Leasehold enfranchisement – Block of flats – Acquisition of freehold by respondent nominee purchaser on behalf of tenants – Leasehold valuation tribunal determining price payable to appellant landlord – Whether lesser deferment rate to be applied – Appropriate valuation date – Appeal allowed
A leasehold valuation tribunal (LVT) was asked to determine the price payable by the respondent nominee purchaser to the appellant landlord to purchase the freehold of a block of flats in Hampstead, London NW3, on a collective enfranchisement by the tenants under section 13 of the Leasehold Reform, Housing and Urban Development Act 1993. The LVT took as the valuation date the date of the appellant’s counternotice, namely January 2005, at which time the tenants’ existing underleases had 63.17 years left to run. It applied a deferment rate of 7% and fixed the purchase price at £2.089m, including a figure of £50,000 for a porter’s flat in the building.
On appeal to the Lands Tribunal (LT), the appellant raised issues as to: (i) the appropriate deferment rate; (ii) the valuation date; and (iii) the valuation of the porter’s flat. On the deferment rate issue, the appellant’s expert saw no reason to depart from the 5% deferment rate that was laid down by the LT in respect of flats in Earl Cadogan v Sportelli [2007] 1 EGLR 153, which had been published after the LVT’s decision in the instant case. The respondent’s expert considered that a rate of 8% was appropriate, having regard to the rate that would be charged on bank loans for speculative property investment and the rates applicable to commercial property investment in the Hampstead area. In reaching that view, he considered that the appeal property had a very different management and risk profile from those considered in Sportelli, in which the management responsibilities had been separated from the freehold. He also took account of the property’s location, its degree of obsolescence and the difficulties that might arise in obtaining possession when the existing leases expired. With regard to the valuation date, the appellant contended that a dispute over the wording of an indemnity covenant meant that the valuation was to take place as at the date of the LVT hearing in January 2006, when that matter was resolved. The appellant contended for a price of £2.983m in January 2006, or £2.935m in January 2005.
Held: The appeal was allowed.
(1) The LT in Sportelli had identified a general deferment rate, which LVTs were to treat as being generally applicable, although subject to variation in particular cases where that was justified by the evidence. Although Sportelli had related to properties within the prime central London area, and the appeal property in the instant case fell outside that area, the evidence did not justify a departure from the deferment rate there applied.
On the issue of obsolescence, the age of a property could not on its own be the appropriate test; the question was whether obsolescence and condition were fully reflected in the vacant possession value and the risk premium. A purchaser of the appeal property would not consider any deficiencies in the building to be sufficiently significant as to justify an increase in the deferment rate. When considering obsolescence, the possibility that site value might exceed the existing use value was irrelevant, since obsolescence was concerned with the risk that a building would decline, not that the value for another purpose would increase.
Although Sportelli supported an adjustment of the generic deferment rate to 5% to reflect the fact that the property was a block of flats and not a house, it was not appropriate to differentiate between flats that were the subject of headleases and those that were managed directly by the freeholder. Sportelli had left open the possibility of an additional allowance where there was a prospect of exceptional management difficulties, but a purchaser of the appeal property would not, at the valuation date, have anticipated such difficulties. Accordingly, the appropriate deferment rate was 5%.
(2) The LVT had correctly taken the valuation date as being the date of the appellant’s counternotice in the circumstances of the case. The appropriate valuation date was the date upon which the substance and quality of the freehold to be conveyed was agreed or determined so that a conveyance embodying those matters could be prepared in accordance with section 34 of, and Schedule 7 to, the 1993 Act: West Hampstead Management Co Ltd v Pearl Property Ltd [2002] EWCA Civ 1372; [2002] 3 EGLR 55; [2002] 45 EG 155 applied. The contested words in the instant case did not raise any issue as to the quality of the freehold since any indemnity would constitute a personal liability undertaken by the purchaser rather than an incumbrance on the property.
(3) The appropriate figure to be attributed to the porter’s flat was £200,000 as the potential sale value. Taking all the above matters into account, the price payable to the appellant for the freehold was £2.835m.
Kenneth Munro (instructed by Pemberton Greenish) appeared for the appellant; Paul Letman (instructed by Coleman Coyle LLP) appeared for the respondent.
Sally Dobson, barrister
