First-tier Tribunal Determines Lease Extension Premium

OUTCOME: Allowed

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FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case reference : LON/00BF/OLR/2021/0832 V:CVPREMOTE Property : 33 [ADDRESS] [POSTCODE] Applicant : [redacted] : [COUNSEL], IRRV(Hons)[COUNSEL], [NAME] Respondent : [redacted] : [COUNSEL] (Oxon),MSc, MRICS, [NAME] of [NAME] : Section 48 of the Leasehold Reform, Housing and Urban Development Act 1993 Tribunal members : Mrs [NAME] Mr [NAME] of determination and venue : Remote video hearing 21 April 2022

Date of decision : 13th May 2022

DECISION

Covid-19 pandemic: description of hearing.. This has been a remote video hearing which has not been objected to by the parties. The form of remote hearing was V:CVPREMOTE. A face-to-face hearing was not held because it was not practicable and no-one requested the same.

Summary of the tribunal’s decision (1) The appropriate premium payable for the new lease is £124,150

2 Background 1. This is an [NAME] made by the [NAME] pursuant to section 48 of the Leasehold Reform, Housing and Urban Development Act 1993 (“the Act”) for a determination of the premium to be paid for the grant of a new lease of 33 [ADDRESS] [POSTCODE] (the “property”).

2. By a notice of a claim dated 5TH February 2021, served pursuant to section 42 of the Act, the applicant exercised the right for the grant of a new lease in respect of the subject property. At the time, the applicant held the existing lease granted on 1 May 1951 for a term of 99 years less one day from 24 June 1943 at an annual ground rent of £5.25 per annum. The applicant [NAME] to pay a premium of £97,300 for the new lease.

3. On 9 April 2021, the [NAME] served a counter-notice admitting the validity of the claim and counter-[NAME] a premium of £160,000 for the grant of a new lease.

4. On 4 October 2021, the applicant applied to the tribunal for a determination of the premium. The hearing 5. The hearing took place on 21 April 2022, as a video hearing, all parties and participants attended the hearing by Video link. The applicant was represented by Mr [APPELLANT] (Hons) of [NAME], The respondent was represented by Mr [RESPONDENT](Oxon) MSc MRICS of [NAME].

6. Neither party asked the tribunal to inspect the property and the tribunal did not consider it necessary to carry out a physical inspection to make its determination.

7. The applicant relied upon the expert report and valuation of [APPELLANT] dated 12 March 2022 and the respondent on the report of [RESPONDENT] dated 30 March 2022. 8. [NAME] described the property and location within their reports. [ADDRESS] is located between Carshalton village, Croydon and Mitcham and within walking distance of both a bus route and railway station. The Property is on the ground floor a two storey block of four semi-detached maisonettes, built in the late 1930’s. The block is of traditional construction comprising a pitched and tiled roof, brick and rendered external walls, timber floors and double glazed windows. The property comprises three rooms, kitchen and bathroom/wc and is

3 centrally heated. It has the benefit of two parking spaces to the front and a rear garden.

9. The [NAME] agreed that there were no tenant’s improvements to be taken into account for the purposes of the valuation.

10. The following matters were agreed: The unexpired term at the valuation date of 5 February 2021 was 21.38 years; Capitalisation and Deferment rate both 5% 1% adjustment for tenure 11. The matters outstanding were: Freehold vacant possession value Existing lease value The premium.

12. Mr [NAME] stated that his valuation was based on the condition of the property at the valuation date. Prior to it being marketed for sale the kitchen and bathroom had been refitted, the property rewired and replumbed, the central heating system replaced, the flat redecorated and new floor coverings laid at a total cost of £20,070 to which he had added an element for profit as family members had undertaken some of the work. He was of the opinion that the flat was not in disrepair but was not in a condition to maximise its value without these works being undertaken.

13. The property was originally under offer at £290,000 on the basis that the existing lease would be extended. However, the lease extension was not completed quickly and the prospective purchasers withdrew. The current sale price of £305,000 was agreed in December 2021, approximately one year after the valuation date. He had adopted £290,000 less £25,000 for necessary updating to arrive at an extended lease value of £265,000.

14. He referred to the sales of four properties in [ADDRESS] to support his opinion of value. 18 90.7 years unexpired sold July 2021 £270,000

4 31 88.4 years unexpired sold February 2021 £310,000. The property had been extended and upgraded. 14 90.1 years unexpired sold January 2021 £280,000 54 105.6 years unexpired sold December 2019 £265,000 15. He had used the Nationwide Index to adjust for time: he considered it the most reliable index as it was postcode related. The later sale price was about 5% higher than the original sale price: the Nationwide index showed growth of 5.11% between February and December 2021. He agreed that the Land Registry index showed a different level of growth.

16. Under cross examination Mr [NAME] insisted that at the valuation date the property was not in disrepair but was “tired”. He was of the opinion that the lease term “maintain” did not mean keep in good condition. The property’s current condition was improved. He considered the cost of the works, including profit, was equal to value.

17. The main area of disagreement was the relativity to be used to value the short lease as there were no relevant comparable sales. Mr [NAME] said that he had regard to a number of graphs of relativity including the [NAME] (49.09%), Savills Enfranchiseable (49.6%), [NAME] (44.43%), [NAME] (54.48%), the [NAME] graph which he noted was based on central London and the Savills 2016 report. He had adopted a relativity of 49.6% which he considered was appropriate for the type and location of the property and the unexpired lease term. He had valued the existing lease at £131,440.

18. Based on the above he had arrived at a value for the premium of £115,150.It appears that Mr [NAME] made a small error in adopting a figure of 0.3693 for deferral of 21.38 years which should in fact be 0.3523.This would reduce the calculated premium to £114,000.

19. Under cross examination he agreed that he had not made any adjustment to the sale prices of the comparables for lease length as the unexpired terms were all in excess of 80 years. He had not relied upon the sale of No.31 because the flat had been extended and had a conservatory.

20. He explained that he had used the Savills Enfranchiseable graph because he could recall the market prior to the Act when sales of short leases took place. He was of the opinion that most landlords were willing to extend short leases. He confirmed that he had used the 2016 Gerald Eve graph.

21. Mr [NAME] confirmed that his client had acquired the short unimproved leasehold interest in January 2015, she had paid a premium of £131,000.

5 22. Mr [NAME] referred to his report. He had dealt with a number of lease extensions in [ADDRESS] and had adjusted the sale prices of those comparables which had up to 99 years unexpired using the 2016 Savills and Gerald Eve Indices. 23. He relied upon the following sales of first floor flats: 18 88.9 years unexpired sold July 2021 £270,000

loft room via ladder and a garage with restricted access 2 146.7 years unexpired sold July 2021 £298,000

Garage and loft storage

66 93.8 years unexpired sold May 2021 £272,500

No parking, refurbished bathroom

14 90 years unexpired sold January 2021 £280,000

Garage and loft storage

68 90.3 years unexpired sold November 2020 £270,000

No parking, loft storage

24. Mr [NAME] used the Land Registry data for flats in the London Borough of Sutton to adjust the sale prices for time and the Savills 2016 graph to adjust for lease length, and adjustments of 5% for a standard garage, 2.5% for a single parking space or garage with limited access and a further 1% for a second parking space, 2.5% for loft storage and 2.5% where the flat is refurbished to a high standard. The calculations resulted in an adjusted average sale price of £292,441 at the relevant date.

25. He also considered the offer made of £290,00 on 2021 for a 111 year lease, applying a 2% uplift based on the decision in [NAME] v [NAME] for leases between 110 and 115 years he said gave a freehold value of £295,918. A reduction of 2.5% to reflect the new bathroom would reduce the value to £288,520. However, he stated that standing back the average price of the comparables looks a little high when compared to the price offered in the market. Assuming that if the long lease had been in place the sale would have completed in December 2021 and adjusting for time the freehold value was £281,923, say £281,900 and an extended lease value £276,262.

26. Mr [NAME] said that he had been unable to find reliable sales evidence of short leases. He had found two sales where there was an unexpired term of approximately 57 years. He had not been able to verify the details and one of the flats had been extended. He was of the opinion that neither transaction was useful.

6 27. He had therefore relied on the Savills unenfranchiseable figures for a lease of 21.38 years which indicated a relativity of 41.01% and the [NAME] figures suggest 38.73%, giving an average of 39.87%. Applying this to the freehold vacant possession value equates to an existing lease value of £112,394 without Act Rights.

28. In cross examination Mr [NAME] agreed that the property would have required some updating but did not accept that cost was equal to value, nor that all expenditure adds value. He said that he would adjust the sale price by 2.5% to reflect condition, reminding the Tribunal that the [NAME] had agreed that there were no tenant’s improvements to be taken into account in the valuation.

29. Based on the above he had valued the premium for the lease extension at £131,000. He had followed the method adopted by the Upper Tribunal in their recent decisions in arriving at this figure.

30. Neither expert had brought to the hearing information regarding prices paid between 28 January 2015 (when the short lease was purchased) and the valuation date. Therefore, the Tribunal asked them to provide this information as it appeared to be the only reliable sales evidence of an unimproved short lease, albeit some time prior to the valuation date. The Tribunal was of the opinion that updating the sales information on the subject flat would be a useful check on the various Indices used by the [NAME].

31. Mr [NAME] responded that the Nationwide Index showed an 18.65% increase over the relevant period as compared with the Land Registry Index of 22.5%.

32. Mr [NAME] advised that the Land Registry data showed a 22.78% increase. Applying this to the sale price would indicate a lease value with Act rights of £160,842 for a 27.40-year lease at the Relevant Date. In reaching a lease value without Act rights he relied on the Savills data, which for 27.40 years indicates 58.48% for the enfranchiseable relativity and 48.48% for the unenfranchiseable relativity. He added that taking the resulting value of Act rights at 17.1% derives a lease value without Act rights of £133,338 for a 27.40-year lease at the Relevant Date. He stressed that in his experience there had been a suppression in the value of short leasehold interests during that period. The Tribunal’s Determination 33. The tribunal determines that the premium to be paid for the lease extension is £124,150 (pounds). Reasons for the tribunal’s determination

7 33. The Tribunal in reaching its decision considered all of the valuation

evidence put forward by both parties. 34. The Tribunal accepts that the best evidence for the value of the

extended lease value is the price agreed in April 2021, only two months

after the valuation date. We accept that the flat required some updating

but do not accept that cost equals value nor that all the costs incurred

would have been reflected in the value of the flat. We are of the opinion

that a reduction of £10,000 from the agreed price of £290,000 would

be appropriate. 35. We determine the extended lease value at £280,000. The Tribunal

further determines that it would be appropriate make an adjustment of

1% to arrive at the freehold value of this flat in outer London at the

lower end of the market, giving a freehold value at £282,800. 36. The [NAME] differ in their approach to the valuation of the existing

leasehold interest. Mr [NAME] has used a number of indices and

adopted a relativity of 49.6% to arrive at a value of £131,440. Mr

[NAME] has relied on the 2016 Savills and Gerald Eve indices and

adopted a relativity of 39.87% to arrive at a value of £99,395. 37. The Tribunal was not convinced that the value of the short leasehold

interest would have reduced from £131,000 in January 2015 to £99,395

by the valuation date, some 6 years later. The evidence is that market

values for flats in this locality had increased by between 18.65% and

22.78% depending on the index adopted, an average of 20.7%. 38. The Savills 2016 Index indicates for the six year reduction in the

unexpired term an enfranchiseable relativity difference of 7.7% and

7.6% for the unenfranchisable relativity. 39. Using this method as a check the purchase price of £131,000 updated

to the valuation date is £157,200, reduced by 7.7% to reflect an

unexpired term of 21.38 years indicates a capital value of £145,960.

Deducting 10% Act rights gives the short lease value at the valuation

date of £131,365., or 46.4% of the freehold value. This compares with

the value adopted by Mr [NAME] of £131,440. 40. The purchase of the short lease in 2015 would have been in the time

frame when Savills would have been considering sales evidence for the

2016 index. The index, is of course based on evidence in central

London. The only market evidence available appears to indicate that in

this location, for this type of property the market may not be as

sophisticated as that in central London. 41. Mr [NAME], in his later submissions regarding the value of the short

lease appears to have made an error in stating that the Savills Index

8

shows Act rights of 17.1% for the 27.4 year lease. The table shows a

difference of 10%.

The premium 42. A copy of the valuation calculation is annexed to this decision.

Name: [NAME] [NAME]: 13th May 2022

Appendix: Valuation setting out the tribunal’s calculations

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]. 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).

9 CASE REFERENCE LON/00BF/OLR/2021/0832

First-tier Tribunal Property Chamber (Residential Property)

Valuation under Schedule 13 of the Leasehold Reform Housing and Urban Development Act 1993

Premium payable for an extended leasehold Interest in [Property]

Valuation date: 5th February 2021

Unexpired lease term 21.38 yrs Ground rent £5,25 Capitalisation rate 5% Deferment rate 5% Short lease value £131,440

Existing Current Term Ground rent £ 5.25 YP 21.38 yrs @5% 12.95 £ 68

Reversion Value (Unimproved) extended lease £280,000 To FH value plus 1% £282,800 PV of £1 21.38 yrs @5% 0.3523 £ 99,630 £99,698

[NAME] (Landlord) Term £NIL Reversion £282,800 PV £1 111.38 yrs @5% 0.0044 £ 1,244 £98,394

[NAME] £ 1,244 [RESPONDENT] £280,000 £281,244

Current £ 98,394 £131,365 £229,759

£51,485 @ 50% £25,743

£124,137

But Say £124,150