UPPER TRIBUNAL (LANDS CHAMBER)

UT Neutral citation number: [2012] UKUT 73 (LC)

UTLC Case Number: LRA/83/2011

 

 

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

 

 

LEASEHOLD ENFRANCHISEMENT – maisonette – premium – freehold vacant possession value – relativity – appeal allowed

 

 

 

IN THE MATTER OF AN APPEAL AGAINST A DECISION OF THE

LEASEHOLD VALUATION TRIBUNAL FOR THE

LONDON RENT ASSESSMENT PANEL

BETWEEN (1) AURY SHOA Appellants

(2) ROSIE SHOA

and

(1) MARIA NIKOLTSEVA Respondents

(2) OLGA KOSSTYCH

 

 

 

Re: 261 Portobello Road,

London, W11 1LR

 

 

Before: N J Rose FRICS

 

 

DETERMINATION ON THE BASIS OF WRITTEN REPRESENTATIONS

 

 

 

DECISION

Introduction

1.           This is an appeal by Aury Shoa and Rosie Shoa, the freeholders, against a decision of the Leasehold Valuation Tribunal for the London Rent Assessment Panel, determining the premium payable for a new lease of the first and second floor maisonette known as 261 Portobello Road, London, W11 1LR (the appeal property) under section 48 of the Leasehold Reform, Housing and Urban Development Act 1993 (the Act) at £48,650.

2.           The respondent tenants are Maria Nikoltseva and Olga Kosstych, who hold a lease of the appeal property which, on 1 March 2010, the agreed valuation date, had 69.82 years unexpired at a ground rent of £100 per annum.

3.           At the LVT hearing the parties agreed the following matters:

(i)              Gross internal area 1,086sq ft

(ii)            Extended long leasehold values with vacant possession have a relativity of 99% to freehold vacant possession values

(iii)          Any indexation for comparables will be against the Savills Table 3 PCL Residential Capital Value Index of Kensington, Holland Park and Notting Hill flats

(iv)          Deferment rate 5%

(v)            Capitalisation rate 7%

Although not specifically agreed, the LVT said that there was no challenge to the extent of the accommodation, which it described as comprising (on the half landing/first floor) open plan kitchen/reception room, bedroom and shower room/wc and (on the second floor) a further two bedrooms and bathroom/wc.

4.           Before the LVT the appellants contended for a premium of £58,000.  The respondents’ figure was £41,387.  The issues between the parties were the freehold vacant possession value and relativity.

5.           Permission to appeal, to be dealt with by way of review, was granted by the President on 18 August 2011.  After service of the parties’ Statements of Case and the appellants’ Reply the appeal was allocated to me for determination. Having read the pleadings I ordered on 13 January 2012 that the appeal be conducted by way of rehearing and that any expert reports and witness statements be filed within 28 days.  I also suggested that the appeal might be suitable for determination without an oral hearing.  Both parties agreed to the written representations procedure and stated that they had nothing to add to the pleadings which were already before the Tribunal.  Neither party asked me to inspect the appeal property or any of the comparables, although they were given an opportunity to do so.  I did not carry out any such inspection.

The LVT decision

6.           The LVT’s conclusions on the freehold vacant possession value disregarding improvements were as follows:

“28.  With regard to the improvements, the Tribunal considers that, even though the quality of work carried out was modest, the effect of the improvements was to increase the accommodation from two to three bedrooms and from one bathroom/wc to one bathroom/wc and one shower room/wc.  Although the rooms may have been smaller, there was a value in the increased accommodation and facilities.

29.  At the hearing, Mr Rangeley [the tenants’ surveyor] had contended for a 5% deduction from the sale price for improvements.  He did not, as stated in his email sent after the close of the hearing speak to 7½% at the hearing.  From the Tribunal’s notes he said ‘5% is on the low side but fair … it was at the lower end of the scale and perhaps should be 7½%.’  As far as the Tribunal is concerned the mention of 7½% was merely in support of his suggested 5%.  The Tribunal finds it regrettable that any expert witness before the Tribunal should seek to expand at a later date on the oral and written evidence given at the hearing.  The only reason for requesting a revised valuation was due to errors made by Mr Rangeley in his proof and for no other purpose.  The use of 7½% by Mr Rangeley is therefore rejected by the Tribunal.

30.  The Tribunal accepts Mr Rangeley’s 5% deduction from the sale price as being more appropriate than Mr Pope’s suggested spot figure of £30,000.  [Mr Pope was the freeholders’ surveyor].

31.  The Tribunal considers that Mr Rangeley’s reference to the Savills 2002 graph is incorrect and that reference should have been made to the Savills With Rights Table of Relativities published in Spring 2003 which converts leasehold values/prices to FHVP.  However, it does appear that Mr Rangeley has correctly used the 2003 Table, as has Mr Pope.

32.  The Tribunal prefers the methodology adopted by Mr Rangeley of deducting the 5% for improvements from the sale price before making the adjustment in accordance with the 2003 Table.  The deduction for improvements must be pertinent to the sale price rather than a deduction from the calculation of the FHVP.

33.  The Tribunal considers that the sale price of the subject property is the best market evidence.  There is no suggestion that the sale was not an arms length transaction and evidence was given that the asking price of £695,000 (as shown on the agents’ particulars) was paid by the Applicants [that is, the respondents in the present appeal] who raised their original offer of £675,000.

34.  The Tribunal accepts Mr Pope’s view that the sale prices of the comparables, when analysed, do not suggest that the sale price of the subject property was too high or out of kilter.

35.  In the circumstances of this case, the FHVP is able to be calculated solely on the evidence of the sale of the subject flat.  Accordingly, taking the sale of the subject property at £695,000, the Tribunal deducts 5% for improvements which results in £660,250 and then adjusts using the Savills 2003 Table to arrive at a FHVP of £741,604.

36.  Adopting the agreed 99% for relativity, the Tribunal determines the extended lease value at £734,188.”

7. On relativity, the LVT said this:

“37.  The Applicants contended for 91.6% and the Respondents for 87%.

38  Mr Rangeley had extrapolated from three graphs of relativities in Prime Central London (‘PCL’) the most commonly adopted relativities for leases having 69.82 years remaining.  These were Knight Frank (87.9%), John D Wood & Co 1996 and Gerald Eve (86.9%) and John D Wood & Co 2008 (89.9%).  He also referred to the more mortgage dependent Beckett & Kay graph which showed a relativity of 92.7%, and he thought this graph was the most appropriate.  He contended that for an unexpired term of nearly 70 years, the effect of the Act was very low.  As a check, he had looked at the actual leasehold transaction.  Mr Rangeley had suggested that the discount to reflect the Act was in the region of 2½%.  He took the sale price of £695,000 and deducted 2½% for Act rights and 5% for improvements which resulted in a figure of £643,744 which, as a percentage of his FHVP value showed a relativity of 90.5%.  He averaged this 90.5% and the 92.7% from the Beckett & Kay graph to produce his adopted relativity of 91.6%.

39.  Mr Pope had relied on one graph, the John D Wood & Co (1996)/Gerald Eve which had been prepared and based on a large number of house settlements on the Grosvenor Estate.  He accepted that this graph had not been altered but in his view, despite further data, there had been no need for alteration.  In his opinion where leases of under 70 years are considered without rights, the pressure to borrow and the lack of mortgage finance must drive relativity lower.  At his relativity of 87% of the FHVP value derived from his graph, he valued the existing leasehold interest of 69.82 years at a revised £652,500.  Mr Pope accepted Mr Rangeley’s discount to reflect the Act at 2½%.

40.  The Tribunal considers that there was a paucity of evidence on both sides in respect of relativity.  Both parties had referred to the RICS research report which, whilst not ideal, is at least based on numerous cases which could help provide a balancing effect on the whole spectrum of figures for relativity.

41.  The Tribunal does not consider the location of the subject property as being in Prime Central London and has been presented with no persuasive evidence to accept either graph contended for by either valuer.

42.  The Tribunal has therefore taken the average of the four graphs presented (see paragraphs 38 and 39) and determines a relativity of 89.35%.”

The Appellants’ case

8.           The appellants said that they agreed with the LVT that the sale of the 70 year leasehold interest in the appeal property for £695,000 was the best market evidence and the appropriate starting point.  At the hearing before the LVT Mr Pope was at first unaware of the date upon which contracts were exchanged.  On being informed that it was 23 December 2009 he told the LVT that the sale price should be updated via the Savills PCL Index Table 3. For the three months period December 2009 to March 2010 the Index for the areas including Notting Hill flats rose from 492.3 to 518.3, an increase of 5.28%.  In his valuation submitted for this appeal Mr Pope proposed an upward adjustment of 3.5% for the 9 weeks period between the date of sale and the valuation date.  This produced a value of £719,325 at 1 March 2010.

9.           The LVT accepted the reduction of 5% for improvements proposed by the respondents’ expert, Mr Rangeley.  The appellants now accepted that as fair.  They said that it produced an unimproved leasehold value of £683,360 (95% of £719,325).

10.        Both experts, and the LVT, used the Savills Table of Leasehold Values as a Proportion of Freehold, Enfranchiseable, Spring 2003 to upgrade the unimproved leasehold value to freehold.  The calculation in paragraph 35 of its decision showed that the LVT adopted a relativity with rights of 89.03%.  Applied to the leasehold value with rights of £683,360 this produced a freehold vacant possession value, disregarding improvements, of £767,560.

11.        The LVT then determined a relativity without rights of 89.35% (para 42).  This was more than its determination of 89.03% with rights.  That was illogical and must be wrong.  During his oral evidence Mr Rangeley had expressed the view that the deduction for rights for an unexpired term of 69.82 years should be about 2½%, which Mr Pope accepted.  If the relativity derived from the Savills With Rights Index were discounted by 2½% it would produce a figure of 86.8% which supported Mr Pope’s opinion of 87%.

12.        The amended valuation of Mr Pope, reflecting his increased opinion of freehold value, was £59,040 (Appendix 1).

 

 

The Respondents’ Case

13. The respondents said that they did not necessarily agree with the LVT’s decision.  The LVT was, however, an expert tribunal and there was no justification for an appeal, particularly since no point of law arose.

14. The respondents agreed that at the hearing Mr Pope had suggested indexing the sale price of the appeal property to reflect the period between the exchange of contracts and the valuation date.  However, it was not possible to confirm the dates of exchange of the other comparable transactions.  If such information had been available it might have had the effect of adjusting the figures to the extent that the LVT decided to take the comparables into account rather than just adopting the sale price of the appeal property.

15. The respondents stated that, as a result of questioning by the LVT, Mr Rangeley had increased his suggested 5% deduction for improvements to 7.5%.  In its decision the LVT appeared to have misinterpreted that statement.

16. The LVT decided to average the four graphs presented (paragraphs 38 and 39 of the decision) and determined a relativity of 89.35%.  Whilst both valuers agreed a discount of 2.5% to reflect the presence of the Act, the LVT did not adopt this methodology, but instead decided that an average of the four graphs provided the most reliable guide.

Conclusions

17. In paragraph 40 of its decision the LVT expressed the view that there was a paucity of evidence as to relativity.  It therefore relied on four graphs taken from the RICS research report, although it accepted that none of the graphs was ideal.  In fact, rather unusually, there was cogent evidence of relativity before the LVT in the form of agreements between the parties.  The LVT referred in paragraph 31 to the Savills With Rights Table of Relativities (Spring 2003), which had been used by both experts.  In normal circumstances it would be difficult to derive the “without rights relativity” from this table because of the difficulty of establishing the value of the tenants’ rights.  In this case, however, the experts had agreed that the appropriate discount for rights was  2½%.  Deducting that percentage from the with rights relativity of 89.03% derived from the Savills table produces a relativity of 86.80%, which supports Mr Pope’s suggested 87%.  In my judgment such a percentage, based on agreed figures, is more reliable than an average of four percentages derived from imperfect graphs.  I therefore accept Mr Pope’s evidence on the issue and determine the appropriate relativity at 87%.

18. As far as the freehold vacant possession value is concerned, the LVT concluded that the best starting point was the leasehold sale price of the appeal property itself, from which it deducted 5% for improvements as suggested by Mr Rangeley (at least in his initial evidence) and then converted to the freehold equivalent using the Savills 2003 Table.  Contracts for the sale of the appeal property were exchanged 9 weeks before the valuation date.  Mr Pope suggests that the agreed price should therefore be increased in line with movement over that period in the Savills PCL Residential Capital Value Index for Kensington, Holland Park and Notting Hill flats.

19.        The respondents disagree with this approach on the basis that, if the LVT had been able to make similar adjustments to the other comparables, it might not have based its decision on the price paid for the appeal property.  That argument is purely speculative.  In my judgment, the evidence provided by the sale of the appeal property itself, very close to the valuation date, is likely to provide the best available evidence whether or not the precise sale dates of each of the comparables is known.  Mr Pope’s evidence regarding the time adjustment of the sale price of the appeal property was not challenged.  I accept it and find that the time-adjusted price paid – with the benefit of the right to a new lease – was £719,325.  I deduct 5% for improvements and upgrade the resultant figure of £683,360 to produce a freehold value of £767,560 in line with the Savills With Rights Table of Relativities, Spring 2003, on which Mr Rangeley and Mr Pope both relied.

20.        A freehold value of £767,560 is in excess of the value of £750,000 to which Mr Pope spoke before the LVT.  It produces a premium of £59,040, which is in turn more than the premium of £58,000 for which Mr Pope originally contended.

21.        The right of appeal to the Lands Tribunal from a decision of the LVT was given by section 175(1) of the Commonhold and Leasehold Reform Act 2002.  Section 175(4) of that Act as amended provides that:

“On the appeal the Upper Tribunal may exercise any power which was available to the Leasehold Valuation Tribunal.”

It would not have been open to the LVT to determine a premium in excess of £58,000 in the light of the evidence before it.  It follows from section 175(4) that I do not have power to award a premium in excess of £58,000.

22.        I therefore allow the appeal and determine that the premium payable by Maria Nikoltseva and Olga Kosstych for a lease extension of the appeal property is £58,000.  I make no order as to costs.

Dated 16 March 2012

 

N J Rose FRICS

 

Appendix 1

First/Second Floors, 261 Portobello Road, London, W11 1LR

Valuation by Mr George Pope FRICS

 

1.           Loss of Freeholders’ Present Value

1.1        Capitalisation of Ground Rent

Ground Rent £100

YP 69.82 years @ 7.00% 14.159

£ 1,416

1.2        Freeholders’ Loss of Reversion

Estimated Freehold Value  £767,560

PV 69.82 years @ 5.0%  0.0332

£25,483

£26,899

 

1.3        Less value of Freeholders’ Proposed Interest

Estimated Freehold Value  £767,560

PV 159.82 years @ 5.0%  0.0004

 £307

Value of Freeholder’s Interest £26,592

 

 

2. Marriage Value

2.1 Value of Proposed Interests:-

Leasehold Extended Lease Value  £759,884

Value of New Lease to Freeholder  £307

£759,577

2.2                Value of Present Interests:-

Freeholders’ Existing Value  £26,899

Leaseholder’s Existing Value (87%) £667,777

£694,676

Marriage Value £  64,901

50% of Marriage Value to Freeholder £32,451

 

 

3. Premium Payable £59,043

say £59,040