the 4th lease annual conference 2006

London

Damian Greenish, Senior Partner, Pemberton Greenish, the Conference Chairman, opened the conference by saying that three major topics had dominated the leasehold sector over the last 12 months: reviews of the definition of what is a house for the purpose of enfranchisement; valuing head leases and the subject of improvements.

He also said that the issue of deferment rates had very much come to the fore, rocking the leasehold markets, particularly post-Arbib and observed that the LVT – with its broadening jurisdictions - and the Lands Tribunal are rapidly becoming considered as the UK’s official ‘property courts.’

David Marcus, Chairman of LEASE, remarked that a major milestone in the Leasehold Advisory Service’s 12-year history has now been reached: LEASE is no longer just a consumer organisation, it is now also a recognised official government body under the newly formed ministry, the Department for Communities and Local Government (DCLG), formerly ODPM. LEASE has an annual budget of £1m and employs 20 full time staff to attend to leaseholder’s enquiries.

Marcus commended Peter Haler, LEASE’s Chief Executive, for doing a tremendous job in bringing the organisation to the forefront of the leasehold community and concluded that LEASE must now move on to the next phase of its strategic development.

Jennifer Ellis analysed in detail the consequences of the oft-quoted so-called Arbib decision on leasehold valuations. She said that the goalposts for deferment rates since the Arbib decision have now moved. While the property in question is in the Cadogan Estate in Chelsea, Ellis is confident that the decision will send out ripples that will in time affect other London suburbs and even the UK provinces.

The background to this case is the determination of the price payable to the landlord (freeholder) under enfranchisement. Only the value on reversion was considered in the Arbib v Earl Cadogan case, and not the other Landlord’s interests. The value on reversion is calculated by an equation that incorporates the deferment rate, or yield. This had been set by little other than convention on the Cadogan Estate – and other similar properties in the same area - at 6%. In the Arbib case, the Lands Tribunal determined that the deferment rate should be reduced from its historic 6% to 4.5%, making the compensation payable to the freeholder under enfran-chisement greater. Ellis provided a mathematical model to indicate the financial consequences. She demonstrated that if the deferment rate is reduced from, say, 7% to 5% on a property valued at £250,000 (value on reversion) with 60 years unexpired on the lease, the amount payable to the landlord would be over three times greater. 

The Lands Tribunal decision states: ‘There is not and never has been a binding ‘convention’ of 6%. The deferment rate in each case must be individually determined on the evidence.’ Ellis pointed out that 6% had become a benchmark for central London properties as the bank rates came down and stabilised over the years.

The fact that the deferment rate cannot henceforth be ‘assumed’ to be 6% marks a real sea-change in the approach to leasehold valuations. In determining the correct deferment rate property interests must now be valued by reference to money markets. The Arbib Decision states: ‘In the absence of reliable evidence resort must be had to the money market to assess deferment rates’. For many, Ellis said, this is highly questionable and downright baffling. The LT, she said, has opened up swingeing changes to the valuation process. And the story is not over yet, as suburban London and other areas are unlikely to escape rates of 4.5%- 4.75%.

Richard Dalton of estate agents, Savills, spoke about the current market and forecast for the prime central London flats market in the context of the Arbib decision.

Growth in values in the central London upper market has gained momentum – values rose 9.2% over the last 12 months. Within the prime central London sector, the highest growth in Q1 2006 was in the Kensington, Holland Park, Notting Hill areas.

Dalton found that there is strong correlation between the performance of the FTSE 100 market and housing price inflation in prime central and southwest London.

Although the top end of the market appeared to be leading the upturn in prime residential values towards the end of 2005, in Q1 2006, the best performing price bands were less than £500,000 with 8.6% annual growth.

Dalton said that the £2,000 per sq foot barrier had been well and truly broken at the upper end of the market, with many top end properties now commanding £3,000 per sq foot. There is a particularly strong demand for large flats, especially above £5,000,000. Service provision has become a market trend in the top end market.

Dalton looked at the market situation for short leases. He concluded that purchasers’ priority is overall cost, not lease apportionment: in other words, the major concern to today’s buyers is to get long leases, not the extra item cost of lease extensions. There is much greater informedness now among buyers about leases and at the same time there is improvement in the advice available to purchasers of short lease property.

For certain categories of buyers, the term of the lease itself is not always the overriding factor. Today’s market has a variety of buyers with a range of requirements and priorities: for some( eg. the elderly) a flat’s location or street address may well be the priority and not the unexpired years.

Dalton said that from professional experience in the sale of short lease properties it’s increasingly essential that the agent manages the process professionally and provides advice to both parties on the costs of extensions. Legal advice is needed, such as the qualification for lease extension and the preparation of Section 42 Notice.

In conclusion, Arbib has undoubtedly had an impact on short lease values. There is greater awareness now of the issues involved, the way advice is given regarding leases has improved and there is greater knowledge among both parties about what is involved. Small changes to the property market do have a noticeable effect on prices; costs for vendors and purchasers have grown, but the sooner clarity is given the better for all parties.

The sources of data quoted in Dalton’s research presentation were Savills Research and Nationwide.

Alastair Smith of Sydney-based Strata Associates, spoke about methods of running property management businesses efficiently. The innovativeness shown by his own company should be a lesson for UK property management business leaders.

Australian strata agents are government-regulated companies. There is a rapidly growing demand for their service, as strata tile is the fastest growing system of property ownership in Australia. (A ‘strata’ title refers to a freehold unit within a block or complex with common parts)

Smiths’ experience of the Australian property management industry in general was that there were several problems endemic in the businesses, including lack of business planning, poor day to day management practices and widespread levels of client dissatisfaction. Despite this the industry presented a serious opportunity to make money and build a successful business based on stable income streams.

The last five years have witnessed a positive change in the Australian property management industry, namely that there is now a higher quality recruitment pool to the sector, strata ownership is having a big impact on consumers and vocational education standards for strata managers are improving. Today in Australia, said Smith, if you can’t provide a quality service as a management business, then you have a real problem.

Smith illustrated the improving revenue mix to strata management businesses. The most important change is the increasing proportion of time-billed and secondary service fee income over fixed sales. This is proving to be the single biggest contributor to strata agents’ profitability. Smith’s analysis of his own company’s revenue mix and profit is that it makes a positive impact on the business’s margin to increase fees by 25%, weed out poor clients, reduce the total number of managed units and introduce more time-charging.

Some innovative examples of Stata Associates’ customer service initiatives include client web pages administered free of charge that include various elements of community information; regular customer surveys to monitor satisfaction levels; service shortcomings followed up personally by a director and a newsletter provided with every service charge notice.

With reference to third–party commissions, Smith issued a word of caution that property management firms have become over-dependent on revenue from insurance commissions and believes that they should look for alternatives to such commissions in developing pricing strategies.

In terms of personnel, Smith identified very real problems posed by firstly, the lack of quality personnel available / willing to work in the industry and secondly, the internal problems of how to create career path opportunities and motivate and retain staff within a strata management business. The problems are that the job lacks imagination and that flat management hierarchies prevent clearly defined career progress. Strata Associates have overcome both these obstacles by creating ‘cluster management’– small management units within the larger business are led by a team leader who typically manages two portflolio managers, a financial manager and an assistant/ co-ordinator. ‘Cluster management’ has shown to lead to healthy internal competition, a better team spirit and most importantly, a small business service mentality is achievable within a large business

Should the property management industry be a regulated service, especially given the substantial funds held in client accounts by property management firms, asked Duncan Rendall, ARMA’s Chairman, in his address.

Rendall acknowledged that there is a good case for regulation of property management provision under the standard regulatory criteria as applied to other professions (such as the law and accountancy). However, he reminded Conference that there are some nine key Acts of Parliament – stretching from the Law of Property Act 1925 to the Commonhold and Leasehold Reform Act 2002 - that already directly apply to the professional provision of residential property management, plus no fewer than 80 other Acts and regulations that also have a bearing on property management businesses and the individuals who are employed by them. In this environment, therefore, it is arguable, he observed, to conclude that property mangers are already heavily regulated, if not statutorily.

Rendall questioned whether statutory regulation is the right way to move forward and create the right definition for an industry that is often poorly regarded. One of the main issues is attracting and retaining good staff. Regulation is prescriptive by nature and punitive, but provides little to attract property managers into the industry - and those with no interest in property management would, Rendall argued, continue to carry out their work with disregard for the regulations. Many businesses have exited the market, partly because of the mounting red tape, creating large numbers of conglomerations and mergers and frequent cross-selling of services.

Arguably, a better approach would be to license property managers and make a professional qualification obligatory. The industry is fortunate to have very strong support and information bodies (he mentioned the RPTS, LEASE and ARMA). Rendall said that, while there may be a theoretical argument for regulation given the amount of money involved, he favours licensing to encourage the professional standing of those in the industry; making ARMA membership compulsory to those who practise and self-regulation to fill the gap left by Government. This would provide a framework for improved professional standards and status and better recruitment opportunities in property management.

Julian Farrand is an LVT Chairman with a long-standing connection to the tribunal that goes back to 1973 with the Rent Tribunals. As an experienced ‘insider’ he considered whether the LVTs are providing a good service, examined some practical and logistical matters regarding the way the LVTs are conducted and suggested improvements to the service.

Farrand acknowledged that the RPTS is not without its critics. He said that mainly this is a question of the service’s own internal management issues. Occasionally, however, criticisms are also voiced by the parties involved - such as the lack of a Clerk at the hearing and lack of availability of a retiring room, or papers not being provided in advance - that can damage the continuity of the service.

 Ways of improving the LVT’s decision–making process were suggested by Farrand. At the pre-trial stage it would be useful to hold a pre-trial review, have a Chairman with proper inquisitorial function and have the same Chairman for the Hearing. This would provide greater consistency to the Tribunal. At the trial stage he advocated running the hearing as much as possible off the papers and to record all oral Hearings. Improvements post-trial would include provisional determinations inviting observations and then final determinations after reconsideration and creating a standard format template for determinations and a template for input from the valuer/surveyor with each determination. Farrand also believes it would be appropriate to supply to the parties the reasons why the decision was reached, as this, he argued, is something they are surely entitled to.

In conclusion, Farrand argued that the strength of the LVT is its independence.   

While consistency is the next best thing to Justice, the circumstances of apparently similar cases are often very different and precedents should not be set.

HH Michael Rich, the Judge who decided in the Arbib decision, spoke about the appellate role of the Lands Tribunal in the context of the LVT.

Under the Leasehold Reform Act 1967, the Lands Tribunal determined valuation on leasehold enfranchisement. With the Housing Act 1980, LVTs were then established to exercise this jurisdiction, and the Lands Tribunal became the appellate tribunal of such cases.

With Commonhold and Leasehold Reform Act 2002, the LVT’s jurisdiction was extended further to determine payability.

Since the Commonhold and Leasehold Reform Act 2002, permission for appeal is given by the Lands Tribunal only if the latter thinks that the LVT’s decision may have been wrong and that an appeal would be proportionate, or is otherwise justified because the matter has potentially wide significance.

Since the Lands Tribunal was first given its appellate role from the LVT it has moved from conducting all cases by a full hearing to usually hearing appeals by way of review.

The Lands Tribunal has only the same power to award costs as has been given to the LVTs - with a limit of £500 in the case of unreasonable conduct. This, believes Judge Rich, “is a source of real potential injustice and presents real problems.”

In terms of the effect of an appeal, Judge Rich explained that decisions of the Lands Tribunal do not constitute binding precedents, although the purpose of its jurisdiction is in order to promote consistent practice. The achievement of such purpose depends on the ability of the Tribunal to produce decisions which command respect. Whether or not the Lands Tribunal’s judgements are ‘last judgements’ depends very much on what LVTs themselves do, said Judge Rich.

Commonhold, a new form of freehold ownership that permits freehold ownership of individual flats and houses within a building, complex or estate, has been very slow to take off. Leading housebuilder, Crest Nicholson, opted for a Commonhold system for its new Oakgrove Millennium Community development in Milton Keynes, the first major development of the kind in the UK.

At Oakgrove in Milton Keynes Crest Nicholson were appointed by English Partnerships as Lead Developer for the 2,000 dwelling seventh Millennium Community in November 2005. In response to the developments unique socio-economic and ICT infrastructure, and in part as a demonstration to the industry of its potential application on large scale complex projects, Crest Nicholson and English Partnerships have elected to proceed with the development, utilising a Commonhold form of tenure. 

The Oakgrove scheme is being developed on two sites covering an area greater than 64 hectares and providing 2,300 new homes as commercial facilities. Initially the intention was to use a traditional leasehold model by Crest Nicholson (Hyde Housing Association is providing social housing on the estate), however the plethora of leasehold Acts created too many obstacles to the smooth long-term management of the scheme.

Commonhold, therefore, was chosen as it has the potential to overcome many of the difficulties encountered when trying to establish an appropriate title structure for mixed-use development.

Chris Tinker, managing director of Crest Nicholson said that the development of the commonhold structure for Oakgrove has provided a model for future developments. It enables the residents to manage their own community, while at the same time simplifying the legal structure. He said that he is aware that the legislation however could benefit from amendments that would help it to become the tenure of choice for the 21st century.

For a full report on the Oakgrove scheme please see issue 27 of News on the Block.

The Cadogan Estate, situated in London’s prime property market, Chelsea, has been a private family company for 300 years, valued at £2.2bn (year end 2005). Chief Executive, Stuart Corbyn, provided a summary of the changes and challenges facing the company in more recent decades.

After the’93 Act the Cadogan Estate accepted that life would take on a very different complexion and had to accept that it would lose a large portion of its freehold interest as increasing numbers of freeholders chose collectively to buy their freeholds. However, it proved not to be the instant demise of the company as some had predicted, with 500 enfranchisement claims having been completed since 1993 and about twice as many again being sold voluntarily.

Corbyn acknowledged that Cadogan is often viewed as a ‘difficult’ organisation to deal with when handling leasehold enfranchisement applications. He said that he believes this not to be the case as it is Cadogan’s policy to co-operate in the sale of its enfranchisement as a willing seller. Leasehold reform has brought pressure to bear on property companies, but he believes that Cadogan is a pro-active and willing participant in the reform process. For example, he said that it is irresponsible to replicate defective leases should not be replicated, so these are re-drafted. Likewise, the valuation process is difficult: Cadogan’s policy is not to get involved but to leave it the valuers.

Looking ahead the Cadogan Estate will still retain a great deal of residential property, Corbyn predicts that residential will form approximately 25% of the estate’s business while its rental portfolio will continue to expand. The company will also concentrate on selling short lease properties and is looking at innovative ways of investing in property, such as public buildings.

Cadogan has accepted that leasehold reform is here, but Corbyn questioned with a degree of concern what the politicians will decide to do next. So much that has happened in the 20th century regarding property was been politically motivated; what, he wondered, will the next step be?