JILL ANDREA TYNDALE KATHLEEN BLANCHE TYNDALE MAUREEN JOAN THOMPSON v KINGSGARN LIMITED LRA/1/2002
[1]This is an appeal by Jill Andrea Tyndale, Kathleen Blanche Tyndale and Maureen Joan Thompson, the freeholders of a house known as “Kingsgarn”, 32 Arterberry Road, Wimbledon, London SW20 8AQ (“the appeal property”) and a cross-appeal by the nominee purchaser, Kingsgarn Limited, against a decision of the Leasehold Valuation Tribunal for the London Rent Assessment Panel (“the LVT”), determining the price to be paid for the freehold interest under the provisions of section 24 of the Leasehold Reform, Housing and Urban Development Act 1993 (“the Act”) at £31,350. By order of this Tribunal the appeal and cross-appeal were consolidated and the appeal was conducted under the simplified procedure (rule 28, Lands Tribunal Rules 1996). Before me the freeholders, treated here as the appellants, contended for a price of £39,900 and the nominee purchaser’s figure was £22,700.[2]The appellants’ counsel, Mr Anthony Tanney, called Mr I J Ailes, BSc, FRICS. Mr Owen Grainger, FRICS, appeared for the respondent with leave of the Tribunal and gave evidence. Facts[3]The respective expert witnesses prepared two statements of agreed facts. In the light of those statements, the evidence and my inspection of the appeal property on 24 June 2002 I find the following facts. The appeal property was originally constructed as a four-storey detached house, arranged on basement, ground, first and second floors. It now contains a total of six flats. It is of conventional solid brick construction, under a pitched, slate-clad roof. The original building has been extended at the rear to facilitate the conversion.[4]The building is situated on the east side of Arterberry Road, a most pleasant street located in Raynes Park/West Wimbledon, to the south of Wimbledon Common, between Ridgway and Worple Road. Wimbledon village and Wimbledon town centre are about three quarters and one and a half miles away respectively. Although the area is predominantly residential in character, there are other uses, including educational and nursing homes, in the immediate vicinity. Most of the buildings in the area were originally constructed as substantial family dwellings and some have since been converted into a variety of self- contained flats. Bus services are available in both Ridgway and Worple Road, but the nearest underground and main line railway station is in Wimbledon town centre. Car parking on the public highway is unrestricted.[5]There is a small block of three garages and a boiler room within the curtilage of the site. The garages are all less than 8 ft wide. Only one is self-contained. The other two comprise narrow parking spaces in a “double” garage, only 14 ft 4 ins wide. The well laid- out front garden is intended for communal use, although only flat 2 has direct access to it. 2[6]The layouts of flats 5 and 6 are most inconvenient. Flat 2 has been modernised to a very high standard by a previous lessee. Flat 1, in the basement, which was originally intended to be used as a caretaker’s flat, is unattractive. It is totally unmodernised and dark, suffering from poor natural light.[7]The accommodation is as follows: Basement Flat 1. 2 bedrooms, 1 reception room, store, kitchen, bathroom and garage Ground Floor Flat 2. Hallway, 3 bedrooms, 1 reception room, kitchen, bathroom/wc, guest wc and garage First Floor Flat 3. Flat 6. 2 bedrooms, 1 reception room, kitchen, bathroom/wc and garage 1 bedroom, 1 reception room, kitchen, shower room and wc Second Floor Flat 5. Flat 4. 1 bedroom, 1 reception room, kitchenette, bathroom and wc. 2 bedrooms, 1 reception room, kitchen, bathroom/wc.[8]There is shared use of the pleasant communal garden to the front of the building and also of the verandah, located immediately outside the master bedroom and reception room of Flat 2.[9]Flats 1 and 3 to 6 inclusive were held on leases which, at the agreed valuation date (19 October 2000) had unexpired terms of 62.68 years. The lease of Flat 2 had 152.68 years unexpired. The annual ground rents payable were £ Flat 1 20 Garage 3 Flat 2 Peppercorn Garage " Flat 3 22 Garage 3 Flat 4 20 Flat 5 15 Flat 6 18[10]The landlords covenant to insure the building; to maintain the exterior (including the structure, foundations and roof) and the common parts and to clean and light the common parts; to provide hot water throughout the year and partial central heating between 15 3 October and 15 April. The lessees covenant to maintain the interior of their flats and to reimburse the appropriate proportions of the landlords’ expenditure in complying with their lease obligations, although no such charges have been demanded and no accounts supplied for the past three years.[11]The parties agree that the values of notional 999 year leases of the individual unimproved flats at the valuation date, subject to peppercorn ground rents, were: £ Flat 1 220,000 Flat 3 255,000 Flat 4 245,000 Flat 5 150,000 Flat 6 150,000[12]It is agreed that the corresponding value for flat 2 is not relevant, as the reversion is too remote. The leaseholders of all flats except Nos.3 and 4 are participating tenants for the purposes of the Act. The parties agree that the freeholders’ share of the marriage value attributable to the four participating flats is 50%. They also agree that there is in fact no marriage value in the case of Flat 2, the lease of which was extended under the Act in 1997. The LVT Decision[13]The LVT’s calculation, producing a premium to be paid of £31,350, is attached (Appendix 1).[14]For the purpose of the present appeal the parties agree that this calculation contains two errors. Firstly, in arriving at the marriage value, and thus the hope value of the non- participating flats, the LVT assumed that the value of the freeholders’ current interest was nil, although it had previously assessed that value at £4,634.45. Secondly, the Present Value of £1 in 62.68 years at 8% is £0.008035243 and not £0.008153 as stated. If the LVT had used the correct figures it is agreed that the resultant premium would have been £31,000. Issues[15]There are two issues in this appeal. Firstly, the hope value attributable to the two non- participating flats, Nos.3 and 4. Mr Grainger considered that there was no hope value, whereas Mr Ailes considered hope value to be equivalent to 56.65% of the landlords’ half share of marriage value; in other words 28.325% of marriage value. The second issue was the yield rate to be adopted in capitalising the rental income under the existing leases and in deferring the reversionary values of the flats. Mr Grainger considered the appropriate yield to be 15% and Mr Ailes’ figure was 8% as determined by the LVT. The valuations of Mr Grainger (Appendix 2) and of Mr Ailes (Appendix 3) are attached. 4 Hope Value[16]It is agreed that there is no reason in principle to exclude the hope value that would be paid to reflect the expectation that, in the future, the non-participating tenants of flats 3 and 4 will seek a lease extension at a premium. Mr Ailes said that, as the leases of those flats had unexpired terms of only 62.68 years, they were almost unmortgageable. In the current mortgage market lenders did not normally lend on property where the lease would have an unexpired term of less than 35 years when the mortgage was redeemed. Mortgages were usually granted for a term of 25 years or more, thus creating a threshold of 60 years as a minimum term for borrowing purposes. Therefore the likelihood of either non-participating tenant wishing to extend its lease within the next five years was very high, as their existing interests would become unmortgageable and they would be unable to sell without extending the current lease terms.[17]Mr Ailes added that he had interviewed the husband of the lessee of flat 3 in respect of their decision not to participate. The flat was currently held as an investment and rented out, but they would be qualifying tenants. They had decided not to participate as they did not want to commit themselves to something to which they did not know the answer, nor did they wish to participate with the other tenants. Nevertheless, they would be interested in extending their lease once the nominee purchaser had acquired the freehold. They would then have the option of extending without commitment to any other party.[18]Mr Ailes’ estimate of hope value was based on the sale of a residential investment secured on three purpose-built blocks, each of six flats, set in communal grounds in Cherrywood Drive, Putney, London SW15, about 3 miles from the appeal property. In each block four flats were held on leases with unexpired terms of 960 years and two with 60 years unexpired. The ground rents were all fixed at £25 per annum. Mr Ailes had sought offers for the freehold interest in each block by 16 July 2001. He received a total of 10 offers, ranging from £75,003 to £9,105. Those making the two highest bids were invited to submit their best offers in November 2001. Contracts were exchanged in April 2002 at £96,060.[19]In his expert report Mr Ailes analysed this evidence as follows. He had valued the blocks in March 2001 on the assumption that all the tenants of the 60 year leases would acquire extended leases in exchange for 50% of the marriage value. This produced a “full” value of £83,800. He then looked at the offers that were received in July 2001. He discounted the two highest, on the basis that they reflected the possibility of constructing additional flats in the roof. The next highest offers were made by a Mr Hussain (£46,500) and West End and City Properties (£36,000); equivalent respectively to 55.49% and 42.96% of the “full” value of £83,800. In the light of this evidence he decided to adopt 50% as the appropriate percentage of the landlords’ share of marriage value (or 25% of the total marriage value), which he considered properly reflected the current market value of the possibility of granting lease extensions in the future. This produced a value for the appeal property as at the valuation date of £38,600.[20]At the commencement of the hearing, however, Mr Ailes produced a new valuation of £39,900, reflecting a different approach. This was because he now accepted that the two bids 5 for Cherrywood Drive, from which he had derived his hope value of 50%, reflected the value of the existing ground rents plus the reversion to open market value of the flats, as well as the marriage value. For the purposes of his revised valuation, Mr Ailes no longer relied upon the average of the third and fourth offers of £46,500 and £36,000 submitted in July 2001. Instead, he used a verbal offer of £45,000 which he had received from West End and City Properties in May 2001, before seeking offers generally in the market.[21]Mr Ailes calculated that, of the total figure offered of £45,000, the amount attributable to marriage value was £25,172. His “full” valuation of £83,800 included a marriage value element of £63,961. Thus, the offer of £45,000 made in May 2001 indicated that the market was prepared to pay 39.36% of marriage value for Cherrywood Drive (i.e. £25,172/£63,961).[22]On the basis of this analysis Mr Ailes then re-calculated his valuation of the appeal property, using 39.36% as the landlords’ share of the marriage value of both the participating and the non-participating flats. This produced a value of £39,900. This valuation, said Mr Ailes, ignored the effects of the Act. Because the principle of the Act was compensatory, and because the Act specified that the freeholders’ share of marriage value in respect of the participating flats was to be not less than 50%, it was necessary to calculate what share of the marriage value of the non-participating flats should be adopted in order to produce the “no Act world” value of £39,900. In this way Mr Ailes concluded that the appropriate proportion was 56.65% of the landlords’ share, or 28.325% of total marriage value.[23]Mr Grainger considered that there was no hope value. He said that the lessees of flat 2 had approached the other lessees of the appeal property to see whether they would be interested in jointly acquiring the freehold. Towards the end of 1998 they instructed Mr Grainger to advise on the likely cost of enfranchisement. It then took them almost two years to persuade enough of their neighbours to participate in order to meet the Act’s requirements. They were unsuccessful so far as flats 3 and 4 were concerned. As it was evident that those lessees were not interested in exercising their rights under the Act, no hope value could be attributed to either of those flats.[24]I shall deal with the question of whether marriage value exists before considering its possible extent. I disregard Mr Ailes’ report of his conversation with the occupier of flat 3, which was not corroborated. However, Mr Tanney suggested that, if Mr Grainger’s approach was right, no hope value could ever be attributed to the flats of non-participating tenants. I agree. The mere fact that a tenant of a property does not wish to participate in acquiring the freehold today does not mean that that tenant (or a successor-in-title) will not be interested in paying for a lease extension in the future. Hope value is the value today of the chance that such a future payment will be received. Mr Grainger accepted in cross-examination that he had very little experience of mortgagees’ requirements. That being so, I accept Mr Ailes’ evidence that leases with less than 60 years unexpired are generally not mortgageable. In answer to a question from me Mr Grainger suggested that, as a rule of thumb, flats changed hands at intervals of five years. It follows that if, in five years time, the tenants of either or both of the non-participating flats decide to place their properties on the market, they may well be willing to pay for a lease extension at that time. Against that background I consider that Mr Grainger’s suggestion that no hope value attaches to those two flats is unrealistic. 6[25]I now turn to the amount of hope value that exists. The only evidence before me consists of Mr Ailes’ analysis of Cherrywood Drive. In its final form, this relied on a verbal offer of £45,000 made in May 2001. I obtain no assistance from that offer, bearing in mind that the company that made it reduced it two months later to £36,000 when asked to confirm it in writing. I have not overlooked the fact that a written offer was received from another party at £46,500. Mr Ailes accepted, however, that there was a valuable potential for developing additional flats in the roofs of the existing buildings. He suggested nonetheless that the offer of £46,500 did not contain any element of development value. That assertion seems to me to be surprising; it has not been supported by any corroborating evidence and I reject it. Accordingly, there is in my view no support for Mr Ailes’ opinion that the hope value at Cherrywood Drive was equal to 39.36% of marriage value. It is therefore not necessary for me to decide whether his unorthodox approach to the assessment of hope value – on the basis that the Act is compensatory – is justified.[26]Nevertheless I consider that, at the valuation date, the prospects of securing a significant element of marriage value in the foreseeable future from one or both of the non- participating flats were real. The LVT decided that those prospects would have resulted in hope value equal to 5% of the marriage value of those flats. In the absence of any other evidence, that decision does not appear to me to be unreasonable and I see no reason to upset it. Yield[27]Mr Grainger said that, in his experience, for at least the decade before the likely effects of the Act became widely known, individual buildings containing only flats that had been sold on long leases were selling in the open market for between 5 years’ purchase (20%) and 7 years’ purchase (14.2857%). Generally 5 YP was achieved by negotiation, whilst between 6 and 7 YP was often secured at auction, for which the vendor had to pay the auctioneer’s charges and probably also higher solicitor’s fees. Although lower yields were sometimes achieved, Mr Grainger’s experience was that these were paid either by sitting tenants or where the property had development potential, such as the facility to construct one or more additional flats, often at roof level.[28]Prices had risen dramatically since 1993, because investors had realised the financial opportunities that the Act had created. He illustrated this change by reference to a schedule of auction sales of freehold ground rents, listing over 60 sales involving nearly 400 flats across London. The schedule covered transactions between January 1991 and July 1996. Mr Grainger said that the schedule clearly demonstrated that prices rose and yields dropped between July 1993, when the Act was passed by Parliament and November 1993, when it came into effect. He suggested that there were no other changes in circumstances that could account for that change in open market value. Mr Grainger’s chosen yield of 15% was equivalent in perpetuity to 6.6667 YP, which he said was at the higher end of the range of prices achieved in the period up to July 1993.[29]In support of his preferred yield Mr Ailes produced a schedule of six agreements, eleven LVT decisions and two decisions of this Tribunal. He said that he had concluded that 7 8% was the correct yield to adopt for the subject property, having regard to its location, the fixed ground rent and the unexpired lease terms. Whilst the ground rents were fixed, five out of the six leases remained unextended, with unexpired terms of just over 62.5 years. The latter factor would be very attractive to an investor, because of the strong possibility of the remaining lessees wishing to enfranchise or extend their leases.[30]Arterberry Road was a very desirable place to live. Whilst a SW20 postcode was less desirable than a SW19 postcode, the location of the property, so close to Wimbledon village and Wimbledon common, was much sought after.[31]In arriving at his valuation, Mr Ailes relied in particular on three LVT decisions, as follows:[1]23 Southdown Road, SW20 Valuation date 1 August 2000. 9% adopted for an inferior property within half a mile of the appeal property and with 86 years unexpired at relatively low ground rents.[2]22 Rocks Lane, SW13 Valuation date 20 October 2000. 9% adopted for an inferior property situated on a main road in Barnes.[3]8 Walpole Court, Hampton Road, Twickenham, Middx Valuation date 30 July 1998. 8% adopted for an unexpired term of 47 years with a fixed ground rent in respect of an inferior property on a main road.[32]Finally, Mr Ailes relied upon the sale of the flats at Cherrywood Drive, which he had devalued at 8%.[33]In cross-examination Mr Ailes accepted that the prospect of securing a capital gain from tenants who wished to purchase the freehold or extend their leases was not a matter to be taken into account in capitalising the existing ground rents for the reminder of the current lease terms.[34]Mr Grainger placed no weight on Mr Ailes’ evidence of settlements and tribunal determinations. He referred to two cases of collective enfranchisement with which he had been involved, where tenants paid far more than his “realistic” estimates in order to avoid the worry and costs of an LVT hearing. He said that his files showed numerous other settlements of a similar nature, in both central and suburban London. Mr Grainger considered that the greatest distortion of settlement figures tended to occur in lower-value properties. This was because the cost of an LVT reference was broadly similar, irrespective of the size of the property or the number of flats. He also felt there were other reasons why reports of settlements were unreliable. One was that many of those that were used to produce statistics and graphs, particularly by valuers who acted for the larger landlords, included prices paid, particularly for lease extensions, by lessees who did not satisfy the residence qualification 8 presently imposed by the Act. Another reason was that many lessees did not think about extending their leases until they wanted to sell their flats. They then turned to their landlords with a cry for help. A plea for an early extension was inevitably met with a choice of either paying an exorbitant price or serving a section 42 notice and proceeding down the lengthy route laid down in the Act.[35]The “Act route” took well over a year and frequently as long as two years to produce the required lease extension. By that time lessees had lost potential sales. They may, perhaps, have married and been forced to live in unsuitable accommodation, or even had children and had to keep the entire family in a one-bedroom flat. If the reason for a sale was relocation due to employment changes, the consequence of refusing a landlord’s demands could be even more disastrous. Mr Grainger considered that, since so many LVT decision had been based either upon settlements, or upon evidence from valuers who used settlements in their arguments, those decisions could not avoid being tainted by the distortions in the settlements themselves.[36]Mr Grainger’s suggested yield of 15% is based on transactions effected in the years up to July 1993, when the Act was passed. All his evidence, therefore, reflects market conditions at least seven years before the valuation date. He says that is an irrelevant consideration because, apart from the passing of the Act itself, there were no changes in circumstances in the intervening period which could have influenced the yields required by purchasers of residential investments of the type with which this appeal is concerned. I cannot accept that suggestion. It is an elementary principle of valuation that the evidential weight of a “comparable” transaction is directly related to its proximity to the subject matter of the valuation, whether in terms of property type, size, location or date. In my judgment, the sales relied upon by Mr Grainger are so out-of-date that they should be disregarded, unless the remaining evidence is wholly unreliable.[37]Such evidence as there is was produced by Mr Ailes. Although he referred in total to nineteen settlements and determinations, in reality his valuation was based on his analysis of one sale – Cherrywood Drive – and three LVT decisions. I referred earlier to Cherrywood Drive. I have found Mr Ailes’ analysis of that transaction to be unreliable and I discount it. As for the LVT decisions, Mr Grainger dismissed them on the grounds that they were tainted by settlements which had been distorted by the unequal bargaining power of the parties.[38]As members of this Tribunal have previously indicated, settlement evidence should always be treated with caution. But Mr Grainger goes much further than that. He suggests that, in recent years, LVTs have consistently been misled by settlement evidence, which has been repeatedly produced before them in a disingenuous manner. The result has been, he says, that LVTs have adopted yields in the region of 8%, when the correct range is 15 to 20%. He bases this rather startling assertion on the fact that some settlements which he has agreed on behalf of “desperate” tenants have been quoted in schedules produced at LVT hearings by major West End firms of surveyors, without any reference to the circumstances of the negotiations. Assuming in Mr Grainger’s favour that this allegation is well-founded, for such distorted evidence to have been reflected in the LVT’s decisions, the landlords would have had to overcome two hurdles. Firstly, the tenants’ representatives must have failed to make their own enquiries into the background of the transactions, and thus not 9 informed the LVT of the true position. Secondly, the members of the LVT, who are entitled to use their own knowledge in arriving at their determinations, must have been consistently out-of-touch with current market rates of interest.[39]So far as the first hurdle is concerned, Mr Grainger said in answer to a question from me that, with one exception, he had never attended a hearing before the LVT where the tenant had been represented by a surveyor other than himself. The one exception was a case where he had agreed, on behalf of the landlord, a yield substantially below the “correct” range of 15 to 20%. There is therefore no reliable evidence before me to support Mr Grainger’s assertion that LVTs are routinely presented with misleading evidence which is not effectively challenged by tenants’ representatives.[40]The second hurdle facing landlords seeking to persuade LVTs on the basis of distorted evidence is the composition of the LVTs themselves. In the three LVT cases upon which Mr Ailes placed most reliance, the tribunal included two chartered surveyors on two occasions (Southdown Road and Walpole Court) and one chartered surveyor in the other (Rocks Lane). I am quite unable to accept that panels which included this degree of expertise produced decisions which are as wildly inaccurate as Mr Grainger suggests.[41]In my judgment the decisions of those LVTs, whilst less reliable than current open market transactions, provide a more useful indication of the correct yield than the extremely dated transactions cited by Mr Grainger. They are therefore the most cogent evidence in this appeal. By arrangement with the parties I inspected externally the three properties which were the subject of the LVT decisions referred to by Mr Ailes. Having done so, I am satisfied that the yield of 8% adopted for the appeal property by the LVT is correct.[42]The appeal fails. It is agreed that, if it had calculated correctly, the LVT should have determined the premium payable by the respondent to the appellants at £31,000. The cross- appeal succeeds to that extent only.[43]I make no order as to costs. Dated: 17 July 2002 (Signed) N J Rose 10 APPENDIX 1 “Kingsgarn”, 32 Arterberry Road, London SW20 8AQ LVT Calculation Freeholders’ interest in participating flats before enfranchisement Ground rent income £56.00 YP 62.68 years @ 8% 12.3988 £694.33 Reversion to vacant possession £520,00.00 PV of £1 in 62.68 years @ 8% 0.008153 £4,239.56 £4,933.89 Marriage value Value of new 999 year leases £520,000.00 Lessees’ current interest, 62.68 years at 91.5% £475,800.00 Freeholders’ current interest £4,933.89 £480,733.89 Marriage value £39,266.11 Freeholders’ share @ 50% £19,633.05 Freeholders’ interest in non-participating flats Ground rent income £45.00 YP 62.68 years @ 8% 12.3988 £557.95 Reversion to vacant possession £500,000.00 PV of £1 in 62.68 years @ 8% 0.008153 £4,076.50 £4,634.45 Freeholders’ hope value in non-participating flats Value of new 999 year leases £500,000.00 Lessees’ current interest, 62.68 years at 91.5% £457,500.00 Freeholder’s current interest £0.00 £457,500.00 Marriage value £ 42,500.00 Hope value @ 5.0% £2,125.00 Premium to be paid £31,326.39 SAY £31,350.00 11 APPENDIX 2 “Kingsgarn”, 32 Arterberry Road, London SW20 8AQ Valuation of Mr O L Grainger, FRICS Freeholders’ interest in participating flats before enfranchisement Ground rent income £56.00 YP 62.68 years @ 15% 6.665621061 £373 Reversion to vacant possession £520,000 PV of £1 in 62.68 years @ 15% 0.000156841 £82 £455 Marriage value Value of new 999 year leases £520,000 Lessees’ current interest @ 91.5% £475,800 Freeholders’ current interest £455 £476,255 Marriage value £43,745 Freeholders’ share @ 50% £21,873 Freeholders’ interest in non-participating flats Ground rent income £45.00 YP 62.68 years @ 15% 6.665621061 £300 Reversion to vacant possession £500,000 PV of £1 in 62.68 years @ 15% 0.000156841 £78 £378 Freeholders’ hope value in non-participating flats Nil £22,706 SAY £22,700 12 APPENDIX 3 “Kingsgarn”, 32 Arterberry Road, London SW20 8AQ Valuation of Mr I J Ailes BSc FRICS Freeholders’ interest in participating flats before enfranchisement Ground rent income £56.00 YP 62.68 years @ 8% 12.3988 £694.33 Reversion to vacant possession £520,000 PV of £1 in 62.68 years @ 8% 0.0080352 £4,178.33 £4,873 Marriage value Value of new 999 year leases £520,000 Lessees’ current interest, 62.68 years at 91.5% £475,800 Freeholders’ current interest £4,873 £480,673 Marriage value £39,327 Freeholders’ share @ 50% £19,664 Freeholders’ interest in non-participating flats Ground rent income £45.00 YP 62.68 years @ 8% 12.3988 £557.95 Reversion to vacant possession £500,000 PV of £1 in 62.68 years @ 8% 0.0080352 £4,017.62 £4,576 Freeholders’ hope value in non-participating flats Value of new 999 year leases £500,000 Lessees’ current interest, 62.68 years at 91.5% £457,500 Freeholder’s current interest £4,576 £462,076 37,924 Marriage value @ 50% Landlords’ share 18,962 Hope value @ 56.65% Landlords’ Share 10,742 Premium 39,855 SAY £39,900 13 14