England and Wales Lands Tribunal

[2004] EWLands LRA_28_2003 (19 April 2004)

LRA/28/2003

LANDS TRIBUNAL ACT 1949

LEASEHOLD ENFRANCISEMENT – Price payable for lease extension – value of virtual freehold – comparable settlement evidence – yield – Leasehold Reform, Housing and Urban Development Act 1993 s48 – Appeal allowed in part – price determined at £80,610

IN THE MATTER of an APPEAL from a DECISION of the

LEASEHOLD VALUATION TRIBUNAL for the

LONDON RENT ASSESSMENT PANEL

by

HUGO BENJAMIN DAY

and

RUPERT ADAM DAY

(as Trustees of the Simon J Day Settlement)

Re: Flat 6, 32 Brechin Place, London, SW7 4QA

Before P R Francis FRICS

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

on

23 February 2004

The following cases are referred to in this decision:

Land Securities PLC v Westminster City Council [1992] 2 EGLR 15

Howard de Walden Estates Ltd v Dioszeghy (2000) (LT) LRA/9/2000 (Unreported)

Mark Sefton, instructed by Pemberton Greenish, solicitors of London, SW1, for the appellants


 


DECISION

1. This is an appeal by the freeholder against a decision of the Leasehold Valuation Tribunal for the London Rent Assessment Panel ("the LVT") on an application under section 42 of the Leasehold Reform, Housing and Urban Development Act 1993 ("the 1993 Act") for the determination of the price payable for a lease extension of Flat 6, 32 Brechin Place, London, SW7 4QA ("the subject flat"). The resident underlessees, Lloyd Joseph Carrington and Hayley Cassidy, do not respond to the appeal.
2. The LVT determined the price payable at £75,662 (premium payable to freeholder £74,549 and premium payable to head-lessee £1,114), and its valuation is set out at Appendix 1 to this decision. In it, the LVT determined the value of the virtual freehold at £297,000 and a yield rate of 7% for the deferment of the reversion and 9% for the capitalisation of the ground rent. The appeal is against these two elements of the LVT's valuation.
3. The subject flat occupies the fourth floor in a brick built, mansard roofed, south facing, inner terrace house, constructed on basement, upper ground and four upper floors in the 1890s. The building was converted from a house to self-contained flats by the head-lessees, Cornwallis Estates (OBSS) in about 1973. The fourth floor is approached over a communal staircase (there is no lift) and the flat, which is centrally heated and has a gross internal area ("GIA") of 540 sq ft, includes an entrance lobby, reception room, kitchen, 1 bedroom and bathroom. There is a full-width narrow balcony at the rear, accessed from the reception room. Located in South Kensington, in a residential street running between Gloucester Road and Rosary Gardens, where the majority of the houses have been converted to flats or maisonettes, the flat is convenient for Gloucester Road underground station, local shops, schools and other urban facilities.
4. The lessees occupy the flat under the terms of a sublease dated 8 August 1974 for 57 years (less 3 days) from 22 December 1973 at a ground and insurance rent of £80 pa, and they served notice under section 42 of the 1993 Act seeking a lease extension of 90 years on 23 August 2002 (the agreed valuation date for the purposes of this decision), at a premium of £40,000. There were 28.34 years remaining on the lease at that date. The landlords' counter-notice under s 45(2) sought a premium of £88,270 payable as to £87,138 to the freeholder, and £1,132 to the head lessee.
5. Having failed to agree terms, the matter was referred by the freeholder to the LVT on 27 January 2003. Following a hearing on 15 May 2003, the LVT issued its decision on 10 June. Notice of appeal from that decision was served upon this Tribunal on 3 July 2003.
6. The appellants' case is that the LVT adopted the wrong approach to the question of the value of the virtual freehold interest. It had selected only 4 of the appellants' expert's comparables, ignoring the remainder. It then applied adjustments that were significantly higher than had been contended for by either of the parties' experts. It then went on to discard one of the 4 comparables, averaged the remainder to arrive at a figure of £558 per sq ft, and then arbitrarily rounded that figure down to £550 per sq ft, giving its figure of £297,000. The resulting valuation was thus unjustifiably out of line with what had been contended for by both parties; if all the landlord's comparables had been taken into account and its adjustments applied, the landlord's valuation of £310,000 would have been seen to be fully supported.
7. The appellants also say that the LVT was also wrong to entirely disregard the landlord's primary evidence of settlements of previous claims under the 1993 Act, and its secondary evidence relating to the general decline in yields achieved in the land market and residential lettings in recent years. The primary evidence, it was submitted, was the best evidence available of appropriate yields in an artificial market in which any effect on value of the rights conferred by the 1993 Act has to be disregarded. The LVT's adoption of what it apparently considered to be a customary yield, having said in its decision

"7% [deferment element] is commonly adopted in settlements and in decisions of the leasehold valuation tribunal and the Lands Tribunal for properties of this type and in this kind of location, and we regard it as appropriate".

was, in fact, inappropriate because previous tribunal decisions are one remove from the market. The landlord's evidence showed 6.25% to be the correct yield for the deferment of the reversion, and 7.25% for the capitalisation of the ground rent.

8. Other aspects of the LVT's valuation being undisputed, including marriage value split 50/50 between landlord and tenant, the value of the lessees' current interest being 62% of the virtual freehold value, there being a 2% adjustment from the virtual freehold value to reflect the fact that the new lease will be for 118 years, and the basis for calculating the sum to be paid to the head-lessee, the two issues that therefore remain for my consideration in this appeal are:

a) The value of the virtual freehold;

b) The appropriate yield(s).

9. Mr Sefton called Patrick Waters BSc MRICS, a chartered surveyor and property consultant who has been acting for the freeholders in respect of 1993 Act claims since 1997. He is also a shareholder of a property development and investment company, carrying out residential and commercial projects in the City, West End, and Kensington and Chelsea. He said that apart from the two issues raised in this appeal, all other elements of the LVT's valuation were agreed by the landlord. He produced an exceptionally comprehensive, and in my view, well presented report and appendices. I deal with the two appeal issues in turn.
10. Firstly, as to the value of the subject flat on a virtual freehold basis, Mr Waters analysed the evidence of open market sales of 7 flats in the immediate vicinity. I made external inspections of all of them and the immediate vicinity on 26 March 2004. All but one were in Brechin Place or Rosary Gardens, the 7^th being a first floor flat in nearby Wetherby Gardens where it was accepted that achieved prices were significantly higher due to it being a superior location. All the flats were sold between June 2000 and April 2003, 7 had a share of the freehold, and one had a lease for 128 years. The information relating to them was corroborated by the selling agents. Mr Waters acknowledged that although very similar in terms of size, accommodation and location, no two flats were identical and he had, therefore, made a number of adjustments. They included lease term, location, floor level, specification and, particularly, date of sale, for which he had relied upon the FPD Savills indices for Prime Central London (West) and Prime Central London (South West) flats. From these analyses, he arrived at an adjusted price per sq ft.
11. The comparables relied upon, in order of preference were:

Address	Floor	Accom	Area	Sale Price	Date	Adj price per sq ft	Adj value
Flat 6, 8 Brechin Place	4	1 rec 2 beds	635 s f	£299,500	Jun 2000	£577	£366,615
Gnd Fl, 18 Brechin Place	Gnd	1 rec 2 beds	615	£360,000	Feb 2001	£566	£348,167
Flat 5 8 Brechin Place	3	1 rec 2 beds	544	£363,000	May 2002	£597	£324,841
Flat 5, 37 Rosary Gdns	2	1 rec 1 bed	497	£327,000	Aug 2002	£592	£294,300
Flat 6, 12 Rosary Gdns	L/Gnd	Studio	361	£200,000	Mar 2003	£549	£198,303
Flat 4, 15 Wetherby Gdns	1	1 rec 1 bed	482	£446,000	Mar 2003	£611	£294,810
Top flat, 21 Brechin Place	4	1 rec 2 beds	672	£345,000	May 2002	£564	£379,616

12. Mr Waters said that the range of sale prices at £565 to £611 per sq ft indicated that his valuation of the subject flat, at £574 per sq ft (£310,000) fits well with the evidence. There was no justification, he said, for the LVT to have specifically excluded Flat 5, 37 Rosary Gardens (along with three others) as that was sold at a similar time and was, although slightly smaller, similar in terms of accommodation. There was also no justification for the arbitrary reduction from the LVT's assessment of £558 per sq ft, down to £550 per sq ft. The agents that Mr Waters had approached in connection with the comparable sales had all, he said, indicated a value of the subject flat of between £300,000 and £325,000.
13. The difference between the appellants' valuation and the LVT's determination is only £13,000, well within a 10% margin of error (indeed it is less than 5%), and Mr Waters accepted in response to a question from me that he would normally accept a 10% margin of error in valuation terms. But he said that the fact that the LVT had ignored his best comparables, and had applied adjustments that were higher than either of the parties valuers had contended proved, in his view, that the LVT was wrong in arriving at the conclusion it did. He pointed out that at the LVT hearing, the tenants' valuer, upon realising that he had not adjusted for market movements between the valuation date and the sale dates of his own comparables, reconsidered his figure in the sum of £302,400, or £560 per sq ft. If this were the case, there might be some question as to why the LVT had adopted, in party and party litigation, a figure below the tenant's contended sum, but I note that the LVT said, at para 5 of its decision, that the tenant's valuer's revised figure (from his initial £290,000) was £549 per sq ft or £296,400). In the absence of conclusive evidence to the contrary, it is the LVT's statement that I have to accept.
14. Whilst I was impressed with the depth of analysis undertaken by Mr Waters, I note from the LVT's decision that they did not, in fact, "ignore" 3 of his 7 comparables, but concluded that, having considered all of them, the first four were the most helpful – all being "reasonably similar to the subject flat". Mr Waters, in agreeing that the Wetherby Gardens comparable is not particularly helpful also said in his report, at para 7.1.3.19 "Of the evidence I put forward I consider comparables 5,6 and 7 are the least relevant….." It appears to me, therefore, that in reality there is little between the appellant and the LVT on which comparables were the most appropriate. However, the LVT went on to use marginally higher adjustments (for example 20% for ground floor as against Mr Waters' 15%) and to discount the fourth comparable (Flat 5, 37 Rosary Gardens) because it was in a different street. It was the exclusion of this 4^th comparable, after the adjustments had been made, that brought the price per square foot down from £558 to £550.
15. Although the appellant states that the LVT's valuation was below the tenants' valuer's amended figure given at the hearing (but in that respect see my comments above), it is evident that the LVT gave virtually no weight to his comparable evidence. I do not think that it was wrong in this respect. It comes down, it seems to me, to whether the 4^th comparable should have been discarded, and whether the adjustments the LVT made were too great. Whilst I see some merit in not discarding flat 5, 37 Rosary Gardens, the exclusion of it does not, in my view, make a sufficient difference to the overall result to warrant disturbing the LVT's decision. I am mindful also of the fact that the LVT is a specialist tribunal and will use its own experience and judgment in analysing the evidence and arriving at its conclusions. That, it appears, is what it has done in using higher adjustments. The difference in value between the LVT's £297,000 and the contended for £310,000 is, as I have said, very marginal and is too small for me to be able to say that the LVT was wrong in reaching the conclusion that it did. This aspect of the appeal, therefore, fails.
16. I now turn to the question of yields. Mr Waters approached this from two angles. Firstly, he said that the primary evidence to be taken into account was settlements of previous claims for lease extensions under the 1993 Act. Whilst not perfect, such evidence has greater value than prior LVT or Lands Tribunal decisions which are once removed from the market. He principally relied upon a schedule of 8 flats in Brechin Place and Rosary Gardens where settlements had been agreed under the 1993 Act. It demonstrated a gradual decline in average yields from the earliest (29 March 1999 at 7.14%) to the latest (9 August 2002 at 6.25%). All the flats were similar to the subject flat in terms of location, size and lease length and most of the yields had been agreed either between the respective parties' advisors or confirmed to him by the relevant surveyor as the basis upon which settlement had been reached. He therefore adopted 6.25% as the appropriate yield for the deferment rate, and considered a discount of 1% to 7.25% was the right figure for the capitalisation of the ground rent.
17. Secondly, Mr Waters said that this general decline in yields that had occurred over a 3 year period was consonant with general economic trends over the same period. The Bank of England base rate fell from 5.5% to 3.75%, and there was a reduction in yields from gilts and bonds and in dividends from the stock market. The consequence of this was that investors have been seeking alternative types of investment to achieve better performance, and many who had previously avoided the land market were now turning to that vehicle, with the result that property investment yields in both the residential and commercial property markets were also falling. This was demonstrated, as an example, by the FPD Savills index on yields in residential lettings. Average gross yields in prime central London flats had fallen from 7.9% in March 1999 to 4.8% in March 2003, the net yields falling from 4.9% to 2.5%.
18. Mr Waters said that historically LVTs and the Lands Tribunal had been reluctant to accept that the land market is connected to what was happening in other investment markets unless there was 'hard evidence' to prove it. The LVT in this case had said "7% is commonly adopted in settlements and in decisions of the leasehold valuation tribunal and Lands Tribunal for properties of this type and in this kind of location, and we regard it as appropriate". It had therefore totally disregarded the landlord's evidence which clearly supported a lower yield. He said that there was no justification for this approach which seemed to place the central London property market 'in a solar system of its own', with no regard for what was happening in the markets generally.
19. In closing, Mr Sefton pointed out that the statement by the LVT giving its reasons for adopting yields of 7% (and 9% for the capitalisation of the ground rent) indicated that they were relying on earlier LVT and Lands Tribunal decisions. He said the lessees' valuer had also principally relied upon previous LVT and Lands Tribunal decisions in his comparables placed before the LVT. Previous tribunal decisions were, of course, inadmissible (see Land Securities PLC v Westminster City Council [1992] 2 EGLR 15 and Howard de Walden Estates Ltd v Dioszeghy (2000) (LT) LRA/9/2000 (Unreported)). In any event, the LVT had made a broad generalisation, and had not even identified which determinations they had taken into account. It was improper, therefore, for them to base their decision on matters that were not before them. Mr Sefton concluded by saying that yields in all markets were now so low that 6.25% as a primary yield could not, under the circumstances be considered too low.
20. I am satisfied on the evidence of Mr Waters that the downward trend in yields on residential lettings in the vicinity is proved, and this suggests, strongly in my judgment that yields in respect of deferment and for capitalisation of ground rents will also have fallen. The LVT was wrong, in my view, to discard that evidence and to base its conclusions as it did. Whilst, as I have said above, the LVT is a specialist tribunal and will apply its own expertise, in this instance the evidence before me is so strongly persuasive that it cannot be ignored.
21. Consideration of trends in the money markets generally is valid, and the fact that yields in the prime Central London residential market have fallen very considerably must, I think, be taken into account in helping to form an opinion as to what an investor would pay in this particular situation. Obviously, money market trends alone are insufficient to form a proper conclusion, and there can be no substitute for hard evidence. However, as I have said, I do think that such evidence exists in this case and therefore find that the LVT was wrong in its determination of the yield aspect. In accepting Mr Waters' figures of 6.25% for the reversion, and 7.25% for capitalisation of the ground rent, my valuation (taking into account my findings on the first issue and the fact that other matters are not in dispute) becomes £80,610 (Appendix 2).
22. The appeal therefore succeeds in part, and I determine that the price payable by underlessees of Flat 6, 32 Brechin Place, London SW74QA shall be £80,610, made up as to £1,152 to the headlessee and £79,458 to the freeholder. In conclusion, I think I should make it clear that, if the question were merely one of valuation evidence I would, because the difference between the parties fell well within an acceptable error margin, have dismissed the appeal. However, on the question of yields it is my view that the LVT wrongly discounted Mr Waters' evidence and, had it taken it into account as it should have done, it would have come out at a higher figure. Therefore, whilst the difference in the premium that I have determined is to be paid by the lessees is not significantly higher than the figure decided by the LVT, as a matter of principle, I must allow the appeal in part.
23. There being no respondent to this appeal, I make no award as to costs.

DATED 19 April 2004

(Signed) P R Francis FRICS


 


Appendix 1

Leasehold Valuation Tribunal

Valuation of Flat 6, 32 Brechin Place SW7

GIA of fiat in square feet 540
Value psf for virtual freehold £550
Virtual freehold value of Flat 6 £297,000
Relativity between freehold & leasehold 98%
Value of long leasehold £291,060
Length of lease remaining 28.34 yrs
Value of existing lease at relativity of 62% £184,140
Valuation date 23 Aug 02
Value of freeholder's present interest
Ground rent remains the same as the headlease is not extinguished
Reversion to Freehold Value	£297,000
PV of £1 @ 7% in 28.34 years	0.146982		£43,654
Value of headlessee's present interest
Ground rent received	£80
YP 28.34 years @ 9% & 3% (tax @ 30%)	8.1507	£652
Value of tenant's present interest	£184,140
Freeholders Interest after grant of long lease
Ground rent remains the same as the headlease is not extinguished
Reversion to freehold value	£297,000
PV of £1 in 118.34 years at 7%	0.0003321		£99
Headlessee's interest after grant of long lease £0
Tenant's interest after grant of long lease £291,060
Calculation of marriage value
Value of property after grant of long lease
Freeholder's interest £99
Headlessee's interest £0
Tenant's interest £291,060
	£291,159
Value of existing interests
Freeholder's interest from above £43,654
Headlessee's interest from above £652
Tenant's interest £184,140	£228,446
Marriage value	£62,713
Share of marriage value to be divided equally between freeholder/headlessee and tenant	£31,356.46
Division of marriage value between freeholder & headlessee
Freeholder 0.9853	£30,895
Value of freehold
Headlessee 0.0147	£461
Premium payable to freeholder
Present interest – from above			£43,654
Share of marriage value			£30,895
Total			£74,549
Premium payable to headlessee
Present interest – from above			£652
Share of marriage value			£461
Total			£1,114
Total premium payable				£75,662


 


APPENDIX 2

Lands Tribunal Valuation

Flat 6, 32 Brechin Place, London, SW7 4QA

Inputs

Value of virtual freehold	£297,000
Relativity between freehold and long leasehold (118.34 years)	98%
Value of long leasehold	£291,060
Lease length remaining
Value of existing lease at agreed relativity of 62%	£184,140
Valuation date	23 August 2002
Yield: Deferment	6.25%
Yield: Capitalisation	7.25%

Value of freeholder's present interest
Reversion to freehold value	£297,000
PV of £1 in 28.34 yrs @ 6.25%	0.17950
		£53,311

Value of headlessee's present interest
Ground rent received	£80
YP for 28.34 yrs @ 7.25% and 3% (tax at 30%)	9.50657
		£761

Value of tenants' present interest	£184,140
Freeholder's interest after grant of long lease
Reversion to freehold value	£297,000
Reversion to freehold value	£297,000
PV of £1 in 118.34 years @ 6.25%		£297,000
PV of £1 in 118.34 years @ 6.25%		0.000766
			£ 227
			£ 0
Tenants' interest after grant of long lease		£291,060
Calculation of Marriage Value
Valuation of property after grant of long lease
Freeholder's interest		£ 227
Headlessee's interest		£ 0
Tenants' interest		£291,060
			£291,287
Value of existing interests
Freeholder's interest from above		£ 53,311
Headlessee's interest from above		£ 761
Tenants' interest		£184,140
			£238,212
Marriage Value			£ 53,075
Share of marriage value @ 50%		£ 26,538

Division between freeholder and headlessee
Freeholder	0.9853	£ 26,147
Headlessee	0.0147	£ 391
Premium payable to freeholder
Present interest from above			£ 53,311
Share of marriage value			£ 26,147
				£ 79,458
Premium payable to headlessee
Present interest from above			£ 761
Share of marriage value			£ 391
				£ 1,152
Total Premium Payable				£ 80,610