Valuation

The surveyor’s role is to assess the factors affecting value and obtain knowledge of comparable sales evidence in the area and consider the similarity in accommodation, lease length and condition of both your flat and recently sold properties.

 

The premium broadly comprises the following:

 

The loss of the ground rent income

 

The loss of receiving the flats back in the future (i.e. at expiry of the lease)

 

Share of marriage value for participating flats

 

Other compensation: i.e. share of marriage value for non-participating flats and development value and appurtenant land

 

 

Condition

 

For the purpose of our Valuation and in accordance with the 1993 Act (as amended) it is necessary to assume that you have complied with your obligations insofar as you are able to, to keep the flat in lease compliant condition. Any disrepair internally or externally due to the landlord is to be considered and if necessary any reduction in value should be considered.

 

Relevant Valuation Date

 

The valuation date for assessing the premium is not the date a surveyor’s report is prepared, but the date that the landlord receives your formal Notice (Section 13 Notice).  You must minimise the date between the valuation and the service of the Notice. Particularly as the lease term is close to 80 years.

 

The Legislation

 

The basis of valuation is found at Section 32 and Schedule 6 of the 1993 Act.

 

                (i) Value of the freeholder’s current interest

 

The value of the freeholder’s interest is the amount which at the valuation date might be expected to be realised if sold on the open market by a willing seller with four categories of buyer excluded on certain assumptions (Schedule 6 paragraph 3(1)).

 

In order to avoid double counting with the marriage value calculation the nominee purchaser and the tenants of the premises contained within the specified premises are excluded from the list of potential purchasers.

 

Also excluded are the freehold and leasehold owners of any additional properties which are to be acquired by the nominee purchaser, such as common parts or appurtenant property.

 

With reference to Hague on Enfranchisement, paragraph 27-03, the text states:

 

                         “It was presumably thought that such neighbouring landowners might be prepared to pay an excessive amount for the freeholder’s interest, thus driving up the price for the participating tenants.”

 

The four main assumptions are as follows:

 

(a)              Estate sold.  It is assumed that the vendor is selling for an estate in fee simple, subject to any leases subject to which the freeholder’s interest is to be acquired, and to any intermediate or other leasehold interests in the premises which are to be acquired.  This includes any rents payable under those leases.

 

(b)              No 1993 Act rights.  It must be assumed there are no rights to acquire any interest in the specified premises under the collective enfranchisement or new lease provisions of the 1993 Act.  (Hague at paragraph 27-04 states: “In practice, with almost all long leases now giving rise to 1993 Act rights, market comparables of sales of flats need to be adjusted to discount the fact that they have the benefit of rights under the Act.  It has to be said that the valuation must take place in the “non 1993 Act world”.”) (Daejan Properties Ltd v Weeks [1998] 3 EGLR 125, LT).  The exception would be where non-participating tenants have served a Section 42 Notice however in this instance this is not applicable.

 

(c)              Improvements.  There must be disregarded any increase in value of a flat held by a participating tenant which is attributable to an improvement carried out at his own expense by the tenant or any predecessor in title. 

 

Note on Improvements 

(Having regard to case law in relation to improvements, it is noted that repair of worn out items would not qualify as improvements.  Case law suggests that structural works are required such as structural works including the strengthening of kitchen units to facilitate the installation of granite worktops and the like.  Simple replacement with a modern day equivalent would be improvement.)

 

(d)              Rights and burdens.  It is assumed that (subject to (a) and (b) above) the vendor is selling with and subject to the rights and burdens with and subject to which the conveyance to the nominee purchaser of the freeholder’s interest is to be made, and in particular with and subject to such permanent or extended rights and burdens which are to be created in order to give effect to Schedule 7. 

 

                                Note on Hope Value

Other elements to be included relate to hope value.  If some flats do not participate since the judgement of the House of Lords in the Sportelli case last year, a further addition is required for hope value in relation to non-participating tenants. This hope value is a speculative proportion of marriage value based upon the “prospect” of future lease extensions. This will normally be between 10% and 25% of marriage value on non-participating flats.

 

(ii) Value of any Marriage value 

 

The second element to be paid relates to marriage value.  This is defined in the 1993 Act as:

 

                          “any increase in the aggregate value [Schedule 6 paragraph 4(2)] of the freehold and every intermediate leasehold interest in the specified premises, when regarded as being (in consequence of their being acquired by the nominee purchaser) interests under the control of the participating tenants, as compared with the aggregate value of those interests when held by the persons from whom they are to be so acquired being an increase in value:

 

(a) which is applicable to the potential ability of the participating tenants, once those interests have been so acquired, to have new leases granted to them without payment of any premium and without restriction as to the length of the term, and

 

(b) which, if those interests were being sold to the nominee purchaser on the open market by willing sellers, the nominee purchaser would have to agree to share with the sellers in order to reach agreement as to price.”

 

The Freeholder’s share of the marriage value is 50%.

 

(iii) Other parts to be Valued and Development Value

 

In relation to the other interests to be valued, this includes the premium required for the landlord’s “freehold” retained parts, such as the parking spaces.

 

In relation to development value, it is necessary to consider the prospect of further development of the building. In this regard there are two main issues. The first being is there planning permission obtained, for example relating to an additional floor or extension?  In this regard, is it known that the landlord has obtained a premium before for granting consent within the building or its appurtenant land? Also, does the lease allow it?

 

In order to provide a realistic approach to the prospect of development value a valuer will need to base opinion upon a reasoned speculation of any figure subject to information available at the time of valuation.

 

In the event of a Tribunal hearing in the future, if this element remains in dispute, a full feasibility study and residual development valuation will need to be undertaken. If planning permission exists it is very likely that a claim for development value would be successful.

 

(iv) Value of any Appurtenant Land

 

With regards to the appurtenant land, i.e. gardens, outbuildings and garages, a valuer will also consider in an enfranchisement claim if there is scope for further development potential to be argued in respect of the grounds to the property (its common parts) and as such if there is any justification for further premium in respect of the appurtenant land.

 

To this end a premium is apportioned between the value of the building and the appurtenant parts: in most cases a notional value is allowed for the appurtenant land. Case should be made with the appurtenant elements as this can be accepted in a Counter-Notice and put the matter outside of the jurisdiction of a Tribunal.

 

 

Calculating the reduction in the landlord’s interest:

 

                This is the sum of the:

 

(i)             capitalised value of the rental income to be derived from the existing lease; and

(ii)             the present value of the reversion in the flat before the lease extension.

 

 

A surveyor will consider negotiated settlements, recently published Leasehold Valuation Tribunal decisions together with experience and Case Law.

 

Simply Explained

 

The capitalisation of the ground rent income is at its basic level: “how much is the rent income from the lease worth if paid in a lump sum”. This is likely to be the smallest element of the premium.

 

The present value of the reversion is: “how much is paid for the freehold of the flat today for getting it back at the end of the lease.” This is assessed off a deferment rate or discount rate.

 

There is a quasi generic (or constant) deferment rate due to the series of “Sportelli” decisions that culminated in a House of Lords judgement at the end of 2008 at 5%.  Recently there was a Lands Tribunal case in Edgbaston at 6%: this allows scope to quote a lower premium figure but its success will depend on whether you are out of “prime Central London”, proving poor management, deterioration of the building and the long term performance of the market.

 

 

Marriage Value 

 

The marriage value is to be ignored in this case as the unexpired term on the lease is more than 80 years.

 

Relevant Values:

 

In considering the relative values comparable evidence is important as is experience in previous negotiations. Further consideration can be had to graph evidence of the surveyor involved, published research, such as the “Graph of Graphs” as referred to by the Leasehold Valuation Tribunal (LVT) and other determinations. Or by the RICS of a series of graphs requested by the Lands Tribunal Decision in Arrowdell Ltd v Coniston Court (North) Hove Ltd (LRA/TL/2005).

 

Relativity

 

Relativity is the expression as a percentage of the difference in value between a short lease and an effective freehold flat (i.e. one with a 999-year lease at peppercorn rent or “Share of Freehold”).

 

 “The Non-Act World”

 

The valuer should also note in the case of the statutory valuation of the existing lease, there is an assumption that a lease extension cannot be claimed. The usefulness of open market evidence was discussed in both the Arrowdell and Nailrile cases, the decision in relation to the Nailrile case was that the relevant discount for the “benefit of the Act” was 7.5% for a 44-year lease.  

 

Non-participation or Non-participating tenants

 

In relation to owners of flats who do not participate in a claim, the value of these flats is including any tenants’ improvements.

 

 

Valuation of Premium

 

The valuation will produce a range of figures due to the valuation factors noted above. That range would be expressed in the following terms:

 

Tenant:   Worst Case or Upper Valuation

Best Case or Lower Valuation

 

Landlord:               Worst Case or Lower Valuation

Best Case or Upper Valuation

 

For the purpose of quoting the premium payable within the Notice to be served (Section 13) on the landlord or Counter-Notice (from the landlord) the Best Case will invariably be quoted.

 

A caution for a tenant is that if you quote too low (an unrealistic figure) you may risk costs and up to a year or more delay.