First-tier Tribunal Sets Freehold Acquisition Costs

OUTCOME: Dismissed

Case Reference : MAN/OOEN/OAF/2019/0010

Property : 10 [NAME], Ellesmere Port

[POSTCODE]

Applicant: [redacted]

Respondent: [redacted]

of transfer

Tribunal Members : Laurence Bennett (Tribunal Judge)

[NAME], MRICS

Date of determination : 30 August 2019

Date of Decision : 25 October 2019

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DECISION

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© CROWN COPYRIGHT 2019

Application

1. Mr [APPELLANT] applies to the Tribunal for a determination of reasonable costs payable under Section 9(4) of the Leasehold Reform Act 1967 (the Act) and for determination of what provisions ought to be in the conveyance under Section 21(2) of that Act.

Parties

2. The Applicant Mr [APPELLANT] is the owner of the leasehold interest in [NAME] created by a Lease dated 29 April 2005 for 150 years from 1 January 2004 made between [COMPANY] (1) [APPELLANT] (2).

3. The Respondent [RESPONDENT] is the successor to the lessors of [NAME].

Directions

4. On 29 May 2019 Judge Bennett made directions for the conduct and determination of the appeal.

5. In accordance with directions the parties made written submissions and provided documentary evidence including expert reports.

6. Neither party requested a hearing. Following external inspection of [NAME] the Tribunal determined the application on the basis of the written submissions and documentary evidence provided by the parties.

[NAME]

7. [NAME] is a 3 storey brick and concrete detached residence with an integral garage. It is located in a relatively quiet residential area close to the M53, convenient for commuting to major conurbations.

8. At the time of the Tribunal’s inspection, [NAME] appeared in good order and consistent with the age of construction around 2004.

Contents of application

9. The application has proceeded as an application to determine the price payable for the freehold interest in [NAME] in addition to issues set out in the application form. Both parties addressed the application on that basis and the Tribunal accepts and orders the implied amendment to the scope of the application.

10. We have some comments on Mr [NAME] presentation of his client’s case. We have noted the difficulties in the application form. The Tribunal was not assisted by the lack of documents which should have been provided including Landlord’s Counter Notice, a full copy of the Lease at the application stage and bundles prepared to a reasonable standard, not least sequentially numbered and bound. It is not appropriate to provide a collection of loose pages within plastic sleeves. Whilst we find it in the interests of the parties that this matter is determined, we consider it unlikely in future a Tribunal would accept submissions in this form.

Background

11. By notice dated 27 November 2018 Mr [APPELLANT] of [NAME] submitted a notice of tenant’s claim to acquire the Freehold on behalf of Mr [APPELLANT]. It noted that the premium on the grant of the Lease was £208,995 at a rent of £80 subject to review every 5 years.

Agreement

12. The parties agree that the price should be calculated according to Section 9(1) of the Act and the appropriate valuation date is 27 November 2018. They further agree the current ground rate payable £112.10 p.a. with a notional ground rent at the date of valuation £123.85 p.a. At the date of valuation the unexpired term was 135.09 years.

Expert evidence

13. Mr [NAME] has made extensive submissions accompanied by precedents and decisions. The Respondent has submitted the first and supplementary reports of Mr [NAME], FRICS.

14. Mr [NAME] calculates the appropriate price at £1,820. Mr [NAME] valuation is £2,601.

15. The essential difference between the parties relates to the capitalisation rate and reversion to modern ground rent as set out in Mr [NAME] schedule.

16. Evidence and submissions are referred to within our determination below.

Tribunal’s conclusions

Capitalisation

17. Mr [NAME] proposes capitalisation at a rate of 6.75% addressed at length in his reply to the Respondent’s valuation.

18. Both experts analysed the comparables submitted. It is clear there has been a detailed discussion between the [NAME]. Mr [NAME] submits his comparables support a capitalisation rate of 6.75%.

19. In proposing a rate of 5%, [NAME] makes some points regarding the nature of this particular Lease as rent is linked to RPI and the market evidence taken into account by both experts. He questions the relevance of comparables submitted by Mr [NAME] and sites his own comparables showing capitalisation rates between 6 and 7%. His view is that the inflation proof element of RPI investments makes them appealing. He summarises “In my opinion the reduced period of 5 year reviews for [NAME] warrants a yield of 5% to reflect the benefits.” In his further report Mr [NAME] provides additional commentary on Mr [NAME] comparables, in particular 5 and [ADDRESS] [2018] UKUT 0064 (LC) reinforcing his view that 5% is appropriate.

20. Mr [NAME] arguments are ingenious and wide ranging including reference to future reform which we consider can have limited impact. His central point relates to the risk inherent in the Lease and in effect disputes the comparative certainty in RPI investments taken into account by [NAME].

21. We are persuaded by [NAME]’s arguments. Traditionally, ground rent reviews do not provide for RPI uplift. This is a relatively modern form of investment, presumably to alleviate inflation and render capitalisation and returns more certain. In this case the position is reinforced by a very short review pattern, 5 years. Accordingly, we accept 5% is the appropriate capitalisation rate.

Reversionary value

22. Mr [NAME] submits that a reversion in excess of 135 years in the future does not carry value. Mr [NAME] takes an approach submitting the reversion to modern ground rent should carry a site value of 33.5% with “generic” deferment rate of 4.75%. The decision in [ADDRESS] is cited both in respect of deferment rate and site value.

23. Mr [RESPONDENT] in his response to the Respondent’s valuation addresses that aspect and suggests the yield based on rent only should be 3.53%.

24. We do not accept as first stated by Mr [NAME] that the reversion to modern ground rent is so distant that it should not be taken into account. [NAME] calculates the Freehold value at £250,000 based on comparables. Mr [NAME] does not challenge this and we find the valuation consistent with our expectation based on our knowledge and experience. Relying on the precedent quoted by [NAME] we accept the site value is 33.5% and a deferment rate of 4.75% should be applied reflecting the longer review period.

25. Neither party suggests it appropriate to provide a deferment for standing house value. We concur, this is remote.

Summary

26. We accept the valuation prepared on behalf of the Respondent and set out Appendix 1 of Mr [RESPONDENT] report and annexed to this decision.

27. Having reached that view we note that the same experts reached a similar freehold price in respect of 7 [NAME] in 2017.

Terms of conveyance

28. We note that transfer terms are now agreed. Both parties submitted draft transfers in identical terms. Accordingly, in as much as it is necessary for the Tribunal to make an order, we do so in agreed terms as annexed to this decision.

Costs

29. The Applicant accepts the Landlord’s valuation costs in the sum of £375 + VAT. We find this cost in line with expectation and appropriate.

30. The Respondent has provided a Costs Schedule in respect of legal fees. This totals £1,190.40 + VAT of £238.08. It sets out the fee earner’s rate and itemised time units. However, the Respondent had offered to settle legal costs in the sum of £1,250 inclusive of VAT.

31. Mr [NAME] has provided a table of costs payable in similar circumstances within his experience and submits that the requested costs in this instance are greater “By about a factor of about 2.”

32. We have kept in mind Section 9(4) of the Act and the scope of the “reasonable” costs recoverable. We note this is a relatively recent Lease, the title is registered and the transfer is in relatively plain form and was first drafted on behalf of the Applicant.

33. In the circumstances we find it difficult to see why 32 units were reasonably incurred in reviewing and drafting documents or why 19 letters/emails to the client were required. We accept the grade of the fee earner was appropriate although transactional aspects have largely taken place between the [NAME].

34. In the circumstances we find the legal fees payable by the Applicant should be limited to 10 letters/emails to clients, 11 in respect of the Tribunal and 20 units in respect of reviewing and drafting documents making a total of £787.20 + VAT of £157.44.

Order

35. The acquisition cost, contents of transfer and costs payable by the Applicant shall be as set out above.

Schedule of attachments

36. Price calculation

37. Draft transfer

L J Bennett

Tribunal Judge

25 October 2019