Sked v Towngran Developments Ltd

Leasehold Reform, Housing and Urban Development Act 1993 — Acquisition of freehold — Determination of price — Capitalisation rates — Value of insurance commission By an initial notice dated December 27 1993 the tenants of the two maisonettes in the subject property gave notice of intention to acquire the freehold interest; the tenants’ entitlement to acquire the house and front and rear gardens was admitted by counternotice dated March 4 1994. The tenants held under two leases dated respectively February 1 and April 18 1985 for terms of 99 years commencing on December 25 1984 at rising ground rents. The parties agreed the value of the leasehold interests at a total of £490,000 and that the reversioner’s share of the marriage value was 50%. The valuation on behalf of the nominee purchaser of £3,410 included: £1,819 for the value of the reversion to the leases; and £1,591 for the reversioner’s share of the marriage value. The valuation on behalf of the reversioner of £18,500 included: £8,269 for the reversion; £1,864 for the value of the right to recover administration charges; £825 for the value of the right to earn insurance commissions; and £7,500 for the reversioner’s share of the marriage value. Decision: The price payable was £5,400. The capitalisation rate of the applicant’s valuer of 13% was supported by auction evidence and was adopted. On the evidence no addition could be justified for the value of insurance commissions or for the administration charges. £3,600 should be attributed to the reversioner’s share of the marriage value. The following cases are referred to in this report: Calthorpe Estate Trustees v Pabari [1991] 2 EGLR 219; [1991] 47 EG 110 Castlebeg Investments (Jersey) Ltd’s Appeal, Re [1985] 2 EGLR 209; (1985) 275 EG 469, LT Clibbett (W) Ltd v Avon County Council [1976] EGD 385; (1975) 237 EG 271, LT The applicant nominee purchaser, Mr Norman A Sked, appeared in person and called Kevin Havill arics; Nicholas Taggart (instructed by Paisner & Co) appeared for the respondent reversioner, Towngran Developments Ltd, and called Martin J Angel frics. Giving the decision of the panel, Lady Fox QC said: This is an application made pursuant to section 24 of the Leasehold Reform, Housing and Urban Development Act 1993 (the Act) by Norman Alexander Sked (the nominee purchaser), on behalf of the participating tenants for the determination of the price to be paid for the freehold in 155 Gloucester Avenue, London NW1 (the subject premises). The nominee purchaser acts on behalf of the tenant, F J M Paulus, of the upper maisonette, and on behalf of himself and P M Ellis, tenants of the lower maisonette in the subject premises. The tenants of the upper and lower maisonettes hold under leases dated respectively February 1 1985 and April 18 1985 from Towngran Developments Ltd, the reversioner, for terms of 99 years commencing on December 25 1984 at rising yearly ground rents as set out in the said leases. At the date of the tribunal’s determination, which is the date of valuation pursuant to Schedule 6.1 to the Act, the unexpired term for the maisonettes was approximately 89 years. By initial notice dated December 27 1993 the tenants of the upper and lower maisonettes at the subject premises gave notice of their intention to acquire the freehold interest of the subject premises and by counternotice dated March 4 1994 the reversioner admitted that the tenants were entitled to the right of collective enfranchisement of the house and front and rear gardens at the subject premises. The parties agreed at the hearing that the tenants qualified for the right of collective enfranchisement in respect of the subject premises, that the statutory procedure had been followed, and the tribunal had jurisdiction to determine the price of the freehold interest. It was further stated at the hearing that all outstanding matters referred to in the reversioner’s counternotice had now been agreed between the parties and the price of the freehold interest was the only matter for determination by the tribunal. It was agreed by the parties at the hearing that section 32(1) and Schedule 6 to the Act provided that the price payable by the nominee purchaser for the freehold of the subject premises was the aggregate of: (a) the value of the freeholder’s interest; (b) the freeholder’s share of the marriage value (c) compensation, if any, for development loss. The value of the leasehold interests had been agreed by the parties at a total of £490,000, being £240,000 for the upper maisonette and, £250,000 for the lower maisonette. It was also accepted that the reversioner’s share of the marriage value was 50%. Valuation of the price payable for the freehold interest by Mr K Havill bsc (Hons) arics on behalf of the nominated purchaser. (a) Value of freeholders interest £ £ 2 × £100 ground rent £200 Years’ purchase for 89 years @ 13%                                                 × 9.05 1,810 £ Capital value of reversion Upper maisonette 240,000 Lower maisonette 250,000 Total 490,000 Defer 89 years @ 13%                                 × 0.000019 9 1,819 217 (b) Marriage value £ £ Proposed interests (i) New freehold £0 (ii) New occupying leases (999 years @ peppercorn rent) £ Upper maisonette 242,500 Lower maisonette 252,500 Aggregate A 495,000 Existing interest (i) Freehold 1,819 (ii) Occupying terms (89 years @ £100 each, rising) £ Upper maisonette 240,000 Lower maisonette 250,000 Aggregate B 491,819 Aggregate A Less Aggregate B 3,181 Share at 50% 1,591 (c) Compensation £0 Proposed enfranchisement price (a + b + c) 3,410 Valuation of Mr M Angel frics on behalf of the reversioner Ground rent income Term 1 2 × 100 pa £200 to year Years’ purchase, 15 yrs @ 6% 9.7122 2009 1,942 Term 2 2 × £200 pa £400 Years Years’ purchase, 25 yrs @ 6% 12.7834 2010– Present value of £1 in 2034 15 yrs @ 6% 0.4173 2,134 Term 3 2 × £400 pa £800 Years Years’ purchase, 25 yrs @ 6% 12.7834 2035– Present value of £1 in 2059 40 yrs @ 6% 0.09722 994 Term 4 2 × £800 pa £1,600 Years Years’ purchase 24 yrs @ 6% 12.5504 2060– Present value of £1 in 2083 65 yrs @ 6% 0.02265 455 Reversion to £490,000 PV £1 in 89 years @ 6% 0.0056 2,744 8,269 Additional value due to ability to recover administration costs 1992 Administration charge — upper maisonette 65.70 1992 Administration charge — lower maisonette 46.78 £112.48 Years’ purchase 89 years @ 6% 16.5734 1,864 Insurance commission £126.92 6.5 years’ purchase 6.5 825 Freehold value = 10,958 say 11,000 Calculation of marriage value Value of freehold with vacant possession say 516,000 Less Existing leasehold value £490,000 Existing freehold value 11,000 say £501,000 Gain of marriage of interests 15,000 Freeholder’s share @ 50% 7,500 Therefore enfranchisement price 11,000 7,500 £18,500 The nominee purchaser appeared in person at the hearing. He stated that he was a statistician and had prepared his case by the collection and analysis of all available information of relevant transactions relating to freehold and leasehold interests in comparable properties in the vicinity of the subject premises. Mr K Havill bsc (Hons) arics of Havills, Grosvenor Street, London W1, gave evidence on behalf of the nominee purchaser in accordance with a written proof and photographs. He stated that he had been in practice on his own account for six years, having experience of commercial valuations and sales of large housing estates. In cross-examination he said that he had no previous experience of leasehold enfranchisement valuation either under the 1967 or 1993 Acts. He described the subject premises noting their location in a predominately residential area within the Primrose Hill Conservation Area. Mr Havill stated that it was the submission of the nominee purchaser that the price to be determined was an open market value and the agreed values for the leasehold interest for 89 years in the two maisonettes were supported by transactions relating to sales of leasehold and freehold interests in comparable terrace houses as set out in table 1 of his proof. Freeholder’s interest In support of his valuation of the first component in the price, he relied on auction sale prices achieved for reversions as set out in table 2 to support the use of a 13% yield rate. A years’ purchase of 7 (equivalent to a yield rate of 13%) was also adopted by Andrew Wells in his book Leasehold Enfranchisement The New Law and by the leasehold valuation tribunal in its decision relating to 64a Parkhurst Road. Mr Havill did not accept that prices for open market transactions in respect of freeholds were increased by reason of insurance commissions and relied on the price achieved for lot 82 set out in table 2 of his proof which, despite an explicit reference to an insurance commission of £475.20, showed a result consistent with the other transactions in respect of the ground rent alone of 6.67 YP (yield of 15%). He also attached no special value to the provision in the leases for administrative costs additional to the service charge, as by virtue of the Landlord and Tenant Act 1985 section 19(1) they were required to be reasonable and in any event such provisions were not reflected in the auction prices. The present value of the reversion was small compared to the capitalised ground rent and would, Mr Havill submitted, be reflected in the auction results. His valuation, however, included this item in the calculation for completeness giving a total figure of £1,819. Marriage value With regard to the difference in value between values of the tenant’s and reversioner’s interests both before and after the collective enfranchisement, Mr Havill submitted that the transactions in table 1 supported that there was no clear differentiation in value between the shared-freehold properties and those held on approximately 89-year leases. Observed differences other than tenure were sufficient to account for differing prices; as for example in respect of 34 Chalcot Road and 87 Gloucester Avenue as compared to the lower maisonette in the subject premises, and 10 St George’s Terrace and 28 Chalcot Road as compared to the upper maisonette. However, to reflect any inherent uplift in value attributable to a share of the freehold, Mr Havill made a £2,000 to £3,000 addition to the value of each maisonette. This approach was borne out by local market evidence of 13 transactions where willing freeholders had sold their interests to leaseholders of properties in the immediate vicinity, as set out in table 3 of his proof. For example £4,000 was paid for the 99-year reversion of 151 Gloucester Avenue divided into two maisonettes, located two doors away from the subject premises. Compensation The reversioner owned the adjacent premises at 157 Gloucester Avenue which lay, as did the subject premises within the Primrose Hill Conservation Area and there was consequently no potential for development of this property either alone or with the subject premises. As a consequence no sum for compensation was payable to the reversioner. Mr Havill on behalf of the nominee purchaser requested the tribunal to determine a price of £3,410 for the freehold interest in the subject premises and submitted that this figure was consistent with private freehold sale prices achieved in the vicinity as demonstrated in table 3 of his proof. In answer to questions on behalf of the reversioner as to the reliability of the transactions set out in his tables, Mr Havill maintained that there was a consistency in the results shown. He had set out auction sales for properties drawn from a wide area because there were few reversions in Primrose Hill sold at auction and because he did not consider the locality to affect the value of the reversion. He did not consider that the Act required the valuation to be conducted in accordance with the practice which had come to be adopted under the Leasehold Reform Act 1967. Mr Nicholas Taggart of counsel appeared on behalf of the reversioner and called Mr M Angel frics, partner in Allsop & Co, chartered surveyors, to give evidence in accordance with a written proof and accompanying photographs. Mr Angel stated that he had 15 years’ experience of property sales and valuations, particularly in the residential field, having worked with Chestertons prior to joining Allsop & Co in 1985. He was one of 18 members of the Appraisal and Valuation Standards Board of the Royal Institution of Chartered Surveyors. He explained his valuation. He had adopted a capitalisation rate of 6% to reflect the security of the income and as a rate utilised in the sale of freeholds in the Eton College Estate, as verified by Daniel Smith, chartered surveyors. He considered the freehold interest should reflect the additional value due to ability to collect administration costs, because an express provision in the leases empowered the freeholder to enjoy this additional financial benefit. Accounts exhibited at appendix 5 showed the amount of administration costs collected for the year ending December 24 1992. Similarly, Mr Angel’s valuation included a capitalised sum for insurance commission, though he accepted that the receipt of such commissions might be less certain in the future, by reason of a possible change in legislation. He had accordingly capitalised the commission at 6.5 years’ purchase as accepted in Castlebeg Investments (Jersey) Ltd v Lynch (LRA 6/1987). Finally, Mr Angel submitted that 89 ¼-year leases were worth approximately 95% of the 999-year leases with a share in the freehold interest which were to be acquired under the Act. To support this figure he relied on research undertaken by Savills into length and value of lease, set out in a table of property value by length of lease and a study entitled The Impact of Leasehold Reform on the Central London Residential Market, 1992. Absence of market transactions in relation to sale of reversions subject to 90-year leases was due to inertia of leaseholders to realise this asset, not to lack of difference in value between 90-year leases and freeholds. In answer to questions on behalf of the nominee purchaser, Mr Angel said that he relied on Savills’ survey to support his 5% figure for the average value as it was too difficult, if not impossible, to find actual sales of leasehold and freehold interests in the area. He had put in calculations based on 8% and 12% yields to demonstrate the sensitivity of the final result and the advisability of following the established practice under the 1967 Act. In answer to questions from the tribunal Mr Angel said he understood that the reversioner received a 20% insurance commission on his properties. As to the administration cost, the benefit of the express provision in the leases, even though it related to reimbursed expenditure, enabled the reversioner to recover the cost separately, and not out of the ground rent. In closing Mr Taggart provided the tribunal with a written statement of the legal issues, suggesting that the tribunal should follow the practice adopted in valuations for enfranchisement under the 1967 Act. He also stressed the need for ‘certainty’ which a common approach to valuation under the two Acts would achieve. Inspection On November 1 1994 we inspected externally the subject premises, a four-storey Victorian terrace house converted into two maisonettes approximately 10 years ago, situated in a good residential location just off Primrose Hill. The exterior decorations were good as the building had been recently redecorated. We also inspected externally properties referred to by the parties in the locality, where details of the prices achieved on sale were given. Decision and reasons Counsel on behalf of the reversioner invited us in making our valuation to apply decisions and practice relating to valuations under the 1967 Act. He referred us to the decision in Re Castlebeg Investments (Jersey) Ltd’s Appeal (1985) 275 EG 469* and Calthorpe Estate Trustees v Pabari [1991] 47 EG 110†. In the former, we noted the word of warning of Mr W H Rees frics citing the president of the tribunal in W Clibbett Ltd v Avon County Council (1975) 237 EG 271 that: ‘previous decisions of the tribunal … are relevant only to arguments on law or procedure. The assessment of compensation must be decided on, and only on, the evidence.’ We accordingly approach our determination as one which must be made on the basis of evidence put before us by the parties. *Editor’s note: Also reported at [1985] 2 EGLR 209. †Editor’s note: Also reported at [1991] 2 EGLR 219. With regard to capitalisation rate for the ground rent, Mr Angel advanced a figure of 6%, but the supporting letter of Daniel Smith gave no particulars of the prices achieved, length of terms or amount of ground rents for the properties there referred to. On the other hand, the figure of 13% put forward by Mr Havill on behalf of the nominee purchaser was supported by prices achieved at auctions as set out in his table 2 and which included sales relating to rising ground rents. We, therefore, adopted his rate. The freehold reversion after 89 years would, in our view, be too remote materially to affect the value. Mr Angel asked us to include an item for the value of the insurance commissions. However, evidence produced by Mr Havill showed particulars of one auction lot which specifically drew attention to the benefit of agency commission on insurance renewals of £475.20 pa in addition to the total ground rents of £600 pa. The price of £4,000 achieved for that transaction, however, showed a yield on the ground rents alone marginally below the average. This transaction was in respect of leases with 979 years unexpired compared with unexpired terms of between 80 and 124 years in the other sales. Even bearing this in mind, the tribunal are satisfied on the evidence that no addition is required to be made for the receipt of insurance commission. The tribunal also do not consider that there is any additional value due to the ability to recover administration costs, as these are in respect of costs to be incurred and not profit. As to the value of the new occupying leases at peppercorn rents: the tribunal is of the view, confirmed by its inspection, that the difference in prices obtained in the transactions, relied on by Mr Havill in the immediate vicinity, could be accounted, as he suggested, by the differences other than tenure; and that no clear difference in value218 between the shared freehold properties and those held on circa 89-year leases emerge. We consider that, the index of property values by lease length contained in Savills’ residential research paper — The Impact of Leasehold Reform on the Central London Residential Market — can only provide a very general indication. The index as demonstrated by the questions asked on behalf of the nominee purchaser was based on opinion, not actual transactions. The paper itself noted that: ‘The opinion of different agents and valuers varied widely as to how lease values diminish with lease length’. We were further assisted by the evidence of the tenants’ purchase of the freehold of 151 Gloucester Avenue (which we also inspected) in 1993 for the sum of £4,000. In that case however total rents of £200 pa were payable, but the leases still had 99 years unexpired. This suggests that Mr Havills’ figure is too low. We noted that the parties agreed the value of the leasehold interests excluding the value of any tenants’ improvements. Neither party requested us to take account of improvements in arriving at the marriage value, or suggested any sum payable by way of compensation under para 5 of Schedule 6. Accordingly, taking all these factors into account, our valuation is as follows. Valuation Purchase price payable by nominee purchaser in accordance with Schedule 6 to the Leasehold Reform and Urban Development Act 1993 Para 2(1)(a) The value of the freeholder’s interest in the premises as determined in accordance with para 3. £ Ground rents 2 × £100 pa £200 pa Years’ purchase 15 years at 13% 6.46 1,292 Ground rents 2 × £200 pa £400 pa Years purchase 25 years at 13% 7.33 Present value of £1 in 15 years at 13% 0.16 1.17 468 Ground rents 2 × £400 pa £800 pa Years’ purchase 25 years at 13% 7.33 Present value of £1 in 40 years at 13% 0.0075 0.055 44 Ground rents 2 × £800 pa £1,600 Years’ purchase in perpetuity at 13% 7.69 Present value of £1 in 65 years at 13% 0.00035 0.0027 4 1,808 say 1,800 Para 2(1)(b) The freeholder’s share of the marriage value as determined in accordance with para 4. £ £ Para 4(2)(a)  — Freehold New leases (999 years) Upper maisonette 244,500 Lower maisonette 254,500 499,000 Para 4(2)(b) Freehold interest 1,800 Upper maisonette 240,000 Lower maisonette 250,000 491,800 Marriage value 7,200 Landlord’s share at 50% 3,600 3,600 Para 2(1)(c) Compensation payable to the landlord under Para 5 — Price payable 5,400 The leasehold valuation tribunal determines that the purchase price payable by the nominee purchaser to the reversioner in respect of the freehold in 155 Gloucester Avenue, London NW1, is £5,400 (five thousand and four hundred pounds).