Tenant Granted Right to Buy Freehold Interest

OUTCOME: Allowed

1

Case Reference

: BIR/00CN/OLR/2022/0041

Property

: 18 [ADDRESS], [POSTCODE]

Applicant

: [redacted]

Applicant's Solicitors

: [redacted]

Applicant's Expert Witness : [APPELLANT]

Respondent: [redacted]

Respondent's Solicitors : [redacted]

Respondent Expert Witness : [RESPONDENT] [NAME] of Application

: Application to determine the price payable for the

Freehold interest under section 9(1) of the Leasehold

Reform Act 1967

Tribunal Members

: [NAME]. [NAME] B.Sc.(Est.Man.) FRICS

V. Ward B.Sc. FRICS – Regional Surveyor

Date and Venue of

: None. Paper determination. \Hearing

Date of Decision

: 01 December 2022

____________________________________________________________

DECISION

© CROWN COPYRIGHT 2022

FIRST - TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY)

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1 The price of the Freehold interest is determined at £54,000 (Fifty Four Thousand Pounds).

REASONS

Introduction 2 This is the Tribunal decision in respect of an application under section 21(1)(a) of the Leasehold Reform Act 1967 ('the Act') for determination of the price to be paid under section 9(1) for the freehold interest in 18 [ADDRESS],

[POSTCODE].

3 The Applicant is [APPELLANT] [NAME] as Executor to the Estate of [NAME] deceased, the owner of the leasehold interest. The Respondent is [RESPONDENT] ([NAME]) [RESPONDENT], the freeholder. There are no intermediate interests.

4 The Applicant served Notice to acquire the freehold interest on 14th October 2021 and applied to the Tribunal on 23rd June 2022.

Issue 5 The only issue for the Tribunal to determine is the price of the freehold interest.

The Law 6 The property is held by Lease dated 16th January 1973 for a term of 70 years from 29th September 1972 at ground rent of £12.50 p.a. There is no provision for rent review. The lease expires 28th September 2042 and at the valuation date, the date of service of Notice, there were 20.96 years unexpired.

7 The Lease is full repairing and insuring.

Facts Found 8 The Tribunal inspected the property on 15th November 2022 in the presence of Mr [NAME]. [NAME] representing the freeholder and a keyholder representing the leaseholder.

9 The property is an end-terrace two storey house in a well-established residential area, densely developed with Victorian terraced housing, just off the A38 [ADDRESS] close to Birmingham University's campus. Local shops and facilities including Selly Oak railway station are within a few minutes' walk and the city centre is within three miles providing a full range of facilities.

10 It is of traditional brick and tile construction with a rear wing. The front elevation has facing brick to the ground floor with rendering above. The left side of the property adjoins an alleyway at ground floor level with the first floor bedroom over-sailing half the alley as

flying freehold.

11 The accommodation comprises two reception rooms and a kitchen on the ground floor with a landing, two bedrooms and bathroom on the first floor. It has small front and back gardens but there is no access to the rear for off-road parking and insufficient space to the front to create a parking space for an average car.

12 The property does not appear to have been occupied for months and the interior is in poor condition. There are missing floorboards, wet and dry rot, areas of plaster have fallen off exposing lath beneath and there is ivy ingress to the kitchen. The house requires complete refurbishment.

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Agreed Facts 13 The parties have agreed the following elements of the valuation:

i Basis of valuation: section 9(1) of the Act.

ii Unexpired term: 20.96 years

iii Ground Rent: £12.50 p.a.

iv Deferment rate: 5.25%

v 'Clarise' deduction: Nil

vi Plot apportionment:32.5%

vii Standing House value:£300,000

14 The valuation points in issue are:

Applicant

Respondent

viii Capitalisation rate 7.0 %

6.5 %

ix s.15 ground rent £5,545 p.a.

£8,531 p.a.

Submissions in respect of Capitalisation Rate 15 The parties are very close and neither Expert made any particular submission on the capitalisation rate that should be applied to the ground rent for the remainder of the lease

other than presenting the figures above. The Applicant's figure resulted in a term value of £135.32, the Respondent £140.93.

Tribunal Decision on Capitalisation Rate 16 This is a very small ground rent where the costs of collection would exceed the income. Nevertheless, it has a notional value and in view of the small amount, the Tribunal finds for the higher capitalisation rate of 7% and values the term at £135.32 as shown at paragraph 39 below.

Submissions in respect of s.15 'Modern Ground Rent' 17 The ground rent effective for the 50 year statutory extension from expiry of the contractual term, generally referred to as the 'modern ground rent'.

The parties approached this in different ways, both of which have merit.

18 Applicant

The Applicant's Surveyor, Mr [APPELLANT], assessed the ground rent in two ways;

a) 'The Standing House Approach' by adopting the procedure applied in [NAME] v [NAME] ([COMPANY]) 1971 218 EG 1177 of assessing the value of a hypothetical house on the plot assuming it had been built to optimise its realistic potential, applying a site apportionment to assess the plot's value and then devaluing the resultant figure by 5.25% return to calculate a rental equivalent;

b) 'The Cleared Site Approach' by researching actual land sales in the area, assessing the equivalent capital value by adjusting for plot size and applying a devaluation rate of 5.25% return to assess the ground rent.

a) Standing House Approach

Mr [NAME] produced a schedule of 12 freehold house sales in the area ranging from £320,000 to £455,000 over a period from 30th June 2021 to 7th April 2022. All were in nearby streets in the same general area. Mr [NAME] provided photographs where available, gave general descriptions and commentary on comparison with the subject house.

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19 Mr [NAME] said a high proportion of houses in the area had been converted to HMOs and in respect of the subject house 'the highest and best use in terms of value would most likely be as a small HMO ...' However, he pointed out that the house did not have planning consent for conversion or a valid HMO licence and based on Birmingham City Council planning policy DM11 'Houses in Multiple Occupation' he considered consent unlikely to be granted. Converting to an HMO would be more risky for the freeholder and this needed to be reflected in the valuation. Furthermore, some of the properties cited in evidence would not have been refurbished or fully developed. In summary, he did not consider the Entirety Value should be assessed assuming the house were fully furnished and let as a student investment.

20 Having considered the sales evidence, he considered the Entirety Value of a hypothetical house on the subject plot to be worth £325,000 at the valuation date.

21 b) Cleared Site Approach

Mr [NAME] referred to a land sale at [ADDRESS], [POSTCODE] where a cleared plot of 40.47 sq.m. with residential planning consent had sold by auction in September 2018 for £40,000. It is within 500 m of the subject property.

22 Respondent

Mr [RESPONDENT] for the Respondent based his valuation on the Standing House Approach. He had also researched house sales in the area and asked the Tribunal to consider six in particular, ranging from £437,000 to £500,000 from 15th September 2021 to 22nd October 2022.

23 In contrast to Mr [NAME], he said there was a high chance of planning permission being granted for conversion to an HMO and referred to 11 houses in the area where Birmingham City Council had granted consent from 5th August 2021 to 5th July 2022. In view of the high number of HMOs the conversion of one more would not harm the character of the area. He also said an owner occupier attempting to sell would be severely prejudiced against obtaining the best price if there were a prohibition against HMO use. He supported this by referring to correspondence between his client and the head of development policy at Birmingham City Council Planning Department.

24 Based on comparable sales, he considered the Entirety Value to be £600,000 although later reduced this to £500,000.

Tribunal Decision

25 Standing House Approach

The Tribunal has summarised the evidence provided by the parties in the attached table.

It was impossible to inspect everything on the day due to adverse weather and the volume of traffic in the area but the Tribunal inspected the exteriors of nine houses referred to for comparison.

26 It is noted that the valuation date was 14th October 2021 and while post dated evidence is not dismissed and helps set a trend, it carries less weight than sales available to parties at the date.

27 One of the properties, No.[ADDRESS], is a large detached house and of little assistance.

28 The others are all terraced houses of similar general age but some may have been in poorer condition than others at the date of sale, the accommodation may have differed and they may not all have been developed to maximise their potential.

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29 Bearing in mind the large number of HMOs in the area and the recent permissions granted by the City Council, the Tribunal finds there is a reasonable prospect of achieving HMO consent for the subject house which should be reflected in the valuation.

30 Mr [NAME] rightly points out that an HMO would be more risky for a property owner but if the value of the completed freehold increased, so too would the owner's profit which is where risk is reflected. Construction costs are also likely to be higher for an HMO than house in single occupation due to occupier requirements for more cloakrooms, larger kitchens, compliance with fire regulations etc. but the increased costs would also be available to a developer if the completed value were higher.

31 In assessing Entirety Value, the Tribunal has regard to the highest realistic use that could be made of the subject plot and by the valuation date there had been three key sales:

No.[ADDRESS] £455,000 30.06.21

No.[ADDRESS] £450,000 15.09.21

No.[ADDRESS]

£460,000 27.09.21

32 Having considered all the evidence, the Tribunal finds the Entirety Value of the subject house to have been £450,000 at the valuation date.

33 Cleared Site Approach

By way of check, the Tribunal notes Mr [NAME] evidence of the plot sold in [ADDRESS] for £40,000. It comprised 40.47 sq.m. compared with 120.34 sq.m. for [ADDRESS] which would make the subject plot worth £118,900 freehold on a like for like basis.

34 Applying the 32.5% plot ratio agreed by the parties to the Entirety Value of £450,000 above would indicate a plot value of £146,250.

35 However, the Tribunal is unable to apply great weight to direct comparison with [ADDRESS] because it was only one plot sold four years ago in a rising market. No evidence has been adduced to demonstrate the rate of growth since 2018 but in the Tribunal's view market values have increased substantially since then.

36 Summary

Having considered the alternative Standing House and Cleared Site Approaches, the Tribunal prefers the Standing House approach on this occasion and finds the Entirety Value to be £450,000.

Tribunal Valuation 37 The Tribunal's valuation is attached. Applying the inputs above, we find the price of the freehold interest under s.21 of the Leasehold Reform Act 1967 to be £54,000 (Fifty Four Thousand Pounds).

[NAME] B.Sc.(Est.Man.) FRICS

Chairman

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38 Summary of [ADDRESS] Evidence Respondent Evidence Price £ Date

No.

No.

__________________________________________________________

Tiverton 155

355,000 24.06.21

Tiverton 261

455,000 30.06.21

Dawlish 184

355,000 30.06.21

Tiverton 143

332,500 30.06.21

Heeley 144

396,000 30.06.21

Elmdon 6

880,000* 30.06.[ADDRESS] 67

330,000 19.08.21

Dawlish

203

450,000 15.09.[ADDRESS] 51

320,000 17.09.[ADDRESS] 1

270,000 17.09.21

Alton

50

460,000 27.09.21

Coronation 18 Valuation Date

14.10.21

Luton

4

500,000 22.10.21

Dawlish 124

360,000 22.11.21

Rookery

29

470,000 21.01.22

Dawlish

258

475,000 21.01.22

Exeter 12

345,000 31.03.22

Exeter 16

322,000 08.03.22

Heeley 171

401,000 07.04.22

Dawlish

194A

437,000 22.10.22

__________________________________________________________

* A large detached house, completely different type of property.

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39 Tribunal Valuation

For valuation purposes, the Tribunal rounds the unexpired term from 20.96 years to 21 years.

Term 1

Rent

£ 12.50

Years Purchase 21 years 7.0%

10.8355

£ 135

Term 2

Freehold Entirety Value

£ 450,000

Site Apportionment

0.325

Site Value

£ 146,250

S.15 Modern ground rent @5.25%

7,678

Years Purchase 50 years @ 5.25%

17.5728

Present Value 21 years 5.25%

0.3414568

£ 46,070

Reversion

Standing House value

£ 300,000

Present Value £1 71 years @ 5.25%

0.0264381

7,931

£ 54,136

s.9(1) Price say

£ 54,000

Appeal to Upper Tribunal

Any appeal against this decision must be made to the Upper Tribunal (Lands Chamber).

Prior to making such an appeal the party appealing must apply, in writing, to this Tribunal for permission to appeal within 28 days of the date of issue of this decision (or, if applicable, within 28 days of any decision on a review or application to set aside) identifying the decision to which the appeal relates, stating the grounds on which that party intends to rely in the appeal and the result sought by the party making the application.