We are often asked to explain what is involved in the valuation issues relating to lease extensions and collective enfranchisements under the Leasehold Reform Housing and Urban Development Act 1993 (“the Act”). Whilst our first instincts are always to advise people that they need expert professional help from a Valuer experienced in these matters such as Valuer members of ALEP we thought it might be useful to explain the process. This article is simply an overview and a professional valuation should always be obtained.
The principles for what is required are set out in Schedule 6 for collective enfranchisements and Schedule 13 of the Act for lease extensions. The principles for each are similar and both are based on “market value”. The reality is that this idea of “market value” is somewhat false often involving various assumptions or discounts.
The valuation date for both types of claim are the date of actual service of the Notice. This fixes the date and the valuation is calculated having regard to the facts at that point in time. This can be very important particularly when some claims do not have the price actually determined until sometime (even years) later.
The price payable for a collective enfranchisement is the total of:
• The value of the freeholders interest if sold on the open market
• The freeholders share of the marriage value
• Any compensation.
For lease extensions it is:
• The reduction in the value of the freeholders interest
• The freeholders share of the marriage value
• Any compensation
So what does this all mean in practice? Taking the elements in turn:
Marriage value is the extra value which is gained when the freehold and leasehold interests come together. In collective enfranchisement claims it is only payable in respect of those flats actually taking part and for both following amendments made to the Act the amount payable is fixed at 50% of any marriage value unless the unexpired term exceeds 80 years in which case no addition is made for marriage value. It is this amendment which has meant that it is vital that Leaseholders and their advisers give careful regard to lease terms getting shorter.
Given marriage value only applies directly to those participating on occasion when you have a block with differing lease terms it may not be beneficial to have all leaseholders participating and it is worth highlighting that individual leaseholders cannot demand to be part of the process if others will not allow them to join. An amendment was made under the Commonhold and Leasehold Reform Act 2002 which would have forced all leaseholders to be given an opportunity to join using what was known as Right to Enfranchise Companies (RTE) however these amendments were never given force and in fact are due to be repealed. That being said it is not unknown for notices to be served by only some leaseholders on the understanding that once they have the freehold others will then join in or be given an extension but if freeholders become aware of this (and they are entitled to have notice of any agreements made which may affect value) they can pursue recovery of any value they may have lost.
Compensation is then to compensate the freeholder for any direct loss of value, or reduction in the value of the interest as a result of the process. Often in the various cases this relates to what is known as “Hope Value”. Generally this tends to come into play with collective enfranchisement claims more so than lease extensions.
For the purposes of this article there are two main types. Firstly on enfranchisement claims it will be an amount assessed having regard to the marriage value that is likely at some point in the future to be paid by non-participating flats. A percentage is assessed as to what sums at a later date would be paid by these leaseholders for a lease extension. The second is for loss of any redevelopment potential. The most common scenario is when a freeholder asserts that they could or would be able to build some additional units at the property. It will be a question of looking at all the evidence such as any planning history and assessments which have been undertaken to see whether this is real or imagined to then calculate what value should be attached to this.
Finally there is the value of the Freeholders interest. There are two main parts to this. The capitalised value of the ground rent and the value of the freehold with vacant possession deferred until the end of the unexpired term.
For the ground rent it is a question of working out what the total value of the ground rent is worth at the valuation date. This is a formula calculating the current annual ground rent income, assessing the type of percentage return an investor would want and then calculating the value given the number of years the landlord would be entitled to this income under the current lease(s).
As for the freehold this is a question of calculating the unimproved vacant possession value in what is referred to as a “No Act” world. Generally this will be less than the actual value of the Unit. The idea is to calculate the amount an investor would pay now on the basis that at the end of the lease term they would recover vacant possession. Again once the vacant possession value is calculated then a percentage of this is calculated for what would be paid at the valuation date of that possibility occurring.
These amounts are then added up to give the premium which can be payable.
The process is complicated and does require a thorough understanding of all the valuation principles not least since many of the percentages and rates applied to the actual valuation numbers are calculated having regard to various tables and graphs. The whole area of valuation has given rise to a substantial body of case law as to what percentages should be applied in what situations and almost every aspect of the valuation formula has at one time or another led to cases in the House of Lords (as it then was) or the Supreme Court.
With good advice these issues can be readily tackled and a valuation produced. Given that valuation is an art rather than a science usually you will be advised as to a best, worst and likely figure since as with all valuations there is always room for negotiation!
If you need help or further guidance we would be happy to help.
Filed under: England & Wales, FLW Article, legislation, long lease
24 April, 2012 • 09:10 4
Daejan v. Benson: where are we at?
We have made various posts about service charges etc on long leaseholds but still have questions asked about the infamous case of Daejan v. Benson.
To recap this started life as an LVT claim as to whether service charges were recoverable or if they were capped due to a failure by Daejan to comply with Service Charges (Consultation Requirements) (England) Regulations 2003 and subsequently on application to dispense with the need to consult under the Landlord and Tenant Act 1985. In both instances the LVT found against Daejan who appealed to the Upper Tribunal (Lands Chamber) who in November 2009 upheld the LVT decisions. So off went Daejan to the Court of Appeal.
The Court of Appeal gave its judgment in late January 2011 (Daejan Investments Ltd v Benson & Ors). The Court of Appeal upheld the previous decisions and therefore found against Daejan. Not put off Daejan sort leave to appeal to the Supreme Court and was granted the same at the end of June 2011. Currently we understand that the matter is likely to be heard by the Supreme Court and judgment given towards the end of this year.
So where does this leave the law? If you are a Landlord (whether arms length or residents) you must ensure that you comply with the Section 20 Consultation requirements to the letter! To do otherwise leaves you open to significant risk that costs will not be recoverable. As the law stands the financial consequences to the freeholder are not a matter for the LVT to take account of when considering prejudice. What needs to be shown is that a failure to comply must not cause any genuine prejudice to the Leaseholders. Whilst LVT’s may have substantial sympathy with residents management companies under the regulations no differentiation is made. LVT’s currently are likely to take a strict view given the fact that the current statement of the law was supported by both the Upper Tribunal (Lands Chamber) and the Court of Appeal.
Landlords and those advising them do have options. Given the serious ramifications of a decision going against a Landlord after works have been completed it is worth bearing in mind that they can apply for a prior determination. When there is opposition to a scheme and it is clear from the conduct of some leaseholders that they will challenge the works this may mean despite there being a delay that an application should be made to the LVT. Given most LVT panels can hear cases with fairly short timescales ( assuming no appeals) then this can be factored in to the process and quotes etc can be obtained which perhaps have a longer “shelf life” than normal to allow for an application. It seems to us that given the various rules and regulations specifically allowing prior determinations this must be the prudent step given that it provides Landlords with a safety net to check compliance if any doubt in the Landlords or their agents mind.
We will of course have to see what view the Supreme Court takes and we will be sure to blog on this when we know more!
Filed under: England & Wales, FLW Article, comment, legislation, long lease, procedure, Section 20