The decision of the Lands Tribunal in Kelton Court (Zuckerman and others v Trustees of the Calthorpe Estates [2009] LRA/97/2008) is clearly of importance to those acting for tenants outside PCL (Prime Central London).
Being the first post-Sportelli case to depart from the 5% deferment rate for flats was clearly going to be seized upon by valuers acting for flat owners everywhere. Achieving a 6% deferment rate is clearly ‘news’ although it has to be borne in mind that the decision to depart from the Sportelli 5% rate was based on 3 key factors in that decision, two of which were very specific to the property and its location.
Firstly, the Tribunal accepted that there was a higher risk of obsolescence in the properties at Kelton Court – effectively because of the economic viability of repairing them being likely to be for a shorter time. This led the Tribunal to conclude that a 0.25% increase in the ‘risk premium’ from 4.5% to 4.75% would be appropriate.
Secondly, the Tribunal accepted that there would be a lesser rate of growth in the capital value of properties in the West Midlands. As such it was appropriate to make an allowance that would have the effect of reducing the growth rate. An appropriate measure in this case according to the tribunal was to increase the risk premium by a further 0.5%, making the total risk premium 5.25%.
Thirdly, and finally, the Tribunal concluded that because of the enhanced ‘management risk’ associated with flats – effectively the difficulty in collecting the service charge and the risk that the landlord might incur some irrecoverable costs in doing this, or might have to meet some of the costs himself – that it would be appropriate to increase the percentage allowed for this in the Sportelli decision of 0.25% to 0.5%.
When applying these factors to the calculation of the deferment rate at Kelton Court, the result was a deferment rate of 6%.
Comment
Whilst the first two factors (obsolescence and growth rate) are more likely to be confined to geographical areas outside Prime Central London (‘PCL’) the third would seem to apply ‘anywhere’.
Indeed in deciding that an investor would require an additional 0.5% rather than 0.25% risk premium to deal with the management risk associated with flats the Tribunal heard (and appears to have accepted) statistical evidence adduced by the tenants’ representatives from the Residential Property Tribunal Service (‘RPTS’) relating to London that the number of service charge disputes had increased greatly – 411 cases in 2007 compared with 232 in 2005 and 27 in 2004.
The number of service charge dispute cases looks set only to increase and whilst this may to some extent (now) be a function of the economy, looking back to 2007 this argument would seem to be less applicable. Greater awareness of flat owners’ rights under the service charge legislation and increased requirements for consultation certainly seem to have given rise to more challenges in the LVT on service charge.
In Kelton Court we therefore appear to have the Lands Tribunal not only giving a clear indication that it is possible (in case specific circumstances) to argue for a departure from the 5% deferment rate outside PCL (on grounds of obsolescence and growth) if applicable, but also that the ‘management headache’ associated with flats was perhaps also under accounted for in Sportelli.
It is worth sounding one note of caution at this point – as the Tribunal did also say that if the flats were subject to a headlease (and the properties in Kelton Court had once been but this had been surrendered) that the Tribunal would not have seen fit to depart from the Sportelli uplift of 0.25% for flats.
Notwithstanding the general importance of this decision for property outside PCL, this third point is more likely to be of general importance and I cannot see any reason why it should not be possible to argue that the tribunal’s comments that the impact of the Commonhold and Leasehold Reform Act 2002 on service charges generally should not apply to properties anywhere – where there is no headlease to buffer the landlord from the ‘problems’ of management – whether in PCL or otherwise. Indeed, the Tribunal’s comments at paragraph 16 of the decision are fairly clear on this: –
“I am satisfied that by 2007, the first date with which I am currently concerned, the market was more aware of the dangers posed by the regulations than was the case in Sportelli, where the properties fell to be valued between 2 ½ and 3 ¾ years earlier.” [NJ Rose FRICS at Para 16]
As such Kelton Court is likely to be of assistance to tenants’ valuers in seeking to argue an enhanced risk premium for flats and hence an overall deferment rate of 5.25%.
How this plays out in practice remains to be seen, but early indications appear to be that the point is being taken in the LVT. So in summary, Kelton Court is good news for the tenant’s valuer and not just outside Central London.
Mark Chick
9.3.2010