United Kingdom Upper Tribunal (Lands Chamber)

UT Neutral citation number: [2015] UKUT 586 (LC)

UTLC Case Numbers: LRA/20/2015

LRA/21/2015, LRA/35/2015

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

LEASEHOLD ENFRANCHISEMENT – FLAT – application to admit additional expert evidence – permission granted

IN THE MATTER OF APPLICATIONS UNDER SECTION 48(1), LEASEHOLD REFORM, HOUSING AND URBAN DEVELOPMENT ACT 1993

BETWEEN:

SOPHIE AARON

Applicant

and

THE WELLCOME TRUST LIMITED

Respondent

AND BETWEEN:

THE TRUSTEES OF THE SLOANE STANLEY ESTATE

Applicant

and

(1) ADRIAN HOWARD MUNDY

(2) ARNAUD LAGESSE

Respondents

Before Martin Rodger QC and Andrew Trott FRICS

Sitting at Royal Courts of Justice, Strand, London WC2A 2LL

23 October 2015                                                                                                                           

Stephen Jourdan QC, instructed by Pemberton Greenish LLP, on behalf of The Trustees of the Sloane Stanley Estate

Gary Cowen, instructed by CMS Cameron McKenna LLP, on behalf of The Wellcome Trust Ltd

Philip Rainey QC, instructed by Collins Benson Goldhill LLP on behalf of the tenants

© CROWN COPYRIGHT 2015

The following case is referred to in this decision:

Kosta v The Trustees of the Phillimore Estate [2014] UKUT 319 (LC)

DECISION

1.             These applications concern claims made by tenants of three central London flats for the grant of new long leases of those flats under Chapter II of Part I of the Leasehold Reform Housing and Urban Development Act 1993.  Because of the significance of the issue common to all three applications (and to many others) the applications were transferred by the President of the First-tier Tribunal (Property Chamber) to the Upper Tribunal and are due to be heard in the week beginning 11 January 2016.  It is estimated that the hearing will occupy the Tribunal for up to 9 days.

2.             At a case management hearing on 23 October 2015 Mr Rainey QC applied on behalf of the tenants for permission to call an additional expert, Dr Philippe Bracke, to be cross examined on technical issues arising in connection with the report of the tenants’ main expert witness, Mr James Wyatt FRICS.   The application was opposed by Mr Jourdan QC and Mr Cowen, on behalf of the landlords concerned.  In the course of the hearing the Tribunal indicated that it would grant permission but would give its reasons later, which we now do. 

3.             All three applications were transferred to the Upper Tribunal after the principal evidence on behalf of the tenants had been filed.  That evidence took a similar form in each application, comprising two reports by Mr Wyatt.  The more substantial of those reports deals with the issue of relativity, that is the relationship, expressed as a percentage, between the value of the existing lease of each flat (on the statutory valuation hypotheses) and its freehold vacant possession value; that relationship is, as a matter of valuation technique, an essential component in determining the premium payable for the grant of a new long lease.  Mr Wyatt’s relativity report drew on a body of research undertaken by Dr Bracke and presented by him in evidence to the Tribunal in Kosta v The Trustees of the Phillimore Estate [2014] UKUT 319 (LC), which concerned an application for the enfranchisement of a house under the Leasehold Reform Act 1967. 

4.             The evidence given by Dr Bracke in Kosta sought to establish leasehold relativity by the analysis of a substantial body of data drawn from the archives of John D Wood & Co concerning more than 8,000 sales of residential leases of different lengths which had occurred in the years 1987-1991, before the entitlement to a new long lease was conferred on tenants by the 1993 Act.  In Kosta the Tribunal identified a number of weaknesses in the evidence presented to it (including that it was not supported by more conventional valuation evidence) and concluded that, though Dr Bracke was an impressive witness, it was not prepared to place weight on his evidence.

5.             The relativity evidence filed by Mr Wyatt on behalf of the tenants in these applications is intended to meet and answer the criticisms made by the Tribunal of Dr Bracke’s evidence in Kosta. It is supplemented by further evidence in Mr Wyatt’s second report in each application (which expresses his view as a valuer on the issue of relativity and other valuation questions), and also by the evidence of Professor Muellbauer, by way of further explanation of Dr Bracke’s hedonic regression analysis.

6.             Following the transfer of the applications to the Tribunal a case management hearing was arranged on 24 April 2015 at which directions were given for the filing of expert evidence on behalf of the landlords.  At that hearing Mr Rainey also applied on behalf of the tenants for permission to rely on additional expert evidence from Dr Bracke.  It was explained that, as the Tribunal was already aware from Kosta, Dr Bracke was responsible for the statistical research and analysis of the John D Wood which was relied on by Mr Wyatt in his report. Mr Rainey therefore sought permission, if it should prove necessary to do so, to call Dr Bracke as an additional expert to answer any technical questions on the methodology employed in his statistical model. 

7.             at that stage it was not clear how far Dr Bracke’s methodology would be challenged by the experts whom the landlords intended to call.  As the Tribunal explained in a short ex tempore decision, it was unpersuaded that it was appropriate at that stage to make an order permitting Dr Bracke to give evidence in addition to that already provided by Mr Wyatt.  The Tribunal said this:

          “It may be that the appropriate way of dealing with any matter which Mr Wyatt feels unable to deal with is for him to put in some observations from Dr Bracke as a supplement to his initial report, or his rebuttal report.  If it transpires that there is significant material which Mr Wyatt feels unqualified to deal with, an application can be made at that stage, together with a copy of the evidence which it would be proposed to ask Dr Bracke to give.  The Tribunal can then take a view (with the benefit of a more concrete understanding of the scope of the evidence) on whether, or on what terms, to permit an additional expert.”

8.             In September 2015 the evidence of the landlord’s experts was filed.  It consists of substantial reports by Professors Lizieri and MacGregor, critical of the original research of Dr Bracke which forms the basis of Mr Wyatt’s evidence.  It was also apparent from question raised by Professors Lizieri and MacGregor that they were concerned to understand in some considerable detail (as one would expect) the statistical coding which underlay the methodology to which Mr Wyatt subscribed. 

9.             Mr Wyatt is not an economist or statistician, he is a valuer, and it was therefore necessary for him to refer technical questions of the sort raised by Professors MacGregor and Lizieri to Dr Bracke.

10.         By letter dated 5 October 2015 the tenants made a further application to the Tribunal for permission to call Dr Bracke to give evidence.  The basis of the application, as amplified by Mr Rainey in oral submissions, is that it is necessary for the fair consideration of the tenants’ case that questions at the level of technical detail raised by Professors MacGregor and Lizieri should not go unanswered but should be addressed by Dr Bracke.  Mr Wyatt is not responsible for the technical analysis and will be unable to answer technical questions on it at the hearing.  Although the tenants have put in a report by Professor Muellbauer in support of the use of hedonic regression analysis to establish leasehold relativity, Professor Muellbauer is equally unable to answer questions on the underlying coding employed by Dr Bracke because he uses a different statistical package and created his own model rather than replicating Dr Bracke’s.  It was therefore necessary, Mr Rainey submitted, for the tenants to call Dr Bracke to avoid the risk that Mr Wyatt’s evidence would be rejected by the Tribunal on the grounds that he was unable satisfactorily to explain the underlying statistical methodology.

11.         For the landlords both Mr Jourdan QC and Mr Cowen objected to permission being granted for the further involvement of Dr Bracke.  They suggested that no adequate explanation had been given why Mr Wyatt or Professor Muellbauer were unable to address technical questions; Mr Wyatt had considered himself sufficiently qualified to give the evidence contained in his relativity report, in which he had not identified Dr Bracke as a co-author, and the questions which were being raised were all directed towards the validity of the conclusions in that report.  Nor was it clear what form it was proposed that Dr Bracke’s evidence should take.  It was too late for wholly new evidence to be admitted.

12.         We accept Mr Rainey’s submissions. 

13.         These applications were transferred to the Tribunal by the President of the First-tier Tribunal in the expectation that the Tribunal would give guidance on the validity of Dr Bracke’s “hedonic regression” analysis of pre-1993 data as a basis for establishing leasehold relativity for current leases.  That issue is important both in these applications and in others.  The sums at stake in these three applications are significant, although not out of the ordinary for central London.  In the two Sloane Stanley cases the parties are between £80,000 and £160,000 apart in their assessment of the premium payable for the new leases while in Ms Aaron’s application the parties are about £210,000 apart.  In each case the disputed issue of relativity accounts for the greater part of the difference. In Ms Aaron’s application, for example, Mr Wyatt adopts a leasehold relativity of 81.18% of freehold value for a an unexpired term of 41 years, based on Dr Bracke’s research, while Mr Alastair Stimson FRICS of Savills, for Wellcome Trust, adopts 63%, based largely on transactional evidence with reference to the conventional graphs as a supporting cross check.

14.         The same relativity issue is raised by one party or the other in almost all applications for the grant of new long leases under the 1993 Act.  It is of the utmost significance for landlords who face a substantial diminution in the value of their reversionary interests if the approach of Dr Bracke and Mr Wyatt is endorsed by the Tribunal and subsequently comes to be applied generally in such applications.  For the body of tenants making such applications in future the outcome of these proceedings is also of great importance.  A large number of cases are pending in the First-tier Tribunal awaiting the outcome of these applications and what is hoped will be a definitive ruling by the Tribunal on the methodology developed by Dr Bracke. 

15.         We take the view that it is very important that the methodology under consideration be explained by a witness fully in command of the technical material. We are satisfied that Mr Wyatt is not  appropriately qualified to answer the technical questions raised on behalf of the landlords, and that although Professor Muellbauer is likely to be qualified, he has not so far been asked to replicate Dr Bracke’s methodology and is not well placed to answer questions on it.  It would therefore frustrate the purpose of these proceedings being transferred to this Tribunal if it does not have access to technical evidence which may be important to the achievement of a consensus amongst the relevant experts on issues of detail or, in the absence of such agreement, may be necessary to a proper understanding of the disputed methodology.

16.         We also have regard to the approach taken by the Wellcome Trust in the preparation of its expert evidence.  The main valuation evidence is given by Mr Alastair Stimson FRICS of Savills, but his report includes, in an appendix, a statistical analysis undertaken by a colleague, Mr Buckle.  Mr Stimson is not qualified to speak to the content of Mr Buckle’s technical analysis and the Wellcome Trust therefore sought and obtained the permission of the Tribunal for Mr Buckle to be called as an additional expert witness whose evidence is limited to explaining the analysis appended to Mr Stimson’s report.  We do not think it unreasonable that the tenants should have the same opportunity.

17.         Although it might be said that the difficulty in which the tenants find themselves is a result of their selection of an expert not fully qualified to speak to the matters on which his evidence is based, we do not criticise them for the approach that they have taken.  Dr Bracke is now an employee of the Bank of England and is not readily available to give evidence, whereas Mr Wyatt is very much available.  His evidence was filed before any discussion had taken place between experts on the scope of their disagreement.  Although in Kosta the Tribunal did not feel able to adopt the approach espoused by Dr Bracke, it recognised the value of his analysis but felt it ought to be supported by more conventional valuation evidence.  It was not unreasonable for the tenants to seek to limit the expert evidence on which, initially at least, they wished to rely.  They sought permission to call Dr Bracke in April but, at that stage were refused.  We consider that it is now clear that his evidence will be required and ought to be permitted.

18.         Although we are prepared to admit Dr Bracke’s evidence we are not prepared to do so on the rather free flowing basis originally suggested by Mr Rainey.  Mr Rainey was at pains to emphasise that the tenants did not wish Dr Bracke and Mr Wyatt to give evidence on the same subject matter; we agree that such duplication must be avoided.  In order to avoid it we require Dr Bracke to identify in a report compliant with the Tribunal’s rules and practice directions, how much of the relativity report so far presented as the work of Mr Wyatt he, Dr Bracke, adopts as his own and on which he is the appropriate witness to whom questions should be directed.  Dr Bracke must also include in that report such evidence as it is desired for him to give concerning the technical issues raised by Professors Lizieri and MacGregor.  That report must be exchanged and filed with the Tribunal by 21 November 2015.  Dr Bracke must then participate in the preparation of a statement of the matters on which the experts agree and disagree.  It must be made clear in Dr Bracke’s report which parts of the evidential basis of the tenants’ case he assumes responsibility for.  Responsibility for those components of the tenants’ case will cease to be that of Mr Wyatt.

19.         We also make it a condition of Dr Bracke being called to give evidence and to address the issues identified by Professors Lizieri and MacGregor that Professor Muellbauer should not be called to give oral evidence.  Having considered Professor Muellbauer’s report we find little in it with which we would expect Professors Lizieri and MacGregor to disagree.  Although the central issue in these applications is important, it is appropriate for the Tribunal to restrict the expert evidence it receives, particularly where hearing arrangements have already been made and there is a risk that the costs involved will become disproportionate to the individual applications. Professor Muellbauer’s report will be evidence in the applications, and we assume he will be asked to participate in the provision of a joint statement of matters agreed and in issue, but his evidence will be received in writing only.  In the course of the hearing we also indicated to the parties that only one of Professors Lizieri and MacGregor should be called to give oral evidence, with the evidence of the other being received on the same basis as that of Professor Muellbauer.  

            Martin Rodger QC                                                                              A J Trott FRICS

             Deputy President                                                                                Member

                                                                                                                        3 November 2015