First-tier Tribunal Determines Lease Extension Premium

OUTCOME: Allowed in Part

FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case Reference : LON/00AY/OLR/2022/0116 V:CVP Property : [ADDRESS], [POSTCODE] Applicant: [redacted] [NAME] [NAME] and [NAME] : [RESPONDENT] Respondent: [redacted]

[COMPANY] : [COUNSEL] [COMPANY] of [NAME] : 93 Act New Lease of Flat Tribunal member(s) : Judge Sheftel Mrs Sarah Redmond MRICS Date of Decision : 17 January 2023

DECISION

Background

1. This is an [NAME] made pursuant to Section 48 of the Leasehold Reform, Housing and Urban Development Act 1993 (the “1993 Act”) for a determination of the premium to be paid and the terms for a new lease.

2. The [NAME] relates to the property known as [ADDRESS], [POSTCODE] (the “Property”). The Property comprises a two-bedroom maisonette on the ground floor of a two storey mid-terrace, built around 1910 . The front and

2 rear gardens are included in the demise, subject to rights of way for the [NAME] of the upper maisonette to access the upper maisonette over the front garden and hang washing in the rear garden.

3. The Property is let pursuant to a head lease for a term of 90 years commencing 25 December 1966 and an underlease for a term of 90 years less one day from 25 December 1966.

4. The Applicant served a Section 42 Notice of Claim dated 10 September 2021, proposing a premium for a lease extension of £120,000. The Respondent served a Counter-Notice dated 19 November 2021, proposing a premium of £245,000.

5. The hearing of this [NAME] took place on 6 December 2022. The Applicant, tenant, was represented by Mr [APPELLANT], who also provided expert evidence. The Respondent, landlord, was represented by Mr [RESPONDENT] MA (Oxon) MSc MRICS who had also provided an expert report. Although the hearing was cut slightly short due to a family member of one of the tribunal being taken ill, as the only outstanding issue at that point was relativity – on which there was little difference between the parties as set out below – both Mr [NAME] and Mr [NAME] agreed to rely on their written submissions on this issue as contained in their respective reports.

6. The parties had provided a bundle in advance of the hearing. The parties confirmed that the terms of the new lease had been agreed and that the only thing for the tribunal to determine was the premium. Valuation 7. The following matters have been agreed between the parties: (1) Valuation date: 13 September 2021 (2) Unexpired Term: 35.28 years (3) Ground rent: The provisions in both leases are the same with £38 per annum for the 1st 30 years, £48 per annum for the next 30 years and £58 per annum for the final 30 years. (4) Deferment Rate: 5% (5) Capitalisation Rate: 1.18%

3 (6) 1% differential between the unimproved extended lease value and the unimproved freehold vacant possession.

8. The issues in dispute were as follows: (1) Floor area (2) Tenant improvements (3) Freehold value with vacant possession (4) Existing underlease value (5) Resulting premium and apportionment 9. Mr [NAME] calculated a figure of £143,000 for the total premium. In contrast, Mr [NAME] proposed a total premium of £155,030. Floor area 10. Mr [NAME] had calculated the floor area to be 772 sq ft. In contrast, Mr [NAME] considered the figure to be 788sq ft – he suggested there were inappropriate deductions in the Applicant’s calculations.

11. The tribunal is not in a position to make a finding one way or the other, although the point is of relatively limited significance for the purposes of these proceedings, particularly given the small difference between the two figures. In any event, the parties agreed to split the difference at the hearing. Tenant improvements 12. Mr [APPELLANT] valued the tenant improvements at £17,000. This was derived from: a change of layout to the kitchen (removing an internal wall), the installation of central heating, double glazing and improved electrics. With regard to the latter, at the hearing he confirmed that essentially this related to additional power points which would have been installed since the lease was granted.

13. In contrast, Mr [NAME] proposed a figure of £5,000. This was an allowance to reflect the fact that it is likely the heating provision has been improved to the Property at some stage since the commencement of the lease with the installation of a gas central heating system. However, having regard to the lease plan, he considered that it is unlikely there have been any significant alterations to the configuration of the accommodation, or alternatively even if there had been the removal of the

4 internal wall to open up the kitchen, this was a matter of preference rather than an improvement. Similarly, he considered that although uPVC framed double glazing had been installed, this was also a matter of preference on period properties rather than a change which would bring about a higher price in the market – as was the alleged additional of electric socket points.

14. The tribunal accepts that each of the items identified by Mr [NAME] could, in principle, constitute improvements. However, as Mr [NAME], himself acknowledged, it is extremely difficult to quantify the value of such improvements and no objective evidence was presented to the tribunal in this regard. While we consider an appropriate sum for tenant’s improvements to be greater that the £5,000 allowed by the Respondent on the basis of our findings that the other items could also constitute improvements, we do not consider that the evidence exists to justify a figure as high as that propose by the Applicant.

15. In the tribunal’s determination, taking all of the matters together and having regard to the submissions of both parties, we consider an appropriate figure in respect of tenant improvements to be £12,000. Freehold value with vacant possession 16. Mr [NAME] considered the appropriate figure to be £500,000 for the extended lease value.

17. He provided several comparables of maisonettes on the same road. The greatest weight was given to [ADDRESS], a similar 2-bedroom ground floor flat with garden, sold in May 2021 and date-adjusted to £492,000. Reference was also made to: [ADDRESS], albeit this is a mansion block with no garden and some 170 sq ft smaller, which sold £425,000 in June 2021; and [ADDRESS], which sold for £492,175 in March 2021, although this is larger 3-bed property. Further, Mr [NAME] included the sales of 23 and [ADDRESS]. They were sold in July and March 2019 respectively, which was more than two years prior to the valuation date, although according to Mr [NAME], there would only be a small adjustment for time, to approximately £520,400 and £514,000.

18. Finally, Mr [NAME] made brief mention to the sale of [ADDRESS] at £550,000. However, as this sale took place six months after the valuation date, he considered that limited weight should be given to it –

5 notwithstanding that this was a comparable relied on by Mr [NAME]. Mr [NAME] submitted that sales on nearby [ADDRESS] should also be given little weight as it is a more desirable road, mainly on the basis of more impressive buildings with larger gardens. He suggested that a price per square foot analysis of the seven most relevant comparables for [ADDRESS] (although little detail was provided as to these comparables) produce a value of £527,000 for a flat of the size of the subject Property.

19. Taking the price per square foot for his chosen comparables on [ADDRESS], the range of prices per sq ft was £552 to £692. However, according to Mr [NAME], £552 was for a larger flat with a garden. He also considered that a 10% uplift is reasonable and considered that the correct value was in the range of £600-£700. A figure of £650 per sq ft would produce an overall figure of £501,800. Mr [NAME] also commented that on the question of adjustments for time, although there had been some variations between March and June 2021, overall, the picture had been broadly stable.

20. In contrast, Mr [NAME] proposed a figure £520,400. He noted that the Property was marketed between June 2021 and May 2022. Whilst originally marketed at £550,000 this was later changed to seek offers in excess of £525,000. It was said that the property was marketed on the basis that the lease would be extended by completion.

21. In determining the valuation, Mr [NAME] also had regard to the recent sales in similar buildings on [ADDRESS] since the beginning of 2021, as well as the sales of other ground floor two-bedroom flats and maisonettes on the surrounding roads. For solely leasehold comparables, he applied an adjustment on the basis that a knowledgeable, prudent [NAME] would reflect this in their offer, based on a discount aligning with the cost of the premium to extend the lease and something towards the associated costs and risk. Mr [NAME] also made adjustments for physical aspects of comparables and their condition. Further, he had regard to the right of way over the rear garden for the upper maisonette to hang washing – although as a matter of fact it appeared that the garden of the subject Property had, perhaps informally, been split into two. Mr [NAME] was of the view that the existence of the right of way made little distance to the overall valuation. He concluded no adjustment was required for comparables where similar rights of way existed over the rear

6 gardens and a 1% adjustment was applied to the others where no rights of way are apparent. More specifically, in answer to a question put by Mr [NAME] as to how the fact that the upstairs maisonette had a right over the garden affected the overall value, he explained why a 1% discount was, in his view sufficient: “It is a specific right rather than a sharing of the enjoyment of the garden and whilst I appreciate it is possible some may have more concerns than others, given modern-day living with the use of washer-driers / tumble driers I believe the [NAME] would not be overly concerned by any potential impact to their enjoyment / use and take a view by the time they become aware of it. To my mind the prices achieved for 48, 56 and [ADDRESS] provide comfort on this point with the latter being an example of a property with a shared garden with the maisonette below it. The above said, whilst relatively typical for the location the garden is not an example of one of the more desirable gardens so in isolation and ignoring the right of way I consider a value of £25,000 for the garden as demised to be appropriate and given the potential for concern I consider my deduction of 1% / c.£5,000-£6,000 in my overall analysis of the other comparables, where it is believed the gardens are not subject to any rights of way, to be sufficient and appropriate.”

22. Mr [NAME] analysis produced a range of £491,946 to £565,884, with an average of approximately £525,400. He considered that this was appropriate, which he then reduced by £5,000 to reflect tenant improvements.

23. In the tribunal’s determination, the best comparable appears to be [ADDRESS]. Whilst caution is required in respect of those sales of similar properties which are which are more than two years prior to the valuation date, we note that the Land Registry House Price Index over this period suggests a relatively stable market. In this regard we also consider that it is reasonable to include the post valuation date comparable in this case.

24. We agree with the Applicant that it appears that adjacent roads may be more desirable. Moreover, given that there are sales of four similar sized 2-bedroom ground floor flats on the road in question (48, 23, 42 and [ADDRESS]), we prefer to look at those in more detail – albeit having regard to the fact that two are more than 2 years prior to the valuation date and one is six months after the valuation date. We also note that neither expert has made deductions for condition for these comparables.

7 25. Taking a broad-brush approach, the average value of these comparables is £512,460 (we have made no adjustment to allow for the lack of share of freehold for [ADDRESS]). Standing back and reflecting on the other comparables put forward by the Respondent and noting Mr [RESPONDENT] conclusion that his comparables suggest a sales price of £515,00– £520,000 we determine the extended lease value at £512,500. From this we deduct the amount of £12,000 to reflect the value of improvements as set out above, to give £500,500. The agreed uplift to FHVP therefore produces a figure of £505,555. Relativity 26. Mr [NAME] proposed a figure of 58.4%. This was arrived at on the basis of the [NAME] 2016, less a 12.5% no-Act discount. This followed the approach set in Zucconi [2019] UKUT 242.

27. In contrast, the Respondent arrived at the figure of 57.40%, being the average of the two [NAME] (2016) and [NAME] (2016) graphs in accordance with the Upper Tribunal guidance in the more recent case of [COMPANY] (Birkdale) Limited v Treskonova [2020] UKUT 0164 (LC).

28. Mr [NAME] considered that averaging [NAME] and [NAME] was a ‘reasonable’ approach but considered that it is less good than the method he has proposed. Firstly, adopting one or the other is simpler and makes relatively little difference. Secondly, he stated that he had been told by staff at [NAME] that their 2016 graph was updated in a “holistic way” by reference to [NAME] 2016, the “finance market” and opinion. In other words, averaging reasonably good data with a very similar copy that has been adjusted by reference to opinion makes little sense.

29. The tribunal acknowledges that there are inevitably difficulties in accurately determining relativity. It is also the case that there is little difference in terms of outcome between the two approaches advocated here.

30. However, the tribunal adopts the approach suggested by the Respondent. While the Applicant’s submission relating to the [APPELLANT] graph is noted, it was based on anecdotal evidence; and in any event, it was acknowledged that the approach suggested by the Respondent was still

8 reasonable. It was also approved of by the Upper Tribunal in Deritend. In that case, the Upper Tribunal stated: “39. The two PCL graphs are still rightly regarded as the most reliable and recent graphs of relativity. They provide objective evidence of relativity, based on a very large data set, and have been revised in light of close scrutiny by the Tribunal in Mundy . They should be considered as a starting point where no, or insufficient, transactional evidence has been submitted by the parties. They are not ideal, particularly for property outside PCL, but for the time being they provide the only treatment of relativity which can be regarded as reliable. Their use is always preferable to the use of an average of the RICS 2009 graphs.

31. We therefore adopt Mr [NAME] figure of 57.40% for relativity.

32. In light of our findings in relation to the three issues in dispute, we therefore determine the premium payable to be £150,609 as set out in the attached appendix showing the tribunal’s calculations. This sum to be apportioned as shown in the calculation as £2,676 to the [NAME] and £147,933 to the [NAME].

Conclusion 33. For the reasons set out above, we determine the premium payable to be £150,609.

Name: Judge Sheftel Date: 17 January 2023

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 [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].

9 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 property 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).

10 [ADDRESS] [POSTCODE] Facts and matters agreed and determined: ground floor maisonette with garden subject to rights 788 sq.ft Valuation date: 13/09/2021 Capitalisation Rate: 1.18% Value of Ground Rents £1,615 Deferment rate: 5.00% Uplift to freehold value: 1% Extended lease value: £500,500 FHVP: £505,555 Lease: expires 24/12/2056 Unexpired Term: 35.28 years Ground Rent per annum: £38 first 30 years, £48 for 30 years, £58 for remainder Existing lease value: £290,189 Marriage Value: 50% Relativity: 57.40% Value of improvements: £12,000 Calculation of premium: Diminution in value of Headlessee's interest: Value of Ground rents 1,615 Diminution in value of Freeholders Interest Reversion to Freehold 505,555 Deferred 35.28 years at 5% 0.17883 90,408 92,023 Value of Landlords proposed interest: Reversion to Freehold 505,555 Deferred 125.28 years @ 5% 0.00221 1,117 Diminution in [NAME]'s interest: 90,906 Calculation of Marriage Value: Proposed interests: [NAME] 0 [NAME]: 1,117 [NAME]: 500,500 501,617 Less Existing interests: [NAME]: 1,615 [NAME]: 90,408 [NAME]: 290,189 382,212 Total Marriage Value: 119,405 Attributable to Landords @ 50% 59,703 Total Premium payable: £150,609

11 Apportionment: Diminution in [NAME]'s interest: £1,615 Diminution in [NAME]'s interest £89,291 Total interests: £90,906 [NAME]'s proportion of existing interest: 0.01777 [NAME]'s proportion of existing interest 0.98223 Thus, [NAME]'s share of Marriage value: £1,061 [NAME]'s share of Marriage value: £58,642 Adding respective shares gives: [NAME]'s share of Premium: £2,676 [NAME]'s share of Premium: £147,933 Total Premium: £150,609