First-tier Tribunal Determines Lease Extension Premium

OUTCOME: Allowed

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Case Reference

: LON/00AG/OLR/2020/0870

HMCTS : V: CVPREMOTE

Property : [ADDRESS], 254 Gray’s [ADDRESS], [POSTCODE]

Applicant: [redacted] : [COUNSEL]

Respondent: [redacted] : [COUNSEL] of [NAME] : Enfranchisement

Tribunal Members :

Judge Robert Latham

Kevin Ridgeway MRICS

Date and venue of

27 April 2021 at Hearing

: 10 [ADDRESS] [POSTCODE]

Date of Decision : 21 May 2021

_______________________________________________

DECISION ____________________________________

The Tribunal determines that the premium payable by the Applicant in respect of the extension of its lease at [ADDRESS], 254 Gray’s [ADDRESS], [POSTCODE] is £54,800. The calculation is annexed to this 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: CPVEREMOTE. A face-to-face hearing was not held because it was not practicable and all issues could be determined in a remote hearing. The parties have provided a Bundle of Documents for the hearing.

FIRST - TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY)

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Introduction

1. This is an [NAME] made 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 and the terms for a new lease. Background 2. The background facts are as follows:

(i) The flat: at [ADDRESS], 254 Gray’s [ADDRESS], [POSTCODE] ; (ii) The subject flat currently comprises a living room with kitchen, bedroom and en-suite bathroom. (iii) Date of Tenant’s Notice: 3 December 2019; (iv) Valuation Date: 3 December 2019; (v) Date of [NAME] to the Tribunal: 13 August 2020; (vi) Tenant’s leasehold interest: • Date of Lease: 11 March 1985; • Term of Lease: 99 years from 24 June 1979, with an unexpired term of 58.55 years; • Ground Rent: the current ground rent is £100 pa, rising to £200 pa in June 2045.

The Hearing 3. The hearing of this [NAME] took place on 27 April 2021. The Applicant, tenant, was represented by Mr [APPELLANT]. The Respondent, landlord, was represented by Mr [RESPONDENT], BSc, FRICS. Both experts provided written reports and gave evidence.

4. On 3 December 2019, the Applicant served its Section 42 Notice of Claim proposing a premium for a lease extension of £35,000. On 20 February 2020, the Respondent served its Counter-Notice proposing a premium of £122,300. This is almost twice the amount for which the landlord now contends.

5. The parties have now agreed the following: (i) Valuation Date: 3 December 2019; (ii) Unexpired Term: 58.55 years; (iii) Deferment Rate: 5%; (iv) There should be a 1% uplift to the long lease value to determine the NFV; (v) The GIA of the subject flat is 36.3 sq m; 391 sq ft; (vi) The terms of the new lease.

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6. There had been an issue between the parties as to the capitalisation rate for the ground rent. However, the parties agree to split the difference and accept 6.5%.

7. The following issues are in dispute: (i) The long leasehold value: Mr [NAME] contends for £378,787; Mr [NAME] for £460,606. (ii) The [NAME] rate: Mr [NAME] contends for 82.25%; Mr [NAME] for 74.69%. Mr [NAME] computes a premium of £43,907; Mr [NAME] one of £67,144. Issue 1: Notional Freehold Value The Subject Property 8. Trinity court was constructed over 9 floors between 1934 and 1935 in the modernist “sun trap” style in front of St [NAME]’s Holborn burial garden to designs of [NAME] and [NAME]. There are 90 flats, all of which were originally studio flats. It is within a conservation area. If is approximately ½ mile to the south of the [NAME].

9. The subject flat is on the 6th storey (5th floor). The flat faces east overlooking [ADDRESS] and south east towards the city which gives interesting views, particularly at night. There is a communal entrance at street level and the flat can be accessed by a lift or stairs. There are two cage style lifts at either end of the building which have been retained in their “art deco” style. There is an [NAME]. The building is managed by the [NAME].

10. The flat now comprises a living room with kitchen, bedroom and ensuite bathroom. Between 1979 and 1984, the [COMPANY] converted many of the studio/bedsits into one bedroom flats. [NAME] have subsequently converted bedsits into one bedroom flats. Others, have changed the layout of the one bedroom flats to suit modern/personal tastes and styles.

11. The Applicants have spent some £79,000, including professional fees and VAT to convert it to a one bedroom flat. A plan of the original layout is at p.164, and the conversion at p.166. The conversion seeks to make the maximum benefit of the natural light.

12. Mr [NAME] suggested that there appeared to be little difference between the value of repaired and decorated one bedroom flat arrangement and its

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equivalent repaired and decorated studio. Mr [NAME] argued that an adjustment of at least £35,000 should be made for improvements.

13. We agree that a purchaser would pay more for a one bedroom conversion. We would assess this at £25,000. [NAME]

14. Both experts agreed that [NAME] is Flat 24 and we do not consider it necessary to consider any of the other flats in the building. Flat 24 is a one bedroom flat on the 2nd floor. It faces north towards a wall and a public entrance into the gardens. It is 406 sq ft and is therefore slightly larger than the subject flat. There is a plan of the flat at p.226. The conversion is less satisfactory, the bedroom being only 11’1” x 4’10”. The flat sold for £450,000 in October 2019.

15. We start with a psf of £1,108. We do not consider that it is necessary to make any adjustment for time. We have been provided with the Land Registry Camden Flat and Maisonette Index at p.324 of the Bundle. This shows a modest fall of £106 to 105.6 between October and December 2019. We prefer this index to the Nationwide Index Price Calculator upon which Mr [NAME] sought to rely.

16. We are satisfied that we should make a 2.5% adjustment for the location of the flat in the building. We accept that the subject flat has a better outlook. This increases the psf to £1,136, and gives a value for the subject flat of £444,209. From this, we make a deduction of £25,000 for the improvements to the subject flat giving a long leasehold value of £419,209. We increase this by 1% to £423,401 to give the Notional Freehold Value. Issue 2: [NAME] - The Unimproved Existing Lease Value 17. We have regard to the guidance given by the Upper Tribunal in The Trustees of the Sloane Stanley Estate v Mundy [2016] UKUT 223 (LC); [2016] L&TR 32, a decision subsequently upheld by the Court of Appeal reported at [2018] EWCA Civ 35; [2018] 1 P&CR 18. The three cases considered by Mr Justice Morgan and Mr [NAME] involved Prime Central London. At the end of an extensive judgment, the [NAME] gave guidance for future cases at [163] – [170]. We are assisted by the following passages: “168. Fourthly, in some (perhaps many) cases in the future, it is likely that there will have been a market transaction at around the valuation date in respect of the existing lease with rights under the 1993 Act. If the price paid for that market transaction was a true reflection of market value for that interest, then that market value will be a very useful starting point for determining the value of the existing lease without rights under the 1993 Act. It will normally be

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possible for an experienced valuer to express an independent opinion as to the amount of the deduction which would be appropriate to reflect the statutory hypothesis that the existing lease does not have rights under the 1993 Act. 169. Fifthly, the more difficult cases in the future are likely to be those where there was no reliable market transaction concerning the existing lease with rights under the 1993 Act, at or near the valuation date. In such a case, valuers will need to consider adopting more than one approach. One possible method is to use the most reliable graph for determining the relative value of an existing lease without rights under the 1993 Act. Another method is to use a graph to determine the relative value of an existing lease with rights under the 1993 Act and then to make a deduction from that value to reflect the absence of those rights on the statutory hypothesis. When those methods throw up different figures, it will then be for the good sense of the experienced valuer to determine what figure best reflects the strengths and weaknesses of the two methods which have been used. 170. In the past, valuers have used the Savills 2002 enfranchisable graph when analysing comparables, involving leases with rights under the 1993 Act, for the purpose of arriving at the FHVP value. The authority of the Savills 2002 enfranchisable graph has been to some extent eroded by the emerging Savills 2015 enfranchisable graph. The 2015 graph is still subject to some possible technical criticisms but it is likely to be beneficial if those technical criticisms could be addressed and removed. If there were to emerge a version of that graph, not subject to those technical criticisms, based on transactions rather than opinions, it may be that valuers would adopt that revised graph in place of the Savills 2002 graph. If that were to happen, valuers and the tribunals might have more confidence in a method of valuation for an existing lease without rights under the 1993 Act which proceeds by two stages. Stage 1 would be to adjust the FHVP for the property to the value of the existing lease with rights under the 1993 Act by using the new graph which has emerged. Stage 2 would be to make a deduction from that value to reflect the absence of rights under the 1993 Act on the statutory hypothesis.” 18. The Upper Tribunal ([NAME], Deputy Chamber President and [NAME]) has most recently given guidance in [RESPONDENT] [COMPANY] v Ms [NAME] [NAME] [2020] UKUT 164 (LC) (“[RESPONDENT]”), a case involving a flat in Sutton Surrey. The Tribunal concluded: “56. In our judgment the FTT was wrong as a matter of valuation practice to rely on an average of the RICS 2009 graphs and to ignore

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the more recent graphs for PCL, and the appeal is therefore allowed. We set aside the FTT’s determination.

57. In view of the relatively modest sum in issue we will reach our own conclusion on the basis of the material before the FTT, rather than remitting the issue to it for further consideration.

58. The guidance given by this Tribunal endorses the use of the Savills and Gerald Eve 2016 graphs where there is no transaction evidence, notwithstanding that the subject of the valuation is outside PCL. If persuasive evidence suggests that the resulting [NAME] is not appropriate for a particular location a tribunal would be entitled to adjust the figure suggested by the PCL graphs. The RICS 2009 graphs do not provide that persuasive evidence and, if it is to be found, it is likely to comprise evidence of transactions; if those are available it may be unnecessary to make use of graphs at all. In any event, no such persuasive evidence was presented to the FTT.

59. We are satisfied that the outcome justified by the evidence provided to the FTT was a determination based on the average of the two 2016 PCL graphs. For the reasons we have already explained we do not endorse Mr [NAME] averaging of the resulting [NAME] figure by reference to the [NAME] and [NAME] 2017 graph.” 19. Mr [NAME] asks us to have regard to the sale of Flat 40, an identical flat in studio layout, which sold in good modern condition on 18 February 2020 (two months after the valuation date) for £375,000. Its unexpired term was 58.43 years, compared to 58.55 for the subject flat. The ground rent is noticeable, being £724 pa and reviewed in June 2045 to 1/500 proportion of the long lease value. An adjustment needs to be made for 1993 Act rights, and he takes a figure of 8.265%. He justifies this figure at [7.5] of his report, it being an average of his usual deduction of 10% and the figure of 6.53% indicated in the Savills 2016 research. At [7.6] of his report, he summarises the 1993 Act benefits for which an adjustment must be made. We accept his approach, and accept his short lease value of £344,006 (namely £375,000 less 8.265%). Mr [NAME] derives a [NAME] of 74.99% for 58.55 years based on his NFV of £460,606.

20. Mr [NAME] (at [8.2]) also has regard to the Gerald Eve 2016 Graph and the [NAME] which gives figures of 77.16% and 77.24% respectively, the average being 77.2%. He then takes an average of his market figure of 74.99% and 77.2% from the graphs to compute his final figure of 75.945%.

21. We prefer the approach adopted by Mr [NAME] to that adopted by Mr [NAME] at Section 6 of his report. Mr [NAME] first considers the four sets of graphs at p.175-176 of the Bundle. Two of these include the 2009

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RICS Graphs for Central London and Greater London and England. The Upper Tribunal has disapproved of use of these graphs. The third table refers to published research which predates 2009. We are satisfied that if we are to have regard to graphs, the most relevant are those to which Mr [NAME] has referred. At [6.7] of his report, Mr [NAME] refers to the market transaction of the sale of Flat 61 for £240,ooo in February 2018. However, he does not explain the adjustments which he has made.

22. Our starting point is therefore the short lease value of £344,006 to be derived from the sale on Flat 40. However, this must be divided by our NFV of £423,401. This gives a [NAME] of 81.25% for 58.55 years.

23. This figure is higher than that to be derived from the Gerald Eve 2016 Graph and the [NAME] which give an average of 77.2%. We therefore adopt the approach suggested by Mr [NAME] and take an average of the market transaction figure of 81.25% and 77.2%. This gives a [NAME] of 79.23% which is the figure which we adopt. Conclusions 24. We make the following determinations on the issues in dispute: (i) The Long Leasehold Value is £419,209; (ii) The Notional Freehold Value is £423,401. (iii) The [NAME] rate: 79.23%; We determine the premium payable to be £54,800. Our working calculation is set out in the Appendix. Judge Robert Latham 24 May 2020

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 Tribunal 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 s after the Tribunal sends written reasons for the decision to the [NAME].

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3. 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.

4. 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.

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Valuation for lease extension

[ADDRESS], 254 Gray’s [ADDRESS] [POSTCODE]

Valuation Date 05/12/2019

Lease Commencement 24/06/1979

Lease Term 99.00 years Expiry Date 23/06/2078 Unexpired Term

58.55 years

Long Lease value

£419,209

Freehold VP value £423,401 +1% long lease value

Term 1 Term 2 Term 3

Ground rent £100.00 £200.00 £0.00

Reversion years

25.55 33.00 0.00

Capitalisation rate 7%

Deferment rate 5%

Compensation

£0.00

[NAME] 79.23%

Diminution of Landlord's interest

Ground rent £100

[NAME] 25.55 yrs @ 6.50% 12.30636342

£1,231

Rent Review 1 £200

[NAME] 33.00 yrs @ 6.50% 13.4590885

PV of £1 25.55 yrs @ 6.50% 0.200086377

£539

[NAME] £0

[NAME] 0.00 yrs @ 6.50% 0

PV of £1 58.55 yrs @ 6.50% 0.02504266

£0

Reversion to VP value £423,401

PV 58.55 yrs @ 5.00% 0.05746012

£24,329

Value existing freehold

£26,098

[NAME]'s interest on reversion of new lease

FH VP

£423,401

PV 148.55 yrs @ 5.00% 0.00071175

-£301

£25,797

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Landlord's share of Marriage Value

Val. Tenant's interest new long lease £419,209

Val. [NAME]'s interest after reversion of new lease

£301

£419,510

Less

Val. tenant's interest existing lease [NAME] 79.23% £335,440

Val. [NAME]'s interest existing lease £26,098

£361,537

£57,973

Marriage Value at 50% £28,986

Compensation £0

PREMIUM £54,783

Say £54,800