Mews-style house on 3 floors in Knightsbridge district of London — Lease 32 1/2 years unexpired — S9(1A) determination — Actual RV above Act’s limits but parties agree to s1(4A) reduction in notional RV to below £1,500 on account of tenant’s improvements — Improvements consisted of addition of second floor in about 1966 — Shortly after service of tenant’s notice, lease sold for £161,000, which it was agreed was best evidence of value of leasehold interest — Lands Tribunal’s decision in Lloyd-Jones v Church Commissioners applicable in general, but three matters of detail in issue: (a) rates per cent for capitalising ground rent and deferring capital value; (b) amount of deduction for tenant’s improvements; (c) whether purchase price of lease included sum for tenant’s right to acquire freehold — Having regard to market conditions at date of tenant’s notice (April 1983), tribunal decides that higher capitalisation percentages than used in Lloyd-Jones as at October 1978 (5 1/2% and 6%) were indicated, namely 6 1/2% and 7% — Although cost of improvements clearly a greater percentage of smaller leasehold value than of larger freehold value, it is increase in value resulting from improvements which falls to be disregarded — As both value of improvements and value of leasehold interest decline as term reduces, the percentage, in tribunal’s view, remains the same and there is no case for differing percentage for freehold and leasehold interests — Therefore, agreed 25% deduction from unencumbered freehold also applied to leasehold — Purchaser of lease had in mind, in tribunal’s opinion, that he would have share of marriage value obtainable on enfranchisement on basis of a 50-50 split in the share accruing to the tenant after a 50-50 split in the value between landlord and tenant — Accordingly, purchaser paid additional £15,000, which was to be deducted from price of leasehold interest — Price of freehold determined at £44,850 against landlord’s £56,400 and tenant’s £32,178 David Neuberger (instructed by Warrens) appeared for the applicant landlord and called Roland W R Cullum FRICS, partner of Cluttons, chartered surveyors; David R Dowson FRICS FRVA, sole principal, of Moreton-in-Marsh, and P A Flindall FSVA FRVA, principal of Browne, Beck, Flindall, of London W1, for the respondent tenants, Mr P F Frampton and Mrs T M Frampton. Giving their decision, THE TRIBUNAL said: This decision is made on an application by the landlord of 35 Clabon Mews, London SW 1, for a determination under section 9(1A) of the Leasehold Reform Act 1967 of the price payable for the freehold interest in the premises. The tenant holds the house and premises under a lease dated December 29 1960 for the term of 56 years from September 29 1959 at a ground rent of £90 per annum. The tenant’s predecessor’s notice of his claim to purchase the freehold interest was dated April 25 1983, which is the date of valuation. At that date it was agreed that the unexpired term of the lease was 32 1/2 years. The property has two garages, one of which has been let. Mr Dowson stated in his evidence that this garage had been let on a lease dated June 16 1961 for the same period as the lease for the remainder of the premises less 10 days at a rent of £10 per annum with the tenant responsible for internal redecoration at seven-year intervals and repairs to interior, doors etc. The tribunal directed the attention of both parties to the fact that the rateable value of the property on March 23 1965 was £497 and the current rateable value was £1,577, rateable values which were in excess of the limits of the Leasehold Reform Act 1967. However, it was understood that section 1(4A) of the Act, as substituted by paragraph 2 of Schedule 21 to the Housing Act 1980, was applicable, and agreement had been reached to reduce the rateable value for the purpose of the section in consequence of tenant’s improvements to bring the property within the scope of the legislation. The tribunal pointed out, however, that no evidence of this agreement had been submitted to the tribunal. The parties apologised for this defect in their prehearing submissions and stated that agreement had indeed been arrived at between the landlord and the tenant for a reduction in the notional rateable value to £1,150 because of tenant’s improvements. The tribunal agreed to proceed with the hearing on condition that during the course of the hearing a document would be completed on behalf of both the landlord and the tenant and produced to the tribunal indicating agreement under the statute in accordance with paragraph 2 of Schedule 8 to the Housing Act 1974 to a reduction in the notional rateable value on account of tenant’s improvements. In due course the agreement was produced, signed on behalf of both parties, showing a reduction for the purposes of the section of £427 in the notional rateable value from £1,577 to £1,150 on account of tenant’s improvements. Both Mr Cullum and Mr Dowson agreed that the case of Lloyd-Jones v Church Commissioners for England (1981) 261 EG 471, [1982] 1 EGLR 209 was in general applicable to the case before the tribunal, but in applying it they had differences on the following matters which will be referred to when considering the respective valuations: (a)    the rate per cent for capitalising the ground rent and in deferring the capital value; (b)   the deduction on account of tenant’s improvements from the value of the leasehold interest; and (c)    whether the purchase price of the leasehold interest included a sum for the right of the tenant to acquire the freehold and even in that event what figure to deduct. During the hearing Mr Neuberger conceded that although the rateable value was above £1,500 and ordinarily would not have been affected by Part I of the Landlord and Tenant Act 1954, for the purposes of section 9 of the Leasehold Reform Act 1967, the assumption set out in section 9(1A)(b) was applicable, namely that at the end of the tenancy the tenant had the right to remain in possession of the house and premises under the provisions of Part I of the Landlord and Tenant Act 1954 and accordingly a deduction was required to be made from the freehold value less improvements. Because of this, the valuation set out on p6 of the proof of evidence of Mr Cullum was not proceeded with, but his valuation was as set out on p 240. Mr Dowson did not include this deduction in his valuation, but he submitted that it should be made. 240 Mr Cullum’s valuation Term Ground rent £90 pa YP 32 1/2 years @ 5 1/2% 15 £1,350 Reversion Unencumbered freehold in present condition 230,000 Less 25% improvements 57,500 172,500 £172,500 Less 10% Landlord and Tenant Act 17,250 155,250 Defer 32 1/2 years @ 6% 0.151 23,442 24,792 Leasehold in present condition 130,000 Less 35% improvements 45,500 84,500 109,292 Gain on marriage 63,208 50% 31,604 Plus value of lessor’s interest 24,792 56,396 Say £56,400 Mr Dowson’s valuation Term Ground rent £90 pa YP 32 1/2 years @ 8% 11.47 £1,032 Reversion Freehold value with vacant possession of garage 230,000 Less value of garage 10,000 220,000 Less 25% improvements (second floor added) 57,500 162,500 PV £1 in 32 1/2 years @ 8% 0.0820 13,325 £14,357 Leasehold Price paid 161,000 Less chattels included in purchase price 11,000 150,000 Less 25% improvements (second floor added) 37,500 112,500 Freehold (as above) 162,500 Lessor’s interest 14,357 Lessee’s interest 112,500 126,857 Marriage value 35,643 ÷ 2 Landlord’s share 17,821 Valuation for purchase of freehold interest £32,178 Both parties agreed on the present value of the unencumbered freehold interest in the sum of £230,000. As can be seen above, Mr Dowson deducted £10,000 from the freehold value for the value of the garage which had been let under the sublease of 1961, but under cross-examination he conceded that as this sublease ended 10 days before the date of expiry of the lease of the remainder of the subject premises, it had no effect on the reversion and accordingly there could be no deduction. Both parties also agreed that there should be a deduction of 25% for tenant’s improvements from the value of the unencumbered freehold in its present condition. The differences between Mr Cullum and Mr Dowson in their respective valuations remained as follows: (a)    The rate per cent for capitalising the ground rent and in deferring the capital value. Mr Cullum could see no reason to depart from the rate per cent used in the Lloyd-Jones case, but Mr Dowson felt that it was not necessary to follow slavishly the rates per cent used in that case. He said that there were precedents for departing from that rate without naming any cases, and he was of the opinion that present interest rates and the money market indicated that in both cases a rate of 8% was more appropriate. (b)   The deduction on account of tenant’s improvements from the value of the leasehold interest. Mr Cullum submitted that the improvements carried out by the tenant’s predecessor in title, which basically consisted of the addition of a second floor providing two bedrooms and a bathroom, increased the freehold value of the property by one-third. This meant a deduction from the freehold value in its present state of 25%, although he conceded that this was not in line with the reduction to a notional rateable value, which was 27%. This latter had been agreed as a reasonable approximation because both parties accepted that the reduction in rateable value would bring the notional rateable value below £1,500 but above £1,000. He was of the opinion, however, that the effect of these improvements was clearly much greater on the less valuable leasehold interest. This is apart from the arithmetical truism that the cost of the improvements, which is the same in both cases, must clearly be a greater percentage of a less valuable leasehold interest than of the more valuable freehold interest. Mr Dowson would not accept this argument. He was of the opinion that the value of the improvements was the same percentage of the leasehold and freehold interests. It was the value of the improvements that fell to be measured. The value declined with the decreasing term but the percentage remained the same. He accepted, however, that 25% was the correct deduction in both cases. (c)    Whether the purchase price of the leasehold interest included a sum for the right of the tenant to acquire the freehold and even in that event what figure should be deducted. Both parties agreed that the best evidence of the value of the leasehold interest before deduction for improvements was the actual sale of the lease of the premises for £161,000 shortly after the service of the tenant’s notice to enfranchise. Again there was agreement as to the deduction from that figure of £11,000 to reflect the value of the chattels included in the purchase price. However, Mr Cullum was of the view that the price of the lease also contained the value of the right of the tenant to acquire the freehold and he submitted that section 9(1A) of the Leasehold Reform Act required the valuation to be made on the assumption that no right to acquire the freehold was conferred. He calculated that a further £20,000 should be deducted as the proportion of the marriage value representing the value of that right. This reduced the leasehold value to £130,000 in the opinion of the landlords. Mr Dowson, on the other hand, said that he did not consider that any such deduction should be made. He submitted that negotiations for the property commenced prior to the service of the notice on April 25 1983 and it was his client’s intention to purchase the lease of the property at or near the asking price whether or not the notice had been accepted by the landlords. Neither could he agree the method adopted by Mr Cullum to arrive at the £20,000 deduction. There was no evidence of any open market freehold sales, but in order to confirm his view of the unencumbered freehold value Mr Cullum produced evidence of a settlement under the Act of the enfranchisement price of 1 Lennox Gardens Mews. This was a property of three bedrooms, bathroom, dining-room, living-room, kitchen and garage with a rateable value of £1,200 and a 32-year unexpired term. The notice was served in August 1983, being some six months after the notice in respect of the subject premises. The enfranchisement price agreed was £38,500. During the negotiations agreement was reached on the leasehold value at £75,000, but no final agreement was arrived at on the freehold value except that it was a figure between £130,000 and £135,000. However, if the settlement was worked back on the basis of Lloyd-Jones Mr Cullum arrived at a figure of £132,000 for the freehold, and applying the ratio £75,000: £132,000 to the leasehold value of £130,000 at 35 Clabon Mews a freehold value of £230,000 was produced. This values a 32 1/2-year lease at 56.8% of the freehold and Mr Cullum produced details of a number of settlements from Gerald Eve & Co, acting for the Grosvenor and Cadogan Estates, with a graph demonstrating that a 32 1/2-year lease was worth about 53% of the freehold value. Mr Cullum also produced details of a number of transactions of leasehold sales in Clabon Mews in which he had not acted personally but he had been provided with details by the estate agents concerned. The properties concerned were 59, 30 and 14 Clabon Mews and in his view they provided evidence to support the leasehold value in his valuation for the subject premises, particularly 59 Clabon Mews. This was a property of four bedrooms, two bathrooms, boxroom, reception room and garage with a rateable value of £1,555 and a 241 ground rent of £300 per annum. A 33-year unexpired lease in respect of this property was sold in December 1982 for £135,000. Mr Cullum accepted, however, that the best evidence was provided by the actual sale on the open market of the lease of the subject property for £161,000 shortly after the service of the notice. However, from that figure it was necessary to deduct an amount in respect of the chattels and a further amount reflecting the right to enfranchise. Mr Dowson did not consider any of the three properties as truly comparable, mainly because they were either larger or better than 35 Clabon Mews. Tribunal’s inspection We found the property to be situated in a very pleasant and highly-sought-after residential area of Knightsbridge in the Royal Borough of Kensington and Chelsea. It was a mews-style property in a very good state of repair and decoration providing accommodation as follows: Ground floor 2 garages; entrance hall; dining-room; cloakroom with we; kitchen First floor Drawing room; 2 bedrooms; bathroom Second floor 2 bedrooms; bathroom. The second floor of the property comprised the tenant’s improvements added, it was understood, in about 1966 by the tenant’s predecessor in title. We inspected externally the properties referred to as comparable at the hearing. We did not consider 14 and 30 Clabon Mews to be very good comparables to the subject property; no 59 had a rebuilt front elevation but looked a little smaller. No 1 Lennox Garden Mews was an attractive two-storey property adjoining an electricity substation and near Walton Street. We considered the subject property to be somewhat superior. Tribunal’s valuation and reasons We agree with the two valuers representing the landlord and the tenant in this case, that the case of Lloyd-Jones v Church Commissioners for England (1981) 261 EG 471, [1982] 1 EGLR 209 is applicable. This was a determination by the Lands Tribunal under section 9(1A) of the Leasehold Reform Act 1967 of the price payable for the freehold interest in a property in the vicinity of the subject property. The notice by the tenant in that case, and which was the date of the valuation, was dated October 1978. In that case there was agreement between the parties on the value of the improvements both to the freehold and the leasehold interests and also on the value of the disregard in respect of the tenant’s right to claim the freehold. The basis of valuation is set out in section 9(1A) of the Leasehold Reform Act 1967, which was inserted by section 118(4) of the Housing Act 1974. The relevant paragraphs are as follows: (1A) Notwithstanding, the foregoing subsection, the price payable for a house and premises, the rateable value of which is above £1,000 in Greater London and £500 elsewhere, on a conveyance under section 8 above, shall be the amount which at the relevant time the house and premises, if sold in the open market by a willing seller, might be expected to realise on the following assumptions:- (a)    on the assumption that the vendor was selling for an estate in fee simple, subject to the tenancy, but on the assumption that this Part of this Act conferred no right to acquire the freehold; (b)    on the assumption that at the end of the tenancy the tenant has the right to remain in possession of the house and premises under the provisions of Part I of the Landlord and Tenant Act 1954; (c)    on the assumption that the tenant has no liability to carry out any repairs, maintenance or redecorations under the terms of the tenancy or Part I of the Landlord and Tenant Act 1954; (d)    on the assumption that the price be diminished by the extent to which the value of the house and premises has been increased by any improvement carried out by the tenant or his predecessors in title at their own expense; . . . We noted that there was no evidence of any open market freehold sales of similar properties in the vicinity of the subject property but that there was agreement between the parties on the value of the unencumbered freehold interest in its present condition in the sum of £230,000. There was agreement between the parties on the following other matters: (a)    That the landlord and the tenant should share equally in the marriage value; (b)   That there should be a 10% deduction from the value of the unencumbered freehold interest after disregarding improvements for the risk of the tenant claiming a tenancy under Part I of the Landlord and Tenant Act 1954 in accordance with the provisions of section 9(1A)(b) of the Leasehold Reform Act 1967; (c)    That there should be a deduction of 25% from the value of the unencumbered freehold interest on account of the improvements carried out by the tenant’s predecessor in title. We considered the matters on which Mr Cullum and Mr Dowson differed. Taking these matters in turn: (a)    The rate per cent for capitalising the ground rent and in deferring the capital value. We noted that the percentage rates used in the Lloyd-Jones case were based on the calculations used in 57 settlements on enfranchisements under section 9(1A) of the Leasehold Reform Act 1967 in respect of houses on the Grosvenor and Cadogan Estates. No evidence was produced to us of the rates used in recent settlements. Mr Cullum said that there was no case for different rates from that used in the Lloyd-Jones case, while Mr Dowson urged that those percentages should not be slavishly followed. However, no detailed evidence was produced to us of the interest rates and money market rates which were relevant in the calculations which led to the 57 settlements referred to in the Lloyd-Jones case and neither was there any evidence as to how present rates differed from those in the settlements referred to. Nevertheless, having regard to market conditions which operated at the date of the tenant’s notice, we are of the opinion that the rates used in the Lloyd-Jones case are rather low and higher percentages are indicated in the case before the tribunal. (b)   The deduction on account of tenant’s improvements from the value of the leasehold interest. The valuers representing the landlord and the tenant arrived at the value of the improvements and the deduction to be made from the value of the leasehold and freehold interests by taking a percentage of the value of those interests. It was agreed that the improvements, which consisted of the addition of one floor to the property, increased the value of the property by one-third. Accordingly, the percentage to be deducted from the value of the unencumbered freehold interest in its present condition was agreed as one quarter. However, Mr Cullum submitted, as set out above, that a greater percentage reduction was required from the value of the leasehold interest. We agree with Mr Cullum that if one is looking at the cost of improvements, which remains the same whether the leasehold or the freehold interest is being considered, such cost must clearly be a greater percentage of the smaller leasehold value than the greater freehold value. However, the section is quite clear that it is the increase in value of the house and premises as the result of the improvements which falls to be disregarded, and as both the value of the improvements and the value of the leasehold interest decline as the term reduces we are of the opinion that this percentage must remain the same. If this percentage remains the same in the case of the reducing leasehold interest value we cannot see that there is a case for a differing percentage for the leasehold and freehold interests. (c)    Whether the purchase price of the leasehold interest included a sum for the right of the tenant to acquire the freehold and even in that event what figure should be deducted. Section 9(1A) of the Act requires that one of the assumptions affecting the price payable by the tenant in the circumstances of the case before the tribunal shall be that the tenant has no right to acquire the freehold and accordingly the leasehold price had to disregard that claim. Both valuers agreed that the best evidence of the leasehold value was the price received on the actual sale of the lease of the subject property in the sum of £161,000 shortly after the service of the notice and both agree as to the value of the chattels (£11,000) to be deducted from that price. Both parties also accept that the landlords and the tenant share the marriage value equally in the event of enfranchisement. The question, therefore, is whether the vendor and purchaser of the leasehold interest were also seeking a share of the marriage value, namely a share of 50% of that marriage value, which was estimated at £60,000 by Mr Cullum. Mr Dowson says that there should be no deduction from the price of the leasehold interest because (a)    it was his client’s intention to purchase the property at or near242 the asking price whether or not the notice had been accepted by the landlords; and (b)   it was unreasonable to adjust the actual purchase price for the leasehold interest ‘merely to take account of what amounts to a statutory right’. In our view the section is quite clear and the assumption set out in para (a) of section 9(1A) of the Leasehold Reform Act 1967 must be made. As to the amount of the deduction, Mr Cullum says that the vendor and purchaser of the leasehold interest would divide the 50% of the marriage value in the ratio 2:1 in the vendor’s favour. Accordingly, using the figure of £60,000 as an estimate of the marriage value, Mr Cullum says that a sum of £20,000 would fall to be deducted to arrive at the figure of £130,000 for the value of the leasehold in its present condition less the price of the chattels as set out in his valuation. Further, Mr Cullum states that this is in line with the recent sale of 59 Clabon Mews. Mr Dowson disagrees that this is a reasonable comparable. We have inspected this property and have taken into consideration that its ground rent is £300 per annum as against the ground rent of £90 per annum in the case of the subject property. We are of the opinion that the present tenant, the purchaser of the leasehold interest in June 1983, did have in mind that he would have a share of the marriage value obtainable on enfranchisement when he made the purchase. Anticipating that on enfranchisement the marriage value would be split on a 50-50 basis between the landlord and the tenant, he had in mind obtaining a share of the remaining 50% which would accrue to the tenant. We consider that this part of the marriage value would also be shared on a 50-50 basis between the vendor and purchaser of the leasehold interest. Accordingly, the purchaser of the leasehold interest paid an additional £15,000, in our opinion, which should be deducted from the figure of £150,000 being the price of the leasehold interest excluding the value of the chattels. In his evidence Mr Dowson did refer to a previous notice being served by the tenant in April 1981 and raised the question as to whether the valuation of the property should really date from April 1981 and not April 1983. It would seem to us that this question is quite irrelevant because (i) the first notice was not proceeded with and (ii) both parties have accepted that April 25 1983, the date of the tenant’s relevant notice, is the date of the valuation. Our valuation, therefore, is as shown: (A) Value of lessor’s interest excluding prospects of ‘marriage’ of interests Term Rent receivable £90 YP 32 1/2 yrs @ 6 1/2% 13.4 £1,206 Reversion Value of unencumbered freehold interest in present condition 230,000 Less 25% improvements 57,500 172,500 Less risk of tenant claiming tenancy under Pt I L & T Act 1954 10% 17,250 155,250 Defer 32 1/2 yrs @ 7% 0.111 17,233 £18,439 (B)  Lessor’s share of ‘marriage’ value Value of unencumbered freehold interest less improvements 172,500 Less (i) Value of lessor’s interest excl prospects of ‘marriage’ 18,439 (ii) Value of Lessee’s interest excl prospects of ‘marriage’: Leasehold in present condition 135,000 Less 25% improvements 33,750 101,250 119,689 Gain on ‘marriage’ 52,811 50% to the lessor 26,405 44,844 Say £44.850 We accordingly determine that the sum to be paid by the tenant for the acquisition of the freehold interest in 35 Clabon Mews, London SW1, in accordance with the provisions of section 9(1A) of the Leasehold Reform Act 1967, as amended, is £44,850.