First-tier Tribunal Determines Freehold Interest Price

OUTCOME: Allowed

FIRST-TIER TRIBUNAL

[NAME] (RESIDENTIAL PROPERTY)

Case Reference

:

BIR/00CA/OAF/2020/0011

HMCTS : P:PAPERREMOTE

Property : 11 [ADDRESS] [POSTCODE]

Applicant: [redacted]

:

Under section 21 (1) (a) of the Leasehold Reform Act 1967 (“the Act”) for the determination of the price to be paid under section 9 of the Act.

Under section 21 (2) (a) of the Leasehold Reform Act 1967 for a determination of the provisions to be included in the conveyance under section 10 of the Act.

Under section 21 (1) (ba) of the Leasehold Reform Act 1967 for a determination of the reasonable costs payable under section 9 (4) of the Act.

Tribunal Members

:

[NAME] (Hons) FRICS – Regional Surveyor

N Wint BSc (Hons) FRICS ACIArb

Judge M [NAME] of Decision

:

28 September 2020

________________________________________________________________

DECISION

_____________________________________________________

Introduction

1. This is the Tribunal’s decision in respect of applications under section 21 (1) (a) of the Leasehold Reform Act 1967 (“the Act”), for the determination of the price to be paid under section 9 of the Act, and also section 21 (2) (a), for a determination of the provisions to be included in the conveyance under section 10, in respect of 11 [ADDRESS] [POSTCODE].

2. The Applicant, [APPELLANT], was represented [NAME]. The Respondent is G & [RESPONDENT].

3. The Applicant served notice to acquire the Freehold interest on 9 January 2020 and applied to the Tribunal by an application dated 4 May 2020.

4. The Property is held by way of a lease dated 9 September 2016. The lease is for a term of 999 years from 1 January 2013. The initial rent was £250 per annum subject to a review every 10 years by the retail prices index.

5. The Tribunal issued Directions for a determination of the applications dated 22 May 2020. Due to the Covid-19 Public Health Emergency, the Tribunal advised the parties that it would be unable to carry out an inspection of the Property unless either party objected within 14 days. Neither party objected. The parties were invited to include photographs in their submissions by way of mitigation.

6. Neither Party requested an oral hearing, the Tribunal therefore makes its determination on the basis of the written submissions of the Parties.

7. Despite warnings, the Respondent failed to comply with Directions and, by way of a decision dated 30 July 2020, was barred from taking any further part in these proceedings pursuant to rule 9(3) (a) and rule 9(7) (a) of the Tribunal Procedure (First-tier Tribunal) ([NAME]) Rules 2013. As the Respondent was barred from taking any further part in these proceedings, under rule 9 (8), the Tribunal need not consider any response or other submission made by the Respondent and may summarily determine any or all issues against them.

8. The basis of valuation is to be in accordance with the provisions of section 9 (1) of the Leasehold Reform Act 1967.

The Property

9. From the information provided by the Applicant, the Property appears to consist of a single modern detached house offering four bedrooms being part of a relatively new development of three similar houses.

The price to be paid for the benefit of the freehold interest

10. On behalf of the Applicant, Mr [APPELLANT] valuation approach was as follows:

a) Capitalise the rent for the term of the lease and add the value of a 50 year lease extension at a modern ground rent and the value of the property after the expiry of the lease and the 50 year extension.

b) The existing lease has 992 years unexpired, the value of a 50 year extension and the reversion would be nil.

c) The lease has a ground rent of £250 per annum.

d) There may be people looking to buy the freehold with the idea of selling it in the future to an occupying leaseholder who may pay in excess of market value.

e) It is assumed the tenant has the right to acquire the freehold under the Act that they hold good leasehold title with no encumbrances, the site is not subject to town planning or other restrictions and there are no contamination or environmental hazards.

11. Mr [NAME] considered it appropriate to offer a range of valuations:

a) The low valuation:

Ground rent (pa) £250.00

YP 992 years @ 5% 20.00

Value £5000.00

b) The higher valuation:

Ground rent (pa) £250.00

YP 992 years @ 4.5% 22.22

Value £5555.55, say £5555.00

12. Taking the average of the above, Mr [NAME] calculated the value at £5250.00

13. To support his valuation, comparables were provided however these were of little use as there was no analysis or insufficient information for the Tribunal to assess the same.

The Tribunal’s valuation

14. The Tribunal relied on its own knowledge and experience to consider the value of the freehold interest as well as the Applicant’s submissions.

15. The Tribunal agrees with Mr [APPELLANT] that the value of the reversion particularly with the benefit of a 50-year extension is de minimis.

16. It is therefore the value of the ground rent of £250 per annum that the Tribunal must consider. The Tribunal considers that ground rent at this level is a “collectable” amount and a purchaser could employ a professional to collect the same. The ground rent is also linked to the retail prices index hence it will broadly keep pace with inflation. On balance, it is therefore an investment that if sold via the appropriate method would garner interest. The Tribunal is not bound to adopt the capitalisation rates suggested by Mr [NAME] however the rate of 4.5% is considered by the Tribunal to reflect the attractiveness of the ground rent investment. The Tribunal’s valuation is therefore as 11 b) above; £5555.00.

The provisions to be included in the conveyance

17. In relation to whether any restrictive covenants should be included in the conveyance, Mr [APPELLANT], on behalf of the Applicant, referred the Tribunal to the provisions of section 10 (4) of the Act. He also referred to the decision of the Upper Tribunal in The Trustees of the [NAME] v [NAME] and anor. 2011 UKUT 415 (LIC) (“The Trustees of the [NAME] decision”). He stated that the Lands Tribunal, approving early decisions of that tribunal, took the view that material enhancement was a matter of ‘general impression’ and that there must be evidence to satisfy a tribunal that there would be some monetary uplift in value or the prevention of some monetary diminution in value of other property.

18. Mr [NAME] also referred to Hague on Enfranchisement (6th Ed.), section 6.32:

“The basic rule is that the landlord cannot require the continuance of any of the covenants imposed by the tenant’s lease. But an exception is made in the case of any restrictive covenant which is capable of benefiting other property, and which also fulfils one of two further alternative conditions. These are as follows:

(i) The covenant is enforceable by one or more persons other than the landlord…

(ii) The covenant, although enforceable only by the landlord, is “such as materially to enhance the value of the other property…””.

19. Mr [APPELLANT] stated that the Applicant had forwarded a Notice of Request for Particulars of Rights of Way and Restrictive Covenants to the Respondent on 21 January 2020. He confirmed that no reply was received within the required period and, consequently, he submitted that the Respondent was barred from requiring any such covenants to be imposed on the acquisition of the freehold title. In addition, Mr [RESPONDENT] referred to the fact that the Respondent had not filed a draft transfer as directed by the Tribunal.

20. Mr [RESPONDENT] provided to the Tribunal a copy of the Respondent’s freehold title (MS635487) and a draft transfer of part (“the Draft Transfer”), which is appended to this Decision. The Draft Transfer referred to rights and covenants detailed in a transfer dated 19 August 2016, referred to in the freehold title, but did not include any of the tenant’s covenants included within the provisions of the lease to the Property.

The Tribunal’s deliberations on the conveyance provisions

21. The Tribunal notes that section 10 (4)(b)(i) of the Act confirms that a conveyance executed to give effect to section 8 of the Act should only contain such provisions as the landlord might require to secure continuance of restrictions arising by virtue of the lease which are capable of benefiting and materially enhance the value of other property.

22. In both The Trustees of the [NAME] decision and the earlier decision of Cadogan v Erkman [2011] UKUT 90 (LC), the Upper Tribunal determined that, although valuation evidence is not required to quantify such a benefit, evidence is required to establish that the restriction would materially enhance the value of the other property.

23. In this matter, although it is clear from the freehold title that the Respondent owned the freehold to two other properties which adjoined the Property, the Respondent failed to reply to the Applicant’s Notice of Request for Particulars of Rights of Way and Restrictive Covenants. In addition, the Respondent failed to provide to the Tribunal a draft Transfer detailing any covenants it required to be included into the conveyance of the freehold title or any other evidence or documentation that any particular covenant would be required to materially enhance the value of any other property.

24. Having considered the restrictive covenants in the lease, and based on the evidence before it, the Tribunal is not satisfied that any restrictive covenants arising by virtue of the tenancy are such as would materially enhance the value of any other property.

25. The Tribunal notes that the Applicant has already included within the Draft Transfer reference to the transfer being made subject to any covenants contained within the transfer dated 19 August 2016 made between (1) [NAME] and [NAME] and (2) [NAME] [RESPONDENT], referred to in the Charges Register of the Respondent’s freehold title. The Tribunal also notes that the Draft Transfer includes a provision that the Property is subject to any rights which are contained within that 2016 transfer, although the provision detailing those rights appears to have been mistakenly detailed in the ‘Rights granted for the benefit of the property’ section in box 12 of the Draft Transfer instead of the ‘Rights reserved for the benefit of other land’ section. There is also a minor typographical error, in that ‘[NAME] [COMPANY] is referred to as ‘[NAME] [COMPANY] in that section.

26. Subject to the alterations to the ‘Rights’ provisions, as detailed in the above paragraph, and the consideration in box 9 of the Draft Transfer being amended to ‘Five thousand five hundred and fifty-five pounds £5,555.00 (as per the Tribunal’s valuation), the Tribunal determines that the provisions that ought to be contained in the conveyance of the freehold title to be as per the provisions contained in the Draft Transfer.

Determination

27. The Tribunal determines that the price payable by the lessee for the acquisition of the freehold interest in the property known as 11 [ADDRESS] [POSTCODE] in accordance with Section 9(1) of the Leasehold Reform Act 1967 as amended, is £5555.00 (Five Thousand, Five Hundred and Fifty-Five Pounds).

28. The Tribunal determines that the provisions that ought to be contained in the conveyance of the freehold title to the Applicant are as per the Draft Transfer subject to the following amendments:

a) the provision detailed in the ‘Rights granted for the benefit of the property’ section in box 12 of the Draft Transfer to be removed from that section and instead inserted within the ‘Rights reserved for the benefit of other land’ section;

b) the typographical error in the spelling of ‘[NAME] [COMPANY] to be corrected; and

c) the consideration being amended to ‘Five thousand five hundred and fifty-five pounds £5,555.00’, as per the Tribunal’s valuation.

Costs

29. The application under section 21 (1) (ba) of the Act for a determination of the reasonable costs payable under section 9 (4) of the Act was stayed by the Tribunal until the determination of the substantive applications. The Applicant is therefore to advise the Tribunal within 21 days if costs are agreed or alternatively if directions are to be issued.

Appeal

30. If either party is dissatisfied with this decision they may apply to this Tribunal for permission to appeal to the Upper Tribunal (Lands Chamber). Any such application must be received within 28 days after these written reasons have been sent to the parties (Rule 52 of The Tribunal Procedure (First-tier Tribunal) ([NAME]) Rules 2013).

V [NAME]