Moore and others v Escalus Properties Ltd

Leasehold Reform, Housing and Urban Development Act 1993, section 24 — Acquisition of freehold reversion to three flats — Rising ground rents — Whether open market value will reflect value of insurance commissions The nominee purchasers sought the determination by the tribunal of the price payable for the acquisition of the freehold in a building converted to three flats; they put forward a valuation of £915 and referred to the price of £750 paid in 1993 when the freehold was acquired by the present landlord. The landlord argued for £3,655 contending that its investment in a freehold ground rent was valued not only on the ground rent itself but also on the insurance commission, benefits of management and subsidiary income. Decision: The price was £1,885; this was based on a capitalisation rate of 11%. Although there may be special purchasers willing to pay a higher price for ground rents because of the possibility of earning insurance commission, this could not be accepted as a proper basis for establishing market value. No cases are referred to in this report. The nominee purchasers, Mr AG Moore, Mr SJ Moore, Mr KA Stirling and Ms WM Pank, appeared in person; Graham Clark (instructed by Malthouse Chevalier) represented the respondent landlord. Giving the decision of the tribunal, Mr GF Bowden said: This is an application made pursuant to section 24 of the Leasehold Reform, Housing and Urban Development Act 1993 (the Act) by the qualifying nominee purchaser for determination of the price to be paid for the freehold in 44 Lancaster Avenue, West Norwood, London SE27 (the subject premises). The participating tenants were as follows: Mr Adam Moore and Mr Simon Moore co-tenants, Ms Wendy Pank and Mr Keith Stirling. The subject premises are a four-storey end-of-terrace property converted into three self-contained units as follows. Flat 1, semi-basement and garden, with car parking at rear; Mr A and Mr S Moore. Flat 2, hall floor, with car parking at front; Ms W Pank. Flat 3, first and second-floor maisonette with car parking at front; Mr Keith Stirling. By initial notice dated November 16 1994 the joint nominee purchasers gave notice of their claim to exercise the right of collective enfranchisement, proposing a purchase price of £750 for the freehold interest in the specified premises and £250 for the freehold interest in the additional property. The reversioner Escalus Properties Ltd, through its solicitors, Malthouse Chevalier, served a counternotice in which it admitted the participating tenants’ right to exercise their right to collective enfranchisement but contested the tenants’ proposed purchase price, making a counter-proposal of £2,250 for the specified premises and £750 for the additional property. It was agreed at the hearing that the tenants qualified for the right of collective enfranchisement in respect of the subject premises and that the price of the freehold interest was the only matter for determination by the tribunal. The tenants submitted a valuation in the recommended form prepared with the assistance of Messrs J Trevor & Webster. Valuation of the nominee purchaser Lease term (remainder) — whole house 1996–2018 22 years @ £75 pa Ground rent 2019–2051 33 years @ £150 pa Ground rent 2052–2084 33 years @ £225 pa Ground rent 1. Value of lease ground rent @13% £623 2. Reversion Current value of flats: £ £ £ Upper flat 60,000 Middle flat 34,500 Lower flat 60,000 154,500 Increase: 5% 7,725 162,225 Present value @ 13% 3 3. Marriage value Assumed New leases (999 years) Upper flat 60,400 Middle flat 34,900 Lower flat 60,400 155,700 Less present Freehold interest 623 Upper flat 60,000 Middle flat 34,500 Lower flat 60,000 155,123 Marriage value 577 Landlord’s share at 50% (288) 289 Total valuation 915 The reversioner did not submit a valuation in the form provided for in the Act, but analysed transactions in a proof of evidence prepared by Mr Christopher Case, as expert witness, from which Mr Graham Clark, counsel for the reversioner, proposed a value of £3,655, and Mr Case, proposed a value of £3,565. At the hearing Mr Keith Stirling, tenant of flat 3, spoke on behalf of himself and the other applicants. He put before the tribunal a proof of evidence from which he spoke. He explained that the property had been a single dwelling-house that had been converted into three units in 1985, and the separate flats had been sold on 99-year leases from December 1984. The ground rent, which was the same for each flat, was £25 pa for the first 33 years, rising to £50 pa for the next 33 years and then £75 pa for the remainder of the term. Flat 1, the garden flat, was occupied by Mr Adam Moore and Mr Simon Moore who acquired the lease in 1987. This flat has sole use of the small garden with parking space at the rear of the flat, and has its own separate entrance on Ardlui Road at the side. The middle flat, flat 2, was occupied by Ms Wendy Pank, who acquired the lease in 1993. This flat is accessed by the main front door to a communal lobby and then its own front door to the flat. It has a balcony at the back overlooking the garden. Flat 3, the top flat, which is on two floors, is occupied by Mr Keith Stirling who acquired the lease in 1985. It shares, with flat 2, the parking area in front of the property, where there is provision for parking some four cars. The property had been converted by a Mr Joseph Nolan, who after the individual flats had been sold, took little interest in the property. It was the leaseholders themselves who took over the management of the property, arranging insurance and security measures. They attempted on a number of occasions to purchase the freehold by agreement, but for one reason or another, these negotiations never came to completion. The leaseholders were advised in May 1993 by the landlord’s agents, Cornerstone, that the reversion was to be sold at auction; Ms Pank, who at that time was in the process of buying the lease of flat 2, through her solicitors, informed Mr Nolan’s solicitors that there had been no offer to sell the freehold to her. She was advised that the auction would go ahead unless she signed a contract to purchase, prior to the auction. She was advised to attend the auction and serve on the purchaser a section 11 and 12 notice under the Landlord and Tenant Act 1987. This was done, but since at that time, she was unable to make immediate payment, the leaseholders were not able to complete. The freehold interest was sold in July 1993 for £750. 201 In October 1993 each leaseholder received a letter informing them that the new reversioner was Escalus Properties. The leaseholders did not attach any particular significance to this communication and took no action. Three months later they each received a demand for £782.05 to cover insurance of the property (cover which had in fact already been effected by the tenants), maintenance, audit and management fees. These demands from the landlord have increased in the intervening year, and while they have been paid in the past, the size of the maintenance fund has remained a matter of dispute. The tenants on deciding to purchase the freehold made a study of the local market. They put before the tribunal 10 comparables, four freehold and six leasehold transactions, as the basis of calculations set out (above). They offered the sum of £1,000 for the freehold interest in the subject property. The nominee purchaser put before the tribunal the following transactions for consideration. With regard to freehold values the following sales: 38 Rosendale Road Four self-contained flats of one to three bedrooms on a 99-year lease from 1985. Ground rent £45 pa/flat first 33 years rising to £90 and £135 after periods of 33 years. Freehold price paid March 1995 £3,000. 27 Lancaster Avenue Four self-contained flats of one to three bedrooms on a 125-year lease from 1985. Ground rent £400 pa in total for the whole house. Freehold price paid September 1995 £3,000. 28 Thurlow Park Road Three self-contained flats of one to two bedrooms on an 88-year lease from 1995. Ground rent £15 pa/flat. Freehold price paid December 1995 £1,000. 44 Lancaster Avenue (the subject house) Three self-contained flats of one to two bedrooms on a 99-year lease from Christmas 1984. Ground rent £25 pa/flat first 33 years rising to £50 and £75 after periods of 33 years. Freehold price paid July 1993 £750. With regards to leasehold values they gave the following market indications: 27d Lancaster Avenue One-bedroom flat with garden. Freehold. Price paid September 1995 £31,500. (Freehold purchased simultaneously.) 28 Thurlow Park Road One bedroom flat. 88-year lease. Ground rent £15 pa. Price paid September 1995 £30,000. 33 Rosendale Road One-bedroom garden flat. 116-year lease. Ground rent £25 pa. Price paid March 1992 £44,995. 36 Turney Road Three bedroom flat. 125-year lease. Ground rent £150 pa. Price paid November 1995 £73,500. 100a Casewick Road One-bedroom flat. 999-year lease (from 1991). Ground rent one shilling pa. Price paid October 1995 £43,000. 44 Lancaster Avenue (in subject house) Hall-floor flat. One bedroom. 90-year lease. Ground rent £25 pa (rising after 2017) etc. Price paid May 1993 £34,500. Mr Clark, counsel for the reversioner called Mr Christopher Case, a director of Empress Properties Ltd, who act as managing agents in respect of the subject property for the reversioner Escalus Properties Ltd. Mr Case submitted a written statement. He stated that in managing his clients’ properties he placed all the insurance business through Princess Insurance Agencies, which provided cover on the whole portfolio. The portfolio is insured with the Commercial Union Assurance Co and a 20% commission is received by the landlord. When valuing a freehold ground rent, account is taken of the commission recoverable as a result of the landlord being able to effect the insurance cover. The value to be attributed to the insurance commission in respect of the subject property was £826.18. With regard to auction sales, Mr Case stated that it was his experience, that those freehold ground rents sold at auction were invariably problem properties, either subject to litigation, or arrears of service charges which are disputed by lessees, or with defective leases. It was a risky investment to purchase freeholds at auction on the limited information that was usually provided. It is therefore dangerous to rely on auction results for the purposes of a valuation under the 1993 Act. Since the subject property is part of a well managed portfolio, if sold it would only be willingly sold as part of such a portfolio and would command a higher price than by sale at auction. Appendix 5 of Mr Case’s statement set out a schedule of some 21 freehold ground rent sales pursuant to the Act. The properties listed in this schedule ranged over a wide area of London, although none of them in the broad locality of the subject property. Details were given of the unexpired terms, ground rents, insurance premiums and commissions and the purchase prices of these properties. On analysis, it was said that whether the freehold interest is based on a 7% or 14% return on ground rent, the total paid is, on average 264% of the freehold interest on the basis of 7 years’ purchase and 6 years’ purchase of insurance commission. On this basis Mr Case contended the freehold interest and the marriage value to the tenants of the subject property was in the region of £3,565. Mr Clark, in his submission, emphasised that his client’s investment in a freehold ground rent was valued on the basis of not only the ground rent itself, but also any insurance commission, benefits of management and subsidiary income such as premiums for deeds of variation. The most likely potential purchasers, prepared to pay for such benefits as that of the interest in the subject property, would be the holders of other substantial ground rent portfolios. Mr Case’s evidence to the tribunal was that his client would not sell at auction, since this is not where the best properties are sold. True valuation is to be ascertained by reference to private treaty transactions and analysis of those sales, (such as set out in appendices 2A and B of Mr Case’s statement) shows that ground rent and insurance commission income should be considered separately. Analysis suggests that there should be 7 YP for the ground rent and 6 YP for the insurance commission and this produces a starting value of £1,351 for the freehold without special features. With regard to marriage value Mr Clark identified the elements giving rise to a marriage value as being control achieved by the lessees and the ability to grant new leases without premium or limit of term; such control is of value to the lessees. He contended that on the analysis of actual sales the true price is about £3,655. Inspection Lancaster Avenue was a wide tree-lined residential road of substantial properties, largely of the Victorian period, but some of a later date and with some newly built redevelopment. The subject property was a three-storey, end-of-terrace, semi-detached house with semi-basement. There were some six steps up to an impressive front entrance with a porch supported by corinthian-style columns. The front elevation had a bay front to the hall floor and the facade was rendered and white painted. The side and rear elevations were brick. The overall external condition of the property was in reasonably good order. The site of the house and garden was triangular in shape, being wider on the Lancaster Avenue frontage and tapering away at the rear along the line of the adjacent Ardlui Road. At the front of the property was a garden area which could provide off-street parking space for some four cars. These spaces were used by flats 2 and 3. The rear yard had a side 202 entrance, with garage gates from Ardlui Road, and provided off-street parking for flat 1. The garden flat, flat 1, a semi-basement, had its own separate entrance at the side in Ardlui Road. It comprised a livingroom, two bedrooms, kitchen and bathroom. The damp proofing arrangements of the original conversion had proved to be ineffective, and new works had been carried out by the tenant in 1990. Many of the windows had security bars and grilles. There was double glazing to the windows of the front room. The other room at the front, although of reasonable size, had a particularly small window offering only restricted light to the room. Glazed patio doors to the rear room gave access to the patio area and the strip garden beyond. Natural light to this room was impaired by the overhang of the balcony to the flat above. The bathroom was an internal room. The galley-style kitchen was small but well equipped. The flat had an independent gas fired central heating system. Flat 2 on the hall, or upper-ground floor, comprised a livingroom, and one bedroom, kitchen and bathroom, with a balcony overlooking the garden at the back. Access was via the main front entrance, through a small shared lobby to its own front door. The front livingroom retained its original proportions and some of the original features from when the house was built. The remainder of the flat though planned with a convenient and compact layout, had a somewhat cramped confined feel with a narrow hallway, small lobby and galley kitchen. The bathroom was an internal room, ventilated by an extractor fan. The flat had an independent, gas fired central heating system. Flat 3, the first and second-floor maisonette with its front door off the entrance lobby and well lit staircase, leading up to a landing with cupboarded boiler and tank. The flat comprised livingroom, two bedrooms, kitchen-diner and bathroom. The rooms were spacious, light and well proportioned. The master bedroom was on the upper floor, a good sized room with a deep dormer window with part of the ceiling following the sloping roof line. The flat was equipped throughout with good quality fixtures and fitments. The flat had an independent, gas fired central heating system. Decision and reasons The tribunal was urged by the nominee purchaser to adopt a capitalisation rate of 13% based on the opinion of Messrs J Trevor & Webster and the fact that this rate had been adopted in some recent tribunal decisions. However the tribunal felt that in this particular instance 13% was too high. Having regard to all the factors, including tribunal decisions in enfranchisement cases where the unexpired term of the leases were of similar length the appropriate capitalisation rate was 11%. In assessing the current open market value of the leases of the subject flats, the tribunal took note of the actual sale price achieved of £34,500, for the hall-floor flat (flat 2) in May 1993. They also took into account the details of comparable local sales transactions put before them, having made an external inspection of these properties. In striking a balance between the points of difference and those of similarity, they found them of assistance in coming to a view. They accepted that the tenants’ valuation of the upper maisonette (flat 3) at £60,000 bore the right relationship in relative values to flat 2 and the other comparables. However they were unable to accept the tenants valuation of the semi-basement flat (flat 1) at £60,000. They felt this estimate was too high and reduced the figure to £45,000 to establish a proper balance of relative values between the three flats. With regard to marriage value the tribunal took careful note of Mr Clark’s arguments regarding the ‘tension’ which is inherent in the relationship between landlord and tenant. They recognised the benefits, some quantifiable, but others intangible, that tenants achieve by gaining control of the freehold interest; the opportunity it offers for granting themselves new leases; lease extensions varying any terms of the leases; supervision of services and management decisions. These must be given due weight in calculating the marriage value. The tribunal felt that the tenants, in their valuation had underestimated these benefits. The landlord argued that his right to receive commission on insurance premiums was a significant factor that should be taken into account in valuing the freehold interest. The tribunal recognised that this may be a material consideration for a professional investor in freehold ground rents who had established such an arrangement with brokers and insurance companies. In such cases they may be seen as special purchasers willing, perhaps, to pay a higher purchase price. However the tribunal could not accept this as a proper basis for establishing an open market value. The tribunal noted that the landlord had purchased the freehold interest at auction in July 1993 for £750. They also accepted the landlord’s argument that auction prices could not be taken as a wholly reliable guide to the market, since these freehold ground rents sold at auction were often those of problem properties subject to disputes and arrears. However in the absence of a body of evidence of private treaty sales of better properties, the tribunal felt they did offer, if treated with some caution in analysis, some guidance of market trends. The tribunal made the following valuation. Purchase price payable by nominee purchaser in accordance with Schedule 6 to the Leasehold Reform, Housing and Urban Development Act 1993. i. Para 2(1)(a): The value of the freeholders interest in the premises as determined in accordance with para 3. Ground rent for 22yrs £75 YP for 22yrs @ 11% 8.176 £613 Ground rent for 33yrs £150 YP for 33yrs @ 11% 8.801 PV £1 def’d 22yrs @ 11% 0.1007 0.886 £133 Ground rent for 33yrs £225 YP for 33yrs @ 11% 8.801 PV £1 def’d 55yrs @ 11% 0.0032 0.028 1 £6 Reversion to capital value Upper flat £60,000 Middle flat £34,500 Lower flat £45,000 £139,500 PV £1 in 88 yrs @ 11% 0.000 1027 £14 £766 ii. Para 2(1)(b): The freeholder’s share of the marriage value as determined in accordance with para 4. New 999-year leases at peppercorn rents with vacant possession. Upper flat £61,000 Middle flat £35,500 Lower flat £46,000 £142,500 Deduct Present freehold interest £766 Present reversion 139,500 £140,266 Marriage value £2,234 Freeholder’s share at 50% £1,117 iii. Para 2(1)(c): Compensation for other loss NIL £1,883 say £1,885 The tribunal, therefore determined that the sum to be paid for the freehold interest in 44 Lancaster Avenue, West Norwood, London SE27, is £1,885 (one thousand eight hundred and eighty five pounds).