UT Neutral citation number: [2010] UKUT 125 (LC)

LT Case Number: ACQ/583/2008

                            TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

COMPENSATION – compulsory purchase – dwellinghouse in poor condition – value in good repair – cost of necessary works – allowance for profit/risk – compensation awarded £242,500

                                 IN THE MATTER OF A NOTICE OF REFERENCE

BY

                                                       LONDON BOROUGH OF                                 Acquiring

                                                                     NEWHAM                                              Authority

                                                             Re: 86B Emma Road

                                                                     Plaistow

                                                                     London

                                                                     E13 ODR

                                                         Before: N J Rose FRICS

                                  Sitting at 43-45 Bedford Square, London, WC1B 3AS

                                                                on 30 April 2010

Ms Nurainatta Katevu, solicitor, Legal and Democratic Services, London Borough of Newham, for the Acquiring Authority

                                                                    DECISION

1.           This is a reference by the London Borough of Newham (the acquiring authority) to determine the compensation payable for the freehold interest in a dwellinghouse known as 86B Emma Road, Plaistow, London, E13 ODR (the subject property).  That property was compulsorily acquired under the Newham (86B Emma Road, London, E13 0DR) Compulsory Purchase Order 2006, which was made pursuant to the Housing Act 1985 and the Acquisition of Land Act 1981 and confirmed by the Secretary of State on 21 December 2006.  A general vesting declaration was made on 18 July 2007 and the subject property vested in the acquiring authority on 16 August 2007, which is the valuation date.  Subsequently the acquiring authority carried out works of repair and improvement and then sold the property to a Registered Social Landlord.

2.           The title to the subject property is unregistered.  The last known owner was Mrs J M Labuda deceased.  Despite various attempts, the acquiring authority has been unable to communicate with the present owner.  They therefore referred the question of compensation to this Tribunal on 12 December 2008.  On 7 August 2009 the Registrar ordered that service of the notice of reference be dispensed with under rule 56 of the Lands Tribunal Rules 1996.

3.           Ms Nurainatta Katevu, solicitor with the London Borough of Newham, appeared for the acquiring authority.  She called one expert witness, Mr David Drane MRICS, employed by DVS, the commercial arm of the Valuation Office Agency.  Following the hearing I made an unaccompanied external inspection of the subject property and comparable properties.

4.           I find the following facts, which are taken from Mr Drane’s first valuation report dated 22 July 2008.  The subject property is a terraced house, erected in about 1920 on two storeys with a back addition.  It is accessed from the A112 High Street (Plaistow) to the north via Upper Road and Florence Road.  It is in an established residential area, within a short walk of Plaistow Underground Station.  At the valuation date the accommodation comprised a through reception room, a kitchen area and bathroom/wc on the ground floor and three bedrooms on the first floor.  It was in below average condition and would have required a degree of repair and refurbishment to bring it up to mortgageable standard.  The roof coverings required overhaul and replacement/installation of cement fillets and flashings.  There was water ingress and damage at the joint between the back addition roof and the main building, which had over time caused damage to the ceiling and floors below.  The guttering and downpipes needed to be replaced.  The condition of the windows and joinery throughout was below average, the timber being rotten in various places; all the timber-framed single-glazed windows and exterior doors required replacement with new double-glazed units; and the property needed rewiring and some plumbing replaced.  Re-plastering was required in various places, as was the replacement of ceilings in the rear bedroom and rear living area.  In addition, it is likely that a purchaser would have found it necessary to carry out the following works: replace bathroom and kitchen fittings and install a new central heating system; completely redecorate exterior and interior; replace rotten floor joists and boards; damp proof bay; re-erect boundary fence and clear extensive rubbish from inside the house and from front and rear gardens.

5.           In his initial report Mr Drane said that, in view of its poor condition, there would have been a restricted market for the subject property.  It would probably have been purchased by a small building firm, able to complete the purchase without a mortgage.  The property market was rising rapidly in 2007.  He produced the following details of four house sales in the area:

34 Emma Road, E13         A 1960 built 3 bedroom end terrace house with garage.  Sale completed 27 September 2007 at £280,000.

78 Emma Road, E13         A 1900 built 2 bedroom mid-terrace house.  Sale completed 18 July 2007 at £229,995.

21 Libra Road, E13          A 1970 built 3 bedroom mid-terrace house.  Sale completed 18 October 2007 at £250,000.

56 Donald Road, E13       A 1900 built 3 bedroom end terrace house.  Sale completed 1 November 2007 at £283,000, noted to be in very good condition.

These sales confirmed his view, based on his general experience of property values in the area, that a typical early twentieth century three bedroom house in the locality, newly refurbished, would have achieved between £280,000 and £290,000.  In order to reach this conclusion he had adjusted the evidence to reflect the condition of each of the comparable properties, and the strong demand for early twentieth century houses with character.

6.           Drawing on his experience of dealing with other properties Mr Drane estimated that it would have cost between £35,000 and £40,000 to put the property into good mortgageable condition.  After allowing a nominal £5,000 for the profit/risk element associated with a cash purchaser, he arrived at a valuation in the order of £250,000.  He noted that this figure marked the stamp duty threshold between the 1% rate and the 3% rate.  In consequence, he thought that the figure of £250,000 would not have been exceeded.

7.           Mr Drane prepared a revised report on 1 February 2010.  He said:

“This report revises my earlier report dated 22 July 2008 in light of a revised estimate of repair and refurbishment costs brought to my attention subsequent to my inspection.  It should be pointed out that upon the date of inspection there was a large accumulation of rubbish and debris (knee deep in most places) throughout the house that resulted in a number of repair issues being beyond normal visual appraisal.”

8.           Mr Drane referred in his revised report to the same four comparable sales as in his earlier report, and his opinion of refurbished value was virtually unchanged, at “around £280,000 to £285,000”.  His assessment of the cost of refurbishment, however, increased to between £65,000 and £70,000 and his allowance for profit/risk rose to £15,000, resulting in a revised valuation of £200,000.  He explained:

“I have taken the view that the market would have (been) keen to preserve the fact (that) the property is a three bedroom (sic) and as a consequence rather than envisage the conversion of one of the bedrooms to provide a bathroom I have allowed in my estimate of costs for the building of a modest extension to, and the re-configuration of, the ground floor.”

9.           I was surprised at the reference to the conversion of a bedroom to a bathroom, which had not been mentioned in Mr Drane’s first report.  I asked him why he had reduced his original valuation of £250,000 by 20 per cent.  He replied that his first valuation had been based on what he could see of the property when he inspected it on the valuation date, at which time it contained a large accumulation of rubbish.  At a later date the acquiring authority had drawn his attention to the fact that the rear of the property was in a worse condition than he had been able to see.  They told him that their building surveyor had advised that the cost of the necessary works was significantly higher than he had estimated.  Moreover, when he inspected the property he “regarded the date of possession as the high watermark of the housing boom.  Having received a basket of evidence relating to subsequent sales, in conjunction with a more realistic estimate of the cost of the necessary works”, he had concluded that his original valuation had been too high.

10.        At my request, Mr Drane produced a copy of an e-mail dated 5 May 2009 that he had received from Mr Ian Foote, writing on behalf of the Legal Services – Planning Team of the acquiring authority.  It read as follows:

“Just recently the Client Department has expressed some concerns about the valuation figure produced in your report of 22 July 2008.

I wonder if it would be possible for you to consider the following points they have made to me and whether in the light of those points you would feel that it merited a revaluation.  Your response would be appreciated.

Their points were:

1.           The existing kitchen and bathroom are both extremely sub-standard, to provide a proper size kitchen within the existing structure the bathroom/wc would need to be moved upstairs to the first floor back room.

2.           The two bed valuation quoted in the DV’s report, ie £229,995 (at 78 Emma Road, which is also the nearest) is therefore more applicable.

3.           The other ‘comparators’ quoted by the DV are not particularly good because they are not of similar age or have a garage and only two are in the same road.

4.           There is substantial dry rot/timber damage and the DV’s assessment of condition is recognised as approximate.

5.           When the rubbish was all cleared it was easier to see that some internal areas would require rebuild and together with new kitchen, new bathroom, new windows, new electrics, new heating services and almost total replastering/architraves/skirting boards/internal doors etc, they would put the refurbishment costs at nearer £60-£70,000.

6.           This brings the valuation to more like £160-£170,000 which fits in more with the £150,000 that an individual allegedly paid for 86C at auction a few months later.

I appreciate that you would not have been aware of some of the matters following your initial inspection but I would really appreciate it if you could review your report.  I will be pleased to pass on your thoughts to the Client Department.

I further appreciate that there may be a cost element for your time in dealing with this further aspect.”

11.        Mr Drane did not reduce his valuation to the extent suggested by Mr Foote.  Although he told me that he had reconsidered the matter in the light of subsequent sales evidence, it is clear that he relied on the same comparable evidence for both valuations and arrived at broadly the same level of value for the property in refurbished condition.  The principal reason for the difference between the two end values is that he subsequently increased his cost estimate substantially to “£65,000 as a minimum but more likely to be £70,000 in reality.”  That estimate fell within the upper half of the range which had been suggested by his client.  He then increased his allowance for profit/risk, as he explained in oral evidence, to reflect the increased scale of the necessary works.

12.        As Mr Drane accepted, the estimate of £60-70,000 for the required works, provided by the acquiring authority’s building surveyor, was arrived at with the benefit of hindsight, which would not have been available to a purchaser on the valuation date.  More importantly, the additional works listed as being necessary in Mr Drane’s second report were not the same as those mentioned by Mr Foote.  The only difference between the required works as described in Mr Drane’s two reports was that the second introduced a requirement to erect an extension and re-configure the ground floor.  I have seen a number of photographs showing the extent of the rubbish present in the subject property on the valuation date.  In my judgment, if the ground floor layout had been such that potential purchasers at that time would have considered the additional works to be necessary, this would have been apparent to Mr Drane and he would have incorporated them in the costs estimate in his first report.

13.        Mr Drane said that he had informed his client that he valued the subject property at £250,000 shortly after he inspected it on the valuation date, although this was not recorded in a formal report until about a year later.  I prefer Mr Drane’s original estimate of building costs to his later, substantially increased figure, which I have regretfully concluded was influenced by pressure from those instructing him.  In the light of my site visit and my inspection of comparable properties, I consider that the value of the subject property, if refurbished, would have been in the middle of the range which Mr Drane first considered appropriate, namely £285,000.  I adopt the mid-point of his original range of estimated costs, namely £37,500 and allow £5,000 for profit/risk.  I therefore determine the compensation payable by the acquiring authority for the freehold interest in the subject property to be £242,500.  I make no order as to costs.

Dated 6 May 2010

N J Rose FRICS