Trustees of Sloane Stanley Estate v Carey-Morgan and another

Collective enfranchisement – Leasehold Reform, Housing and Urban Development Act 1993 – Premium payable to appellant freeholders — Relativity – Deferment rate in relation to reversions of less than five years – Allowance for prospect of rooftop development – Hope value in relation to non-participating flats with reversions of less than 80 years – Terms of transfer – Appeal allowed in partThe respondents were two of the nominee purchasers on a collective enfranchisement of a 1920s mansion block within a conservation area in Kensington, London SW3, on behalf of qualifying tenants pursuant to the Leasehold Reform, Housing and Urban Development Act 1993. The leasehold valuation tribunal (LVT) determined that a premium of £2,666,407 was payable to the appellant freeholders on enfranchisement.In reaching that figure, the LVT: (i) applied a relativity of 11.5%, derived from the rate applied on an enfranchisement of another nearby property, for the purpose of calculating the existing leasehold vacant possession value in respect of six participating flats in the block that were held on leases with less than five years unexpired; (ii) applied a deferment rate of 7% in respect of those flats when valuing the freehold reversion, taking into account that there was little or no expectation of growth in the property market at the relevant time; (iii) allowed only £10,000 for the prospect of being able to carry out additional residential development on the roof of the block, on the grounds of the planning uncertainty and delays associated with any such project; (iv) awarded hope value in respect of two non-participating flats with unexpired terms of 4.74 years, but not in respect of two other flats with similar unexpired terms or another non-participating flat with 70.25 years unexpired; and (v) found the landlords’ proposed terms of transfer to be inappropriate so far as they contained a covenant against alternations and restricted the rights of light and air enjoyed by the property.The appellants appealed from that determination, seeking a premium of more than £3.5m. Held: The appeal was allowed in part; a premium of £2,961,613 was determined. (1) The LVT had erred in relying on the figure for relativity adopted on an enfranchisement of another property. The bare percentage figure adopted in a particular case was of no evidential value and, by adopting that percentage, the LVT had failed to comply with its duty to reach a decision on the evidence before it and without relying on evidence that had not been exposed to the parties for comment: Arrowdell Ltd v Coniston Court (North) Hove Ltd [2007] RVR 39 and Nailrile Ltd v Earl Cadogan [2009] 2 EGLR 151; [2009] RVR 95 applied. It was appropriate to substitute a relativity of 8% to unimproved freehold values, derived by capitalising the rental value over the unexpired term and taking into account any dilapidations obligation on the lessee. The relevant rental values were derived from comparables, with, inter alia, a 25% deduction to give the rent net of management costs, and were then capitalised on a dual-rate basis at a gross yield of 3.9%, that being the market rate given in the Savills PCL Index for the relevant date; a deduction of £25,000 per unit was also made as a fair “ball-park” figure for modernisation costs or a dilapidations allowance. It was not appropriate to rely on graphs of relativity in relation to leases that had such short unexpired terms.(2) The deferment rate formula in Earl Cadogan v Sportelli, based on a long-term risk-free rate derived from government securities, should not be applied to the valuation of very short-term reversions. The Sportelli formula had been devised to deal with the valuation of hypothetical long-term reversions for which there was no relevant market evidence, and which would be purchased only as financial interests. Short-term reversions, on the other hand, were more akin to freehold interests in possession, to be valued by starting with the freehold value then making adjustments to reflect that fact that the right to possession was deferred. The deferment rate for reversions of less than five years should be the net rental yield that the evidence showed to be appropriate for the property in question, as a discount to reflect the value of possession that was lost during the currency of the lease. An end allowance of 5%, unless the evidence established some other percentage, should then be made to take into account the lack of control over the premises when compared to an owner in possession. No allowance needed to be made for real growth in relation to a short-term, as opposed to a long-term, reversion since a purchaser’s outlook would be the same as that of the purchaser of the interest in possession and it would not make any allowance for possible movements during the reversion period. In the instant case, a net rental yield of 3.31% was derived from evidence of comparable lettings.(3) A purchaser considering the potential for rooftop development would seek advice on the pattern of permissions and refusals for such development by the local planning authority or on appeal. On the evidence, had a purchaser consulted the local planning authority on the prospects of planning permission being granted, it would have received strongly negative indications and would have realised that an appeal would be needed if permission were to be obtained. There was no evidence to suggest that such an appeal would be successful. The development would conflict with applicable development plan policies and serious opposition to the proposals could be expected. The LVT had been entitled to conclude that a purchaser would offer only a nominal amount of £10,000 as a “gambling chip” for the prospect that an application might be treated more sympathetically in the future.(4) It was permissible to include hope value on flats where the lessees were non-participators in the enfranchisement, so far as that hope value was attributable to the lessees seeking new leases on the open market: Earl Cadogan v Sportelli [2010] 1 AC 226 (HL) applied. Hope value was best expressed as a percentage of the overall marriage value rather than as a percentage of the landlord’s share. It was not appropriate to apply a blanket figure for hope value on all non-participating properties regardless of differing unexpired leases lengths, and a purchaser would need to weigh up the circumstances relating to each non-participator. Hope value in respect of the four non-participating flats with unexpired terms of 4.74 years should be 20% of marriage value. There were many potential imperatives for the lessees of such flats to come forward and seek a lease extension before their leases expired, and the fact that they had not already served a section 42 notice did not mean that they would not do so. As to the flat with more than 70 years unexpired, a figure of 10% was appropriate: Culley v Daejan Properties Ltd [2009] UKUT 168 (LC) applied.(5) The disputed terms of transfer could be justified only if they fell within para 5(1)(b)(i) of Schedule 7 to the 1993 Act. For that provision to apply, evidence was required that the restrictions would materially enhance the value of other property of the appellants. Mere assertions on the matter were not sufficient: Earl Cadogan v Erkman [2011] UKUT 90 (LC) applied. The appellants had failed to establish their case.Kenneth Munro (instructed by Pemberton Greenish LLP) appeared for the appellants; James McDonald appeared for the respondents.Sally Dobson, barrister