Solent Pines Residents Association Ltd v Campbell and another

Leasehold enfranchisement — Leasehold Reform, Housing and Urban Development Act 1993 — Acquisition of reversion to block of flats — Whether decisions of other tribunals admissible — Determination of yield — Whether compensation payable for hope value, loss of insurance commissions and loss of ability to enforce covenants on other properties Following a claim by the qualifying tenants of a block of flats to exercise their rights to collective enfranchisement, the applicant nominee purchaser sought the determination of the tribunal that the price payable to the respondent landlord was £218,677. The landlord, in claiming £1,225,725, contended that the evidence of decisions of other leasehold valuation tribunals was inadmissible. Its valuer contended that, having regard to the yield on gilts, the appropriate yield should be 6.7%. The landlord also sought hope value, to reflect the possibility of leaseholders wishing to extend their leases in the future, marriage value and compensation for the loss of insurance commissions and the ability to enforce covenants imposed on other properties. Decision: The total enfranchisement price should be £401,200. The evidence of other tribunal decisions was admissible. The appropriate yield rate should be 8.5% and this reflected any hope value. Marriage value must take into account of future increases in ground rent and other factors; 50% share was appropriate. Compensation was payable for the loss of insurance premiums based on two years’ purchase and for the loss of the ability to enforce covenants imposed on other properties. The following cases are referred to in this report. Clibbett (W) Ltd v Avon County Council [1976] 1 EGLR 171; [1976] EGD 385; (1975) 237 EG 271, LT Inland Revenue Commissioners v Clay [1914] 3 KB 466; (1914) 83 LJKB 1425; 111 LT 484; 30 TLR 573 Land Securities plc v Westminster City Council [1993] 1 WLR 286; [1993] 4 All ER 124; [1992] 2 EGLR 15; [1992] 44 EG 153 Sked v Towngran Developments Ltd [1995] 1 EGLR 216; [1995] 05 EG 169, LVT Mr SP Dancer asva, aciarb appeared for the nominee purchaser; Hazel Williamson QC (instructed by Lee Bolton & Lee) represented the landlords. Giving the decision of the tribunal, Mr MJ Greenleaves said: This was an application by Solent Pines Residents’ Association Ltd, whose registered office is 328a Wimborne Road, Winton, Bournemouth, to the leasehold valuation tribunal under section 24 of the Leasehold Reform, Housing and Urban Development Act 1993 (the Act) for the determination of the price payable pursuant to section 32 and Schedule 6 of the Act. No other terms were in dispute. Notice by qualifying tenants of their claim to exercise their right to collective enfranchisement under section 13 of the Act had been given on August 4 1994 and the landlord’s counternotice under section 21 had been given on October 4 1994. In their initial notice, the qualifying tenants had nominated the applicant as the nominee purchaser for the purposes of section 15 of the Act. The premises to be acquired by the applicant are Solent Pines, 29 Manor Road, Bournemouth, Dorset. Those premises are, subject as mentioned below, described in and demised by a lease dated November 11 1974 made between Michael Skillicorn Close and David Archibald Campbell (1) and Regentgrange Ltd (2) as varied by a deed of variation dated June 15 1979 and made between the same parties so that the effective term of the lease was 104 years from September 29 1974 at a rent currently of £5,500 pa, to be increased on September 29 2000 and thereafter every 21 years to a figure to be calculated in accordance with the provisions contained in the second schedule of the lease. The property agreed to be excluded from the application was a wooded area lying between Manor Road and Solent Pines. Inspection The tribunal convened on September 27 1995 when it inspected a representative sample of the flats in the block, namely: Floor Flat no No of bedrooms Flat type Ground 2 2 Caprice Ground 4 3 Contessa Fifth 52 2 Commodore Ninth 94 3 Contessa 11th 111 3 Contessa 11th 113 2 Caprice West penthouse 3 The tribunal noted that the block of flats is situated on a site fronting Manor Road on its northern boundary and extending back to East Overcliff Drive on the south. The block is in a good class predominantly residential area, where many other blocks of flats have been built over the years, and situated about one mile from Bournemouth town centre. Being separated from the clifftop only by East Overcliff Drive, there are extensive sea views from the property over Poole Bay and towards the distant Isle of Purbeck. Solent Pines is a 13-storey block built about 15 years ago, comprising 23 three-bedroom flats, 25 two-bedroom flats and two penthouses. All the flats have balconies and two bathrooms, while the penthouses have three bathrooms and larger balconies. It was noted that the layouts of the flats are rather poor, with small kitchens and that some flats have restricted sea views, due partly to the proximity of the Albany (a large block of flats to the east) and the design of the Solent Pines block itself. There is no direct pedestrian access to the underground car parking from inside the block. There are two passenger lifts, an entry system and a daytime caretaker. 214 Hearing At the hearing the applicant was represented by Mr SP Dancer asva, who also gave evidence on behalf of the applicant. The respondent was represented by Miss Hazel Williamson QC, and evidence for the respondent was given by Mr GD Bevans frics and by Mr SJ Cooke frics. The parties had submitted in advance the following written evidence: (a) joint statement of agreed facts; (b) for the applicant, statement of Mr SP Dancer; for the respondent, statements of Mr GD Bevans and Mr SJ Cooke; all of which had been considered in detail by the tribunal prior to the hearing. Admissibility of evidence In the course of his evidence, Mr Dancer sought to adduce evidence of other decisions of leasehold valuation tribunals. Miss Williamson submitted that the evidence was inadmissible and cited reports in the Estates Gazette of the following cases: (a) Land Securities plc v Westminster City Council [1992] 44 EG 153*; and (b) Sked v Towngran Developments Ltd [1995] 05 EG 169†. *Editor’s note: Also reported at [1992] 2 EGLR 15. †Editor’s note: Also reported at [1995] 1 EGLR 216. The Land Securities case related to an arbitrator’s award on a rent review. The court found that the arbitrator’s award was inadmissible as it was his opinion after hearing evidence and it was not direct evidence of what was happening in the market. The ratio decidendi of the case was that an arbitrator acting as such is obliged to act solely upon the evidence adduced by the parties and, even if he was an expert, he would not have been able to take his expert knowledge into account. Therefore, if the arbitrator were subsequently called to give evidence, he could not be cross-examined on the reasons for his award and therefore, there would be no admissible evidence to support the arbitrator’s opinion. Accordingly, the arbitrator’s award is inadmissible. This present tribunal found that: it was not acting as arbitrator; it was entitled to bring its expert opinion to bear on the issues; and accordingly, a leasehold valuation tribunal decision is distinguished from an arbitrator’s award. This present tribunal, therefore, found that the applicant’s evidence was not inadmissible under the Land Securities case. The respondent also relied on the Sked v Towngran Developments case on the basis of a quotation from the president of a tribunal in W Clibbett Ltd v Avon County Council (1976) 237 EG 271* that: *Editor’s note: Also reported at [1976] 1 EGLR 171. 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. This present tribunal found: (a) that it was not bound by other decisions of a tribunal; and (b) that it was entitled to bring its expert knowledge into consideration in making its determination. For those reasons the tribunal found that Mr Dancer’s evidence concerning other tribunal decisions was admissible. Basis of valuation The purchase price payable by the nominee purchaser is to be the aggregate of: (a) the value of the freeholder’s interest in the premises on the open market; (b) the freeholder’s share of the marriage value; (c) any compensation payable to the freeholder for loss arising from enfranchisement; and the provisions of Schedule 6 to the Act specify the basis on which each is to be fixed. Valuation of freeholder’s interest In considering this, the tribunal was asked to take into account: (a) the value of the ground rents; (b) hope value, ie the possibility that at some future date individual leaseholders might seek and be prepared to pay consideration for extension of their leases; (c) the agreed fact that (a) the various Meyrick Trusts would be potential bidders in the market (b) they would be wishing to purchase; (d) the relevance of those facts in the light of the judgments delivered in Inland Revenue Commissioners v Clay [1914] 3 KB 466. Valuation of ground rents The applicant submitted the valuation should be based on a yield of 10.5%. In support of that yield the applicant provided a number of comparables. In particular: (a) a letter dated September 12 1995 from Fanshawe Lofts concerning ground rents which were sold on December 16 1994 as part of a mixed portfolio of properties, of which the sum of £47,000 was attributed to ground rents. There was no evidence on other aspects of the transaction and the tribunal considered the available evidence was only of limited value; (b) evidence concerning the reversion of Grasons, Canford Cliffs and Evesham Court, Poole, properties in Aylesbury, Foundry Mews, Chertsey, and an office investment in Elephant and Castle, London. While the evidence was of interest, the tribunal found that the office investment in London was not relevant to assist in the determination of the yield and that the yields from the other properties reflected less favourable terms than at Solent Pines. The tribunal found that the respondent’s evidence of comparables concerning the Gables, Branksome Park, Heathside Court, Poole, and Red Court, Bournemouth, was helpful but did not directly support its contention of a yield of 7.5%. Mr Cooke’s evidence did not relate to direct valuation of Solent Pines, but in essence, compared an investment in the Solent Pines’ ground rents against an index-linked gilt-edged security. He considered, as detailed in his written evidence, that the appropriate yield for Solent Pines was 6.75%. The tribunal considered that insufficient account had been taken of, in particular, the liquidity of the investment and that gilts could be purchased in small units, thus increasing their marketability, while the converse was true with the Solent Pines ground rents. The evidence, being of interest, was not considered an entirely realistic basis for establishing the yield for this type of investment. The tribunal recognised that the existing investment in Solent Pines had attributes over all the other comparables put forward: (a) There was a single rent payable thereby reducing management. (b) The next review was in only five years’ time and 21 years thereafter. (c) The review was geared to an agricultural wages index, historically seen to be above inflation, while the other comparables were geared to fixed formulae which were proving to be below inflation. It logically followed the yield should reflect these differences and not be higher than 9% — the lowest return of the analysis. Against this there was insufficient evidence to suggest 7.5% was a fair level as proposed by Mr Bevans. Taking all the evidence into account, the tribunal decided the appropriate yield applicable to the ground rents of Solent Pines to be 8.5%. Hope value It was argued for the applicant that hope value did not exist. Mr Bevans contended that a hope value could be calculated to reflect the possibility that the underleaseholders (the occupiers) would wish to extend their leases in about 33 years time, when there would be only 50 years unexpired, and this had a present value of £34,462. If there was any hope value, the tribunal considered it was significantly reduced by the effect of the Act, such that it was notional and was reflected in the yield. Marriage value The parties adopted different approaches in order to illustrate their respective opinions of the values of the flats before and after enfranchisement. The method adopted by Mr Dancer was to place a value on each flat taking account of their respective features. These 215 figures were supported by reference to the few actual sales within Solent Pines. Flat no Price Date Flat type 73 £102,000 December 1993 Caprice 93 £127,500 December 1992 Caprice 33 £90,000 September 1993 Caprice Each of these flats has two bedrooms. His valuation of the flats after enfranchisement was based on an uplift of 4%, illustrated by examples, particularly Heathside Court. On the other hand, Mr Bevans chose to support his respective figures by reference to asking prices of three-bedroomed flats in Solent Pines, together with the sale of a two-bedroomed flat, which reflected, in his view, an average value of £90,000. Following enfranchisement he adopted sales and asking prices of flats in other blocks, in particular, Keverstone Court and Green Park, Bournemouth, which he agreed were more modern and therefore he adjusted to reflect the age, position in the block and notional cost for improving them up to the same standard of the newer flats, which on his figures indicated an uplift to an average of £120,000 per flat. This also illustrated, in his view, the value of the flats with less onerous ground rent provisions. The tribunal considered all the other evidence put before it by both parties, particularly regarding the flats in the blocks known as Green Park and Keverstone Court. The flats on the lower floors in those blocks do not have sea views to the same extent as Solent Pines. However, the Solent Pines flats are not particularly well designed and it was considered that the Keverstone Court flats were better and that on average they would be valued at about £120,000 each. On the available evidence and taking into consideration its local knowledge, the tribunal was of the opinion that on existing terms: (a) the value of a penthouse flat was likely to be about £200,000; (b) three-bedroom flats would be worth in the region of £105,000 on average and likewise two-bedroom flats a little in excess of £95,000; (c) This effectively determines an average value per flat (including the penthouses) of £105,000, producing a current total valuation of £5,250,000. The tribunal considered that any marriage value must take account of future increases in ground rent, the length of the lease and the proximity and mechanism of the rent review. The effect of the lease as varied is that the passing rent is £5,500 pa and the rent is to be increased on September 29 2000 and thereafter every 21 years pursuant to the second schedule to the lease. The second schedule provides that the rent is to be increased pro rata according to the increase in agricultural wages under the Agricultural Wages Act 1948, but that if there should not be a statutory agricultural wage at the revision date, the rent would be determined by an arbitrator as 11% of such sum as in his opinion represented a fair yearly rack-rent of the flats. It was contended for the respondent that the valuation should be based on the assumption that review by reference to agricultural wages would still occur in 2000. On behalf of the applicant, it was contended at best that there was uncertainty in the future basis of ground rent review so that an investor would require a higher rate of return, but that in any event as all other statutory minimum wages had been abolished there was a real possibility of abolition of the minimum agricultural wage and therefore, it would be certainly taken into account by an investor. The tribunal considered it significant that the minimum agricultural wage had been retained when others had been abolished and therefore, that there was very little chance of abolition of this primary basis of ground rent review. It accordingly determined marriage value on the basis that the rent revision in 2000 would occur on the basis of the agricultural wage mechanism. Mr Bevans had put the value of the flats as enfranchised at £120,000 on average and Mr Dancer adopted an uplift of 4%, in line with his analysis of Heathside Court, which gave an average value after enfranchisement of £112,486. The tribunal found the 4% uplift did not reflect the true nature and the likely effect of the forthcoming rent review and was consequently too low. Conversely an ultimate value of £120,000 on average per flat was considered too high. If the 4% uplift propounded by Mr Dancer were used, on the tribunal’s average value per flat on the existing leases, this would produce an average value of approximately £110,000. The tribunal considered a marginally higher uplift was appropriate and in the absence of any more precise evidence had adopted a mean value of £115,000 average per flat, after enfranchisement, and thus a total of £5,750,000. Share of marriage value It was submitted for the respondent that the freeholder’s share of marriage value should exceed 50% due to the peculiar circumstances of the property and the basis of rent review; that the tribunal should evaluate it and not simply follow other tribunal decisions. No evidence was brought before the tribunal to support a figure higher than 50%. The tribunal considered that the circumstances of the property and the basis of ground rent review already having been reflected in the values referred to above, there appeared to be no remaining basis to increase the percentage and the tribunal accordingly found that the marriage value should be shared equally. Compensation (a) The applicant submitted that compensation was not payable. The freeholder submitted that as the freeholder owned many other properties in the immediate area surrounding Solent Pines, loss of ownership of Solent Pines would reduce its strength in enforcing covenants it had imposed on sales of properties. The tribunal so found and that compensation should be paid on the basis on a nominal £100 for each flat. (b) In addition the tribunal considered the loss of insurance commission. It was agreed between the parties that the present insurance commission receivable by the freeholders is £596 pa. The tribunal did not consider the commission could be treated as dependable long-term income in the same way as the ground rent, but that an element of compensation for its loss was reasonable and based this on two years’ purchase. (c) Accordingly, the tribunal found compensation to be payable in respect of (a) and (b) in the sum of £6,192 rounded to £6,200. The valuations of the applicant (as it appeared to the tribunal) and the respondent are summarised respectively in schedules 1 and 2 to this decision. Decision The leasehold valuation tribunal accordingly determines that the purchase price payable by the applicant to the respondent in respect of the freehold in Solent Pines, 29 Manor Road, Bournemouth, Dorset, in accordance with Schedule 6 of the Act is £401,200. The calculation of the tribunal is set out in schedule 3 of this decision. Schedule 1 Summary of tribunal’s interpretation of the applicant’s valuation (a) Freehold interest £ £ £ Current ground rent 5,500pa Years’ purchase for 5 years @ 10.5% × 3.743 20,586 Reversion to 34,266 pa Years’ purchase in perpetuity deferred 5 years @ 10.5% × 5.781 198,091 Value of freehold 218,677 (b) Marriage value Value of flats after enfranchisement 5,624,320 Less Value of freehold in (a) 218,677 216 Plus Value of flats before enfranchisement 5,408,000 5,626,677 Marriage value Nil (c) Compensation Not applicable Nil TOTAL ENFRANCHISEMENT PRICE £218,677 Schedule 2 — Part 1 Summary of respondent’s valuation SOLENT PINES VALUATION 1. Freehold interest £ £ Current ground rent 5,500 pa Years’ purchase for 5 years @ 7.5% × 4.0459 22,252 Reversion to 34,266 pa Years’ purchase in perpetuity deferred 5 years @ 7.5% × 9.2874 318,242 £340,494 Insurance rent 596 Years’ purchase in perpetuity @ 7.5% × 13.33 £7,945 Hope value: Full hope value per unit £30,000 50% of hope value £15,000 Total hope value for 25 units × 25 375,500 Present value of £1 in 33 yrs at 7.5% 0.0919 £34,462 TOTAL VALUE OF FREEHOLD £382,901 2. Marriage value Value of participators flats after enfranchisement 50 × 120,000 6,000,000 Less Value of freehold 382,901 50 units @ £90,000 4,500,000 4,882,901 Marriage value 1,117,099 3. Compensation 50 Units at £100 5,000 Summary 1. Freehold 382,901 2. Marriage value at 75% 837,824 3. Compensation 5,000 TOTAL ENRANCHISEMENT PRICE 1,225,725 Schedule 2 — Part 2 Summary of respondent’s valuation SOLENT PINES VALUATION — ALTERNATIVE 1. Freehold interest Current ground rent 5,500pa Years’ purchase for 5 years @ 6.7% × 4.1335 22,734 Reversion to 34,266 pa Years’ purchase in perpetuity deferred 5 years @ 6.7% × 10.687 366,200 388,934 Insurance rent 596 Years’ purchase in perpetuity @ 6.7% × 14.92 8,892 Hope value: Full hope value per unit 30,000 50% of hope value 15,000 Total hope value for 25 units × 25 £375,500 Present value of £1 in 33 yrs at 6.7% 0.1176 £44,158 TOTAL VALUE OF FREEHOLD £441,984 2. Marriage value Value of participators flats after enfranchisement 50 × 120,000 6,000,000 Less Value of freehold 441,984 50 units @ £90,000 4,500,000 4,941,984 Marriage value 1,058,016 3. Compensation 50 Units at £100 5,000 Summary 1. Freehold 441,984 2. Marriage value at 75% 793,512 3. Compensation 5,000 Total Enfranchisement Price 1,240,496 Schedule 3 Tribunal decision (a) Freehold £ £ Present ground rent 5,500 pa Years’ purchase for 5 years @ 8.5% × 3.94 21,670 Reversion to agreed rent 34,266 pa Years’ purchase in perpetuity deferred 5 years @ 8.5% × 7.82 267,960 289,630 Say 290,000 Hope value Nil (b) Marriage value Value after enfranchisement 50 @ £115,000 5,750,000 Less Value of freehold in a) 290,000 Plus Value before enfranchisement 50 @ £105,000 5,250,000 5,540,000 Marriage value 210,000 50% = 105,000 217 (c) Compensation 50 flats @ £100 each 5,000 Insurance commission 596 × 2 yp = £1,192 say 1,200 6,200 (d) Summary (a) 290,000 (b) 105,000 (c) 6,200 TOTAL ENFRANCHISEMENT PRICE £401,200