Wilkes v Larkcroft Properties Ltd

Leasehold Reform Act 1967 — Appeal from decision of Lands Tribunal (Mr W H Rees FRICS) — Questions raised by tenant as to (1) whether there was evidence to support decision as to price, (2) whether tribunal was wrong in law in failing to apply the ‘adverse differential’, (3) whether tribunal was wrong in not applying the ‘Delaforce effect’ and (4) whether tribunal had wrongly exercised the discretion as to costs — All criticisms of tribunal’s decision rejected by Court of Appeal — Premises consisted of two-storey inner-terrace house in Birmingham built before 1919, subject to a lease with 17 1/2 years to run at relevant date — Tenant’s valuer’s price was £265, landlords’ £462 and tribunal’s determination was £420 — Both valuers adopted the ‘standing house approach’ and the entirety value was agreed at £4,500 — There was a difference between them as to the percentage attributable to site value and to the rates of interest used in the final calculation, the tenant’s valuer decapitalising at 6% and recapitalising at 8% (thereby applying the adverse differential) while the landlords’ valuer used 7% for both operations — Held by the Court of Appeal that there was evidence to support the tribunal’s decision; that evidence of purchases of ground rents en bloc did not justify the claim that an adverse differential should as a matter of law be applied in this case; that the tribunal did not err in law in declining to make a deduction for the ‘Delaforce effect’; and that, as the tenant’s sealed offer was less than the figure determined by the tribunal, the court had no ground for interfering with the exercise of the discretion as to costs — A number of authorities were considered by the court, including Official Custodian for Charities v Goldridge This was an appeal by case stated from a decision of the Lands Tribunal (Mr W H Rees FRICS) in respect of the price payable under the Leasehold Reform Act 1967 for the freehold interest in a house at 28 Teall Road, Saltley, Birmingham. The tenant, Miss Lily Wilkes, appealed against the tribunal’s determination of a price of £420. The tribunal’s decision was given on January 13 1981 and was reported at (1981) 257 EG 1160. Harry Sales (instructed by Saltley Action Centre) appeared on behalf of the appellant; Michael Dudley (instructed by Wallace Robinson & Morgan) represented the respondents. Giving the first judgment at the invitation of Eveleigh LJ, SIR DAVID CAIRNS said: This is an appeal by way of case stated from the Lands Tribunal in respect of the price to be paid for the purchase of a freehold interest under the Leasehold Reform Act 1967. The relevant statutory provisions are as follows. Section 1(1): This Part of this Act shall have effect to confer on a tenant of a leasehold house, occupying the house as his residence, a right to acquire on fair terms the freehold or an extended lease of the house and premises where — (a) his tenancy is a long tenancy at a low rent and (subject to subsections (5) and (6) below) the rateable value of the house and premises on the appropriate day is not (or was not) more than £200 or, if it is in Greater London, than £400; and (b) at the relevant time (that is to say, at the time when he gives notice in accordance with this Act of his desire to have the freehold or to have an extended lease, as the case may be) he has been tenant of the house under a long tenancy at a low rent, and occupying it as his residence, for the last five years or for periods amounting to five years in the last ten years; and to confer the like right in the other cases for which provision is made in this Part of this Act. Section 8(1): Where a tenant of a house has under this Part of this Act a right to acquire the freehold, and gives to the landlord written notice of his desire to have the freehold, then except as provided by this Part of this Act the landlord shall be bound to make to the tenant, and the tenant to accept (at the price and on the conditions so provided), a grant of the house and premises for an estate in fee simple absolute, subject to the tenancy and to tenant’s incumbrances, but otherwise free of incumbrances. Section 9(1): Subject to subsection (2) below, the price payable for a house and premises on a conveyance under section 8 above shall be the amount which at the relevant time the house and premises, if sold in the open market by a willing seller (with the tenant and members of his family who reside in the house not buying or seeking to buy) might be expected to realise on the following assumptions:– (a) on the assumption that the vendor was selling for an estate in fee simple, subject to the tenancy but on the assumption that this Part of this Act conferred no right to acquire the freehold; and if the tenancy has not been extended under this Part of this Act, on the assumption that (subject to the landlord’s rights under section 17 below) it was to be so extended; . . . Section 14(1): Where a tenant of a house has under this Part of this Act a right to an extended lease, and gives to the landlord written notice of his desire to have it, then except as provided by this Part of this Act the landlord shall be bound to grant to the tenant, and the tenant to accept, in substitution for the existing tenancy a new tenancy of the house and premises for a term expiring fifty years after the term date of the existing tenancy. Section 15(2): The new tenancy shall provide that as from the original term date the rent payable for the house and premises shall be a rent ascertained or to be ascertained as follows:– (a) the rent shall be a ground rent in the sense that it shall represent the letting value of the site (without including anything for the value of buildings on the site) for the uses to which the house and premises have been put since the commencement of the existing tenancy, other than uses which by the terms of the new tenancy are not permitted or are permitted only with the landlord’s consent; (b) the letting value for this purpose shall be in the first instance the letting value at the date from which the rent based on it is to commence, but as from the expiration of twenty-five years from the original term date the letting value at the expiration of those twenty-five years shall be substituted, if the landlord so requires, and a revised rent become payable accordingly; (c) the letting value at either of the times mentioned shall be determined not earlier than twelve months before that time (the reasonable cost of obtaining a valuation for the purpose being borne by the95 tenant), and there shall be no revision of the rent as provided by paragraph (b) above unless in the last of the twenty-five years there mentioned the landlord gives the tenant written notice claiming a revision. The words in brackets in section 9(1) were introduced by section 82 of the Housing Act 1969. The premises concerned are a house, 28 Teall Road, Saltley, Birmingham. Miss Wilkes was the tenant under a lease which had 17 1/2 years to run at the relevant date and Larkcroft Properties Ltd were the landlords. Mr W H Rees, the member of the Lands Tribunal who heard the reference, determined the price to be paid at £420 and ordered the tenant to pay the costs. She appeals, contending that the member made errors of law which caused him to fix too high a price and that he wrongly exercised his discretion as to costs. The questions raised by the case stated are: (1) whether there was any evidence to support the decision as to price; (2) whether the member was wrong in failing to apply to the figures put before him what is called an ‘adverse differential’ — no doubt because it is adverse to the landlords; (3) whether the member was wrong in not taking account of a doctrine called the ‘Delaforce effect’ — so called because it was introduced in Delaforce v Evans (1971) 22 P & CR 770; (1970) 215 EG 315; (4) whether in reaching a decision as to costs he was wrong to ignore the fact that the value he had determined was only £20 above that offered by the tenant, but was £80 below what the landlords had been prepared to accept. Evidence of value was given by a Mr G Green for the tenant and by a Mr P J Lloyd for the landlords. They both made the same approach. The first element was the capitalised value of the ground rent under the lease. The other and larger element was the estimated value of the site at the expiration of the lease. Each valuer first estimated the ‘entirety value’, ie the total value of the house and land; then took a percentage of that figure to represent the present value of the site; then decapitalised that figure to give a notional rent in accordance with section 15 of the Act; then assessed the capital value of that rent in perpetuity deferred for 17 1/2 years, a process called recapitalisation. It appears from several reported cases that this method of calculation is the one regularly adopted by valuers in this context. The differences between the valuers were as follows: Mr Green took 7% as the appropriate percentage in capitalising the ground rent and Mr Lloyd took 8%, but that made only £3.50 difference in the final figure and no point is made on it in the appeal. Both valuers took the entirety value as £4,500, but Mr Green put the site value at 25% thereof whereas Mr Lloyd put it at 30%. Next Mr Green decapitalised at 6% and recapitalised at 8% (the adverse differential), whereas Mr Lloyd used 7% for both operations. In the result Mr Green’s final figure was £265 and Mr Lloyd’s was £462. Various comparisons were made by each valuer in support of his figures. A Mr Woodhead was called in support of the landlords’ case, but the member said he derived little help from his evidence. The member found that Mr Green’s calculations had almost no support, but that Mr Lloyd’s had considerable support. He said that Mr Lloyd’s £462 was in the right range, but Mr Green’s £265 was too low. The member, however, took a figure of 27% instead of Mr Lloyd’s 30% for the site value calculation and on that ground reduced the £462 to £420. In regard to costs, the reason the member gave for awarding costs to the landlords was that on opening the sealed offers he found that the tenant’s offer was below £420. Evidence as to price. Mr Lloyd gave evidence of some comparables and it is impossible to say that there was no evidence to support the decision. It has to be remembered at all stages that the appeal to this court is on law only and, assuming that there was some evidence and that no error of law was made in applying it, the appeal cannot succeed. As to site value, it was common ground that outside London site value should generally be reckoned at from 25% to 33 1/3% of entirety value. For the tenant it was contended that the correct percentage here would be 25% because the curtilage was very small and the area was depressed and obsolescent. There was, however, evidence that a claim in respect of a similar house in the same area had been settled on a basis from which it could be implied that the site value had been reckoned at 27% of entirety value. The issue was not one of law but of fact and opinion. There was evidence to support the member’s conclusion and this court cannot interfere. Adverse differential. There has been a practice for at least 12 years of recapitalising the section 15 ground rent at a higher rate of interest than the rate at which the site value was decapitalised to obtain that section 15 rent. The practice has not been universal. In Siggs v Royal Arsenal Co-operative Society Ltd (1971) 220 EG 39 an expert witness expressed the firm opinion that there were no grounds to justify it. Mr Lloyd in his evidence in this case said that he had not used it for the last five years. The ground usually relied on by those who support its use (see, for instance, Lead v J & L Estates (1976) 31 P & CR 495; (1975) 236 EG 819, [1975] 2 EGLR 200) is that the decapitalisation has to be considered as taking place in an open market, in which the tenant himself is a possible bidder; that he cannot be regarded as a bidder for the recapitalisation because he is excluded by the terms of the amendment introduced into section 9 of the Act of 1967 by section 82 of the Housing Act 1969; that he is likely, if bidding at all, to be the highest bidder, and that therefore the market price must be considered to be more on the decapitalisation than on the recapitalisation. If this is right, it would involve the use of a higher multiplier at the second stage than at the first. If I were free to do so, I should be tempted to accept this reasoning, but it was firmly rejected as a general proposition by this court in Official Custodian for Charities v Goldridge (1973) 26 P & CR 191. Lord Denning MR said at p 209: It may be that in some cases there may be evidence which would justify the use of an ‘adverse differential’ . . . Mr Edwards for the tenant here was unable to point to any such evidence or to put forward any ground to justify its use except that it was ‘valuation technique’. It has not been in force so long as to acquire a peculiar sanctity. Unless some such evidence or reasons are forthcoming I think that the Lands Tribunal should give up using the ‘adverse differential’. Megaw LJ said at p 210: I am unable to understand on what reasoning the adverse differential can be justified, as a matter of general principle or practice, by reference to the section 82 amendment. I respectfully agree with the view which Lord Denning MR has expressed on this topic. Scarman LJ said at the foot of p 212: For the reasons already given by Lord Denning MR, I agree that the use of the differential to exclude the tenant’s overbid is inconsistent with the statute. If, however, there be factors operating in the market to produce a genuine difference between the letting value of the site as represented by a ground rent and the price which an investor-purchaser would pay for the encumbered freehold, it is, in my view, a legitimate and appropriate device for calculating that difference. Thus the legitimacy, or otherwise, of its use must depend on circumstances, and particularly on the market conditions relevant to the particular property concerned. Mr Hague says that no ‘willing seller’ would accept a price which represented a loss on the letting value of his site, but his proposition is fact, not law. If the property market is such that an investor-purchaser will not pay a price which represents the letting value of the site, a Lands Tribunal decision which uses the adverse differential to calculate the difference between market price and letting value cannot be faulted. Some Lands Tribunal decisions, for example, Siggs v Royal Arsenal Co-operative Society Ltd, have used the differential to exclude the possibility of the tenant’s overbid; in doing so they have erred in law. Some have used it not to exclude the tenant’s overbid but to find a true market price, for example, Lake v Bennett (1971) 219 EG 945, 949. On the assumption that the evidence in that case supported the existence of factors operating on the market to produce the difference, the decision cannot, in my opinion, be criticised as wrong in law. At the foot of p 213 Scarman LJ added: I read the tribunal’s decision as proceeding on the basis that an investor-purchaser would expect a greater return on his money than an owner of land is content to take on granting a 50-year lease at a ground rent. If there be evidence as to the state of the market which supports this view of it, well and good. In Chilcott v Clinton Devon Estates (1974) 27 P & CR 282*, Mr Stuart Daniel QC, a very experienced and highly respected member of the Lands Tribunal, said at the foot of p 286: As regards one matter, the main flow of evidence has been all one way; that an investor-purchaser would expect a greater return on his money than the freeholder would obtain on the granting of a lease under the terms of section 15. For convenience a name, ‘adverse differential’, has become attached to this difference between the two rates of return. But, as has been seen, this ‘adverse differential’ does not rest on any theory or principle of valuation; nor does it involve any question of law; it is indeed no more than a by-product of the cumulative factual and opinion evidence which the tribunal has received in the cases heard under this branch of its jurisdiction. *Editor’s note: See also (1974) 229 EG 39, 41. 96 I do not read this passage as meaning that an adverse differential should be used in every case; that would be contrary to the Goldridge decision. In my judgment the right approach is that indicated in the passages I have read from Scarman LJ’s judgment, that is to say, to see whether the evidence in the particular case makes the application of an adverse differential appropriate. In the present case evidence was indeed given on both sides directed to this matter. Mr Green referred to sales in the market of fairly large groups of ground rents in Birmingham to investor-purchasers who bought with a view to selling off individual ground rents to tenants. He was able to point to a number of cases where the selling price exceeded the buying price. The decision, however, contains the following observations: ‘In his’ — Mr Lloyd’s — ‘opinion purchases of ground rents en bloc were of no assistance in determining the price to be paid for an individual freehold: the market was a different one with different considerations. This was confirmed by Mr Green.’  Later the member said: ‘I derive little assistance from the evidence spoken to by Mr Green of offers made by freeholders to individual tenants. I accept the view of both experts that the factors affecting the supply of and demand for ground rents in bulk are not the same as the factors which apply in the case of the purchase of an individual ground rent.’ Mr Lloyd’s evidence related mainly to settlements arrived at in cases he had dealt with, and the member found most helpful the settlement in respect of 20 Herrick Road, a comparable house in the same part of Saltley as Teall Road, where there was a settlement at £375. The member preferred Mr Lloyd’s evidence to Mr Green’s. I find it quite impossible to say that this was a case where the evidence was such as to indicate that adverse differential must as a matter of law be applied. ‘Delaforce effect’. In Delaforce v Evans it was found that there was a tendency for tenants to pay more than the calculated value to obtain the freehold interest and so to unify the ownership without the trouble and expense of a reference to the Lands Tribunal. This doctrine has, we were told, been frequently applied since 1971. It was relied on in the present case mainly in support of the argument that an adverse differential was of general application. In that connection it cannot prevail in view of the decision in the Goldridge case. It might be used as a basis for attacking the use of comparables based on settlements and the member here referred to it in that light in connection with the settlement in the case of 20 Herrick Road. But he took the view, rightly in my opinion, that if it had been intended to rely on the ‘Delaforce effect’ in that connection it ought to have been put to Mr Lloyd in cross-examination. There was clearly no error of law in not applying the ‘Delaforce effect’ here. Costs. Costs are always a matter of discretion. A sealed offer by a tenant in a leasehold enfranchisement case is analogous with a payment into court in an action for damages. If a payment-in falls short of the sum awarded the defendant usually has to pay all the costs. I would not say that in a case before the Lands Tribunal it would be wrong to take account of a counteroffer made on a landlord’s behalf and to make some order more favourable to the tenant on that account if his offer were nearer to the sum awarded than the landlord’s was. But the member was certainly not bound to adopt that course. This court cannot interfere with the exercise of his discretion. Accordingly, I would answer all the questions in the case stated in favour of the landlords and would dismiss the appeal. O’CONNOR LJ agreed that the appeal should be dismissed for the reasons given by Sir David Cairns. Also agreeing, EVELEIGH LJ said: The ultimate question is the value of the house with a tenant who is not a bidder. This could be proved by opinion — evidence from experts based on experience of sales in similar conditions. However, both sides seek to establish the value, as opposed to supporting an opinion, by a formula. The issue is whether an adverse differential should be applied. If an adverse differential is to be relied upon, evidence of facts which justify it must be adduced. (See Official Custodian for Charities v Goldridge (1973) 26 P & CR 191.) The facts relied upon by the appellant are to be found at p 1160 of the decision, namely, there were comparable bulk purchases at £100 a house. While this in fact produced a low initial yield from the actual rent receivable, the eventual yield was high because the houses were bought by tenants for £300 to £450. The member did not regard this as justification for a higher differential rate. The main ground of this appeal says he was wrong because ‘he disregarded the evidence of the willingness of purchasers to pay a price for a freehold interest which gives a low yield, because of their view to a high profit on selling to individual leaseholders’. In my opinion the member was right. If a formula is to be applied which requires a rent to be ascertained, that is, a section 15 rent, and then seeks to discover the investment value of that rent, then prices paid in the market are only relevant for formula purposes if they are prices paid for the postulated rent yield. The purchases relied upon showed a low rent yield. They aimed at and achieved a high profit turnover only on sale to tenants. I therefore think the member was right in regarding those purchases as irrelevant for formula purposes. For those reasons and those stated by Sir David Cairns, I, too, would dismiss this appeal.