Leasehold enfranchisement – Lease extension – Deferment rate – Premium payable for new lease of flat in block in Horsham – Whether addition to generic 5% Sportelli deferment rate justified to take into account management risks associated with block – Whether such addition to be made for lower capital growth in Horsham compared to prime central London – LVT applying rate of 6% – Appeal allowed in part
The leasehold valuation tribunal (LVT) was asked to determine the premiums payable by the respondent tenant to the appellant freeholder and to a headlessee for the grant of a new underlease of a flat in Horsham, West Sussex, pursuant to Chapter II of the Leasehold Reform, Housing and Urban Development Act 1993. The flat was situated on the first floor of a four-storey, purpose-built block of 54 flats dating from the 1930s. The block lay close to the centre of town behind a parade of shops.
The LVT noted that the block was poorly sited, unattractive and in need of maintenance, with dated windows. As part of the valuation process, it applied a deferment rate of 6%, starting with the 5% generic deferment rate for flats laid down in Earl Cadogan v Sportelli [2007] 1 EGLR 153 and [2007] EWCA Civ 1042; [2008] 1 EGLR 137 and adding a further: (i) 0.5% for additional risk that growth would not be achieved at the same rate as in prime central London (PCL); (ii) 0.25% for obsolescence; and (iii) 0.25% for the risks involved in the management of the block. It concluded that the respondent should pay £1,312 to the headlessee and £8,906 to the appellant.
The appellant appealed on the issue of the deferment rate, contending that the LVT had erred in making additions for capital growth issues and management risks; there was no appeal on the issue of obsolescence.
Decision: The appeal was allowed in part.
(1) The purpose of the deferment rate was to produce an annual discount of a future receipt, namely the vacant possession value of the flat at a future date. If a feature of the flat or of the block was fully reflected in the vacant possession value of the flat, then it would be double counting to use the same feature to justify an upward or downward adjustment to the deferment rate. Compelling evidence would be needed to justify an additional allowance to reflect exceptional difficulties in management. No such exceptional difficulties were in prospect with the appellant’s block at the valuation date, notwithstanding that the management account was overdrawn with a bank loan and there was a trend of increasing service charge arrears. The value of the long leasehold or freehold of a flat would be affected by whether it was well or poorly maintained and whether there were present or prospective management problems. There was no evidence that the management problems relating to the appellant’s block, in terms of defects and problems for the future, were not already fully reflected in the vacant possession value of the property.
(2) An addition of 0.25% was nonetheless justified in respect of increased management risks arising from the consultation requirements imposed by section 20 of the Landlord and Tenant Act 1985 and the Service Charges (Consultation Requirements) (England) Regulations 2003: Zuckerman v Trustees of Calthorpe Estate [2009] UKUT 235 (LC); [2010] 1 EGLR 187 applied. As a result of that factor, those investing in freehold reversions of flats would, as at the valuation date, have had greater concerns about possible management problems during the course of the tenancy than had been recognised in Sportelli. That raised concern would have led a hypothetical purchaser of a freehold reversion on flats to make an addition of 0.25% to the Sportelli rate to reflect the potential burden of management that would fall on the purchaser or might do so in future. Such an addition could be excluded if there was clear evidence that the purchaser of the freehold reversion would realise, on the facts of the particular case, that it was extremely improbable that it would ever become burdened with any responsibility of management. The existence of a headlease and the nature of that headlease would be relevant on that point. However, there was no such evidence in the instant case and the 0.25% addition should accordingly be made.
(3) The hypothetical successful purchaser of the freehold reversion could be assumed to be knowledgeable and prudent and to have cast its bid after performing a careful analysis of the value of the prospective investment. That careful analysis would lead the purchaser to decide that no adjustment to the deferment rate was required for differences in capital growth since there was no substantial evidence of lesser long-term growth in Horsham as compared with PCL. In order to assess long-term growth trends, the ideal approach was to look for evidence extending back 50 years and consider different starting dates. Evidence of prices over a period of only 13 or 15 years was inadequate to indicate the long-term position. Where information covering more than 15 years but less than 50 was available it might, depending on the length of time and the particular circumstances, be sufficient to indicate a trend that an investor would consider as a reliable guide to future performance. The evidence in the instant case did not support the assumption of a different growth rate in Horsham.
(4) Retaining the 0.25% addition for obsolescence, and making a 0.25% addition for management risks, produced a deferment rate of 5.5% and an overall premium of £10,762 payable to the appellant.
Gary Cowen (instructed by Wallace LLP) appeared for the appellant; Anthony Radevsky (instructed by ODT Solicitors LLP, of Brighton) appeared for the respondent.
Sally Dobson, barrister
Leasehold enfranchisement – Lease extension – Deferment rate – Premium payable for new lease of flat in block in Horsham – Whether addition to generic 5% Sportelli deferment rate justified to take into account management risks associated with block – Whether such addition to be made for lower capital growth in Horsham compared to prime central London – LVT applying rate of 6% – Appeal allowed in part The leasehold valuation tribunal (LVT) was asked to determine the premiums payable by the respondent tenant to the appellant freeholder and to a headlessee for the grant of a new underlease of a flat in Horsham, West Sussex, pursuant to Chapter II of the Leasehold Reform, Housing and Urban Development Act 1993. The flat was situated on the first floor of a four-storey, purpose-built block of 54 flats dating from the 1930s. The block lay close to the centre of town behind a parade of shops. The LVT noted that the block was poorly sited, unattractive and in need of maintenance, with dated windows. As part of the valuation process, it applied a deferment rate of 6%, starting with the 5% generic deferment rate for flats laid down in Earl Cadogan v Sportelli [2007] 1 EGLR 153 and [2007] EWCA Civ 1042; [2008] 1 EGLR 137 and adding a further: (i) 0.5% for additional risk that growth would not be achieved at the same rate as in prime central London (PCL); (ii) 0.25% for obsolescence; and (iii) 0.25% for the risks involved in the management of the block. It concluded that the respondent should pay £1,312 to the headlessee and £8,906 to the appellant.The appellant appealed on the issue of the deferment rate, contending that the LVT had erred in making additions for capital growth issues and management risks; there was no appeal on the issue of obsolescence.Decision: The appeal was allowed in part. (1) The purpose of the deferment rate was to produce an annual discount of a future receipt, namely the vacant possession value of the flat at a future date. If a feature of the flat or of the block was fully reflected in the vacant possession value of the flat, then it would be double counting to use the same feature to justify an upward or downward adjustment to the deferment rate. Compelling evidence would be needed to justify an additional allowance to reflect exceptional difficulties in management. No such exceptional difficulties were in prospect with the appellant’s block at the valuation date, notwithstanding that the management account was overdrawn with a bank loan and there was a trend of increasing service charge arrears. The value of the long leasehold or freehold of a flat would be affected by whether it was well or poorly maintained and whether there were present or prospective management problems. There was no evidence that the management problems relating to the appellant’s block, in terms of defects and problems for the future, were not already fully reflected in the vacant possession value of the property.(2) An addition of 0.25% was nonetheless justified in respect of increased management risks arising from the consultation requirements imposed by section 20 of the Landlord and Tenant Act 1985 and the Service Charges (Consultation Requirements) (England) Regulations 2003: Zuckerman v Trustees of Calthorpe Estate [2009] UKUT 235 (LC); [2010] 1 EGLR 187 applied. As a result of that factor, those investing in freehold reversions of flats would, as at the valuation date, have had greater concerns about possible management problems during the course of the tenancy than had been recognised in Sportelli. That raised concern would have led a hypothetical purchaser of a freehold reversion on flats to make an addition of 0.25% to the Sportelli rate to reflect the potential burden of management that would fall on the purchaser or might do so in future. Such an addition could be excluded if there was clear evidence that the purchaser of the freehold reversion would realise, on the facts of the particular case, that it was extremely improbable that it would ever become burdened with any responsibility of management. The existence of a headlease and the nature of that headlease would be relevant on that point. However, there was no such evidence in the instant case and the 0.25% addition should accordingly be made.(3) The hypothetical successful purchaser of the freehold reversion could be assumed to be knowledgeable and prudent and to have cast its bid after performing a careful analysis of the value of the prospective investment. That careful analysis would lead the purchaser to decide that no adjustment to the deferment rate was required for differences in capital growth since there was no substantial evidence of lesser long-term growth in Horsham as compared with PCL. In order to assess long-term growth trends, the ideal approach was to look for evidence extending back 50 years and consider different starting dates. Evidence of prices over a period of only 13 or 15 years was inadequate to indicate the long-term position. Where information covering more than 15 years but less than 50 was available it might, depending on the length of time and the particular circumstances, be sufficient to indicate a trend that an investor would consider as a reliable guide to future performance. The evidence in the instant case did not support the assumption of a different growth rate in Horsham.(4) Retaining the 0.25% addition for obsolescence, and making a 0.25% addition for management risks, produced a deferment rate of 5.5% and an overall premium of £10,762 payable to the appellant.Gary Cowen (instructed by Wallace LLP) appeared for the appellant; Anthony Radevsky (instructed by ODT Solicitors LLP, of Brighton) appeared for the respondent.Sally Dobson, barrister
