Landlord and Tenant Act 1987 — Rights of pre-emption — Sale of 24 buildings — Purchase notice relating to one building — Determination of price payable for part of property portfolio
In September
1996 the respondent landlord acquired the freehold of 24 properties containing
some 160 flats for £155,000. The acquisition was in breach of the Landlord and
Tenant Act 1987, as no rights of first refusal were given to the tenants and no
notice was served by the landlord on the tenants under section 18 of the Act. A
purchase notice was served on behalf of the tenants of two of the buildings.
The applicant nominee purchaser referred the determination of the price payable
to the leasehold valuation tribunal.
would have paid approximately 11 years’ purchase of the ground rents for the
subject blocks. An alternative approach based on 7 years’ purchase of the
ground rents, 3 years’ purchase of insurance commission (at 15% of the
approximate £4,000) and £2,000 for the defective leases, gives a similar
figure. Taking a broad view, it is considered that the price to be paid by the
nominated person for the freehold interest in the properties is £9,500.
No cases are
referred to in this report.
This was an
application by the nominee purchaser, Groundpremium Property Management Ltd, to
the leasehold valuation tribunal under Part I of the Landlord and Tenant Act
1987 for the determination of the purchase price.
Anthony
Radevsky (instructed by Thackery Wood, of Beckenham) appeared for the
applicant; Lana Wood (instructed by Nigel Murray & Co) represented the
respondent.
Giving the
decision of the tribunal, LADY WILSON said: Parkwood and Vivian Court
are a development of 28 flats in four blocks and 28 garages in three blocks,
built in the late 1960s, and situated in a good residential area. The flats are
similar to each other and have three rooms, kitchen, bathroom and wc. All the flats and garages are
subject to leases for terms of 999 years from December 25 1967, at total ground
rents which are agreed to be £842.50 pa. The freeholder is responsible for
repairs to the structure, but, under the original leases, the lessees are
responsible for insurance in an office nominated by the freeholder. The
freeholder is entitled to management expenses not exceeding 5% of the cost of
providing services. Approximately six of the flat leases have been varied by
deed. We have not seen all the deeds of variation, but are told that three of
them provide a more comprehensive clause relating to insurance and strengthen
the provision relating to the enforcement of covenants against other lessees
and that one relates only to the enforcement of covenants.
On September
30 1996, the day before the rights of first refusal given to tenants by Part I
of the Landlord and Tenant Act 1987 were strengthened by the coming into force
of sections 89 to 93 of and Schedule 6 to the Housing Act 1996, CBMK Developments
Ltd transferred the freehold of 24 properties, one of them Parkwood and Vivian
Court, to Longmint Ltd for a total consideration of £155,000. In breach of
section 1 of the 1987 Act, CBMK gave no rights of first refusal to the tenants.
No notices under section 18 were served by Longmint Ltd. It emerged for the
first time in the course of the hearing, when further documents relating to the
transfer were produced at the request of Mr Anthony Radevsky and of the
tribunal, that contract and completion took place on the same day and that CBMK
advanced the purchase price to Longmint. Had the transfer taken place one day
later, CBMK would have had to sever the transaction to deal separately with
each building in the portfolio, but on the date when the transaction is said to
have taken place there was no such requirement and the price was not
apportioned between the 24 properties, containing a total of 160 flats, in the
portfolio.
Decision
Mr Radevsky,
for the nominated person, said that the new purchaser had not informed the
tenants of its identity until November 25 1996, when Miss Cummings, the
managing director of Longmint Ltd, wrote to the tenants. The tenants then
sought information, which had emerged either not at all or by dribs and drabs,
some of it on the morning of the hearing. Although in response to the tenants’
notice under section 11(1) of the 1987 Act the other properties in the
portfolio had been named, their full addresses and particulars of ground rents
had not been given, and the tenants’ valuer, Mr Richard Julian Inniss FRICS,
had been obliged to attempt to apportion the price attributable to Parkwood and
Vivian Court on the basis of wholly inadequate information. Mr Inniss had, in
September 1997, asked to agree a statement of facts and exchange evidence with
Longmint’s valuer, but on December 12 1997 (the Friday before the hearing,
which was a Monday) Longmint’s solicitors had said that their client had
decided to dispense with the services of an expert because costs could not be
recovered from the tenants for the hearing before the leasehold valuation
tribunal, but that if Longmint was not satisfied with the decision of the
leasehold valuation tribunal, it would appeal to the Lands Tribunal and would
seek an order for the costs of the appeal. The company would call expert
evidence before the Lands Tribunal and had already had discussions with its
expert. Mr Radevsky said that this was the sort of unfortunate behaviour which
had led to the 1996 Act reforms of the rights of first refusal. The freeholder’s
solicitors also said in the letter that Miss Cummings would give evidence,
supported by two schedules which they would copy in return for Mr Inniss’
report. Mr Inniss’ report was exchanged for the two schedules on Friday and
Miss Cummings’ statement, produced on the morning of the hearing, was clearly
prepared with the contents of Mr Inniss’ report in mind and was an attempt to
rationalise the deal in the freeholder’s favour, which should be viewed with
caution. Premiums which the landlord might extract for correcting defective
leases, to which the
freeholder’s solicitors in any of the correspondence between solicitors.
Mr Inniss,
reading from a written proof on which he enlarged in his oral evidence said
that a brief schedule attached to his proof as appendix 4 [not reproduced here]
was the only information provided to him by the freeholder prior to the Friday
before the hearing. The schedule (Miss Cummings’ appendix C [not reproduced
here]) provided on that day, which attached a value of £23,400.49 to Parkwood
and Vivian Court, conflicted with an open letter dated January 10 1997 in which
she said that the freeholder would be willing to sell to the tenants for
£17,500. Furthermore, Longmint had, on September 29 1997, transferred another
of the properties in the portfolio, a block of 12 flats at Montreux Court, 55
Albemarle Road, Beckenham, to the tenants of that block for £16,000, whereas in
appendix C she had valued Montreux Court at £12,809.38. Furthermore, Longmint
was seeking £18,750 from the tenants of Chevening Court, Brasted Close,
Orpington, whereas in appendix C it was valued at £10,200.40. Appendix B [not
reproduced here] to Miss Cummings’ statement showed an insurance premium for
the subject block of £4,107, whereas he believed it to be £3,458. He disputed
that the freeholder received 20% commission on the insurance premiums as Miss
Cummings claimed. Most freeholders received 10% and a few 15%. Here, the freeholder
did not insure the property, but merely nominated the insurer, and he would not
expect nomination of the insurer to entitle the freeholder to commission. No
evidence had been provided to show that in the present case they received any
commission at all. In appendix C Miss Cummings had attributed a value of £500
per flat to ‘defective leases’. He did not accept that the leases were so
defective as to be unsaleable in their original form and he was aware that one
of the flats had been sold in December 1996 without any amendment of the lease.
There was a slow turnover of flats in the subject blocks and no purchaser of
the freehold would pay full value for the right to demand payments for the
amendment of leases, even if they were defective. The subject blocks were of a
basic standard, each flat being, in his opinion, worth about £65,000, and the
other properties in the portfolio were all higher quality developments. He said
that Longmint’s purchase was a negotiated one and written information would
have been likely to have been provided by Ground Rent Brokers, the agents, on
such matters as ground rents, whether such rents were fixed or rising,
insurance commission, rent arrears and length of unexpired terms. He said it
was necessary to have regard to the full nature and extent of the portfolio and
analyse how the purchase price would have been apportioned, a difficult task
because so little information had been provided.
However, there
were several reasons why the subject blocks would have been considered a particularly
unsatisfactory long term investment: the freeholder did not have the right to
insure; there was, in view of the length of the leases, no opportunity of
further income from applications by the lessees to extend their leases; the
ground rents were fixed; the management charge was fixed at 5%, which was well
below market rates and meant that the freeholder would suffer a loss on the
management of the property; and the obligation to insure the reserved property
imposed by lease variations in respect of some of the flats, without the
ability to reclaim the proportionate share of the cost from the majority of the
lessees, meant that there was a risk of loss on insurance. An analysis of the
portfolio on an overall basis showed a yield of 9.18%, which gave a price to be
paid of £9,175. An alternative analysis, based on deriving an average insurance
premium from such information on insurance premiums as he had managed to
discover, taking l5 of that premium as commission and applying 6 years’
purchase in line with the Lands Tribunal decision on 63 Perham Road
(LRA/11/95), with which approach he disagreed, gave a yield of 10% on the
ground rent income and a price of £11,537. In view of the drawbacks of Parkwood
and Vivian Court, he considered that a prudent purchaser, assessing the total
value of the portfolio, would have applied a much higher yield to the subject
property than to the remainder of the portfolio, arguably as much as 20%. He
had, however, taken a robust view and applied a yield of 14%, which gave a
price of £6,015.
Cross-examined
he said that the tenants had in fact some years ago, for convenience and to
save money, entered into an informal agreement to arrange a collective
insurance policy. After acquiring the property, the freeholder had immediately
and unilaterally cancelled the insurance policy taken out by the tenants and
harassed them with threats of proceedings under section 146 of the Law of
Property Act. Questioned by the tribunal, he agreed that it might be
appropriate to apply some reduction in the yield to take account of the
possibility that some investors might seek to profit out of defects in the
leases. He did not agree that a good landlord would make a profit out of
managing the property where the management charge was fixed at 5%.
Miss Cummings,
reading from a written proof which she supplemented orally, said that the price
of £155,000 paid for the portfolio was a global figure based on her own
calculation of the value of the properties in it. The approach she took when
valuing properties was based on a projected income stream from ground rent,
insurance commission, management fees, other fees, reversionary value and deeds
of variation for defective leases. Longmint did not purchase properties which
gave a right to ground rent only, unless those properties formed part of a
larger portfolio, because the company expected to derive an income from its
management of properties. She said that she took no account of rising ground
rents unless any rise was likely to take effect within three years. Larger
blocks were more attractive because the management fee was greater. The
schedule in appendix B was a breakdown of the information given to her by CBMK
and formed the basis of her negotiations with the company. The schedule in
appendix C indicated the value which she attributed to each property. The
figures were not exact, but showed the method she used when negotiating the
price. She said that insurance commission was available when the lessor
insured, and the company currently received a commission of 20%. Only one lease
in the portfolio had less than 80 years to run and the length of the leases was
thus not a major factor in determining the value of any of the properties.
Parkwood and Vivian Court were the ‘star property’ in the portfolio because 22
of the leases were defective, the freeholder was entitled to insurance
commission, the property was purpose built and it was a large block which
provided a better return on management. The fact that the blocks had flat
roofs, which would require expensive recovering every 15 years (on which 5%
could be charged) also enhanced their attraction. The defects in the leases
were a major factor. These were twofold: the leases gave the lessees no right
to ensure that positive covenants were performed and the leases made no
provision for the insurance of the common parts. She had recently agreed to
grant a deed of variation to a lessee at a premium of £1,500, but in
attributing a value to the potential for future deeds of variation she applied
a substantial discount, because there might be a long delay before a particular
flat was sold. As for insurance she had been advised by CBMK that since 1989
they had insured the whole of the subject block and had recovered the cost of
insurance from the lessees by way of service charges. Even if each lessee
insured individually, commission would be available to Longmint, who were
entitled to nominate the insurer.
Cross-examined
by Mr Radevsky, she agreed that the price for the portfolio was not apportioned
before the freeholder bought it. She said that she had never received any
documents from Ground Rent Brokers apart from a fax with summary details in May
or June 1996. Her company’s brokers had an informal agreement to pay the
company a commission of 20% on all their properties, but she had no written
evidence available to prove it. She agreed that after her company took over the
blocks she had, without reference to the tenants, cancelled an insurance policy
which they had arranged and negotiated a more expensive insurance policy. She
said that she regarded it as normal practice to volunteer to a potential
purchaser of a lease of which her company held the freehold that the lease was
defective and that a premium would be charged for correcting it. She had taken
that course on the recent executor sale of a flat at Parkwood and had charged a
the lowest she had seen, but it was still sufficient to give an adequate return
where the block was large. She agreed that there were inaccuracies in her
appendix B, but said that the information was as provided by CBMK. She had
drawn up appendix C the previous week and she denied that the figures there
given for Parkwood and Vivian Court were inflated. She said that CBMK lent
Longmint the purchase price because it suited them to do so and that the loan
was supported by a mortgage which was redeemed in one month. She could not
remember when terms were agreed with CBMK. CBMK wished to dispose of the
properties before the law changed.
It is well
established that our task under section 13 of the 1987 Act is to determine the
price at which the freeholder bought the property specified in the purchase
notice. We are not to value it de novo nor are we to penalise the freeholder
for having connived at a transaction which was in clear breach of the tenants’
statutory right of first refusal. We have to do our best to ascertain the
position as it was when the freeholder purchased the property, and, as Mr
Radevsky said, we should not be unduly influenced by ex post facto
rationalisation. We do not accept that the freeholder in fact apportioned the
purchase price at the time of the transfer at £23,400.49, as set out in Miss
Cummings’ appendix C. We found Miss Cummings an unconvincing witness who has,
in our view, inflated the proportion of the price attributable to Parkwood and
Vivian Court. The price she proposes is inconsistent with her open offer to the
tenants of January 10 1997, expanded on by her solicitors in their letter of
May 27 1997, and with the prices she appears to have sought for Montreux Court
and Chevening Court. It is not supported by any documentary evidence. Indeed,
there is a remarkable lack of documentary evidence from the freeholder and
neither we nor the tenants’ advisors have been assisted by the freeholder’s
grudging attitude to the production of evidence. We also deprecate the tactic
of withholding relevant evidence from this tribunal, because costs are
irrecoverable, while allegedly keeping it in reserve for any appeal.
We agree with
Mr Radevsky that there is nothing to support Miss Cummings’ assertion that
Parkwood and Vivian Court were the ‘star properties’ in the portfolio. Mr
Radevsky says that the value attributed by the freeholder to the defective
leases is a recent invention to justify the ridiculously high figure now sought
by the freeholder. We have some sympathy for that view, but it does appear that
these leases, as originally drawn, are defective, and on balance we consider
that the freeholder would have attached some value to that factor, although we
are surprised that it was not mentioned in the correspondence between
solicitors. Indeed, Mr Inniss conceded that it might be appropriate to adjust
the yield to a moderate extent to allow for this aspect.
We are of the
view that the freeholder would also have attached some value to the receipt of
insurance commission, but that it would have regarded it in the unusual
circumstances of this case as by no means straightforward or certain to
continue. Moreover we do not accept that a purchaser could reasonably expect to
rely on a continued commission of 20%. We regard 15% as more realistic.
Taking these
factors into account, we are of the view that a reasonable and prudent
purchaser, such as we assume the freeholder to be, would have paid
approximately 11 years’ purchase of the ground rents (£9,267.50) for these
blocks. An alternative approach based on 7 years’ purchase of the ground rents,
3 years’ purchase of insurance commission (at 15% of approximately £4,000) and
£2,000 for the defective leases, gives a similar figure (£9,697.50). Taking a
broad view as, in our opinion, the freeholder would have done, we consider that
the price to be paid by the nominated person for the freehold interest in
Parkwood and Vivian Court is £9,500.
