First-tier Tribunal Determines Premium for New Lease Under Leasehold Reform Act

OUTCOME: Allowed

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FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case Reference : CHI/45UC/OLR/2020/0049 Property : 50 The Grangeway Rustington Littlehampton [POSTCODE] Applicants : [redacted] [NAME] [COUNSEL] : [NAME] Witness : Mr [COUNSEL] Respondent : [redacted] : [RESPONDENT] Witness : Mr [NAME] of Application : Determination of premium section 48 of the Leasehold Reform, Housing and Urban Development Act 1993 Tribunal Member(s) : [NAME] (Chair) [NAME] (Valuer Member) Date of Hearing : 11 December 2020 By Video Link Date of Decision : 14 January 2021

DECISION

2 Decisions of the Tribunal

1. The Tribunal determines the premium payable for the new lease of 50 The Grangeway, Rustington (“the property”) at £41,153 in accordance with section 48 of the Leasehold Reform, Housing and Urban Development Act 1993 (“the Act”).

2. The determination of reasonable costs application was stayed pending determination of the substantive issues by Directions dated 11 June 2020.

The Application

3. The Applicant seeks a determination of premium for the acquisition of a new lease pursuant to Section 48 of the Leasehold Reform, Household and Urban Development Act 1993.

4. On 05 September 2019 the Applicant served a notice to exercise the right to acquire a new lease of the property at a premium of £29,875.

5. On 14 November 2019 the Landlord’s solicitor issued a counter notice admitting the Applicant’s right to a new lease, but disputing the Applicant’s proposals in respect of the premium and the terms of the new lease, proposing a price of £61,785

6. The sole matter in dispute was the premium. [NAME] had agreed the terms of the new lease.

7. At the hearing the Applicant’s representative proposed a premium of £34,334 as against £51,428 proposed by the landlord’s representative.

The Hearing

8. The parties’ expert witnesses, Mr [APPELLANT] (for the Applicant) and Mr [APPELLANT] (for the Respondent) gave evidence and represented their respective parties at the hearing.

9. The [NAME] had prepared a bundle [page numbers] which contained a Memorandum of Agreed matters signed by the expert witnesses [83-84].

10. Prior to the hearing the parties had submitted supplemental representations and revised valuations following the agreed sale of 51 The Grangeway. On hearing the parties this additional evidence was admitted.

11. Directions for the conduct of the case were issued on 11 June 2020 with Further Directions on 25 June and 15 October [13-20]. The case was conducted under special arrangements to allow for the Covid 19 pandemic and the relevant Practice Directions. With the parties consent, the proceedings were conducted without an inspection by the Tribunal members and the hearing was conducted by secure video link.

3 Background

12. 50 The Grangeway is a ground floor flat with garden areas to the front and rear and has an agreed floor area of 55.87 m². The block dates from the 1930s and is built of brick and tile.

13. The flat has its own entrance and the accommodation originally comprised a hall, living room, kitchen, one single and one double bedroom and a bathroom with W.C. The experts supplied various photographs and plans and the Tribunal members viewed the property online using various public platforms.

14. The flat is held under two leases combined in title WSX 215928 the first dated 06 August 1984 and the second dated 13 April 1972 for a section of the rear garden. Both leases are for the term of 99 years from 24 June 1970. It is agreed that the unexpired lease term is 49.796 years. The valuation date is agreed at 06 September 2019 with the existing ground rent of £100 p.a. increasing to £125 p.a. in 16.796 years from the valuation date.

15. The terms of the new lease to be granted are agreed.

The Law 16. The statutory provisions dealing with the premium payable by the Applicant for the grant of a new lease are found in paragraph 2, part 11 of schedule 13 of the Act. The premium is the aggregate of

• The diminution in value of the landlord’s interest in the tenant’s flat

• The landlord’s share of the marriage value.

• Any amount of compensation payable to the landlord.

17. Paragraph 3(1) states that the diminution in value of the landlord’s interest is the difference between: • The value of the landlord’s interest in the tenant’s flat prior to the grant of the new lease: and • The value of his interest in the flat once the new lease is granted.

18. Paragraph 3(2) spells out the factors to be taken into account when valuing the landlord’s interest. Essentially the valuation equates with the value of an open market sale by a willing seller of an estate in fee simple which ignores the right to acquire a new lease and disregards any value attributable to tenant’s improvements.

19. The value of the landlord’s interest comprises two elements: • The right to receive rent under the existing lease for the remainder of the term (The term).

4 • The right to vacant possession at the end of term subject to the tenant’s right to remain in occupation (The reversion).

20. Paragraph 4 of schedule 13 deals with marriage value which is calculated by aggregating the values of the landlord’s and tenant’s interests after the new lease had been granted, and then deducting the corresponding values prior to the grant of the new lease. The landlord is entitled to a 50 per cent share of the marriage value.

21. Paragraph 5 of schedule 13 enables compensation to be paid to a landlord for any loss or damage arising out of the grant of a new lease. The question of loss or damage was not an issue in this Application. The Issues 22. The matters agreed between the parties in respect of the premium were as follows:

• Valuation date: 06 September 2019.

• Unexpired term: 49.796 years.

• Deferment Rate: 5 per cent.

• 1% differential between the Leasehold Vacant Possession Value and the Freeholder Vacant Possession Value.

• There are no improvements of value to be considered.

23. The matters remaining in dispute on which the valuers have not been able to reach agreement for the Tribunal to determine are: • The capitalisation rate for the ground rent. • The long leasehold value of the property. • The relativity in connection with the calculation of the current lease value and marriage value. • The premium payable Evidence and Consideration

24. The Tribunal considered each issue in turn.

25. On the question of the capitalisation rate there was little evidence available to the Tribunal. Mr [NAME] considered that 7% was appropriate as he had agreed this rate on other enfranchisement cases and this rate is generally accepted for a lease with modest ground rent reviews. He summarised the accepted factors which would influence the appropriate rate citing Lands Tribunal and a FTT case in support. Because of the relatively low ground rent and 33 year reviews he concludes that 7% is the correct rate.

5 26. Mr [NAME] referred the Tribunal to the current very low interest rates and that the income is secure and risk of non-payment is low. He considers that 6% is appropriate.

27. Doing the best it can, the Tribunal uses an average 6.5% in its calculation.

28. Now turning to the value of the current lease both parties agreed to follow the approach taken in the Upper Tribunal case [NAME] v [NAME] (“[NAME]”)1 and followed in several subsequent Upper Tribunal decisions. It was the judgement in [NAME] that, where market transactions at or around the valuation date are available these should be the starting point for determining relativity. Mr [NAME] accepts that there are no relevant transactions in the block as he dismisses No. 48 as unreliable and historic [5.08 @ 95]. Mr [NAME] relies on the price agreed for No. 51 but see our comments at paragraphs 29 - 33 below. On this basis there are no relevant short lease market transactions.

29. In his original representation Mr [NAME] at section 7 [361] referred to the flat upstairs, No. 51, which was on the market and had been for some time at £175,000. He states that the marketing is not conclusive but is indicative of the market for short lease, but not as reliable as a recent sale. He goes on to adjust the figure for a sale without rights under the Act. Starting at £165,000 (his estimate of the likely sale price), he arrives at a “no act” figure of £146,850.

30. Subsequently it came to light that a sale had been agreed, but not contracted, at £170,000. Upon a request to the Tribunal the parties were given permission to submit further representations on this issue and at the hearing these were admitted [see para 10 above].

31. The Tribunal has given careful consideration whether this type of information should be taken into account in the valuation. Mr [NAME] is adamant that the amount accepted as an offer, subject to contract, cannot be proper evidence. Mr [NAME] was not aware that this type of information has been used in other Tribunal determinations.

32. The Tribunal determines that although the information on the agreed price for 51 The Grangeway is interesting it would be wrong for it to form any part of the calculation of the premium payable or relativity.

33. The value can only be assessed by applying a percentage relativity to the virtual freehold value by using published graphs so first the long lease value has to be assessed.

34. Mr [NAME] assembled a schedule of seven nearby properties [113] which he considered were comparable to the subject property. He stated that they were geographically close and all had to a greater or lesser extent similar facilities. Where there was a difference between the date of the transaction and the valuation date, he made adjustments using the Land Registry Index. He also made adjustments for size, location, parking or garages, general condition, heating etc. He favours the first comparable at 43 The Grangeway with his adjusted valuation of £200,454 but if the first five comparables are used with his adjustments these show an average of £196,866.

1 The Trustees of the [NAME] and [NAME] [2016] UKUT 223 (LC)

6 35. Taking account of all other relevant factors Mr [NAME] concludes that £200,000 would be his assessment of the value of the property with an extended lease.

36. Mr [NAME] took issue with the amounts Mr [NAME] had used for adjustments and raised these concerns at the hearing. He believed that the location of some of the comparables were more remote from the village centre and as such were less valuable. Mr [NAME] thought that this made no difference. Mr [NAME] questioned the deduction for the cost of a lease extension, Mr [NAME] pointed out that this included costs and where the lease length was over 80 years it made little difference. Mr [NAME] also took the view that with the government’s intention to stop gas heating from 2025 the differential by comparison with electric heating was minimal. Mr [NAME] did not agree.

37. Mr [NAME] chose to rely on only two comparables but Mr [NAME] considered this to be ‘cherry picking’. Mr [NAME] favoured 43 The Grangeway and, like Mr [NAME], made a similar adjustment for date. He made different other adjustments however to take account of the first floor configuration which he considered was an advantage. He believed that the flat was not of better quality and no adjustments were needed for the garage and parking arrangements. The adjustments suggest a value of the property, with an extended lease with a peppercorn rent, of £239,000. He considers the next best comparable to be No. 34 but as the sale was in 2015 it is very historic. None-the-less he makes an index adjustment and some other adjustments to arrive at a valuation of £247,802 for it. He then takes an average of 43 and 34 only to calculate the value of the subject property with an extended lease at £249,959.

38. When making his additional representations Mr [NAME] identified revised Land Registry Index figures which involved minor adjustments to his comparables. 43 The Grangeway should be revised to £233,949 and 34 The Grangeway revised to £247,591. The consequence is that he revises his value of the virtual freehold to £245,565.

39. Mr [NAME] questioned Mr [NAME] use of limited comparables to produce an answer favourable to his client’s case. Although probably not deliberate Mr [NAME] approach seems contrary to the usual valuation approach. We do not agree that any of the five comparables used by Mr [NAME] should be excluded as they all are located within a reasonable locality to the subject property. We do, however, find that some of the adjustments both experts make to the sale figures for each comparable are open for discussion. This is reflected in the wide disparity between the two figures contended i.e. £200,000 by Mr [NAME] and £245,565 by Mr [NAME]. Neither expert gave detailed information regarding their calculations of adjustments for such things as, locality, parking or garaging, modernisation, floor level, heating etc. There was a general debate during oral evidence and cross examination. We were particularly concerned by the severe deductions made by Mr [NAME] when adjusting the price for No 43. We also felt that the use, by Mr [NAME], of an adjusted price for No. 34, a very historical comparable, as his only alternative comparable affected the end figure too substantially.

40. Having regard to its findings in paras 33 to 39 the Tribunal Determines the extended lease value at £215,000 and £217,150 for the virtual freehold value of the landlord’s interest in the flat applying the agreed 1% differential.

7 41. Mr [NAME] then addresses which of the graphs are, in his opinion, the correct ones to use. He refers expressly to “Oliyide”2 and “[NAME]”3 and other cases. He believes that these cases have been interpreted incorrectly to favour reference only to [NAME] and [NAME] graphs. Prior to “[NAME]” he would have considered the five Greater London and South East relativity graphs contained in the 2009 RICS Relativity publication4 which of these he favours the [NAME] graph5 ([NAME]”). When appearing in the FTT case [ADDRESS]6 he was able to demonstrate that relativity calculated from market evidence was within 0.5% of the [NAME] graph for a term of 49.54 years. He says that unfortunately there are no Upper Tribunal cases relating to properties on the South Coast.

42. Mr [NAME] accepts that there has been some change in relativity since the date that the RICS graphs were published. He makes adjustments for the later date based on the relative differences now published with the updated Savills and [NAME] graphs showing an average difference of 4.07%. This would give a revised [NAME]” figure of 74.44%. which is the figure he adopts to calculate the marriage value.

43. Mr [NAME] identifies the graphs used in [NAME] as [NAME] and [NAME] but these graphs relate to Prime Central London (“PCL”). The “Mansard” case7 endorsed the use of PCL graphs outside the centre. If other suburban graphs are to be considered he favours Beckett & Kay (“Beckett”) showing 62% for the unexpired term. Savills is 70.74% exclusive of rights and [NAME] 70.33%. His opinion is that there would be lower relativity in Rustington once the acts Rights effect is removed and uses the [NAME] graph to allow for this.

44. Mr [NAME] averages the PCL graphs at 70.535% and takes [NAME] at 61% making an average of these two figures of 65.77% in his calculation.

45. When considering the different approaches of the experts there does seem to be something amiss with the graphs selected to try and shade distinguish the PCL graph figures to allow for a property outside central London. [NAME] at 61% and Pridell at 74.44%. At least Mr [NAME] has recognised the established use of PCL graphs but Mr [NAME] seems to have chosen to ignore any assistance from the PCL figures. Neither expert has made a case for any real difference between relativities outside PCL. The Pridell figure is now out of date but to suggest that it should be adjusted using a PCL differential seems counter-intuitive. Mr [NAME] points out the deficiencies of the Beckett figures.

46. As indicated by the decided cases we can find no compelling evidence to adjust the established graphs and we therefore adopt the average of the Savills and Gerald Eve 2016 graphs at 70.535%.

47. Having regard to its finding at paras 41 – 46 above the Tribunal applies relativity the determined relativity to the virtual freehold value to determine a short lease value of £153,167.

2 Mrs [NAME] v [COMPANY]/802/018 3 Trustees of Barry and [NAME] v [NAME] and [NAME] [NAME]/138/2018 4 RICS Research Leasehod Reform: Graphs of Relativity October 2009 5 [COMPANY] 2008 6 [NAME] v [COMPANY]/45UC/OLR/2017/0069 7 [COMPANY] ([COMPANY] v Ms [NAME]/123/2019

8 The Tribunal’s decision

48. The Tribunal determines the premium payable for the new lease of 50 The Grangeway, Rustington, West Sussex at £41,153.00 in accordance with section 48 of the Leasehold Reform, Housing and Urban Development Act 1993. 49. The Tribunal’s calculation is set out below:

Address 50 Grangeway, RUSTINGTON Facts used Value 'Share of freehold' £217,150 +1% Value of new very long lease (unimproved) £215,000 Value of existing lease (unimproved) £153,167 Relativity 70.535% Valuation date 05/09/19 Yield 6.50% deferred yield 5.00% Unexpired term at valuation date 49.80 yrs £ £ £ Value of landlord's interest Capitalise ground rent for current termnd rent for current term Ground rent £100.00 YP 6.50% 16.83 years 10.05381 1,005 Increase to £125.00 YP 6.50% 33.00 years 13.45909 x PV 6.50% 16.83 years 0.34650 4.66360 583 1,588 plus Landord's net reversion Capital value of share of freehold £217,150 x PV 5.00% 49.80 years 0.088059 19,122 LESS eventual reversion £217,150 x PV 5.00% 139.8 years 0.[PHONE] 18,885 Value of landlord's interest 20,473

Landlord's share of marriage value Capital value of new extended lease 215,000

Value of landlord's interest after grant of new lease 237

215,237

Less Capital value of existing lease 153,167

Value of landlord's interest lost 20,710

173,877

Marriage value 41,360

Landlord's share of marriage value at 50% 20,680

Compensation nil Price payable 41,153 £

9 RIGHTS OF APPEAL

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