Leasehold Enfranchisement: Determination of enfranchisement premium where market value is unclear

The Upper Tribunal is asked to consider an appeal to determine the premium payable by enfranchising tenants where market value is unclear as a result of two sales completed with very different premiums.

The background

Brickfield Properties Ltd v Ullah and others [2022] concerned a flat within a number of two-storey blocks on a development in London, the long leasehold of which was granted on 11 July 1958 for 99 years less 3 days from 29 September 1936. Access to the flat was via a communal area shared with three other units, and the appellant company was the landlord.

The leasehold interest was marketed from March-June 2019 with a guide price of £129,950. On 4^th July, vendors served a s.42 notice under the Leasehold Reform, Housing and Urban Development Act 1993 to claim a new lease and extend the leasehold term by 90 years at a suggested premium of £49,950. On the same day, the leasehold interest was sold to Birdview Homes Ltd for £112,000, who immediately listed the property at auction with a guide price of £80,000. The respondents bid successfully for the property and bought the leasehold interest for £175,000. Brickfield served a counter notice under s.45 on 18^th November for a premium of £198,620.

In order to assess the premium payable by the tenant for an extended lease, the value of its short leasehold interest needed to be determined. This comprised three parts:

1. The diminution in value of the landlord’s interest;
2. The landlord’s 50% share of the ‘marriage value’ created (this is assumed to be nil where the unexpired term of the lease is 80 years or more); and
3. Compensation for any loss suffered by the landlord.

The marriage value calculation requires the value of the tenant’s interest, which can be reached by a number of methods:

1. Reference to comparable evidence, for example sales of similar leasehold interests in the block or development with the benefit of the s.42 notice to claim a new lease;
2. Reference to graphs of relativity produced by leading valuers, referring to the relationship between the leasehold value and freehold value in a property. The shorter the unexpired lease term, the lower the relativity. As the term increases, the closer relativity gets to 100%.

Enfranchising tenants made an application in the First-tier Tribunal to determine the premium payable. With no comparable sales, the appellant relied on expert evidence which argued that the auction sale price should be excluded ‘because of its marketing history prior to auction and because the price paid exceeds any graph-based evidence’. In averaging the graph evidence available, the appellant’s expert applied a relativity percentage of 32.1%, reaching an existing leasehold interest value of £87,707.

The leaseholders’ expert used the auction sale value in his calculations, discounting the first sale which was deemed to have been made below market value. He stated that the auction better represented open market value as a result of competitive bidding. Two deductions were made in respect of the value of tenant’s improvements and the enfranchisement rights under the LRHUDA 1993, calculated at 21.49% and resulting in a value of £120,100.

The FTT adopted the appellant’s freehold value but preferred the leaseholders’ expert’s approach in using the auction sale price, determining the leasehold value at £135,430 and the premium at £128,774. The appellant’s appeal reviewed the FTT’s decision and its valuation of the existing leasehold interest.

The decision

The Upper Tribunal considered whether the FTT had determined the correct valuation of the leasehold interest. Three aspects were considered:

1. The sale on 4^th July at £112,000, following a marketing period of 3 months and sold with the benefit of the s.42 notice.
2. The auction sale at £175,000 two weeks after the valuation date. There had been no general – and substantial – increase in property values in that time.
3. Valuation by reference to relativity graphs. The UT stated that the FTT’s approach did not fit with either model presented.

The UT concluded that the FTT had erred in focusing on the auction sale, but that both values were so far apart, middle ground was tricky to find. The first sale price was consistent with the evidence presented by the relativity graphs, and it was more likely that this price represented market value than the auction price, which could have been affected by unknown factors.

The UT held that the FTT should have used the first sale price, adjusted to represent tenant’s improvements and LRHUDA 1993 rights and then checked against the relativity graphs. The UT carried out the revised calculation itself, giving a leasehold interest value of £85,982 with a premium of £153,498.

Advice and action for landlords

This decision is useful in circumstances where properties change hands at very different values, particularly within a short space of time. Providing helpful guidance as to the relevant reference points, parties following this decision are recommended to use private treaty sale prices as a valuation point rather than auction sales, which can be less consistent and vary more widely depending on the sale conditions that day.

Relativity graphs can prove useful references, but only where the appropriate comparable sale price or valuation is used as a basis.