Lease Extension in London - Leasehold Valuation Decision 2007

On hearing the application made under Section 48 of the Act for a determination of the price payable under a claim for a lease extension in relation to the flat at 12 Windcott Court, Draycott Avenue, Middlesex the Leasehold ValuationLeasehold Valuation Tribunal  decides that the Leasehold Owner should pay the Freeholder a lease extension premium of £65, 446 in accordance with Section 56 and Schedule 13 of the Act.

Background to the lease extension decision

In this Application a determination is sought of the price payable under claim for a lease extension made under the Act. The Application is made under Section 48 of the Act.

The Leasehold owners were the joint leaseholders of the subject premises. The Freeholder was the owner of the freeholder of the building containing the subject premises and the competent landlord in relation to the claim (within the meaning of Section 40 of the Act).

The flat consist of a residential ground floor flat (and a garage numbered 6) and are part of building containing four flats. There is a garden and garages to the rear of the building. This building, garden and garages are known as numbers 1 — 12 Windcott Court, Draycott Avenue, Middlesex (the `building').

The lease of the subject premises was dated the 28th March 1960 and was for a term of 99 years (less 3 days) from the 25th December 1937. This lease relates both the subject premises and to a garage numbered 6 which was also demised under that lease.

There are two intermediate leases relevant to the claim. The first is for a term of 99 years. This lease extends to the building. The second relates to flats 7 and 8 Windcott Avenue and Garage 6. This is for a term of 99 years less 3 days. Both of these intermediate leases commenced on the 25th December 1937.

On the 14th December 2006 the Leasehold owners gave notice under Section 42 of the Act to the Freeholder seeking a lease extension. In this notice they proposed the sum of £40, 000 to be paid to the Freeholder, a figure of £10 for the first of the intermediate leases and a nil premium in respect of the second of those intermediate leases.

In accordance with Section 45 of the Act, the Freeholder gave a counter notice on the 1st February 2007. In this counter-notice the Freeholder contended that the Applicant's Section 42 notice was invalid but it also made counter proposals on the price to be paid and on the terms of the new lease. In particular the Freeholder proposed that a premium of £80, 000 should be paid for the grant of the extended lease.

Although the Freeholder contended that the Applicant's notice was invalid, later, however, the parties agreed to proceed on the basis that the Section 42 notice is valid. The valuation date is therefore the 14th December 2006 (Section 56 and Schedulel3, paragraph 3(2)).

The parties failed to agree the premium to be paid. Accordingly, on the 10th April 2007 application was made to the Leasehold Valuation Tribunal  (under Section 48 of the Act) for a determination of the price payable and the terms of the new lease. The Leasehold Valuation Tribunal  gave directions. The price payable is to be determined in accordance with Section 56 and Schedule 13 of the Act.

In accordance with the Leasehold Valuation Tribunal 's Directions, the Leasehold owners' property solicitors prepared a bundle of documents for the hearing. These included a Valuation Report prepared by Mr David A M Graham FRICS dated the 15th December 2006. In that Report, Mr Graham included a description of the property and its location, and gave details of the accommodation, its condition, the basis of valuation for the lease extension and details of his valuation as at 11 December 2006. He calculated that the premium payable for the lease extension was £61, 500.

Mr Graham described the property as consisting a self-contained ground floor purpose-built maisonette within a semi-detached two storey building probably built around 1935 on a development of three blocks each arranged as a pair of semi-detached buildings with two units per floor and totalling twelve maisonettes. The properties are built of traditional 225mm solid brickwork construction, under pitched and clay tiled roofs, with partly pebble dash or rendered elevations.

He also stated that each maisonette has its own separate entrance, with the entrance to Flat 7 being at the front of the building and the entrance to Flat 8 being at the side of the building. The front and rear gardens have been subdivided between the flats and Flat 7 has the benefit of a single lock-up garage (No. 6), which forms part of a battery of six garages at the rear of the leasehold flats.

The accommodation of Flat 7 comprises an entrance passage, two bedrooms, a reception room, a kitchen and a bathroom/WC. Externally, the flat has a front garden to the road and a small rear garden. All services are connected, and a gas-fired boiler in the kitchen provides hot water and central heating.

Internally, Mr Graham had found the flat to be in generally good decorative condition. The kitchen and bathroom fittings had been modernised in recent years, and double-glazing had been installed - although some units have misted up. Mr Graham had assumed a valuation date of 11 December 2006, which was around the date of service of the tenants' notice under s. 42 of the Act.

For valuation purposes Mr Graham had disregarded the modernised kitchen and bathroom, the double-glazing and the central heating. He had capitalised the ground rent at 8% and had deferred the landlord's reversion at 5%, the latter in accordance with the decision of the Lands Tribunal  in Cadogan v Spode 2006] (since confirmed by the Court of Appeal in a judgement given on the 25th October 2007— see [2007] EWCA Civ 1042).

In arriving at his opinion of the unimproved value of the flat he had taken into
account the sales of other flats and maisonettes in the general area and particularly those on the nearby Windermere Court. His conclusion was that a long leasehold /share of the freehold value of around £195, 000 would be reasonable for property of this type including a garage.

To this value he applied a relativity of 60% to arrive at the value of the existing
leasehold interest of £117, 000.   In Mr Graham's closing comments in the written report he added that he considered that his "worse case" relativity figure would be around 55%, and that the existing short unexpired lease term was likely to make the property virtually unsaleable on the open market.

Unfortunately Mr Graham was unable to attend the hearing on Wednesday 3 October, and the Applicant arranged for Mr Richard Steed of Cook Steed Associates to attend and to deal with the valuation issues on his behalf. Mr Steed confirmed that he had only received instructions just a week before the hearing. He had inspected the flat on the 1st October 2007 and had researched the valuation evidence but had not prepared a separate valuation. He therefore relied upon Mr Graham's Report.

Mr Steed told the Leasehold Valuation Tribunal  that he had measured the flat internally and had calculated the gross internal area (GIA) at 763 sq ft. The flat also had small front and rear gardens and a garage. He had spoken to local estate agents and Winkworths had advised him that Flat 6 Windcott Court was currently under offer at £235, 000. It was a first floor flat which had been offered for sale in May 2006 at £210, 000 to include a share of the freehold.

Mr Graham had valued Flat 7 in December 2006 at £195, 000, excluding the value of the recently modernised bathroom and kitchen, the central heating and the double-glazing, which he had regarded as tenant's improvements. Mr Steed considered that Mr Graham's valuation of £195, 000 as at December 2006 had been about right. The leasehold owners lease had about 30 years unexpired at the valuation date, and Mr Graham had applied a relativity of 60% to produce a value of £117, 000 as the value of the existing lease. Mr Steed had referred to the 'Beckett & Kaye Graph of Graphs' and confirmed that 60% fell within the range of the graphs.

Valuation Evidence: on behalf of the Freeholder

Mr Mason, for the landlord, relied upon the current offer of £235, 000 for Flat 6, and considered that £25, 000 was the maximum allowance that should be made for tenant's improvements at that property and for the general increase in values since December 2006. His minimum value for the existing leasehold interest was £205, 000.

Mr Mason provided the Leasehold Valuation Tribunal  with a copy of the Particulars of Sale when the property had been offered for sale in May 2006. The asking price had been £209, 950, and the flat had been described as a fabulous property in very good condition with gas central heating and double-glazing, and a large out building. It had a modern fitted kitchen and a modern fully tiled bathroom. The outbuilding measured 14 ft x 13 ft 5 ins and had a range of kitchen units, worktop surfaces, butler sink, spot lights, wooden flooring and a wall mounted electric heater.

As to the value of the existing leasehold interest, with 30 years unexpired, Mr Mason relied upon the sale of the identical leasehold interest in Flat 9 – a ground floor flat with a garage - on 31 October 2005 for £100, 000, and on a decision of the leasehold Valuation Tribunal  (LON/ENF/ 2050/06) in respect of Flats 5 and 6 where the existing lease values had been determined at £105, 000. The valuation date in that case had been 30 March 2006, that is to say some nine months earlier than the valuation date in this application.

Mr Mason also pointed out that the relativity determined by the Leasehold
Valuation Tribunal  in proceedings in respect of Flats 5 and 6 had been 58. 3%, and to reflect the nine months shorter term he suggested that the relativity in this case should be 57. 5%. Using his minimum short leasehold value of £205, 000, this produced a value for the existing lease of £117, 875, and an premium of £67, 332.

Reasons For The Lease Extension Decision

The Leasehold Valuation Tribunal 's decision was summarised above. In reaching this decision, the Tribunal considered the valuation evidence, which had been provided by Mr Graham, Mr Steed and by Mr Mason. It also obtained a copy of the Leasehold Valuation Leasehold Valuation Tribunal 's decision in respect of Flats 5 and 6 dated 25 January 2007, which had been referred to by Mr Mason during his evidence. The Tribunal noted from that decision that the former air raid shelter at Flat 6 had been arranged as a studio, and that Flat 6 had been substantially improved.

The Leasehold Valuation Tribunal  therefore considered that the under offer price for Flat 6 should be reduced to reflect the substantial improvements carried out by the tenant, the outbuilding arranged as a studio and the general increase in values since December 2006. Taken together, and having regard to all the valuation evidence before the Leasehold Valuation Tribunal, it considered that the long lease value, as at the valuation date, was £200, 000.

Looked at another way, no evidence was adduced that Flat 6 had been improved in any way between May 2006 and September 2007. The increase in value from the asking price of £209, 950 to the offered price of £235, 000 was, on the face of it, due to the general increase in values - an increase of £25, 000 over a period of 16 months. This would suggest that the value of Flat 6 at December 2006 would have been in the region of £222, 500, and in the Leasehold Valuation Tribunal's opinion £22, 500 fairly reflects the value attributable to the substantial improvements, which had been carried out by the tenant, and the additional value of the studio.

Mr Mason referred to Mr Graham's relativity of 60%, to the Leasehold Valuation Tribunal 's determination at 58. 3%, and to Mr Graham's "worse case" (to use his expression) relativity at 55%, and suggested that the relativity in this case, to reflect the shorter unexpired term, should be 57. 5%. In the Leasehold Valuation Tribunal 's opinion a relativity of 57. 5% is supported by the evidence; it therefore determines the value of the existing leasehold interest, with 30 years unexpired at the valuation date, at £115, 000.

Finally, Mr Graham had used a capitalisation rate of 8% in his valuation. Mr Mason drew the Leasehold Valuation Tribunal 's attention to the decision of the Leasehold Valuation Tribunal in respect of Flats 5 and 6 where the Leasehold Valuation Tribunal  had determined a capitalisation rate of 7. 5%. It was suggested that interest rates had hardened between March and December 2006 and, given the type and condition of the property the Leasehold Valuation Tribunal  is satisfied that 8% is appropriate in this case.

Having determined the values of the long leasehold and the short leasehold interests at the valuation date at £200, 000 and £115, 000 respectively, and the capitalisation rate at 8%, the Leasehold Valuation Tribunal  determined the enfranchisement premium, in accordance with Schedule 13 to the Act, at £65, 446.