First-tier Tribunal Determines Premium for New Lease

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Case Reference

: CHI/21UD/OLR/2019/0105 Property

: 49 [ADDRESS] [POSTCODE] Applicant

: [redacted] [NAME]

: [NAME], Counsel, instructed by [COMPANY]

: [COMPANY]

: [NAME], Counsel, instructed by [NAME] of Application

: Determination of premium for new lease: section 48 Leasehold Reform, Housing and Urban Development Act 1993

Tribunal Members

: Judge E Morrison and venue of Hearing

: 9 December 2019 at White Rock Hotel, Hastings Date of decision

: 23 December 2019 _______________________________________________

DECISION ____________________________________

© CROWN COPYRIGHT

FIRST - TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY)

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The application

1. Under the application dated 25 April 2019 the applicant lessees applied under section 48 of the Leasehold Reform, Housing and Urban Development At 1993 (“the Act”) for a determination of the premium payable for a new lease in respect of their flat at [ADDRESS]. The respondent is the competent landlord, as defined in section 40 of the Act.

Summary of decision

2. The premium payable is £46,614.00. Of this sum £45,393.00 is payable to the Respondent (competent landlord), and £1,221.00 is payable to the intermediate landlord. However, as a payment to the intermediate landlord of £1,330.00 has already been agreed by the parties, this figure must be substituted for the tribunal's figure of £1,221.00.

The inspection

3. The tribunal inspected the property immediately before the hearing in the presence of the applicant, the legal representatives, and the [NAME]. [ADDRESS] is a 1960s purpose-built block of flats overlooking Hastings seafront which, at the eastern end, oversails part of a [NAME] department store. It is close to the town centre with the usual amenities. There are three entrances to the block, each with a staircase and lift. Flat 49 is on the seventh (top) floor and has sea views to the front. Due to the construction of the building, it appears that the majority of the flats are of a similar overall area although there are different configurations so that some have no balcony, some a balcony half the width of the flat and a proportionately smaller living-room, and some, including Flat 49, a balcony the full width of the flat (and therefore also a smaller main bedroom).

4. Flat 49 comprises, on the southern side of the flat, a full width covered balcony with living room and main bedroom facing the sea, an internal bathroom with corner bath, separate shower & wash basin (no WC) and, on the northern side, a kitchen, second bedroom and separate WC.

The flat appeared generally in good decorative order with the bathroom and kitchen having both been refurbished although not in the immediate past. There is a full gas central heating system in place of the original partial warm air system which is understood to have served just the living room, main bedroom & hall. The windows and balcony doors are UPVC double glazed replacement units which appear to have been installed throughout the block.

The leases

5. The respondent holds a head lease of [ADDRESS] from the freeholder [NAME]. This lease expires on 31 October 2203. The rent is a peppercorn.

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6. [ADDRESS] Limited holds an intermediate lease which expires on 8 October 2059. The rent is £1800.00 p.a. without review.

7. The applicant holds a lease of the flat which expires on 29 September 2059. The rent is £26.00 p.a. without review.

The law and jurisdiction

8. Section 42 of the Act provides that a qualifying tenant of a flat must give written notice of a claim to exercise the right to a new lease. Section 45 provides that the landlord must serve a counter-notice. If it is agreed that the tenant has a right to a new lease, but any of the terms of acquisition remain in dispute two months after the date when the counter-notice was given, section 48 provides that the Tribunal may, on the application of either party, determine the matters in dispute.

9. The price (premium) to be paid by the tenant for the new lease is governed by Schedule 13 of the Act. The premium shall be the aggregate of:

(i) The diminution in value of the landlord’s interest in the tenant’s flat as determined in accordance with paragraph 3 of the Schedule. Values are open market values subject to certain assumptions. (ii) The landlord’s share of the marriage value as determined in accordance with paragraph 4 of the Schedule; (iii) Any amount of compensation payable to the landlord under paragraph 5 of the Schedule.

Paragraphs 6-10 of the Schedule govern the calculation of the sum payable to any intermediate landlord.

Matters agreed

10. The only dispute between the parties is the amount of the premium. However many elements of the valuation process are agreed. The valuation date is 15 September 2018, at which point the unexpired term of the flat lease was 41.04 years, the unexpired term of the intermediate lease was 41.07 years, and the unexpired term of the head lease was 185.13 years. The respondent’s reversion is currently to a 144.06 year leasehold, but after the grant of the new lease this reversion will reduce to 54.06 years. It has been agreed to discount the respondent’s current reversion at 5% and the intended reversion at 5.5%. In assessing the diminution in value of the intermediate landlord’s interest, £26. 00 p.a of the head rent should be apportioned to the flat and the parties agreed that this should be at the NLF rate at valuation date of 2.15%. The value should be taken at £704.00. Having said that, the applicant made an offer of £1,330.00 to the intermediate landlord, which has been accepted. It is agreed that there is no compensation payable.

4 The issues

11. The three matters in dispute are:

(i) The value of the flat with a new lease (“the long leasehold value”) (ii) The value of the flat held on the current lease without rights under the Act (“the short leasehold value”) (iii) The value of the landlord’s reversion in the flat with a new lease (54.1 years).

The expert evidence

12. The applicant’s valuer, [NAME], works locally in the Hastings area, and has been dealing with lease extension and enfranchisement work for the last three years. His report was dated 11 September 2019 and his valuation produced a premium of £25,098.00.

13. The respondent’s valuer, [NAME], is based in London and has many years of experience in lease extension and enfranchisement work. She produced two reports dated 24 September 2019 and 2 October 2019, the second report considering recent decisions of the Upper Tribunal. She proposed a premium of £57,642.00.

14. The Tribunal heard oral evidence from both experts at the hearing. They agreed that the short and long leasehold values should be assessed by reference to the available market evidence.

The market evidence

15. The [NAME] prepared a joint statement of matters agreed, to which was appended details of flat sales at [ADDRESS]. The tables below reproduce that appendix, with an additional column (figures provided by [NAME] but not disputed by [NAME]) updating the sale prices to the valuation date, based on the Land Registry house price index for Hastings and also adjusting to freehold value.

Long leaseholds

Flat Floor Sale date Sale price -£ Updated and adjusted to FH value Term at sale - years Notes 52 4 22.11.16 147,000 160,790 133 1 bed, half balcony 29 5 29.9.14 146,000 197,370 113 2 beds, half balcony 61 3 5.7.13 135,000 204,520

121 3 beds, full balcony

5 39 2 7.9.12 135,000 204,395 137 2 beds, half balcony

Short leaseholds

Flat Floor Sale date Sale price - £ Updated and adjusted to FH value Term at sale - years Notes 11 5 16.10.17 140,000 136,650 42 2 beds, half balcony 36 1 14.2.17 130,000 134,911 42.6 2 beds, no balcony 24 3 10.2.17 143,000 148,402 42.6 2 beds, full balcony 60 3 9.2.17 170,000 Not calculated 42.6 3 beds, full balcony 45 5 19.12.16 130,000 137,780 42.8 2 beds, half balcony

In addition two other short leasehold sales were referred to: Flat 42 (by [NAME]) and Flat 59 (by [NAME]).

42 4 15.7.19 120,000 118,503 40.2 2 beds, half balcony 59 7 17.3.16 139,950 Not calculated 43.5 2 beds, full balcony

16. [NAME] also relied on one comparable in a different block: the sale of a two-bedroom, half balcony seafront flat, [ADDRESS], a post-war purpose-built block in St Leonards. The flat sold on 10 August 2018 for £177,500.00 with a share of the freehold.

The long leasehold value

17. The [NAME] agreed that the long leasehold value should be taken to be the freehold value less 1%.

18. [NAME] proposed a freehold value of £160,000.00, producing a long leasehold value of £158,400.00. He explained at the hearing that this figure was largely derived from the sale at [ADDRESS], after deducting 10% for the difference in location, as [ADDRESS] was in St Leonards and a more desirable area. He did not think the Land Registry index time-adjusted values for long leasehold sales at [ADDRESS] were of much assistance, because although the Land Registry

6 index was useful for 3 to 4 and possibly 5 years, it was an average, covering the demand for the whole of the town and it did not allow for the subtleties of the market, such as the differences between seafront and inland locations. People were relocating from London and Brighton and over the last few years period properties had become particularly desirable. The demand for purpose-built flats had reduced. He stated that there is a “glass ceiling” on what someone will pay. As a local valuer he used his experience of the market rather than just looking at the indexes, which must be treated with caution. He described the Flats 29, 39 and [ADDRESS] as “very historic sales” for which the Land Registry index produced inflated figures, and suggested that his local experience of the market carried more weight.

19. The tribunal asked [NAME] why he had not included other similar blocks in his comparables. He stated that the nearest purpose-built block was retirement flats with associated facilities and therefore not comparable. Other than that, there were only three other seafront blocks in the locality, [ADDRESS] which comprised one bedroom flats only, [ADDRESS] (referred to above), and [ADDRESS] which was a 1930s period block with a number of problematic issues that meant that the values there were not useful.

20. [NAME] admitted that her local experience was limited to this block but said that an “academic” approach based on the actual evidence was the one required by the Upper Tribunal decisions. She accepted that the market evidence available was not ideal but all the sales at the block had been recorded and she believed that she could rely on the Land Registry index. She made the point that a valuer doesn’t determine the sales prices but analyses them.

21. Based on the four long leasehold sales at the block, she arrived at the freehold value of £207,500.00, producing a long leasehold value of £205,425.00. The sale of Flat 52 did not assist much as it was a one bedroom flat. Considering the other three sales, and allowing for the full balcony and better views from the 7th floor, £207,500.oo was a reasonable value for Flat 49. [NAME] did not consider that the [ADDRESS] sale was a useful comparable.

Discussion and determination

22. While the tribunal acknowledges that the local market is relevant and should be considered, we accept [NAME]’s point that views about it must be evidence based. [NAME] set out his opinion as to why a buyer would pay no more than £158,400.00 for Flat 49 with a long lease, he was unable to support this with any hard evidence. We do not consider that the [ADDRESS] sale is a useful comparable. While it is a two bedroom flat in a purpose-built block on the seafront, it was sold “with a share of the freehold” but no details were available of what this meant– was the flat itself subject to a short/shorter lease that would still require extension and what might be the arrangements for that if it was necessary? [NAME] also produced no evidence to back up

7 his assertion regarding the differential in value between the two locations

23. However, we accept [NAME]’s point regarding the usefulness of the Land Registry index. In Roberts v Gardner [2018] UKUT 0064 (LC) the Upper Tribunal commented that whilst indices are regularly used to adjust for time, the reliability of the evidence must decrease the further from the valuation date transactions occurred. The warning in [COMPANY], Re: 51 and [ADDRESS] [2017] UKUT 0314 (LC) that transactions which require an adjustment using indices covering a three year period must carry a health warning was repeated. It placed more weight on a comparable which was five months after the valuation date.

24. Looking at the four sales at [ADDRESS], Flats 61 and 39 were both sold for £135,000.00 in July 2013 and September 2012 respectively, some 5 and 6 years before the valuation date. Given the lapse of time between these sales and the valuation date, we are unable to place a great deal of reliance on the updated prices. Flat 61 is also a larger flat in that it has 3 bedrooms and was understood to be situated at an angle to the main elevation, giving it a larger footprint. The most recent sale was Flat 52 in November 2016, but this is a one-bedroom flat which has no rear windows and an internal kitchen, and is therefore not a very useful guide. This leaves only Flat 29, a fifth floor two bedroom, half balcony flat sold for £146,000.00 in September 2014, just over 4 years before the valuation date. No evidence was given by either side as to the relative values of a flat with a full or half balcony and our view, with no evidence to the contrary, is that the size of the balcony does not make a material difference. A half balcony is still a good size, a larger balcony might only be used part of the time, and means that the main bedroom is smaller. Based on the limited evidence available, we adopt the updated value of Flat 29 of £197,300.00 as the best guide and determine a freehold value of Flat 49 at £197,000.00, reducing to £195,030.00 for long leasehold.

The short leasehold value

25. The [NAME] agreed that this should be determined from the available evidence of sales of short leases with rights under the Act, making an appropriate deduction to arrive at the value for a short lease without rights.

26. [NAME] considered that the sale of Flat 24 was the best comparable, being a two bedroom flat with a full balcony. The updated value was £148,402.00. He considered there should be a 7.5% reduction for rights, this percentage reflecting the local market and what people would pay. He then made a further reduction by “stepping back” in light of local knowledge, to arrive at a short leasehold value of £130,000.00. He said that whilst it would be exceptionally difficult, if not impossible, to raise a mortgage on short leases, a point which would normally reduce demand, the age and type of buyer at Albany

8 Court meant that the lease length seemed to be less critical. There was a good level of demand.

27. [NAME] noted the most recent sale of Flat 42 in July 2019 for £118,503 (index-adjusted), considered the other sales, and arrived at a short lease with rights value of £130,000.00. She made a deduction of 10% for rights, producing a figure of £117,000.00. She considered that in London many purchasers have access to private finance which enables them to buy 41 year leases, and that may not be as readily available in Hastings.

28. [NAME] also referred to relativity graphs as a cross-check on her conclusions. In her initial report she referred to two graphs: [NAME] less 1% and [NAME] enfranchiseable. In her second report, following guidance in [NAME] of the Barry and Peggy High Foundation v Zucconi [2019] UKUT 0242 (LC), she also considered the [NAME] and the [NAME] unenfranchiseable graphs. These produced relativities at 41.0 years of between 62.91% and 65.83%, and she adopted 63%. On her freehold figure of £207,500.00 this produced a figure of £130,725.00 for a short lease without rights. However, adopting a preference for the market evidence, she maintained that £117,500.00 was the correct figure.

29. [NAME] was able to produce a copy of the sales particulars for Flat 42, from which it was clear that, apart from replacement UPVC double glazed windows and balcony doors, the flat was in need of complete modernisation, including the provision of heating.

30. The other flat excluded from the agreed statement was Flat 59. This flat was on [NAME]’s original list and, when asked about it, [NAME] said that he still wished to rely upon it. [NAME] said that it was the most historic sale of a short lease, so she did not think it was necessary to take it into account as there was sufficient evidence without it. The tribunal considered that this flat was useful in that it was a two- bedroom, full balcony, seventh floor flat, i.e. apparently very similar to Flat 49. Whilst the sale took place in March 2016, this was more recent than the evidence available for the long lease sales relied on by [NAME], except for the discounted Flat 52 mentioned above.

Discussion and determination

31. The Upper Tribunal has made it clear that market evidence is to be preferred over relativity graphs where such evidence is available: The [NAME] of the Sloane Stanley Estate v Adrian Howard Mundy [2016] UKUT 223 (LC); Roberts v Gardner [2018] UKUT 0064 (LC). In the latter case it was said that graphs should only be considered if the market evidence was inconclusive. In our view there is sufficient market evidence in this case.

32. With respect to Flat 42, having seen the sales particulars describing its condition, the Tribunal concludes that its sale price, rather than being a

9 useful aid to value, is misleading. We also consider that Flat 60 should be excluded from consideration as it is a larger 3-bedroom flat sold at a price substantially out of line with the other sales.

33. However, the other four flats on the agreed statements, together with Flat 59, provide good evidence. The average sale price of these flats with rights (11, 36, 24, 45 & 59), adjusted to September 2018, is £143,130.00. We see no reason to depart from a 10% deduction for rights as applied in [NAME] to a 41.32 year lease, as [NAME] did not provide any evidence to corroborate the appropriateness of his suggested percentage of 7.5%. A deduction of 10% from the average sale price produces a short leasehold value of £128,800.00.

34. The tribunal does not see any need to consider the relativity graphs, but as a useful cross-check it is noted that applying a 63% relativity to of a freehold value of £197,000.00 produces a short lease value of £124,100.00. This is not substantially out of line with our analysis of the market evidence, and we bear in mind that only a small minority of the flats at [ADDRESS] have extended leases. This unusual situation in this day and age may suggest that, in this block, the length of the lease is not so relevant to the type of lessee that it attracts, and may be a factor in explaining why the figure we have arrived at is higher than the figure suggested by the graphs.

The value of the landlord’s reversion with new lease

35. [NAME] used his long leasehold value to calculate the value of this reversion. [NAME] disagreed with this approach, saying that as that there is no market evidence the graphs must be used. The four graphs produced the following relativities:

[NAME] less 1% 76.25% [NAME] enfranchiseable 75.48% [NAME]

73.68% [NAME] unenfranchiseable 74.00%.

36. Taking the [NAME] graph as the lowest and rounding up, [NAME] adopted a relativity at 54 years of 73.75%. [NAME] was questioned on this and whilst he did not accept [NAME]’ freehold value figure, he said that he accepted her calculations, which the tribunal takes to mean the relativity of 73.75% and not the freehold valuation. We agree with the approach of [NAME] and applying a relativity of 73,75% to our freehold value of £197,000.00 produces a figure of £145,287.00 for use in the reversion calculation.

10 37. Appended to this decision is the tribunal’s valuation using the figures as agreed by the parties and determined by the tribunal.

Dated: 23 December 2019

Judge E Morrison

Appeals

1. A person wishing to appeal this decision to the Upper Tribunal (Lands Chamber) must seek permission to do so by making written application to the First- tier Tribunal at the Regional office which has been dealing with the case.

2. The application must arrive at the Tribunal within 28 days after the Tribunal sends to the person making the application written reasons for the decision.

3. If the person wishing to appeal does not comply with the 28-day time limit, the person shall include with the application for permission to appeal a request for an extension of time and the reason for not complying with the 28-day time limit; the Tribunal will then decide whether to extend time or not to allow the application for permission to appeal to proceed.

4. The application for permission to appeal must identify the decision of the Tribunal to which it relates, state the grounds of appeal, and state the result the party making the application is seeking.

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[ADDRESS], [ADDRESS], Hastings Valuation date 15/09/2018 Expiry of Headlease 31/10/2203 VALUES Unexpired term of Headlease 185.13 years Freehold 197,000 £ Expiry of Intermediate Lease 08/10/2059 144.06 year L/H 195,030 £ 99.00% Unexpired term of Intermediate Lease 41.07 years 131.04 year L/H 195,030 £ 99.00% Expiry of Underlease (Flat) 29/09/2059 54.06 year L/H 145,288 £ 73.75% Unexpired term at valuation date 41.04 years 41.04 year L/H 128,800 £ Freehold Value 197,000 £ Value of extended lease (unimproved) 195,030 £ Freehold Reversionary Value uplift 99.00% Value of existing lease (unimproved) 128,800 £ Yield, Ground Rent 2.15% Yield, Current Reversion 144.06 years 5.00% Yield, intended Reversion of 54.06 years 5.50% New lease term (plus 90 years) 131.04 years Ground Rent 26 £ for 41.04 years Diminution in value of Landlords' present interests, excluding marriage value [COMPANY]'s Interest (Head Lessee/Competent Landlord) Current Reversion on 08/10/2059 to 144.06 year leasehold 195,030 £ PV £1 after 41.07 years at 5.00% 0.13482 26,294 £ Intended Reversion on 29/09/2149 to 54.06 year leasehold 145,288 £ PV £1 after 131.04 years at 5.50% 0.00090 131 £ 26,163 £ [ADDRESS] Ltd's Interest (Intermediate Landlord) Capitalise ground rent for current term Ground rent 26 £ YP 41.04 years at 2.15% 27.08404 704 £ 704 £ Plus Landlords' share of marriage value Value of future interests Freeholder - £ Competent Landlord 131 £ Intermediate Landlord - £ Lessee 195,030 £ 195,161 £ Value of current interests Freeholder - £ Competent Landlord 26,163 £ Intermediate Landlord 704 £ Lessee 128,800 £ 155,667 £ Total Marriage value 39,494 £ Landlords' share of marriage value at 50% 19,747 £ [COMPANY] & ALBANY COURT HASTINGS LTD. 46,614 £ Apportionment of Marriage Value As dimunition of part of whole Competent Landlord's Interest 26,163 £ 97.38% 19,230 £ Intermediate Landlord's Interest 704 £ 2.62% 517 £ 26,867 £ 19,747 £ Amounts payable Competent Landlord 26,163 £ 19,230 £ 45,393 £ Intermediate Landlord 704 £ 517 £ 1,221 £ 46,614 £