Leasehold enfranchisement – Acquisition of freehold – Leasehold Reform, Housing and Urban Development Act 1993 – Premium payable – Deferment rate – Whether departure from generic Sportelli rate justified for 88-year reversion outside prime central London area – Additional value to be attributed to developable land – Appeal allowed in part
The appellant applied to acquire the freehold interest in four blocks of flats in London under the Leasehold Reform, Housing and Urban Development Act 1993. The property comprised 36 two-bedroom flats over the four blocks, plus 12 lock-up garages, ancillary gardens and parking areas and a small area of undeveloped land to the rear of the site. August 2005 was the appropriate valuation date for the purposes of assessing the premium payable for the freehold.
The leasehold valuation tribunal (LVT) determined the premium at £248,825. In doing so, it applied a deferment rate of 5%, in accordance with Earl Cadogan v Sportelli [2007] 1 EGLR 153, in respect of 35 of the flats, which had unexpired terms between approximately 48 and 88 years. It attributed no reversionary value to the remaining flat, the lease of which had an unexpired lease term of more than 177 years. It further attributed £50,000 in respect of the value of the undeveloped land.
On appeal against that determination, the appellant contended for a premium of £119,012. It argued that the LVT should have applied a higher deferment rate of 7% to the flats with an unexpired term of 88 years since Sportelli had been concerned with properties in the prime central London area (PCL) with reversions only up to 71 years. It submitted that a higher deferment rate should apply to properties outside the PCL with leases of 75 years’ unexpired, a higher rate still to those with 80 years’ unexpired and that reversions that were 100 years distant had no value at because landlords in non-prime areas took a shorter-term view of investments than those in the PCL. The respondent argued that the value of a reversion, discounted at the appropriate deferment rate, automatically declined as the length of the unexpired term increased, such that any further reduction by an increase in the deferment rate would involve double-counting.
The appellant further argued that the undeveloped land should be valued at nil, owing to the various problems and risks inherent of any development on that site.
Held: The appeal was allowed in part.
(1) It was open to a party to call evidence seeking to demonstrate that a different deferment rate was appropriate in the case of longer-dated reversions: Earl Cadogan v Sportelli [2007] EWCA Civ 1042; [2008] 1 EGLR 137 applied. There were several components to the deferment rate, one of which was the risk premium. This involved a consideration of the risks of investment in long reversions in terms of volatility, illiquidity, deterioration and obsolescence; whether one of those risks increased over time was a matter for evidence. If the evidence demonstrated that the risk increased, it would not be double counting to reflect it in the yield as well as the period of deferment. However, the evidence adduced by the appellant did not support its contention that the circumstances of the appeal property justified an addition of 2% to the deferment rate for leases with 88 years’ unexpired: Arbib v Earl Cadogan [2005] 3 EGLR 139 considered. Decisions of other LVTs were of as little evidential value on the deferment rate as they were in respect of relativity: Arrowdell Ltd v Coniston Court (Hove) Ltd [2007] RVR 39 applied.
(2) On all the evidence, the value of the undeveloped land was £10,000, on the ground that development would not be financially viable and its speculative value therefore did not exceed the £10,000 value of the garage on the site. Overall, the premium payable by the appellant was £205,000.
Gary Cowen (instructed by Alan Edwards & Co) appeared for the appellant; Ellodie Gibbons, instructed by direct access, appeared for the respondent.
Sally Dobson, barrister
