MARYLAND ESTATES LIMITED v CAMPANA COURT LIMITED LRA/21/2000

UPPER TRIBUNAL
LANDS CHAMBER
LRA/21/2000Case No LRA/21/2000
Between
MARYLAND ESTATES LIMITEDApplicantCAMPANA COURT LIMITEDRespondent
Before
P R Francis FRICSVenue 48/49 Chancery Lane, London, WC2A 1JRDate 23 January 2001Hearing 22 and 23 January 2001Property: Campana Court, 4-5 Blenheim Road,, Barnet, HertsCatchwords: LEASEHOLD ENFRANCHISEMENT – price payable for freehold of flats – value of freeholder’s interest - assessment of marriage value – yield – uplift – hope value – analysis of settlements and auction results – Leasehold Reform, Housing and Urban Development Act 1993, Schedule 6 paras 2-4 – price determined at £33,300
[1]This is an appeal by the landlord, Maryland Estates Limited (“the appellant”) against a decision of the Leasehold Valuation Tribunal for the London Rent Assessment Panel (“the LVT”) dated 18 April 2000, relating to a collective enfranchisement claim made under s24 of the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”) concerning premises at Campana Court, 4-5 Blenheim Road, Barnet, Herts (“the subject property”). The LVT determined the amount payable for the freehold interest in the sum of £22,000.[2]The appellant was represented by Stephen Jourdan of counsel who called Laurence Nesbitt BSc FRICS ACIArb to give valuation evidence. The nominee purchaser, Campana Court Ltd, which did not cross-appeal and accepted the LVT’s determination, was represented by Stan Gallagher of counsel who called Bruce Maunder-Taylor FRICS MAE to give valuation evidence. FACTS[3]The parties produced a statement of agreed facts and issues from which, together with the expert witness reports and evidence given at the hearing, I find the following facts:3.1 The appellant is the freehold owner of the subject property which comprises a 1960’s three-storey block of 9 self-contained flats (3 per floor) constructed of brick under pitched tiled roofs. It is located at the end of a cul-de-sac, close to the centre of the Barnet, adjacent to school playing fields and opposite tennis courts. The flats each have a garage at the rear lower ground floor level (the development occupies a sloping site), and there are four visitors spaces and an area of communal gardens.3.2 The flats are of two similar types, each having three rooms, kitchen, bathroom and w.c., and all are subject to leases for a term of 99 years from 25 December 1968, thereby, at the valuation date, having approximately 69 years unexpired, at fixed ground rents of £26.25 each (£236.25 aggregate). There are no head-leases or intervening interests between the 9 flat leases and the freehold interest.3.3 Each lessee is liable to pay one ninth of the service charge together with additional charges, limited under the lease to 10 per cent of the rateable value, for administration and management. Since the abolition of the domestic rating system that percentage has increased, but it is agreed that there is no current dispute in that regard. The lessees also covenant to reimburse the lessor for the cost of insurance effected by the landlord.3.4 6 of the 9 lessees are participating tenants, and the appellant accepts the respondent nominee purchaser is entitled to require the transfer of the subject property on behalf of them. Flats 3,4 and 5 are non-participating.3.5 The values of the existing leasehold interests, at the agreed valuation date of 11 January 1999, are agreed at 3 Flats1,2,3,5,7 and 9 at £130,000 each £780,000 Flats 4,6 and 8 at £120,000 each £360,000 Total £1,140,000 The value of the participating leases is £760,000. It is also agreed that marriage value should be shared 50/50. ISSUES[4]In the original appeal to the LVT the nominee purchaser had sought a determination of the enfranchisement price at £21,400 and the freeholder had argued for £54,600. The LVT determined an enfranchisement price of £22,000. In this appeal, the appellant freeholder contended that the LVT gave insufficient weight to its expert valuer’s evidence particularly in respect of comparable sales and settlements under the Act. It also incorrectly directed itself as to the law, or failed to take proper account of the facts relating to the effect on the calculation of marriage value of seven benefits which the participating tenants would enjoy following enfranchisement.[5]In determining the two relevant elements to the price to be paid on enfranchisement, namely(i) the value of the freeholder’s interest and(ii) the freeholder’s share of the marriage value, it is agreed that the 3 issues for this Tribunal to consider are: a) Yield. The yield to be applied to capitalise the ground rent and to calculate the value of the right to possession at the expiry of the leases. b) Uplift. The amount of the uplift from the value of the existing leases with 69 years unexpired to the value of 999 year leases with a share of the freehold. c) Hope value. Whether the valuation of the freehold should include any hope value for the expectation by the purchaser that he can anticipate, in due course, receiving premiums from tenants in return for agreeing to extend the terms of their leases. Also, as a matter of law, if hope value is found to exist, whether it should be applied to both participating and non- participating flats. APPELLANT’S CASE[6]In opening, Mr. Jourdan said the issues on yield and uplift were purely valuation related and to be decided on the evidence. Regarding hope value, and following the recent Lands Tribunal decision in Re: Shulem B Association Ltd [2001] 11 EG 175 he said that Mr. Nesbitt had prepared a revised valuation to that which had been submitted to the LVT. The original valuation had suggested a ‘market’ approach of £2,000 per flat, to include an element of hope value on all of them, in addition to the traditional yield basis for calculating the value 4 of the reversion. This approach had been dismissed by the LVT. The revised valuation allowed an element of hope value in respect of the non-participating flats only, and amounted to £54,682 – just £82 more than his original assessment. However, Mr. Nesbitt had subsequently produced a further revision, upon which it was intended to rely, this again allowing for a hope value element in respect of all the flats, but taking the hope value element for the six participating flats only into the calculation of marriage value. This valuation amounted to £57,600.[7]Mr. Jourdan said that in Becker Properties Ltd v Garden Court NW8 Property Co Ltd [1998] 1 EGLR 121 HH Judge Marder (President) had indicated that he considered hope value should be included if the evidence justified it. The head-note to the decision summarised the point:
“…if there were value in the expectation that a non-participating tenant would seek a lease extension at a premium, such value should be taken into account. On the evidence [of that case] there was no such value”
. In the Shulem B Association decision the Tribunal (N J Rose FRICS) held on the evidence that there was such hope value in respect of the non-participating flat.[8]There is an issue of principle, Mr. Jourdan said, as to whether the hope value should be taken into account on all the flats – participating and non-participating, if the evidence justifies it. Mr. Nesbitt’s further revised valuation of £57,600 reflected this approach (which accorded, Mr. Jourdan said, with the true construction of Sch 6 of the 1993 Act).[9]Mr. Nesbitt is a chartered surveyor who practises on his own account as Laurence Nesbitt, Chartered Surveyors of Edgware, Middlesex and specialises in landlord and tenant matters and leasehold reform. He said that in assessing the value of the freeholder’s interest a good source of evidence is the analysis of auction sales of ground rents, and produced a schedule of results from a sale held by Allsops on 15 September 1998. He also produced a schedule of transactions that had been arranged by private treaty through a firm of ground rent brokers.[10]Whilst, historically, the principal return an investor would consider when determining an appropriate multiplier was the ground rent income, Mr. Nesbitt said that professional investors now recognise the additional actual and potential sources of income that may be available. These include commission from insurance premiums, management fees, premiums obtained from granting deeds of variation in defective leases, for granting lease extensions, and for granting new rights. This had the effect of substantially increasing the traditional single multiplier, especially in respect of the granting of lease extensions where, as in the case of the subject property, there were only 69 years remaining on the leases. Accepting, as he did in cross-examination, that analysis of auction results from the limited information given in the auction brochure may not reflect the additional attributes he had mentioned, he said the average return of 6.28 per cent (calculated by averaging the auction results with a YP of less than 20) and the average return on the private treaty sales that he had analysed at 8.39 per cent, served to endorse the 8 per cent yield he had used in his valuation. 5[11]It was Mr. Nesbitt’s view that where leases had more than 70 years to run, they could be considered ‘entirely reversionary’ (the only value being in the reversion), but any having less than 70 years would bring to the valuation an element of ‘hope value’ that could substantially affect the price an investor would pay. This was demonstrated by comparing two of the auction results he had referred to. To all intents and purposes lots 134 and 136 in the Allsop’s sale were identical save for the unexpired term of one of the leases. Each lot contained a modest semi-detached house in Edgware, North London divided into two maisonettes. Lot 134’s had unexpired terms of 110 and 115 years respectively and sold for £1,100, whilst lot 136’s had 114 and 64 years remaining and sold for £3,300. The difference of £1,900, Mr. Nesbitt said, reflected the additional value attaching to the 64 year unexpired term. Due to the fact that he considered the reversionary value of the longer leases to be de minimis, he analysed the hope value at £1,355.[12]In his analysis of private treaty sales he had obtained full details from the brokers that handled the sales of two specific properties where leases had less than 70 years remaining. These showed that in one, Brownlow Lodge, New Malden, (average lease term 63 years) the price paid equated to £2,375 per flat. In the other, Belle Vue Mansions, Bournemouth, (average lease terms 61 and 64 years) the price equated to £1,875 per flat, and the sales particulars had specifically highlighted the opportunity to grant lease extensions. If the prices paid had been expressed as a multiple of the rent (169 times and 114 times respectively) the result would have been substantially out of line with the prices paid on properties with longer unexpired terms (ranging from 9 to 27 times). He calculated that, excluding the value of the rent and reversion in each case, the hope value became £1,574 per flat on Brownlow Lodge and £1,086 per flat on Belle Vue Mansions. Mr. Nesbitt said that he had been given access to the files relating to these sales, and he had therefore been able to establish that there were no other factors that could have affected the price.[13]Mr. Nesbitt said that as a result of his investigations, he thought that it was appropriate to consider a ‘market approach’ rather than the traditional multiplier, and in respect of the subject property had concluded that a figure of £2,000 per flat was appropriate. In his original valuation submitted to the LVT this amounted to £18,000 and, he explained, that figure included the ground rent and reversion elements. Using the 8 per cent yield he had mentioned for the reversion element, this resulted in £972 per flat (participating and non- participating) specifically representing hope value, and the enfranchisement figure became £54,600. [See Appendix 1 to this decision][14]In his first amended valuation, he had applied the additional element of hope value to the non-participating flats only in accordance with Becker and Shulem B Association. [See Appendix 2] and the result was virtually the same (£54,682). In his further amended valuation [See Appendix 3] he had again applied hope value at £972 to each one of the 9 flats, but in calculating the marriage value, had included the hope value for the 6 participating flats only (this according with Sch6, para 4 of the 1993 Act). Thus by taking a lower figure for the value of the freeholder’s current interest (than had been done in the original valuation), this served to increase the marriage value. The resulting increased enfranchisement figure of £57,600, Mr. Nesbitt said, reflected the reality of the landlord’s situation in the real world. 6[15]The landlord, he said, would expect to be able to achieve a premium in the market, and that prospect would be reflected in the price. There is nothing in Schedule 6 to the Act that says that prospect must be ignored. The fact that, under the Act, only the participating flats could be taken into account in calculating the marriage value was reflected in his latest valuation. Whilst the first revised valuation (at £54,682) followed the precedent set in the cases he had referred to, he said he could see no reason why hope value could not be included for all the flats. As Mr. Jourdan had said in opening, there was nothing in Schedule 6(3)(1) that directs the exclusion of hope value – the assumptions being specific as to two things that must be excluded, namely the right to acquire the freehold and the value of tenants improvements. Mr. Nesbitt said that hope value could, to the investor, be the most important or valuable aspect of what he is buying.[16]As to the yield he had used for the reversionary element, Mr. Nesbitt stressed that his use of 8 per cent was based on taking a broad overview of the auction results, settlements and private treaty sales and could not be put down to a specific calculation based narrowly on individual comparables.[17]Mr. Nesbitt had also considered settlements, with which he had personally been involved, relating to sales of freeholds and lease extensions under the 1993 Act, in respect of calculating the appropriate uplift (in order to calculate the marriage value) and in support of the 8 per cent he had used in respect of the reversion. He had concluded that these were relevant as comparables because there had not been a rise in the value of freehold reversions resulting from the Act, contrary to Mr. Maunder-Taylor’s views. In his view, the reasons prices had increased were the general reduction in interest rates from 1993 to the present day; the recognition by lending institutions that ground rent investments produce a secure investment and guaranteed income flow, and thus the availability of funding and newly developed computer software making ownership and management considerably easier.[18]Firstly, regarding applications for lease extensions, he produced seven comparables where unexpired terms ranged from 64.75 to 70.5 years, and the uplift to the virtual freehold had been agreed at 12.3 to 15.8 per cent. Mr. Nesbitt had acted for the freeholders in the first three (and Mr. Maunder-Taylor had acted for the lessees), and for the lessees in respect of the other four. The calculations relating to the value of the freeholders’ interest had been taken at 10 per cent to reflect the landlord’s right to ground rent and insurance premiums. Mr. Nesbitt said these figures fully supported his ‘reasonable’ application of a 12 per cent uplift for the subject property.[19]Evidence of two negotiated freehold sales of blocks of flats was also produced. The first, Angel Hill Court, Sutton, Surrey comprised 6 flats with 71.75 years unexpired where the uplift amounted, on his analysis of the transaction, to 10 per cent. Secondly, 32 Clifton Road, London N8, a block of four flats with 73 years unexpired had been valued by Mr. Nesbitt at an enfranchisement price of £11,300 which also represented a 10 per cent uplift, although the sale price finally agreed was £10,500. He said that the reason for the reduction in price was not attributable to the uplift, but to an adjustment in the value of the freeholder’s interest due to separate multipliers being used for ground rent and the right to receive insurance commission. 7[20]Mr. Nesbitt said he had also considered the Lands Tribunal decisions in Maryland Estates Ltd v 63 Perham Road Ltd [1997] 2 EGLR 98 and Maryland Estates v Abbathure Flat Management Co Ltd [1999] 1 EGLR 100. In both of those the Lands Tribunal had increased the LVT’s uplift to 5 per cent plus an amount calculated at 7 YP to reflect the elimination of ground rent. He said that in his opinion the Tribunal’s decision that the total uplift should be assessed by reference to an additional value attributable to the elimination of ground rent was correct. The valuation of the virtual freehold under the control of the participating tenants must be greater due to their having the opportunity to extinguish their existing ground rents. This benefit can be easily quantified by applying the appropriate multiplier to the ground rent payable.[21]Mr. Nesbitt said that, under para 4 of Schedule 6 to the 1993 Act he is required to value the interests under the control of the participating tenants compared to the aggregate value of the interests held by the person from whom they are to be acquired. He agreed with the Lands Tribunal that owners of leasehold properties would pay a sum equivalent to seven times the ground rent in order to eliminate it, and by assessing that particular benefit separately it could be clearly seen what proportion that bore in relation to total uplift. However, in respect of his valuation of the subject property, he had not assessed the benefit separately, and had included it within his overall uplift of 12 per cent.[22]Finally, in respect of what he had taken into account in calculating the appropriate uplift, Mr. Nesbitt referred to the graph that had been prepared by Cluttons Daniel Smith in relation to settlements on the John Lyon’s Charity and Eyre Estates in North London which indicated a 19 per cent uplift.[23]In assessing the increase in value of the existing leasehold interest when regarded as being under the control of the participating tenants, Mr. Nesbitt said there were 7 benefits that had to be taken into account. These are the ability for the participating tenants to: Extend their leases at no premium Vary the terms of the leases Effectively extinguish the ground rent[4]Manage the property themselves and thus control management charges[5]Carry out repairs at their own choosing and to control costs Eliminate possible disputes with the landlord[7]Grant themselves new rights over the property He said that in Abbathure the Tribunal had determined that it was right in principle to take account of any increased value that these benefits might bring for the purposes of determining marriage value, and in his view all seven benefits applied in the case of the subject property. He noted that 3 of the flats were owned by non-residents, and thus had no rights to renew their leases under the Act. They would therefore benefit from a variation on the existing user clause. 8[24]Regarding Mr. Maunder-Taylor’s evidence, and his contention that a 5 per cent uplift was appropriate, Mr. Nesbitt said he did not agree that the ‘profile’ of the residents at the subject property was mainly of retired people, who were unlikely to have mortgages, and would be less interested in purchasing longer leases. Whilst flat 6, that had been sold in 1997, was to a retired person, and some of the existing occupants of other flats were older, some of the flats were now let to younger people, and the mix was therefore changing. The flats were of a type that, due to the proximity to schools and the town centre, were likely to appeal to divorcees and single parents who would require mortgages. Thus the unexpired term would be of increasing importance.[25]Mr. Maunder-Taylor had referred to the sale of Museprime Limited (which at the date of the hearing had not completed), a property investment company with a portfolio of ground rent investments. Mr. Nesbitt said that the suggestion the agreed price (which represented 22 YP or 4.54 per cent) was more than would have been the case in the pre-1993 Act world was not correct. Conversely, in his experience, investors were likely to pay less as a result of the Act – the ability of the lessee to demand enfranchisement rights being a disadvantage in comparison with the situation that prevailed pre-1993. Before the Act, owners could name their price for enfranchisement, although it was accepted that at heavily inflated prices it was unlikely the deal would proceed. He also thought that the sale of the whole Company would be less attractive than just the freeholds that it owned.[26]In response to Mr. Maunder-Taylor’s evidence relating to lease extensions he had negotiated on flats with between 60 and 75 years unexpired, Mr. Nesbitt said that those relating to South Lodge, Barnet appeared to suggest an uplift of 11 per cent (taking account of his own knowledge of sale prices in the area and reflecting inflation) although, as with Barrydene, the lack of formal analyses or sufficient detail, meant certain assumptions had to be made. Mr. Nesbitt analysed the evidence on 73 Woodville Road at an uplift of 14.8 per cent (70 years unexpired), and Cromwell Close, London N2 at 13.2 per cent (61 – 63 years unexpired). This information supported the fact, he said, that he had been conservative in applying 12 per cent to the subject property, especially as he had included in that figure an element of additional value representing the share of the freehold.[27]In cross-examination, Mr. Nesbitt said that his selective analysis of the auction results (excluding those of over 20 YP) did not reflect the attributes such as the possibility of earning commission on insurance premiums, fees for granting deeds of variation and other aspects that might reflect hope value. He had simply analysed the price paid in relation to the ground rent income to give the average yield of 6.28 per cent, and agreed that any sales where the yield was over 20 YP would almost certainly have had some hope value (or some other benefit such as development potential) built in.[28]Asked why he had only analysed lots 134 and 136 from the Allsop’s catalogue, and ignored lots 130 (75 years unexpired) and 131 (74 years unexpired) where the price difference was very small, Mr. Nesbitt said this proved his argument that leases with over 70 years unexpired would have little if any hope value. Lot 133 that had 75 years unexpired and a larger price difference than 130 and 131 had not been used because that represented a YP of 23 – over his benchmark. He stressed that in analysing a sample of 16 lots that fell 9 within his parameters to give the average of 6.28 per cent, he was demonstrating only the sort of reversionary yield that a purchaser would expect to derive.[29]Whilst accepting that in any analysis there were a number of imponderables, Mr. Nesbitt did not accept that, in arriving at his estimate of £2000 per flat for the value of the freehold interest, he had only relied upon one un-researched auction result (lot 134) where he did not, for instance, know the age of the tenant. He had referred in his evidence specifically to two other transactions and all three (at circa £1,800, £1,900 and £2,375 respectively) had led him to his conclusion.[30]As to the private treaty sales at Brownlow Lodge and Belle Vue Mansions he had received full information from the ground rent brokers. These, together with the fact that he had used similar type properties for comparables, and from his wide experience of the market led Mr. Nesbitt to feel confident that he had carried out adequate research. His reasoning for using a single ‘per flat’ figure for the value of the freehold reversion reflecting hope value was that that was how investors would approach the calculation. He had also not used any sales where properties had been purchased by the tenants.[31]It was suggested that analysing, on very limited information, a large quantity of comparables of both auction and private treaty sales, to produce average yields of 6.28 and 8.69 per cent for the value of the reversionary element was more risky than carrying out a quality analysis of fewer properties. Mr. Nesbitt said it depended upon the type of property being valued. Ground rent investors made up their own minds, and it was for the valuer to analyse what they had paid on the traditional and accepted basis. By restricting his analysis on the basis he had (for example, excluding prices equating to more than 20 YP) Mr. Nesbitt felt his results were reliable. In his experience, he said 70 years was the benchmark at which hope value came into play, but he accepted that a year or two either way made a marginal difference. The suggestion that hope value would only come into play at the point that mortgage lenders started to show concerns about the term remaining (agreed to be at about 55 years), was not accepted as relevant. It was the lessees who started to show interest in extending their leases at about 70 years, and Mr. Nesbitt said his evidence proved this to be the case.[32]He said that he advised lessees who have 71 or 72 years remaining to ‘get on with it’, and start negotiating lease extensions, but did not think that, once the unexpired term fell below 70 years, there was necessarily a sliding scale, relating to hope value, as to prices say between 69 and 65 years.[33]Responding to the suggestion that the per-flat basis was not the traditional way of valuing the freehold reversion, and may result in double-counting, Mr. Nesbitt said that how it was expressed did not matter. His valuation of £2,000 per flat was made up as to £972 per flat for hope value, with the balance being the reversionary element calculated at an 8 per cent yield. He did not accept that the 8 per cent deferment rate included an allowance for future potential. It would have to be revised if hope value were to be included in that figure, the price achieved reflecting both the income stream and any other potential. Mr. Nesbitt pointed out that in the three specific cases he had looked at to arrive at the £2,000 per flat 10 figure, he had analysed them in exactly the same way – stripping out the reversionary element and treating the rest as hope value.[34]Of the seven attributes to be taken into account in calculating the marriage value, Mr. Nesbitt accepted that in this instance some of them would add little if any value, but felt that the major ones were the ability to grant leases at no premium, and the right to a share of the freehold. As to uplift, he accepted that he had been unable to agree the analysis of the first three comparables where Mr. Maunder-Taylor had acted for the lessees, but the other four he had referred to had been specifically agreed. It was suggested, in regard to the first of the three un-agreed comparables (Flat 10 Henley Court, London N14) where Mr. Maunder- Taylor had valued it at £3,600, Mr. Nesbitt had valued at £7,000 and the final price agreed was £5,190, that there may have been a Delaforce effect which meant the tenant paid over the odds. Mr. Nesbitt said that the Delaforce effect worked both ways and in any event, he had prepared his analysis on the basis of the settled price.[35]It was suggested that by only using one comparable in his settlement evidence (14 Yale Court, NW6) where the unexpired term was over 70 years (and that being only 70.5 years), the Tribunal would not have a fair balance to consider. Mr. Nesbitt said the ones he had used were the closest to the unexpired term in respect of the subject property, and although marginally over the benchmark, he had used Yale Court to assist in establishing the appropriate uplift. In that case he had acted for the tenant, who had understood the enhancement (12.3 per cent), and had a signed confirmation from the landlord’s surveyor, agreeing his breakdown as a true and fair analysis of the settlement. The uplifted value of £140,000 on enfranchisement was not, he accepted, an open market transaction but had been based upon comparable evidence and, as he had said, that figure had been agreed with the landlord’s surveyor.[36]As a general point, Mr. Nesbitt accepted that there would be a material difference in uplift between 65 and 69 years, this being different from hope value where there would, in his view, be no difference.[37]Regarding the Angel Hill Court analysis, Mr. Nesbitt said that he had not included an element of hope value as there were 71.75 years unexpired. He accepted that the uplift (11 per cent) was his professional opinion and not an open market transaction with which he had been involved. As the property was outside his normal area, he had obtained the relevant information from the agent who had negotiated the settlement.[38]Responding to the suggestion that settlement evidence was less reliable than open market transactions, Mr. Nesbitt said he had relied upon a whole body of evidence. As to comparables he had only included what he had available, but had also considered (but not relied upon) Lands Tribunal and LVT decisions. In his view, his evidence demonstrated a balance and gave the broad picture that was necessary to support his conclusions. Regarding the two decisions he had referred to in evidence Perham Road and Abbathure, where the Tribunal had determined a 5 per cent uplift, he accepted that the tenants had not been represented in the former, and in the latter, the Tribunal had ‘done the best it could’ having rejected the evidence. 11[39]Finally, in connection with Mr. Maunder-Taylor’s addendum evidence he said he had had to form his own conclusions as that evidence was devoid of analyses – for instance, no uplift percentages had been given. RESPONDENT’S CASE[40]In opening, Mr. Gallagher said that whilst the parties agreed that the hypothetical valuation required assumes there were no statutory rights of enfranchisement, the parties were not agreed as to the application of this disregard. It was Mr. Maunder-Taylor’s submission that the 1993 Act had served to increase the amount investors were prepared to pay for freehold reversionary interests, whereas Mr. Nesbitt contended it had made no difference. Thus, he said, the use of comparable evidence from post 1993 Act transactions was tainted and unreliable.[41]As to hope value, whilst it was accepted that in principle any additional value attributed by the market to the prospects of negotiating lease extensions with the non-participating tenants formed part of the freehold reversionary interest, the amount of that additional value (if any) was in question. It was the respondent’s case that for hope value to arise, there must be a clear basis for a market perception that a lease extension may be negotiated in the short to medium term. The evidence did not show market perception to be a function of the unexpired term. There were many examples, Mr. Gallagher said, of leases with shorter than the subject 69 years where tenants had no interest in extending their leases – especially where the tenant profile was of older people. The fact that the non-participating tenants were not participating meant they had no interest in extending their leases.[42]Tenant profile was also a factor to be taken into account in calculating the uplift. Whilst it was accepted that 6 of the 7 headings referred to by Mr. Nesbitt could (subject to evidence) have an effect, the ability to extinguish ground rent should not be included. To do so effectively amounted to double counting – diminution in the value of the freehold interest offsetting any increase in value of the leasehold interest. It was notable, Mr. Gallagher said, that the appellant had refrained from assessing a separate figure for the elimination of ground rent both before the LVT and this Tribunal.[43]Mr. Gallagher said the use by the appellant of settlement evidence, and that relating to unresearched auction results created fundamental problems. Firstly, whilst the Lands Tribunal had accepted the reliability of settlement evidence on high value estates such as those in North London referred to by Mr. Nesbitt and shown in his graph, the Delaforce effect was likely to render settlement evidence significantly unreliable in cases where the value of the interests was low relative to likely costs of litigation. This was the case with the subject property where the tenants did not have the support of a residents or tenants association, and where they were likely to be anxious to conclude negotiations without recourse to costly litigation, or the delays associated with a tribunal hearing. The terms of settlement were likely to reflect the relative strengths and weaknesses of the parties and the constituent parts of the complex valuation exercise, which were often not agreed, could be dis-aggregated with infinite variation. Settlement evidence was also likely to relate to volume transactions which necessitate an element of averaging – often losing details of 12 important individual circumstances. It was usually also ‘time-series data’ and there was no guarantee that values or trends remained constant over a period of time. The reliance upon unresearched auction results suffered the same failings as settlement evidence, except for the Delaforce effect.[44]In summary Mr. Gallagher said that the best evidence was a limited number of good local market transactions, individually analysed by a valuer with intimate local market knowledge.[45]Mr. Maunder-Taylor is a chartered surveyor, a member of the Academy of Experts and a partner in Maunder-Taylor, Chartered Surveyors of Whetstone, London N.20. He has dealt with leasehold reform matters since 1995. He produced the expert witness report that he had presented to the LVT hearing, together with an addendum report prepared for this appeal.[46]In his main proof, he had valued the freeholder’s current interest on the basis of a 10 per cent yield on the strength of his market knowledge. He said that he had noted, in auction sales of blocks of flats for Fairview, often several blocks were put together in one lot. This had the effect of reducing purchase costs which was reflected in the price a purchaser would be prepared to pay. Conversely with small, single lots, and smaller blocks with low aggregate ground rents (such as the subject property) investors would often carry out their own conveyancing to reduce purchasing costs.[47]As to marriage value, Mr. Maunder-Taylor submitted that the landlord was not entitled to any in respect of the 3 non-participating flats, each of the lessees on being offered the opportunity to participate, having refused to do so. In concluding that an uplift of 5 per cent was the appropriate figure on the participating flats, he said that he had considered the profile of the flat owners being older people with no, or only small, mortgages who would not be suffering mortgagee pressure to extend their leases. The market was strong in January 1999 and he was not aware, in his experience, that properties with only 69 years unexpired suffered any material discount.[48]Mr. Maunder-Taylor’s valuation was thus: Value of freeholder’s current interest Ground rent receivable £236.25 YP @ 10 per cent 10 £2,363 Reversion to: 9 flats @ £125,000 £1,125,000 PV of £1 deferred 69 years @ 10% 0.0013929 £1,567 13 £3,930 Marriage value Value of 6 participating flats after enfranchisement £750,000 Value of 3 non-participating flats as above £1,310 Less Value of 6 flats with existing lease (at 95% of post- enfranchisement value) (£712,500) Value of freeholder’s current interest (£3,930) Marriage Value £34,880 @ 50 per cent £17,440 £21,370 Say £21,440 The valuation was prepared before the parties’ subsequent agreement regarding the current value of all the flats.[49]In his supplementary report, Mr. Maunder-Taylor sought to amplify the evidence upon which he said he based his conclusions on yield and uplift in his initial report, although he accepted in cross-examination, that no reference to specific comparables or analysis of transactions had been made in that report. He referred firstly to the prospective sale of Museprime Limited, an investment company that held a portfolio of residential ground rents and with which he was personally involved. He said the interest in, and the price agreed for this company, indicated that prices for portfolios of investment property had increased subsequent to, and as a result of the 1993 Act. This was because purchasers could now expect to purchase at investment value, collect ground rent income whilst they hold the investment, and at some future date sell with the benefit of that income together with half the marriage value and recoverable costs.[50]Prior to the 1993 Act, because there was no guarantee that tenants would apply to extend their leases, and if they did there were no ground rules as to procedure or price to be paid, what happened in reality depended on the policy of the investor or freehold owner. He could quote an unrealistically high price and then hope to buy-in the remainder of the lease at a low price if the tenant could not afford, or was unwilling to pay. The result was that a significant number of flats with less than 90 years unexpired came onto the market, and in Mr. Maunder-Taylor’s experience those with around 60 years unexpired could achieve virtually full value. 14[51]The consequence of these considerations was that, pre the 1993 Act, investment interest in suburban ground rents was considerably less than it was in the post 1993 Act world.[52]Mr. Maunder-Taylor then referred to Verkan & Co Ltd v Byland Close (Winchmore Hill) Ltd [1998] 2 EGLR 139 in stressing the value of good comparable local evidence of sales against settlements and auction results where, as he had said, the averaging process could lead to relevant adjustments for individual circumstances, that may well be appropriate, being lost.[53]The reasons for treating unresearched auction results with some scepticism included the fact that it would not be known whether the tenant was bidding (such bid having to be disregarded under para 3 of Schedule 6 to the 1993 Act); whether or not the landlord was bidding up to the reserve; whether there was any ‘added value’ such as contemplated by para 2(1)(c) of Schedule 6, or whether there were any outstanding disputes.[54]As to the auctions of Fairview flats which he had considered in connection with the yield, he said that those were all offered to the tenants first and there was a management company owned and controlled by the lessees – this absolving the landlords from any risk as to management responsibilities. Insurance was to be arranged through Fairview, thus, presumably, entitling it to commissions on premiums. As a general point he said that auctions at the relevant time were, of course, in the post 1993 Act world.[55]Mr. Maunder-Taylor explained his involvement with South Lodge, Barnet as a director and shareholder of the investment companies that owned the freehold and as the person who negotiated lease extensions on the flats. Quoting examples of where he had only been able to achieve £1,000 for a lease extension in 1995 when the landlord wanted to make sales, but only one of the tenants was interested, and where extensions had achieved premiums of up to £5,000 each in 2000 when the tenants approached the landlord, he said this proved the effect of variable negotiating strengths. In undertaking valuations, such as the one he had prepared for the appeal flats, he said that he undertook them in accordance with the provisions of the 1993 Act, therefore neither reflecting a low price from a landlord when he particularly wanted to make a sale, nor a high price from a tenant when he particularly wanted to make a purchase.[56]Moving onto the history of the marketing and lease extension negotiations on ‘Barrydene’, two blocks totalling 36 flats in Whetstone, N20, Mr. Maunder-Taylor said that agreements had been reached at £10,000 per flat on three of the units (where notices under the 1993 Act had not been served). At 73 Woodville Road, Barnet, a block of four purpose built flats, he had negotiated in 1995 a 90 year lease extension on one of them at £3,000 (reduced from the £5,000 asking price in return for a ground rent of £100 per annum), where there had been 70 years unexpired. Regarding Cromwell Close, N2, he produced correspondence from the surveyor who had been acting for the tenants in negotiations for lease extensions and freehold acquisitions, together with a copy of a schedule agreeing the proposed figures from the landlord company, for whom Mr. Maunder-Taylor was acting. This appeared to show that lease extensions on flats with about 74 years unexpired were selling for £5,630. 15[57]In cross-examination, Mr. Maunder-Taylor accepted that he had not relied upon any particular market evidence in reaching his conclusion that a deferment rate of 10 per cent was appropriate. He said that he did not keep notes or analyses of specific deals, but had purely exercised his professional judgment and if ever he wanted to know what was happening in the market, he would ring a his investor associate (Mr. Henley of Museprime Limited) for details. In putting together his addendum statement to prove his figures, he said it took one and a half days to prepare, and there was a limit to the time he could expend on the exercise.[58]The yields from the Fairview results referred to in his addendum report showed, he said, a range of 7.5 to 9.5 per cent, and the ground rents he purchased on behalf of Mr. Henley were in the range 7 to 10 per cent, although he accepted that he had not produced any evidence to support those statements. As to why he had not referred to the auctions of Fairview properties in his original report, Mr. Maunder-Taylor said that although he had the information to hand at the time of the LVT hearing, he had not considered it necessary to refer to the information, as the LVT would not, in his view, “want to hear the same old evidence, over and over again”. The LVT hearing was expected to be short, and he did not think it appropriate, or economically viable, to produce a detailed report and analysis for the tribunal. He accepted that his failure to refer to the evidence that he was now relying on in the original appeal meant that, despite his statement to the contrary, he had not indicted all his sources in accordance with the requirements for expert witnesses.[59]As to the sale of Museprime Limited, Mr. Maunder-Taylor said this was the first time he had acted in the sale of a ground rent portfolio. At the date of the hearing the sale had not completed, but he accepted that, if it proceeded at the price agreed, it would represent a 4.5 per cent yield (22 YP) and in his view the price was much higher than it would have been in the pre-1993 Act world. He thought (although could not confirm) that the purchaser had been attracted by a large number of small properties on long leases (in terms of spreading the cost of purchase) and in his view there was a substantial Delaforce effect. Conversely, it was his view that with the subject property, there were only six tenants to share the costs and there was therefore little if any Delaforce effect. Mr. Maunder-Taylor did not agree with the appellant’s suggestion that the sale of a company would have an adverse effect on the price achieved. The opposite would be true in that when selling the company rather than individual properties no notices had to be served on the tenants under the Act.[60]In response to the suggestion that the result of the 1993 Act giving tenants the right to purchase at a price fixed by a third party served to depress the value of the freehold rather than enhance it, Mr Maunder-Taylor said he disagreed. Whilst he accepted that the tenant’s ability to compel a landlord to grant a longer lease (or sell the freehold at a pre-ordained price subject to the requirements being met) was an advantage to the tenant, he said that, in reality, it did not work like that. In many blocks insufficient numbers of tenants were willing to participate in the acquisition of the freehold and, as he had said, the costs of obtaining a lease extension were high.[61]In respect of his opinion that the requirement of mortgage lenders for longer leases, which he said was more prevalent post the 1993 Act and was one of the elements that had served to push up prices, it was accepted that at 69 years unexpired, there would be little if any effect. Mr. Maunder-Taylor said that in a strong market there was likely to be no 16 distinction, in value terms, between one with 69 years remaining and one with 99. In a weak market, one or two years could make a difference.[62]As to his suggestions in evidence regarding the unreliability of un-researched auction results, Mr. Maunder-Taylor said proper research would reveal discrepancies or factors which might have affected the achieved price. As to why he had not undertaken any research himself (other than looking at the Fairview results in response to the appellant’s requirement for an explanation of his opinions), he said that the time and expense involved were too great and his clients would not be prepared to pay for that research.[63]Mr. Maunder-Taylor said he did not accept that due to the provisions of the Landlord and Tenant Act 1987 it was extremely unlikely a tenant would bid at auction in the pre-1993 Act world. He said the tight time-scales within which the tenants had to ‘get their act together’ to buy at the price agreed at auction meant they would be more likely to attend the auction and bid themselves. They might also contact the landlord prior to the auction in the hope of trying to ‘do a deal’.[64]There was no argument that the right to receive insurance commissions would be a factor that affected the value of the freehold, and buyers at auction would be likely to check the leases for this aspect and to ensure that they were able to recover 100 per cent of their costs. Mr. Maunder-Taylor could not say whether the 10 per cent yield he had applied to the subject property took into account the insurance commission rights.[65]In connection with the uplift, Mr. Maunder-Taylor confirmed that in his view, there was no material benefit to the lessees in acquiring a share of the freehold – if the property was reasonably well managed. There were onerous obligations in respect of management and control which they would have to take on, and that would only be worthwhile if the property had previously been badly managed.[66]As to length of term, he said there was little discernible difference in value between 69 and 99 years, but there was a 5 per cent uplift between 69 and 999 years unexpired, however he was unable to say at what point this uplift came into effect. He said he had considered, in arriving at his 5 per cent figure, the sale by private treaty of flat 6 at the subject property 2 years earlier at the same price as that agreed between the parties to be appropriate in January 1999. He had also considered the sales of two other properties (Abingdon Lodge and The Logans) from details provided by the agents, but had not inspected either of them and accepted that there was no evidence to prove what the uplift might have been. He accepted that a difference of two per cent or so could be put down to standard valuation tolerances. Mr. Maunder-Taylor said he had also considered the Lands Tribunal decisions he had referred to, but did not accept the suggestion that he had been selective. The table that he had produced – from looking at properties with 67 to 76 years unexpired proved that 5 per cent was ‘about right’, but did not agree that if he had looked at a broader band there would have been a result nearer to the appellant’s figure. As to whether the Lands Tribunal decisions should generally be accepted as good evidence, he said that, taken in the round, they did assist. 17[67]Regarding the 7 benefits of owning the freehold as set out by Mr. Nesbitt, Mr. Maunder-Taylor said, in respect of the subject property, the situation was neutral in that any actual advantages were balanced out by disadvantages. He noted that only 6 of the 9 flats were participating, and it could therefore be assumed that only two-thirds of the lessees saw any value in owning a share of the freehold – they could have applied for extended leases instead. Mr. Jourdan pointed out that the majority of the lessees had chosen to acquire the freehold, and that included buying out the landlord’s interest in the 3 non-participating flats. Mr. Maunder-Taylor said that the cost of individual lease extensions was more than the proportionate cost of buying the freehold.[68]Finally, Mr. Maunder-Taylor said that the additional evidence he had produced to this hearing was not a question of having left out vital evidence in the LVT hearing, but was to lend support to his initial views. Closing Submissions.[69]In written submissions following the hearing, Mr. Gallagher said that the only legal issue arising, as distinct to purely valuation issues, was whether in principle, the valuation of the freehold should include what may be attributed by the market to the expectation by prospective purchasers that, at some future date, a premium may be obtained for negotiating lease extensions i.e., hope value.[70]It was accepted that para 3(2) to Schedule 6 of the 1993 Act did not preclude the making of assumptions other than those specifically referred to, and therefore the prospects of negotiating lease extensions with the non-participating tenants may form part of the freehold reversionary value. It was for the market to decide whether any such value existed, on the evidence and in the particular circumstances, but it was noted that in Becker, where 82 years were unexpired, there was considered to be no such value. There must be a clear prospect that a lease extension may be concluded in the short to medium term, but where those prospects were remote or purely speculative, the market would perceive nothing more than a nominal value. Mr. Nesbitt’s conclusion that 70 years was the benchmark, with leases of 70 years or more unexpired having no hope value (entirely reversionary), but those with 69 or less suddenly attracting hope value – which in his view would be the same whether there were 60, 65 or 69 years unexpired - was not supported by evidence, and was counter- intuitive. That benchmark might have been explainable if 69 years was the point at which the flats became unmortgeagable, but that was not the case. 50 to 60 years was the point at which mortgage lenders began to show concern, and it was submitted therefore that 70 years had been used as an arbitrary figure to put the subject property on the wrong side of the line. 18[71]As had been explored with Mr. Nesbitt in cross-examination, Mr. Gallgher said the hope value for the expectation of the future grant of a lease extension was traditionally already factored into the capitalisation rate. Such value could serve to create a lower yield percentage. Once a lease had been extended for, say, a further 99 years, the present value of the reversionary interest would be negligible. Accordingly, including both hope value and the reversionary value as separate elements of the freehold valuation resulted in double- counting. Indeed, Mr. Nesbitt’s schedule of ground rents sold at auction by Allsops did not include a column showing the reversionary value of the leases. He had simply extracted his hope values by subtracting the capitalised ground rent value from the sale price, this resulting in a figure that was a composite of hope value and reversionary value.[72]In summary, there needed to be compelling evidence that the market would attribute a hope value to the appeal property, and no such evidence had been produced.[73]As to the factors relevant to the analysis of the valuation evidence, Mr. Gallagher said that whilst the parties agreed statutory rights of enfranchisement were to be disregarded (para 3(2)(b) of Sch 6 to the 1993 Act), the fact that the Act, in the respondent’s opinion, had served to increase the prices investors were prepared to pay for freehold reversions created valuation difficulties. In establishing what, if any, uplift applied it was accepted that, apart from the value of extinguishing the ground rent (which had not, in any event, been separately included in Mr. Nesbitt’s valuation) the other six factors referred to (as in Abbathure) could result in an uplift. However, there was no presumption that there would be an increase, and it was for the landlord to produce reliable evidence to support that contention. Mr. Nesbitt had contended that, aggregating all 7 ‘benefits’, there was an uplift, but he was unable to attribute a specific uplift to any of the individual factors. Some of the factors, it was submitted, (other than tenants carrying out their own management, organising repairs and elimination of disputes with the landlord, all of which overlapped) were discrete and capable of individual analysis in value terms.[74]Mr. Gallagher submitted that there were fundamental problems with the analysis of settlement evidence and unresearched auction results, not least of which was the Delaforce effect which applied particularly in circumstances where the value of the interest was low relative to the cost of LVT proceedings, there was no tenants association to offer support and some of the participating tenants might be anxious to complete quickly. All these factors could apply to the appeal property. Settlement evidence was also often volume related, and analyses therefore tended to suffer from averaging, and important individual circumstances affecting agreed figures could be lost. The best evidence, it was submitted, was that which related to a limited number of good local market transactions that had been carefully and individually analysed by a valuer with local market knowledge.[75]Regarding the appellant’s criticisms of Mr. Maunder-Taylor’s approach, and particularly the report he had prepared for the LVT (and which had also formed the main submission in respect of these proceedings), Mr. Gallagher said that the expectation was that the experienced LVT members would not be interested in, or prepared to hear, detailed evidence as to capitalisation and deferment rates. The LVT was familiar with the various professional opinions as to these rates, having heard them many times before and Mr. Maunder-Taylor had therefore expressed his opinions only briefly against this background. 19 The question of proportionality had had to be considered and, it was submitted, this appeal concerned a freehold reversion of modest value and, in order to avoid disproportionate expense and Tribunal time, it was necessary for any expert to be selective as to the material relied upon.[76]Mr. Jourdan produced, following the hearing, detailed closing submissions setting out the appellant’s case regarding the correct treatment of hope value in law, the correct approach to market value, uplift in value and the value of the freehold interest.[77]Firstly, in respect of hope value, he said that if the Tribunal found, on the evidence, that there was hope value attached to the freehold interest in Campana Court, there were two possibilities that needed to be considered as a matter of law. Either a) hope value must be taken into account on all the flats or b) only the hope value (if any) attributable to the non- participating flats must be taken into account. The respondent, he said, adopted (b) in its closing submissions.[78]It was the appellant’s submission that (a) must prevail. Mr. Jourdan said it was quite clear that, in the real world, on the open market, some freehold interests would have hope value. Part of the price a purchaser paid would reflect his expectation that some or all of the lessees would, in due course, seek to extend their leases, and would be prepared to pay a premium. If, as was the case with the subject property, all the leases were of the same length, then there would be no difference in the amount of hope value attributable to each flat.[79]In quoting extensively from Schedule 6 to the 1993 Act he said there was nothing in para 3 that states hope value should be ignored. It was assumed that, unless a tenant had served a notice under s.42 of the Act seeking an extended lease, he had no rights under the Act. In the real world, a sale on that basis would reflect the hope value inherent in the freehold interest, and it must therefore be taken into account as an attribute of the property. Whilst there was an assumption that the tenants did not want to buy the freehold there could be no assumption that they would not, at some future date, wish to extend their leases.[80]Referring to the Becker case, Mr. Jourdan said that the argument for the tenant was recorded as:
“Mr. Denyer-Green further submitted that the potential ability of participating tenants to have new leases granted after acquisition of the freehold is dealt with in the calculation of marriage value in para 4 of the 6th Schedule. That paragraph accordingly confined any additional value of lease extensions to the ability of participating tenants to grant themselves lease extensions. Since for valuation purposes the position of participating tenants’ granted lease extensions, and the position of a non-participating tenant who has given a section 42 notice prior to the valuation date, are both expressly dealt with in Schedule 6, the expressio unius principle operated to exclude for valuation purposes the prospect of lease extensions to non-participating tenants. Alternatively, since para 3(1) deals expressly with lease extensions to non-participating tenants who had served section 20 42 notices, the expressio unius principle operated to exclude the valuation of lease extension rights of other categories of non-participating tenant”
. This argument, he said, was hopeless. The expressio unius principle is that the specific expression of one matter implicitly excludes all others. The tenant’s argument was that because the draughtsman had specifically stated that s.42 notices in respect of non-participating flats are to be taken into account, any other prospect of granting a lease extension must be ignored, even if, in the real world, such prospects would be taken into account by a purchaser and would form a valuable part of the advantages he would acquire. Mr. Jourdan said that the purpose of the specific assumptions set out in para 3(1)(a)-(d) is to make clear those matters which are to be assumed that are, or may be, contrary to reality. There is no need at all to direct an assumption that the freehold interest has a characteristic that it really does have. In any event, if there were any doubt in the matter, para 3(2) says in terms that the assumptions set out in para 3(1) are not exclusive.[81]In the event, HH Judge Marder did not have to decide the point as he concluded that, on the evidence, there was no hope value. However, in expressing his views obiter dicta, he indicated that he thought hope value could be taken into account.[82]Summarising the hope value point, Mr. Jourdan said the scheme of paras 3 and 4 was that the landlord should be paid in full the current value of his interest in the property, together with a share of the marriage value in respect of the participating tenants. If hope value for all the flats was taken into account then the freeholder would get the full value of his interest, just as he would if he sold to a third party. He would also get half the marriage value in respect of the participating flats under para 4. That accorded perfectly with the purpose of the Schedule and produced a just and fair result.[83]In respect of marriage value, and its definition in para 4(2) of the Sch 6 to the 1993 Act, Mr. Jourdan quoted from the Lands Tribunal decision in Abbathure in which it interpreted the definition as meaning that all the advantages and disadvantages derived from owning the freehold must be taken into account in calculating the marriage value. It said:
“We conclude that Maryland’s contentions are correct and that, in principle, all the factors 1 to 7 above can be taken into account in valuing the freehold interest for the purposes of determining marriage value. The correct approach, in our judgment, is to ask whether any of these factors flow from the ability to have new leases unrestricted as to length of term. The essential feature is that the participating tenants will be in effective control of the freehold interest through the nominee purchaser and can secure the grant to themselves of new leases. What has to be determined is the increase in value, if any, of the freehold interest when it passes into the tenants’ control in that way. As we have pointed out, although certain assumptions are expressly to be made by virtue of paras 4(3) and 4(4), this does not prevent any other appropriate assumptions being made in order to determine market value of the freehold in accordance with para 3(2).”
[84]It is clear then, he said, that to calculate marriage value, two valuations are required, namely the value of the freehold when held by the landlord and the value of the freehold 21 when regarded as being (in consequence of its being acquired by the nominee purchaser) an interest under the control of the participating tenants, including the ability to grant 999 year leases to the participating tenants without premium and all the other advantages of owning the freehold.[85]Taking into account the provisions of para 4(3), the value of the freehold when held by the landlord and the value when held by the participating tenants must both be determined in accordance with para 2(1)(a) on the basis of an open market sale. The value of the freehold when held by the landlord, Mr. Jourdan said, was easy, as it would already have been calculated under para 3. The value when held by the tenants must be calculated on the basis of the open market value of 999 year leases together with a share of the freehold. It did not seem that Mr. Maunder-Taylor had carried out this exercise.[86]Mr. Jourdan said that Mr. Maunder-Taylor’s theory that the 1993 Act had caused the value of freehold reversions to rise was ludicrous. Prior to the 1993 Act, a landlord who wanted to sell to his tenants, or grant extended leases could do so. If the tenant did not like the price offered he could walk away. After the Act, the landlord had no choice as the tenants can now compel him to sell them the freehold or extend their leases. If no agreement can be reached on price, then the matter is decided by the LVT; the landlord has to bear his own costs of the reference even if the LVT agrees his figure. The reasons for the increases in values, he said, were as set out by Mr. Nesbitt in his evidence.[87]Moving specifically to valuation matters and in connection with the uplift, Mr. Jourdan said Mr. Nesbitt had demonstrated from his analysed settlements, substantial support for his figure of 12 per cent. Conversely, Mr. Maunder-Taylor, in producing his addendum statement (which had only been forthcoming following a meeting of experts prior to the Lands Tribunal hearing) had provided some information about lease extensions he had been involved with and two freehold reversions, but made no attempt to analyse them to work out the uplift. However, Mr. Nesbitt had analysed Mr. Maunder-Taylor’s information, and the results which he gave in evidence and upon which he was not cross examined, showed uplifts ranging from 11 per cent to 14.8 per cent on unexpired leases ranging from 61 to 75 years. Thus, even Mr. Maunder-Taylor’s evidence supported Mr. Nesbitt’s figure, and not his own.[88]The other evidence adduced by Mr. Maunder-Taylor, including his reference to the sale of flat 6 at the subject property, Abingdon Lodge and The Logans was of no assistance. The information on the sale of flat 6 at Campana Court contained nothing that could possibly help to demonstrate an uplift of 5 per cent from a 69 year lease to a virtual freehold. The other two properties were in different locations, had sold at different times and had not been inspected. Crucially, therefore, there was no information as to the condition of the properties. In summary, Mr. Jourdan said that Mr. Maunder-Taylor’s evidence, such as it was, was worthless and there was absolutely nothing to support his contention, 'based upon knowledge and experience', that 5 per cent was the right figure for the uplift. He had failed in his duty, in this case, to take account of all relevant matters in accordance with the requirements of the RICS and Academy of Experts. 22[89]As to the value of the reversion, it was agreed between the parties that purchasers of this type of investment would not determine the price by analysing in the traditional way that valuers did. There was no reason for Mr. Nesbitt, in basing his conclusions on his knowledge of the market, talking with investors and knowing their policy, not to value the subject property at £2,000 per flat. That figure reflected all the advantages of owning the freehold and included the reversionary element. He had provided evidence to support this conclusion, researching both auction results and private treaty sales. As to the auction results, for instance, Mr. Nesbitt had identified the lots that most closely resembled the subject property in terms of flat type and length of lease unexpired, and had compared these with others where the lease terms were longer. The differences could logically be put down to hope value, there being no other aspects that would affect the value.[90]Mr Jourdan referred to the fact that it was put to Mr. Nesbitt that hope value and the reversion are really the same thing, and that historically low deferment rates have been justified by hope value. As to the first point, this is academic, going to how one analyses the price paid for the freehold, rather than deciding what the price is. Even if the point were correct, it made no difference to the value of the freeholder’s interest nor the price payable by the respondent. It would just mean that either a lower yield would be applied in deferring the reversion, or the value of the reversion would be treated as nominal and the difference would simply be apportioned between the capitalised ground rent and the value of the freehold to hope value. In fact, he said, there was no inconsistency between allowing something for both reversion and hope value, provided that the overall figure reflected accurately what the market would pay.[91]Allowing something for both reflected the fact that hope value was just that – the value of hope and not a certainty, whereas the reversion was a certainty. The price determined by Mr. Rose in Shulem B was on the basis of allowing both £426 for the reversion, and £4,581 for the hope value in the case of the non-participating flat. He therefore saw no logical inconsistency in taking this approach.[92]Finally, Mr. Jourdan said however one analyses it, £18,000 was the right value for the freehold. In its component parts, that figure broke down to £8,754 for hope value, or £972 per flat – this being only a very small percentage of the marriage value (6.7 per cent as opposed to the 15 per cent in Shulem B) DECISION. Hope Value.[93]The first question I have to answer is whether, from the evidence, it can be concluded that there is any hope value attributable to the expectation that a purchaser of the freehold interest in Campana Court might, at some future date, be able to obtain a premium in respect of the grant of longer leases. If I find that to be the case, I will need to consider, as a matter of law, how that value is to be treated in respect of the valuation of the freeholder’s current interest and the calculation of marriage value, in the light of Mr. Jourdan’s submissions. The 23 existence and subsequent treatment of hope value (if any) would, of course, have a bearing on yield rates to which I will turn.[94]The appellant’s expert relied firstly upon evidence extracted from auction results, and his analysis of two virtually identical lots in Methuen Close, Edgware where, he said, the only logical conclusion for the substantially higher price paid for the second one was the fact that one of the leases had only 64 years unexpired. Mr. Nesbitt said he had inspected the properties, which were close to his office, together with the auction particulars which gave details of the properties, leases and the rising ground rents. He also analysed the private treaty sales of two properties from information provided to him by the ground rent brokers who handled the sales, and having inspected the files, was able to conclude that there were no other factors affecting value. The fact that these two properties were in New Malden and Bournemouth respectively, and could not therefore be considered to be local to the subject property did not matter, Mr. Nesbitt said, as his research was to prove that hope value could, and indeed did, exist on properties with less than 70 years unexpired. Whilst I accept the reference to properties outside the immediate area as an argument to prove that hope value can exist, I would have great difficulty (as this Tribunal has done on many occasions in the past) in accepting that evidence as appropriate in proving quantum.[95]Mr. Maunder-Taylor expressed concern over unresearched auction and private treaty sales, and warned that the inevitable averaging process that resulted from looking at a large body of evidence may serve to distort figures and hide any relevant individual circumstances that could affect value. He said also that there was likely to be a substantial Delaforce effect in private treaty sales, and with auctions it was impossible to know whether the tenant had bid.[96]There have been many Lands Tribunal cases, including Abbathure in which Mr. Nesbitt gave evidence, where the potential for unreliability in auction and settlement evidence (to which I shall refer under ‘uplift’), has resulted in little or no weight being given to it. However, from the way Mr. Nesbitt has presented his evidence in this case (on the hope value issue), I am satisfied that, certainly as far as the auction evidence was concerned, his research was sufficient to prove the point that there may well have been an element of hope value in the prices achieved.[97]Nevertheless, the existing lease in the Methuen Close property had 64 years unexpired, and those at the New Malden and Bournemouth properties were between 61 and 64 years. The subject property has 69 years unexpired which is quite significantly longer, and almost 15 years away from the point at which residential lenders draw the line for mortgageability. The parties agreed that there would be little if any effect on mortgageability at the 69 year stage. Mr. Nesbitt said that 70 years was the benchmark, and that there was no ‘sliding scale’ as to effect on hope value as the unexpired term reduced – once the term arrived at less than 70 years, a hope value element came into play that did not increase as the term reduced.[98]According to his analysis the property with 64 years unexpired at Methuen Close suggested a hope value of £1,355, the leases with an average of 63 years unexpired at New Malden suggested £1,574 but the 61 and 64 year leases at Bournemouth had a hope value 24 element of £1,086. Unfortunately, Mr. Nesbitt produced no evidence relating to unexpired leases of 65 to 70 years and in my judgment the point he was trying to prove is not made. As I have said, I accept that it appears there was a hope value element in the comparables referred to, but those do not prove that the situation is the same at 69 years. The analyses certainly do not prove that from 69 years downwards hope value applies at a uniform rate, and I find that suggestion defies logic. It stands to reason, in my view, that the shorter the unexpired term, the more likelihood there will be that the tenant will approach the landlord for an extension, with the consequence that the price an investor will be prepared to pay will increase proportionately. Indeed, in saying that 70 years was the benchmark, and that no hope value at all applied from that point onwards, Mr. Nesbitt’s argument supports my conclusion that, even if he had proved that to be the case, the hope value at 69 years would not be material and certainly very much less than the amounts his shorter comparables indicated.[99]It follows that Mr. Jourdan’s submissions regarding the way hope value should be treated (as a lump sum) and whether or not it applies to the participating as well as the non- participating flats, do not need to be considered in this case. The parties have accepted that if the market attributed a value to the prospects of negotiating lease extensions with the non- participating flats, that would form part of the freehold reversionary interest, but I accept Mr. Gallagher’s submission that the fact the non-participating tenants in this collective enfranchisement are not participating is indicative of their having no immediate interest in extending their leases. As I have said, no evidence has been adduced that proves there is any hope value where leases have 69 years unexpired. Yield Rate.[100]In arriving at a yield rate of 8 per cent for the reversionary element Mr. Nesbitt analysed a block of auction sale results, excluding those which showed multipliers of more than 20YP which, he said, suggested hope, or some other additional value. These indicated an average of 6.83 per cent. Carrying out the same exercise in respect of private treaty sales, he came to an average of 8.9 per cent. These analyses supported, he said, his 8 per cent figure for the subject property against the LVT’s determination of 9 per cent. Mr. Gallagher said the respondent accepted the LVT’s figure although Mr. Maunder-Taylor had argued before the LVT for 10 per cent.[101]I have already referred to this Tribunal’s approach to unresearched comparables, and whilst I have accepted Mr. Nesbitt’s specifically researched transactions in relation to the hope value argument, he has not carried out the same degree of research in the analyses referred to above and has used averaging, the risks associated therewith having been pointed out by Mr. Gallagher. Bearing in mind the potential unreliability in the analyses, I find nothing in Mr. Nesbitt’s evidence to persuade me that the LVT’s decision was wrong, especially as no adjustment for hope value is, in my judgment, appropriate. I therefore determine the yield rate at 9 per cent. Uplift. 25[102]Mr. Nesbitt produced seven comparables of cases where he had been involved in respect of applications for lease extensions. Whilst the analysis in the 3 in which he had been acting against Mr. Maunder-Taylor had not been agreed, Mr. Nesbitt was able to confirm that the other four were. These indicated a range of 12.3 to 15.8 per cent in terms of uplift. Six of the comparables had 64.75 to 65 years unexpired with uplifts from 14.7 to 15.8 per cent, and the only one with a term really close to the subject property (70.5 years) showed 12.3 per cent. He also analysed two negotiated freehold sales each suggesting a 10 per cent uplift, but accepted that he had not been involved and it was only his interpretation of the results. Mr. Nesbitt said that in terms of uplift percentage, there was a stepped, or linear adjustment and there would therefore be a material difference in uplift between a property with 65 years unexpired, and one with 69. The evidence certainly appears to support this, and I accept the principle. As I have already said, in my view the same principle would logically apply to hope value. The graph that had been referred to indicating a 19 per cent uplift as being appropriate for flats with 69 years unexpired, was in my view not particularly helpful. Whilst it indicated a trend, and may well have accurately reflected settlement levels on the estates in North London, it did not relate to properties of the same category or location as the subject and in any event showed a percentage substantially higher than that being sought in this case. I attach no weight to this graph.[103]I found Mr. Maunder-Taylor’s evidence, such as it was, unhelpful. As pointed out by Mr. Jourdan, he had not analysed any of the comparables upon which he sought to rely. Mr. Nesbitt’s analysis of Mr Maunder-Taylor’s figures – which he admitted may be unreliable on the limited information received - if anything, lent support to his own figures. Mr. Maunder- Taylor referred to the sale of one of the flats at the subject property as indicating his suggested uplift of 5 per cent, but as Mr. Nesbitt pointed out, there was absolutely nothing in that information that could be construed to indicate anything to do with uplift. His reliance on Abingdon Lodge and the Logans as a comparison between a flat with a virtual freehold and one with 71 years unexpired was, according to Mr. Jourdan, “completely useless for the purpose of identifying the difference in value between 69 and 999 year leases”, and I agree with him. Those properties were in different locations, sold at different times and had not been inspected.[104]I agree with Mr. Gallagher that the best evidence is a limited number of good local market transactions, individually analysed by a valuer with intimate local knowledge. In the normal course of events this must be right (I have given my reasons for accepting Mr Nesbitt’s evidence on the Bournemouth and New Malden properties elsewhere). Mr. Maunder-Taylor did not produce individually analysed local transactions. His reasons given in cross-examination for not producing evidence that was relevant and within his knowledge to the LVT and for not carrying out any sort of analyses of the information that he was introducing to this Tribunal (which would have assisted me), appear to me to be contrary to the requirements of the RICS and Academy of Experts, in respect of expert witnesses. Conformity with those requirements was acknowledged within his reports, but he has not, in my view, (and as pointed out by Mr Jourdan in closing) included “all facts which I regard as being relevant to the opinion which I have expressed” (RICS) or “covered all relevant issues concerning the matters stated which I have been asked to address” (Academy of Experts). If Mr Maunder-Taylor had insufficient time, or was unable to secure an acceptable fee from his client to undertake the necessary research he had the option of declining the instruction. 26[105]Mr. Maunder-Taylor said that in his general professional experience a 5 per cent uplift was appropriate but, as I have said, he produced no evidence that could be interpreted to support this. He did make reference to the possible Delaforce effect in the evidence produced by Mr. Nesbitt, and it is true that, as Mr. Nesbitt pointed out, this can work both ways. Nevertheless, I suspect that in the majority of cases it will work to the benefit of the landlord – a point which was taken by the LVT and one that, in my view, supports a significant reduction from Mr. Nesbitt’s proposed figure.[106]In my judgment the LVT was wrong not to be influenced by the settlements referred to by Mr. Nesbitt, but in respect of the 7 benefits that had been referred to in Abbathure and in this case, I agree with its comment that “we have to look at the facts and decide if they apply in this case”. I accept that there is little value in the ability to effectively extinguish ground rent as the amount is low, and fixed for the term. Nevertheless, I do think that there is some pecuniary benefit to be obtained from the other 6 benefits although I do not accept Mr. Gallagher’s suggestion, in closing, that most of the factors are discrete and can be individually valued.[107]Doing the best that I can on the basis of the evidence, and particularly the possible Delaforce effect in Mr. Nesbitt’s comparables, I consider the appropriate uplift to be 8 per cent. I therefore determine the uplift in value between a 69 year unexpired term, and one with 999 years together with the other benefits of ownership of the freehold as set out at 8 per cent.[108]This Tribunal’s valuation is set out at Appendix 4. I determine that the price to be paid by the respondent nominee purchaser for the enfranchisement is £33,300.[109]This decision concludes my determination of the substantive issues raised in this appeal. It will take effect as a decision when the question of costs has been decided and at that point, and not before, the provisions relating to the right of appeal in section 3(4) of the Lands Tribunal Act 1949 and order 61 rule 1(1) of the Civil Procedure Rules will come into operation. The parties are invited to make submissions as to the costs of this appeal and a letter accompanies this decision which sets out the procedure for submissions in writing. DATED: 10 April 2001 (Signed) P R Francis FRICS 27 Addendum on Costs[110]I have received submissions on costs from the parties. The appellant said that it should be entitled to its costs in full as it had clearly won – the Tribunal having determined the price some 50% in excess of the LVT’s figure. Whilst the Lands Tribunal, under rule 52(1) has discretion on costs, and under rule 44 parties can protect themselves from cost consequences by making a sealed offer, neither of the two offers made by the respondent set out the basis upon which they were made. Neither were they adequate. The first (at £24,000) was 37% below what the Tribunal determined and was not capable of acceptance after the second increased offer of £27,500 was made – that being withdrawn after only 7 days.[111]The appellant had made a Calderbank offer in the sum of £42,000 setting out the detail of the basis on which it was made, and whilst it was acknowledged that that was some £9,000 more than the figure determined by the Tribunal, no response to it had been made by the respondent.[112]The respondent in submitting its reasoning for seeking its costs or, in the alternative, no award, sought a stay pending the Court of Appeal decision in Goldstein v Conley [2001] EWCA CIV 637. That decision, which was subsequently handed down, related to the Lands Tribunal’s jurisdiction to award and enforce costs. Following its finding that the Tribunal has such jurisdiction, counsel for the respondent sought a further stay pending the outcome of inquiries as to whether or not there was to be an application for leave to appeal direct to the House of Lords, despite the Court of Appeal having refused leave.[113]I reject the application for a stay on the grounds that case bears no relevance to the issues in question in the instant case.[114]It was the respondent’s submission that, whilst it could not be disputed that the appellant had achieved an increase on the LVT’s determination, the award at £33,300 by the Lands Tribunal was significantly short of the price being sought (£57,600) and only marginally more than the respondent’s highest sealed offer.[115]Regard should be had to the recent Court of Appeal decision in Phyllis Trading v 86 Lordship Road Ltd [2001] EWCA CIV 350 which overturned a Lands Tribunal costs award, and contained a warning by the three members of the Court of Appeal that the discretionary powers to award costs should be exercised so as not to discourage settlements.[116]In the instant case, it was submitted that the appellant lost on the hope value argument – which was in terms of time spent the major issue and the Tribunal also upheld the LVT’s rate of 9%. The decision on uplift was also closer to the respondent’s contended figure than the appellant’s. Furthermore, the Lands Tribunal’s determination was closer to the LVT’s decision than the price contended for by the applicant on appeal, and therefore, all things 28 being considered, rather than being a win for the appellant, it was either a win for the respondent, or a draw.[117]The respondent Calderbank offers were both reasonable and realistic. The only response to them was a counter offer of £42,000, the tone of which was not in the spirit of seeking a reasonable comprise. It was therefore submitted that, in accordance with the guidance given in Phyllis Trading, the Tribunal should exercise its discretion in awarding the respondent’s its costs at least from 14 days after 16 January 2001 or alternatively make no order as to costs.[118]In response to the respondent’s detailed submissions, the appellant pointed out that Phyllis Trading was a low value case where the Lands Tribunal awarded a very marginal increase on the LVT decision and that was some 10 per cent less than the respondent’s offer. The reference by the respondent to the hope value argument was exaggerated in that that was only one factor. Considerable time had also been spent on comparables and settlements and the subject of marriage value.[119]The appellant submitted that there was no rational explanation for the respondent’s contention that the appeal did not succeed. It was also submitted that the Lands Tribunal should take into account the conduct of the parties both before and at the hearing and particularly the difficulty that the appellant’s expert had had in extracting information from Mr Maunder Taylor and Mr Maunder Taylor’s unsatisfactory evidence at the hearing.[120]I have considered the submissions of both parties very carefully and the principles laid down in the Phyllis Trading Court of Appeal decision. That discretion on costs should be exercised in such a way that prevents misuse of the system, particularly by landlords, cannot be in question. Nevertheless, the circumstances of that case were very different. Phyllis Trading was acknowledged as a small value case and in it the appellant’s offer was not beaten. Here, there was a significant difference between the respondent’s highest Calderbank offer of £27,500 and the award (some 21%) and that award was, as rightly pointed out by the appellant, some 50% more than that determined by the LVT.[121]However, the respondent is correct in its submissions that the appellant failed on two of the three issues, and I agree that considerable time was expended on the issue of hope value – especially the treatment of it (if found to exist) as a matter of law. A determination on that aspect, it transpired, was not necessary. Having said that, if I had determined that there was, indeed, material hope value, that matter would have to have been decided, and the evidence therefore was not irrelevant.[122]In all the circumstances therefore, and on balance, I do not think it would be appropriate for costs to simply follow the event. Applying the discretion permitted under rule 52(1), I determine that the respondent shall pay half the appellant’s costs of this appeal. Such costs shall be agreed and if not will be subject of a detailed assessment by the Registrar of the Lands Tribunal on the standard basis. 29 DATED: 31 May 2001 (Signed) P R Francis FRICS 30 APPENDIX 1 Mr. Nesbitt’s Original Valuation Campana Court, 4-5 Blenheim Road, Barnet Value of freeholder’s interest Ground rent income £236.25 YP 69 years @ 8% 12.4382 £2,938 Reversion to £1,276,800 PV of £1 in 69 years @ 8% 0.004940 £6,308 £9,246 But, applying ‘market approach’ as demonstrated by comparables: 9 short leases at £2,000 each £18,000 Marriage value Value of 6 participating flats £760,000 Value of virtual freehold 6 participating flats (+12%) £851,200 Less 1) Value of existing leases £760,000 2) Value of existing freehold £ 18,000 £778,000 Marriage Value £ 73,200 Freeholder’s share (50%) £ 36,600 Enfranchisement price 1) Value of existing freehold £18,000 2) Share of marriage value £36,600 £54,600 31 APPENDIX 2 Mr. Nesbitt’s First Revised Valuation Campana Court, 4-5 Blenheim Road, Barnet(1) All participating tenants Value of 6 new interests (999years @ peppercorn with share F/H) + 12% uplift £851,200 Value of 6 existing interests (89.3%) £760,000 Value of freeholder’s current interest in 6 participating flats Rent reserved £157.50 YP 69 yrs @ 8% 12.4382 £1,959 Reversion to VP value £851,200 PV of £1 in 69 yrs @ 8% 0.00494 £4,205 £6,164 £766,164 Marriage value in 6 flats £85,036 Half share of marriage value £42,518 Value of freeholder’s current interest £ 6,164 £48,682(2) Value of Freeholder’s Current Interest in non-participating flats Rent reserved £78.75 YP in 69 yrs @ 8% 12.4382 £ 980 Reversion to VP value (380,000 + 12%) £425,600 PV of £1 in 69 yrs @ 8% 0.00494 £2,102 Hope Value (£18,000 - £9,246) £8,754 attributed to 3 non-participators /3 £2,918 £ 6,000 £54,682 32 APPENDIX 3 Mr. Nesbitt’s Further Amended Valuation Campana Court, 4-5 Blenheim Road, Barnet (1) All participating tenants Value of 6 new interests (999 years @ peppercorn with share F/H) + 12% uplift £851,200 Value of 6 existing interests (89.3%) £760,000 Value of freeholder’s current interest in 6 participating flats Rent reserved £157.50 YP 69 yrs @ 8% 12.4382 £1,959 Reversion to VP value £851,200 PV of £1 in 69 yrs @ 8% 0.00494 £4,205 Hope Value 6 x £972 £5,836 £ 12,000 £772,000 Marriage Value in 6 flats £ 79,200 Half share of marriage value £ 39,600 Value of freeholder’s current interest £ 12,000 £ 51,600 (2) Value of Freeholder’s Current Interest in non-participating flats Rent reserved £ 78.75 YP in 69 yrs @ 8% 12.4382 £ 980 Reversion to VP value (£380,000 + 12%) £425,600 PV of £1 in 69 yrs @ 8% 0.00494 £2,102 Hope Value (£18,000 - £9,246) £ 8,754 Attributed to 3 non-participators / 3 £2,918 £ 6,000 £ 57,600 33 APPENDIX 4 Lands Tribunal Valuation Campana Court, 4-5 Blenheim Road, Barnet Value of freeholder’s interest Ground rent pa £236.25 YP 69 years @ 9% 11.0820 £2,618 Reversion to VP value (£1,140,000 + 8%) £1,231,200 PV £1 in 69 years @ 9% 0.0026156 £3,220 £5,838 Marriage value Current value of 6 participating flats £760,000 Value of virtual freehold of 6 participating flats (+8%) £820,800 Less 1) Value of existing leases £760,000 2) Value of existing freehold £ 5,838 £765,838 Marriage value £54,962 Freeholder’s share (50%) £27,481 Enfranchisement price 1) Value of existing freehold £ 5,838 2) Share of marriage value £27,481 £33,319 Say £33,300 34