[2001] EWLands LRA_23_2000 (22 February 2001)	LRA/23/2000

	LANDS TRIBUNAL ACT 1949
	
LEASEHOLD ENFRANCHISEMENT – flat – premium for grant of new lease – yield – review rents – value of existing and proposed interests – compensation for loss or damage – valuation costs – Leasehold Reform, Housing and Urban Development Act 1993, section 60 and Schedule 13

IN THE MATTER of an APPEAL against a 	DECISION of a LEASEHOLD VALUATION TRIBUNAL of the MIDLAND RENT ASSESSMENT PANEL

BETWEEN	ABACONA INVESTMENTS LIMITED	Appellants

	and

	ANN ELIZABETH WRIGHT	Respondents
	JANE ROSEMARY STIRLING
	GORDON JOHN TRINDER
	(Executors of the will of Eileen Elizabeth Yardley deceased)

	Re: Flat 13, The White House,
		High Street,
		Henley-in-Arden,
		Warwickshire

	Tribunal Member: P H Clarke FRICS

	Sitting at Birmingham
	on 7 February 2001

The following cases are referred to in this decision:

Swann v White [1996] 1 EGLR 199
Re Risbylane Ltd’s Appeal (1999) (unreported) (LRA/25/99)
Re Taylor’s Appeal (1998) (unreported) (LRA/10/98)
Re Speedwell Estates Ltd’s Appeal (1998) (unreported) (LRA/70/97)

British Airways plc v Heathrow Airport Ltd [1992] 1 EGLR 141
Basingstoke and Deane Borough Council v The Host Group Ltd  [1987] 1 EGLR 147
Jarrett v Burford Estates & Property Co Ltd  [1999] 1 EGLR 181
Land Securities plc v Westminster City Council [1992] 44 EG 153
Wellcome Trust Ltd v Romines [1999] 3 EGLR 229
Howard De Walden Estates Ltd v Dioszeghy (2000) (unreported) (LRA/9/2000)

Douglas Readings instructed by Buller Jeffries, solicitors of Birmingham, for the appellants.
Amarjit Rai instructed by Lee Crowder, solicitors of Birmingham, for the respondents

DECISION OF THE LANDS TRIBUNAL

1.	This an appeal by the landlords of a long leasehold flat in Henley-in-Arden against the decision of a leasehold valuation tribunal fixing the premium on the grant of a new lease and determining the landlords’ recoverable valuation costs under the Leasehold Reform, Housing and Urban Development Act 1993.
2.	Douglas Readings of counsel appeared for the appellants and called Kenneth Frederick Davis FRICS, in private practice on his own account and a consultant to Cottons of Edgbaston, Birmingham.  Amarjit Rai of counsel appeared for the respondents and called John K Willson BSc MRICS, a consultant to Lambert Smith Hampton of Birmingham.  
3.	Following the hearing I made an inspection of Flat 13 The White House, the comparables in Henley-in-Arden and the surrounding area.  
FACTS
4.	Henley-in-Arden is a small, historic country town situated to the south of Birmingham, 6 miles north of Stratford-upon-Avon.  The main street is the High Street ( A3400) which runs north to south through the town.  On the east side of the High Street a former inn, the White House, was redeveloped with adjoining property in the early 1970s to form an attractive development (The Whitehouse Development) comprising flats, houses and two shops in the existing buildings fronting the High Street and new flats at the rear around a landscaped area with parking and garages.  
5.	The flat which is the subject of this appeal, 13 The White House, is situated on the first floor of the original frontage building, overlooking the High Street.  Access is from an external staircase at the rear leading to an entrance hall shared with Flat 14.  The accommodation comprises: hall and passage, kitchen, two living rooms, bathroom, box room/store/study (with skylight) and bedroom.  The flat has central heating.  
6.	The freehold of The Whitehouse  Development is held by the appellants.  By a lease dated 19 September 1975 the subject flat was let for 99 years from 25 March 1973 at an initial rent of £50 per annum, subject to reviews at 25 yearly intervals, plus a service charge.  The rent at each review is to be the current market ground rental value (as defined) but shall not be less than one and half times the rent payable for the preceding period.  The initial rent was increased to £460 per annum at the first review (25 March 1998) following determination by an independent surveyor.  The lease had just over 72 years to run at the agreed date of valuation in this appeal, 17 February 2000.  
7.	By a notice under section 42 of the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”) the tenant of the subject flat (Mrs Eileen Elizabeth Yardley) claimed the right to acquire a new lease.  The premium could not be agreed and application was made by Mrs Yardley to a leasehold valuation tribunal of the Midland Rent Assessment Panel.  The landlords, Abacona Investments Limited, applied for the determination of their valuation costs under section 60(1)(b) of the 1993 Act.  Following a hearing on 17 February 2000 the tribunal issued a decision dated 28 April 2000 fixing the premium at £7,587 and the valuation costs at £250 plus value added tax, to the extent that the landlords are unable to recover value added tax on that amount.  On 23 May 2000 the landlords appealed against that decision to this Tribunal.  On 17 January 2001 the Tribunal was informed that Mrs Yardley had died and by an order dated 1 February 2001 the executors of her will were substituted as respondents.  On 2 February 2001 the appellants’ solicitors applied for leave to call Mr Davis as expert witness (in place of Mr Pennycuick) and to lodge his report out of time.  Mr Readings renewed this application at the start of the hearing.  Mr Rai raised no objection.  I gave leave for Mr Davis to appear as expert witness for the appellants and to exchange and lodge his report out of time.  
8.	The agreed valuation date for the purposes of this appeal is 17 February 2000.  
ISSUES
9.	There are two issues in this appeal: the amount of the premium under Schedule 13 to the 1993 Act for the grant of a new lease of the subject flat; and the amount of the appellants’ valuation costs payable by the tenant under section 60(1)(b) of the Act.  
PREMIUM
10.	The effect of enfranchisement by the tenant of a flat under the 1993 Act is that he obtains in substitution for the existing lease a new lease for a term equivalent to the unexpired term of the existing lease plus 90 years at a peppercorn rent (section 56).  The landlord obtains a premium for the grant of this lease calculated in accordance with Schedule 13 to the Act.  This premium is the aggregate of:-
(i)	the diminution in value of the landlord’s interest in the tenant’s flat;
(ii)	the landlord’s share of the marriage value;
(iii)	any compensation payable to the landlord for loss arising out of the grant of the new lease.
11.	The first element in the premium, the diminution in value of the landlord’s interest (paragraph 3 of Schedule 13), is the difference between the value of the landlord’s interest in the tenant’s flat: (a) prior to the grant of the new lease, and (b) once the new lease is granted.  In both cases the value is the amount which the interest might be expected to realise on the valuation date if sold on the open market by a willing seller, excluding the tenant’s and any intermediate leaseholder’s bid, and on certain other assumptions, including the assumption that any increase in value attributable to tenant’s improvements is to be disregarded.  
12.	The second element in the premium is the landlord’s share of marriage value (paragraph 4 of Schedule 13).    This is 50 per cent of the marriage value (as defined) or such greater proportion of that value as is agreed or determined by the Tribunal to be the proportion which would have been determined by agreement at the valuation date on a sale on the open market by a willing seller. 
13.	Marriage value is defined as the difference between: (a) the aggregate of the values of the landlord’s, intermediate and the tenant’s interests when the new lease has been granted (the proposed interests), and (b) the aggregate of the values of the landlord’s, intermediate and tenant’s interests under the existing lease (their existing interests).  The values of the tenant’s existing and proposed interests exclude any landlord’s bid and, similarly, the values of the landlord’s interests exclude any tenant’s bid.  In this appeal there is no intermediate interest and the parties agree the landlord’s share of marriage value at 50 per cent.
14.	The third element in the premium, the amount of compensation payable to the landlord for loss arising out of the grant of the new lease (paragraph 5 of Schedule 13), comprises: (a) any diminution in value of the landlord’s interest in other property which results from the grant of the new lease, and (b) any other loss or damage including loss of development value in relation to the tenant’s flat.  
15.	Mr Davis, for the appellants, assesses the premium at £19,149 calculated as follows:-
							
Current ground rent		£  460		
YP 23 years @ 6.5%		  11.77	£5,414	
Revised ground rent 2023		£1,840		
YP 25 years deferred 23 years @ 6.5%		   2.85	£5,248	
Revised ground rent 2048		£7,360		
YP 24 years deferred 48 years @ 6.5%		    0.58	£4,288	
Revert to capital value		£126,000		
PV of £1 deferred 72 years @ 6.5%		  0.0107	£ 1,348	
Diminution in value of landlords’ interest			£16,298	
				
Marriage value				
Value of tenants’ new lease		£126,000		
Less				
Value of tenants’ existing interest	£105,000			
Value of landlords’ existing interest	   16,298	£121,298		
Marriage value 50% share		£4,702 ÷ 2	£2,351	
			£18,649	
Compensation			    500	
	Premium		£19,149	

16.	Mr Willson, for the respondents, assesses the premium at £7,857 calculated as follows:-
				
Diminution in value of landlords’ interest				
Current rent		£    460		
YP 23 years @ 9%		  9.5802	£4,407	
Revised rent (2023 – 2048)		£    690		
YP 25 years deferred 23 years @ 9%		  1.3534	£  934	
Revised rent (2048 – 2072)		£  1,035		
YP 24 years deferred 48 years @ 9%		  0.1551	£  160	
Reversion to capital value		£105,000		
PV of £ in 72 years @ 9%		   0.002	 £  212	
			£5,713	
Less				
Value of landlords’ interest subject to new lease			       nil	
Diminution in value of landlords’ interest			£5,713	
				
Marriage value				
Value of tenants’ interest with new lease	£105,000			
Value of landlords’ new interest	   nil   	£105,000		
Less				
Tenants’ present interest 	£95,000			
Landlords’ present interest	  5,713	 100,713		
Gain on marriage		£  4,287		
Landlords’ share, 50%			£2,144	
				
Other amounts payable			     nil  	
	Premium		£7,857	

17.	The parties agree the value of the landlords’ interest once the new lease is granted (nil) and the landlords’ share of marriage value (50 per cent).  They disagree on the following:-
(i)	the capitalisation and deferment yield;
(ii)	the review rents payable in 2023 and 2048;
(iii)	the value of the tenants’ interest under the existing lease;
(iv)	the freehold value on termination of the existing lease;
(v)	the value of the tenants’ interest under the new lease;
(vi)	any compensation for loss arising out of the grant of the new lease.
All other elements in the premium calculation are dependent on these figures.  I now deal with each of the disputed items.
(i)	Yield
18.	Mr Davis adopted a rate of 6.5% for capitalisation and deferment.  He said that it would be easy to use a yield of 7%, in line with the valuation of a house under the Leasehold Reform Act 1967, but there is a secure and sizeable income and the bank interest rate has been 6% for the past year with the possibility of a reduction.  This shows a good return on investment.  In support Mr Davis referred to:-
(i)	A letter from Ian Shelley of Visa Properties who said that he would be looking for a yield of 4-5%.  
(ii)	The sale of a portfolio of ground rents in or near Birmingham at a 3% yield.
(iii)	The sale of a block of flats at Rushall, Walsall by auction at a yield of 4.12%.
(iv)	The practice of his property company clients of increasing his valuations of freehold ground rents under the Leasehold Reform Act 1967 by 15-25% to secure a purchase.
There is no justification for varying capitalisation rates.  Where there are rent reviews an investor will accept a lower yield than that determined by a leasehold valuation tribunal.  Market evidence shows that yields are consistently lower than those used by these tribunals.  Market evidence should prevail.  
19.	Mr Willson used a capitalisation and deferment rate of 9%.  He said that an investor would take the view that, although rent reviews are superficially attractive, there is uncertainty about future increases and a risk of costs and delay in agreeing a new rent.  The rent reviews are not a disadvantage.  An investor would expect a higher yield to reflect these uncertainties.  Mr Willson arrived at his figure of 9% by taking as his starting point the yield on Gilts (6%) and then adding 3% for the poorer liquidity of property, greater management and leasehold tenure.  Mr Willson was cautious regarding the 4-5% suggested by Mr Shelley.  There is a lack of information as to the justification for the use of such low yields.  They suggest the prospect of capital gain rather than the receipt of income.  Mr Willson accepted the 9% used by the leasehold valuation tribunal.  In answer to a question from me he said that his yield would have been the same in the absence of rent reviews in the existing lease because the increase at each review would be so small.
20.	Decision – Mr Davis supported his yield of 6.5% by reference to two comparables, an opinion from a third party and his experience in dealing with property company clients.  Mr Willson adopted the 9% yield used by the leasehold valuation tribunal and supported it by reference to the Gilt rate with adjustment.
21.	I look first at the two comparables.  On 5 February 2001 Lawrence and Wightman, chartered surveyors of Birmingham, advised Mr Davis that terms had just been agreed for the sale of the freehold of five blocks of flats in Walsall, Sutton Coldfield, Wylde Green and Erdington.  The price was £75,000 plus costs.  The sale comprised 69 flats and five garages.  The flats produce a rental income of £2,118 per annum on long leases expiring between 2062 and 2070.  Mr Davis analysed this sale to show yields on the flats of 2.98% and 3.25% with and without costs.  In December 2000 a block of 24 flats, Yemscroft in Rushall, Walsall, was sold by auction by Mr Davis for £45,000.  The flats are let on long leases to 2061.  The total ground rental income is £396 per annum.  Mr Davis analysed this sale to show a yield of 4.12% on the ground rents after deducting the value of management and 15 garages let weekly.  
22.	These are sales of portfolios of ground rents.  In my view they are unreliable evidence of the price which would be paid for a single ground rent secured on an individual flat where it must be assumed that the tenant is not buying or seeking to buy (paragraph 3(2) of Schedule 13 to the 1993 Act).  The factors affecting the sale of ground rents in bulk are not the same as those affecting the sale of a single ground rent under the 1993 Act.  This point has often been made by this Tribunal (see eg Swann v White at page 200M, Re Risbylane Limited’s Appeal  at paragraph 41, Re Taylor’s Appeal at page 3 lines 20-40, and Re Speedwell Estates Limited’s Appeal at page 5 lines 5-15).  Although these decisions relate to the enfranchisement price of a single house under section 9(1) of the Leasehold Reform Act 1967, the fundamental objection to the use of portfolio ground rent prices also applies to the extension  of a lease under the 1993 Act, namely that the purchaser may be able to achieve a capital gain by selling or leasing to a tenant at a premium.  In short, the low yields in such cases reflect an element of speculation by the purchaser; they include a possible tenant’s bid for the freehold or an extended lease.  This special value is expressly excluded from the value of the landlord’s interest by paragraph 3 of Schedule 13 to the 1993 Act and section 9(1) of the 1967 Act.  In the case of the first portfolio referred to by Mr Davis, why would the purchaser have agreed a price which reflected a yield of only 3% for a fixed income of £2,118 per annum for the next 62 to 70 years?  Or for the second portfolio, a yield of 4% for the right to receive £396 per annum fixed for the next 62 years?  The reason for these low yields is, of course, speculative value and not the investment value required under paragraph 3 of Schedule 13 to the 1993 Act.  In the absence of evidence regarding the circumstances of these sales, the identities of the purchasers and their reasons for buying I reject these transactions as reliable evidence for the purposes of valuation in this appeal.  
23.	I turn now to the letter dated 2 February 2001 from Mr Shelley of Visa Properties Limited of Edgware to Mr Davis.  This refers to The White House and says:-
“I refer to our telephone conversation in which you gave me a brief outline of this ground rent investment which is particularly interesting because of the ground rental review pattern.

As substantial ground rent investors, based upon the information so far available we would be very interested in purchasing this investment or any others with similar lease terms and would be looking for a yield of between 4 and 5% of the current ground rental income, subject to contract.”
24.	Mr Shelley did not give evidence and this letter is therefore hearsay.  It is admissible (see section 1 of the Civil Evidence Act 1995) but it remains hearsay and, in the absence of oral evidence by Mr Shelley as to the reasons for his statement, I give it no weight.  In my view this is another reference to speculative value related to a possible capital gain and reflected in the low yield.
25.	Finally, Mr Davis relied on his experience of valuing freehold ground rents for purchase by property company clients.  He said that if he arrived at a figure using the approach adopted by leasehold valuation tribunals under the 1967 Act his client would increase his figure by 15 to 25% to secure a purchase.  This evidence is too general to be useful.  I suspect that an investigation of the facts of any particular case would show that the property company included an element of speculative value for capital gain in their bid.  This value (the tenant’s bid) is expressly excluded under both section 9(1) of the 1967 Act and paragraph 3 of Schedule 13 to the 1993 Act.
26.	I do not find Mr Davis’s supporting evidence helpful.  Even if I should take it into account he did not explain why he adjusted his analysed yields of 3-4% to the 6.5% used in his valuation.  He seemed to be saying that 6.5% must be right because the market evidence points to a lower figure of 3-4%. 
27.	Mr Willson adopted the 9% yield used by the leasehold valuation tribunal.  He did not support it with comparables but by extrapolation from a Gilts rate of 6%.  I do not disagree with this approach (although I have no evidence that the return on Gilts was 6% in February 2000).  But I think that he has been unduly pessimistic, having regard to the circumstances of this case.  The lease of 13 The White House is unusual in having rent reviews which produce rents of amounts worth collecting.  The flat is an attractive one in an attractive development in a good location in a small, historic country town, close to Birmingham (for commuting) and Stratford-upon-Avon.  In the absence of more helpful supporting evidence I can only fix the yield having regard to these factors and on general principles.  I find Mr Davis’ figure of 6.5% to be too low but Mr Willson’s 9% to be too high.  I am closer to Mr Davis and fix the capitalisation and deferment yield at 7.5%, particularly having regard to the length of the unexpired term, the 25 yearly rent reviews and the basis and amounts of the ground rents.
(ii) Review rents
28.	Mr Davis assessed the review rents at March 2023 and 2048 at £1,840 per annum and £7,360 per annum respectively.  He said that the rent at March 1998 was fixed by an independent expert (in the absence of agreement) at £460 per annum.  The initial rent from March 1973 was £50 per annum, an increase of 920% between 1973 and 1998.  The purpose of a rent review is to reflect changes in the value of money and real increases in the value of property during a long term (see British Airways Plc v Heathrow Airport Limited and Basingstoke and Deane Borough Council v The Host Group Limited).
29.	Mr Davis said that there is considerable information regarding past increases in values.  The RPI rose 620% between 1973 and 1998.  The appellants have owned The White House Development for 17 years and have indicated that property values in Henley-in-Arden have outperformed the RPI.  The value of this development increased by 700% between 1973 and 1998.  In January last FPD Savills reported that property values in the 20th Century rose by 17,300%.  It is proper to take this historical information into account, and not be shackled to the minimum increase in the lease.  Mr Davis advises investors to take a reasonable approach.  He adopted a multiplier of four times the existing rent to produce the review ground rents, a figure below a midway figure to that determined by the independent expert when fixing the current ground rent of £460 per annum.  
30.	In answer to questions from me Mr Davis said:-
(i)	He believed the original rent of £50 per annum to have been a full, and not a nominal, ground rent due to the wording of the rent review clause, but he has not checked this assumption by inquiry or calculations.  
(ii)	The future rents of £1,840 per annum and £7,360 per annum represent the rental values in March 2023 and 2048 respectively expressed in the estimated values at those dates and not in terms of values as at 17 February 2000, the agreed valuation date.
(iii)	He could not say what the ground rental value under the lease would have been in February 2000 but it would have been less than 1½ times the rent of £460 per annum, the minimum at the next review in 2023.  
(iv)	Although he has used projected rental values in his valuation he has not used projected capital values due to the longer period to the end of the current lease.
31.	Mr Willson said that it is important to consider how an investor would reflect the rent reviews in a bid for the landlords’ current interest.  The increase from £50 to £460 per annum at the first review was significant but past performance is not a useful guide to the future.  It is impossible to predict what will happen to property values to the next two reviews and then to the end of the lease.  If rents are projected into the future (a DCF approach) the present value must be found by discounting back at rates which are significantly higher than the all-risks yield used in traditional valuations and used by Mr Davis.  There is no direction in the rent review to assume the term of the hypothetical lease.  Reality must therefore be followed and the actual unexpired terms of the lease used at each review date (see British Airways).  This will have a depressing effect on the review rents.  Any assessment of what the rent might be on review must be purely speculative; it is right therefore to allow only for the minimum increases under the lease.  
32.	In answer to questions from me, Mr Willson said:-
(i)	He did not know whether the initial rent of £50 per annum was a nominal or full ground rent but suspected that it was the former.
(ii)	His valuation uses only values as at February 2000 and not projected values.
(iii)	If the ground rent at the rent review in February 2023 is assessed at the February 2000 level of values it would be less than the minimum rent at that review (i.e. 1½ times the existing rent of £460 per annum).  
33.	Decision – The rent review provisions are contained in The Eighth Schedule to the lease of the subject flat.  The rent is to be reviewed at 25 yearly intervals and shall be “the current market ground rental value at the beginning of each period that is the rental to be obtained for the site of the Demised Premises disregarding the building and structure thereof and on the assumption that the Development were to be redeveloped in the same manner as it shall then stand”.  The rent payable for each review period “shall be not less than one and one half times that payable for the preceding period.”
34.	In my judgment Mr Davis’s approach to the assessment of the review rents is flawed for the following reasons.  The agreed valuation date is 17 February 2000.  Valuations under the 1993 Act (and generally) are conventionally prepared using the level of values at the valuation date.  A valuation incorporating projected future values, using a discounted cash flow approach, can be made (although in my experience this is a rare occurrence).  This latter approach to valuation projects income to a future date by reference to the expected increase (or perhaps decrease) over the relevant period and then discounts the projected figure back to the valuation date using a high discount rate, higher than the all-risks yield used in a conventional valuation.  Mr Davis’s calculation of the premium is a mixture of the conventional approach and a DCF approach.  He has projected the review rents as at 2023 and 2048 to estimated values at those dates but has discounted them back to the valuation date by the low all-risks yield used in a conventional valuation.  The remainder of his calculations are on the conventional basis using values prevailing at February 2000 and a low all-risks yield.  Mr Davis’s valuation is therefore internally inconsistent.  He said that investors adopt this approach but produced no evidence in support and I am doubtful if this is correct.  A consideration of his valuation reinforces these doubts.  His valuation of the landlords’ existing interest is £16,298.  The existing rent (fixed for the next 23 years) is £460 per annum, and the initial return is therefore only 2.8%.  I think it unlikely that an investor would be satisfied with such a low initial yield when the increases in rent at the review dates are speculative (above £690 per annum and £1,035 per annum) and there is no prospect of a capital gain or marriage value in this part of the valuation.
35.	Even if I could accept Mr Davis’s projected income approach two criticisms can be made of his use of this method.  First, a comparison of the £50 initial rent with the first review rent of £460 may not be valid.  The rent of £460 per annum should be the full ground rental value of the subject flat but it is unclear whether the initial rent was a full ground rent in March 1973.  It may well have been a nominal ground rent which bore no relationship to the true letting value of the site of the subject flat (see Jarrett v Burford Estates and Property Co Ltd at page 186 G-K).  Mr Davis did not make inquiries or check the original rent to see whether it was a full or nominal ground rent.  The position is uncertain and an alleged increase in value from 1973 to 1998 of 920% is therefore also uncertain.  In short, in arriving at that figure, Mr Davis may not have been comparing like with like.  Secondly, even if the ground rental value of Flat 13 increased by this amount from 1973 to 1998 it is pure speculation whether this rate of increase, or any other, will apply over the next 23 and 48 years.  Having said that growth over the first 25 years of the lease was 920% Mr Davis then used 400% over the next two review periods without explanation.  This is a guess and, in my view, wholly unreliable.  
36.	For the reasons given above I reject as fundamentally wrong Mr Davis’s approach to the assessment of the review rents and the way in which he has carried it out.
37.	In my judgment the correct approach is to consider what the current market ground rental value of the subject flat was on 17 February 2000, using values current at that date.  If the independent surveyor was correct in his determination it was £460 per annum on 25 March 1998 but what was the increase, if any, by 17 February 2000?  If it was greater than the minimum rent at the next review (£690 per annum) it should be incorporated in the valuation and increased by multiplying it by 1½ to produce the minimum rent in 2048.  If it was less than £690 per annum it should be disregarded and the minimum rental figures used as if they were fixed increases at the review dates.  Both Mr Davis and Mr Willson said that the ground rental value as at 17 February 2000 would have been less than £690 per annum and therefore the minimum figures of £690 per annum (2023) and £1,035 per annum (2048) should be incorporated in the valuation.
(iii)	Tenants’ existing interest
38.	Mr Davis supported his figure of £105,000 with a valuation prepared in January 2001 by Nicholas J Haycock FRICS of Howkins and Harrison of Henley-in-Arden in the sum of £115,000.  He reduced this value by £10,000 to allow for the earlier valuation date in this appeal.  
39.	Mr Willson valued the existing leasehold interest in the subject flat at £95,000.  He referred to the sale of 14 The White House for £95,000 in January 2000 and three settlements under the 1993 Act in Edgbaston, where Mr Willson acted for the landlords, and where values were agreed for 60 year leases of £91,000 (twice) and £136,000.
40.	Decision – The evidence referred to in support of the respective figures of £105,000 and £95,000 consists of a valuation, the sale of an adjoining flat and settlements under the 1993 Act.  The parties included in their statement of agreed facts details of the sale of the long leasehold interest in 9A The White House in August 2000 for £85,000 but neither valuer referred to this transaction in his evidence.  
41.	In my judgment, the sale of 14 The White House close to the valuation date is the best evidence of value of the subject flat.  Mr Howkins’s valuation is opinion hearsay (he did not give oral evidence at the hearing) and furthermore no leave was given or even sought by the appellants to call a second expert witness.  This valuation was made one year after the valuation date and made specifically for these proceedings.  I give it no weight having regard to the better market evidence.  I also give no weight to the settlements relating to flats in Edgbaston, a different locality some way from Henley-in-Arden.  Settlement evidence is greatly inferior to market evidence.  I am left with the sales of 14 and 9A The White House as evidence for the value of the existing leasehold interest in the subject flat.
42.	14 The White House is next door to the subject flat, in the front building overlooking the High Street and sharing a common entrance.  I was not able to inspect no.14 but I have been supplied with the agents’ particulars on sale (including plans).  The lease has the same unexpired term but I note that the ground rent for March 1998 is £530 per annum, higher than the rent of the subject flat.  Flat 14 is on first and second floors and comprises an entrance hall, living room and kitchen on the first floor and two bedrooms, bathroom and store/study area on the second floor.  The sale price was £95,000 in January 2000, a month before the valuation date in this appeal.  
43.	9A The White House is a modern flat in the rear part of The Whitehouse Development.  It appears to be on the first floor and the accommodation comprises living room, kitchen, bathroom and two bedrooms.  The leasehold interest for 99 years from 29 September 1978 (about 77 years unexpired) at a fixed ground rent of £1,000 per annum was sold in August 2000 for £85,000.
44.	The sale of Flat 14 provides the best evidence of value.  A comparison between the agents’ particulars, supplemented by my limited external inspection, and the details of the subject flat, also supplemented by my internal inspection, has led me to the conclusion that Flat 14 is slightly inferior to the subject flat.  Accordingly, the sale price of £95,000 should be marginally increased.  I put the value of the current leasehold interest in the subject flat at £100,000.  9A The White House is a different type of property and I was given little information.  I do not find it of assistance.  I note that neither Mr Davis nor Mr Willson referred to it in their evidence.  
(iv)	Freehold interest with vacant possession
45.	Mr Davis valued the landlord’s freehold interest at the expiration of the current lease at £126,000.  He arrived at this figure by taking his value of the existing leasehold interest (£105,000) and adding 20% to reflect the freehold tenure.  In support he referred to the opinion of an expert witness before a leasehold valuation tribunal that, in the circumstances of that case, 34% was the correct uplift; and to a decision of a leasehold valuation tribunal concerning flats in Edgbaston accepting an uplift of 10%.  
46.	Mr Willson valued the freehold in the subject flat on the expiration of the current lease at £105,000.  He referred to asking prices of just under £105,000 for 99 years leases of flats and town houses in a new nearby development, Henley Park Court.  
47.	Decision – It is common ground that the value of the freehold at the end of the lease is greater than the value of the current lease.  Mr Davis has applied an uplift of 20%; Mr Willson’s uplift can be calculated as 10.5%.  The flats in Henley Park Court provide some assistance although the information I have is limited and the prices are asking prices only.  They indicate the freehold value of the subject flat will not be less than £105,000.  I do not find Mr Davis’s supporting evidence helpful and give it no weight.  An opinion by an expert witness in another case is hearsay and I decline to take it into account.  I also note that this opinion was given in the context of the valuation of a house in Sutton Coldfield under section 9 of the 1967 Act, different circumstances to this appeal.  Mr Davis also relied on the decision of a leasehold valuation tribunal in a case concerning flats in Edgbaston.  Leasehold valuation tribunal decisions on questions of fact or opinion are indirect or secondary evidence and can be given little or no weight in proceedings in this Tribunal, even if they are admissible (see Land Securities plc v Westminster City Council, Wellcome Trust Limited v Romines at paragraphs 62 and 63 and Howard De Walden Estates Limited v Dioszeghy at paragraphs 31-35). 
48.	On the limited evidence before me I find that the uplift to be applied to the existing leasehold value to produce the freehold value is 15%.  I have determined the value of the current leasehold interest to be £100,000 and applying this uplift produces a freehold value of £115,000.  
(iv)	Tenants’ interest under new lease
49.	Mr Davis has adopted the same figure for both the freehold interest and the tenant’s proposed interest under the new lease (£126,000).  
50.	Mr Willson has also use the same figure for both interests (£105,000).  He arrived at this value by reference to negotiated settlements (in which he took part) relating to flats in Edgbaston where the differential between leases with 59 years unexpired and new leases under the 1993 Act (149 years unexpired) was about 10%.  This indicated that the differential should be less for the subject flat.  He put that differential at £10,000.  
51.	Decision – When the new lease is granted of the subject flat under the 1993 Act the unexpired term will be 162 years.  Although their approach to the value of this extended lease is different both Mr Davis and Mr Willson agree that it will be the same as the freehold value.  In the absence of other evidence I accept this common ground and determine the value of the proposed lease to be the same as the freehold value (£115,000).  I note that this is a differential of 15% between a lease with 72 years unexpired with a ground rent and reviews and a lease with 162 years unexpired at a peppercorn rent.  This seems to me to be reasonable.  Neither valuer has suggested that there is any difference between the value of the proposed long lease and the value of the freehold with vacant possession.
(vi)	Compensation under paragraph 5 of Schedule 13
52.	Mr Davis said that the appellants own 167 and 179 High Street and properties at the rear.  This application will be the first extension to a lease under the 1993 Act.  Others may follow.  This will have a detrimental effect on the value of the appellants’ adjoining property.  An investor would reduce the price he would pay.  Leases are co-terminus and on termination there would be a loss of income but a continuing responsibility for maintenance.  Below the subject flat is a shop and the 99 year lease has been bought in, subject to an existing tenancy under the Landlord and Tenant Act 1954.  A new 15 year lease has been granted but the appellants have left room for redevelopment at the end of this lease.  It is not possible to assess by valuation the compensation but £500 should be paid now.  An investor purchaser would bid £500 less if the new lease of the subject flat had been granted.  
53.	Mr Willson said that the landlords cannot redevelop for another 72 years and until that time they are in no different position if a new lease is granted.  Planning permission is unlikely to be granted for redevelopment involving demolition of the frontage buildings.  Refurbishment is more likely.  This could be carried out without possession of the subject flat.  
54.	The appellants have the right under section 61 of the 1993 Act to apply to the court to terminate the lease of the subject flat for demolition or reconstruction.  The appellant landlords will not suffer loss by the diminution in the value of other property.  Redevelopment is too remote.  Even if this were not the case it would be impossible to put a value on the possible right to possession in 72 years time.  No compensation is payable.  
55.	Decision – Paragraph 5 of Schedule 13 to the 1993 Act refers to other loss or damage to the landlords arising out of the grant of the new lease.  Compensation for this loss or damage forms part of the premium.  The paragraph applies to:-
(a)	any diminution in value of the appellants’ interest in The Whitehouse Development (other than the subject flat) and any other property owned by the appellants which results from the grant of the new lease of the subject flat;
(b)	any other loss or damage referable to the appellants’ landholding which results from the grant of the new lease, including loss of development value in relation to the subject flat.
Section 61 of the 1993 Act gives landlords rights to terminate a new lease granted under section 56 for the purposes of redevelopment.  
56.	As I understand the position nearly all the appellants’ adjoining property is let for about 70 years.  The reversions are a long way off and the current prospects of redevelopment are remote.  I am not persuaded that an investor purchasing the appellants’ landholding in February 2000 would have reduced his bid by £500 (or at all) to compensate for the extension of the lease of the subject flat by a further 90 years, having regard to the right to terminate under section 61 of the 1993 Act.  Redevelopment is not a consideration which would have been in the mind of a hypothetical purchaser of the landlords’ property in February 2000.  The premium under Schedule 13 to the 1993 Act should not include any compensation under paragraph 5.  
(vii)	Premium under Schedule 13
57.	I have now decided the disputed elements in the premium payable for the grant of a new lease of the subject flat.  I find the premium to be £11,175, calculated as follows:-
Diminution in value of landlords’ interest			
(a)	Value prior to grant of new lease 
	Ground rent
YP 23 years @ 7.5%
Revised ground rent 2023
YP 25 years deferred 23 years @ 7.5%
Revised ground rent 2048
YP 24 years deferred 48 years @ 7.5%
Reversion to 
PV of £1 in 72 years @ 7.5%	
£460
 10.8
£690
    2.1
£1,035
       0.34
£115,000
   0.005	

£4,968

£1,449

£352

   £575
£7,344	
Less			
(b)	Value once new lease is granted
Diminution in value of landlords’ interest		    nil    
£7,344	

Landlords’ share of marriage value
(i)	Value of tenants’ interest under new lease
(ii)	Value of landlords’ interest once new lease is granted	

£115,000
     nil     	

£115,000	
Less			
(i)	Value of tenants’ interest under existing lease
(ii)	Value of landlords’ interest prior to grant of new lease
Marriage value
Landlords’ share, 50%
	Landlords’ share of marriage value	£100,000
£  7,344	
£107,344
£  7,656
     0.5
£  3,828	

Compensation under para 5 Schedule 13		
   nil   	
Premium payable by tenants

	Diminution in value of landlords’ interest
	Landlords’ share of marriage value
	Compensation under para 5 Schedule 13

Premium
Say	

£ 7,348
£ 3,828
   nil  
£11,176
£11,175	

VALUATION COSTS
58.	Section 60 of the 1993 Act gives a landlord the right to recover certain costs where notice is given by the tenant requiring an extension of the lease.  The provisions of this section relevant to this appeal are as follows:-
“(1)  Where a notice is given under section 42, then (subject to the provisions of this section) the tenant by whom it is given shall be liable, to the extent that they have been incurred by any relevant person in pursuance of the notice, for the reasonable costs of and incidental to any of the following matters, namely – 

(a)	….
(b)	any valuation of the tenant’s flat obtained for the purpose of fixing the premium … payable by virtue of Schedule 13 in connection with the grant of a new lease under section 56;
(c)	….

but this subsection shall not apply to any costs if on a sale made voluntarily a stipulation that they were to be borne by the purchaser would be void.  

(2)	 For the purposes of subsection (1) any costs incurred by a relevant person in respect of professional services rendered by any person shall only be regarded as reasonable if and to the extent that costs in respect of such services might reasonably be expected to have been incurred by him if the circumstances had been such that he was personally liable for all such costs.”
A “relevant person” includes the tenant’s landlord (subsection (6)).  
59.	At the leasehold valuation tribunal the appellants claimed valuation costs of £659.38 comprising a fee of £350 plus value added tax (£411.25) paid to their valuer (Mr P N Dening), Mr Pennycuick’s time (half a day for an inspection plus two hours preparing figures, £200) (Mr Pennycuick FRICS is the managing director of the appellants) and his travelling costs of £48.13 (76.4 miles at 63 pence).  At the hearing before me the facts underlying the claim were agreed.  The decision of the leasehold valuation tribunal was as follows (page 12):-
“We find that, in determining the reasonableness of the valuation costs incurred by the Landlord pursuant to the Tenant’s notice, it would be unreasonable to allow two valuation fees.  It is common ground that the Landlord incurred a valuation fee pursuant to the Tenant’s Notice.  Accordingly we disallow the claim Mr Pennycuick’s own time at £200 and travelling expenses associated with it.  We accept Mr Willson’s contention that a reasonable fee in the circumstances of this case is £250, and not £350.

We, therefore, determine that the Tenant shall reimburse the Landlord the sum of £250 and, to the extent that the Landlord is unable to recover vat on that amount as an input tax, vat on £250.”
60.	Mr Davis said that he has been asked to express an opinion of the level of valuation fees payable by the tenants.  A valuation under the 1993 Act is not as straightforward as one under the 1967 Act.  The subject flat is unusual.  An inspection is necessary with research to obtain the correct capital value.  The rising ground rent and latest case law must be considered.  He estimated 7 hours at £90 per hour, namely £630.  
61.	Mr Willson said that the costs of two valuations have been claimed; there is an element of double-counting.  The external valuation costs of £350 plus VAT are excessive.  The appropriate fee is £250 plus VAT.  Mr Willson criticised Mr Davis’s hourly rate of £90 which he said cannot be obtained in the market from clients.  £50 per hour is more appropriate.  Mr Davis’s estimated time of 7 hours is excessive, 4 to 5 hours is more reasonable.
62.	Decision – Fees recoverable under section 60(1) of the 1993 Act: (a) must have been incurred, (b) must be reasonable, and (c) must be costs which might reasonably have been incurred if the landlord had been personally liable for them.  There is no dispute that the costs claimed have been incurred, the issue is the reasonableness of those costs.  I agree with Mr Willson (and the leasehold valuation tribunal) that Mr Pennycuick’s costs are unreasonable due to a duplication of work with Mr Dening.  I also agree with Mr Willson that 4 to 5 hours work at £50 per hour is reasonable in the circumstances of this case.  This produces a valuation fee of £250 which is the amount awarded by the leasehold valuation tribunal.  I am not persuaded that this part of their decision is wrong.  The appeal fails on the issue of valuation costs.
CONCLUSIONS
63.	I am satisfied on the evidence put before me that the decision of the leasehold valuation tribunal fixing the premium at £7,587 is wrong.  This part of the appeal is allowed.  I determine the premium payable by the tenants on the grant of a new lease of the subject flat under section 56 of the 1993 Act, calculated in accordance with Schedule 13 to the Act, to be £11,175 (eleven thousand one hundred and seventy-five pounds).  
64.	I am not satisfied on the evidence put before me that the decision of the leasehold valuation tribunal regarding reasonable valuation costs is wrong.  This part of the appeal is dismissed.
65.	This decision concludes my determination of the substantive issues in this case.  It will take effect as a decision when the question of costs has been decided and at that point, but not before, the provisions relating to the right of appeal in section 3(4) of the Lands Tribunal Act 1949 and order 61 rule 1(1) of the Civil Procedure Rules will come into operation.  The parties are invited to make submissions as to the costs of this appeal and a letter accompanies this decision which sets out the procedure for submissions in writing.  
Dated: 22 February 2001

(Signed: P H Clarke )
ADDENDUM

66.	I have received written submissions on costs.  The appellants seek half their costs on the grounds that they have been successful on the main issue (premium) to a substantial degree and that, although they have been unsuccessful on the question of valuation costs, the amount is insignificant.  The respondents submit that I should make no order of costs on the grounds that the appellants achieved only limited success on the premium, failed on the issue of valuation costs and their assessments of the premium were greatly exaggerated.  
67.	The leasehold valuation tribunal determined the premium at £7,587 and awarded valuation costs of £250 plus VAT if applicable.  Before me, the appellants sought a premium of £19,149 and valuation costs of £630.  The respondents defended the decisions of the leasehold valuation tribunal but recognised that there were arithmetical errors in the tribunal’s calculation of the premium and that it should have been slightly higher, £7,857.  The appeal against valuation costs failed.  The appeal against the premium was successful and I increased this amount from £7,587 to £11,175.  The respondents, in their submissions on costs, refer to the Civil Procedure Rules, rule 44.3(4) and (5).  Although they do not apply to proceedings in the Lands Tribunal I nevertheless have regard to them.  When awarding costs, rule 44.3(4) requires regard to be had to all the circumstances including the conduct of the parties and whether a party has succeeded on part of his case, even if he has not been wholly successful.  The conduct of the parties includes a consideration as to whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim (rule 44.3(5)(d)).  
68.	In my judgment the appellants, although successful, exaggerated their assessment of the premium and this should be taken into account when exercising my discretion regarding costs.  Their expert witness was originally Mr Malcolm Pennycuick, managing director of the appellant company.  He lodged an expert report assessing the premium at £23,345. A few days before the hearing in this Tribunal the appellants substituted Mr Davis as expert witness and his premium was £19,149.  Both figures are exaggerated and unsupportable.  In the absence of this exaggeration I would have awarded the appellants at least half their costs to reflect their success in this appeal.  The use of inflated figures, however, is to be discouraged.  They prevent or hinder a settlement.  Although the appellants have been successful I should reduce their recoverable costs to reflect their exaggerated claims.  I reduce their recoverable costs to one-quarter.
69.	I order the respondents to pay one-quarter of the appellants’ costs of this appeal, such costs, if not agreed, to be the subject of a detailed assessment on the standard basis by the Registrar of the Lands Tribunal in accordance with rule 44.4 and rule 44.7 of the Civil Procedure Rules.  The procedure in rule 52 of the Lands Tribunal Rules 1996 will apply to such detailed assessment.
					DATED:

					(Signed: P H Clarke )