First-tier Tribunal Sets Price for Collective Enfranchisement

© CROWN COPYRIGHT

FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case reference : CAM/26UF/OCE/2020/0006 HMCTS code (paper, video, audio) : A:BTMMREMOTE

Property :

1-8 [NAME], Royston and 9- 21 [NAME], Royston, [POSTCODE]

Applicant : [redacted] : [COMPANY] Respondent : [redacted] : [COMPANY] of application :

Section 24 of the Leasehold Reform, Housing and Urban Development Act 1993

Tribunal members : [NAME] (Hons) Judge Wayte

Date of hearing

Date of decision : : 11 January 2021

11 February 2021

DECISION

Covid-19 pandemic: description of hearing This has been a remote audio hearing. The form of remote hearing was A:BTMMREMOTE. A face-to-face hearing was not held because it was not practicable and all issues could be determined in a remote hearing. The

2 documents that we were referred to are in a bundle of some 344 pages together with leasehold titles and plans and email correspondence between the parties, the contents of which we have noted. Summary of the tribunal’s decision (1) The price payable for the collective enfranchisement is £28,588 for 1- 8 [NAME] and £53,597 for 9-21 [NAME]. Background 1. These are applications pursuant to section 24 of the Leasehold Reform, Housing and Urban Development Act 1993 (the “Act”) for a determination of the price to be paid for collective enfranchisement of 1-8 [NAME], Royston and 9- 21 [NAME], Royston, [POSTCODE] (the “Property”).

2. The parties are the same for both applications and, with the agreement of the parties the tribunal has merged the applications for the purposes of this hearing. However, decisions have been given in respect of each individual property.

3. Two notices of a claim dated 27 February 2020 were served pursuant to section 13 of the Act.

4. In the first notice of claim the Applicants claimed to exercise the right to acquire: (a) the freehold of 1-8 [NAME] [POSTCODE], pursuant to section 1(1) of the Act, together with the demised parking spaces. (b) the freehold of external areas, pursuant to section 1(2)(a) of the Act, being appurtenant property, which tenants are entitled to use in accordance with the leases and in common with occupiers of other premises and consisting of gardens grounds footpaths drying and bin areas, open spaces and access ways. (c) The sum proposed to be paid was £19,233.

5. In the second notice the Applicants claimed to exercise the right to acquire: (a) the freehold of 9-21 [NAME] [POSTCODE], pursuant to section 1(1) of the Act, together with the demised parking spaces and gardens. (b) the freehold of external areas, pursuant to section 1(2)(a) of the Act, being appurtenant property, which tenants are entitled to use in

3 accordance with the leases and in common with occupiers of other premises and consisting of gardens grounds footpaths drying and bin areas, open spaces and visitors parking spaces and vehicular access ways. (c) The sum proposed to be paid was £33,192 6. On 29 April 2020, the [NAME] served counter-notices in respect of each property admitting that the Applicants were entitled to exercise the right to collective enfranchisement and counter-proposing sums to be paid in respect of 1-[ADDRESS] of (a) £34,325 for the freehold of the building; and (b) £1,000 for the freehold of the external areas. In respect of 9-[ADDRESS] the sums proposed were (c) £65,893 for the freehold of the building and (d) £1,000 for the freehold of the external areas.

7. On 3 September 2020, the Applicants applied to the tribunal for a determination of the prices payable.

8. On 15 September 2020, the tribunal gave case management directions and a hearing was subsequently arranged by telephone for 11 January 2021.

9. The parties were informed that there would be no internal inspection and that any relevant information which would have been obtained by the tribunal at such an inspection could be provided by the parties by other means. The issues 10. The basis of calculation of the prices is set out in Schedule 6 to the Act. In summary and referring to the relevant paragraphs of Schedule 6, the prices are to be the aggregate of: (a) the value of the freeholder’s interest if sold in the open market by a willing seller (as set out in paragraph 3 in respect of the building and paragraph 11 in respect of the external areas); (b) the freeholder’s share of any marriage value (as set out in paragraph 4 in respect of the building and paragraph 12 in respect of the external areas); and (c) the amount of any compensation payable to the freeholder (as set out in paragraph 5 in respect of the building and paragraph 13 in respect of the external areas).

4 11. In calculating (a) and (b) above, any increase in value which is attributable to an improvement carried out by the tenants at their own expense is to be disregarded. Matters agreed 12. The following matters were agreed: (a) The leases of all [NAME] are for a term of 125 years from 29 September 1988. (b) The leases have 93.58 years outstanding and therefore there is no marriage value (c) The one bedroom [NAME] ([NAME] 1-8) have a ground rent of £90 until 29 September 2038, £125 until 29 September 2063, £175 until 29 September 2088 and £265 until 28 September 2113. (d) The two bedroom [NAME] ([NAME] 9-21) have a ground rent of £100 until 29 September 2038, £135 until 29 September 2063 , £185 until 29 September 2088 and £275 until 28 September 2113 (e) The relativity of existing leasehold to freehold values is 97.65% (f) The valuation date is 28 February 2020 Matters not agreed 13. The following matters were not agreed: (a) The long leasehold and freehold values; (b) The value of the external areas ; (c) The capitalisation rate; (d) The deferment rate; and therefore (e) The prices payable. The hearing 14. The hearing in this matter took place by telephone on 11 January 2020. The Applicants were represented by, and relied on the expert report and valuation of, Mr [NAME] dated 27 November 2020. The Respondent was represented by, and relied on the expert report and valuation of, [NAME] CONS FRICS dated 8 December 2020.

15. Only those documents in the bundle referred to in this decision have been considered by the tribunal in reaching its determination, together with the oral evidence provided by each expert at the hearing.

5 16. No party requested an inspection. The tribunal was satisfied that, based on the evidence provided by the parties and their experts, and use of internet mapping applications, an inspection was not necessary Properties 17. In their reports and the joint statement, the experts agreed that: (a) [NAME] 1-21 [NAME] are on a level site in a residential area, close to the town centre. Access to the site is via a dedicated private estate road from [ADDRESS]. (b) [NAME] 1-8 [NAME] comprise a two-storey block of 8 one bedroomed [NAME] built circa 1988 whilst [NAME] 9-[ADDRESS] is a two storey block of two bedroomed [NAME] built around the same time. [NAME] have a parking space and there are 5 further visitors’ spaces. Five of the ground floor two bedroomed [NAME] ([NAME] 9,10,11,12 and 13) have small private gardens and all [NAME] have access to the communal gardens surrounding the development. (c) [NAME] 2-8 have had replacement UPVC windows installed at some point post construction as have 7 of the [NAME] in the Flat 9-21 block. All the wooden cladding to the front of the blocks has been replaced with UPVC. (d) The one-bedroom [NAME] are 45m² and the two bedroom [NAME] are 52m² Evidence and decision Leasehold/Freehold value 18. In his written evidence [NAME] provided a schedule of comparables to support the long leasehold value of the [NAME].  One bedroom flat

£167,000  Two bedroom flat – no garden £183,000  Two bedroom flat with garden £203,000 19. In his expert report he said that for one-bedroom properties taking sales over the last 6 years in the development, adjusted by price movements for [COMPANY] indices for East Anglia which he favoured over the Land Registry indices, the average price would be £165,949.

6 20. In his written evidence he said that comparable sales in February and March 2020 within half a mile showed an average of £148,750 and from limited information he put the price per square metre of one and two bedroomed [NAME] in the area at £3,500. There was a one bedroom flat on the market currently at £175,000.

21. At the hearing he did not refer directly to his comparables but rather argued that market conditions had softened in the previous 12 months reflecting concerns over Brexit, the heavier burdens placed on the buy to let market and the concerns over the COVID-19 pandemic which he felt were reflected in the [COMPANY] indices on flat prices.

22. Taking these into account he had arrived at a valuation for the one- bedroom [NAME] of £169,000.

23. He had then deducted £2,000 from [NAME] 2-8 to reflect the added value of the tenants’ improvements as set out in paragraph 17 (c) above to arrive at this leasehold value net of improvements of £167,000.

24. In respect of two-bedroom [NAME] he had similarly applied the Nationwide indices to sales over the last 6 years in the development to arrive at an average price for those with gardens of £212,572 and those without gardens of £183,776, giving an average price of two-bedroom [NAME] of £195,294.

25. Comparable sales in February and March 2020 within half a mile showed an average of £201,000. Adopting the price per square metre of £3,500 gave £182,000 for the [NAME] without garden and adjusting this by £15,000, produced a value of £197,000 for [NAME] with gardens.

26. Taking all this into account he had arrived at a value of £185,000 for two bedroom [NAME] without gardens and £205,000 for two bedroom [NAME] with gardens.

27. As previously he had then deducted £2,000 for tenants’ improvements from 7 of the two-bedroom [NAME] to arrive £183,000 and £203,000 respectively.

28. He had made no adjustment to the existing lease value to new lease value given the existing term was 93.59 years but had adjusted the leasehold values by the agreed relativity of 97.65% to arrive at freehold values of  One bedroom flat

£171,019  Two bedroom flat – no garden £187,404  Two bedroom flat with garden £207,885

7 29. In his written evidence [NAME] also produced a schedule of comparables to support the long leasehold value of the [NAME] which he assessed at:  One bedroom flat

£170,000  Two bedroom flat - no garden £210,000  Two bedroom flat with garden £225,000 30. He believed that there had been considerable uncertainty in the housing market over recent years but he believed that Hertfordshire and the Home Counties had been more resilient than areas such as prime central London. However, the Land Registry indices indicated that values had fallen at the valuation date by around 3% from the peak in 2018. He did not believe that values at the end of February 2020 had been affected by COVID 19 and he saw no reason to adjust sales data for this prior to March 2020.

31. He had considered the evidence for flat sales in the block and felt that the most helpful sales were; Flat Accom Date Sale price 8 [NAME] 1 bed October 2017 £184,000 2 [NAME] 1 bed January 2017 £160,000 9 [NAME] 2 bed, garden August 2016 £220,250

32. He had adjusted these for time and had also considered other sales in the vicinity which he had set out in this schedule of comparables.

33. In terms of one-bedroom [NAME] he had considered three recent sales in Royston which ranged between £151,158 and £162,000. These were larger than the [NAME] at [NAME] but he said that historic values suggested that the general range for good one-bedroom [NAME] in central locations falls within the range of £150,000 to £180,000 depending on condition and facilities. Previous sales evidence showed that these [NAME] had achieved relatively high values and he had adopted a value of £174,000 for the leasehold interest in the one bedroom [NAME]

34. Adjusted sales of comparable two bedroom [NAME], none of which had private gardens were in the range of £220,000 - £231,000. Again, the subject [NAME] were smaller than others in the locality but tended to achieve sales prices

8 as the upper end of the range and he had adopted a differential of £15,000 to reflect the additional value of a garden. 35. He did not believe that any adjustment should be made to the values for the installation of the double glazing as he considered it a repair and not an improvement. 36. Adopting the agree relativity of 97.65% he arrived at a freehold value of :  One bedroom flat

£174,000  Two bedroom flat – no garden £215,000  Two bedroom flat with garden £230,000 Decision 37. The tribunal puts limited weight on the adjustment of the previous sales on [NAME] in that there were some 3 years prior to the valuation date. It does note however that they are reasonably contemporaneous one with another and indicate a significant uplift for a two-bedroom garden flat. We also note that 8 [NAME], a one-bedroom flat was for sale on the development at the time of the valuation at a guide price of £175,000 having been reduced from £180,000 earlier in the year.

38. We have reviewed the schedules of comparables provided by the experts in their evidence, although not referred to during the hearing.

39. In respect of the one-bedroom [NAME]’s comparables ranged from £148,500 to £170,000 whilst those cited by [NAME] ranged from £151,158 to £162,000. Both however valued the subject [NAME] at more, given that the development was agreed to attract prices at the higher end of the market and indeed their valuation of the long leasehold is only some £3,000 apart.

40. The tribunal prefers the evidence put forward by [NAME] in respect of the leasehold value of the one-bedroom [NAME] and adopts a valuation ignoring tenants’ improvements of £170,000.

41. However, it agrees with [NAME] that it is appropriate to make a deduction from the valuation for those [NAME] (2-8) which have replacement double glazed windows. One of the one bedroom [NAME] and 6 of the two bedroom [NAME] retain their existing windows and therefore the tribunal is inclined to regard this as an improvement and not a repair. However, we consider that £2,000 is excessive. [NAME] provided receipts for a two bedroom flat showing the cost of installation of windows was £1550 and the cladding an additional £171.86. We therefore make a deduction of £1000 on the one bedroom [NAME] to arrive at a value for [NAME] 2-8 of £168,750.

9 42. In respect of the two bedroom [NAME] the comparables produced by [NAME] ranged from £176,000 to £220,000, none of these are noted as having a garden. The lowest of these is on a restricted site in the town centre. Those supplied by [NAME] range from £220,000 to £227,000 with no information on whether they have a garden – although it is reasonable to assume that most do not. [NAME] has adopted an addition of £15,000 for a garden whilst [NAME] has adopted £10,000 addition. Both experts agree that this development attracts values at the higher end of the market for [NAME] of a similar size and having regard to the comparables and the evidence put forward by both parties the tribunal believes that [NAME]’s valuations are too low whilst [NAME]’s are slightly on the high side .

43. The tribunal adopts a long lease value of £200,000 for the two bedroom [NAME] with no garden and £215,000 for the two bedroom [NAME] with a garden. It then makes a £1,250 deduction from this for the 7 [NAME] that have upvc double glazing and cladding as a tenant’s improvement.

Accordingly, the adjusted long lease values for those [NAME] with the upvc double glazing and cladding is £198,750 for the two-bedroom [NAME] with no garden and £213,750 for the two bedroom [NAME] with a garden.

44. The uplift to freehold value was agreed by the parties as 2.35% and the tribunal has adopted this in its calculations. The external areas 45. [NAME] argued that the site and current configuration of the properties together with the small areas of appurtenant land means that the freeholder cannot argue that there is hope or unlocked development value on site. 46. [NAME] agreed that it was a compact site with little space for further development. He suggested that, after enfranchisement, the five visitors spaces could be sold to individual tenants or let although accepted that this would require the consent of all tenants.

47. He had also noted that it appeared that one of the visitors’ spaces was being acquired in the claim. When the tribunal asked him to explain how he had come to this view he explained that the plan accompanying the Section 13 notice for 9-[ADDRESS] showed one of the visitors’ spaces coloured mauve, mauve denoting the property of which the freehold was proposed to be acquired. He had sought clarification on this from the applicant but as none was forthcoming he felt he had to assume that this was correct and had added £5,000 to his valuation to reflect the value of the space.

48. He had also added a further value of £500 for each block to reflect the loss of reversionary value. The Tribunal’s determination

10 49. We prefer [NAME]’s evidence on this. This is a compact site with only small areas of appurtenant land. It is very unlikely that all tenants would agree to a sale of the visitors’ spaces and the tribunal has not made any addition for this nor any adjustment to reflect loss of ‘reversionary value’ of the site.

50. Further, the colouring of the plan accompanying the Section 13 notice on 9-[ADDRESS] as indicated by [NAME] would appear to be an error and the tribunal has therefore made no adjustment for this – although clearly this will need rectifying on transfer. Capitalisation rate 51. [NAME] had adopted a capitalisation rate of 7%. He felt that public awareness of the pitfalls and unfairness of ground rents affecting leasehold properties had increased significantly over recent years. He pointed in particular to a private members bill in June 2019, a discussion paper issued by Ministry for Housing Communities and Local Government in December 2017, a Law Commission report in 2019 and another in 2020 on leasehold reform. He felt it inevitable that the position on ground rents would change and the change would be sooner rather than later.

52. He felt that the attitude of building societies to onerous ground rents added a layer of uncertainty to the market. However when questioned by the tribunal he agreed that the ground rents on the development were not onerous .

53. He also cited [NAME] (2007) 1 EGLR 153 where it was noted that the size of the ground rent could affect the capitalisation rate.

54. He felt that capitalisation rates were moving up generally and he had agreed the majority of recent cases at 7% which he felt reflected the risk. The income per annum from the ground rents (£720 and £1300 respectively) was relatively small and the admin costs of collecting them and the risk of the loss of income on default disproportionately high.

55. On that basis he had adopted 7% and cited a number of FTT decisions at that figure. When questioned by [NAME] he accepted that the majority of these were lease extensions rather than enfranchisement but did not believe that this was a relevant consideration as it was about the rate applied to loss of income. 56. [NAME] had adopted 6%. He argued that capitalisation rates tend to fall in the range of 5.5%-7% with the upper figure of 7% usually associated with fixed rents whereas these rose every 25 years by a minimum of 35% and a maximum of 51%.

11 57. He felt that freehold investments which have a larger rising income stream would have lower rates than single lease extensions where the cost of collection can be an issue 58. He cited a number of FTT cases for collective enfranchisement where the rate adopted had been 6% on ground rents with a review clause. He also felt that the additional income in respect of management and insurance commissions of £1,050, whilst not compensable under Schedule 5, it was appropriate to reflect this in the capitalisation rate. The Tribunal’s determination 59. In this case the tribunal is more persuaded by [NAME]’s argument. The ground rent increases in respect of both developments and it would be deemed more attractive than more modest ground rents with limited increase patterns and on that basis, we agree the capitalisation rate proposed by [NAME] of 6%. Deferment Rate 60. [NAME] had adopted a rate of 6%. He said that whilst it was generally accepted that under the decision in [NAME] (2007) that the deferment rate should be 5% in relation to Prime Central London ([NAME]) he felt that there was a significant argument that it should be modified in circumstances that do not come within this definition. Particularly given what he said was the current political disquiet concerning leasehold property.

61. He cited the decision in [NAME] v Trustees of Calthorpe Estate (2009) where the tribunal had found for 6% in regard to [NAME] in Birmingham. He felt this equally applied to Royston where growth rates applicable to [NAME] would never apply and that the [NAME] rate should be discounted by 1% as in the [NAME] case and had adopted 6%. 62. [NAME] had adopted a deferment rate of 5%. He believed that the correct approach was to follow [NAME]. He said that subsequent decisions such as [NAME] have enabled adjustment to the rate in certain circumstances but that, as held in [NAME] (2014) L & T10, it was necessary for the valuer to provide evidence to justify the additional rate and he did not believe such evidence had been produced.

63. He also believed that the market had moved on since [NAME] , that [NAME] values had fallen by around 20% since 2015 according to [NAME] indices whilst [NAME] values had risen by the same amount. In terms of growth [NAME] values had increased by a factor of 4.09 from February 2000 to February 2020 whilst [NAME] had grown by 3.39. Growth over the last 10 years for the same areas had been similar at around factor 1.6.

12 The Tribunal’s determination 64. The tribunal is not persuaded that [NAME]’s produced sufficient evidence to justify a departure from [NAME] for the reasons set out in the [NAME] decision and the adoption of 6%. It also noted out of interest that all FTT decisions cited by [NAME] to support his capitalisation rate of 7% adopted a deferment rate of 5%.

65. On this basis we agree with the deferment rate as proposed by [NAME] of 5% Summary 66. In summary, the tribunal has determined that: i) Subject to (ii) below, the long lease values are £170,000 for the one bedroom [NAME], £200,000 for the two bedroom [NAME] and £215,000 for the two bedroom [NAME] with gardens ii) The long lease values are to be adjusted for tenant’s improvement to the relevant [NAME] to £169,000 for the one bedroom [NAME], £198,750 for the two bedroom [NAME] and £213,750 for the two bedroom [NAME] with gardens. iii) The uplift from long leasehold to freehold is 2.35% iv) The value of the appurtenant land is £nil v) The capitalisation rate is 6%. vi) The deferment rate is 5%

The price 50. The tribunal determines the appropriate premium for [NAME] 1-8 is £28,588 and for [NAME] 9-21 is £53,597. A copy of its valuation calculation is annexed to this decision.

13

Appendix

Case Reference CAM/26UF/OCE/2020/0006

1-8 [NAME], Royston and 9- 21 [NAME], Royston, [POSTCODE]

Tribunal's valuation

[NAME] 1-8

Valuation date

28/02/2020 Unexpired term

93.58 Period to 1st review

18.58 Capitalisation rate

6% Deferment rate

5%

Calculations

Diminution of freehold

Ground rent

£ 720

Years Purchase 18.58 years @ 6% 11.0216 £7,936 £0 Ground rent

£ 1,000

Years Purchase 25 years @ 6% 12.7834 £0 Present value of £1 in 18.58 years @ 6% 0.3387 £4,330 Ground rent

£ 1,400

Years Purchase 25 years @ 6% 12.7834 £0 Present value of £1 in 43.58 years @ 6% 0.0789 £1,412 Ground rent

£ 2,120

Years Purchase 25 years @ 6% 12.7834 £0 Present value of £1 in 68.58 years @ 6% 0.0184 £498 £14,176 Reversion to Freehold

Capital value

£ 1,385,561

Present value of £1 in 93.58 years @ 5% 0.0104 £14,412 £28,588

14

Tribunal's valuation

[NAME] 9-21

Valuation date

28/02/2020 Unexpired term

93.58 Period to 1st review

18.58 Capitalisation rate

6% Deferment rate

5%

Calculations

Diminution of freehold

Ground rent

£ 1,300

Years Purchase 18.58 years @ 6% 11.0216 £14,328 £0 Ground rent

£ 1,755

Years Purchase 25 years @ 6% 12.7834 £0 Present value of £1 in 18.58 years @ 6% 0.3387 £7,599 Ground rent

£ 2,405

Years Purchase 25 years @ 6% 12.7834 £0 Present value of £1 in 43.58 years @ 6% 0.0789 £2,426 Ground rent

£ 3,575

Years Purchase 25 years @ 6% 12.7834 £0 Present value of £1 in 68.58 years @ 6% 0.0184 £840 £25,193 Reversion to Freehold

Capital value

£ 2,730,625

Present value of £1 in 93.58 years @ 5% 0.0104 £28,403 £53,597

15

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 application for permission must be made to the First-tier Tribunal at the regional office which has been dealing with the case. 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 [NAME]. 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. 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 [NAME] the application is seeking. If the tribunal refuses to grant permission to appeal, a further application for permission may be made to the Upper Tribunal (Lands Chamber).

Sum of A + B + C +D £94,66 Sum of A + B + C +D £94, Sum of S