Price of freehold of semi-detached house at Solihull with 57 years of lease unexpired and £8 pa ground rent — Important and thoughtful decision on use of standing house approach, particularly where unexpired term in ‘grey area’ between 50 and 75 years — Main issue was which of two distinct methods of valuation in relation to length of unexpired term precedent had established should be used: (1) valuation of ground rent in perpetuity when there is long unexpired term and (2) valuation of reversion by standing house approach, with addition of value of term, when unexpired term is shorter — Tenant valued at £80 using former method while landlord valued at £831 adopting latter method
be applied to entirety value to derive site value also in issue if standing
house approach adopted — On this point tribunal found for 37%, as against
landlord’s 40%, having regard to present site’s characteristics of being
capable of development and being located in good residential area —
Accordingly, if tribunal adopted standing house approach, their valuation would
be £776.74 — In event, that figure found too high
valuer contended that traditional break point at which value of reversion
ceased to be relevant was 60 years but that recent significant rise in interest
rates should result in break point nearer 50 years — Landlord’s valuer argued
that 57 years was significantly less than generally accepted break point of
around 70 years adopted by tribunal — Put simply, question before tribunal was
whether market was likely to reflect different figure for right to receive (a)
£8 pa in perpetuity, (b) £8 for 57 years and current ground rent thereafter in
perpetuity, and, if so, what was best valuation method to reflect that figure
recognising relevance of previous decisions, tribunal felt they should not
become so attached to a convenient formula that it blurred the objective — In
present case, tribunal found, market would reflect a value in reversion —
Having so decided, it was axiomatic that calculation by accepted standing house
approach, if adopted, would produce relatively high valuation for reversion —
Standing house approach not completely dependable and in present case
relatively remote from reality — It was unacceptable per se, as it was not
derived directly from free market evidence
model of facts, where only variable factor was length of unexpired term,
considered by tribunal — This showed grey area of about 50 to 75 years and that
the longer the unexpired term the more likely a valuation in perpetuity was
appropriate — As unexpired term became smaller, however, a method of valuation
of reversion (standing house approach in present case) became appropriate — In
model there must be some point in time at which standing house approach was
incorporated in valuation and at that point a ‘very large jump’ in end
valuation occurred — Such a significant, sudden jump would not be reflected in
market and a smooth transition would be more likely — In grey area, tribunal
therefore found, consideration should be given to (1) tempering end valuation
produced by standing house approach and (2) applying lower yield for valuation
of ground rent in perpetuity — In general terms, precedent provided clear
guidance that valuation when unexpired term was less than, say, 50 years should
incorporate valuation of reversion and that unexpired term of more than, say,
75 years should exclude value of reversion — Tribunal stressed, however, that
limits of grey area thus stated were not intended to be definitive guide
to length of unexpired term in present case, valuation of reversion adopting
standing house approach was appropriate but should be tempered to reflect
particular facts of (1) relatively nominal amount of ground rent and (2) high
site value — Using their own knowledge and experience, tribunal determined
price of £600
The following
case is referred to in this report.
Mimmack v Solent Land Investments Ltd (1973) 26 P&CR 139; [1973]
EGD 635; 226 EG 1771, LT
L Abrahams MA
FRICS FRVA, of Lolga Enterprises, Coventry, appeared for the applicant tenant,
Mrs M E Wood; A Shepherd FRICS FRVA, of Bigwood Ltd, Birmingham, appeared for
the freeholder, Martindale Developments Ltd.
Giving their
decision, THE TRIBUNAL said: This is a decision on an application by the
tenant for a determination under section 9 of the Leasehold Reform Act 1967, as
amended, of the price payable for the freehold interest in the dwelling-house
and premises at 54 Greyfort Crescent, Olton, Solihull, West Midlands. We
inspected the property on November 29 1989.
The tenant
holds the subject property under a lease for a term of 99 years from December
25 1946 at a ground rent of £8 per annum. The tenant’s notice of claim to
purchase the freehold is dated January 11 1989. The unexpired term of the lease
at that date was, therefore, about 57 years. We and the parties accept that the
qualifying conditions for entitlement to enfranchise under the Act have been
met.
The subject
property comprises a semi-detached house of traditional brick and tile
construction. It has been extensively modernised and improved including:
conversion of the former attached brick garage to a dining-room; bedroom above
the dining-room; new double-glazed window frames throughout; and full gas-fired
central heating to radiators. The accommodation includes: on the ground floor —
enclosed porch entrance, hall, through lounge, dining-room, kitchen; first floor
— three bedrooms, bathroom and wc. The house is built on a corner site of about
390 sq. yds.
|
Valuation by Mr Abrahams (for the tenant) |
||||
|
Ground rent |
£8 |
|
|
|
|
YP in perp @ 10% |
10 |
|
£80 |
|
|
Valuation by Mr Shepherd (for the freeholder) |
||||
|
(Amended to reflect the |
|
|
|
|
|
Term |
|
|
|
|
|
Ground rent reserved |
£8 |
|
|
|
|
YP for 57 years @ 7% |
13.984 |
|
£112 |
|
|
Reversion |
|
|
|
|
|
Standing house |
£85,000 |
|
|
|
|
Site value @ 40% |
34,000 |
|
|
|
|
Modern ground rent @ 7% |
2,380 |
|
|
|
|
YP in perp @ 7% def 57 years |
0.30201 |
|
719 |
|
|
|
|
£831 |
||
Summary of
issues
The main issue
in dispute is the method of valuation to determine the price. Mr Abrahams
contends the ground rent should be valued in perpetuity. Mr Shepherd contends a
valuation of the reversion is appropriate (by the standing house approach), to
which should be added the value of the term. The other issue is the percentage
to be adopted to derive the site value from the standing house value — commonly
known as the entirety value.
Background
of methods
Precedent has
established two distinct methods of valuation (relevant to this case) in
relation to the length of the unexpired term. First, the ground rent is valued
in perpetuity at an appropriate yield when there is a long unexpired term —
that is, when it can be shown the market would not reflect a value in the
reversion. Second, a valuation of the reversion is derived to which is added
the value of the term when the length of the unexpired term is shorter — that
is, when it can be shown the market would reflect a value in the reversion. Mr
Abrahams adopts the former method; Mr Shepherd the latter.
A valuation of
the reversion may be derived (a) mainly by reference to the prices of sites
sold for development or redevelopment for comparable uses (the cleared site
approach), or (b) mainly by reference to the value of the whole premises as
they stand, the site value being taken as a proportion of the entirety value
(the standing house approach). As no evidence was adduced as to prices of sites
sold, the standing house approach is appropriate.
Evidence
Mr Abrahams
contends that the traditional break point at which the value of the reversion
ceases to be relevant is 60 years to the effect that a valuation of the ground
rent in perpetuity is adopted for an unexpired term of greater than 60 years;
the recent significant rise in interest rates should result in the break point
being reduced to nearer 50 years. In the case of the subject property (57
years’ unexpired term), a valuation of the reversion in perpetuity is
appropriate adopting a 10% yield. An unexpired term of 57 years could be
regarded as being within ‘a grey area’ to the effect that both of the two
valuation methods may be appropriate — in which case, if the tribunal finds a
value of the reversion relevant, an average of the results obtained by the two
methods may be considered appropriate. If the tribunal adopts the standing
house approach, the percentage to be applied to the entirety value to arrive at
the site value should not be as high as 40% (contended for by Mr Shepherd),
mindful of previous decisions of this tribunal at, predominantly, 25%.
Mr Shepherd
contends that a valuation of the ground rent in perpetuity is not appropriate
in this case, as the unexpired term of 57 years is significantly less than the
generally accepted break point of around 70 years adopted by the tribunal.
While 25% of the entirety value to derive the site value may have been
appropriate in 1985-86, there are a number of cases in 1987 when 30% was
adopted. It is common ground that there was a rapid increase in capital values
between mid-1986 and the end of 1988. Mr Shepherd contends this is largely
attributable to the increase in the value of land, in support of which he
refers us to a publication by the Inland Revenue in the autumn of 1988 in which
the increase in the value of residential building land from October 1 1987 for
a 12-month period is recorded as 163.8%. In consequence, if 30% was appropriate
in 1987, a higher percentage should be appropriate for January 1989 (the date
of the notice for the subject property). In the case of WM287 [an earlier
reference to the tribunal] the date of notice was May 6 1988 and this tribunal
adopted 35%.
The £85,000
entirety value is derived from the fact that the leasehold interest in the
property had been offered for sale at £89,950 and no interest was shown.
Averaging of the valuations obtained by the two methods is inappropriate — the
tribunal should adopt whichever of the two methods produces the fairer result.
Decision of
tribunal
Standing
house approach
If the
standing house approach is to be adopted, we accept £85,000 as the entirety
value contended for by Mr Shepherd and not contested by Mr Abrahams. We accept
that the most significant part of the increase in the value of dwellings
(common ground between the parties) is the land element. Having regard to the
characteristics of the site as a site readily capable of development and its
location in a good residential area, we find that 37% is the correct percentage
in this case to be applied to the entirety value to derive the site value. In
consequence, if we adopt the standing house approach of valuation, our
valuation is:
|
Term |
|
|
|
|
Ground rent reserved |
£8 pa |
|
|
|
YP for 57 years @ 7% |
13,984 |
|
£111.87 |
|
Reversion |
|
|
|
|
Entirety value |
£85,000 |
|
|
|
Site value @ 37% |
31,450 |
|
|
|
Modern ground rent @ 7% |
£2,201.50 |
|
|
|
YP in perp @ 7% def 57 years |
0.30201 |
|
664.87 |
|
|
|
£776.74 |
Dependability
of standing house approach
We have given
careful consideration to the differing contentions of the parties as to the
appropriate method to use in this case. We recognise that any accepted
valuation method, however simple or complicated, is used by valuers to arrive
at a figure which represents the likely results of free market negotiations but
subject to the constraints of the Leasehold Reform Act, which we must take into
account. Sections 9(1), 14(1) and 15(2) of the Leasehold Reform Act 1967
provide the statutory basis of valuation. However, for practical purposes the
question is simply: is the market likely to reflect a different figure for the
right to receive (a) £8 per annum in perpetuity; (b) £8 for 57 years with the
right to receive the current ground rent thereafter in perpetuity and, if so,
what is the best valuation method to reflect the figure?
While we
recognise the relevance of previous decisions of both the Lands Tribunal and
this panel, they relate, in the context of the subject dispute, to findings and
fact in each of the particular cases. We should not become so attached to a
convenient formula that it blurs our objective.
We find (as
contended for by Mr Shepherd) that in this case the market would reflect a
value in the reversion. Having so decided, it is axiomatic that the calculation
by the accepted standing house approach (if adopted by us) will produce a
relatively high valuation for the reversion. This is because in recent time
entirety values have risen very appreciably and the percentage to be applied to
the entirety value to derive the site value is also higher (found by us to be
37% in this case).
We ask
ourselves: is the result produced by the standing house approach dependable to
arrive at the free market figure (subject to the Act) in this case? It is derived from an ‘unprovable case’ as
contemplated in Mimmack v Solent Land Investments Ltd (1973) 226
EG 1771. The hypothetical nature of the valuation of the reversion — the
dominant characteristic of the freehold interest to be valued — rules out the
possibility of supporting open market transactions. It is hypothetical in that
it is derived from opinion evidence in this case and previous cases. We find it
is not completely dependable and is relatively remote from reality in this
case; it is unacceptable per se, as it is not derived directly from free
market evidence.
Grey area
This can be
explained by contemplating a hypothetical model of the facts in this case,
where the only variable factor is the length of the unexpired term. A grey area
of between, say, 50 and 75 years results. The longer the unexpired term the
more likely a valuation of the ground rent in perpetuity is appropriate. It has
been usual to adopt a year’s purchase of around 10, but this has been increased
in some cases when the unexpired term falls within the grey area. Such
decisions are on the basis that the market would take into account the value of
the reversion, but such account would be not very significant — any such
account would be more properly reflected in the adoption of an appropriate
yield in a valuation of the ground rent in perpetuity than by including a
specific valuation of the reversion.
As the
unexpired term becomes smaller, a valuation method of the reversion (in this
case the standing house approach) becomes
standing house approach is incorporated into the valuation. At this point a
very large jump in the end valuation occurs. This is inconsistent and such a
significant sudden jump in value would not be reflected in the market; a smooth
transition would be more likely.
We find that
in this grey area consideration should be given to, first, tempering the end
valuation produced by the standing house approach; second, applying a lower
yield (higher YP) for a valuation of the ground rent in perpetuity. Any such
adjustment should be made to avoid inconsistency at the margin and to reflect
the likely result of the free market. However, an adjustment would be made
reflecting the facts and findings of fact of the particular case in issue. In
general terms, precedent provides clear guidance that a valuation when the
unexpired term is less than, say, 50 years should incorporate a valuation of
the reversion; a valuation with an unexpired term of more than, say, 75 years
should exclude the value of the reversion. We find that in this case, 57 years
is within the grey area we have referred to.
We stress that
the limits of the grey idea we refer to are not intended to be a definitive
guide; they are identified solely in relation to the hypothetical model we have
created in explanation of the parties’ contentions in this case.
Findings
on parties’ valuations
We find (as
contended for by Mr Shepherd) that the market would reflect a value in the
reversion. Therefore, we do not accept Mr Abrahams’ valuation of £80: it is too
low. As to our valuation (adopting the standing house approach) derived from Mr
Shepherd’s valuation, we find that the end result is too high. Our findings as
to the entirety value (standing house approach) and site value percentage to be
adopted produce a result which is not likely to be reflected in a free market
as envisaged under the Act. It is the free investment market which is
appropriate to determine the price for enfranchisement not the market in respect
of freehold sales of dwelling-houses and freehold sales of residential building
land. We have no evidence that the investment land market has changed to the
same extent as the very significant increases in the market for dwellings and
land. In recognition of this and to derive consistency, we decide that, in this
case, the standing house approach should be tempered, as it is within the grey
area we have referred to.
A further
factual matter we should take into account is the amount of the present ground
rent, ie £8 per annum. In real terms this is relatively nominal. However, the
current term is not being valued as a separate entity; it forms a subsidiary
element of the total valuation.
No evidence is
adduced of settlements or sales of ground rents; however, Mr Shepherd takes the
view that the market in ground rents is buoyant.
Using our
knowledge and experience to evaluate the evidence placed before us, we find
that, in this case, a figure of £600 more correctly represents the price on
enfranchisement than if we adopt either of the figures contended for by the
parties.
Summary of
decision
Having regard
to the length of the unexpired term (57 years), a valuation of the reversion
adopting the standing house approach is appropriate. However, this should be
tempered, reflecting the facts in this particular case, owing to, first, the
relatively nominal amount of the present ground rent and, second, the high site
value of the site.
Had we adopted
the standing house approach per se, the percentage to be adopted to
derive the site value in this case is 37%.
We determine
that, with the benefit of the evidence adduced, our evaluation of it, our
inspection and our own knowledge and experience, the sum to be paid by the
tenant for the acquisition of the freehold interest in 54 Greyfort Crescent,
Olton, Solihull, in accordance with section 9 of the Leasehold Reform Act 1967,
as amended, is £600.
