In the Tribunal, experts need to know what a successful outcome looks like. If you consult a life coach, or listen to a motivational speaker, it will be more than likely that within their repertoire of “take away” one liners, the mantra of “you need to know what success looks like” will be high up on their list of ways to achieve your goals, ambitions and even perhaps even enlightenment.
As expert advisors, that mantra should be our driving force. If followed, not only is it of great reputational value, it is also, and more importantly, advantageous for our clients’ wallets and peace of mind.
A recent FtT case put the spotlight on how failing to recognise what success looks like at Tribunal resulted in a case that lacked any monetary gain. It didn’t even warrant the cost of the journey to the Tribunal, let alone the expense of preparation and attendance.
The case involved yet another property in East London where a house, containing two modest flats, was being enfranchised. One of the leases had 66 years and the other 120 years unexpired.
The matters in dispute were the capitalization rate and the long lease values.
The ground rent of the short lease was a nominal £30 for the first 25 years, rising to £75 for the final 25, whilst the long lease rent was £200 for the first years 20 doubling every 20 years thereafter, whereby in odd 60 years’ time the rent was £1,600 per annum or increased with reference to RPI.
With regards to long lease values, the applicant was at an amazingly precise £343,422 and £342,679 for the 2 flats, whilst the respondent took an overview of £355,000 for both.
When it came to the determination the Tribunal expounded that the applicant had considered the findings in Nicholson and Goff 2007 as best guidance. One factor for the determination of a capitalization rate is the provision of review, and in this case, in 60 odd years’ time, the rent would be linked to RPI.
The Tribunal thought it was a relatively good ground rent review for an investor and determined a capitalization rate of 6%, and also that the Tenant’s expert conceded it was also a reasonable rate to be applied. So, to my reading, there was no argument or dispute.
Regrettably this tale doesn’t become more interesting when it came to the determination of the long lease values, except that the Tribunal explicitly “marked the experts’ cards”. They worked out, very quickly no doubt, that the parties were only 3.50% apart in terms of value, and that the difference between them made no material difference and ‘should have been agreed prior to the Tribunal’.
Against the background of this valuation futility the Tribunal took the average of the applicant’s values and the value from the respondent, and split it down the middle.
To my calculation, in premium terms the parties were £500 apart for the total loss of the reversion for the two flats, whilst for the long lease alone, the dispute was over £35. The total dispute was over £3,200 and once the Tribunal split the difference, the applicant had to pay £1,700 more than proposed whilst the landlord respondent received £1,500.
So what wisdom can be learnt and how might we avoid falling into the same trap?
Practitioners need to recognize that, with respect, a Tribunal is the journey’s end, the place of last resort, where the need of independent review is required as there is a stand-off between the parties. In other words “there was simply no other way to reach a resolution”.
In practical terms, before experts advise their clients to venture into the Tribunal - where any control of the outcome is removed and before they “pull the trigger” - they need to know what a successful outcome will look like.
It would appear that in this case the outcome was ignored, as even before it had started, it could only have gone one way: into the abyss. Having said that, I am now left with a nagging unanswered question.
At any time leading up to the hearing, did anyone think to ask me “what is the variable in dispute, and what effect does that have on the premium”?
With all but certainty, had that simple question been asked, then a pointless hearing would have been avoided.
Mark Wilson, Managing Director at myleasehold Ltd