63 Perham Road Ltd v Manyfield Ltd

Leasehold reform — Acquisition of freehold by leaseholders’ nominee company — Determination of price — Whether insurance commission part of price By notice dated February 21 1994 the tenants of the four flats in the subject property stated their intention to acquire the freehold interest under the Leasehold Reform, Housing and Urban Development Act 1993. The applicant nominee purchaser applied to the tribunal under section 24 of the Act for the determination of the price to be paid for the freehold. Three flats were held on long terms of 88.5 years and the fourth for a 999-year term. The applicant’s valuer spoke to a total enfranchisement price of £2,500 and contended that there was no marriage value payable. The respondent landlord’s valuer supported a price of £8,500, which included a 50% share in the marriage value and a sum to reflect the loss of insurance commission. Decision: The purchase price was determined at £4,225. A capitalisation rate of 13% was adopted. Any value of the insurance commission would be reflected in the auction price of freehold ground rents and was therefore not valued separately. The price included a share of the marriage value. The following cases are referred to in this report. Castlebeg Investments (Jersey) Ltd v Lynch (1988) 57 P&CR 493, LT Castlebeg Investments (Jersey) Ltd’s Appeal, Re [1985] 2 EGLR 209; (1985) 275 EG 469, LT Clibbett (W) Ltd v Avon County Council [1976] 1 EGLR 171; [1976] EGD 385; (1975) 237 EG 271, LT Delaforce v Evans (1970) 22 P&CR 770; 215 EG 315, LT Lynch v Castlebeg Investments (Jersey) Ltd [1988] 1 EGLR 223; [1988] 03 EG 101, LVT Sked v Towngran Developments Ltd [1995] 1 EGLR 216; [1995] 05 EG 169, LVT Waitt v Morris [1994] 2 EGLR 224; [1994] 39 EG 140 Edwin Johnson (instructed by Franks Charlesly & Co) appeared for the nominee purchaser; Nicholas Dowding (instructed by Malthouse Chevalier) represented the landlord. Giving their decision, THE TRIBUNAL said: This is an application made pursuant to section 24 of the Leasehold Reform, Housing and Urban Development Act 1993 (the Act) by the nominee purchaser, ie 63 Perham Road Ltd, on behalf of the participating tenants for the determination of the price to be paid for the freehold in 63 Perham Road, London W14 (the subject premises). The nominee purchaser 207 acts on behalf of the following tenants: Christopher David Tyson — flat 1; Penelope Anne Swann — flat 2; Simon Brian Fletcher and Janet Millward — flat 3; Jasvinder Singh Mankoo — flat 4. Flats 1, 2 and 4 were held on long leases for terms of 99 years from June 24 1984 and therefore had about 88.5 years unexpired as at the date of the tribunal’s determination, this being the date of the valuation, pursuant to Schedule 6(1) to the Act. In each case the ground rent was £75 pa, which doubled every 33 years. Flat 3, however, was held for a term of 999 years from June 24 1984 at a ground rent of £75 pa, doubling in the 33rd and 66th years. By initial notice dated February 21 1994 the tenants of the four flats gave notice of their intention to acquire the freehold interest of the subject premises to the reversioner, Manyfield Ltd, proposing a purchase price of £2,000. By a counternotice dated April 27 1994, the reversioner did not accept the proposed purchase price of £2,000, proposing £30,000 for the freehold interest in the subject premises. It was agreed by the parties at the hearing that the issue before the tribunal was mainly as to the purchase price, the transfer document being in draft form only. It was agreed by the parties at the hearing that section 32(1) and Schedule 6 to the Act provided that the price payable by the nominee purchaser for the freehold of the subject premises was the aggregate of: (a)    the value of the freeholder’s interest; (b)   the freeholder’s share of the marriage value; (c)    compensation, if any, for resulting loss, including development value. The values of the leasehold interests of three of the four flats were agreed at a total of £230,000, but the value of flat 3 was disputed at £70,000 or £76,000. [See pp209–210 for valuations.] Mr Edwin Johnson of counsel then called on Mr DL Struth ba ARICS to give evidence for the nominee purchaser in accordance with a written proof and photographs. Mr Struth said that he was a director of Charles Price & Co and had been employed by them for over six years, with recent experience of advising clients under the Leasehold Reform, Housing and Urban Development Act 1993. In 1991, he had advised the residents of a large residential purpose-built block in West Kensington, comprising 118 flats, in negotiating the purchase of both the held leasehold and freehold interests, and was currently involved in a number of matters in central London pursuant to existing legislation, relevant to the present proceedings. He then said that he had been advised that the freeholder originally had purchased the freehold of the subject property in or around May 1989 as part of a parcel of freehold ground rents, the purchase price paid being £15,632.50 for the parcel of ground rents which comprised 11 properties. Mr Struth then described Perham Road as being in a predominantly residential area with close proximity to the Queens Tennis Club in West Kensington, with West Kensington (Piccadilly Line) and Barons Court underground tube stations (Piccadilly and District Lines) within easy walking distance, and with main road access to both central London and out to the west of London. He then described the subject property as a brick-built mid-terrace Victorian building arranged on basement, ground, first and second floors, and the accommodation provided by the four subject flats, all of which had ‘D’ banding for council tax . He continued by describing in detail the leases and their expiry dates; and by saying that the ground rents payable were £75 pa with fixed increases every 33 years when the ground rent doubled. He stated that the leases were fully repairing and insuring with each of the tenants covenanting in 1988 and in every fifth year thereafter to redecorate internally; that the landlord covenanted to insure, repair and renew the exterior of the property and recover the expenditure from the lessees; and was responsible for cleaning, lighting, maintaining, repairing and redecorating the internal common parts as well as providing, repairing and maintaining the entry-phone systems; and each tenant contributed a quarter of the cost of the service charge, although the basement tenant did not contribute towards the upkeep of the common parts or the entry-phone system. He said that the tenants of the ground floor and upper floors paid 33 1/3% of each of the costs relating to the common hallway through which they passed to get to their flats; and that the freeholder could appoint a managing agent, the costs of which were added to the service charge. Mr Struth continued by saying that the residential market had improved to a degree over the last year and that flat 1 had been sold to Christopher Tyson for £75,000 on August 23 1993 and flat 2 for £75,000 including a £750 contribution by the previous tenant to Nicholas Ventham on March 31 1994. Those flats sold readily in the open market with their unexpired leases of about 89 years and that of greater importance to a sale was the condition, size and configuration of a flat. The length of a lease became a problem only when it was less than 70 years and therefore difficult to mortgage. That did not apply to the subject flats nor did the length of leases affect their valuation or sale. The reversionary interest of the flats where existing lease lengths were approximately 88.5 years unexpired (with the exception of flat 3, which had a far greater length of lease) was nominal and therefore the value of the freehold value was to be calculated by valuing the income flow, ie the ground rent income. In his opinion, the best way of ascertaining the open market value of the landlord’s interest, including ascertaining whether any marriage value was applicable, was to analyse the results of recent sales of similar residential freehold ground rents at auction. The following were among the properties auctioned at Barnard Marcus property auctions. I June 7 1994 (a) 41 Shepherd’s Bush Road, Shepherd’s Bush, W6 Freehold ground rents secured on four self-contained flats, three being leased for a term of 99 years from January 1 1988 and one flat for a term of 125 years from January 1 1987 at a total ground rent of £500 pa, and sold for £3,700 equating to 7.4 years’ purchase. (b) 15–17 Stonor Road, West Kensington, W14 These consisted of seven units, leased for 99 years, four of them from December 25 1976 and three from December 25 1979, with a total ground rent of £500 and sold for £4,000, which equated to 8 years’ purchase. This property was in a similar location though on the other side of the Talgarth Road and the unexpired leases were shorter than those of the subject flats. II September 13 and 14 1994 (c) 97 Bravington Road, Maida Vale, W9 The freehold ground rent secured on a maisonette and a flat with leases for a term of 125 years, the maisonette from July 27 1993 and the flat from August 31 1993, at a total ground rent of £200 pa and sold for £2,000 equating to 10 years’ purchase. (d) 5 Fairholme Road, West Kensington, W14 The freehold ground rents were secured on four self-contained flats, with leases of 125 years from June 25 1985, the total ground rent payable being £300 pa. The freehold was sold for £3,000 prior to the auction equating to 10 years’ purchase. This property was very close to the subject property, being located in the adjoining road. (e) 24 Trebovir Road, Earls Court, SW5 The property was far larger than the subject property, containing seven flats, each leased for a term of 99 years from December 25 1979, thus having approximately 84 years unexpired. The total ground rent income was £616 pa and the freehold was sold for £6,500 in auction (which equated to 10.5 years’ purchase). Mr Struth concluded that whether the leases were of 81 years duration or 124 years, the freehold interests were sold in the open market at multiples of between 7.5 and 10.5 years’ purchase; and that any ‘hope’ value for the sale of the lease extensions was included in the prices achieved. Mr Struth valued the freeholder’s income at a multiple of 7.5 times 208 the annual ground rent income in perpetuity. He deducted 5% for the possibility of the tenants of the three flats whose leases expired in 2083 remaining under assured tenancies to reach a reversionary value of £218,500. He assessed as nil any compensation for an injurious affection since there was no development value and the property was within a conservation area. With regard to the marriage value, he considered that none was applicable since the leases were so long that their value would not be enhanced with the merging of the freehold and leasehold interest and were sufficiently long to be easily mortgageable. The research carried out by Savills in 1992 referred to prime properties and not to a typical residential conversion. Concerning the comparables produced on behalf of the freeholder, Mr Struth said that: (a) 235 Portnall Road, W9, was a long way from the subject property; (b) 25 Elsham Road, W14. The freehold was sold in June 1989 when different conditions prevailed. (c) 229 Elgin Avenue, W9, was too far away and the leases were very long. (d) 53 Comeragh Road, W14, had longer leases and the ground rents were £100 pa. (e) 11 Algernon Road, NW6, was too far away. (f) Flat 4, Park Mansions, SW15, was a lease extension only and the tenant might have been badly advised. (g) 16 Kingscroft Road, NW6, was too far away and in need of repair. He also drew our attention to two properties to demonstrate that there was no real difference between two similar flats, one for which the tenant owned a share of the freehold and another with 88.5 years lease unexpired. (h) 18 Fairholme Road, W14 A top-floor two-bedroomed flat was sold for £76,000 on May 31 1994, including a share in the freehold interest. (i) 65 Perham Road, W14 Adjacent to the subject property and contained four flats. The freehold sold for £400 on November 2 1994 and equated to less than two years’ purchase, as it was inclusive of legal costs. Mr Nicholas Dowding of counsel appeared on behalf of the reversioner and called Mr M Angel FRICS, partner in Allsop & Co, chartered surveyors, to give evidence in accordance with a written proof and accompanying photographs. Mr Angel stated that he had 15 years’ experience of property sales and valuations, particularly in the residential field, having worked with Chestertons prior to joining Allsop & Co in 1985. He was a member of the appraisal and valuation standards board of the Royal Institution of Chartered Surveyors. He stated that the property comprised a former terraced house on four storeys, situated in a reasonably good residential road and converted into four self-contained flats. He described the accommodation in each flat, with the details of the tenure. Mr Angel stated that the value of three flats had been agreed, but not of flat 3 which had a lease of 989 years unexpired. The issue of the marriage value for this flat related only to the extinguishment of ground rent. With regard to the capitalisation rate of 10%, adopted by him for the ground rent income, this was higher than could be earned from gilt edged investments and higher than that used in leasehold reform cases since 1967. He considered that the 88.5-year leases were worth approximately 95% of the 989-year lease with a share in the freehold interest, and attached a letter and supporting information compiled by Savills’ research department, concerning the relative values of properties in central London on various lease lengths and indicating the rate at which the value of leases ‘decayed’ over time. Though the property was just outside the area considered by the research, the rate of decay of leases in Perham Road would be no different from the research area. Absence of market transactions in relation to sale of reversions subject to 90-year leases was due to inertia of leaseholders to realise this asset, not to lack of difference in value between 90-year leases and freeholds. Mr Angel’s valuation included a capitalised sum for insurance commission, though he accepted that the receipt of such commissions might be less certain in the future, by reason of a possible change in legislation. He had accordingly capitalised the commission at 6.5 years’ purchase, as accepted in Castlebeg Investments (Jersey) Ltd v Lynch (1988) 57 P&CR 493. After adopting a value for flat 3 of £76,000 to reflect the much longer unexpired term, he calculated the existing value on the basis of 999 years at a peppercorn as follows: Existing leasehold value with vacant possession £ Flat 3 76,000 Flats 1, 2 and 4 230,000 306,000 Proposed value with 999 years unexpired at a peppercorn with vacant possession £ Flat 3 (increase of £750 to reflect extinguishment of ground rent) 76,750 Flats 1, 2 and 4 £230,000 ×  100% 242,000 95% 318,750 He relied on the evidence of the following properties as comparables: 1. 235 Portnall Road, W9 This was converted into three small self-contained flats, held on leases having 88 years unexpired with ground rents of £75 pa each rising by £75 pa every 33 years, the average value on the basis of the existing leasehold interest was slightly lower than at Perham Road. A consent order had been made at a price of £6,800 with costs. 2. 25 Sinclair Gardens, W14 This was arranged as five flats on leases with about 106 years unexpired at ground rent of £80 pa. An option to purchase was agreed on October 21 1994 at £10,000. 3. 25 Elsham Road, W14 This was arranged as three flats two with 89-year leases and one with 121 years and one maisonette with a 115-year lease at ground rents of £250 pa. The freehold was sold for £6,000 in June 1989. 4. 229 Elgin Avenue, W9 This was arranged as five flats with leases of 112 years unexpired and aggregate ground rents of £250 pa. A sale was recently agreed at £6,000. 5. 53 Comeragh Road, W14 This was arranged as four flats with leases of 106 years unexpired and aggregate ground rents of £100 pa. The freehold was sold for £4,000 on November 3 1994. 6. 11 Algernon Road, NW6 This property was arranged as three flats, with leases of 90 years unexpired at a ground rent of £50 for each rising. The freehold was sold on February 21 1994 at £6,750. 7. Flat 4, Park Mansions, Howards Lane, SW15 This was a flat in a purpose-built block with a lease of 83 years unexpired and a ground rent of £50 pa rising. The premium for a lease extension of 16 years was £5,500. 8. 15 Kingscroft Road, W6 This property comprised four flats for terms of 99 years from 1979 or 1985 with a total ground rent income of £180 pa. The freehold was sold on September 2 1993 for £8,000. Insurance commission Mr Bedingfield of the reversioner company gave evidence to the effect that insurance commission was often 15%; and that such commission was the asset in the purchase of a freehold. During the hearing, Mr Johnson, for the nominee purchaser, and Mr Dowding, for the reversioner, submitted legal argument and the following cases were discussed. 209 Waitt v Morris [1994] 39 EG 140, [1994] 2 EGLR 224* was a case for a lease extension under the Act of 1993. There the Leasehold Valuation Tribunal accepted a figure of 7 years’ purchase for the valuation of the ground rent. The tribunal said that the sum of £175 represented 7 years’ purchase of the ground rent of £25 pa and this was acceptable taking into account that the value of a reversion of a lease for 169 years held at a peppercorn was nominal. *Editor’s note: Also reported at [1994] 2 EGLR 224. Re Castlebeg Investments (Jersey) Ltd’s Appeal [1985] 275 EG 469* was a case under section 9(1) of the Leasehold Reform Act 1967, as amended. The Lands Tribunal accepted the landlord’s valuation, amply supported by comparables, reflecting the benefit of insurance clauses in the lease, and considered it right to take account of an advantage which a lease might have to a freeholder, but warned that the decision must be reached on the evidence. *Editor’s note: Also reported at [1985] 2 EGLR 209. Reference was made to Lynch v Castlebeg Investments (Jersey) Ltd [1988] 03 EG 101*, in which the Leasehold Valuation Tribunal hearing a case under the 1967 Act, considered themselves bound by the earlier Castlebeg case of 1985 on the issue of insurance commission. *Editor’s note: Also reported at [1988] 1 EGLR 223. The case of Delaforce v Evans (1970) 215 EG 315 was discussed in the two Castlebeg cases (see above) and before the present tribunal. The tribunal also had the benefit of the recent decision of the Leasehold Valuation Tribunal under section 24 of the Act of 1993, namely Sked v Towngran Developments Ltd heard on October 24 1994 [1995] 1 EGLR 216; [1995] 05 EG 169. Decisions and reasons We were invited by Mr Angel for the reversioner in making our valuation to apply decisions and practice relating to valuations under the 1967 Act. In Castlebeg [1985] 275 EG 469 we noted the word of warning of Mr WH Rees FRICS citing the President of the Lands Tribunal in W Clibbett Ltd v Avon County Council (1975) 237 EG 271, [1976] 1 EGLR 171* that ‘previous decisions of the tribunal …  are relevant only to arguments on law or procedure. The assessment of compensation must be decided on, and only on, the, evidence.’ We, accordingly, approach our determination as one which must be made on the basis of evidence put before us by the parties. *Editor’s note: Also reported at [1976] 1 EGLR 171. With regard to the capitalisation rate for the ground rent, we adopted the rate of 13% which had been applied by the Leasehold Valuation Tribunal in the case of 155 Gloucester Road, NW1, although the valuation for the nominee purchaser was based on 14% and that of the reversioner on 10%, Sked v Towngran Developments Ltd. We also did not consider that there was any additional value due to the ability to recover administration costs, such as those of the managing agents, as these were in respect of costs to be incurred and not profit. As to the value of the new occupying leases at peppercorn rents, the tribunal noted the comments of the Leasehold Valuation Tribunal in the case of 155 Gloucester Avenue, NW1, as follows: We consider that the index of property values by lease length contained in Savills residential research paper The Impact of Leasehold Reform on the Central London Residential Market can only provide a very general indication. The index as demonstrated by the questions asked on behalf of the nominee purchaser was based on opinion, not actual transactions. The paper itself noted that ‘The opinion of different agents and valuers varied widely as to how lease values diminish with lease length’. Nevertheless, we considered that there would be a small increase in value of the properties, if they had 999 years unexpired at a peppercorn rent with vacant possession. The parties agreed as to the present leasehold value of flats 1, 2 and 4, but not as to the value of flat 3. We considered that flat 3 which was held on a 999-year lease was worth £72,000. We were of the opinion that any allowance for the possibility of the lessees remaining in occupation at the year 2083 on an assured tenancy was too remote to be valued. With regard to the value of the insurance commission received by the landlord, we considered that any value relating to this would be reflected in the auction price of the freehold ground rents and was therefore not valued separately by us, but was included in the total freehold value. We applied the evidence of the auction result quoted by Mr Struth for 41 Shepherd’s Bush Road, W6, where £3,700 was paid for a total ground rent income of £500 pa, with a note that ‘the freeholder insures and recovers’, producing a years’ purchase of 7.4, showing a yield of 13%. We preferred the factual evidence of an auction result as against the landlord’s interpretation of the cases under the 1967 Act. We considered 5 Fairholme Road, West Kensington, W14, where the landlord also ‘insures and recovers’, but were not assisted by it as we were told that the property had been sold prior to auction. After inspecting the exterior of the subject property, we inspected the exteriors of some of the properties drawn to our attention by the parties, and gained some limited assistance from them. The Leasehold Valuation Tribunal determines that the purchase price payable by the nominee purchaser to the reversioner in respect of 63 Perham Road, West Kensington, London W14, is £4,225 (four thousand two hundred and twenty-five pounds). Valuation of the price payable for the freehold interest by Mr DL Struth BA ARICS on behalf of the nominee purchaser, as set out in his written proof of evidence. A. Term £ Ground rent receivable £300 pa Valued at 7.5 years’ purchase 2,250 Reversion Freehold vacant position value £ Basement (flat 1) 80,000 Ground floor (flat 2) 80,000 First floor (flat 3) 70,000 Second floor (flat 4) 70,000 300,000 First reversion in 88.5 years approximately Flat 3 ignored as held on 988.5 years’ lease. Therefore reversion as at 2083 230,000 Less 5% for possibility of lessees remaining in occupation under assured tenancies 11,500 218,500 Present value deferred 88.5 years @ 8% (0.0011023) 241 Subtotal 2,491 B. Marriage value N/A Nil C. Compensation for injurious affection N/A Nil Total enfranchisement price 2,491 Say 2,500 An alternative calculation of the price payable for the freehold interest as produced by Mr Struth during the hearing on behalf of the nominee purchaser. Ground rent income Term 1 4 ×  £75 pa £300 to year Years’ purchase, 23 yrs @ 14% 6.7921 2,038 2017 Term 2 4 ×  £150 pa £600 years Years’ purchase, 33 yrs @ 14% 7.0482 2017– Present value of £1 in 23 yrs @ 14% 0.0491121 208 2050 Term 3 3 ×  £300 pa £900 Years Years’ purchase, 33 yrs @ 14% 7.0482 2050– Present value of £1 in 56 yrs @ 14% 0.0006500 4 2083 Reversion Flat 3 1 ×  £300 pa £300 Years’ purchase, in perpetuity @ 14% 7.14 Present value of £1 in 56 yrs @ 14% 0.0006506 1 Flats 1, Reversion to £230,000 2 and 4 PV £1 in 89 yrs @ 8% 0.0010600 244 £2,495 Say £2,500 Valuation of Mr M Angel FRICS on behalf of the reversioner Ground rent income £ Term 1 4 ×  £75 pa £300 to year Years’ purchase, 23 yrs @ 10% 8.8832 2017 2,665 Term 2 4 ×  £150 pa £600 years Years’ purchase, 33 yrs @ 10% 9.5694 2017– Present value of £1 in 23 yrs @ 10% 0.1117 2050 641 Term 3 3 ×  £300 pa £900 years Years’ purchase, 33 yrs @ 10% 9.5694 2050– Present value of £l in 56 yrs @ 10% 0.0048 2083 41 Reversion Flat 3 1 ×  £300 pa £300 Years’ purchase, in perpetuity @ 10% 10.00 Present value of £1 in 56 yrs @ 10% 0.0048 14 Flats 1, Reversion to £230,000 2 and 4 PV £1 in 89 yrs @ 10% 0.0002 46 Insurance commission Premium £765.44 Commission at 20% £153.08 6.5 years’ purchase 6.5 995 Total 4,402 Freehold value Say £4,400 Calculation of marriage value £ Value of 999-year leasehold at peppercorn and with vacant possession 318,750 Less £ Existing leasehold value 306,000 Existing freehold value 4,400 Say 310,400 Gain on marriage of interests 8,350 Freeholders’ share @ 50% 4,175 Therefore enfranchisement price Existing freehold value 4,400 Share of marriage value 4,175 8,575 Say 8,500 VALUATION OF THE TRIBUNAL Purchase price payable by nominee purchaser in accordance with Schedule 6 to the Leasehold Reform, Housing and Urban Development Act 1993 para 2(1)(a). The value of the freeholder’s interest in the premises as determined in accordance with para 3. To 2083 £ Ground rents to 2017 £300 pa YP 23 years @ 13% 7.230 2,169 Ground rents to 2050 £600 pa YP 33 years @ 13% 7.556 Deferred 23 years @ 13% 0.060 0.453 272 Ground rents to 2083 £1200 pa YP 33 years @ 13% 7.556 Deferred 56 years     @ 13% 0.001 0.008 9.60 Reversion Freehold flats 1, 2 and 4 £230,000 PV £1 89 years @ 13% 0.00002 4.60 Flat 3 ground rent £300 pa — YP 989 years @ 13% de minimis Deferred 89 years 2,455.20 Say 2,455 Marriage value Calculation £ £ £ Freehold New 999-year leases at a peppercorn rent with vacant possession Flats 1, 2 and 4 236,000 Flat 3 72,000 308,000 Deduct Existing freehold value as above 2,455 Existing leasehold value Flat 3 72,000 Flat 1, 2 and 4 230,000 304,455 Therefore gain on marriage 3,545 Freeholder’s share @ 50% 1,772 4,227 Para 2(1)(c) Compensation payable to the landlord under para 5 Total 4,227 Say 4,225