First-tier Tribunal Determines Lease Extension Premium

OUTCOME: Allowed

FIRST-TIER TRIBUNAL [NAME] (RESIDENTIAL PROPERTY) Case reference : LON/00AH/OLR/2020/0471 HMCTS code : V: VIDEO Property : 27 [ADDRESS] [POSTCODE] Applicant : [redacted] : [RESPONDENT] Respondent : [redacted] : [COMPANY] of application : Section 48 Leasehold Reform Housing and Urban Development Act 1993 Tribunal members : Judge [NAME] of hearing : 19 January 2021 Date of decision : 1 February 2021

DECISION

Covid-19 pandemic: description of hearing

This has been a remote video hearing which has been not 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 all issues could be determined in a remote hearing. The documents before the tribunal at the hearing were;

1. The indexed bundle of documents (403 pages)

2. The statement of agreed facts and outstanding issues (2 pages).

In addition, immediately after the hearing both valuers provided revised valuations to the tribunal and Mr [NAME] provided a revised version of his Appendix 5, “Short Lease Transactions”, to correct certain arithmetical errors.

At the hearing the tribunal heard evidence from Mr [COUNSEL] of [APPELLANT], acting for the applicant and from Mr [COUNSEL], acting for the respondent.

Summary of the tribunal’s decision (1) The value of the extended lease with vacant possession is £244,018. (2) Relativity is 73.97%. (3) The premium payable for the new lease is £40,000.

The application 1. This is an application made by [COMPANY] pursuant to section 48 (1) Leasehold Reform Housing and Urban Development Act 1993 (“the 1993 Act”) for a determination of the premium to be paid for a lease extension, or other terms of acquisition of the lease of the ground floor flat [ADDRESS] 4 8AH (the “Property”).

2. By a notice of claim dated 24 September 2019, served pursuant to Section 42 of the Act, Mr [NAME] and Ms [NAME] exercised the right to claim a new lease of the property and proposed to pay a premium of £33,344 for the new lease. The notice was assigned to [COMPANY] on 8 October 2019, and by [COMPANY] to [RESPONDENT] on 27 November 2019.

3. On 9 January 2020 the respondent landlord served a counter-notice admitting the validity of the claim and counter-proposed a premium of £98,915.00 for the new lease.

4. On 4 May 2020 the applicant applied to the tribunal for a determination of the premium.

The issues Matters agreed 5. The following matters were agreed before the hearing

(i) The subject property is a purpose built 2-bedroom first floor flat of approximately 65.9 sqm, with a kitchen, reception room, two bedrooms and a bathroom/WC. It has the right to use the communal gardens. (ii) The valuation date:

23 October 2019. (iii) Unexpired term at valuation date:

54.17 years (iv) Details of the tenant’s underleasehold interest: (a) Date of lease: 26 March 1975 (b) Term of lease: 99 years from 25 December 1974 (c) Ground rent: £25 p.a for the first 33 years of the term; then rising to £50 p.a. for the remainder of the term. (v) Deferment rate:

5% (vi) Headlessee’s compensation:

£1

6. Both valuations assumed the freehold vacant possession value to be 101% of the extended lease value.

7. At the hearing the parties agreed capitalisation of ground rent at 6.5% and both submitted revised valuations to the tribunal after the hearing, reflecting this agreed capitalisation. Matters not agreed 8. The following matters were not agreed (i) The value of the extended lease with vacant possession. Mr [NAME] contended that this should be £245,000 and Mr [NAME] £252,000. (ii) Relativity. Mr [NAME] contended that this should be 73.97% and Mr [NAME] that it should be 66.05%. (iii) The premium. Mr [NAME] contended that this should be £40,155 and Mr [NAME] that it should be £51,358. The hearing 9. The hearing took place on 19 January 2021. The applicant was represented by Mr [APPELLANT] of [APPELLANT] and the respondent by Mr [RESPONDENT].

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.

11. The applicant relied upon the expert report and valuation of Mr [APPELLANT] 21 December 2020 and the respondent relied upon the expert report and valuation of Mr [NAME] dated 29 December 2020.

12. The following cases were referred to by the valuers; [NAME] v [NAME] [2016] UKUT 468 (LC) (“[NAME]”) Sloane Stanley v Mundy [2016] UKUT 223 (LC) (“Mundy”) [NAME] v Ironhawk Ltd [2018] UKUT 0311 (LC) (“[NAME]”) [COMPANY] ([NAME]) Limited v [NAME] [NAME] [2020] UKUT 0164 (LC) (“[NAME]”)

The tribunal’s determination 13. The tribunal has had regard to, the valuation reports in the bundles, the evidence that it heard, and the case law referred to in reaching its decision. As appropriate these are referred to in the reasons for the tribunal’s decision. Reasons for the tribunal’s determination Extended lease value 14. In calculating the value of an extended lease with vacant possession both valuers looked to comparable evidence within the development and both referred the tribunal to [ADDRESS] which sold in good condition two days after the valuation date for £260,000 (with lease with a term of 103 years), and [ADDRESS]. The latter in average to good condition, with a lease term of 143 years sold at auction on 14 January 2020 for £205,000 and was resold by private treaty in the same condition on 14 August 2020 for £230,000.

15. Mr [NAME] was of the opinion that the auction sale showed that property auction sold achieved a price of 10% less than that achieved by a private treaty sale. He considered that the two private sale prices were the best comparables to work from and took an average of these to conclude that the appropriate long leasehold value for the property was £245,000.

16. Mr [NAME] adjusted the price of [ADDRESS] for time by reference to the Croydon flats and maisonettes Land Registry index to £228,350. He also adjusted the price achieved for [ADDRESS] to reflect that it is a flat on the third floor of the property. He considered the property, being on the first floor, to be marginally more valuable than [ADDRESS], which is on the second floor. He also adjusted the price to reflect that [ADDRESS] had an electric source of hot water and space heating. Mr [NAME] did not take an average of the two adjusted prices for the comparables. He gave more weight to [ADDRESS] because [ADDRESS] was marketed during the pandemic and was two floors above the property. He used his judgement to reach a value of £252,500 for the extended lease value of the property.

17. The tribunal finds that Mr [NAME] was correct in taking an average of the prices achieved for the sale of the two comparables by private treaty. It finds that Mr [NAME] was correct to make a time adjustment for [ADDRESS], to £228,350, which Mr [NAME] did not do. It does not consider that the different floors upon which the property and the comparables are located, nor their different form of energy supply for water and heating necessitate an adjustment to the prices achieved for the comparables. The tribunal has therefore averaged the price of [ADDRESS] and the time adjusted price for [ADDRESS], giving a long leasehold value of £244,018 and a notional freehold value of £246,458. Relativity 18. Both valuers were agreed that following the decision in Mundy the preferred method of establishing relativity is to look to market transactions around the valuation date as

the starting point for determining the value of the existing lease without rights under the 1993 Act. 19. The property itself had sold at auction on 27 November 2019 for £148,405, with a guide price of £149,000. 20.

In his valuation Mr [NAME] analysed eight short leasehold transactions in the development between 2015 and 2017. He did not adjust the sale prices where the properties had been sold between 2018 and 2020 as he considered that the market had been static during this period. For sales between 2015 and 2017 he adjusted the price achieved with reference to the Land Registry HPI. On the basis of the evidence of the sale of [ADDRESS] by auction and by private treaty he made a 10% adjustment to the sale prices of the three comparable properties that had been sold by auction. To adjust for a “No Act World’ he deducted 6% for leases with less than 57 years remaining and 5.5% for leases with over 57 years remaining. Where the flats were described as requiring refurbishment Mr [NAME] added £30,000 to the price to provide for refitting the kitchen and bathroom, replacing electrics and floor coverings and redecoration throughout. This provided a range of values from which Mr [NAME] took an average, which he compared to the [NAME] (2016) and [NAME]. He considered that it was preferable to exclude those properties that had been sold at auction, as short leases do not achieve their best price at auction and so he averaged the adjusted prices of the five comparables sold by private treaty and compared these to the [NAME] (2016) and [NAME]. Given that the calculated averages corroborated the results from the graphs he adopted an average of the two graphs to give a relativity of 73.97%.

21. Mr [NAME] started from £149,000, based on the sale price achieved at auction for the property. He deducted 10% for the ‘No Act World’ on the basis that he normally deducted 10% on leases which had between 50 and 60 years unexpired. He accepted that not all tribunals accepted this deduction but referred the tribunal to certain decisions of the first tier tribunal where 10% had been accepted. He referred to the deduction of 5.5% accepted in [NAME] but commented that the Upper Tribunal had considered this modest and that the decision (from 2015) was now ‘historic’. He submitted that the deduction should be greater than the [NAME] value of Rights Acts of 7.83%, as this derives from Prime Central London not the suburbs, where mortgageability is relevant. Deducting 10% from £149,000 and taking his freehold value of £255,050 gave a relativity of 52.7% which he stated was low. Mr [NAME] therefore considered other evidence. He considered the sale of [ADDRESS] in May 2018 for £168,000, which he adjusted for condition, floor, time and ‘No Act Rights’ to £162,650. He then took an average of this adjusted value and his adjusted value of the property short lease to achieve a relativity of 58.17%. He did not consider it necessary to refer to other short lease sales in the development. Mr [NAME] then considered the various relativity graphs, submitting that the Beckett and Kay 2017 mortgage dependent graph, is the most reliable and up to date of the suburban graphs. He referred the tribunal to relativities determined by the Upper Tribunal in [NAME] as being below those of [NAME] 2016 graph. Mr [NAME] submitted that the tribunal should accept a relativity based on an overall average of his market evidence, the [NAME] and [NAME] graph and 73.97%, being the average of the [NAME] (2016) and [NAME]. He therefore proposed a relativity of 66.05%.

22. The tribunal is concerned by the limited market evidence provided by Mr [NAME] to produce his market-based relativity. It considers that his deduction of 10% to reflect the ‘No Act World’ to be high, without sufficient supporting evidence. The tribunal notes that the difference between the relativities determined by the Upper Tribunal in [NAME] and [NAME] differed from those of the [NAME] 2016 graph by less than 1%. It is not persuaded that it is appropriate to place as much weight on the [NAME] and [NAME] graph as Mr [NAME] has. The tribunal is mindful that in [NAME] the Upper Tribunal described the [NAME] and [NAME] graph as, having ‘severe limitations and cannot be regarded as reliable’ (paragraph 48). The tribunal prefer the approach adopted by Mr [NAME] to relativity. He has provided a wider range of comparables, the average of which is close to the average relativity of the [NAME] (2016) and [NAME]. In light of the wide range of values which produce the average it accepts his adoption of the average relativity of the [NAME] (2016) and [NAME], an approach which is endorsed by the Upper Tribunal in [NAME]. The tribunal therefore adopts relativity of 73.97%. The premium 23. Based on his extended leasehold value and relativity Mr [NAME] considered the premium for the lease extension to be £40,155 commenting that his approach was that adopted by the first-tier tribunal in 34 [ADDRESS] [POSTCODE] LON/00AH/OLR/2019/1000.

24. Based on his extended lease value and relativity Mr [NAME] considered the premium for the lease extension to be £51,358.

25. Taking an extended leasehold value of £246,458 and relativity at 73.97% the tribunal determine that the premium is £39,996, say £40,000, as set out in its valuation in the Appendix. Name: Judge Pittaway Date: 1 February 2021

Rights of appeal

By rule 36(2) of the Tribunal Procedure (First-tier Tribunal) ([NAME]) 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 ([NAME]), then a written application for permission must be made to the First-tier Tribunal at the [NAME] which has been dealing with the case. The application for permission to appeal must arrive at the [NAME] within 28 days after the tribunal sends written reasons for the decision to the person making the application. If the application is not made within the 28 day time limit, such application 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 application for permission to appeal to proceed, despite not being within the time limit. The application 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 making the application is seeking. If the tribunal refuses to grant permission to appeal, a further application for permission may be made to the Upper Tribunal ([NAME]).

Appendix