Section 9 of the Leasehold Reform Act 1967 provides the basis for calculating the price payable by the tenants of qualifying leasehold houses to buy the freehold interest in the house and premises. Conventional valuation practice ordinarily values the term and the freehold reversion separately. Valuation of the reversion requires the current value of the reversion with vacant possession to be discounted to reflect the fact that vacant possession will not be available until the end of the lease term.
In Earl Cadogan and Cadogan Estates Ltd v Sportelli [2007] 1 EGLR 153, the Upper Tribunal (Lands Chamber) heard five appeals concerning properties located in prime central London. Following an extensive trial, involving evidence given by expert witnesses in the fields of valuation, finance and economics, the UT set a deferment rate of 4.75% for houses and 5% for flats. On appeal, the Court of Appeal ([2007] EWCA Civ 1042; [2008] 1 EGLR 137) approved the deferment rates set by the UT. Further, the Court of Appeal affirmed the status of the UT’s decision as a “guidance case”, which should be followed unless “compelling evidence” to the contrary was adduced.
The deferment rate in Sportelli was derived as follows: “2.25% rate of return for risk-free investment, to which was added a 4.5% ‘risk premium’ in recognition of the expectation the landlord would in fact be accepting some risk by investing in property. From that 6.75% was subtracted 2% to reflect long-term growth in property values, giving a rate of 4.75%. A further 0.25% was added for flats because the management responsibilities associated with them make flats a more expensive or risky investment.”
