The appellant leaseholders applied, under Chapter II of the Leasehold Reform, Housing and Urban Development Act 1993, for lease extensions of 11 flats in a 1970s development located within the Edgbaston conservation area of Birmingham. Each flat comprised an entrance hall, two bedrooms, living/dining room, kitchen, bathroom and separate WC, and had a single garage in a separate block. Each was held on a lease for a term expiring in September 2071. Following the surrender of a headlease in 1981, the appellants held their properties directly from the respondent freeholders.
The leasehold valuation tribunal (LVT) determined the premiums payable for the new leases. It was agreed that, for valuation purposes, the unexpired term of the existing leases was 64 years except in one case it would be a few months less. The only disputed matter was the deferment rate to be applied to the value of the extended lease. The LVT applied the 5% generic rate for flats laid down by the Lands Tribunal in Earl Cadogan and another v Sportelli and another and similar appeals [2007] 1 EGLR 153 and determined premiums of £9,843 for most of the flats and £9,887 for the flat with the shorter unexpired term. It rejected the appellants’ argument for a deferment rate of 6.5%.
On appeal, the appellants contended that a higher deferment rate was justified than had been applied in Sportelli to properties in the prime central London area (PCL), owing to: (i) a higher rate of obsolescence or deterioration of properties in the local area, caused by the lower market value of such properties when compared with the cost of their maintenance; (ii) lower growth rates in capital values in Birmingham than in the PCL area; and (iii) an increased gap between houses and flats resulting from recent legislative changes, such as those introduced by the Commonhold and Leasehold Reform Act 2002, which had placed more significant management burdens on investors in flats.
Held: The appeal was allowed; a deferment rate of 6% was applied.
(1) The 5% Sportelli rate provided the starting point when considering the appropriate deferment rate to be adopted. However, there was a striking difference between the value of the properties considered in Sportelli and those in the instant case: between £740 and £1,100 per square foot (psf) in the former compared with £198.50 psf for the appellants’ development. It was likely to remain economically viable to repair high-value properties in the PCL area for considerably longer than for similar-sized flats in the appellants’ development. Consequently, while the individual flats might be let on full repairing terms, there was a greater risk of deterioration in the appellants’ development than in PCL properties; that difference was not reflected in the respective vacant possession values. A purchaser of the freehold reversion to the development would require an increase of 0.25% in the risk premium to 4.75% to compensate for that difference: Culley v Daejan Properties Ltd [2009] UKUT 168 (LC); [2009] PLSCS 260 considered.
(2) Although there were deficiencies in the available statistical information, such as lenders’ indices of price movements in residential properties, that information demonstrated a considerable difference between past rates of long-term price increases in the PCL area and those in the West Midlands. That information would persuade an investor that it could reasonably anticipate significantly slower long-term growth from residential properties in the West Midlands generally than in the PCL area. There was no reason to suppose that the position would be different for the appellants’ development, and an investor would reduce its bid accordingly. That reduction should be reflected by a further 0.5% increase in the risk premium to 5.25%: Hildron Finance Ltd v Greenhill (Hampstead) Ltd [2008] 1 EGLR 179 and Re Mansal Securities Ltd and others’ application [2009] 20 EG 104 considered.
(3) Regarding the additional management allowance for flats, the provisions of the Service Charge (Consultation Requirements)(England) Regulations 2003, introduced pursuant to the 2002 Act, were potentially serious for landlords: Re 30-40 Grafton Way LRX/185/2006; [2008] PLSCS 198 considered. They imposed strict procedural requirements and a landlord’s failure to comply could leave it unable to recover a large proportion of the costs of repairs. By September 2007, the relevant date in the instant case, the market was more aware of the dangers posed by the regulations than had been the case at the time of Sportelli. Investors would require a management allowance of 0.5% to reflect the greater management problems associated with flats compared with houses; however, had the headlease still been in existence, it would not have been appropriate to depart from the Sportelli uplift of 0.25% in respect of that factor. The above adjustments to the Sportelli calculation produced an overall deferment rate of 6%. The premium payable by the appellants was £8,100 for 10 of the flats and £8,150 for the other.
Douglas Readings (instructed by Hadgkiss Hughes & Beale, of Birmingham) appeared for the appellants; Anthony Radevsky (instructed by Boodle Hatfield) appeared for the respondents.
Sally Dobson, barrister
