Can indexation be used over an extended period when estimating leasehold value?
Legal
by
Elizabeth Dwomoh
When estimating the value of the extended leasehold interest in a subject property, is the use of indexation of transaction prices to the valuation date reliable over long periods of time? This issue was considered by the Upper Tribunal in Mrs Ohunene Oliyide v Elmbirch Properties plc [2019] UKUT 190 (LC).
Mrs Oliyide purchased a small one-bedroom flat in the Rotton Park Road area of Birmingham in 2007 for £92,000. The ground rent payable was £90 per annum for 32.83 years and £180 per annum for 33 years thereafter. The unexpired lease term was 65.83 years.
Mrs Oliyide served notice to acquire a new lease on the respondent freeholder, Elmbirch Properties plc, under section 42 of the Leasehold Reform, Housing and Urban Development Act 1993. She proposed a premium of £6,200. Elmbirch Properties plc admitted Mrs Oliyide’s right to acquire a new lease but disputed the premium payable, proposing a figure of £17,030. The First-tier Tribunal (FTT), determined the premium at £11,959. Mrs Oliyide appealed.
When estimating the value of the extended leasehold interest in a subject property, is the use of indexation of transaction prices to the valuation date reliable over long periods of time? This issue was considered by the Upper Tribunal in Mrs Ohunene Oliyide v Elmbirch Properties plc [2019] UKUT 190 (LC).
Mrs Oliyide purchased a small one-bedroom flat in the Rotton Park Road area of Birmingham in 2007 for £92,000. The ground rent payable was £90 per annum for 32.83 years and £180 per annum for 33 years thereafter. The unexpired lease term was 65.83 years.
Mrs Oliyide served notice to acquire a new lease on the respondent freeholder, Elmbirch Properties plc, under section 42 of the Leasehold Reform, Housing and Urban Development Act 1993. She proposed a premium of £6,200. Elmbirch Properties plc admitted Mrs Oliyide’s right to acquire a new lease but disputed the premium payable, proposing a figure of £17,030. The First-tier Tribunal (FTT), determined the premium at £11,959. Mrs Oliyide appealed.
When calculating the marriage value, to ascertain the estimated figure for the extended lease value, Elmbirch Properties’ expert surveyor indexed the original sale price of the flat in 2007 (£92,000) up to the valuation date (5 June 2017). By indexing the historical sale prices of two comparable flats relied on by Elmbirch Properties’ expert with their recent sale prices, Mrs Oliyide’s expert was able to demonstrate that indexation over such a long period of time overvalued the comparable flats by 27% and 71% respectively.
The Upper Tribunal found that indexation over long periods was unreliable and should not be used. The Tribunal found the use of indexation over shorter periods of time, for example over a period of 15 months, was reasonably reliable.
The Upper Tribunal also rejected the assertion made by the expert for Elmbirch Properties that it was not appropriate to value the flat on a rate per square foot basis. His reasoning was that the market would largely be composed of buy-to-let investors whose main concern was the rental return. Accordingly, price was geared to this factor, which was not sensitive to size. The Upper Tribunal noted that Mrs Oliyide had first purchased the flat in 2007 as an owner-occupier. Further, there was no evidence to support the assertion that the price of one-bedroom flats was inelastic with respect to size. The argument may have some merit where flats were of a broadly similar area. In the present case, however, the flat was 30% smaller than the average of the six comparable flats relied upon and could not be worth the same.
Elizabeth Dwomoh is a barrister at Lamb Chambers
