P H Clarke FRICSDate 25 November 2002Property: 148 Midland Road, Cotteridge, BirminghamCatchwords: LEASEHOLD ENFRANCHISEMENT – price – semi-detached house built about 1900 – standing house value – site value – Haresing addition – yield rates – appeal dismissed – Leasehold Reform Act 1967, s 9(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 £11,311.[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.[3]I have inspected the subject property externally and the surrounding area. Facts[4]148 Midland Road (“the subject property”) is situated close to Cotteridge Park and the centre of Cotteridge, Birmingham. It is a two-storey semi-detached house of brick construction with a slate roof built around 1900. The house has been improved by the tenant by an extension to the ground floor to provide a shower room/wc. The accommodation comprises two reception rooms, kitchen and shower room/wc on the ground floor and three bedrooms and a bathroom on the first floor. There is a rear garden which backs onto Cotteridge Park which is accessed from a shared right of way and directly from the house.[5]The appellants are the freehold owners of the subject property which is let to Mrs D F Tanner for 55 years from 24 June 1958 at a rent of £6 per annum. On 11 April 2001 the tenant served notice under the Leasehold Reform Act 1967 (“the 1967 Act”) that she 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 14 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 £11,311. 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, site apportionment (site value), the lack of a Haresign addition and capitalisation yields. Standing house value[6]The LVT assessed the site value by taking 30% of the standing house (or entirety) value of £80,000. Mr Dixon says that this should be £97,500. He relies on the following comparables: the sale of 24 Park Avenue in August 2001 for £99,950 and of 110 Midland Road in September 2001 for £105,000, the sales of 24, 34 and 36 Ashmore Road each at £99,950 (no dates of sale given) and the sale of 144A Midland Road at £130,000 (no date given). I give no weight to these four sales due to lack of information as to the dates of sale. In his representations to this Tribunal Mr Dixon said that 110 Midland Road sold earlier in 2 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 for 110 Midland Road is substantive proof that a value of £97,500 is justified for the subject property bearing in mind that the repairing obligations in the lease do not appear to have been fully complied with. 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 £80,000, 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 February and August 2001 at prices between £67,000 and £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 £80,000, 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. But Mr Dixon has not 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.[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 (to which I can give any weight) give a true picture of values in Midland Road 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 Mr Dixon has been able to show that the LVT were wrong in this part of their decision. Site Value[9]The LVT assessed the site value at £24,000, 30% of the standing housing value (£80,000). The tribunal considered that the presence of a shared right of way to the rear of the house was significant.[10]Mr Dixon says that the site value should be £32,496, 331/3% of the standing house value of £97,500. He refers to the decision of the LVT in respect of 11 Park Avenue where the Tribunal adopted 33% of the entirety value as site value. Land and house values have significantly outstripped inflation and the RPI. The result is that the price of land has risen 3 more steeply than the cost of building materials. An award of 331/3% appears entirely appropriate. Development profit for single building plots is far greater as a consequence of increasing land prices. Mr Dixon refers to a letter dated 2 July 2002 which referred to a “nil percentage buildings rebuild index linking” for a policy for an unspecified property.[11]Mr Dixon states that it seems logical and appropriate that a semi-detached house in the same location should be valued on the same basis as an inner terraced house (11 Park Avenue). Both the frontage and the site area are greater at the subject property. This house is more valuable due to its attractive rear aspect, looking over Cotteridge Park, and it is semi- detached.[12]Mr Dixon also referred me to the evidence he gave to the LVT on site value. He refers to the disposal of a development site in Raddleban Road, Selly Oak in 1998 for £175,000 with planning permission for five units (£35,000 per plot). Land values have increased significantly since 1998. He also drew attention to a determination of the LVT in respect of 16 Park Avenue where the Tribunal fixed the site value at £22,500 as at March 2000. This was a 30% site apportionment which devalued to £175.27 per square metre. Mr Dixon applied this to the subject property by adding 10% for the superior location and the uplift in land values to produce £192.77 per square metre multiplied by the site area of the subject property (167.12 square metres) to produce a site value of £32,219.[13]The evidence put forward by Mr Dixon to attack the LVT’s decision falls into three categories. First, general evidence regarding the recent increases in land values. I find this to be too general and imprecise to be of assistance and give it no weight. Second, the open market sale of a development site in Selly Oak in 1998. I give no weight to this transaction for the following reasons: Selly Oak is just under two miles to the north of Cotteridge; the sale took place three years before the valuation date in this appeal; the land sold had planning permission for five units and cannot usefully be compared to a single house plot. Third, decisions of the LVT in respect of 11 and 16 Park Avenue. As this Tribunal has said on many occasions, decisions of fact and opinion given by an LVT or this Tribunal are based on the evidence given before that tribunal and cannot be used as “comparables” in another hearing where the evidence is likely to be different. I give no weight to the LVT decisions referred to by Mr Dixon.[14]Overall, I am not persuaded that the LVT were wrong to apply 30% of the standing house value to find the site value of the subject property. It is clear from their decision that the percentage to be applied was reduced (probably from 33%) to reflect the shared right of way at the rear of the house and I am not persuaded by Mr Dixon’s evidence that this was wrong. Haresign addition[15]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 4 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.[16]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.[17]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, refers to the strong demand for houses such as 148 Midland Road with a life of 75 to 100 years. A report from Mr R J Wishart, a chartered building surveyor, dated January 2002 says that the life of the subject property may well exceed 2050.[18]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.[19]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 found in Midland Road and as such, considered that such an addition would not be appropriate in this instance.” 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 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 5 reversion to standing house value for small 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.[20]The lease of 148 Midland Road 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 house typical of those to be found in the inner areas of Birmingham and in the West Midlands.[21]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 148 Midland Road 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 house. I am not satisfied that the LVT’s decision on this issue is wrong. Yield Rates[22]The last issue concerns the rates used to capitalised the existing and modern ground rents. The LVT adopted 7% and 6½% respectively; Mr Dixon says the yield should be 5½% throughout the valuation.[23]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 settled 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 difficult to obtain an investment which provides a secure return over 5½% especially where guaranteed growth is a certainty. 6[24]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%.[25]Mr Dixon referred to two decisions of this Tribunal. The first, Re Speedwell Estates Appeal (unreported) (LRA/70/97), concerns 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.[26]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.[27]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).[28]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.[29]I am not persuaded by Mr Dixon’s evidence that the LVT were wrong to capitalise the existing ground rent at 7% for the remaining 12 years of the lease. The LVT then capitalised the modern ground rent of £1,560 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 made a decision on this point. I am not persuaded that I should reduce the yield used to capitalise the modern ground rent below 6½%. Determination 7[30]I have found against Mr Dixon on all grounds of appeal, which is dismissed. In the absence of a respondent there can be no order as to costs. DATED: 25 November 2002 (Signed) P H Clarke 8