First-tier Tribunal Decides on Freehold Valuation and Compensation

OUTCOME: Allowed

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FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case reference : LON/00AN/OCE/2024/0112 Property : 1-19 [NAME_1], [ADDRESS] [POSTCODE] Applicant : [redacted] : [NAME_2], counsel Respondent : [redacted] : [NAME_3], counsel Type of application : s.24(1) of the Leasehold Reform, Housing and Urban Development Act 1993

Tribunal members : Judge Tagliavini Mr Ian Holdsworth BSc MSc FRICS Venue : 10 [ADDRESS] [POSTCODE] Date of hearing Date of decision :

15 & 16 April 2025 20 May 2025

DECISION

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The tribunal’s decision (i) The enhanced (hope) value of £72,750 to Flat 9 is divided equally between the leaseholder and freeholder with each to receive £36,375 (see attached valuation).

(ii) A sum of £250 is payable as compensation for the landlords’ loss in respect of appurtenances and freehold owned communal parts.

The application 1. This is an application made pursuant to s.24(1) of the Leasehold Reform, Housing and Urban Development Act 1993. The background 2. By a Tenants’ initial notice of claim dated 30 November 2023, the applicant sought to acquire the freehold of the subject property at a proposed purchase price of £12,900 and £100 for the additional freeholds specified in the Notice.

3. The respondent served a counter-notice dated 30 January 2024 admitting the applicant’s right to acquire the freehold and proposing a premium payable of £125,000 for the freehold interest and £500 for the additional freeholds. The property 4. [NAME_1] comprises a red-brick Victorian development comprising a five-storey block of mansion flats of 20 flats. There is no outside space or off-street parking except for a flat roof area accessible only via Flat 9 or possibly flat 7. The flat roof has a total area of approximately 80.5 square metres but part of the roof is occupied by a water tank and housing and reduces the usable area to 65 square metres.

3 The issues 5. In a signed joint statement dated 22 January 2025 the parties respective valuers, [NAME_4] for the applicant and [NAME_5] for the respondent, agreed the following: 1.1 We are agreed that the freehold interest in the property is registered under Land Registry Title Number BGL12554. 1.2 That the freehold interest is subject to twenty leasehold interests of which; 1.2.1 There are twenty residential flats. 1.2.2 18 of the 20 flats are held on very long leases with original terms of 999 years from the dates of commencement. 1.2.3 Flat 2 is held on a lease dated 23rd December 2008 for a term of 125 years from 1st June 2004. 1.2.4 Flat 6 is held on a lease dated 17th October 2011 for a term of 150 years from 1st June 2004. 1.3 We are agreed that the valuation date is 30th November 2023. 1.4 We are agreed in respect of the landlords’ loss of reversion and loss of ground rent to the applicant’s leasehold interests and that the price payable in respect of those losses attributable to the freeholder are, globally, the sum of £19,400 (Nineteen Thousand Four Hundred Pounds).

6. The parties were not able to reach agreement on:

2.1 The landlord’s loss in respect of future development potential to those external flat roof area adjoining Flat 9 on the fifth floor of the building. 2.2 The landlords’ loss in respect of appurtenances and freehold owned communal parts. 2.3 The price payable for the freehold interest. The hearing 7. The tribunal was provided with a hearing bundle of 773 digital pages and the hearing was by way of a video hearing at which the applicant was

4 represented by [NAME_2] of counsel. The respondent was represented by [NAME_3] of counsel. The applicant’s case 8. At the hearing, the applicant contended a revised premium of £29,500 was payable for the freehold, which was comprised of £10,oo0 in respect of the flat roof space adjacent to [NAME_6] and £100 in respect of appurtenant areas held within the freehold demise and £19,400 already agreed between the parties. The respondent contended a revised premium was payable of £75,000 plus the £19,400 agreed by the parties.

9. At the hearing [NAME_7] gave oral evidence to the tribunal and spoke to his report dated 25 March 2025. In this he identified the only remaining freehold held areas of material value to be the flat roof space which is above the fourth floor level. In valuing this area [NAME_7] stated he considered it most appropriate to use a combination of the comparable and residual methods of valuation. 10. [NAME_7] considered that a prospective purchaser would view the flat roof as:

(i) a ‘gambling chip;’

(ii) requiring a Schedule of Work;

(iii) requiring planning consent to use flat roof as a roof terrace space.

and that the freehold interest must be acquired at a price which reflects this Hope Value of the development of the flat roof. 11. [NAME_7] stated that in order to calculate his opinion of the Hope Value he sought to determine the developed value of the flat roof in use as a terrace by seeking contemporaneous evidence of similar properties in [NAME_1] and nearby. In his view the values achieved on rate per sq ft basis across his basket of comparable sales is £781 psq.ft. 12. [NAME_7] stated the residual method of valuation relied on subtracting the relevant costs of works from the Gross Development Value (GDV) to arrive at the residual amount which reflects a net uplift as a result of the development. 13. [NAME_7] accepted hr was not a planning specialist and relied on a report provided by [NAME_8] and [NAME_9] as to the viability of such a development. The likelihood of planning consent being obtained was estimated at 70%. However, [NAME_7] reduced this to 50%

5 to take into account potential changes in policies in granting planning consent. 14. [NAME_7] also considered the cost of the works and state he had sought advice from [NAME_10] a quantity surveyor of [NAME_11]. Mr [NAME_10] estimated the likely cost of the works as £82,528 rounded to £85,000. 15. [NAME_7] concluded the following:

(i) A gross development value of £725,000;

(ii) Less development costs of £85,000;

(iii) Less the value of Flat 9 before development £650,000;

(iv) which produced a loss of £10,000 before considering adjustment for planning and other risks. He concluded that the roof space had a nominal value of £10,000 to reflect the nature of the roof space as a ‘gambling chip.’; 16. [NAME_7] concluded that the premium payable was £29,500. This is made up of £10,000 added to the £19,400 sum already agreed as compensation for landlords loss of ground rent plus a further £100 for appurtenant areas given up by the freeholder at enfranchisement. The respondent’s case 17. The respondent relied upon the expert evidence of [NAME_12] who spoke to his report dated 24/03/2025. 18. [NAME_13] considered in his valuation report:

(i) the potential to erect a conservatory on the roof space;

(ii) the likelihood of planning consent being obtained;

(iii) the load bearing capacity of the roof space;

(iv) the schedule of works required;

(iv) the cost of the works;

(vi) the value of the works once completed;

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(vii) any legal restrictions or impediments to a roof space development;

(viii) the eventual ‘profit’ that could be made from developing the area. 19. [NAME_13] submitted that:

(i) the roof space could be used as a roof terrace and/or conservatory; (ii) planning consent is not required as the terrace has been in continual use for more than four years without formal objection or enforcement action; (iii) it would not be necessary to strengthen the structure as the roof space currently supports a water tank that remains in use and no additional structure needs to be built and therefore there is no increase in load; (iv) that the cost of works to convert the roof space to auseable roof terrace including safety and privacy works is £10,000; (v) the likely value of the completed works is an uplift of 25% to the value of Flat 9 without the roof terrace. This produces an uplift in the region of £160,000 less the estimated £10,000 works costs which equates to a development value shared between the parties of £150,000 equivalent to £75,000 each; (vi) there are no legal restrictions or impediments to continuing to use the flat roof area as a roof terrace; 20. [NAME_13] concluded the premium payable is £94,400 (£75,000 added to the agreed £19,400) The tribunal’s decision and reasons 21. In reaching its decision the tribunal took into account the parties written and oral evidence in addition to other supporting evidence. The tribunal also had regard to s.32 of the 1993 Act which states: (1)Schedule 6 to this Act (which relates to the determination of the price payable by the nominee purchaser in respect of each of the freehold and other interests to be acquired by him in pursuance of this Chapter) shall have effect. (2)The lien of the owner of any such interest (as vendor) on the specified premises, or (as the case may be) on any other property, for the price payable shall extend—

7 (a)to any amounts which, at the time of the conveyance of that interest, are due to him from any tenants of his of premises comprised in the premises in which that interest subsists (whether due under or in respect of their leases or under or in respect of agreements collateral thereto); and (b)to any amount payable to him by virtue of section 18(2); and (c)to any costs payable to him by virtue of section 33. (3)Subsection (2)(a) does not apply in relation to amounts due to the owner of any such interest from tenants of any premises which are to be comprised in the premises demised by a lease granted in accordance with section 36 and Schedule 9. (4)In subsection (2) the reference to the specified premises or any other property includes a reference to a part of those premises or that property. (5)Despite the fact that in accordance with Schedule 6 no payment or only a nominal payment is payable by the nominee purchaser in respect of the acquisition by him of any interest he shall nevertheless be deemed for all purposes to be a purchaser of that interest for a valuable consideration in money or money’s worth.

23. Paragraph 3 of Schedule 6 of the 1993 Act states: 3(1)Subject to the provisions of this paragraph, the value of the freeholder’s interest in the specified premises is the amount which at the relevant date that interest might be expected to realise if sold on the open market by a willing seller (with no person who falls within sub-paragraph (1A)] buying or seeking to buy) on the following assumptions— (a)on the assumption that the vendor is selling for an estate in fee simple— (i)subject to any leases subject to which the freeholder’s interest in the premises is to be acquired by the nominee purchaser, but (ii)subject also to any intermediate or other leasehold interests in the premises which are to be acquired by the nominee purchaser; (b)on the assumption that this Chapter and Chapter II confer no right to acquire any interest in the specified premises or to

8 acquire any new lease (except that this shall not preclude the taking into account of a notice given under section 42 with respect to a flat contained in the specified premises where it is given by a person other than a participating tenant); (c)on the assumption that any increase in the value of any flat held by a participating tenant which is attributable to an improvement carried out at his own expense by the tenant or by any predecessor in title is to be disregarded; and (d)on the assumption that (subject to paragraphs (a) and (b)) the vendor is selling with and subject to the rights and burdens with and subject to which the conveyance to the nominee purchaser of the freeholder’s interest is to be made, and in particular with and subject to such permanent or extended rights and burdens as are to be created in order to give effect to Schedule 7.

23. The tribunal accepts the parties agreed value of Flat 9 without a roof terraces as £650,000 as at the valuation date of 30 November 2023.

24. In determining the value of Flat 9 with the roof terrace, the tribunal finds that [NAME_7] assembled a basket of 8 comparable flat transactions and relied upon an analysis of this data to justify his opinion of value of the flat with roof terrace of £725,000. He explained that the criteria used to select the property sales included in the comparable basket, was that: (i) The property had to be a flat with some outside ancillary space. The outside space could be a balcony, small terrace, Juliet balcony or first floor garden;

(ii) The properties had to be in the vicinity of the subject; and

(iii) the sales had to of taken place within 12 months or so of the valuation date. This could be either before or after the relevant date.

25. [NAME_7] derived a value per sq.ft. for each property from which he identified two values that he considered outliers. He removed the outliers from his basket and then recalculated an average value per sq.ft. for the reduced basket. This produced a value per sq.ft f £851 which when multiplied by the square footage of no 9 [758 sq.ft] produced a value less than the that agreed for the property without a roof terrace. He then took the value per ft2 of a single property [NAME_6] as the basis for his valuation of No 9.

9 26. The tribunal found [NAME_7]’s approach was flawed for the following reasons:

(i) None of his basket of comparable sales matched the subject in size of outside space [701ft2];

(ii) He did not adjust any of the transactions for size, time of sale, property type, bedrooms, internal layout, age etc. He did not isolate the effect of outside space on value.

(iii) The analysis of his data produced such value variation that it wholly undermined the accuracy of the average.

(iv) The resultant use of a single property transaction derived from the sale of a dwelling in the same block with a 20ft2 or so outside area is an insufficient basis upon which to determine the uplift arising from the acquisition of a 701ft2 roof terrace.

(v) The outcome generated a leasehold value for Flat 9 with roof terrace less than that agreed without terrace. He failed to check his results with say the 2018 transactions at Flat 9 and Flats 29, or the 2021 marketing prices of Flat 9.

(vi) There is no logical explanation for the valuation outcomes.

(vii) [NAME_7]’s figure of £725,000 with terrace is equivalent to a 11.5% uplift from the £650,000 value for flat with no terrace.

27. The tribunal took into account the evidence provided by both the Experts which was derived from the sales of Flat 9 in December 2018 at £550,000 and Flat 29 at £1,150,000 in October 2018. The tribunal are told Flat 29 has a roof terrace of about 500ft2 .Notwithstanding the significant quality and condition differences between the two properties they are both flats, located in same block, one with a developed roof terrace whilst the other property has a similar sized undeveloped roof space. The property sales also took place within 2 months of each other.

28. In his valuation, [NAME_13] added £100,000 to the value of Flat 9 to reflect the difference in condition. It was emphasised that Flat 9 has three bedrooms and Flat 29 two bedrooms, so more bedrooms typically add value and no deduction is made from the sale price of Flat 9 for this difference.

This produces a value per ft2 for Flat 9 of 869 ft2 compared to Flat 29 £1,174 ft2 a difference of 35% . A large part of this difference in value is attributable to the roof terrace but maybe not all the uplift as Flat 29

10 enjoys better roof top views, has a roof terrace without water tank and a layout orientated towards the use of the terrace.

29. The tribunal considered that a comparison between the £850,000 marketing value of Flat 9 in 2021 and the agreed without terrace value of £650,000, produces a difference of £200,000 which is equivalent to a 30% uplift. The tribunal considered the [NAME_14] roof terrace articles referred to by [NAME_13] to be unreliable and have no statistical basis and therefore concluded they should be given no weight.

30. The tribunal broadly accepted the valuation approach adopted by [NAME_13], to determine the additional value of the roof terrace. Although the tribunal considered [NAME_13]’s valuation approach demonstrated a number of inadequacies, on balance it preferred this to the more greatly flawed approach adopted by [NAME_7].

31. The tribunal adopts the 25% uplift in value [NAME_13] has alighted upon and reduces this percentage by a further 2.5% to reflect the following differences:

▪ The quality of the roof terrace works at Flat 29, which are far superior to those envisaged at Flat 9; and

▪ The unimpeded views from the roof terrace of Flat 29 when compared with flat 9.

32. The Tribunal has assumed an uplift in value of 22.5% from the benefit of the roof terrace which gives a value with roof terrace for Flat 9 of £796,250.

33. In considering the cost of the works, the tribunal concluded that a hypothetical purchaser would seek to carry out necessary works to the terrace in order to enable the use of the space as a terrace. These would include works to the perimeter balustrade railings, limited trellis screening and patch repair to the existing surface. The tribunal finds that the current loading of the roof by a large water tank implies there is existing adequate structural roof strength sufficient for the use as a roof terrace without further works. The tribunal finds the work will need to satisfy Building Regulations.

34. The Tribunal estimate these works can be carried out within a budget figure of £25,000 inclusive of VAT.

11 35. The Tribunal accept the advice of the Planning consultant that there is a 70% chance of securing planning consent for a change of use and the proposed limited scheme of works.

36. The tribunal finds that any potential development or change of use scheme is subject to several, often unforeseen risks which could delay or impede the interest of a property purchaser. In this instance such risks could delay the leaseholders of Flat 9 in acquiring the terrace and undertaking the works. Given the interest already expressed by the Flat 9 leaseholders in the acquisition of the roof space the tribunal recognise that a significant delay in the scheme proceeding is unlikely. The tribunal therefore applied a 10% discount to reflect the likelihood of the scheme not proceeding.

37. On application of the parameters listed above are applied, they produce a value for the [ADDRESS] amounting to £72,750. This enhanced value to Flat 9 is divided equally between the leaseholder and freeholder with each to receive £36,375 (see attached valuation as Table 1).

38. The tribunal based upon a review of the property and their knowledge and experience of these matters determine a sum of £250 as compensation for the landlords’ loss in respect of appurtenances and freehold owned communal parts.

39. In reaching its decision the tribunal noted that the leaseholders of Flat 9 proposed a purchase price in 2021 for the unimproved terrace of £31,625. It is accepted this offer did not complete however it may give some indication of the relative value of the roof space to a willing purchaser at that time and provides a check of the Tribunal outcome.

Name: Judge Tagliavini

Date: 20 May 2025

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Appendix 1 : Roof terrace value

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Rights of appeal

By rule 36(2) of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013, the Tribunal is required to notify the parties about any right of appeal they may have. If a party wishes to appeal this decision to the Upper Tribunal (Lands Chamber), then a written application for permission must be made to the First- tier Tribunal at the Regional Office which has been dealing with the case. The application should be made on Form RP PTA available at https://www.gov.uk/government/publications/form-rp-pta-application-for- permission-to-appeal-a-decision-to-the-upper-tribunal-lands-chamber The application for permission to appeal must arrive at the Regional Office within 28 days after the Tribunal sends written reasons for the decision to the person making the application. If the application is not made within the 28-day time limit, such application must include a request for an extension of time and the reason for not complying with the 28-day time limit; the Tribunal will then look at such reason(s) and decide whether to allow the application for permission to appeal to proceed, despite not being within the time limit. The application for permission to appeal must identify the decision of the Tribunal to which it relates (i.e. give the date, the property and the case number), state the grounds of appeal and state the result the party making the application is seeking. If the Tribunal refuses to grant permission to appeal, a further application for permission may be made to the Upper Tribunal (Lands Chamber).