First-tier Tribunal Sets Freehold Acquisition Price for Leaseholders

OUTCOME: Allowed

FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case Reference :  LON/OOAH/OCE/2022/0135

Property :  77 [APPELLANT], Croydon CRO6XJ Applicant: [redacted]

Respondent :  [redacted] Type of Application :  For determination of premium payable. Tribunal Members :

Judge Shepherd [NAME] of Determination :  20th September 2023

Determination

1. In this case [APPELLANT] (“the Applicants”) applied for a determination of the terms of acquisition of the freehold of the semi-detached premises at 77 [APPELLANT], Croydon, [POSTCODE] (“the Premises”) from the Respondent, 77 [APPELLANT], Croydon Limited (“The Respondent”).

2. The Applicant is a nominee purchaser and is owned by the leaseholders of Flats 1 & 2 in the premises. The premises comprise flats on the ground, first, and second floors. The freehold of the building and external areas of the premises were registered to the Respondent on 15th May 2020. [RESPONDENT] [NAME] was registered as the leaseholder of Flat 1 on 4th November 2013. [COMPANY] was registered as the leaseholder of Flat 2 on 24th November 2020. [NAME] was registered as the leaseholder of Flat 3 on 13th January 2010

3. The Applicant served an initial notice under Section 13 Leasehold Reform, Housing and Urban Development Act 1993 (“the Act”) on 11th March 2022. The Respondent served a positive counter-notice on 16th May 2022. In its covering letter, the Respondent challenged the validity of the notice. The Applicant served a second initial notice on 19th May 2022. The Respondent served a positive counter-notice on 26th July 2022. In its covering letter, the Respondent challenged the validity of the Second Section 13 notice.

4. The Applicant applied under Section 24(1) of the Act for a determination of the premium on 11th October 2022. Following a 3-month stay until 19th January 2023, the Tribunal first issued directions on 9th February 2023. Those directions were amended on 11th April 2023.

5. On 27th July 2023, following a Case Management Hearing, Judge Latham and [NAME] issued further directions and listed the hearing on 19th September 2023. The Tribunal issued further directions having noted that the only issue in dispute was the premium. A draft TR1 with tracked changes, was provided by [NAME] on 11th May 2023 in compliance with the Tribunal’s directions. The Applicants also provided an expert report in proper form produced by [NAME] dated 31st August 2023. In the report Ms [NAME] concluded that the premium payable for the enfranchisement was £15300. The flats were individually valued at £245k ( Flat 1) , £220k ( Flat 2) and £190k ( Flat 3). The Respondent failed to allow access to Ms [RESPONDENT] to

inspect Flat 3 but from the lease plan it was assumed that this was a one bedroom flat with kitchen, bathroom and reception room. The lease of Flat 3 was believed to have 69.07 years to run.

6. The Respondent has failed to provide an expert report in proper form. On the day of the hearing on 19th September 2023 they provided what was headed a “Valuation Summary” they had received from [NAME]. He had inspected the premises with Ms [NAME] on 15th September 2023. His summary is not an expert report because it is not a report to the Tribunal and does not contain the correct declarations. In any event he was also working on the basis that the lease of Flat 3 had 69 years to run. He had also not inspected flat 3. He arrived at a valuation of £17260.

7. On 18th September 2023 , the day before the hearing, the Respondents sent an email to the Tribunal suggesting the matter had been settled on the basis that they were agreeing the valuation figure of Ms [NAME]. The parties were asked to provide a consent order. The Claimant replied to the effect that the matter had not settled because they had received new information which affected Ms [NAME] valuation. The information concerned had been provided by the Respondent in an email on 18th September 2023 which stated that a new lease had been granted in relation to Flat 3 with effect from 10th June 2020. The Registration of the new lease was pending with the [NAME]. The Applicant had requested information about the lease having checked the [NAME] day list as early as 1st September 2023 but no disclosure was forthcoming.

8. As a result of the new lease Ms [NAME] prepared an Addendum report dated 18th September 2023 which concluded that the value of the freehold was £5211.

The adjournment application 9. On the morning of the hearing [RESPONDENT] of the Respondent sent an email to the Tribunal stating that neither he nor his wife would be attending the hearing. He said they both had flu like symptoms (non - covid). An adjournment was requested. No medical evidence was provided. At the hearing I indicated that the adjournment application was refused. The hearing had been listed since 27th June 2023 in consultation with the Respondent. The application was not in a proper form and should have been made before the day of the hearing – according to [NAME] his flu like symptoms had been evident since Thursday 14th September 2023. In addition it is not clear why the Respondent had not instructed Mr [RESPONDENT] or anyone else to appear on their behalf even if they could not attend themselves.

The hearing

10. The Applicant was represented by Mr [COUNSEL] of Counsel. He attended with Ms [COUNSEL] the surveyor and [COUNSEL] who owns a share of Flat 2.

11. [NAME] said that no concluded agreement had been reached before the hearing as the Applicant had not accepted the offer to settle made by the Respondent. He said that the information about the lease extension had been suppressed by the Respondent. The result of which was potentially that the nominee purchaser would be required to pay for it had the existence of it not been disclosed at the last minute. He said that the lease extension meant that the reversionary interest in Flat 3 was minimal. He asked the Tribunal to accept the addendum report from Ms [NAME].

12. Mr [NAME] invited the Tribunal to determine the premium payable for the freehold of the Property and determine or approve the draft TR1. The relevant dates for the purpose of valuation are: a. 11/03/22 in respect of the First Section 13 notice; and

b. 27/05/22 in respect of the Second Section 13 notice.

13. There have been no proceedings to determine the validity of the Section 13 notices. As a result, the Tribunal’s determination was sought in respect of both notices. The differences between the valuations was considered to be trivial.

14. Mr [NAME] said that although the particulars of the new lease were not known. Ms [NAME] calculations reasonably took into account the presumed grant of a long lease at a peppercorn rent.

The Law 15. Chapter 1 of part 1 of the Act confers on the qualifying tenants of flats in premises to which the provisions apply, the right to have the freehold of those premises acquired on their behalf by a nominee at a price determined under that chapter.

16. The premium payable is calculated in accordance with Schedule 6 to the 1993 Act. The valuation date is the relevant date.1

17. The premium is comprised of:2 i. The value of the freeholder’s interest in the Building (but in practice including the surrounding grounds);3 ii. The freeholder’s share of marriage value;4 and iii. Additional compensation.5

1 Section 126(1) Commonhold and Leasehold Reform Act 2002 2 Paragraph 2 of Schedule 6 to the 1993 Act 3 Paragraphs 3 & 10 of Schedule 6 4 Paragraph 4 of Schedule 6 to the 1993 Act 5 Paragraph 6 of Schedule 6 to the 1993 Act

iv. The value of the freeholder’s interest in the Building and surrounding grounds is the open market value, based on certain assumptions.6 Ms [NAME] calculation Capitalisation rate 18. She relied on 7%. The capitalisation rate is the rate used to capitalise the freeholder’s rental income. Ms [NAME] notes that the rental income at present is £100 per annum each for Flats 2 & 3, although rent for Flat 3 may now be £0. The key points are the ground rent is low with standard increases (every 33 years). Ms [NAME] had adopted the higher end of the range (which is usually 6- 7%).

Deferment rate 19. Ms [NAME] relied on a deferment rate of 5%. The deferment rate is the percentage discount applied to the value of a reversionary interest to account for the loss of the right to future possession. In other words, it is the value of deferred possession. She saw no reason to depart from the rate and guidance in Cadogan v Sportelli [2007] 1 EGLR 153.

Freehold vacant possession value 20. This is the value of the freehold for each flat by reference to comparables (which are then adjusted). The values for Flats 1 (£245k) & 2 (£220k) were very similar to the offers received and accepted by the leasehold owners of those flats in 2021 (£240k & £215k respectively). Those sales did not proceed because the Respondent as freeholder failed to provide information relating to the management of the Building.

Relativity

6 Paragraph 3(1) of Schedule 6 to the 1993 Act

21. In her initial report, Ms [NAME] relied on a relativity percentage of 85.44%. Relativity is the value of a dwelling held on a lease (here, the short lease of Flat 3) at a given unexpired term divided by the value of the same dwelling in possession to the freeholder. It is expressed as a percentage. She relied on the case [NAME] v [NAME] of Sloane Estate [2016] UKUT 223 (LC).7 Where there is no real-world evidence, the correct approach to determining the present leasehold value is to use graphs of relativity. Later graphs from 2015-2016 have not been considered and approved and applied consistently at the highest levels of the courts, whereas GE96 has. Ms [NAME] said it was appropriate to adopt GE96 and discount by 1% on the basis that the Property is outside PCL.

Marriage value 22. In her Addendum Report Ms [NAME] said marriage value is not payable if the new lease is accepted by the tribunal. Marriage value is the increase in aggregate value of the freehold and every intermediate leasehold interest in the Building when acquired by a nominee purchased compared to their value prior to acquisition. However, marriage value is only payable where a lease (i) has 80 years of less unexpired and (ii) is held by a participating tenant.8 The participating tenants’ leases have unexpired terms of ~159 years and ~88 years respectively.

Hope value 23. Ms [NAME] relied on a Hope Value of 5%. Hope value is the expectation that a purchaser of the freehold could grant new long leases to non-participating tenants outside the 1993 Act at a premium. It is calculated as a percentage of marriage value. She saw no reason to depart from Earl of Cadogan v Cadogan Estates [2011] UKUT 154 (LC). As the Addendum Report is on the basis that the non-participating lease has already been extended there is no hope value in this valuation.

7 [NAME] v [NAME] of the Sloane Estate [2016] UKUT 223 (LC) 8 Paragraph 4(2A) of Schedule 6 to the 1993 Act

Valuation of additional premises 24. Ms [NAME] gave this value as £50 because the additional premises were limited; they comprise the garden path over which the leaseholders have an express easement. Ms [NAME] observed little potential development value.9 25. In response to a question from the tribunal Ms [NAME] confirmed that her original valuation stood if the tribunal decided that the new lease should not be taken into account.

Determination 26. The Tribunal considers that a new lease of Flat 3 has been granted and that it is correct to take into account the new lease notwithstanding the fact it had not yet been registered. It is tolerably clear that the existence of the new lease would affect the valuation even if unregistered. Mr [NAME] was unable to identify any authority or reference in Hague that contradicted this proposition. It seems that even Mr [NAME] was not told of the new lease as he made no reference to it in his summary.

27. Ms [NAME] evidence was impressive. The Tribunal accepts the valuation contained in her addendum report for 11 March 2022 at £5211.00. The value on 25 May 2022 is £5251.00 so a marginal difference for date. Mr [NAME] calculation is attached in the appendix.

Summary

28. The valuation of the freehold as at 11th March 2022 was £5211 and the valuation of the freehold as at 25th May 2022 was £5251. The Applicant’s proposed transfer deed is accepted.

Judge Shepherd 20th September 2023

9 Paragraph 5 of Schedule 6 to the 1993 Act

ANNEX - RIGHTS OF APPEAL Appealing against the tribunal’s decisions

1.A written application for permission must be made to the First-tier Tribunal at the Regional tribunal office which has been dealing with the case.

2.The application for permission to appeal must arrive at the Regional tribunal office within 28 days after the date this decision is sent to the parties.

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 state the grounds of appeal, and state the result the party making the application is seeking. All applications for permission to appeal will be considered on the papers

5. Any application to stay the effect of the decision must be made at the same time as the application for permission to appeal.

Appendix

Valuation date 11 March 2022

Address 77 [APPELLANT] Reference LON/00AH/OCE/2022/0135

Basic Information Flat 1

Valuation Date 11 March 2022

Existing lease Expiry Date 23 June 2181

Years unexpired 159.28

Existing Ground Rent £0

Freehold value £245,000

Extended lease value £245,000

Capitalisation Rate 7.00%

Deferment Rate 5.00%

Reversion value Flat 1

Reversion to freehold value

£245,000 Pv of £1 159.28 Years @ 5.00% 0.00042 Reversion value

£ 103

Premium payable Flat 1

£ 103

Address Flat 2

Case Reference

Basic Information Flat 2

Valuation Date 11 March 2022

Existing lease Expiry Date 22 October 2110

Years unexpired 88.61

Existing Ground Rent £100

Basis of review 25

Date of 1st review 23 October 2036

Years to 1st review 14.62

Length of period 25

Rent at 1st review £200

Date of 2nd review 17 October 2061

Years to 2nd review 39.60

Length of period 25

Rent at 2nd review £300

Date of 3rd review 11 October 2086

Years to 3rd review 64.59

Length of period 24.03

Rent at 3rd review £400

Freehold value £220,000

Extended lease value £220,000

Capitalisation Rate 7.00%

Deferment Rate 5.00%

Term Value

Term 1

Ground rent

£ 100.00 [NAME] 14.62 Years @ 7.00% 8.9731 PV of £1 0 Years @ 7.00%

1.00

£ 897

1st review

Ground rent

£ 200.00 [NAME] 25.00 Years @ 7.00% 11.6536 PV of £1 14.62 Years @ 7.00%

0.37

£ 867

2nd review

Ground rent

£ 300.00 [NAME] 25.00 Years @ 7.00% 11.6536 PV of £1 39.60 Years @ 7.00%

0.0686

£ 240 3rd review

Ground rent

£400 [NAME] 24.03 Years @ 7.00% 11.4745 PV of £1 64.59 Years @ 7.00%

0.01 Term Value

£ 58

Reversion value Flat 2

Reversion to freehold value

£220,000 Pv of £1 88.61 Years @ 5.00% 0.01325 Reversion value

£ 2,916

Total Premium payable flat 2

£ 4,978

Address Flat 3

Case Reference

Basic Information Flat 3

Valuation Date 11 March 2022

Existing lease Expiry Date 23 June 2181

Years unexpired 159.28

Existing Ground Rent £0

Freehold value £190,000

Extended lease value £190,000

Capitalisation Rate 7.00%

Deferment Rate 5.00%

Reversion value Flat 3

Reversion to freehold value

£190,000 Pv of £1 159.28 Years @ 5.00% 0.00042 Reversion value

£ 80

Premium payable flat 3

£ 80

Premium for specified premises

Premium payable Flat 1 £ 103

Premium payable Flat 2 £ 4,978

Premium payable Flat 3 £ 80

£ 5,161

Premium for additional premises

Say

£ 50.00

Total payable

£ 5,211

Valuation date 25 May 2022

Address 77 [APPELLANT] Reference LON/00AH/OCE/2022/0135

Basic Information Flat 1

Valuation Date 25 May 2022

Existing lease Expiry Date 23 June 2181

Years unexpired 159.08

Existing Ground Rent £0

Freehold value £245,000

Extended lease value £245,000

Capitalisation Rate 7.00%

Deferment Rate 5.00%

Reversion value Flat 1

Reversion to freehold value

£245,000 Pv of £1 159.08 Years @ 5.00% 0.00043 Reversion value

£ 104

Premium payable Flat 1

£ 104

Address Flat 2

Case Reference

Basic Information Flat 2

Valuation Date 25 May 2022

Existing lease Expiry Date 22 October 2110

Years unexpired 88.41

Existing Ground Rent £100

Basis of review 25

Date of 1st review 23 October 2036

Years to 1st review 14.41

Length of period 25

Rent at 1st review £200

Date of 2nd review 17 October 2061

Years to 2nd review 39.40

Length of period 25

Rent at 2nd review £300

Date of 3rd review 11 October 2086

Years to 3rd review 64.38

Length of period 24.03

Rent at 3rd review £400

Freehold value £220,000

Extended lease value £220,000

Capitalisation Rate 7.00%

Deferment Rate 5.00%

Term Value

Term 1

Ground rent

£ 100.00 [NAME] 14.41 Years @ 7.00% 8.8988 PV of £1 0 Years @ 7.00%

1.00

£ 890

1st review

Ground rent

£ 200.00 [NAME] 25.00 Years @ 7.00% 11.6536 PV of £1 14.41 Years @ 7.00%

0.38

£ 879

2nd review

Ground rent

£ 300.00 [NAME] 25.00 Years @ 7.00% 11.6536 PV of £1 39.40 Years @ 7.00%

0.0696

£ 243 3rd review

Ground rent

£400 [NAME] 24.03 Years @ 7.00% 11.4745 PV of £1 64.38 Years @ 7.00%

0.01 Term Value

£ 59

Reversion value Flat 2

Reversion to freehold value

£220,000 Pv of £1 88.41 Years @ 5.00% 0.01339 Reversion value

£ 2,945

Total Premium payable flat 2

£ 5,016

Address Flat 3

Case Reference

Basic Information Flat 3

Valuation Date 25 May 2022

Existing lease Expiry Date 23 June 2181

Years unexpired 159.08

Existing Ground Rent £0

Freehold value £190,000

Extended lease value £190,000

Capitalisation Rate 7.00%

Deferment Rate 5.00%

Reversion value Flat 3

Reversion to freehold value

£190,000 Pv of £1 159.08 Years @ 5.00% 0.00043 Reversion value

£ 81

Premium payable flat 3

£ 81

Premium for specified premises

Premium payable Flat 1 £ 104

Premium payable Flat 2 £ 5,016

Premium payable Flat 3 £ 81

£ 5,201

Premium for additional premises

Say

£ 50.00

Total payable

£ 5,251