sufficiently, emerge from the Tribunal’s post-Sportelli decisions – what matters is the view that the market, properly informed on relevant factual matters, would take on such features (the prospective movement of house prices in the area, for instance, or the potential obsolescence of the property) in considering an investment in the reversion. On this the expert opinion of the valuer is likely to be important.”
43. Mr Willson considered that there was no justification for a departure from any of the Sportelli elements of the deferment rate when valuing a block of flats such as
Deterioration and obsolescence – conclusions
44. In Mr Rutledge’s opinion, by comparison with the much more valuable properties in PCL, there was a greater risk that flats in Edgbaston would become obsolete over the term of the existing leases, or that the extent of deterioration would be so great that the flats would no longer be worth repairing. Mr Willson disagreed. He said that it was inevitable that parts of buildings would need to be repaired or replaced over time and other parts would need regular maintenance. In most purpose-built blocks of flats, including
45. In Sportelli, the Tribunal’s conclusion on obsolescence and condition was set out in para 91 in these terms:
“As with location, while we do not rule out the possible need to adjust the deferment rate to take account of such matters as obsolescence and condition, we think that it would only exceptionally be the case that such factors were not fully reflected in the vacant possession value and the risk premium. Evidence would be needed to establish that they were not fully reflected in this way.”
46. Mr Rutledge produced a schedule showing that the values of the properties considered in Sportelli were of a different order of magnitude from those of the flats in
Prospect of future growth – conclusions
47. Mr Rutledge produced statistical evidence which, he said, demonstrated why a potential purchaser of a reversion secured on
48. In Hildron the Tribunal said at para 39:
“In order to provide a reliable indication of the long term movement in residential values so as to justify a departure form the Sportelli starting point, we consider that a period in the region of 50 years should be looked at, and that a series of statistics with different starting dates should be considered in order to ensure that an unrepresentative period is not relied upon.”
49. Both experts in the present case have taken trouble to search for all the available statistics illustrating residential property movements in the
50. Despite their deficiencies, the patterns of price movements shown in the Nationwide Regional Index –
“we do not know whether they show the long-term position. All you can do is give the available information to the investor and he has to take the decision [on which location offers better growth prospects] which cannot be based on hard evidence.”
51. In my judgment, in spite of its undoubted limitations, the available statistical information demonstrates that the difference between past rates of long-term price increases in PCL and in the
52. In arriving at its conclusion, in para 72 of Sportelli, that a real growth rate of 2% per annum should be assumed in calculating the deferment rate, the Tribunal said
“we think a realistic, or neutral, assumption would be 2%, the one made by Mr Cullum, with any concern on the part of the investor that this rate might not be achieved being reflected in the risk premium.”
53. As I have said, the 5% deferment rate determined in Sportelli for flats in PCL is the starting point for calculating the appropriate rate for
Allowance for flats
54. In Sportelli, the Tribunal’s conclusions on the difference between the deferment rate for houses and flats were contained in para 95 as follows:
“We think, however, that an adjustment needs to be made to reflect the greater management problems [associated with flats], although we do not consider it appropriate to differentiate between flats that are the subject of headleases and those which are not. Nor do we think that the management concerns are necessarily so much less for a single flat than for a block to warrant a different adjustment. Even where flats are efficiently managed, service charge and repairs problems inevitably occur, and the management exercise in itself is, we feel, sufficiently more complex to warrant a generalised 0.25% additions for flats. We do not consider that any fine-tuning below this percentage is justified.”
55. Mr Rutledge relied primarily on the introduction of the provisions of the 2002 Act to support his view that the risks to landlords of flats had increased since Sportelli. He had in mind in particular The Service Charges (Consultation Requirements) (
56. The provisions of the 2003 Regulations are potentially extremely serious for landlords (see the Lands Tribunal decision dated 11 April 2008 (George Bartlett QC, President and N J Rose FRICS) in London Borough of Camden and The Leaseholders of 37 flats at 30-40 Grafton Way, (LRX/185/2006, unreported). I accept Mr Rutledge’s evidence that, although LVTs have only heard a limited number of service charge appeals relating to properties in
Summary
57. The LVT reached the conclusion, based on the evidence before it, that the appellants had not made out their case for a departure from the Sportelli starting point of a 5% deferment rate. In the light of the more extensive evidence produced before this Tribunal, I have concluded that the risk premium of 4.5% determined in Sportelli should be increased to 5.25% and that the 0.25% management allowance for flats should be increased to 0.5%, resulting in a deferment rate of 6%. The appeal is allowed. The premium payable by the leaseholder of flat 33 is £8,150. The premium payable by the respective leaseholder or leaseholders of each of the remaining ten flats is £8,100. The calculations producing these figures appear in the Appendix to this decision.
58. I would add that my conclusion in this appeal differs from the one reached by the Tribunal in Culley, namely that there was no justification for a departure from the Sportelli starting point. In Culley, as in the present appeal, the basis of the Tribunal’s decision was the expert valuation evidence adduced by the parties.
59. The Tribunal’s power to order the payment of costs is extremely limited in cases of this nature. I make no order as to costs.
Dated: 18 November 2009
N J Rose FRICS
Appendix
Flats 1,2,5,6,19,21,31,33,34,35 and
Carpenter Road, Edgbaston,
Valuation by Lands Tribunal
All properties except Flat 33
| (i) Diminution in the freeholder’s interest | |
| Term: | |
| Current rent: £75.00 per year | |
| Years Purchase: 15 years @ 6% = 9.712 | |
| £75.00 x 9.712 = £728.40 | £728.40 |
| Rent (from 2022): £100.00 per year | |
| Years Purchase: 25 years @ 6% @ 12.783 | |
| PV £1 in 15 years @ 6% = 0.417 | |
| £100.00 x 12.783 x 0.417 = £533.05 | £533.05 |
| Rent (from 2047): £125.00 per year | |
| Years Purchase: 24 years @ 6% = 12.550 | |
| PV £1 in 40 years @ 6% = 0.097 | |
| £125.00 x 12.550 x 0.097 = £152.17 | £152.17 |
| £1,413.62 | |
| Reversion: | |
| Open market value with extended lease: £158,025 | |
| (excluding tenant’s improvements) | |
| PV £1 in 64 years @ 6%: 0.024 | |
| £158,025 x 0.024 = £3,792.60 | £3,792.60 |
| £5,206.22 | |
| (ii) Marriage value | |
| Open market value with extended lease: | £158,025.00 |
| (excluding tenant’s improvements) | |
| Less Freehold interest | 5,206.22 |
| Leasehold interest | £147,000.00 |
| £5,818.78 | |
| (iii) Premium payable | |
| Freehold interest: | £5,206.22 |
| Marriage value (£5,818.78) x 50% = | £2,909.39 |
| £8,115.61 | |
| Say £8,100 |
| Flat 33 | |
| (i) Diminution in the freeholder’s interest | |
| Term: | |
| Current rent: £75.00 per year | |
| Years Purchase: 14.75 years @ 6% = 9.608 | |
| £75.00 x 9.608 = £720.60 | £720.60 |
| Rent (from 2022): £100.00 per year | |
| Years Purchase: 25 years @ 6% = 12.783 | |
| PV £1 in 14.75 years @ 6% = 0.423 | |
| £100.00 x 12.783 x0.423 = £540.72 | £540.72 |
| Rent (from 2047): £125.00 per year | |
| Years Purchase: 24 years @ 6% = 12.550 | |
| PV £1 in 39.75 years @ 6% =0.098 | |
| £125.00 x 12.550 x 0.098 = £153.74 | £153.74 |
| £1,415.06 | |
| Reversion: | |
| Open market value with extended lease: £158,025 | |
| (excluding tenant’s improvements) | |
| PV £1 in 63.75 years @ 6%: 0.0244 | |
| £158,025 x 0.0244 = £3,855.81 | £3,855.81 |
| £5,270.87 | |
| (ii) Marriage value | |
| Open market value with extended lease: | £158,025.00 |
| (excluding tenant’s improvement) | |
| Less Freehold interest | £5,270.87 |
| Leasehold interest | £147,000.00 |
| £5,754.13 | |
| (iii) Premium payable | |
| Freehold interest: | £5,270.87 |
| Marriage value (£5,754.13) x 50% = | £2,877.07 |
| £8,147.94 | |
| Say £8,150 |
