Leasehold enfranchisement — Leasehold Reform, Housing and Urban Development Act 1993 — Premium for extended lease — Appellate jurisdiction of Lands Tribunal — Whether leasehold valuation tribunal erred in determining value of extended lease — Amount of discount for ‘sitting tenant’ rights — Proportion of marriage value — Costs
This was an appeal and cross-appeal from a
decision of the London leasehold valuation tribunal, which had determined the
premium payable by the tenant for the grant of an extended lease under the
Leasehold Reform, Housing and Urban Development Act 1993. The tenant occupied
the subject maisonette by virtue of an underlease, the contractual term of
which expired on 27 September 1995. The valuation date was 4 June 1996. The
underlease fell within the provisions of Part
Act 1954. The landlord argued that the value of the extended lease should be
£630,000; the uplift for freehold value should be 3%; the deduction to reflect
the risk of a statutory tenancy arising should be 15%; the value of the
existing tenant’s interest was nil; and its share of marriage value should be
72.5%. The tenant contended for £425,000 for the value of the proposed lease;
1% uplift for freehold value; 55% discount for a statutory tenancy; £24,000 for
the value of the existing lease; and 50% for the landlord’s share of the
marriage value.
was allowed and the cross-appeal dismissed. There was no statutory requirement
that an appeal to the Lands Tribunal be conducted in any particular way. The
value of the proposed 90-year lease at a peppercorn rent was £600,000,
equivalent to £433 per sq ft. A 3% uplift to find the freehold value was fair
and reasonable. 15% was the correct discount to reflect the risk of a statutory
tenancy as it was based on market evidence. The value of the existing lease was
nil. There were compelling reasons for the landlord’s share of the marriage
value to be 72.5%. There was no order as to costs; the decision would assist
the landlord in the settlement of other cases in the area and the landlord
relied on evidence that it could have advanced before the leasehold valuation
tribunal.
The following cases are
referred to in the decision.
Barbour v Viscount
Chelsea LVT ref LON/NL/133, 17 January 1997
Hordern v Viscount
Chelsea [1997] 1 EGLR 195; [1997] 07 EG 144
Lloyd-Jones v Church
Commissioners for England [1982] 1 EGLR 209; (1981) 261 EG 471
Sinclair Gardens Investments (Kensington) Ltd v Franks unreported 19 May 1997
Swann v White
(1996) 71 P&CR 210; [1996] 1 EGLR 199; [1996] 26 EG 136, LT
Verkan & Co Ltd v Byland Close (Winchmore Hill) Ltd [1998] 2 EGLR 139;
[1998] 28 EG 118
Vignaud v Keepers
and Governors of the Possessions Revenues and Goods of the Free Grammar School
of John Lyon (1996) 71 P&CR 456; [1996] 2 EGLR 179; [1996] 37 EG 144
Woodbury (VO) v Toby
Restaurants Ltd [1998] RA 315, LT
Anthony Radevsky
(instructed by Lee & Pemberton) appeared for the appellant landlord, and
called JW Duncan, MJ Angel FRICS and RN Strathon MA FRICS; Thomas Jeffries (instructed by Freeman Box)
represented the respondent tenant, and called CSR Marr-Johnson FRICS.
Giving his decision, JUDGE MARDER QC, President said:
This is an appeal and cross-appeal from the decision of the London leasehold
valuation tribunal dated 30 October 1996 relating to the premium to be paid by
the tenant (hereinafter called the respondent) for a new lease of the subject
premises in accordance with Schedule 13 to the Leasehold Reform Housing and
Urban Development Act 1993 (hereinafter the 1993 Act). The leasehold valuation
tribunal determined the premium to be £417,975.
I heard the appeals on 1, 2 and 3 April 1998, when
the landlord (hereinafter called the appellant) was represented by Mr Anthony
Radevsky of counsel. By leave of the tribunal, he called three expert witnesses,
Michael Duncan, senior partner in WA Ellis, estate agents of London SW3; Martin
John Angel FRICS, partner in Allsop & Co, chartered surveyors of
Knightsbridge, London SW1; and Richard Nicholas Strathon MA FRICS, consultant to Gerald Eve,
chartered surveyors of London W1. The respondent was represented by Mr Thomas
Jefferies, who called Mr Clifford Simon Romer Marr-Johnson FRICS, partner in
Marr-Johnson & Stevens, chartered surveyors of Bolton Street, London W1.
The issues in these appeals arise from the
provisions of section 56 and Schedule 13 to the 1993 Act. By virtue of these
provisions, the respondent is agreed to be entitled to a new lease of the
subject premises at a peppercorn rent for a term of 90 years from the date of
expiry of the existing lease, 27 September 1995, upon payment of a premium
calculated in accordance with the provisions of Schedule 13. The parties agreed
an extensive statement of facts of which the following is a summary:
1. The subject maisonette forms part of a
converted six-storey terraced house in Cadogan Place, overlooking large private
gardens immediately to the West. Cadogan Place is a much sought-after
residential location and one of the prime residential areas of Central London.
It is at the extreme eastern end of the Cadogan Estate and adjoins the
Grosvenor Belgravia Estate.
2. The building dates from about 1840 and is
brick-built with white stucco front elevations and porticoed entrance. The
terrace including number 45 is listed Grade II. The house was substantially converted
to its present form in 1962 and now comprises:
|
Basement: |
Garden flat |
|
|
Caretaker’s flat and |
|
Ground floor: |
Flat |
|
First floor & |
Flat |
|
Second and Third Floors: |
The subject |
|
Fourth and fifth |
Maisonette |
3. Facilities and
services common to the building include a resident caretaker, domestic hot
water, and a lift serving the ground, second and fourth floors.
4. There are agreed sketch plans and measurements
of the subject maisonette. Access is gained via the communal hallway and stairs
or by lift. The gross internal floor area (GIA) is 1,385 sq ft and comprises:
|
Second floor |
Drawing room (260 sq ft) |
|
|
Dining room (225 sq ft) |
|
|
Kitchen (64 sq ft) |
|
|
Cloakroom (20 sq ft) |
|
Stairs lead to |
|
|
Third floor |
four bedrooms (165, 110, |
|
|
two bathrooms (40 and 35 |
5. The second-floor reception rooms, which are on
a split level, are spacious and attractively proportioned. The bedroom and
bathroom accommodation on the third floor is less generous but is well suited
to its purpose. There are pleasing outlooks and good natural light throughout.
Kitchen and sanitary fittings were refitted by the tenant and are modern and of
good quality. There is a system of electric night‑storage heaters for
space heating. The apartment is in good decorative repair.
6. The respondent occupies by virtue of an
underlease dated 29 September 1965, which was assigned to him on 19 October
1990. There are covenants by the tenant to repair and redecorate the interior
and to bear a proportion of the service charge. The rent payable was £150 pa.
The term of the underlease expired on 27 September 1995 but the respondent
continues to occupy the maisonette on the terms of the underlease, by virtue of
Schedule 12 para 5(1) to the 1993 Act. The underlease falls within the
provisions of Part I of the Landlord and Tenant Act 1954 (the 1954 Act).
7. The underlease was granted under the terms of a
headlease now expired, and the respondent holds his statutorily continued
interest directly from the appellant estate.
8. It is agreed that the respondent be granted a
new 90-year lease under the 1993 Act for a term expiring on 27 September 2085,
and upon terms agreed on 4 June 1996, which is the valuation date. It is
further agreed that the deferment rate to be used in valuing the landlord’s
existing and proposed reversionary interests is 6%.
9. At the date of the hearing before the leasehold
valuation tribunal (4 June 1996) the respondent was aged 72 years and his wife
67 years.
10. Facts and particulars relating to comparable
transactions referred to later in this decision were agreed.
Appellant’s case
In opening the appeal, Mr Radevsky referred to
comments made by me and by other members in recent decisions concerning the appellate
function of the tribunal: see Verkan & Co Ltd v Byland Close
(Winchmore Hill) Ltd [1998] 2 EGLR 139; [1998] 28 EG 118; Sinclair
Gardens Investments (Kensington) Ltd v Franks unreported 19 May
1997; Swann v White [1996] 1 EGLR 199; [1996] 26 EG 136.
He submitted that the statutory right to appeal
was unfettered and was by way of a complete rehearing. It would be unjust for
the nature of an appeal to be changed in respect of cases already heard by the
leasehold valuation tribunal. If parliament were to restrict the right of
appeal in future, by imposing a requirement of leave or by limiting the
grounds, it would not do so retrospectively. While it is open to the Lands
Tribunal to look with care at evidence or argument not put forward at the
leasehold valuation tribunal, he submitted that the decision on an appeal must
be based on the evidence put before the Lands Tribunal.
Mr Radevsky identified five elements in the
valuation that are in issue in the appeal, namely:
1. The vacant possession value of the proposed
90-year lease of the maisonette. The appellant says this should be £630,000.
The tenant at the leasehold valuation tribunal said it should be £425,000, but
now adopts £480,000 as determined by the leasehold valuation tribunal. The
appellant relies on five comparables, of which two post-date the leasehold
valuation tribunal hearing. The respondent relies on one comparable only, which
is also one of the appellant’s. The treatment of comparable evidence by the
leasehold valuation tribunal was unsatisfactory.
2. The adjustment of the value of the 90-year
lease to reflect the freehold value. The appellant says the uplift should be
3%. The respondent’s expert had put forward 3% at the leasehold valuation
tribunal but now adopted 1%, as determined by the leasehold valuation tribunal.
The leasehold valuation tribunal had not explained the basis for their
decision, which was outside the range of the expert evidence.
3. The deduction to reflect the tenant’s right to
a statutory tenancy under the 1954 Act. The appellant says that 15% is adequate
to discount the risk of a statutory tenancy arising. The respondent says 55%.
The appellant at the leasehold valuation tribunal had assessed this at 10% and
the respondent at 60%. The tribunal decided 25%. Thus both sides accept that
the leasehold valuation tribunal was wrong.
4. The value of the tenant’s existing interest.
The appellant says that this has no value as did the leasehold valuation
tribunal. The respondent now says £24,000, but only by second thoughts on the
cross-appeal.
5. The landlord’s share of marriage value. The
appellant says that this should be 72.5% to reflect the fact that the lease has
expired. The respondent says 50% in accordance with the leasehold valuation
tribunal’s decision, which it was submitted was perfunctory.
Mr Radevsky first called Mr Duncan, the senior
partner in the firm of WA Ellis, established in 1868, and specialist agents in
residential property in Mayfair, Belgravia, Knightsbridge, Kensington and
Chelsea. Mr Duncan joined the firm in 1957 and has been a partner since 1965.
He has been much involved with leasehold reform cases, and has advised the
Cadogan, Ilchester, Ellesmere and Portman Estates on open market values.
Mr Duncan described the subject premises and the
location. As to the quality and advantages of the maisonette, he noted that the
evidence of Mr Marr-Johnson painted an unnecessarily black picture, and did not
accord with the statement of agreed facts that Mr Marr-Johnson signed in March
1998: see above.
He considered that the existing underlease had no
value. The contractual term had expired and its further currency is short. The
rights of an assignee were not absolute, and fair rents under a statutory
tenancy were moving strongly towards market rents. There was a potential
liability for dilapidations and the cost of preparing the premises for
reoccupation. He referred to the case of Hordern v Viscount Chelsea [1997]
1 EGLR 195* in which the leasehold valuation tribunal had considered the
first-floor flat at 45 Cadogan Place in similar circumstances. The claimant’s
representative in that case had agreed and the leasehold valuation tribunal
accepted that the claimant’s current interest had a nil value. He did not
regard the transactions referred to by Mr Marr-Johnson as reliable. One was a
case of an illegal premium, the other was a ‘buy-out’ by the estate in
circumstances where the tenant’s interest hindered the restoration of a whole
house to a single dwelling.
*Editor’s note: Also reported at [1997] 07 EG 144
As to the vacant possession value of the proposed
new lease, Mr Duncan considered this to be £630,000 as at the valuation date in
June 1996. This value represented £455 per sq ft on the agreed GIA of 1,385 sq
ft. His examination of comparable transactions well supported this opinion.
In considering the comparables, Mr Duncan said he
had adjusted for lease length differentials by reference to an index (produced)
formulated over many years by his firm and by Gerald Eve, Savills and John D
Wood. He had also adjusted for inflation in accordance with another index,
which related to prime central London residential properties maintained by
Savills.
Mr Duncan referred to the following transactions:
Flat 2, 22 Cadogan Place
A lease of about 50 years sold in April 1996 at
£465,000 (gross internal area 1,188 sq ft = £391 per sq ft). Adjusted for
lease-length by a factor of 94:73 it equated to about £598,767 or £504 per sq
ft. He considered number 22 to be in a less favoured part of Cadogan Place,
close to the underground car park entrance, but it was a duplex apartment on
first and second floors, and therefore more valuable than a duplex on second
and third floors. This transaction on balance fully justified his valuation of
the subject maisonette at £455 per sq ft.
First floor flat, 45 Cadogan Place
This occupied the first floor and mezzanine
immediately below the subject maisonette. The particulars showed a most
handsomely proportioned drawing room, but the rest of the accommodation was
cramped and the condition of fittings and decorations was not good. The tenant
acquired a new 90-year lease under the 1993 Act at a premium determined by the
leasehold valuation tribunal. The computation attributed a vacant possession
value to the new lease of £325,000. Shortly after the leasehold valuation
tribunal’s decision the claimant sold the new lease for £325,000 (October 1996)
and in January 1997, with no modernisation or redecoration having been carried
out, the lease was sold again for £400,000 (GIA 765 sq ft = £523 per sq ft).
Adjusted for inflation this represented £372,000 or £486 per sq ft at the
valuation date. Although he recognised that this flat occupied the most highly
valued floor, Mr Duncan considered that its shortcomings made it a realistic
comparable and offered strong support for his valuation at £455 per sq ft.
64-65 Cadogan Place
He acknowledged that this was a very special
apartment, occupying the first and second floors of two adjoining and laterally
converted houses in the same terrace as the subject property. A lease of about
122 years was offered in early 1996 for £1.35m with the apartment requiring
complete modernisation. Eventually the apartment was sold by tender for £1.48m
(£574 per sq ft) and soon after was resold in the same condition for £1.9m
(£737 per sq ft). The length of lease was more attractive than a 90-year term;
the apartment occupied first and second floors; and there was a considerable
rarity value. On the other hand extensive modernisation and refurbishment were
required. On balance Mr Duncan considered these transactions reinforced the
reasonableness of his valuation of the subject maisonette.
39 Cadogan Square
A fourth- and fifth-floor maisonette facing west
over the gardens of a similarly well-regarded square in the vicinity. A lease
of about 51 years was sold in August 1997 for £660,000. Adjusted down for
inflation and up for lease-length, the equivalent at the valuation date was
£716,434 or about £595 per sq ft. Apart from the advantage of a roof terrace,
Mr Duncan thought this maisonette no more valuable than the subject property.
Flat 12A, 78 Cadogan Square
A second-floor flat extending over two adjoining
and laterally converted houses. A lease of about 80 years sold in November 1994
for £685,000. Adjusted marginally for lease length and adjusted for inflation
by 6% this transaction represented at the valuation date a price of £762,607 or
about £581 per sq ft. This apartment was modernised to a good standard and
would command a higher value than a second- and third-floor maisonette, but the
differential lent further support to his valuation of the subject premises.
Mr Duncan turned his attention to the question of
a fair rent on the assumption of a statutory tenancy arising. There were no
recent decisions of the rent assessment committee relating to Cadogan Place,
but he referred to three decisions in respect of flats in Cadogan Gardens,
reflecting rents in the range £9.72 to £12.36 per sq ft of A area at dates
between September 1995 and March 1997. He considered Cadogan Place was clearly
superior to Cadogan Gardens, and in his opinion an appropriate fair rent per sq
ft of A area for the subject premises would be at least £12.50. He estimated
the A area at about 1,022 sq ft and the fair rent therefore would be not less
than £12,775 pa say £13,000.
When cross-examined Mr Duncan did not agree that
the subject property was ‘unsuitable for a family’. He acknowledged the
shortcomings and had valued what was there. Thus, if the bathrooms were en
suite, his valuation would have been higher. He thought the split-level
lounge/dining room was helpful, although the steps to the kitchen were a
nuisance. The passenger lift was small but this was common enough.
As to the value of the existing lease, he had no
experience of selling an interest of less than a year, though he accepted that
it could happen, as Mr Marr-Johnson had demonstrated with the example of a sale
at an illegal premium. The tenant in the present case however did not have a
short lease. He had an expired lease. His interest could have a value if there
were no potential liability for dilapidations and no uncertainties as to the
effect of the 1954 Act. He thought nobody would regard getting into this kind
of hassle as attractive enough to be willing to pay for it. It had no
attraction; there was an empty flat, without carpets, curtains or furniture and
with no certainty of tenure and a liability for dilapidations. This, in his
view, meant a nil value. He accepted that the transaction referred to by Mr
Marr-Johnson had taken place but it was irrelevant; it was an illegal premium
that the payer was entitled to recover.
As to the comparables, Mr Duncan agreed that he
had adjusted the lease length of flat 2, 22 Cadogan Place to 77.7% as against
82% in the leasehold valuation tribunal. He had changed his view on
consideration of the index which he thought gave a better and later picture. He
agreed that no index was totally reliable, but it was the most helpful way of
cross-referencing evidence. The location of flat 2, 22 Cadogan Place was not so
good because of congestion around the car-park entrance. This was a minor
blight not suffered by the subject property.
The differential of £50 per sq ft was more than
enough, in his view, to account for minor differences between this and the
subject property in terms of decoration, convenience etc, and to take account
of the more valuable first- and second-floor position. The drawing room at flat
2, number 22 was better but it had no dining room, and you could not invite an
ambassador to dine in the kitchen. The bedrooms were better but there were only
three, whereas a four-bedroom flat was attractive to a segment of the market.
The first sale of the first-floor flat at 45
Cadogan Place was very suspect. It immediately followed the leasehold valuation
tribunal decision at the price determined by the tribunal. He thought it
doubtful if this was an arm’s-length transaction. The later sale in January
1997 was an open market transaction. This flat was ‘unbalanced’. It had a grand
reception room, but the rest was poorly arranged, and to provide a meaningful
apartment required far more work than the subject property, which was sensibly
and conveniently planned. The terrace at the rear was not included in the
demise and the tenant had no right of access. Despite the first-floor position,
he would not expect the same price per sq ft as the subject property. He
accepted that the rateable value was higher, but this merely reflected the
vagaries of the rating system, and he gave it no weight.
Mr Duncan accepted that 64-65 Cadogan Place was
‘very special’, but it was only a few doors away and it offered tremendous
support in demonstrating the high values in this area, all part of the same
market.
39 Cadogan Square was in the same locality and
commanded much the same level of value. This maisonette had a roof terrace
included, but he did not think that this justified a 10% uplift in value. The
top floor (the fifth) was added superstructure, and, as the photographs showed,
the principal reception room on the fourth floor had a leaning mansard window
wall.
Flat 12A, 78 Cadogan Square is a flat within
laterally converted adjacent houses, but he considered the transaction
particularly useful, requiring relatively little adjustment for date or lease
length.
In re-examination, Mr Duncan referred to the
leasehold valuation tribunal decision relating to the first floor of 45 Cadogan
Place (Hordern v Viscount Chelsea), which confirmed that the rear
terrace was not included in the demise and did not add value. He considered
that the analysis of the January 1997 sale at £523 per sq ft when adjusted
fitted well with the valuation of the subject maisonette at £455 per sq ft.
In answer to me, Mr Duncan said he thought some
structural alterations in the first-floor flat were desirable; the leasehold
valuation tribunal in the Hordern case had detailed the cramped and
awkward arrangement. The need for such alterations in the subject property was
not nearly so radical
Mr Martin John Angel FRICS is a partner in Allsop & Co based at the Knightsbridge
office, and in charge of the residential valuation department. He had over 18
years’ experience of property sales and valuation, almost entirely in the
residential field in Central London.
Mr Angel’s evidence related to the investment
values of residential properties let on regulated tenancies. He described the
market for such investments at the valuation date in June 1996 as ‘generally
buoyant’. Investors purchased these properties at a discount from vacant
possession value reflecting the tenant’s right to security of tenure and to
have a fair rent registered.
While fair rents were generally materially below
open market rental levels, there had since the Housing Act 1988 been a
reduction in ‘scarcity’ and the differential between ‘fair’ and ‘market’ rents
was diminishing. The general level of fair rents in Central London had in
recent years risen at a rate greatly in excess of inflation, thus increasing
the yield and the attractiveness to investors. The market was specialised, and
because with very limited exceptions no new regulated tenancies have been
created since January 1989, competition between investors is generally
intensified. The primary attraction of the investment was not the net yield but
the prospect of achieving vacant possession. This could not be predicted, but
could arise for several reasons, such as the death or departure of the tenant,
inability to pay the fair rent, or the provision of suitable alternative
accommodation. The effect of obtaining vacant possession as early as possible
was a substantial gain in value, which increased further if the residential
market generally rose in value. Where it is perceived that the general level of
values is rising and interests rates are reasonably low, competition increases
and the proportion of vacant possession value the investor is prepared to pay
also rises. At the valuation date, base rate was comparatively low at 6% and
vacant possession values were rising and were expected to continue rising. As a
result demand was strong, and Mr Angel would have expected a prospective
purchaser of the subject investment to have to pay 65% of vacant possession
value. This compared with the situation in 1991 when interest rates were high,
vacant possession values were falling and finance was scarce. At that time such
an investment would, in his view, have been worth only 45% of vacant possession
value.
The price paid by an investor would vary according
to individual circumstances, depending for instance on the prospects of
obtaining vacant possession or on the likelihood of extensive repairing
obligations. The price was the result of an investor’s estimate of vacant
possession value discounted to reflect such factors. Mr Angel had sought the
views of a number of recognised investors, and produced an appendix of letters
in reply and of telephone conversations. In consequence, he said that the
proportion of vacant possession value lay in the range 50% to 65% with the
great majority in the region of 65%. He pointed out that such an investment
would be sold to the highest bidder, hence it was appropriate to reflect the
highest proportion of vacant possession value rather than an ‘average’. He
concluded that, based on his general knowledge and experience of the market, if
the subject property were occupied by a regulated tenant at the valuation date,
its investment value would have been equal to 65% of vacant possession value;
if the tenant were particularly elderly or in poor health, the proportion could
be slightly higher. Mr Angel had noted Mr Marr-Johnson’s evidence suggesting a
discount of 45-50% of the vacant possession value, but he did not consider this
evidence was related to actual market conditions.
In cross-examination Mr Angel agreed that while
fair rents had risen, capital values had risen as high or higher. He did not
think the rise was seen as having peaked by June 1996.
As to the subject property, he considered that an
investor would view an expired tenancy with potential statutory rights very
differently from property occupied by a regulated tenancy. The latter was
already there and was paying a fair rent. The former was wholly uncertain and
the tenant could hand in the keys and walk away. He could not agree that they
would be regarded in the same way by the market.
As to his letters of inquiry, he denied setting
out to obtain confirmation of his own views. That would have been pointless. He
had asked for opinions, and the responses had come from people who were not
‘shrinking violets’.
When it was put to him that a tenant in Central
London would probably seek to rely on his statutory rights, Mr Angel said that
did not necessarily follow; it was a generalisation. He accepted that a prudent
tenant would take advice as to his position, but the course of action was
speculative. He accepted that fair rents were still below open market value,
and that a tenant would prefer to pay a fair rent.
As to the value of the existing tenancy, Mr Angel
said that some short leases were sold, and if there was an assignable tenancy
for less than a year, he supposed somebody would pay something for it. There
were many factors involved and a lot of hassle, including a potential liability
for dilapidations; the market would be very limited. He agreed that such an
interest could, in some circumstances, be an attractive proposition. He did not
know what it was worth, but he accepted that it would have some value.
Mr Richard Nicholas Strathon MA FRICS recently
retired as a partner in Gerald Eve and was now a consultant to the firm. He has
over 36
had advised the Cadogan Estate since 1976 on leasehold reform matters under the
1967 Act and latterly under the 1993 Act, and his colleague Mr JM Clark had
dealt with valuation and negotiation of nearly all the claims made for lease
extensions or collective enfranchisement. The firm also advised the Grosvenor,
Howard de Walden and Ilchester Estates.
Mr Strathon presented an extensive proof of
evidence with exhibits and supporting documents. He said he had relied on the
evidence of Mr Duncan as to the vacant possession values of the existing and
proposed leasehold interests of the claimant, and had relied on Mr Angel’s evidence
as to the relationship between vacant possession values and the investment
value of tenanted properties.
Mr Strathon reviewed the factual background,
including a description of locality and the premises, the current planning
position, and the details of the leasehold interest. He set out the statutory
basis of valuation in accordance with Schedule 13. As to the diminution in
value of the landlord’s interest, he said that the assessment should have
regard to the fact that the same landlord owns the freehold in the whole
building, and in assessing the market value it was very unlikely and
unrealistic to assume anything other than sale as part of the whole building.
It was also relevant to take account of the existing freeholder’s interest in
unifying the freehold with neighbouring residential property. The subject
maisonette was part of a large estate in single ownership. The estate could
afford to take a long-term view and was content to accommodate a wide variety
of tenants, whether underlessees or statutory tenants. It had no need for early
vacant possession nor to pay substantial sums to obtain vacant possession. The
hypothesis of a sale in the open market by a willing seller did not preclude a
close associated company of the vendor. In the market also would be speculators
interested in a possible sale on to Cadogan, seeking a sale price reflecting
the value to the estate.
Relying on Mr Duncan’s evidence, Mr Strathon
expressed the first step in the calculation as the value of the 90-year lease
with vacant possession as £630,000. He then considered the adjustment to value
the freehold in possession. This required a number of factors to be borne in
mind. First, a lessee could not obtain absolute title; there was always a
reversion. Second, the lessee always had obligations, including the payment of
rent, where appropriate, repair and decorating, possible restrictions on user
and on alterations, the need for the landlord’s consent to vary the terms, and
the threat of forfeiture for breach. The landlord would generally retain a
right of access to inspect. By contrast a freeholder with vacant possession had
full control. Thus a leasehold interest will be less than a freehold with
vacant possession. He had regard to the differential agreed at 3.25% in the
leasehold valuation tribunal’s decision concerning 3 Wyndham House, Sloane
Square, and he considered it fair and reasonable to adopt 3% in the present
case, giving a value of £650,000 for the freehold in possession, which he
deferred for three months at the agreed rate of 6% to give £640,900.
Mr Strathon then considered in detail the question
of a further deduction to reflect the risk of the claimant seeking to exercise
rights under the 1954 Act. He referred to Mr Angel’s evidence that properties
sold subject to statutory tenancies achieved prices reflecting about 35%
discount on vacant possession values. In the present case the tenant was
not a sitting statutory tenant but had the opportunity to exercise 1954 Act
rights. There could be no certainty that he would do so. He would have to pay a
fair rent estimated at about £13,000 and there was a liability for
dilapidations, though this in itself was unlikely to be a significant burden.
The statutory tenancy had some severe disadvantages. It was not assignable and
the right to inherit was limited. There could be no capital appreciation. It
provided no security for a loan or to carry out substantial modernisation or
improvement; the rent was subject to periodical increase; possession could be
obtained by the provision of suitable alternative accommodation; and the terms
of tenancy could be altered by parliament at any time.
The Cadogan Estate maintained a flexible approach
to statutory tenancies and continued to make some provision for them. Although
there was the disadvantage of being unable to gain vacant possession
immediately on expiry of a lease, the statutory tenancy had some positive
features for a large mixed estate such as Cadogan, contributing to a varied
portfolio, at a fair rent subject to regular review, and at a time when fair
rents were tending to increase to a level close to open market rents.
Furthermore, the large estate was able to provide suitable alternative
accommodation and thus gain vacant possession where it was considered necessary
in the interest of good estate management.
In Lloyd-Jones v Church Commissioners for
England [1982] 1 EGLR 209* the Lands Tribunal had assessed the risk at 10%,
and a similar discount featured in the enfranchisement prices negotiated by
Gerald Eve on the Grosvenor, Howard de Walden and Cadogan Estates in respect of
houses where the existing leases had only a short term or no term unexpired. In
the recent Lands Tribunal case of Vignaud v Keepers and Governors of
the Possessions Revenues and Goods of the Free Grammar School of John Lyon
[1996] 2 EGLR 179† a similar 10% allowance was repeated, to reflect ‘the remote
risk’ that the tenant or an assignee from her in the last 10 months of the term
might decide to remain in possession under the 1954 Act.
*Editor’s note: Also reported at (1981) 261 EG
471
†Editor’s note: Also reported at [1996] 37 EG 144
In the present case it was suggested that the risk
was greater, but Mr Strathon did not agree that this was necessarily so, since
the tenant had shown clearly that he sought a lease extension and not a
statutory tenancy. Mr Strathon referred to his analysis of the 32 tenancies in
Cadogan Place which expired in September 1995. Twenty-six of these tenants
qualified for security of tenure under the 1954 Act. Less than half the total
had sought in the first instance to rely on 1954 Act rights, and a potential
investor would have this proportion in mind. Thus Mr Angel’s 35% discount for a
sitting statutory tenant required a further reduction as the risk reduced. In
the circumstances, Mr Strathon thought it reasonable for the overall reduction
to be less than half of 35%, and 15% appeared to him to be a fair proportion.
He therefore valued the present interest of freeholder at £544,765.
Mr Strathon then valued the estate’s proposed
interest at £3,250, being the value of the freehold in possession deferred 90
years at the agreed rate of 6%. The resultant diminution in value was
accordingly £541,515, rounded to £541,500.
He then turned to the calculation of marriage
value. The aggregate value of the proposed interests was £630,000 plus £3,250 =
£633,250. The value of the existing interests was £554,765, ie the value of the
freeholder’s present interest as calculated above. He added nothing for the
tenant’s present interest, relying on Mr Duncan’s evidence accepted by the
leasehold valuation tribunal. Thus, the gain on marriage was £88,485.
Mr Strathon turned
to consider the appropriate share of marriage value. The definition in para
4(1) of Schedule 133 plainly contemplated that 50% was a minimum, and the share
was therefore in the range 50‑100%. This was an exceptional case where
the contractual term had already expired, the tenant’s interest was reduced to
a statutory three months with a nil value. The agreement of both parties was
necessary to release the marriage value but the point of agreement depended on
the respective bargaining powers. Having considered in detail the options
available to the parties in the hypothetical negotiation, and produced a
detailed analysis of voluntary transactions in settlement of 1993 Act claims
against the estate reflecting marriage value shares of 100% in many cases, Mr
Strathon concluded that the fair proportion that would have been determined by
agreement would be in the region of 70-75%, and thus assigned 72.5% as the
landlord’s share; equivalent to £64,150.
Mr Strathon accordingly calculated the premium
payable as follows:
|
(a) |
£541,500 |
|
(b) |
£ |
|
Total |
£605,650 |
Mr Strathon produced an alternative calculation
that resulted in the same final figure. This was based on the ‘other loss’ in
para 5 of Schedule 13. He argued that if, contrary to his view, the hypothetical
purchaser of the investment neither owned it nor needed to compete with the
owner of the extensive neighbouring estate, the overall market would be reduced
and hence the value of the interest being sold would likewise be reduced. The
vendor would thus suffer a loss for which it should be compensated. He produced
a valuation in which the premium payable was reduced to £588,042, and the
consequent ‘loss’ to the estate was the difference of £17,608.
In support of his valuation, Mr Strathon referred
specifically to four recent cases determined on the estate. In the case of flat
3, 44-45 Hans Place, seven years remained unexpired and the premium agreed for
a lease extension reflected the estate’s share of marriage value at 60%. The
other three cases examined closely resembled the present claim, where the
contractual term had expired.
First floor, 45 Cadogan Place, was determined by
the leasehold valuation tribunal at a premium of £283,100, or 87.1% of the
vacant possession value of the 90-year lease. The share of marriage value was
determined at 50%. The estate did not appeal, but soon after the decision, the
claimant assigned her interest for £325,000 releasing a capital gain of 12.9%
and a further assignment three months later (January 1997) was at £400,000.
In the case of third/fourth floor, 65 Cadogan
Place, a settlement was agreed prior to the leasehold valuation tribunal
hearing at £335,000 representing 88.2% of the agreed vacant possession value of
the 90-year lease, and marriage value was shared equally.
In the case of flat 1, 64 Cadogan Place, agreement
was reached on the day of the leasehold valuation tribunal hearing and the
agreement signed by both valuers expressed:
(a) vacant possession value of the lease agreed at
£825,000;
(b) claimant’s existing interest (expired) nil
value;
(c) uplift to freehold 3%;
(d) deferment rate 6%;
(e) premium payable £725,000.
The agreed premium represented 87.9% of vacant
possession value. The discount for the tenant’s 1954 Act rights equated to 25%
and the marriage value was share equally.
These last three cases demonstrated slight
variations in the discount from vacant possession value of the leasehold
interest, but the common features were 25% discount for the tenant’s 1954 Act
rights, and an equal division of marriage value.
Mr Strathon concluded by drawing together the
elements of his valuation, as set out earlier, producing a total premium of
£605,650.
In cross-examination, Mr Strathon maintained that
the concept of a willing seller did not preclude a sale to an associate or
similar company with the same objectives. In other words, it was necessary to
take account of an investor in the market with the quality and characteristics
of the Cadogan Estate.
He agreed that the yield from a statutory tenancy
was low, but then so were yields from many other forms of investment. An estate
that could take a long-term view might well seek the income from a fair rent
under a statutory tenancy rather than the premium for a long lease at no rent.
He accepted that there was no evidence of Cadogan or other large estates buying
property subject to statutory tenancies.
Mr Strathon conceded that the uplift to freehold
value was marginal in the computation, but he regarded it as fundamental in
concept; a
inadequate.
As to the discount for 1954 Act rights, 15%
adequately reflected this case of an occupier with no tenancy who is actively
seeking a lease extension. He had regard to Mr Angel’s evidence of a 35%
discount for an existing statutory tenancy. His schedule of 26 tenancies showed
that no more than 13 could be assumed to rely on a statutory tenancy. The
primary choice was an extended lease. The situation was very fluid, and he had
sought to evaluate the degree of uncertainty an investor would have in mind. He
did not deny the possibility of a statutory tenancy, but it was against the
balance of probability in this particular case.
With regard to marriage value Mr Strathon said the
basis was that both parties came to the negotiating table, willing to buy and
to sell, each looking to his own best interest, seeking to ensure full value
for his asset, and not under pressure or urgency to sell. He agreed it was
necessary to assume that a bargain will be achieved. On the facts of this case,
he agreed also that the logic of his argument suggested that the landlord
should receive 100% of marriage value. He said that that had been achieved in
some of the cases he cited, but considered the tenant had some bargaining
power.
As to his final valuation, Mr Strathon said it was
important to stand back and to see if the figure fairly compensated the
landlord for granting a long lease to a tenant that had no real existing
interest.
Respondent’s case
Mr Jefferies called Mr CSR Marr-Johnson FRICS, a
partner in Marr‑Johnson & Stevens, chartered surveyors of Bolton
Street, London W1. He has been in professional practice for 39 years, having
previously been a partner in Cluttons and thereafter in Winkworth & Co
prior to establishing his own practice in 1979. He had throughout been involved
in valuation, mainly of residential property and advised many land-owning
clients including the Church Commissioners, The Crown Estate, Henry Smith
Charity and the Howard de Walden Estate. He had made a special study of
leasehold reform, on which he had lectured and had given expert evidence in
some of the leading cases before the Lands Tribunal and leasehold valuation
tribunals.
Mr Marr-Johnson described the subject property as
in the agreed statement of facts. He pointed out that the approach to the
maisonette was via a narrow hallway and stairs, or by a cramped two-person
lift. In referring to the accommodation he said that many lessees would prefer
three larger bedrooms to four smaller ones; only one of the four could be
counted as a double bedroom. He described the quality of the space as fairly
typical for the age and character of the property, but it suffered from small
bathrooms of which neither was en suite, and a small kitchen with no room to
eat there. The split-level living room might suit a minority, but served to
reduce the usable area, since the higher part is too small to accept furniture
with reasonable convenience and the wide steps take up valuable floor space.
Overall, the floor space is on three or four different levels including two
steps up to the kitchen, and there are three entrance doors. There is no roof
terrace or balcony.
Mr Marr-Johnson stated in his proof that there was
no prime evidence of sales of comparable properties on comparable leases. He
had considered several local transactions but found them frequently misleading
because they were either small flats on a single floor, or as in the case of
64-65 Cadogan Place, a two-storey lateral conversion providing magnificent
accommodation of totally different character. The only comparable to which he
made detailed reference was flat 2, 22 Cadogan Place; in oral evidence however,
he considered the comparables referred to by Mr Duncan.
Flat 2, 22 Cadogan Place
This maisonette on first and second floors sold in
April 1996 for £465,000 with an unexpired term of about 50 years at an ‘almost
nominal’ ground rent. This pointed to a value of about £560,000 for a 90-year
lease, assuming the 50-year term was worth about 83% of a 90‑year term
and approximately £600,000 for the freehold. He was aware of Mr Duncan’s index,
which could be useful, but in this case he considered 83% to be right rather
than the 73% indicated by the index. He considered the differences between this
maisonette and the subject property to be ‘striking’; flat 2, number 22 was on
first and second floors, the first floor having high ceilings with fine
cornices and full height windows to a full-width balcony, no split level, and a
good size kitchen. The particulars also referred to ‘ornate and attractive
architraves’, and there was full gas central heating. Both properties had a
lift, but for flat 2, 22 Cadogan Place this was more an optional extra than a
necessity. The proximity of the underground car park was not a disadvantage
affecting value.
First floor 45 Cadogan Place
He considered the transactions useful, but their
value as comparables was limited, and nothing that had been said by Mr Duncan
about this flat disturbed his opinion of the value of the subject maisonette.
He believed Mr Duncan was over-optimistic and ignored the negative aspect of
the subject property.
64-65 Cadogan Place
This was, in his view, very much less useful. The
lateral conversion produced a much grander apartment, especially for
entertaining, and attracted a much higher price.
39 Cadogan Square
This was not, in his view, truly comparable. This
maisonette had a roof terrace, an impressive reception room and better
proportioned rooms. He thought a penthouse could attract up to 10% added value,
and this was an absolutely prime location, the equal of Eaton Square.
Flat 12A, 78 Cadogan Square
This was also a lateral conversion. There were two
en-suite bathrooms, no split levels, and a better location. It was bound to be
more expensive.
Mr Marr-Johnson said that he thought these
comparables in general were helpful in supporting his valuation of the subject
property.
In valuing the proposed leasehold value of the
subject property, he was required to assume an improved state. The maisonette
in fact required much modernisation and renewal of fittings and decoration, but
the respondent had spent about £40,000 at the time of his purchase in 1990.
Together with the premium paid of £105,000, this equated to over £25,000 pa or
about double the likely fair rent under a statutory tenancy.
Mr Marr-Johnson was prepared to accept the
leasehold valuation tribunal’s assessment of £480,000. He considered that the
difference between this and the freehold value was ‘very slight’ and agreed
with the 1% differential determined by the leasehold valuation tribunal, thus
giving a freehold value of £485,000.
Mr Marr-Johnson considered that with three months
to run under the statutory provisions, the lessee’s interest still had some
value. It was difficult to be precise, but sales do take place, and the effects
of both the 1954 Act and the 1993 Act were in play. He accepted that the sale
of the short end of a short lease constituted an illegal premium, but this had
happened in the case of the ground floor at 41 Cadogan Place, and it does at
least show the level of value attributed to the effect of the 1954 Act. Mrs
Sally Jeeves paid £70,000 in July 1995 for the remaining two months of a short
lease. The value of a long lease of her unimproved flat was about £325,000,
which put the value of the ‘fag end’ at well over 20% of the long-lease value.
He referred also to the sale back to the Cadogan Estate of the top maisonette
at 113 Cadogan Gardens in December 1994 for £135,000 with just under two years
unexpired. Mr
against market rents, but he did not believe that rent officers would equate
the two in the foreseeable future. Furthermore, if the 1954 Act depressed the
landlord’s interest, it was logical for it to increase the tenant’s. The Act
plainly intended the statutory protection to have an effect on the price of a
long lease. He suggested that a fair value of the lessee’s current interest was
5% of the leasehold value, ie £24,000.
The value of the landlord’s proposed interest was
difficult to quantify but must be minimal and he agreed the leasehold valuation
tribunal figure of 1% or £5,000. The marriage value should be shared equally
between landlord and tenant.
Mr Marr-Johnson discounted the value of the
landlord’s current interest by 55% because of the tenant’s rights under the
1954 Act. He referred to the sale of parts of the Smith’s Charity Estate to the
Wellcome Foundation, from which it appeared that on a sale of top-quality
rented properties in Central London the open market price was generally
discounted for statutory tenancies, in that case by 50%. He referred also in
support of the discount to the valuation of flat 3, 14 Onslow Square, on the
grant of a long lease to his own mother in Autumn 1995, to an agreed valuation
for probate of 1 Wellington Square, and to the sale at auction in October 1990
of two flats in Ovington Court subject to regulated tenancies. He also
mentioned two decisions of the leasehold valuation tribunal: Barbour v Viscount
Chelsea unreported 17 January 1997, which related to the fourth- and
fifth-floor maisonette at 45
(apparently subject to a pending appeal) and Hordern v Viscount
Chelsea, which related to the first floor of 45 Cadogan Place, in which the
discount applied of 25% ‘gave him some comfort’. Mr Marr-Johnson considered
that the uncertainties in the present case as to the tenant’s intention would
tend to increase the level of discount in the mind of an investor. Mr
Marr-Johnson put forward a revised valuation of the premium payable at
£331,236, of which the following is a summary:
|
Landlord’s |
|
£ |
|
Ground |
|
107 |
|
Freehold |
£485,000 |
|
|
Less |
£266,750 |
|
|
|
£218,250 |
|
|
Deferred |
|
208,915 |
|
|
|
209,022 |
|
Deduct |
|
|
|
Freehold |
£485,000 |
|
|
Deferred |
|
2,450 |
|
Diminution |
|
206,572 |
|
Marriage |
|
|
|
Freeholders |
£2,450 |
|
|
Lessee’s |
£480,150 |
|
|
|
£482,600 |
|
|
Deduct landlord’s present interest |
£209,022 |
|
|
and |
£ |
233,272 |
|
Total |
|
249,328 |
|
50% |
|
124,664 |
|
Total |
|
£331,236 |
When cross-examined, Mr Marr-Johnson said that
since the leasehold valuation tribunal hearing he had given further thought to
the characteristics of the property, but he denied that he was ‘denigrating
it’. A better word was ‘describing’. He had been remiss in agreeing the
statement of facts without pointing out their further drawbacks. He considered
the premises would be inconvenient for some. He did not know if the present
tenant considered it so.
Mr Marr-Johnson accepted that he had referred in
his proof to only one comparable, but he did not think the others referred to
in the leasehold valuation tribunal decision to be important or relevant
enough.
When it was put to him that flat 2, 22 Cadogan Place,
when adjusted by means of the index, could not support his valuation of
£480,000 for
said that he regarded the subject property as having special disadvantages that
push it below the normal rule-of-thumb method of valuation in £
Asked about the Mrs Sally Jeeves transaction (41
Cadogan Place) he agreed that the £70,000 paid was an illegal premium. The
tenancy was a protected tenancy. The value of £325,000 was his own opinion. The
tenant now paid £9,000 as a registered fair rent. As to 113 Cadogan Gardens he
had not been involved in the sale to the estate, and he agreed that it was not
much use as a comparable.
He agreed that fair rent levels were moving
towards market rents, but there remained a scarcity element and a discount for
improvements. A current open market rent of £600 per week or £31,000 pa sounded
about right for the subject maisonette. He believed that fair rents had been
rising in Central London at 11% pa, higher than inflation but lower than
capital growth. As capital values increased the statutory tenant enjoyed the
benefit of the difference between a fair rent and open market rent, but he
accepted that a statutory tenancy becomes less attractive as fair rents approach
market rents.
As to the value of the tenant’s current interest,
he did not agree that his figure of 5% was arbitrary. It was a matter of
judgment, and the comparables he had referred to showed much higher
percentages.
As to the uplift to value the landlord’s
reversionary interest, he reiterated that this was negligible or minimal and
was adequately represented by 1%.
As to the share of marriage value, Mr Marr-Johnson
could not think of a case under the Act where the landlord’s share could exceed
50%. He had himself agreed 75% with the Crown Estate in Regent’s Park on
specific instructions of a client who wanted a longer lease and where money was
no object. But he saw no reason to assume that one party is more willing than
the other, and he did not know how the split could be measured other than
equally. He agreed that 50% was the statutory minimum, and that more than 50%
could be awarded, and he accepted that the variable must result from unequal
negotiating powers.
Mr Marr-Johnson was aware that Mr Strathon’s
schedule showed some settlements above 50%. He agreed that Mr Shahgholi was not
a statutory tenant, but his position was not clear; he might or might not take
up his rights or he might or might not move out tomorrow, taking up a new lease
elsewhere.
Mr Marr-Johnson was questioned about the
transaction involving his own mother. He denied that there was a special
concession to her, but he agreed that all the statutory tenants involved got a
concession because of the bad publicity around the sale by Smith’s Charity to
Wellcome and because of an error as to notice to the tenants. He accepted that
this was in the context of a huge sale of a very large number of properties at
a price exceeding £200m. But the premium paid by his mother was agreed between
professional advisers and both estates were investors acting at arm’s length
and competently advised.
In his closing submission, Mr Jefferies helpfully
provided a skeleton in writing. He submitted that the Lands Tribunal was
entitled to set out the principles on which it would determine appeals from
leasehold valuation tribunals, and had legitimately done so in the Sinclair
Gardens and Verkan cases. As set out in those decisions, the
tribunal should be slow to disturb the leasehold valuation tribunal decisions
on matters of fact and value unless satisfied that the leasehold valuation
tribunal decision was clearly wrong; and equally slow to reverse a decision of
the leasehold valuation tribunal on the basis of new evidence that could and
should have been offered at the leasehold valuation tribunal hearing.
As to the vacant possession of the proposed
leasehold interest, the issue was plainly in the category where the Lands
Tribunal should be reluctant to interfere. It could be assumed that the
leasehold valuation tribunal took all the evidence into consideration. The
evidence of Mr Duncan was unreliable in several respects, eg his assertion that
a potential purchaser of a short lease would be deterred by a potential
liability for dilapidations; his refusal to acknowledge that there could be
purchasers for a short fag-end of a lease, which Mr Angel had admitted; and the
revisions of his differential between a 50-year term and a 90-year term. He had
overvalued the premises, overlooking the fact that he was to disregard the
tenant’s improvements, omitting to mention the changes in levels, and failing
to acknowledge the drawbacks of the reception rooms.
Mr Jefferies submitted that the index relied on by
Mr Duncan was unreliable and that the differential between a 50-year and a
90-year term should be accepted as 83%.
The primary comparable relied on by both valuers
and by the leasehold valuation tribunal was flat 2, 22 Cadogan Place. Properly
adjusted this reflected £471 per sq ft as against Mr Marr-Johnson’s and
the leasehold valuation tribunal’s valuation of the subject premises at £346
per sq ft. This was a legitimate conclusion as to the differential between the
two, and was a proper matter of judgment for the leasehold valuation tribunal.
The other comparables referred to in the leasehold valuation tribunal hearing
were all distinguishable, and the post-hearing comparables should be treated
with great caution, as giving the landlord a second bite of the cherry. The
decision of the leasehold valuation tribunal was not ‘plainly wrong’ and should
not be disturbed.
As to the uplift to freehold value, the leasehold
valuation tribunal was entitled to rely on its own knowledge and experience and
was not shown to be wrong. Mr Strathon had given no reason for the choice of 3%
other than an agreement made in a leasehold valuation tribunal hearing. In many
other cases 1% had been adopted. Both Mr Marr-Johnson and Gerald Eve had
shifted their views on this.
As to the discount for the statutory rights under
the 1954 Act, Mr Marr-Johnson’s valuation at 55% was supported by actual
transactions, including the case of his mother (54%); 1 Wellington Square (55%)
reduced to 471/2% for doubts as to the tenancy; and by some of the property
dealers whose opinion was sought by Mr Angel, notwithstanding the ‘tainted’
letter requesting information. The low yield in this case (a fair rent of about
£13,000) and the ages of Mr and Mrs Shahgholi suggest a discount at the high
end of the scale.
Mr Jefferies submitted that Schedule 13 para
3(2)(a) requires the assumption that the vendor is selling subject to ‘the
relevant lease’ which in this case must mean the lease as continued by Schedule
12 para 5. It must therefore be assumed that the interest cannot be terminated
before expiry of six months’ notice, and accordingly by operation of the
statutory provisions the lease continues for at least nine months at the
existing rent of £150 pa. Schedule 13 para 3(2)(b) required the further
assumption that the Act conferred no right to acquire a new lease, but did not
require the assumption that the tenant had no rights at all.
In consequence of the statutory assumptions, Mr
Jefferies submitted, first, that the right to possession must be deferred nine
months; and second, that the risk of a statutory tenancy was an imminent
possibility, as the leasehold valuation tribunal had decided, and which
significantly affected the value of the freehold interest. He reviewed the
evidence and the cases referred to, and contended that the 55% discount
proposed by Mr Marr-Johnson was appropriate.
As to the value of the tenant’s existing interest,
Mr Jefferies argued that since the tenant had a nine-month contractual term to
assign, this must have a value, a proposition that had been accepted by Mr
Angel. The only evidence as to what this value was came from Mr Marr-Johnson
and should be accepted.
As to the share of marriage value, Mr Jefferies
analysed the evidence and the hypotheses on which the valuers have proceeded in
detail, and submitted that no case was made out for departing from the norm of
an equal division between landlord and tenant.
In reply, Mr Radevsky submitted that Mr
Marr-Johnson’s reliance on only one comparable was inadequate. Flat 2, 22
Cadogan Place was helpful to the landlord and when taken with the range of
transactions produced, demonstrated a range of £560,000-600,000 for a 90-year
lease of the subject property. As to the uplift, Mr Marr-Johnson’s 1% was a
figure plucked out of the air and did not reflect the state of the market and
the relationship of leasehold to freehold as Mr Duncan’s index had done, nor
reflect the careful reasoning given by Mr Strathon.
He suggested that Mr Marr-Johnson had adopted an
unbalanced and negative view of the subject property. The comparables had shown
a clear range in terms of £ per sq ft and it was obvious that Mr Duncan’s
valuation was modest. The leasehold valuation tribunal was shown to be plainly
wrong in adopting a figure that was far too low and unsupported by proper
reasoning.
Mr Radevsky criticised the evidence called by the
respondent in relation to the discount for 1954 Act rights. The sale by Henry
Smith Charity to the Wellcome Foundation concerned an enormous portfolio and
was not an open market transaction; the letter produced from a valuation
officer had no value at all, and the Ovington Court transaction was eight years
ago. It was clear that a 35% discount was about right for a sitting tenant, but
in the particular circumstances of this case, with an elderly tenant actively
seeking a long lease at a time when fair rents were rising rapidly the
reduction by Mr Strathon to 15% was justified. The leasehold valuation tribunal
had not explained their choice of 25%.
As to the value of the tenant’s existing interest,
Schedule 12 para 5(1) provided a continuation triggered by the application for
a new lease, and under Schedule 13 para 3(2)(b), the right to a new lease was
to be disregarded; the continuation tenancy was merely an incident of that
right. As at the valuation date the tenant had nothing to sell. By that date, in
the absence of a claim to a new lease, the issue of a statutory tenancy would
have been resolved. Either the tenant would have left or he would have become a
statutory tenant, which was not an assignable interest. Mr Radevsky submitted
that under para 3(2)(b) it must be assumed that there is no claim made and
therefore no continuing tenancy. If this submission was incorrect, then the
only interest survived for three months and the leasehold valuation tribunal
was correct in giving that a nil value. No evidence had been found of anyone
buying such an interest. The Sally Jeeves case was of an illegal premium paid
for an existing protected tenancy; the case of 113 Cadogan Gardens was a case
of the estate itself buying out a term of two years unexpired in order to
obtain full vacant possession to reconvert the building.
As to marriage value, it was inescapable in the
circumstances of this case that the landlord’s share was more than 50%.
Inspection
I carried out an inspection of the subject
maisonette accompanied by representatives of both parties and in the presence
of the respondent tenants on 14 May 1998. Arrangements had not been made for
access to any other property, but I viewed externally those properties cited in
evidence in Cadogan Place and Cadogan Square.
Decision
Before considering the issues between the parties
in this appeal, it is necessary to comment on the appellate role of the Lands
Tribunal. In the course of his submissions, Mr Radevsky criticised the views
previously expressed by me and by other members of the tribunal, and in
particular the formulation I adopted in the case of Verkan & Co Ltd
v Byland Close (Winchmore Hill) Ltd (LT reference LRA/12-13/97, 4
February 1998)*. In that case, I said in relation to the function of the Lands
Tribunal:
In my judgment, where as in this case a competent
leasehold valuation tribunal (which is assumed to have local market knowledge)
has decided matters of fact and value on the opinion evidence of valuers and an
inspection of the subject premises, then on a subsequent appeal to the Lands
Tribunal, at least where there is no suggestion of any dispute as to matters of
law or of valuation principle, the Lands Tribunal should be slow to disturb the
decision of the leasehold valuation tribunal unless satisfied that the decision
is clearly wrong.
*Editor’s note: Also reported at [1998] 2 EGLR
139; [1998] 28 EG 118
Mr Radevsky submitted that the statutory
provisions imposed no such restriction on the right of appeal, and that an
appeal both as a matter of law and of long-established practice proceeded as a
complete rehearing.
As I commented in the Verkan case, there is
no statutory requirement that an appeal to the Lands Tribunal be conducted in
any particular way, and, for my part, I do not resile from the views I
expressed in that decision as to the principles on which the Lands Tribunal
should approach an appeal from the leasehold valuation tribunal. However, the
point may be regarded as academic in the present case, for I am satisfied that
it has been clearly demonstrated that the leasehold valuation tribunal was
wrong, and the conclusion and valuation was against the weight of market
evidence presented at the hearing.
The issue in this appeal is the valuation of the
premium to be paid by the tenant for a 90-year lease at a peppercorn rent of
the subject premises, a second- and third-floor maisonette in Cadogan Place.
The
valuation date in June 1996.
Mr Radevsky defined the five elements in the
valuation that are in dispute. By far the most important of these elements in
the calculation is the vacant possession value of the proposed 90-year lease.
In respect of this element I am satisfied on the evidence that Mr Marr-Johnson,
on behalf of the tenant (and the leasehold valuation tribunal) seriously
undervalued the subject matter.
It is common ground between the parties that Cadogan
Place is one of the prime residential areas of Central London. I observed in
the course of my inspection obvious differences of architectural styles, from
the white-stuccoed and porticoed terrace at the southern end of Cadogan Place,
in which the subject property is situated, to the Georgian terraced houses at
the northern end, which includes number 22, and to the red-brick, heavy
‘mansion’ style of Cadogan Square. However, in terms of location, convenience,
amenities, outlook, seclusion, and spaciousness, the properties referred to by
Mr Duncan as comparables all form part of the same market. Although Mr
Marr-Johnson placed no reliance on any but flat 2, 22 Cadogan Place, I am in no
doubt that the other transactions in Cadogan Place and Cadogan Square are also
relevant and must be taken into account.
Mr Duncan’s method of evaluating the evidence is
to adjust each comparable transaction for date and for lease length to a value
expressed as £ per sq ft by reference to indices compiled on a statistical basis
by highly reputable firms of valuers in central London. He readily admitted
that no such index is perfect, but I agree with him that it is a legitimate and
helpful method of cross-referencing evidence of value.
When the necessary adjustments are made, it
becomes plain that the market for leasehold flats and maisonettes in the
immediate area of Cadogan Place and Cadogan Square, at the relevant date, was
buoyant and that a property such as the subject maisonette would command a high
premium. Particularly illuminating is the sale in April 1996 (close to the
valuation date) of a 50-year lease of the first- and second-floor maisonette at
22 Cadogan Place for a price that, adjusted for date and lease length, equates
to £504 per sq ft. I bear in mind that this maisonette, while having a fine
drawing room, has no separate dining room or dining area. Equally helpful is
the evidence relating to the first‑floor flat at 45 Cadogan Place,
immediately below the subject maisonette. A 90-year lease of this flat changed
hands in January 1997 for £400,000, a price that, when adjusted, equates to
about £486 per sq ft. This transaction was, of course, subsequent to the
leasehold valuation tribunal hearing, but it offers further support for the
view that the subject property was undervalued. The other transactions referred
to by Mr Duncan revealed still higher values, although these were mainly for
admittedly grander apartments. I noticed on inspection, however, that one of
these comparables, 78 Cadogan Square, does not enjoy an outlook across the
communal gardens.
Taking this evidence as a whole, the question
remains as to where within the range of market values should the subject
maisonette be placed. Mr Duncan values the 90-year lease at £630,000 equal to
£455 per sq ft, a value lower than any of his comparables. Mr Marr-Johnson’s
valuation is £480,000 equivalent to about £346 per sq ft. The difference is
greater than can be accommodated by the normal range of variation in opinion
between experts. It is not clear to me how Mr Marr-Johnson’s valuation is
supported by the one comparable on which he relied, flat 2, 22 Cadogan Place. I
think it is a matter of judgment, and I believe that in this instance his
judgment is at fault.
As to Mr Duncan’s valuation, in substance he
acknowledged certain disadvantages in the subject maisonette, but he considered
that the relatively low figure of £455 per sq ft adequately reflected those
disadvantages. I have some difficulty in making the comparisons, as I have not
seen the interiors of any of the comparable properties, but making as full use
as I can of the floor plans, photographs and descriptions supplied, I have come
to the conclusion that Mr Duncan’s valuation is somewhat too high. I do not
regard the split-level reception area of the subject maisonette as a drawback,
but the internal staircase is cramped and intrudes into the reception area; the
two steps up to the kitchen are difficult; the lift is tiny and there is no
sense of a ‘grand’ entrance; and the four bedrooms and the two bathrooms are
small and out of character with the spacious reception area. Finally, I think
inadequate weight has been given to the lack of central heating. Taking all
these matters into account, I am of the view that Mr Duncan’s ‘discount’ from
the general level of values is inadequate, and doing the best I can on the
evidence, I have concluded that the vacant possession value of a 90-year lease
is properly represented in the sum of £600,000, which equates to about £433 per
sq ft.
The next issue is the value of the freehold
interest in reversion from the proposed lease. The actual figure is not
significant in financial terms as it is reduced by deferment, but I agree with
Mr Strathon’s view that, since the value of the landlord’s interest is a
fundamental element in the calculation, it is necessary to establish the
correct principle. I accept Mr Strathon’s evidence as to the differences
between the leasehold and the freehold interest, and I do not consider that
these differences are adequately reflected by the purely nominal 1% uplift
adopted by the leasehold valuation tribunal. I note that Mr Marr-Johnson put
forward a 3% differential at the leasehold valuation tribunal hearing, but now
adopts the 1% found by the leasehold valuation tribunal. In my view, 3% is a fair
and reasonable figure. Accordingly, I find the value of the landlord’s
reversionary interest is £618,000.
The next issue is the appropriate deduction to be
made to reflect the tenant’s right under Part I of the Landlord and Tenant Act
1954. It is common ground that some adjustment to the value of landlord’s
interest is necessary to reflect the risk of a statutory tenancy arising. The
leasehold valuation tribunal discounted by 25% on the ground that there was an
‘imminent possibility’ of a statutory tenancy because the contractual term had
expired; this would significantly affect the value of the freehold in the
market. Both parties now dispute that finding. Mr Jefferies argues that the
percentage is too low and relies on Mr Marr-Johnson’s opinion that it should be
55%. Mr Radevsky contends that it is too high and relies on Mr Strathon’s view
that it should be 15%.
I prefer the evidence of Mr Strathon. It is based
on clear market evidence that the existence of a sitting statutory tenancy will
generally be reflected in a discount of 35% from the vacant possession value.
Mr Strathon’s reasoning for reducing that discount by about one-half in the
particular circumstances of this case is, in my view, sound. The combination of
factors, including the tenant’s actual desire to acquire a long lease; the
advance of registered fair rents towards open market rents; and the capability
and willingness of a large estate such as the Cadogan Estate to assimilate or
absorb a proportion of statutory tenancies; all appear to me to justify a
reduction in the ‘risk rate’ to 15%.
The next issue is whether the tenant’s existing
interest has any value. Mr Radevsky submits that the lease has expired and the
tenant has nothing to sell. The leasehold valuation tribunal accepted that view.
Mr Jefferies puts forward Mr Marr-Johnson’s valuation of the tenant’s interest
at £24,000. It appears that it was this ‘second thought’ that prompted the
cross appeal. Mr Marr-Johnson based this valuation on two transactions; the
sale of the fag-end of a short lease at 41 Cadogan Place in July 1995 for
£70,000 and the sale of a maisonette at 113 Cadogan Gardens back to the estate
in December 1994 for £135,000. I have some difficulty in understanding how
these transactions support Mr Marr-Johnson’s valuations. Both represent the
sale of an existing interest. The present claimant has none but the statutory
right to hold over. The sale at 41 Cadogan Place was admittedly the taking of
an illegal premium. As such it is hardly evidence of the ‘open market’. The sale
at 113 Cadogan Gardens was of a lease with two years unexpired, purchased by
the estate in order to complete the obtaining of vacant possession of the whole
building.
I agree with the appellants and with the leasehold
valuation tribunal that the market value of the tenant’s current interest is
nil. However, I also agree with Mr Jefferies’ interpretation of the statutory
provisions that the appropriate period for deferment as at the valuation date
is nine months, being the period in practice likely to be perceived in the
market as necessary to obtain vacant possession.
Finally, there is an issue as to the appropriate
share of marriage value. The leasehold valuation tribunal saw no reason to
depart from
The appellants claim that in the circumstances of this case, the landlords
share should be 72.5%.
It is clear from the terms of para 4(1) of
Schedule 13 that what is to be determined, in the absence of agreement, is the
proportion that would have been agreed at the valuation date between the
parties on an open market sale by a willing seller, and further that a
landlord’s share of 50% is stipulated as the minimum. As it seems to me, the
only significant component in this notional agreement, which would govern the
variable share, is the respective bargaining power of the parties. Mr Strathon
based his view on that, and Mr Marr-Johnson accepted it in cross-examination.
Mr Strathon set out in detail the pros and cons
and the motives and objectives of the parties to this hypothetical negotiation.
I find his analysis to be compelling and his reasoning sound. He concluded that
a bargain would be struck giving the landlord between 70% and 75% of marriage
value. I agree and adopt his figure of 72.5%.
The valuation of the premium which follows from my
conclusions is calculated on the basis of Schedule 13 as follows:
Valuation
|
1. |
|
|
|
(a) |
|
|
|
Current rent receivable nine months at £150 |
|
£107 |
|
(i) Value of lease 90 years at peppercorn rent |
£600,000 |
|
|
(ii) Freehold equivalent at 3% uplift |
£618,000 |
|
|
(iii) Defer 0.75 years @ 6% = 0.95723 = |
£591,500 |
|
|
(iv) Deduct 15% for risk of statutory tenancy |
£ 88,735 |
|
|
|
|
£502,765 |
|
|
|
£502,872 |
|
|
Say |
£503,000 |
|
(b) |
|
|
|
(i) Reversion to freehold in possession |
£618,000 |
|
|
(ii) Defer 90.75 years at 6% = 0.00505 |
|
£3,120 |
|
|
Say |
£500,000 |
|
|
|
|
|
2. |
|
|
|
(a) Sum |
|
|
|
(i) |
£ 3,120 |
|
|
(ii) |
£600,000 |
|
|
|
£603,120 |
|
|
(b) |
|
|
|
(i) |
£503,000 |
|
|
(ii) |
Nil |
|
|
Gain on |
£100,120 |
|
|
(c) |
|
£ |
|
|
Premium payable |
£572,587 |
|
|
Say |
£572,000 |
For the reasons given, this appeal will be allowed
and the cross-appeal dismissed. The premium payable by the respondent is
determined at the sum of £572,500.
This decision determines the substantive issues
raised between the parties, and the tribunal’s award is final. The parties are
invited to make such submissions as they are advised as to the costs of the
hearing, and a letter accompanies this decision as to the procedure for
submissions in writing. The tribunal will, in due course, incorporate an order
as to costs in an addendum to this decision. Rights of appeal under
section 3(4) of the Lands Tribunal Act 1949 and Rules of the Supreme Court Ord
61 will not accrue until the decision has been thus completed, ie from the date
of the addendum.
Addendum as to costs
I have received and considered the written
submissions of the parties.
The landlord succeeded in its appeal and achieved
a substantial increase in the premium payable over that determined by the
leasehold valuation tribunal. The tenant’s cross-appeal was dismissed. In the
absence of special circumstances, costs should follow the event in accordance
with the usual practice.
However, in this case there are special
circumstances relied upon by the tenant. First, the appeal is said to be a test
case. It is plain, as the landlord points out, that this was not technically a
test case as provided by the tribunal’s rules: see 1996 Rules, r 31.
Nevertheless, it is not disputed that this was the first case in Cadogan Place
to be heard in the Lands Tribunal, and that the appellant estate which is of
course a substantial freeholder in the area, will use the result in many other
similar cases to negotiate settlements.
Second, there was no point of law nor of valuation
principle in this appeal, and the tenant complains that the landlord has used
the appeal procedure as ‘a second bite of the cherry’, and ‘saving his big
guns’, calling a witness and much more evidence that could and should have been
produced before the leasehold valuation tribunal. I agree broadly with this
criticism. It is in accordance with views I have expressed in other cases, and
with the views of other members of this tribunal. Perhaps the point was best
expressed by Judge Rich QC in Sinclair Gardens Investments v Franks
LRA/19/96, in a passage quoted by the tenant in written submissions. The appeal
to this tribunal is of right, and the landlord is entitled to pursue the appeal
as a rehearing, but if, as in this case, the opportunity is taken to reinforce
the appellant’s case by additional evidence, most of which was available to be
produced at the time of the leasehold valuation tribunal hearing, this is a
course that is to be discouraged. I do not say that the costs of calling the
additional witness (Mr Angel) were unnecessary nor that time was wasted by his
evidence, but, in my view, the unsuccessful respondent should not be penalised
in costs as a consequence.
As I suggested recently in the rating appeal
concerning the floating restaurant TS Queen Mary (Woodbury (VO) v Toby
Restaurants Ltd [1998] RA 315), the fact that the decision may affect other
properties is not of itself sufficient to displace the usual practice, but
taking account of all the circumstances, I consider the appropriate course in
this case is to make no order for costs.
Appeal allowed,
cross-appeal dismissed.
