Introduction

The case Contactreal Ltd v. Smith Re Hitchman Court ([2017] UKUT 178 (LC)) was adjudicated by the Upper Tribunal (Lands Chamber) on May 16, 2017. The dispute centered around the valuation of a premium payable for the extension of a lease under the Leasehold Reform, Housing and Urban Development Act 1993. The appellant, Contactreal Limited, contested the First-tier Tribunal's (Property Chamber) determination of a £6,750 premium for Flat 23 at Hitchman Court, Leamington Spa. The key issues revolved around alleged arithmetic errors, the benefit of the 1993 Act, deferment rate adjustments, Schedule 10 rights implications, and the appropriate valuation of the extended leasehold.

Summary of the Judgment

The Upper Tribunal allowed the appeal in part, overturning the First-tier Tribunal's premium assessment. The primary determinations included:

• The premium was adjusted from £6,750 to £8,300.
• An allowance for the benefit of the Act was set at 3.5%, rejecting the First-tier Tribunal's position that no such adjustment was necessary.
• The deferment rate was modified from 5.75% to 5.5%, acknowledging some justification for adjustment but not to the extent initially determined.
• An allowance for Schedule 10 rights was reduced from 4% to 2.5%, indicating a lower risk of tenant retention under assured tenancy.
• The freehold vacant possession value was adjusted to 99% of the market value, countering the First-tier Tribunal's assertion that a 99% valuation was uncommon in the Midlands.

Analysis

Precedents Cited

The judgment referenced several key cases that influenced the tribunal's decision:

• Cadogan (Earl) v Cadogan Square Limited [2011] UKUT 154 (LC)
• Sarum Properties Ltd v Cooley Stuart Webb & Others [2009] UKUT 188 (LC)
• Nailrile Limited v Earl Cadogan [2009] RVR 95
• The Trustees of the Sloane Stanley Estate v Mundy [2016] UKUT 0223 (LC)
• Denholm v Stobbs [2016] UKUT 0288 (LC)
• Re Coolrace Limited’s Appeal [2012] UKUT 69 (LC)
• Zuckerman v Trustees of the Calthorpe Estate [2009] UKUT 235 (LC)
• Re Sinclair Gardens Investments (Kensington) Limited’s Appeal [2014] UKUT 0079 (LC); [2015] EWCA Civ 1247

These precedents provided foundational principles regarding leasehold valuation, benefits under the 1993 Act, and deferment rates. Notably, cases like Nailrile Limited v Earl Cadogan and The Trustees of the Sloane Stanley Estate v Mundy underscored the market value adjustments attributable to statutory rights and lease terms.

Legal Reasoning

The Tribunal's legal reasoning was methodical, addressing each ground of appeal sequentially:

• Arithmetic Adjustment: The Tribunal found no error in the arithmetic adjustments made by the First-tier Tribunal, affirming the £87,000 valuation as accurate.
• Benefit of the Act: Contradicting the First-tier Tribunal, the Upper Tribunal recognized the benefit conferred by the 1993 Act, setting a 3.5% adjustment based on the unexpired lease term.
• Deferment Rate: A nuanced approach was adopted, slightly lowering the deferment rate to 5.5% after considering regional growth rates and property-specific factors.
• Schedule 10 Rights: The Tribunal reduced the allowance to 2.5%, reflecting a balanced view on the risk of tenant retention and redevelopment.
• Freehold Vacant Possession Value: Aligning with broader valuation principles, the Tribunal adjusted the value to 99% of the freehold, acknowledging the qualitative differences between leasehold and freehold tenures.

The Tribunal emphasized the importance of contextual and regional factors in lease valuation, rejecting blanket applications of precedent and highlighting the necessity for property-specific analysis.

Impact

This judgment has significant implications for future leasehold enfranchisement cases:

• Enhanced Recognition of Statutory Benefits: Affirming the necessity to account for the benefits under the 1993 Act, especially as lease terms decrease.
• Refined Deferment Rates: Providing a more tailored approach to deferment rates based on regional market dynamics and property-specific conditions.
• Clarification on Schedule 10 Rights: Offering a balanced framework for assessing the risk of tenant retention, indirectly influencing landlord strategies and tenant negotiations.
• Valuation of Leasehold vs. Freehold: Reinforcing the principle that even long leases hold less value than freeholds, promoting more accurate premium assessments.

Practitioners in the field of leasehold enfranchisement will need to consider these refined valuation principles to ensure compliance and accuracy in future assessments.

Complex Concepts Simplified

Benefit of the Act

This refers to the advantage leaseholders gain under the Leasehold Reform, Housing and Urban Development Act 1993, which allows them to extend their leases or purchase the freehold. The Tribunal recognized that possessing statutory rights under this Act increases the value of the leasehold interest.

Deferment Rate

The deferment rate is a discount applied to future rental income to account for its present value, considering factors like economic growth and property obsolescence. Adjusting this rate impacts the overall valuation of the lease.

Schedule 10 Rights

Under Schedule 10 of the Local Government and Housing Act 1989, landlords may have rights to regain possession of a property under certain conditions. The Tribunal assessed the risk of these rights being exercised post-lease, affecting the lease's value.

Conclusion

The decision in Contactreal Ltd v. Smith Re Hitchman Court sets a pivotal precedent in the realm of leasehold enfranchisement valuations. By meticulously addressing each contested issue and refining valuation principles, the Upper Tribunal has provided clearer guidance for future cases. Key takeaways include the essential consideration of statutory benefits under the 1993 Act, the need for region-specific deferment rates, and a balanced approach to assessing Schedule 10 rights. This judgment underscores the complexity of leasehold valuations and the importance of a nuanced, evidence-based approach in legal determinations.