P H Clarke FRICSDate 25 November 2002Property: 11 Park Avenue, Cotteridge, BirminghamCatchwords: LEASEHOLD ENFRANCHISEMENT – price – terrace house built about 1900 – standing house value – Haresign addition – yield rates – appeal dismissed – Leasehold Reform Act 1967, s9(1)
[1]This is an appeal by the landlords of a leasehold house in Cotteridge, Birmingham against the decision of a leasehold valuation tribunal fixing the price on enfranchisement at £12,127.[2]The tenant has not responded to the appeal. The appellants have agreed that the proceedings may be determined without an oral hearing under rule 27 of the Lands Tribunal Rules 1996. I have received written representations from Mr Grant Dixon of Jack Dixon & Company, auctioneers, estate agents, surveyors and valuers of Harborne. I note from the LVT decision that Mr Dixon has an interest in the appellant landlords. In a recent decision of this Tribunal (Re Marlodge(Monnow) Ltd (unreported) (LRA/15/02) Mr Dixon is stated to be a director of the appellant company with a 20% holding. In so far as Mr Dixon’s representations consist of expert evidence therefore I look at it with some caution due to his lack of independence.[3]I have inspected the subject property externally and the surrounding area. Facts[4]11 Park Avenue (“the subject property”) is situated in a cul-de-sac leading to Cotteridge Park close to the centre of Cotteridge, Birmingham. It is a two-storey inner terraced house of brick construction with a slate roof built around 1900. The house has been improved by the tenant including the installation of UPVC double glazed windows and the incorporation of the original coalhouse into the kitchen. The accommodation comprises two reception rooms and a kitchen on the ground floor and three bedrooms and a bathroom on the first floor. There are gardens front and rear.[5]The appellants are the freehold owners of the subject property which is let to Mr D Carter for 55 years from 24 June 1958 at a rent of £6.50 per annum. On 30 April 2001 the tenant served notice under the Leasehold Reform Act 1967 (“the 1967 Act”) that he desired to have the freehold of the subject property. This is the date of valuation. At that date the lease had approximately 12 years unexpired. The price was not agreed and on 11 July 2001 it was referred to a leasehold valuation tribunal of the Midland Rent Assessment Panel. Following a hearing on 27 February 2002, at which both parties were represented by surveyors (including Mr Dixon), the tribunal gave a decision on 11 April 2002 fixing the price at £12,127. On 1 May 2002 the landlords appealed to this Tribunal. The tenant has not responded to the appeal. The grounds of appeal relate to: the standing house value, the lack of a Haresign addition and the capitalisation yields. Standing house value[6]The LVT assessed the site value by taking 33% of the standing house (or entirety) value of £78,000. Mr Dixon says that this should be £90,000. He relies on the two 2 comparables he put before the LVT: the sale of 24 Park Avenue in August 2001 for £99,950 and of 110 Midland Road in September 2001 for £105,000. He made a 10% deduction for tenant’s improvements to arrive at his figure of £90,000. In his representations to this Tribunal Mr Dixon said that 110 Midland Road sold earlier in 2001 for £73,950 which indicated that it was a dealer’s lot in poor condition which was resold following refurbishment. A sale price of £105,000 in September 2001 is substantive proof that the LVT figure is incorrect. Mr Dixon also included in his representations agents’ particulars for 24, 34 and 36 Ashmore Road, all sold for the asking price (“offers around £99,950”), and 144a Midland Road on offer at £130,000. I have been given no dates for these sales and offer, nor are they referred to in his representations in this appeal. I give them no weight due to lack of information. Mr Dixon also refers to a file note he made in November 2001 regarding information given to him by Mr Harrison of Albion Estates that terraced houses in Midland Road and Park Avenue were selling for £90,000 - £95,000 (two bedrooms) and as high as £105,000 (three bedrooms).[7]The LVT fixed the entirety value at £78,000, a figure which appears to be out of line with the above evidence. The LVT, however, had before it evidence from the tenant’s valuer giving a different picture to that given in this appeal by Mr Dixon. The tenant’s valuer put in a schedule of 10 sales in the immediate vicinity of the subject property between April and August 2001 at prices between £67,000 and £89,000 including in Park Avenue, nos.19 (£78,000), 17 (£79,959) and 22 (£89,000). He also gave details of the sales of 56 terraced houses in the same postcode area from April to June 2001 giving an average price of £75,944. It is clear that, in arriving at its standing house value of £78,000, the LVT gave greater weight to the tenant’s valuer’s comparables than to Mr Dixon’s comparables. The tenant’s evidence is not, of course, before me and I cannot take it into account in arriving at my decision on appeal. Mr Dixon has not, however, referred to this other comparable evidence. I do not have the full picture. In criticism of Mr Brunt’s evidence (the tenant’s valuer) Mr Dixon says that Mr Brunt got information from Albion Estates in February 2002 (and not at the valuation date) which does not coincide with other sales evidence and contradicts the information from that company referred to above. I am surprised at this criticism because the dates for the comparables set in the LVT’s decision are in April to August 2001, close to the valuation date of 30 April.[8]Looking at the position overall I am not persuaded that the standing house value of the LVT is wrong. By not referring to, and not criticising or distinguishing or explaining, the other comparable evidence, which was relied upon by the LVT, Mr Dixon has not been able to show that his two comparables give a true picture of values in Park Avenue in April 2001. I suspect that they are out of line with the majority of sale prices and that the LVT, with their local knowledge, were aware of this and decided to fix the standing house value at a lower figure more in line with their own experience and Mr Brunt’s evidence. The burden of proof is on the appellants and has not been discharged. Furthermore, I am not satisfied that Mr Dixon has included all the relevant comparable sales in his expert evidence. On the incomplete evidence before me, I am not persuaded that the LVT were wrong in this part of their decision. Haresign addition 3[9]The Haresign addition is the name given to a valuation practice following the decision of this Tribunal in Haresign v St John’s College, Oxford (1980) 255 EG 711. It involves including in the valuation a reversion to the value of the house at the end of the assumed 50 year lease extension (i.e. a reversion to the landlord’s right to possession at the end of the extended lease). Standard practice is to capitalise the modern ground rent in perpetuity. The Haresign addition is, in effect, an exception to this practice, thus including in the valuation two reversions or increases in value.[10]In the LVT Mr Dixon’s valuation included reversion to the standing house value at the end of the extended lease. The tribunal declined to include this Haresign addition in their valuation and capitalised the modern ground rent in perpetuity.[11]Mr Dixon says that this is wrong: there is sufficient evidence to suggest that the subject property is likely to remain standing for 60-100 years. In support he refers to the following. Letters dated 17 and 26 July 2001 from Barclays Bank and HSBC which set out their mortgage requirements on houses built in 1900 with 60 years unexpired on the lease. There is a considerable stock of housing in Birmingham dating from 1870 to 1905. 15% of the West Midlands housing stock was built before the First World War. These houses are popular and mortgageable. A letter dated 12 November 2001 from Mr Jeremy A T Goer ARIBA Dip Arch (Birmingham) refers to the inspections which were usually carried out during the building of houses at the turn of the century and their sound construction. Mr Goer said that the subject property should remain standing and in good order for the next 60 to 65 years. A letter dated 7 February 2002 from Mr D J Coleman MRICS of Hollier Browne, of Kings Norton, which refers to the strong demand for houses such as 11 Park Avenue with a life of 75 to 100 years. A report from Mr R J Wishart, a chartered building surveyor, dated January 2002 which says that the life of the subject property may well exceed 2050.[12]Mr Dixon states that in almost every LVT decision the reversion is valued where more than 60 years remains on the lease. He gives one example, 96 Lordswood Road, Harborne, where a Haresign addition was awarded. He says that houses built at the turn of the century are considered to be both more desirable and readily saleable than modern houses. There is no logical explanation as to why these properties should not remain standing for at least the next 60 years.[13]The LVT did not include in their valuation a further reversion to the standing house value at the end of the extended lease. Their decision is in the following terms:- “In considering the question of whether or not a Haresign addition should be included in the valuation, the Tribunal was mindful of the fact that in those cases where this had been felt to be appropriate, the subject properties had been very substantial in nature when compared with houses such as those in Park Avenue. As such, the Tribunal considered that such an addition would not be appropriate in this instance.” 4 In reaching that decision the tribunal clearly preferred the evidence of the tenant’s valuer who, contrary to Mr Dixon’s statement in the previous paragraph, referred to 11 other cases before the LVT concerning small terraced houses where a Haresign addition was considered. 96 Lordswood Road appears to be an exception to the practice of the LVT in not valuing the reversion to standing house value for small terraced houses. The tenant’s valuer also referred in detail to the Haresign decision. This evidence is not, of course available to me when reaching my decision but it assists in explaining the reasons for the LVT’s rejection of a Haresign addition and in putting Mr Dixon’s evidence in context.[14]The lease of 11 Park Avenue had 12 years unexpired at the valuation date. The lease extension assumed under section 9(1)(a) of the 1967 Act is 50 years, giving a reversion in 62 years. At that time the house will be about 160 years old. It is a small terraced house typical of those to be found in the inner areas of Birmingham and in the West Midlands.[15]The essential question, to my mind, is not whether the subject property will still be standing 62 years after the valuation date, but whether the purchaser in the hypothetical sale envisaged in section 9(1) of the 1967 Act would value the reversion to standing house value? The usual practice is to capitalise the modern ground rent in perpetuity, ignoring both the rent review at the 25th year and the landlord’s right to possession at the end of the extended lease. The so-called Haresign addition is an exception to this practice. The circumstances must warrant this exception. I accept that 11 Park Avenue will still be standing at the end of the extended lease but I cannot accept that the hypothetical purchaser would include in his price any additional value for the house in excess of the capitalised ground rent in perpetuity which forms part of a standard enfranchisement valuation under section 9(1). I can accept that a Haresign addition might be included where the house is substantial (as in the Haresign decision itself) but not where it is a small terraced house. I am not satisfied that the LVT’s decision on this issue is wrong: it seems to follow the evidence which it considered. I am not persuaded by Mr Dixon’s evidence that it is wrong. Yield rates[16]The last issue concerns the rates used to capitalise the existing and modern ground rents. The LVT adopted 7% and 6½% respectively; Mr Dixon says that the yield should be 5½% throughout the valuation.[17]In support he refers to the following. The average investment rate between 1991 and 2001 was 3.88%. In May 2001 the rate was 0.65% and it would therefore not be unreasonable to deduce that the average rate for the remainder of the term of the lease would be approximately the same. Coupled to the substantial growth rate and reversionary value over the remainder of the lease it is likely that an investor would readily settle for a yield of 5½%. Base rate was 5½% in May 2001 and interest rates over the past decade have been at an all time low since the introduction of the 1967 Act. 10 year bonds offer potential for far less growth and yield 4.93% (February 2002). In December 2001 the forward projection rate for the cost of borrowing was 5.78%. Returns on investments would be lower. The stock market has been volatile and ground rents have proved to be a favourable alternative. It is 5 difficult to obtain an investment which provides a secure return over 5½% especially where guaranteed growth is a certainty.[18]Ground rents with high reversionary value are popular. In August 2000 9 Albany Road, Harborne was sold at auction at a price of £18,250. This house had an unexpired term of 22½ years at a ground rent of £12 per annum, a yield of about 3¼%.[19]Mr Dixon referred to two decisions of this Tribunal. The first, Re Speedwell Estate’s Appeal (unreported) (LRA/70/91), concerned 1 Wrekin Road, Perry Bar. The date of valuation was 6 June 1997 and the unexpired term of the lease was 38 years. In his decision the member (Mr M St J Hopper FRICS) valued the existing ground rent at 7% and the rent under the extended lease at 6½%. The second decision is Windsor Life Assurance v Austin [1996] 2 EGLR 169, which concerned a house in Redditch. Mr Dixon refers to various comments made by the member (Mr M St J Hopper FRICS) in his decision. Mr Dixon also refers to the decision of the LVT in this case and to other LVT decisions.[20]The LVT considered that different capitalisation rates should be used for the term and reversion and concluded that these should be 7% and 6½% respectively. These were the rates used by the tenant’s valuer, the lower rate for the reversion being adopted to reflect the anticipated uplift in rent in 12 years time.[21]I do not derive any assistance from the rates used in other decisions of this Tribunal or the LVT. As the Tribunal has often emphasised, decisions of fact or opinion rest on the evidence given in the particular case and should not be treated as “comparables” in another case where the evidence may be different. Also, I do not derive assistance from Mr Dixon’s evidence regarding the money market, which is an unsafe guide to property yields (Gallagher Estates v Walker (1973) 28 P & CR 113).[22]As to market evidence, Mr Dixon refers to 9 Albany Road but does not explain how he arrives at his overall yield of 3¼% (presumably by reference to a reversion to a standing house value or a revised ground rent at the end of the lease). This house may have been purchased by the tenant and not an investor. I note that other freehold ground rents on the same results page (and not referred to by Mr Dixon) show much lower prices. I give no weight to this evidence.[23]I am not persuaded by Mr Dixon’s evidence that the LVT were wrong to capitalise the existing ground rent of £6.50 per annum at 7% for the remaining 12 years of the lease. The LVT then capitalised the modern ground rent of £1,673 per annum at the lower rate of 6½%, presumably on the grounds that it is greater in amount and more attractive. While this is true, the revised rent is less secure and is fixed for 25 years compared to 12 years for the existing ground rent. The LVT might have used the same 7% yield or even a higher yield for the capitalisation of the modern ground rent. In the absence of a tenant’s cross-appeal, however, I do not have to make a decision on this point. I am not persuaded that I should reduce the yield used to capitalise the modern ground rent below 6½%. 6 Determination[24]I have found against Mr Dixon on all grounds of appeal, which is dismissed. In the absence of a respondent there can, of course, be no order as to costs. DATED: 25 November 2002 (Signed) P H Clarke 7