England and Wales Lands Tribunal

[2004] EWLands LRA_70_2002 (19 November 2003)

LRA/70/2002

LANDS TRIBUNAL ACT 1949

LEASEHOLD ENFRANSHISEMENT – extended lease – ground rent – lack of market evidence – standing house approach – personal or financial circumstances not to be taken into account – legislation to be applied as it is – appeal dismissed – Leasehold Reform Act 1967, s15(2)(a)

IN THE MATTER of an APPEAL against a DECISION of a LEASEHOLD VALUATION TRIBUNAL for the MIDLAND RENT ASSESSMENT PANEL

BETWEEN

OLIVE MAY DARRELL

Appellant

and

ANTHONY SEYMOUR BERKELEY PORTMAN

Respondent

Re:

204 Addison Road

Kings Heath,

Birmingham

Before: Mr P H Clarke FRICS

Sitting at Birmingham on 14 November 2003

The following cases are referred to in this decision:

Buckley v SRL Investments Limited (1970) 22 P & CR 756

County and Metropolitan Developments Limited v Brewer Trust (1971) 22 P & CR 1135

Machin v Redspring Limited (1973) 225 EG 2037

Farr v Millersons Investments Limited (1970) 22 P & CR 1055

Official Custodian of Charities v Goldridge (1973) 26 P & CR 191

Paul Rocky FRICS of Paul Rocky, chartered surveyors, for the appellant

Derek Hackett FRICS of Bigwood, chartered surveyors, for the respondent


 


DECISION OF THE LANDS TRIBUNAL

1. This is an appeal heard under the simplified procedure by the tenant of a house in Birmingham against the decision of an LVT fixing the rent on an extended lease at £1,450 per annum.
2. Mr Paul Rocky FRICS, in practice on his own account in Birmingham, and acting pro-bono, appeared for the appellant, Mrs Olive May Darrell. Mr Derek Howard Hackett BSc FRICS IRRV, a director of Bigwood, chartered surveyors of Birmingham appeared for the respondent, Mr Anthony Seymour Berkeley Portman.
3. At the conclusion of the hearing I gave a decision to dismiss the appeal with no order as to costs, with a written decision to follow.

Facts

4. From the evidence I find the following facts.
5. The appeal property (204 Addison Road) is a three-storey brick and slate terraced house situated in the suburb of Kings Heath, some five miles from the city centre of Birmingham.
6. The freehold of the appeal property is held by the respondent. The appellant acquired a long leasehold interest in the property in August 1958. This was the residue of a lease dated 14 May 1903 for a term of 99 years (less three days) from 25 March 1903 (expiring 22 March 2002) at an apportioned rent of £4 per annum. On 26 September 1994 Mrs Darrell served on the respondent notice of her desire to have an extended lease of the property under section 14 of the Leasehold Reform Act 1967 ("the 1967 Act"). On 29 March 1996 Mrs Darrell was granted a new full repairing and insuring lease for a term expiring on 22 March 2052 at an initial rent of £4 per annum until 22 March 2002 and then a yearly rent to be ascertained in accordance with section 15(2) of the 1967 Act. It is this rent which is in dispute in this appeal. The valuation date is 22 March 2002. This rent is subject to review at the 25th year of the term.
7. On 24 September 2002 Mrs Darrell applied to have the rent determined by an LVT for the Midland Rent Assessment Panel. Following a hearing on 1 November 2002 the LVT gave a decision dated 14 November 2002 determining the rent under section 15(2) of the 1967 Act at £1,450 per annum. On 10 December 2002 Mrs Darrell appealed against that decision to this Tribunal. On 26 August 2003 it was ordered to be heard under the simplified procedure.

Appellant's case

8. In his evidence Mr Rocky said that there have been only two other decisions on modern ground rents by the West Midland LVT. In both cases the rent has been found by the standing house approach using a 7% decapitalisation rate. This is a convention used to determine a rent under section 15(2) of the 1967 Act. The financial predicament in which the appellant now finds herself has led Mr Rocky to consider whether this convention should be followed.
9. There is no market evidence of ground rents for 50 years and therefore another approach should be taken into account. The only way in which the site of the appeal property could have a letting value under section 15 is for development for a single dwelling converted into two flats. On this basis Mr Rocky arrived at a ground rent of £91 per annum, by taking a net income of £8,200 per annum, capitalising this for 50 years at 10% and then deducting the agreed cost of construction of £80,000, leaving a site value of £1,301 which he decapitalised to find the ground rent at 7%.
10. Mr Rocky said that Mr Hackett's approach using the standing house method is reasonable as a conventional or expedient method of calculation. His figures are not excessive. However, the LVT did not question this approach. If a set of rules are unworkable or produce an unexpected result then it is the rules that require changing so as not to disadvantage people such as the appellant. The LVT's decision cannot possibly comply with the definite terms laid down in the 1967 Act. They should have considered who would be likely to build a house on the site on a 50 year lease. No one would do this. The ground rent should only be £91 per annum. A rent of £1,450 per annum cannot be sustained when applying the terms of the legislation and therefore the LVT were wrong to apply the conventional or expedient method of valuation to fix a section 15 rent. Strictly, the letting value of the site for a single dwelling on a 50 year term is nil. However, given that a reasonable use of the site would be for a single dwelling converted into two flats, the ground rent should be £91 per annum. Mr Rocky put in evidence letters from two Birmingham surveyors expressing surprise at the rent fixed by the LVT.
11. In his submissions Mr Rocky said that his case rested on three points. First, that the decision of the LVT was unsupported by market evidence. The standing house approach should not have been used to fix the section 15 rent. In the absence of ground rents in the market on a 50 year lease the LVT were wrong to accept Mr Hackett's standing house valuation. They should have determined a nil rent. It is agreed that there is no market evidence of rents for vacant sites for a 50 year term. Second, if the appeal property is considered as a development site for two flats then the section 15 rent is £91 per annum. Third, if the appeal property is considered as a site for one house then the rent is nil.
12. Mr Rocky said that Mrs Darrell cannot now sell her house due to the decision of the LVT; this cannot be right. There is a difference between applying the standing house approach to fix the price on enfranchisement, where the use of this approach is permissible to make the 1967 Act work, and its use when fixing a section 15 rent on an extended lease, where it produces injustice. This point has never been previously considered in the cases. In the absence of market ground rents the standing house approach should not have been used to fix a section 15 rent. The absence of market ground rents indicates a nil ground rental value.

Respondent's case

13. Mr Hackett said that in October 2001 a new rent of £1,450 per annum was agreed with Mrs Darrell's solicitors but the agreement was never signed. Mr Hackett arrived at this rent by taking the agreed standing house value of £75,000, adopting 27.5% as site value (£20,625) and then decapitalising this figure at 7% to find the ground rent (£1,450 per annum). This valuation was accepted by the LVT. He believes it to be reasonable. There is no point of law upon which it is based. He has dealt with several hundred similar cases in the Midlands where a 7% decapitalisation rate has been agreed.

Decision

14. The sole issue in this appeal is the rent under section 15(2) on an extended lease granted under the 1967 Act. The LVT fixed this rent at £1,450 per annum; this is accepted by the respondent landlord; it is challenged by the appellant tenant. Mr Rocky says that it should be nil or £91 per annum.
15. This rent is defined in section 15(2)(a) of the 1967 Act as follows:-

"the rent shall be a ground rent in the sense that it shall represent the letting value of the site (without including anything for the value of buildings on the site) for the uses to which the house and premises have been put since the commencement of the existing tenancy, other than uses which by the terms of the new tenancy are not permitted or are permitted only with the landlord's consent;"

16. With that definition in mind, I reject Mr Rocky's rental calculation of £91 per annum for two reasons. First, and most importantly, it is not in accordance with the above definition. Mr Rocky assumes that the appeal property could be redeveloped on a 50 year lease as a house converted into two flats. The appeal property was used as a single house under the previous lease granted in 1903. Clause 3(6) of the new lease permits use as a private dwellinghouse only, not two flats. Furthermore, clause 3(7) prevents building on the site without the landlord's consent. Under section 15(2)(a) it cannot be assumed that the appeal property could be redeveloped as two flats. The word "uses" in section 15(2)(a) does not mean general residential use in a broad town planning sense, involving either development of the site to a higher density or multiple-occupation of the house itself. It means, in this case, a house in single residential occupation (see Buckley v SRL Investments Limited (1970) 22 P & CR 756 at 762; County and Metropolitan Developments Limited v Brewer Trust (1971) 22 P & CR 1135 at 1140).
17. For this reason alone I reject Mr Rocky's valuation but I also reject it as unreliable due to his use of the residual method of valuation, the limitations of which in the context of litigation are well-known (see eg. Machin v Redspring Limited (1973) 225 EG 2037).
18. As to Mr Rocky's submission that there was no market evidence of ground rents before the LVT and they should therefore have determined a nil rent, I entirely reject this submission. There was evidence before the LVT in the form of expert evidence from Mr Hackett, including comparables. Mrs Darrell put forward no evidence. The LVT were justified in accepting Mr Hackett's evidence. It cannot be said that there was no evidence to support their decision. Lack of market evidence is a feature of valuation under the 1967 Act. Valuers and tribunals have used particular methods of valuation to make the Act work, eg. the standing house approach. The fixing of a section 15 rent on an extended lease does not differ from fixing the price on enfranchisement which necessarily incorporates a section 15 rent. I cannot accept Mr Rocky's submission that lack of ground rental evidence necessarily requires a nil rental value to be determined. Nor can I accept his submission that the standing house approach can be used to fix a section 15 rent as part of the price on enfranchisement but cannot be used to fix a section 15 rent on an extended lease. In the absence of market evidence the standing house approach can be used in both cases.
19. In my judgment, Mr Rocky's approach to the calculation of a section 15 rent is misconceived. The emphasis should not be on the development of a cleared site under a 50 year lease but on the assessment of site value (or rental value) as a component part of the value of the whole premises (see Farr v Millersons Investments Limited (1970) 22 P & CR 1055 at 1060). The principle underlying the 1967 Act is that the land belongs in equity to the landowner and the house belongs in equity to the occupying leaseholder (see Official Custodian of Charities v Goldridge (1973) 26 P & CR 191 at 204). The tenant is required to pay a rent for the land but not for the house.
20. I have two other comments on Mr Rocky's case. First, when fixing a section 15 rent, I cannot take into account, directly or indirectly, the personal or financial circumstances of the landlord or the tenant. It is immaterial that Mrs Darrell may have been badly advised or that she cannot now sell her leasehold interest (although I received no evidence of this and no evidence that it is the amount of the rent which is preventing a sale). Second, I am required to apply section 15(2)(a) as it is and not as it might be or ought to be. I cannot take into account whether the 1967 Act is or is not fair.
21. For these reasons I reject Mr Rocky's submissions and evidence. I am left with Mr Hackett's valuation, supporting the LVT's decision. Mr Rocky accepts that Mr Hackett's approach, as a conventional or expedient method of valuation, is reasonable and that the resultant figure is not excessive. In my judgment, and in the circumstances of this case, the standing house approach is an acceptable method of valuation. I accept Mr Hackett's figures, which are either agreed or are reasonable. The entirety value of £75,000 is agreed. The proportion of site value to entirety value of 27.5% is within the generally accepted bracket of one quarter to one third outside central London. I have no evidence that this percentage is too high. A 7% decapitalisation rate is generally accepted and has been used by Mr Rocky in his valuation. The standing house approach is open to criticism but, in the absence of market evidence of bona-fide ground rents or development land sales, it is often the only way to find a modern ground rent. I do not accept that, if market evidence is not available, the ground rent must be nil. I am not persuaded that the decision of the LVT is wrong. I dismiss the appeal.
22. Mr Hackett asked for costs to be awarded to the respondent on the grounds that the appellant's challenge to the LVT's decision was largely based on her personal circumstances and was really an attack on the working of the 1967 Act. Mr Rocky resisted that application on the grounds that Mrs Darrell really had no choice but to appeal due to her personal circumstances and the possibility of a negligence claim against her former solicitors.
23. Costs are not normally awarded in proceedings under the simplified procedure and may only be awarded where there has been an offer or in exceptional circumstances (rule 28 (11) of the Lands Tribunal Rules 1996). There have been no offers in this case. Although I have some sympathy with the respondent's position, in having to reply to an appeal largely without merit, I do not think that this lack of merit and the extraneous circumstances behind the appeal are sufficient to constitute exceptional circumstances justifying an award of costs. Accordingly, I make no order as to costs.

DATED 19 November 2003

(Signed P H Clarke)