First-tier Tribunal Determines Fair Premium for Lease Extension

OUTCOME: Allowed

© CROWN COPYRIGHT

FIRST-TIER TRIBUNAL [NAME] CHAMBER ([NAME]) Case reference : LON/00AF/OLR/2018/1417 [NAME] : [ADDRESS], [POSTCODE] Applicant : [redacted] : Judge & [COMPANY] Respondent : [redacted] : [RESPONDENT] of [NAME] : Section 48 Leasehold Reform Housing and Urban Development Act 1993 Tribunal members : Judge Pittaway Ms M Krisko FRICS Venue : 10 [ADDRESS] [POSTCODE] Date of decision : 26 March 2019

DECISION

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Summary of the tribunal’s decision (1) The appropriate premium payable for the new lease is £28,340.00 The [NAME]

1. This is an [NAME] made by Ms [NAME] pursuant to section 48 (1) Leasehold Reform Housing and Urban Development Act 1993 (“the 1993 Act”) for a determination of the premium to be paid for a lease extension, or other terms of acquisition of the lease of [ADDRESS] [POSTCODE] (the “[NAME]”).

2. By a notice of claim dated 16 May 2018, served pursuant to Section 42 of the Act, the applicant exercised the right to claim a new lease of the [NAME] and proposed to pay a premium of £15,000 for the new lease.

3. On 4 July 2018 the [NAME] served a counter-notice admitting the validity of the claim and counter-proposed a premium of £35,300 for the new lease.

4. On 29 October 2018 the applicant applied to the tribunal for a determination of the premium. The issues Matters agreed 5. The following matters were agreed (i) The subject [NAME] is a 3 bedroom one bathroom (with separate WC) ground floor flat with a gross internal area of 1250 sq ft (116 sq m). It is in a small block of purpose built flats constructed in late 1960s/early 1970s. The windows have been replaced with UPVC double glazed units. (ii) The valuation date is 16 May 2018 (iii) Details of the tenants’ leasehold interest: (a) Date of lease 6 March 1990 (b) Term of lease from 24 June 1989 to 23 June 2088

3 (c) Ground rent £27.10 per annum (d) Unexpired term at valuation date 70.1 years (iv) Capitalisation of ground rent

6.5% (v) Deferment rate

5% Matters not agreed 6. The following matters were not agreed (i) The extended leasehold value; (ii) The value of improvements; (iii) The freehold value; (iv) The existing leasehold value; and (v) The premium payable The hearing 7. The hearing took place on 19 March 2019. Mr [NAME] of [NAME] gave evidence for and made submissions on behalf of the applicant. Mr [APPELLANT] of [NAME] gave evidence for and made submissions on behalf of the respondent.

8. Neither party asked the tribunal to inspect the [NAME] and the tribunal did not consider it necessary to carry out a physical inspection to make its determination.

9. The applicant relied upon the expert report and valuation of Mr [RESPONDENT] dated 7 February 2019 and the respondent relied upon the expert report and valuation of Mr [NAME] dated February 2019 (without a specific date in that month specified). The tribunal’s determination The tribunal made its decision having regard to the evidence before it and the submissions made on behalf of both parties, to which it refers, as appropriate, in the reasons for its decision given below.

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Reasons for the tribunal’s determination The extended leasehold value 10. Mr [NAME] provided four comparables to the tribunal although he invited the tribunal to ignore the comparable [ADDRESS], as being in a gated development and overlooking the lake. [ADDRESS] his three comparables time adjusted, by reference to the Land Registry index for flats for the local area, to the valuation date of the [NAME] provided an average price per square metre of £4,011 per sq. m. On the basis of the flat having a gross internal area of 116.4 square metres he submitted that this gave a freehold value of £466,880, say £467,000, from which he deducted £20,000 to reflect improvements that should be disregarded. Mr [NAME] questioned whether [ADDRESS] had actually been marketed (Mr [NAME] stated that it had); put to Mr [NAME] that [ADDRESS] was not in a gated development, and that [ADDRESS] and [ADDRESS] required refurbishment.

11. Mr [NAME] provided 8 comparables to the tribunal, of which four were stated by him to be “under offer” rather than sold. He had not time adjusted the sale prices referred to to reflect the time difference of the respective sale dates from the valuation date for the [NAME]. Of his comparables Mr [NAME] put to him that 12 Lakeside should be disregarded as it was significantly smaller than the [NAME] and would therefore achieve a greater price per square foot; that [ADDRESS] had actually sold but for £530,000 and not £550,000 which was the “under offer” price given by Mr [NAME] in his schedule of comparables. Mr [NAME] did not take an average price per square foot of his comparables but looked at the price per square foot achieved by his comparables in [ADDRESS], and the price achieved for those of his comparables that had three bedrooms and one bathroom. He also considered the relative attractiveness of [ADDRESS] to [ADDRESS] and [ADDRESS]. In his submission a flat on the ground floor (as the [NAME] is) is more attractive than one on an upper floor. He therefore ascribed a value of £405 per square foot to the [NAME] to achieve an extended lease value of £505,000, from which he deducted £15,000 to reflect the value of tenent’s improvements.

12. The tribunal prefers the comparables offered by Mr [NAME]. He had limited his comparables to flats which had been sold and had time adjusted the prices achieved with reference to the valuation date of the [NAME]. The tribunal were concerned that Mr [NAME] had included comparables where the properties in question had not been sold, and one [NAME] which was significantly smaller than the [NAME]. The tribunal is not persuaded that a ground floor flat would command a higher price than one on an upper floor.

5 13. However, the tribunal do not consider, on the basis of the evidence put to them, that [ADDRESS] should have been excluded from Mr [NAME] comparables; nor was there any evidence put to it that the sale prices of his comparables were in fact for the freehold values of the properties (and no evidence was provided to it at the hearing in this regard).

14. The tribunal have therefore adopted a value of £380 per square foot (based on an average of Mr [NAME] four comparables) for the extended leasehold value, giving an extended leasehold value for the [NAME], as improved, of £475,000. Improvements 15. Mr [NAME] argued for a deduction of £20,000 to reflect the improvements undertaken by the applicant to the [NAME]. He referred in particular to the modernised kitchen, the installation of patio doors, the replacement of all windows (including the patio doors) with double glazing, built-in wardrobes in bedrooms 2 & 3 and the bathroom having been refitted and tiled, as being agreed improvements with further improvements being listed in his report.

16. Mr [NAME] in his report submitted that the only agreed improvements were the installation of UPVC double glazing and the installation of the patio doors, to which he attributed a value of £15,000.

17. While the tribunal is not persuaded that all the works listed by Mr [NAME] amount to improvements (rather than replacements) it does consider that the improvements included more than just the double- glazing and the installation of the patio doors, and that the tenant had undertaken overall modernisation which had added value to the [NAME].

Accordingly, it has adjusted the value of the extended lease by £20,000, to £455,000. The freehold value 18. The [NAME] agreed a 1% differential between the value of the extended lease and the value of the freehold.

19. The tribunal accordingly determine the freehold value of the [NAME] to be £459,550. The existing lease value. 20. [NAME] agree that the use of direct comparables was the preferred method of ascertaining the existing lease value.

6 21. Mr [NAME] referred the tribunal to the recent sale of flat [ADDRESS] which sold with a lease of a similar term unexpired to that of the [NAME] for £440,000. As the flat had been modernised he deducted £20,000 from that price to reflect improvements. He calculated the freehold (sic) value of the unimproved value of flat 6 to be £420,000 and that the difference between the unimproved freehold value of flat 2 and the unimproved existing lease value of flat 6 to be £27,000, or 6%. He then proposed a further deduction of 1.5% to reflect the existence of a “[NAME]” to give a [NAME] percentage of 92.5%. Mr [NAME] also referred the tribunal to the average of the graphs for non-Prime Central London in the RICS report of October 2009: Leasehold Reform: Graphs of [NAME], which give an average [NAME] for a 70.08 year lease of 92.59%; and in particular referred the tribunal to the SE Leasehold graph (which is for properties mainly in the London Borough of Bromley) which shows a [NAME] of 93.03%. Mr [NAME] therefore proposed a [NAME] of 92.5%, using an average of his market evidence and the SE Leasehold graph.

22. Mr [NAME] queried the value of the evidence provided by the sale of flat 6, where he submitted that the sale had been with the possibility of a lease extension (outside the Act) for a term of 123 years at a premium of £21,750 at a ground rent of £140 per annum rising to £140 plus .05% of the then market value of the [NAME] on every 25th anniversary of the term. Mr [NAME] also queried whether the suggested premium was realistic. He referred the tribunal to the Upper Tribunal decision in Reiss v Ironhawk [2018] UKUT 0311 (decided after service of the notice and counter-notice in this [NAME]) where the tribunal preferred to use [NAME] 2015 enfranchisable graph (based on Prime Central London) for a [NAME] not in Prime Central London, in preference to unreliable market evidence. Mr [NAME] therefore produced two possible valuations, one based on the [NAME] enfranchisable graph and one on the evidence afforded by the sale of flat 6. The valuation that he then put to the tribunal was the one based on graph evidence, not that based on the sale of flat 6, because of the uncertainty of the evidence provided by the sale of flat 6.

23. The tribunal accept that there are uncertainties surrounding the sale of flat 6 and therefore the evidence it provides should not be relied upon. It has therefore considered the alternative graphs proposed by the two [NAME]. The SE Leasehold graph, one of the five graphs in the RICS 2009 report is based on evidence collected primarily in the area in which [NAME] is located, and on over 1000 transactions in that area. In such circumstances the tribunal determine that this is the most appropriate graph to adopt. It gives a [NAME] of 93%. However Mr [NAME] evidence was that 93% was too high and both [NAME] suggested a lower figure.

24. Mr [NAME] argued (in relation to flat 6) for an adjustment of 1.5% to reflect the “[NAME]”, without providing evidence to substantiate this adjustment. Mr [NAME] argued for a reduction of 3 or 3.5%,

7 referring the tribunal to the 3.5% reduction used by the Upper Tribunal in [NAME] and anor v Gardener and anor [2018] UKUT 0064. The tribunal consider a reduction of 1.5% to be too small and have elected to accept a deduction of 3%, noting that this is the differential adopted by [NAME] to differentiate between enfranchiseable and non-enfranchiseable leases in its 2015 graphs. It has therefore adopted a [NAME] of 90%. The premium The valuation setting out the tribunal’s calculations is set out in the Appendix Name: Judge Pittaway Date: 26 March 2019

Rights of appeal

By rule 36(2) of the Tribunal Procedure (First-tier Tribunal) ([NAME] 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 [NAME] for permission must be made to the First-tier Tribunal at the regional office which has been dealing with the case. The [NAME] for permission to appeal must arrive at the regional office within 28 days after the tribunal sends written reasons for the decision to the [NAME]. If the [NAME] is not made within the 28 day time limit, such [NAME] 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 [NAME] for permission to appeal to proceed, despite not being within the time limit. The [NAME] for permission to appeal must identify the decision of the tribunal to which it relates (i.e. give the date, the [NAME] and the case number), state the grounds of appeal and state the result the party [NAME] the [NAME] is seeking. If the tribunal refuses to grant permission to appeal, a further [NAME] for permission may be made to the Upper Tribunal (Lands Chamber).

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TRIBUNAL VALUATION FLAT 2, PEMBROKE COURT, 41 WICKHAM ROAD, BECKENHAM, KENT

Valuation Date 16th May 2018. Term 70.1 years Existing lease £413,595 Extended lease £455,000 Freehold £459,550 [NAME] 90%

Ground Rent: Agreed

£ 412

Reversion: £459,550 70.1 years @ 5%

£15,046

Freehold interest

£15,458

Less: Landlord's future interest: £459,550 160.1 years @ 5%

£ 184

£15,274

Marriage value: Extended lease £455,000 Future interest: £ 184 Less: Existing lease £413,595 Freehold interest £ 15,458

£ 26,131

50%

£ 13,066

Premium

£ 28,340