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UPPER TRIBUNAL
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UT Neutral citation number: [2013] UKUT 13 (LC)
LT
Case Number: LRA/51/2011
TRIBUNALS, COURTS AND
ENFORCEMENT ACT 2007
LEASEHOLD ENFRANCHISEMENT –
house – price – freehold value – whether comparable to be analysed as an
existing house or development site – effect on value of school development site
and proximity of ambassador’s residence – leasehold value – relativity –
valuation method – graphs or deduction for benefit of Act from single
comparable market transaction – LVT valuation upheld – appeal dismissed
IN
THE MATTER OF AN APPEAL AGAINST A DECISION OF THE LONDON RENT ASSESSMENT PANEL
LEASEHOLD VALUATION TRIBUNAL
BETWEEN SOPHIA
MARIA VOYAZIDES Appellant
and
(1) CHARLES
GEORGE SAMUEL EYRE
(2) JAMES
HENRY ROBERT EYRE
(3) PETER
LOMAS
(4) HUGH
JOHN LOMAS
(in their capacity
as Trustees of the Eyre Estate) Respondents
Re:
60 Avenue Road, St John’s Wood, London NW8 6HT
Before:
Her Honour Judge Alice Robinson and Mr A J Trott FRICS
Sitting
at: 45 Bedford Square, London WC1B 3DN
on
8 and 9 November 2012
Edwin Johnson QC
instructed by David Conway & Co
Michael Buckpitt
instructed by Pemberton Greenish LLP
DECISION
Introduction
1.
This is an appeal against a decision of the London Rent Assessment Panel
of the Leasehold Valuation Tribunal (“LVT”) dated 23rd February 2011
in which it determined that the price to be paid for the freehold interest in
60 Avenue Road, St John’s Wood, London NW8 6HT (“the Property” or “No.60”) pursuant
to section 9(1C) of the Leasehold Reform Act 1967 (“the 1967 Act”) should be
£7,430,000. In its decision the LVT found the freehold value to be £15,000,000,
the leasehold value to be £6,300,000 and the deferment rate to be 4.75%. The
deferment rate is now agreed but the appellant (“the Tenant”) appeals against
the LVT’s decision as to the freehold and leasehold values.
2.
As to the freehold value, the LVT concluded that two sales of 64 Avenue
Road were the most relevant and helpful comparables. No adjustment was made
for planning blight said by the Tenant to have been caused by proposals to
redevelop an adjoining school on the grounds that purchasers would have
appreciated the school site was ripe for development. The LVT did not consider
it was necessary to make any other adjustments including for size, No.64 being
a larger site, or for the proximity of the private residence of the Israeli ambassador
at No.58. The LVT analysed these two sales to give an average value for No.60
of £14,703,494. The LVT accepted the evidence of the valuer for the respondents
(“the Landlords”), Mr Martin, who also appeared before us, that more weight
should be given to the later of the two sales of No.64 and it accepted Mr
Martin’s valuation of £15,000,000.
3.
As to the leasehold value, the LVT considered that in the light of the
paucity of market evidence it was appropriate to have regard to graphs of
relativity. Mr Martin’s analysis of the graphs was accepted as fair giving
rise to a relativity of 42% of leasehold to freehold value, the unexpired term
of the lease being 19.16 years. The LVT was not persuaded by the Tenant’s
valuer, Mr Buchanan, who also appeared before us, that the market sale of the
leasehold interest of No.62 was the best starting point when valuing the
leasehold interest in the Property, subject to adjustments for the benefit of
the Act and for the proximity of the school development. The LVT rejected Mr
Buchanan’s cross-check based upon the capitalisation of rental income at a
gross yield, stating that a lease of this length would not be valued in this
way.
4.
When granting the Tenant permission to
appeal The President observed that: “It is arguable that the LVT erred in its
consideration of the graphs of relativity and the evidence relating to 62
Avenue Road”. He ordered the appeal to be
dealt with by way of rehearing.
5.
The Tenant’s case is that the LVT should have had greater regard to the
evidence of the sale of the lease of 62 Avenue Road and the freehold and
leasehold values assessed by the LVT when determining the price to be paid for
the freehold of that property on an enfranchisement claim pursuant to the 1967
Act. Further, the Tenant considers that when adjusting the values of Nos. 62
and 64 an allowance should be made for planning blight, as the school proposals
had progressed by the valuation date, as well as for the difficulties caused by
the location of the Israeli ambassador’s residence next door to the Property.
The Tenant’s husband gave evidence in this appeal about the problems which he
said was caused by the latter.
6.
The Landlords support the LVT’s decision. They argue that the two sales
of 64 Avenue Road were open market transactions of a comparable property and
are the best evidence of value. No.64 was not redeveloped but was altered and
extended by the second purchaser and the second
transaction should not be treated as though it was the sale of a development
site. The evidence relating to 62 Avenue Road would require adjustment to
reflect the smaller site size, poorer accommodation and layout and an element
of overlooking. Further it was not a straightforward sale as the vendor
effectively loaned half of the purchase price to the purchaser. For these
reasons it is not a good comparable. The Property is no worse affected by the
school redevelopment than the comparables and no adjustment should be made. Nor
should any allowance be made for any problems caused by the proximity of the Israeli
ambassador’s residence since these have been exaggerated and would not be known
to a purchaser.
7.
Mr Edwin Johnson QC appeared for the appellant and called Mr Leonidas
Voyazides as a witness of fact and Mr Kenneth Gavin Buchanan BSc MRICS, a
partner of Knight Frank, as an expert valuation witness.
8.
Mr Michael Buckpitt of counsel appeared for the respondents and called
Mr Julian Briant as a witness of fact and Mr John Martin BSc MRICS, a partner
in Cluttons, as an expert valuation witness.
9.
We made an accompanied site inspection of the Property and the relevant
comparables on 16 November 2012.
Facts
10.
From the statement of agreed facts and the evidence
we find the following facts. The Property is located on the east side of
Avenue Road just north of its junction with Elsworthy Road. It is a
substantial 1930’s double fronted house on four floors with a carriageway
driveway providing parking for several cars. The Property has a site area of
14,130 sq ft (1,313 sq m) with a GIA (gross internal area) of 9,300 sq ft (854 sq
m) comprising 7,600 sq ft (706 sq m) of original floorspace in the house and
1,700 sq ft (158 sq m) of additional accommodation provided by virtue of
various licences for alteration together with a 695
sq ft garage block (64.6 sq m).
11.
The Property is subject to two leases; one dated 12 January 1932 for the
main house and the other dated 25 March 1934 for a piece of adjoining land. Both
expire on 24 June 2029 and have a combined rent of £200 per annum.
12.
The valuation date is 27 April 2010 at which time the leases had 19.16
years left to run.
13.
The parties have agreed a deferment rate of 4.75% and a capitalisation
rate of 5%. They also agreed that any adjustment of comparable sales for time
should be made by using the Savills Research Prime London Residential Capital
Value Index (St John’s Wood and Regents Park Houses). The terms of the
freehold draft transfer are not in dispute. Details of the comparables relied
upon by the parties were also agreed, although during the hearing there was a
difference between the experts about the indexation of the value of 62 Avenue
Road. We consider this point at paragraph 49 below.
Statutory provisions
14.
It is agreed that the price payable for the Property is to be determined
under section 9(1C) of the 1967 Act. Where that section applies the price
payable shall be determined in accordance with section 9(1A); but in any such
case -
“(b) section 9A below has effect for determining whether
any additional amount is payable by way of compensation under that section;
and in a case where the provision (or one of the
provisions) by virtue of which the right to acquire the freehold arises is
section 1A(1) above, subsection (1A) above shall apply with the omission of the
assumption set out in paragraph (b) of that subsection.”
In this appeal there is no claim
for any additional amount of compensation under section 9A and subsection
9(1A)(b) is to be omitted. The provisions of section 9(1A) as they apply in
this appeal state:
“…the price payable for a house and premises, -
shall be the amount which at the relevant time the house
and premises, if sold in the open market by a willing seller, might be expected
to realise on the following assumptions:-
(a) on the assumption that the vendor was selling for an
estate in fee simple, subject to the tenancy, but on the assumption that this
Part of this Act conferred no right to acquire the freehold or an extended
lease;
(b) …
(c) on the assumption that the tenant has no liability to
carry out any repairs, maintenance or redecorations under the terms of the
tenancy or Part 1 of the Landlord and Tenant Act 1954;
(d) on the assumption that the price be diminished by the
extent to which the value of the house and premises has been increased by any
improvement carried out by the tenant or his predecessors in title at their own
expense;
(e) on the assumption that (subject to paragraph (a)
above) the vendor was selling subject, in respect of rentcharges to which section
11(2) below applies, to the same annual charge as the conveyance to the tenant
is to be subject to, but the purchaser would otherwise be effectively
exonerated until the termination of the tenancy from any liability or charge in
respect of tenant’s incumbrances; and
(f) on the assumption that
(subject to paragraphs (a) and (b) above) the vendor was selling with and
subject to the rights and burdens with and subject to which the conveyance to
the tenant is to be made, and in particular with and subject to such permanent
or extended rights and burdens as are to be created in order to give effect to
section 10 below.”
15.
Section 9(1D) provides for the treatment of marriage value:
“Where, in determining the price
payable for a house and premises in accordance with this section, there falls
to be taken into account any marriage value arising by virtue of the
coalescence of the freehold and leasehold interests, the share of the marriage
value to which the tenant is to be regarded as being entitled shall be one-half
of it.”
Issues
16.
The parties agreed that there are two issues to be determined in respect
of the enfranchisement price:
(i) the unimproved freehold vacant possession value; and
(ii) the unimproved leasehold
vacant possession value and the relativity.
Freehold value: the case for the appellant
17.
Mr Buchanan’s preferred evidence of freehold value was derived from the
sale of houses at the northern end of Avenue Road, to the north of the
crossroads with Elsworthy Road and Queens Grove. He identified four such
sales; two freehold development site sales at 64 and 85 Avenue Road, a combined
leasehold and freehold sale of a development site at 73-75 Avenue Road and a
combined leasehold and freehold sale of an existing house at 62 Avenue Road.
18.
Before the LVT Mr Buchanan had valued No.64 as a house sale and not a
development site sale. He explained that he now thought that this was an
incorrect approach. There was no new evidence about the sale; he had just got
it wrong before the LVT.
19.
In July 2007 planning permission was obtained for the redevelopment of
No.64. It was then sold in December 2007 for £15.5m. Contracts for a further
sale for £16m to a developer were exchanged in June 2008 with completion taking
place in June 2009. Mr Buchanan did not rely upon the first sale since it was
further away from the valuation date for the Property. He considered that the
purchaser did not proceed with the redevelopment of No.64 because of the
“drastically reduced” availability of development funding after the collapse of
Lehman Brothers in September 2008. The purchaser obtained planning permission
for a smaller development comprising the alteration and extension of the
existing building in March 2009. This was subsequently implemented.
20.
Mr Buchanan said that the second sale of No.64 should be treated as a
development site sale since it was marketed as such at a time before the Lehman
Brothers episode. The sale price should be analysed by reference to the
maximum development potential that existed at the date of sale, which he took
as the date of exchange of contracts in June 2008. He therefore adjusted the
sale price of £16m for time to give a value of £16.208m at the valuation date
for the Property and then divided that figure by 16,300 sq ft, which was the amount
of floorspace for which planning permission was obtained in July 2007. This
gave a rate of £994 per sq ft.
21.
85 Avenue Road was sold twice in 2009; firstly in May for £12m and then
in December for £11.7m. Both sales were with the benefit of planning
permission for a redevelopment of 14,246 sq ft. Mr Buchanan relied upon the
second sale since it was closer to the valuation date in this appeal.
Adjusting for time gave a value of £12,193,740 or £845 per sq ft.
22.
The third development site comparable was that of a double plot at 73-75
Avenue Road. The leasehold interest in this property was sold in August 2009
with the benefit of a notice to enfranchise for £10.1m. A figure of £7.5m was
subsequently agreed as the freehold enfranchisement price giving a combined total
of £17.6m. Adjusting for time gave a figure of £18.876m. At the date of sale
there was no planning permission for redevelopment, although permission was
obtained in 2011 for a house in excess of 20,000 sq ft. Mr Buchanan adopted
this figure and derived a rate of £944 per sq ft.
23.
The average of the three comparables was £927 per sq ft. Mr Buchanan
took £1,000 per sq ft as being the appropriate figure to value the development
potential of the Property.
24.
Mr Buchanan said that the best evidence of the value of the unimproved
floorspace of the Property was derived from the combined leasehold and freehold
sale of the existing house at 62 Avenue Road. The leasehold interest was sold
in July 2009 for £8m with the benefit of a notice to enfranchise. The freehold
enfranchisement price was determined by the LVT at £4.95m with a valuation date
in March 2009. The total value was therefore £12.95m which Mr Buchanan
adjusted for time from July 2009 to give £13,821,535. He divided this by the
existing GIA of No.62 (9,245 sq ft) to give a rate of £1,495 per sq ft for the
unimproved floorspace.
25.
Applying the rate of £1,495 per sq ft to the unimproved area of the
Property (7,600 sq ft) gave a value of £11.362m. Mr Buchanan then allowed for
the potential to undertake the tenant’s improvements. He took the area of
house improvements (1,700 sq ft) at the rate of £1,000 per sq ft derived from
the comparable development site sales to give a figure of £1.7m. He then took
the area of the garage block (695 sq ft) at half of this rate to give a value
of £347,500. This gave a total unimproved freehold vacant possession value for
the Property of £13,409,500. The value of the improvements represented 15.27%
of this figure.
26.
Mr Buchanan then made two further adjustments. The first adjustment was
in respect of the new Swiss Cottage School to the north of 64 Avenue Road. He
said that although this proposal had been known for some time, by the valuation
date it was clear that the school redevelopment was actually going to happen.
At the time of the sale of the comparable properties the proposals were much
less certain and it was necessary to make an adjustment to reflect the market’s
earlier view that the school development might not proceed. Mr Buchanan also
relied upon the collapse of the sale of 56 Avenue Road in 2010 as evidence of
the deleterious effect of the proposed school development. He produced a recent
letter from Mr James Simpson of Knight Frank, the selling agent of that
property, in which Mr Simpson said that he had been informed that, after
contracts had been exchanged, the purchaser learned about the school and
decided that it would have a severely adverse effect upon the value of No.56.
The purchaser declined to complete the sale. Mr Buchanan made a 10% deduction
from the freehold value to allow for the impact of the school.
27.
The second adjustment was in respect of the proximity of the property to
the Israeli ambassador’s house at 58 Avenue Road. Mr Voyazides gave evidence
about the problems caused by living next door to the ambassador. These
included intrusive scrutiny of the appellant’s movements by Special Branch; questioning
of visitors (for instance the appellant’s daughter’s tutor); Special Branch’s
insistence that there should be no access to a balcony overlooking the
ambassador’s garden; having to close the gates to the Property whenever the
ambassador held a function at his house; armed policemen patrolling outside;
being prevented from using an intercom system at the Property in case it
interfered with communications at No.58 and interference with the appellant’s
television reception. Mr Buchanan concluded that these were serious problems
and represented a material disadvantage to the Property that should be
reflected in its price. He therefore made a 5% discount in value to allow for
the proximity of the ambassador’s residence.
28.
Deducting a total of 15% from the freehold value gave a final figure for
the unimproved vacant possession value of the Property of £11,398,075.
Freehold value: the case for the respondents
29.
Mr Martin maintained that the best comparable to value the freehold
interest in the Property was the sale of 64 Avenue Road. Unlike Mr Buchanan,
Mr Martin considered that the two sales of No.64 in January 2007 and June 2008
should be treated as house sales rather than development site sales. In
support of this view he explained that although No.64 had planning permission
for redevelopment, the second purchaser, a developer called Mr Kevin Cash, had
not implemented that permission but instead had obtained planning permission in
March 2009 for a smaller development involving the retention of the house with
alterations and extensions. Mr Martin said that some two to three years ago he
had contacted Mr Max Dealey of the Blue Star Group to try and arrange an
inspection of No.64. Mr Dealey acted for Mr Cash and he told Mr Martin that Mr
Cash had not intended to demolish No.64 at the time of his purchase but instead
had planned to retain and refurbish it as indeed he had done subsequently.
30.
The original GIA of No.64 was 8,880 sq ft. A further 1,045 sq ft could
be developed under the March 2009 planning permission, making a total of 9,925
sq ft. Mr Martin took this additional floorspace at a rate of 50% which gave
an effective GIA of some 9,405 sq ft. He divided the time adjusted prices of
the two freehold sales of No.64 by this effective area to give rates of £1,780
per sq ft and £1,720 per sq ft for the January 2007 and June 2008 sales
respectively.
31.
Mr Martin adjusted the GIA of the Property to reflect the improvements
that had been made during the term of the leases. He took 50% of the
additional floorspace of 1,700 sq ft and 25% of the area of the garage block of
695 sq ft. This gave an adjusted GIA for improvements of 1,024 sq ft and a
total adjusted GIA of 8,624 sq ft. Applying the rates derived from the two
sales of No.64 gave an unimproved freehold value for the Property of £15.35m
based on the January 2007 sale and £14.83m based on the June 2008 sale. Giving
more weight to the later sale which was closer to the valuation date, Mr Martin
valued the freehold interest in the Property at £15m.
32.
Mr Martin analysed the comparable at 62 Avenue Road in two ways. He
emphasised that it was the combined price of the leasehold sale (£8m) and the
freehold enfranchisement price as determined by the LVT (£4.95m), and “not the
individual valuation components”, that had some evidential value for
determining the freehold value of the Property. In his first analysis Mr
Martin took the combined figure of £12.95m and adjusted it for time to the
valuation date. He adjusted the two elements of the combined price separately;
indexing the enfranchisement price from the valuation date for No.62 in March
2009 and the leasehold value from the date of the sale in July 2009. The time
adjusted value so calculated was £14,058,640. He then divided this figure by
what he described as the “equivalent GIA” of No.62. The total GIA of No.62 was
9,245 sq ft but some of the space was not fully usable. Mr Martin made two
adjustments; he reduced the value of the second floor accommodation at the
front by 10% (as it was built into the roof, had no front window and was
effectively loft space) and reduced the value of the basement “remainder” area
by 50% (as it comprised a warren of unlit rooms with no natural light and was
effectively a cellar used for storage). Making these adjustments gave a GIA of
8,315 sq ft and produced a rate of £1,691 per sq ft. Applying this to the
improvement adjusted GIA of the Property (8,624 sq ft) gave a freehold value of
£14,580,691. Before the LVT Mr Martin had conducted a similar analysis but had
used the total GIA of No.62 of 9,245 sq ft. This resulted in a freehold
valuation of the Property of £13.1m.
33.
In his second analysis Mr Martin referred to his agreement of the
unimproved value of No.62 in the sum of £11.25m with the tenant’s valuer, Mr
Beckett, at the time of the LVT hearing into the enfranchisement of that
property. Mr Martin adjusted that figure to the valuation date for the
Property which gave £12.546m. He explained that No.62 was inferior to the
Property in a number of respects: its layout was very poor and provided badly
arranged accommodation; it was overlooked by No.64 at the rear; the plot of
No.62 was narrower and smaller than that of the Property (11,800 sq ft compared
to 14,130 sq ft). Taking these factors into account Mr Martin considered that
this analysis also supported his freehold valuation of the Property at £15m.
34.
Mr Martin said that he considered the building at No.62 to be so
unattractive and poorly laid out that its true value lay in the site for
redevelopment rather than as an existing house (which was the basis upon which
he had analysed the combined leasehold sale price and enfranchisement price).
In this regard it was similar to 85 Avenue Road which had been sold in December
2009 for £11.7m. Adjusting for time and dividing by the GIA of the existing
house at No.85 gave a rate of £2,150 per sq ft. Applying this rate to the
Property resulted in a value of £18.54m. Mr Martin also analysed an earlier
sale of No.85 in May 2009 which resulted in a value for the Property of
£19.695m; the average of the two analyses being £19.1m, a figure which Mr
Martin said was “clearly too high”. The reason for this was the fact that
No.85 had been sold as a redevelopment site with planning permission and not as
a house. Analysed as a site and not as an existing house gave an average site
value for No.85 of £12.575m, time adjusted to the valuation date. Its site
area (14,745 sq ft) was similar to that of the Property (14,130 sq ft) and was
therefore directly comparable in terms of size. However No.85 was in a worse
location than the Property, being heavily overlooked at the rear by the
Queensmead flats and other nearby properties. Mr Martin concluded that the
market was willing to pay at least £12.2m (the adjusted value of the second
sale) for a site of comparable size but in a far less desirable location.
35.
Mr Martin made no discount for either the new school or the proximity of
the ambassador’s residence to the Property. He said that the proposal to build
a new school had been known about for several years with outline planning
permission being granted in November 2008 and full planning permission in
September 2010. The proposals had been the subject of public consultation
since May 2007. The possibility of the redevelopment of the school site had
been recognised well before then and Mr Buchanan had acknowledged “a risk of
[its] potential redevelopment by a high rise residential scheme” in his
evidence to the LVT in 2002 regarding 64 Avenue Road. The sale price of the
comparables at 62, 64 and 85 Avenue Road all reflected the impact of the
proposed school development and the Property was further away from the school
site than any of these properties. While Mr Martin accepted that the
ostensible reason for the collapse of the sale of 56 Avenue Road had been the
failure to disclose the proposed redevelopment of the school site he considered
that there may have been other undisclosed reasons for the purchasers’ action.
36.
Mr Briant, a partner in Cluttons and since 2000 the Estate Surveyor of
the Trustees of the Eyre Estate’s St Johns Wood properties, said that the
appellant had not complained about the Israeli ambassador’s residence to the
Eyre Estate. He explained that he had come into contact with the Voyazides
family at the time their respective daughters had attended the same school. Mr
Briant’s connection with the Eyre Estate had become known to the appellant in
July 2001 but she had not raised any problems about the ambassador’s residence
with him at any time. Mr Briant’s daughter had attended birthday parties at
the Property but the security at No.58 had not been noticeable on those
occasions. Mr Briant had always found the police stationed at No.58 to be
courteous and accommodating and he thought it unlikely that anyone visiting the
Property would be aggressively challenged unless they gave cause. No planning
application had been made for a balcony at the Property nor any application
made to the Eyre Estate for permission to build one. Mr Briant noted that the
Property had two vehicular entrances and if one had to be closed at the request
of the police the other could still be used. He also described his own
experience of living close to the home of a former prime minister whose block
of flats had been protected by the police. His perception was that the police
presence discouraged burglaries and gave neighbouring residents additional
security.
37.
Mr Martin said that Mr Buchanan had not raised the proximity of the
ambassador’s residence as an issue at the LVT hearing in the case of 56 Avenue
Road, the property which adjoined the ambassador’s residence to the south. Mr
Martin thought that the presence of the ambassador next door had no impact on
value and he made no allowance for it in his valuation. He therefore
maintained that the unimproved freehold value of the Property was £15m as
determined by the LVT.
Freehold value: conclusions
38.
The parties agree that the Property should be valued as a house and not
as a development site. They also agree that the comparables at 73/75 and 85
Avenue Road should be analysed as development site sales. But there is no
longer agreement about the appropriate way to analyse the sale(s) of 64 Avenue
Road; Mr Buchanan having now decided to treat No.64 as a development site
contrary to the view that he expressed before the LVT, shared by Mr Martin,
that it should be valued as a house. Mr Buchanan gave no reason for this change
of mind other than to say that his previous approach was wrong. There appears
to be no new evidence to support his revised opinion.
39.
Mr Buchanan’s treatment of No.64 as a development site means that he now
relies upon the combined price of 62 Avenue Road (the leasehold sale value plus
the enfranchisement price as determined by the LVT) as being the best (rather
than good) evidence of the freehold value of the Property. Mr Martin disputes
this and prefers the evidence of the sale(s) of No.64, which is the approach
favoured by the LVT. We consider firstly therefore whether No.64 should be
valued as a house or a development site.
40.
Mr Martin produced a copy of the property particulars of No.64 in
respect of the June 2008 sale. These referred to:
“An outstanding opportunity to purchase a substantial (902
sq m/ 9742 sq ft) residence set back from the road on an exceptional 0.75 acre
plot with full planning consent to construct a truly spectacular lateral 1,514
sq m/ 16,300 sq ft iconic mansion arranged over four floors.”
The planning permission referred to was that granted in July
2007. There were several computer generated images of what the redevelopment
would look like together with floor plans of the proposed development. In our
opinion the emphasis of the particulars was on the redevelopment potential of
No.64, although they do refer to the existing building and contain photographs
of it.
41.
The first sale of No.64 was completed in December 2007 although
contracts were exchanged the previous January, the date from which Mr Martin
adjusted the transaction for time. Planning permission for the redevelopment
of the house had not been granted at the date of exchange.
42.
Mr Martin relies on hearsay evidence about the purchaser’s intentions at
the time of the second sale in June 2008. There is no witness statement from
Mr Cash or Mr Dealey to corroborate Mr Martin’s assertion on this point. But
it is known that Mr Cash did not implement the 2007 planning permission;
instead he obtained and implemented planning permission for a more limited
refurbishment and extension of the existing building. Mr Buchanan says that Mr
Cash did this because of the increased difficulty of obtaining development
finance following the collapse of Lehman Brothers in September 2008, but he
adduced no evidence about Mr Cash’s access to finance and his opinion was based
upon a generalisation about market behaviour.
43.
In our opinion the evidence of the sales of No.64 and the subsequent
actions of the purchaser suggest that the value of the Property is very similar
whether viewed as a redevelopment site or as an existing house suitable for
refurbishment and improvement. There is not necessarily a significant
difference between these two values.
44.
Mr Martin analyses the second sale of No.64 as a house with the
potential for improvement at a value of £1,720 per sq ft (or £1,825 per sq ft
if one only uses the GIA of the existing floorspace). That figure contrasts
with the rate he obtained by dividing the sale price of No.85 by the GIA of the
existing accommodation. This showed a time adjusted value of £2,284 per sq ft
for the May 2009 sale and £2,150 per sq ft for the December 2009 sale. The
parties agree that No.85 was a site sale and the high figures produced by Mr
Martin’s analysis reflect the present underdevelopment of the site and the
ability to redevelop at a greater density. The same is true of the combined
leasehold sale price and negotiated enfranchisement price for 73/75 Avenue
Road. The time adjusted combined price when divided by the GIA of the existing
house showed a rate of £3,189 per sq ft which again reflected the redevelopment
potential of the site as agreed by the valuers.
45.
We do not accept Mr Johnson’s submission that Mr Martin, by using the
rate he derived from No.64 as a house to value the Property, committed a
“valuation nonsense”. It was a legitimate analysis of the sale of No.64 and
indeed was a method used by Mr Buchanan before the LVT. Mr Buchanan did not
give any reason for his change of approach in this appeal other than that he
was previously mistaken. We do not agree and in our opinion the sale of No.64
is the best market evidence of the freehold value of the Property as an
existing house with the potential for improvement. We prefer to rely upon the
second sale of No.64 which was closer to the valuation date.
46.
The valuers agree that the time adjusted price of the second sale of
No.64 in June 2008 was £16.208m. The GIA of the existing building was 8,880 sq
ft and planning permission was granted in March 2009 for extensions comprising
a further GIA of 1,045 sq ft. Mr Martin said that this prospective floorspace
should be valued at 50% of the rate for the existing accommodation. The
effective area of the improvements at No.64 was therefore 525 sq ft (rounded)
and the total area 9,405 sq ft. Dividing this into the time adjusted purchase
price of £16.208m gives £1,723 per sq ft which Mr Martin rounded down to £1,720
per sq ft. He therefore adopted a rate of £860 per sq ft to value the
improvements. This compares with the rate derived by Mr Buchanan for No.64 as
a development site of £994 per sq ft. Applying Mr Martin’s figures to the
existing and improved areas of the Property gives a freehold value of £14.83m.
Substituting Mr Buchanan’s figure of £994 per sq ft for the new floorspace and
£497 per sq ft for the garage block at the Property gives a freehold value of
approximately £15.165m. In our opinion this analysis supports a value of £15m
for the Property.
47.
Mr Buchanan now relies upon the combined price of the leasehold sale of
No.62 and its enfranchisement price as being the best (rather than good)
evidence of the freehold value of the Property. In our opinion such a
“combined” approach gives an indication of the minimum value of the freehold
interest; the logic of the approach being that a purchaser will not pay an
amount for the leasehold interest plus the enfranchisement price that is more
than the value of the unencumbered freehold interest. So £12.95m is, in our
opinion, an indication of the minimum value of the freehold value of No.62; it
may have been worth more. The use of this figure as a proxy for the
unencumbered freehold value involves a circularity; it is necessary to know the
unencumbered freehold value of No.62 in order to calculate the enfranchisement
price but it is necessary to know the enfranchisement price before the
unencumbered freehold value can be determined. The LVT adopted the freehold
value of £11.25m that the valuers had agreed in the case of No.62 but which is
now said by Mr Martin, and accepted by Mr Buchanan, to be too low. The method
as applied to No.62 also assumes that the leasehold sale price will accurately
reflect not only the benefits of a prior valuation date in a rising market (although
the market fell again in the quarter ending September 2009) but also the 50% of
the marriage value that is not included in the enfranchisement price. But at
the time the leasehold of No.62 was sold in July 2009 the enfranchisement price
had not been determined by the LVT and so there must inevitably have been
uncertainty about the figures.
48.
Subject to these reservations, which lead us to agree with Mr Martin
that the use of the combined value approach at No.62 is a secondary valuation
method and that the use of a direct comparable freehold transaction such as
that at No.64 is to be preferred, we proceed to analyse in more detail the
combined value approach relied on by Mr Buchanan.
49.
There is a small difference in the valuers’ respective adjustments for
time. Mr Buchanan increased the combined figure of £12.95m from July 2009
until the valuation date, giving a total of approximately £13.82m, while Mr
Martin increased the enfranchisement price of £4.95m from March 2009 and the
leasehold price of £8m from July 2009 until the valuation date, giving a total
of approximately £14.06m. Mr Buchanan said that the sale of a leasehold
interest where the vendor has served a notice to enfranchise was a benefit to
the purchaser that would be reflected in the leasehold price; such a notice
fixed the valuation date and the purchaser would therefore benefit from any
subsequent rise in house prices. Prices rose by 5% between March and June 2009
(but then fell by 1.4% in the next quarter, before rising again thereafter).
We accept that at least some of this benefit was likely to have been reflected
in the purchase price and we prefer Mr Buchanan’s approach to time adjustment
and accept his figure.
50.
The other significant difference between the experts when analysing
No.62 was in the GIA which each expert adopted. Mr Buchanan took the figure of
9,245 sq ft that Mr Martin had used at the LVT hearing, while Mr Martin now
reduced this figure to 8,315 sq ft (a reduction of 10%) to reflect the
disadvantages of some of the floorspace (see paragraph 32 above). In cross-examination
Mr Buchanan accepted in principle that such an adjustment was warranted but he
did not think it should be as large as Mr Martin’s figure. We do not accept Mr
Johnson’s description of Mr Martin’s adjustment of the GIA as being a “savage
cut”. It is a figure which is based upon Mr Martin’s inspection of the
property and which gives a result which is considerably larger than the figure
of 6,735 sq ft adopted by the lessee’s expert, Mr Beckett, before the LVT
hearing in No.62. When using the total GIA of 9,245 sq ft before the LVT in
No.60 Mr Martin said that it was not “truly reflective” and that some of the
space was “not particularly usable”. We consider Mr Martin’s adjustment to the
GIA of No.62 to be reasonable and we adopt it for the purpose of our analysis.
51.
Taking Mr Buchanan’s time adjusted combined value for No.62 of
£13,821,535 and dividing it by Mr Martin’s adjusted GIA of 8,315 sq ft gives a
rate of £1,662 per sq ft. Applying this to the existing floorspace of the
Property of 7,600 sq ft gives a value of £12,631,200. Mr Buchanan values the
potential additional floorspace of 1,700 sq ft at £1,000 per sq ft and the
garage space of 695 sq ft at £500 per sq ft. This gives a total additional
value of £2,047,500, making an overall freehold value of approximately
£14.68m. Mr Martin takes the additional floorspace at 50% of the existing
value (£831 per sq ft) and the garage space at 25% (£415 per sq ft). This
gives a total additional value of £1,701,125, making an overall freehold value
of approximately £14.33m. The average of the two figures is £14.5m.
52.
We accept Mr Johnson’s submissions that the value of No.62 is not
diminished by overlooking from No.64. However we accept Mr Martin’s opinion
that the size (and frontage) of the plot at the Property, the area of which is
20% larger than that of No.62, goes to value. We also accept Mr Martin’s view
that No.62 is a less attractive house than the Property. Although we did not
inspect the interior of No.62 we are of the opinion that its appearance, shape,
design and general layout make it less valuable as an existing house than the
Property. That being so we are satisfied that a freehold value of £15m for the
Property is supported by the evidence of the combined price of No.62.
53.
Although both experts agree that the Property should be valued as an
existing house with potential for improvement we note that No.62 received
planning permission in June 2012 for the development of a new house with a GIA
of 16,170 sq ft. Based on the planning permission obtained for No.85 Mr
Buchanan said that the maximum size of a new house at the Property would be
14,000 sq ft. But the subsequent evidence of the planning permission at No.62
suggests that Mr Buchanan might have underestimated the development potential
of the Property. We acknowledge that neither No.62 nor the Property had
planning permission for redevelopment at the valuation date but we consider
that a redevelopment of at least 15,000 sq ft would have been viable at that
time. The absence of planning permission would have reduced the value of the
Property for redevelopment but at Mr Buchanan’s figure of £1,000 per sq ft for
the value as a site we consider that a site value approach would support Mr
Martin’s valuation of the freehold interest of £15m.
54.
Mr Buchanan deducted a total of 15% from the freehold value rate per sq
ft derived from the combined price of No.62 to reflect the relative
disadvantage of the Property with regard to the new school (10%) and the
proximity of the Israeli ambassador’s residence (5%). Mr Buchanan was unable
to identify any specific event that occurred between March/July 2009 and the
valuation date that would justify such a reduction due to the new school. He
said that as time went on the market came to realise that the school was
actually going to be built which had an adverse impact upon value. We do not
agree. The proposal to redevelop the school had been in the public domain for
a long time. Outline planning permission had been granted in November 2008 for
an 1150 pupil academy, a replacement special educational needs school, together
with 3,400 sq m of residential accommodation. By the time the details of the
proposal were considered by the Greater London Authority in July 2010 the
residential element of the scheme had been dropped. There is no evidence that
the evolution of the scheme over the year between March 2009 and April 2010 had
a detrimental impact on house values in the area. We consider that any impact
that the school might have had would have affected the value of Nos.62 and 64
more than that of the Property since they are closer to the school site. We
agree with Mr Martin that the effect of the proposed development was already
reflected in the comparables. We have also had regard to the correspondence
submitted by the appellant regarding the collapse of the sale of No.56 in 2010,
the ostensible reason for which was the non-disclosure of the proposed school
development. But we do not accept the purchaser’s comment, as reported by the
selling agent, that “the scale of the new school would have a severely adverse
effect on the value of the property”, given that No.56 is more than 75m from
the school site at its nearest point and there are four substantial houses
between it and the school boundary. We therefore see no justification for Mr
Buchanan’s 10% adjustment and we make no such allowance.
55.
Mr Buchanan said in his evidence to the LVT that the proximity of the
Israeli ambassador’s house would be regarded as a disadvantage by some
purchasers of the Property, but he did not reduce his valuation as a
consequence. His adoption of a 5% discount in the value of the Property in his
evidence to this Tribunal was based upon Mr Voyazides’ evidence about the
practical problems of living next door to the ambassador. Mr Buchanan
described these as “serious problems” involving a significant level of security
interference and intrusion. Mr and Mrs Voyazides have lived at the Property
since 1994 and Mr Voyazides said that they had been unaware of the problems
with their neighbour when they bought No.60. He described their purchase of
the Property as “messy” and said that they did not have time to consider the
matter. They had not written to the ambassador about their problems because
they did not believe that their convenience would be put before the
ambassador’s security; but the matter has not been tested. Mr Voyazides accepted
that the security surrounding No.58 probably helped deter burglaries.
56.
We were not assisted on this issue by Mr Briant whose evidence was based
upon isolated observations and which occasionally strayed into opinion.
57.
We accept that at times the problems identified by Mr Voyazides are
likely to be a nuisance but we do not agree with Mr Buchanan’s assessment of
the seriousness that they represent. It is uncertain whether these problems
would be disclosed to a purchaser but even if they were we are not persuaded
that they are such as would sound in value in a rising market at the valuation
date, particularly given the compensating factor, acknowledged by Mr Voyazides,
that a visible police/security presence would probably help deter burglaries.
We therefore make no adjustment for the proximity of the Israeli ambassador’s
house.
58.
We conclude that the unimproved freehold vacant possession value of the
Property is £15m.
Leasehold value: the case for the appellant
59.
Mr Buchanan relied upon market sales as being the best evidence of
leasehold value, making a percentage adjustment to allow for the benefit of the
1967 Act. Such an adjustment was based upon what his “experience suggests is
appropriate” and reflected the likely element of anticipated marriage value in
the purchase price. He preferred this method of valuation to the use of graphs
of relativity.
60.
In the subject case, with a lease with an unexpired term of 19.16 years,
Mr Buchanan said that the appropriate deduction for Act rights was between 20
to 25%. He adopted a figure of 25% which he said was supported by the recent
LVT decision in respect of No.62 which also determined a discount of 25% for a
similar unexpired term.
61.
Mr Buchanan relied primarily upon the leasehold sale of No.62 to
determine the leasehold value of No.60. He adjusted the leasehold price of
No.62 for time to give £8,538,400. He then divided this by the total GIA of
9,245 sq ft to give a rate of £923 per sq ft. He applied this rate to the
unimproved GIA of the Property (7,600 sq ft) to produce a value of £7,014,800.
Mr Buchanan then made an adjustment to reflect the potential to increase the
floorspace of the Property to 9,300 sq ft. He did this by calculating the
percentage of the total freehold value of No.62 that was represented by the
value of the improvements (15.27%) and increasing the unimproved leasehold
value of No.60 by the same percentage. This gave a figure of £8,085,960. He
allowed for the benefit of the Act by making a deduction of 25% and then
deducted a further 15% to allow for the adverse effects on the Property of the
new school and the proximity to the Israeli ambassador’s residence. He made no
allowance for the small difference in lease length between No.62 (20.3 years)
and No.60 (19.16 years). Mr Buchanan’s final figure for the leasehold value of
the Property was £5,154,400 which represented a relativity of approximately 45%
of his adopted freehold value.
62.
Mr Buchanan undertook a similar analysis in respect of the sale of the
leasehold interest in No.73/75 for £10.1m in August 2009. This produced a
leasehold value for No.60 of £5,788,483 before adjusting for the new school and
the proximity of the ambassador’s residence. However Mr Buchanan did not rely
on this comparable because it involved two extra stages of analysis; firstly,
it had to be adjusted for lease length (the lease of Nos.73/75 had an unexpired
term of 24 years) and, secondly, it was sold as a development site which led Mr
Buchanan to make an additional discount of 25% “to reflect the larger site and
greater development potential”.
63.
Although he did not rely upon graphs to obtain the relativity Mr
Buchanan noted that the graph of graphs showed a relativity for an unexpired
term of approximately 19 years of between 42 and 48%. The relativity graph
produced by Knight Frank in June 2011 (which excluded LVT decisions) showed a
relativity for an unexpired term of just under 20 years of some 44.6%. He also
noted that in its decision on No.62 the LVT had adopted a relativity of 51% for
a lease with an unexpired term of 20 years. He considered that such evidence
supported his adopted relativity of 45%.
64.
Mr Buchanan considered a third approach to calculating the relativity,
based upon the capitalisation of rental value, and which he adopted as a
cross-check. He said that 83 Avenue Road had been let in 2010 for £10,000 per
week and 46 Avenue Road had been let in 2011 for £11,000 per week. He said
that No.60 could have been let at the valuation date at a gross rent of £10,000
per week or £520,000 per annum. He capitalised this at a gross yield of 6% for
19.16 years to give a leasehold capital value of approximately £5.8m. No adjustment
was necessary for the benefit of the Act. He considered that this cross-check
supported his adopted leasehold value.
Leasehold value: the case for the respondents
65.
Mr Martin relied upon graphs of relativity and, in particular, upon the graph
entitled “Eyre Estate and John Lyon’s Charity Settlements (Houses)” produced by
Cluttons in November 2010. The graph excluded all tribunal decisions and cases
involving onerous ground rents. Mr Martin considered this to be the most
reliable graph to use in this appeal because it included settlement evidence of
houses for St John’s Wood and Maida Vale. It was therefore geographically and
property type specific. For an unexpired term of 19.16 years the Cluttons
graph showed a relativity of 41%.
66.
Mr Martin also referred to two other graphs; the RICS Research Report
version of Cluttons graph (42.81%) and the Gerald Eve 1996 graph (41.66%). He
took the mean of these three graphs (41.82%) and rounded it to 42%.
67.
In response to the appellant’s criticism of the Gerald Eve graph Mr
Martin said that it continued to be used by many valuers including valuers
acting for tenants. He referred to, but did not rely upon, the Knight Frank
graph and he dismissed the graph of graphs as historic and irrelevant.
68.
As a check on his figure Mr Martin referred to a method of calculation
of relativity that had been used by the Lands Chamber in its decision in Earl
Cadogan v Cadogan Square Limited [2011] UKUT 154 (LC). In that appeal the
Tribunal compared the relativity from two graphs for equivalent unexpired terms
over a range from 5 to 50 years. One graph showed the relativity including Act
rights (Savills 2002 enfranchisable graph); the other showed the relativity
excluding Act rights (the Gerald Eve 1996 graph). The difference in the
relativities for equal unexpired terms shown in those two graphs should
(theoretically) represent the value of the Act rights. Applying the method to
No.60 gave a relativity of 42.27% for an unexpired term of 19.16 years which Mr
Martin said supported his figure (and that of the LVT) of 42%.
69.
Mr Martin did not agree with Mr Buchanan’s view that the best comparable
for the leasehold value of the Property was the leasehold sale of No.62. Mr
Martin said that there were a number of factors surrounding that sale which led
him to think that it might not have been an arm’s length transaction: No.62 had
not been advertised in the market; no sales particulars were prepared; no for
sale sign was erected; the purchaser had known and liked the property for many
years; contracts were initially exchanged at a price of £9.2m in July 2008 but
this was subsequently reduced to £8m in July 2009 and only half of this amount
was paid on completion with the balance effectively being loaned to the
purchaser by the vendor who took a legal charge against the property for the
remaining £4m. Mr Martin agreed with Mr Buchanan that the leasehold sale of
73/75 Avenue Road was not a useful comparable. Because of the problems with
the sale of No.62 Mr Martin preferred to use graphs to calculate the relativity
to be applied to the freehold value.
70.
Mr Martin said that the market did not use a rental capitalisation
approach to value a lease with an unexpired term of 19.16 years. He said that
the rental value adopted by Mr Buchanan reflected an improved house and failed
to allow for void periods which he anticipated would be likely to occur after 3
to 4 years. He considered that an adjustment of 40 to 50% would be required to
obtain a rent net of outgoings such as management, letting costs and void
periods. Data from the Investment Property Databank suggested a deduction of
33% of gross income should be allowed for voids and irrecoverable operating
costs. Even if one made a deduction for outgoings as low as 25% and applied it
to Mr Buchanan’s annual rent of £520,000 it would produce a capital value for
No.60, using a gross yield of 6%, of £4.37m. This represented a relativity of
29.13% against Mr Martin’s freehold value of £15m and of 37.47% against Mr
Buchanan’s equivalent figure of £11.664m. Mr Martin said that these
relativities were too low and demonstrated that the use of a rental
capitalisation approach was wrong in this instance.
Leasehold value: conclusions
71.
In Arrowdell Limited v Coniston Court (North) Hove Limited [2007] RVR 39, which was followed in Nailrile and Others v Earl Cadogan and Others
[2009] RVR 95, the Tribunal said:
“In such circumstances, in our view, it is necessary for
the tribunal to do the best it can with any evidence of transactions that can usefully
be applied, even though such transactions take place in the real world rather
than the no-Act world. Regard can also be had to graphs of relativity…”
Mr Buchanan prefers the evidence of the single market
transaction at No.62 while Mr Martin prefers the use of graphs of relativity.
Both methods have been accepted by the Tribunal in other appeals.
72.
An initial examination of the figures suggests that there is little
between the parties on the point. Given that we have found that there should
be no deduction for either the new school or the proximity of the ambassador’s
residence, Mr Buchanan’s approach produces a leasehold value of £6,064,470
compared with Mr Martin’s figure of £6,300,000. Mr Buchanan’s valuation
represents a relativity of 40.4% of the freehold value, as determined by us, of
£15m.
73.
But in our opinion Mr Buchanan’s valuation requires two further
adjustments. Firstly, Mr Buchanan’s analysis of the leasehold sale of No.62
was based on a GIA of 9,245 sq ft. We have adopted Mr Martin’s GIA of 8,315 sq
ft for the reasons given in paragraph 50 above. To be consistent the analysis
of the leasehold sale of No.62 should also be made by reference to the smaller
GIA. This produces an unimproved rate of £1,027 per sq ft (compared with Mr
Buchanan’s figure, based on the larger area, of £923 per sq ft). Applying this
rate to the unimproved GIA of No.60 of 7,600 sq ft gives a base leasehold value
of £7,805,200.
74.
Secondly, Mr Buchanan has added 15.27% to the unimproved leasehold value
to reflect the potential for improvements. He says that this “is derived from
the same percentage derived for the value of improvements in my assessment of
the freehold value…” That is not the case. In Mr Buchanan’s freehold
valuation he expresses the value of improvements as 15.27% of the total
freehold value, ie a figure which includes the value of the improvements. The
improvements represent 18.02% of the base freehold value, ie the value of the
unimproved floorspace. It is the latter percentage that, in our opinion, Mr
Buchanan should have added to his base leasehold value. Adding this percentage
to the base leasehold value of £7,805,200 produces a figure of £9,211,697.
Applying Mr Buchanan’s adjustment of 25% for the benefit of the Act gives an
adjusted leasehold value of £6,908,772, which is a relativity of 46.1% compared
to our freehold value of £15m.
75.
We make two further observations on this point. Firstly, there is a
small difference in the lease length between No.62 (20.3 years) and No.60 (19.16
years). The lower the unexpired term of the lease the lower the leasehold
value will be. Mr Buchanan adjusted for lease length (in the case of 73/75
Avenue Road) by reference to the Savills 1992 unenfranchisable graph and
although he made no such adjustment in respect of No.62 he acknowledged that
there would be “a very small difference” between the leases on that property
and No.60. Making a similar adjustment between Nos.62 and 60 suggests a
reduction of some 1.3% in the relativity to reflect the shorter unexpired term
at the Property. This would give an adjusted relativity of 44.8%. Mr Martin
adjusts for lease length by reference to the Gerald Eve 1996 graph. Adjusting
the relativity of 46.1% using this graph gives a relativity for an unexpired
term of 19.16 years of 44.2%. The average of the two figures is 44.5%.
76.
Secondly, the LVT in No.62 determined that the benefit of a notice of
claim having been served was of additional value (“at least” 7.5%) to any
allowance for the benefit of the Act (17.5%). There are two benefits to such a
notice; firstly, (in all instances) it enables the purchaser to avoid the two
year qualifying period as a tenant before he can serve such a notice himself;
and, secondly, (in a rising market) it allows the purchaser to enjoy any increase
in value since the date of service of the notice (the valuation date). (Conversely
in a falling market there may be no benefit in a notice having been served by
the vendor.) Both of these benefits apply to the sale of the leasehold
interest in No.62. Mr Martin said in cross-examination that the deduction for
the benefit of the Act should be “a bit more” than 25% to reflect the benefit
of a notice to enfranchise having been served in this case. He did not specify
the amount of any such increase. Mr Buchanan said that he had made a single
adjustment to reflect all of the benefits of the Act and had not distinguished
the particular benefits of a notice having been served.
77.
In our opinion a deduction of 25% to reflect all of the benefits of the
Act, including the service of a notice to enfranchise by the vendor, is
appropriate in this instance. Neither party identified, or attributed
different percentages to, the component parts of those benefits. Mr Martin’s
check reference to the comparison of the Savills (2002) enfranchisable graph
and the Gerald Eve (1996) graph also showed a deduction for Act rights in the
region of 25%.
78.
Our analysis of the sale of the leasehold of No.62 gives a relativity
for No.60 of 44.5% which is in line with Mr Buchanan’s adopted figure of 45%.
79.
Mr Martin relied mainly upon the graph entitled “Eyre Estate and John
Lyon’s Charity Settlements (Houses)” produced by Cluttons in November 2010.
This graph was presented as a scatter diagram of points with, for each
transaction, relativity plotted against the unexpired term. (The source
information for some of the points is given in appendices to Mr Martin’s report
to the LVT.) The graph does not show a best fit line between the points. There
is only one data point (just over 20 years) recorded close to the unexpired
term of the lease at No.60 (19.16 years). That point shows a relativity of
42%. The nearest other data points either side of this point are at unexpired
terms of 18 years (40%) and 22 years (46%). There are a total of two data
points between unexpired terms of 15 to 20 years and five data points between
unexpired terms of between 20 to 25 years. While this is a small sample size
upon which to base conclusions about the relativity of the leasehold interest
at No.60 the data does have the benefit of being geographically proximate to
the Property and is comprised only of house sales. But it represents the subjective
analysis of settlements by Cluttons which is, we understand, from the
landlord’s perspective.
80.
Mr Martin also referred to the earlier (November 2008) version of the
Cluttons graph for settlements in respect of houses in the St John’s Wood and
Maida Vale areas that forms part of the RICS Research Report published in
October 2009 and which shows a relativity (by interpolation) of 42.81% for an
unexpired term of 19.16 years. The same observations that we made above in
respect of Cluttons’ more recent graph also apply to this graph.
81.
The third graph upon which Mr Martin relies is the Gerald Eve (1996)
graph. This is strongly criticised by Mr Johnson as having been disowned for
several years by one of its authors (John D Wood) and as being out of date and
of no relevance today. The graph shows a relativity (by interpolation) of
41.66% for an unexpired term of 19.16 years. Over 90% of the data relates to
houses and is taken from prime central London postcode areas (W1, SW1 and
SW3). We accept Mr Martin’s observation that this graph is still used by
practitioners - it is often referred to before this Tribunal. The reason for
its continued use is explained in the notes to the graph in the RICS Research
Report at page 19:
“The Graph has been tested continuously by challenges in
negotiations and in evidence given to the Leasehold Valuation Tribunal and the
Lands Tribunal. The Graph has been reviewed in the light of those challenges.
It has not been amended, because it is believed that the evidence that was
available then [between 1974 and 1996] is stronger than that which has emerged
since 1996. The underlying reason for this is that since 1993, and more so
since 2002, there has been a drastic contraction in the supply of
non-enfranchisable leases, following the fundamental extension of rights to
enfranchise permitted by the LRHUDA 1993 and latterly by the Commonhold and
Leasehold Reform Act 2002. It is considered that there is no reason for
relativity to have changed over time.” (These notes were apparently produced by
Gerald Eve and not the RICS.)
The graph represents settlements based upon sales of non-enfranchisable
leases and is therefore, at least to some extent, representative of direct
market evidence that does not require an adjustment for the benefit of the
Act. In our opinion the graph is not redundant and we give it weight when
considering the relativity of the leasehold interest in the Property.
82.
Although Mr Martin referred to a graph of relativity produced by Knight
Frank he does rely upon it. Knight Frank revised this graph in 2011 and it now
shows a relativity for an unexpired term of 19.16 years of 44.8% (based mainly
on settlement evidence, excluding LVT decisions, of flats and houses in prime
central London). This graph is not as geographically specific as the Cluttons
graph and it includes flats as well as houses. (We note that the Cluttons RICS
graph indicates that, at all lengths of unexpired term, the relativity of flats
is shown as higher than that of houses). But the graph does represent a
mixture of landlord and tenant clients.
83.
The evidence from the graphs, with the exception of the Knight Frank
graph, suggests a lower relativity (approximately 42%) than that obtained from
the leasehold transaction at No.62 (44.5%).
84.
The difficulty that we face is that both methods can be validly
criticised. Mr Buchanan’s approach depends upon a single transaction which, as
Mr Martin points out, has features which suggest that it may not have been at
arm’s length (see paragraph 69 above). Graphs can be criticised for being historic
or based upon one parties’ analysis of settlements, which in the case of
Cluttons is from a landlord’s viewpoint (and therefore likely to produce lower
relativities than an analysis from the point of view of a tenant). Nor do we
gain assistance from Mr Buchanan’s third method of approach which involves
rental capitalisation. There was no evidence that this method is used in the
market for leases with unexpired terms of approximately 20 years. We also
accept Mr Martin’s point that the rents referred to by Mr Buchanan are those
attributable to fully modernised accommodation whereas the Property is assumed
to be unimproved.
85.
We must determine whether, in the light of the evidence that we have
heard, the LVT was wrong in its decision to take the relativity of the
leasehold interest of the Property at 42%. The LVT said in its conclusions on
this point:
“We are satisfied that the relativity of 42% to the
freehold value of the 19.16 year lease, without Act rights, which Mr Martin
proposed is certainly not too low. While we accept that first recourse should
be had to market evidence, the market evidence of the value of the short lease
is sparse and, as is usual, requires many adjustments, and in these
circumstances we consider that it is appropriate to have regard primarily to
graphs, and in our view Mr Martin’s analysis from the graphs is fair.”
In our opinion the LVT were entitled to take that approach to
the determination of the relativity and we have not been persuaded by the
evidence in this appeal that Mr Buchanan’s primary approach of relying upon a
single transaction and adjusting for the benefit of the Act is to be
preferred. We have rejected his alternative approach based upon the
capitalisation of rental value. The use of graphs is a recognised method of
assessing the relativity and is one which we prefer in this instance, given
that there is only one piece of usable transactional evidence to support Mr
Buchanan’s preferred approach. We consider that the majority of the graphs referred
to in evidence support Mr Martin’s relativity of 42% and we adopt that figure.
This gives a leasehold value for the unexpired lease at No.60 of £6.3m, which
is the figure determined by the LVT.
Determination
86.
We have upheld both the freehold value (£15m) and the leasehold value
(£6.3m) of the Property as determined by the LVT. The appeal is therefore
dismissed and the price to be paid for the freehold interest in the Property is
determined at £7,430,000.
Dated 22 January 2013
Her Honour Judge Alice
Robinson
A J Trott FRICS
