[1999] EWLands LRA_25_1999 (21 December 1999)	LRA/25/1999
	
	LANDS TRIBUNAL ACT 1949

LEASEHOLD ENFRANCHISEMENT - price payable for freehold of house - site element of value on standing house approach - yield to be adopted - whether previous Lands Tribunal decisions relevant - whether “comparable” sales reflected marriage value - whether decline in money market rates helpful evidence of movement in property yields - whether additional price payable to reflect freeholder’s right to nominate insurance company - appeal dismissed

IN THE MATTER OF AN APPEAL FROM A DECISION OF 
THE LEASEHOLD VALUATION TRIBUNAL OF
THE WEST MIDLAND RENT ASSESSMENT PANEL BY

	RISBYLANE LIMITED	Appellant
(No Respondent)

	Re: 25 Ferndale Road
	Streetly
	Sutton Coldfield
	B74 3QD

	Before:  N J Rose FRICS

	Sitting in public at:  48-49 Chancery Lane, London, WC2A 1JR
	on 8 December 1999

The following cases are referred to in this decision:

Windsor Life Assurance Co Limited v David and Daphne Austin (LRA/4/1994, unreported); Windsor Life Assurance Co Limited v Philip Buckley (LRA/5/1994, unreported); 
Speedwell Estates Limited (No Respondent) (LRA/70/1997, unreported); 
Mrs J B Taylor (No Respondent) (LRA/10/1998, unreported);
Castlebeg Investments (Jersey) Limited (No Respondent) [1985] 2 EGLR 209 LT; 
Calthorpe Estate Trustees v Pabari [1991] 2 EGLR 219 LT;
Blackstone Investments Limited v Middleton-Dell Management Co Limited (1997) 14 EG 135.

Appearance:	Mr M A Fell for the Appellant by leave of the Tribunal

DECISION OF THE LANDS TRIBUNAL
1.	This is an appeal by Risbylane Limited (“the appellant”) from a decision of the leasehold valuation tribunal of the West Midland Rent Assessment Panel (“the LVT”) determining the price payable for the freehold interest in the house and premises known as 25 Ferndale Road, Streetly, Sutton Coldfield, B74 3QD (“the appeal property”) at £867.  The tenant’s notice to acquire the freehold interest was dated 28 October 1998, although it was not despatched until 12 November 1998, when some 55 years of the term remained unexpired.  There was no respondent to the appeal.
2.	Mr M A Fell, the managing director of Fell Estates Limited, appeared for the appellant with leave of the Tribunal and gave evidence, contending for a price of £1,332.45.  In the light of Mr Fell’s evidence, I find that the appeal property comprises a semi-detached house constructed of brick and tile in about 1955.  The accommodation comprises a porch, hall, two connecting reception rooms, kitchen, attached garage and utility room on the ground floor and three bedrooms, bathroom and separate WC on the first floor.  There are front and rear gardens and a parking area at the front.  The site has a frontage of 8.23 m and an area of 386.28 m2.
3.	There are two issues in this appeal.  The first is the appropriate yield rate to be adopted to calculate the modern ground rent from the agreed site value and to decapitalise that ground rent in perpetuity.  The LVT decided that the correct rate was 7%;  Mr Fell considered it should be 6½%.  The second issue is whether the landlord’s right to direct which company should be used to insure the appeal property against fire should be taken into account in valuing the freehold reversion.  The LVT decided that no value should be attributed to this right;  Mr Fell disagreed.  His  valuation was as follows:	
TERM
				
Annual Ground Rent		£4.46 pa		
				
YP for 55 years @ 7%		 13.9399	£62.18	
				
REVERSION				
				
Standing House Value	£95,000			
				
Site Value @ 35%	£33,250			
				
Section 15 Rent @ 6.5%		 2161.25		
				
YP @ 6½% in perpetuity		 0.48179	1041.27	
deferred 55 years				

				
VALUE OF RIGHT TO INSURANCE COMMISSION		
				
Sum insured say £60,000				
Premium say £108				
Lessor’s commission @ 25%, £27 x 8.5 YP
		    229.00	
			£1332.45	

4.	Mr Fell has over 22 years experience in dealing with the management, purchase and sale of residential investment property, particularly freehold ground rents.  He agreed that the current ground rent should be valued for the unexpired term of the lease based on a yield rate of 7%.  He did not accept, however, that the same rate of 7% should be used to obtain and capitalise the modern ground rent.  In support of his view that a rate of 6½% should be used for these calculations, he referred to four decisions of this Tribunal, where the unexpired term of the existing lease was between 38 and 77 years.  In all four decisions a rate of 6½ % was adopted.  The cases he referred to were Windsor Life Assurance Co Limited v David and Daphne Austin (LRA/4/1994, unreported); Windsor Life Assurance Co Limited v Philip Buckley (LRA/5/1994, unreported); Speedwell Estates Limited (No Respondent) (LRA/70/1997, unreported) and Mrs J B Taylor (No Respondent) (LRA/10/1998, unreported).  
5.	The Tribunal’s decision in each case indicated that, since the modern ground rent was more substantial in amount that the current ground rent, and was subject to review after only twenty five years of the notional fifty-year lease, it should be capitalised at 6½% - lower than the rate applied to the current ground rent.
6.	Mr Fell produced a summary of thirty ground rents which had been sold at public auction between November 1995 - the date of the first of the two Windsor Life decisions - and October 1999.  These analyses were based on information contained in the respective auction catalogues.  In nearly all cases Mr Fell had carried out an external inspection of the property and then attended the relevant sale.  None of the properties was advertised for sale as containing insurance covenants of value to the freeholder.  All thirty investments were secured on houses in the Birmingham and West Midlands area, let at low ground rents on leases with between six months and fifty four years unexpired.  According to Mr Fell’s analysis, the prices realised suggested that the modern ground rents had been valued at between 3½% and 6½%.
7.	Many of the properties were tenanted.  Mr Fell considered that those sales which showed the very lowest yields must have reflected an element of speculation in the prices paid, since these could not be justified on an orthodox investment valuation basis.  The most likely purchaser of a single investment property of this nature was a small private investor.  Such a purchaser would hope that the lessee would not exercise its statutory right to enfranchise in the first few years and that, in the longer term, the increase in the vacant possession value of the house would be reflected in the value of the investment.  Such a purchaser would consider that an investment of this nature provided a cheap way to obtain exposure to the property market.  When deciding how much to pay, the purchaser would compare the initial rate of return with the interest he could earn by placing his money on deposit.
8.	Mr Fell quoted a passage in Hague on Leasehold Enfranchisement, Third Edition to the effect that, with very few exceptions, the rate determined by both this tribunal and leasehold valuation tribunals for decapitalising site values had varied between 6% and 8%.  The passage continued:
“Attempts to obtain substantially higher rates have failed.  In 1971, it was said that the adoption of a 6% rate had become ‘stabilised’, and in 1973 that there was a ‘convention of decapitalising the site value at 6% in order to arrive at the section 15 rent.’ But more recently, although 6% has sometimes been adopted, slightly higher rates have been used, including 6½% and 8%,  Much the most common rate is 7%, which has frequently been either agreed between valuers or adopted in several cases by both the Lands Tribunal and leasehold valuation tribunals.  However, in determining the rate, convention should not simply be relied on, but should always be examined critically in the light of the valuation evidence given in a particular case.”  
9.	In Mr Fell’s opinion, the LVT had simply relied on its own previous decisions at 7% and had not given sufficient weight to the evidence before it.  The scope for capital growth with freehold ground rents was now such that the rates generally awarded between 6% and 8% were too high.  Where the reversion was very close the capitalisation rate for  the modern ground rent should be as low as 4%.  Where it was up to seventy years distant, the absolute maximum rate was 6½%.  He had attended various auction sales and was sure that it was now impossible to buy any ground rent investment at the rate of 7% suggested by the LVT.  Moreover, as a matter of valuation principle, a lower yield should have been adopted for the modern ground round than the 7% applied to the current ground rent.  
10.	He then produced a “table of settled cases”, relating to houses on the appellant’s Streetly estate.  These were of similar style and construction to the appeal property, situated in the same or adjoining roads.  The entirety value in each case was between £90,000 and £110,000.  All properties were let on ninety nine-year leases at fixed apportioned head ground rents of between £4.21 and £4.46.  In January 1999, Mr Fell had written to the lessees of about seventy such properties, offering to sell the freehold in each case for £1,700.  None of the tenants had served a statutory notice requiring transfer of the freehold or a lease extension.  All the houses had previously been sold off on underleases and Mr Fell also acted for the head lessee in each case.  He had offered both interests to the sub-lessees.  The tenants of thirty one of the houses had accepted the prices quoted for the two superior interests.  In addition to the sale consideration, they were responsible for the vendor’s conveyancing fees (£250 plus disbursements and VAT) and valuer’s fees (£250 plus VAT).  In each case the offer included the option for the purchaser to instruct the vendor’s solicitor to act for both parties.  If this offer was taken up, the additional legal fee would be £50 plus VAT.
11.	I suggested to Mr Fell that the agreed prices might have included an element of the marriage value which would have been enjoyed by the tenant, but which must be disregarded for the purposes of the present exercise.  He agreed that this “could be a valid point”.  However, he said, the prices quoted were in line with the level which the landlord could have achieved if he had sold the property to another investor.  There was thus no addition for the tenant’s bid.
12.	I also asked Mr Fell why the same price had been quoted for a house with an entirely value of £90,000 as for one worth £110,000.  He replied that it was not practical to value each house individually.  In broad terms, however, the asking prices were calculated on the basis of a 6% yield for the modern ground rent, plus £200 for the loss of insurance commission.
13.	Mr Fell also produced details of changes in bank base rate between October 1989 and November 1999 and in long-dated gilt rates between September 1992 and December 1999.  He said that the substantial reduction in both the cost of money and return on money had influenced the ground rent investment market, as it had all other property-related investment markets.  Gilt rates had fallen to only 5% at the date of the tenant’s notice.  At the relevant date in the two Windsor Life cases gilt rates were 9.2% and 8.4% respectively.  Rates of return on ground rents had generally been lower than on gilts to reflect the expectation of capital growth in property investments.
14.	He then turned to the value of the freeholder’s right to receive insurance commission.  By clause 2(13) of the lease, the tenant of the appeal property covenanted:
“to insure and to keep insured against loss or damage by fire all buildings erections and fixtures of an insurable nature which at any time during the said term may be erected or placed upon the demised land or affixed to the said premises to the full replacement value thereof in the State Assurance Company Limited (Birmingham Branch) through the Lessors’ agency or in such other insurance office as may from time to time be directed by the Lessors and none other in the names of the Lessors and the Lessees.”
15.	This insurance covenant was clearly a right which fell to be valued and the LVT should have determined a value to reflect the loss to the landlord of a right to agency commission on the fire insurance policy.  In this connection Mr Fell referred to decisions of this tribunal in Castlebeg Investments (Jersey) Ltd (No Respondent) [1985] 2 EGLR 209; Calthorpe Estate Trustees v Pabari [1991] 2 EGLR 219 and Blackstone Investments Limited v Middleton-Dell Management Co Limited (1997) 14 EG 135.  
16.	The landlord had not enforced the insurance covenant, but neither had a waiver been given.  The landlord had a valuable right which an investor would have taken into account in valuing the freehold reversion.  There were many ground rent investors particularly interested in leases with landlords’ insurance nomination clauses and who would attribute a separate and additional value to the right to receive insurance commission.  Such investors would have existing agencies or commission arrangements with insurance companies and would have no difficulty in obtaining commission on a single property such as this.  In each case an investor would add a value of at least £200 for the right to receive insurance commission.  For the purposes of the Leasehold Reform Act 1967 it was irrelevant whether or not the existing landlord had enforced the insurance covenant.  The important factor was whether such a covenant had a value to a prospective purchaser.
Decision
17.	In this case Mr Fell criticises the LVT’s choice of 7% as the yield rate at which the modern ground rent should be capitalised on four grounds.  Firstly, he refers to four previous decisions of this Tribunal in which a rate of 6½% was adopted.  As has been stated on various occasions in the past, matters of value fall to be decided upon the evidence produced and not on previous decisions.  Moreover, the relevant valuation dates in the two Windsor Life appeals were 25 September 1992 and 20 March 1993 - over five years before the date of the tenant’s notice in this appeal.  As for the other two cases cited by Mr Fell, both were landlord’s appeals to which the tenants did not respond.  As the Member (Mr Michael Hopper FRICS) said in Speedwell:
“I am well aware that I have not had the benefit of hearing any evidence on behalf of the lessee and that my decision must perforce be based solely on the appellant’s evidence.  Insofar as this decision may in any way be regarded as a precedent its authority is inevitably weakened by the lack of any evidence or argument on behalf of the lessee.”
18.	Insofar as these four decisions are relied upon as “evidence” supporting a rate of 6½% instead of 7%, therefore, I find them to be of no weight whatever.
19.	However, Mr Fell also relies on the four cases as suggesting “a matter of valuation principle”, that a lower yield rate should necessarily be applied to the modern ground rent than the 7% which it is agreed is appropriate for the current ground rent.  I agree with Mr Fell that there are certain passages in certain of the decisions to which he has referred which suggest that a higher capitalisation rate should always be applied to a low rent fixed for a long period than to a higher rent subject to review after a shorter interval.  In my opinion, however, selective quotations from past decisions can sometimes give a misleading impression and this is one such occasion.  Both Windsor Life decisions were heard by the same Member (Mr Michael Hopper FRICS) and Mr Hopper also decided Speedwell.  In Windsor Life v Austin, he said:
“Both witnesses appeared to give some credence to the view that, other things being equal, the longer the period which would elapse before an increase in income, the higher would be the risk rate.”
20.	
In Speedwell, he said: 
“The Windsor Life decisions… may be taken as authority for the proposition that, other things being equal, the longer the period for which a rental income is fixed, ie the period before the rent review or the reversion, the less will be its attractiveness to an investor-purchaser and thus the higher will be the yield rate which he will require.  The rent review in the extended fifty-year lease, which has to be assumed, if it has not actually been granted, comes at the twenty fifth year.  If therefore other elements of a valuation for enfranchisement involved the valuation of income fixed for substantially longer or shorter periods than twenty five years, a higher or lower yield rate will normally be appropriate to value such income.”
21.	It is important to note that in both decisions the Member qualified his remarks with the words “other things being equal”.  In the current appeal, Mr Fell himself accepts that the price an investor is prepared to pay for a modern ground rent will depend, among other things, on whether it will be receivable in the near future or will be deferred for a long period.  In his view, early reversions should be valued at 4% and those after seventy years at 6½%.  In this case, as suggested in Speedwell, other things being equal the current ground rent of £4.46 per annum fixed for fifty five years is clearly less attractive than the modern ground rent of over £2,000 which will be subject to review after only twenty five years.  Set against the advantages of the modern ground rent, however, is the fact that it will not be received for another fifty five years.  It does not necessarily follow that all the advantages and disadvantages of the two ground rents will cancel each other out, so that the same yield will apply to both, but it is certainly possibly that this will happen.  The LVT’s view that a rate of 7% should be adopted throughout the valuation is, therefore, nor inconsistent with the valuation principle mentioned in Speedwell.
22.	To the extent that certain references in the previous decisions referred to by Mr Fell may suggest that there is an immutable valuation principle that relative yield rates depend solely on the periods for which the rents are fixed, it is clear from the evidence in this case that they do not paint the entire picture.  Indeed, it is apparent from Mr Fell’s evidence that he does not consider that this “principle” is of universal applicability.  He has produced a schedule of thirty prices achieved for ground rents at auction.  His analysis of these prices has been prepared without regard to the “principle” which he suggests should apply to this determination.  For example, in the case of 47 Fentham Road, Birchfield and 194 Formans Road, Sparkhill, the existing ground rents were £7 and £5.34 respectively and the leases had 6 months unexpired.  In both cases, the analysis put forward by Mr Fell capitalised the current ground rent at 7% and the modern ground rent - to be fixed for 25 years - at 3½%.  
23.	The thirty sales by auction formed the basis of Mr Fell’s second criticism of the LVT decision.  His analysis of all these sales showed that the modern ground rent had been capitalised at rates varying between 3½% and 6½%.  This showed, he said, that the LVT must have been wrong to adopt 7%.  In fact, it is plain from this evidence that in many instances the purchaser would inevitably have incurred a substantial loss if the tenant had submitted a notice shortly afterwards and then exercised  its right to buy the freehold based on 7%, as suggested by the LVT, or even at Mr Fell’s suggested rate of 6½%.  One example will serve to illustrate the point.  41 Elmwood Road, Streetly was sold in June 1999 for a total consideration of £2,252.  Mr Fell calculated that this was equivalent to a yield of 7% on the current ground rent and 5¼% on the modern ground rent.  In answer to a question from me he agreed that, even if the modern ground rent were valued at his suggested rate of 6½%, the tenant would have been able to secure the freehold for only £1,180 - approximately half the price paid at auction.  He accepted that in those sales which showed the lowest reversionary yield, the purchasers must have bought as a speculation, hoping to sell on to the tenant at a profit.  He did not attempt to draw the line between those sales which reflected an element of speculation and those which did not.  In my opinion, there is no logical reason why investors who were in the market for freehold ground rents in the hope of an eventual sale to the tenant should have decided to restrict their bidding to a limited selection of the available lots.  Consequently, I consider that all the prices achieved at auction reflected an element of value to the tenant.
24.	Section 9(1) of the Leasehold Reform Act 1967, as amended, provides that the freehold interest must be valued on the assumption that the tenant and members of his family residing in the house are not buying or seeking to buy.  It follows that the thirty auction sales relied upon by Mr Fell did not take place in the hypothetical market postulated by statute.  They are therefore not of assistance in the present exercise.
25.	The third element in Mr Fell’s attack on the LVT decision consisted of the sale of thirty one freehold ground rents secured on houses in the neighbouring area at prices which broadly equated to a return of 6% plus £200 for the insurance commission.  He accepted that, as these were sales to sitting tenants, they were not on all fours with the statutory valuation hypothesis.  He suggested, however, that this did not disqualify them as comparables, because the prices quoted by the freeholder were similar to those that would have been paid by other investors on the open market.  As I have indicated above, I am satisfied that prices paid for freehold ground rents on the open market do indeed reflect the possibility of a future sale to the tenant.  I therefore do not consider that the thirty one sales provide helpful evidence for the purposes of this appeal.
26.	Finally, Mr Fell cited the fall in bank base rate and long-dated gilts rates as justifying a decline in the yields required for freehold ground rents in recent years.  In Gallagher Estates Limited v Walker (1973) 28 P&CR 113 (relating to the freehold value of a house in Solihull, held on a ground lease with approximately 85 years unexpired), Lord Denning MR said:
“I doubt whether the money market is a safe guide in making valuations of land.  The important market is the land market in the vicinity.”
27.	In this case, Mr Fell has produced details of the sale by auction of freehold ground rents in the vicinity of the appeal property between 1995 and 1999.  The fact that, as I have found, these sales incorporated an element of value to the tenant, does not disqualify them from providing evidence of trends in the yield appropriate for such investments generally.  Mr Fell conceded, however, that the large number of transactions where the unexpired term was short meant that there was insufficient evidence to provide an accurate picture of yield movements.  The appellant has therefore failed to persuade me that the LVT was wrong to adopt a yield rate of 7% when valuing the modern ground rent.
28.	In support of his criticism of the LVT’s refusal to value the benefit of the insurance covenant, Mr Fell referred to three previous decisions of this tribunal, namely Castlebeg Investments (Jersey) Limited (No Respondent) [1985] 2 EGLR 209, Calthorpe Estate Trustees v Pabari [1991] 2 EGLR 219 and Blackstone Investments Limited v Middleton-Dell Management Co Ltd (1997) 14 EG 135.
29.	In his decision on Calthorpe the Member, Mr John Hill FRICS, said:
“There must be many sales of properties where the vendor is receiving an insurance commission and it must be a matter of evidence as to whether a purchaser is prepared to pay an additional value for the expectation of receiving a similar commission and, if so, the customary basis of calculation.  In the present case I have heard no such evidence and I have considerable reservations as to whether insurance commissions should be taken into account.”
30.	I respectfully agree with that approach.  In this appeal, notwithstanding the provisions of the lease, the landlord has so far chosen to forego the right to secure insurance commission.  In answer to a question from me Mr Fell said that this was because his clients did “not specialise in insurance”, although they were now looking at the position more closely.  I have to say that I found this answer somewhat surprising.  Until very recently, the appellant owned an estate of at least 70 ground rents in Streetly, all of which included a similar insurance covenant and reserved a similar ground rent to that in the present appeal.  If Mr Fell’s valuation approach is correct, then in every case the appellant has been happy to forego an annual insurance commission of about £27, satisfying itself with a ground rent of less than a fifth of that amount.  I find it difficult to believe that any prudent landlord would conduct its business affairs in this manner and conclude that the LVT was probably justified in referring to 
“the known difficulties experienced in (enforcing insurance covenants) or receiving commission from insurance companies under modern competitive and volume conditions”.
31.	As the Member said in Calthorp, however, the value, if any, of the right to obtain insurance commission must be a matter of evidence.  Mr Fell manages over one thousand residential properties, mainly in the Midlands.  Despite his general experience that bidders will pay an additional amount for this type of insurance clause, he has not produced any direct evidence of such payments.  The only evidence on which he relies is the sale of the 31 freeholds on the appellant’s Streetly estate at prices which, he says, included £200 for the insurance premium.  I do not think that these sales can be interpreted as showing that such a price was in fact attributed by the purchasers to that item.  Firstly, as previously mentioned, the prices may well have reflected an element of marriage value.  Secondly, it was a term of the offer in each case that the tenant was entitled to employ the landlord’s solicitor at a fee of £50, compared with the figure of £250 charged by that solicitor for representing the vendor.  It seems to me that, even if the tenants did consciously attribute a sum of £200 to an item separate from the value of the freehold interest, it is more likely to have reflected the real saving in legal fees than the notional value of an insurance covenant which had never been enforced.
32.	The appeal therefore fails.  I find that the price payable for the freehold interest in the appeal property is £867.
33.	Since there was no respondent to this appeal there will be no order as to costs.

				Dated:

				(Signed)  N J Rose