First-tier Tribunal Determines Lease Extension Premium

OUTCOME: Allowed

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Case Reference : LON/00BK/OLR/2022/0583

Property : 65 [ADDRESS] [POSTCODE]

Applicant: [redacted] : Mr [COUNSEL], MRICS of [RESPONDENT]

Respondent: [redacted] : Miss [COUNSEL] – Counsel and Mr [COUNSEL] of [NAME] : [NAME] for a lease extension under section 48(1) of the Leasehold Reform Housing and Urban Development Act 1993

Tribunal Members : Judge [NAME] (Hons) LLM Property Law MA

Date of Hearing : 28th February 2023

Date of Decision : 22 March 2023

_______________________________________________

DECISION ____________________________________

© CROWN COPYRIGHT 2023 FIRST - TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY)

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TRIBUNAL DECISION

The appropriate premium payable for the new lease is £189,072 as set out on the attached valuation schedule.

BACKGROUND

1. This is an [NAME] made by the Applicant leaseholder pursuant to section 48 of the Leasehold Reform Housing and Urban Development Act 1993 (the Act) for the determination of the premium to be paid for the grant of a new lease of 65 [ADDRESS] [POSTCODE] ([NAME]).

2. By a notice of claim dated 2nd December 2021 served pursuant to section 42 of the Act, the Applicant exercised the right for the grant of a new lease in respect of [NAME]. At the time the Applicant held the existing lease granted on a term of 99 years from the 24th June 1997 at a current annual ground rent of £160 due to increase to £320 in June in 2043 for the remainder of the term. The Applicant proposed a premium of £135,000 for the new lease.

3. On 14th February 2022 the Respondent served a counter notice admitting the validity of the claim but counter proposing a premium in the sum of £237,095 for the grant of the new lease.

4. The Applicant made [NAME] to the Tribunal for the premium to be determined on 27th July 2022.

ISSUES

5. The following matters were agreed:-

(1) The valuation date is 3rd December 2021. (2) The existing lease is for a term of 99 years from 24th June 1977. (3) The unexpired term on the lease as at the valuation date is 54.55 years. (4) The current annual ground rent is £160 due to increase to £320 on 24th June 2043 for the remainder of the term. (5) The capitalisation rate is 6%. (6) The deferment rate is 5%. (7) The relativity was agreed at 74.27%. (8) [NAME] is described as a first floor, self-contained flat in an eight/nine storey purpose-built block of flats thought to have been constructed in the 1930s and containing 40 flats. [NAME] consists of a reception room with open plan kitchen, three bedrooms, two bathrooms and a separate WC. (9) The extended lease value, which is 99% of the freehold vacant possession value. (10) The imperial gross internal floor area of [NAME] is 1,053 square feet.

MATTERS NOT AGREED

6. The following matter were not agreed:-

3 (1) The parties disputed the internal layout of [NAME]. The Applicant valuer contended that [NAME] should be valued in accordance with the lease plan and the current layout reflects improvements, which should be discounted. The Respondent’s valuer contends [NAME] should be valued in accordance with the current layout and no discount for improvement should be considered. (2) The freehold vacant possession value (FVPV). (3) The current lease value. (4) The appropriate premium payable for a statutory lease extension.

THE HEARING

7. The consideration of this case took place on 28th February 2023 by way of video hearing to which the parties consented. The Applicant was represented by Mr [APPELLANT], who also provided the valuation report. The Respondent was represented by [COUNSEL] of Counsel with Mr [COUNSEL] as the Respondent’s expert.

8. Neither party asked us to inspect [NAME] and we did not consider it necessary to do so. The experts’ reports contained photographs both of the exterior, of the development and the interior of the [NAME].

9. In a bundle of documents provided prior to the hearing we were given a copy of the [NAME] and directions, notices served under section 42 and 45 of the Leasehold Reform Housing and Urban Development Act (the Act), copy entries of the freehold and leasehold title together with the existing lease and the Applicant and Respondent’s expert valuation reports.

10. We heard firstly from Mr [APPELLANT] on behalf of the Applicant. His report was dated 8th February 2023 and after giving details of [NAME], his instructions his CV and the documents he had seen, he gave a background to [NAME] itself. He told us he had inspected it in July in 2021 and it was as described in the statement of agreed facts. It was suggested that [NAME] was well located in the heart of St Johns Wood with good access to facilities. The current accommodation was described as a reception room with open plan kitchen, three bedrooms, two bathrooms and a separate WC. This was a change from the original layout shown on the lease plan which appeared to indicate that there had been a reception room, separate kitchen, three bedrooms, bathroom and separate WC. Mr [NAME] report confirmed that the gross internal floor area was 1,053 square feet.

11. The lease was said to be for a term of 99 years from 24th June 1977 and accordingly there was some 54.55 years of the term remaining at the valuation date, which had been agreed as 3rd December 2021.

12. Mr [NAME] first addressed the freehold vacant possession value (FHVP) and confirmed that he had undertaken research of flats thought to be comparable to assist him in this exercise. There were appendices attached to which he had made adjustments to the comparables that he put forward at 71, 52 and [ADDRESS]. In addition, to provide some form of consistent approach, he had relied on two previous decisions of the First Tier Tribunal involving flats at [ADDRESS] heard in April of 2017. These related to flats numbered 25 and [ADDRESS]. The schedule that he relied upon had in turn been based

4 upon the schedules to the decisions of the above cases again to provide some consistency in approach. He was of the view that [ADDRESS] was the best comparable and he gave additional weight to this when compared to 52 and [ADDRESS]. Having used these three comparables, which he adjusted both in respect of the time, condition, the level of floor of [NAME] and to adjust for a notional freehold, gave him a range of rates per square foot, which he sought to apply to [ADDRESS].

13. His report went on to give some more details of the comparable properties at 71 and [ADDRESS] as well as [NAME] at [ADDRESS] and the adjustments and weighting he applied. He had assessed a freehold price per square foot for the [NAME], based on the comparables and the weighting that he had given, of £996 which when applied to the internal floor area of the [NAME] of 1,053 square feet, gave an FHVP of £1,048,788. There was then a good deal of discussion in his report on the question of relativity. We do not need to consider that because both [NAME] agreed that the appropriate relativity in this case was 74.27%, which we have accepted and we have applied.

14. Mr [NAME] doing these mathematics came up with a premium for the [NAME] of £167,460.

15. In oral evidence to us and also the subject of cross-examination from Miss [NAME], he touched on the question of the improvements and was of the opinion that the works that had been done to [NAME] by a predecessor in title did enhance the valuation. He confirmed during his evidence that he was happy to agree the adjustment of .5% for floor level and the 1% for freehold.

16. He was then asked why he had resiled from an agreed square footage in respect of No 45 Grove Hall in the previous decision that he had been involved in where a 1,000 square feet had been agreed. It was put to him that he had described 45 and 65 as being identical and therefore the same size and his request to attribute 1,000 square feet to [ADDRESS] was inconsistent with the 1,062 size that he understood had been the area attributed by [NAME] on a previous sale. Asked why he was not prepared to stick to the measurements that he had agreed at the hearing in the previous case, he thought that they may have been in error and that the [NAME] may have got the correct figure.

17. There then followed deductions as to matters relating to condition and he was also asked why he had a deduction in the region of £75,000 for condition in relation to the [NAME] when compared to [ADDRESS] which he put down to improvements. He was asked whether there should be a greater adjustment between ground and first floor level and from first floor level upwards. Mr [NAME] had used a .5% for each floor although it was put to him that Mr [NAME] had allowed a larger adjustment between ground floor and first floor level. He also accepted that smaller flats had a greater £ per square foot rate, particularly relying on a comparable that Mr [NAME] had put forward of [ADDRESS].

18. Asked again about whether the changes to the [NAME] had enhanced the value, he said he had no evidence to show the improvements had done so,

5 but it was his opinion. After some further questioning, Mr [NAME] amended the £ per square foot for the [NAME] and slightly amended the weighting that he had given to Nos 71 and 52 as well as increasing the weighting to No 45 to give an amended FHVP of £1,053,211 which applying that amendment gave a premium payable of £168,120.

19. We then heard from Mr [NAME] who has with Mr [NAME] provided a detailed expert’s report, which was dated 7th February 2023. This gave an introduction and summary of the case as well as the issues that we were required to determine. The location of [NAME] was given as was the description and he then moved on to provide the long leasehold value and freehold assessments. As with Mr [NAME] he had relied on [ADDRESS] as the main comparable and included also by way of reference [ADDRESS], [ADDRESS] and an additional one that was not used by Mr [NAME], [ADDRESS]. As with Mr [NAME] he had applied various adjustments to cover for condition, time and floor level.

20. In his report he cites No 45 as being the best comparable being sold only four months before the valuation date, a very similar flat, in the same section of the development albeit on the sixth floor as opposed to the first floor. In order to give more weight to 45 as a comparable he used £ per square foot rate of £1,170 which applied to the 1,053 square feet gives a figure of £1,232,010. Uplifted for freehold gives a value of £1,244,454 which he has incorporated into his calculation. He confirmed the relativity at 74.27%. The deferment rate and capitalisation rates had been agreed and applying these he came to the determination that the premium for the [NAME] should be £198,357.

21. He confirmed that he made a slightly larger adjustment between ground and first floor than .5% and confirmed that one of the big differences between him and Mr [NAME] was the floor area applied to Flat 45. He said this should be 1,000 square feet as had been agreed at the previous decision and not the larger square footage that Mr [NAME] sought to argue for.

22. He was asked some questions by Mr [NAME] centring on the adjustments and a suggested value for a second bathroom which he had put at £50,000.

FINDINGS

23. We were very grateful to the parties’ [NAME] for identifying three comparables which were agreed and so many elements of the valuation process. We were left only to assess the freehold vacant possession value of [NAME] and apply that to the agreed relativity.

24. We examined the lead comparable at 45 and noted that there had been disagreement between Mr [NAME] and Mr [NAME] over the size to be used for analysis. At the previous FTT decision Mr [NAME] had agreed an area of 1,000 but now sought to place greater alliance on the size cited by agents in the sales particulars of 1,062 square feet. We find it somewhat strange that Mr [NAME] should seek to resile from a size that he himself had agreed for the [NAME] at a different hearing, and in those circumstances we have applied, for the purposes of this decision, an area to No 45 of 1,000 square feet.

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25. No 45 is on the sixth floor but the same elevation of the block as the [NAME]. It was sold in August 2021 for £1,140,000, and both [NAME] agreed on the approach to index this for time to the valuation date of 3rd December 2021. Agreed indexation places the revised value of the comparable to £1,167,273 which when applied to the 1,000 square foot gives a rate of £1,167 per square foot.

26. The [NAME] is on the first floor but No 45 is on the sixth. [NAME] agreed an approach of .5% increase in reflecting the increased amenity level as you proceeded up the building. The adjustment between the first and sixth floor is therefore 2.5% and when applying this to the comparable it needs an adjustment, which gives a rate per square foot of £1,137.82.

27. Other comparables were put forward by Mr [NAME], namely Nos 71 and 52 which required more adjustment but were in our view useful in setting the context. These two comparables supported the adoption of the rate gleaned from the analysis of No 45 taking into account condition, size and floor area. The same could not be said of the additional comparables suggested by Mr [NAME] of 185 as it was two small and did not provide the comparability that No 45 did supported by 71 and 52.

28. Applying the rate of £1,137.82 per square foot to the subject Premises which is 1,053 square feet, gives a value of £1,198,124.

29. The Act requires that [NAME] be valued disregarding any improvements made by the original tenant or successors. Those improvements of course have to be of value. No 45 had a double living room, kitchen with window, good condition kitchen fittings and a location of the kitchen across the hallway from the living room. There was a separate bathroom and three bedrooms, the largest having an en suite. In contrast the [NAME] had a galley kitchen, two separate bathrooms but no en suites within the three bedrooms, although it did not seem to us it would be difficult to create some form of bathroom/en suite facility.

30. It had been suggested by Miss [NAME] that the alteration to the flats may have taken place before the grant of the lease based it seemed on the assessment that the lease plan was different to that which was on the ground. It seems to us it is highly unlikely that alterations would have taken place between the preparation of the plan for the lease and the works that were carried out to amend the internal areas and, in those circumstances, we prefer to accept on the balance that the alterations occurred subsequent to the original granting of the lease and as such any new value attributable to them would require to be removed.

31. The original layout had a kitchen, which was remote from the living room, and had a single bathroom. We felt on balance that the alterations made to the [NAME] did amount to an improvement and that adjustments were required. The first of the lead comparables No 45’s layout was with a double living room and kitchen accessed across the corridor, separate bathroom and an en suite. This differed to the [NAME]. In our view the [NAME]’s layout at the date of valuation is slightly poorer so we have allowed

7 an adjustment of £12,500 to the value, reducing the £1,198,124 to £1,185,624. We consider this to be, in our opinion, reasonable. However, a further adjustment is required to take the value back to reflect the original condition of the [NAME], as granted. The original layout comprised one bathroom and kitchen, with living areas at opposite ends of the flat This contrasted with that of current layout with the improved galley kitchen and location. We consider that a further adjustment for this is required and doing the best we can we have come to the decision that this should be £12,000 which reduces the long leasehold value to £1,173,624. We then applied the agreed freehold uplift of 1% and as both [NAME] have helpfully come to the same view on the question of relativity of 74.27%, this gives the existing lease value of £880,455.

32. Accordingly, we determine that the price payable for the freehold of the [NAME] is as set out on the attached valuation, namely £189,072.

Judge: Andrew Dutton A A Dutton Date: 22 March 2023

ANNEX – RIGHTS OF APPEAL

1. 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 at the Regional Office which has been dealing with the case.

2. 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].

3. If the [NAME] is not made within the 28-day time limit, such [NAME] must include a request to 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.

4. The [NAME] for permission to appeal must identify the decision of the Tribunal to which it relates (ie give the date, [NAME] and the case number), state the grounds of appeal and state the result the party [NAME] the [NAME] is seeking.

8 65 [ADDRESS] [POSTCODE]

Valuation date 3rd December 2021 Lease details: 99 years from 24 June 1977

Lease term remaining at date of valuation 54.55 Capitalization rate 6 Deferment rate 5 Gross internal floor area (squ feet) 1053 Adjusted rate per square foot £1137.82/ sq ft Freehold vacant possession vale (FHVP) £1,185,478 Long leasehold value (99% of FHVP) £1,173,624 Relativity 74.27% Current lease value (FHVP multiplied by the relativity percentage) £880,455

As existing

£ £ £ £ Annual ground rent (AGR)

160

[NAME] for 21.55 years@ 6%

11.9187 1907

Reversion to AGR

320

[NAME] 33 years @ 6% 14.23022961

PV of £1 for 21.55 years @ 6% 0.284877798 4.0539 1,297

Reversion to FHVP

1,185,478

PV of £1 for 54.55 years @ 5%

0.0698431 82,797

Current value of freeholder’s interest before granting lease extension

86,001

After grant of lease extension

£ £ £ £ Annual Ground Rent

0

[NAME] for 144.55 6%

16.66

9 years @ Reversion to FHVP

1,185,478

PV of £1 for 144.55 years @ 5%

0.[PHONE]

Value of freeholders interest after lease extension granted

1,025

Diminution in value of freehold interest as a result of granting lease extension

84,976 Marriage Value

Value of leaseholder’s interest after lease extended

1,173,624

Value of freeholders interest after lease extended

1,025 1,174,649

Less

Current value of freeholders interest

86,001

Current value of leaseholders interest

880,455 966,456

208,193

Marriage value at 50%

104,096 Total

£189,072