First-tier Tribunal Determines Lease Extension Premium

OUTCOME: Allowed

FIRST-TIER TRIBUNAL [APPELLANT] CHAMBER ([APPELLANT]) [APPELLANT] : BIR/00CN/OLR/2021/0004

[APPELLANT] : 3 Phoenix [APPELLANT] [[APPELLANT]] Applicant : [redacted] [NAME])

Representative : Mr [COUNSEL] of [NAME] Respondent No.1 : [COMPANY]

: Mr [COUNSEL] of [RESPONDENT]. on behalf of [NAME]. 2

: [APPELLANT] Management ([APPELLANT]) [COMPANY]. Type of Application : Application under section 48 of the

[APPELLANT], Housing & Urban Development Act 1993

Tribunal Members : [NAME] (Hons) [APPELLANT]

V [NAME] [APPELLANT] of Decision : 28 July 2021

DECISION

2 DECISION

1. The Tribunal determines the premium [APPELLANT] by the Applicants at £24,925 (Twenty Four Thousand, Nine Hundred and Twenty Five Pounds).

2. The application to determine the landlords’ recoverable costs associated with this case is stayed. The parties are to advise the Tribunal within 21 days of the date of this decision if costs are agreed or if they require the Tribunal to issue Directions in this regard.

REASONS FOR THE

DECISION

Introduction

3. This is an application received by the Tribunal on 19 February 2021, under section 48(1) of the [APPELLANT] and Urban development Act 1993 (the 1993 Act) to determine the premium [APPELLANT] to extend a lease and the other terms of the acquisition in addition to an application under section 60 (1) of the Act for a determination of reasonable costs in respect of Garage No. 6 and Flat No. 3 Phoenix [APPELLANT] [POSTCODE].

4. The Applicant served a Notice of Claim (to extend the current lease by 90 years at a peppercorn [APPELLANT] and otherwise in accordance with the existing lease) under section 42 of the 1993 Act dated 17 August 2020. The Notice proposed a total premium of £19,010 for the grant of a new lease (£18,919 [APPELLANT] to the [NAME], £35 [APPELLANT] to the [NAME] together with a further £56 [APPELLANT] in accordance with Part III of Schedule 13 of the Act).

5. By way of reply the Respondent served a Counter-Notice under section 45 of the 1993 Act dated 12 October admitting the Tenants right to acquire a new lease on the relevant date of the Flat only as the Applicants Claim did not contain sufficient particulars to identify the garage and no plan was included to deduce title and that it appears that a garage was not within the curtilage of the block of flats within which the flat is situate 6. The Respondent submitted a counter proposal stating that the Landlord requires a total premium of £34,440 (£34,220 [APPELLANT] to the [NAME], £80 [APPELLANT] to the [NAME] together with a further £140 [APPELLANT] in accordance with Part III of Schedule 13 of the Act). The Respondent also proposed that the new lease is to include the same terms

3 and covenants as the existing lease together with various additional clauses and amendments.

7. Directions were issued by the Tribunal dated 22 February 2021.

8. The Tribunal understands that that the draft lease setting out the proposed terms has been agreed and the application to determine the landlord’s recoverable costs has been stayed.

9. Due to the Covid 19 public health emergency the Tribunal has not been able to inspect [APPELLANT]. The parties have confirmed they are content to proceed without a hearing and by way of documents only.

10. In accordance with the Tribunals Directions the Applicant and Respondent have prepared and submitted their valuations. Mr [APPELLANT] for the Leaseholder submits a [APPELLANT] of £21,434 and Mr [APPELLANT] for the Freeholder a [APPELLANT] of £28,790. The Law 11. Section 48 of the 1993 Act prescribes that if a premium is not agreed it can be referred to the First-tier Tribunal ([APPELLANT] Chamber) where it can be assessed in accordance with the formula in Schedule 13 to the Act.

12. The relevant law in relation to the application under the Act is set out in Chapter II sections 39 to 62 and Schedule 13 to the [APPELLANT], Housing and Urban Development Act 1993.

13. Chapter II of the Act relates to the individual right of a tenant of a flat to acquire a new lease of that flat. The law is contained in Sections 39 to 61B of the Act and Part 2 of Schedule 13 deals with the premium [APPELLANT] in respect of the grant of a new lease.

14. Section 42 sets out what must be contained in the tenant’s notice. Section 45 sets out what must be contained in any counter-notice given in response by the Landlord.

15. Section 48 deals with applications where the terms of the new lease are in dispute or where there is a failure to enter into a new lease.

16. Section 56 deals with the obligation to grant a new lease and section 57 sets out the terms on which a new lease is to be granted.

4 The Lease 17. The underlease dated 6 April 1960 was originally made between [APPELLANT[COMPANY] (as Under-lessor) and [APPELLANT] (as Under-lessee). The lease describes [APPELLANT] as all that flat on the ground floor of the Building known as [ADDRESS] show edged red on the lease plan.

18. There is a further underlease dated 6 April 1960 also originally made between the same parties in respect of the garage No. [ADDRESS], [APPELLANT]

19. The lease in respect of the flat was granted for a [APPELLANT] of 99 years (less 3 days) from 25 March 1958 subject to a [APPELLANT] of £10 per annum.

20. The lease in respect of the garage was granted for a [APPELLANT] of 99 years (less 3 days) from 25 March 1958 subject to a [APPELLANT] of £1.00 per annum. [APPELLANT] 21. [APPELLANT] is a ground floor flat situated in a part 5-storey and part 6- storey block of flats constructed in the late 1960’s. There are separate blocks of garages located on [ADDRESS].

22. The accommodation comprises a hallway with airing cupboard, living room, double bedroom, kitchen and bathroom extending to approx. 350 sq. ft. in total. Heating is provided by wall mounted electric panel radiators (in the lounge and bedroom only) and the windows are UPVC double glazed units.

23. Access to the flat is via a communal entrance door and hallway and there are communal gardens around the block. The garage is known as No. 6.

24. The flat is described as being in an average condition with basic kitchen fittings, a dated bathroom suite and basic decorations throughout.

25. Mr [APPELLANT] advises that he has not inspected [APPELLANT] due to the Covid-19 restrictions and has only carried out an external inspection.

5 Matters agreed between the parties

26. The following matters are agreed between the parties: (i) [APPELLANT]:

36.59 years (ii) Capitalisation rate:

7% (iii) Adjustment to [APPELLANT]: 1%

Matters in dispute between the parties

27. The following matters are in dispute:

[NAME]

(i) [APPELLANT]:

17 Aug, 2020 19 Aug. 2020

(ii) [APPELLANT]: £86,000

£100,000

(iii) [APPELLANT]: £64,000

£59,358

(£55,334)

(iv) Deferment Rate:

5.5%

5%

(v) Relativity: (a) Enfranchiseable Graph 67.97%

(b) [APPELLANT] of [NAME] 13.54%

58.77% (c) Unenfranchiseable Graph

58.77%

Issue No.1: [APPELLANT] 28. [NAME] for the Applicant advises that the Notice of Claim dated 17 August 2020 was served on the freeholders. Therefore, the [APPELLANT] date for the purpose of the application is 17 August 2020 and as at that date the lease has 36.59 years unexpired.

29. Mr [RESPONDENT] for the Respondent advises that although the Notice of Claim is dated 17 August 2020 under Part 6 of the Civil Procedure Rules (CPR) the deemed date of service is the second day after it was posted (provided that day is a business day). As 17 August was a Monday the deemed date is Wednesday 19 August but calculates that, after rounding, the [APPELLANT] remaining is 36.59 years unexpired.

6 30. The Tribunal finds that the [APPELLANT] date for the purposes of this application is the date of the Notice served, 17 August 2020.

31. The unexpired [APPELLANT] is 36 years, 7 months and 6 days (36.59 years). Issue No.2: [APPELLANT] 32. [NAME] has considered four extended lease sales on the development: (i) No. [ADDRESS] sold in January 2020 at £104,000, (ii) No. [ADDRESS] sold in June 2020 at £85,702 (iii) No. [ADDRESS] sold in September 2020 at £96,600; and (iv) No. [ADDRESS] sold in March 2021 at £96,000.

33. Additionally, Mr [NAME] has considered [ADDRESS] which has a balcony and appears to be in good order is on the market and under offer at £90,000.

34. Mr [NAME] concludes that the best evidence is [ADDRESS] and [ADDRESS] both of which were sold either side of the subject [APPELLANT]’s [APPELLANT] date. [NAME] suggests that the price achieved in respect of [ADDRESS] looks out of line whereas the price in respect of [ADDRESS] and [ADDRESS] are reflective of their good order and general condition unlike [ADDRESS] which is in need of modernisation.

35. Having regard to the general condition of [APPELLANT], the fact it does not have a balcony, possible noise issues given its proximity to the main entrance and the need for updating Mr [APPELLANT] concludes that the extended lease [APPELLANT] would be £86,000.

36. Mr [APPELLANT] has considered the sale of [ADDRESS] and [ADDRESS] the specific details of which concur with those of Mr [APPELLANT].

37. However, Mr [APPELLANT] considers the subject [APPELLANT] to be superior by virtue of it being on the ground floor and having easy access to the communal gardens. Based on this Mr [APPELLANT] concludes that the [APPELLANT] is £100,000.

7 38. The Tribunal agrees with Mr [NAME] that the evidence in respect of No. 9 appears out of line with the other evidence however this may be due to the fact that it has been refurbished (including a refurbished kitchen), is located on the 1st floor and includes a balcony.

39. The Tribunal considers No. 27 and No. 32 more helpful having regard to their similar condition and respective sale dates. Further both are similar in size and offer the same sort of accommodation except No. 32 has a balcony. It also appears from the details that neither have been modernised to the extent of No.

9. In addition, the Tribunal does not find that due to the fact [APPELLANT] is on the ground floor it would achieve a higher [APPELLANT]. Whilst ground floor properties may be more appealing to residents with mobility issues, they are considered less secure than properties on upper floors.

40. The Tribunal determines that the [APPELLANT] is £90,000. Issue No. 3: [APPELLANT]

41. In the absence of market evidence Mr [APPELLANT] has had regard to the [NAME] and made an additional adjustment for the [NAME] deduction. Based on an [APPELLANT] of £86,000 (adjusted upwards to [APPELLANT] by 1%) [NAME] adopts a relativity of 67.97% (36.59 years remaining) and 13.54% for the [APPELLANT] of [NAME] to arrive at a [APPELLANT] of £51,050.

42. However, Mr [APPELLANT] also refers to No. [ADDRESS] which sold in December 2018 at £75,500. According to the details provided the flat was in need of refurbishment and had approximately 42 years remaining on its existing lease. In addition, Mr [NAME] has considered the sale of No. [ADDRESS] from December 2016 but discounts it on the basis of it being too historic.

43. Based on this and having regard to his experience and judgement Mr [APPELLANT] considers that the existing lease [APPELLANT] is £64,000 and after deducting 13.54% for [NAME] arrives at £55,334.

44. Mr [NAME] also advises that in the absence of market evidence he has used the Graphs of Relativity but has taken an average of the [NAME] and [NAME] [NAME] (and hence no need to make any further adjustment [NAME]) to arrive at a total adjustment 58.77%. Based on an [APPELLANT] of £100,000 (adjusted upwards to [APPELLANT] by 1%) arrives at a [APPELLANT] of £59,358.

8 45. Both parties are in agreement that given the lack of reliable market evidence the best approach is to adopt graph-based evidence from [NAME] and [NAME]. Mr [NAME] has however considered the enfranchiseble graphs and Mr [NAME] the unenfranchiseable graphs but have effectively arrived at the same total adjustments.

46. The Tribunal considers that in the absence of any market evidence the most appropriate method is to adopt the graph-based approach.

47. The Tribunal is aware of the decision in Sloane Stanley v Mundy [2016] UKUT 0223 (LC) where the Upper Tribunal commented extensively on the unreliability of graph-based evidence. The Tribunal is also aware that the Upper Tribunal in [COMPANY] v two leaseholders [2017] UKUT 314 (LC), at paragraph 37 expressed concerns about the use of a straight-line graph, although not going so far as to say they must not be relied upon.

48. However, given the lack of transactional based evidence the Tribunal is satisfied that there is good reason to depart from these decisions as there is insufficient market evidence to follow the view expressed by the Upper Tribunal on this point.

49. The Tribunal determines that based on the [APPELLANT] of £90,000 adjusted to [APPELLANT] to £90,900 and reflecting the Graph evidence the [APPELLANT] is £53,419. Issue No. 4: Deferment Rate 50. Mr [APPELLANT] has adopted a deferment rate of 5.5%.

51. Mr [NAME] advises that this rate has been adopted by him in a number of negotiated cases and in cases previously heard by the Midlands Tribunal.

52. This, Mr [NAME] advises, follows [NAME] which decided a generic rate of 5% for flats and Zuckerman which increased the rate to 6% after being adjusted upwards to reflect lower capital growth rates in the West Midlands, obsolescence and the likely increased costs of management. However, following Voyoda and [ADDRESS] the Upper Tribunal decided that the adjustments for obsolescence and management costs should only be considered in exceptional circumstances and Mr [NAME] therefore concludes that the correct deferment rate is 5.5%.

53. In further support Mr [APPELLANT] refers to the decisions of Flat 6 [APPELLANT] and 62 Michael [APPELLANT] in which the Tribunal in both cases adopted a deferment rate of 5.5%.

9 54. Mr [RESPONDENT] for the Respondent has adopted a deferment rate of 5%.

55. Mr [RESPONDENT] starting point is also [NAME]. In that decision Mr [NAME] refers to paragraph 88 which says that it is accepted that the deferment rate can be adjusted for location but based on the evidence adduced there was no justification for making an adjustment to reflect regional or local differences and that no adjustment to the real growth rate was appropriate given the long-[APPELLANT] basis of the deferment rate and that any locational differences, in the absence of clear evidence suggesting otherwise, are to be assumed as being reflected in the [APPELLANT] vacant possession [APPELLANT]. 56. [NAME] also refers to paragraph 114 in the [NAME] decision where the Tribunal effectively observes that its function is to promote consistent practice and predictability thereby avoiding the need to submit extensive financial and [APPELLANT] evidence in every case. That is unless there is compelling evidence to the contrary.

57. Mr [NAME] also refers to paragraph 121 which again refers to the need for predictability and that subsequent Tribunals should be able to be guided by this decision but that they should also be able to use their own expertise where there is compelling evidence to the contrary. This, the Tribunal concluded, was because the deferment rate was unlikely to be affected by such factors as the prospect of long-[APPELLANT] growth while other factors such as location and obsolescence will already be affected in the vacant possession [APPELLANT].

58. In effect the decision effectively goes on to say that the adoption of a deferment rate of 5% for flats needs to be considered in relation to the facts of each individual case. But in adopting a different rate, the valuer or Tribunal has to be satisfied that there are particular features that fall outside the matters that are reflected in the vacant possession [APPELLANT] of the particular [APPELLANT] concerned. 59. [APPELLANT] calculated that the generally accepted deferment rate for flats of 5% was made up of the risk-free rate (2.25%) less the real growth rate (2%) plus the risk premium (4.75%). 60. [NAME], which followed [NAME], held that the deferment rate should be increased to reflect an investor’s view that the long-[APPELLANT] growth prospects (i.e. the real growth rate) in the West Midlands compared to that achievable in PCL would not be lower and to reflect this the risk premium should be adjusted upwards by 0.5%.

61. In [NAME], where Mr [NAME] also acted, the evidence adduced demonstrated a difference in [APPELLANT] price growth between Kensington and Chelsea, the West Midlands and the UK as a whole. However, Mr [NAME] considered that the actual real growth rates in [NAME] was not fully considered and that

10 these were simply assumed to be less than 2% whereas in his view the RGR exceeded 2%.

62. In further support of this Mr [NAME] refers to Elmwood and explains that the reason he was unable to provide evidence of growth rates from 1974/75 to 1995 was because Land Registry did not make such information available prior to 1995 and he only had details of sales of 32 of the 36 properties at [ADDRESS].

63. In Lanehead Mr [NAME] states he did in fact provide evidence from 1974/75 which was for a period longer than [NAME] and suggests that the Tribunal made certain assumptions regarding real growth rates based on price growth which were incorrect.

64. Based on this Mr [NAME] concludes that an upward adjustment in the deferment rate should only be made if it can be shown that the real growth rate was in fact less than 2% and considers that as this is not the case, as in shown in Elmwood and Lanehead, then Zuckerman should not be followed and for these reasons adopts 5%.

65. The Tribunal has carefully considered the respective arguments of Mr [NAME] and Mr [NAME]. The Tribunal is not persuaded by Mr [NAME] arguments and finds that the guidance in [NAME] to promote consistent practice in the application of the law remains and finds no compelling evidence to the contrary which would persuade the Tribunal to depart from this principal.

66. The Tribunal considers that the authority for the deferment rate for 1993 Act cases remains the decision of the Court of Appeal in [COMPANY] (Kensington) [COMPANY] v [NAME] [2015] EWCA Civ 1231 ([ADDRESS]).

67. The Tribunal therefore finds that the appropriate deferment rate is 5.5%. [APPELLANT]

68. If either party is dissatisfied with this decision, they may apply for permission to appeal to the Upper Tribunal (Lands Chamber). Prior to making such an appeal, an application must be made, in writing, to this Tribunal for permission to appeal. Any such application must be made within 28 days of the issue of this decision (regulation 52 (2) of The Tribunal Procedure (First-tier Tribunal) ([APPELLANT] Chamber) Rules 2013) stating the grounds upon which it is intended to rely on in the appeal.

[APPELLANT]

11 [APPELLANT] [APPELLANT] [[APPELLANT]] The Tribunal determines that the [APPELLANT] of the premium [APPELLANT] by the Applicant for the subject [APPELLANT] is calculated as follows: [APPELLANT]

£11.00 YP 36.59 years @ 7.0%

13.08414 £143.93

Reversion (to [APPELLANT])

[APPELLANT]

£90,000 [APPELLANT] uplift 1%

£900.00

£90,900

PV 36.59 years @ 5.5%

0.140991 £12,816.08 £12,960.01

[APPELLANT] £90,000 PV 126.59 years @ 5.5%

0.001139

£102.51

[APPELLANT]

1. [APPELLANT]

£102.51

[APPELLANT]

£90,000 £90,102.51

2. [APPELLANT]

£12,960.01

[APPELLANT]

£53,419.00 £66,379.01

[APPELLANT]

£23,723.50

[APPELLANT] at 50%

£11,861.75

[APPELLANT]

£24,924.27

[APPELLANT]

£24,925.00

[APPELLANT] : 3 Phoenix [APPELLANT] Applicant : [redacted] [NAME])

Representative : [NAME] of [NAME] Respondent No.1 : [COMPANY]

: [NAME] of [COMPANY]. on behalf of [NAME]. 2

[APPELLANT], Housing & Urban Development Act 1993

Tribunal Members : [NAME] (Hons) [APPELLANT]

V [NAME] [APPELLANT] of Decision : 28 July 2021

DECISION

2 DECISION

REASONS FOR THE

DECISION

Introduction

18. There is a further underlease dated 6 April 1960 also originally made between the same parties in respect of the garage No. [ADDRESS], [APPELLANT].

5 Matters agreed between the parties

36.59 years (ii) Capitalisation rate:

7% (iii) Adjustment to [APPELLANT]: 1%

Matters in dispute between the parties

27. The following matters are in dispute:

[NAME]

(i) [APPELLANT]:

17 Aug, 2020 19 Aug. 2020

(ii) [APPELLANT]: £86,000

£100,000

(iii) [APPELLANT]: £64,000

£59,358

(£55,334)

(iv) Deferment Rate:

5.5%

5%

(v) Relativity: (a) Enfranchiseable Graph 67.97%

(b) [APPELLANT] of [NAME] 13.54%

58.77% (c) Unenfranchiseable Graph

58.77%

52. This, Mr [NAME] advises, follows [NAME] which decided a generic rate of 5% for flats and [NAME] which increased the rate to 6% after being adjusted upwards to reflect lower capital growth rates in the West Midlands, obsolescence and the likely increased costs of management. However, following [NAME] and [ADDRESS] the Upper Tribunal decided that the adjustments for obsolescence and management costs should only be considered in exceptional circumstances and Mr [NAME] therefore concludes that the correct deferment rate is 5.5%.

64. Based on this Mr [NAME] concludes that an upward adjustment in the deferment rate should only be made if it can be shown that the real growth rate was in fact less than 2% and considers that as this is not the case, as in shown in Elmwood and Lanehead, then [NAME] should not be followed and for these reasons adopts 5%.

[APPELLANT]

£11.00 YP 36.59 years @ 7.0%

13.08414 £143.93

Reversion (to [APPELLANT])

[APPELLANT]

£90,000 [APPELLANT] uplift 1%

£900.00

£90,900

PV 36.59 years @ 5.5%

0.140991 £12,816.08 £12,960.01

[APPELLANT] [APPELLANT] £90,000 PV 126.59 years @ 5.5%

0.001139

£102.51

[APPELLANT]

1. [APPELLANT]

£102.51

[APPELLANT]

£90,000 £90,102.51

2. [APPELLANT]

£12,960.01

[APPELLANT]

£53,419.00 £66,379.01

[APPELLANT]

£23,723.50

[APPELLANT] at 50%

£11,861.75

[APPELLANT]

£24,924.27

SAY

£24,925.00