First-tier Tribunal Sets Premium for Statutory Lease Extension

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FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case reference : LON/00AM/2024/0302 Property : [ADDRESS] [POSTCODE] Applicants : [redacted] : [NAME] [COUNSEL], counsel Respondent : [redacted] : [NAME] [COUNSEL], counsel Type of [NAME] : Section 48 of the Leasehold Reform, Housing and Urban Development Act 1993 Tribunal members : Judge Tagliavini Mrs S Phillips MRICS Venue :

10 [ADDRESS] [POSTCODE] Date of hearing Date of decision : 12 November 2024 9 January 2025

DECISION

2 The tribunal’s decisions 1. The capitalisation rate to be applied is 8.5%. 2. The premium payable for the new lease is £36,750,00

The [NAME] 2. This is an [NAME] made by the applicant leaseholder pursuant to

section 48 of the Leasehold Reform, Housing and Urban Development

Act 1993 (“the Act”) for a determination of the premium to be paid for

the grant of a new lease of [ADDRESS]

[POSTCODE] (‘the property’).

Background 3. By a Notice of a Claim dated 11 December 2023 served pursuant to

section 42 of the Act, the applicants exercised the right for the grant of a

new lease in respect of the subject property. At the time, the applicants

held the existing extended lease dated 8 September 2015 for a term of

120 years from 25 March 2015 at a ground rent of £450 per annum

doubling every 10 years. The applicants proposed to pay a premium of

£11,500 for the new lease. 4. It was not disputed that the existing extended lease had been entered

into voluntarily by the parties with the applicants acting through a

solicitor and a premium paid of £17,000. Under the terms of this

new agreed lease the ground rent is:

£450 per annum during the first 10 years of the New Term

hereby granted and the annual rent during every successive

10 year period of the New Term will be twice that which it

was in the previous 10 year period.

5. Ground rent payable during the term of the lease was calculated to

generate the following amounts:

1st Period: £450 06-Dec-2023 25-Mar-2025

2nd Period: £900 25-Mar-2025 25-Mar-2035

3rd Period: £1,800 25-Mar-2035 25-Mar-2045

4th Period: £3,600 25-Mar-2045 25-Mar-2055

5th Period: £7,200 25-Mar-2055 25-Mar-2065

6th Period: £14,400 25-Mar-2065 25-Mar-2075

7th Period: £28,800 25-Mar-2075 25-Mar-2085

8th Period: £57,600 25-Mar-2085 25-Mar-2095

9th Period: £115,200 25-Mar-2095 25-Mar-2105

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10th Period: £230,400 25-Mar-2105 25-Mar-2115

11th Period: £460,800 25-Mar-2115 25-Mar-2125

12th Period: £921,600

6. On 8 February 2024 the respondent freeholder served a counter-notice

admitting the validity of the claim and counter-proposed a premium of

£90,00 for the grant of a new lease. 7. In an [NAME] dated 8 April 2024 the applicant applied to the tribunal

for a determination of the premium. The issues Matters agreed 8. The following matters were agreed: (a) The subject property is a self-contained flat on the first floor of a building comprising four flats; (b) The gross internal floor area is 41.84 square metres, which equates to 450 square feet; (c) The valuation date: 11 December 2023; (d) Unexpired term: 111.28; (e) Ground rent; £450.00 per annum doubling every 10 years; (f) Next rent review: 25 March 2025 (1.29 years from relevant date); (g) Long leasehold (unimproved) value: 99% of the freehold (unimproved) value; £425,000; (h) Deferment rate: 5%. Matters not agreed 9. The following matters were not agreed: (a) The capitalisation rate. (a) The premium payable.

10. Consequently, the current claim effectively seeks to ‘buy out’ the ground

rent as it is calculated it will rise in accordance with the term as set out

under paragraph 5. The hearing 11. The hearing in this matter took place on 12 November 2024 by remote

video hearing. The applicants were represented by [NAME] [COUNSEL] [NAME] and the respondent by [NAME] [COUNSEL] [NAME].

4 12. Neither party asked the tribunal to inspect the property and the tribunal

did not consider it necessary to carry out a physical inspection to make

its determination. 13. The applicant relied upon the expert report and valuation of [NAME] [APPELLANT] BA (Hons) MRICS dated 22 October 2024 who relied on

alternative capitalisation rates of (i) 15.9% with ‘no adjustment for [NAME]’ which produced a premium of £8,983.00 or (ii) 11.5% ‘adjusted

‘[NAME]’ which produced a premium of £15,991.00. 14. The respondent relied upon the expert report and valuation of [NAME] [NAME] [NAME] dated 7 November 2024 who applied a

capitalisation rate of 6% and produced a premium of £97,322.89. 15. The central issue in dispute between the parties was the calculation of

the capitalisation rate the calculation of which would lead to the

determination of the premium payable by the applicants. The applicant’s case 17. In his oral and written evidence [NAME] [APPELLANT] told the tribunal that he had

defined the capitalisation rate as:

Capitalisation Rate or Cap Rate (CR) – the yield applied to

capitalise the rental income. It can be either explicit or implicit of

future rental growth.

Explicit Cap Rate (ECR) – where the CR is applied to each known

increase in the rental income and is therefore explicit of rental growth

(and the timing of the growth) and will be stated as ECR. ECR is also

known as an equated yield or discount rate.

Implicit Cap Rate (ICR) – where the CR is applied to the current

rent (and sometimes the rent at the next rent review, increased by

inflation to the date of valuation). The ICR is low to reflect the benefit

of the future rental growth. Valuing using a GIY, where there is rental

growth, is an example of an ICR. 18. [NAME] [NAME] told the tribunal that in his report he had considered [NAME]

v [NAME] [LRA/29/2006 (2007)] which sets out the factors relevant in

assessing capitalisation rates i.e:

1. The length of the lease term

2. The security of recovery (i.e. risk of not receiving the full

rent over the course of the lease term)

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3. The size of the ground rent (a larger ground rent being

more attractive)

4. Whether there was provision for review of the ground rent

5. If there were such a review, the nature of it. 19. [NAME] [NAME] told the tribunal that [NAME] v [NAME] considers a generic capitalisation rate which in that case related to a ground rent which was £50 per annum fixed. In the current [NAME] he believed the correct method in the current [NAME] by which to value the ground rent income, is to analyse comparable investment transactions of other investments with 10 year doubling ground rent increases. These comparable transactions should be analysed so that the ECR can be calculated. 20. [NAME] [NAME] told the tribunal that he taken into account 5 comparable properties that he was aware of and applied an average of ECR of 12.85%. He also referred the tribunal to a number of First Tier Tribunal decisions which included [ADDRESS] and [ADDRESS] [POSTCODE]

Ref: CAM/00MC/OLR/2019/0020 and [ADDRESS] [POSTCODE] Ref: LON/00BF/OLR/0904 and as well as Settlements where he had acted on behalf of one of the parties. 21. [NAME] [NAME] referred to the ongoing government consultation on The Leasehold and Freehold Reform Bill. If passed in its current form, it would include a mechanism to cap the ground rent in the lease extension premium calculation at 0.1% of the value of the flat. In this case the value of the flat is £425,000 so the maximum rent in the lease extension calculation would be £425 per annum. Adopting a capitalisation rate of 6%, which is very much a freeholder friendly capitalisation rate for a non-onerous ground rent, it would return a SLE premium of £9,000. This mechanism is contained in the Leasehold and Freehold Reform Act 2024. 22. [NAME] [NAME] concluded his report and his evidence to the tribunal by maintaining that as of the date of valuation, the Leasehold and Freehold Reform Bill was having its second reading in Parliament and contained a mechanism to cap the ground rent for the calculation of the premium payable at 0.1% of the value of the Flat. Further, there was a consultation to cap ground rents in existing leases.

23. In this case, that would result in a lease extension premium of £9,000 based on a 6% capitalisation rate. [NAME] [NAME] does not consider a hypothetical investor would pay over this amount. [NAME] [NAME] therefore valued the premium for the Statutory Lease Extension at £8,983 reflecting an ECR of 15.9%. This level of ECR is reasonable when

6 considered against the comparable evidence of a 10 year doubling ground rents which averages 12.85%, especially considering the evidence transacted before the issue of onerous ground rents were identified by the market and during a period of lower interest rates.

24. If the tribunal find that an adjustment for [NAME] is required, [NAME] [NAME] was of the opinion that the premium for the SLE is £15,991 reflecting an ECR of 11.5%. If no [NAME] adjustment is necessary the ECR should still reflect the bad publicity, conflict and political pressure that come with this type of ground rent investment. An ECR of 11.5% is supported by recent FTT cases for less onerous and non- onerous rents with a far greater Security of Recovery, such as [ADDRESS] at 8.5% and the evidence of 25 year doubling rents in the recent Parkhill case at 8.82%. [NAME] [NAME] concluded that significantly higher ECR should be adopted for a 10 year doubling ground rent. The respondent’s case 25. In his oral and written evidence [NAME] [RESPONDENT] relied on a number of

previous First Tier Tribunal decisions as well as [NAME] v [NAME] to

substantiate his view that the appropriate capitalisation rate to be

applied in this [NAME] is 6%. 26. In Ref: LON/BB/0CE/2015/0180 & /0255 & /0277 the core issue was

the interpretation of the ground rent clause in the leases for two flats,

which affected the enfranchisement premium the leaseholders needed to

pay to acquire the freehold. The lease specified an annual ground rent of

£250 for the first ten years, with a provision to double it every ten years.

The applicants argued that this rent only applied to the first ten years,

after which no further payments were due, while the landlord contended

it would double every decade for the entire 99-year lease term. 27. The tribunal interpreted the lease to mean that the rent should double

each decade, following contract interpretation principles to preserve the

intended function of the rent review clause. The tribunal accepted the

landlord’s interpretation, which led to significant future ground rent

values reaching up to £128,000 per annum by the lease's final decade.

This interpretation greatly impacted the enfranchisement premium, as

the future income stream from the ground rent increased the property's

value for the landlord. 28. [ADDRESS]: LON/00AM/OLR/2024/0302 the tribunal

favoured the landlord’s proposed capitalisation rate of 6%, deemed more

appropriate given the secure nature of the ground rent income, and

supported by prior case law [NAME] v [NAME] . This rate, combined with

the doubling ground rent schedule, resulted in an enfranchisement

premium of £116,047.

7 29. [NAME] [NAME] also drew the tribunal’s attention to the considerations of the

Lands Tribunal in [NAME] v [NAME] that influenced the determination of

the capitalisation rate. There a 6% capitalisation rate was determined

which has been influential in later applications when seeking the

appropriate capitalisation rate to apply. 30. [NAME] [NAME] also had regard to the recent legislative changes under the

Leasehold Reform (Ground Rent) Act 2022, where a 5% rate could

reasonably be considered, particularly given the finite nature of the asset

and high security of income recovery. A finite asset with a structured

income flow and reliable enforcement provisions would support a lower

capitalisation rate, reflecting the asset’s inherent value and stability. He

stated that it is unlikely there will ever be 10 year doubling ground rents

again and the opportunity for an investor to come in and purchase this

asset with the real and clear opportunity of not only getting a substantial

income throughout the term but also potentially benefiting from

forfeiture should the ground rent become too onerous. [NAME] [NAME]

regarded the subject lease’s forfeiture clause mitigates the default risk

by allowing for repossession if debts exceed £350, thereby ensuring

strong rent recoverability. He stated that this high degree of security,

combined with the long lease term and reliable ground rent income,

would typically favour a rate as low as 5%, maximising the asset's

value to reflect its secure nature. 31. [NAME] [NAME] stated that in his opinion the Leasehold Reform (Ground

Rent) Act 2022 limits ground rents on most new leases to zero, has

shifted market perspectives on ground rent obligations. This change

influences the valuation of properties with escalating ground rents,

affecting both marketability and future rent recoverability as ground

rents are increasingly scrutinised or removed. Therefore, in light of

these new legislative conditions, applying a 6% rate in the context of this

[NAME], provides an appropriate adjustment to reflect potential

future market impacts, consistent with trends observed in similar

tribunal cases post-Act and relevant at the valuation date. 32. [NAME] [NAME] concluded his evidence by saying that in his opinion, the 6%

capitalisation rate selected in this valuation balances the asset's high

security and structured income flow with evolving market influences

under the 2022 Act. While a 5% rate could traditionally reflect the

strength and finite nature of the asset, the 6% rate aligns with current

tribunal standards and market trends, capturing the reliable yet

increasingly regulated nature of ground rent income. This approach

offers a balanced, contextually relevant valuation. The tribunal’s determination 33. The tribunal determines that the capitalisation rate to be applied to this

valuation should be 8.5%. Whilst the tribunal sees merits in both the

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applicants’ and the respondent’s arguments, neither have persuaded the

tribunal to agree in totality with either valuation. 34. Although The Leasehold and Freehold Reform Bill has not yet become

law or been enacted, there appears to be a clear indication of the that

this area of law will significantly change in the future. However,

neither the tribunal nor the parties know when this will happen

although the tribunal considers this is a relevant factor that should

therefore be included as a risk when assessing the appropriate the

capitalisation rate to apply. However, the tribunal avoids placing too

heavily a reliance on it in its decision. 35. The tribunal took into account all the market evidence provided by the

parties and considers that a starting rate of 6% is appropriate with an

increase of 2.5% to reflect the likelihood of future legislative change to

be reflected in the capitalisation rate. 36. Having applied this to the appropriate calculations, this results in a

premium of £36,750. Reasons for the tribunal’s determination 37. The tribunal has arrived at the premium after considering the matters as

raised by the applicants and the respondent. On balance the tribunal

preferred the approach taken by the respondent to that of the applicant,

as it found the latter to be somewhat unclear with no, or no adequate

explanation provided as to how some of the key figures relied upon by

[NAME] [NAME] were calculated or why they were adopted. 38. The lease terms are clear in its [NAME] in relation to the rent review

calculations, as are the forfeiture terms in relation to the failure to pay

the rent due. Therefore, from a valuation perspective, the level of comfort

and security that can be provided to a landlord from this property is

significant and should therefore be reflected in the capitalisation rate

applied. From the market evidence provided by both parties, the tribunal

considers a rate of 6% is appropriate. 39. With regards to The Leasehold and Freehold Reform Bill, as stated

above, this is proposed legislation that has not yet been enacted and the

timetable for such [NAME] is still uncertain. As such, whilst this

should be factored into to the valuation, only limited weight should be

given to it at this moment in time. However, the tribunal finds that an

adjustment of 2.5% in the capitalisation rate is appropriate to reflect this. 40. The tribunal did not agree with the applicants’ argument relating to

applying the rate found in [ADDRESS] as being more appropriate

due to that property have greater security of recovery. As previously

stated, in the event of non-payment at the subject property, rights of

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forfeiture are applicable and an enforceable method of securing

recovery. 40. The tribunal also preferred the respondent’s evidence and submissions

as to why ‘[NAME]’ are not relevant i.e. as both the existing lease and the new lease will have terms in excess of 80 years. 41. In conclusion the tribunal determines the premium payable by the

applicant to the respondent is £36,750.00; see Valuation attached.

Name: Judge Tagliavini

Date: 9 January 2025

Rights of appeal

By rule 36(2) of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013, the Tribunal is required to notify the parties about any right of appeal they may have. 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 Tribunal at the [NAME] which has been dealing with the case. The [NAME] should be made on Form RP PTA available at https://www.gov.uk/government/publications/form-rp-pta-[NAME]-for- permission-to-appeal-a-decision-to-the-upper-tribunal-lands-chamber 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]. If the [NAME] is not made within the 28-day time limit, such [NAME] 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 [NAME] for permission to appeal to proceed, despite not being within the time limit. The [NAME] 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 [NAME] the [NAME] is seeking.

10 If the Tribunal refuses to grant permission to appeal, a further [NAME] for permission may be made to the Upper Tribunal (Lands Chamber).