[2000] EWLands LRA_47_2000 (21 December 2000)
	LRA/47/2000
	
	LANDS TRIBUNAL ACT 1949
	
LEASEHOLD ENFRANCHISEMENT – Price payable on collective enfranchisement for acquisition of freehold interest in four purpose built maisonettes – value of existing leases – comparables - relationship between short and long lease values – effect on value of deficient lease terms - appropriate yield – hope value to be attributed to non-participating tenant’s flat-reasonable legal fees - price determined £29,816 plus agreed valuation fee and majority of  legal fees  claimed - Leasehold Reform, Housing and Urban Development Act 1923, ss.24 and 33.

IN THE MATTER of an APPEAL from a DECISION OF THE LEASEHOLD VALUATION TRIBUNAL FOR THE LONDON RENT ASESSMENT PANEL

By	SHULEM B ASSOCIATION LTD	Appellant
	(No Respondent)

	Re: 	34-40 Westmere Drive
		Apex Corner
		London NW7

	Before: N J Rose FRICS

	Sitting in public at 48/49 Chancery Lane, London WC2A 1JR
	On 6 December 2000

Anthony Radevsky, instructed by Kanter Jules for the Appellant.

DECISION

1.	This is an appeal by Shulem B Association Limited (“the appellant”), against a decision of the Leasehold Valuation Tribunal for the London Rent Assessment Panel (“the LVT”), determining the price payable to the appellant for the freehold interest in 34-40 Westmere Drive, Apex Corner, London NW7 (“the appeal property”) by Elizabeth Riordann , Arline Ivy Limbrey and Mary Ann Stanley (“the nominee purchaser”) under the provisions of sections 24 and 33 of the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”) at £14,000, plus a valuation fee of £450 plus VAT, legal fees of £875 plus VAT and disbursements of £32 and £500 plus VAT for conveyancing fees. The appellant contended for a price of £34,166 plus a valuation fee of £450 plus VAT, legal fees of £1,190 plus VAT and disbursements of £560.75 and £650 plus VAT for conveyancing.  There was no respondent to the appeal.  The valuation date is 30 September 1999.
2.	Mr Anthony Radevsky, counsel for the appellant, called Mr E F Shapiro, BSc, FRICS, IRRV, FCIArb, senior partner of Moss Kay and Roy Frank and Mr C N F Hobson, solicitor and partner of Kanter Jules.  
3.	I made an unaccompanied inspection of two of the flats in the appeal property on 18 December 2000.  I saw No. 34 on the ground floor and No. 40 on the first floor.  I also made an external inspection of the flats in the immediate area which had been cited as comparables.
4.	From the evidence I find the following facts:-
(1)	Westmere Drive is located to the west of Barnet Way (A1), a short distance north of Northways Circus in the London Borough of Barnet.  Northways Circus is otherwise known as Apex Corner.  It is a major roundabout at the intersection of the A1 and A41 trunk roads, as well as the A5109.
(2)	The appeal property lies on the south side of Westmere Drive, approximately midway between its junction with Fernside Avenue and Ellesmere Avenue.  Westmere Drive is one of five roads which make up a small residential area occupying a triangle of land bounded by the Barnet Way (A1), the M1 motorway and Mill Hill Golf Course.  Notwithstanding its proximity to these main roads, it comprises a quiet backwater with local shopping facilities located at Apex Corner and fair transportation facilities, both by road and by London Underground (Edgware Northern Line) and  railtrack (Mill Hill Broadway).  Access is only available from the Barnet Way.
(3)	The appeal property comprises a detached block of four purpose - built maisonettes, constructed in 1961 in sun trapped style, with each maisonette comprising entrance hall, three rooms, kitchen and bathroom/WC. 
(4)	Three of the four lessees are qualifying lessees for the purposes of the 1993 Act and have served notice.  Each flat is held on a lease for 99 years from 24 June 1961 at a rent of £9 per annum fixed for the entire term.  The leases therefore had 60.75 years unexpired at the valuation date.  The leases are on conventional terms, with each tenant responsible for all repairs to the demise and for insuring it.  There is no service charge provision except in respect of party walls, structures and other conveniences, the use of which is common.  The landlord does not undertake to enforce covenants against other lessees in the building. 
5.	It was agreed before the LVT that the value of each flat in the appeal property, unimproved and on the basis of a 999 year lease at a peppercorn, was £80,000.  The LVT’s valuation of £14,000 is attached (Annex 1).  So also is that of Mr Shapiro at £34,166 advanced before me on behalf of the appellant (Annex 2).  
6.	The issues in this appeal are as follows:
(1)	The value of each of the existing leases, assuming the tenants have no right to purchase a lease extension.  
(2)	The effect of the absence from the existing leases of a covenant by the landlord to enforce covenants against other lessees. 
(3)	The yield to be adopted when valuing the existing freehold interest.
(4)	The hope value to be attributed to the flat owned by the non-participating tenant.
(5)	Legal fees.
7.	I deal firstly with the value of the existing leases in the “no 1993 Act world”.  In Mr Shapiro’s opinion, the lease of each flat was worth £62,400, or 78% of the value of a 999 year lease.  In arriving at this figure he had regard to the prices achieved for six flats in 
Westmere Drive and one in Ellesmere Avenue, an adjacent road containing similar properties.  He adjusted these prices to reflect differences in size, lease length, tenant’s improvements and “the no 1993 Act world”.  The average of the resultant figures was equivalent to 71.72% of the agreed long lease value; if the highest and lowest were excluded, the average was 72.4%.
8.	Mr Shapiro said that a number of major firms of valuers had produced schedules showing the value relationship between a short lease and a long leasehold interest and these showed approximately the same relativities.  He produced a copy of the graph produced by Cluttons Daniel Smith in respect of settlements on the Eyre Estate and the John Lyons Charity Estate and also a copy of a table produced by FPD Savills Research Unit.  The former showed that a lease of 60.75 years had a value in the region of 78% and the latter about 80%.  He placed more reliance on the Cluttons graph, because it was based entirely on actual transactions, whereas the FPD Savills table was partly transaction-based and partly based on valuers’ opinions.  
9.	Both graphs showed a considerably higher percentage for a lease of 60.75% years unexpired than was shown by the adjusted comparables.  This did not surprise him, since the graphs were based on transactions in high value areas and where there were more cash purchasers than in the case of the subject flat.  Notwithstanding the difference between his analysis and the Cluttons graph, he utilised the graph in preference because it was based on a much larger sample size than he had been able to find in Westmere Drive.  He considered that the Cluttons graph was as applicable to Mill Hill as it was to St John’s Wood; it showed relativity and not absolute value.  If anything, the equivalent graph for Mill Hill would show a lower percentage, as purchasers in that area were more reliant upon mortgage finance than they were in St John’s Wood. 
10.	Mr Shapiro felt that his assessment of 78% was reasonable in the light of the comparables in Mill Hill that he had put forward, which in fact suggested an even lower percentage.  I put to him a point made at the LVT by the surveyor for the nominee purchaser, namely that the typical lessee in Mill Hill was a retired person who did not need a mortgage, and to whom the length of lease was relatively immaterial.  He pointed out that this suggestion had not been supported by any evidence as to the ages of people occupying the appeal property.  In any event, even if such premises in Mill Hill were of particular interest to the elderly, the effect would not be to increase the relative value of shorter leases there.  It was logical for older people to buy shorter leases, because the reduced prices required would leave them with more disposable income to spend and, if necessary, for nursing care.   It was quite common for older people to move to cheaper accommodation in order to release capital.  If, however, the value of a shorter lease was not much less than that of a long one, there would be little to be gained by choosing a short lease.
11.	I agree with Mr Shapiro that the figures of 71.72% and 72.4% suggested by his analyses of the seven sales of flats in the vicinity of the appeal property do not provide a reliable guide to the existing lease values.  The reason, however, is not the small number of comparable sales but the reliability of the information that is available about them.  Notwithstanding the difficulty of adjusting sale prices for the effects of the statutory right to enfranchise, I consider that a sample of seven comparable flats in the immediate area would usually be adequate to provide a good indication of value.  Moreover, in normal circumstances such an indication is likely to provide a more accurate guide to value than a graph illustrating settlements between surveyors in an area some miles closer to central London, where property values tend to be appreciably higher.
12.	The reason I place little reliance on Mr Shapiro’s seven comparable sales is that he has not inspected any of those properties internally.  The danger of a valuation based only upon an external inspection is illustrated by the observations made in its decision by the LVT in relation to one of Mr Shapiro’s comparables, 77 Westmere Drive.  Mr Shapiro’s evidence to the LVT was based on the assumption that that flat had two bedrooms, but during its inspection the LVT established that there was in fact only one bedroom.  Mr Shapiro took this into account in his evidence before me.  Nevertheless, the fact that he has not inspected any of the comparables internally means that I cannot assume that the adjustments he has made for size and tenant’s improvements are reliable, nor whether there are any other features of the properties, such as their condition, that justify further adjustments.
13.	Against that background, I find that the graph prepared by Cluttons Daniel Smith in respect of settlements in the St John’s Wood area is of assistance in deciding the relative value of a lease with 60.75 years unexpired.  I accept Mr Shapiro’s evidence that there is no reason in principle why a lease of this length relating to a flat in Mill Hill should be significantly more expensive relative to a 999 year lease than one in St John’s Wood.  Accordingly, and in the absence of any other evidence, I find that the value of the existing lease of a flat in the appeal property is £62,400 (78 per cent of the long leasehold value).
14.	Mr Shapiro reduced his existing lease value by 2%, giving a net value per flat of £61,152.  This deduction was made because none of the existing leases of the appeal property contained a covenant by the landlord to enforce covenants against other lessees.  He said that the absence of such a clause was now found by lending institutions to be unacceptable and they would not provide a mortgage unless there was a deed of variation.  Insurance was not a substitute because this would cover loss in value due to the action of a neighbouring lessee, but would not provide specific performance of such lessee’s covenants.  Many landlords had a standard practice in respect of the grant of such deeds of variation.  They either made a fixed charge or they charged a percentage of the value of the lease at the time the deed was granted.  Mr Shapiro produced details of a portfolio of maisonettes at various locations in London and the south-east where all the leases contained a similar defect.  Over the course of a year and a half he had agreed deeds of variation in respect of 34 of these properties.  In each case a charge of £2,000 plus fees was made.  Four deeds were completed between 26 May 2000 and 6 November 2000.
15.	It is in my view significant that, although the appellant’s ownership extends to Nos.2-64 Westmere Drive, Mr Shapiro did not produce any examples of similar payments being made for deeds of variation elsewhere on that estate, despite the fact that several leases there had recently changed hands.  Indeed, in May 2000 the purchasers of the lease of 11 Westmere Drive surrendered that lease and took a new lease for 99 years at a premium and subject to an increased ground rent, but without obtaining a mutual enforceability clause.  There is therefore no evidence of transactions before me to suggest that the lack of such a clause in leases in Westmere Drive has a depressing effect on value and I make no deduction on this account.  
16.	The third issue is the appropriate yield to be adopted when valuing the current ground rents and in deferring the reversion.  The LVT adopted a primary yield of 13%, which it applied to both elements of the freeholder’s interest.  Mr Shapiro considered that the correct yield in each case was 9%.  In support of this view he produced details of an auction sale by Messrs Allsop on 26 May 1999 of freehold ground rents in Greater London.  In each case the unexpired term of the lease was more than 90 years.  He summarised the sale prices as follows:-
	Lots 284 – 292
	Income:	£12,480
	Price:	£171,750
	Yield:	7.265%
	Lot 300
	Income:	£4,400
	Price:	£60,000
	Yield:	7.33%
	Lot 302
	 Income:  			£3,700
	Price:	£50,000
	Yield		.4%
		Lots 304 – 308
	Income:		£5,630
	Price:		£77,500	
	Yield:		7.26%
17.	He explained that he had adopted a rather higher rate for the appeal property because the prices achieved at auction reflected the possibility of insurance commission being earned by the freeholder and also some hope value.  In response to a question from me he agreed that if the reversionary element were valued separately from the term, there would be a small rise in the yield applied to both elements.
18.	Mr Shapiro also referred to the yields adopted by practitioners when valuing similar investments in Central London,  which he suggested were between 6% and 6.5%.  He considered that these lower rates reflected the greater reversionary potential for such properties.  Nevertheless, he felt that the prospects of capital growth for even small flats of the kind found in the appeal property were still very substantial and that this potential justified the yield of 9% which he had adopted.  He pointed out that the rental income receivable from the various auction lots was very much higher than at the appeal property, where the total rents amounted to only £36 per annum.  He disagreed with the suggestion that a high yield would be required where the income was small, as the high cost of rent collection made management of the investment very expensive.  In his view this was a misunderstanding of the position, because a great part of the yield was derived from the reversion as opposed to the current income.  He said that, on his valuation approach, the ground rental income of £9 for each flat, capitalised for 60.75 years at 9% with a reversion to £80,000, was worth £525.  Of that figure only £99 reflected the value of the ground rental income; the balance of  £426 represented the value of the reversion.  Consequently the cost of collecting the ground rent was irrelevant to the true value of the investment, which lay in the reversion.
19.	In my opinion it is necessary to make various adjustments to the evidence provided by the auction sales to reflect the different circumstances at the appeal property.  There is the (unquantified) potential insurance commission; the hope value of negotiating revised terms with lessees in the future and, notwithstanding Mr Shapiro’s arguments to the contrary, there is in my view the real disadvantage at the appeal property that the rental income is only nominal and therefore scarcely worth the management expense of collecting it.  In my view the adjustment which Mr Shapiro has made from an average of 7.3% for the various auction lots to 9% for the appeal property is inadequate to reflect the disadvantages of the latter.
20.	In answer to another question from me, Mr Shapiro agreed that the generally accepted yields for valuing similar investments on the Eyre Estate ranged from 6% to 7%, and not 6.5% as he had suggested in his written report.  Given Mr Shapiro’s acceptance of the appreciably better growth prospects in St John’s Wood, I consider that by comparison a rate of 10% would be appropriate for the appeal property.  Such a rate is also consistent, in my view, with the yields indicated by the Allsop auction sale.
21.	The next issue relates to the value of the non-participating flat.  Mr Shapiro thought that this consisted of the value of the term and the reversion – capitalised in the same manner as for the three participating flats – together with an additional sum to reflect the expectation of the future sale of a lease extension – that is, hope value.  To illustrate this potential, he referred to the history of 11 Westmere Drive.  In May 1999 the purchasers of the lease having 61 years unexpired surrendered it,  took a new 99 year lease and paid a premium of £10,000.  They also agreed to pay a ground rent of £100 per annum, rising by £100 per annum every 25 years, compared with the previous fixed rent of £9 per annum.  If one included the capitalised value of the increased ground rent, the total premium was £11,100.  A similar situation had arisen at 26 Westmere Drive.  The unexpired lease, which was for 99 years from 24 June 1961 at £9 per annum fixed, was surrendered and a new lease taken for 99 years from 10 July 1997 at £50 per annum, rising by £50 every 25 years.  A premium was paid of £7,000 which, together with the value of the increased ground rent, equated to £7,550.
22.	Although  there was a market for a lease with 60.75 years unexpired, that market would become increasingly difficult as the unexpired term reduced.  Mr Shapiro referred to a ground rent estate of 34 maisonettes at Avon Terrace and Bloomfield Avenue, Loughton, Essex, which had been purchased by  his clients in 1994.  Those maisonettes were of a similar value to those in the appeal property.  27 of the leases were for 99 years from 1956 and 7 for 99 years from 1986, having been extended.   The total annual income was £701.80 and the purchase price was £52,000, showing a yield of only 1.35%.  The purchase was justified by the fact that the seven leases commencing in 1986 had been the subject of lease extensions between 1986 and 1994 for premiums which ranged from £2,000 at the beginning of the period to £5,500 at the end, and with  ground rents increasing from £8.40 per annum fixed to either £50, £75 or £100, doubling every 25 years.  The average price paid by Mr Shapiro’s clients for the 27 leases which had not been extended was £1,740, of which £359 related to the value of the term and reversion and £1,381 reflected hope value.  Since in 1994 marriage value was £10,000, the hope value represented 13.81% of the marriage value.   Mr Shapiro said that the purchase of the estate in Loughton took place shortly after the 1993 Act was passed and the level of premium which would be determined or agreed was therefore uncertain, as was the potential level of activity.  The position was now much more certain and hence he believed that a purchaser would now pay a higher share of marriage value to reflect this future gain.  In his opinion, with a lease which was wasting as rapidly as that at the appeal property, the amount which an investor would pay would be the investment value plus half  of the landlord’s normal share of the marriage value – i.e investment value plus 25% of marriage value.
23..	Mr Shapiro accepted that an alternative method of reflecting hope value would be to reduce the yield.  The LVT had reduced the primary yield of 13% to 11% to reflect both the hope value and the defects in the leases.  Its valuation of the collective enfranchisement price (before rounding down) was therefore £14,057.  If the yield had been 13% the price would have been £13,792.  Therefore the additional price for hope value and defective leases was £265.  Since, on the LVT’s figures, half of the marriage value in one flat was £2,194, this was an unrealistic assessment and the LVT’s yield differential was insufficient.  In order to arrive at a similar result to that which he had calculated it would be necessary to reduce the yield in the whole calculation from 9% to 6%. 
24.	In a subsequent report, Mr Shapiro referred to an auction of residential ground rent investments by Messrs Strettons on 20 November 2000.  He analysed four sales,  relating to flats in East Ham, Leytonstone, Manor Park and Enfield, as showing hope value being paid in addition to the value of the term and the reversion.  His analyses suggested payments for hope value varying between £2,400 and £5,948.  He did not claim that his calculations were totally accurate.  He had assumed arbitrarily that each flat was worth £80,000 if sold on a long lease and he had not taken into account limited fixed increases in certain ground rents.  Nevertheless, this evidence served to illustrate the principle that investors paid a significant element of hope value for such investments.
25.	In the light of Mr Shapiro’s evidence, I have been persuaded that the LVT’s approach of reducing the yield by two percentage points to 11% is inadequate to reflect the real prospect that the tenant of the non-participating flat will at some stage be prepared to pay a substantial premium in order to extend the existing lease.  I consider that the best indication of the quantum of such hope value is provided by the purchase in 1994 of 34 maisonettes at Loughton, Essex, which suggests hope value of 13.81% of marriage value.  I bear in mind that the price paid on that occasion may have been influenced by the  uncertainties resulting from the recent introduction  of the 1993 Act and I find that a  purchaser of the appeal property at the relevant date would have paid 15% of marriage value for the non-participating flat.  
26.	Finally, I turn to the amount of legal costs.  Mr Hobson explained that the appeal property was part of a larger title, and so the question of cross rights had to be considered in detail.  Furthermore, the appellant had to consider whether or not the appeal property constituted premises to which the 1993 Act applied, that is whether it was one self-contained building divided into four maisonettes or  two self-contained parts of a building each divided into two maisonettes.  That question had to be investigated because only three out of four of the qualifying tenants were participating.  If the premises were, in fact, two self-contained parts of a building, then  one self – contained part could not have been  enfranchised  as less than two thirds of the two qualifying tenants were participating.  Counsel had advised that on the particular facts of this case  it was open to the qualifying tenants to make the application that they had chosen to do.  The appellant’s costs in respect of the application to enfranchise amounted to £1,190 plus VAT (based on 6.8 hours at £175 per hour) and disbursements (mainly counsel’s charges) of £560.75.  In addition, conveyancing costs would be £650 plus VAT.  The latter charge was slightly increased due to the necessity to consider the cross rights that would be required with regard to matters such as drainage and rights of way.
27.	In general I accept Mr Hobson’s evidence.  In particular, unlike the LVT I do not consider it was unreasonable to consult counsel in this case. It seems, to me, however, that Mr Hobson’s suggested figures include some double-counting of the work arising from the cross rights.  That being so, I determine the legal costs payable to the appellant in the sum of £875 for five hours work plus VAT and disbursements of £560.75, together with conveyancing costs of £650 plus VAT.
28.	The appeal is therefore allowed.  I find that the price payable by the nominee purchaser to the appellant under the terms of s.24 of the 1993 Act is £29,816 as calculated in Annex 3.  In addition, the reasonable costs payable pursuant to s.33 of the Act are £450 plus VAT for valuation; legal fees of £1,028.13 including VAT plus disbursements of £560.75; and conveyancing fees of £763.75 inclusive of VAT.
29.	I make no order as to costs.
Dated:	21 December 2000

(Signed):  N J Rose FRICS

Annex 1

34-40 Westmere Drive, Apex Corner, London NW7
Leasehold Valuation Tribunal’s Valuation

Freeholder’s Current Interest
	Ground Rent £9 per annum per flat x 4
	YP 11% for 60.75 years
	Reversion to £80,000 per flat x 4
	PV £1 in 60.75 years at 11%	
£36 per annum
	 9.074875
£320,000
	 0.0017663	

£327

£565
£892
	
Value after enfranchisement
	3 flats @ £80,000
	Value of non-participating flat £8924	
£240,000
	£223	

£240,223	
Marriage Value
	Value after enfranchisement
	Less
	Current Value of 3 flats @ £71,000: £213,000
	Freeholder’s Interest	£892
	Divided equally ie	
£240,223

£213,892
£  26,331
	2	

£  26,331
£  13,165	
Price to be paid
	50% of Marriage Value
	Value of Freeholder’s Interest	
£  13,165
	£892	

	£  14,057	
		Say		£  14,000	

Annex  2

34-40 Westmere Drive, Appex Corner, London NW7
Mr Shapiro’s Valuation

(1)	All participating tenants
Value of extended lease
Value of existing lease
Less 2% for deed of variation	
(999 yrs @ peppercorn)
	78.00%		

£187,200
£3,744
£183,456	
£240,000	

Value of Freehold Current Interest in 3 participating flats	
	Rent Reserved
	YP 60.75 yrs @ 9%		£27.00
        11.0519	
	£298			
	
	Reversion to VP value
	X  PV of £1 in 60.75 yrs@ 9%	
	
£240,000
          0.0053	

£1,278	

    £1,576	

£185,032	

Marriage Value
	Half share of marriage value					
£54,968
     x50%	

	Value of F/H current interest				£27,484
    £1,576	
					£29,060	
(2) Value of Freehold Current Interest in non-participating flat	
	Rent Reserved
	YP 60.75 yrs @ 9%	
	£9.00
 11.05194163	
£99	

	Reversion to VP value
	X  PV of £1 in 60.75 yrs @ 9%	

£80,000
0.0053253	

£426	

	

	Hope value, say 25% of marriage value 	
£4,581		
   £5,106	
						
					£34,166	

Annex  3

34-40 Westmere Drive, Appex Corner, London NW7
Lands Tribunal’s Valuation

 (1) All participating tenants
Value of 3 extended leases
Value of 3 existing leases
	
(999 yrs @ peppercorn)
	78.00%		

£187,200
	
£240,000	

Value of Freeholder’s Current Interest in 3 participating flats	
	Rent Reserved
	YP 60.75 yrs @ 10%		£27.00
     9.969	
	£269			

	Reversion to VP value
	X  PV of £1 in 60.75 yrs @ 10%	
£240,000
          0.003	

£720	

£989	

£188,189	

Marriage Value in 3 flats

	

£51,811
     x50%	
	Half share of marriage value
	Value of freeholder’s current interest				£25,906
    £989	
					£26,895	
(2) Value of Freeholder’s Current Interest in non-participating flat	
	Rent Reserved
	YP 60.75 yrs @ 10%		£9.00
9.969	
£90	

	Reversion to VP value
	X  PV of £1 in 60.75 yrs @ 10%	

£80,000
    0.003	

£240	

	

	Hope value, say 15% of Marriage value of one flat (£17,270)	
£2,591		
   £2,921	
						
					£29,816