First-tier Tribunal Sets Freehold Acquisition Premium

OUTCOME: Allowed

© CROWN COPYRIGHT 2019

FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case Reference : LON/00BC/OCE/2018/0222 Property : 38 [ADDRESS] [POSTCODE] Applicants :

[redacted] [NAME] [NAME] and [NAME] [NAME] (2); and 38 [COMPANY] (As the nominee purchaser) (3) Representatives :

Mr [COUNSEL] Counsel Mr [COUNSEL] BA (Hons) MRICS Respondents :

[redacted] Mr [COUNSEL] : Mr [COUNSEL] of Application : S24 Leasehold Reform, Housing and Urban Development Act 1993 (the Act) – determination of terms of acquisition in dispute Tribunal Members : Judge [NAME] (EstMan) FRICS Date and venue of Hearing : 22 [ADDRESS] [POSTCODE] Date of Decision : 4 February 2019

DECISION

2 The issues before the tribunal and its decisions 1. The issue before the tribunal was the premium payable to the

respondent for the freehold interest in the Property

2. The decisions of the tribunal are that:

2.1 The name of the first applicant shall be corrected to The

[APPELLANT] ([NAME]);

2.2 38 [COMPANY] ([NAME]) (the

Company) shall be joined in the proceedings as the [NAME]

applicant; and

2.3 The premium so payable to the respondent is the sum of

£102,894 made up as to:

Flat 38A £ 84,229

Flat 38B £ 18,665

£102,894

as calculated in the two valuations marked ‘A’ and ‘B’ appended

to this decision.

3. The reasons for these decisions are set out below.

NB Later reference in this Decision to a number in square brackets ([ ]) is a reference to the page number (where legible) of the hearing file provided to us for use at the hearing.

Background 4. The freehold interest in [ADDRESS] is registered at HM Land

Registry with title number EGL85816. On 7 November 2011 the

respondents were registered as proprietors [27].

The Schedule of notices of leases set out in the Charges Register records

two leases:

38A Dated 22 January 1960 - 99 years from 30.09.1959 - EGL110267

38B Dated 20 May 1960 – 99 years from 25.03.1960 – EGL518234

This lease was varied twice – 02.05.1991 – to extend the term to

expire on 24 March 2090 [51] and – 23.08.2005 to include in

the demise the loft space above the first floor flat [36].

5. On 15 December 2017 The [COMPANY]

([NAME]) was registered at HM Land Registry as proprietor

of the lease of 38A [55]. The price said to have been paid is recorded as

being £170,000.

3 6. On 1 March 2007 [NAME] and [NAME] were

registered at HM Land Registry as proprietors of the lease of 38B [31].

The price said to have been paid is recorded as being £250,000.

7. By an initial notice given pursuant to s13 of the Act and dated 25

January 2018 [6] [NAME] as the

participating and qualifying tenant of 38A and [APPELLANT] and

[APPELLANT] as the participating and qualifying tenant of

38B sought to exercise the right to enfranchise and acquire the freehold

interest in the Property.

By paragraph 7 of the notice the price proposed for the specified

premises was £80,000 and £500 for the property mentioned in

paragraph 2 (a slither of land to the side of [the Property]).

By paragraph 9 of the notice the nominee purchaser was named as ’38

[APPELLANT].

The accompanying Tenant Information Sheets recorded that:

[APPELLANT] and [APPELLANT] were the tenant of 38A

(we infer that was a typo and it should have read ‘38B’): and

The [APPELLANT] was the tenant of 38A

8. By a counter-notice given pursuant to s21 of the Act and dated 6 March

2018 [19] the respondents admitted that on the date when the initial

notice was given, the participating tenants were entitled to exercise the

right to collective enfranchisement in relation to the specified premises.

The respondents did not accept the proposals as to the price and

counter proposed:

£120,000 for the specified premises;

£2,500 for the property mentioned in paragraph 2 of the initial notice;

and

£15,000 for the freehold of garden grounds and garage demised under

the respective leases – the appurtenant property.

9. An application dated 22 August 2018 and made pursuant to Chapter 1

of the Act was filed with the tribunal [1]. The application was stated to

have been made by:

[NAME] of 118-120 [ADDRESS] [POSTCODE]; and

[NAME] and [NAME] of [ADDRESS].

The application was lodge by solicitors, Boulter and Company.

4 10. Directions were given on 24 September 2018 [4].

11. The application came on for hearing before us on 22 January 2019.

The applicants were represented by Mr [COUNSEL] of counsel. Mr

[COUNSEL] called Mr [COUNSEL] BA (Hons) MSc MRICS to give

expert valuation evidence.

The respondents were represented by Mr [COUNSEL] who

acted as advocate and who also gave expert valuation evidence.

The parties 12. Post the hearing and in the course of preparing this decision we have

identified an issue as to the correct party or parties to this application.

13. Two points arise.

14. First on several, but not all documents, the tenant of 38A is named as

simply as [NAME]. The name of the

registered proprietor as recorded at HM Land Registry is The [COMPANY] ([NAME]). The tribunal

has undertaken a company search of that company which shows that its

registered office is at 118-[ADDRESS], Mitcham, London CR4

3LB; and that its sole officer is named as [APPELLANT].

We infer that the named first applicant was intended to be [APPELLANT] as registered with [NAME] and we made an order to record that the name of the first

applicant is [APPELLANT] ([NAME]).

15. Second, the first and second named applicants are the two participating

and qualifying tenants. Paragraph 9 of the initial notice names 38 [COMPANY] (the Company) as the nominee purchaser. S24

of the Act provides that where terms of acquisition are in dispute, the

tribunal may, on the application of either the nominee purchaser or the

[NAME], determine the matters in dispute. Thus, here the

application to the tribunal ought to have been made by the Company.

16. The tribunal has undertaken a company search in respect of the

Company which records:

Incorporated: 4 September 2018

Registered office: 118-120 [ADDRESS] [POSTCODE]

Officers:

[NAME] of 38b St Albans …

[NAME] of 38b St Albans …

[NAME] of 118 – [ADDRESS] …

5

We infer that it was in error that the application was made by the

participating tenants and that it was intended the application should be

made by the Company.

For the sake of good order, we have made an order to join the Company

as the [NAME] applicant, and so that we can make a determination on an

application by (or at least which includes) the nominee purchaser.

17. If either party has any concerns or representations to make on either of

these orders concerning the names of the applicants, they may make a

written request to the tribunal to review them by 5pm Friday 22

February 2019.

The matters in agreement and in dispute Agreed matters 18. Prior to the hearing the parties had been able to agree several of the

component parts of the valuation. These are set out in a statement of

matters at [347]. We need not set them out in detail.

At the hearing we were told it was now agreed that:

18.1 The annual ground rent payable in respect of 38B was £12.10

and not £12.00; and

18.2 The GIA of 38B (excluding the improvement of the extension of

the demise into the roof space) was 786 ft²/73m².

19. Thus, the matters in dispute were the freehold and reversionary values

and the relativities to adopt so as to arrive at existing lease values.

The rival positions are set out in the table in paragraph 23 below.

The Property 20. The Property was originally constructed as an end of terrace Edwardian

house in traditional solid brick beneath a pitched roof covered in slate

tiles. It is an elegant building with interesting period features including

a turret. Photographs are at [74].

In 1960 the building was adapted to create two self-contained

flats. Most of the rooms remain of good proportion. Each flat has a gas-

fired combi boiler to provide central heating and domestic hot water.

38A is arranged as a one-bedroom flat with a small reception room

close to a small kitchen and with a large reception room which

enjoys bay and turret windows.

38B was originally demised as a two-bedroom flat, with a

kitchen/diner and a smaller reception room but which also enjoys bay

and turret windows. Subsequently, and pursuant to the 2005 deed of

variation, this flat has been extended into the roof space to provide an

additional bed-room and bathroom. It was agreed that these works

6

amount to tenant’s improvements. The 2005 deed of variation also

included a covenant on the part of the [NAME] to maintain the roof of the

building and the joists and beams to which the ceilings of that flat are

attached.

Agreed plans of the ground and first floors of the Property are at [273].

Each flat has its own entrance door at street level.

The front garden and a part of the rear garden is demised to 38A, the

ground floor flat (GFF). The remainder of the rear garden to include a

garage is demised to 38B, the first floor flat (FFF).

On street parking is available immediately outside the Property and in

neighbouring roads.

21. The Property is located in a residential area comprising character

Edwardian terraced housing, most of which have been converted to

flats. Shopping facilities are available in the nearby [ADDRESS],

about a quarter of a mile to the west. Public transport facilities are good

with South Woodford and Woodford Underground stations on the

Central Line each being about one mile away and which connect easily

into central London.

22. The immediate area around the Property can reasonably be described

as desirable and favoured by commuters into London.

Valuation Matters 23. At the hearing the rival evidence was as follows:

[NAME])

Mr [NAME] Mr [NAME] value:

£360,000

£424,200

Long lease value (-1%):

£356,400

£420,000

Relativity:

69.63%

65.05%

Existing lease value:

£250,668

£275,942

[NAME])

Freehold value:

£410,000

£424,200

Long lease value (-1%):

£405,900

£420,000

Relativity:

93.25%

87.90%

Existing lease value:

£382,385

£372,871

7

[NAME]) 24. To arrive at £360,000 Mr [NAME] has taken four comparables. He

made a number of adjustments to each one to arrive at an average £ft²

and then applied that to the subject flat. His first comparable, [ADDRESS], is not a ground floor flat, but a first floor flat with the

benefit of a loft converted room [95]. We disregard it because, in our

judgment, it is not a helpful or appropriate comparable.

Of the remaining three, the adjusted purchase prices were:

Size ft²

[ADDRESS]

£364,181

660

[ADDRESS]

£368,815

543

[ADDRESS] £367,187

627

The ft² of 38A is 795.

Thus, all three comparables are a fair bit smaller.

25. Mr [NAME] approach was to value this flat at the same value as the FFF

38B, and so he arrived at value of £424,200. In doing that Mr [NAME]

accepted that he had shifted from his original position of £410,000 for

38A. Despite very focussed cross-examination in which Mr [NAME] urged

Mr [NAME] to agree that, for several reasons, the GFF must be worth less

than the FFF, Mr [NAME] was adamant that in his professional opinion

it was not. Mr [NAME] accepted that the valuation of 38B at £424,200

included the benefit of a demised garage, which both valuers had

valued at £15,000.

26. Mr [NAME] also asserted that Mr [NAME] comparables were in

roads to the south-west of [ADDRESS], on the other side of the

main A1199 High Road Woodford Green, with different postcodes, were

less grand and of a different architectural style and were less attractive

and desirable in features and location than the subject Property. Thus,

Mr [NAME] was of the opinion that an adjustment was required to reflect

those matters.

Discussion 27. In broad terms we preferred Mr [NAME] general approach. His

three adjusted comparables were of some assistance to us. We accept

Mr [NAME] evidence about location. That evidence strikes a chord with

us and is supported by the external photographs of the several

properties in the trial bundle.

28. We do not share Mr [NAME] view that the values of 39A and 38B are

going to be broadly the same. There are pro’s and cons to both flats.

Just by way of example, 38A has the benefit of direct access into the

rear garden, whilst 38B has the benefit of there being no one above and

is a little more secure. Also, we have to bear in mind the agreed value of

the garage at £15,000.

8

29. We were not persuaded that valuation by £ft² was appropriate

here. In the accumulated experience of the members of the tribunal in

suburban London the market does not price one-bedroom flats on such

a basis. A one-bedroom flat is still a one-bedroom flat. Whilst size will

have some bearing on value, we do not find that £ft² is a helpful

tool for comparison purposes, especially where the difference in size of

the subject flat and the comparables is quite significant.

30. Our preferred approach is to take an average of the adjusted sales

prices of the of the three comparables and then to make a broad

adjustment to reflect size and location.

The average price is £366,727. We make an adjustment for size and

location and arrive at a long lease value of £386,140. We have tested

this against our valuation of 38B, set out in paragraph 39 below and

we find it sits well. Unlike Mr [NAME], we find that the market will see a

modest differential in the values of 38A and 38B. We find that the

value of £409,200 for 38B (excl the garage - £15,000) mentioned in

paragraph 39 below and £386,140 for 38A – a difference of just over

£23,000 is an appropriate differential in line with market sentiment.

[NAME]) 31. Inevitably, and as is to be expected, prior to the hearing the respective

valuers had discussed the matters in issue with a view to reaching an

agreement. Evidently a tentative (but not binding) understanding had

been arrived at as regards the freehold value of the FFF at £424,200,

to include the value attributed to the garage.

32. When Mr [NAME] expert report was finalised, he put the value at

of the FFF at £410,000. This took Mr [NAME] by surprise because his

report was drafted on the basis of the informal understanding of a

value of £424,200.

33. Mr [NAME] approach was to identify eight comparables. He

arbitrarily dismissed two because he considered they were out of sync

with the remainder. But he did include one, [ADDRESS]

even though it had not sold but was simply under offer.

34. Mr [NAME] then made a number of adjustments to reflect time,

particular features such as condition, garden, parking and size. Mr

[NAME] then averaged those comparables to arrive at a value of

£469 per ft². His valuation was thus:

GIA – 839 ft² @ £469 per ft² £393,491

Garage

£ 15,000

£408,491 say £410,000

At the hearing Mr [NAME] agreed that the GIA of 38B was in fact

786 ft², and not 839 ft². However, he did not want to make any

9

adjustment to his value because, in his view, the adjusted figure 786

ft² @ £469 = £368,634 would be too low.

35. Mr [NAME] was critical of Mr [NAME] for including a comparable of

a property which was under offer and for excluding two actual

transactions which were both in [ADDRESS].

36. Because Mr [NAME] was working on what he thought might have been

an agreed value of £424,200, Mr [NAME] did not have a detailed

analysis of how that figure might have been arrived. Mr [NAME] was very

clear that 38B had a value of at least £424,200 and he considered he

could justify a higher value, perhaps around £438,000, but for the

purposes of the hearing he was prepared t0 standby the lower value of

£424,200, and not to exceed it.

37. Mr [NAME] had included in paragraph 10.12 of his report seven

comparables, three of which were ground floor flats. Of the first-floor

flats, only one was in the same road, namely [ADDRESS].

But Mr [NAME] has not made any adjustments whatsoever. One had a

garage, one off-street parking, one had a balcony, one was said to be in

excellent condition internally, one in average condition and one in need

of updating. As to dates, the subject valuation date is 25 January 2018.

The transactions cited by Mr [NAME] ranged from 18 July 2016 to 13

February 2017 but no adjustments for time were made.

In these circumstances we found we could not be confident that the

comparables were of much assistance.

Discussion 38. In broad terms we preferred Mr [NAME] general approach. It was

more methodical and in line with usual valuation practice. But we

could not understand the logic in including an ‘under offer’ property yet

excluding an actual transaction in the same road.

39. We find that the preferred approach is take the average adjusted sales

values of the four transactions – 19A & [ADDRESS] and 2B

and [ADDRESS]. The average size of those properties is

792.75 ft² which sits well with the agreed 786 ft² for the subject flat

That average value is £407,530. A modest adjustment to allow for style

and location of the two [ADDRESS] properties might take that to,

say £415,000 and a value of £15,000 for the garage produces a total of

£430,000. Given that Mr [NAME] wished to stand by his figure of

£424,200 and not go beyond it, we find that the long lease value of

38B is it be regarded as £424,200.

Relativity 40. Mr [NAME] said that he had been unable to find any transactional

evidence of short lease sales. His approach was to resort to the graphs

in the RICS report, excluding those for Prime Central London (PCL).

This was on the footing that [ADDRESS] is plainly not in PCL.

Having considered the range of graphs Mr [NAME] relied upon

10

three of them, South East Leasehold, [NAME] and [NAME] because they are based predominantly on transactional data of

flats within outer London and the suburbs which sits well with and are

representative of [ADDRESS].

41. Mr [COUNSEL] took an average of those three graphs to arrive at:

38A 69.63%

38B 93.25%.

Mr [NAME] submitted that this approach was in line with the guidance

given by the Upper Tribunal (Lands Chamber) in [NAME] v [NAME] [2014] UKUT 0319 (LC) and Roberts v

Fernandez [2015] UKUT 0106 (LC).

Mr [NAME] also submitted that in The [NAME] of the [NAME] v Mundy [2016] UKUT 0233 (LC) whilst the Upper Tribunal

placed greater weight on the Savills Enfranchiseable (2015) graph and

the [NAME] graph, it did so in the context of a case in which all the

subject properties were in PCL. Evidently the raw data was gathered

from PCL transactions, where the market is largely not mortgage-

dependent.

42. Mr [NAME] took a different approach. Mr [NAME] relied upon one

transaction – the sale of a FFF at 12 [ADDRESS] [POSTCODE] in

June 2016 for the price of £227,000 where the unexpired term was

70.56 years. Mr [NAME] estimated the reversionary value to be

£250,000 from which he concluded the no act world relativity

amounted to 87.90%.

43. Mr [NAME] acknowledged in cross-examination that the guidance of the

Upper Tribunal in [NAME] v [NAME] [2016] UKUT 0468 (LC)

was that: “We endorse and reiterate the Tribunal’s preference for

market evidence over the use of relativity graphs, as long as it can be

shown that the market evidence is reasonably comparable and does

not require artificially extensive manipulation in order to apply it to

the subject valuation.” Mr [NAME] also accepted that in [NAME] the

comparables were flats in the same block, sold close to the valuation

date and with almost identical unexpired terms and that no substantial

adjustments were required to be made to them to provide useful

market evidence.

44. Mr [NAME] also accepted that he had no other information about the

[ADDRESS] transaction, had not inspected the property although he

was generally aware of the location and that it was quite different in

style to [ADDRESS] and at the opposite end of the Borough of

Redbridge. He agreed it was not a great comparable and he agreed with

Mr [NAME] that it might be “an outlier”. Nevertheless, Mr [NAME] gave it

some weight because it was in sync with Savills Enfranchiseable 2015

graph.

11 45. Mr [NAME] sought to moderate the transactional evidence by reference

to graphs. He said that prior to [NAME] he would have adopted an

average of several graphs and would have arrived at a relativity of:

38A 63.72%

38B 93.65%

But, since [NAME] two additional graphs have emerged – Savills 2015

Enfranchiseable and [NAME]. If he were to average those graphs he

would arrive at:

38A 64.60%

39B 86.96%

Standing back Mr [NAME] said that in his professional opinion he

adopted relativities of:

38A 65.05%

38B 87.90%

In support of his approach Mr [NAME] relied upon the guidance given by

the Upper Tribunal in [NAME] v [NAME] [2018] UKUT 0311 (LC), a

decision issued on 27 September 2018.

46. In cross-examination Mr [NAME] accepted that the valuation date of the

subject properties was 25 January 2018. The task of valuation was the

determination of the values as at that date based on hypothetical

market transactions in which the parties are advised by valuers

adopting the approach and methodology in vogue and in common

usage at that time. Mr [NAME] accepted that the [NAME] guidance did

not come along until September 2018 and thus would not have been

adopted in January 2018. Mr [NAME] also accepted in cross-

examination that in January 2018 he would have adopted the approach

of an average of the graphs, which was the approach he had actually

adopted in a valuation report to the FTT in September 2017 in

LON/00BC/OLR/2017/0847 and in an expert witness report signed off

by him and filed in March 2018 in LON/00BB/OLR/2018/0219.

Discussion 47. In these circumstances we find that do not need to consider [NAME]

and to the extent to which it may turn on its very particular

circumstances.

48. We accept and prefer the approach taken by Mr [NAME] and his

reasoning for his reliance on the three graphs he refers to. We therefore

adopt his relativities of 69.63% and 93.25% respectively.

Valuation 49. For the reasons set out above we find that the premium payable to the

respondent for the freehold interest is £102,894 made up as to:

12

Flat 38A £ 84,229

Flat 38B £ 18,665

£102,894

Judge John Hewitt 4 February 2019

ANNEX - RIGHTS OF APPEAL

1. If a party wishes to appeal this decision to the Upper Tribunal (Lands Chamber) then a written application for permission must be made to the First-tier Tribunal at the Regional office which has been dealing with the case.

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

3. 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.

4. 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.

13 TRIBUNAL VALUATION 38a ST. ALBANS CRESCENT (Ground Floor), WOODFORD GREEN, ESSEX

Valuation date: 25th January 2018

Unexpired term: 40.62 years

Relativity: 69.63%

Existing leasehold value: £271,557

Extended leasehold value: £386,140

Freehold value:

£390,000

Yield's term: 7%

Reversion: 5%

Term Value agreed:

£ 134

Reversion Freehold value: £390,000 PV 40.62 years 0.1378

£53,742

Freeholder's interest

£53,876

Marriage Value Extended lease: £386,140

Less: Existing lease

£271,557

Less: Freeholder's interest £ 53,876

50% £ 60,707 £30,353

Premium:

£84,229

14 TRIBUNAL VALUATION 38b ST. ALBANS CRESCENT (First Floor), WOODFORD GREEN, ESSEX

Valuation Date: 25th January 2018

Unexpired term: 72.16 years

Relativity: 93.25%

Existing leasehold value: £395,566

Extended leasehold value: £420,000

Freehold value

£424,200

Yield's term: 7%

Reversion 5%

Term Value agreed:

£ 170

Reversion Freehold value: £424,200 PV 72.16 years 0.030

£12,726

Freeholder's interest

£12,896

Marriage Value Extended lease:

£420,000

Less: Existing lease

£395,566

Less: Freeholder's interest £ 12,896

50%

£ 11,538 £ 5,769

Premium:

£18,665