For those of us that attended the Reigate valuers’ forum on Thursday 17th June there was an interesting dialogue concerning the impact of the service charge legislation on valuation for leasehold reform purposes in the post Kelton Court environment.

Whilst it appears that the principle of an enhanced ‘management risk’ associated with flats could give rise to an increase in the appropiate risk premium and hence the deferment rate, those circumstances where this would not be appropriate were also discussed.

The presence of headlease clearly negates some of the ‘management headache’ assciated with this asset class, but what about the situation where the Right to Manage (RTM) has been exercised ?

In this situation the landlord (arguably) has a reduced management burden – although this of course assumes a well-run RTM company. If the landlord has to exercise his powers to compel the company to comply with its obligations this will not be the case.

Similarly, if the RTM company has the right to place the insurance then arguably one of the motivating factors associated with owning a ground rent is also diminished. So the question then arises as to whether the one cancels the other out.

I expect that in practice the particular property will need to be examined to see which of the following factors are present and are likely to be of significance in arguing for a departure from the Sportelli deferment rate of 5% for flats. Briefly, these seem to be:-

1. Whether there is a headlesse in place (with management responsibility).

2. Whether there is a ‘third party’ management company (a party to the leases and with all the flat owners as members) and with the power to set the service charge.

3. Whether the Right to Manage has been exercised.

4. In the case of a small block (usually two flats) whether the leases impose a full repairing obligation on the flat owners (i.e. Where there is no service charge).

I would be interested to know what other practitioners think.

Mark Chick

22.06.2010