Leasehold enfranchisement – Valuation – Relativity – Indexation – Value of extended lease – Value of existing lease – Appellant appealing against decision of First-tier Tribunal concerning premium payable on exercise of right to acquire new lease – Whether deduction to be made to freehold vacant possession – Value to reflect risk of tenant remaining as assured tenant at expiry of lease – Appeal allowed in part – Cross-appeal allowed
The appellant was the leaseholder of Flat 6, The Lindens, 7 Rotton Park Road, Birmingham. Her leasehold interest was for a term of 99 years from 25 March 1984 at a ground rent of £90 per annum, rising to £180 per annum in 2050. The appellant served a notice of claim to exercise the right to acquire a new lease under section 42 of the Leasehold Reform, Housing and Urban Development Act 1993 on 5 June 2017 at a proposed premium of £6,200. At that time the lease had an unexpired term of 65.83 years.
The property was a one-bedroom first-floor flat located in a purpose-built mid-1980s development of 24 flats in three joined three-storey units. It had brick elevations under a shallow pitched roof. The accommodation comprised an entrance hall and corridor, an open-plan living room and fitted kitchen, a double bedroom and a bathroom with WC, wash hand basin and a bath with an electric shower above. The parties said its area was 345 sq ft (32.1 sq m) and the respondent 360 sq ft (33.5 sq m). The property was single glazed and had electric heaters. There was mains electricity, water and drainage. The demise included an allocated car parking space.
The respondent landlord served a counternotice admitting the appellant’s right to acquire a new lease but disputing the amount of the premium, which it said should be £17,030. The appellant applied to the First-tier Tribunal (FTT) for the determination of the premium. The FTT determined the premium at £11,959.
Permission to appeal was granted, restricted to the extended lease value and the existing lease value. Before the tribunal, the appellant argued for a premium of £8,008 and the respondent for £12,080.
The respondent cross-appealed against the FTT’s decision to make a deduction of 3.5% from the freehold vacant possession (FHVP) value to reflect the possibility of the tenant remaining in occupation as an assured tenant at the end of the lease under section 186 of and schedule 10 to the Local Government and Housing Act 1989.
Held: The appeal was allowed in part. The cross-appeal was allowed.
(1) Indexation over long periods was unreliable and should not be used. The respondent’s adopted figure of £99,100 was the result of indexing the original sale price of the subject flat in 2007, a period of 10 years. It was an unreliable figure and would be rejected.
(2) There was no evidence to support the respondent’s assertion that the price of one-bedroom flats was inelastic with respect to size. Although it might have some merit where flats were of broadly similar area, the subject flat, which was 30% smaller than the average of the six comparables, would not be worth the same as the larger flats. Therefore, a valuation would be adopted based upon a rate per square foot. The appellant accepted that the rate per square foot would be higher for smaller flats than for larger ones, due to a quantum effect. However, the experts did not analyse the six comparables by reference to value-affecting factors such as double-glazing, central heating, floor level and the availability of a lift, car parking spaces, age or condition. Their analyses were therefore at a very basic level which did not allow a nuanced evaluation of the differences between the comparables. Although the appellant acted fairly in adopting a rate of £232 per sq ft, which was above the highest rate per square foot of the comparables, that should be increased due to the small size of the subject flat, and £25 per sq ft, or just over 10%, would be added to give £255 per sq ft. The value of the extended leasehold interest in the subject property was therefore £89,760, rounded to £90,000. The FHVP value was £90,909: The Trustees of the Sloane Stanley Estate v Mundy [2016] UKUT 0223 (LC); [2016] EGLR 35 considered.
(3) As regards the existing lease value, the parties referred to the 1996 Gerald Eve Graph and the appellant also referred to the Savills 2015 Graph. In the absence of market evidence of relativities obtained from the sale of leases (albeit with Act rights) of a similar unexpired term to that of the appeal property, the Tribunal relied on those graphs. Both graphs showed the relativity net of Act rights. The Gerald Eve 1996 Graph gave a relativity of 84.5% for an unexpired term of 65.83 years. The equivalent figure in the Savills Unenfranchisable Graph 2015 was 82.0%. Gerald Eve published an updated version of their graph in December 2016 which was available to the parties at the FTT hearing in February 2018 but neither party appeared to have referred to it. The 2016 Gerald Eve Graph showed a relativity, without Act rights, of 82.3% for an unexpired term of 65.83 years, i.e. in line with the Savills graph. Accordingly, the appropriate relativity in the present appeal was 82.0%. The existing lease value was therefore £74,545: Midlands Freeholds Ltd’s and Speedwell Estates Ltd’s Appeals [2017] UKUT 0463 (LC) considered.
(4) The Tribunal had reviewed the question of whether any allowance should be made for the prospect of a lessee holding over on an assured tenancy in Midlands Freeholds Ltd’s and Speedwell Estates Ltd’s Appeals. It concluded, in the light of some, albeit limited, evidence that a hypothetical purchaser would not make any discount to the FHVP value where the lease had 46 years to run. The factors discussed in that case applied with greater force to a leasehold with more than 65 years unexpired and no adjustment should be made for schedule 10 rights in the present appeal.
The parties appeared by their representatives.
Eileen O’Grady, barrister
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