Leasehold Reform Act 1967 – Enfranchisement of house – Houses converted into flats – Appropriate method of valuing freehold reversion – Aggregation of values of individual flats or capitalisation of income therefrom – Whether proper to make deduction from value of flats to reflect difficulties in market at valuation date – Whether such deduction inappropriate where hypothetical purchaser of freehold reversion unable to sell flats until expiry of lease terms – Appeal dismissed
On an enfranchisement under the Leasehold Reform Act 1967, the leasehold valuation tribunal (LVT) determined the price payable by the respondent leaseholders to the appellant freeholders to acquire the freehold of two houses in the West Cliff area of Bournemouth. Both properties were converted into flats, with nine flats in the larger property and three flats in the smaller. The respondents used two of the flats in the larger property as a single unit, which they occupied as a holiday home. As part of the valuation exercise, the LVT valued the freehold reversions of the properties at £945,000 and £445,000 respectively, as at the valuation date in March 2008.
On appeal against that decision, the appellants contended that the correct approach to valuation was to aggregate the long lease values of the individual flats, on the assumption that they were in the condition that was required under the relevant legislation. The respondents argued that the properties should be valued on the “investment” basis, by capitalising the passing rents, plus the potential rents from the flats that the respondents occupied; they contended for a capitalisation rate of 8% to 8.5% on gross income or 6% net. The respondents also contended for a reduction of 15% to reflect the depressed condition of the residential housing market as at the valuation date. The appellant submitted that no such reduction should be made. They argued that the valuation did not necessarily have to assume a sale with vacant possession on the valuation date, since the valuation was premised on a sale of the reversion, a purchaser of which would not be concerned about difficulties in selling the flats in March 2008 since it could not sell until the expiry of the existing lease terms in 2029. The appellants contended that any concerns that the purchaser might have that market circumstances would be similarly depressed when the flats were eventually sold was already reflected in the deferment rate.
Held: The appeal was dismissed.
The appellant’s suggested valuation method was wrong as a matter of law. The valuation should be based on a freehold sale with vacant possession on the valuation date. The normal practice was to defer the freehold value, based on an assumed sale of that interest with possession on the valuation date, and assuming market conditions to be as they were on that date. Although the deferment rate included a risk premium, which reflected the volatility of the property market and the fact that real house prices fluctuated significantly, that did not mean that the starting point for calculating the open market value of the freehold interest at the valuation date was other than by reference to values at that date. On the respondents’ evidence, market conditions in March 2008 would have impacted on value in two ways: (i) the most likely purchaser would have been a “wholesale buyer”, who would negotiate a bulk discount; and (ii) the addition to the market of 12 flats for sale, at a time of limited demand, would have had a negative impact on the prices obtainable. It was normal valuation practice to quantify the effect of these two factors by making two separate deductions. A purchaser of the freehold interests in March 2008, calculating its bid by reference to the combined values of the individual flats after it had improved them, would take into account all the costs that it would have to meet, including an appropriate profit to compensate for the effort and risk involved; accordingly, the purchaser would prepare a residual valuation.
On the evidence, the best price would be paid by a purchaser who intended to hold the properties as a continuing investment, such that the properties should be valued on the investment basis. On a consideration of comparable transactions, adjusted to reflect differences in the properties, a gross yield of 8% to 8.5% should be assumed, with a net yield of 6%.
The relationship between the existing lease values determined by the LVT, against which there was no appeal, and the freehold valuation of the respondents’ expert was within the 40% to 50% range suggested by the graphs of relativity in a research document published by the RICS in 2009. By contrast, the appellants’ valuations fell well outside that range. The graphs did not necessarily produce unreliable results when valuing houses as opposed to flats. Although the treatment of necessary works of repair was different in valuations of flats and houses, and the graphs would not necessarily be helpful in the case of houses in exceptional disrepair, there was no reason to depart from the respondents’ valuations, which were consistent with market evidence, simply because they fell within the wide range of relativities indicated by the published data. The prices payable for to the appellants for the freehold interests in the two properties were accordingly £466,300 and £231,400.
Ellodie Gibbons (instructed by Lester Aldridge LLP, of Bournemouth) appeared for the appellants; Anthony Radevsky (instructed by Wallace LLP) appeared for the respondents.
Sally Dobson, barrister
Leasehold Reform Act 1967 – Enfranchisement of house – Houses converted into flats – Appropriate method of valuing freehold reversion – Aggregation of values of individual flats or capitalisation of income therefrom – Whether proper to make deduction from value of flats to reflect difficulties in market at valuation date – Whether such deduction inappropriate where hypothetical purchaser of freehold reversion unable to sell flats until expiry of lease terms – Appeal dismissedOn an enfranchisement under the Leasehold Reform Act 1967, the leasehold valuation tribunal (LVT) determined the price payable by the respondent leaseholders to the appellant freeholders to acquire the freehold of two houses in the West Cliff area of Bournemouth. Both properties were converted into flats, with nine flats in the larger property and three flats in the smaller. The respondents used two of the flats in the larger property as a single unit, which they occupied as a holiday home. As part of the valuation exercise, the LVT valued the freehold reversions of the properties at £945,000 and £445,000 respectively, as at the valuation date in March 2008.On appeal against that decision, the appellants contended that the correct approach to valuation was to aggregate the long lease values of the individual flats, on the assumption that they were in the condition that was required under the relevant legislation. The respondents argued that the properties should be valued on the “investment” basis, by capitalising the passing rents, plus the potential rents from the flats that the respondents occupied; they contended for a capitalisation rate of 8% to 8.5% on gross income or 6% net. The respondents also contended for a reduction of 15% to reflect the depressed condition of the residential housing market as at the valuation date. The appellant submitted that no such reduction should be made. They argued that the valuation did not necessarily have to assume a sale with vacant possession on the valuation date, since the valuation was premised on a sale of the reversion, a purchaser of which would not be concerned about difficulties in selling the flats in March 2008 since it could not sell until the expiry of the existing lease terms in 2029. The appellants contended that any concerns that the purchaser might have that market circumstances would be similarly depressed when the flats were eventually sold was already reflected in the deferment rate.Held: The appeal was dismissed.The appellant’s suggested valuation method was wrong as a matter of law. The valuation should be based on a freehold sale with vacant possession on the valuation date. The normal practice was to defer the freehold value, based on an assumed sale of that interest with possession on the valuation date, and assuming market conditions to be as they were on that date. Although the deferment rate included a risk premium, which reflected the volatility of the property market and the fact that real house prices fluctuated significantly, that did not mean that the starting point for calculating the open market value of the freehold interest at the valuation date was other than by reference to values at that date. On the respondents’ evidence, market conditions in March 2008 would have impacted on value in two ways: (i) the most likely purchaser would have been a “wholesale buyer”, who would negotiate a bulk discount; and (ii) the addition to the market of 12 flats for sale, at a time of limited demand, would have had a negative impact on the prices obtainable. It was normal valuation practice to quantify the effect of these two factors by making two separate deductions. A purchaser of the freehold interests in March 2008, calculating its bid by reference to the combined values of the individual flats after it had improved them, would take into account all the costs that it would have to meet, including an appropriate profit to compensate for the effort and risk involved; accordingly, the purchaser would prepare a residual valuation.On the evidence, the best price would be paid by a purchaser who intended to hold the properties as a continuing investment, such that the properties should be valued on the investment basis. On a consideration of comparable transactions, adjusted to reflect differences in the properties, a gross yield of 8% to 8.5% should be assumed, with a net yield of 6%.The relationship between the existing lease values determined by the LVT, against which there was no appeal, and the freehold valuation of the respondents’ expert was within the 40% to 50% range suggested by the graphs of relativity in a research document published by the RICS in 2009. By contrast, the appellants’ valuations fell well outside that range. The graphs did not necessarily produce unreliable results when valuing houses as opposed to flats. Although the treatment of necessary works of repair was different in valuations of flats and houses, and the graphs would not necessarily be helpful in the case of houses in exceptional disrepair, there was no reason to depart from the respondents’ valuations, which were consistent with market evidence, simply because they fell within the wide range of relativities indicated by the published data. The prices payable for to the appellants for the freehold interests in the two properties were accordingly £466,300 and £231,400.Ellodie Gibbons (instructed by Lester Aldridge LLP, of Bournemouth) appeared for the appellants; Anthony Radevsky (instructed by Wallace LLP) appeared for the respondents.Sally Dobson, barrister