First-tier Tribunal Determines Lease Extension Premium

OUTCOME: Allowed

© CROWN COPYRIGHT

FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case reference : LON/00BK/OLR/2020/1268 HMCTS code (paper, video, audio) : V: CVPREMOTE Property : 18 [NAME], 76-82 [ADDRESS] [POSTCODE] Applicants : [redacted] and [COUNSEL] : Mr [COUNSEL] Respondent : [redacted] [RESPONDENT] : Mr [COUNSEL] of [NAME] : Section 48 of the Leasehold Reform, Housing and Urban Development Act 1993 Tribunal members : Judge Nicola Rushton QC [NAME] Date of determination and venue : 20 July 2021 at 10 [ADDRESS] [POSTCODE] Date of decision : 22 July 2021

DECISION

Summary of the tribunal’s decision The appropriate premium payable for the new lease is £292,750.

2

Covid-19 pandemic: description of hearing This has been a remote video hearing which has been consented 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 all issues could be determined in a remote hearing. The documents that the Tribunal were referred to are in a bundle of 287 pages, the contents of which have been noted. Background 1. This is an [NAME] made by the applicant leaseholders 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 18 [NAME], 76-82 [ADDRESS] [POSTCODE] (the “property”).

2. By a notice of a claim dated 6 April 2020, served pursuant to section 42 of the Act, the applicants exercised the right for the grant of a new lease in respect of the subject property. At the time, the applicants held the existing lease granted on 11 June 1979 for a term of 99 years from 29 September 1976 at an annual ground rent of £120/£240/£480 p.a., rising every 33 years. The applicants proposed to pay a premium of £160,000 for the new lease.

3. On 17 June 2020, the respondent intermediate landlord served a counter-notice admitting the validity of the claim and counter- proposed a premium of £495,750 for the grant of a new lease.

4. On 16 December 2020, the applicants applied to the tribunal for a determination of the premium payable to the respondent.

5. Notice of the claim was also given to the freehold owner, [NAME]) [COMPANY], which has taken no active part in this claim. It is agreed that no part of the premium is payable to the freeholder. The issues Matters agreed 6. The following matters were agreed: (a) The subject property is a self-contained flat on the first floor within a 7 storey mansion style block of flats, which is the rear block of two, constructed between 1936 and 1938, between them containing 35 flats; (b) The gross internal floor area is 1,731 square feet;

3 (c) The valuation date: 7 April 2020; (d) Unexpired term: 55.47 years; (e) Ground rent: £240 p.a. for a further 22.48 years, rising thereafter to £480 for the remaining 33 years of the term; (f) Relativity of the “no-Act world” short leasehold (unimproved) value to the freehold (unimproved) value: for the sake of settlement and with no admissions as to the proper basis of calculation, this was agreed between the experts at 75.03%; (g) Capitalisation of ground rent: 6% per annum; and (h) Deferment rate: 5%. Matters not agreed 7. The following matters were not agreed: (a) The unimproved freehold vacant possession value (“FHVP”): the applicants contending at the hearing for £1,800,000 and the respondent contending for £2,018,605; (b) The unimproved long leasehold vacant possession value: the applicants contending at the hearing for 98% of FHVP and the respondent contending for 99% of FHVP; and (c) The premium payable. The hearing 8. The hearing in this matter took place on 20 July 2021, as a remote video hearing on the CVP platform. The applicants were represented by Mr [NAME], who was also the expert witness for the applicants, and the respondent by Mr [RESPONDENT], who was also the expert witness for the respondent. There were no other attendees.

9. The applicants relied upon the expert report and valuation of Mr [RESPONDENT] dated 30 June 2021 and the respondent upon the expert report and valuation of Mr [RESPONDENT] dated 1 July 2021. Mr [NAME] has dealt with many lease extensions and valuations in the St John’s Wood area which includes the property, over many years. Mr [NAME] was involved in advising on the collective enfranchisement price for the [NAME] blocks in 2001 and also historically (pre-1997) acted for the freeholder, and more recently he has acted and advised on many lease extensions including in this locality. The tribunal considers that both experts had significant relevant expertise and is grateful for their assistance.

10. 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. The tribunal notes that both experts

4 attended the property together on Friday 16 July 2021 to make a further physical inspection and agree measurements.

11. Each expert relied upon their report as their evidence in chief together with supplementary evidence given orally, was cross-examined by the other expert, and also answered questions from the tribunal. Finally the tribunal heard submissions from each of them in turn, each then acting as advocate.

12. The two outstanding issues on which the tribunal heard evidence and submissions were therefore: (a) the unimproved freehold value of the property and (b) the percentage adjustment to freehold value to calculate the long leasehold value. The evidence received and the tribunal’s determination on each of those issues is as follows. Unimproved freehold value of the property 13. [NAME] is a period development of large flats, with porter service and lifts. Flats 1 – 15 are located in the front block and flats 16 – 29 in the rear block. There is a communal courtyard garden between the blocks. The subject property is therefore in the rear block. It has dual aspect onto the courtyard garden and onto [ADDRESS] (at the rear).

14. The experts were agreed that sales of flats in the rear block were significantly better comparables than those in the front block, as the flats in the front block benefit from views over [ADDRESS] (to varying degrees) and so tend to command higher prices, although they also face onto a busier road. The experts were also agreed that there was sufficient market data from sales within [NAME] itself and no useful purpose was served by looking at sales outside it.

15. There have been four recorded open market sales of flats within [NAME] in the past 5 years. Both experts referred to the same four comparables, although the weight and reliance which they placed on them differed. However, both were agreed that the recent sale of [NAME] was easily the best comparable (Mr [NAME] considering it ultimately the only proper comparable). Flat number Date of sale Price Size ft2 (from sale particulars) Lease length (years) Floor 25 (rear) Jan 2020 £2.075m 1,778 992 +share F/hold 4

5 8 (front) Oct 2019 £2.425m 1,776 or 1772 992 +share F/hold 3 6 (front) Jul 2017 £2.6m 2,156 148 2 28 (rear) Feb 2016 £2.15m 1,710 995 +share F/hold 6

16. Mr [NAME] made adjustments to each comparable for: lease length, floor level, time passed from sale to valuation date, aspect, and condition/layout. He also adjusted each comparable by reference to size in square feet. In reaching his final valuation figure, he applied a weighting to each of the four comparables, which was (finally) as follows: x4, x2, x1 and x2 (respectively). As to floor, Mr [NAME] said he had made an adjustment of 1% for each floor from first upwards (treating the first floor as least attractive).

17. In [NAME] his adjustments for time, Mr [NAME] used the [NAME] index, on the basis that it covered this location and the subject property was typical of the type of flat used to compile that index. He included in his evidence an exchange of emails with [NAME] and [NAME] at [NAME] confirming that the average price of a flat in that index was £1.8m, and included several in NW8 7, although not this block. Further, it was Mr [NAME] experience that [NAME] in this part of North London frequently used that index, and he said that in his own experience it was the index which seemed most closely to reflect local market conditions.

18. On this basis and applying his comparable weighting, he calculated the unimproved freehold value of the subject property as £1,817,550, which he rounded to £1.8m.

19. Mr [NAME] said that while he agreed that [NAME] was easily the best comparable, he was always reluctant to rely on only one transaction because you never knew if there was something unusual about that one comparable which was not apparent.

20. In relation to [NAME], Mr [NAME] evidence was that he had made an overall adjustment of -1% for the combination of floor level (-3%) and the better aspect of the subject (+2%). He had then made an overall adjustment of -10% for condition and layout combined, to arrive at an equivalent figure for the subject, unmodernised but in good repair. This was because he said [NAME] was in good modernised condition, with modern, good quality kitchen and bathrooms, a better bathroom

6 layout (including en suite and dressing room to the master bedroom), wooden flooring throughout and the removal of a partition wall between living room and dining room to make a more attractive, open space.

21. Mr [NAME] evidence was that he had treated the sales of nos. 8, 6 and 28 as background information as to the tone of values in the block and as validation of the sale price of [NAME]. He had therefore calculated the unimproved freehold value of the subject property by reference to the sale price of [NAME] alone, adjusted for aspect, layout and condition.

22. Mr [NAME] made no adjustments by reference to floor area, as it was his view that when the floor areas were as similar as they were as between the subject property and [NAME], purchasers were influenced by features other than precise square footage. He noted that [NAME] had a worse aspect but did not consider any reduction for floor level was appropriate in this case. He deducted a round figure of £15,000 (equating to about 0.75% of the purchase price) for the better bathroom layout in [NAME] but considered that overall the condition and layout of [NAME] was only a little better than the subject, assuming an unmodernised condition of the latter. He therefore made a further reduction of only minus 1% for condition.

23. Both experts agreed that there was no need to make any adjustment for time to the sale price of [NAME], which was in January 2020, albeit their reasons differed. (Mr [NAME] relied on the [NAME]; Mr [NAME] view was that the effect of Covid-19 on sales meant that January 2020 prices were more reliable than April 2020 data in any event).

24. Overall the experts therefore agreed that the appropriate reduction for [NAME] for aspect and floor level combined, was -1%, although they differed a little as to how they got there.

25. Their main area of disagreement on adjustments to the [NAME] sale price was as to the appropriate reduction for condition and layout to ensure a good match with the subject: Mr [NAME] contended for a total reduction of -10% (or around £200,000) on the sale price of No 25 and Mr [NAME] for a total reduction of -1.75% (or around £35,000). The tribunal’s conclusions on this issue 26. The tribunal considers that the best approach to the available comparable evidence is to base its valuation on the sale price for [NAME], with appropriate adjustments, treating the other comparables as providing evidence of the overall tone of values in the blocks. This is especially so since there are real difficulties, as the

7 experts both accepted, with adjusting the value of number 28 for time (its sale was more than 4 years before the valuation date) as the [NAME] index and the HM Land Registry index (the latter preferred by Mr [NAME]) give radically different adjusted figures. In doing so, the tribunal does not consider that it is simply relying on one comparable, because there is a significant degree of consistency between the four comparables (in size and price, allowing for which block they are in), and the sale price for [NAME] accords with the overall tone of adjusted sale prices of these properties.

27. The tribunal also makes no adjustments by reference to square footage. The square footages of the subject property and [NAME], as recorded, were very similar. It also appeared from the evidence of the experts that the reason the agreed square footage of the subject was slightly lower than that of [NAME] might well be because the sales particulars for [NAME] slightly overstated it. The tribunal also agrees that such a small difference is unlikely to affect the view of a purchaser.

28. In terms of the adjustments to be made to the £2,075,000 sale price of [NAME], the tribunal reminds itself that it is assessing an equivalent freehold value for the subject property in an unmodernised condition and without the benefit of any tenants’ improvements, but in good repair.

29. Mr [NAME] submitted that the sales particulars for number 6 gave an excellent example of a flat in [ADDRESS] which presented in an unmodernised condition but still in good repair. Mr [NAME] was unwilling to agree with this on questioning from the tribunal, although the tribunal notes he has described number 6 as “unmodernised” in his table of comparables (para. 6.5 of his report).

30. The tribunal agrees that number 6 is a good example of an unmodernised flat and that there is a significant differential between the condition of that flat and of [NAME], which it concludes was indeed in a good, modernised condition. In addition, the tribunal accepts that the layout of [NAME] is better than that of the subject property (unimproved and unaltered). The arrangement of the bathrooms in the subject property is poor, and the tribunal agrees with [NAME] that the en suite master bathroom and dressing room, and open plan living room in [NAME], are features of the layout likely to be more attractive to buyers. It also agrees that the kitchen and bathrooms in [NAME] are modern and of good quality and clearly superior for example to the functional but old-fashioned bathrooms in number 6.

31. The tribunal’s conclusion is that it should make an overall reduction of 7.5% to the sale price of [NAME] to reflect the latter’s superior

8 condition and layout (5% for condition and 2.5% for layout), as compared to the subject property (unmodernised but in good repair).

32. The tribunal’s calculation of unimproved freehold value of the subject is therefore: Flat no 25 sale price: £2,075,000 Less 1% for aspect/level and 7.5% for condition/layout: Adjusted sale price of no 25: £1,898,625 The adjusted sale price is then rounded to £1,900,000 The tribunal relies upon this determined value as the unimproved vacant possession value of the subject. Long leasehold unimproved value 33. The extended lease in this case will be for 145.47 years. Mr [NAME] submitted that the extended lease value should be calculated as 98% of the freehold figure, whereas Mr [NAME] submitted that it should be calculated as 99%.

34. Both experts referred to the decision of the Upper Tribunal on this issue in Cadogan v. Erkman [2011] UKUT 90 (LC) in which the Upper Tribunal was asked to consider two alternative scales of relativities when comparing long leasehold values with freehold values, where the leases were over 100 years in length. The scale preferred by the Upper Tribunal was the [NAME]/[NAME] 1996 graph. On that basis, the tribunal concluded at [98]: “In our opinion the following range of relativities is appropriate: leases with unexpired terms of 100 to 114 years – 98%; 115 to 129 years – 98.5% and above 130 years – 99%...” This tribunal notes that the alternative scale put before the Upper Tribunal also provided for a relativity of 99% above 130 years in any event, so there was no difference between the scales on this point.

35. Mr [NAME] submitted that on the basis of the Cadogan decision, a relativity of 99% should be applied as the extended lease was over 130 years. In addition he submitted that this was the relativity which was applied by most [NAME] in practice when dealing with extended leases of this length and that Mr [NAME] had accepted in cross examination that it was a percentage widely adopted by surveyors in premium calculation.

9 36. Mr [NAME] submitted that tribunals have been encouraged to rely on the [NAME] 2016 current market relativity table and graph for enfranchiseable leases, which gives a relativity figure of 94.6% for relativity at 100 years. He submitted that this was inconsistent with the direction in Cadogan that a relativity of 98% should be applied from 100 to 114 years, which in turn strongly suggested that the suggested figures for relativities between 100 and 150 years should be reconsidered. He said that the approach in Cadogan was not consistent with the approach that the Upper Tribunal had since mandated to relativity tables in [NAME] v Mundy [2016] UKUT 223 (LC); [2016] L. & T.R. 32, in particular that the approved graphs should be based on data and not only on opinion evidence.

37. Mr [NAME] accepted however that while [NAME] had published a graph which extended to 150 years, they had not published the relativity figures above 100 years, and also had not responded to his request for their data set for relativities between 100 and 150 years.

Accordingly, the best that he could do was submit that the slope of the graph at 145 years had not quite reached 100%, and that when he calculated how that figure probably changed between 100 years (at 94.6%) and 150 years (at 100%), the relativity at 145 years was 98.35%, which he said should be rounded to 98%.

38. While the tribunal has some sympathy for the argument which Mr [NAME] presented, it considers that in the absence of data which more directly challenges the conclusions as to relativity in Cadogan and/or shows that relativity figures have changed since that decision was reached, it should follow the recommendation of 99% for lease lengths over 130 years which was given in Cadogan. The tribunal is also conscious that, from the evidence of Mr [NAME] and Mr [NAME], it appears the current practice of [NAME] considering long lease extensions is overwhelmingly to apply a relativity of 99%, certainly to lease lengths over 140 years.

39.

Accordingly, the tribunal has applied a relativity of 99% in calculating the long leasehold (unimproved) value, which it therefore treats as £1,881,000. The premium 40. Taking into account these determinations, the tribunal accordingly determines the appropriate premium to be £292,750. A copy of its valuation calculation is annexed to this decision.

Name: Judge Nicola Rushton QC Date: 22 July 2021

10

Appendix: Valuation setting out the tribunal’s calculations

11

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).