Re Lethaby and another’s application

Collective enfranchisement – Leasehold Reform, Housing and Urban Development Act 1993 – Deferment rate – Flats – Whether departure from generic Sportelli deferment rate of 5% justified where that decision not given at relevant valuation date – Whether justified by evidence of difference from prime central London area to which Sportelli decision relating – Appeal allowedThe appellants were the long leaseholders of two flats in east London that had been created by dividing a terraced house: one flat comprised the ground and first floors and the roof, while the other was at lower ground-floor level and included the foundations. Each lease was for a term of 99 years from 1987, with full tenant’s repairing covenants and an annual ground rent. The appellants exercised their right to acquire the freehold of the building pursuant to the collective enfranchisement provisions of the Leasehold Reform, Housing and Urban Development Act 1993, with the second appellant acting as nominee purchaser. The relevant valuation date was August 2006.The matter was referred to the leasehold valuation tribunal (LVT) to determine the price payable to the freeholder, who took no part in the proceedings. The LVT determined the purchase price at £12,000, applying the 5% generic deferment rate for flats laid down by the Lands Tribunal in Earl Cadogan v Sportelli [2007] 1 EGLR 153.On appeal from that decision, the appellants argued that a deferment rate of 6.5 or 6% should be applied. They submitted that Sportelli was irrelevant to their case since it post-dated the relevant valuation date and the property would, if sold on the open market on that date, have achieved a price comparable with deferment rates adopted pre-Sportelli. They further argued, by reference to the Court of Appeal’s decision in Sportelli ([2007] EWCA Civ 1042; [2008] 1 EGLR 137) that a departure from the generic rate was justified both by reason of lower real growth rates for properties in the area in question than in the prime central London (PCL) area and as an increase in the risk premium to reflect the greater management difficulties for landlords following the introduction of the Service Charges (Consulation Requirements)(England) Regulations 2003 and the greater risks of deterioration of the property when compared with the PCL.Decision: The appeal was allowed.(1) The fact that the Sportelli decision had not been published at the relevant valuation date did not affect its relevance since it concerned valuations that pre-dated the decision.(2) The evidence did not establish lower growth rates for east London compared with the PCL area and no alteration to the deferment rate was justified on that ground.As to management risks, the risk to landlords resulting from a failure to comply with the 2003 Regulations was that their ability to recover the substantial expenditure that they had incurred in providing services, repairs, improvements, insurance or management services would be restricted to £250 for each tenant. The risk was likely to be greater where expensive building work had been undertaken to the structure and/or the common parts of a block of flats. By contrast, under the terms of the appellants’ leases, the freeholder’s responsibility for repairs to the property was minimal. Since the property was divided into only two flats, the demises included the roof and foundations and each leaseholder covenanted to keep the demised premises in good and substantial repair and condition, the risk to the freeholder was less than would arise with a larger block of flats, where the landlord’s responsibilities included the maintenance of the structure and common areas: Zuckerman v Trustees of Calthorpe Estate [2009] UKUT 235 (LC); [2009] PLSCS 331 distinguished. The Sportelli allowance of 0.25% for management difficulties adequately reflected the greater problems of managing the appeal property than if it were occupied as a single house.As to the risk of deterioration, although the case was borderline, an investor would conclude that there was a greater risk, compared to the Sportelli properties, of eventual deterioration in the state of the property towards the end of the lease terms, which the freeholder would have to remedy, notwithstanding the leaseholders’ contractual repairing obligations. That increased risk should be reflected by an increase of 0.25% in the risk premium.Accordingly, the Sportelli deferment rate of 5% for flats should be increased to 5.25% to reflect the circumstances of the appeal property. Applying that rate, the price payable for the freehold interest was £10,850.The appeal was decided on the basis of written representations.Sally Dobson, barrister