City & Country Properties Ltd v Yeates

Factual and Procedural Background

This opinion concerns an appeal from a decision of the Leasehold Valuation Tribunal (LVT) for the Southern Rent Assessment Panel dated 22 November 2010. The LVT determined the premium payable by the Respondent for the grant of a new lease of a flat in a block of flats located in Horsham, West Sussex (the Property). The appeal relates specifically to the appropriate deferment rate to apply in calculating the diminution in value of the landlord's interest under the Leasehold Reform, Housing and Urban Development Act 1993.

The Property is described as a first floor flat in a 4-storey block of 54 flats built circa 1930, situated in a secondary location with limited parking and poorly maintained communal areas. The block suffers from management and maintenance issues, including a non-functioning lift at the time of inspection and a generally tired appearance.

The lease structure includes the Appellant as the original lessor, the Respondent as the tenant of the flat, and a head lease granted to a head lessee (now vested in a third party company) who manages the block and holds the head leasehold interest. The LVT determined the premium payable to both the head lessee and the freeholder.

Legal Issues Presented

1. Whether the deferment rate of 5% established in Cadogan v Sportelli should be adjusted to reflect different long-term growth prospects between Horsham and Prime Central London (PCL).
2. Whether an additional adjustment to the deferment rate should be made to reflect increased management burdens associated with flats, including the effect of the 2003 Regulations and the presence or absence of a head lease.
3. Whether any adjustment for obsolescence should be applied to the deferment rate (not subject to appeal in this case).

Arguments of the Parties

Appellant's Arguments

• The starting point for the deferment rate is 5% as established in Sportelli, with an additional 0.25% for obsolescence already accepted and not under appeal.
• The Respondent bears the burden of proof to justify any further increase in the deferment rate, which they have failed to do.
• No additional 0.25% should be added for management risk because the head lessee assumes management responsibilities, insulating the freeholder from such risks.
• The LVT erred in preferring the Sportelli analysis but then applying the additional uplift from Zuckerman inconsistently; the correct approach is to apply only the 0.25% uplift for management risk regardless of the presence of a head lease.
• The 2003 Regulations have been assimilated by the market, and there is no evidence of increasing management difficulties at the valuation date.
• The risk that the head lessee would fail and the freeholder would have to resume management is minimal.
• The evidence on growth rates is insufficient to justify an uplift; statistical data covers too short a period and is unreliable due to differences in property types, lease lengths, and improvements.
• Comparisons with other areas and properties do not conclusively demonstrate a lower long-term growth rate in Horsham relative to PCL.

Respondent's Arguments

• The appeal is the Appellant's burden, and the Tribunal should not lightly interfere with the LVT decision.
• The 0.25% uplift for management risk established in Sportelli applies regardless of a head lease; thus, the total uplift should be 0.5% to reflect increased management difficulties under the 2003 Regulations.
• Management problems have increased due to the stricter consultation regime, as evidenced by rising service charge disputes and related tribunal applications.
• The head lessee may fail or become insolvent, forcing the freeholder to resume burdensome management responsibilities, justifying the additional uplift.
• Evidence on capital growth prospects shows a reasonable basis for believing that Horsham has lower long-term growth prospects than PCL, consistent with the approach in Zuckerman.
• The hypothetical purchaser would adopt a limited but reasonable investigation approach and conclude that the risk premium should reflect these growth differentials.

Table of Precedents Cited

Court's Reasoning and Analysis

The Court began with the established 5% deferment rate from Sportelli, which includes a risk-free rate, a deduction for real growth, and a risk premium. The LVT had increased this rate to 6% by adding 0.5% for lower growth prospects in Horsham compared to PCL, 0.25% for obsolescence (not under appeal), and 0.25% for management risks.

Regarding management risk, the Court analyzed the relevant passages in Sportelli which prescribe a 0.25% uplift for flats due to inherent management risks, regardless of the presence of a head lease. The Court acknowledged the Zuckerman decision, which allowed an additional 0.25% uplift reflecting increased management burdens arising from the 2003 Regulations and their market impact.

The Court accepted the LVT's factual findings describing the Property's condition and management accounts, including overdrawn service charge accounts and increasing arrears. However, it found no compelling evidence of exceptional management difficulties beyond those reflected in the vacant possession value of the flat. It emphasized that features fully reflected in vacant possession value should not also justify an adjustment to the deferment rate, to avoid double counting.

Nonetheless, the Court agreed with Zuckerman that the 2003 Regulations had increased management risks and market awareness of those risks by the valuation date. Consequently, an uplift of 0.5% (0.25% standard plus 0.25% additional) for management risk was justified unless clear evidence showed the freeholder would not bear these risks. The Court found no such evidence here, as the head lessee's financial position and the risk of failure were uncertain.

On capital growth, the Court reviewed the evidence comparing Horsham and PCL. It noted that reliable evidence ideally covers 50 years, and shorter periods are generally insufficient. The evidence presented was limited, with some data covering only 11 to 19 years and some of limited relevance. The Court rejected the Respondent's argument that a hypothetical purchaser would rely on a simplistic, short-term "back of a fag packet" approach, emphasizing instead a prudent and knowledgeable purchaser's perspective.

Accordingly, the Court concluded that the evidence did not justify increasing the deferment rate to reflect lower growth prospects in Horsham compared to PCL, reversing the LVT's 0.5% uplift on this ground.

Holding and Implications

The Court's final decision was to allow the appeal on the issue of capital growth and dismiss the appeal on the issue of management risk. The deferment rate was adjusted downward from 6% to 5%, reflecting no increase for growth risk but maintaining the full 0.5% uplift for management risk (0.25% standard plus 0.25% additional).

HOLDING: The premium payable for the lease extension is calculated using a deferment rate of 5% rather than 6%.

Implications: The decision confirms the applicability of the Sportelli deferment rate as a starting point, with justified adjustments based on compelling evidence. It clarifies that management risk uplifts should be applied consistently regardless of head lease existence unless clear evidence dispels the risk. It also affirms that prudence and knowledge characterize the hypothetical purchaser's valuation approach, rejecting simplistic short-term analyses for growth prospects. The ruling affects calculation methodology for leasehold enfranchisement premiums but does not establish new precedent beyond confirming existing principles.