Landlord and tenant – Leasehold enfranchisement – Freehold vacant possession value (FHVP) – Schedule 13 to Leasehold Reform, Housing and Urban Development Act 1993 – Respondent acquiring lease of flat owned by appellant – Parties failing to agree premium payable – Respondent appealing against determination of premium by First-tier Tribunal – Whether FTT erring in assessment of value of existing lease and determination of FHVP – Appeal dismissed
The appellant was the landlord and the respondent was the lessee of Flat 2E, Hyde Park Mansions, Chapel Street, London NW1. The property was a self-contained flat on the first floor of a part 6, part 7 storey Victorian mansion block near Edgeware Road station in Central London. The gross internal floor area of the property was 1,439 sq ft, and it comprised five rooms (three or four bedrooms and one or two reception rooms), together with a kitchen, bathroom and additional WC. The building was served by a lift.
Previous tenants had acquired the property in 2021 at a price of £990,000. The current lease of the property was sold by the previous lessee to the respondent on 9 February 2024 for £1,170,000, with the benefit of the admitted right to a new lease on terms yet to be agreed or determined. The parties could not agree the premium payable for the new lease and the respondent applied to the First-tier Tribunal to determine the premium payable.
Before the FTT, the appellant relied on expert evidence supporting a premium of £279,105, while the respondent’s expert considered the figure should be £143,000. The FTT determined a premium of £159,000. The appellant appealed against the decision of the FTT contending that its assessment of the value of the existing lease was too high and its determination of the freehold vacant possession value (FHVP) was too low.
Held: The appeal was dismissed.
(1) Chapter II of Part I of the Leasehold Reform, Housing and Urban Development Act 1993 conferred on the tenant of a flat who satisfied specified conditions the right to acquire a new lease for an additional term of 90 years, beginning on the expiry of the current lease, on payment of a premium calculated in accordance with schedule 13.
Under paragraph 2 of schedule 13, the premium payable for the new lease was the aggregate of three sums: (i) the diminution in the value of the landlord’s interest in the tenant’s flat resulting from the grant, calculated in accordance with paragraph 3; (ii) the landlord’s 50% share of the marriage value arising from the grant of the extended lease, calculated in accordance with paragraph 4; and (iii) any amount of compensation payable to the landlord under paragraph 5 (not applicable here).
(2) Ascertaining the diminution in value of the landlord’s interest in the tenant’s flat under paragraph 3 required a comparison between the current value of the landlord’s interest and its value after the acquisition of the new lease. Here, the current value of the landlord’s interest comprised the current value of the right to receive the ground rent for the remainder of the term plus the current FHVP in the flat at the end of the current term in 54.71 years.
No ground rent was payable under the new lease, so the value of the landlord’s interest after the acquisition of that lease was simply the current FHVP in the flat deferred for 144.71 years (the original unexpired term plus 90 years under the new lease).
(3) The ascertainment of the landlord’s share of the marriage value, calculated in accordance with paragraph 4, required that the combined value of the freehold and leasehold interests before the acquisition of the new lease be deducted from the combined value of the freehold and leasehold interests after the grant of the new lease.
To determine each of the two components of the premium, it was therefore necessary to know both the current value of the tenant’s interest in the flat and the value of the freehold interest in the flat unencumbered by the lease and with vacant possession. As flats were not generally sold freehold, and as a freeholder enjoyed advantages which a leaseholder did not, FHVP was usually arrived at by adjusting the value of the extended lease upwards (often by 1%).
(4) Both FHVP and the value of the tenant’s interest in the unextended lease were determined by reference to the value they would realise on a sale in the open market, subject to certain assumptions specified in the 1993 Act (one such assumption being that the Act did not confer any right to acquire a new lease of the flat or any other premises in the same building). The determination of those values required the application of valuation judgment to evidence of transactions in the market, making the adjustments necessary to take account of differences between those real world transactions and the terms of the hypothetical sale required by the Act.
(5) The relationship between the value of a short lease and FHVP (relativity) could be a useful tool in determining the value of a short leasehold interest, where there was reliable evidence of the value of long leases of comparable properties from which the FHVP could be derived. In this case, a review was warranted because the determination by the FTT, using heavily adjusted market evidence, gave rise to a relativity of 81.85%, when a graph of relativity which would be used in the absence of market evidence suggested a relativity in the region of 74.37%. A simple cross check based on the published graphs should have rung alarm bells and good valuation practice should have prompted a more critical examination of the evidence: Mallory v Orchidbase Ltd [2016] UKUT 468 (LC); [2016] PLSCS 316 and Trustees of Barry and Peggy High Foundation v Claudio Zucconi [2019] UKUT 242 (LC); [2019] PLSCS 183 considered.
However, the appellant’s challenge was only to the FHVP. The FTT’s determination of existing lease value was therefore taken to be established. Relativity played no part in a review of the FTT’s determination of FHVP, which depended simply on the evidence.
(6) The FTT could reasonably have determined a value for the property of £950 psf or above, giving most weight to the top three pieces of evidence which required the least adjustment. That would have produced an extended lease value of £1,367,050 and FHVP of £1,380,859. As a cross-check, that would have reflected a relativity of 76.31% with the determined existing lease value of £1,053,709. However, the UT did not feel able to say that the FTT’s approach was wrong in principle.
The appeal was determined on written representations.
Eileen O’Grady, barrister