Sinclair Gardens Investments (Kensington) Ltd v Ray [2015] EWCA Civ 1247

[2015] EWCA Civ 1247Case No C3/2014/2100
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (LANDS CHAMBER)
LRA482013
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 2 December 2015
Before
LORD JUSTICE MOORE-BICK VICE PRESIDENT OF THE COURT OF APPEAL CIVIL DIVISIONLORD JUSTICE LEWISONLORD JUSTICE KITCHIN
Between
SINCLAIR GARDENS INVESTMENTSAppellant(KENSINGTON) LIMITEDAppellantCHRISTINE LESLEY RAYRespondent
MR OLIVER RADLEY-GARDNER (instructed by W H Matthews &Co) for AppellantMS CHRSTINE LESLEY RAY –the RespondentHearing Hearing date : 25 November 2015
Judgment
[1]To what extent may a panel of the First Tier Tribunal rely on a decision of the Upper Tribunal on what is a question of valuation? That is the issue raised by this appeal. The appeal is brought with the permission of the Upper Tribunal (Mr Martin Rodger QC, Deputy President, and Mr AJ Trott FRICS), whose decision is at [2014] UKUT 0079 (LC). More precisely, the single ground on which permission to appeal was granted is:
“What status is to be accorded to Upper Tribunal decisions which are not “guidance cases,” and whether “non-guidance” cases of the Upper Tribunal are no more than factual decisions which ought not to be followed without more by the First Tier Tribunal.”
[2]The context in which the issue arises is a claim by Mrs Ray to an extended lease of her flat in Halesowen in the West Midlands. The claim was brought under the Leasehold Reform, Housing and Urban Development Act 1993 (“the Act”). Where such a claim is brought in England the amount of the premium payable for the extended lease is determined, in default of agreement, by the First Tier Tribunal (formerly the Leasehold Valuation Tribunal). Schedule 13 to the Act lays down a complex formula for determining the amount of the premium, but fortunately we are not concerned with the details. Suffice it to say that it consists of three components: i) The diminution in value of the landlord’s interest in the flat consequent on the grant of the new lease; ii) The landlord’s share of marriage value; and iii) Compensation for any other loss that the landlord will suffer as the result of the grant of the new lease.[3]Under paragraph 3 of Schedule 13 the diminution in value of the landlord’s interest is the difference between: i) The value of the landlord’s interest in the flat prior to the grant of the new lease and ii) The value of his interest in the flat once the new lease is granted.[4]It is only this part of the valuation formula with which we are concerned. In essence the value of the landlord’s interest before the new lease is granted consists of(a) the right to receive the rent and other sums payable under the lease and(b) his right to possession of the flat at the end of the term. Both these rights must be given a capital value. Because the right to possession will not materialise until the end of the term the landlord is not entitled to exploit the vacant possession value of the flat immediately. Thus the present value of that right is determined on the basis that the vacant possession value is deferred. This requires the application of an adjustment, called the deferment rate, to that vacant possession value. It is the annual discount applied, on a compound basis, to an anticipated future receipt (assessed at current prices) to arrive at the market value of that receipt at an earlier date.[5]The deferment rate itself is influenced by a number of factors. First, the very fact that the anticipated receipt is a future receipt means that an investor would require a return on his investment to reflect the delay in being able to realise it. This is called the risk-free rate. The appropriate proxy for this component is a zero-coupon government gilt held to redemption. Second, because of the ups and downs of the property market, and the fact that a property investment of this kind is illiquid, there is a risk that the investor will not realise the full value of the investment at any given time. He would thus require an additional return to compensate for that risk. This is called the risk premium. This serves to increase the deferment rate. Third, there is a countervailing factor. The value of the investment will appreciate inherently as the lapse of time before its realisation becomes shorter. But if property prices rise at a rate that exceeds inflation then that increase in value will also feed through to the value of the landlord’s interest. So an investor’s expectations of real increases in property prices serve to decrease the deferment rate. When the three components are put together the result is the deferment rate.[6]In the early days of the Act different tribunals adopted different deferment rates, in each case based on the expert evidence called before them. Many of the claims to an extended lease were relatively low value claims. The need to commission bespoke expert evidence was therefore burdensome, and the fluctuations in the deferment rate were an obstacle to out of court settlement. In two cases in the Lands Tribunal (the forerunner of the Upper Tribunal) that Tribunal attempted to give general guidance on the deferment rate to adopt. The first of the cases was Arbib v Earl Cadogan [2005] 3 EGLR 139; and the second was Earl Cadogan v Sportelli [2007] 1 EGLR 154 (Mr George Bartlett QC, Judge Michael Rich QC and Mr Paul Francis FRICS). Both concerned property in the prime central London area (“PCL”). In Sportelli the Lands Tribunal heard extensive expert evidence on both the investment market and the property market. After a comprehensive review it concluded that: i) The appropriate risk-free rate was 2.25%; ii) The risk premium was 4.5% but the aggregate of these components was offset by iii) A real growth rate of 2%.[7]Accordingly the Tribunal concluded that an appropriate generic deferment rate was 4.75%: see [79]. It described that rate as “a generic deferment rate, applicable to long-term property investments in general”: see [80]. The Tribunal then considered what, if any, adjustments needed to be made to that generic deferment rate. It considered and rejected such matters as length of term, location, and obsolescence and condition. I will need to return to these matters in due course. However, it did consider that an adjustment was necessary in the case of reversions to flats as opposed to houses, in order to reflect the increased burden of management of flats. The Tribunal considered that an increase of 0.25% was justified, thus resulting in a deferment rate of 5% for reversions to flats.[8]The Tribunal then turned to consider the precedential status of its decision. At [114] it pointed out that one of its functions was to promote consistent practice in the application of the law in decisions that fall within its specialist jurisdiction. At [117] it said:
“The function of the tribunal is thus to make decisions on points of law and on what may be called principles of practice to which regard should be had by the first-tier tribunals and by practitioners dealing with claims in any of the tribunal's original or appellate jurisdictions. Such principles of practice are not, in our view, confined to valuation methodology … but may extend to matters of quantification if the considerations underlying the quantification are of general application.”
[9]At [121] it said:
“It is obviously undesirable and, indeed, it would be impossible, for the sort of financial and valuation evidence that we have heard to be called and considered in every enfranchisement case. It is, in our judgment, unnecessary that it should be, because LVTs and this tribunal are entitled to rely upon their own expertise, guided by this decision. The prospect of varying conclusions on the deferment rate in different cases reached on evidence that was less comprehensive than that before us can therefore be avoided by LVTs adopting the practice of following the guidance of this decision unless compelling evidence to the contrary is adduced. This is justified because, as we have explained above, the deferment rate is unlikely to vary according to factors particular to the individual case. Some factors, including, in particular, the prospect of long-term growth, will not vary from case to case, while other factors, such as location and obsolescence, will already be reflected in the vacant possession value. … The case for adopting a single deferment rate (with a standard adjustment for flats) for all reversions in excess of 20 years is thus, in our view, strong. Indeed, we think that statutory prescription could well be appropriate and could usefully give a greater certainty to the market than a decision of the tribunal setting a guideline is capable of doing.”
[10]Finally it concluded at [123]:
“The application of the deferment rate of 5% for flats and 4.75% for houses that we have found to be generally applicable will need to be considered in relation to the facts of each individual case. Before applying a rate that is different from this, however, a valuer or an LVT should be satisfied that there are particular features that fall outside the matters that are reflected in the vacant possession value of the house or flat or in the deferment rate itself and can be shown to make a departure from the rate appropriate.”
[11]The case then went to the Court of Appeal: [2007] EWCA Civ 1042, [2008] 1 WLR 2142. The question of the status of the Lands Tribunal’s decision was one of the subjects discussed in the appeal. Carnwath LJ (with whom Ward LJ and Sir Peter Gibson agreed) considered the question at [91] to [102]. He held that, by analogy with country guidance cases in the immigration sphere, the Lands Tribunal was entitled to offer guidance and to expect LVTs to follow that guidance unless and until the legislature intervened. However he also noted at [99] that the functions of the Lands Tribunal were to be subsumed into the Tribunal Service; and that it would be for the Upper Tribunal as a superior court of record to lay down guidelines as to the precedent effect of its decisions for different purposes.[12]As I have said the Lands Tribunal rejected the argument that the deferment rate should be adjusted for different locations. The main reason for their conclusion was that differences in location would be reflected in the vacant possession value of the property in question, which was itself the value that required to be discounted by application of the deferment rate. However, in the Court of Appeal Carnwath LJ pointed out that the cases before the Tribunal had all been about properties within the PCL area and that the Tribunal had rejected the argument about location only on the evidence called before it. He said at [102]:
“The tribunal's later comments on the significance of their guidance do not distinguish in terms between the PCL area and other parts of London or the country. However, there must in my view be an implicit distinction. The issues within the PCL were fully examined in a fully contested dispute between directly interested parties. The same cannot be said in respect of other areas. The judgment that the same deferment rate should apply outside the PCL area was made, and could only be made, on the evidence then available. That must leave the way open to the possibility of further evidence being called by other parties in other cases directly concerned with different areas. The deferment rate adopted by the tribunal will no doubt be the starting point; and their conclusions on the methodology, including the limitations of market evidence, are likely to remain valid. However, it is possible to envisage other evidence being called, for example, on issues relevant to the risk premium for residential property in different areas. That will be a matter for those advising future parties, and for the tribunals, to consider as such issues arise.”
[13]In Hildron Finance Ltd v Greenhill Hampstead Ltd [2008] 1 EGLR 179 the Lands Tribunal applied the deferment rate of 5% determined by Sportelli to a block of flats in Hampstead which, although in London, was outside the PCL. The members who heard that appeal were HHJ Reid QC and Mr Norman Rose FRICS. Mr Rose was the single member, sitting as a judge of the Upper Tribunal, who heard the appeals in Zuckerman v Trustees of the Calthorpe Estate [2009] UKUT 235 (LC), [2010] 1 EGLR 187. He had previously been the single member who heard the appeals in Re Mansal Securities Limited’s Appeal [2009] 2 EGLR 87 which concerned 22 houses in different parts of the West Midlands. Mr Rose was not persuaded on that occasion that the evidence in that case was sufficient to enable a departure from Sportelli, but he emphasised that he had heard no expert evidence on behalf of the leaseholders. Mr Rose was thus well aware of the principles laid down by Sportelli. The appeals in Zuckerman related to 11 flats in Edgbaston. The judge recorded that there were another 20 appeals relating to flats in Edgbaston which had been stayed to await the outcome of the appeals. The LVT had decided that the deferment rate applicable was 5%, in line with Sportelli. The issue on the appeal was whether that was the appropriate rate. This time Mr Rose heard expert evidence from valuers instructed both by the lessees and by the lessors. The lessees’ valuer argued that the deferment rate should be increased to reflect a greater risk of deterioration and obsolescence; and also to reflect the risk that the real growth in property prices might not achieve the 2% per annum assumed in Sportelli. In support of his argument the lessees’ valuer produced evidence from Nationwide Building Society, HBOS, the Land Registry, the Valuation Office and others: see [12]. He also provided evidence of transactions within Kelton Court, the particular block of flats with which that case was concerned: see [13]. Mr Rose was persuaded in Zuckerman that, on the basis of the evidence that he had heard, a departure from Sportelli was justified. He considered that the greater risk of deterioration and obsolescence justified an increase in the risk premium of 0.25%: see [46]. In view of some of the submissions that Mr Radley-Gardner made I should set out Mr Rose’s conclusion at [51]:
“In my judgment, in spite of its undoubted limitations, the available statistical information demonstrates that the difference between past rates of long-term price increases in the PCL and in the West Midlands has been not slight but considerable. I accept Mr Rutledge's opinion that this information would persuade an investor that it could reasonably anticipate significantly slower long-term growth from residential properties in the West Midlands generally than in the PCL and I find that there was no reason to suppose that the position would be significantly different in the case of Kelton Court.”
[14]Mr Rose thus considered that an investor in property in the West Midlands would be less confident than an investor in property in PCL that real growth in property prices would achieve an annual rate of 2% over the long term. That, he considered, justified a further increase of 0.5% in the risk premium, giving a total risk premium of 5.25%: see [53]. There was a third adjustment based on difficulties in recovering service charges; but that adjustment has now been disapproved: Voyvoda v Grosvenor West End Properties Ltd [2013] UKUT 427 (LC), [2013] 3 EGLR 55.[15]What to my mind is clear from the quoted passage at [51] is that Mr Rose first considered the position of the West Midlands generally and then considered whether Kelton Court was significantly different. Although, as Mr Radley-Gardner said, Mr Rose had evidence of transactions within Kelton Court the first sentence of the quoted paragraph shows that his appreciation of the position in the West Midlands was based on “the available statistical information”. The statistical evidence on which that conclusion was based is more generally available at least to valuers, (and was known to the lessor’s valuer in our case); so I do not consider that the inability to challenge the particular transactions relating to Kelton Court undermines the value of the decision in Zuckerman.[16]Re Clarise Properties Ltd’s Appeal [2012] UKUT 4 (LC), [2012] 1 EGLR 83 concerned a house in Northfield, Birmingham. The special adjustments for flats did not therefore apply. But the question did arise whether there needed to be any adjustment to the risk premium to reflect an investor’s perception of long term real growth in property values in the West Midlands. The Upper Tribunal (Mr George Bartlett QC and Mr Norman Rose) took the generic deferment rate in Sportelli as their starting point. However, they decided that an adjustment was necessary because of evidence that prospects of capital growth were lower in the West Midlands than in the PCL. They said at [37]; “We accept Mr Evans' evidence that the prospects of capital growth were lower in the West Midlands than in PCL and that it is appropriate to increase the Sportelli rate by 0.5% to reflect this difference in line with the decision in Zuckerman. In that case, however, the tribunal, at [46] made a further addition of 0.25% because it was “likely to remain economically viable to repair high value properties in PCL for considerably longer than it will for similar sized flats in Kelton Court.” The open market value of each of the Kelton Court flats was agreed to be £158,025, which is similar to the agreed value of the appeal property. The respective floor areas of the relevant properties are not available, but in both cases the accommodation includes two bedrooms. Mr Evans did not suggest that there was any reason why the risk of deterioration of the appeal property was less than at Kelton Court and, to be consistent with the decision in Zuckerman, we find that the Sportelli rate should be increased by a total of ¾% to 5.5%.”[17]It is clear from this passage that consistency with Zuckerman was an important consideration. Mr Bartlett was the President of the Lands Tribunal who sat on the appeal in Sportelli, and clearly had no doubts about the correctness of Zuckerman or about the propriety of adopting a higher risk premium for the West Midlands. Mr Rose had of course himself decided Zuckerman.[18]In 82 Portland Place (Freehold) Ltd v Howard de Walden Estates Ltd [2014] UKUT 1033 (LC) the Deputy President (Martin Rodger QC) put it thus at [199]:
“Clear evidence of regional or locational considerations not fully reflected in the freehold vacant possession value may justify a departure from the Sportelli rate (paragraph 85, and Zuckerman v Trustees of the Calthorpe Estate [2009] EKUT 235 (LC) and Sinclair Gardens Investment (Kensington)Ltd v Ray [2014] UKUT 079 (LC)).”
[19]The second of the two cited cases is, of course, this appeal.[20]There is no doubt at common law that, leaving aside questions of res judicata or issue estoppel, a finding of fact in one set of proceedings is not only not binding, but not even admissible, in another set of proceedings. Inroads into that principle have been made over the years, but those need not concern us here. We are concerned with decisions of the Upper Tribunal and their consequent effect on decisions of the First Tier Tribunal. Under the Tribunal Courts and Enforcement Act 2007 the Tribunal Rules Committee has power to make tribunal rules. Schedule 5 paragraph 10 of the Act provides:
“Rules may modify any rules of evidence provided for elsewhere, so far as they would apply to proceedings before the First-tier Tribunal or Upper Tribunal.”
[21]Rule 16 of the Tribunal Procedure (Upper Tribunal) (Lands Chamber) Rules 2010 provides:
“(2) The Tribunal may— (a) admit evidence whether or not— (i) the evidence would be admissible in a civil trial in England or Wales”
[22]Mr Radley-Gardner’s first point in his written argument was that a previous decision of the Upper Tribunal which is not stated to have been a “starred” or “guidance” decision has no evidential value at all in a subsequent case raising the same issue. However, he did not press that submission orally; quite rightly because the rules are clearly inconsistent with that argument. His more nuanced position was that the weight to be given to a previous decision of the Upper Tribunal depended on whether it had proclaimed itself as being a “guidance case”.[23]“Starred” cases are (principally) cases of the Upper Tribunal (Immigration and Asylum) Chamber which decide points of law: NM and Others (Lone women – Ashraf) Somalia CG [2005] UKIAT 00076 at [140] cited in R (Iran) v Secretary of State for the Home Department [2005] EWCA Civ 982 at [26]. Since the Upper Tribunal is a superior court of record, its decisions on points of law bind inferior tribunals (such as the First Tier Tribunal). The correct deferment rate is not a point of law, in that sense, so we can put “starred” cases on one side.[24]The Upper Tribunal (Immigration and Asylum) Chamber also issues what are known as “country guidance” cases. These deal with the situation in a particular country and bear the designation “CG”. A country guidance case is not a binding precedent in the same way as a “starred” case. A country guidance case should be applied except where it does not apply to the particular facts of an individual case. Country guidance cases have the flexibility to accommodate individual cases, changes, fresh evidence and other circumstances: NM and Others at [140]. Unlike starred decisions it is always possible for further evidence to show that the original decision was wrong or to expose other issues that require examination: NM and Others at [141].[25]The Upper Tribunal (Lands Chamber) does not have the sort of formal designations that apply to decisions of the Upper Tribunal (Immigration and Asylum) Chamber. Nor did its predecessor, the Lands Tribunal. Indeed, Mr Radley-Gardner told us that Sportelli was the first case in which the Lands Tribunal had said in terms that its decision was intended to give general guidance. Moreover, the guidance that it gave was expressed as guidance to LVTs (now the FTT) and not as guidance to the Lands Tribunal (now the Upper Tribunal) itself. The Lands Tribunal was not a superior court of record, unlike the Upper Tribunal. In Sportelli in this court, as I have noted, Carnwath LJ said that it would be for the Upper Tribunal to lay down guidelines as to the precedent effect of its decisions for different purposes. That has not as yet been done, although there has been at least one ad hoc decision on the approach to be adopted where the unexpired lease term was less than twenty years that addressed the precedential status of the decision: Cadogan Square Properties Ltd v Earl Cadogan [2010] UKUT 427 (LC), [2011] 1 EGLR 155 (Morgan J and Mr AJ Trott FRICS). However, I do not consider that the mere fact that the Upper Tribunal has not taken the formal step of proclaiming that its decision is to be treated as a “guidance case” robs it of value for a subsequent tribunal.[26]Once one has arrived at the conclusion that a previous decision of the Upper Tribunal is admissible evidence of what it decided, then in the absence of guidelines laid down by the Upper Tribunal itself, it is a question of what weight a subsequent tribunal should give it. No doubt the extent to which the previous decision is a decision on general points of interest rather than specific facts and the cogency of the reasoning will impact on the weight to be given to a particular decision; but that is a matter for the subsequent tribunal. In this case, therefore, it was for the LVT and the Upper Tribunal to decide what weight to give to Zuckerman. That, as it seems to me, is a question of fact for the tribunal in question and is not a point of law on which an appeal lies to this court.[27]In addition in our case the LVT had evidence from Mr Brunt, the valuer called on behalf of the lessee. His evidence, which the LVT accepted, was that since Zuckerman all negotiated settlements in the West Midlands had taken deferment rates of between 5.75% and 6% (which, it should be noted, is not the same rate as that adopted in Zuckerman itself). The LVT itself said at [17] that following Zuckerman “it is now generally accepted that in the Midlands area a higher deferment rate should be adopted.” Having made that statement, the LVT adopted the deferment rate in Zuckerman, namely 5.75%. Thus the LVT’s selection of the appropriate deferment rate was not simply based on the decision of the Upper Tribunal in Zuckerman but also on the expert opinion of Mr Brunt and on the effect that that decision had had in the real world. In reaching their conclusion the LVT were also entitled to rely on their specialised general knowledge as is the case with many expert tribunals, and as the Lands Tribunal confirmed in Sportelli at [121]. It cannot be said that there was no evidence upon which the LVT came to their conclusion. Nor, in my judgment, can it be said that their judgment was perverse. Whether the decision was right or wrong on the facts, the LVT’s decision does not, in my judgment, reveal any error of law.[28]Mr Radley-Gardner began to develop an oral argument to the effect that Zuckerman was itself wrongly decided. This argument was not put to the LVT and, I infer, was not put to the Upper Tribunal either since it is nowhere mentioned in the Upper Tribunal’s very full decision. Nor in my judgment is it encompassed in the single ground on which permission to appeal was granted. Nor did it feature in the skeleton argument. In my judgment this argument is not one that was open to the Appellant.[29]Since the only permitted ground of appeal from the First Tier Tribunal to the Upper Tribunal (or from the Upper Tribunal to this court) is an error of law, it follows that in my judgment this appeal should be dismissed.[30]I agree.[31]I also agree.

Cited in 2 later judgments