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[2000] EWLands LRA_16_1999 (11 January 2000)

LRA/16/1999

LANDS TRIBUNAL ACT 1949

LEASEHOLD ENFRANCHISEMENT- Leasehold Reform, Housing and Urban Development Act 1993 s.24 - premium payable for freehold - value of right to receive insurance commissions - value of right to manage. Appeal allowed in part – premium payable for freehold determined at £3,610.

IN THE MATTER of an APPEAL from a DECISION of a LEASEHOLD

VALUATION TRIBUNAL of the LONDON RENT ASSESSMENT PANEL

BETWEEN

Phyllis Trading Limited Appellant

and

86 Lordship Road Limited Respondent

Re: 86 Lordship Road, Stoke Newington, London N16 0QP

Tribunal Member: P.R.Francis FRICS

Sitting at: 48/49 Chancery Lane, London WC2A 1JR

on 6 December 1999

The following cases are referred to in this decision:

Maryland Estates v 63 Perham Road Limited [1997] 2 EGLR 198.

Verkan & Co v Byland Close (Winchmore Hill Limited) [1998] 2 EGLR 139

Daejan Properties v Weeks [1998] 3 EGLR 198

The Wellcome Trust Limited v Romines LT LRA/8/1998 (Unreported)

Mr. Stephen Bickford-Smith, instructed by Farrington Webb, solicitors of Brighton for the appellant.

Mr. William Boyes, instructed by Percy Short & Cuthbert, solicitors of London N7 for the respondent.

DECISION

This is an appeal by Phyllis Trading Limited (hereinafter referred to as "PTL") as the landlord, from a decision of the London Leasehold Valuation Tribunal for the London Rent Assessment Panel, dated 11 May 1999, whereby the tribunal determined the premium payable for the freehold of 86 Lordship Road, Stoke Newington, London N 16 ("the subject property") to be £3,300.

PTL were represented in this appeal by Mr. Stephen Bickford-Smith of Counsel. He called Mr. Michael Hannan CA, a Chartered Accountant of London W2, who gave evidence relating to valuation matters and particularly any value to be attributed to the right to receive insurance commission, and the right to manage. Mr. T. Nelson, an insurance broker from Jersey had produced an expert witness statement, but was not called.

86 Lordship Road Limited ("the respondent") was represented by Mr. William Boyes of Counsel. He called Mr. Ian Rennie BSc. FRICS, a chartered surveyor and partner in Rennie & Partners of London N 2, who gave valuation evidence.

There was no statement of facts agreed between the parties, but from the documentary evidence produced, and the oral evidence given at the hearing I find the following facts:

1. The subject property comprises a four-storey mid-terrace house constructed c.1890, and converted into three flats c.1986. It is located on the north-east side of Lordship Road, about a quarter of a mile from local shopping and other facilities in Stoke Newington High Street. The flats (one basement, one ground floor and a first/second floor maisonette) are all provided with gas central heating.

2. The flats were each the subject of 99 year leases from 24 June 1986 (thus having unexpired terms of 86.25 years at the valuation date (30 March 1999)). Ground rents of £50 per annum until 2019, £150 per annum until 2052 and £250 per annum for the remainder of the term were payable.

3. The initial application under Section 24 of the Leasehold Reform, Housing and Urban Development Act 1993 was made by the lessees on 23 October 1997 at an offer price of £2,500. A counter notice was served by the freeholder on 23 December 1997 at £7,000. The application to the LVT was dated 6 April 1998, and its decision, following a hearing on 30 March 1999, was issued on 11 May 1999. That decision determined that the premium payable for the freehold would be £3,300.

4. Notice of appeal to this Tribunal was dated 4 June 1999.

On behalf of the appellant, Mr. Bickford-Smith said that the grounds of the appeal were that the LVT failed to give adequate weight to the value of the management charges, and to insurance commission (the right to receive it having been retained by the freeholder); had assessed the yield on ground rent too high and failed to apply their own experience of the market in assessing open market value. Also, in the light of an offer subsequently received for the property, that market sales are at a higher level than the premium determined.

In essence, he said, there is now direct evidence of the market value of the reversion (which at the time of the LVT hearing was unavailable), as indicated by the offer received from J H Watson Property Investment Limited. This offer relates to a portfolio of properties, of which 86 Lordship Road is one, and in Schedule 2 to the Agreement for Sale, dated 4 June 1999, values the subject at £3,780. Thus, the LVT's determination at £3,300 was too low. Also, the right to nominate the insurer, and retain the insurance commission for the premises under that agreement remains with the appellant, and is valued at £1,929.87. Therefore, the total value of the reversion was at least £5,709. Furthermore, Mr. Bickford-Smith said that the LVT were wrong to ignore the value to the freeholders of the right to manage the property, and gave undue weight to the arrangements actually being operated by the appellant. By this, he meant that the LVT should have considered the potential value to a purchaser of that right. There must be a value to this aspect, he said, as property managers were in business to make a profit.

Mr. Bickford-Smith said that a purchaser would look first at the ground rent income stream, and capitalise it accordingly, and would then add any value attributable to potential profit earning elements such as insurance and management. He said that the LVT had erred in applying a capitalisation rate of 5 years purchase (YP) in respect of the achievable insurance commission, and this should have been 6 YP as determined by the Lands Tribunal in Maryland Estates v 63 Perham Road Limited [1997] 2 EGLR 198.

In summary, Mr. Bickford –Smith said that the new evidence being placed before this Tribunal provides clear material to justify a departure from the LVT decision, and thus overrides the principles established in Verkan & Co v Byland Close (Winchmore Hill Limited) [1998] 2 EGLR 139, wherein it was stated that the Lands Tribunal should be slow to disturb the position unless satisfied that the decision is clearly wrong.

Mr. Michael Hannan is a Chartered Accountant who qualified in 1966 and practices as a financial consultant to various property companies. He said that in formulating their offer for the subject property, J H Watson Property Investment Limited (who at the date of this hearing had not completed the purchase) had valued the ground rent income stream at £3,060 and the right to manage at 1.5 times the expected management fee income at £720, giving the agreed figure of £3,780. He explained that whereas at the present time the management fees were set at £100 per flat, the buyer was intending to increase this to £160. The justification for this was that they operated a computerised management system that would allow them to respond to queries effectively, and had a facility to produce a detailed summary of all work undertaken. The current managing agents did not, he said, have this facility.

He admitted that there was evidence the lessees had been difficult to deal with, and in this respect criticised Mr. Rennie's use of auction results as comparables, as in those cases, purchasers would probably not be in receipt of such detailed information about lessees as would be the case in a private treaty sale.

As to the insurance, Mr. Hannan said there was a clause in the contract of sale allowing for an amount of liquidated damages to be payable in the event that the purchaser sold any or all of the freeholds, including the right to insure, pursuant to a notice served by the qualifying lessees under the act. In respect of other sales, there was a clause to the effect that a purchaser should enter into an agreement in similar terms regarding the insurance. Whilst J H Watson Property Investment Limited did not want to pay for the right to insure, it had agreed that there was be a value to that right, which would have to be payable if the vendor's rights were lost. This had been agreed between the parties at three times the annual premium at the date of sale (which was £643.29 per annum), or £1,929.87.

Mr. Hannan also referred to the witness statement of Mr. Nelson which indicated that insurance commissions in respect of reasonably substantial portfolios could amount to 50% of the premium. This gives an annual income stream, in respect of this property, of £321.64, which if capitalised at 6 YP gives a value of £1,929.84. Therefore, he said, this substantiated their claim as to the value of the insurance commission element. As to the fact that PTL did not receive commission of this amount, he said this was irrelevant, and the market would pay a price based upon what was perceived to be a potential, rather than an actual, income stream.

In cross-examination, Mr. Hannan was unable to confirm whether or not the purchase price of £2,550 paid in 1996 by Claverton Estates, a linked company to PTL, was at arms length, although he thought it was. He also did not know when the property was transferred to PTL.

In respect of the right to manage, Mr. Hannan did not agree with the suggestion that if property management were profitable, PTL would have elected to manage it itself. He said that, unlike the prospective purchaser, PTL were not geared up to manage their properties and thus used a local agent, Simon Smith, who found it economic. Mr. Hannan accepted that the basis of the calculation of the value of the right to manage (at £720), as submitted to this Tribunal, was different to that produced to the LVT (at £1,450). Following discussion about the merits of using local agents or, as would be the case for the purchaser, managing from a considerable distance, Mr Hannan said that he could not comment about the purchaser's arrangements, and in any event this was irrelevant. The fact was that that a managing agent would make a profit out of the work, and thus that had a value. In cross-examination, Mr. Hannan said that a firm of managing agents, Richard Cabot & Co, were managing the property when it was acquired by Claverton Estates. The management then transferred to Supervising Surveyors and subsequently, about two and a half years ago to Messrs Simon Smith, Chartered Surveyors.

Mr. Hannan said that he had been involved with the purchase of ground rent portfolios for many years, and that for the seller to retain the right to insurance commissions was extremely rare. As to the market at the valuation date, he said that the availability of ground rents had dried up, and current low interest rates meant demand far exceeded supply, although he was unable to produce evidence of this. The purchaser had been introduced to PTL through a firm of ground rent brokers. He criticised Mr. Rennie's list of comparables, saying that they showed a massive variance in yields – from 13.45% to 6.1%, included mainly auction results, and related to properties of vastly differing types. It was not acceptable, he said, to take a mean in dealing with a specific property.

Mr. Hannan said that the agreed sum for liquidated damages in the contract of sale, relating to the value of the right to retain insurance commissions, would only be payable in the event that the prospective purchaser fails to complete, or otherwise breaches the contract, or the lessees purchase under the provisions of the Act. He said that the parties to the contract had agreed the calculation at three times the annual premium, and thus that must be the market value. Mr. Boyes said that the calculation was not related to the value of the right to receive commission, but Mr. Hannan did not agree. As to the alternative method of calculating the value, i.e., capitalising commission at 50% of the premium, Mr. Hannan referred to the statement by Mr. Nelson confirming that, in the case of reasonably substantial portfolios, commissions at this rate were unexceptional. In response to the suggestion that PTL were only receiving 10 per cent commission, Mr. Hannan said that the value was in the potential to receive a higher percentage.

For the Respondent, Mr. Boyes called Mr. Ian Rennie, a chartered surveyor who has experience in transactions involving the sale of freehold reversions to long leasehold owners. His firm also manages properties, and the Harrogate branch, of which he is also a partner, has an agency with Avon Insurance, through whom flat insurances are arranged.

He referred firstly to the valuation he had prepared in April 1998, at £2,950 – being the value of the landlord's interest at £2,900 (an 8 per cent yield), together with 50 per cent of the marriage value of £100. He also indicated that if the landlord could prove he received other benefits, such as insurance commissions or profits from management, then the value would rise. In the valuation prepared for this Tribunal, in September 1999, he had calculated the total value of the freehold reversion to be £3,330. This was made up of £2,980 relating to the value of the landlord's interest, plus £50 marriage value and £300 being the value of the insurance commission receivable at £60 per annum multiplied by 5 YP. Mr. Rennie was of the opinion that there was no value in the right to manage.

In cross-examination, it was suggested that the purchaser would be able to earn a higher commission on the insurance aspect than the 10 per cent being obtained by PTL due to its bargaining power (as a major landlord). Mr. Rennie said he had no knowledge of what might be achievable beyond his own firm's experiences with Avon Insurance, where the commissions being paid ranged between 15 and 17.5 per cent. He had never heard of insurance commissions as high as 50 per cent, and if that were to be the case, then the lessees would have justifiable grounds for alleging that they were being overcharged.

As to whether there was any value in the management of the flats, Mr. Rennie said he could not anticipate any profit being earned. The premises would need to be inspected at least once a year by a qualified surveyor. Whilst that in itself would not cost as much as the management charges received, by the time other aspects of day to day management had been dealt with, such as dealing with 'phone calls and queries from the tenants, arranging cleaning and maintenance of common areas, gardening etc., there would be no profit left.

Mr. Rennie said that the reason for the wide range of yields apparent from the schedule of comparables submitted with his report was that he had considered it appropriate to include as broad a list as possible, to give an indication of what would be appropriate for this type of property. He did not accept the suggestion that auction prices (which made up the bulk of his comparables) were necessarily lower than those achieved by private treaty. Whilst accepting that a purchaser might learn more about the quality of tenants in a private negotiation, auction results were a good indicator as the prices achieved were in open competition between willing purchasers who would have, like he had done in compiling his schedule, inspected the conditions of sale and done whatever homework was possible. He said that, amongst his comparables, he had been able to establish that there were tenant arrears in the Sheffield properties, but none had been disclosed for any of the others.

In closing, Mr. Boyes said that none of the appellant's submissions showed the LVT valuation to be wrong, and reminded me that I should be slow to disturb the LVT's decision (as referred to in Verkan). The appellant had relied upon the terms of an unusually worded contract, allegedly negotiated at arms length post the valuation date. Mr. Boyes said that, as to the price paid for the freehold in 1996 by PTL's related company, Claverton Estates, (£2,550), bearing in mind there had been little movement in the market by the valuation date, the LVT had been generous in applying their figure for the value of the landlord's interest at £2,980.

In respect of the proposed figure of £1,929.87 for the liquidated damages relating to the right to retain insurance commissions, Mr. Boyes said that this should be ignored in its entirety as, in circumstances where the property is sold pursuant to a notice served by the qualifying lessees under the Act, the amount is not specified. It is only in circumstances other than this where the amount to be paid to PTL equates to three times the annual premium. He also said that the liquidated damages calculation did not relate to the value of the right to receive commissions as it was only payable at the stipulated rate if the buyer fails to proceed, or otherwise breaches the contract as specifically set out in the contract. He said that no evidence was produced to substantiate the appellant's contention that insurance commissions of 50 per cent could potentially be earned.

Mr. Boyes said that the right to manage is not worth anything, especially as, in the case of the prospective purchaser, it would have to travel an extremely long way to carry out inspections (from West Yorkshire).

Mr. Bickford-Smith referred me to the Lands Tribunal decision in Maryland Estates v 63 Perham Road Limited and suggested that the new evidence before me provides clear material justifying a departure from the LVT decision. The appellant was not here, he said, for a second bite at the cherry, but the evidence proved that the LVT were wrong. For example, in Maryland Mr. M St. J Hopper had opted for 6 YP in respect of the insurance commissions whereas the LVT in this case had used 5 YP. Furthermore, a value based upon 20 per cent commission had been taken, whereas the LVT here had adopted 10 per cent. Notwithstanding the 20 per cent in Maryland, he said they were seeking a value based upon 50 per cent commission, owing to the nature of J H Watson's purchase.

He said that Mr. Hopper's comments in the same decision relating to the use of comparables derived from auction sales, proved they could be less reliable than those obtained from private treaty sales, where the required information for purchasers may be more readily available.

As to the value attributable to the right to manage, Mr. Bickford-Smith said that the LVT were wrong to ignore this aspect, and gave undue weight to the arrangements actually adopted by the appellant.

Decision

There are three specific issues upon which a determination is sought:

i) The yield to be applied to the ground rents receivable.

ii) The value (if any) attributable to the right to earn insurance commissions.

iii) The value (if any) attributable to the right to manage.

Before dealing with the evidence on those issues, I need to consider Counsel's submissions relating to the right to appeal, and this Tribunal's jurisdiction. Mr. Bickford-Smith said that, even if I were minded to follow the decision in Verkan and was reluctant to upset the LVT decision, the fact that there is a dispute as to valuation principle, and new evidence proves the lower tribunal to be wrong, I am justified in departing from the LVT decision. Mr. Boyes, in supporting Verkan seeks additionally to rely on the decision in Daejan Properties v Weeks [1998] 3 EGLR 198 (which closely followed H.H. Judge Marder's decision in Verkan), suggesting that no real point of law or principle of valuation is at stake and that the appellant is merely seeking a second bite at the cherry.

The jurisdiction of this Tribunal has recently been dealt with at length by Mr. P. H. Clarke FRICS in The Wellcome Trust Limited v Romines LT LRA/8/1998 (Unreported). Having reviewed the decisions in a large number of cases (including Verkan and Daejan), he concluded that a number of principles have been established regarding the right of appeal to this Tribunal given by paragraph 2 of Schedule 22 to the Housing Act 1980. As far as those principles apply to this case, the following are relevant:

1) The proceedings before the Lands Tribunal on appeal take the form of a re-hearing and must be determined on the evidence presented to it, without regard to the evidence given before the LVT.

2) The appellant must prove that the decision of the LVT is wrong. The LVT decision stands until it is shown to be wrong by the evidence produced at the re-hearing before the Lands Tribunal.

3) If the Lands Tribunal is satisfied on the evidence before it that that the decision of the LVT is wrong, then it must allow the appeal; otherwise it must dismiss the appeal.

4) The jurisdiction of this Tribunal is not limited to matters of law or valuation principle. It has a duty to allow an appeal where the decision of the LVT is shown to be wrong, whether the error of the lower tribunal's decision is one of law or valuation principle or any other substantive matter, including matters of fact or value.