MARLODGE (MONNOW) LIMITED LRA/15/2002

UPPER TRIBUNAL

LANDS CHAMBER

LRA/15/2002

Case No LRA/15/2002

Between

MARLODGE (MONNOW) LIMITEDApplicant

Before

P R Francis FRICS

Venue Birmingham Rent Assessment Panel

Date 11 July 2002

Property: 177 Sandy Hill Road, Shirley, Solihull, B90 2EX

Catchwords: LEASEHOLD ENFRANCHISEMENT – price payable for freehold of house – site value on standing house approach – yield to be adopted – comparables – previous decisions of LVTs and Lands Tribunal – money market rates – Appeal dismissed

[1]This is an appeal, heard under the Simplified Procedure (Rule 28, Lands Tribunal Rules 1996) by Marlodge (Monnow) Limited (“the appellant”) from a decision of the Leasehold Valuation Tribunal of the Midlands Rent Assessment Panel (“the LVT”), determining the price payable for the freehold interest in the house and premises known as 177 Sandy Hill Road, Shirley, Solihull, B90 2EX (“the subject property”) at £4,440. The tenants, Mr. M J and Mrs P M Workman, who were the applicants at the LVT hearing, did not respond to this appeal. Their notice to acquire the freehold interest was dated 8 May 2001 (the valuation date) and the LVT’s decision was dated 30 January 2002.

[2]Mr. Grant Dixon, an employee of Jack Dixon and Company, auctioneers and estate agents, of Harborne, Birmingham, B17 appeared for the appellant with permission of the Tribunal and gave evidence contending for a figure of £10,500. Mr. Dixon is also a director of the appellant, and has a 20 per cent holding in the Company. From his evidence, and from my inspection of the subject property on the same day as the hearing, I find that it comprises a two-storey, bay front semi-detached house, constructed in the 1930s of part rendered brick under concrete tiled roofs. It occupies a corner plot at the junction of Sandy Hill Road with Skelcher Road, having a frontage to the former of 17.2m (56’6”) and a return frontage to the latter of 37.5m (123’). Almost triangular in shape (widest immediately adjacent to the house, and narrowing to the rear to 3.0m (10’)), the site has an overall area of 380.4sq.m. (455 sq.yds). A sewer, serving this and adjacent properties, crosses the rear garden approximately 9.0m (30’) behind the house.

[3]The accommodation of the property comprises hall, living room and kitchen at ground floor and two bedrooms and a bathroom at first floor. To the rear there is a large glazed conservatory and front, side and rear gardens together with a garden shed. There is vehicular access to an in/out driveway leading off Sandy Hill Road and thence through the side garden, exiting onto Skelcher Road. This arrangement allows parking space for a caravan or boat and there is also a shared vehicular right of access, again off Skelcher Road, at the rear of the garden, although it is understood that this is not currently utilised.

[4]The property is the subject of a lease for 99 years from 24 June 1932 at a fixed ground rent of £5 per annum, this having been assigned to the tenants in 1971, and at the valuation date there were, therefore, some 30 years remaining.

[5]There were two issues in this appeal. The first was whether or not the standing house value was the appropriate measure of assessment in the light of the alleged development potential. The LVT concluded that there was insufficient potential for significant development to warrant the site value being calculated as if it were building plot, but Mr. Dixon contended that, bearing in mind the size and configuration of the site, its value was as a plot for the erection of one four or five bedroom property. The second issue was the appropriate yield rate to be adopted to calculate value of the existing ground rent and the reversion to a modern ground rent in 30 years. The LVT accepted the tenants’ expert’s calculation of 7 per cent, but Mr. Dixon contended for 6 per cent. His valuation was as follows: 3 TERM Annual Ground Rent £5.00 Y P for 30 years @ 6% 13.765 £68.00 REVERSION Site value £60,000 Section 15 rent @ 6% £3,600.00 YP @ 6% in perpetuity deferred 30 years 2.90 £10,440.00 £10,508.00 Say £10,500

[6]Mr. Dixon said he was, as an employee of his father’s firm, principally an auctioneer, but had experience of leasehold enfranchisement matters through his involvement with, and personal interest in, the appellant company. It was his view that the LVT was wrong to accept the applicants’ evidence that the standing house value, based upon a value for a two bedroom semi-detached house in this location of £100,000 and site value at 33.33% of that figure, was the correct method of calculation. It seemed to have disregarded the potential for redevelopment of the site. He said that, being on a corner plot which was larger than most in the street, and the house having a ‘footprint’ that amounted to only 10 per cent of the site area, there would be potential, in fully developing the site, for either a 4 or 5 bedroom detached house worth, at the valuation date, at least £200,000, or a pair of semi-detached houses of £100,000 each (the entirety value). The opportunity for redevelopment was evidenced by what had happened on the opposite corner of the junction with Skelcher Road, where significant development of the return frontage had been effected.

[7]Quoting from Hague on Leasehold Valuation, Third Edition, Mr. Dixon said (p168 para 8-09) “…the entirety value must represent the value of the property fully developing the value of the site…” “It may be appropriate…where the house is small in relation to the site…to assume that the house has been extended or even wholly or partially replaced by a larger house”… “No deduction is made in such circumstances to reflect uncertainty over planning permission”.

[8]Mr. Dixon had commissioned a valuation by Ian G Humphrey, Chartered Surveyors, which had concluded that there was potential for the development of a 4 or 5 bedroom detached house on the site and produced the following valuation: 4 Sale Price £200,000 Less Development costs and fees £ 83,000 Developer’s profit £ 60,000 £143,000 Value of land £ 57,000 Realistically, Mr. Dixon said, the value of the land was nearer £60,000, which represented 30 per cent of the entirety value and this was the figure that the LVT should have adopted as the basis for calculating the value of the reversion.

[9]As to the site value proportion, Mr. Dixon quoted again from Hague, (p171 8-10): “…it seems clear that the percentage should be adjusted upwards if the site contributes a materially above average proportion of the site value (e.g. if the property has a large garden)” and “…if a particular house should have a value above or below the value of an average house of its type in the same locality…some adjustments may have to be made to the percentage of such standing house value to arrive at the site value; otherwise anomalies might arise…” and “…Thus a corner site may be marginally more valuable than other sites”.

[10]In his view 30 per cent of the completed value was appropriate in this instance, particularly considering the results of sales by auction of 2 building plots in Great Barr and one in Hall Green, Birmingham which had come to light since the LVT hearing

[11]Mr. Dixon said that even if this Tribunal did not support the notion of a fully developed site on the basis that the appellant was contending, account should be taken of the fact that there was an opportunity to substantially extend the existing house and the figure of £100,000 that had been adopted by the LVT in acceptance of the applicants’ expert’s comparables was not a fair representation of the value. Those comparables, that had been found simply by searching the internet for available properties, were misleading and did not reflect the popularity of, and premium attributable to, properties in this part of Shirley. A more realistic open market value would have been £115,000 – that being the figure that Graham Broadman, chartered surveyor, of Hall Green, Birmingham B28 had suggested as appropriate when approached for an opinion by Mr. Dixon. Mr. Dixon also produced estate agents particulars of two semi-detached houses in Sandy Hill Road where the asking prices were £144,950 for No 35, a 4 bedroom unit, and £125,500 for No 96, a 3 bedroom, 2 reception room house with garage. He also referred to 5 The Crescent, Shirley, Solihull where £121,500 was the asking price for a 1930’s 3 bedroom semi-detached with 2 reception rooms and 3 bedrooms.

[12]On the subject of the appropriate yield, Mr. Dixon pointed out that Hague said that determining the appropriate percentage rate to be adopted was a matter of evidence, and that convention should not simply be relied upon. He produced details of 5 Lands Tribunal and LVT decisions, all of which supported yields of less than the 7 per cent adopted by the LVT in this case: 5 Address Date of notice Years unexpired Relevant base rate % Yield award % Subject property 5/01 30 5.25 7 20 Bishopstone Close, Matchborough East, Redditch LT Ref: LRA/4/1994 9/92 77.75 9 6.5 7 St. Govans Place LVT Ref: LVT/877/125 6/97 79 6.5 6 20 Acacia Road, Bournville, B’ham LVT ref: WMEH/1903 9/98 11.66 7.25 6.5 10 Hilary Drive, Walmley, Sutton Coldfield LT Ref: LRA/10/1998 6/97 65.5 6.5 6.5 1 Wrekin Road, Perry Bar, B’ham LT Ref: LRA/70/1997 6/97 38 6.5 6.5

[13]In each of these, where the unexpired terms were mostly very much longer, base rates either equalled or exceeded the yield, but in the case of the subject property, the LVT had been reluctant to vary the consistent 7 per cent that had been propounded by the applicants’ expert. The result, Mr. Dixon said, was that the yield now significantly exceeded the base rate that was applicable in May 2001. He said it was now largely agreed that the economy is in a period of sustained low interest rates and whilst minor short-term variations may occur, analysts were expecting low interest rates to persist over a number of years. Furthermore, investors regularly seek portable investment vehicles and invest according to the economic and monetary circumstances prevailing at any given time, and in deciding whether to invest in property, consideration of the state of the money market is one of the most important factors. As interest rates fall, investment in property becomes more attractive, this being especially so with ground rents as they provide the highest level of security, both in terms of income and growth.

[14]Current trends in yields were evidenced by single ground rent auction results, and Mr. Dixon provided details of 5 ground rents that had been sold in the period February to September 2001. Yields varied from 3.08% to 5.25%. The most directly comparable was 126 Sarehole Road, Hall Green, Birmingham. This was a very similar semi-detached house to the subject property located in a comparable residential area but which did not quite have the ‘cachet’ of the Solihull postcode. There were 33 years unexpired at a ground rent of £5.50 and the property sold for £10,000 which represented a yield of 4.5%. 44 Apsley Road, Oldbury, West Midlands, another semi-detached house with 37 years unexpired and a ground rent of £6.00 also sold for £10,000, this representing a yield of 3.25%.

[15]This demand, and true open-market evidence, Mr. Dixon argued, could not be ignored. This was supported in Speedwell Estates Limited’s Appeal (LRA/70/1997) regarding 1 6 Wrekin Road, Perry Bar, Birmingham, referred to in the schedule above, where the Member, Mr. M St J Hopper FRICS had said: “…I therefore think that the auction sale results in respect of single freehold ground rents are of some evidential value”.

[16]In that case, where it was being argued for a lower yield rate to apply to the reversion than for the ground rent of £5.50 pa for 38 years, the Member accepted that it was appropriate to value the notional rental income under the extended lease at a yield 0.5% lower than that which applied to the existing ground rent. A yield of 7% was applied to the existing ground rent, and 6.5% to the reversion. Mr. Dixon said that if 6.5% was deemed acceptable in June 1997 for a 38 year unexpired term, 6% would seem appropriate in this case where the unexpired term, at 30 years, was considerably shorter.

[17]Mr. Dixon also referred to Mrs J B Taylor’s Appeal regarding 10 Hilary Drive, Walmley, Sutton Coldfield in which the Lands Tribunal determined a yield rate of 6.5% where a ground rent of £29 was fixed for a period of 65.5 years. He quoted a passage from that decision where it was decided that there should be a difference in yields applied between the capitalisation of the current ground rent, and the capitalisation of the deferred modern ground rent. DECISION

[18]I look firstly at the question of the standing house value. In my view, Mr. Dixon has been selective in his quotes from passages in Hague and, taken out of context, they paint a picture that was not intended by the authors. For example, in quoting from para 8–09, Mr. Dixon said:

“It may be appropriate…where the house is small in relation to the site…to assume that the house has been extended or even wholly or partially replaced by a larger house”… “No deduction is made in such circumstances to reflect uncertainty over planning permission”

. However, that very sentence went on: “provided that the potential is realistic and not fanciful”.

[19]It is this proviso that, in my judgment, causes Mr. Dixon’s argument to fail. The subject property is a semi-detached house in a mature and typical 1930’s street which has a substantial majority of similar houses. There are some small detached properties of virtually identical style further along the street and on Skelcher Road, but there are no new large detached houses nearby. There would undoubtedly be an opportunity to provide a fairly substantial 2 storey extension to the side of the house, this being the point where the plot is at its widest, similar to what had been done to the property at Blythsford Road, Hall Green, a photograph of which Mr. Dixon produced in evidence. However, to completely demolish the existing half of the semi-detached house and replace it with a new detached house of the type suggested would, to my mind, be both unrealistic and fanciful.

[20]Although there is direct evidence, immediately opposite the subject property at 164 Sandy Hill Road, of significant development having occurred by utilising the return frontage, such an opportunity does not exist at 177 Sandy Hill Road due to the fact that it is a 7 triangular site, narrowing significantly towards the rear, and also intersected by the public sewer. Again referring to Mr. Dixon’s selective quotes from Hague, he said (para 8– 10)“…Thus a corner site may be marginally more valuable than other sites”. He failed to complete the sentence which continued:

“…and conversely a site which is unattractive, awkwardly shaped or unattractive may be less valuable”

. This site is undoubtedly awkward in shape and, as I have said, offers no opportunity for the type of development to which Mr. Dixon alludes.

[21]The subject property is also, as it stands, significantly smaller than any of the comparables to which he referred and I note that the details produced were merely of asking prices and there was no evidence of when they were marketed and whether or not they sold. Such evidence therefore cannot be given any weight. I cannot accept Mr. Humphrey’s report as evidence, it not having been produced for this hearing and he was not called as a witness. In any event, it was a hypothetical exercise for which no plans or specifications had been produced and no enquiries appeared to have been made to the local planning authority. Similar comments apply to the assessment of value provided to Mr. Dixon by Mr. Boardman.

[22]It is unfortunate, from Mr. Dixon’s point of view, that he has produced no evidence of actual sales of similar properties in Sandy Hill Road, or the immediate vicinity. No Tribunal will accept sales particulars or asking prices as evidence of open market transactions; therefore, having concluded that no potential for overall redevelopment exists I have no grounds for upsetting the LVT’s conclusions as to the appropriate value, in terms of the adoption of the standing house approach. Also, although Mr Dixon criticises the applicants’ expert for adopting a site-value element of 33.33%, he produces no evidence from which I could determine that the LVT was wrong to accept that percentage.

[23]I now turn to yield. Mr. Dixon referred to 5 decisions of this Tribunal and LVTs and produced extracts which were intended to demonstrate that a return of 7% was not an appropriate yield in respect of the subject property. Those extracts detailed the reasoning behind decisions to apply different yield rates to the various constituent parts of the valuation, but I note that, in this case, it was not being argued that there should be any differential between the capitalisation of the current ground rent and the capitalisation of the deferred section 15 rent. The argument was for 6 per cent to apply to both elements and the main thrust of Mr. Dixon’s approach was the current and anticipated state of the money markets justifying a lower return than has historically been applied.

[24]He also produced details of 5 auction results of single lot ground rents demonstrating that, in the open market, investors were now accepting much lower yields than hitherto. In respect of this argument, he said in his evidence that ‘it was understood that in all cases the prices achieved ignored the tenants bid’. I fail to comprehend how such a statement can be made with any authority. The information was obtained from ‘Under The Hammer’, a periodical publication setting out basic details of regional auction results, and from this it would not have been possible to draw any such conclusion.

[25]I refer to the decision in another appeal by Speedwell Estates Limited (LRA/30/1999) regarding 163 Wagon Lane, Solihull, West Midlands where the Member, Mr. N J Rose FRICS said, at para 15: 8 “15 Mr. Shepherd has criticised the LVT’s choice of 7% as the yield rate at which the modern ground rent should be capitalised on three grounds. Firstly, he produced an analysis of the prices paid for 30 freehold ground rents, sold as single lots at public auction between November 1995 and October 1999. They indicated that the modern ground rents had been capitalised at rates varying between 3.5% and 6.5%.

[16]I asked Mr. Shepherd why investors were prepared to pay prices for such properties which were often very high, compared with the valuation he had submitted for this appeal. He replied that the purchasers were clearly influenced by the possibility of agreeing a higher price in due course with the tenants. That was not the full explanation, however, and there was a very big difference even between the price of 5.5% paid for some lots and the 6.5% for which he was contending.

[17]Despite this qualification by Mr. Shepherd, I consider that the auction sale prices only make business sense on the basis that, if the tenants subsequently decided to purchase the freehold, in order to sell their homes on a freehold basis, or re-mortgage them, they would have agreed to pay a higher price than required by statute, in order to avoid protracted negotiations and, possibly, hearings before the LVT and this Tribunal. This conclusion applies equally to all 30 lots, since there is in my view no logical reason why investors who were in the market for freehold ground rents in the hope of an eventual profitable sale to the tenant should have decided to restrict their bidding to a limited selection of the available properties. Consequently, I consider that all the prices achieved at auction reflected an element of value to the tenant.

[18]Section 9(1) of the Leasehold Reform Act 1967, as amended, provides that the freehold interest must be valued on the assumption that the tenant and members of his family residing in the house are not buying or seeking to buy. It follows that the 30 auction sales relied upon by Mr. Shepherd did not take place in the hypothetical market postulated by statute. They are therefore not of assistance in the present exercise”.

[26]I agree with that decision and, with the circumstances of this case being not dissimilar, I reject the auction evidence provided by Mr. Dixon for the same reasons.

[27]As to the references to LVT and Lands Tribunal decisions, Mr. Dixon said in evidence that the LVT’s comments in its decision on this case, suggesting that evidence from uncontested decisions was potentially misleading, was wrong. The respective Tribunals should, he said, have based their decisions upon the evidence and the fact they were uncontested appeals should have made no difference to the outcome. I make no apology for referring to the paragraphs that immediately followed those referred to in the Speedwell case above as, again, I see no difference in the circumstances of this case. Mr. Rose said, at para 19: “19. The second element in Mr. Shepherd’s attack on the LVT decision consists of references to previous decisions of the Tribunal as providing evidence of value and valuation principle. In support of his view that a rate of 6.5% should be applied to the modern ground rent, he referred to the decision concerning 1 Wrekin Road. This was an appeal to which the tenant did not respond. As the Member said in his decision: 9 “I am well aware that I have not had the benefit of hearing any evidence on behalf of the lessee and that my decision must perforce be based solely upon the appellant’s evidence. Insofar as this decision may in any way be regarded as a precedent its authority is inevitably weakened by the lack of any evidence or argument on behalf of the lessee”.

[20]I entirely agree with that observation. I do not consider that the decision on 1 Wrekin Road is of any material weight as showing in the present case that a rate of 6.5% is right and 7% is wrong”.

[28]Mr. Dixon referred to 1 Wrekin Road, amongst others but, as I have said, there are sufficient similarities in this case for me not to differ from the decision in Speedwell. Each decision of this Tribunal is based solely upon the evidence and arguments submitted in that particular case and there was nothing in Mr. Dixon’s reference to other Tribunal decisions to persuade me that the position adopted by the LVT in this case was wrong in the circumstances that apply to it.

[29]As to the submissions relating to the effect of the money markets, and the current low interest rates justifying a reduction in the yield required for freehold ground rents, despite Mr. Dixon’s arguments being entirely logical, he has failed to provide any evidence that supports his case. As I have said, I do not think that the figures achieved for single lots of freehold ground rents at auction provide supportable evidence of values that must apply in decisions under the auspices of the 1967 Act. The fact that much lower yields may have been achieved at auction, where an opportunity to treat with tenants at an inflated figure may have existed, is not sufficient to persuade me that there is any evidence that yields to be applied in decisions such as this should be anything other than the figure which the LVT adopted in its decision.

[30]In summary, there being, in my judgment, no evidence sufficient to persuade me that the LVT was wrong in coming to the conclusions that it did in this case, I dismiss this appeal. I find that the price payable for the freehold interest in the appeal property is £4,440.

[31]Since there was no respondent, no question of costs arises. DATED 11 July 2002 (Signed) P R Francis FRICS