Lease Extension Conveyancing – London does not cost any extra for lease extension premiums

One might expect that all conveyancing matters relating to London conveyancing or property transactions are more expensive. This is not the case with Fridaysmove's recommended Conveyancing Solicitors in London and not necessarily the case when it comes to lease extension premiums as recently determined by case law .

Cik v Chavda Re: Flats 1, 2, 5 & 8 Noel Court, Bath Road, Hounslow is yet further case  law in which the leaseholders sought to question the deferment rate set in “ Sportelli “. The tenants had asked the Leasehold Valuation Tribunal (LVT)  for the determination of the prices to be paid by the tenants for extensions to their leases.

The deferment rate is one of the most sensitive parts of the valuation as it is the investment multiplier applied to the assumed freehold vacant possession value of the flat at the end of the lease term. The deferment rate is "the annual discount applied on a compound basis to an anticipated future receipt (assessed at current prices) to arrive at its market value at the valuation date".

The assumption in the valuation of the reversionary (freehold) interest is that the market value of the unencumbered freehold in any property is likely to exceed the aggregate of the values of the interests of the tenant and the reversioner (freeholder) considered separately. That excess is commonly known as the "marriage value", which is a statutory term.

A number of points seeking to justify a higher deferment rate were made by the tenants in this case. The most interesting of these was the argument that a different deferment rate should apply outside prime central London.

The LVT  considered and then dismissed a  number of legal arguments  presented by the tenants such as  : the fact that there was a legacy of litigation between the parties concerning services and charges; the tenants made up half the occupancy of the flats; the poor external condition of the premises; noise from the A3006 Bath Road and the overhead flight path; and the flanking road to the industrial estate to the rear.

The LVT commented that, in the light of Sportelli, the correct approach when considering issues such as this is to determine whether they are taken into account in the vacant possession value. If the facts dictate that they are not fully reflected – i.e. they would be of greater concern to the purchaser of the reversion than to the purchaser of the freehold with vacant possession – an adjustment to the risk premium might be justified. The LVT ruled that none of these factors justified such an reduction in premium.

Commenting on the location of the premises the LVT said as follows:

“The first factor was the property’s outer London location. The mere fact of location, however, does not self-evidently affect the deferment rate. The vacant possession freehold value of each flat is £175, 000, a mere fraction of the value of a flat situated in the PCL area. The question is whether, notwithstanding that location is so strongly reflected in the vacant possession freehold value, the notional purchaser of the reversion would make an additional allowance for it in determining what he would pay.

If there was evidence that the prices of flats in outer London, or this part of outer London, appreciate more slowly over the long term than those of flats in the PCL area, there would be the basis for deducting a lesser growth rate than 2% from the risk free premium. If there was evidence to show that such prices were significantly more volatile than the prices of PCL flats, this could justify an adjustment to the risk premium. There is, however, no evidence that growth rates are slower or prices more volatile in this outer London location.

There was no evidence at all on behalf of the tenants, while the Land Registry schedules for the period April 2000 to October 2007 produced by Mr Asbury show that for part of the time prices in Hounslow outperformed those in Kensington and Chelsea (up to March 2003, for instance, the increase in Hounslow was 43% compared with 26% in Kensington and Chelsea); up to September/October 2006 the increases were the same; while Kensington and Chelsea substantially outperformed Hounslow in the year between October 2006 and October 2007.

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These, however, are mere snapshots, and no conclusion can be drawn from them other than that they do not suggest that the long term growth rate is lower in this location than in the PCL area. We agree with the Tribunal in Hildron Finance that to establish such differential growth rates it would be necessary to look at a long period and that a series of statistics with different starting dates would need to be considered in order to ensure that an unrepresentative period was not relied upon. ”