Sloane Stanley Estate v Carey-Morgan - A never ending story 

The tribunals were asked to consider a number of issues:

a.  The existing leasehold vacant possession values of the flats that have less than 5 years unexpired.

b. Whether there was potential to undertake additional residential development on the roof; if so, whether there is a prospect of obtaining planning consent, and, if so, the value of that potential.

c. Hope value in respect of the 5 non-participating flats with terms of less than 80 years unexpired.

d. Deferment rate relating to those flats with less than 5 years unexpired.

e. Landlord's proposed terms of transfer.

The First Issue – Relativity

The Upper Tribunal again rejected the use of past LVT decisions as evidence of relativity in subsequent proceedings. For a lease with an unexpired term of 4.74 years, the landlord’s valuer had identified an unimproved rental value for the flat and then capitalised it to the end of the term to calculate the appropriate relativity. The Upper Tribunal agreed with this approach in accordance with paragraph 4.6 of RICS Research Report: Leasehold Reform: Graphs of Relativity (2009). It therefore determined relativity at 8% for an unexpired term of 4.74 years and, significantly, decided that graphs of relativity were not appropriate for such short terms.

The Second Issue - Development Value

This element of the decision is largely dependent on the particular facts. Despite evidence from the landlord’s expert witnesses suggesting a 60% plus chance of obtaining a planning consent for a roof development, it is clear tribunals remain reluctant to award anything other than a nominal sum for potential development value, unless there is a planning consent in place. Alternatively, it seems there must be a positive view from the planning authority on the development prospects.

The Third Issue – Hope Value

The leases considered had unexpired terms of 70.25 years (1 flat) and 4.74 years (4 flats). The Upper Tribunal expressed hope value as a percentage of the overall marriage value (as opposed to a percentage of the landlord’s share). A purchaser will weigh up the circumstances relating to each non-participator, and the percentage of hope value that he would apply would reflect those circumstances. Here, the tribunal determined hope value for flat 1 (70.25 years unexpired) at 10% of overall marriage value (following Culley) and for the other four flats (4.74 years unexpired) at 20%.

The Fourth Issue – Deferment Rate

The tribunal decided that the widely publicised Sportelli formula is not to be applied to very short-term reversions because they have different characteristics. Long-term reversions were comparable to financial interests and should be valued as such. However, short-term interests are more akin to freehold interests. Accordingly the starting point should be the value of the freehold interest, to which explicit adjustments are made to reflect the fact the right of possession is deferred.

The potential for the three elements of adjustment are as follows:

a.  The value of possession that is lost during the currency of the lease. This can be allowed

for by discounting (applying Present Value) at the net rental yield

b. Loss of control until possession. This can be reflected by either an end allowance or an adjustment to the yield.

c. Real growth. The Tribunal accepted the time horizon of a purchaser of a short-term reversion will go beyond the reversion itself with the expectation of retaining the freehold, possibly for a long time after the reversion. The purchaser can look forward to being able, within a short time, to let, occupy, keep vacant or redevelop (as he chooses) the property. Freehold vacant possession prices will always reflect market sentiment about short-term future price levels. The tribunal concluded that the purchaser of a short term reversion would, as regards growth and future price movement, take no different view from that of a purchaser of the freehold in possession and consequently would not make any allowance for possible movements during the period of the reversion. 

The Tribunal concluded on the evidence there should be a deferment rate of 4.37% based on a net rental yield of 3.25% (the first element of adjustment) with a 5% end allowance for lack of control (the second element of adjustment).

Importantly, as a matter of valuation guidance, the Tribunal concluded that the deferment rate for reversions of less than 5 years should be the net rental yield that the evidence shows to be appropriate for the property in question. In addition there should be an end allowance which, in the absence of evidence establishing some other percentage, should be 5%.

The Fifth Issue – the terms of transfer

The landlord sought to include in the transfer deed a qualified covenant against alterations and a declaration regarding rights of light and air. However, it was unsuccessful retaining these provisions. It was held that evidence is required to establish a restriction will materially enhance the value of other property being retained, although quantification of such enhancement in value is not needed. A party cannot rely solely on submissions of Counsel.

The decision provides useful guidance for the determination of a deferment rate, relativity and hope value for short-term reversions. It also bears testament to the continuing debate on these issues and the important financial consequences they elicit.

The nominee purchaser has applied to the Upper Tribunal for permission to appeal to the Court of Appeal on those parts of the decision concerning relativity, deferment rate and hope value.

Damian Greenish is Senior Partner and Anna Favre a Solicitor at Pemberton Greenish LLP