[2024] UKUT 26 (LC)

We now have the FHVP; the other component needed for the calculation of the premium is the value of the existing lease on the valuation date (which we have already, £747 per sq ft see paragraph 32 above) but without the right to an extended lease or “without Act rights” as it is usually put.

The value of Act rights is expressed as a percentage, to be deducted from the date-adjusted value of the lease.

Mr Sharp put it at 7.87%. He derived this from a comparison of the Savills 2016 enfranchiseable and unenfranchiseable graphs, the latter being 7.87% lower than the former.

Mr Rangeley put it at 5.75%. He explained that he considered the Act rights discount to be subjective and relied on previous decisions of the Tribunal. In Mallory v Orchidbase Limited [2016] UKUT 0468 (LC) 5.5% was adopted where the lease had 57.68 years unexpired. In Nailrile Ltd v Cadogan & Ors [2009] RVR 95 where the unexpired term was 45 years, the discount was determined at 7.5%; in Trustees of Barry and Peggy High Foundation v Zucconi and Anor [2019] UKUT 242 (LC); where the lease had 52.56 years unexpired, the Tribunal determined 6%. Although Mr Rangeley did not provide us with a explanation of his methodology in coming to 5.75%, it appears that it was simply a matter of judgement as although it is the average of the adjustments in Mallory and Zucconi the unexpired term at the property is lower than the average of the unexpired term in those two cases.

As we said at the outset (paragraph 6 above), there is now no market in long leases without Act rights. So the value to be placed on them is a construct or convention. The Tribunal has considered the appropriate value to place on Act rights on several occasions over the last fifteen years; in its decision in Sinclair Gardens Investments (Kensington) Ltd [2017] UKUT 494 (LC) it listed the discount applied in what were then recent cases that related to leases with 40 years or more unexpired, and it is possible to use that list and supplement it to provide a value for leases of different lengths - as Mr Rangeley did. The advantage of this approach is that it promotes consistency; it also promotes simplicity as we shall see.

Below is an updated version of the table set out in Sinclair Gardens to which we have added decisions since 2017 where the value of Act rights was determined after argument (and so excluding the decision in Midland Freeholds Ltd & Anor [2017] UKUT 463 (LC)):

The decisions set out in the table above demonstrate a relatively simple approach: 2.5% has been applied to unexpired terms of 75.2 and 77.7 years and 3.5% to unexpired terms of between 66.8 and 69.3 years. If we take a straight line between 52.6 years and 57.68 years the appropriate value for the subject lease is 5.85%. We adopt that figure, and we commend that approach for future use.

Relativity is a figure that enables the value of the existing short lease, albeit without Act rights, to be calculated from the FHVP. In circumstances where there is little or no evidence of existing values it is normal valuation practice to use relativity graphs, based on a wider sample of transactions and published from time to time by surveying practices engaged in this specialist area of work. Relativity is expressed as a percentage, to be applied to the FHVP to yield the value of a lease of the length in question without Act rights. Relativity is thus used as a tool to derive a value.

However, the subject property was sold only three months before the date of the application for the extension of the lease, and a date-adjusted value is readily available as we have seen. In such cases the value of the lease without Act rights can be calculated without using relativity. Obviously the value without Act rights derived from such a calculation can be expressed as a percentage of the FHVP already determined, and compared with the relativity graphs; in such cases relativity is used as a cross-check; if the value calculated without the use of the graphs is adrift from the value in the tables then something may have gone awry and it may be worth looking again at adjustments.

In practice valuers tend to combine the two methods, as did the expert witnesses in relation to this property. We need to look at their methods, bearing in mind that the figures they produced were derived from their own assessment of the FHVP which differed from the value the Tribunal has adopted.

Mr Sharp employed the 2016 graphs produced by Savills and Gerald Eve which demonstrated an average relativity of 73.81%. He described the graphs as ‘reliable’ and commented that their use was required to “temper” the market evidence. As far as the sale of the property itself was concerned Mr Sharp explained in his report that it was first marketed at the end of March 2021 at £1,275,000. By June, following a change of agents, the asking price had dropped to £1,050,000 and a single offer was received resulting in a sale at £973,000 in November 2021. That figure of course included the 1993 Act rights. Mr Sharp made three adjustments; he subtracted 7.87% for Act rights and added 7.5% for condition and 3.5% in recognition that the transaction was an executor’s sale. He considered that the flat was dated and that any purchaser would replace the kitchen and bathroom fittings as well as renewing the decorations and carpets. His rationale for his final adjustment was that an executor would be willing to conclude a sale at a level which would expedite the transaction, in comparison to someone who was part of an ongoing chain. Mr Sharp’s final figure was £1,000,000. He then divided this figure by the product of the adjusted average of his FHVP comparables (£1,045 per sq ft) and the agreed area (1,407 sq ft), namely £1,470,315, to arrive at a relativity figure of 68.01%. He then took an average of this analysis and the average of the Gerald Eve and Savills figures to arrive at 70.56%, which was the figure he deployed in his valuation.

We are sceptical of this approach, for a number of reasons. The first is that there is no reason to adjust the date-adjusted sale price of the property by reference to condition in this case; the objective is to ascertain the value of this lease at the valuation date, not of an adjusted lease.

Second, we see no substance in the adjustment on the basis of this being an executors’ sale. Had this been an adjustment worth making it should have been applied at the first stage of the analysis when the FHVP was determined; there is no reason why different adjustments should be made at this stage. The only new adjustment should be the value of Act rights.

Finally, we do not understand the repeated averaging exercise carried out by Mr Sharp. Instead of applying his deduction for Act rights to his adjusted value for the short lease, he has averaged that value with the other comparables; and he has then averaged the resulting relativity with the relativity derived from the graphs to produce a blended figure. No explanation has been given for either of these averaging exercises; we do not understand the need to “temper” the market evidence in this way.

So we are not persuaded by Mr Sharp that anything is needed at this stage other than the deduction of the value of the Act rights from the existing short lease value.

Turning to Mr Rangeley, his methodology was slightly more circuitous. He identified what he described as the ‘Mundy approach’ referring to the Tribunal’s methodology in The Trustees of the Sloane Stanley Estate v Mundy [2016] UKUT 223 (LC) where at paragraph 168 the Tribunal commented that:

He thought it too risky to rely solely on the property itself and preferred to take the average of his analyses of numbers 207, 211 and 224. This resulted in a figure of £672 per sq ft to which he applied a discount of 5.75% to arrive at a value without Act rights of £633 per sq ft. Dividing this number by £852 (being the average of his FHVP comparables) produced a relativity of 73.82%. If he had relied only on number 207 the outcome would have been 73%. He described the use of graphs as a ‘cross check’ and noted that in several recent Tribunal decisions concerning properties outside Central London that graphs produced by Savills in 2015 and 2016 and by Gerald Eve in 2016 had been preferred. However, he noted deficiencies in both 2016 graphs and recounted his experience of dealing with Central London properties where negotiations had been conducted with both practices and that neither had insisted on the use of the most recent graph. He said that the outcome of these discussions often aligned closely to an older Gerald Eve graph published in 1996. Mr Rangeley considered that the relativity in Central London was slightly higher than in other areas due to fewer concerns about ‘mortgageability’ and the cost implications of short leases. He thought that the market in Central London had proportionately more flats and the market was better informed. The 1996 Gerald Eve graph reflected his view and in relation to the property produced a result of 77.17%, some 4.5% higher in proportionate terms than the average of the Gerald Eve and Savills 2016 graphs. Taken together the three graphs (Gerald Eve 1996, Savills 2016, and Gerald Eve 2016) averaged 74.93% and his analysis of the short lease transactions (which we set out in paragraph 21) showed a relativity of 73.82%. He therefore adopted 74.38% being the average of the two methods.

So while Mr Rangeley resisted the temptation to make further adjustments, his method again involved repeated averaging, both with the comparables and then with the relativity graphs, We are not persuaded that this is a reliable method and we continue to take the view that in a case such as this where there is reliable market evidence, we should start from the application of the value of Act rights to the market value, date-adjusted (the one adjustment which, oddly, neither valuer made). Relativity can then be used as a cross-check, although we reject the use of the 1996 graph which is too old to be of use.

We can now return to the analysis of the sale of the property.

We have already calculated the date-adjusted value of the property, at paragraph 32 above, as being £747 per sq ft (by reference to the Land Registry’s House Price Index). For present purposes we have to express that as a capital value, £1,051,029. If we deduct the value of Act rights at 5.85% we get a value of £989,544, say £989,500.

We have already determined the FHVP at £1,322,500 and the relativity is therefore 74.8%. As discussed we can use the graphs as a cross-check. In Deritend Investments (Birkdale) Limited v Treskonova [2020] UKUT 0164 (LC) the Tribunal endorsed the use of the Savills and Gerald Eve 2016 (unenfranchisable) graphs in a situations where there is no transactional evidence. That is obviously not the case here but in our view the relativity we have arrived at compares reasonably to the outcomes from the 2016 graphs, which are 74% and 73.68%. Accordingly, in calculating the premium we use £989,500 as the value of the existing lease without Act rights. It is based on a transaction at the property itself which is almost contemporaneous with the application date and there is no need to use the relativity tables as anything other than a cross-check.