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

When is a house not a house?

The answer appears to be when it is on the Grosvenor Estate, used 88.5% as offices and has a lease clause that restricts the property to such use under the terms of the lease.

The latest case on what constitutes a house for the purposes of enfranchisement under the Leasehold Reform Act 1967 takes the question of ‘what is a house?’ a step further although, as the tenant has abandoned their proposed appeal to the House of Lords, we will not be treated to further judicial consideration of the question in this case.

The case in question is Grosvenor Estates Limited v Prospect Estates Limited [2008] EWCA Civ 1281.

In Prospect, the facts were that the building constructed in or around 1850 as a house. Since construction two floors had been added and at the date of the notice of claim in early 2007, the property was held under the terms of a lease for use as offices, with only the topmost floor being set aside for residential purposes.

The terms of the lease stated that the top floor was to be used for residential purposes only by a director, partner, officer or senior employee of the company person or firm in occupation of the remainder of the building.

On the facts 88.5% of the building was used for non-residential purposes under the terms of the lease. The building had been used in this way for the last 50 years.

At first instance the court had determined that the building was a house within the meaning of the 1967 Act. The landlord appealed.

The Court of Appeal reviewed the relevant authorities on this point and considered the applicable tests to be as follows:-

1. If a mixed-use building can reasonably be called a house, it remains a house within the meaning of the 1967 Act even if it could reasonably be called something else.

2. Whether it is reasonable to call something a house is a question of law.

3. If a building is adapted or designed for living in only in exceptional circumstances can it not reasonably be called a ‘house.’

The Court of Appeal (Mummery, LJ) considered that the above principles had been applied without taking into account the full factual circumstances. The requirement in the lease that the building should be used pretty much wholly as offices was persuasive. A consideration of the internal and external features was not enough.

Accordingly, at the relevant date the building was not a house within the 1967 Act and the tenant’s claim failed.

Mark Chick

9 March 2009

A key issue for tenants serving notice on their landlords to purchase their freehold or extend their lease under the provisions of the 1993 Act will always be the offer figure put forward in their initial notice. ‘If the offer figure is too low, the claim will be invalid’ is the conventional wisdom. But is this quite correct?

The starting point is the case of Cadogan v Morris [1996] 4 All ER 643 a Court of Appeal decision in which it was held that simply putting forward a nominal figure (such as a pound) which could not represent adequate compensation in the particular case would invalidate the notice. Following Morris tenants have been advised (no doubt correctly) to obtain valuation advice in order to ensure that they put forward a ‘reasonable offer figure.’

This point was considered further in 9 Cornwall Crescent (London) Limited v Kensington and Chelsea Royal London Borough [2005] EWCA 324, a case which concerned the landlord’s counter-notice and whether this could be invalid if the response figure was too high. The Court of Appeal considered that a subjective element of genuineness was all that was required for the landlord’s counter offer to be valid and that this would meet the subjective test in Morris that it should be made in ‘good faith.’

However, a decision of the Central London County Court from the end of last year (Magnet v Renshaw) shows a further degree of latitude, which may open the door further for the tenant whose offer figure is under attack for being too low.

In Renshaw (which is perhaps more well known for its guidance on who has the actual capacity to serve the counter-notice when the reversion is sold) the court also considered a challenge to the tenants’ offer figure. The court held that the 9 Cornwall Crescent requirement of ‘good faith’ applies equally to the tenant’s offer. In Renshaw the judge rightly said that valuation evidence was of itself not conclusive as to the bona fides of the person making the offer.

Following Renshaw it seems that the tenant’s offer figure could be one that is below the acceptable range of values (as might be ascertained by later valuation evidence) provided that it is made honestly and in good faith (and presumably therefore not merely a nominal figure).

What this means in practice, is that in cases where a tenant has made an offer (honestly, and perhaps without the benefit of valuation advice) that all may not be lost, notwithstanding perhaps a large disparity between the offer figure and the landlord’s counter-notice figure.

Mark Chick

27 August 2008

Mark Chick is a partner at Bishop & Sewell LLP, a committee member of ALEP and is a solicitor specialising in leasehold reform and landlord and tenant matters: www.bishopandsewell.co.uk.