Landlord and tenant — Leasehold enfranchisement — Leasehold Reform, Housing and Urban Development Act 1993 — Collective enfranchisement — Appeal to Lands Tribunal — Whether Lands Tribunal should disturb decision of leasehold valuation tribunal — Whether hope value compensatable — Whether 65% share of marriage value
The appellant
landlord owned five blocks of flats in respect of which a notice of collective
enfranchisement was served in September 1995 under the Leasehold Reform,
Housing and Urban Development Act 1993. The flats were let on long leases for
terms of 99 years from September 29 1960 at low ground rents. Not all the
tenants participated in the enfranchisement notice. The landlord appealed the
decision of the leasehold valuation tribunal raising issues, inter alia,
as to the value of the current and extended leases, the appropriate yield rates
and how the value of the non-participating flats should be addressed. In
respect of the value of the possibility of granting lease extensions in respect
of the non-participating flats, the landlord’s valuer spoke to the landlord’s
share of the marriage value at 65%.
acted as a court of review, but has treated every appeal as a hearing de
novo, with the parties entitled to call fresh evidence if so advised. There
were no statutory provisions which bind the tribunal to conduct the appeal in
this way, or indeed in any particular way. Where a competent leasehold
valuation tribunal (which is assumed to have local market knowledge) has
decided matters of fact and value on the opinion evidence of valuers and an
inspection of the subject premises, then on a subsequent appeal to the Lands
Tribunal, at least where there is no suggestion of any dispute as to matters of
law or of valuation principle, the Lands Tribunal should be slow to disturb the
decision of the LVT unless satisfied that the decision is clearly wrong. The
prospect of securing premiums for future lease extensions was too uncertain and
remote to be taken into account; the marriage value share should not be
adjusted above 50%. The reasoning of the LVT and its conclusions was agreed and
its valuations adopted.
The following
cases are referred to in this report.
Black v Eton College [1995] 1 EGLR 223; [1995] 25 EG 161, LVT
Blackstone
Investments Ltd v Middleton-Dell Management Co
Ltd LRA/17/95
Land
Securities plc v Westminster City Council (No 2)
[1995] 1 EGLR 245
London
& Winchester Properties Ltd’s Appeal, Re (1983)
45 P&CR 429; [1983] 2 EGLR 201; 267 EG 685
Maryland
Estates Ltd v 63 Perham Road Ltd [1997] 2
EGLR 198; [1997] 35 EG 94
Sinclair
Gardens Investments (Kensington) Ltd v Franks
LRA/19/96
Swann v White (1996) 71 P&CR 210; [1996] 1 EGLR 199; [1996] 26
EG 136, LT
Barry
Denyer-Green (instructed by Wallace & Co) appeared for the appellant
landlord; David Iwi (instructed by Jennifer Israel & Co) appeared for the
respondent nominee purchaser.
Giving his
decision, JUDGE MARDER QC, President said: These are appeals and
cross-appeals from decisions of the London Leasehold Valuation Tribunal dated
January 28 1997 under sections 24 and 48 of the Leasehold Reform, Housing and
Urban Development Act 1993 (hereinafter called the 1993 Act) concerning premises
in Byland Close, Winchmore Hill, London N21. The appeals and cross-appeals were
heard together, as were the applications before the leasehold valuation
tribunal. The issues raised relate in part to the price to be paid by the
nominee purchaser (the respondent company) to the appellant reversioner for the
freehold interest in a majority of the flats in Byland Close, and in part to
the premium to be paid for an extended lease of one of the flats.
I heard the
appeals on November 10, 11 and 12 1997. The appellant was represented by Mr
Barry Denyer-Green, of counsel, who called Mr Eric Shapiro bsc (e
mgt) frics irrv fci arb.
The respondents were represented by Mr David Iwi, of counsel, who called Mr
Bruce Maunder Taylor frics mae.
The parties
placed before me a comprehensive statement of agreed facts which I found most
helpful. The facts material to these appeals may be summarised as follows:
1. The subject
properties are five blocks of flats or maisonettes in a cul-de-sac at Byland
Close, Southgate, a predominantly residential suburban area. The properties
were constructed in 1960 and, although generally described as flats, each block
is a two-storey building containing two upper and two lower maisonettes, each
with a separate entrance and with no internal common parts.
2. The design
of all the blocks is similar. The detail of layout and room sizes is not
identical, but it is agreed that the variations are not significant for
valuation purposes. The flats each have two bedrooms, a living room, kitchen
and bathroom. Each flat has a garage, but in some cases the garage adjoins the
building; in the other cases the garage is in a separate block of garages at
the end of Byland Close.
3. In the case
of flat 1, the issue is as to the premium payable for a new extended lease. In
the case of the remaining flats, the issue is the price payable on
enfranchisement. In some cases there are non-participating tenants. In summary
form, the position is:
|
|
|
|
Flats 5–8 |
Flat 8 is non-participating |
|
Flats |
Flat 15 is |
|
Flats |
All are |
|
Flats |
Two flats |
|
Flats |
Flat 26 is |
4. All the
subject properties are held on existing leases in standard form for a term of
99 years from September 29 1960, with a fixed ground rent of £16.30 or £16.80
pa. At the agreed valuation date (September 6 1996) the leases thus had 63
years unexpired.
In the case of
flat 1, the tenants’ notice was given on September 26 1995 and application was
made to the leasehold valuation tribunal in February 1996. By the time of the
hearing before the leasehold valuation tribunal the terms of an extended lease
were agreed save as to the premium. Similarly in the other cases, the tenants’
notice was given in September 1995 and the application made to the leasehold
valuation tribunal in February 1996. By the time of the leasehold valuation
tribunal hearing in October 1996, the terms of transfer were agreed save as to
price. The decision of the leasehold valuation tribunal dated January 28 1997
determined as follows:
|
|
|
£ |
|
|
1 Byland |
(extended |
3,580 |
|
|
5–8 Byland |
(freehold) |
10,900 |
|
|
13–16 |
(freehold) |
10,900 |
|
|
17–20 |
(freehold) |
14,320 |
|
|
23–24 |
(freehold) |
7,160 |
|
|
25–28 |
(freehold) |
10,900 |
|
In the case of
flat 1, both landlord and tenant have appealed. In the other cases the landlord
and the nominee purchaser have appealed. For clarity I refer throughout to the
landlord as the appellant and the tenant or nominee purchaser as the
respondent.
Case for
the appellant
Mr
Denyer-Green in opening provided a chronology and said that the agreed
valuation date for all cases was September 1996, when the terms of the extended
lease and the terms of transfer had been agreed. All existing leases were in
standard form as stated above, with 63 years unexpired at the valuation date.
The issues which arose were:
(a) the value
of existing leases;
(b) whether
there was any difference in value between those flats with adjoining garages
and those with garages in a block;
(c) the value
of the 999-year leases assumed in calculating marriage value;
(d) the yield
rate for valuing the existing lease term;
(e) the yield
rate for valuing the reversion; and
(f) how the
value of non-participating flats should be addressed.
As to all
these points except the last, Mr Denyer-Green showed in tabular form the
figures contended for by the parties and the determination of the leasehold
valuation tribunal. As to the treatment of the non-participating flats, he
submitted that it could not be a correct construction of the Act that a
landlord received less because fortuitously some flats were non-participating.
It was unrealistic to suppose that the non-participating tenants would never
seek lease extensions outside the Act and the potentiality of this should be
included as part of the open market valuation. It was not excluded by Schedule
6 and it was a necessary implication from the terms of section 18 requiring
disclosure of an agreement to grant an extended lease that such an agreement
adds value. It must follow that the possibility of such an agreement also adds
value. In the alternative, if it was not appropriate to include this element in
valuing the landlord’s interest, then account should be taken by increasing the
landlord’s share of marriage value, since the assumption in determining
marriage value is that of a willing seller. Hence Mr Shapiro in a supplementary
proof would assess the landlord’s share of marriage value at 65%.
Mr Iwi, on
behalf of the respondents, objected to Mr Shapiro’s supplementary proof being
admitted. It had been delivered on Friday immediately before the hearing on
Monday, in breach of the rules and without leave. Leave should not be granted,
as no explanation for late delivery had been given and the respondents would be
prejudiced by the admission of fresh evidence, including comparables that had
not been given before the leasehold valuation tribunal and which the
respondents had been unable to investigate. He submitted that the appellant
should be restricted to the grounds stated in the notice of appeal.
After a short
adjournment counsel agreed to admit Mr Shapiro’s supplementary proof upon
deletion of section 2 (which I have accordingly disregarded).
Mr Eric
Shapiro is the senior partner of Moss Kaye & Roy Frank, chartered surveyors
and valuers, Swiss Cottage, London NW3. He has over 32 years’ experience in the
valuation, sale and letting of residential and commercial property in Greater
London. He also has extensive experience as a lecturer on valuation and is
co-author of text books on the subject.
Mr Shapiro
described the location of the subject properties as ‘a good class residential
suburb’ well served by public transport and shopping facilities and with good
access to the metropolitan green belt and to parks and open spaces. He
described Byland Close and the subject properties and existing leases in terms
which are reflected in the statement of agreed facts.
Mr Shapiro
referred as comparables to transactions relating to flats 12, 13 and 18 Park
House, a block immediately around the corner and managed by his firm. These
flats had two rooms, kitchen and bathroom/wc,
and all had existing terms of 99 years from December 1961 with 64 years
unexpired. The lease of flat 12 with a fixed ground rent of £11.54 pa was
assigned in March 1996 for a consideration of £39,000. Flat 13 was granted an
agreed lease extension in June 1995 for a term of 189 years from 1961 at the
existing fixed ground rent of £19 pa until 2060 and thereafter at a peppercorn.
The consideration was £6,000. The lease of flat 18 was extended in January 1996
to a term of 169 years from December 1969 at a fixed ground rent of £5 pa. The
consideration was £3,500.
With regard to
13 The Glade, it was established that the price of £68,000 mentioned in Mr
Shapiro’s proof was an asking price later reduced to £66,000 and no sale took
place. Mr Shapiro finally referred to 4 Gladeside, a flat almost opposite
Byland Close. A lease of 999 years was sold in July 1996 for £70,000. This was
an unmodernised flat without a garage or garage space.
Mr Shapiro
considered the four constituents to arrive at a valuation were:
(1) the value
after acquisition of the freehold (or lease extended by 90 years in the case of
no l);
(2) the value
of the existing leases;
(3) the
appropriate yield rate to apply to the ground rent and to discount the
reversion; and
(4) the share
of marriage value.
In valuing the
virtual freehold, Mr Shapiro’s view was that there is no difference between a
ground-floor and a first-floor flat, but there is a difference between a flat
with a garage and one without, and a further difference between a flat with
adjoining garage and a flat with a garage in the block. These differentials
were fairly represented by £2,500, and he referred to the offer for sale by Mr
Maunder Taylor’s firm of garages in Woodside Park for £2,950 for a 99-year
lease at £25 pa ground rent doubling every 25 years.
4 Gladeside
and 13 The Glade were almost identical to the subject properties, but neither
had a garage and 13 The Glade required modernisation. The sale of 4 Gladeside
for £70,000 in July 1996 and the offer of 13 The Glade in April 1996 for
£66,000 justified a basic value of £70,000 for flats in Byland Close, to which
must be added £2,500 where the garage is in a battery and £5,000 where the
garage adjoined the flat.
Mr Shapiro
referred also to 3 and 4 Byland Close, within the same development as the
subject properties. 3 Byland Close was sold twice in 1995. The first sale was
at £47,500 and then the flat was resold in July 1995 for £59,995. The flat was
in poor condition requiring about £3,000 expenditure to bring it up to good
condition. The garage was in the garage block. Flat 4 Byland Close sold in the
summer of 1994 for £60,000, plus £1,000 for fixtures and fittings. The garage
adjoined the flat.
Mr Shapiro
acknowledged that the two sales in Byland Close were at prices of £59,995 and
£60,000, but he said that both took place after the passing of the 1993 Act and
were, in his view, necessarily ‘contaminated’ by the legal rights under the
Act, as against the statutory hypothesis that the right to buy is to be
disregarded.
As to the
value of the existing leases, the basis under the Act requires the right to buy
a lease extension to be disregarded. Therefore,
that at least £5,000 extra was paid. He believed the fact of availability of a
lease extension speaks for itself. Accordingly, a reasonable basic figure for
valuing the existing leases was £55,000 for a flat without a garage increased
by £2,500 for a garage in the block and £5,000 for an adjoining garage.
With regard to
yield, Mr Shapiro referred to auction sales of ground rents, which when
analysed demonstrated a yield rate of 8.7%. This was not surprising. It was
consistent with the current low interest climate, and the Lands Tribunal had
recently accepted 7% for the term and 6.5% for the reversion as appropriate.
This was in respect of a house and it was possible that a higher yield would be
applicable to a flat. He referred to the permanent income bearing share (PIBS)
as having a great similarity to a freehold subject to a long lease, and
produced evidence of the prices and yields of PIBS in October 1996, showing
gross yields generally in the range 9.25% to 9.75%. (Tribunal’s note: the
document produced in fact shows gross yields ranging from 9.003% to 9.65%.)
Mr Shapiro
described minor differences between PIBS and the freehold investment, but
regarded them as broadly similar. They supported a rate of 8.7% derived from
the auction sales, which he described as the best market evidence.
As to marriage
value, Mr Shapiro said that the usual position between willing buyer and
willing seller was to divide this 50:50, notwithstanding that the Act provided
that the landlord’s share should be not less than 50%.
This case
however was not usual, because not all the lessees are participating. The
respondents argued that as a matter of law there was no right to presume that
non-participating tenants would later exercise rights under the Act, and
therefore no right to include hope value. Mr Shapiro did not agree with this
view, but if the tribunal so decided, he submitted that a higher share of
marriage value should apply because the landlord was not in those circumstances
a willing seller, being required to give away potential marriage value for no
return. Whatever the attitude of the present non-participating tenants, sooner
or later the tenant or his heirs would approach the then reversioner for an extended
lease, and the later this happened the more the tenant would have to pay. By
how much this should be reflected in the share of marriage value was a very
difficult question, but he had settled on 65% as appropriate. Alternatively, Mr
Shapiro thought the landlord should accept 50% of the marriage value if in
return the landlord received an overriding lease for 999 years of the
non-participating flats.
In his
valuations, Mr Shapiro put forward the following (these are the same values in
the same form as were before the leasehold valuation tribunal):
|
|
|
£ |
|
|
Flat 1 |
Lease |
7,792 |
|
|
Flats 5–8 |
Freehold |
30,021 |
|
|
Flats |
Freehold |
30,024 |
|
|
Flats |
Freehold |
31,142 |
|
|
Flats |
Freehold |
15,577 |
|
|
Flats |
Freehold |
30,030 |
|
In his supplementary
evidence, Mr Shapiro said that a reason advanced by the respondents for a high
yield rate was that rent collection was expensive in relation to the amount
collected. He believed this revealed a built-in error. There was no management
involved and no rent to be collected with regard to the reversion, which was a
significant saleable asset achieving a higher value as each year passed and
totally inflation proof. With regard to the rent during the term, this was
mostly paid without demand and without the need to chase for arrears. Arrears
would in any case have to be paid before assignment.
The only way
to reflect the ultimate inflation-proofness of the reversion if the same yield
is used in both parts of the equation (term and reversion) is to use a lower
yield for both than would be appropriate in the case of no growth at all.
Mr Shapiro
referred to the finding of the leasehold valuation tribunal that ‘there was no
evidence that the non-participating tenants were presently seeking lease
extensions or … likely to do so in the short or medium term …’. He commented
that this was not the correct approach. Mr Maunder Taylor’s hypothesis was that
the market value of four freehold maisonettes was the same as the value of
three freehold maisonettes plus one leasehold with a reversion in 63 years.
This must clearly be wrong.
As he had
said, sooner or later the non-participating tenants or their heirs would wish
to sell. The remaining terms would make it difficult to obtain mortgages and
they would be competing with lessees offering the equivalent of 999-year
leases. In his opinion, it would not be unrealistic to assume that within the
next 10 years the great majority of non-participating tenants would wish to
purchase a lease extension before their leases became unreasonably short.
Originally, he had reflected this additional hope value in the extra marriage
value a willing lessor would require, as explained earlier. Alternatively, it
could be reflected in the value of the existing interest, making the reasonable
assumption that the average period to achieve sales to lessees would be five
years. He had therefore added a schedule calculating the landlord’s interest on
this basis, taking a yield of 11% in place of 8.7% to reflect the risk of some
tenants not seeking extensions, and assuming a premium of £5,500 for those who
did. This demonstrated that where there was a non-participating tenant the
landlord’s current interest was worth £3,326, as compared with the investment
value of £570. He reworked his valuations on this basis as follows:
|
|
£ |
|
|
Flats 5–8 |
25,682 |
|
|
Flats |
26,686 |
|
|
Flats |
26,693 |
|
Cross-examined
by Mr Iwi, Mr Shapiro said that rent collection was very simple with the use of
computers and most tenants paid the ground rent promptly whether demanded or
not.
He did not
accept that PIBS was ‘a totally different animal’ from a freehold reversion,
but this was back up evidence only in support of a yield of 8.7%. He agreed
there were costs involved in the sale of a reversion and not in the sale of
PIBS. But the prospect of management difficulties with tenants was irrelevant.
An agent managed, and the landlord was unaware and uninvolved in any disputes
with tenants.
Mr Shapiro was
aware of evidence accepted by the tribunal in other cases from other surveyors,
but this did not outweigh the market evidence he produced of actual prices paid
for ground rents at auction. He agreed that his examples were all ‘insurance
bonus’ cases, but this was offset by the 99-year term as against the 63 years
unexpired in the present cases.
As to the
assumption of hope value from non-participating tenants, Mr Shapiro said the
leases became increasingly unsaleable and so at some time the tenant had to
seek a lease extension. He thought these leases were only acceptable to a
mortgagee for another three years.
Mr Shapiro
agreed that there was no market evidence to support a landlord’s share of
marriage value at 65%, but this was a matter of instinct and judgment. It must
be above 50% to be the price at which a vendor was willing. He accepted that
the non-participating tenants in this case had no present intention to seek
lease extensions, but death was a certainty and their heirs would have to seek
extensions. He could not accept that this element was reflected in a 50%
marriage value. That could not be so, as the marriage value was that of the
participating flats, so that 50% offered nothing at all in respect of the
non-participating tenancies.
With regard to
flats 13 and 18 Park House, it was suggested that the circumstances showed the
price of £3,500 paid in respect of a lease extension at no 18 was a far better
guide than that of no 13, but Mr Shapiro did not agree. The landlord at no 18
had settled on his own and against his advice. He considered both transactions
were relevant and that £5,000 represented a fair price.
As to the
value of a garage, Mr Shapiro said it extended the life of a car and made it
easier to insure. He saw no reason to reduce the value from the £2,500 obtained
by Mr Maunder Taylor for garages at Sylvan Court, and he did not agree with the
leasehold valuation tribunal that £1,000 was adequate to reflect the difference
in security and convenience between a garage in a block and an adjacent garage.
The advantages of the latter were self-evident. Adjusting for dates, the sales
of 3 and 4 Byland Close demonstrated the point.
In
re-examination Mr Shapiro pointed out the advantage of these self-contained
maisonettes without common parts as against a large block of flats. From the
point of view of a landlord the former were hassle-free; it was a ‘sit back and
do nothing’ lease and the yield should reflect this. He was perfectly satisfied
that his figure of 8.7% fairly reflected the value of this interest as an
investment.
Respondents’
case
Mr Iwi, on
behalf of the respondents, called Mr Bruce Maunder Taylor. He is the senior
partner in Maunder Taylor, chartered surveyors, Whetstone, London N20.
Mr Maunder
Taylor put forward a valuation capitalising the ground rent with 63 years
unexpired at 13%, representing YP 7.689. The ground rent of 16 guineas had to
be collected four times per year. The cost and inconvenience of collection and
keeping records could not be recovered. The leasehold valuation tribunal had
adopted the same rate in regard to a similar block of modern flats at Merrion
Avenue, Stanmore, where there was a small ground rent on leases with 62 years
unexpired.
He considered
there were two levels of market price achievable for ground rent investments.
It was possible to obtain a better price at auction, but there were auction
costs incurred. Investors buying by private treaty tended to buy at lower
prices but with lower costs. Sale and transfer costs were an important part of
the consideration representing a very significant percentage of the overall
value and needed, in his opinion, to be taken into account. He also pointed out
that the auction sale returns to which Mr Shapiro has referred were expressly
reflecting the value of insurance commissions. In the present case the value of
an uncertain return was too small to be of significance.
Mr Maunder
Taylor pointed out that since the leasehold valuation tribunal’s decision in
this case, the Lands Tribunal had considered the capitalisation of ground rents
in two published decisions, namely Blackstone Investments Ltd v Middleton-Dell
Management Co Ltd LRA/17/95 and Maryland Estates Ltd v 63 Perham
Road Ltd LRA/11/95*. In both cases it was the landlord who submitted that
residential ground rents of this type were valued on the basis of seven times
the current ground rent income, which accorded with his own experience and his
valuation. In neither case had there been reference to money market rates or
other financial vehicles to assess the value of the ground rent. His experience
in dealing with investing clients was that they made no such comparisons in
assessing what they were prepared to pay. In both the Lands Tribunal decisions
the landlord’s basis for valuing the ground rent was accepted, and he suggested
that Mr Shapiro’s approach was entirely novel and had no bearing on the way the
market operated to value residential ground rents.
*Editor’s note:
Reported at [1997] 2 EGLR 198
As to the
value of the existing leases, Mr Maunder Taylor said that reasonably recent
sales of two flats in Byland Close itself indicated a value of £60,000 for
flats in poor decorative repair and with neglected and overgrown gardens. This
supported his valuation of the subject properties at the valuation date in
September 1996 of £62,500, assuming satisfactory decoration and repair and
reasonably cultivated gardens.
He
particularly disagreed with Mr Shapiro as to the relative value of garages. The
two sales in Byland Close suggested there was no particular difference between
an adjacent garage and a garage in a block. Mr Maunder Taylor gave particulars
of sales in East Finchley and of garages held for sale by his own firm at
Sylvan Court, Woodside Park. Based on his experience, both of sales and
management, he concluded that the garages in Byland Close were worth £2,000
each and that there was no significant difference whether the garage adjoined
the flat or was in the block at the end of the cul-de-sac.
A further
matter of difference between Mr Shapiro and himself was the value of these
maisonettes on the hypothetical assumption of a new 999-year lease. He referred
to the sales of 4 and 13 Gladeside and 6 Winchmore Villas, each being a lease
of 999 years from about 1960. He concluded that the sum of £68,000 fairly
represented the valuation of a typical individual flat in Byland Close, and he
made no distinction between an extended lease with an additional 90 years and
the purchase of the freehold reversion with the grant of a hypothetical new
999-year lease. He saw no reason to uplift for the non-participating tenants.
There remained 63 years to run and the value was properly calculated by the conventional
deferment calculation. Accordingly, Mr Maunder Taylor put forward the following
valuations:
|
|
|
£ |
|
|
Flat 1 |
lease |
2,800 |
|
|
Flats 5–8, |
non-participating |
8,700 |
|
|
Flats |
non-participating |
8,700 |
|
|
Flats |
all |
11,300 |
|
|
Flats |
two flats |
5,700 |
|
|
Flats |
flat 26 |
8,700 |
|
Cross-examined
by Mr Denyer-Green, Mr Maunder Taylor agreed that as leases got shorter there
may be good reason to seek an extension and a landlord would look to a premium,
but these leases remained marketable and in many cases the tenant either does
not want or cannot afford a lease extension. In any event, the prospect of
future premiums was reflected in the reversionary calculation.
As to yield,
Mr Maunder Taylor agreed there were differences between this case and the Maryland
case, but there were similarities. He had adjusted seven times the ground rent
in that case, which produced a rate of 14.28% to 13% in this case.
Asked about
the auction sales of ground rents referred to by Mr Shapiro, Mr Maunder Taylor
said he did not deny this was the only market evidence produced, but he did not
consider these results represented what buyers are prepared to pay as there was
at the time a temporary blip in the market, and he disagreed with Mr Shapiro as
to the need for adjustments. He accepted that the prospect of insurance income
was a factor, but it was a small factor making a very slight difference
overall, perhaps up to 1%. In relation to garages, Mr Maunder Taylor said there
was no evidence in the immediate locality of a shortage of garages. In Byland
Close there were 27 garages for 28 flats. Quite a few tenants had no cars and
public transport was good. This was wholly different from Sylvan Court where
his firm were advertising garages for sale. There was a shortage in the area
and a demand from commercial users. He did not believe an adjoining garage
added value, and the market evidence was there in the sales of 3 and 4 Byland
Close.
As to the
value of the landlord’s reversionary interest, Mr Maunder Taylor said that 63
years unexpired was a very long time. The reversionary value would increase as
the term got shorter, but there was no evidence as to whether or when there
might be an opportunity to obtain a premium. Purchasers of ground rents were
all in the business of long term capital growth. There was a gamble, an
inevitable risk. The extent was not measurable except by means of reversionary
value. It was a form of gambling with better odds than the lottery.
As to the
value of the existing leases, Mr Maunder Taylor has taken the price paid for 3
and 4 Byland Close and added £2,500 for better condition to arrive at £62,500.
He made no adjustment for 1993 Act rights; this was a 63-year term for flats
close to shops and amenities and attractive to older people who do not want or
need an extended lease. He saw no real difficulty in mortgaging. Most mortgage
terms were 20 to 25 years and of the endowment type, and the length of term was
only one factor in mortgageability. He agreed there was a
accept the word ‘considerable’.
As to marriage
value, this was open to negotiation and it was not the case that marriage value
necessarily all belongs to a landlord in free negotiation. A landlord anxious
to sell or needing to sell may offer a tenant an attractive opportunity to
purchase. The landlord could not assume a higher share for the outside chance
of a premium from a non-participating tenant. In this case we know that the
non-participating tenants do not want to participate and do not want to extend.
A purchaser in the market would pay nothing for the possibility of a change of
mind, taking account also of the costs and fees incurred in the purchase.
Asked about
the comparables 4 Gladeside, 6 Winchmore Villas and 13 The Glade, Mr Maunder
Taylor said the minor differences in date were not material, and he felt that
taking an average of these three transactions was, in the circumstances, the
most reliable way to value the extended leasehold interest, since all were
similar in accommodation and all were cases of a new 999-year term. After
adjusting for improvements etc, the average was £68,000.
In re-examination
Mr Maunder Taylor said that where there is hope value of future premiums, that
should be reflected in the valuation of the reversion; that was the proper way
to calculate it.
In answer to
me Mr Maunder Taylor said that having considered the evidence he was prepared
to concede that there could be a small difference between the adjoining garage
and the block garage, but not more than about 10% of the value of the garage,
say £250.
Respondents’
submissions
Mr Iwi in
closing submitted that the appropriate yield should be 13% where the ground
rent was small and the costs of collection and administration were high. This
was also consistent with the Lands Tribunal decision in Maryland Estates
v 63 Perham Road Ltd, where evidence that residential ground rents sold
at 7YP (14.2%) was accepted. The auction sales relied upon by the appellant
included insurance and were advertised as such, and were therefore not
acceptable comparables.
There was no
justification for comparing the yield on PIBS, which provided a risk-free
return without administrative costs and was readily marketable without auction
costs or delays.
As to the
share of the marriage value, 50% was the norm in the absence of evidence that a
greater share would be obtained in the market: see Black v Eton
College [1995] 1 EGLR 223. Here the only justification given for a higher
share was ‘hope value’, which Mr Iwi submitted could not be taken into account
on the proper construction of para 4(2) of the Sixth Schedule. It was clear
that the landlord’s share of marriage value could not take account of sums that
might be paid at a later date by non-participating tenants. That was extraneous
to the marriage value and could not affect division of marriage value as
between the parties. Mr Denyer-Green had sought to rely on an implication from
the terms of section 18, but that section was of no assistance to him as the
valuation date represented a cut-off date by which the marriage value came to
be valued.
Mr Iwi
submitted further that, in any event, the leasehold valuation tribunal had been
right to conclude on the facts that there was no hope value. The
non-participating tenants were known to have rejected the opportunity to
participate, and the hope of a future premium is so remote as to be valueless
in the open market. If any addition were made to take account of
non-participating tenants, there would to that extent be double counting, since
any value to investors must be assumed to be taken into account already in the
price paid. As Mr Maunder Taylor has put it, any hope value was subsumed in the
calculation of reversionary value.
As to the
amount of marriage value, Mr Iwi pointed out that the assessments of Mr Maunder
Taylor and of the leasehold valuation tribunal were broadly in line, whereas
the appellant’s assessment put the value of an extended lease at about 25% more
than the value of the existing leases. This was quite unrealistic where leases
had 63 years to run, where the flats were modest and occupied by people who
were unlikely to be able or willing to pay substantial sums without compulsion
to do so.
There was no
basis for Mr Shapiro’s assertion that the sales of 3 and 4 Byland Close were
‘contaminated’ by the tenants’ statutory rights. With 63 years unexpired it
must be wrong to ascribe a significant sum to the value of the statutory
rights. The other comparables also supported the tenants’ valuation, as the
price of £3,500 paid for the lease extension at 18 Park House made clear. He
submitted that the £6,000 paid at 13 Park House could be explained by the wish
to avoid the delay and expense of an application under the Act. It was
significant that the settlement at 18 Park House followed that at 13 Park
House, indicating that the landlord must have known that £6,000 could not be
supported if challenged.
In any event,
neither of these comparables was consistent with the appellant’s claim that the
extended lease is worth £15,000 more than the existing lease.
Mr Iwi
submitted that the claim was flawed for a number of reasons which he
enumerated, principally:
(a) the
overall figure of £15,000 made no sense and there was no warrant for this
arbitrary method of calculation;
(b) there were
repeated errors in Mr Shapiro’s valuation including a failure to take account
of price increases up to the valuation date;
(c) a failure
to adjust 3 and 4 Byland Close to allow for the want of repair;
(d) failure to
average the prices of comparables, using the maximum price of £70,000 for 4
Gladeside. Bearing in mind that one figure was only an asking price, he
submitted that Mr Maunder Taylor’s average of £68,000 was a generous maximum;
(e) the garage
value was overstated;
(f) the
difference between an adjoining garage and a block garage was overstated. If
there is any difference it should not exceed the £1,000 found by the leasehold
valuation tribunal.
Mr Iwi
submitted finally that the Lands Tribunal was entitled to take account of the
leasehold valuation tribunal’s decision and ought not to overrule it unless
convinced it was clearly wrong. He referred to Sinclair Gardens Investments
(Kensington) Ltd v Franks LRA/19/96 (Judge Rich QC).
Appellant’s
closing submissions
Mr
Denyer-Green, in reply, said that the appeal to the Lands Tribunal had always
been regarded as a rehearing de novo and cited Mr VG Wellings QC in Re
London & Winchester Properties Ltd’s Appeal (1983) 45 P&CR 429*. It
was very important that the point be clarified as the position of a respondent
was affected. A respondent would have to decide whether to support the
leasehold valuation tribunal’s decision or to cross-appeal in order to rely on
its own evidence.
*Editor’s
note: Also reported at [1983] 2 EGLR 201
With regard to
yield, Mr Shapiro had relied on actual market evidence of sales to support
8.7%. Mr Maunder Taylor did not. Mr Maunder Taylor’s suggestion of a temporary
blip in auction prices was unsupported and tentative. If insurance commission
was to be included, Mr Maunder Taylor’s own evidence suggested an adjustment of
1% would be sufficient. Previous decisions on yield were unacceptable, being
based on different evidence and not available for cross-examination at this
hearing: see Land Securities plc v Westminster City Council (No 2)
[1995] 1 EGLR 245. In any case, the property in the Maryland case was
quite different, an old house converted to four flats with consequent
management problems.
If the yield
rate for valuing the term should be higher (which Mr Shapiro denied), then the
rate used for valuing the reversionary interest in possession should be lower,
reflecting a guaranteed and inflation proof value without collection problems.
Mr
Denyer-Green submitted that the garage value was not less than the selling
price of £2,500 to £2,750 sought by Mr Maunder Taylor’s firm in an area with
more garages than dwellings. The only considered
Taylor’s £240 was a grudging afterthought.
As to
assessing the marriage value, Mr Denyer-Green said there was no ground for the submission
that Mr Shapiro’s uplift of £15,000 must be wrong in principle. Mr Shapiro had
used the same approach as Mr Maunder Taylor by seeking to establish the value
of the existing leases and then the extended leases. If that approach is
correct, then Mr Maunder Taylor’s price for the lease extension at 1 Byland
Close is clearly suspect. He attributed £2,670 as 50% of the marriage value in
the face of market transactions at 13 and 18 Park House at £6,000 and £3,500.
If these were averaged at £4,750, this was for properties similar in size and
location, but of lower value.
He submitted
that there must be a differential between the value of 63-year leases and
longer terms because: (a) mortgageability problems were met below about 60
years; and (b) the lease extensions at 13 and 18 Park House demonstrated a
marriage value which can only exist where there is a differential.
As to the
value of existing leases, there was no good reason to seek extensions if there
is no differential. The effect of the 1993 Act, which gave part of the marriage
value to the existing tenant, made it necessary to adjust downwards any
post-Act transaction in existing unextended leases to reflect the statutory
rights of the purchaser. Thus, the sales of existing leases at 3 and 4 Byland
Close require downward adjustment, as Mr Shapiro has said, of £5,000.
As to the
value of extended leases, the sale of 4 Gladeside at £70,000 in July 1996 was
the closest to the valuation date. 13 The Glade was to be ignored as there was
never an actual transaction, while Mr Maunder Taylor has accepted an upward
adjustment of £5,000 of 6 Winchmore Villas to allow for a poorer location.
Neither 4 Gladeside nor 6 Winchmore Villas had a garage, and therefore each
required further additions for the garages which all the subject flats had.
As to hope
value, Mr Denyer-Green raised two questions: (1) can hope value be recovered as
a matter of construction of Schedule 6; and (2) is there hope value as a matter
of fact? He had dealt with the former in opening. As to the latter, he
submitted that the present intentions of non-participating tenants were
irrelevant. As Mr Shapiro has said, death was a certainty and they or their
heirs/executors will want to sell at some future time. In view of
mortgagability problems, there were strong reasons to seek lease extensions,
and therefore hope value must be there as Mr Shapiro’s evidence indicated. The
argument of Mr Maunder Taylor that this value is covered by the residuary
valuation is plainly wrong, as he attributed only £31 for the reversionary
value. This offended commonsense. Mr Denyer-Green submitted finally that each
of the supposed ‘flaws’ identified by Mr Iwi was misconceived. The reasoning of
Mr Shapiro was soundly based on the judgment and opinion of a very experienced
valuer and should be accepted.
Neither party
considered that I would be assisted by an inspection of the subject properties.
Decision
In practical
terms, this case is a rerun of the cases presented before the leasehold
valuation tribunal, with the same witnesses giving virtually the same evidence.
Historically, the Lands Tribunal has not acted as a court of review, but has
treated every appeal as a hearing de novo, with the parties entitled to
call fresh evidence if so advised. This tribunal in determining an appeal has
not hitherto been concerned to consider whether the decision appealed against
was right or wrong, save perhaps in relation to the costs of the appeal
proceedings. However, I am not aware of any statutory provision which binds the
tribunal to conduct the appeal in this way, or indeed in any particular way.
The relevant
statutory provision, which emerges obscurely from para 2 of Schedule 22 to the
Housing Act 1980, as applied by section 91(10) of the 1993 Act, merely creates
a right of appeal from the decision of the leasehold valuation tribunal to this
tribunal. In my judgment, where, as in this case, a competent leasehold
valuation tribunal (which is assumed to have local market knowledge) has
decided matters of fact and value on the opinion evidence of valuers and an
inspection of the subject premises, then on a subsequent appeal to the Lands
Tribunal, at least where there is no suggestion of any dispute as to matters of
law or of valuation principle, the Lands Tribunal should be slow to disturb the
decision of the leasehold valuation tribunal unless satisfied that the decision
is clearly wrong. This is consistent with the views expressed by Judge Rich QC
(sitting as a member of the Lands Tribunal) in the case of Sinclair Gardens
Investments (Kensington) Ltd v Franks LRA/19/96.
In reference
to the task of the Lands Tribunal on appeal, Judge Rich referred to the
comments of Mr Peter Clarke frics
in the case of Swann v White [1996] 26 EG 136*, at p137, inter
alia, quoting the former president, Mr Wellings, in the case of London
& Winchester Properties (supra). In the following passage, Judge
Rich said:
*Editor’s
note: Also reported at [1996] 1 EGLR 199
For myself I
am hesitant to rely on any expertise of my own, but I would treat new evidence
brought before the Lands Tribunal for the first time with, if not particular
scepticism, at least with particular care, for I would not wish to encourage
lessors to think that they can reserve the evidence which should have been
offered to the Leasehold Valuation Tribunal, when the parties appeared on equal
terms, to the appeal before the Lands Tribunal, where the nominee purchaser may
have exhausted funds and is on risk as to costs. I agree with Mr PH Clark (sic)
that unless I am satisfied by the Appellant’s evidence that the Leasehold
Valuation Tribunal was wrong, I should allow the decision to stand, rather than
interfering with it because another valuation might equally be said not to be
wrong. To this extent, I do think that it is proper for me to have regard, if
not to the evidence before the Leasehold Valuation Tribunal, except insofar as
the parties otherwise agree, at any rate to their decision.
I entirely
agree with those comments of Judge Rich, and I draw attention to the anomalous
situation which has arisen, whereby leave to appeal is now required for appeals
arising under the 1996 Act (in relation to service charges etc) although an
appeal as of right remains in cases of the price of enfranchisement or extended
leases under the Acts of 1967 and 1993. Consideration should be given to
imposing a requirement of leave to appeal in all cases from the leasehold
valuation tribunal.
What is to be
determined in these appeals is, first, the premium payable by the tenant for
the grant of a new lease of 1 Byland Close and, second, the price payable by
the nominee purchaser for the freehold interest in the remaining properties.
Both determinations require application of a statutory formula, provided in the
first case by Schedule 13 and in the second case by Schedule 6 to the 1993 Act.
The formulae have common features, requiring valuation, inter alia, of
the existing lease, of the landlord’s reversionary interest and of the
landlord’s share of marriage value.
In relation to
1 Byland Close, the existing lease had 63 years unexpired at the valuation
date, and accordingly, what is to be valued is the premium payable for the
grant of a new lease for a term of 90 years commencing in 2059 at a peppercorn
rent.
Before the
leasehold valuation tribunal, the landlord’s valuer, Mr Shapiro, had contended
for £7,792 and the tenants’ valuer, Mr Maunder Taylor, for £2,800. The
leasehold valuation tribunal valued the premium at £3,580. The issues raised
between the parties were: (i) the value of the existing lease which the
leasehold valuation tribunal held to be £63,000; (ii) the value of the extended
lease which the leasehold valuation tribunal held to be £70,000; and (iii) the
rates for capitalising the ground rent and for deferring the reversion. The
leasehold valuation tribunal adopted 13% for both in agreement with Mr Maunder
Taylor. The difference between Mr Maunder Taylor’s valuation and the decision
of the leasehold valuation tribunal is accounted for entirely by the fact that
the leasehold valuation tribunal disagreed with Mr Maunder Taylor as to the
value of an adjoining garage as compared with a garage in the block. The
leasehold valuation tribunal took the view that there was some additional value
in an adjacent garage.
Before me, the
appeal has followed the same pattern. Mr Shapiro and Mr Denyer-Green have
sought to persuade me that the value of the
that an appropriate yield rate is 8.7% providing YP 11.5. The same comparables
were relied upon and the same arguments deployed, including the reference to
auction sales of ground rents and a comparison with other forms of investment
such as PIBS.
The tenants
responded to the landlord’s appeal and subsequently cross-appealed. Mr Maunder
Taylor has spoken to the same valuation as before the leasehold valuation
tribunal. However, neither he nor Mr Iwi has sought to challenge the decision
of the leasehold valuation tribunal and Mr Iwi described the cross-appeal as a
protective measure.
Having
considered the evidence, I take the view that the existing leasehold interest
is properly valued at £63,000; that the value of the extended leasehold interest
is £70,000; and that the appropriate rate for capitalising the ground rent and
deferring the reversion is 13%. In coming to these conclusions, I have taken
account of the difference between the valuers as to the benefit of an adjoining
garage as against a garage in a block, and I agree with the leasehold valuation
tribunal that there is some additional value in an adjacent garage, which can
be used more conveniently for storage or as a workshop. The calculation thus
proceeds in accordance with the formula and as set out in the leasehold
valuation tribunal decision. I hold that the premium payable is £3,580.
Accordingly, the appeal and the cross-appeal will be dismissed and the
leasehold valuation tribunal’s decision affirmed.
With regard to
the other subject properties, much the same course has been followed. Indeed
the applications to the leasehold valuation tribunal in respect of Byland Close
were heard together and the decisions issued on the same day. The issues raised
are not precisely the same as in the case of 1 Byland Close.
For the
purpose of determining the price to be paid for the freehold by the nominee
purchaser (the respondent) the differing contentions of the parties concerned:
(a) the value of the existing leases. This raised again the difference of view
as to the value of garages. The leasehold valuation tribunal found the value to
be £63,000 with an adjoining garage and £62,000 with a garage in the block; (b)
the value of the virtual freehold acquired. The leasehold valuation tribunal
determined that value as £69,000 for a flat with garage in the block and
£70,000 for one with an adjacent garage; (c) the appropriate yield rate, which
the leasehold valuation tribunal took at 13%; and (d) whether the landlord’s
share of marriage value should be adjusted above 50% to reflect hope value in
respect of the non-participating tenants. The leasehold valuation tribunal in
effect held that the prospect of securing premiums for future lease extensions
was too uncertain and remote to be taken into account in valuation.
Before me the
same arguments have been deployed, perhaps in more elaborate form, and
substantially the same evidence has been relied on. Having considered the
evidence and the submissions of both sides, I find it unnecessary to say more
than that I agree with the reasoning of the leasehold valuation tribunal and
with their conclusions. I find that there is a differential between a flat with
an adjacent garage and a flat with a garage in the block, which can reasonably
be expressed as £1,000. Thus, I consider the existing leases have a value of
£62,000 and £63,000 respectively; that the value of the extended leases with a
share of the freehold is £69,000 and £70,000 respectively; that 13% is the
appropriate yield rate and that no addition falls to be made in respect of hope
value, whether by increasing the landlord’s share of marriage value as
suggested by the appellant or otherwise. Accordingly, I adopt the valuations as
set out in the leasehold valuation tribunal decisions and dismiss both the appeal
and the cross-appeal.
The amounts
payable by the nominee purchaser to the freeholder are therefore as follows:
|
|
£ |
|
|
5–8 Byland |
10,900 |
|
|
13–16 |
10,900 |
|
|
17–20 |
14,320 |
|
|
23–24 |
7,160 |
|
|
25–28 |
10,900 |
|
This decision
determines the substantive issues raised between the parties, and the
tribunal’s award is final. The parties are invited to make such submissions as
they are advised as to the costs of the hearing, and a letter accompanies this
decision as to the procedure for submissions in writing. The tribunal will, in
due course, incorporate an order as to costs in an addendum to this
decision. Rights of appeal under section 3(4) of the Lands Tribunal Act 1949
and Rules of the Supreme Court Ord 61 will not accrue until the decision has
been thus completed, ie from the date of the addendum.
Addendum
as to costs
I have
received and considered the submissions of the parties as to costs. The
appellant does not seek to resist an order that it pays the respondents’ costs
of the appeals, but claims that the respondents’ cross-appeals were unnecessary
and were in the event unsuccessful.
I doubt
whether either side incurred any more than nominal additional costs by reason
of the lodging of cross-appeals, which the respondents did not in fact pursue
at the hearing. In any case, it seems to me that the hearing of both appeals
and cross-appeals would have been avoided if the appellant had accepted an
adequate offer of settlement made by the respondents in good time before the
hearing.
In all the
circumstances, the order I make is that the appellant pays the respondents’
costs of the appeals and cross-appeals, such costs if not agreed to be taxed by
the registrar on the standard High Court basis.
