Leasehold enfranchisement – Lease extension – Determination of premium – respondent seeking new lease of flat under Chapter II of Part I of Leasehold Reform, Housing and Urban Development Act 1993 – First-tier tribunal determining premium payable to appellant landlords – Whether erring in calculation of premium – Whether adjustments to be made to relativity, deferment rate, capitalisation rate and other matters – Appeal dismissed
The respondent held a long lease of a one-bedroom flat in a purpose-built block in Bromley dating from around 1985. The lease had been granted in 1986 for a term of 99 years at a ground rent of £200, subject to review every 25 years in line with the retail prices index (RPI). The rent had been increased to £358.68 in 2011. The lease also contained an unusual provision requiring a payment to the appellants of 1% of the sale price each time the lease was assigned.
The first-tier tribunal (FTT) was asked to determine the premium payable by the respondent to acquire a new, extended lease of her flat pursuant to Chapter II of Part I of the Leasehold Reform, Housing and Urban Development Act 1993. The valuation date was agreed to be April 2013, at which time the existing lease had 71.964 years left to run. In valuing the unexpired term of the lease, the FTT applied a relativity of 93.7% of freehold value, which it derived from graphs of relativity contained in the relevant RICS report. It also applied a deferment rate of 5.75%, the latter departing from the 5% generic rate for flats laid down in Earl Cadogan v Sportelli [2007] 1 EGLR 153. The additional 0.75% comprised additions, along the lines of those made in Zuckerman v Trustees of the Calthorpe Estate [2009] UKUT 235 (LC); [2010] 1 EGLR 187, of: (i) 0.25% to reflect the property’s higher risk of obsolescence when compared with properties in prime central London (PCL); (ii) 0.25% to reflect the lack of substantial long-term growth in capital values in the area when compared with PCL; and (ii) 0.25% (rather than the 0.5% applied in Zuckerman) to reflect the potential management difficulties posed by the consultation requirements of the Service Charges (Consultation Requirements) (England) Regulations 2003 for landlords of flats. As part of the valuation process, the FTT also applied a capitalisation rate of 5.5%. Overall, it determined that a premium of £10,052 was payable.
The appellants appealed. They contended that: (i) a relativity of 85% was appropriate to reflect the current attitude of lenders, who, in light of the difficult financial conditions prevailing since 2007, were increasingly averse to lending against short leases; (ii) an addition should be made to the freehold value, and the marriage value calculation should be adjusted, to take into account the onerous terms of the lease, including the relatively high ground rent and the requirement to pay 1% of the sale price to the freeholders on an assignment; (iii) there was no evidence to justify a departure from the 5% Sportelli deferment rate; (iv) the capitalisation rate should be reduced, again to reflect the attractiveness of the lease terms to an investor.
Held: The appeal was dismissed.
(1) The FTT had been entitled to base its decision in relativity on six graphs taken from the RICS report, which, while containing certain deficiencies, did provide evidence of some value when deciding the relativity in any particular case. Although the FTT’s task would have been simpler had it been provided with reliable market evidence, the information on sale prices that had been given to it was limited since it was confined to property address, sale price and lease length. It was not possible to draw any meaningful conclusions from the sale prices without further information as to, for example, the condition of the flat, the extent of tenant’s improvements, the floor on which the flat was located and whether there was a lift. What was certain was that a long lease was more valuable than a short lease in an otherwise identical property. There were no grounds for interfering with the FTT’s decision on relativity.
(2) The appellants’ arguments for an onerous lease supplement and marriage value adjustment rested on the proposition that the element of the ground rent which exceeded 1% of the freehold value, together with certain other lease features, would be considered onerous in the market. The only support for that proposition, both before the FTT and on appeal, consisted of certain leasehold valuation tribunal (LVT) decisions and the assertions of an advocate with a financial interest in the outcome of the case. So far as those decisions suggested that the ground rent was onerous, they were inconsistent with the RICS research paper. Earlier LVT decisions did not constitute useful evidence in subsequent proceedings: Arrowdell Ltd v Coniston Court (North) Hove Ltd [2007] RVR 39; [2013] PLSCS 278 applied. The RICS research paper, on the other hand, was valid evidence of the opinion held by the experienced practitioners who compiled the document. It followed that there was no evidence before to support either of the adjustments put forward by the appellants.
(3) In relation to the deferment rate, there was insufficient evidence to justify the FTT’s addition of 0.25% to the Sportelli rate for the risk of deterioration or obsolescence. The decision in Zuckerman was not, on its own, sufficient justification for such an addition in the absence of sufficient evidence relating to the property in question, Moreover, the FTT’s view that the flat was of a type of property that would be demolished and rebuilt in the fullness of time, as it would not be economically viable to continue to maintain it, was problematic. Properties were rebuilt, not when it was no longer economically viable to maintain them, but when their existing use value in whatever condition they happened to be was less than their site value for redevelopment. The question of whether a property was likely eventually to be developed and rebuilt was different from the question which had to be answered when deciding whether a departure from Sportelli was justified, namely whether the risk of future deterioration or obsolescence was greater than was reflected in the risk premium determined in Sportelli or in the current freehold value with vacant possession. There was no evidence in the instant case to show that the risk was not so reflected: Re Sinclair Gardens Investments Ltd’s appeal [2014] UKUT 79 (LC); [2014] PLSCS 168 applied.
The evidence before the FTT was insufficient to justify an addition to the Sportelli rate to reflect differences in long-term capital growth. Land Registry statistics covered a period of only 17 years, which was insufficient to provide a reliable picture of long-term price movements. The valuations of flats in PCL and in the Greater London suburbs that the FTT had considered represented too small a sample to be reliable.
Nor was there any justification for any reduction to reflect increased management risk arising from the 2003 Regulations. The addition made in Zuckerman had reflected the problem as it was then perceived. Although that risk had been reduced as a result of the Supreme Court decision in Daejan Investments Ltd v Benson [2013] UKSC 14; [2013] 2 EGLR 45; [2013] 1 EGILR 4. Although an element of management risk remained, that risk was adequately covered by the uplift of 0.25% for flats (as compared with houses) in Sportelli. It followed that the FTT had erred in making any adjustment for that factor: Voyvoda v Grosvenor West End Properties [2013] UKUT 0334 (LC); [2014] L&TR 10; [2013] 3 EGLR 55; [2013] EGILR 27 applied.
The FTT was therefore wrong to make the three additions to the deferment rate. However, since the appellants had indicated appellants indicated that they would be prepared to accept a total reduction of 0.5% from the 5.75% applied by the FTT, the overall deferment rate should be 5.25%.
(4) Although right to collect a 1% premium on assignment of the lease was an attractive feature of the freeholder reversion from the point of view of an investor, it was irrelevant to the calculation of the premium for the new lease since the right to receive the premium on assignment would continue notwithstanding the lease extension. The landlord could not, at the same time, retain the right to the premium and be compensated for its loss. So far as the respondent was liable, under the terms of the lease, to contribute to the landlords’ costs of operating a leisure centre, that did not affect the premium since the landlords were merely reimbursed for their own costs and were not provided with any profit or income such as would enhance the value of the freehold reversion. There was no evidence to suggest that other factors, including the fairly high ground rent, would have affected the yield required by an investor. In those circumstances, the appropriate capitalisation rate was 7%, being a figure that had been agreed in hundreds of cases where ground rent reviews were at intervals of 20 years or more.
(5) Making all the relevant adjustments resulted in a valuation of £10,008. Since that was only £44 below the figure determined by the FTT, it was not appropriate to substitute it for that found by the FTT. Accordingly, while the deferment rate and capitalisation rate decided by the FTT were wrong, the appeal was nonetheless dismissed.
The first appellant appeared in person for the appellants; Peter Morgan FRICS, MCIArb appeared for the respondent.
Sally Dobson, barrister
