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Cite as: [2005] EWLands LRA_42_2004

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LRA/42/2004

LANDS TRIBUNAL ACT 1949

LEASEHOLD ENFRANCHISEMENT – price payable for freehold of house – clause in lease providing for forfeiture in event of tenant's bankruptcy – amount purchaser would pay for prospect of profit from releasing provision – whether personal circumstances of actual tenants relevant – price of £250 determined by LVT upheld

IN THE MATTER OF AN APPEAL

by

G and O PROPERTIES (LONDON) LIMITED

Re: Bungalow

6 Burford Gardens

Tinstall

Sunderland SR3 1LX

Before: The President

Sitting at Procession House, 110 New Bridge Street, London EC4V 6JL

on 16 February 2005

Tom Weekes instructed by Glenisters for the applicant

No cases referred to.

DECISION

This is an appeal by the landlord against the decision of the Leasehold Valuation Tribunal for the Northern Rent Assessment Panel on an application under section 21 of the Leasehold Reform Act 1967 to determine the price payable under section 9 of that Act for the grant of the freehold of the subject premises, a semi-detached bungalow. Notice under the Act was served by the tenants on 28 September 2003. They hold the premises under a lease dated 27 April 1962 for a term of 999 years from 1 October 1958 at a yearly fixed rent of £12.60. Clause 4(i) of the lease contains a right of re-entry in the event of the tenants' bankruptcy. It is this provision that gives rise to the present appeal.

The landlord did not appear at the LVT hearing. Instead, as the LVT's decision records at paragraph 11, at a very late stage and too late for the tenants to get professional advice on it, the landlord put in a report by a surveyor, Mr T M S L'Estrange FRICS. In that report Mr L'Estrange expressed the view that the effect of the forfeiture clause was to enable an investor purchaser of the freehold to demand a premium and/or an increase in ground rent for agreeing with the leaseholder to vary that clause. This therefore increased the value of the freehold. Mr L'Estrange said that he considered that an investor who had bought the freehold would be able to charge £5,000 for entering into such a deed of variation and would in addition be able to obtain an increase in the ground rent to £100 per annum. That would mean that the freehold was worth an extra £6,000 above the capitalisation of the ground rent. However, he said, a potential purchaser would discount that by 50% leaving a hope value of £3,000 to be added to a capitalisation of the ground rent.

The LVT dealt with Mr L'Estrange's contention as follows in paragraph 21 of its decision:

"21. Whilst the Tribunal accepted that the presence of clause 4 (i) would have some effect on the price it did not consider that Mr L'Estrange had taken account of all the possibilities in assessing the value to the freeholder of the relevant clause. As is clear from the evidence in the present case, not all purchasers require a mortgage. Not all purchasers will have a mortgage from a member of the Council of Mortgage Lenders. Some purchasers have mortgaged their property notwithstanding the relevant clause. The opportunity for charging for a deed of variation etc. where the property comes up for sale and the purchaser needs a mortgage will not occur frequently and may be long delayed – the Tribunal found that the Applicants have spent a good deal of time and money in getting the Premises exactly to their liking and noted their expressed intention to stay there for the foreseeable future. This is not for them a 'starter home'. The Tribunal found that the whole business of possibly profiting from a request to remove the offending clause or part of it was very speculative and certainly not as valuable as suggested by Mr L'Estrange."

The tenants appeared at the LVT hearing and gave evidence. They also relied on a report on valuation prepared by Mr D A Toes BSc MRICS, whose opinion was that the open market value of the freehold interest was £300. Taking that into account the LVT expressed its decision as to price in these terms:

"26. It is not clear from Mr Toes' valuation what proportion if any of the figure of £300.00 was attributable to the effect of clause 4(i). However, the Tribunal, using its own knowledge and experience, considered that the single rent of £12.60 per annum payable half-yearly is one which would be difficult to find an investor to purchase, notwithstanding the security of the income stream. The rent cannot be increased and collection costs would be disproportionate. In the circumstances 10 years purchase was appropriate and that the resulting value relating to the capitalisation of the ground rent was £126.

27. However to that must be added the value of the speculative element of the chance of making a profit at some time in the future of a need on the part of the leaseholder to obtain a variation of the forfeiture clause. For the reasons given at paragraph 21 the Tribunal felt that this chance was far more remote than Mr L'Estrange allowed for and valued it at a nominal figure of £124.00.

28. The price determined by the Tribunal is therefore the aggregate of £126.00 and £124.00, namely £250.00".

On 18 August 2004 I gave the landlord permission to appeal on the ground that there was a realistic prospect of success on the point that the LVT was wrong in law to take account of the leaseholder's personal circumstances; and that it was appropriate that evidence relating to the effect of the bankruptcy forfeiture clause should be considered by the Lands Tribunal. The tenants gave notice that they did not intend to respond to the appeal. The appellant landlord lodged an expert report by Mr L'Estrange and an expert report prepared by John Bridge DipM FCIM MAE MCIArb MICM CISMM. Two days before the hearing the appellant's solicitors faxed to the Tribunal an addendum to Mr Bridge's report, and on the day of the hearing I was provided with an addendum to Mr L'Estrange's report that substantially revised the opinions he had earlier expressed. Mr L'Estrange gave evidence at the hearing.

In his report Mr Bridge said that he had 29 years experience in the mortgage market. He had been employed by Leeds Permanent Building Society and Cheltenham and Gloucester Building Society and he was currently a partner with Bridge and Company Consultants, who had as clients various financial service organisations and individuals requiring advice on mortgage-related and compliance matters. His report addressed the questions of how difficult it would be for a leaseholder to obtain a mortgage on the security of the lease and whether the terms of any mortgage would be less onerous if the lease did not contain the clause providing for forfeiture in the event of bankruptcy. In his addendum report he considered the possibility of the leaseholder obtaining indemnity insurance in order achieve a loan. He recorded from the Council of Mortgage Lenders handbook the responses of 6 mortgage lenders (Halifax plc, Abbey National, Cheltenham and Gloucester, The Mortgage Business plc, Paragon Mortgages Limited, and Kensington Mortgages) to the question: "Do you accept indemnity insurance where the terms of the lease are unsatisfactory?" The responses all indicated that they might do so. Mr Bridge then recorded the results of recent telephone enquiries to these companies or their mortgage underwriters as to whether they would approve a mortgage on a lease with a clause such as clause 4(i) in it. He failed to achieve a response in one case; one of the lenders said yes, another no, and the remaining three said that it would depend on the advice received from their solicitors. Mr Bridge said that he had also made three telephone calls to insurers to investigate the availability of cover. One of them, Countrywide Legal Indemnity Limited, said that they could offer such indemnity insurance on the basis of the indemnity limit being the value of the property. Assuming a value of £100,000, the premium for such a policy was quoted at £210 inclusive of premium tax.

As the result of these responses and on the basis of his own experience Mr Bridge said that he was of the opinion that a reasonably competent lender would not knowingly accept a lease that included the provision for forfeiture without the protection of indemnity insurance. He was of the opinion that it would be possible to obtain a mortgage secured on a property subject to the lease in question by way of obtaining some sort of indemnity insurance. The acceptance of such an application and the terms imposed by the lender would usually be assessed on the merits of the individual case. Such matters as the applicant's credit worthiness, payment record and income, together with a loan to value ratio, would be considered. It might be that any special interest rate offers, for example discounted or fixed rates, would not be available for such an application. Those matters would all be matters for the discretion of the lenders' underwriters.

In his original report Mr L'Estrange had said that in his view the lease of the subject property was unmortgageable due to the forfeiture clause and that that would therefore affect the saleability of the property. He also said that there was no way of removing the clause except by approaching the freeholder for a deed of variation, and in his view the freeholder would be looking for a consideration of £5,000 together with a revised ground rent. In the light of Mr Bridge's addendum report Mr L'Estrange said that it was now clear that the property could be mortgaged subject to indemnity insurance being in place. It seemed probable from the information provided in that report that the cost of insurance would be no more than £300. In the light of that additional information the freeholders negotiating position was weaker than he had previously assumed it to be.

Mr L'Estrange said that the leaseholder would weigh up the cost and benefits of the deed of variation against the cost and disadvantage of arranging indemnity insurance. He would take account of the following matters. Firstly the benefit of the deed of variation was that it would last for the remainder of the lease, so that there would be no further problems as the property changed hands. Secondly an indemnity insurance policy would only apply to a particular loan from a particular lender. On a resale of the property a new policy would have to be arranged. If the present owner wished to remortgage a new policy would have to be arranged. Thirdly the continuing presence of the forfeiture clause might limit the number of lenders prepared to offer a mortgage and restrict the leaseholder's choice for remortgaging to take advantage of special deals. Fourthly in the light of Mr Bridge's advice there appeared at present to be only one provider of the suitable indemnity insurance cover. That provider might withdraw from the market or significantly alter the terms available and the premium payable. The leaseholder would be at the mercy of one insurance provider. Mr L'Estrange said that he was of the opinion that a leaseholder diligently advised by his solicitor would opt for a deed of variation as by far a better alternative to indemnity insurance.

In these new circumstances, therefore, Mr L'Estrange said that he considered that a leaseholder and freeholder would be prepared to agree a deed of variation on payment to the freeholder of a consideration of up to £2,000 plus the capital value of a revised ground rent (£1,000). The total of £3,000 would give a 50% hope value of £1,500.

In answer to me Mr L'Estrange said that he produced no evidence of any transactions that showed in such circumstances as these that a purchaser would be prepared to pay a substantial amount for the prospect of being able to negotiate at some future time a release of the forfeiture clause, but he said that that was what happened in the real world. In his view the opportunity for profit was there. In the real world the purchaser would buy a parcel of ground rents and if they contained clauses such as the forfeiture clause in the present case he would say that he could expect to gain on some but not on others.

Mr Tom Weekes in his submissions on behalf of the appellant said that the LVT was wrong to have regard to the particular personal circumstances of the tenants in coming to its conclusion on the effect of the bankruptcy provision on the value of the freehold. Under section 9(1) what had to be valued was the freehold interest "subject to the tenancy". These words merely required the assumption that the freehold interest was encumbered with the leasehold interest and did not require it to be assumed that the actual leaseholders were holding the tenancy. If it were necessary to value on the basis of the tenant's personal circumstances it would complicate the valuation process; and it would produce the perverse result that the worse the tenants were the lower would be the price at which they would be able to acquire the freehold.

I can see the force of these submissions. On the other hand, however, section 9(1) refers to "the tenancy" rather than to a hypothetical tenancy, and this would tend to suggest that it is the actual tenant rather than a hypothetical one that is relevant for the purposes of the provision. I am not sure that an investigation of the actual tenants' circumstances would inevitably be more complicated than seeking to establish those of a hypothetical tenant. Nor would it necessarily be the case that, if it were the actual tenant that had to be considered, a bad tenant would be able to acquire the freehold for less than a good tenant. The prospect of forfeiting the bad tenant's lease for breach of covenant could indeed increase the value of the freehold. This is a potentially important point, but, since (see below) I do not think that the outcome in the present case depends upon it and as I have heard argument from one side only, I express no conclusion on the issue.

Mr Weekes submitted that on the evidence the conclusion of the LVT that the possibility of profiting from a request to remove the bankruptcy forfeiture provision was very speculative was totally wrong. He referred to Woodfall on Landlord and Tenant at paras 16.185 and 17.075, where it is said that a proviso for re-entry in the case of insolvency often has the practical effect that the tenant cannot raise money on the security of the lease since it represents a considerable detraction from the value of the lease as a security. Moreover the CML handbook stated at para 5.10.2 that there must be no provision for forfeiture on the insolvency of the tenant or any superior tenant. Since three of the mortgage lenders who had responded to Mr Bridge's inquiries had said that they would be guided by their solicitors, and since those solicitors would take account of what was said in the handbook, the first instruction from the solicitor would always be that a variation of the lease should be obtained. Similarly a purchaser of the leasehold interest would be advised to seek a removal of the bankruptcy forfeiture provision in order to avoid problems that might arise on re-selling.

The question that I have to decide is whether the decision of the LVT that the value of the freehold for the purposes of section 9(1) was £250 has been shown to be wrong. I am not satisfied that it has been. The question is by how much the purchaser of the freehold would increase the amount he would pay to reflect the possibility that at some stage in the future the tenant might seek release from the bankruptcy forfeiture provision. There is nothing to suggest that an existing tenant (or these particular tenants) would seek release, or might be prepared to pay for release, until the time came for him to sell his interest. It might be many years before the tenant came to sell, and it seems to me to make no difference for this purpose whether one assumes the actual tenants (as the LVT did) or a hypothetical tenant since in either case a sale could be long delayed. The tenant might sell to a cash buyer who was not concerned about the provision. If a purchaser required a mortgage, on the evidence he could expect to find a lender who was prepared to lend on the basis of indemnity insurance. The cost of that insurance, at no more than £300, would represent an obvious constraint on the amount that the landlord could demand for release from the provision. In these circumstances, and taking into account all those matters that are now urged by the appellants, it seems to me that the LVT's description of the prospect of profit on the part of the landlord as very speculative was fully justified, and I am not satisfied that the amount that it allowed to reflect this possible profit was too small. It must be borne in mind that the assumption that requires to be made for the purpose of this valuation is that this single freehold interest is the subject of a sale. Mr L'Estrange said that in the real world a purchaser would buy a parcel of ground rents. If they contained clauses such as the forfeiture clause in the present case the additional amount that the purchaser might be prepared to pay would reflect the fact that the chances of individual tenants not seeking release from the provision would be evened out across their number. As Mr L'Estrange put it, the purchaser would say to himself that he could expect to gain on some but not on others. By contrast, the prospect of profit in the case of a single property would clearly be more speculative. The appeal is dismissed.

18 February 2005

George Bartlett QC, President