England and Wales Lands Tribunal

[2001] EWLands LRA_54_1999 (26 March 2001)

LRA/54/1999

LRA/7/2000

(Consolidated)

LANDS TRIBUNAL ACT 1949

LEASEHOLD ENFRANCHISEMENT – price payable for freehold of house – appropriate capitalisation and deferment rates – reliability of settlement evidence – whether transfer should include absolute prohibition on use other than as single private residence – whether improvements to be disregarded include conversion from flats to single dwellinghouse – if so, values of unimproved freehold and leasehold interests – appeal and cross-appeal dismissed.

IN THE MATTER of APPEALS from a DECISION OF THE LEASEHOLD VALUATION TRIBUNAL FOR THE LONDON RENT ASSESSMENT PANEL

BETWEEN JOHN LYON'S CHARITY Appellant

and

PETER SHALSON Respondent

Re: 98 Hamilton Terrace,

St John's Wood,

London NW8

Before: N J Rose FRICS

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

on 26 and 27 February 2001

The following cases are referred to in this decision:

Delaforce v Evans (1970) 22 P & CR 770

John Lyon's Charity v Brett (LT ref. RA/16/1997, unreported)

Eyre Estate v Jaskel (LT ref. LRA/48/1997, unreported)

Wellcome Trust Ltd v Romines [1999] 3 EGLR 229

Howard De Walden Estates Ltd v Von Dioszeghy (LT ref. LRA/9/2000, unreported)

Cadogan v Cecil (LT ref. LRA/10/2000, unreported)

Kenneth Munro, instructed by Pemberton Greenish, solicitors of London for the Appellant.

Edwin Johnson, instructed by David Conway & Co, solicitors of London for the Respondent.


 


DECISION

1. This is an appeal by the Trustee of John Lyon's Charity, the freeholder of a house known as 98 Hamilton Terrace, London, NW8 ("the appeal property") and a cross-appeal by the lessee, Mr Peter Shalson, against a decision of the Leasehold Valuation Tribunal for the London Rent Assessment Panel ("the LVT") determining the price to be paid for the freehold interest under s.9(1C) of the Leasehold Reform Act, 1967 as amended ("the 1967 Act") at £398,200 (Annex 1). By order of this Tribunal the appeal and cross-appeal were consolidated and the freeholder, treated here as the appellant, contended for a price of £405,647 (Annex 2) and the lessee, as respondent, contended for £275,298.
2. Mr Kenneth Munro, counsel for the appellant called as his expert witness Mr J E C Briant BA, MRICS, a partner in Messrs Cluttons. Counsel for the respondent, Mr Edwin Johnson called as expert witness Mr K G Buchanan, BSc (Est Man), MRICS, a director of Colliers Conrad Ritblat Erdman. He also called a factual witness, Mr D C Radford, a partner in Messrs Boston Carrington Pritchard.

Facts

3. From a statement of agreed facts and the evidence, I find the following facts. Hamilton Terrace is a well known tree-lined avenue in St John's Wood, running between Carlton Hill to the north and St John's Wood Road in the south. The appeal property is on the north side of the road. It is a detached period house, arranged on lower ground, ground and three upper floors and is of brick construction under a slate roof. There is an integral garage with off-street parking in front of the garage and an east facing garden at the rear.
4. The appeal property was built under an agreement for lease dated 11 March 1840. A lease of the house was granted to Charles Calley on 30 August 1843 for a term of 95 years from 24 June 1843 and included the subject property and the mews house, 6 Abercorn Mews South. On 22 November 1920 the then lessee, Lady Kathleen Weaver, took an assignment of part of the 1843 lease and on 11 February 1921 she was granted a new lease for a term of 50 years from 25 December 1919. A series of assignments between 1921 and 1946 took place and finally there was an assignment to Erwin Weissenstein on 13 June 1946. By a deed of surrender dated 19 May 1947 Erwin Weissenstein surrendered the 1921 lease and on the same day was granted a new term of 99 years from 25 March 1947. The ground rent is £140 per annum fixed for the duration of the term and the lease is on a full repairing and insuring basis.
5. The appellant has accepted the decision of the LVT that, under s.3(3) of the 1967 Act, the appeal property is to be valued disregarding any improvements carried out during the 1947 lease, the 1921 lease and the 1843 lease. During the 1920s or earlier the then lessee, at his or her own expense, constructed additional accommodation in the mansard and an extension on the north side of the property and alterations to the rear. The effective floor area disregarding these lessee's improvements is 315m² (3390 sq ft).
6. Following the grant of the 1947 lease the premises were converted into five flats and were subsequently altered by successive assignees, in each case at the lessee's own expense. The result was that by 1991, when the respondent acquired the lease, the accommodation had been rearranged to provide two units only, a self-contained basement flat and the remainder of the house. The conversion to a single family house was completed in 1993/94 by the respondent at his own expense. The appeal property is to be valued on the assumption that there are no off-street parking spaces and no garage.
7. On 12 March 2001, accompanied by a representative of each party, I inspected the appeal property and made an external inspection of certain other properties that had been referred to as comparables.

Issues

8. The issues in these appeals are as follows:

(1) The yield rate to be adopted in capitalising the rental income under the lease and deferring the value of the reversion.

(2) Whether the transfer should include an absolute prohibition on the use of the subject property other than as a single private residence.

(3) Whether works to convert the premises from flats to a single house should be disregarded.

(4) If those works should be disregarded, and the property falls to be valued as flats, the value of the freehold with vacant possession and the value of the existing lease, assuming there were no right to enfranchise.

The first two issues are the subject of the appellant's appeal. The last two issues are the subject of the respondent's appeal.

9. It is agreed that the valuation date is 19 November 1997 and that the freeholder will receive 50% of the marriage value. It is also agreed that if the subject property is to be valued as a house, the capital values adopted by the LVT should be accepted, namely unimproved freehold £2,250,000 and unimproved leasehold £1,575,000.

Yield

10. Mr Briant considered that the ground rent should be capitalised and the freeholder's reversionary interest deferred at 6%, compared with the 6¼% determined by the LVT. He said that the subject property was of very high quality and located in a prime residential area. Hamilton Terrace was regarded as one of the most prestigious roads in the St John's Wood area. The higher the value of the property the lower the yield would be when considering the value of the freeholder's reversionary interest. St John's Wood was a high capital value area and there was no reason to doubt that it would continue to benefit from high growth in capital values for the foreseeable future. This would be reflected in the deferment rate.
11. In support of his opinion he produced a schedule listing 181 enfranchisement transactions on the Eyre and John Lyon's Charity Estates in St John's Wood in which his firm had been involved between October 1995 and January 2001. The schedule was annotated to show where yields had been specifically agreed, tacitly agreed or not agreed and it represented Mr Briant's opinion of the basis of settlement in each case. It showed that all high value properties in good locations had been subject to 6% yields. In particular, 6% had been achieved in every case in Hamilton Terrace.
12. Mr Briant said that decisions of the LVT and the Lands Tribunal influenced negotiations in the market by providing a framework of yields and deferment rates. In particular, he referred to this Tribunal's determination at 6% in the case of 43 Hamilton Terrace which, he said, was in a similar location and was of a high value at the valuation date of August 1994. Although the Member had requested that his decision should not be treated as a precedent, it provided a useful guide in setting the level of yields in the area. The Tribunal's determination in the case of 139 Hamilton Terrace also indicated that 6% was appropriate, in that case with a valuation date of February 1995. That decision related to a similar high value property, although the unexpired term was 66.67 years and the rent was subject to review to one-sixth of the annual rental value after 20.6 years and thereafter at 15 yearly intervals; at the valuation date the annual rent payable was £1,000 and the revised ground rental value was £5,000 per annum. Mr Briant accepted that No.139 was a modern house and therefore attracted a slightly different market from the subject property, but he considered that the decision also supported a deferment rate of 6%.
13. Mr Briant also referred to two decisions of this Tribunal at 6¼% - on 85 Avenue Road and 11 Loudoun Road. In each case the choice of yield had been influenced by the property's location, including its proximity to a school. He said that the subject property was not situated close to a school and it occupied a very good position in one of the most prestigious roads in the area. He also stated that one matter common to this Tribunal's decisions on the John Lyon's Charity Estate and the neighbouring Eyre Estate was that settlements on those estates had generally been found to be preferable to LVT decisions in determining the correct yield.
14. Mr Briant explained that the appellant had for many years adopted a policy of encouraging houses which had been converted to flats during or shortly after the Second World War to be converted back into the single family houses for which they had been originally designed. He considered that this had had a beneficial effect on capital values in Hamilton Terrace, because 20 or 30 houses had been involved. This policy had re-established the St John's Wood area as a fashionable place for large single family houses, just as it had been some 100 years previously.
15. 96 Hamilton Terrace – which immediately adjoined the subject property – was a good example of the trend from flats to houses. Here the owners of the various flats had joined forces to serve a collective enfranchisement claim and then marketed the property as a single unit. In that case, the lessees' valuer had agreed a yield of 6% and there was no reason why the same yield should not apply to the adjoining property, whether it fell to be valued as flats or as a single house.
16. Mr Buchanan explained that he had contended for a yield of 6½% in evidence before the LVT. The appellant's valuation expert – Mr Reade – had contended for 6% and the LVT had settled on a yield of 6¼%. In valuation terms the difference in the enfranchisement price produced by changing the yield from 6% to 6½% was not substantial in relation to the overall figure; it amounted to approximately £15,000 when valued as a house and £12,000 as flats. It followed that the difference in the price between 6% and 6¼% or between 6¼% and 6½% was between £6,000 and £7,500 in each case. In those circumstances the respondent had accepted the decision of the LVT and had not appealed the yield of 6¼%. His own expert view remained that the appropriate yield was 6½%.
17. Mr Buchanan considered that the factors which affected yield were location, value and lease terms. Location was probably the most important factor. As a general rule prime locations produced the lowest yields. In central London prime areas included Mayfair, Belgravia and parts of Kensington and Chelsea. He regarded St John's Wood as a good area but not prime. Within St John's Wood he regarded particular roads such as Cavendish Avenue, Hamilton Terrace and Avenue Road as being amongst the best locations.
18. Lease terms also had an effect on yield; in particular the length of the unexpired term and the level of ground rent and whether it was subject to review. As a general rule leases with very short unexpired terms - usually less than 21 years – and high ground rents or rents subject to review would attract a lower yield. On the other hand the yield for a lease with a reasonably long unexpired term and a relatively low fixed ground rent would be likely to be higher. The subject property was in the latter category.
19. Overall quality or value was also a factor. Generally speaking, for good quality properties the higher the value the lower the yield. In St John's Wood house prices ranged from £400,000 to over £3m and styles ranged from Listed Grade II Victorian villas to modern town houses. The subject property was a detached period house with an unimproved freehold value of approximately £2.25m. He regarded it as a high value property, but without the benefit of a garage or off-street parking.
20. Mr Buchanan referred to 21 properties in St John's Wood, where the LVT had awarded yields between 6% and 7%. Fifteen of those decisions had been appealed to this Tribunal and settled or determined at between 6% and 6.665%. He considered that the settlements which had been reached following the LVT determinations were prime examples of the "Delaforce effect", namely that a tenant would be more likely to go up in price than the landlord would be to come down to achieve a settlement and so avoid the expense of Tribunal proceedings (Delaforce v Evans (1970) 22 P & CR 770). The fact that tenants had agreed to pay an additional sum to settle an appeal did not, in his view, necessarily indicate an agreement to a yield of 6%. A lessee may choose to pay the additional sum to avoid the delay, risk and associated costs of an appeal before this Tribunal, particularly in circumstances where the difference in yield between the parties represented a relatively small sum. Furthermore, a lessee was not concerned with the make-up of the enfranchisement price but only the final amount. An estate landlord, on the other hand, was much more concerned at the effect a determination on yield would have on other settlements. It would often litigate on yield in order to "hold the line", even where the amount was quite small and did not in isolation warrant the costs of an appeal. The present case was a good example of such a situation. Mr Buchanan added that, to his knowledge, almost all LVT decisions on the Eyre Estate and the John Lyon's Charity Estate, where the yield had been fixed above 6%, had been appealed by the landlord.
21. In almost every case which resulted in a settlement, the lessee's objective was to agree an enfranchisement price which was acceptable to both sides. In that context, there were a number of variables in the calculation which could be adjusted to produce the final figure. There was often a difference of opinion between surveyors over both the yield rate and the differential between the freehold and leasehold vacant possession values. In many cases, such as the instant one, adjustments to the yield or the differential between freehold and leasehold values had only a relatively small impact on the final enfranchisement price. He believed that, provided the adjustments were within acceptable valuation tolerances, it was possible for surveyors to agree on the final price while adopting different methods of analysis to reach that figure.
22. There was a difference between the role of a surveyor when attempting to negotiate a settlement and when appearing before a tribunal as an expert witness. During the course of negotiations he may be asked to concede a valuation issue in order to achieve a settlement. In a number of cases, however, landlords required a signed break-down as a condition of the settlement, and this usually included a 6% yield. If this requirement resulted in a lower settlement figure then the tenant's surveyor was likely to recommend agreement to his client, rather than referring the matter to the LVT. Nevertheless it did not, in his view, demonstrate agreement to a 6% yield.
23. Apart from acting on behalf of numerous lessees on the Eyre Estate and John Lyon's Charity Estate, Mr Buchanan had also acted on behalf of a number of lessees on the MCC Estate in St John's Wood in relation to enfranchisement claims for houses. He regarded those properties as comparable in many respects to the properties referred to in Mr Briant's schedule of settlements. The MCC had been represented by Messrs Knight Frank, who had agreed to a yield of 7% for properties in Grove End Road and Elm Tree Road, London NW8.
24. All these comments were made on the assumption that the subject property had to be valued as a house. Houses would attract a lower yield than flats. At the date of valuation both the adjoining properties and a number of nearby properties were divided into flats and this factor should be reflected in the yield rate to be adopted. To his knowledge there had been only one LVT decision on yields for a flat in Hamilton Terrace; a yield of 6½% had been determined for Flat 3, 105 Hamilton Terrace.
25. To summarise, Mr Buchanan considered that the long unexpired term; the low fixed ground rent; the lack of a garage or off-street parking and the fact that the building was flanked by flats and overlooked at the rear were sufficient to take the subject property above a yield rate of 6%.
26. On the issue of the value of settlement evidence, I was referred to the following decisions by this Tribunal: Eyre Estate v Jaskel (LRA/48/1997, unreported), John Lyon's Charity v Brett (LRA/16/1997, unreported), Wellcome Trust Ltd v Romines [1999] 3 EGLR 229, Howard De Walden Estates Ltd v Von Dioszeghy (LRA/9/2000, unreported) and Cadogan v Cecil (LRA/10/2000, unreported).
27. Mr Briant's schedule of settlements appears on its face to provide formidable support for his adopted rate of 6%. It shows that 6% has been agreed for approximately three-quarters of the houses in St John's Wood whose lessees have enfranchised and the appeal property is clearly a valuable house in one of the most valuable roads in that area. I have come to the conclusion, however, that the settlement evidence is not as consistent as it appears. There are various reasons for this conclusion. Firstly, although Mr Briant said that the rate of 6% had been accepted irrespective of the unexpired term of the lease, he agreed in cross-examination that the very short unexpired lease term of 74 Maida Vale was a factor influencing the choice of a 6% yield in that case. Secondly, when questioned about the rate of 6% which had been agreed for 1 and 3 Langford Place, he replied that he would be happy to accept 6¼% if he were valuing those properties today. Thirdly, although he considered that close proximity to a school would be a justification for increasing the yield from 6% to 6¼%, he had agreed 6% for 14 Ordnance Hill, even though it immediately abutted a school playground. He sought to justify this apparent inconsistency on the ground that 14 Ordnance Hill was "a very special house." In the light of my inspection of that property and various other houses in comparable locations where Mr Briant considered 6¼% to be appropriate, I am unable to accept that explanation.
28. Another reason for my reservations about the settlements arises from the manner in which agreement was reached on 22 Norfolk Road and 33 Clifton Hill. In each case Mr Buchanan had represented the lessee. The appellant had been prepared to accept a price of £103,500 for the former without a signed breakdown or £101,750 with a signed breakdown at 6%. In the case of 33 Clifton Hill the appellant had been seeking a price of £127,500 the day before the LVT hearing, but had agreed to reduce this to £125,000 provided Mr Buchanan signed a breakdown at 6%. Mr Briant said that the appellant's approach in these cases had resulted from a request from the LVT. Mr Buchanan could not recall any specific indication that the LVT required a signed breakdown, although he agreed that the LVT had expressed an interest in seeing a table of settlements. In my view, even if the LVT had specifically indicated a preference for signed breakdowns, it is inconceivable that it would have suggested that a lower price should be offered to a tenant who was willing to provide one than to one who was not.
29. In my opinion, these two cases demonstrate an abnormal zeal on the part of the appellant to substantiate a yield of 6%. They therefore add credibility to the evidence of Mr Radford, who had negotiated a number of settlements with the appellant's surveyors, including one relating to the adjoining property, 96 Hamilton Terrace. He said that, from his previous negotiations in the area, he was aware that Mr Briant was "unbending" in his insistence on a yield of 6%. With that in mind, Mr Radford had had to decide which other elements of the valuation he should concentrate on in order to arrive at a valuation which he considered to be reasonable.
30. I accept that evidence. In doing so, I have borne in mind Mr Briant's agreement that the issue of the correct yield was of considerably more importance to the appellant than to its tenants. I have also had regard to the sums of money involved in the negotiations on No.96. The price agreed was £396,000, based on a yield of 6% and values of £2,080,000 and £1,420,000 for the freehold and existing leases respectively. If the figures were re-calculated on an identical basis, but using a yield of 6¼%, the price payable would be £389,419 – a difference of £6,581. I calculate that a similar difference could be obtained by accepting the 6% yield, but changing the freehold and leasehold values by less than 0.5% each. In my view it is not possible to say that surveyors can value properties of this nature to such a degree of accuracy.
31. Thus, in some circumstances at least, a surveyor can agree to a yield which he considers to be 0.25% "too low" and still achieve his valuation figure, provided he is able to secure a very small compensating adjustment to another element or elements of the valuation. Mr Munro suggested that there was something unprofessional about a surveyor signifying his agreement to a yield which differed from his true opinion. I reject that submission. Valuation is not an exact science and surveyors are accustomed to settling negotiations at figures with which they are broadly comfortable. When he negotiated the settlements on 22 Norfolk Road and 33 Clifton Hill, Mr Buchanan's overriding duty was to his lessee clients and he acted entirely properly in signing breakdowns in order to secure the lowest figures possible.
32. In the light of the evidence and my inspection, I find that the appeal property suffers from the absence of a garage or off-street parking facilities; the presence of flats on either side; a long unexpired term and a low fixed ground rent. These disadvantages, taken together, are material but not substantial. In my judgment, the settlement evidence is not sufficiently clear-cut to show that a prospective purchaser would not have required a yield of 6¼% rather than 6% to persuade him to proceed with the transaction. Mr Munro accepted that the onus was on the appellant to prove that the elements of the decision about which it complained were wrong. In my judgment that onus has not been discharged in relation to the LVT's chosen yield of 6¼%.
33. In the light of that finding, it is not necessary for me to determine whether the settlement evidence has been influenced by the "Delaforce effect".

Terms of Transfer

34. One term of the transfer was in dispute between the parties. The appellant contended that it was appropriate to include an absolute prohibition on the use of the appeal property other than as a single private residence, even though its scheme of management under the 1967 Act provided only for a qualified prohibition. It is agreed that, if an absolute prohibition is to be included, it must fall within either s.10(4)(b) or (c) of the 1967 Act, namely:

"(b) such provisions (if any) as the landlord or the tenant may require to secure the continuance (with suitable adaptations) of restrictions arising by virtue of the tenancy or any agreement collateral thereto, being either –

(i) restrictions affecting the house and premises which are capable of benefiting other property and (if enforceable only by the landlord) are such as materially to enhance the value of the other property; or

(ii) restrictions affecting other property which are such as materially to enhance the value of the house and premises;

(c) such further provisions (if any) as the landlord may require to restrict the use of the house and premises in any way which will not interfere with the reasonable enjoyment of the house and premises as they have been enjoyed during the tenancy but will materially enhance the value of other property in which the landlord has an interest."

35. The appellant's policy in relation to houses on its estate is to seek, on every occasion when the covenants as to user are in issue, an unqualified covenant restricting use to a private dwelling house in single family occupation. I was told that such a covenant had always been agreed when it had been requested by the appellant. As I have previously indicated, Mr Briant explained how the policy of encouraging re-conversion from flats to houses has had a beneficial effect on capital values in Hamilton Terrace. In cross-examination he agreed that, if the appeal property were considered in isolation, he could not demonstrate that an absolute prohibition on its use would materially enhance the value of other property in Hamilton Terrace, as compared with the qualified prohibition which would otherwise apply under the scheme of management. He considered, however, that the appeal property had to be viewed as part of a wider picture. The conversion of, say, 30 houses into flats would have a negative impact on values in the area. It was possible for property owners to challenge a decision by the appellant to withhold consent under the scheme of management. The proposed covenant would prevent such challenges and thus strengthen the appellant's ability to maintain the character of its estate.
36. Mr Buchanan agreed that it was conceivable that an element of enhancement in value could result from the imposition of an absolute covenant, but he did not believe that it would be material. He added that it was difficult to quantify the benefit to the whole estate from each of its individual components.
37. On the evidence before me, I am not persuaded that the imposition of the proposed absolute covenant, as opposed to the qualified covenant under the scheme of management, would materially enhance the value of other property in the area. In this connection, I have been particularly influenced by Mr Briant's evidence that the value of the appeal property would not, on its own, be enhanced if the adjoining property, No.96, were converted back from flats into a single family house. That being the case, I agree with Mr Johnson that it is difficult to understand why the imposition of an absolute covenant on the appeal property – which is the only one with which I am concerned - would materially enhance the value of the neighbouring property or properties further away. I therefore find that, notwithstanding the acceptance of such a covenant by other enfranchising lessees, the imposition of an absolute restriction on user will not materially enhance the value of other property in the area and I uphold the LVT's refusal to include such a restriction. I would add that, if absolute restrictions in the leases of a number of houses in Hamilton Terrace, taken together, would materially enhance the value of other property on the appellant's estate, then the appropriate route for the appellant to adopt would be to seek a variation to the scheme of management, which it may do at any time.
38. In the light of this conclusion, it is not necessary for me to consider whether the absolute prohibition would be a suitable adaptation of a restriction arising by virtue of the existing tenancy, within the terms of s.10(4)(b).

Improvements

39. I now turn to the question of whether the appeal property should be valued as a single house, as the LVT decided or whether, as the respondent contends, the conversion from flats to a house was an improvement which should be disregarded.
40. Mr Johnson pointed out that the relevant basis of valuation was to be found in s.9(1A) of the 1967 Act. This provided that the price payable

"shall be the amount which at the relevant time the house and premises, if sold in the market by a willing seller, might be expected to realise"

on the assumptions set out in paragraphs (a) to (f). Paragraph (d) provided that the valuation was to be made

"on the assumption that the price be diminished by the extent to which the value of the house and premises has been increased by any improvement carried out by the tenant or his predecessors in title at their own expense."

41. He submitted that the valuer should consider whether any works of improvement had been carried out at any stage during the currency of the various leases which fell to be taken as a single tenancy under s.3(3). If they had, he should ascertain whether they had been carried out by the tenant or his predecessors in title at their own expense. If, in relation to any particular works of improvement, the answer to these questions was in the affirmative, then those works fell within paragraph (d), provided they increased the value of the house at the valuation date. Applying those principles to the conversion from flats to a single house, it was agreed that the conversion had been carried out in stages by the respondent and his predecessors in title at their own expense. It was also agreed that those works added value to the house and premises at the valuation date. They therefore qualified as works of improvement within paragraph (d).
42. Mr Munro submitted that the correct comparison was between the property when it was first leased, absent the various additions and alterations which it was agreed had been carried out in or prior to the 1920s. He submitted that, since the subject property was a house both before the grant of the 1947 lease and at the valuation date, there were no improvements to be disregarded. If Mr Johnson's analysis were right, a lessee could reduce the value of a property by wrecking it and then claim that restoring it was an improvement. Mr Munro said that houses in St John's Wood were often completely gutted by their new owners following purchase. He produced various factual examples where, on Mr Johnson's approach, the tenant would be entitled to say that the last programme of works constituted an improvement, irrespective of what had happened previously. In one case a house had been destroyed by fire during the term of the lease and subsequently re-built. In another a house had been demolished and re-built on the original foundations. He also referred to a lessee who had gutted the inside of a house and was then forced to sell it to a new owner who refurbished it. Finally, the interior of a 19^th century villa had been completely gutted and turned into an open plan architect-designed loft with a glass staircase. Following changes in fashion, a new owner had decided to restore the original interior.
43. Mr Munro submitted that the correct approach was to look at the property as originally demised and at the valuation date. The difference between the two represented the improvements whose valuation implications had to be disregarded.
44. Mr Johnson accepted that the results of para (d) may be capricious. For example, it did not distinguish between works carried out pursuant to an obligation to a landlord and those carried out voluntarily. Thus, the tenant may have carried out works pursuant to an obligation to the landlord and received a benefit in return, and yet still be entitled to the benefit of them under the 1967 Act. Conversely, the lessee may have carried out works in the past which had added value at the time but did not do so at the valuation date; those were not to be disregarded. In the instant case, it was agreed that the conversion from a house to flats in 1947 had added value in the market conditions then current, with the result that they were improvements at the time they were carried out. If, however, the property had remained as flats, those works could not be disregarded at the valuation date, when it was agreed that a house was more valuable than flats.
45. Turning to Mr Munro's examples, Mr Johnson suggested that if the relevant works comprised the demolition of one house and its replacement with another, one did not go back to a bare site. The valuer had to compare the property prior to the improvements – a house – with the situation when the improvements had been completed – another house. As for the other examples, if the value following the works was in excess of that before the works, it was quite possible that those were improvements falling within para (d).
46. I accept Mr Munro's submissions on this issue. It is agreed that it is necessary under s.3(3) to assume that the appeal property has been held under a single tenancy commencing in June 1843. In my judgment, the effect of s.9(1A)(d) is that the market value of the appeal property is to be assessed on the valuation date in its condition at that date. The valuer must then ascertain to what extent that value has been increased as a result of tenant's improvements carried out since the commencement of the tenancy. Both the original conversion from a house to flats and the subsequent re-conversion from flats to a house were equally tenant's improvements and there is no requirement for the valuer to restrict his analysis to the effect of only one of them. Since the consequence of the tenant's improvements carried out to the appeal property has been to return it to its original state as a single dwellinghouse, there is no justification for disregarding the final works of re-conversion to that state.
47. For the sake of completeness I should add that, in the course of the hearing, a dispute arose as to the meaning of one sentence in the Agreed Statement of Facts. The sentence read as follows:

"At the time when the premises were divided into separate flats it is agreed that the premises constituted a 'house and premises' for the purposes of section 2 of the 1967 Act."

48. Mr Johnson concluded from this sentence that there was no issue as to whether, at the time of its conversion from a house to flats, the subject property had ceased to be a house and became a block of flats. Mr Munro, however, said that this was still an issue between the parties.
49. The disputed sentence arose from an exchange of correspondence between the parties' solicitors. On 24 July 2000 the respondent's solicitors, Messrs David Conway & Co wrote to the appellant's solicitors (then known as Messrs Lee & Pembertons) as follows:

"We do not believe a time estimate of one day will be sufficient as that in our view will depend on the extent to which the facts can be agreed so as matters stand, we would say two days should be allowed. So far as the agreed facts are concerned, the parties should endeavour to agree the extent, if not the value, of the works of improvement. For this purpose you are aware that the conversion of the property back into a single occupation is claimed by our client to be an improvement. Whilst your clients may continue to dispute this analysis we should like to know if they are prepared to agree that at the time the property was divided into separate flats, nevertheless the property constituted a 'house and premises' for the purpose of section 2 of the 1967 Act."

50. In their reply dated 9 August 2000, Messrs Lee & Pembertons said:

"… we confirm that our clients have never sought to contend that the property did not constitute a 'house and premises' for the purpose of section 2 of the 1967 Act notwithstanding that for a period of time it was divided into separate flats. They do, however, continue to dispute your client's analysis of the valuation consequences of the conversion."

51. I held that the appellant was bound by this letter which, in my view, meant that at all material times the subject property constituted a house and premises for the purposes of s.2.
52. The appeal and cross-appeal are therefore dismissed. I find that the price payable by the respondent to the appellant for the freehold interest in the appeal property under the terms of s.9(1C) of the 1967 Act is £398,200.
53. If I am wrong in law, and the appeal property falls to be valued as if it were flats and not a house, I would accept Mr Buchanan's valuations of £1,575,000 and £1,110,000 for the freehold and existing leasehold interests respectively and reject Mr Briant's figures of £1,950,000 and £1,365,000. The price payable by the respondent to the appellant would then be £275,298 (Annex 3).
54. What I have said so far concludes my determination of the substantive issues in this case. It will take effect as a decision when the question of costs is decided and at that point, but not before, the provisions relating to the right of appeal in section 3(4) of the Lands Tribunal Act 1949 and Order 61 rule 1(1) of the Civil Procedure Rules will come into operation. The parties are invited to make submissions as to the costs of this appeal and a letter accompanying this decision sets out the procedure for submissions in writing.

Dated: 26 March 2001

(Signed): N J Rose

ADDENDUM

55. I have received written submissions on costs.
56. The appellant submits that there should be no order for costs. It suggests that, since both parties' appeals were dismissed, the only other realistic order would be for the appellant to pay the respondent's costs of the appellant's appeal and the respondent to pay the appellant's costs of the respondent's appeal. It points out, firstly, that the yield issue took more time than the other issues but involved a comparatively modest amount of money; the respondent could have chosen not to respond to the appeal and saved substantial time and cost. Secondly, the covenant issue took little time. Thirdly, the improvements issue involved an important point of principle and a substantial amount of money; the appellant had no choice but to respond to the respondent's cross-appeal, both on the principle and because of the amount at stake.
57. A "split" order for costs would involve a difficult and expensive exercise to produce a result which may be little different from no order for costs; the latter would be a just and equitable result, reflecting all the circumstances of the appeal.
58. The respondent submits that, since the appeal and cross-appeal were consolidated and heard together, costs should be approached in the same way. He suggests that, in the absence of any without prejudice offer to settle which either equalled or bettered the Tribunal's decision, the costs order should reflect the relative success of the parties in terms of the result and the time and money spent on particular issues.
59. In terms of the result, the order should reflect the simple fact that the respondent won two issues to the appellant's one. The position is more stark, however, in terms of the time spent on particular issues. The issue which occupied most time both in terms of preparation and at the hearing itself was the yield. The appellant fought this point as a matter of principle and rested its case upon Mr Briant's table. The deployment of the table, with its 181 settlements, compelled the respondent to spend a great deal of time, in preparing and presenting his case, on challenging the table. It was for this reason that Mr Radford had to be called and that substantial time had to be taken in cross-examining Mr Briant and Mr Buchanan on the table. In the event, the appellant was unsuccessful on this point.
60. The respondent points out that success for the appellant on this issue would had made little difference to the amount of premium determined by the LVT. From a tenant's point of view, the economics of resisting a landlord's appeal on this issue are usually difficult to justify. It is unfair, however, that a tenant should have to cave in on this issue, simply because resisting an appeal is hard to justify on economic grounds.
61. As between the covenant point and the improvements point, the respondent says that it is probably wrong to suggest that one took up significantly less time than the other; both took up significantly less time than the yield. Nevertheless, on the improvements point, time was wasted at the hearing as a result of the appellant's unsuccessful attempt to escape from its agreement that the property still constituted a house and premises, within the meaning of the Act, for the period of time it was divided into flats. Moreover, Mr Buchanan's evidence was preferred on the issue of the valuation of the property as flats. The appellant could have conceded this valuation and thus confined the improvements point to the simple legal issue of whether the conversion from flats to a single house constituted work of improvement to be disregarded.
62. The costs order which the respondent invites the Tribunal to make, reflecting these considerations, is that the appellant should pay the respondent three-quarters of the respondent's costs of the appeal and cross-appeal. If a split costs order were made, the respondent suggests that the bill to be paid by the appellant would be substantially larger than the bill to be paid by the respondent.
63. I agree with the respondent that it is appropriate to deal with the costs of the appeal and cross-appeal together. In my view, the majority of the costs of these proceedings related to the issues of yield and restrictive covenant, in respect of which the respondent was successful. In the absence of any effective without prejudice offer, the costs order should reflect that fact. It should also reflect the fact that, as Mr Briant conceded, the yield issue was considerably more important to the appellant than to the respondent. I do not consider there is any merit in the appellant's suggestion that the respondent should not have responded on the yield point.
64. I therefore order that the respondent shall recover one-half of his costs of the appeal and the cross-appeal from the appellant. Such costs are to be agreed or in default of agreement assessed on the standard basis by the registrar of the Lands Trbunal in accordance with the Civil Procedure Rules.

Dated: 19 April 2001

(Signed): N J Rose

ANNEX 1

98 Hamilton Terrace, London, NW8

LVT's Determination

VALUE OF FREEHOLD INTEREST

Ground Rent	£140 per annum
YP 48.5 years @ 6¼%	15.154	£ 2,122
Reversion
Unimproved FHVP	£2,250,000
PV £1 48.5 years @ 6¼%	0.053	£119,250
Lessor's present interest		£121,372
Marriage Value
Unimproved FHVP	£2,250,000
Less Lessor's present interest £121,372
Lessee's unimproved LHVP £1,575,000	£1,696,372
Marriage value	£ 553,628
50% Marriage Value		£276,814
	Total	£398,186
	Say	£398,200

ANNEX 2

98 Hamilton Terrace, London, NW8

Mr Briant's Valuation

VALUATION OF FREEHOLD PRESENT INTEREST

TERM 1	Ground Rent	£140
	x YP 48.40 years @ 6%	15.673
			£2,194
REVERSION	FHVP	£2,250,000
	x PV 48.40 years @ 6%	0.060
			£134,100
		Lessor's present interest	£136,294
MARRIAGE VALUE
	FHVP	£2,250,000
Less
	Lessor's Present Interest Lessee's Present Interest	£  136,294 £1,575,000
Marriage Value		£538,706
	Take 50% Marriage Value		£269,353
		TOTAL	£405,647

ANNEX 3

98 Hamilton Terrace, London, NW8

Mr Buchanan's Valuation

VALUATION OF FREEHOLD PRESENT INTEREST

TERM	GROUND RENT	£140p.a.
	x YP 48.40 years @ 6¼%	15.154
			£2,122
REVERSION	Unimproved freehold value as 4 flats £  1.575m
	x PV 48.5years @ 6¼%	0.053
			£83,475
		Lessors interest	£85,597
MARRIAGE VALUE
	Unimproved freehold value as 4 flats £  1.575m
Less
	Lessor's Present Interest	£  85,597
	Unimproved leasehold value as 4 flats £   1.110m
Marriage Value		£379,403
	50% Marriage Value		£189,701
		TOTAL	£275,298