England and Wales Lands Tribunal

[2000] EWLands LRA_22_2000 (29 November 2000)

LRA/22/2000

LANDS TRIBUNAL ACT 1949

LEASEHOLD ENFRANCHISEMENT – price payable on collective enfranchisement for acquisition of freehold of four flats – value of tenants improvements – value of flats – uplift – yield – Leasehold Reform, Housing and Urban Development Act 1993 s.24 –Appeal dismissed.

IN THE MATTER of an APPEAL against a DECISION of a

LEASEHOLD VALUATION TRIBUNAL of the SOUTH WESTERN

RENT ASSESSMENT PANEL

BETWEEN VICTOR F HYDE Appellant

and

MALLOW PROPERTIES LIMITED Respondent

Re: 27 Fernbank Road, Redland, Bristol, BS6 6PZ

Before: P R Francis FRICS

Sitting at: Bristol County Court, Small Street, Bristol.

on

1 November 2000

Victor F Hyde, appellant in person.

Nigel Freston FRICS of Besley Hill, Chartered Surveyors of Downend, Bristol for the respondent company.

© CROWN COPYRIGHT 2000


 


DECISION

1. This is an appeal, heard under the Simplified Procedure (Rule 28, Lands Tribunal Rules 1996), from a decision of a Leasehold Valuation Tribunal of the South Western Rent Assessment Panel ("LVT") dated 26 April 2000 under section 24 of the Leasehold Reform, Housing and Urban Development Act 1993 ("the 1993 Act"), in respect of 27 Fernbank Road, Redland, Bristol ("the subject property").
2. The freehold landlord, Victor F Hyde, ("the appellant") appeared in person. There were no intermediate leases. The nominee purchaser, Mallow Properties Limited, ("the respondent") was represented by Nigel Freston FRICS a chartered surveyor, and Donald Wilshire, one of the flat-owners who represented the nominee company.

FACTS.

3. The parties had failed to agree any facts, despite the preparation by the appellant of a draft statement of facts and issues. From that draft, the evidence provided before and at the hearing, and my inspection of the subject property on 1 November 2000, I find the following facts:

3.1 The subject property comprises a four storey semi-detached house, built about 1900 and subsequently converted into four self-contained flats. It is constructed of solid masonry incorporating natural and dressed stonework and the principal elevations are rendered. The roofs are covered with interlocking concrete tiles, and there are gardens to front, side and rear. There is a single garage with workshop area to the rear, accessed off Fairview Drive.

3.2 It is located in the Redland area of Bristol, a mature residential area predominating with substantial period properties, about 1.5 miles from the city centre.

3.3 The flats are arranged as follows:

1. Lower Ground Floor. Private hall, living room, kitchen, 2 bedrooms (1 with en-suite shower), bathroom and WC. Gas central heating.

2. Upper Ground Floor. Hall, living room, kitchen, 2 bedrooms, bathroom and WC. Gas central heating.

3. First Floor. Hall, living room, kitchen, 3 bedrooms, Bathroom. Electric night storage heating.

4. Second Floor: Hall, living room, kitchen, 3 bedrooms, bathroom. Gas central heating. Upvc replacement windows. Garage.

3.4 Each of the flats is subject to a lease commencing 1 July 1973 for a term of 99 years at a ground rent of £15 per annum. The garage is subject to a similar lease, to the benefit if the second floor flat, at a ground rent of £0.05 per annum. All the leaseholders are participating tenants.

3.5 The respondent had served notice upon the appellant under s.1 of the 1993 Act specifying a purchase price for the freehold of £1000 and the appellant had responded, by a counter notice dated 25 February 1999, admitting that the participating tenants were entitled to exercise the right to collective enfranchisement, but proposing a purchase price of £20,000. Having failed to agree terms, the matter was referred to the LVT which, following a hearing on 20 March 2000, determined the enfranchisement purchase price at £17,250 (rounded) apportioned as to the value of the existing freehold (term and reversion) £5,517, and the share of the marriage value (50/50) £11,741.50.

3.6 The valuation date, for the purposes of this appeal is 20 March 2000.

Issues.

4. The grounds of appeal were:

a) That the LVT allowed an excessive deduction in the valuation for tenants improvements. (LVT – tenants improvements £20,000)

b) The LVT erred in attributing too low a value to the flats. (LVT £600,000)

c) The LVT allowed insufficient uplift to reflect the merging of the interests. (LVT 5 per cent)

d) The LVT applied too high a yield in respect of the valuation of the existing freehold reversion. (LVT 7 per cent)

In addition, shortly prior to the Lands Tribunal hearing, the appellant introduced a further issue – that a valuation fee he had incurred in the sum of £705 prior to the LVT hearing should be recoverable, and sought my determination in that regard.

Appellant's case.

5. Mr. Hyde submitted a revised valuation [attached to this decision at Appendix 1] calculating a purchase price of £42,440.
6. In respect of tenants improvements he said that he had accepted the cost of the installation of Upvc double glazed replacement window units to the second floor flat, at £3,300. All the other works that the respondent claimed as tenants improvements were outweighed, he said, by the management company's failure to maintain the premises in accordance with the terms of the leases.
7. He had obtained sales particulars of 18 comparable flats within the vicinity from local estate agents that indicated a total value of the flats at 27 Fernbank Road, assuming them to be in good condition, of £680,000. The figure of £600,000 that had been estimated by the valuer he had retained in connection with the LVT hearing was correct when taking into account the lessees alleged failure to comply with the covenants of their leases. Mr Hyde had, in the revised valuation he submitted for this hearing, taken the diminution in value due to the condition of the flats at 10 per cent of £680,000, rounded this up to £70,000 and then deducted the £3,300 he had agreed.
8. Mr. Hyde said that his former valuer, JR Lake BSc ARICS of Chappell and Matthews, surveyors of Clifton, Bristol, had reported that the subject property was in a 'fair' state of repair and decoration, commensurate with its age and type. Rising dampness had been found in the walls to the lower ground floor flat, and dry rot was suspected in the floor to the living room, particularly around the bay. There was also dampness and defective tiling to the shower area in that flat and, Mr Lake had said, none of the flats in the building incorporated adequate fire precautions in accordance with current regulations.
9. It was Mr. Hyde's view that the LVT had failed to address what he described as the 'under-valuation' (at £600,000) by not allowing for the state of disrepair in calculating the value of the reversion. In applying an arbitrary figure of £20,000 for tenants' improvements, the LVT had not sought or received supporting evidence on costs.
10. In cross-examination, Mr. Hyde accepted that the details he had received from local agents were not evidence of actual sales, but were purely asking prices. He could not confirm what condition they were in or whether or not some of them might have been in more valuable areas of Bristol. He said that, to his mind, his valuer's description of the subject property as fair indicated the repairing covenants had not been complied with. If the condition had been described as good, that would indicate compliance. He said that the extra £70,000 to £80,000 the flats would command if in good condition, represented the cost of such compliance.
11. Having established his base calculations for the value of the flats, taking into account their condition, Mr. Hyde said that the LVT did not take account of the inflationary rise in property values between 12 February 2000 (the date of Mr. Lake's valuation) and the valuation date of 20 March. He referred to the original valuation undertaken by Mr. Freston, for the respondent, on 24 January 2000 at £480,000 and his revised valuation submitted to the LVT on 20 March at £571,000. This represented an increase over the period of 19 per cent, which, on a pro-rata basis gave an increase between 12 February and 20 March of 12.6 per cent. Mr. Hyde had, therefore, multiplied his figure of £600,000 + £70,000 - £3,300 (£666,700) referred to in pares 7 and 8 above by 1.126 to give a current value of the flats of £750,700.
12. As to the appropriate uplift, Mr Hyde said that he had been advised by the Leasehold Advisory Service (LEASE) that an appropriate uplift to reflect the fact that the existing leases only have 72 years to run, against those which would effectively be 999 year leases, was 10 per cent. This was, he said, supported by a 'linear extrapolation' of Mr Freston's own figures and reference to the lending criteria of the Bristol and West Building Society. He produced a copy of an article from The Times dated 27 July 1996, which said: "lenders are increasingly reluctant to offer loans on properties with leases of less than 75 years to run". He also produced a copy of Bristol and West's 'Notes for Mortgage Applicants' (dated December 1999) which stated that, in respect of leasehold properties, "the remaining term of the lease must be at least 70 years from the day we make the loan". There was not a straight cut off point, in valuation terms, between a leasehold interest that was for less or the same as the minimum permitted term required by lenders, but there would be a gradual decline in values starting some years further away – the reduction increasing as the number of 'additional' years reduces.
13. Mr Hyde gave examples of correspondence between solicitors in 1991 which, he said, proved that difficulties had been encountered in achieving a sale of one of the flats unless either agreement was reached for the purchase of the freehold, or a deed of variation extending the lease to 999 years was available.
14. In cross-examination Mr Hyde admitted he had no personal experience of valuing properties in the Bristol area, and was unaware of lenders criteria in respect of leasehold properties other than the Bristol and West, to which he had referred. As to the correspondence between solicitors, Mr Hyde accepted that it was standard practice for them to make enquiries in respect of enfranchisement opportunities and qualification criteria. He also acknowledged that despite the alleged sale difficulties in 1991, three of the flats had sold between 1992 and 1995, but did not know whether or not they were subject to mortgages.
15. In respect of the yield to be adopted in calculating the value term in reversion (the freehold), Mr Hyde referred to Mr Freston's investment property comparables used in his submission to the LVT, and said that gross incomes had been used, with no allowance for outgoings such as repairs, insurance and management. Those comparables had led Mr Freston to the conclusion that 8 per cent was the appropriate yield, but if those incomes were netted down, Mr Hyde said the figure became 6.5 per cent, and that was what he had used in his revised calculations. Again, in cross-examination, Mr Hyde admitted he had no actual evidence to support the figure of 6.5 per cent.
16. As to Mr Hyde's claim for reimbursement by the nominee purchaser of the £705 valuation fee he had incurred in February 2000 prior to the LVT hearing, he referred to s.33(1)(d) of the 1993 Act which states:

"33 – Costs of enfranchisement

(1) Where a notice is given under s.13, then (subject to the provisions of this section and sections 28(6), 29(7) and 31(5)) the nominee purchaser shall be liable, to the extent that they have been incurred in pursuance of the notice by the reversioner or by any other relevant landlord, for the reasonable costs of and incidental to any of the following matters, namely-

(d) any valuation of any interest in the specified premises or other property;

and said that, in equity, the cost should be recoverable whether or not the sale to the nominee purchaser proceeds to completion.

Respondent's case.

17. Mr Freston said that although the LVT had not found entirely in the respondent's favour (the applicant at the LVT hearing), overall it was satisfied with the decision and was happy for it to stand. Whilst the LVT had adopted a figure of £20,000 for tenants improvements, Mr Freston said that the copy documentation relating to improvements undertaken to the individual flats produced to this Tribunal justified, if anything, a figure of £35,000.
18. The installation of gas fired central heating to three of the flats, replacement of kitchen and bathroom fittings, provision of fitted wardrobes and installation of modern entry-phone systems were all improvements and were in addition to the replacement double glazing in the upper flat that the freeholder had accepted. Mr Freston said that the appellant's contention that any value attributable to the improvements, other than the one item he had accepted, were outweighed by estimated costs of £50,000 or more to resolve items of disrepair was not justified. There was a properly constituted management company that ensured all necessary repairs and maintenance were undertaken. For example, Mr Freston said that extensive repointing had been effected to the external stonework together with replastering to a section of the render at the rear. Fascias and soffits had been replaced where necessary, all the rainwater goods had been renewed, and the redecoration covenants had been complied with.
19. The dry rot that Mr Hyde had suggested had been allowed to take hold in the basement flat was, in fact, an area of wet rot that had been caused by a leak from a new plumbing installation in the flat above, and a leak around the shower tray in the basement flat going unnoticed for a period of time due to the occupier being blind. This had all now been resolved, and a new damp proof course had also been installed to the basement flat where the internal walls were below ground level. Mr Freston said that there was no evidence whatsoever to support the appellant's suggestion that the lessees or the management company had failed to meet their obligations.
20. As to the value of the flats, Mr Freston said that whilst his valuation before the LVT had suggested there should be an approximately 5 per cent reduction from the figure of £600,000 (giving the £571,000 he had used), he was happy to agree the figure that Mr Lake had suggested, and that had been adopted by the LVT.
21. The 5 per cent uplift confirmed by the LVT was, he contended, a 'full' figure, but one which he was prepared to accept especially bearing in mind that whilst mortgageability would not be significantly affected by the lease term, he accepted there was no 'hard' evidence as to whether or not actual problems had occurred. The figure of 10 per cent to reflect perceived difficulties on obtaining mortgages as put forward by the appellant was not supported by evidence. Mr Freston said that the practice of mortgage lenders had moved on since 1996 when the Times article had been written, and referred to the instruction to valuers from the Council of Mortgage Lenders that had been adopted by most of the major institutions. It was evident from this that the 'norm' was to require the mortgage term plus 30 years, which would give a lease term of 55 years before any mortgage problems could be anticipated. Although he could not confirm the point, he did not think that the sales of various flats in the subject property between 1992 and 1996 were without mortgage. Mr Wilshire, for the respondent, said that as secretary of the management company he received pre-contract enquiries when flats were changing hands, and although he could not produce documentary evidence, recalled that most if not all the flats were subject to mortgages.
22. As to yield, Mr Freston said that he took Mr Hyde's point that the figure he had used was gross and did not reflect outgoings. Whether 20 or 15 per cent of the gross income was a reasonable figure to take to allow for costs, he was not sure.
23. In cross-examination, Mr Freston said that he had altered his original valuation to more or less concur with that provided by Mr Lake in an effort to reach agreement. The fact that Mr Hyde had not retained the services of Mr Lake, or any other local valuer in connection with the LVT or Lands Tribunal hearings had not helped those efforts. As to the two properties Mr Freston had referred to in his initial report, indicating sales of properties with short leases, he accepted that he had no evidence as to whether or not they were subject to mortgage.
24. In respect of the appellants claim for the valuation fee, Mr Freston referred to the respondent's solicitors reply to the additional statement of case. This pointed out that the matter had been the subject of proceedings in the Oxford County Court on 31 August 2000 and the claim had been dismissed. In its defence to those proceedings, the respondent had said that as it was not a party to the contract between Mr Hyde and his valuer, it was not therefore liable in contract to either to the claimant or the valuer.
25. Furthermore, the defence stated that the cost of the report could not be recoverable pursuant to s.33(5) of the 1993 Act which stated:

"(5) The nominee purchaser shall not be liable under this section for any costs which a party to any proceedings under this Chapter before a leasehold valuation tribunal incurs in connection with the proceedings".

26. In the alternative, it was contended that the report was general in nature and scope and was not a valuation of a particular interest as contemplated by s.33(1) of the 1993 Act. Further, even if the valuation were for the purposes contemplated, it was considered to be excessively high and did not comprise reasonable costs incurred by the reversioner within the meaning of s.33(1).

Decision.

27. I deal with the four specific grounds of appeal in turn.
28. Firstly, the value attributable to tenants improvements. Mr Hyde's argument that any value over and above the 'agreed' £3,300 for the double glazing to the upper flat was outweighed by the management company's failure to adhere to the repair covenants, was not borne out by inspection. I inspected the exterior of the subject property together with the communal hallway and stairs serving the ground, first and second floor flats, and the second floor flat itself on the day of the hearing in the company of the appellant, Mr Freston and Mr Wilshire. I was also able to see parts of the lower ground floor (basement) flat through the windows on the rear elevation.
29. It was clear to me that the subject property has been maintained in good overall repair and there was no evidence either from a physical inspection, or adduced by the appellant at the hearing, that could lead me to conclude that the management company was not performing its obligations.
30. Mr Hyde said in his evidence that the LVT had attributed value to the installation of gas central heating in three of the flats in addition to the double glazing and adjudged the value of those improvements at £20,000. Having seen no evidence to persuade me that the value of the tenants' improvements, or indeed of the flats themselves, had been diminished by a failure to perform the lease covenants, I cannot accept the appellant's arguments that the LVT's figure was wrong by being too high. Mr Freston said that "if anything, the value of the tenants improvements should be increased to at least £35,000", and produced some supporting documentation by way of invoices for works done on the individual flats and estimated costs where invoices were not available.
31. Many of the costs included were for items of repair – such as replacement of the garage roof, lead or zinc coverings to bay roofs, replacement of soffits, fascias and guttering and redecoration. Those items that unquestionably, in my judgment, constitute improvements such as installation of gas central heating, renewal of kitchens and bathrooms and the modern entryphone system, amount (including estimated costs) to fractionally over £20,000. On ground (a) therefore, there is no evidence to show that the figure adopted by the LVT was wrong.
32. On the value of the flats, Mr Hyde set much store by Mr Freston's original valuation, rather than the amended version that had been presented to the LVT. Mr Hyde's methodology for assessing an 'inflationary' increase of 19 per cent between January and March 2000 does not bear scrutiny. The comparables he produced, as Mr Freston correctly pointed out, were sales particulars and not evidence of actual transactions. It is interesting to note that Mr Hyde's former valuer and Mr Freston had agreed as to the base value of all the flats although Mr Freston had suggested at the LVT hearing there should be a reduction to reflect the remaining lease term of only 72 years. However, he subsequently said that he was happy to accept the LVT's finding. On ground (b) therefore, the appellant has failed to show, as he set out to demonstrate, that the value of £600,000 for the flats was wrong.
33. On the question of uplift, I prefer Mr Freston's evidence relating to the practice of mortgage lenders generally in considering the effects on value of the remaining term of a lease. It was apparent from the examples he produced that a number of the major lenders appear to adopt the Council of Mortgage Lenders' recommended guidelines of mortgage term plus 30 years. The Bristol and West have, as Mr Hyde said, a different approach requiring a minimum of 70 years unexpired. However, the flats all had a residual term of 72 years at the relevant date, and thus fall within the criteria. Mr Freston said that, from his local professional knowledge, the Bristol and West now state that they will consider leases with shorter terms "where there is an opportunity to enfranchise" but that statement was unsupported. Nevertheless, no evidence was produced to suggest that purchasers would have any difficulty in obtaining mortgage funding and in my judgment, even if one lender had strict or inflexible lending criteria a prospective buyer would thoroughly investigate the highly competitive mortgage market and would, in the light of the evidence I have seen, not have undue difficulty in obtaining a mortgage.
34. Having said this, there is no doubt in my mind that there will be some adjustment to value to reflect the difference between a 72 year term and one, effectively, of 999 years and I am satisfied that a figure of 5 per cent would be appropriate.
35. The final point at issue is yield. The argument as to whether gross or net rental incomes should apply in determining the yield that an investment will command is not appropriate in these circumstances. The accepted valuation approach for the value of the ground rent income is to take the actual ground rent paid and apply the appropriate percentage return multiplied by the remaining number of years. Similarly, the actual improved value is deferred for the remaining term at the appropriate percentage. Mr Hyde said he had no evidence to support his revised figure of 6.5 per cent and, therefore, ground (d) necessarily fails.
36. Mr Hyde has wholly failed to make out any of his four principal grounds of appeal, and his appeal is dismissed.
37. In considering Mr Hyde's application for reimbursement of the valuation fee, and whether or not that was a matter for this Tribunal, s.32(2)(c) of the 1993 Act, in connection with Determination of Price states:

"(2) The lien of the owner of any such interest (as vendor) on the specified premises, or (as the case may be) on any other property, for the price payable shall extend-

( c ) to any costs payable to him by virtue of section 33.

Therefore, any costs and fees that might legitimately be claimed by the reversioner constitute part of the enfranchisement price, and a determination on such an issue is therefore within this Tribunal's jurisdiction.

38. Following the hearing, I asked Mr Hyde to produce a copy of the valuation he had commissioned from Mr Lake a matter of weeks before the LVT hearing, together with a copy of the terms of engagement relating to it. The letter from Chappell and Matthews (Mr Lake) of 2 February 2000 confirming instructions stated that it was to "provide an open market valuation of each of the flats, on the basis of a long leasehold interest and full vacant possession". It went on to say: "We understand that the valuations are required in order to assist you in your determination of the value of the freehold interest". Similar statements were repeated under the heading "Valuation Purpose" within the report which was dated 25 February 2000.
39. The initial application by the nominee purchaser was dated February 1999, but the valuation which Mr Hyde commissioned was dated just three weeks before the LVT hearing. Even though neither the valuation nor the conditions of engagement specifically refer to the hearing, there is no doubt, in my judgment, that the purpose of the valuation was to assist the appellant in that respect. I therefore accept the respondent's contention that the fee for such a valuation is, in accordance with the provision of s.33(5) of the 1993 Act, not recoverable. The alternative grounds referred to do not fall to be considered.
40. I determine that the enfranchisement price payable by the respondent nominee purchaser under Schedule 6 of the 1993 Act for the freehold of 27 Fernbank Road, Redland, Bristol shall be as decided by the LVT at £17,250, in accordance with the valuation at Appendix 2 to this decision.
41. It is normal in a reference, application or appeal heard under the Simplified Procedure (Rule 28, Lands Tribunal Rules 1996) for no costs to be awarded, unless it is considered that there are exceptional circumstances. At the hearing, the respondent suggested that the appellant should pay the additional costs it had incurred in responding to the appeal, bearing in mind it had accepted the LVT decision. I am mindful of the fact that Mr Hyde failed to produce evidence to establish any of his grounds of appeal. I am therefore sympathetic to the respondent's claim, and determine that the appellant shall pay the nominee purchaser a lump sum contribution of £250 towards the cost of the appeal.

DATED: 29 November 2000

(Signed) P R Francis FRICS

APPENDIX 1

LEASEHOLD ENFRANCHISEMENT VALUATION (SUPPLEMENTARY)

27 FERNBANK ROAD, REDLAND, BRISTOL

APPELLANT V F Hyde (Respondent in LVT hearing)

RESPONDENT Mallow Properties Limited (Applicant in LVT hearing)

VALUATION Computation by Appellant based on figures supplied by:

J R Lake BSc ARICS ASVA of Chappell & Matthews

(Valuation/Report of 25 February 2000)

LVT VALUATION DATE 20 MARCH 2000

1. Calculating the Term :-

£15 per annum per flat £60.00

Years purchase for 72 years @ 6½% 15.2195

£913.00

42. Calculating the Reversion :-

a. Freston 24 January to 20 March (56 days) 19% Inflation

Lake 12 February to 20 March (37 days) 12.6% Inflation pro rata

b. Current value of 4 flats

(£600,000 + £70,000 - £3,300) x 1.126 £750,700

c. Improved value after conversion to

999 year lease @ 10% £825.800

d. Present value deferred 72 years @ 6½%

is 0.0107356 x £825,800 £8,865.00

e. Investment value of freehold

£913.00 + £8,865.00 say £9,780.00

43. Marriage value :-

a. Improved value £825.800

b. Less tenants interest £750.700

c. Less freeholders interest £9,780

£65,320

d. Marriage value @ 50% £32,660

e. Freeholders interest £9,780

f. 50% Marriage value £32,660

g. Total purchase price £42,440

Victor F Hyde (Appellant)

APPENDIX 2

Decision Valuation

(a) Value of the Term

Ground rent £15 per annum per flat £ 60.00

Years Purchase 72 years @7% 14.1763

£850.58

(b) Value of the Reversion

Total current value of 4 flats £600,000.00

Less tenants' improvements (central heating

In 3 flats, double glazed Upvc windows in top flat) £ 20.000.00

£580,000.00

Improved value from conversion to 999 year leases 5% £ 29,000.00

Improved Value £609,000.00

Present value deferred 72 years @ 7% .0076625

£ 4,666.46

Current value of freehold interest (term and reversion) £ 5,517.04

(c) Marriage Value

Improved value (from above) £609,000.00

Less tenants' interest (from above) £580,000.00

£ 29,000.00

Less current value of freehold interest (from above) £ 5,517.00

Gain on merger of interests £ 23,483.00

Freehold share 50% £ 11,741.50

(d) Enfranchisement Price

_______________________________________________________________________________

Existing freehold value £ 5,517.00

Freehold share of Marriage value £ 11,741.50

£ 17,258.50

Say £ 17,250.00

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