JOHN BERESFORD WATTON v THE TRUSTEES OF THE ILCHESTER ESTATES LRA/21/2001

UPPER TRIBUNAL
LANDS CHAMBER
LRA/21/2001Case No LRA/21/2001
Between
JOHN BERESFORD WATTONApplicantTHE TRUSTEES OF THE ILCHESTER ESTATESRespondent
Before
P R Francis FRICSVenue 48/49 Chancery Lane, London, WC2A 1JRHearing 9,10 and 12 September 2002Property: Ground Floor Flat, 65 Addison Road, London W14Catchwords: LEASEHOLD ENFRANCHISEMENT – premium payable for new extended lease of flat – yield rates –treatment of tenant’s improvements – additional value of subject flat and whole building for re-conversion to a single house – method of allowing for prospect of repossession under section 61 and whether discount appropriate – Leasehold Reform, Housing and Urban Development Act 1993 – price determined at £144,450
[1]This is an appeal by Mr John Beresford Watton, lessee of premises known as Ground Floor Flat, 65 Addison Road, London, W14 8JL (“the subject flat”), and a cross-appeal by the freeholders, the Trustees of the Ilchester Estates, from a decision of the London Leasehold Valuation Tribunal for the London Rent Assessment Committee (“the LVT”) under section 48 of the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”). By order of this Tribunal, the appeal and cross-appeal were consolidated with Mr Watton designated as the appellant and the Trustees of the Ilchester Estates as the respondents.[2]The lessee was represented by Mr. Jonathan Gaunt QC, who called Mr. Justin Shingles of Justin Shingles Ltd, a valuer specialising in Leasehold Reform Act negotiations who gave valuation evidence. The respondents were represented by Mr. Simon Burrell of counsel who called Mr. Ian Macpherson MA FRICS, a partner in Gerald Eve, Chartered Surveyors of London W1 and Mr. Michael Duncan, senior partner of W A Ellis, Estate Agents and Surveyors of London SW3, both of whom gave evidence of value. I inspected the subject flat both internally and externally on 16 September 2002, together with the locations and external elevations of a number of the comparables referred to in evidence. FACTS[3]The parties produced a statement of facts and matters both agreed and in dispute, from which, together with the written and oral evidence, and my inspection of the subject flat and surrounding areas, I find the following facts:3.1 The subject flat comprises a self-contained upper ground-floor unit in an imposing detached villa fronting Addison Road, a residential street forming part of the Ilchester (Holland Park) Estate. The building has been converted into four separate apartments. Kensington High Street, with its extensive shopping and other local facilities is within a short walk, with Holland Park and High Street Kensington London Underground stations each being about ½ mile distant. The flat has been extensively altered and modernised in recent years, and has been fitted out to a high standard. It contains (approached off the communal entrance hall), hall with cloakroom, large fitted kitchen/dining room, impressive drawing room with large bay window overlooking the rear garden (communal use of which is shared, under the terms of a separate licence, with the other flats in the building), principal bedroom with en-suite bathroom and second bedroom, also with en-suite facilities. The gross internal floor area is 1445 sq ft .3.2 The lease to be enfranchised was dated 3 April 1987 for a term expiring 24 June 2040 at a rent of £200 per annum, subject to review in December 2008 and December 2029 to 0.2 per cent of the open market vacant possession value of a 2 hypothetical lease for 65 years at a peppercorn. The other 3 flats are let by the respondents on assured shorthold tenancies, and thus no security of tenure subsists on them.3.3 A 90 year lease extension, under the terms of Chapter II of Part 1 of the 1993 Act was claimed by the appellant by a section 42 Notice dated 30 September 1999 at a proposed premium of £75,000, and the claim was admitted by the respondents in a counter-notice under section 45 of the Act on 1 December 1999, but at a proposed premium of £258,300. Terms, other than the premium, were agreed between the parties on 16 February 2000, this being the valuation date for the purposes of this determination. Failure to agree upon the premium resulted in an application to the LVT (both parties having revised the proposed premiums), who determined the amount payable for a new lease of 130 years (90 years from the contractual termination of the existing lease) at £182,700 in a decision dated 12 June 2001. Notice of Appeal against the LVT’s decision was lodged by the claimant on 9 July 2001, the respondents’ notice on the cross-appeal was dated 9 August 2001, and the appeals were consolidated on 18 October 2001.3.4 The following values, in respect of the subject flat, the other flats within 65 Addison Road, and the building as a whole, were agreed as at the valuation date:3.4.1 The freehold interest in the subject flat, with continued use for that purpose, disregarding tenant’s improvements: £710,0003.4.2 The freehold interest in the subject flat, taking account of the tenant’s improvements: £862,1463.4.3 The leasehold interest in the subject flat for 65 years, with continued use for that purpose, disregarding tenant’s improvements: £596,400 (for the purposes of rent review)3.4.4 The remaining leasehold interest in the subject flat under the terms of the existing lease (40.35 years), disregarding tenant’s improvements and any tenant's rights under the 1993 Act: £477,5003.4.5 The new leasehold interest in the subject flat (approximately 130 years), taking account of tenant’s improvements: £850,0003.4.6 The new leasehold interest in the subject flat (approximately 130 years), disregarding tenant’s improvements: £700,0003.4.7 The freehold interest in each of the other flats within the building: a) Second and third floor maisonette: £1,065,000 b) First floor flat: £ 760,700 c) Basement flat & garage £ 801,3003.4.8 The freehold interest in the whole building, with vacant possession, for conversion to a single house: £5,140,000 3 ISSUES[4]The following matters remain in dispute between the parties: Issue 1 The capitalisation and deferment rates to be adopted. The LVT adopted a uniform yield rate of 7%. Mr. Shingles accepted this figure, despite having argued for 7.5% before the LVT. Mr. Macpherson proposed capitalisation rates of 5% up to the 2008 rent review, with 6% thereafter, and 6% as a deferment rate. Issue 2 Whether, in calculating the additional value to be realised by a sale of the whole building for re-conversion to a single residence, the value of the subject flat should be taken as improved (per Mr. Shingles) or disregarding tenant’s improvements (per Mr. Macpherson). The LVT opted for the unimproved value. Issue 3 Whether it is appropriate to reduce by 50%, 25%, or at all, that part of the value of the freeholder’s interest in the subject flat that is represented by its apportioned part of the additional value of the whole building for re-conversion to a single dwelling house, to reflect ‘market perception of uncertainty’. The LVT considered that any such increase in value to the freeholder should be reduced by 25%, Mr. Shingles argued for 50% and Mr. Macpherson contended for nil. Issue 4 Whether it is appropriate to reduce by 75%, 25%, or at all, that part of the additional value of the whole building for re-conversion to a single residence that is apportioned to the remainder of the building (excluding the subject flat) to reflect market perception of uncertainty, the possibility that such a conversion might neither be attractive to the market, or appropriate in 40.35 years, any opportunities the freeholder may have to ‘buy-in’ the subject flat in the interim and/or the possibility that re- conversion might become impossible due to the freeholder having granted long leases on one or all of the other flats. The LVT considered a reduction of 25% to be appropriate; Mr. Shingles contended for 75% and Mr. Macpherson argued that a nil reduction should be allowed. Issue 5 What is the appropriate method by which to allow for the prospect that the freeholder may be able to recover possession of the subject flat at the termination date of the existing lease (40.35 years time) under section 61 of the 1993 Act when calculating: a) the value of the freeholders’ proposed interest b) the quantum of the freeholders’ ‘other loss’ in accordance with paragraph 5 of Schedule 13 to the 1993 Act Issue 6 Whether it is appropriate to reduce by 10% (as found by the LVT) or at all, the value of the proposed new lease on account of the landlord’s rights under section 61 of the 1993 Act. Mr. Shingles accepted the LVT’s figure, but Mr. Duncan argued that no such reduction was appropriate.[5]In summary, Mr. Shingles’ valuation on behalf of the appellant produced a premium of £124,200 [Appendix 1] and Mr. Macpherson’s valuation, for the respondents, produced a premium of £253,100 [Appendix2]. 4 Issue 1 – Yield Rates[6]Mr Shingles said, firstly, that in his professional opinion, the subject flat should be valued as a flat and not, as Mr Macpherson espoused, as if it were a house. Even though it was agreed that the value of the flat was significantly higher as a prospect for re-conversion, along with the other flats in the property, to a single house, any such conversion would not be carried out for 40 years. Furthermore, whilst it was accepted that the agreed figure of £5,140,000 was the value of the whole building before the works had been undertaken, the landlord would still have to ‘jump through a number of hoops’ before that value could be realised – for example the steps to invoke and implement section 61 of the 1993 Act. There was at this stage no cast iron guarantee that the re-conversion would actually happen, and an investor would look to a yield that reflected the current use.[7]There was, Mr Shingles said, clear evidence to demonstrate that on, and in the vicinity of, the Ilchester Holland Park Estate, there was a differential in yield rates between houses and flats of approximately 0.5%. He produced details of a number of historical LVT decisions, and in two relevant examples, Mr Macpherson had acted. Firstly, 80 Addison Road, a house in a marginally better position in the street, had been determined at 6.5% whereas a flat at 22 Melbury Road had been determined at 7%. A large number of the modern town-houses in nearby Woodsford Square had also been settled at 6.5% - as was apparent from one of Mr Macpherson’s schedules, and, as had been confirmed by Mr G Hollamby of agents John D Wood, flats on the adjacent Phillimore Estate (very similar, but slightly better in terms of location) were being settled at 7%.[8]Although he accepted that he had little evidence of his own, relying as he did on LVT decisions and some settlements, Mr Shingles said there was nothing to indicate that the LVT, in this case, was wrong to determine a 7% yield. It appeared to be common ground that an equivalent yield of 6.5% was applicable for houses, but he did not agree with Mr Macpherson that yields on flats should be the same. He accepted that, on some prime central London estates, such as Belgravia and Mayfair, there was no longer a differential but this, he said, was due specifically to their very central location and the fact that the market for flats in those areas would be equivalent to the market for houses. That pattern of convergence of yield rates had not yet been established on the Ilchester estate (or for that matter Phillimore, as had also been confirmed by Mr Hollamby), and in any event yields on these two estates were historically higher than prime central London. After all, he said, W14 was hardly SW1 in terms of cachet.[9]Furthermore, it was logical that flats should attract a higher yield than houses due to the management problems inherent in the former and also the fact that, according to the FPD Savills and Chesterton prime central London indices, capital growth in houses had, in recent years, far outstripped that applicable to flats.[10]Regarding Mr Macpherson’s evidence, Mr Shingles accepted that he had a much more comprehensive database that, in part, reflected lower yields. However, he was concerned about the fact that many of Mr Macpherson’s figures appeared to the results of his own analysis, and had not been agreed with the surveyors acting for the other parties. Mr Shingles also pointed out the Lands Tribunal’s past criticism of settlement evidence and, of 5 course, there was always the possibility that settlements might have been subject to the Delaforce effect (see Delaforce v Evans [1970] 214 EG 315.[11]Mr Macpherson acknowledged that if it were not for the fact that the lessee had appealed the LVT’s decision, the respondent would have accepted its determination on yield rates at 7% for both capitalisation and deferment. Justification for the figures that were now being proposed was principally provided by his analysis of 5 voluntary sales of freeholds of houses, together with a substantial raft of secondary evidence derived from enfranchisement settlements on houses under the Leasehold Reform Act 1967 (“the 1967 Act”) and premiums agreed for new leases on flats under the 1993 Act. He also sought support from LVT and Lands Tribunal decisions, and consideration of the prime central London investment market as at the valuation date.[12]Although it was the respondents’ case that the evidence showed there to be no differential in yield rates between houses and flats on the Ilchester Holland Park Estate, Mr Macpherson said that if I were to find that there was, the subject flat should be valued as a if it were a house due to its current substantially increased value as a re-conversion prospect. The appropriate capitalisation rates that were being contended for were 5% up to the next ground rent review in 8.85 years, and 6% thereafter together with a deferment rate of 6%. These were supported by the prices achieved for 5 houses fronting Addison Road that had been sold, on a voluntary basis, since 1993 outside the provisions of the 1967 Act.[13]They had all been subject to similar lease terms to the subject flat but had been either owned by companies or had been otherwise incapable of enfranchisement. The analyses were on the basis of an initial capitalisation rate of between 5 and 5.5% to the next rent review, and 6% thereafter with a deferment rate also of 6%. The landlord’s share of marriage value had been calculated at between 63% and over 100%.[14]Mr Macpherson also produced two summary schedules relating to negotiated settlements on 172 houses and 38 flats on the Ilchester Estate since 1993. As to the weight that should be given to this information, he referred to Lloyd Jones v Church Commissioners for England [1982] 1 EGLR 209. In that Lands Tribunal case the Member, Mr W H Rees FRICS, held that the fact that the figures relating to 57 settlements on the Cadogan and Grosvenor Estates referred to were not derived from [the lessor’s expert’s] own analysis, but from the actual figures used in the calculations, even though not always agreed by the lessees, lent ‘massive’ support to that evidence.[15]Although criticism of the use of settlement evidence often came on behalf of tenants in the context of subsequent disputes about enfranchisement prices and premiums by reference to lack of explicit agreement between the parties’ respective surveyors on each of the constituent parts, Mr. Macpherson said the situation was clarified in Sharp v Cadogan Estates (1998) LT LRA/33&95/1997 (Unreported). In that case the Member, Mr. P H Clarke FRICS, said, in relation to a schedule of 19 settlements, (at 11):
“While it is true that a settlement price can be analysed in different ways and that one or only a few settlements may produce a false picture, the analysis of a large number of 6 settlements will generally produce an accurate overall picture of the component parts of the settlement figures”
. Whilst he had been able to obtain confirmation of the figures in certain cases, Mr. Macpherson said that in those settlements where Langley-Taylor had been involved, they were always reluctant to provide it.[16]There was no justification for Mr. Shingles’ suggestion that the Ilchester (Holland Park) Estate should attract a higher yield than applicable to Cadogan, Grosvenor and Howard de Walden Estates. Ilchester properties had consistently produced returns in capital value growth to match those other locations, and this was supported by the FPD Savills Prime Central London Residential Capital Values Index which showed higher capital growth in PCL West (including Holland Park) than in PCL South West and North.[17]Mr. Macpherson explained his reasoning for considering separately the yield rates applied for capitalising the rental income from those applied for deferring the reversion. Whilst the same result could be achieved by applying an equivalent yield (equivalent being described by him as “a means of analysing or applying the same yield rate to all elements of the valuation”) there was a risk that differences between the security and the dynamism of the long-term returns to be expected from the investment might get overlooked. This approach had been supported in another case in which he had been involved, John Lyon’s Charity v Brett (1998) LT LRA/16/1997 (Unreported). In that case, which related to a property in Hamilton Terrace, the Member (Mr. M St J Hopper FRICS) observed, in connection with the evidence of settled and accepted prices (which he had determined to be preferable to LVT decisions) (at 37):
“Mr. Briant [one of the appellant landlord’s experts] said that he had adopted the standard practice of valuing the rental income during the unexpired terms of the lease and deferring the value of the reversion at the same yield rate. I did not understand Mr. Buchanan [one of the respondent lessee’s experts] to demur as to as to that being standard practice, but that it is not universal practice is clear from Mr. Macpherson’s [one of the appellant landlord’s experts] analysis of the Ilchester Estate settlements. Different considerations apply to the yield rate to be adopted to capitalise the rent payable during the unexpired term of the lease and that to be adopted to defer the reversion. Mr. Briant said that the existence of rent review provisions exercised a downward pressure on yields and Mr. Buchanan said that, other things being equal, yield rates would be lower where there was a very short unexpired lease and higher where it was very long and I think Mr. Johnson was right to imply that one might expect there to be some difference in the yield rates adopted for capitalising rents fixed for very long periods and those fixed for a relatively short unexpired term or subject to significant increase during longer unexpired terms. It is perfectly possible that the risks and attractions of income during the unexpired lease term and the value of the reversion may justify the adoption of the same yield rate for both, although I do not think this was the reason for Mr. Briant’s practice. It is equally perfectly possible to express the differing risks and attractions of the right to receive the rental income during the unexpired term of the lease and the benefit of the reversion by way of a single yield rate, but this appears to me to make the already difficult choice of a yield rate, in the absence of open market evidence, more difficult. 7 I should have preferred to see analyses based on differing yield rates for the term and the reversion, where justified”
. Mr. Macpherson said the reasoning in Brett was agreed by the Member in Trustees of the Eyre Estate v Saphir [1999] 34 EG 71.[18]The evidence produced by Mr. Macpherson’s schedule of 172 settlements relating to houses showed a predominance of equivalent yields at around 6.5%. However, his own calculations had been based upon differing yields, for example: 2c Melbury Road. In the enfranchisement price settlement for this modern town house, he capitalised the rental income at 5% and 6% before and after the rent review (which was to a proportion of the capital value every 21 years) and deferred the reversion at 6%. Langley Taylor, who acted for the lessee, had produced a corresponding analysis that showed an equivalent yield of 6.4% with higher values for the freehold in possession and the existing lease than W A Ellis had advised him had been agreed. 67 Addison Road. Exactly the same yield figures were used in the enfranchisement settlement on this property, although, Langley Taylor’s equivalent yield amounted to 6.5%, with their analysis again showing slightly higher values. 56 Holland Park Road. Similarly, Mr. Macpherson capitalised the rental income at 5% and 6% and deferred the reversion at 6%. The settlement was agreed with Mr. G Hollamby MRICS of John D Wood & Co, although he had been working on the basis of an equivalent yield of 6.5% to produce an enfranchisement price of £97,500 before it was finally agreed at £102,600. Woodsford Square. This is a large development of modern town houses off Addison Road, and fairly close to the subject flat. A high percentage of them have been enfranchised in recent years and in most cases the relevant valuation, agreed with Mr. James Hewetson MRICS of Matthews and Goodman, has been based upon an equivalent yield of 6.5%. However, Mr Macpherson said that in 1999 when rental growth was not keeping pace with capital appreciation, he reduced the yield applied to 6%, the effect of which he offset by applying lower growth in rental compared with capital values. Nevertheless, Mr. Hewetson continued to work on 6.5%. In July 1999, Mr. Shingles had acted for the lessee in regard to No 27 Woodsford Square, and Mr. Macpherson had, as he said, reduced the yield to 5% and 6% for the capitalisation and 6% for the reversion. There was a perception that yield rates were falling, this being supported in a submission to the LVT that had been made by Mr. J M Clark BSc MRICS (acting for the freeholder) in respect of 54 and 66 Woodsford Square. Mr. Clark had said that the difference between his firm’s analysis of the prices agreed for these houses (8 exceptions to the common basis of valuation agreed in 1999 and 2000 – including No 27), and those that had preceded and those that have followed was that these analyses reflected yield rates of 5% to capitalise the ground rent passing, 6.5% to capitalise the rent on review and 6% to defer the reversion, rather than an equivalent yield of 6.5% throughout. This was because, Mr. Clark had said, “in consultation with W A Ellis we concluded that during most of 1999 capital values outstripped growth in rental values…leading to downward pressure on yield rates”. 8[19]In cross-examination on the Woodsford Square enfranchisements, Mr. Macpherson accepted that prices could be analysed either way, and that most of the others on that development were settled at an equivalent yield of 6.5%.[20]As to the schedule on flats, which included units in Monckton Court, Kingfisher House, Oakwood Court and Serlby Court (the latter two being virtually opposite the subject flat), the vast majority had been on the basis of an equivalent yield of 6.5% with no breakdown of individual yield patterns on a differing basis, although in some, his own analysis had been the same as in respect of the houses in his other schedule.[21]I deal firstly, and shortly, with the question of whether, in terms of the determination of an appropriate yield, the subject property should be looked at as a flat, or as if it were a house, whether or not there is any differential between rates. On this point I prefer Mr Shingles’ argument. That there is agreed to be a substantially increased value in the property (the appropriate apportionment of that extra value between the landlord and the lessee forming a significant part of this decision), makes no difference, in my judgment, to the fact that, at the valuation date the subject property was a flat, and was likely to remain so for at least 40 years.[22]The fact is that in this case, the premium for a new extended lease of a flat is to be determined in accordance with the provisions of the 1993 Act, and not of a house under the 1967 Act. Any additional value of the prospects for re-conversion is accounted for in the factors that are dealt with in respect of the other issues to be determined, and to adjust the yield rate to reflect the opportunities that might arise would, in my view represent double counting.[23]Now, as to whether the evidence supported a differential between yield rates for flats and houses on the Ilchester Estate, I found Mr Shingles’ limited evidence in support of a differential (which referred solely to equivalent yields) convincing. Mr Macpherson, in saying that if I found that there was a differential, the flat should be valued as a house, seemed to me to also be acknowledging that there may be a differential.[24]During the course of the hearing it became common ground that, in terms of equivalent yield, Mr Macpherson’s and Mr Shingles’ evidence demonstrated that houses on the estate were attracting, in the vast majority of the settlements and the LVT decisions, an equivalent yield of 6.5%. However, although in many of the examples that Mr Macpherson quoted the surveyor acting for the other side had been working to that figure, and in some cases agreeing the settlement on that basis, Mr Macpherson had chosen to consider separately the capitalisation and deferment rates. It was clear that, despite his justification for so doing partly being the Member’s comments in the Brett case, none of the analyses that he had carried out on this basis had been specifically agreed and it was evident that, in general, surveyors operating in this area seem to think in terms of equivalent yield.[25]Similar comments apply in respect of his schedule of 38 flat settlements and LVT decisions. Thirty one of those he had analysed at an equivalent yield of 6.5% with the remainder shown with differing capitalisation and yield rates. Whilst, on the face of it this 9 seems to indicate flats in the area being taken at similar rates to houses, an analysis of Mr Macpherson’s detailed explanation relating to each of the settlements shows that in many instances 6.5% was not agreed. For example, I quote from his report dealing with the settlements on Serlby Court as follows (para 7.47):
“Serlby Court. This is a modern block of flats fronting Addison Road almost opposite the subject flat. These flats are held on leases that have around 70 years unexpired and contain rent reviews to a proportion of the capital value at 27 – 20 year intervals. Several have been the subject of claims for new leases, and we have negotiated all but one of the premiums payable for those new leases with Langley Taylor acting on behalf of the claimants. Our valuations to the premiums agreed have been based upon an equivalent yield of 6.5% whereas I see from Langley Taylor’s schedule of settlement evidence that their analysis of those premiums is based upon an equivalent yield of 7.5% and higher values for the old and new leases than W A Ellis advised to us…”
[26]Therefore, despite the sheer number of examples Mr Macpherson has used, due to the fact that very few of his analyses were actually agreed, I find I can attach little weight to them. Whilst undoubtedly the product of his own experience and expertise, his analyses could, as has been demonstrated, be interpreted in different ways. Without much stronger evidence to support the premise that his figures, and the bases upon which he applied them, were the accepted and agreed trend in the local marketplace, I find myself unconvinced as to their veracity. The situation is certainly different here from that which applied in the Lloyd Jones case to which Mr Macpherson referred, where the settlements ‘were not derived from the lessor’s expert’s own analysis’. In this case, they were.[27]I also take no account of the 5 house settlements he has referred to as, not only were the circumstances in those cases very different (being voluntary transactions outside the 1967 Act), but wildly differing landlords share of marriage value had been applied and again Mr Macpherson’s figures were purely his own analysis.[28]There is certainly merit, in my judgment, in Mr Shingles’ argument for higher yield rates in Holland Park than those that which have become the norm on some of the prime central London estates, and thus I conclude that the respondents have failed to demonstrate that the LVT was wrong in determining an equivalent yield for the subject flat of 7%. Issue 2 – Improved or Unimproved Value[29]As to the consequence of the LVT taking the notional unimproved value of the subject flat (£710,000) in assessing the enhancement to the value of the building if it had the prospect for re-conversion to a single house, instead of the notional improved freehold value (£862,146), Mr Shingles said the effect was to wrongly increase the differential between the two hypotheses (aggregate of flats on one hand, and unmodernised house on the other) by £152,146. Clearly, he said, if the building were actually sold at the valuation date as a notional freehold, the owner of the subject flat would receive £862,146. There was no justification in the LVT taking the improved values of the other flats in the building, and singling out the unimproved value of the subject flat. 10[30]Such action resulted in the owner of the flat not receiving the value of his improvements. This was not the intention of the legislation. The correct way for the value to be calculated demonstrated, Mr Shingles said, that the LVT should have calculated the aggregate freehold value of the building, as flats, at £3,489,000 on the following basis: Long Leasehold Freehold Basement £ 790,000 £ 801,300 Ground Floor £ 850,000 £ 862,146 First Floor £ 750,000 £ 760,700 2nd/3rd Floor £1,050,000 £1,065,000 £3,440,000 £3,489,146 say £3,489,000[31]With the value of the property as a conversion prospect agreed at £5,140,000, this had the effect of making the additional value £1,651,000. The apportionment of that additional value to the Ground Floor Flat becomes: £ 862,146 x £1,651,000 = £407,969 say £408,000 £3,489,146[32]Conversely, the apportionment of the £1,651,000 to the rest of the building should be: £2,626,854 x £1,651,000 = £1,242,979 say £1,243,000 £3,489,146 rather than £1,419,383 as determined by the LVT.[33]The landlord’s proposed interest after sale (reversion to freehold in possession) should be: £ 710,000 (subject flat unimproved freehold value) £ 408,000 (apportionment of additional value to ground floor flat) £1,118,000 and not £1,093,617 as determined by the LVT.[34]Mr. Macpherson said that, in all elements of his valuation, he had taken the unimproved freehold value of the subject flat (£710,000) as to do otherwise would not be in accordance with the provisions of the 1993 Act. It would also go against the decisions in Norfolk v Trinity College Cambridge (1976) 32 P&CR 147 and in Sharp, both of which related to claims under the 1967 Act, but the principles of which were the same as those relating to the 1993 Act. In Norfolk the Member, Mr. W H Rees FRICS said (at 156): “However, I am satisfied that Mr. Hopper’s [the landlord’s expert’s] approach, treating the house as being unimproved in all the constituent parts of his valuation, contains no error in principle but I did not have the benefit of legal argument on behalf of the tenant”. 11[35]In Sharp the Member, Mr.

(d) of the 1967 Act (at 6):

“It is common ground that the enfranchisement price is to be calculated under section 9(1A). This is to be the price on a sale in the open market by a willing seller on certain assumptions. The assumptions under paragraphs (a) and (d) are relevant to this appeal. Paragraph (a) is an assumption that “the vendor is selling for an estate in fee simple, subject to the tenancy…”
Paragraph (d) is an assumption “that the price to be diminished by the extent to which the value of the house and the premises has been increased by any improvements carried out by the tenant or his predecessors in title at their own expense”. In my view the relationship between these two assumptions is that paragraph (a) defines the interest to be valued, the freehold subject to the existing tenancy, and paragraph (d) provides for the exclusion of the tenants improvements from the price payable for that interest. I do not think that paragraph (a) overrides paragraph (d) – they fulfil different functions. The effect of assumption (d) is to exclude from the value of the property the value of tenants improvements. At every stage of the valuation that value must be excluded so that the price is thereby diminished by the value of those improvements. This exclusion must include the rent or rents under the current lease otherwise full effect would not be given to paragraph (d); the price would only be partly diminished by the value of the tenants improvements. I agree with the passage from Hague, “Leasehold Enfranchisement” (second edition) at paragraph 9-47:
“The manner in which the assumption is given effect is for the property to be valued (at all stages of the valuation) as if the improvements had not been made, i.e. as if the property had been in the same condition as when originally let; and it is their value, and not their costs, which falls to be disregarded””
After then quoting from Norfolk, Mr. Clarke continued (at 8): “The leasehold valuation tribunal clearly did not exclude the value of tenants’ improvements in their assessment of the ground rent on review in 1997 (it was based on the improved value of £1,825,000 and not on the unimproved value of £1,175,000). They were in error in this part of their decision”.[36]Mr. Macpherson produced an example of a hypothetical valuation, analysing the effect of the relationship between paragraphs 3 and 5 of Schedule 13 to the 1993 Act. This was to demonstrate how Mr. Shingles’ approach of taking the improved value in the part of his valuation that related to the calculation of the effects the additional value of the building for re-conversion had on the landlord’s interest, was wrong. I set out Mr. Macphersons example in full: “Schedule 13 – Example of effect of relationship between paras 3 and 5[1]Assume building of 2 flats. Flat 1 is worth £1,200,000 as a freehold in possession, including the effect of tenant’s improvements worth £200,000. Flat 2 is worth £1,000,000 as a freehold in possession. Thus the 2 flats together are 12 worth £2,200,000 (existing use) but the whole building is worth £2,400,000 as a shell for conversion to a house.[2]Flat 2 is already in hand to the landlord, and Flat 1 is the subject of an admitted claim for a new 90 year lease. The consequences for the landlord are thus:(a) the deferment by a further 90 years of the reversion in the unimproved Flat 1 for continued use as a flat worth £1,000,000(b) no effect on the value of the landlord’s interest in Flat 2 for continued use as a flat worth £1,000,000 and(c) the prejudice suffered to the additional value of the whole building as a shell for conversion to a house. That additional value is £400,000.[3]On my approach, I would take into the valuation under paragraph 3: (a) the value of the freehold with vacant possession in the unimproved Flat 1 worth £1,000,000, (i) and (b) a proportion of the additional value of the building as a shell for conversion calculated at £400,000 x £1,000,000 £2,000,000 = £200,000 (ii) I would take into the valuation under paragraph 5 the balance of the value of the building as a shell for conversion to a single house calculated as follows: £400,000 - £200,000 included at (ii) above = £200,000 (iii) The claim would not affect the value of the landlord’s interest in Flat 2 for continued use as a flat worth £1,000,000 (iv)[4]Thus my valuation would have taken account of :(i) the value of the landlord’s reversion in the unimproved Flat 1 for continued use as a flat £1,000,000(ii) &(iii) the additional value of the landlord’s £ 200,000 reversion in the entire building for conversion to a house £ 200,000(iv) the value of the landlords interest in Flat 2 £1,000,000 £2,400,000 As such, it would take account of the whole of the value of the landlord’s reversion at £2,400,000.[5]If I were to apply Mr. Shingles’ approach I would take into the valuation under para 3 only (I) above, i.e. the value of the freehold with vacant possession in the unimproved Flat 1 worth £1,000,000.[6]I would then take into the valuation under para 5 not more than: £ £ Valuation of freehold interest with vacant possession in building for conversion to a house 2,400,000 LESS 13 Value of corresponding interests in Flat 1 as improved (if disregard in para 3 does not apply to para 5) 1,200,000 Flat 2 1,000,000 2,200,000 200,000 (ii) The claim would not affect the value of the landlord’s reversion in Flat 2 for continued use a flat worth £1,000,000 (iii)[7]The valuation would thus have taken account of(i) the value of the landlord’s reversion in the unimproved Flat 1 £1,000,000(ii) additional value of entire building for conversion to a house £ 200,000(iii) the value of the landlord’s interest in Flat 2 for continued use as a flat £1,000,000 £2,200,000 As such it would fall short of the total value of the landlord’s reversion in the building as a shell for conversion to a single house at £2,400,000 by £200,000. The landlord would therefore be deprived of compensation for any diminution in that amount of £200,000 which results from the grant to the tenant of a new lease on his flat”.[37]In cross-examination on this point, Mr. Macpherson accepted that, if it were not for the 1993 Act, as the flat would actually revert to the landlord in its improved state, that would be the figure, in the real world, that was taken in calculating compensation. He could sell it for its improved value but, in granting the lease extension, he is being deprived of that additional value for a further 90 years. He also loses out on that part of the additional value created by the opportunity to reconvert the building as a house that is matched by the value of the tenant’s improvements. He said that the simple point he was making was that the whole of the additional value for re-conversion should be taken into account in assessing the compensation that would be payable to the landlord under paragraph 5, in addition to that part of the value already accounted for in the paragraph 3 calculation. If it was not, then he (the landlord) would lose out on that part of the value for conversion that was matched by the value of the tenants improvements, which was what Mr. Shingles was effectively proposing.[38]Mr. Macpherson did not accept that, by his method which in his view accorded with the provisions of the 1993 Act, the tenant was effectively paying again for the value of his own improvements.[39]In submissions, Mr Gaunt said that the respondents were relying upon the assumption in para. 3(2)(c) of Schedule 13 to the 1993 Act, but that was directed to ensuring that the tenant did not pay for his own improvements, not the assessment and apportionment of the 14 extra value generated by the potential for conversion to a house. The extra value has first to be determined and then apportioned and added to the value of the subject flat. The improvements did not increase this figure, they decreased it. Their value did not, therefore, fall to be disregarded under para 3(2)(c) and it was the interpretation of this clause that needed to be determined.[40]The value of the flat, as existing, ignoring any apportioned development value, could be said to be the ‘bottom slice’ and in respect of this element it was right to ignore improvements. Any additional value attributable to the development, or conversion potential, could be said to be the ‘top slice’, and in respect of the calculation of that element, it was right to take the improved value. If the improvements were disregarded in the calculation of the value of the top slice, the proportion of the overall value attributable to the top slice would be increased. The differential, therefore, was increased if the unimproved value was taken, giving the landlord the benefit of the improvements, and nothing to compensate the tenant.[41]Mr Burrell, for the respondents, said that the issue of taking the improved value as Mr. Shingles had done did not assist the tenant in this case. Mr Shingles’ approach, which ignored the statutory disregards set out in paragraph 3(2)(c) of Schedule 13 – which should be applied throughout the valuation, as intended by Parliament – served to reduce the differential. When the differential was apportioned between the flats on a rateable basis, if the improved value was taken, the differential decreased but the subject flat’s proportion increased.[42]The relevant Statutory Provision (Schedule 13, para (3)(2)) to the 1993 Act provides:[3]– (2) Subject to the provisions of this paragraph, the value of any such interest of the landlord as is mentioned in sub-paragraph (1)(a) or (b) is the amount by which at the valuation date that interest might be expected to realise if sold on the open market by a willing seller (with [neither the tenant nor any owner of an intermediate leasehold interest] buying or seeking to buy) on the following assumptions:(a) on the assumption that the vendor is selling for an estate in fee simple or (as the case may be) such other interest as is held by the landlord, subject to the relevant lease and any intermediate leasehold interests;(b) on the assumption that Chapter I and this Chapter confer no right to acquire any interest in any premises containing the tenants flat or to acquire any new lease;(c) on the assumption that any increase in the value of the flat which is attributable to an improvement carried out at his own expense by the tenant or by any predecessor in title is to be disregarded; and(d) on the assumption that (subject to paragraph (b)) the vendor is selling with and subject to the rights and burdens with and subject to which the relevant lease has effect or (as the case may be) is to be granted. 15[43]Both valuers were agreed that the landlord’s interest had a value that exceeded that derived from a capitalisation of the ground rent, and the simple value of the reversion. The additional value arose from the prospect of re-converting the property into a single house. Under para 3(1)(a) what has to be determined is the value of the landlord’s interest in the flat. Under subpara (2), that value is the open market value on the four assumptions set out, assumption (c), providing that any increase in the value of the flat attributable to tenant’s improvements is to be disregarded. The question for me therefore is: has the open market value of the flat been increased by the improvements that have been carried out.[44]The simple answer, in my judgment, is that the improvements have not increased the additional value (and thus the value of the subject flat within the meaning of para 3(2)(c)), since that additional value derives from the prospects of re-conversion. The overall value of the property (agreed at £5,140,000) as a prospect for re-conversion would be the same whether or not the subject flat had been improved. For that part of the valuation that deals with the additional value there is nothing to be disregarded. There has been no increase in value of the sort referred to in subpara 2(c) and, therefore, it seems to me that Mr Shingles is right on this point. Thus, in Mr Macpherson’s hypothetical example, the figure in 2(a) should be £1,200,000, and the prejudice suffered to the landlord (2(c)) was £200,000 and not £400,000 as he was suggesting.[45]I am satisfied, for the reasons I have given, that the LVT was wrong in its determination on this aspect of the valuation, to treat Sharp as authority on this particular point. No question arose in that case as to an additional value arising from the prospect of conversion or redevelopment, and the Member’s summary of the effect of the statutory provisions was not directed at that question. In this case, the argument under issue 2 was purely in respect of whether or not the improved or the unimproved value in the subject flat should be taken in that part of the valuation that dealt with the additional development value. I therefore adopt Mr Shingles’ value figures in respect of the calculation of the additional value of the subject flat (step 4 in his valuation). I now turn to the discount for uncertainty. !ssue 3 – The extra value of the freeholder’s interest in the subject flat[46]Regarding the issue of what percentage a purchaser would pay of the additional value attributable to the subject flat due to its potential for conversion to a house (£408,000 in Mr. Shingles’ view, deferred 40.35 years), he said that there was only a 50/50 chance that, as far in the future, that extra value might still pertain. It was only in the past 10 years or so that properties of this type had come to be worth more for conversion to a single house due to a large extent to excessive city bonuses and general world wealth. After all, when the property was converted from its original single house status to 4 flats in 1987, it must then have been considered that the value as a conversion prospect for flats was greater. Due to the uncertainties, the investment was less secure, and in his view, a 50% allowance, rather than the LVT’s 25% discount was more appropriate.[47]Mr. Shingles accordingly reflected this allowance in his valuation, and reduced the resulting deferred value of £26,609 (£408,000 deferred 40.35 years at 7%) by 50% to £13,304. This was effectively the same as moving the yield out by 1.85% to 8.85% for this ‘top slice’ of the flat’s value. No adjustment was needed to the yield rate for the ‘bottom slice’ (the flat’s value as a flat, ignoring the extra value) as there was no risk or uncertainty as 16 to that element. The ‘moving out’ of the yield rate on the top slice alone, in this part of the valuation rather than making any adjustment to the yield rates for, say, the calculation of the freeholder’s interest before sale, meant that the effective adjustment to the yield rate was being made at the appropriate stage.[48]Mr Macpherson’s view that no such discount should be applied. There was no more uncertainty about the value of the subject flat as part of the whole building for conversion than there would be about the value of any neighbouring house. Such a proposition was rejected by the Lands Tribunal in the 1967 Act case of Lake v Bennett (1971) 219 EG 945 where the Member, R C Walmsley FRICS said: “I find the proposition equally unacceptable when it is based on the fact that that a rent assessed today but deemed to be assessed at some future date, cannot be as realistic a figure as a rent assessed today and deemed also to commence today. Provided that a valuer properly brings into account all the relevant considerations when determining rental value, he then customarily treats the quantum of the rental income as a settled factor, and turns to decide his rate of interest in the light of other factors, such as the comparability of income from property in general with other available types of investment, and the comparability of the subject property with other types of property”.[49]To reduce the value of the freehold in possession, as the LVT had done, had the same effect as increasing the deferment rate applied to the value of the freehold in possession before, or without reduction. Mr Macpherson said that there would be no need to increase the deferment rate applied to value this reversion as compared with that which would be appropriate for any neighbouring houses, because there was no difference in potential for growth between the subject property and any of its neighbours. He considered that 6% was the appropriate deferment rate to take account of any growth potential, and any risks that might be involved in respect of the investment.[50]To speculate as to whether or not the market cycle might or might not be right for re- conversion in 40 years time, and to apply a percentage discount, as both Mr. Shingles and the LVT had done, was to ignore the purpose of choosing an appropriate ‘all risks’ yield to take account of all possible eventualities. An all risks yield, it was submitted, took everything into account and, Mr Burrell said in closing, it was not for valuers to carve the value up into slices and apply differing rates to each of them, thus speculating as to what the market’s perception of the investment might be in 40 years time.[51]I prefer Mr Shingles’ approach and accept that, in reality, a purchaser of the subject flat at the valuation date would be most unlikely to be prepared to pay the whole of its additional value as a prospect for conversion. Although the likelihood of section 61 ever being invoked so that the conversion could proceed was originally denied by the respondents, it was accepted by Mr Macpherson during the course of the hearing that there was, indeed, a very high likelihood. Nevertheless, that likelihood was subject to some uncertainty and under the 1993 Act, there is a fairly short window of opportunity for the necessary action to be taken by the landlord, and in my judgment a 25% discount, as found by the LVT, rather than Mr Shingles’ 50%, fairly represents that degree of risk. 17[52]Mr Macpherson seems to be so certain that circumstances will be right for re- conversion in 40 years that he says there should be no discount from that proportion of the additional value attributable to the subject flat. He said such risk, if any, is already accounted for in the adoption of an all risks yield, however, in his view the appropriate yield is exactly the same as that applicable to a nearby property that is already a house. Thus, no allowance whatsoever has been made, and I do not see how that can be right. The neighbouring house, to which he referred, is already a house and not a prospect for conversion with all the implications that has, and the adoption of the same yield rate seems to me to be illogical.[53]Mr Shingles’ calculation had, as he had said, the effect of moving the yield out on the ‘top slice’ (a description that was dismissed by Mr Macpherson, but which I think is apt in these circumstances) to 8.85% and whilst I think Mr Shingles has gone a little too far in the percentage discount applied, the methodology appears sound. It certainly is not, in my view, in conflict with the principles in Lake. Issue 4 – The extra value attributable to the rest of the building.[54]Mr Shingles said that the onus was upon the landlord to demonstrate that he would suffer losses in respect of his other interests within the building (under para 5 of Schedule 13 to the 1993 Act), by the grant of the new lease on the subject flat, but it was his view that he would not. It was, as had previously been said, common ground that the prospective re- conversion of the property would satisfy the provisions of section 61, thus enabling the landlord to regain possession in 40 years. He would then immediately realise the additional value both in the subject flat, and in respect of the rest of the property (as a conversion prospect). The only compensatable loss therefore, that he would suffer under para 5, would be such sum as would compensate him now for the eventual cost and inconvenience of invoking section 61 and gaining possession.[55]This was taken into account in his valuation by allowing the landlord 25% of the deferred extra conversion value relating to the rest of the building that would be released by obtaining possession of the subject flat. This, in effect, was the same as reducing that extra value to the landlord by 75%. The total additional value in the building for re-conversion over the existing use as flats was, by Mr Shingles’ calculation, £1,651,000. Deducting the additional value in the subject flat left £1,243,000 attributable to the rest of the building. That sum, deferred 40.35 years became £81,065. He then reduced this figure by 50% to allow for any perception of market uncertainty (as he had done in respect of the additional value in the subject flat (issue 3)).[56]There was the possibility that with average turnover of flats in central London being every 5 years, the landlord may well have the opportunity to buy the flat in earlier, but there was also the risk that conversion in 40 years time (or whenever vacant possession of the whole was obtained) might not be viable on commercial, market or economic terms and, indeed, government legislation might prevent such a conversion being permitted. If that were to happen, the landlord would not suffer that para 5 loss. The fact that the landlord was getting this element of compensation now, and the tenant would probably not get any of it back when the Schedule 14 compensation was paid, should also be taken into account. For these reasons, Mr Shingles deducted a further 50% to leave a compensation for other loss 18 figure of £20,266. From that, £184 needed to be deducted to reflect the reversionary value of the £1,243,000 attributable to the additional value in the other flats over 130 years. This left £20,100 (rounded). Such a sum, if invested now, would produce almost £300,000 in 40 years, and that, in Mr Shingles view was more than adequate to compensate the landlord for what, in reality, would be only very minor loss and inconvenience.[57]In Mr Macpherson’s view no such discount should be allowed. The key to calculating the value of the landlord’s interest was to look at the reality of the marketplace at the valuation date and, as he had said previously, to apply capitalisation and deferment rates that were appropriate in the light of all the relevant circumstances. In his valuation in respect of this element, he had again looked at a best and worst scenario, and took an average. However, in the ‘at best’ situation, where possession would be obtained in 40 years, he had moved the deferment rate out 1% to 7% to allow for uncertainties such as the limited timescale in which the requisite action has to be taken under section 61, and that it might come at a disadvantageous time in the market cycle. There were also questions as to the amount of compensation that the landlord might have to pay to the lessee upon obtaining possession, as whether or not he might have to pay some marriage value had not yet been tested under the 1993 Act. Those uncertainties had an adverse effect upon the current value of the landlord’s interest, hence the higher deferment rate. It was nevertheless accepted that the section 61 opportunity for an earlier reversion must add value to the landlords interest.[58]Mr Macpherson’s resultant figure of compensation for landlord’s other losses under para 5 was £88,640, this being 65% of the present value of the difference between the aggregate of the value of the other flats in the building and the apportioned value of the whole building as a house. It was put to him that if he had not used a 7% deferment rate on the ‘at best’ valuation, his figure would have been very much closer to that of Mr Shingles, although, in any event, as to the total value they were only about £7,000 apart. However, by not allowing any discount, approximately £88,000, if invested at the valuation date, would produce well over £1,000,000 in 40 years time – this being out of all proportion to any potential other losses that he might incur. If the landlord was able to undertake the conversion, then he would have obtained a very substantial windfall, no part of which could be reclaimed by the lessee.[59]Once again, I find myself pursuaded, up to a point, by Mr Shingles’ reasoning and cannot accept Mr Macpherson’s assertion that the lessee should pay 100 per cent of the calculated para 5 losses. However, I think that by applying his ‘second 50% reduction’, Mr Shingles was, as was suggested by Mr Burrell, to a certain extent double counting. This was Mr Macpherson’s view. He said, in cross-examination that, in taking the average of the best and worst scenarios as he had, he felt there was a 50/50, or even, chance that the circumstances would be right in 40.35 years for section 61 to be implemented – this was not dissimilar to Mr Shingles’ approach of reducing his initial figure by 50%, but he could not understand why Mr Shingles had then gone on to make a second 50% reduction. Mr Macpherson said that pushing out the yield rate was sufficient to cover that risk. He did not accept that this was, effectively, double counting or, in other words, making two allowances for the possibility that circumstances may not be right for the section 61 grounds for possession to be implemented. The investment in this case was less secure, in the eyes of the market, than it was, overall, under the worst case scenario. 19[60]The LVT allowed 25%, and in its reasoning said (at para 57):
“As the section 61 right is included, the Tribunal made a deduction because it accepts that the ‘market’ would not pay as much for a 130 year lease with a redevelopment break clause than one without. That the deduction does not equal the measured loss of future development value to the freeholder is because the Tribunal has not given section 61 the same weight in terms of perception by the market. Section 61 is not only about uncertainty over a possible ‘change of climate’, it is about one opportunity/possibility for the landlord over a period of 12 months in a term of 130 years and not without its problems as referred to by Mr Burrell. If the lessors were successful in terminating the new lease in 40 years time, then they will have gained financially, but if they fail the lessors will have lost financially and the lessee will have gained from having paid less for the new lease”
. I agree with that reasoning, and have heard nothing in evidence which suggests to me that I should differ from the LVT’s conclusion. I determine therefore that there should be a 25% discount from the value of the freeholder’s other losses, calculated on the basis of the ‘methodology’ determined in issue 5, to which I now turn. Issue 5 – Methodology[61]Mr Shingles has taken a ‘percentage approach’ in assessing both the value of the freeholder’s proposed interest in the subject flat, and the quantum of the freeholder’s other loss in accordance with para 5. In the former, he halved the proportion of the additional value as, in his view, an investor would take a 50/50 view as to whether the building was worth more as a house than as flats in 40 years time. This was different from Mr Macpherson’s ‘best and worst’ approach, where he had averaged the value of the freehold reversion deferred 130 years at 6%, and the same interest deferred 40 years at 7%.[62]In Mr Gaunt’s submission, this had resulted in the prospect of conversion given a 40 year term being valued at £36,444, but the value of a break clause in a 130 year term became only £8,744. This was an example, he said, of the inappropriateness of Mr Macphersons methodology. It was common ground, Mr Gaunt said, that the building was worth more as a re-conversion prospect, and there was also a real prospect the proposed works would satisfy section 61. In those circumstances, it was obvious that the reversion on a 130 year term with a landlords break clause in 40 years was more valuable to the freeholder than a straight 130 year term. Therefore, Mr Macpherson’s discrepancy was too great. It was suggested that Mr Macpherson had double-discounted to reflect the same risks, and if he had left the yield rate the same, and simply taken an average, the resulting figure of £12,653 would have been extremely close to Mr Shingles’ £13,304.[63]As to the calculations for the para 5 losses, Mr Macpherson had again looked at the best and worst situation, and that had resulted in compensation for those losses being calculated at £88,000.[64]In my view, Mr Macpherson’s approach is unnecessarily complicated and I accept Mr Gaunt’s submissions in this regard. Mr Shingles’ approach is, I think, to be preferred as it seems to me to reflect more clearly the way investors in the market would actually look at the 20 situation. I therefore adopt that approach in my valuation, adjusted for discounts in accordance with the determinations set out above. Issue 6 – Section 61 Discount[65]The threat of the new extended lease being terminated under the provisions of section 61 of the 1993 Act in 39 to 40 years must reflect, Mr. Shingles said, in the price a purchaser would pay against what he would bid for a 130 year lease where there was no prospect of such termination occurring. He agreed with the LVT that 10% was an appropriate figure and argued that Mr. Macpherson’s view that no discount should be applied was unrealistic. Indeed, he had confirmation from the agents acting for both parties that a 10% section 61 discount had been agreed in relation to a 90 year lease extension on a flat at 6 Wilton Crescent (Grosvenor Estate) with 15 years unexpired on its original lease. However, in cross-examination he accepted that the very much shorter period would have been an important factor, nevertheless, he felt that evidence should be given weight.[66]As had already been established, and agreed, there was a very real prospect that section 61 would be implemented in the case of the subject flat. Also, the other three flats in the building were ‘in-hand’, so it was not a question of several section 61 notices having to be served. Even though the lessee would get the full market value of the flat, in accordance with the provisions of Schedule 14 of the 1993 Act it was likely to be on the basis of its current use. He would also have the upheaval of having to find another property, to incur fees, stamp duty and removal costs. That must make the property worth less than if that possibility did not exist.[67]The 10% allowance had been made in his valuation by reducing the unimproved extended lease value (£700,000) by £70,000 to give a net extended lease value of £630,000.[68]In cross-examination, Mr. Shingles said he did not accept Mr. Duncan’s evidence regarding the Cadogan Estate, and particularly properties in Cadogan Square, where he had said that the existence of section 61 rights had had no valuation effect in a number of recent transactions, even though those original leases only had 23 years, rather than 40, to run. It was Mr. Shingles’ view that the Cadogan properties were very different, the demand for flats being such that there would be little if any difference in value whether there were conversion prospects or not. The leases were also badly drawn, in that there was no provision, in some cases, for the recovery of service charges, and the Estate would therefore pay ‘royal money’ to get the properties back. Many of the properties were also, being extremely large, converted into many more flats, and so as many as 8 section 61 notices may have to be served.[69]Mr. Shingles said that, in assessing the Schedule 14 compensation that the landlord would have to pay on exercising section 61, whether or not Marriage Value would have to be taken into account had not yet been tested. It was to be assumed that the flat was to be valued for the purpose of occupation, and no development value could be taken into account. Therefore, even though it was right to allow for the fact that the landlord would be in the market, there would be no opportunity for the lessee to receive any of the additional value that would be unlocked for the landlord. 21[70]Mr. Duncan is senior partner in W A Ellis, estate agents and surveyors, practising in Mayfair, Belgravia, Kensington and Chelsea. He said his firm had standing instructions from the Cadogan Estate and the Ilchester (Holland Park) Estates to advise on open market valuation issues in respect of leasehold reform claims. This advice was used by Gerald Eve in calculating enfranchisement premiums. In this case, he had been asked to give evidence of the effect (if any) of section 61 of the 1993 Act on the vacant possession value of the extended lease of the subject flat.[71]He said that despite the fact there was no certainty that the landlord would take measures to implement the provisions of section 61, if he did, and his application succeeded, the tenant would receive full open market value and would therefore suffer no financial loss, other than, perhaps, some costs. With the date upon which section 61 could be instigated being almost 40 years away, and with the tenant unlikely to suffer significant financial loss, it was his opinion that the new lease would have been readily saleable at full open market value at the valuation date.[72]Mr. Duncan said he had evidence of transactions involving previously extended leases where the landlord had specifically reserved section 61 rights and where that had no effect either upon the negotiations leading to settlement of the new lease terms, or in respect of resales. There were three examples in Cadogan Square, SW1 where the original lease term dates expired in 2023, very much sooner than was the case with the subject flat. All of the flats were unimproved and in ‘ordinary’ order. The increase in values between those agreed or applied at the enfranchisement date and the those achieved upon resale indicated, he said, that the purchasers were apparently undeterred by the section 61 factor.[73]There were also flats in Ennismore Gardens, SW7, Egerton Gardens, SW3 and Lennox Gardens, SW1 where, after carrying out settlement analyses, applying adjustments for improvements where necessary and for house price inflation, it was evident that purchasers had been unconcerned about the section 61 factor. For example, Mr. Duncan referred to Flat V, 23-24 Ennismore Gardens, London SW7 and said:
“This flat was held on an existing lease expiring December 2026. As at a valuation date of November 1998, the value of the new lease (about 118 years) was put at £435,000 in Cluttons’ analysis for the landlords. There was no adjustment for improvements. The new lease was re-sold following refurbishment for £640,000 in March 2000. Cluttons’ settlement analysis of £435,000, with an increment for inflation to March 2000 would have been £548,100. The purchaser was apparently undeterred by the section 61 factor”
The Egerton Gardens and Lennox Gardens flats had new leases voluntarily granted, but the leases included provisions in the same terms as section 61.[74]In cross-examination, Mr. Duncan said he considered there to be no marked difference in terms of desirability of location and market demand between the Cadogan Estate, Belgravia and the Ilchester (Holland Park) Estate. He did not accept that Cadogan Square could effectively be described as ‘flat-land’, where due to the demand for them, there would be little if any financial benefit in converting flats to houses. He said he personally knew of at least six Cadogan Square properties that were in single family occupation and, indeed, was 22 aware that No 16 was recently brought back into possession expressly for the purpose of re- selling it freehold (for £8.5 million) for restoration as a single residence. That property had over 11,000 sq ft of accommodation but the buy-in by the Cadogan Estate was not, he accepted, effected under section 61.[75]Mr. Duncan confirmed that he was unaware of any transactions in recent years where the Cadogan Estate had actually exercised section 61. Whilst accepting it would be more difficult to do so in a very large property which might contain 7 or 8 flats than in the case of the subject property, where there were only 4 flats, and 3 were already in hand, he said the immediacy of the possible implementation, at 40 years, was much less than in the other cases he had mentioned. As those with reversions of nearer 20 years had not, in his opinion, been affected, then it was most unlikely that section 61 would have any effect on the value of the subject flat.[76]Mr. Duncan admitted that whilst he agreed with Mr. Macpherson that the value of the landlord’s interest would be increased by the possibility of implementing section 61 in 40 years, he did not think the value of the tenant’s interest would be affected, for the reasons that he had given. The market in reversions was, he said, more sophisticated than the owner/occupier market.[77]In submissions, Mr Gaunt said that to a tenant, it was obvious that a 130 year term without a landlord’s break clause must be worth more than one that has a break clause after 40 years. Mr Duncan had accepted that a lease affected by a section 61 break clause became more difficult to market as the period to the break got shorter, but he had tried to assert that, in this case, a 40 year ‘countdown’ had no effect on value. It was rather implausible, Mr Gaunt said, that whilst, as had been agreed, the break clause had served to enhance the value of the reversion, Mr Duncan had sought to argue that the value of the term, to a lessee, was not affected.[78]It was apparent that Mr Duncan had not taken into account the fact that the other flats in the building were in hand, the marked additional value in the building for conversion, and the fact that the tenant would have to incur significant costs associated with moving, but in cross-examination had accepted that, in principle, a deduction for the section 61 risks to the tenant would be applicable. Mr Gaunt said that Mr Shingles’ evidence was to be preferred and the 10% discount that he had sought was the correct figure in all the circumstances.[79]I am not persuaded by Mr Duncan’s evidence. There is no doubt in my mind that the market and circumstances are very different in Cadogan Square and the fact that to invoke section 61 at the subject property would be very much more straightforward than it would be in any of Mr Duncan’s examples, also needs to be taken into account. To me, it defies logic to suggest that a prospective purchaser of a 130 year lease would pay the same sum if he knew there was a landlord’s break clause in 40 years, even though he would then receive market value.[80]Even if he were entitled to a share of the marriage value in 40 years (and I acknowledge that this has not been tested) he would still have all the inconvenience of having to find and 23 acquire another property, with all the costs, upheaval and stress that goes with any home move.[81]In my judgment the LVT was correct to apply a discount of 10%, and in that regard, therefore, I find for the appellant.[82]Having now determined the issues in this appeal, I set out my valuation at Appendix 3. The premium to be paid for the new extended lease is therefore £144,450.[83]This determination will take affect as a decision when the question of costs has been determined, and not before. The accompanying letter sets out the procedure for written submissions on costs. Dated 4 November 2002 (Signed) P R Francis FRICS ADDENDUM ON COSTS[84]I have received submissions on costs from the parties. The claimant said that as he had been successful on every issue, resulting in the award being reduced from the LVT’s figure of £182,7000 to £144,450, he should receive all his costs in the appeal on an indemnity basis. Furthermore, he had sent a “Calderbank” letter to the respondents on 19 December 2001 offering, without prejudice save as to costs, the sum of £161,500 for the freehold interest. That letter, he said, was not responded to.[85]The respondents accepted that they had not responded to the Calderbank offer, and that as the award was less than that offer, they should pay the appellant costs from 9 January 2002 (21 days from the date of the offer). However, these should be on the standard basis. There being nothing in respect of their conduct of the case to justify being penalised by costs award on the indemnity basis.[86]As to the costs prior to 9 January 2002, the respondents said that they should only pay one-third of the appellant’s costs to reflect the extent he had succeeded in respect of the six discrete issues before the Tribunals. The appellant had appealed on four issues, winning on two and losing on two. In such circumstances on an “issues based” award of costs, there 24 should be no award. However, the respondents had cross-appealed on a further two issues and in respect of those, the appellant had won. He should have his costs of those two issues (being two out of the total of six) and therefore it was submitted that I should award the appellant one-third of his costs up to 9 January 2002.[87]In response the claimant said that the general principle was that the costs should follow the event. Simply put, the appeal had succeeded, and in respect of the two issues upon which the respondents said the appellant had lost, that was not in fact the case. The Tribunal had accepted the appellant’s reasoning but had reduced the allowance.[88]I do not accept, in such a straightforward matter as this, that it is either necessary or appropriate to examine the question of costs on an issue by issue basis. The appellant clearly succeeded in this appeal, my award being significantly below the figure for which the respondents contended and also well below the offer to settle that the appellant had made in December 2001. It was also only marginally above the figure for which the appellant had contended.[89]I cannot accept the respondents’ argument as to why the appellant should only receive one-third of his costs prior to 9 January 2002. If anything there might have been an argument (on an issue by issue basis) for the appellant only getting two-thirds of his costs before January 2002, rather than the one-third contended for. However, as the appellant said, his expert reasoning and methodology was indeed accepted on those two issues, so he did not ‘lose’ as such.[90]In my judgment there can be no question of the appellant being deprived of any of his costs in this case.[91]No questions have been raised as to the conduct of the case either prior to or after 9 January 2002 other than the fact that the respondents chose not to respond to the appellant’s offer to settle. It is the exception rather than the rule that this Tribunal awards costs on an indemnity basis and I do not think that the fact that the Calderbank offer was not acted upon was of sufficient gravity to effectively penalise the respondents by awarding costs on the indemnity basis.[92]I therefore determine that the respondents shall pay the appellant’s costs in this appeal on the standard basis such costs to be subject to a detailed review by the Registrar if not agreed. Dated 4 December 2002 (Signed) P R Francis FRICS 25 26 27 APPENDIX 1 LRA/21/2001 VALUATION BY J SHINGLES for the APPELLANT Property Ground Floor Flat 65 Addison Road W14 Date of Valuation 16 Feb 2000 Unexpired term of lease 40.35 Yrs LANDLORDS INTEREST BEFORE SALE[1]Ground rent payable Years Purchase for 8.85 Yrs @ 7.0% £200 6.436 £1,287[2]Reversion on review to- 65 year lease value @ 84% of FH Value Rent Review Cap val 0.2% of £596,400 £1,193 £1,193 Review rent increase in 8.85 Yrs Years Purchase for Present value of £ in 31.50 Yrs 8.85 Yrs @ @ 7.0% 7.0% 12,590 0.549 6.918[1]Reversion to end value- Freehold value with vacant possession Deferred 40.35 Yrs @ 7.0% £710,000 0.06522 £8,252 £46,304[4]Add proportion of additional value Of 65 Addison Road for conversion to single house as follows: VP value of 65 Addison Road for conversion to single house as found by LVT £5,140,000 Basement Ground Floor First Floor 2nd/3rd Floors Total Additional value for conversion therefore £801,300 £862,146 £760,700 £1,065,000 £3,489,146 SAY £3,489,000 £1,651,000 Proportion therefore; Ground floor flat Formula therefore for aggregate of house as FH flats: £862,146 £3,489,000 x £1,651,000 = £407,969 SAY £408,000 Deferred 40.35 Yrs @ 7.00% 0.06522 £26.609 Less allowance to reflect market perception of uncertainty 50.00% £13,304 Landlords value before marriage value £69,148 28 LANDLORDS PROPOSED INTEREST AFTER SALE Reversion at lease end Freehold value with vacant possession being £710,000 Deferred 130.35 Yrs @ 7.00% 0.00015 £105 Reversion to freehold value in possession £710,000 Add back for prospect of determining full future Reversion under S61 of 1993 Act Landlords NET Reversionary value after sale £13,304 £13,409 TENANTS EXISTING INTEREST BEFORE PURCHASE Unexpired lease 40.35 Yrs Freehold value £710,000 Relativity 67.25352 % Negot’d existing lease £477,500 Value of existing lease before purchase £477,500 TENANTS PROPOSED VALUE AFTER PURCHASE New lease 130.35 Yrs Percentage of Value 98.59 % Freehold Value `£710,000 Calc new long lease free of S61 £700,000 % Val of ground rent £0 Less 10% against risk of S61 of £70,000 Applying in 40.35 years time as found by the LVT Value of new lease after purchase £630,000 £630,000 MARRIAGE VALUE Landlord Tenant Present Val £69,148 £477,500 Proposed Val £13,409 £630,000 Gain/Loss (£55,739) £152,500 Marriage value (Gain/Loss) £96,761 50% Difference to Landlord £48,381 PRICE FOR LEASHOLD INTEREST Landlords loss £55,739 Marriage Value amount £48,381 Price to be paid £104,119 SAY £104,100 29 c/f £104,100 COMPENSATION FOR OTHER LOSS Add proportion of additional value of 65 Addison Road for conversion to single house attributable to other parts of building VP value of 65 Addison Road For conversion to single house as found by LVT £5,140,000 Less VP value of flats as freehold Basement £801,300 Ground Floor £862,146 First Floor £760,700 2nd/3rd Floors £1,065,00 £3,489,146 Say £3,489,000 Additional value for conversion Therefore £1,651,000 Proportion of additional value Applicable to subject flat £408,000 Total for basement 1st and 2nd Floor flats apportioned in proportion to corresponding values as flats therefore: £1,243,000 Deferred 40.35 yrs @ 7% 0.06522 £81,065 Less allowance to reflect market Perception of uncertainty 50% £40,533 Less allowance in 130 year lease of effect afforded by S61 break clause 50% £20,266 Total for Basement, 1st and 2nd floor flats apportioned in proportion to corresponding values £1,243,000 Deferred 130.35 Yrs @ 7% 0.00015 £184 £20,083 SAY £20,100 TOTAL PREMIUM £124,200 30 APPENDIX 2 Ilchester Estates LRA/21/2001 Leasehold Reform, Housing and Urban Development Act 1993 Schedule 13 Calculation of Premium for New Lease Ground Floor Flat, 65 Addison Road, London W14 As at 16th February 2000 By Ian Macpherson MA FRICS Value of Landlord’s Existing Interest Excluding Marriage Value £ £ £ £ £ Annual rent payable Years Purchase 8.85 years @ 5.0% 200 7.013 1.403 Annual rent payable from review 25 December 2008 (0.2% of VP Value of 65 year lease) Value of 65 year @ 84% of FHVP 0.84 x Rent Payable @ 710.000 0.20% 596.400 say 1,193 1,193 Years Purchase 31.5 years @ Deferred 8.85 years @ (Yield reflects reviews every 21 years) 6.0% 6.0% 14,088 0.597 8,363 9,977 Reversion to value of freehold in possession for continued use as separate flat 710,000 Add proportion of additional value of 65 Addison Road for conversion to single house from Appendix A Deferred 40.35 years @ 6% 383,617 1,093,617 0.095 103,894 115,274 £ £ £ £ Value of Landlord’s Proposed Interest At worst Reversion to value of freehold in possession Deferred 130.35 years @ 6% 1,093,617 0.0005 547 Or at best Reversion to estimated value of freehold in possession for conversion to single house Less minimum compensation to Leaseholder for buying in Lease with 90 years unexpired (Sch 14) Deferred 40.35 years @ Average of worst and best Equivalent to deferring for 40.35 years @ Diminution of Value of Landlord’s interest 7.0% 8.75% 260,617 0.034 1,093,617 833,000 260,617 0.065 8,861 16,940 8,744 106,531 Calculation of Marriage Value Value of Proposed Interests Landlord’s (from above) Tenant’s Value of Existing Interests Landlord’s (from above) Tenant’s Gain on marriage Share of marriage value to Landlords @ 50% 8,744 700,000 115,274 477,500 115,970 say 57,985 164,515 164,500 31 32 Landlord’s Other Loss BEFORE GRANT OF LEASE OF SUBJECT FLAT Proportion of additional value of 65 Addison Road for conversion to single house attributable to other parts of building than Subject Flat c/f £164,500 Total for Basement, 1st and 2nd/3rd floor flats apportioned in proportion to corresponding values as flats from Appendix A 1,419,384 Deferred 40.35 years @ 6% 0.0953 135,267 Following Grant of New Lease of Subject Flat At Worst Total for Basement, 1st and 2nd/3rd floor flats apportioned in proportion to corresponding values as flats from Appendix A Deferred 130.35 years @ Or at best Additional Value in Freehold with vacant possession for conversion to single house Deferred 40.35 years @ 6% 7% 1,419,384 0.0005 1,1419,384 0.0652 710 92,544 Average of worst and best Equivalent to deferring for 40.35 years @ Premium Payable 8.75% 1,419,384 0.034 48,259 Say 46,627 ______ 88,640 253,140 253,100 33 APPENDIX 2A 65 Addison Road, London W14 Apportionment of Additional Value for Conversion to Single House over and above Value for Continuation of Existing Use as Flats £ £ £ Mr Duncan’s valuation of freehold interest with vacant possession in 65 Addison Road for conversion to single house 5,140,000 Mr Duncan’s valuations of corresponding freehold interests with vacant possession in: Ground Floor First Floor Second and Third Floors Basement with Garage Therefore Additional Value for Conversion 760,700 1,065,000 801,300 710,000 2,627,000 3,337,000 1,803,000 Apportionment between flats in proportion to corresponding values as flats: £ £ Ground Floor First Floor Second & Third Floors Basement 411,011 575,426 432,947 1,419,384 383,617 1,419,384 1,803,001 34 APPENDIX 3 LRA/21/2001 LANDS TRIBUNAL VALUATION Ground Floor Flat, 65 Addison Road, London W14 As at 16 February 2000 LANDLORDS’ INTEREST BEFORE SALE[1]Ground rent payable Years Purchase for 8.85 Yrs @ 7.0% £200 6.436 £1,287[2]Reversion on review to- 65 year lease value @ 84% of FH Value Rent Review Cap val 0.2% of £596,400 £1,193 £1,193 Review rent increase in 8.85 Yrs Years Purchase for Present value of £ in 31.50 Yrs 8.85 Yrs @ @ 7.0% 7.0% 12,590 0.549 6.918 Reversion to end value- Freehold value with vacant possession Deferred 40.35 Yrs @ 7.0% £710,000 0.06522 £8,252 £46,304[4]Add proportion of additional value Of 65 Addison Road for conversion to single house as follows: VP value of 65 Addison Road for conversion to single house as found by LVT £5,140,000 Basement Ground Floor First Floor 2nd/3rd Floors Total Additional value for conversion therefore £801,300 £862,146 £760,700 £1,065,000 £3,489,146 SAY £3,489,000 £1,651,000 Proportion therefore; Ground floor flat Formula therefore for aggregate of house as FH flats: £862,146 £3,489,000 x £1,651,000 = £407,969 SAY £408,000 Deferred 40.35 Yrs @ 7.00% 0.06522 £26,.609 Less allowance to reflect market perception of uncertainty 25.00% £19,957 Landlords existing interest £75,800 35 LANDLORDS PROPOSED INTEREST AFTER SALE Reversion at lease end Freehold value with vacant possession being £710,000 Deferred 130.35 Yrs @ 7.00% 0.00015 £105 Reversion to freehold value in possession £710,000 Add back for prospect of determining full future Reversion under S61 of 1993 Act Landlords NET Reversionary value after sale £19,957 £20,062 TENANTS EXISTING INTEREST BEFORE PURCHASE Unexpired lease 40.35 Yrs Freehold value £710,000 Relativity 67.25352 % Negotiated existing lease £477,500 Value of existing lease before purchase £477,500 TENANTS PROPOSED VALUE AFTER PURCHASE New lease 130.35 Yrs Percentage of Value 98.59 % Freehold Value `£710,000 Calc new long lease free of S61 £700,000 % Val of ground rent £0 Less 10% against risk of S61 of £70,000 applying in 40.35 years time Value of new lease after purchase £630,000 MARRIAGE VALUE Landlord Tenant Present Val £75,800 £477,500 Proposed Val £20,062 £630,000 Gain/Loss (£55,738) £152,500 Marriage value (Gain/Loss) £96,762 50% Difference to Landlord £48,381 PRICE FOR LEASHOLD INTEREST Landlords loss £55,738 Marriage Value Amount £48,381 Price to be paid £104,119 SAY £104,100 36 b/f £104,100 COMPENSATION FOR OTHER LOSS Add proportion of additional value of 65 Addison Road for conversion to single house attributable to other parts of building VP value of 65 Addison Road For conversion to single house As agreed £5,140,000 Less VP value of flats as freehold Basement £801,300 Ground Floor £862,146 First Floor £760,700 2nd/3rd Floors £1,065,000 £3,489,146 Say £3,489,000 Additional value for conversion Therefore £1,651,000 Proportion of additional value Applicable to subject flat £408,000 Total for basement 1st and 2nd Floor flats apportioned in proportion to corresponding values as flats therefore: £1,243,000 Deferred 40.35 yrs @ 7% 0.06522 £81,065 Less allowance of 50% 40,533 Total for Basement, 1st and 2nd floor flats apportioned in proportion to corresponding values £1,243,000 Deferred 130.35 Yrs @ 7% 0.00015 £184 £40,349 SAY £40,350 TOTAL PREMIUM £144,450