Cadogan Square Properties Ltd v Earl Cadogan (2010)
In determining the price to be paid by tenants exercising a right to collective enfranchisement involving leases for unexpired terms of below 20 years, it was appropriate to apply the Earl Cadogan v Sportelli (2007) 1 EGLR 153 formula as a starting point and then determine whether the position in the property cycle at the relevant valuation dates should lead a Lands Valuation Tribunal to change one or more of the components of the formula.
The Upper Tribunal (Lands Chamber) was required to determine as a preliminary issue, in conjoined cases, the deferment rate to be used in the valuation of five properties in eight appeals concerning the tenants (T) and the landlord (L) in various capacities. The properties were subdivided into a number of flats, each the subject of an unexpired lease. In exercising their rights of collective enfranchisement in respect of those properties, the tenants applied to the Lands Valuation Tribunal for a determination of the premium payable in respect of the freehold of the properties pursuant to the Leasehold Reform, Housing and Urban Development Act 1993 Sch.6. The tribunal determined the premium in each case. As part of the process of determining the open market value of a freehold subject to a lease, the tribunal had to determine the deferment rate which should be used to arrive at the value, at the relevant valuation date, of the freehold valued with vacant possession, until a future date upon the expiry of the existing leases. Issues arose as to whether (i) the generic deferment rate identified in the case of Earl Cadogan v Sportelli (2007) 1 EGLR 153 Lands Tr and, in particular, the generic rate of five per cent in relation to flats, should be increased if, and in so far as, the property market would have been perceived to have been at or near the top of the property cycle at the relevant valuation dates; (ii) the generic deferment rate taken from Sportelli in relation to property No.31 and No.37 should be the appropriate rate for flats or the appropriate rate for houses to take into consideration the prospect of re-conversion to a single dwelling.
These appeals (heard together on these overlapping issues) concerned the deferment rate to be applied in enfranchisement valuations where the unexpired term was less than 20 years, the shortest being around 15.6 years.
The Upper Tribunal decided that the deferment rates to be applied in the valuations under appeal should be 5.25% or 5.5% (compared with the rate of 5% for unexpired terms of over 20 years), and that the deferment rate applicable to flats should be used (rather than that applicable to houses). The Tribunal also laid down guidelines to be applied in future cases as to how to identify the deferment rate where the unexpired terms are between 10 and 20 years.
Andrew Walker acted for the successful appellants in one of the appeals.
(1) In cases involving leases for unexpired terms of below 20 years, it was appropriate to apply the Sportelli formula as a starting point and then ask oneself whether the position in the property cycle at the relevant valuation dates should lead a tribunal to change one or more of the components of the formula, Sportelli applied. In the instant case on the evidence, it was not appropriate to alter the risk free rate in the formula and, accordingly, that it was not appropriate to regard the real growth rate and the risk premium as being coupled together: it might be appropriate to adjust one, but not both. Indeed, in a case where the argument was about expected growth rates, the obvious component to consider was the real growth rate and, in selecting the appropriate growth rate, it was important to remember that one was trying to value a property interest and, furthermore, to do so by reference to what hypothetical parties in the open market would have negotiated. That being so, and having regard to what hypothetical parties would have negotiated, the tribunal was able to determine the correct deferment rate in respect of each property, (see paras 158-164 and 188 of judgment). (2) The re-conversion of a property from flats to a single dwelling was irrelevant to the period before the term date. Accordingly, the deferment rates under consideration should, in every case, including No's.31 and 37 be those applicable to flats rather than houses, (para 192).
Preliminary issue determined
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