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Leasehold Enfranchisement Update

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21st May 2015

Roberts v Fernandez [2015] UKUT 106 (LC)

The UT disapproved additions to the deferment rate for obsolescence and differences in the long term growth rate and increased the capitalisation rate from 5.5% to 7%.

Facts

The lessee of No. 70 Andace Park Gardens, a one bedroom flat in Bromley, claimed a lease extension. The unexpired term of the lease was 71.96 years.

Issues

There were several case specific issues. The issues of some wider relevance were as follows:

1. Whether it was appropriate to add 0.25% to the deferment rate for the risk of deterioration or obsolescence.
2. Whether it was appropriate to add 0.25% to the deferment rate for the difference in long term growth between PCL and Bromley.
3. The appropriate capitalisation rate.

Decision Below

1. The F-tT added 0.25% to the deferment rate for the risk of deterioration or obsolescence.
2. The F-tT added 0.25% to the deferment rate to reflect the difference in long term growth between PCL and Bromley.
3. The F-tT applied a capitalisation rate of 5.5%.

Decision on Appeal

1. The UT disapproved of the 0.25% addition to the deferment rate for the risk of deterioration or obsolescence:
   • “Firstly, if Zuckerman – which concerned a property in the West Midlands – was insufficient on its own to justify departing from the Sportelli rate without sufficient evidence when considering a property in Halesowen, that principle applies with even greater force to No. 70, situated as it is in Greater London. Moreover, the F-tT’s comment that No.70 was of a type of property that would be demolished and rebuilt in the fullness of time, as it would not be economically viable to continue to maintain it, is problematic. Properties are rebuilt, not when it is no longer economically viable to maintain them, but when their existing use value in whatever condition they happen to be is less than their site value for redevelopment (always provided, in the case of a block of flats for example, that vacant possession of the whole can be obtained). In our judgment, the question whether or not a property is likely eventually to be developed and rebuilt is quite different from the question which must be answered when deciding whether a departure from Sportelli is justified, namely whether the risk of future deterioration or obsolescence is greater than that reflected in the risk premium determined in Sportelli or in the current freehold value with vacant possession. In the present case there was no evidence before the F-tT – apart from Zuckerman – to suggest that the answer to that question was no. There was therefore no justification for a departure from Sportelli on the grounds of obsolescence or deterioration.”
2. The UT also disapproved of the addition for the alleged differential in long term growth:
   • “On long-term growth, the F-tT was persuaded that the evidence produced by Mr Morgan [valuer for the landlord] was sufficient to justify an addition to the Sportelli rate. We do not agree. The Land Registry statistics covered a period of only seventeen years, which is insufficient to provide a reliable picture of long-term price movements. As for the evidence based on his valuations of certain flats in PCL and the suburbs, Mr Morgan fairly accepted that the sample of properties he had produced was too small to be reliable. In those circumstances we consider that there was not enough evidence before the F-tT or this Tribunal to justify increasing the Sportelli rate to reflect future growth.”
3. Mr Morgan gave evidence that he had agreed a 7% capitalisation rate “in hundreds of cases where ground rent reviews are at intervals of 20 years or more”. The F-tT had found that was “too generous” because the lease imposed an obligation on the tenant to pay a 1% premium on alienation and that would be attractive to an investor. The UT rejected that approach:

“We agree that this lease provision is an attractive feature of the freehold reversion. However, we also agree with Mr Morgan that it is irrelevant to the calculation of the premium. As Mr Morgan pointed out, the right to receive the premium will continue notwithstanding the lease extension. The landlord cannot in our view retain the right to the premium and be compensated for its loss.”

Comment

The F-tT had also added 0.25% to the deferment rate for an element of management risk but that was clearly wrong in view of the decision in Voyvoda v Grosvenor West End Properties [2014] L & TR10. This was a low value case and although the UT overturned the F-tT on several points the resulting difference in the valuation was £44! In view of that the UT declined to substitute its own figure for that of the F-tT. This illustrates that outside PCL it is often uncommercial to challenge a decision of the F-tT, even when, as here it is clearly wrong.

The other take away points are (i) that anyone seeking an addition to the deferment rate for obsolescence should have specific evidence to establish the claim and (ii) anyone seeking an addition to the deferment rate to reflect a differential growth rate should come armed with data covering a period of more than 17 years. In Re Mansal Securities [2009] 2 E.G.L.R. 87 the UT rejected data covering a period of 55 years, but was forced to accept data covering a similar period in Zuckerman [2009] UKUT 235 (LC) as it was demonstrated that it was difficult to find reliable statistics for any earlier period. Incidentally I would also comment that anyone seeking to meet an argument for an addition based on differential growth rate should remember that the rationale for the addition is that in view of the past underperformance in the locality an investor would not be confident that the 2% growth rate in Sportelli would be achieved in that locality. It seems to me that possible counter arguments are (i) that the past does not predict the future; and (ii) that two areas of the country cannot maintain a differential growth rate forever and that that law of mean reversion suggests that a period of over-performance will be followed by a period of under-performance or stagnation.

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