THE TRUSTEES OF THE CALTHORPE ESTATE LRA/44/2000

UPPER TRIBUNAL
LANDS CHAMBER
LRA/44/2000Case No LRA/44/2000
Between
THE TRUSTEES OF THE CALTHORPE ESTATEApplicant
Before
P R Francis FRICSVenue 48/49 Chancery Lane, London, WC2A 1JRDate 5 February 2001Hearing 25 January 2001Property: 15 Euan Close, Edgbaston, Birmingham, B17 8PLCatchwords: LEASEHOLD ENFRANCHISEMENT – value of freehold – market and settlement evidence – Leasehold Reform Act 1967 s 9(1C) – appeal allowed - value determined at £260,000
[1]This is an appeal by the freeholders, the Trustees of the Calthorpe Estate, (“the appellants”) against a decision of the Midlands Leasehold Valuation Tribunal for the Midlands Rent Assessment Panel (“the LVT”), dated 18 July 2000, determining the price payable for the freehold reversion of 15 Euan Close, Edgbaston, Birmingham, B17 8PL (“the subject property”) at £6,334 in accordance with s.9 of the Leasehold Reform Act 1967 (“the 1967 Act”).[2]The leaseholders, John Michael Prosser and Rosemary Ann Prosser, who were the applicants before the LVT, do not respond to this appeal. Mr. Radevsky called John Keith Willson BSc, MRICS to give valuation evidence.[3]The background facts are not in dispute, and from the appellants’ expert’s report, the evidence given at the hearing and my external inspection of the subject property and surrounding area, I find the following: 3.1. Mr. and Mrs Prosser occupy the subject property by virtue of an underlease dated 21 October 1977 between Bryant Homes Ltd and the appellants, although the headlease was surrendered some years ago, and the lessees are therefore now direct tenants of the freeholders. The underlease was for a term of 99 years (less 3 days) from 29 September 1975 (approximately 75 years therefore remaining unexpired at the valuation date). The current ground rent of £60 per annum rises to £90 per annum in 2008 and to £120 per annum in 2041. The freeholder insures the property, recovering the premium from the lessees. The Estate is subject to a Scheme of Management, pursuant to s.19 of the 1967 Act, with the lessors maintaining roads and amenity areas, and recovering proportionate costs as service charges from the lessees. 3.2. The lessees served a Notice of application to acquire the freehold in accordance with the provisions of the 1967 Act on 2 October 1999, and a Notice of Reply admitting the claim was served by the freeholders on 22 October 1999. 3.3. The subject property comprises a detached two-storey private dwelling house located at the end of a cul-de-sac of 14 houses in a residential area on the borders of Harborne and Edgbaston. The property was built by Bryant Homes Ltd in 1975, and when constructed, contained hall, cloakroom, living room, dining room, kitchen, laundry room, 4 bedrooms, two bathrooms (1 en-suite) and a box room. There is an attached double garage and gardens to front, side and rear. The house, which has subsequently been extended (this factor being excluded for valuation purposes) originally had a gross internal floor area of about 187 sq.m. (2,013 sq.ft.). The total site area amounts to about 1,047 sq.m. (1,252 sq yds.).[4]Mr. Radevsky said that the only point in issue regarding the LVT decision was its assessment of the freehold vacant possession value in the sum of £250,000, it being the appellants contention that the vacant possession value at the valuation date (2 October 1999) was £260,000. Indeed, that had been the sole issue before the LVT, all other aspects of the valuation relating to the leaseholders’ application having been agreed. A finding for the appellants, he said, would result in 2 an enfranchisement price of £11,400, compared with the LVT’s determination of £6,400 which was only 55 per cent of that figure. It followed therefore, that whilst the absolute sum in issue in this case is small, the relative sum is substantial. Bearing in mind the size of the appellants’ estate and the fact that a substantial number of its properties were subject to enfranchisement, the impact of allowing the LVT’s incorrect figure to stand would be to seriously devalue the appellants’ overall interest.[5]It was the appellants’ case, Mr. Radevsky said, that the LVT’s valuation of the freehold was too low both because of the comparable evidence and the because of the relativity between the freehold value it had determined, and the leasehold value of the remaining 75 year term that had been agreed at £240,000. Mr. Radevsky pointed to this Tribunal’s decision in Wellcome Trust v Romines [1999] 3 EGLR 229, and to the fact that it was for the Lands Tribunal to decide upon the evidence before it, and not consider the LVT’s reasoning.[6]Mr. Willson, a chartered surveyor, is currently a consultant to Lambert Smith Hampton, Consultant Surveyors of Birmingham, specialising in leasehold reform matters. Between 1984 and 1997 he was employed by the appellants dealing with commercial and residential estate management and related aspects of leasehold reform, including acting as expert witness before LVTs and this Tribunal.[7]He explained that the Calthorpe Estate has over 7,000 properties (approximately 3,500 residential) occupying some 1,500 acres of Harborne and Edgbaston. In considering whether or not it was appropriate to lodge an appeal in this case, bearing in mind the apparently modest sums involved, the Estate decided that if the LVT decision, which was thought to be wrong, were allowed to stand, it would serve to set a precedent. That precedent would be seriously damaging to the value of the estate by limiting the prices achievable for freeholds of neighbouring and other similar properties elsewhere on the estate.[8]Mr. Willson said that not only did the LVT fail to correctly interpret the comparables that were used in evidence, but it had also failed to take into account the relativity between the freehold and leasehold values. In concluding that the unencumbered freehold was worth £250,000 the LVT had in effect determined that the leasehold value was 96 per cent of the freehold. This, he said, was too high for a lease that had 75 years unexpired, his evidence indicating that, based upon his opinion of the freehold value at £260,000, 92 per cent was the correct figure. [Mr. Willson’s valuation is at Appendix A to this decision].[9]Dealing first with comparables, Mr. Willson said that evidence of freehold sales in the area following enfranchisement was difficult to find, only 3 properties coming to light. The first, 5 Lara Close, was not a good comparable in his view. Whilst being a similarly located house in another small cul-de-sac, only a few hundred yards from the subject property, it was very much larger and had also been extended to a significant degree. It had been sold freehold in 1992 for £298,000 which, according to the Nationwide All Properties Index for the West Midlands, would give a value at the appropriate date some 20.5 per cent higher at nearly £360,000. 3[10]The second comparable, 4 Antringham Gardens was one of the two properties that, he said, fully supported his opinion of the freehold value of the subject property. This was another Bryant house, built in about 1971 close to entrance of another, longer, cul-de-sac within ¼ mile of Euan Close. It was, at the date of sale in July 2000 at £295,000, extended to both ground and first floors and contained hall, cloakroom, living room, dining room, utility, 5 bedrooms and 2 bathrooms. Although extended, due to the fact it was smaller than the subject property when built, the internal area is even now less at 176 sq.m. (1,895 sq.ft.). Mr. Willson said that, in his opinion, even though some purchasers may find the additional bedroom and bathroom an advantage, many buyers would prefer the more spacious accommodation and corner position of the subject property. He pointed out that the Antringham Gardens house had a much smaller plot area at 600 sq.m. (717 sq,yds.) and was overlooked to the rear by another property. Using an average of both the Nationwide and Halifax House Price Indices to adjust the sale price to October 1999 gave an equivalent value of £272,500.[11]8 Sheringham Close, Mr. Willson’s final freehold comparable, was a Bryant house built in 1984 and located midway along another cul-de-sac, very similar to Euan Close, about ½ a mile away. Whilst the accommodation of this property is superficially similar to the subject with 2 reception rooms, 4 bedrooms and 2 bathrooms, it is significantly smaller at 125 sq.m. (1,346 sq.ft.) gross internal area, and has a plot that is only just over half the size of that of the subject property. It is also overlooked to the rear by a terrace of houses and, he said, gives the impression of being somewhat hemmed in. The property sold in March 2000 at £265,000 which figure, when adjusted, gave an equivalent value at October 1999 of £252,500.[12]As to relativity, Mr. Willson said that the value of the subject property with 75 years unexpired on the lease had been agreed at £240,000. It was important, he said, to look at evidence of negotiated settlements in addition to market evidence in order to analyse the relativity between freehold and leasehold values. He firstly looked at the 6 negotiated sales of freeholds that the appellants had negotiated on similar properties in the vicinity in recent years (since the Leasehold Reform, Housing and Urban Development Act 1993). There had not been many, and these were the only ones he thought comparable. Five had been settled in accordance with s 9(1C) of the Act and one was voluntary, although the valuation had been carried out on the same basis. These properties had unexpired terms ranging from 71.25 to 79.75 years and the relativity averaged out at 94 per cent.[13]He had considered whether or not the Delaforce effect (Delaforce v Evans & Evans [1970] 215 EG 315) might have applied, with tenants being prepared to settle at higher figures than they wanted to avoid the cost and delay of litigation, but concluded that, as the purchasers were all professionally represented, it did not. It must also be appreciated, he said, that particularly on large estates where one settlement can have an impact on many others, there can be an anxiety to settle on the part of the landlord, as recognised by the Lands Tribunal in Cadogan Estates Limited v Hows and Another [1989] 48 EG 167.[14]Whilst the 1967 Act directs that it is necessary to assume for valuation purposes that the lessee is not entitled to enfranchise, Mr. Willson said that in reality potential purchasers of leasehold property are aware that they will be able to buy the freehold at some point in the future, even if they cannot do so immediately. The possibility that the freehold might be available will colour their judgment, and result in them being prepared to pay more for the leasehold interest than would be the 4 case if they would never have the entitlement to buy the freehold. With this in mind, Mr. Willson said it would be useful to analyse transactions that had taken place prior to lessees obtaining the right to enfranchise.[15]A body of voluntary sales completed on the Calthorpe Estate prior to 1993 was considered, this being due to the fact that, prior to that date, a significant number of the Estate’s properties did not qualify for enfranchisement due to their rateable values being above the limits then in place. Non-qualifying properties tended to be scattered all over the Estate, and as the appellants did not consider it necessarily beneficial to retain the freeholds, voluntary sales were negotiated from the late 1970’s. None of the transactions that Mr. Willson had analysed were capable of enfranchisement at the time of the sale. Narrowing down the resulting schedule of 113 transactions to the 18 that that had unexpired leases of between 72.5 and 77.5 years, gave an average relativity of 90.82 per cent, leasehold to freehold value. In adopting 92 per cent in his valuation of the subject property, Mr. Willson said that this was a “tenant friendly” figure, and if he had used 90.82 per cent. this would have resulted in a freehold value of £264,259 – more than had been claimed at the LVT.[16]He also produced a composite relativity graph (which had been used by Mr. Radevsky in another case) which, he said, supported his evidence. This graph plotted the relativity between freehold and leasehold values in relation to settlements and agreements negotiated by some six firms of estate agents and surveyors that specialise in leasehold reform work. This resulted in a band of relativity of 85 to 92 per cent on properties with 75 years unexpired. Thus, Mr. Willson said, there could be no justification for the LVT’s finding of 96 per cent on the subject property.[17]In summary, Mr. Willson said that the value of the unencumbered freehold interest should be determined by reference to actual transactions, although they may need to be adjusted to reflect changes in market conditions over time. The use of comparable sales under the Act was particularly important, and the analysis of transactions where the lessee was not entitled to enfranchise was useful to establish the relativity between freehold and leasehold, where the price was not tainted by the lessee’s ability to purchase the freehold. On both tests, he said, it was clear that the LVT’s valuation of £250,000 was wrong and his own conservative figure of £260,000 was correct.[18]In response to a question from me as to why he had not referred in his evidence to the sales of 7 and 11 Euan Close, used in his evidence to, and to a large extent relied upon by the LVT, Mr. Willson said that they were open market sales of leasehold interests and, as there was no dispute as to the leasehold value, they were of no assistance. I return to this aspect later. DECISION[19]I inspected the subject property and the 3 freehold sale comparables (externally only) on Monday 29 January 2001.[20]There is no doubt in my mind that the position of the subject property, tucked away as it is in the corner of a pleasant residential cul-de-sac that has houses on one side and at the end only (the 5 other side being on to woodland), is significantly better than those of the other properties I saw. It also enjoys a large corner garden, and as far as I could see from my limited external inspection, was not overlooked to the rear at all, there being a pleasant open aspect over playing fields towards Lara Close.[21]I accept that 5 Lara Close is not particularly helpful, being very much larger and having been sold some seven years prior to the relevant date. Antringham Gardens is considered, according to Mr. Willson, to be a better road than Euan Close in marketing terms although the location of no. 4, close to the entrance, is much less attractive than a position in the corner. I agree. Antringham Gardens is older, and with a number of mature trees has, in my judgment, a more mature and established feel especially at the far end (away from the comparable). This is a very much longer cul-de-sac than Euan Close, with many more properties, the consequence being an increase in traffic past no 4 which is also overlooked to the rear, and has a much smaller garden. I also note that despite the fact that there are more rooms in 4 Antringham Gardens than in the subject property, the accommodation is smaller overall.[22]In balancing all the relative advantages and disadvantages, the crucial element will, in my view, always be location. The subject property undoubtedly occupies a much better position in terms of its siting in its own close, and its relationship to other properties in the immediate vicinity than 4 Antringham Gardens does in its road. However, Antringham Gardens as a more marketable geographical location will account for the difference between the £260,000 contended for Euan Close and the adjusted price for no.4 of £272,500. In my judgment this comparable alone supports the appellants’ argument, as a difference of £22,500 (if the LVT’s figure were taken) would be too much.[23]However, Mr. Willson does not rely on a single comparable. He refers also to 8 Sheringham Close. As a location it is comparable with Euan Close, being a small development with properties on one side only and therefore very little passing traffic. Whilst there is a pleasant outlook to the front, no.8 is badly overlooked to the rear, is very much smaller than the subject property and also has a small garden. The adjusted sale price of £252,500 for this comparable also supports a figure of at least £260,000 for the subject property.[24]I now turn to relativity. I found the composite graph, based upon evidence from a number of agents, to be a useful ‘check’ mechanism against the actual local evidence that had been produced. The production of such an analysis at Lands Tribunal hearings on Leasehold Reform matters is common, but usually it relates to the particular expert’s own practice only, and one that tracks results from a number of different practices tends to lend it additional support. However, such a graph can only ever be a general guide to trends and, as with the house price indices produced by Halifax and Nationwide, I would not expect to be relied upon as definitive without other supporting evidence.[25]As to the Delaforce effect, I accept Mr. Willson’s contention that there would be a minimal impact in a case such as this. As W H Rees FRICS and T Hoyes FRICS said in Cadogan: “On the issue of the Delaforce effect, we prefer the evidence of Mr. Strathon and his opinion that in an area of high property values such as prime Central London locations, where the 6 majority of lessees are professionally represented in negotiations by surveyors, it has a minimal impact on the prices agreed. As was accepted in Lloyd-Jones [Lloyd-Jones v Church Commisioners for England [1982] 1 EGLR 209] and re-stated by Mr. Strathon in evidence before us, the issue is not a one way matter. On large estates such as the Grosvenor and Cadogan, where there is a continuing string of applications from lessees to enfranchise, there is also a continuing desire by the freeholder, equal to that by the lessees, to avoid references to this Tribunal and to the leasehold valuation tribunals”.[26]The same point was made by M St J Hopper FRICS in Sir John Lyons Charity v Brett [1998] LT Ref LRA/17/1997 when he said:
“However, I accept that even parties who can afford to litigate generally wish to avoid doing so, if at all possible. I am sure that this is true of lessees who settled with Mr. Briant’s clients as much as it is true of Mr. Briant’s clients themselves. As Mr. Macpherson’s evidence showed, large estate owners are reluctant to litigate, because of costs and delay, in a rising market where the price is fixed by reference to the claim date, and with no interest payable between the claim date and the date of sale completion, lengthy delays are a significant disadvantage. Lastly, unfavourable decisions may well have an adverse affect on many other of the estate owner’s properties. Generally, I find that there is likely to have been an equal desire to avoid litigation, or further litigation, in the case of the settled and accepted prices on both sides and that the settled and accepted prices should not be regarded as exhibiting the Delaforce effect”
. The Calthorpe Estate can certainly be considered to be large, and whilst not comparable with Central London prices, there can be no doubt that they are dealing, in this case at least, with relatively high value properties.[27]Mr. Willson’s argument that there may have been some uplift to the leasehold value in the post 1993 Act cases he analysed (where a relativity of 94 per cent was found) may or may not have merit, but that point is one that I do not need to consider. I find his analysis of the pre-1993 settlements to be a persuasive general indicator of relativity levels on properties with between 77.5 and 72.5 years unexpired. With this analysis clearly showing an average of around 90 per cent, and with no evidence to the contrary, I accept his contention that this proves the 96 per cent found by the LVT was wrong.[28]The parties have agreed the leasehold value of the subject property at the relevant date at £240,000, this being the reason Mr. Willson does not seek to rely upon the leasehold sales of 11 Euan Close (next door) at £230,000 in June 1999, and 7 Euan Close at £220,000 in late 1999. I am of the view that they support the agreed leasehold value for the subject property, which takes into account the premium relating to the corner location and large garden. The LVT relied heavily on those leasehold sales, and considered that the differential between the agreed leasehold value and the freehold was £10,000, but the evidence produced at this hearing relating to the comparables and the relativity analyses has persuaded me that the correct differential was £20,000 – giving a freehold figure of £260,000 (and a relativity of 92 per cent).[29]I am satisfied on the evidence, which was well researched, and clearly and coherently presented by the appellants’ expert, that the LVT’s decision was wrong, and that the value of the freehold interest in the subject property as at 9 October 1999 was £260,000. 7[30]The appellants therefore succeed in this appeal and I determine the price payable for the freehold, in accordance with Mr. Willson’s valuation at Appendix A at £11,400.[31]There being no respondent, I make no award as to costs. DATED 5 February 2001 (Signed) P R Francis FRICS 8 APPENDIX A VALUATION of 15 Euan Close, Edgbaston, Birmingham, B17 8PL Lessors current interest Term Current rent £60.00 YP for 9 years @ 7% 6.5152 £390.91 Fixed increase 1 £90.00 YP for 33 years @ 7% 12.7538 PV of £1 in 9 years @ 7% 0.5439337 6.9372216 £624.35 Fixed Increase 2 £120.00 YP for 33 years @ 7% 12.7538 PV of £1 in 42 years @ 7% 0.0583286 0.7439113 £89.27 Reversion Estimated value of unencumbered freehold interest (exc. tenants improvements) £260,000 PV of £1 in 75 years 0.0062548 £1,626.25 Freeholder’s current interest £2,730.78 Freeholder’s share of marriage value Estimated value of unencumbered freehold interest £260,000 Value of lessor’s interest excluding marriage value £2,730.78 Value of lessee’s interest ignoring tenant’s improvements and excluding marriage value £240,000 £242,730.78 Gain on marriage £17,269.22 Landlord’s share @ 50% £8,634.61 £11,635.39 Say £11,400 9