Leasehold Reform Act 1967 – Valuation of freehold interest – Leasehold valuation tribunal taking two-stage approach to valuation – LVT later issuing correction certificate – Certificate applying different deferment rate from that agreed by the parties – Regulation 18(7) of Leasehold Valuation Tribunals (Procedure) (England) Regulations 2003 – Whether appropriate to take three-stage approach to valuation including Haresign addition – Whether power to make corrections under regulation 18(7) permitting substantive change to deferment rate – Appeal allowed Held: The appeal was allowed.
The appellant owned the freehold of a two-bedroom house in Northfield, Birmingham, which was the subject of a leasehold enfranchisement claim under Part I of the Leasehold Reform Act 1967. The property was a semi-detached, two-storey structure, made of brick with a tiled roof, dating from approximately 1937 and forming part of a large development of similar houses. The leaseholder occupied it under a full repairing and insuring lease for a term of 99 years from June 1937 at a rent of £6.25 pa. The leasehold valuation tribunal (LVT) determined that the price payable under section 9(1) to acquire the appellant’s freehold interest was £10.878. In doing so, it adopted a two-stage approach to the section 9(1) valuation, by first determining the section 15 ground rent then capitalising it in perpetuity. The valuation date was December 2007.
The LVT’s original decision contained errors in that it recorded an agreement as to the capitalisation rate that had not in fact been reached, recorded 6.5% instead of 5.5% as the deferment rate, and applied the wrong multiplier. Subsequent to its decision, the LVT issued a correction certificate under regulation 18(7) of the Leasehold Valuation Tribunals (Procedure) (England) Regulations 2003. The certificate substituted a deferment rate of 5.75% in place of the rate of 5.5% that the parties had agreed at the hearing and increased the freehold price to £10,925 accordingly.
The appellant appealed. It contended that the LVT: (i) should have adopted a three-stage approach to valuation, applying a Haresign addition to represent the present value of the appellant’s reversion to the standing house once the current lease term and a statutory 50-year extension came to an end; and (ii) could not use regulation 18(3) to issue a correction certificate adopting a different deferment rate from that which the parties had agreed.
(1) It was time to move away from the long established standard practice of taking a two-stage approach to valuation, in which the value of the reversion at the end of the assumed 50-year lease extension was not separately quantified, and to apply the three-stage approach as standard instead. As a matter of good valuation practice, where a price had to be determined every element of value should be separately assessed unless there was good reason not to do so. The justification for not valuing the reversion separately had been that, given the period of deferment and the small amounts of value involved, any difference in the end result would be minimal and would be lost in the other elements of the valuation. However, compared to 40 years ago when the two-stage approach had become standard, there was now a much greater likelihood that the ultimate reversion would have a significant value. This was because house prices had substantially increased in real terms and, further, lower deferment rates were now applied in the light of Sportelli. There was a real danger that applying the two-stage approach as standard would in some cases lead to the exclusion of an element of value that ought to be included in the price. In future, therefore, the appropriate approach was to capitalise the section 15 rent to the end of the 50-year extension and then to assess the value, if any, of the ultimate reversion: Farr v Millersons Investments Ltd (1971) 22 P&CR 1055; (1971) EG 1177 and Haresign v St John the Baptist’s College, Oxford (1980) 255 EG 711 considered.
(2) Although there had been errors or accidental slips in the LVT’s decision, which required correction, it had not been entitled to correct them by applying a wholly different deferment rate, which had not been contended for, or agreed, by the parties. The power to alter a decision under regulation 18(7) was very restricted in scope; it was essentially a slip rule and did not entitle the LVT to rewrite major parts of its substantive decision, having had further thoughts about their correctness. It had therefore been inappropriate for the LVT to use the slip rule to amend the substance of its decision and doing so amounted to a serious procedural irregularity: Bristol-Myers Squibb Co v Baker Norton Pharmaceuticals Inc [2001] EWCA Civ 414 applied.
The appropriate deferment rate was 5.5% as agreed by the parties. This reflected an increase of 0.75% from the generic rate of 4.75% for houses established in Earl Cadogan v Sportelli [2007] EWCA Civ 137; [2008] 1 WLR 1042; [2007] 1 EGLR 137, to take into account the lower prospects of capital growth in the West Midlands compared to prime central London (PCL) and the fact that it was likely to remain economically viable to repair properties in PCL for longer: Zuckerman v Trustees of the Calthorpe Estate [2009] UKUT 235 (LC); [2010] 1 EGLR 187 applied.
(3) A deduction of 20% was also made from the full reversion value of the standing house to take account of the leaseholder’s right to an assured tenancy at the end of the lease, pursuant to Schedule 10 of the Local Government and Housing Act 1989, and the consequent uncertainty over whether the freeholder would obtain vacant possession at the end of the 50-year extension. The overall price payable was determined at £12,600.
Re Clarise Properties Ltd’s appeal
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Leasehold Reform Act 1967 – Valuation of freehold interest – Leasehold valuation tribunal taking two-stage approach to valuation – LVT later issuing correction certificate – Certificate applying different deferment rate from that agreed by the parties – Regulation 18(7) of Leasehold Valuation Tribunals (Procedure) (England) Regulations 2003 – Whether appropriate to take three-stage approach to valuation including Haresign addition – Whether power to make corrections under regulation 18(7) permitting substantive change to deferment rate – Appeal allowed
The appellant owned the freehold of a two-bedroom house in Northfield, Birmingham, which was the subject of a leasehold enfranchisement claim under Part I of the Leasehold Reform Act 1967. The property was a semi-detached, two-storey structure, made of brick with a tiled roof, dating from approximately 1937 and forming part of a large development of similar houses. The leaseholder occupied it under a full repairing and insuring lease for a term of 99 years from June 1937 at a rent of £6.25 pa. The leasehold valuation tribunal (LVT) determined that the price payable under section 9(1) to acquire the appellant’s freehold interest was £10.878. In doing so, it adopted a two-stage approach to the section 9(1) valuation, by first determining the section 15 ground rent then capitalising it in perpetuity. The valuation date was December 2007.The LVT’s original decision contained errors in that it recorded an agreement as to the capitalisation rate that had not in fact been reached, recorded 6.5% instead of 5.5% as the deferment rate, and applied the wrong multiplier. Subsequent to its decision, the LVT issued a correction certificate under regulation 18(7) of the Leasehold Valuation Tribunals (Procedure) (England) Regulations 2003. The certificate substituted a deferment rate of 5.75% in place of the rate of 5.5% that the parties had agreed at the hearing and increased the freehold price to £10,925 accordingly.The appellant appealed. It contended that the LVT: (i) should have adopted a three-stage approach to valuation, applying a Haresign addition to represent the present value of the appellant’s reversion to the standing house once the current lease term and a statutory 50-year extension came to an end; and (ii) could not use regulation 18(3) to issue a correction certificate adopting a different deferment rate from that which the parties had agreed.
Held: The appeal was allowed.(1) It was time to move away from the long established standard practice of taking a two-stage approach to valuation, in which the value of the reversion at the end of the assumed 50-year lease extension was not separately quantified, and to apply the three-stage approach as standard instead. As a matter of good valuation practice, where a price had to be determined every element of value should be separately assessed unless there was good reason not to do so. The justification for not valuing the reversion separately had been that, given the period of deferment and the small amounts of value involved, any difference in the end result would be minimal and would be lost in the other elements of the valuation. However, compared to 40 years ago when the two-stage approach had become standard, there was now a much greater likelihood that the ultimate reversion would have a significant value. This was because house prices had substantially increased in real terms and, further, lower deferment rates were now applied in the light of Sportelli. There was a real danger that applying the two-stage approach as standard would in some cases lead to the exclusion of an element of value that ought to be included in the price. In future, therefore, the appropriate approach was to capitalise the section 15 rent to the end of the 50-year extension and then to assess the value, if any, of the ultimate reversion: Farr v Millersons Investments Ltd (1971) 22 P&CR 1055; (1971) EG 1177 and Haresign v St John the Baptist’s College, Oxford (1980) 255 EG 711 considered.(2) Although there had been errors or accidental slips in the LVT’s decision, which required correction, it had not been entitled to correct them by applying a wholly different deferment rate, which had not been contended for, or agreed, by the parties. The power to alter a decision under regulation 18(7) was very restricted in scope; it was essentially a slip rule and did not entitle the LVT to rewrite major parts of its substantive decision, having had further thoughts about their correctness. It had therefore been inappropriate for the LVT to use the slip rule to amend the substance of its decision and doing so amounted to a serious procedural irregularity: Bristol-Myers Squibb Co v Baker Norton Pharmaceuticals Inc [2001] EWCA Civ 414 applied.The appropriate deferment rate was 5.5% as agreed by the parties. This reflected an increase of 0.75% from the generic rate of 4.75% for houses established in Earl Cadogan v Sportelli [2007] EWCA Civ 137; [2008] 1 WLR 1042; [2007] 1 EGLR 137, to take into account the lower prospects of capital growth in the West Midlands compared to prime central London (PCL) and the fact that it was likely to remain economically viable to repair properties in PCL for longer: Zuckerman v Trustees of the Calthorpe Estate [2009] UKUT 235 (LC); [2010] 1 EGLR 187 applied.(3) A deduction of 20% was also made from the full reversion value of the standing house to take account of the leaseholder’s right to an assured tenancy at the end of the lease, pursuant to Schedule 10 of the Local Government and Housing Act 1989, and the consequent uncertainty over whether the freeholder would obtain vacant possession at the end of the 50-year extension. The overall price payable was determined at £12,600.
Georgia Bedworth (instructed by SE Law Ltd, of Northwich) appeared for the appellant; the leaseholder did not respond to the appeal.
Sally Dobson, barrister
