First-tier Tribunal Sets Lease Extension Premium Based on Comparable Sales

OUTCOME: Allowed

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Case Reference : LON/00BH/OLR/2019/0135

Property : [ADDRESS] [POSTCODE]

Applicant: [redacted] : Mr [COUNSEL], Counsel instructed by [NAME] together with Mr [COUNSEL] of [RESPONDENT]

Respondent: [redacted] : Mr [COUNSEL] of [NAME] of [NAME] : [NAME] under section 48 of the Leasehold Reform, Housing and Urban Development Act 1993

Tribunal Members : Tribunal Judge [NAME] and venue of : 10 [ADDRESS] [POSTCODE] on 11th Hearing

June 2019

Date of Decision : 19th August 2019

_______________________________________________

DECISION ____________________________________

© CROWN COPYRIGHT 2019 FIRST - TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY)

2 DECISION

The Tribunal determines that the premium payable in respect of the lease extension of the property at 12 [ADDRESS] [POSTCODE] is £236,988 this being the value argued for by Mr [NAME]. Our reasons are set out below.

BACKGROUND

1. On 24th January 2019 solicitors on behalf of the Applicant, [APPELLANT], made [NAME] to the Tribunal under section 48 of the Leasehold Reform, Housing and Urban Development Act 1993 (the Act) for a determination of the premium payable in respect of the lease extension. This related to her property at [ADDRESS] [POSTCODE] (the Property). The [NAME] followed a notice of claim under section 42 of the Act dated 30th April 2018 in which a premium of £225,000 was proposed with the lease extension being on the same terms as the existing lease, subject to any modification by section 57 of the Act.

2. In a counter notice dated 1st August 2018 on behalf of [RESPONDENT] [COMPANY] (the Respondent) the right for the Applicant to extend the lease was accepted but a premium of £296,267 was proposed. The counter notice accepts the terms of the new lease that the tenant had proposed in her initial notice.

3. On that point we should say that there had been some issues between the parties as to the inclusion within the new lease of the Respondent’s right to redevelop under section 61. This did not, however, figure in the proceedings before us. We should also say that an adjustment that was proposed in respect of the state of repair of the roof also did not feature of the assessment of the premium to be paid.

4. Before the hearing we were provided with a bundle of papers which included the [NAME] and the notices, copies of the land registry registers of title and the existing lease. The proposed draft lease was also included.

5. Within the bundle were reports by Mr [NAME] on his opinion of the premium to be paid. The report is dated 8th June 2019, this date reflecting the addendum that had been included in respect of the now non-existent issues concerning the roof and the break clause at section 61 of the Act. There were a number of appendices.

6. On 4th June 2019 Mr [NAME] had prepared his report and that also was included within the bundle. Both valuers had produced valuations which were attached. It should be noted, however, that Mr [NAME] during the course of the hearing amended his reaching a final assessment of £280,592 as the premium payable. Mr [NAME] valuation after the changes we referred to above argued for a total premium payable of £236,988.

7. We had the opportunity of reading both Mr [NAME] and Mr [NAME] reports. There were a number of matters that were agreed as follows:

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• The valuation date is 1st May 2018. • The unexpired term is 4.88 years. • The uplift from long lease value to freehold is 2.5%. • The deferment rates for the short term is 5.5% and for the long term 5%. • The sum of £40 payable in respect of compensation for loss of the ground rent.

8. Those matters therefore that we needed to consider were as follows:

• The long lease value. • The freehold vacant possession value. • [NAME].

9. We should say that prior to the hearing we had been provided with a skeleton argument on behalf of the Applicants which highlighted the matters that we dealt with during the hearing and had been noted by us.

10. On behalf of the Applicant we heard firstly from Mr [APPELLANT], who in his report put forward four comparable properties all in blocks and within 250m of the Property. They were as follows:

a. [ADDRESS] sold in January of 2019 at £265,000. This was a one bedroom flat with a square footage of 516 compared to the subject flat having 663 square feet. He made adjustments for the presence gas central heating, double glazing and its superior condition and also adjusted for time giving an adjusted value of £250,350 or £485 per square foot.

b. [ADDRESS], [ADDRESS] sold in February of 2018 at £294,500. This was a similar sized two bedroom ground floor flat which he adjusted for £3,000 for double glazing and an adjustment for the passage of time giving an adjusted figure of £276,364 and on Mr [NAME] calculation a square footage rate of £460.

c. [ADDRESS] sold in September of 2018 at £355,000. This property was significantly larger being four bedroomed and two bathrooms with a square footage of some 871. [NAME] adjustments for superior condition, time and double glazing, the adjusted figure was £333,865 or £407 per square foot.

d. The final property Mr [NAME] relied upon was 30 Winsbeach, a two bedroom ground floor flat sold in November 2018 at £320,000. After adjustment for gas central heating, passage of time and double glazing the adjusted price was £307,560 or £406 per square foot. Applying the average to the square footage gave a value for the subject property of £290,000. Applying the agreed 2.5% uplift for freehold from the long lease value gave a value of £297,436.

11. Mr [NAME] then commented on Mr [NAME] short lease comparable at 23 Fernhill, more details of which appear under the evidence from Mr [NAME]. He told us that this had been sold in August 2018 with a five year lease remaining, at £37,500. A further £250,000 had been paid for a lease extension

4 and the property having been refurbished was, we were told, currently being let at £1,250 per month. He did, however, point out that the property at 23 Fernhill did not suffer the problems that the Property had with the roof and cracks, although these did not feature in the assessment.

Accordingly, his view that this property would give a value on an extended lease of £270,000 but this reflected the roof problems which, of course, no longer apply, so a truer value would be £290,000.

12. He then went on to indicate how he would consider the assessment of the [NAME]. The existing lease at 23Fernhill Court had he said too many unknown variables which would require subjective adjustments and he did not believe that it was helpful. In any event he thought it was bad valuation practice to make an assessment on the existing lease value on just one sale.

13. He had undertaken an assessment of the existing lease value by reference to the rental income achieved at [ADDRESS] but although a calculation was set out in the report we were told to disregard same.

14. He then went on to consider [NAME] by reference to various graphs. The three graphs that he had chosen to use were [NAME] at 11.71%, [NAME] and [NAME] at 16.19% and [NAME] at 14.66%. He indicated in his report why he had made various disregards in respect of the five graphs that formed the RICS document from 2009. He thought that the [NAME] graph would apply notwithstanding it was prime central London because [NAME] in an unexpired term of less than five years would not be greatly affected by whether the Property was in PCL or non-PCL areas as it was not mortgageable.

15. He took the average of the three graphs resulting in a [NAME] of 14.19% which he considered was appropriate.

16. This resulted in his valuation of £236,988, increased by some £18,570 from the valuation originally included in his report.

17. He was taken through his report by Mr [NAME]. He confirmed that all the properties he had put forward as comparables were ex-local authority flats but he did not consider that that would have an impact on the value and on his understanding the service charges were often lower in these properties. He considered that some of Mr [NAME] comparables were unhelpful as they were too old. He did, however, confirm that he would have included 35 Winsbeach in his comparable list.

18. He was then taken through the four comparable properties that we have referred to which confirmed his view standing back that £290,000 felt right for the long lease value.

19. He was dismissive of Mr [NAME] comparable for the short lease considering it not appropriate to rely on just one comparable. He was aware of the findings of the Tribunal on Mundy and thought that it there were no reliable market data then graphs had to be used.

5 20. In questioning from Mr [APPELLANT], he was asked whether the windows were the tenant’s improvements. There was no evidence to this effect although the tenant, Miss [APPELLANT], was at the Tribunal and confirmed albeit in a somewhat unprompted response that she had indeed effected the replacement of the windows.

21. We were provided with photographs that the communal area had been decorated prior to the valuation date and we were told that matters were to be resolved in respect of the roofing issues. Mr [NAME] did also confirm in questioning from Mr [NAME] that it was unlikely that purchasers would use the square footage assessment to reach a value.

22. Mr [NAME] then gave his evidence relying on his report and put forward a number of properties in a schedule within the report. These were as follows:

• [ADDRESS], ground floor flat sold in October of 2015 for £300,000. • 6 Winsbeach, again a ground floor flat, slightly larger sold for £273,000 in September of 2015. • He then relied on the property at [ADDRESS] which was the comparable that Mr [NAME] had used and also at [ADDRESS]. • He also introduced [ADDRESS] which Mr [NAME] indicated he would have used had he known about it. • Two other comparables were [ADDRESS] and 12 Winsbeach both in 2017, [NAME] being August and 12 Winsbeach being March 2017.

23. He, like Mr [NAME], had used the house price index for Waltham Forest but thought that he had spotted an anomaly whereby the figure for May 2018, being the valuation date, was below the figures for both the month before and the month after which may, in his view, suggest a false reading. He therefore considered it appropriate to utilise the average of the HPIs for April, May and June giving a figure of 127.12 as opposed to a figure of 126.86 if this were limited to April and May.

24. He explained the details in respect of the sale of [ADDRESS] as this was the latest sale on the estate. He then explained the other comparators that he had put forward and that overall, he came to the conclusion that the long lease value for the Property on 1st May 2018 was £325,000 in his report but in fact £330,000. He had initially adopted a 1% uplift from leasehold to freehold but he agreed that 2.5% was appropriate.

25. To assess the value of the short lease he relied on one sale of 23 Fernhill in August of 2017 having a lease term of 5.61 years unexpired and achieving a sale price of £37,500. He had apparently inspected the property prior to sale. He thought it was near identical second floor flat but in a tired state. With adjustments for standard of accommodation he felt that a further £5,000 should be added giving a sale price in August of 2017 of £42,500. He then had to make adjustments utilising his average of the three months of April, May and June 2018 which with a discount in respect of the lease length gave a short lease value of £26,167 equating to 7.9% of the freehold value.

6 26. He dismissed the [NAME] tables for this length of lease. He did consider the findings of the Upper Tribunal in [NAME] v Carey Morgan [2011]UKUT415(lc) where on a lease as short as 4.75 years it would be appropriate to calculate the short term interest based on capitalised rental income. In that case a [NAME] of 6.5% was produced which the Upper Tribunal increased to 8% because of special factors. This he felt supported his figure using real world evidence of 7.9%. At the end of his report he explained how he had reached the premium of £271,300 set out in his report subsequently amended in the final valuation produced to us at the hearing to £280,592. This was in part the result of differing short term reversion rates, an increase in the long lease and subsequently freehold value.

27. In oral evidence to us he confirmed that the uplift of 2.5% had been agreed and explained his thinking behind the use of the various comparables. He did not consider that Mr [NAME] comparable at 42 Fernhill or at 7 Hempstead were of help as they had a different number of bedrooms. Asked about the adjustments for time, he indicated that he thought it took two to three months for the data to get to the house price index but accepted that the market was fairly flat over the period around the valuation date. It was pointed out to him that by taking June this increased the HPI uplift.

28. Asked why it was reasonable to use properties that had sold in 2015 he responded that whilst accepting they were older they were on the same estate. He had no particular view of whether there was any stigma attached former local authority housing.

29. He was asked about various adjustments that needed to made to windows and central heating which resulted in some changes to his long lease value which we have referred to above. His comparable at 33 Fernhill was attacked as perhaps being over-priced when one considered other comparable properties on the list.

30. In respect of the short lease comparable, his view was that where a short lease comparable was available this was preferable to using the graphs.

31. Submissions were made by Mr [NAME] suggesting that Mr [NAME] evidence was logical and transparent which could not be said for Mr [NAME]. It was suggested that Mr [NAME] had be impartial and had dealt with the house price index appropriately. In contract Mr [NAME] evidence was nebulous with no method shown to explain the figures used.

32. The reliance on one short lease comparable was not appropriate. The graphs were helpful and should be accepted by us.

33. Mr [NAME] responded briefly indicating that no evidence had been put up by the Applicant to show that she had in fact changed the double glazing. Mr [NAME] had included comparables that were either smaller or substantially larger than the subject Property but that generally he considered that his assessment of the value for the lease extension was appropriate.

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FINDINGS

34. In assessing the value to be attributed to the premium payable for the else extension of the Property we have considered the long lease comparables and in our view those at 30 and 35 Winsbeach and [ADDRESS] are the most helpful. They are common to the parties, Mr [NAME] accepting that 35 Winsbeach would have been included. The properties at [ADDRESS] and 6 Winsbeach are too dated for us to take into account. Sales in 2015 with a valuation date in 2018 seems to us to be too far in the past. Mr [NAME] suggested comparables at [ADDRESS] and [ADDRESS] are a different size and require further adjustments. We find that three comparables that we have utilised give sufficient spread to achieve an appropriate value for the long lease of the Property.

35. The adjustments to be made of £4,000 for gas central heating and £3,000 for double glazing in our finding are reasonable. We accept that the Applicant did install the double glazing even though there may have been little evidence actually produced in that regard. The fact is that the windows have been changed and would have required the consent of the Respondent. There was no evidence produced by the Respondent to suggest that that had not been given and in those circumstances, we are prepared to accept that the Property was improved and that this needs to be reflected in any valuation.

36. We prefer Mr [NAME] assessment using the HPI figures, using just April and May. The inclusion by Mr [NAME] of June's assessment as there is an apparent anomaly in the May figure, is not sustainable.

37. To assess the evidence of both valuers we undertook our own assessment of the long lease value, which is shown on the attached schedule. This gives a slightly lower long lease value for the Property than that argued for by Mr [NAME]. We accept the uplift of 2.5% for long lease to freehold value. Although we suspect that the market would not consider values by reference to the square footage of the property in this case we are prepared to do so.

38. We consider the value attributed to the long lease and thus freehold value by Mr [NAME] to be too high. His report does not, in truth, set out the basis upon which he reached these values. He appears to base the value on the suggestion that [ADDRESS] achieved £300,000 in 2015 and thus must have increased, after [NAME] further adjustments, to £325,000, but it is not possible to discern the basis upon which such an assessment is made. At least with Mr [NAME] assessment we have some solid basis for the figures he achieved.

39. We then turn to the short lease value and [NAME]. We accept that if market evidence was available to us then that should be used. In this case, however, the only market evidence is that produced by [NAME] relating to 23 Fernhill sold some nine months before the subject Property with a lease length of 5.61 years. Mr [NAME] said that he had inspected the property prior to sale and could confirm its condition. He then makes adjustments, which are not supported by any evidence, that the refurbishment would be not more than £5,000. This appears to be based on photographs of before and after showing

8 that there has been improvement works undertaken to the Property. Whether £5,000 is a reasonable amount is open to conjecture. Certainly the property would have been decorated, there may well have been works done to the flooring and there is clearly some work to the kitchen.

40. Of more concern to us is the basing of [NAME] on one short lease comparable. The [NAME] figure of 7.9% is a world away from the figures indicated on the graphs that have been cited by Mr [NAME]. He has sought to edit those graphs to remove those that do not provide data in respect of leases of this length and in the case of [NAME] where they have little experience in the market. It seems to us also that the point is well made that in prime central London, and outside, a lease of this length is likely to have a similar [NAME], particularly as it would not be mortgageable. We are therefore content to accept the inclusion of the [NAME] graph at 14.64% in the assessment of the relevant [NAME] in this case. We are therefore happy to accept Mr [NAME] assessment of [NAME] at 14.19% as opposed to the substantially lower indication put forward by Mr [NAME] based that it is on one market “transaction.” On our assessment this gave us a short lease value of £40,078 and a premium of £232,667.

41. However, this is outside either values given to us by Mr [NAME] and Mr [NAME]. The difference between the valuation we have assessed and that put forward by Mr [NAME] is small. We preferred the evidence of Mr [NAME], he showing a flexibility in reaching his assessment of the premium payable, which indicated more transparency in how he had achieved his figures and percentages. As was suggested by Mr [APPELLANT] for the Applicant, Mr [APPELLANT] evidence was somewhat nebulous. In those circumstances we are content to accept the value for the lease extension of the Property was that assessed by [NAME] of £236,988

Andrew Dutton Judge:

A A Dutton Date: 19th August 2019

ANNEX – RIGHTS OF APPEAL

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

2. The [NAME] for permission to appeal must arrive at the [NAME] within 28 days after the Tribunal sends written reasons for the decision to the [NAME].

3. If the [NAME] is not made within the 28-day time limit, such [NAME] must include a request to 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 [NAME] for permission to appeal to proceed despite not being within the time limit.

9 4. The [NAME] for permission to appeal must identify the decision of the Tribunal to which it relates (ie give the date, the property and the case number), state the grounds of appeal and state the result the party [NAME] the [NAME] is seeking.

Agreed and Tribunal Facts Valuation Date 01/05/2018 Agreed Lease Commencement 20/04/1975 Agreed Lease Term 48.00 years Agreed Unexpired Term 4.88 years Agreed Long Lease value

£282,438

Tribunal assessment

+2.5% to F/H VP value

Agreed Freehold VP value

£289,499

Tribunal assessment

Deferment rate 5.50% Short Term Agreed 5.00% Long Term Agreed Compensation £40.00 [NAME] 14.19%

Tribunal assessment

Long Leasehold Value Property Sold Date HPI Adj. as per Mr [NAME]. Value £ psf 30 Winsbeach £320,000 Nov 2018 -1.7% £5,440 [NAME] £4,000 D. Glazing £3,000 £307,560 406 [ADDRESS] £294,500 Feb 2018 -4.8% £14,136 No CH £0 D. Glazing £3,000 £277,364 462

35 Winsbeach £325,000 Dec 2018 -1.7 £5,525 [NAME] £4,000 D. Glazing £3,000 £312,475 411

Average £426 psf x 663 sf =£282,438