Freehold price of house in Cardiff outer suburb with 85 years of lease unexpired — Agency commission on single insurance premium — Landlord’s valuer’s reliance on Lands Tribunal’s decision in Re Castlebeg Investments (Jersey) Ltd’s Appeal (1985) in which he gave evidence to effect that purchaser could obtain commission on single insurance premium — Lands Tribunal did not actually decide whether it was right to consider sale of one freehold reversion in isolation but did not think it was — On evidence adduced, however, that tribunal accepted YP which reflected insurance commission — Tenants, appearing in person, argued that once freehold was sold the element in agency commission to cover administration and collection costs would disappear and it was therefore unnecessary to pay landlord compensation for its loss — Present tribunal considered themselves bound by Lands Tribunal’s decision, provided they had sufficient evidence that purchaser of freehold reversion could obtain commission on insurance premium — Under lease terms landlord could compel tenants to insure comprehensively in nominated office through landlord’s agency — Tribunal must, in their view, be satisfied that purchaser of single freehold could obtain such commission — Although matter not entirely free of doubt, they concluded, on evidence before them (including evidence from landlord’s valuer additional to his Re Castlebeg submissions), that they should properly admit that element of claim — Landlord’s 20 YP multiplier not accepted — Contrary to landlord’s valuer’s view, tribunal considered negotiations in all but one of his comparables probably influenced by ‘Delaforce’ effect — 7% applied in determination of £680 against tenants’ figure of £650 and landlord’s £800
The following
cases are referred to in this report.
Castlebeg
Investments (Jersey) Ltd’s Appeal, Re [1985] 2 EGLR
209; (1985) 275 EG 469, LT
The applicant
tenants appeared in person; Mr W K R Ricketts FRICS represented the respondent
landlord.
Giving their
decision, THE TRIBUNAL said: This is a decision on an application made by the
tenants, Mr James Lynch and Mrs Jane Bernadette Lynch, for the determination of
the price payable under section 9 (as amended) of the Leasehold Reform Act 1967
for the freehold of the house and premises, 4 Fairbrook Close, Rhiwbina,
Cardiff.
We inspected
the subject property prior to the hearing and viewed 2 Fairbrook Close from the
Close.
The subject
property is situated in an outer suburb of Cardiff comprising good-quality
dwellings and according to Mr W K R Ricketts FRICS, who appeared for the
landlord, Castlebeg Investments (Jersey) Ltd, the property has an RCA of 1,813
sq ft plus garage and porch. The subject lease is for a term of 99 years from
March 25 1972 at a yearly rent of £40 and the relevant time for the purposes of
section 37(1)(d) of the Act is May 28 1986.
At the hearing
Mr and Mrs Lynch appeared in person. Mr Lynch capitalised the ground rent by
using 7%, producing a multiple of 14.3 and giving £572 and also added a figure
for the reversionary interest of £62. Mr Ricketts agreed to exclude such
interest from the calculations. The total figure from Mr Lynch was £634,
rounded off at £650. Although Mr Lynch referred to two comparables, he was
unable to give details of them and Mr Ricketts invited us to exclude them. We
do not think that they were particularly relevant, but Mr Lynch also referred
to the price that he understood had been paid for the freehold of 2 Fairbrook
Close in 1984, namely £600. While it seems probable that the term of years and
ground rent were identical to the subject property, Mr Lynch produced no
evidence in support of this, although Mrs Lynch thought that the owner of no 2
had paid £20 a half year ground rent.
As to the
comparables introduced by Mr Ricketts, Mr Lynch did not accept them, since he
felt that tenants were minded to compromise rather than have legal argument.
In the matter
of the landlord’s right to receive insurance commission Mr Lynch was not aware
of any provision in the Act to cover this and stated that once the freehold was
sold the element in agency commission to cover administration and collection
costs would disappear and that therefore it was unnecessary to pay the landlord
compensation for its loss. He could not see how an agency commission could be
as legitimate a part of the landlord’s income as the ground rent.
Mr Ricketts
was relying on the authority of Re Castlebeg Investments (Jersey) Ltd’s
Appeal heard by the Lands Tribunal in June 1985 [1985] 2 EGLR 209.
Mr Lynch
suggested that because the tenant was not represented at such hearing this
tribunal should not be influenced by such decision, but he was unable to
suggest any submissions that he would have made had he been present at such
hearing.
The tenant
introduced a cutting from a Sunday newspaper suggesting a price for a freehold
of 5-8 years’ ground rent. We are not influenced by this document. Although the
tenant referred to advice from two chartered surveyors he did not call any
witnesses.
Mr Ricketts’
valuation adopted a 20 YP, giving a price of £800. He supported this figure by
two groups of comparables. In the one group 20 YP had been used in the
negotiations and in the other the price reflected 22 YP. Mr Ricketts could not
say whether in such matters the tenants had received professional advice save
that in one case in the former group he himself had advised the tenant. Mr
Ricketts acknowledged the existence of what is known as the ‘Delaforce’ effect
and contended that this was represented by the difference of two years’ ground
rent between the two groups. In reply to an inquiry by the tribunal Mr Ricketts
maintained that there was no ‘Delaforce’ effect in the negotiations resulting
in a 20 YP formula. We do not accept this and consider that in both groups
‘Delaforce’ would probably have influenced the negotiations save in the
instance in which Mr Ricketts participated.
Mr Ricketts
relied on the decision in Re Castelbeg Investments (Jersey) Ltd’s Appeal
in which a multiple of 16 had been adopted. The Lands Tribunal in that decision
had emphasised that it was reached on the evidence adduced and that there being
no respondents the tribunal did not have evidence from any other expert or any
argument on behalf of the tenants, but the tribunal added that it had no reason
to reject any of the evidence in that instance. Mr Ricketts’ evidence before
the Lands Tribunal was to the effect that a purchaser could obtain a commission
in respect of a single insurance premium and would take it into account and it
seemed to the tribunal that it would be correct to take account of any
advantage which a lease may have to the freeholder, and the commission on a
fire insurance premium was such an advantage.
The Lands
Tribunal did not actually decide whether it was right to consider the sale of
one freehold reversion in isolation, although the tribunal did not think it
was.
The question
of whether the value of the right to receive an insurance commission should be
taken into account in calculating the price of a freehold under the Act has
been considered on several occasions by a leasehold valuation tribunal and has
been rejected in the absence of satisfactory evidence. Indeed, the said
decision of the Lands Tribunal followed a leasehold valuation tribunal decision
rejecting such a claim.
However, we
are now bound by such Lands Tribunal decision provided that we have sufficient
evidence that a purchaser of a freehold reversion could obtain a commission in
respect of the insurance premium. Certainly there is no doubt that under the
terms of the lease the landlord can compel the tenant to insure the subject
property comprehensively in a nominated office through the landlord’s agency.
Our own view, notwithstanding the reservation expressed by the Lands Tribunal,
is that we must be satisfied that the purchaser of a single freehold could
obtain such a commission. In addition to referring to the acceptance by the
Lands Tribunal of such a submission, Mr Ricketts introduced further evidence,
and although the matter is not, we think, entirely free of doubt we come to the
conclusion that on the evidence before us we should properly admit this element
of the landlord’s claim.
Mr Ricketts
had produced evidence of the cost of rebuilding the property at £70,000 and Mr
Lynch assented to this figure. Mr Ricketts deduced that the commission at the
relevant time would have been £16.80 pa and emphasised that this figure would
increase as building costs (and possibly agency commission rates) increased.
Mr Ricketts
was not persuaded to apportion the price between the two elements of ground
rent and insurance but maintained that the multiple of 20 was the correct
figure and was supported by the comparables.
We do not
accept the YP of 20 and we allot a multiplier of 14.286 to the ground rent, and
since the insurance commission is not as well secured as the ground rent we
allot a YP of 6.5 for the insurance commission.
Accordingly
our calculations are:
|
Ground rent |
£40.00 |
pa |
|
|
|
YP at 7% |
14.286 |
|
£571.44 |
|
|
Insurance commission |
£16.80 |
pa |
|
|
|
YP |
6.50 |
|
|
|
|
|
|
£109.20 |
||
|
|
|
£680.64 |
||
|
|
Say |
£680.00 |
We therefore determine the price under the subject application at £680.
