England and Wales Lands Tribunal

[2000] EWLands LRA_30_1999 (17 January 2000)

LRA/30/1999

LANDS TRIBUNAL ACT 1949

LEASEHOLD ENFRANCHISEMENT - price payable for freehold of house - site element of value on standing house approach - yield to be adopted - percentage of site value - comparables - previous decisions of Lands Tribunal - money market rates - appeal dismissed

IN THE MATTER OF AN APPEAL FROM A DECISION OF

THE LEASEHOLD VALUATION TRIBUNAL OF THE

WEST MIDLAND RENT ASSESSMENT PANEL BY

SPEEDWELL ESTATES LIMITED Appellant

(No Respondent)

Re: 163 Wagon Lane

Solihull

West Midlands

B92 7PA

Before: N J Rose FRICS

Sitting in public at: 48-49 Chancery Lane, London, WC2A 1JR

on 8 December 1999

The following cases are referred to this in this decision:

Appeal by Speedwell Estates Ltd. re 78 Berryfield Road, Sheldon, Birmingham (no respondent) (LRA/8/1999, unreported)

Appeal by Speedwell Estates Ltd. re 1 Wrekin Road, Perry Bar, Birmingham (no respondent) (LRA/070/1997, unreported)

Appeal by Mrs J. B. Taylor re 10 Hilary Drive, Walmley, Sutton Coldfield (no respondent) (LRA/10/1998, unreported)

Windsor Life Assurance Co.Ltd. v Philip Buckley (LRA/5/1994, unreported)

Gallagher Estates Ltd. v Walker (1973) 28 P & CR 113

Appeal by Risbylane Ltd re 25 Ferndale Road, Streetly, Sutton Coldfield

Appearances: Mr A I Shepherd FRICS for the Appellant by leave of the Tribunal


 


DECISION OF THE LANDS TRIBUNAL

1. This is an appeal by Speedwell Estates Limited ("the appellant") from a decision of the Leasehold Valuation Tribunal of the West Midland Rent Assessment Panel ("the LVT"), determining the price payable for the freehold interest in the house and premises known as 163 Wagon Lane, Solihull, West Midlands, B92 7PA ("the appeal property") at £1,612. There was no respondent to the appeal. The tenant's notice to acquire the freehold was dated 17 December 1997, when some 37 years of the term remained unexpired.
2. Mr A I Shepherd FRICS, a director of Bigwood, chartered surveyors of Edgbaston, Birmingham appeared for the appellant with leave of the tribunal and gave evidence.
3. In the light of Mr Shepherd's evidence I find that the appeal property comprises a semi-detached house constructed in the 1930s of brick with a tiled roof. The accommodation consists of a small entrance hall and a reception room intercommunicating with a dining room/kitchen on the ground floor and two bedrooms and a bathroom/WC on the first floor. There is a front garden and parking area and a rear garden. The site has a frontage of 6.09 m and an area of 276.60 m².
4. There are two issues in this appeal. The first is the appropriate yield rate to be adopted to calculate the modern ground rent from the agreed site value and to capitalise that ground rent in perpetuity. The LVT decided that the correct rate was 7%; Mr Shepherd considered it should be 6.5%. The second issue is the percentage of the standing house value to be used in calculating site value. The LVT adopted 30% and Mr Shepherd's figure was 33%. His valuation was as follows:

Ground Rent	£ 5.00
YP for 37 years at 7%	13.117	£ 65.59
Standing House Value £63,000
Site Value at 33% - £20,790
Modern Ground Rent @ 6.5%	1351.35
YP in perpetuity deferred 37 years at 6.5%	1.49	£2,013.51
		£2,079.10
	Say	£2,080.00

5. Mr Shepherd has been in practice for some 40 years in the Birmingham area since first qualifying as a chartered surveyor; it is 50 years since he entered the profession as an articled clerk. He submitted a summary of 30 freehold ground rents which had been sold at public auction between November 1995 and October 1999. These analyses had been prepared by Mr Martin Fell of the appellant, who had inspected most properties externally and then attended the auctions. The prices realised indicated that in each case the modern ground rent had been valued at a rate varying between 3.5% and 6.5%.
6. Mr Shepherd referred to a previous decision of this tribunal given by me on 27 October 1999 in relation to another of the appellant's properties at 78 Berryfield Road, Sheldon, Birmingham (LRA/8/1999, unreported). In that decision I quoted with approval a passage in this tribunal's decision on another similar appeal by the appellant in respect of 1 Wrekin Road, Perry Bar, where the member (Mr Michael Hopper FRICS), referring to two previous appeal decisions, said:

"As is the case with all decisions of this tribunal, they were based upon the evidence given in those cases and they are not to be taken as authority for the adoption of any particular yield rate in other cases." (LRA/070/1997, unreported).

7. Notwithstanding that statement, Mr Shepherd said that he felt "absolutely entitled" to bring to the attention of the tribunal certain points of similarity between the current case and the case of 1 Wrekin Road. There the standing house value was £62,000 (£63,000 in this case); the current ground rent was £5.50 per annum (£5.00 here) and the unexpired term was 38 years - one more than in the present case. On that occasion the member had determined the appropriate capitalisation rate at 6.5% and it was not unreasonable to ask for 6.5% to be adopted again.
8. He also quoted extracts from 3 previous decisions of this tribunal which, he suggested, established matters of principle which should apply to all valuations of this nature.
9. In his decision on 1 Wrekin Road Mr Hopper said:

"In the present case, the annual ground rent was £5.50, fixed for a period of 38 years. The notional section 15 rent is a much more substantial amount, well secured, as it excludes the value of the building, and subject to revision at the 25th year of the notional 50 - year lease. It is thus clearly of much more attraction to an investor than the annual ground rent of a small amount fixed for 38 years. As it is common ground that this element should be valued on the basis of a yield rate of 7%, it follows that a lower yield rate is appropriate to value the notional rental income under the extended lease and I accept Mr Shepherd's 6.5%."

10. In an appeal by Mrs J B Taylor relating to 10 Hilary Drive, Walmley, Sutton Coldfield (LRA/10/1998, unreported) the member (Mr Peter Clarke FRICS) said:

"I am reluctant to disturb the decision of the leasehold valuation tribunal for such a small difference in price… but there is a matter of valuation principle involved here, namely whether the same capitalisation rate should be applied to a rent fixed for 65½ years as for a rent fixed for 25 years. In my view there should be a difference in yields."

11. Finally, Mr Shepherd quoted the following extract from the decision of Mr Hopper in Windsor Life Assurance Co Ltd v Philip Buckley (LRA/5/1994, unreported):

"Although I do not mean to disregard Mr Sadleir's opinion, I am not convinced that as at June 1993, a risk rate lower than 7% should be adopted to capitalise a ground rent fixed for a term as long as 70.5 years. However the reversionary value relates to a more substantial income, subject to review after 25 years, and I think a somewhat lower risk rate is appropriate: I adopt 6.5%."

12. These three decisions, said Mr Shepherd, were reached by two members of this tribunal in the light of auction evidence and argument. It was perfectly reasonable for valuers like himself to refer to such cases. In my decision on 78 Berryfield Road, I had referred to the fact that, in previous proceedings before this tribunal, Mr Shepherd had considered it appropriate to apply a yield of 7% to both the current ground rent of £9.19 fixed for 38 years and to the modern ground rent that would be receivable thereafter. At the time he formed that view, Mr Shepherd had not had the advantage of reading the decisions of this tribunal in the appeals relating to 1 Wrekin Road and 10 Hilary Drive. Now that those decisions were available, it would be "arrogant" of him to disregard statements relating to questions of valuation principle, made by members of this tribunal. Each case was not entirely different. They all related to freehold ground rents with some similarities between them.
13. The market for freehold ground rents was extremely strong. He was convinced that low interest rates had affected the market. Even a return of 7% for the current ground rent was not attractive in relation to current interest rates, but he was required to value by reference to market conditions in December 1997, when interest rates were higher than at present - base rate was 7.25% and gilts rate was 6.44%.
14. As far as the site value is concerned. Mr Shepherd based his opinion solely on the decision of this tribunal in Windsor Life v Buckley, where the member found that the site value was 33.33% of the entirety value. As in the case of the current appeal, the subject property in Windsor Life was situated in Solihull, although it was rather more modern, being part of a post-war development. Its splay frontage at 7.01m was slightly bigger than the frontage of the appeal property, but the site area at 171.4m^2. was substantially smaller. In these circumstances Mr Shepherd considered that it was reasonable to adopt a site value for the present appeal based on 33% rather than the 30% fixed by the LVT.

Decision

15. Mr Shepherd has criticised the LVT's choice of 7% as the yield rate at which the modern ground rent should be capitalised on three grounds. Firstly, he produced an analysis of the prices paid for 30 freehold ground rents, sold as single lots at public auction between November 1995 and October 1999. They indicated that the modern ground rents had been capitalised at rates varying between 3.5% and 6.5%.
16. I asked Mr Shepherd why investors were prepared to pay prices for such properties which were often very high, compared with the valuation he had submitted for this appeal. He replied that the purchasers were clearly influenced by the possibility of agreeing a higher price in due course with the tenants. That was not the full explanation, however, and there was a very big difference even between the price of 5½% paid for some lots and the 6½% for which he was contending.
17. Despite this qualification by Mr Shepherd, I consider that the auction sale prices only make business sense on the basis that, if the tenants subsequently decided to purchase the freehold, in order to sell their homes on a freehold basis, or re-mortgage them, they would have agreed to pay a higher price than that required by statute, in order to avoid protracted negotiations and, possibly, hearings before the LVT and this tribunal. This conclusion applies equally to all 30 lots, since there is in my view no logical reason why investors who were in the market for freehold ground rents in the hope of an eventual profitable sale to the tenant should have decided to restrict their bidding to a limited selection of the available properties. Consequently, I consider that all the prices achieved at auction reflected an element of value to the tenant.
18. Section 9 (1) of the Leasehold Reform Act 1967, as amended, provides that the freehold interest must be valued on the assumption that the tenant and members of his family residing in the house are not buying or seeking to buy. It follows that the 30 auction sales relied upon by Mr Shepherd did not take place in the hypothetical market postulated by statute. They are therefore not of assistance in the present exercise.
19. The second element in Mr Shepherd's attack on the LVT decision consists of references to previous decisions of this tribunal as providing evidence of value and valuation principle. In support of his view that a rate of 6.5% should be applied to the modern ground rent, he referred to the decision on the appellant's previous appeal concerning 1 Wrekin Road. This was an appeal to which the tenant did not respond. As the member said in his decision:

"I am well aware that I have not had the benefit of hearing any evidence on behalf of the lessee and that my decision must perforce be based solely on the appellant's evidence. Insofar as this decision may in any way be regarded as a precedent its authority is inevitably weakened by the lack of any evidence or argument on behalf of the lessee."

20. I entirely agree with that observation. I do not consider that the decision on 1 Wrekin Road is of any material weight as showing in the present case that a rate of 6.5% is right and 7% is wrong.
21. Mr Shepherd also relied on three decisions of this tribunal, including that on 1 Wrekin Road, as suggesting as a matter of "valuation principle", that a lower yield rate should necessarily be applied to the modern ground rent than the 7% which it is agreed is appropriate for the current ground rent. I agree with Mr Shepherd that there are certain passages in the three decisions to which he has referred which suggest that a higher capitalisation rate should always be applied to a lower rent fixed for a long period than to a higher rent subject to review after a shorter interval. In my opinion, however, selective quotations from past decisions can sometimes give a misleading impression and this is one such occasion.
22. In his decision on 1 Wrekin Road the member said:

"The Windsor Life decisions... may be taken as authority for the proposition that, other things being equal, the longer the period for which a rental income is fixed, ie the period before the next rent review or the reversion, the less will be its attractiveness to any investor purchaser and thus the higher will be the yield rate which he will require. The rent review in the extended 50 - year lease, which has to be assumed, if it has not actually been granted, comes at the 25th year. If therefore other elements of a valuation for enfranchisement involve the valuation of income fixed for substantially longer or shorter periods than 25 years, a higher or lower yield rate will normally be appropriate to value such income."

23. It is important to note that the member qualified these remarks with the expression "other things being equal". In the current appeal, Mr Shepherd himself accepted that the price an investor was prepared to pay for a modern ground rent would depend, among other things, on whether it would be receivable in the near future or after a longer interval. In answer to a question from me, he said that the capitalisation rate should be less than 6.5% if the unexpired term were very short. In this case, as suggested in the decision on 1 Wrekin Road, other things being equal the current ground rent of £5.00 per annum fixed for 37 years is clearly less attractive than the modern ground rent of approximately £1,300 which will be subject to review after only 25 years. Set against the advantages of the modern ground rent, however, is the fact that it will not be received for another 37 years. It does not necessarily follow that all the advantages and disadvantages of the two ground rents will cancel each other out, so that the same yield will apply to both, but it is certainly possible that this will happen. The LVT's view that a rate of 7% should be adopted throughout the valuation, is, therefore, not inconsistent with the valuation principle mentioned in the Wrekin Road decision.
24. To the extent that certain references in the decisions referred to by Mr Shepherd may suggest that there is an immutable valuation principle that relative yield rates depends solely on the periods for which the rents are fixed, it is clear from the evidence in this case that they do not paint the entire picture. It is apparent from Mr Shepherd's evidence that he does not consider that this "principle" is of universal applicability. He has produced a schedule of 30 prices achieved for ground rents at auction. The analysis of these prices has been prepared without regard to the "principle" which he suggests should apply to this determination. For example, in the case of 47 Fentham Road, Birchfield and 194 Formans Road, Sparkhill, the existing ground rents were £7 and £5.34 respectively and the leases had 6 months unexpired. In both case, the analysis put forward by Mr Shepherd capitalised the current ground rent at 7% and the modern ground rent - to be fixed for 25 years - at 3.5%.
25. Finally, Mr Shepherd referred to the low level of interest rates as justifying a reduction in the yield required for freehold ground rents. In Gallagher Estates Limited v Walker (1973) 28P & CR 113 (relating to the freehold value of a house in Solihull, held on a ground lease with approximately 85 years unexpired), Lord Denning MR said:

"I doubt whether the money market is a safe guide in making valuations of land. The important market is the land market in the vicinity."

26. I would respectfully agree and I derive no assistance from the rates of interest in the money market at the relevant date. Mr Shepherd has therefore failed to persuade me that the LVT was wrong to adopt a yield rate of 7% when valuing the modern ground rent.
27. Mr Shepherd based his opinion that the value of the site was equal to 33% of the standing house value on the fact that this tribunal had adopted a similar percentage in its decision in Windsor Life. The tenant's notice in that case was served on 20 March 1993 - nearly 5 years before the relevant date in the present case. For that reason, I find that the Windsor Life decision is of no assistance in this appeal.
28. I should perhaps add that this is the fifth decision given by this tribunal since August 1998 relating to the price payable under the Leasehold Reform Act 1967 for the freehold interest in a house in the Birmingham area. In three of these cases the appellant was Speedwell Estates Ltd. One of the other appeals was by Risbylane Ltd (LRA/25/1999, unreported) whose managing agent and expert witness, Mr Martin Fell, is also an officer of Speedwell. In none of the appeals did the tenant respond and in the fifth, by Mrs J B Taylor, the appeal was conducted by written representations only.
29. The appropriate capitalisation rate is clearly a matter of considerable significance to Mr Fell and the companies with which he is associated. It is possible to conclude that considerable time and expense might have been saved if one of the tenants had been able to present a fully argued case to this tribunal, if necessary with financial support from the landlord. If that had happened, the tribunal's decision might possibly have been of more assistance, if not as actual evidence, at least as providing some guidance to the parties and the LVT in other cases. Those comments, however, are made with the benefit of hindsight.
30. The appeal fails. I find that the price payable for the freehold interest in the appeal property is £1,612.
31. Since there was no respondent to this appeal there will be no order as to costs.

Dated: 17 January 2000

(Signed): N. J. Rose