UPPER
TRIBUNAL (LANDS CHAMBER)
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UT Neutral citation number: [2013] UKUT 52 (LC)
UTLC
Case Number: LRA/75/2011
TRIBUNALS,
COURTS AND ENFORCEMENT ACT 2007
LEASEHOLD ENFRANCHISEMENT –
house – freehold enfranchisement price – whether LVT double counted a premium
to reflect property’s location in value per square foot for the freehold –
whether LVT failed to make allowance for development risk, planning risk and
planning costs in assessing development value - Leasehold Reform Act 1967
s.9(1)(C) - appeal allowed in part - Enfranchisement price £1,536,000
IN
THE MATTER OF AN APPEAL AGAINST A DECISION OF THE
LEASEHOLD
VALUATION TRIBUNAL FOR THE
LONDON RENT ASSESSMENT PANEL
BETWEEN MR
M A JACKSON Appellants
MRS
J W JACKSON
and
THE
KEEPERS & GOVERNORS OF THE POSSESSIONS REVENUES & GOODS OF THE FREE GRAMMAR SCHOOL OF JOHN LYON
Respondent
Re:
101 Hamilton Terrace,
London
NW8
9QY
Before:
Her Honour Judge Alice Robinson and Paul Francis FRICS
Sitting
at: 43-45 Bedford Square, London WC1B 3AS
on
19-20 November 2012
Tim Jackson for the Appellants
Mark Loveday instructed
by Pemberton Greenish LLP for the Respondent
DECISION
Introduction
1.
This is an appeal by Mr MA and Mrs J W Jackson (“the
Tenants”) against a decision of the Leasehold Valuation
Tribunal for the London Rent Assessment Committee (“LVT”) dated 4th
March 2011 whereby the LVT decided the amount of the purchase price in respect
of the freehold enfranchisement of 101 Hamilton Terrace, London NW8 9QY (“the
Property”) under the terms of the Leasehold Reform Act 1967. The Respondent
(“the Landlord”) is the freehold owner of the Property.
2.
The LVT initially determined the price payable to be £1,605,220 but
after the Appellants application for permission to appeal pointed out errors, a
correction certificate was issued dated 3 May 2011 which revised the
price payable to £1,589,650. The LVT however refused the application.
3.
Although the Tenants had applied to the
LVT for permission to appeal on a number of grounds, in a decision dated 2
August 2011 the President of this Tribunal granted
permission to appeal on 5 specified grounds only (Grounds 1-4 and 6) and
ordered that the appeal be limited to the matters raised in those grounds. He
also ordered the appeal to be by way of rehearing. Before us, the Tenants
sought an enfranchisement price of £1,328,167.
4.
The issues that had been before the LVT
related to the unimproved freehold value of the Property at the valuation date,
the value of any development potential by way of roof and ground floor extensions
and the relativity which should be adopted between the freehold and leasehold
values. The permitted grounds of appeal relate
to the amount per square foot which should be used to determine the freehold value (ground 6) and whether certain matters
had been taken into account in determining development value (grounds 1-4).
5.
It was apparent from the documents including the Tenants’ Skeleton
Argument and Landlord’s Written Opening that an issue arose between the parties
as to the ambit of the appeal. We took the view that this should be determined
at the outset because our decision, whatever it was, would have a significant
effect on the evidence which would be called. Therefore at the beginning of the
hearing we indicated our provisional view and invited the parties to make any
further submissions. Both Mr Jackson appearing on behalf of his parents and Mr
Mark Loveday, counsel for the Landlord, made oral submissions. Having
considered those we re-affirmed our provisional view. Our reasons, and
conclusions, are as follows.
6.
The LVT’s decision adopted a two stage approach to the ascertainment of
a value per square foot (“psf”) for the
freehold. First it accepted the evidence of Mr Kevin Ryan FRICS of Carter
Jonas, the Tenant’s valuer who also appeared before us, that an analysis of
four comparables located outside Hamilton Terrace produced a value of £1,240
psf. Second, the LVT added a premium of £147 to reflect the Property’s
location in Hamilton Terrace which it considered was superior to the locations
of the four comparables, giving rise to a figure of £1,386 psf. Ground 6 of
the appeal asserts that the LVT failed to have regard to the fact that Mr
Ryan’s figure of £1,240 psf already included a Hamilton Terrace premium. In
consequence of this the Landlord argued that the appeal was limited to
considering whether this was correct, and if it was not, what level of premium
should be added. In other words, it was not open to the Lands Chamber to
revisit the base figure of £1,240 psf save to decide whether or not, on the
comparables from which it was derived, it included a Hamilton Terrace premium.
7.
In our view the difficulty with this argument is that it does not make
adequate allowance for the fact that this is a rehearing not a review. At its heart,
the Tenants’ argument is that a figure of £1,240 properly reflects the
Property’s location in Hamilton Terrace. Whether this is correct or not is to
be determined having regard to the evidence before us and we are not restricted
to the evidence which was before the LVT. Indeed, Mr Loveday submitted that
the further comparables relied upon by Mr Ryan were not irrelevant. If this is
correct their relevance must be as to whether the £1,240 figure fairly reflects
the freehold value of the Property. Of course this does not mean that the
LVT’s decision is immaterial; we must be satisfied that the LVT got it wrong
before we can interfere with the decision. We therefore indicated that we were prepared to consider the additional
comparables to which Mr Ryan referred as well has his new approach to them.
8.
As to development value, the LVT accepted the approach of Mr Philip Hamilton
BSc MRICS of Cluttons, the Landlord’s valuer who also appeared before us, that
the method of determining development value should be a residual valuation. The
LVT had regard to the evidence as to what form of extension might be granted
planning permission and decided that it was ‘not unlikely’ that permission
could be obtained for a 510 sq ft roof extension. It identified the gross
development value (“GDV”) of the completed extension by adding an uplift of
£260 psf to reflect the improvement to the £1,386
it had determined as the value psf, and applied that to the 510 square feet to
arrive at a figure of £839,460. The LVT then deducted various costs from that
figure, including building costs, a 25% contingency and 17.5% for fees, before
arriving at a net development value of £650,000 which it determined was the additional
amount a purchaser would pay to reflect the Property’s development potential. The
freehold value was thus determined at £5,762,482.
9.
Grounds 1, 2 and 4 of the appeal assert that the LVT failed to make a
discount from development value respectively for development risk, for the fact
that planning permission had not yet been obtained and for the costs of
obtaining planning permission. Ground 3 asserts that when judging planning
risk, the LVT failed to have regard to a Conservation Area Audit of St John’s
Wood (“the Audit”). In their evidence before the Lands Chamber the Tenants produced
alternative building cost figures and a letter from the local planning
authority suggesting planning permission might only be obtained for a lesser development than that found by the LVT.
The Tenants also persisted in their argument that the correct approach was not
a residual valuation but to deduct a percentage from the GDV to reflect the
development and planning risks.
10.
In our judgment grounds 1-4 of the appeal are clear. They challenge the
failure to include an allowance for certain risks and costs in the calculation
of development value. The grounds do not challenge the LVT’s use of a residual
valuation, the building costs used, the 510 square foot loft extension size or
the £260 per square foot uplift to reflect the improvement. Although the
Tenants complained that the Landlord’s evidence of building costs was produced
very late, they did not apply for an adjournment at the LVT despite being
represented at that stage by leading counsel. We therefore indicated that we
would not hear evidence challenging these matters but would hear evidence as to
development risk, planning risk, planning costs and whether the Audit had been
taken into account in the LVT’s calculation of development value in Annex B of
its decision.
Facts
11.
From the Statement of Agreed Facts and the evidence we find the
following facts. The Property is located on the south west side of Hamilton
Terrace between the junctions with Abercorn Place and Hall Road. The whole of
Hamilton Terrace and indeed most of St Johns Wood lies in the St John’s Wood
Conservation Area. The Property is not listed.
12.
The Property comprises a detached double fronted house on lower ground,
raised ground and first floors, standing on a plot of land with a garden. The
Property was built in the 1930’s and has an agreed gross internal floor area of
3,686 square feet. There are no tenant’s improvements to be disregarded.
13.
The Tenants are the lessees of the Property pursuant to a lease dated 11
July 1985 for a term of 65 years from 25 March 1985. The valuation date is 8
March 2010.
Ground 6 – freehold value
14.
In its decision, the LVT said:
“33. Mr Ryan approached the
valuation of the property through the collections of comparables into property
baskets, each with distinct characteristics. He then relied upon the average
per square foot value from these baskets to produce a match to the particular
features of the subject property. He argued that the average value per square
foot from a basket of three improved houses dating from the 1930’s, together with
a discount for unimproved condition, produced the best match to the subject.
The discount was applied by taking the mid-point between the average for the
three improved houses and the single unimproved property, No.35 Loudoun Road.
This produced a value per square foot of £1,240. The Tribunal viewed the
comparable evidence and recognised this method relied upon good comparable data
and succeeded in achieving a good match for the subject property in two key
property areas; namely:
-condition; and,
-house type
The Tribunal favoured Mr Ryan’s approach
because it achieved comparison between comparable properties and subject
properties without resorting to subjective adjustment for condition. Reliance
upon subjective adjustment for condition was adopted by Mr Hamilton and the
Tribunal had concerns about the influence of the adjustments on the calculation
of the per square foot values. However, the Tribunal recognises the approach
adopted by Mr Ryan failed to reflect the value premium afforded any property situated
in Hamilton Terrace. A criticism raised at Mr Ryan’s valuation by Counsel was
it represented “a valuation of an unimproved house in Springfield Road, not
Hamilton Terrace”.
15.
To address the failure sufficiently to reflect the Hamilton Terrace
location premium, the Tribunal used the same basket method as adopted by Mr
Ryan. The Tribunal used the comparables submitted and agreed by the Experts to
create a basket of Hamilton Terrace properties (excluding No.22) and a basket
of non-Hamilton Terrace properties. Despite the acknowledged variability
within and between these property baskets in type, age and character, with
their knowledge and experience the Tribunal considered this method the best
approach to determine a crude Hamilton Terrace premium with the available
data. Details of the properties in each basket are shown in Table 1 at Annex
A. The results of the analysis were an average for the Hamilton Terrace
properties of £1,531 psf and an average for those properties located elsewhere
of £1,384 psf. The Tribunal inferred from those findings that there is a
premium of £147 psf for the Hamilton Terrace properties equivalent to around an
11% uplift on prices for properties beyond Hamilton Terrace. The Tribunal,
based upon their experience and knowledge, considered this an appropriate price
differential.
16.
The Tribunal has added this premium to £1,240 psf, the value arrived at
by Mr Ryan, from the property basket of improved houses dated from 1930 but
adjusted for condition. This produces a freehold value per square foot of
£1,387. When applied to the agreed gross internal area of the house of 3,686
sq ft it equates to £5,112,482 (to which development value of £650,000 would be
added).”
17.
In his expert witness report to this Tribunal, Mr Ryan produced a new “composite
basket of transactions” covering 52 properties located over a wide area within
NW8. This included the 24 comparables that he had initially relied upon below.
Whilst he accepted that this new list was substantially larger, he said that he
had taken on board the criticisms that had been made by the LVT and that it was
perfectly in order to carry out an even more thorough analysis and to take
account of any new evidence that had become available. He did this, he said,
because he “wanted to make sure.” There was only one property on the new list
where the analysis had not been agreed with Mr Hamilton: 98 Hamilton Terrace
where there was a discrepancy in terms of floor areas between the agents
particulars and detailed floor plans. Mr Ryan said that although he was not
particularly acquainted with “the law of large numbers” that Mr Jackson had
referred to, it stood to reason that the more comparables that were considered,
the more accurate would be the averaging exercise that he had carried out.
18.
The properties were all located in high-class residential streets in the
area (including Hamilton Terrace) and comprised 13 modern and 38 older or
period detached, semi-detached and terraced houses, some unmodernised and some
comprehensively refurbished. In the light of the wide variation in house
types, age and condition, Mr Ryan said he had not made subjective adjustments
which would be complex and likely to cause prolonged debate. He instead
undertook several averaging/grouping exercises.
19.
Firstly, he simply calculated an average rate psf of all 52 properties
and arrived at a figure of £1,314 psf. He said that his schedule included four
properties where the values could be said to be at the extreme margins
(including 22 Hamilton Terrace that had been excluded from his original list
because the sale price was 43% of the average), but had decided to include them
all as to exclude them was, in his view, subjective. For instance, whilst
there were several sales at below the average, 15 Cavendish Avenue had sold for
£2,827 psf and that would skew the figures the other way. However, on the
basis that the subject property was built in the 1930s, that it was
unmodernised by the prevailing standards of the market in that area and that it
was in Hamilton Terrace, he then went on to allocate the properties into
separate baskets. Mr Ryan said that the 13 non-period properties had an
average value of £1,259 psf with the remaining period properties producing an
average of £1,333 psf indicating a non-period discount of £74 psf. The 10
unmodernised houses produce an average of £1,097 psf with the average of the
remainder being £1,366 psf indicating a discount for being unmodernised of £269
psf. Finally, the average for the 11 Hamilton Terrace houses was £1,421 with
the remainder producing an average of £1,286 psf. This, he said, implied a
premium for Hamilton Terrace of £135 psf. The resulting calculation became:
Starting
average for all properties (psf) £1,314
Non period
adjustment £74
Unmodernised
adjustment -£269
Hamilton
Terrace adjustment +£135
Average of
these 3 adjustments to apply to subject -£
69
Adjusted base value £1,245
That was within 0.4% of the £1,240 he had put
before the LVT and, as it was the result of a far more detailed analysis that
was the figure he said he was now adopting. This analysis, he said, clearly
demonstrated that the Hamilton Terrace premium was included in his calculations
and the LVT’s suggestion that it was not was therefore manifestly wrong.
20.
At the commencement of the hearing it was pointed out that there had
been an error in that one of the properties in his new schedule of comparables
had been entered twice, and so the actual list comprised 51 sales. Although a
fully revised schedule and breakdown of the calculations upon which he had
based his assessments of average prices per sq ft was not produced to us, Mr
Ryan said that the overall effect was not great. However, it did result in the
Hamilton Terrace premium becoming £141 which he accepted was not far away from the
LVT’s figure of £147. According to his initial calculations, Mr Ryan said that
based upon the subject property’s existing square footage of 3,686, the valuation
(to which development value was to be added) became £4,589,070.
21.
In examination in chief, Mr Jackson asked Mr Ryan to comment on Mr
Hamilton’s criticisms of the way in which the averages had been calculated.
Mr Hamilton had produced an appendix to his report which demonstrated the
difference between Mr Ryan’s simple method of taking an arithmetical mean to
produce an average, and adopting a median basis that smoothes out the highs and
lows. Mr Jackson worked through the individual examples which produced a psf
figure for the subject property of £1,143 rather than the £1,245 that Mr Ryan
had come to. Mr Ryan pointed out that the difference, which he thought was not
great in any event, produced a figure that was even less in the Tenants’ favour
and showed the fairness of his approach.
22.
In cross-examination, Mr Ryan accepted that there was no question but that
there was a Hamilton Terrace premium, and insisted that his LVT valuation did
include it. When reminded that the £1,240 psf sought before the LVT was
derived specifically from 4 of the 24 comparables he had considered, none of
which were in Hamilton Terrace, so could not include the premium, Mr Ryan said
that his report was “badly stated” and that the premium was included. In the
paragraph of his expert report to the LVT that Mr Loveday was referring to, Mr
Ryan said:
“4.13 In the
circumstances I have averaged the adjusted rates derived from the other three
modern detached houses, 42 Springfield Road, £1,586, 55 Springfield Road,
£1,133 and 15 Marlborough Place £1,424, which is £1,381 per sq ft. The
average of this rate and the £1,098 derived from the unmodernised Loudon Road comparable [35 Loudon Road referred to in the previous paragraph] is £1,239.50,
say £1,240 per sq ft. Standing back and considering this rate, I believe it
is appropriate to the subject property as it is around £250 per sq ft less than
the £1,506 rate derived as the average of both refurbished houses and the
Hamilton Terrace average, excluding No 22. This is a fairly modest sum when
considering the costs of refurbishment and the value added by it, which is
quite clear from the evidence and as such I am happy that it does not
understate the value of the subject property.”
He said that in arriving at his figure, it was
necessary to stand back and take a view, and he regretted that he had not
included more detail. In his review of 24 properties, there were 7 in
Hamilton Terrace, and 5 of those fell into more than one “basket”.
23.
Asked about Mr Hamilton’s use of 143 Hamilton Terrace as support for the
LVT’s decision (which he did not wish to disturb), Mr Ryan said that he thought
it was unsafe to rely upon a single comparable as “every transaction has its
own story”. Also, the property was very different in a number of respects, and
thus a significant number of adjustments had had to be made. In his view, due
to the much better layout of 143 and the need for extensive modernisation, Mr
Hamilton should have made a further discount of £12.5% from the £1,809 psf
which would bring it down to £1,283 psf which was very much closer to his own assessment
for the subject property at £1,245 psf.
24.
Picking up on that basis of analysis, where adjustments were made to
individual properties, Mr Loveday put to Mr Ryan that that was precisely the
way valuers normally work and asked why he had not adopted this approach in his
own valuation. Although he insisted that his basket approach was commonly
used, Mr Ryan admitted that he had not previously adopted the approach of
averaging across a basket of properties instead of individually adjusting each
and then producing an average. He said that St Johns Wood is an unique location
having so many similar properties (although none were directly similar to the
subject), and he could not understand why Mr Hamilton had homed in on just one
property as a cross-check on the veracity of the LVT’s decision, whereas he could
have done the same exercise on all 51 comparables. Mr Ryan pointed out that the
LVT had said they favoured his approach.
25.
In submissions, Mr Jackson pointed out that at paragraph 7 of the Landlord’s
Statement of Case, it was said that “there is no appeal against the LVT’s
finding that a roof extension would be worth some £839,460.” This statement
was, he said, incorrect. That figure had been derived from the value per sq ft
for the main accommodation of £1,387 adopted by the LVT to which the £260
uplift for the 510 sq ft new accommodation was to be added. Whilst it was
accepted that the uplift was not subject to appeal, the other figure was. If
the Lands Chamber finds in the appellants’ favour in respect of ground 6, then
it follows that the GDV of the extension must be less than the £839,460
referred to. Mr Jackson also drew to our attention some factual errors in the
LVT’s recording of the evidence of both Mr Ryan and Mr Hamilton that had been before
them.
26.
He said that Mr Hamilton had had an opportunity to produce a new
valuation for this Tribunal, but had chosen not to do so. Mr Jackson said that
in his view, the choice of 143 Hamilton Terrace for use as a “cross-check” was
a curious one as it would have been more appropriate to pick a house of the
same age and condition from elsewhere in the agreed list of comparables, and
simply add his £147 Hamilton Terrace premium. It would be perilous to rely
upon that comparable alone as neither valuer had seen it and there was no
tangible evidence in respect of costs of refurbishment.
27.
Mr Hamilton acknowledged in his report that the LVT had preferred Mr
Ryan’s averaging exercise to the more detailed analysis of a selection of
comparables that he had used. However, in his view the approach he had taken
was more appropriate and was the traditional basis upon which valuers analyse
comparables. He had used only the properties where the fewest adjustments
were required (11 of the 24 in the Agreed Statement of Facts) and had reached a
figure before the LVT (which included the Hamilton Terrace premium) of £1,425
psf which was just under 2.5% above the figure they determined. This was well
within an acceptable error of margin, and the Landlord accepted it particularly
in the knowledge that based upon the grounds of appeal, the Upper Tribunal
could not increase the LVT’s figure.
28.
He said that Mr Ryan’s specific analysis of four comparables at
paragraph 4.13 of his revised report to the LVT (see paragraph 22 above) in
assessing a figure of £1,240 psf took the average of two Springfield Road sales
and one Marlborough Hill sale and then averaged those against one in Loudon Road. The calculation was:
42 Springfield Road £1,586
55 Springfield Road £1,133
15 Marlborough Hill £1,424
Total £4,143
/3
Average £1,381
35 Loudon Road £1,098
/2
Average £1,239.50
– say £1,240
This makes it, Mr Hamilton said, abundantly
clear that the rate he adopted did not include any premium for Hamilton Terrace
as there were no Hamilton Terrace properties in the list from which the figure
was derived.
29.
Furthermore, it was clear from the appellant’s summary of Mr Ryan’s
evidence in their application to the LVT for permission to appeal (at
paragraphs 3.2.3 and 3.2.4) that they had misunderstood what Mr Ryan actually
did. They had also referred to his original calculations which had in fact been
amended before the LVT.
30.
Turning to Mr Ryan’s new evidence to this Tribunal, Mr Hamilton pointed
out in his supplemental report that all but one of the further comparables
related to sales that took place after the valuation date, and all but one of
the “new” comparables (143 Hamilton Terrace) were not in that street. Further,
they were all period houses and, as such, little weight could be attributed to
this evidence. He also produced worked examples to demonstrate the dangers
inherent in Mr Ryan’s approach of averaging across baskets of properties, and
provided at Appendix 12 the baskets of properties that Mr Ryan had referred to
and in each case, the balance of sales not included within that basket.
Putting Mr Ryan’s rates psf into order from lowest to highest, he set out the
arithmetic mean, range and median mode. The result proved a number of
mathematical inaccuracies and showed how misleading simple averages across a
very wide range of values could be. Whilst it gave an indication of what could
be described as a crude average for NW8, with there being no adjustment for anything
other than the three points Mr Ryan had used (age, condition and
modernisation), without the sort of detailed analysis that valuers normally
undertake, the figures could be shown to be meaningless.
31.
Explaining his own approach, Mr Hamilton said he had not produced a new
valuation as the LVT’s adopted figure was accepted by the respondents.
However, he had carried out a cross-check based on 143 Hamilton Terrace. It is
one of three houses built after the second world-war, has been recently refurbished
and has better off-street parking. Mr Ryan’s date adjusted analysis of the
November 2011 sale price of £7.75 million was £6,444,655 or £1,809 psf and Mr
Hamilton said that in his view that figure should be reduced by £300 psf to
reflect these differences producing £1,509 psf which is some 6% higher than the
£1,425 psf he had been arguing for the subject property before the LVT. He
said that the sale of No 143 suggests that the LVT’s rate of £1,387 psf for the
subject property (prior to the development potential addition) and a freehold
value of £5,112,482 was certainly not too high and did not double-count the
Hamilton Terrace premium.
32.
Asked why he had only analysed one comparable this time, Mr Hamilton
said it was the closest on in terms of location and type and thus fewer
adjustments had to be made. The properties in Springfield Road, Marlborough Place and other streets in the vicinity all needed much more adjustment and
did not have the Hamilton Terrace premium built in.
33.
Mr Loveday submitted that in determining the issue of which was the
correct valuation approach, the Tribunal should recognise that Mr Hamilton’s cross-check
of 143 Hamilton Terrace, and indeed his wider analysis and evidence before the
LVT, followed convention and, in comparison with Mr Ryan’s complex and
inappropriate basis of analysis, was simple and straightforward. Mr Ryan’s
suggestion that the analysis of No 143 should be reduced by a further 12.5% to
reflect the need for refurbishment was unrealistic, as that would mean another
£2.1 million of expenditure was anticipated over and above the allowance which
Mr Hamilton had already made.
34.
It was suggested that the Tribunal would need to consider the
credibility of the witnesses, and should attach little weight to the novel and
unconventional approach relied upon by Mr Ryan. It was worth noting, Mr
Loveday submitted, that in reaching its conclusion the LVT did not rely upon
the whole basket of properties put forward by Mr Ryan, but the four specifically
referred to in his paragraph 4.13.
35.
A few days after the hearing, we carried out an accompanied inspection
of the subject property and viewed externally a selection of the comparables
that had been referred to by the experts. The properties varied in location,
age, style and apparent condition to a considerable degree and we agree with
the reasons promulgated by Mr Hamilton that the argument that the more
properties that are averaged, the more accurate will be the resulting figure
just does not bear scrutiny. For instance, the property at 22 Marlborough Hill
amongst others bears no similarity to the subject property whatsoever. If
adjustments were made to cover the whole range of differences, the result would
be so subjective as to be worthless. However, for properties closer in type,
style and condition we agree that the conventional adjustment approach
preferred by Mr Hamilton is what valuers normally do. Indeed, Mr Ryan admitted
that he had never before used the basket averaging approach and we are
satisfied from the evidence that it was neither appropriate nor accurate.
36.
We found the averaging exercise of the four properties homed in on by Mr
Ryan at paragraph 4.13 of his report confusing and self-serving. The specific exercise
he used of averaging three properties and then adding a fourth and averaging
that result seems odd, and is certainly a methodology strange to this Tribunal.
We therefore attach no weight to it. However, what the exercise does show, as
Mr Hamilton rightly in our view pointed out, is that on that analysis a
Hamilton Terrace premium cannot possibly have been included.
37.
Although we are of the view that Mr Hamilton should perhaps have carried
out an exercise of making his subjective adjustments to three of the four
properties referred to in Mr Ryan’s paragraph 4.13 (excluding Marlborough Hill
for the reasons we have given) to give more weight to his opinion, we accept
what he says about then having to find a Hamilton Terrace premium. That is, of
course, already included in his analysis of 143 Hamilton Terrace. We do not
accept Mr Ryan’s arbitrary further reduction of 12.5% on this property – the
result of which again seems to again be somewhat self serving to get to a
figure close to the one he seeks. Although it is acknowledged that neither of
the valuers had seen inside 143 Hamilton Terrace, we agree with the submission
that such a deduction would equate to additional expenditure on modernisation
of over £2 million on top of what Mr Hamilton had already allowed for, which we
find very unlikely.
38.
In our view, from the evidence, it is clear that the figure of £1,240
(or £1,245 psf) is far too low and, as we have said, we accept that on the
basis of Mr Ryan’s evidence, the LVT was correct to conclude that the Hamilton
Premium was not included. Given Mr Ryan’s current view that the uplift for
Hamilton Terrace is in the region of £141psf – which is very close to the LVT’s
figure of £147psf, we consider that it would be wrong to disturb the LVT’s
decision. Despite the Tenants’ efforts through Mr Ryan’s evidence to have a
“second bite at the cherry”, the LVT has not been shown to be wrong on its
conclusion and the appeal is therefore dismissed on this ground. Having come
to this conclusion, it follows that there is no need for an adjustment to be
made to the development value of £839,460 as argued by Mr Jackson (para 25
above).
Grounds 1-4 – development value
39.
The LVT rejected the Landlord’s argument that there was potential for a
ground floor extension. As to a loft extension it said, at paragraph 36:
“36. The
Tribunal took the view that the 510 sq ft project with no change to the roof
line was not unlikely to obtain planning permission with 3 dormers at the front
and 3 on the back.”
The LVT made various findings as to building costs and set out
the following calculation in Table 2 to Annex B of
its decision:
Table 2 – Potential development
value
Roof space
conversion
Useable floor space
from conversion (GIA) 510
Estimated value
psf:
Freehold value psf £
1,386
Uplift psf £
260
Total £
1,646
Total additional
capital value £ 839,460
Less
Cost of works £
88,000
Additional fitting
out £ 15,000
Contingencies at 25% £
25,750
Fees at 17.5% £
22,531
VAT at 20% £
30,256
Total cost of works plus contingencies and
risk £ 181,538
Additional value to purchaser from roof
space conversion £657,923
Say £650,000
40.
The Tenants argue that this calculation makes no allowance for
development risk, planning risk or the costs of obtaining planning permission.
Mr Ryan’s evidence is that a purchaser would adjust the price he was prepared
to pay to reflect the risk that he might not get
planning permission and would also expect to be rewarded for the time, effort
and inconvenience of undertaking the extension works. He said the Audit
identifies the Property on a map as lying in an area where roof extensions
“would not normally be acceptable”. In the light of that he considered that
there was only a 30-40% chance of successfully obtaining planning permission.
41.
That was reinforced, he said, by the recent receipt of a letter from
Westminster City Council (“the Council”) dated 31 October 2012 in response to a
request that Mr Jackson had made for pre-application advice. Although the letter
states that the Council would ordinarily require detailed plans, it expressed
the view that “the creation of a 45 degree
mansard roof extension with three dormer windows to the front and to the rear…
would be likely to be viewed as unacceptable in principle having regard to the
content of UDP policies DES1 and DES6(A) 2, 3, 4.” The letter went on to say that
there might be scope for discreet dormer windows on the rear elevation subject
to consideration of detailed plans. In cross examination Mr Ryan agreed that
a roof extension with 6 windows that did not alter the existing roofline would
not contravene DES6(A) 3 or 4 but that the Property could be regarded as a
‘completed composition’ and therefore any front extension would be contrary to
DES6(A) 2. However, when pressed as to this and the effect of the Audit he
said ‘I’m not saying you would not get planning permission, just that there
would be doubt about it.’ As to the fees for obtaining planning permission, he
agreed that he had not made any specific allowance
for them but considered the LVT’s overall allowance for fees of 17.5% was
inadequate.
42.
Mr Ryan further considered that buyers, whether owner-occupiers or
developers, are rarely willing to pay the full as-built value for development
potential even when planning permission has been granted and would make an
adjustment for development risk. In his opinion this would be 50% of the
developed value but he also looked at a more optimistic scenario where the
buyer would be willing to pay 70% of developed value. To this should be added
the planning risk and he produced various calculations. He concluded by
adopting a figure which lay at a mid point
between assuming a 30-40% chance of obtaining planning permission and a buyer
willing to pay 70% of the developed value namely £188,050 as the net
development value. His alternative residual valuation of development value
used different building costs to the LVT, did not make any deduction for
development risk, but made a 70-60% reduction to reflect the risk that there
was only a 30-40% chance of obtaining planning permission. In cross
examination he conceded that it was implicit in the LVT’s approach to
development value that development risk was taken into account, but they
thought the risk was low. He said that if you were adopting the residual
valuation approach you should deduct 10-15% of the GDV to reflect development
risk.
43.
Mr Hamilton’s evidence was that a roof extension with 6 windows would
not offend any of the Council’s planning policies. The buildings on either
side of the Property are taller and such an extension would not look out of
place. The building was not listed and many extensions had been permitted at
properties in St John’s Wood, most of which were covered by the same notation
in the Audit as the Property. The planning officer who wrote the letter dated
31 October 2012 had nothing in front of him and Mr Hamilton considered that if
the officer had detailed architect’s drawings he could be persuaded to come to
a different conclusion. He considered that the 17.5% for fees shown in the
development costs included the professional fees of obtaining planning
permission.
44.
Mr Hamilton further said that the LVT accepted his figure of £650,000
for development value in which he had not made any specific deduction for
development risk, planning risk or the cost of planning consent. He considered
that while a developer would make a deduction for development risk a
residential owner occupier, the type of buyer who would be interested in the Property,
would not. There was a risk that planning permission might not be granted but
his figure, which the LVT accepted, took that into account because it was at
the lower end of a range of values. In effect, in terms of value, the prospect
that permission might be obtained for more than 510 square feet cancelled out
the risk of not obtaining planning permission for the 510 sq ft extension.
45.
In our judgment a purchaser of the Property would certainly have regard
to its development potential. The houses either side are considerably taller
and there are many 1930’s houses similar to the Property in St John’s Wood which have a mansard type roof with dormer windows - no. 91
being a typical example. We accept the Landlord’s argument that this would be
an obvious form of development to consider. However, we also accept Mr Ryan’s
evidence that a purchaser would not be willing to pay the full amount of any
uplift or profit i.e. net development value. While the risks involved in site
development that a developer would be willing to undertake are no doubt greater
than those that an owner-occupier, contemplating the construction of what would
be a relatively modest extension adding about 13% floorspace to a house, would
be willing to undertake, we think it is unrealistic to suggest no allowance
would be made. In addition to the inevitable time, effort and inconvenience of
constructing an extension there may well be borrowing costs and delays. In our
judgment an allowance should be made for what Mr Ryan described as development
risk.
46.
We note Mr Ryan’s acceptance that the LVT had made some allowance for
development risk and the description of the extension costs in their decision
as being “Total cost of works plus contingencies and risk.” However, Mr Hamilton
did not suggest that the LVT had included a figure for development risk or
that, more specifically, the 25% contingency figure reflected development risk.
We do not consider that the LVT made any proper allowance for development
risk. As there is no appeal against the LVT’s residual method of valuing
development potential it is not possible for us to adopt Mr Ryan’s approach of
simply deducting a global figure from the GDV. We accept his evidence that if
doing a residual valuation a specific allowance for development risk would fall
to be an additional deduction from GDV along with construction and other costs.
Adopting this approach Mr Ryan considered that 10-15% would be an appropriate
deduction from GDV. Mr Hamilton did not put forward a figure for development
risk in the event that we considered one should be allowed. We return to the
figures after assessing planning risk.
47.
As to planning risk, the evidence as to what might be permitted is set
out in the UDP policies, the Audit policies and the letter dated 31 October
2012. The key policy is DES6 of the UDP:
“POLICY DES
6: ROOF LEVEL ALTERATIONS AND EXTENSIONS
(A) Permission may be refused for
roof level alterations and extensions to existing buildings (which may include
the installation of conservatories, roof terraces, telecommunications equipment
or solar collectors) in the following circumstances:
1) where any additional
floors, installations or enclosures would adversely affect either the
architectural character or unity of a building or group of buildings
2) where buildings are
completed compositions or include mansard or other existing forms of roof
extension
3) where the existing
building’s form or profile makes a contribution to the local skyline or
was originally designed to be seen in silhouette
4) where the extension
would be visually intrusive or unsightly when seen in longer public or
private views from ground or upper levels
5) where unusual or
historically significant or distinctive roof forms, coverings, constructions
or features would be lost by such extensions.
(B) Permission may be granted for
new roof structures or additional storeys on existing buildings in the
following circumstances:
1) where the proposed
development or form of alteration is in sympathy with the existing
building’s architectural character, storey heights and general elevational proportions
2) where the form of
detailing to the extension either repeats or reflects the form, detailing
or use of materials found in an existing building
3) where the proposed
design accords with (or establishes an acceptable precedent for) similar
extensions within the same group of buildings
4) where the design of
extension avoids any infringement of the amenity or reasonable visual
privacy enjoyed by the occupants of adjacent or nearby buildings.”
48.
Although Mr Ryan at one stage suggested that DES6(A) 5 might apply, the
Property could not be said to have an unusual or historically significant roof,
being very similar to many other 1930’s houses. He focused on DES6(A) 2 and
the issue of whether the Property is a ‘completed composition’, a phrase also
used in the Council’s letter. He agreed there is no mansard or existing roof
extension. We note that the explanatory text adds this in paragraph 10.69:
“Buildings that are completed compositions, with an existing architectural
climax at roof level, are not suitable for extension.” The phrase ‘completed
compositions’ is picked up in the Audit paragraph 4.81 which deals with
“Category 1 – Properties with existing roof extensions, or where extensions
would not normally be acceptable” and states:
“This includes all listed buildings and
groups of buildings that remain largely unaltered. It applies to many of the
villas in St John’s Wood which are completed compositions, often with
distinctive roof forms, and overhanging eaves, making extensions difficult to
achieve and highly visible. It also applies to semi-detached houses and groups
of houses, where an extension would imbalance or damage the integrity of a pair
or group. Included here are 20th century developments where
prominent mansard and pitched roofs are important elements of the original
design.”
49.
It is difficult to see how the property could be regarded as a
‘completed composition’ in the sense being used in the UDP and Audit; there is
nothing architecturally distinctive about it that the anticipated roof
extension would disrupt. Further, it is not part of a group but sandwiched
between two very different houses which date from much earlier, are taller and
stuccoed. It does not have a mansard nor is there any suggestion that the roof
is an important element of its design. In our view, less weight would be given
to the Property’s inclusion in the Audit than the UDP for these reasons as well
as others. The blanket designation of most of St John’s Wood as Category 1
including the Property is questionable and gives rise to doubt as to whether
sufficient consideration was given to the Property’s architectural character,
particularly in the light of the fact that the Property is wrongly identified
on another Audit plan as dating from 1850 to 1879. Further, the Audit is
supplementary planning guidance rather than a development plan and in deciding
whether or not to grant planning permission the development plan must be accorded
the weight required by s.38(6) of the Planning and Compulsory Purchase Act 2004.
50.
As to the letter from the Council dated
31 October 2012, we consider that the planning
officer was understandably adopting a cautious approach in the light of the
fact that he was not provided with any detailed drawings. Although the officer
appears to have a clear idea of the current appearance of the Property and its
neighbours, it is not clear to what extent he thought the roof was going to be
altered. It is difficult to see what proper objection there could be to a roof
extension similar in appearance to the 1930’s houses shown in figure 51 of the
Audit and described there favourably as being “characterised by the use of
higher pitches and neatly detailed dormers.” We accept Mr Hamilton’s evidence
that, with the benefit of detailed drawings, the planning officer could be
persuaded to adopt a favourable approach. In our view, giving proper
consideration to policy DES6 and the Audit, planning permission would be likely
to be granted especially when taking into account the statements in DES 6(B)
(1), (2) and (4).
51.
Notwithstanding our view as to the likelihood of planning permission
being granted, as Mr Hamilton said that he made an allowance for planning risk
it appears to be common ground that some allowance should be made for the fact
that planning permission has not been obtained. We agree. However optimistic
s/he was, a purchaser would naturally take into account the risk that for some
unforeseen reason planning permission could not be obtained in deciding what to
bid for the freehold. We accept Mr Ryan’s evidence that no specific allowance
has been made for planning risk by the LVT. Mr Hamilton’s evidence is that his
figure of £650,000 which the LVT accepted made an allowance for planning risk
because it took into account the possibility that planning permission might be
granted for a larger roof extension. However, the LVT do not appear to have
accepted that and indeed that was Mr Hamilton’s view because he said he thought
they were wrong on that point. Therefore the LVT’s decision has made no
allowance for planning risk. Mr Hamilton did not put forward a figure for
planning risk in the event that we considered one should be included though we
note that the figure of £650,000 which he put forward at the LVT was about 8%
less than the value he put on the larger roof extension (£704,088) which he
thought would get planning permission, paragraph 8.10 of Mr Hamilton’s report
to the LVT. Mr Ryan did not put forward a figure for planning risk in the
context of a residual valuation. We consider the arbitrary 60-70% reduction he proposed to GDV to reflect
planning risk to be wholly excessive.
52.
In the light of the fact that the risk of not obtaining planning
permission would be modest, we do not consider a significant allowance should
be made for this. Having regard to the evidence and in particular the range of
figures proposed by Mr Ryan for development risk, namely 10-15%, we consider
that a deduction of 20% from GDV would adequately reflect both development and
planning risks in the sum that a purchaser would be prepared to bid for the
Property.
53.
As to planning fees, although Mr Ryan considered that the fees allowed
of 17.5% were inadequate he produced no calculations nor did he put forward any
alternative figure. In those circumstances we do not consider the Tenants have
made out their case that the LVT was wrong not to
allow any more.
54.
Our calculation based on these conclusions, which is set out in the
Tribunal’s valuation at Appendix A, results in a revised development value of £500,000
and an enfranchisement price of £1,536,000 and to that extent the appeal is
allowed.
55.
This determines the matter in issue in this appeal, and we determine the
enfranchisement price at £1,536,000.
DATED 18
February 2013
Her Honour
Judge Alice Robinson
Paul R Francis
FRICS
LRA/75/2011
UPPER TRIBUNAL
(LANDS CHAMBER) VALUATION
101 HAMILTON
TERRACE, LONDON NW8 9QY
APPENDIX A Table 1
Lease
Data
|
|
Valuation
data
|
|
Lease
Term
|
66
years
|
Deferment
rate
|
4.75%
|
Lease
Expiry date
|
25
March 2050
|
Capitalisation
Rate
|
5.5%
|
Unexpired
term as at valuation date
|
40.04
|
Landlords
share of marriage value
|
50%
|
|
|
|
|
Annual Rent receivable by
landlord:
|
|
Relativity
|
|
Payable
from 25 March 1985 for 30 years
|
£
6,000
|
Term
of 40.04 years
|
64.5%
|
Payable
from 25 March 2015 for 15 years with reviews at 2030 and 2045
|
£
12,619
|
Term
of 65 years
|
81.5%
|
|
|
Existing
GIA of property (R2)
|
3686
|
|
|
Freehold
value per ft 2
|
£
1,387
|
|
|
Assessed
development potential
|
£
500,000
|
|
|
Value
(see table 2)
|
|
|
|
|
|
|
|
Unencumbered
Unimproved
|
£
5,612,482
|
|
|
Freehold
value with vacant possession (FHVP)
|
|
|
|
|
|
|
|
Value
of 55 year term for
|
£
4,574,173
|
|
|
Calculation
of existing ground rent at 81.5% relativity
|
|
|
|
Current
lease value after adjustment for onerous ground rent
|
£
3,550,323
|
|
Valuation
date
|
8 March 2010
|
|
Value
of Freeholders present interest
|
|
|
|
Term
1
|
|
|
|
Ground
rent payable
|
|
£
6,000
|
|
YP
@ 5.05 yrs @ 5.5%
|
|
4,304
|
£
25,624
|
Term
2
|
|
|
|
Ground
rent payable
|
|
11,435
|
|
YP
@ 35 years @ 5.5%
|
|
15,39
|
|
PV
of £1 in 5.04 years @ 5.5%
|
|
0.7634
|
£
134,347
|
Reversion
|
|
|
|
Freehold
in vacant possession
|
|
5,612,482
|
|
40.04
years @ 4.75%
|
|
0.156
|
£
875,547
|
Freeholder’s
interest
|
|
|
£
1,009,894
|
|
|
|
|
Calculation
of Marriage Value
|
|
|
|
Freehold
Possession Value (FPV)
|
|
|
£
5,612,482
|
Less
|
|
|
|
Freeholders present
interest
|
|
£
1,009,894
|
|
Leaseholder’s
interest
|
|
£
3,550,323
|
|
|
|
|
£
4,560,217
|
Marriage
Value
|
|
|
£
1,052,265
|
Take
share of marriage value at 50%
|
|
|
£
526,132
|
Enfranchisement
price
|
|
|
Total
£1,536.026
|
|
|
|
Say
£1,536,000
|
|
|
|
|
Onerous
Ground Rent Adjustment
|
|
|
|
Freehold
Value (FHVP)
|
|
£5,612,482
|
|
25
year lease value with palatable ground rent
|
|
81.5%
|
£4,574,173
|
Existing
Lease Value with palatable ground rent
|
|
|
|
Relativity
|
|
64.5%
|
£3,620,050
|
Ground
Rent
|
|
|
|
Current
receivable
|
|
£
6,000
|
|
Less
|
|
|
|
Payable
rent at 0.1% of freehold value
|
|
£
5,612
388
|
|
Years
purchase 5.65 years at 5.5%
|
|
£ 4,304 1,670
|
|
Rent
receivable at review 25 March 2015 @ 0.25% of 54 years term
|
|
£
11,435
|
|
Less
|
|
|
|
Payable
rent at 1% of freehold value
|
|
£
5,612
£
5,823
|
|
Years
purchase 35 years at 5.5%
|
|
15.31
|
|
Deferred
at 5.04 at 5.5%
|
|
0.7634
|
£
68,057
|
|
|
|
£69,727
|
Existing
Lease Value with onerous ground rent terms
|
|
|
£3,550,323
|
|
|
|
|
APPENDIX A
Table 2
Potential development value
Roof space
extension
Usable
additional floor space 510 sq ft
Total
additional capital value £839,460
Less
Discount
for development
and
planning risk @ 20% £167,892
Cost of
works £ 88,000
Additional
fit out £ 15,000
Contingencies
@ 25% £ 25,750
Fees at
17.5% £ 22,531
VAT @ 20% £
30,356
Total
build costs £181,538
Total
deductions £349,430
Net
development value £490,030
Say £500,000