Leasehold enfranchisement – Premium – Deferment rate – Leasehold valuation tribunal (LVT) determining premium payable by respondent tenant on purchase of freehold under Leasehold Reform Act 1967 – Appellant landlord challenging decision – Whether LVT applying correct deferment rate when determining premium payable – Appeal dismissed
The appellant owned a three-bedroom semi-detached house at 26 Barnes Avenue, in a residential development at Cefn Glas, Bridgend. The respondents held a leasehold interest in the property held on a 99-year lease from 25 December 1972 with a ground rent of £15 per annum.
The respondents exercised their right to acquire the freehold interest of the property under Part 1 of the Leasehold Reform Act 1967. It was agreed that the relevant valuation date was 31 August 2020 when the unexpired term was 51.31 years. In the absence of agreement between the parties as to the price payable for the freehold, the respondents served notice under section 21(1)(a) of the 1967 Act to have the price determined by the leasehold valuation tribunal (LVT).
The respondents’ valuer assessed the premium at £5,380, using a capitalisation rate of 6.5% for the term and a deferment rate of 5% for the first reversion and freehold reversion. The appellant’s valuation expert assessed the premium at £12,450 using a different methodology which ignored the ground rent payable for the term. He used a deferment rate of 3% for the first reversion and 3.75% for the freehold reversion. Both valuers made a deduction from the agreed standing house value for rights under schedule 10 to the Local Government and Housing Act 1989.
Following the guidance in Earl Cadogan v Sportelli [2007] 1 EGLR 153 (affirmed by the Court of Appeal: [2008] 1 EGLR 137), the LVT determined the premium at £5,430, preferring the methodology and figures used by the respondents.
The appellant, appealed contending that the risk-free rate used as the first element of the deferment rate in Sportelli was now incorrect in the light of changed economic conditions since it depended upon outdated financial data. The appeal was heard as a review of the decision of the LVT.
Held: The appeal was dismissed.
(1) The price payable for the freehold, assessed under section 9(1) of the 1967 Act, was assessed under the conventional valuation practice in Re Clarise Properties Limited’s Appeal [2012] UKUT 334 (LC), as the aggregate of three elements of value: (i) the value of the existing ground rent receivable for the remainder of the original term (the term); (ii) the present value of the modern ground rent (s.15 rent) that would have been receivable for the extended lease period of 50 years from the end of the original term had the tenant chosen to extend the lease (the first reversion); and (iii) the present value of the freeholder’s reversion to a house with vacant possession at the expiry of the extended lease (the freehold reversion). A discount might be made from the value of the house to allow for the risk that when the long lease came to an end the tenant might stay on so that an assured tenancy would arise under schedule 10 of the 1989 Act (schedule 10 rights).
(2) In Earl Cadogan (the guidance case), the Lands Tribunal decided five appeals. It set a deferment rate of 4.75% for houses and 5% for flats, having heard from eight expert witnesses in the fields of valuation, finance and economics. The deferment rate set by Sportelli was made up of three ingredients: a 2.25% rate of return for risk-free investment (based on evidence in particular of the returns on index linked gilt-edged investments), to which was added a 4.5% “risk premium” in recognition of the expectation the landlord would in fact be accepting some risk by investing in property. From that 6.75% was subtracted 2% to reflect long term growth in property values, giving a rate of 4.75%. A further 0.25% was added for flats because the management responsibilities associated with them make flats a more expensive or risky investment.
The Court of Appeal affirmed that decision and stated that the prospect of varying conclusions on the deferment rate in different cases, reached on evidence that was less comprehensive than that before the tribunal in Sportelli, could be avoided by LVTs following the guidance of the Sportelli decision unless compelling evidence to the contrary was adduced.
(3) It could not plausibly be claimed that there was evidence that the deferment rate in Sportelli was wrong at the time when, and in the circumstances in which, it was made. However, a challenge to the rate might succeed where evidence relating to the specific property or its locality showed that a different rate was required in a particular case. Further, it would be possible to prove that the Sportelli deferment rate was wrong, for all properties and localities, if there was compelling evidence that circumstances had changed so that the decision itself was no longer correct.
In the present appeal, the appellant argued that the risk-free rate was no longer correct on the basis of national economic factors and in particular the low level of interest rates.
However, compelling evidence was required to shake Sportelli and the best evidence that the appellant could offer was information. Even assuming all his figures were correct, the appellant’s valuer had no expertise in investment forecasting or economics and could not say to what extent the fluctuation in interest rates in recent years would have surprised those who gave evidence in Sportelli or was indicative of new long-term trends. The evidence did not show to what extent rates in 2020 were affected by what might or might not be short-term factors arising from the pandemic. Nor did the appellant’s evidence show what the risk-free rate should be, even if investment returns had moved outside the range that was determined in Sportelli.
(4) The LVT did not make a finding about what the risk-free rate was. Instead, it relied upon the guidance case and adopted the rate set out there, in the absence of compelling evidence sufficient to displace the risk-free rate in Sportelli. Such evidence would have to be given by one or more experts with experience in economics and financial forecasting, rather than only in valuation, and would be supported by robust and properly-attributed data.
Accordingly, the appeal failed because it became clear, on examination of what had been placed before the LVT, that it could have reached no other conclusion.
The appellant appeared by its representative. The respondent did not appear and was not represented.
Eileen O’Grady, barrister
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