Lease Extension London - Leasehold Valuation Tribunal Decision 2006

In April 2006 The Leasehold Valuation Tribunal  was asked to determine an application under Section 48 of the Leasehold Reform Housing and Urban Development Act 1993 (hereinafter called "the 1993 Act") for the determination of a lease extension for  Flat 7, and Basement Lock-up Store 7; and Parking Space 6, at 55 Portland Place London

The Applicant-leasehold owners were Jonathan Esfandi and Nathalie Esfandi. They held under a lease granted for a term of 64 years, less 3 days, from 6 April 1971, at a ground rent of £50 per annum, rising by £25 per annum at 21 yearly intervals

The Respondent-freeholder was the Howard de Walden Estates Ltd. There was an Intermediate-landlord, the Legal & General Assurance Society Ltd

The leasehold owners, in their Notice of Claim, dated 13 July 2004, proposed a new lease in the terms of the existing lease, with the exception of its terms and rent payable, with a premium of £230, 000, and a sum of £1, 000 in accordance with Schedule 13 of the Act

The Respondent (Landlord), in their Counter-Notice, dated 16 November 2004, did not accept any of the leasehold owners proposals. . They sought (a) a premium of £585, 850; (b) to intermediate landlord £800; (c) the lease should contain terms and conditions in accordance with Section 57 of the Act, to include a proviso to the effect that the landlord may, as a condition of consent to an assignment of the lease, require the tenant to enter into an Authorised Guarantee Agreement within the meaning of the Landlord and Tenant (Covenants) Act 1995.
The Leasehold owners Statement of Case, submitted by Messrs Hamlins, Property Solicitors, on 1 September 2005, confirmed that the valuation date was agreed at 13 July 2004 A detailed valuation was also submitted proposing a revised figure for the premium payable by the tenant for the lease extension in the sum of £490, 774

Mr G Buchanan MRICS, on behalf of the leasehold owners, and Mr J M Clark BSc MRICS of Messrs Gerald Eve, on behalf of the Landlord, submitted a joint Statement of Facts and Issues (dated September 2005), which set out the circumstances of the reference; the tenure of the subject flat; the covenants under the lease; and a description of the subject flat with approximate floor areas.

The leasehold valuers agreed that:-
(i) The valuation date is the date of claim – 13 July 2004;
(ii) The value of the freehold in possession £1, 573, 250;
(iii) The value of the proposed extended lease of 120, 72 years at a peppercorn £1, 550, 000;
(iv) value of existing lease of 30. 72 years £892, 500;
(v) the intermediate leaseholders rental income to be capitalised at a yield of 7. 75% with a sinking fund of 2. 5% and an adjustment for tax of 30% giving a diminutive in value of the intermediate leaseholders' interest of £791;
(vi) the Landlord's share of the marriage value is 50%;
(vii) there are no material alterations to the subject flat that, at the date of valuation which constitute tenant's improvements.

The valuation matters in dispute, which would determine the lease extension premium to be paid, was the yield by which to defer the freehold reversion before and after the extended lease term. Mr Buchanan for the leasehold owners  argued originally for 6%. . At the Leasehold Valuation hearing he stated it should be 5. 25%. Mr Clark for the freeholder argues for 4. 5%,
The Leasehold Valuation Tribunal inspected the subject property at 10am on Wednesday, 12 April 2006. They acknowledged the claim of Portland Place to be part of the prime residential area of Central London. However, there are certain aspects which detract somewhat from its appeal. . it is an area of mixed development, primarily residential, but also with some mixed institutional, office and commercial use. A neighbouring property is occupied by an Embassy, which from time to time is subject to demonstrations of popular protest.

The leasehold flat is in a substantial purpose-built, stone-clad, seven-storey mansion
block constructed in the 1930's, with the architectural design and detail characteristic of the period.

The Leasehold Valuation Tribunal recognised this leasehold flat, with its spacious layout, sense of style and high quality fixtures and fittings, to be in the top category of residential accommodation.

The Leasehold owners Lease Extension Case

The Leasehold owners case for the lease extension was presented by Mr Gavin Buchanan in accordance with his proof of evidence which was before the Leasehold Valuation Tribunal

Mr Buchanan originally stated that he would propose a deferment yield of 6% as set out in his proof of evidence However, at the Hearing he revised this to 5. 25% in the light of the Arbib guidance, and the decision  in respect of Winsley Court, 37/39 Portland Place where the Leasehold Valuation Tribunal determined 5. 5%.

In acknowledging that the yield of 6% may now be considered too high, Mr Buchanan contended that there was no supportive evidence on the Howard de Walden Estate to imply that 4. 5% was the correct figure. He stated "In my view, the correct deferment rate lies somewhere between these two figures "

The settlement evidence within the subject block, Flat 6, 55 Portland Place, in which Mr Buchanan acted on behalf of the purchaser of the lease, who acquired the benefit of a Notice of Claim, was cited.   This lease extension case, after negotiation was settled in June 2003, which both valuers accepted that the appropriate deferment rate was 6%.

The Leasehold Valuation Tribunal made a determination in respect of Flat 8 in the subject block, on the basis of a 6% deferment yield, with a valuation date of October 2002. Mr Buchanan concluded on the basis of the Arbib decision that there should
be a 0. 25% difference between houses and flats, to reflect the management issues arising from investment in flats.

On the basis of the above argument, as amplified in his oral evidence, Mr Buchanan stated that the correct deferment rate for the subject leasehold flat should be 0, 5% above the 4. . 75% deferment for Cadogan Square„ This produces a deferment rate of 5, 25%.

The Respondent- Freehold Reversioner's lease extension Case

The freeholder’s case was presented by Ms Katharine Holland of Counsel Expert evidence was given by Mr Julian Clark, of Messrs Gerald Eve, in accordance with his Proof of Evidence and supporting documentation.

Mr Clark's main contention was that the yield rate should be "no higher than 4 5% " in support of his view, he cited the Arbib decision, which questioned the accepted convention of a 6% yield-rate for such properties, In the Arbib case the Lands Tribunal determined a rate of 4. 75% in the decision, in relation to properties in both Chelsea and Cadogan Squares, and 4. 5% in Astell Street

Mr Clark drew a distinction between house and flats. . Houses offered greater prospect of capital growth and presented less management problems. This difference should be reflected in determining the yield.

In the absence of any direct open property market evidence recourse should be made to other investment evidence from the financial market generally, including long-dated and index-linked gilts; the Bank of England lending rates; and the Retail Price index Mr Clark, in noting the advantages that had been obtained over the last 25 years, by investing in prime Central London residential property, drew the Leasehold Valuation Tribunal's attention to a series of indexes and graphs, in support of his proposed yield of 4 5%,

Some 16 Leasehold Valuation Tribunal lease extension decisions were cited, where the Leasehold Valuation Tribunal in making their determination as to yield, had ranged from 6% to 4, 75%. He also noted in a claim for the collective enfranchisement of Winsley Court, and at 37-39 Portland Place, and 6-7 Weymouth Mews, the Tribunal had determined a freehold deferment rate at 5. 5%,

In the course of examination-in-chief, cross-examination and questions from the Leasehold Valuation Tribunal, Mr Clark gave his opinion that the prospects for growth on the Howard de Walden, Marylebone Estate were equal to those on the Cadogan Estate, and that 4. 5% was therefore on appropriate yield rate.

When questioned as to why all post Arbib settlements, which were accepted as good evidence, were at 4, 75%, Mr Clark stated that the Howard de Walden Estate for practical purposes were prepared to settle at that figure to avoid proceedings before the Leasehold Valuation Tribunal

On the basis of the evidence given by Mr Clark at the Hearing, supported by the comprehensive documentation of data and analysis of transactions, and his own professional opinion, Mr Clark urged the Leasehold Tribunal to determine a yield rate of 4 5%

Lease Extension Decision

The first issue for the Leasehold Valuation Tribunal to determine was the appropriate yield rate by which to defer the freehold reversion, before and after the estimated lease term

Mr Buchanan, for the leasehold owners, argued for 5. 25% in his valuation, which resulted in a figure of £490, 774 as the total payable by the Claimant for the lease extension.

Mr Clark, for the Freehold Reversion owner, argued for 4. 5% in his valuation which resulted in a figure of £528, 950 as the total payable for the lease extension

The Leasehold Valuation Tribunal took note of the vacant possession values, as agreed between the respective values.
Freehold in possession  £1, 573, 250
Proposed extended lease of 120. 72 years at a peppercorn  £1, 550, 000
Existing lease of 30. 72 years  £892, 500
The Landlord's share of marriage value at 50%

The parties agreed that the intermediate lease value at £791, although the Leasehold Valuation Tribunal noted that while they had achieved the same result, they had, in fact, arrived at that figure by applying different yields.

The Leasehold Valuation Tribunal had in mind the settlements cited by Mr Buchanan at a yield of 6 5% (Winsley Court; also Flat 6 in the subject block; and two LVT Decisions; and a further settlement They also noted the distinction that Mr Buchanan had drawn, in establishing the appropriate yield rate as between houses and flats)

In reviewing Mr Clarke's documentary evidence and contentions at the Hearing, the Leasehold Valuation Tribunal paid particular attention to his proof of evidence, paragraph 8. 5 with reference to the Lands Tribunal decision in the case of Arbib v Cadogan, and also 8. 8 where it was noted that there were "the prospect of greater growth in capital values for houses and lesser management problems for houses".

Mr Clarke's regard in aspect of the Arbib decision for the yields on long-dated gilts (paragraph 8. 12) was noted by the Leasehold Valuation Tribunal.

The Tribunal, on considering the schedule of comparables, noted that none appeared to have settled below 4. 7% (paragraph 8. 62; 8. 63; 8. 66) and these appeared to mainly relate to short lease terms. Mr Clarke set the location of Portland Place firmly on the Prime Central London West Flats Category.

In considering the relative merits of Portland Place when compared with Cadogan Square, the Leasehold Valuation Tribunal took the view that Cadogan Square had the edge on Portland Place, as a somewhat superior residential location The appropriate yield rate had been determined by the Lands Tribunal at 5. 25%.

The Leasehold Valuation Tribunal, having carefully considered the documentary evidence before them, the testimony of the expert witnesses at the Hearing, the guidance given by the Lands Tribunal decision in Arbib v Cadogan, and other settlements and LVT decisions, came to the view that the appropriate yield in the present case should be 5. 25%. .

The appropriate yield having been determined by the Leasehold Valuation Tribunal at 5 25%, the resultant sum was £497, 326.

Accordingly, the Leasehold Valuation Tribunal determined that the sum payable by the tenant for the lease extension to be £497, 326 (four hundred and ninety seven thousand, three hundred and twenty-six pounds).