Black v Eton College

Leasehold Reform, Housing and Urban Development Act 1993 — Determination of premium payable for extension of lease — Appropriate capitalisation rate — Marriage value share By an initial notice dated November 1993 the applicant tenant claimed the right to acquire a new lease of a ground-floor flat which she held for term expiring in 2038 at a rent of £50 pa. In an application to determine the premium payable within the provisions of Schedule 13 of the 1993 Act, the tenant’s valuer spoke to a premium of £7,850, which included £699 for the diminution in the freeholder’s reversionary interest and £7,151 being 50% of the marriage value. The landlord’s valuer supported £9,741 as the diminution of the freeholder’s interest and 100% of the marriage value of £20,259, making a premium of £30,000. Decision: The premium should be £9,600. No deduction to the reversionary freehold value should be made for the risk of the tenant claiming protection of Part I of the Landlord and Tenant Act 1954 because such contingency was now remote following the amendment of that Act by the Local Government and Housing Act 1989. A capitalisation of rate of 7½% applied to the ground rent reflects the location and length of term. In the absence of evidence of open market negotiations supporting a higher percentage, the marriage value share should be 50%. The following cases are referred to in this report. Cadogan Estates Ltd v Hows [1989] 2 EGLR 216: [1989] 48 EG 167 Eyre Estate Trustees v Shack [1995] 1 EGLR 213; [1995] 24 EG 153 Waitt v Morris [1994] 2 EGLR 224; [1994] 39 EG 140 The applicant tenant appeared in person and called Mr G Black; Edwin Johnson (instructed by Charles Russell) represented the landlord and called D C Haines frics. Giving the decision of the tribunal, Lady Fox QC said: This is an application made pursuant to section 48 of the Leasehold Reform, Housing and Urban Development Act 1993 (‘the 1993 Act’) by Stephanie J Black, the tenant, for the determination of the premium payable in respect of the grant of an extension of the lease of the ground-floor flat, Flat 2, 58 Eton Avenue, London NW3 (‘the subject flat’). The tenant holds the subject flat from the landlord, Eton College, on an underlease dated June 3 1982 for a term of 56 years commencing on September 24 1980 at a ground rent of £50 pa. Pursuant to an underlease dated November 3 1980 58 Eton Avenue Ltd was set up as the management company of 58 Eton Avenue and the landlord, the tenant and the other tenants of flats hold shares and are directors of the said company. By initial notice dated November 18 1993 the tenant claimed the right to acquire a new lease of the subject flat and by counternotice dated March 29 1994 the landlord admitted the tenant’s right. On April 8 1994 the tenant applied to the leasehold valuation tribunal to determine the premium payable for the grant of the new lease and at that date all terms of the acquisition were agreed by the parties other than the amount of the premium. Accordingly, pursuant to Schedule 13, para 1 of the 1993 Act the valuation date is April 8 1994, at which date the unexpired term was agreed by the parties to be approximately 43 years. Valuation of the tenant, Ms S J Black A: Diminution of value of freeholder’s interest Term of existing underlease Loss of rental income £50 pa YP 43 years @ 14% 8.2696 £413 Reversion in 43 years’ time Currently: Reversion to capital value £80,000 Less for risk of protection Nil £80,000 PV £1 in 43 years @ 14% 0.0035735 £286 Loss of rental income on new lease Nil Intended: reversion in 133 years @ 14% Nil £699 Loss £699 Dimunition in value of headlessee’s interest Nil B: Marriage Value Intended interests Long leaseholder’s 133 year interest £80,000 Freeholder’s interest Nil £80,000 Current interests Freeholder’s interest £699 Underlessee’s 43-year interest £65,000 £65,699 Gain on marriage of interests £14,301 50% to vendors £7,151 C: Severance/Development Potential Nil £7,850 At the hearing Mr G Black, father of the tenant, appeared on her behalf and said the above valuation should be revised to substitute 7.1173 as the appropriate multiplier at 14%, and to include a 10% deduction for the risk of the tenant staying on at the end of the term under the Landlord and Tenant Act 1954 Part I, which would reduce the current reversion to capital value by £8,000, giving a figure of £72,000. Valuation of Mr D C Haines on behalf of the landlord. A: Diminution of value of freeholder’s interest Term of existing underlease Loss of rental income £50 pa YP 43 years @ 6% 15.3062 £765 Reversion in 43 years’ time Currently: Reversion to capital value £110,000 Less for risk of protection Nil £110,000 PV £1 in 43 years @ 6% 0.0816 £8,976 Loss of rental income on new lease Nil Intended: reversion in 133 years @ 6% Nil £9,741 Loss £9,741 A: Dimunition in value of headlessee’s interest Nil B: Marriage value Intended interests Long leaseholder’s 133 year interest £110,000 Freeholder’s interest Nil £110,000 224 Current interests Freeholder’s interest £9,741 Underlessee’s 43-year interest £80,000 £89,741 Gain on marriage of interests £20,259 100% to vendors £20,259 C: Severance/Development Potential Nil £30,000 Mr Johnson, counsel on behalf of the landlord, accepted at the hearing that the landlord’s share of the marriage value should be less than 100%. It was agreed by the parties at the hearing that in accordance with Schedule 13 para 2 of the 1993 Act the premium payable should be the aggregate of: (a) the diminution in value of the landlord’s interest; (b) the landlord’s share of the marriage value; and (c) any compensation payable to the landlord. It was agreed that no sum was payable as compensation by reason of loss suffered by the landlord as a result of the grant of the new lease. It was further agreed that the tenant had carried out no improvements at the subject flat which required to be taken into account for the purposes of the valuation. Mr G Black, father of the tenant, presented the case to the tribunal on the tenants’s behalf. He said that the subject flat was a one-bedroomed ground-floor flat in an Edwardian house on four floors, converted into eight units, located in an attractive tree-lined street, close to Swiss Cottage, with good shopping, restaurant and transport facilities. The only true comparable was an extension in November 1993 of a lease at flat 8A, 56 Eton Avenue, from 44 years to 99 years at a price of £15,000 paid by the tenant of flat 8A to the landlord, Eton College. Flat 8A, a two-bedroomed flat in good repair, was held under a lease granted on the same date and same terms as that relating to the subject flat. Value of the freehold and leasehold interests The tenant gave evidence in accordance with a written proof. She described the subject house as in a poor state of repair, requiring work as set out in a report prepared by Boyd Johnson Property Service at a total cost of £123,547, exclusive of VAT, fees and contingencies. The contribution of the subject flat was some £12,000 of that sum. She had had persistent problems with security, exacerbated by the corner position of the property and consequently had endeavoured to sell the subject flat. She had first put the flat on the market in 1986 with Ellis & Co at £80,000 and again in 1988. In 1989 she had put it in the hands of Greene & Co and received one offer, which was withdrawn after a survey. It was still on the market on the same terms as in 1990 and 1991 and she had received no offers. In November 1993 after the passing of the 1993 Act she gave Greene & Co an eight-week exclusive agency to sell with an extended lease of 99 years at £85,000, making it clear that she was open to offers. 38 prospective purchasers called, but not one made an offer and again, when in the first three weeks in 1994 it was on the market, a further 11 inspected but made no offer. The properties relied on by the landlord in Eton Avenue were superior being recently refurbished and were not in her view comparable. From her experience in attempting to sell the subject flat, she considered its present value to be £65,000, with an extended lease, £80,000. If the whole building were in proper repair at a cost of £150,000, the value of the subject flat with an extended lease would be £92,000. She had acquired the property in 1984 at a price of £38,000 and had made an unconditional offer to surrender her lease to the landlord for £70,000. In answer to questions on behalf of the landlord, Ms Black said there was a hotel next door which held a lease of one of the flats in the subject house; there was no offstreet parking and she did not accept that the communal gardens were secluded from the road. She had objected to the subject flat being assessed as in band F for council tax at a value of £120,801 — £160,000, and had received an offer in May 1994 from the authorities to place it in band E for properties valued at £88,001 — £120,000. She had not accepted this offer and the matter was still pending. Capitalisation rate of the freeho1d interest Mr Black produced a written note supporting a negotiated settlement achieved in November 1994 of a price for the freehold in respect of collective enfranchisement of three flats in a terrace house where Mr Peter Berger frics, of Clifford & Firrell on behalf of the tenant, and Allsops, chartered surveyors, on behalf of the landlord had agreed 10% as the rate of capitalisation. He also produced records of auction sales held by Clarke Hillyer and Athawes Son & Co on June 15 and July 18 1994 respectively of reversions, where the year’s purchase on ground rents sold averaged seven to eight years. He had no information as to the length of the leases in such sales. He considered 14% to be the appropriate rate of capitalisation: it was supported by these auction sale prices, the decision of the London leasehold valuation tribunal in Waitt v Morris [1994] 39 EG 140*, the first determination in respect of an extended lease, and another decision relating to collective enfranchisement in Godalming reported in the Observer on October 23 1994. It was, in his submission, the proper yield; taking into account that the subject flat was not located in a prime area, was in poor condition, with few owner occupiers of the other flats and with problems over management and consequent high costs; on the tenant’s evidence it would be difficult to ‘liquidise’ the asset. *Editor’s note: Also reported at [1994] 2 EGLR 224. Land1ord’s share of the marriage value Mr Black submitted that 50% was the appropriate proportion for the landlord’s share of the marriage value; this proportion was adopted in the practice under the 1967 Act and the present Act and was supported by an opinion of Mr Alan Steinfeld QC, a copy of which he produced. Any higher proportion achieved in negotiated sales should be treated with suspicion as the tenant was under considerable pressure by reason of delay and costs to agree the landlord’s figure. Para 4(1)(a) of Schedule 13 required the proportion greater than 50% to be one ‘determined by an agreement … made on a sale on the open market by a willing seller’, and only, therefore, in the most exceptional circumstances could the landlord’s share exceed 50%. In answer to questions from the tribunal Mr Black accepted that the capitalisation rate should be influenced by the length of the unexpired term and that the ground rents for a term of 10 years as in Cadogan Estates Ltd v Hows [1989] 48 EG 167† would be well secured and justify a low rate of interest. He did not accept, however, that the presence of a management company in the present situation ensured that the freeholder would have a trouble-free investment. *Editor’s note: Also reported at [1989] 2 EGLR 216. Mr Edwin Johnson of counsel presented the case on behalf of the landlord and called Mr D C Haines frics to give evidence in accordance with a written proof. Mr Haines said he had been a partner in Langley-Taylor, chartered surveyors, since 1981, having previously been employed with Knight Frank & Rutley. He had been a member of a co-ordinating committee established by the Consumers’ Association and Mortgage Lenders making representations to the Department of the Environment in the preparation of the Act. He was a co-author of a book on leasehold enfranchisement published by the College of Estate Management and had given lectures on the topic and was currently advising 12 individual clients and representing Eton College on enfranchisement matters under the Act. The subject property was one of many individual Edwardian houses erected as gentlemens’ residences in a broad tree-lined road and was in a reasonable state of repair. In support of his valuation of the leasehold interest he relied on sales and asking prices for leasehold interests of comparable properties in Eton Avenue, Steeles Road, Winchester Road, Strathray Gardens and Fellows Road. He particularly relied on transactions in respect of Flat 8A, 56 Eton Avenue, where a 44-year lease of a third-floor two-bedroomed flat had sold in November 1993 for £51,500. The same flat with a new 99-year lease was now on the market at £135,000 and he expected a price of £120,000 to be achieved. Flat 3, 3 Eton Avenue where a 42-year lease for a second-floor two-bedroomed flat in poor order had sold in April 1994 for £85,000. He also relied on an agreed premium for an extension under the 1993 Act for a 42-year lease at flat 2, 3 Eton Avenue where the valuation showed that the parties had adopted 90% as the landlord’s share of the marriage value. He maintained that no discount should be made to the freehold interest for the risk of the tenant staying on, as the position was now totally changed by legislation, and the tenant could only stay on at an open market rent. He relied on the practice in the 1967 Act and Cadogan Estates Ltd v Hows in support of a 6% rate of capitalisation; the ground rents were well secured in respect of a property enjoying a management company. Schedule 13 para 4(1)(b) of the 1993 Act entitled the landlord to a minimum of 50% of the marriage value with no maximum set. The purchase was of a compulsory nature and not at the behest of the landlord who was entitled to a full 100% of the marriage value. The term for the subject flat was approaching the 40-year barrier where values diminished considerably and in his view the tenant would be willing to concede a greater proportion than 50% of the marriage share to the landlord in order to secure a saleable lease. In answer to questions from the tribunal Mr Haines did not accept that he was selecting the elements in the practice under the 1967 Act which supported his valuation, such as the 6% rate, and discarding those, such as the 50% marriage value, which did not. He agreed that the tenant in the negotiated premium for flat 2, 3 Eton Avenue was more interested in the final figure than the method or proportion attributable to the marriage share by which it was arrived at. Mr Johnson, counsel, on behalf of the landlord, in closing, summarised the outstanding issues between the parties. He relied on a passage in Hague on Leasehold Enfranchisement justifying a relatively low rate of capitalisation compared to interest rates by reason of the existing rent being followed on its termination by a greatly increased rent of substantial value. He explained that, unlike para 4 relating to the landlord’s share of the marriage value, the 1993 Act contained no express provision as to the capitalisation rate. It was accordingly appropriate to follow established practice under the 1967 Act. Inspection The tribunal inspected the subject flat on November 8 1994. It was located on the north side of Eton Avenue at its western end, close to the intersection of that road with Adamson Road and Winchester Road. There were shops nearby in Winchester Road and also in Finchley Road, which was only a few minutes’ walk away as was Swiss Cottage underground station. Eton Avenue was a wide tree-lined road fronted by large, good quality, mainly residential properties, most of which appeared to have been built around the turn of the century and many had been converted into flats in recent years. The road was heavily parked. No 58 was such a detached building, constructed of red brick and tiles and now with four floors. The building had a turret at its western end and had a heavily ornamented elevation which included terracotta mouldings. The fourth floor was either constructed or enlarged in relatively recent times to form two flats. The house was now converted to a total of eight flats. The plot was triangular in shape due to the intersection of Adamson Road and Eton Avenue meeting at an acute angle just to the west of the site. The building had been constructed at the eastern end of the plot close to no 56, and at the rear, where it backed on to the rear gardens of the Adamson Road houses, there was only a small gap between the angled rear wall of the building and the brick boundary wall of the Adamson Road properties. As a consequence of this configuration the rear and garden of no 58 were much overlooked by surrounding properties, one of which was the Swiss Cottage Hotel site on the apex of the Adamson Road/Eton Avenue intersection. The subject flat, being on the ground floor at the rear of no 58, was particularly affected by this juxtaposition. The subject flat was approached at ground-floor level through a common front entrance door controlled by an entryphone. This led to a common entrance hall from which the subject flat was accessed. It comprised entrance hall (with borrowed light from the common staircase), living room, kitchen, bedroom, bathroom/wc. There was gas-fired central heating with radiators throughout. None of the rooms was of regular rectangular shape; in particular, the bedroom, bathroom and especially the kitchen all had angled rear walls. All the windows were fitted with internal security bars. The internal decorative condition was fair. The subject flat was much affected by its immediate proximity to the rear boundary wall and line of trees of the Adamson Road properties, which gave it a gloomy ambience. Externally, close to the living room though not directly visible from it, was the dustbin area serving the building. The building’s lack of maintenance was apparent and some external repair work was needed. Internally, the common parts presented a drab and dingy appearance. The floors were not clean, the stair carpets were dirty and worn, and redecoration was needed. In places, on the staircase, damp penetration was evident. The overall general impression was that of an original cheap conversion into flats and a subsequent general lack of maintenance and care, particularly in recent years. The garden, which was directly overlooked from the living room bay window of the subject flat, was a pleasant feature, but itself much overlooked by adjoining properties. Comparables The tribunal subsequently the same morning inspected externally: Flat 8A, 56 Eton Avenue This was a three-roomed flat of the adjoining similar property. No 56 had a more regular-shaped plot than no 58, less affected by the proximate configuration. Also, being on the third floor, this flat appeared to enjoy better lighting and outlook than the subject flat. Its contiguity made it a useful comparable so far as its sale in November 1993 and its subsequent lease extension were concerned. However, it was understood that it had been substantially renovated since purchase and was now on the market at a much higher price. Flat 3, 3 Eton Avenue This was a three-roomed flat on the second floor of a four-storey house, at the other (eastern) end of the road, close to the junction with Belsize Park Gardens and Primrose Hill Road, with shops and public house nearby. Notwithstanding its polar position in the road in relation to the subject flat, it appeared to be a useful comparable. We also inspected the other comparables referred to by Mr Haines including 29 Steeles Road, 25 Winchester Road, flat 2, 38–40 Eton Avenue, 28 Winchester Road, 3D Strathray Gardens and 130 Fellows Road, but found them to be of limited assistance. Decision and reasons Following our inspection of the subject premises and comparables relied on by the parties we were of the view that the prices achieved for sales in Eton Avenue were of the most assistance in determining the value of the leasehold interest; 29 Steeles Road related to a different type of property in Belsize Park and the transaction referred to by the landlord’s representative as 25 Winchester Road related to a property with shop premises on the ground floor. The tenant put I forward for the value of the existing leasehold interest of a 43-year term a figure of £65,000 which, in our view, was supported by the transactions relied on by the landlord for flat 8A, 56 Eton Avenue and flat 3, 3 Eton Avenue, taking into account differences in size, accommodation and security and natural light by location on an upper floor. So far as flat 8A, 56 Eton Avenue was concerned, we were prepared to accept the figure of £70,000 put forward by Mr Haines rather than the actual price of £51,500 achieved in November 1993 on the basis that this price was unduly low, due to a mortgage repossession. We make no deduction for the risk of the tenant taking a tenancy under Part I of the Landlord and Tenant Act 1954, as proposed225 by the tenant’s representative, because we agree with the landlord’s representative that the amendment of the 1954 Act by the Local Government and Housing Act 1989 section 189 and Schedule 10 has rendered such a contingency so unlikely and remote as to have no effect on the valuation. The recent decision of the London leasehold valuation tribunal in the Eyre Estate Trustees v Shack lon/lvt/541 dated November 2 1994 confirms this approach in respect of the determination of the enfranchisement price payable for a house under section 9(1 )A of the Leasehold Reform Act 1967. The tenant advanced a figure of £80,000 as the value of the leasehold interest extended in accordance with the 1993 Act, on the basis that no purchaser had come forward to buy when the subject premises were placed on the market with a 99-year extended lease at an asking price of £85,000. We are satisfied from the tenant’s evidence of the numbers who came to inspect that the subject premises were offered for sale on the open market and we do not consider that Mr Haines, on behalf of the landlord, produced any evidence of completed transactions relating to comparable properties to challenge her proposal. We accordingly adopt the tenant’s figures for the values of the current and extended leasehold interest. In considering the diminution of the value of the landlord’s interest we were of the view, in relation to a 43-year term, that in addition to the capitalisation of the ground rent, it was also necessary to value the reversion at the end of the term. In putting forward a rate of capitalisation and deferment the tenant’s representative relied on decisions already reached on the 1993 Act by leasehold valuation tribunals. The rates used in these decisions, in our view, are not directly applicable as the unexpired lease terms were considerably longer, approximating more closely to freehold interests. The tenant’s representative also relied on auction sale prices for reversions showing multipliers of seven to nine years’ purchase, but again we are not satisfied in the absence of particulars of length of term that these sales concern transactions of the length of lease of the subject property. We broadly agree with the landlord’s representative that the approximate rate of capitalisation and deferment reflects the length of the term and the quality of the investment including the excellence of the location. The proposed rate of 6% advanced by the landlord, however, does not, in our view, adequately distinguish between a short term (as in Cadogan Estates Ltd v Hows) and a medium term, as in the subject lease, nor reflect the difference in investment between reversions in flats and in houses. We have accordingly adopted the rate of 7½% throughout our valuation. Finally, we gave careful consideration to the landlord’s proposal that the landlord’s share of the marriage value should be in excess of 50%. We accept that the landlord’s share of the marriage value as defined in para 4(1) of Schedule 13 contemplates occasions where that share may be greater than half the marriage value, a position confirmed by the government in Lord Strathclyde’s written answer to Lord Coleraine on April 14 1993 when he stated ‘… the freeholder’s share could exceed 50 per cent, if he could show that in open market negotiations he would reasonably receive more’. We do not construe the opinion of Mr Alan Steinfeld QC relied on by the tenant’s representative in support of the proposition that ‘in all cases the marriage value should be split equally’ to be the contrary, as it is our understanding that that opinion relates to newly enfranchised houses under the 1993 Act and not to the position of flats. The landlord, however, has failed to satisfy us that there is evidence of open market negotiations supporting the landlord’s reasonable receipt of a larger share. In the one valuation produced by Mr Haines in respect of a negotiated (though not finalised) premium for a transaction for an extended lease under the 1993 Act at flat 2, 3 Eton Avenue, he accepted that the tenant’s consent was given to the total sum payable, rather than the 90% share of marriage value attributable to the landlord, by which it was arrived at. In the absence, therefore, of evidence of an agreement made ‘… between the parties on a sale on the open market by a willing seller’ we determine the marriage share of the landlord as 50% in accordance with para 4(1)(b) of Schedule 13. Taking all these facts into account, we make the following valuation: Premium payable by tenant in accordance with section 48(7) and Schedule 13 to the Leasehold Reform, Housing and Urban Development Act 1993. Para 2(a). The diminution of the landlord’s interest in the tenant’s flat as determined in accordance with para 3. Term of existing underlease. Loss of rental income £50 pa YP 43 years @ 7½% 12.74 £637 Reversion in 43 years’ time Reversion to capital value £80,000 PV £1 in 43 years @ 7½% 0.0446104 £3,569 £4,206 Para 2(b). The landlord’s share of the marriage value as determined in accordance with para 4. Extended interests. Value of tenant’s interest under new 133 years’ lease £80,000 Value of landlord’s interest in tenant’s flat at once new lease is granted Nil £80,000 Less: Existing interests Value of tenant’s interest under existing lease £65,000 Value of landlord’s interest in tenant’s flat prior to grant of new lease £4,206 £69,206 Marriage value £10,794 Landlord’s 50% share £5,397 £9,603 Part 2(c). Compensation payable to landlord under para 5 Nil £9,603 Say £9,600 The tribunal, therefore, determines the premium payable in accordance with section 48(7) and Schedule 13 of the 1993 Act by the tenant in respect of the extension of the lease at flat 2, 58 Eton Avenue, London NW3, as £9,600 (nine thousand and six hundred pounds).