Section 9 of the Leasehold Reform Act 1967 provides the basis for calculating the price payable by the tenants of qualifying leasehold houses to buy the freehold interest in the house and premises. Conventional valuation practice ordinarily values the term and the freehold reversion separately. Valuation of the reversion requires the current value of the reversion with vacant possession to be discounted to reflect the fact that vacant possession will not be available until the end of the lease term.
In Earl Cadogan and Cadogan Estates Ltd v Sportelli [2007] 1 EGLR 153, the Upper Tribunal (Lands Chamber) heard five appeals concerning properties located in prime central London. Following an extensive trial, involving evidence given by expert witnesses in the fields of valuation, finance and economics, the UT set a deferment rate of 4.75% for houses and 5% for flats. On appeal, the Court of Appeal ([2007] EWCA Civ 1042; [2008] 1 EGLR 137) approved the deferment rates set by the UT. Further, the Court of Appeal affirmed the status of the UT’s decision as a “guidance case”, which should be followed unless “compelling evidence” to the contrary was adduced.
The deferment rate in Sportelli was derived as follows: “2.25% rate of return for risk-free investment, to which was added a 4.5% ‘risk premium’ in recognition of the expectation the landlord would in fact be accepting some risk by investing in property. From that 6.75% was subtracted 2% to reflect long-term growth in property values, giving a rate of 4.75%. A further 0.25% was added for flats because the management responsibilities associated with them make flats a more expensive or risky investment.”
In Llangewydd Court Ground Rent Estate v Ralph and another [2021] UKUT 251 (LC); [2021] PLSCS 177, the appellant was the freehold owner of a three-bedroom semi-detached house in Cefn Glas, Bridgend. The respondent tenants held the property under a 99-year lease from 25 December 1972. A ground rent of £15 per annum was reserved under the lease, with no provision for review.
The parties agreed that the relevant valuation date was 31 August 2020. At that date the unexpired term was 51.31 years. The parties, however, were unable to agree the price to be paid for the freehold. Accordingly, the respondents applied to the Leasehold Valuation Tribunal for a determination pursuant to section 21(1)(a) of the Act.
Preferring the respondents’ valuation evidence, the LVT determined the premium at £5,430 using a deferment rate of 5%. The appellant appealed, arguing that the risk-free rate used in calculating the deferment rate in Sportelli was now incorrect in the light of current changed economic conditions and low interest rates.
In dismissing the appeal, the UT found that the majority of the appellant’s evidence was “anecdotal at best”. The UT underscored that “compelling evidence” was required to shake Sportelli. The appellant did not rely on any evidence from experts with experience in economics or financial forecasting in support of his contention that the risk-free rate was wrong. The LVT could not be criticised for attaching little weight to the appellant’s evidence.
Elizabeth Dwomoh is a barrister at Lamb Chambers
