Landlord and tenant – Leasehold enfranchisement – Extension of lease – Leasehold Reform, Housing and Urban Development Act 1993 – First-tier Tribunal determining premium payable for new lease – Parties granted permission to appeal and cross-appeal – Errors identified in decision – Appeal heard as rehearing – Improvements – Value of precarious rights – Comparables – Relativity – Value of Act rights – Premium determined accordingly
A lease of a first-floor mansion flat at 207, Ashley Gardens, Emery Hill Street, London SW1, for a term of 177 years from 25 December 1898, was granted in January 1985; the respondents purchased the lease in November 2021 for £973,000.
Their vendor assigned to them the benefit of a notice pursuant to section 42 of the Leasehold Reform, Housing and Urban Development Act 1993, claiming an extended lease. The notice proposed a premium of £146,750. At that date there were 53.96 years unexpired. The appellant was the head lessee of the block, and the competent landlord so far as the extension of the lease was concerned. It served a counter-notice proposing a premium of £451,470.
The flat had three bedrooms, a reception room, kitchen, bathroom, and an additional separate WC. The plan to the lease showed only one bathroom and a larger kitchen; at some point the kitchen had been reduced in size to make space for the extra WC and a short access corridor. The floor area was agreed between the parties to be 1,407 sq ft. The terms of the extended lease had been agreed and only valuation was in dispute.
The First-tier Tribunal (FTT) determined the premium payable. Applications for permission to appeal and cross-appeal identified a number of errors in the decision and the FTT gave both parties permission. The Upper Tribunal directed the appeal to be by way of a re-hearing.
Held: The premium was determined accordingly.
(1) The Leasehold Reform, Housing and Urban Development Act 1993 gave to qualifying tenants of flats the right to acquire a new lease on giving notice in accordance with section 42. Section 56 provided that where such notice had been given, a new lease extending the existing lease by 90 years should be granted and accepted in substitution of the existing lease upon payment of the premium payable under schedule 13.
The granting of the new, extended lease enhanced the value of the tenant’s interest and reduced the value of the landlord’s reversion. Paragraph 2 of schedule 13 provided that the premium payable for the new lease was the sum of: (i) the diminution in the value of the landlord’s interest resulting from the grant, (ii) the landlord’s share (50%) of the marriage value; and (iii) any compensation payable to the landlord under paragraph 5 (in this case agreed to be nil). In calculating the value of the landlord’s interest and his share of marriage value, any increase in the value of the flat attributable to an improvement carried out by the tenant at his own expense was to be disregarded.
(2) Where one was concerned with the grant of a new long lease or an extended lease to the existing lessee, marriage value was defined in para 4 of sch 6 to the 1993 Act. Where the unexpired term of the existing lease exceeded 80 years, marriage value was ignored. Paragraph 4(1) provided that the freeholder’s share of marriage value was 50% Carey-Morgan and Stephenson v Trustees of the Sloane Stanley Estate [2012] EWCA Civ 1181; [2012] 3 EGLR 38 considered.
The calculations of both the diminution in value of the landlord’s interest and of the marriage value required a value to be ascribed to the new lease, and thence to the notional value of the freehold interest with vacant possession (FHVP), one of the primary components in the calculation of the premium payable for an extended lease.
A further component of marriage value was the value of the existing lease. Conventionally that value was ascertained by the use of a “relativity”, ie, a percentage figure that enabled the value of the existing short lease to be calculated by reference to the FHVP.
The statute also required that the existing lease be valued on the assumption that there was no right to an extended lease under the 1993 Act (without Act rights). That assumption was difficult to value because there was now no market in long leases without Act rights.
(3) To allow comparison with the subject property, it was necessary to adjust the comparables to put them on an equal footing with the property, by identifying the differences that would be material to the valuation and making the appropriate allowances for them. At the end of that process the tribunal was left with a series of values from which the FHVP could be derived. One then had to look at adjustments for time, which was necessary because all the transactions took place on different dates, at parking rights for which one expert contended, whether there should be adjustments for parking or for improvements, and finally various other deductions for which the valuers argued.
The presence of a covenant not to park in the lease made no difference to the value of the right to park. All the residents could apply for a permit, and if they parked with a permit then any breach of covenant had been waived. Nevertheless, parking was a permission not a right. It could be withdrawn at any time, or a charge could be made for parking.
(4) Where, as here, there was reliable market evidence, the best method was to start from the application of the value of Act rights to the market value, date adjusted. Relativity could then be used as a cross-check.
The date adjusted value of the property was £747 per sq ft (by reference to the Land Registry’s House Price Index). Expressed as a capital value, that was £1,051,029. A deduction of the value of Act rights at 5.85% gave a value of £989,544, say £989,500.
The FHVP was £1,322,500 and the relativity was 74.8%. The relativity arrived at compared reasonably to the outcomes from the Savills and Gerald Eve 2016 (unenfranchisable) graphs, which were 74% and 73.68%. Accordingly, in calculating the premium, £989,500 was the value of the existing lease without Act rights. It was based on a transaction at the property itself which was almost contemporaneous with the application date and there was no need to use the relativity tables as anything other than a cross-check: Deritend Investments (Birkdale) Ltd v Treskonova [2020] UKUT 0164 (LC); [2020] PLSCS 145 considered.
Nicola Muir (instructed by Wallace LLP) appeared for the appellant; Mark Loveday (instructed by Lawrence Stephens) appeared for the respondents.
Eileen O’Grady, barrister
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