Zuckerman v Calthorpe Estates

Factual and Procedural Background

This opinion concerns an appeal by leaseholders against a decision of the Leasehold Valuation Tribunal (LVT) of the Midland Rent Assessment Panel regarding the premiums payable for eleven lease extensions under the Leasehold Reform, Housing and Urban Development Act 1993. The properties involved are flats located at Kelton Court, Carpenter Road, Edgbaston, West Midlands. The LVT had fixed premiums based on a deferment rate of 5%, which was contested by the appellants seeking a higher rate of 6.5%. The appeal was heard by Judge Rose FRICS at Dudley County Court in September 2009. The LVT's determination related solely to the appropriate deferment (capitalisation) rate to be applied to the ground rent for the valuation of the extended lease. The appellants were represented by counsel and expert valuation evidence was presented by both sides. The court also inspected the properties during the hearing. The decision impacts approximately 20 other flats with pending appeals stayed awaiting this outcome.

Legal Issues Presented

1. Whether the deferment rate of 5% established in Sportelli for flats in Prime Central London (PCL) should be adjusted to reflect different growth rates and different rates of deterioration and obsolescence applicable to flats in the West Midlands, specifically Kelton Court.
2. Whether increased management burdens on flats following legislative changes warrant an increase in the management risk allowance within the deferment rate.
3. How to properly assess the risk premium component of the deferment rate for flats outside PCL, taking into account local market conditions, property values, and statutory requirements.

Arguments of the Parties

Appellants' Arguments

• The deferment rate of 5% from Sportelli should be increased due to greater risk of obsolescence and deterioration of flats in Kelton Court compared to PCL flats.
• Statistical evidence shows lower long-term capital growth rates in the West Midlands compared to PCL, justifying a higher risk premium.
• The management burden for flats has increased following the introduction of the Commonhold and Leasehold Reform Act 2002 and the Service Charges (Consultation Requirements) (England) Regulations 2003, necessitating a higher management risk allowance than the 0.25% used in Sportelli.
• The cumulative effect of these factors supports a deferment rate of approximately 6.5%.

Respondent's Arguments

• The deferment rate of 5% established in Sportelli remains appropriate for Kelton Court flats, as there is no sufficient evidence to justify a departure.
• Available indices and statistics are unreliable or insufficient to demonstrate any sustained difference in long-term growth rates between PCL and the West Midlands.
• Deterioration and obsolescence risks are not materially greater at Kelton Court; repair and maintenance obligations mitigate these risks, and obsolescence is reflected in vacant possession value.
• Management burdens and legislative impacts apply equally to flats in both areas; the 0.25% management risk allowance remains suitable.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began with the established 5% deferment rate from Sportelli for flats in Prime Central London, which comprises a risk-free rate of 2.25%, a real growth rate of 2%, a risk premium of 4.5%, and a management risk allowance of 0.25%. The court examined whether this starting point was appropriate for Kelton Court flats in the West Midlands, considering evidence on differences in property values, growth rates, obsolescence, deterioration, and management burdens.

The court found that the significantly lower capital values of Kelton Court flats compared to PCL flats meant that the economic viability of repairs and refurbishment was lower, increasing the risk of deterioration not reflected in vacant possession values. This justified an increase in the risk premium by 0.25% to 4.75%.

Regarding future growth prospects, the court accepted that available long-term statistical data were imperfect but nonetheless showed a clear pattern of higher long-term growth in PCL compared to the West Midlands. The court concluded that an investor would reasonably anticipate slower growth in Kelton Court, warranting an additional 0.5% increase in the risk premium to 5.25%.

On management risks, the court considered the impact of the 2002 Act and the 2003 Regulations, which increased the procedural and financial risks for landlords of flats. The court accepted expert evidence that these risks had become more significant since Sportelli, justifying an increase in the management risk allowance from 0.25% to 0.5%.

In sum, the court adjusted the risk premium upwards from 4.5% to 5.25% and the management risk allowance from 0.25% to 0.5%, resulting in a deferment rate of 6%. This was deemed appropriate to reflect the local market conditions and legislative environment affecting the flats at Kelton Court.

Holding and Implications

The court ALLOWED THE APPEAL and increased the deferment rate from 5% to 6% for the valuation of the lease extensions on the eleven flats at Kelton Court. This adjustment resulted in revised premiums payable by the leaseholders: £8,150 for flat 33 and £8,100 for each of the other flats.

The decision directly affects the parties involved and approximately 20 other pending appeals for flats in the same area, which had been stayed pending this ruling. No new precedent was established beyond the application and adjustment of the Sportelli principles to a different locality with supporting evidence. The ruling emphasizes the necessity of considering local market conditions, property values, legislative changes, and management burdens when determining deferment rates for leasehold valuations outside Prime Central London.