Latifa Kosta v The Trustees of the Phillimore Estate [2014] UKUT 0319 (LC) (47 Phillimore Gardens)

The debate about relativity rages on as can be seen from the decision of the Upper Tribunal in this case…

1.1              The single biggest variable factor that will determine the price that the enfranchising tenant will pay to buy their freehold or extend their lease in a valuation calculation with marriage value is the so-called ‘relativity.’ This percentage represents the proportion of the freehold vacant possession value of the property that the existing (short) lease bears to it and can only be calculated by estimating or looking at accepted trends based on market evidence of the likely differential.

1.2              The traditional way to assess this is by the use of graphs of relativity which show the trend as lease length diminishes and the likely percentage of the freehold value that the short lease represents. The graphs in general follow a similar shape, but traditionally landlord advisors have preferred graphs that tend to a lower level of relativity and tenants the reverse. It is worth bearing in mind in this discussion that the higher the relativity, the better the outcome for the tenant as the ‘gap’ that then must be divided between landlord and tenant on a 50/50 basis when assessing the marriage value is thereby diminished.

1.3              For a view of the various competing graphs of relativity the website www.graphsofrelativity.co.uk shows very visibly the general trend of the relativity curve but also allows valuers to compare the impact of different graphs, given varying lease lengths. A picture of a comparison of the various relativity graphs applicable to Prime Central London (plotted on the same axes) appears in the image below. The figure shows the general trend, but the debate rages as to which graph is ‘correct.’

1.4

1.5              Because of its significance and the difficulty in pinning it down exactly (matters of valuation are as the tribunal itself said in this case ‘an art not a science’), the question of relativity has been under debate for some time and there have been numerous examinations of the best approach to calculating relativity, including the decision in Nailrile v Cadogan [2009] 2 E.G.L.R. 151 in which the Lands Tribunal clearly stated that graphs of relativity should not be used in preference to reliable open market evidence. In other words the concept of relativity can be very much case specific. Indeed, following the decision in Arrowdell Limited v Coniston Court (North) Hove Ltd (LRA/72/2005) the Lands Tribunal expressed the hope that it might be possible to produce standardised graphs of relativity. Indeed, following on from this the RICS produced a study on relativities, however, it was not possible to for the RICS working party to agree upon definitive graphs and professional views on how relativity should be calculated remain disparate.

1.6              The facts in 47 Phillimore Gardens concerned an enfranchisement under the Leasehold Reform Act 1967, of a house with 52.45 years unexpired on the lease as at the valuation date. The LVT had determined that the enfranchisement price to be £16,138,743. The valuation being carried out under Section 9(1D).

1.7              The case concerned in particular the expert evidence of Dr Bracke (a professor of economics), who also now has his own research company dedicated specifically to research in this area. He deployed a detailed and significant statistical analysis of data held by the Central London agents John D Wood relating to transactions prior to the 1993 Act, in an attempt to find a methodology of calculating relativity and evidence of it that was truly from a ‘no act world’ – as this is one of the valuation assumptions when assessing this.

1.8              Dr Bracke had carried out significant research and deployed a ‘hedonic regression’ model to the data to produce, what he said was an accurate means of determining relativity for a lease of 52.45 years unexpired term at the valuation date. His figure was some 87%.

1.9              The Respondents (the Phillimore Estate), perhaps unsurprisingly preferred the relativity figures that would be arrived at by use of the more traditional graphs of relativity such as the Gerald Eve, Knight Frank and Cluttons graphs which led to a relativity figure of some 76%.

1.10           Because of the technical nature of Dr Bracke’s arguments, the Respondents also called an economics and statistical expert, Professor Lizieri. The tribunal considered the matter and the evidence and remarked that whilst it was bound to decide the matter on the arguments before it, neither side had adduced valuation evidence in the Upper Tribunal and had instead confined in the main their arguments solely to the consideration of the means by which relativity should be calculated.

1.11           After considering the matter at some length the Upper Tribunal declined to interfere with the decision of the LVT (as it then was) at first instance that the relativity figure in this case should be 76%.

MARK CHICK

This article being general in nature is not a substitute for legal advice. If you require legal advice please visit www.bishopandsewell.co.uk or email: leasehold@bishopandsewell.co.uk

Jewelcraft v Pressland

Following on from the recent decision in Henley v Cohen, this is the next case to take the question of ‘what is a house’ in the context of mixed-use premises.

The case is currently unreported but is a decision of HH Judge Dight at the Central London County Court. The property comprises a flat above a shop. In this case there are similarities to Henley as there was no internal connection between the flat and the shop and access was via an external staircase. The Court held that the property was not a house ‘reasonably so called.’The Claimant tenant is now appealing to the Court of Appeal.

MARK CHICK

This article being general in nature is not a substitute for legal advice. If you require legal advice please visit www.bishopandsewell.co.uk or email: leasehold@bishopandsewell.co.uk

Henley v Cohen [2013] 2 P&CR 10 (CA)

1.1              The debate in case law about what constitutes a house for the purposes of the Leasehold Reform Act 1967 (‘the 1967 Act’) rages on. Readers may be familiar with the combined appeals in Hosebay v Day; Lexgorge v Howard de Walden [2012] 1 WLR 2884 (SC), in which the Supreme Court was asked to address this question.

1.2              The test in Section 2(1) of the Leasehold Reform Act 1967 is that a to qualify for a the right to enfranchise a building should be a house, and the definition of this is as follows:

“…any building designed or adapted for living in and reasonably so called, notwithstanding that the building…was or is not solely designed or adapted for living in…”

1.3              In both of these cases the properties had an element of mixed use or comprised a number of units of hostel type accommodation within the envelope of a larger building held under the terms of a single long lease and claimed to be a ‘house’ by the tenants for the purposes of the 1967 Act. In both of these cases the claims failed with the Supreme Court (Lord Carnwarth) deciding that the use of the property as at the date of the notice of claim was determinative.

1.4              In Henley v Cohen there was an element of mixed use, as the property comprised a shop with a flat above it. The case of Tandon v Trustees of Spurgeons Homes [1982] AC 755 held that a shop with a flat above (held under a single long lease) could be enfranchised. However, the decision was a 3:2 majority in the House of Lords[1].

1.5              In Henley the distinguishing feature was that the flat above was recently created and could not be accessed from the shop below. The property had also been purposely converted to bring it within the ambit of the 1967 Act. The Court of Appeal declined to find that the property qualified for the right to enfranchise.

Voyvoda v Grosvenor West End Properties [2014] L&T.R. 10

The End of the Zuckerman Addition

1.1              Previous authority (such as City and County Properties v Yeats [2012] UKUT 227 (LC); [2013] R.V.R 47 had held that the so called ‘Zuckerman[1] addition’ (the 0.25% addition to the Sportelli[2] rate to reflect the additional management risk for flats did not need to be applied in a situation where there was likely to be no or little management risk to the freeholder (such as a case where there is a third party management company).

1.2              In this case, heard by the Upper Tribunal (Lands Chamber) concerned a substantial (circa £4M) lease extension on the Grosvenor Estate. The landlord successfully argued that notwithstanding the management ‘risk’ associated with owning the reversion to flats and the burdens placed on the landlord by the service charge regime both under the Commonhold and Leasehold Reform Act 2002 and under the Service Charges (Consultation Requirements) (England) Regulations 2003 (‘the 2003 Regulations’), that it was no longer appropriate to make the Zuckerman addition.

1.3              This was because of the decision of the Supreme Court in Daejan v Benson [2013] UKSC 14 which determined that the power to dispense with the consultation requirements under the 2003 Regulations was to be exercised in a proportionate manner to achieve a balance between the parties, so as to avoid the tenants receiving a windfall because of the refusal of the court to exercise such dispensation, but also to ensure that landlords do not become slipshod in their approach to service charge consultation. Accordingly, the risk to the owner of a well-managed reversion was reduced and there was no longer any basis for making the Zuckerman Addition.

MARK CHICK

This article being general in nature is not a substitute for legal advice. If you require legal advice please visit www.bishopandsewell.co.uk or email: leasehold@bishopandsewell.co.uk