Leasehold Enfranchisement Update - 82 Portland Place

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Leasehold Enfranchisement Update

Collective Enfranchisement

Valuation

Case name and reference

82 Portland Place (Freehold) Ltd v Howard de Walden Estate Ltd [2014] UKUT 0133 (LC)

Summary

 The Upper Tribunal rejected several theoretical approaches to relativity and preferred the approach adopted in Nailrile of doing the best one can with graphs and discounts for Act right.

Facts

The case concerned 82 Portland Place a purpose-built 1920’s mansion block comprising 25 units of accommodation on basement, ground and eight upper floors  which stands on the south east corner of the junction of Portland Place and Devonshire Place, a short distance south of Regents Park in the Harley Street conservation area. 12 flats were held on leases with unexpired terms at the valuation date of 11.82 years. 11 flats were held on leases which had been extended under the 1993 Act.

Issues

The issues were as follows:

(i) The McHale issue i.e. whether in calculating marriage value one should value the leasehold interest on the “no Act world” assumption, or not.

(ii) Whether two tenants who had not originally participated had effectively elected to become participating tenants.

(iii) Whether or not the Tribunal should adopt one of several new theoretical approaches to relativity.

(iv) Whether the tribunal should deduct from the valuation of the reversion a “purchaser’s margin”.

Decision

(i) The McHale issue

The parties agreed that the Tribunal was bound by the decision of the CA in McHale to the effect that the “No Act world” assumption applies to the valuation of the tenant’s lease. In McHale the Supreme Court granted permission to appeal but the case was compromised. It is possible, therefore, that this issue might be pursued on appeal.

(ii) The participation issue

This issue turned on a consideration of the actual wording of the Participation Agreement and no point of general importance arises.

(iii) Relativity

Mr Beckett, the valuer for the Nominee Purchaser had arrived at his figure for relativity by first assessing the no-Act world relativity, then reviewing transactional evidence and then considering a range of alternative theoretical approaches. Much of the decision is concerned with the pros and cons of those alternative approaches but it is unnecessary to set out the reasoning as, in the end, the Tribunal rejected them all. The decision is a restatement of Nailrile orthodoxy: one must do the best one can with real world evidence of relativity allowing for the benefit of the Act and with regard to the various graphs of no-Act world relativity. The decision paragraphs shows the rough and ready reasoning of this method:

“150. Taking the PCL graphs as a whole, they represent the collective efforts of a large group of knowledgeable valuers adopting different methods and using slightly different base data. The range of figures at 11.82 years unexpired is from 27.4% (WA Ellis) to 38.6% (John D Wood), but given the varying methodologies employed that range is unsurprising and casts little doubt on the validity of any of the graphs. The average of these is 32.6%; if WA Ellis is excluded because at this duration the graph takes an atypical swerve downwards, the average is 33.5%. The use of decimal places lends spurious precision to the exercise and the best one can say in this case is that consideration of the graphs reinforces the conclusion that the appropriate relativity lies in the range from Mr Ryan’s 31% to Mr Beckett’s 36%. Any assessment of the value of a lease of 11.82 years duration which was

based on a relativity figure within that range is, in our judgment, eminently defensible.

151. Mr Ryan allowed 25% for the benefit of the Act (41.25% to 31%) while Mr Beckett allowed approximately half that amount, namely 12.7% (41.25% to 36%). In our opinion, and doing the best we can with the evidence available, the appropriate allowance to make for the benefit of the Act at this length of term is 20%. Applying this to the agreed real-world relativity of 41.25% gives a no Act relativity of 33%, which is the relativity figure we will adopt in this case.”

(iv) The purchaser’s margin issue

The issues is best explained by the decision:

"The purchaser's margin" is an expression introduced by Mr Beckett to refer to the difference in value which he suggests must exist between the amount that a dealer or an investor (the purchaser) would pay on reversion for the freehold of the building with vacant possession of the short leasehold flats and the aggregate value of those flats if sold

individually to an end user ("the aggregate value"). The issues between the parties on this aspect of the appeal are whether a purchaser’s margin is permissible in principle, and whether on the facts of this case such a margin should be allowed in the determination of the price payable by the appellant on acquisition of the freehold interest in 82 Portland Place.”

Counsel for the freeholder submitted that, as Mr Beckett had advanced it, the appellant’s argument for a purchaser’s margin depended upon a hypothetical sale of the freehold interest in the whole building upon the expiry of the short leases in July 2021, but that there was no warrant for assuming such a sale on any date other than the valuation date, in accordance with paragraph 3 of Schedule 6 to the 1993 Act.

 That argument succeeded:

“There is no statutory requirement to assume a further sale upon expiry of the short leasehold interests and we see no justification for the assumption of such a sale. The only sale required to be assumed is at the valuation date. The term and reversion approach to valuation may propose the assumption of a sale of individual flats at the date of reversion as one element of a technique to arrive at the value which would be realised on the statutory valuation date, but that is no more than valuation methodology and should not be taken too far. In particular we consider that there is no justification for the assumption,

that the hypothetical purchaser on the valuation date would seek and achieve an

allowance to cover not his own costs of buying and selling the property, but the costs of a subsequent purchaser which that purchaser might seek to recoup by discounting the price which he would otherwise be prepared to pay at the reversion date. “