Haw v Peek

Acquisition of freehold interest — £820 to be paid for four-bedroomed semi-detached house in North London with unexpired term of 32 years — Custins case followed — Correct to include tenant’s bid — Landlord’s submission that tenant would give full merger value — Costs awarded against tenant Mr JS Daniel, QC, and Mr HP Hobbs, FRICS (Members of the Lands Tribunal), gave the following decision on April 14 in Haw v Peek. This case concerns the price which Mr RB Haw should pay in order to obtain the freehold interest in his house, 6, Warwick Road, New Southgate, in the Greater London Council Borough of Haringey. Mr Haw holds his house subject to a ground rent of £8 10s per annum payable under a lease for a term of 99 years from March 25, 1901. He served on his landlord, Mr IM Peek, the necessary notice under the Leasehold Reform Act 1967 on February 8, 1968, claiming the right to acquire the freehold and this right was admitted by the landlord on August 9, 1968. No 6, Warwick Road is semi-detached and is one of the larger houses situated at one end of an estate developed at the turn of the century. The estate is typical of its period and consists mainly of three-bedroomed houses; many are terraced or semi-detached, but there are some detached. The subject house is in good structural condition and is situated in the best part of the estate and has the advantage of fronting an open space known as Bounds Green. It contains three living rooms, kitchen, bathroom with wc on the ground floor and four bedrooms and a bathroom with wc on the first floor. Mr Haw occupies the ground floor and one room on the first floor. One bedroom on the first floor has been converted into a kitchen and this with the remainder of the first-floor rooms is let off as a flat. The total floor area is about 2,000 sq ft. The site measures some 30 ft wide by 132 ft deep. The rateable value is £154. Tenant’s Valuation Mr Haw told us that he had considerable experience of values in this area having been a negotiator in the firm of King & Co, chartered surveyors, at their office at Winchmore Hill from 1962 to 1967, when he left to join a development company. He said that he based his valuation of £552 on the application of the conclusions reached by the Lands Tribunal in the case of Custins v Hearts of Oak Benefit Society [THE ESTATES GAZETTE, January 18, 1969, page 239] and it was as follows: Present Ground Rent £8 10s 0d Years’ purchase for 31 years and 1 month taken as 31 years at 7% 12.532 £106.522 say £107 Estimated modern site value £1,500 PV £1 31 years at 4% 0.2964 £444.6 say £445 £552 During the course of the hearing Mr Haw agreed that the period should be 32 years. In order to arrive at a correct modern site value he considered it necessary to have a thorough knowledge of the area, since any direct comparables were difficult to obtain. To reach his site value he started from the value of his house on the assumption that it was freehold in possession, which he put at £6,000; he then allocated £1,500 to the site, being 25 per cent of the total value, which he thought fair and comparable to the value placed on 63, Arcadian Gardens, which was the subject property in the Custins case. In support of his figure of £6,000 he referred us to seven houses on the estate and in each case told us the amount of the consideration on purchase; in all cases the properties were sold as freehold in possession and contracts had been exchanged within the last two months. The adjacent house, 8, Warwick Road, had been sold in July, 1965, for £5,250, but, although the main structure is identical, there was, in addition, a garage and the site frontage was 35 ft. In the course of his evidence he said that he thought that a reasonable modern ground rent would be £105 per annum based on 7 per cent of his £1,500 site value. Mr Haw was asked during cross-examination to say what he thought the value would be in the market of an 82-year lease of the property (with possession) at a rent of £8 10s for the first 32 years and a rent of £180 for the remaining 50 years (£180 was the landlord’s estimate of a modern ground rent, which was not accepted by Mr Haw). Mr Haw felt that this was a difficult question to answer, since a jump in the ground rent was an unusual feature in the market. On the assumptions he was asked to make, however, he felt that the maximum value of the lease would be about £4,500. If the ground rent remained at £8 10s for the whole of the term he thought it would make the value of the lease only slightly higher, say £4,600. If the freehold reversion were also available the purchaser might, having regard to his own valuation of the unencumbered freehold at £6,000, give another £1,200 or £1,300 to obtain both interests. These answers were elicited by Mr Ground, counsel for the landlord, in connection with a submission he later made that the amount the tenant would pay could best be ascertained by deducting from the value of the freehold in possession the value of the leasehold in possession if this ran for 32 years at the current ground rent and for 50 years thereafter at a modern ground rent and it was his submission that the tenant would give the full merger value; and only if he were wrong in this submission was there any need to ascertain the value of the site itself. Landlord’s Valuation Evidence for the landlord was given by Mr RC Richardson, ARICS, a partner in CH & JW Willmott, of Goldhawk Road, London, W12. In his view the freehold value of the existing house and gardens was £7,000 to £7,500 and if a new 4-bedroomed house with integral garage were to be built on the site, it would fetch £9,000 freehold. He supported these figures by reference to the same transactions as those quoted by Mr Haw. Mr Haw criticised the £9,000 on two counts; first he very much doubted if planning permission for such a house on this site would be forthcoming, and secondly he thought £7,500 the maximum figure which even a new house would realise in this area. Mr Richardson said that in his view the value of a lease of the property for 82 years with a ground rent of £8 10s per annum for the first 32 years and £180 per annum thereafter was £5,250, and having regard to his estimate of the unencumbered freehold value (£7,000 to £7,500) there was a difference of £1,750 to £2,250 and this difference accorded well with his experience of the difference between freehold and leasehold values. People preferred freeholds and would pay more for them. If, however, the method adopted by the tribunal in the Custins case were to be followed, he put forward the following two valuations: Value from the viewpoint of the tenant Ground rent £8 10s 0d Years’ purchase for 32 years at 6% 14.084 £119 Modern site value £3,000 Present value of £1 — 32 years at 4% 0.285 £888 £1,007 Value from the viewpoint of the tenant Ground rent £8 10s 0d Years’ purchase for 32 years at 7% 12.647 £107 Modern site value £3,000 Present value of £1 — 32 years at 6% (tax at 8s 3d) 0.33 £990 £1,097 In support of his modern site value of £3,000, he referred us to three comparables. First, a plot of land containing some 3,500 sq ft adjoining 14, Cranley Gardens, Muswell Hill, which was sold by auction in 1968 for £3,700. Secondly, |page:348| a plot of land containing about 2,100 sq ft which was sold in 1968 for £3,200 and now has a house thereon known as 2a, The Bourne, Southgate, and, finally, the £1,300 determined by the Lands Tribunal for 63, Arcadian Gardens, London, N22. We have inspected 6, Warwick Road and have looked at the other houses and plots of land to which we were referred. As we understand the requirements of the Act (and in particular the requirements of sections 9, 14, and 15 thereof), we have to find the price which the freehold of the house would fetch in the open market if it was subject to a lease with 82 years to run at a rent of £8 10s per annum for the first 32 years and with a rent per annum for the next 25 years based upon the letting value of the site to be gathered from land values 32 years ahead and with the possibility of a further revision of rent 57 years ahead to correspond with values then subsisting. The parties did not consider the possibility of estimating today the letting value of the site in 32 years’ time nor did they seek to assess the effect of the rent being revised 25 years later. Thus they followed, in effect, what was done by the parties in the Custins case. We agree with the view expressed in that case that it is correct to include the sitting tenant as a bidder in the open market. Mr Haw did not suggest that it was wrong to regard the sitting tenant as a bidder in the market, though he did not agree with Mr Ground’s submission that he would give the full merger value. We will deal first with the valuation as put forward by the tenant and the valuations in similar form given by Mr Richardson for the landlord. The period of the existing ground rent is very similar to the period of the existing ground rent in the Custins case and we think the 7 per cent used there for the capitalisation thereof should be adopted here. The Modern Site Value This brings us to what has been termed “modern site value,” which Mr Haw estimates as £1,500 and Mr Richardson as £3,000. Mr Haw adopts a proportion of the total freehold value; Mr Richardson has in mind two vacant building sites and the tribunal’s figure in the Custins case. In the Custins case the tribunal had the advantage of knowing about a number of sales under the Act where agreement had been reached with tenants; we have no such information, but we think from what was said in that decision that the £1,300 site value found therein was not based upon a percentage of the total freehold value, although it does happen to approximate to 25 per cent thereof, and we cannot subscribe to the view that the relationship between these two values should necessarily be the same in all cases. The Cranley Gardens site quoted by Mr Richardson, though not level, we consider to be in a better area than the subject land, and the Southgate site, though smaller, to be in a far better area. In regard to Arcadian Gardens we feel that this area is inferior and, moreover, No 63 is a terraced house with a frontage of but 16 ft 10 in, and could only be rebuilt as such, whereas 6, Warwick Road is semi-detached, has a greater frontage and also has the considerable advantage of looking out over the open space of Bounds Green. With all this in mind, we have reached the conclusion that the modern site value is £2,500. With regard to the percentage to be used for the deferment, we take 4 per cent, the period of deferment being very similar to that in the Custins case, and we adopt the comment from that decision, “we are inclined to the view that in reversions of this sort the use of tax adjusted tables can in certain circumstances lead to unrealistic results. In any case what we are concerned with here is the price which a tenant would pay for the freehold interest, and we think it unlikely that he would in practice be directly influenced by considerations of this nature.” We think that the residual value on the expiry of the extended tenancy can be brought into account with sufficient accuracy by treating the modern ground rent as one in perpetuity. Accordingly, on this basis of valuation, we arrive at £819, say £820, being £107 as the capitalised value of the existing ground rent of £8 10s per annum for 32 years plus £712 for the reversion to a site value of £2,500 deferred 32 years at 4 per cent (multiplier 0.2850). Submission for Full Merger Value We now come to consider the submission by Mr Ground that the amount the tenant would pay could best be ascertained by deducting from the value of the freehold in possession the value of the leasehold in possession if this ran for 32 years at the current ground rent and for the 50 years thereafter at a modern ground rent. We see the relevance of a calculation based on these premises, but we have two observations to make. First, we would not agree that the tenant could be expected to give the full merger value but only a proportion thereof, for he will only go forward if he can feel assured that the transaction will be profitable for him. Secondly, this method introduces further valuation problems. We were asked to give a finding on this basis, but this we are unable to do owing to lack of sufficient evidence. Having seen the adjoining house, No 8, and the other houses on the estate to which we were referred, we can determine the freehold value of the subject house to be £6,650. The evidence which we had concerning the value of the leasehold was, however, confined to figures based on the landlord’s estimate of the modern ground rent and even then we were only given resultant figures (Mr Haw £4,600, Mr Richardson £5,250), and we had no indication of the calculations leading to these figures; accordingly, we feel that we are not in a position to arrive at any conclusion. Having decided that the tenant would only give a proportion of the full merger value, we are not in a position to say what that proportion would be, as we have neither evidence nor argument upon which to found a decision. In conclusion, we would stress that our findings are based upon the evidence and arguments put forward in this case and that it is from these that we decide that the amount which should be paid for the freehold interest upon a sale resulting from the exercise by the tenant of his rights under the Leasehold Reform Act 1967 is £820. Costs Having read our decision so far, we heard a short argument as to costs. Mr Ground asked for costs on behalf of the landlord and pointed out that the amount awarded was considerably more than the tenant’s valuation. He also said he thought that this case could have been settled at the figure awarded, but we said that we did not feel we could have any regard at all to negotiations which were not in evidence and which were probably without prejudice. Mr Haw in his turn pointed out that the award was substantially less than the landlord’s valuation. Our decision is that the tenant shall pay £20 towards the landlord’s costs. As we informed the parties at the time we think that there is some analogy here with cases of compulsory acquisition, so that if, by proceedings before the tribunal, the landlord obtains a higher purchase price than that offered he is prima facie entitled to, at any rate, a contribution towards his costs. We also said that we saw no reason why the procedure available in compulsory purchase cases for making a sealed offer should not be available also in this type of case. We should add that since reading our decision it has been brought to our attention that in Rule 7 of the Lands Tribunal (Amendment) Rules 1968, provision is made for this very matter; for a new paragraph is thereby added to Rule 51 of the 1963 Rules (which deals with sealed offers in compensation cases) extending the ambit of the rule to cases under the Act of 1967. Mr RP Ground (instructed by Messrs Leonard Gray & Co, of Chelmsford) appeared for the landlord. The tenant appeared in person.