Tenant Entitled to Freehold Interest Under Leasehold Reform Act

OUTCOME: Allowed

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Case References

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BIR/47UB/OAF/2019/0010 BIR/47UB/OC9/2019/0007 Property : 28 [ADDRESS] [POSTCODE] Applicant : [redacted] : [NAME] [COUNSEL] and Co Surveyors & Valuers Respondent : [redacted] : [NAME] Tribunal Members : [NAME] (Hons) FRICS (Chairman) Judge M K Gandham Date and venue of Hearing : 7 August 2019 [ADDRESS] [POSTCODE] Date of Decision : 29 August 2019

DECISION ____________________________________________________

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

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Introduction

1. An application was submitted by [APPELLANT] (“the Applicant”), under section 21 (1) (a) of the Leasehold Reform Act 1967 (“the Act”) for the determination of the price to be paid under section 9 of the Act in respect of the acquisition of the freehold interest in 28 [ADDRESS] [POSTCODE] (“[NAME]”). Applications were also submitted under section 21 (2) (a) of the Act, for a determination of the provisions to be included in the conveyance under section 10 of the Act, and under section 21 (1) (ba) of the Act, for a determination of the reasonable costs payable under section 9 (4) of the Act.

2. The Applicant was represented by Mr [APPELLANT] of [NAME], [NAME]. The Respondent freeholder, [RESPONDENT], a Chartered Surveyor, acted on his own behalf.

3. The Applicant served Notice to acquire the freehold interest on 28 November 2018 and the Respondent replied by counter-notice dated 24 January 2019.

4. The Applicant holds a Lease for a term of 99 years from 29 September 1969 at a fixed ground rent of £30 per annum.

Matters agreed between the parties before the hearing

5. The following items were agreed between the parties:

a) Provisions to be included in the transfer.

b) [NAME] is to be valued in accordance with section 9 (1) of the Act.

c) The Valuation Date: 28 November 2018.

d) The Capitalisation rate for section 15 modern ground rent: 5.25%

Matters in dispute between the parties

6. The Tribunal was advised that the following matters were still in dispute:

a) Term capitalisation rate

Applicant: [redacted] Respondent: [redacted]

b) [APPELLANT]

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Applicant: [redacted] Respondent: [redacted]

c) [APPELLANT]

Applicant: [redacted] Respondent: [redacted]

d) Deferment rate

Applicant: [redacted] Respondent: [redacted]

e) [APPELLANT]

Applicant: [redacted] Respondent: [redacted]

7. The [APPELLANT] of the freehold interest as provided by each party was as follows:

Applicant £4,926.00 Respondent £7,148.00 (Rounded to £7,150.00)

Citations

8. The following decisions are referred to below:

a) [NAME] v [NAME] and [NAME] [2007] EWCA Civ 1042 "[NAME]"

b) [COMPANY] [2012] UKUT 4 (LC) "[NAME]"

c) [COMPANY] [2017] UKUT 0233 (LC) "[APPELLANT]"

The Law & The Basis of Valuation

9. The Applicant has the right to acquire the freehold interest under the Leasehold Reform Act 1967 and it is agreed that the valuation is to be determined under section 9(1) of the Act at the date of service of the Notice, 28 November 2018.

10. The parties adopted the same method of valuation, based on the Act and case precedents, which is entirely conventional and in line with current practice. Under this method, the price of the freehold comprises three elements:

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Term 1 A sum representing the [APPELLANT] at the date of Notice of the right to receive the ground rent for the duration of the lease.

Term 2 A sum representing the right of the landlord to receive a modern ground rent, i.e. a rent in accordance with section 15 of the Act, for a period of 50 years from the date of the existing lease expiry to the expiry of the statutory extension period subject to a rent review after 25 years. The right is brought back to represent its [APPELLANT] at the valuation date by applying an appropriate deferment rate.

The Act envisages the section 15 rent to be a market rent but as the parties agreed that there were no comparable market rents for plots of this size let in the market on these terms they relied on alternative means of assessing the rental [APPELLANT]. This was to assume that the site would be vacant and to let in the open market and estimate the annual rent a [NAME] might have paid for the land at the valuation date. The assumption is that a [NAME] would have estimated the market [APPELLANT] of the best house that could reasonably have been built on the land (“[APPELLANT]”), assume a percentage of that sale price to represent the [APPELLANT] of the plot (“the plot [APPELLANT]'”, and from the resulting plot [APPELLANT], calculate an equivalent rent in annual terms spread over 50 years (the “modern ground rent”) that would have equalled the [APPELLANT] of the land.

Reversion A sum representing the right of the landlord to receive the [APPELLANT] of the actual house on site, (“the standing house [APPELLANT]”), on expiry of the 50 year modern ground rent. The assumption is that the [APPELLANT] at the Notice date can be invested at a compound rate of interest, the deferment rate, to equal the [APPELLANT] of the standing house at the expiry of the 50 year extension. In some cases, a deduction from the standing house [APPELLANT] is made to reflect the risk of a lessee remaining in occupation on expiry of the 50 year extension, a [NAME] deduction. In this matter, neither side made an alteration in this regard and hence the Tribunal declines to do so.

Inspection

11. The Tribunal carried out an inspection of [NAME] on 7 August 2019 in the presence of Mr [RESPONDENT]. The Respondent did not attend the inspection.

12. [NAME] comprises a modern mid-terraced house (of four), which benefits from gas fired central heating and double glazing, offering the following accommodation:

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Ground floor: hall, kitchen, lounge;

First floor: Two double bedrooms and one single bedroom and bathroom with full suite including shower over the bath;

Outside: Small fore garden, rear garden.

Garage: [NAME] benefits from a garage in separate block approximately five minutes walk from the house itself. The garage was in an extremely dilapidated condition and was not suitable for any form of beneficial use.

13. [NAME] does not enjoy a direct road frontage but is situated to the rear of an area of public open space and is approached via a pedestrian walkway from [ADDRESS]. There is a layby for parking to the roadside in front of the area of public open space. Other properties in the vicinity of the subject appear to be of a similar age type and class.

Catshill is a village and residential area approximately 2 ½ miles to the north of Bromsgrove town centre.

The Hearing

14. A Hearing was held following the inspection at the Tribunal Hearing Rooms, City Centre Tower, [ADDRESS], Birmingham. Mr [APPELLANT] attended the Hearing and the Applicant was, again, represented by Mr [APPELLANT].

15. Although adopting a valuation under section 9(1) of the Act in his valuation (as referred to below), Mr [NAME], at the Hearing, also asked the Tribunal to note that the purpose of the valuation was to adequately compensate landlords for their loss and that the best evidence for the [APPELLANT] of the freehold interest of [NAME] was his purchase of it in January 2017 for £7,000. The Tribunal notes Mr [NAME] comments, however, it is also mindful of the fact that a leaseholder should not be required to pay a sum simply to compensate a landlord who may have purchased the interest for a sum much higher than its true [APPELLANT].

Submissions of the Parties

16. The Tribunal finds it convenient to detail the Applicant’s and Respondent’s representations in respect of each facet of the valuation that is at issue followed by its own determination:

a) Term capitalisation rate

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Applicant: [redacted]

[NAME] applied 6.5% to the passing ground rent due to the fact that the rent was relatively nominal and was fixed for the remainder of the term, hence would effectively lose [APPELLANT] due to inflation. In addition, he contended that a landlord’s collection costs in respect of a relatively small amount would be disproportionately high.

Respondent: [redacted]

A different approach was taken by Mr [RESPONDENT] who had analysed numerous transactions recorded from auction sales of ground rent investments which were, in many cases, of small portfolios. The initial yields shown ranged from 0.26% to 4.55%. Commenting generally on First-tier Tribunal decisions where capitalisation rates had been determined at between 6.00 to 7.00%, Mr [NAME] was of the opinion that these were out of step with the market, particularly due to uneconomic uncertainty caused by Brexit and other factors, accordingly he adopted a capitalisation rate of 4.0%, which equated to an initial yield of 4.66%

The Tribunal

The Tribunal noted the evidence provided by Mr [NAME], however, does not agree that economic uncertainty would necessarily lower yields particularly in the context of proposed leasehold reform to make it easier and cheaper for leaseholders to enfranchise. The ground rent is a small amount fixed for a significant period, therefore, the Tribunal adopts 6.5%.

b) [APPELLANT] them, the parties had provided a significant number of comparables. The Tribunal viewed externally those that it considered the most relevant.

In respect of the evidence below it should be noted that, unless where stated, all are located in Catshill and are mid terraced with three bedrooms. The sale price and date of sale is given.

[ADDRESS] £145,000 August 2018 [ADDRESS] £168,000 December 2018 [ADDRESS] £168,000 March 2019 [ADDRESS] £170,000 November 2018 Two bedrooms [ADDRESS] £168,000 April 2019

Two bedrooms [ADDRESS] £182,500 April 2019

End Terraced [ADDRESS] £179,000 March 2019 With gf WC

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Applicant: [redacted]

[NAME] considered the most relevant comparables were the properties on [ADDRESS] which are all within close proximity of [NAME], which had led him to his [APPELLANT] of £170,000. These properties were believed to be of a similar configuration albeit that they enjoyed road frontage and hence enjoyed forecourt parking.

Respondent: [redacted]

In addition to sold prices, Mr [RESPONDENT] had also provided details of two properties which were currently sold subject to contract:

[ADDRESS] sold, subject to contract, for just under £180,000. End terraced.

[ADDRESS] sold, subject to contract, for £175,000. End terraced in adjacent terrace to subject facing onto the area of public open space.

The Tribunal

The Tribunal considers the [ADDRESS] properties are useful as a starting point, they are in very close proximity and are of a similar layout with garages also in separate blocks and of similar usability. They differ from the subject in that they have forecourt parking. The degree to which this factor influences [APPELLANT] will be down to the individual, however, [NAME] has the benefit of the layby and a pleasant outlook onto the area of public open space. This factor coupled with some evidence of higher values being achieved, such as [ADDRESS] - £175,000 for a house with two bedrooms, leads the Tribunal to adopt an [APPELLANT] of £172,500.

c) [APPELLANT]

Applicant: [redacted]

[NAME] stated that, generally, site apportionments were approximately 35% for detached houses (as in [COMPANY]), semi-detached properties 33 1/3 % and terraced houses 30% hence his application of the latter to the subject.

Respondent: [redacted]

[NAME] considered that, due to the hypothetically lower costs of developing a terraced plot due to the fact that only two external elevations would be

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required and gable ends are already constructed, the plot [APPELLANT] should be higher.

The Tribunal

The Tribunal does not consider that the benefits outlined by Mr [NAME] outweigh the disadvantages of what is a relatively narrow plot particularly since it has no road frontage; a plot with wider frontage can be developed more easily, the Tribunal, therefore, finds the plot [APPELLANT] for valuation purposes to be 30%.

d) Deferment rate

Applicant: [redacted] [RESPONDENT] adopted 5.25%.

Respondent: [redacted] opinion that an adjustment was required to reflect current market conditions and produced some comparables to this effect. These provided details of the sales of the freehold interests in houses in the West Midlands area which are subject to leases where the term unexpired is between 45 to 54 years and the ground rents are at a similar level to [NAME]. The values achieved were between approximately £5,700 and £7,100. The Respondent acquired [NAME] at auction in January 2017 at a price of £7,000.

The Tribunal

Whilst the Tribunal noted the comparables provided by Mr [NAME], his analysis was not considered sufficiently rigorous to outweigh the guidance given by the Upper Tribunal in [COMPANY] and hence adopts 5.25% as the deferment rate.

e) [APPELLANT]

The reports submitted by the parties prior to the hearing appeared to indicate that they were of the opinion that the standing house [APPELLANT] and [APPELLANT] were one and the same, as [NAME] was effectively already developed to its fullest extent.

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Applicant: [redacted]

At the hearing, and following the benefit of an inspection of the garage subsequent to his report being submitted, Mr [APPELLANT] sought to adjust his opinion of standing house [APPELLANT] down to £165,000 and differentiate it from his opinion of the [APPELLANT]. The Tribunal did not accept this adjustment. It is customary to apply the same deferment rate to the standing house [APPELLANT] for the third stage of the valuation however in this case Mr [NAME] chose to adopt 5.5% instead of the 5.25% he had adopted for the second stage of the valuation, due to the fact that at the final stage of the valuation, the deferment rate, was being applied to a house and land as opposed to purely land at the second stage i.e. greater obsolescence.

Respondent: [redacted]

The Respondent employed a standing house [APPELLANT] of £175,000 in line with his opinion of the [APPELLANT].

The Tribunal

The Tribunal, on balance, are of the opinion that the standing house [APPELLANT] and [APPELLANT] were one and the same for [NAME], as whilst the garage could be improved, its usefulness would always be limited due to its proximity to [NAME] itself and the poor access to the block in which it is situated. The Tribunal, therefore, adopts its [APPELLANT] of £172,500. The Tribunal was not persuaded to adopt a different rate in the third stage of the valuation, Mr [NAME] had not advanced evidence of sufficient merit to deviate from what is considered the conventional approach.

The Tribunal's Valuation

17. Applying those determinations to the matters agreed by the parties the Tribunal’s valuation is as shown in Appendix 1.

18. The Tribunal determines the [APPELLANT] of the freehold interest in accordance with the provisions of section 9 of the Leasehold Reform Act 1967 at £5,215.00 (Five Thousand, Two Hundred and Fifteen Pounds).

Costs

19. It was agreed at the hearing that either party may apply to the Tribunal, within four weeks of the date of this decision, to issue Directions in respect of the Costs application. If there is no application during this period it was agreed that the application would be considered as withdrawn.

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Appeal

20. A party seeking permission to appeal this decision must make a written application to the Tribunal for permission to appeal. This application must be received by the Tribunal no later than 28 days after this decision is sent to the parties. Further information is contained within Part 6 of The Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013 (S.I. 2013 No. 1169).

[NAME]

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APPENDIX 1

THE TRIBUNAL’S VALUATION Term 1 Ground Rent (pa) £ 30.00 [NAME] 49.83 years @ 6.50% 14.717 £ 441.51 Term 2 [APPELLANT] £ 172,500.00 Site Apportionment 30% £ 51,750.00 Section 15 Rent @ 5.25% £ 2,716.88 [NAME] 50 years 50.00 years @ 5.25% 17.573 PV of £1 49.83 years @ 5.25% 0.0781 £ 3,728.78 [APPELLANT] £ 172,500.00 PV of £1 99.83 years @ 5.25% 0.00605 £ 1,043.63 £ 5,213.92 say £ 5,215.00