Sinclair Gardens Investments (Kensington) Ltd v Christine Lesley Ray
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lewison,Lord Justice Kitchin,Lord Justice Moore-Bick |
| Judgment Date | 02 December 2015 |
| Neutral Citation | [2015] EWCA Civ 1247 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: C3/2014/2100 |
| Date | 02 December 2015 |
[2015] EWCA Civ 1247
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (LANDS CHAMBER)
LRA482013
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Moore-Bick VICE PRESIDENT OF THE COURT OF APPEAL CIVIL DIVISION
Lord Justice Lewison
and
Lord Justice Kitchin
Case No: C3/2014/2100
Mr Oliver Radley-Gardner (instructed by W H Matthews & Co) for the Appellant
Ms Chrstine Lesley Ray— the Respondent
Hearing date: 25 November 2015
To what extent may a panel of the First Tier Tribunal rely on a decision of the Upper Tribunal on what is a question of valuation? That is the issue raised by this appeal. The appeal is brought with the permission of the Upper Tribunal (Mr Martin Rodger QC, Deputy President, and Mr AJ Trott FRICS), whose decision is at [2014] UKUT 0079 (LC). More precisely, the single ground on which permission to appeal was granted is:
"What status is to be accorded to Upper Tribunal decisions which are not "guidance cases," and whether "non-guidance" cases of the Upper Tribunal are no more than factual decisions which ought not to be followed without more by the First Tier Tribunal."
The context in which the issue arises is a claim by Mrs Ray to an extended lease of her flat in Halesowen in the West Midlands. The claim was brought under the Leasehold Reform, Housing and Urban Development Act 1993 ("the Act"). Where such a claim is brought in England the amount of the premium payable for the extended lease is determined, in default of agreement, by the First Tier Tribunal (formerly the Leasehold Valuation Tribunal). Schedule 13 to the Act lays down a complex formula for determining the amount of the premium, but fortunately we are not concerned with the details. Suffice it to say that it consists of three components:
i) The diminution in value of the landlord's interest in the flat consequent on the grant of the new lease;
ii) The landlord's share of marriage value; and
iii) Compensation for any other loss that the landlord will suffer as the result of the grant of the new lease.
Under paragraph 3 of Schedule 13 the diminution in value of the landlord's interest is the difference between:
i) The value of the landlord's interest in the flat prior to the grant of the new lease and
ii) The value of his interest in the flat once the new lease is granted.
It is only this part of the valuation formula with which we are concerned. In essence the value of the landlord's interest before the new lease is granted consists of (a) the right to receive the rent and other sums payable under the lease and (b) his right to possession of the flat at the end of the term. Both these rights must be given a capital value. Because the right to possession will not materialise until the end of the term the landlord is not entitled to exploit the vacant possession value of the flat immediately. Thus the present value of that right is determined on the basis that the vacant possession value is deferred. This requires the application of an adjustment, called the deferment rate, to that vacant possession value. It is the annual discount applied, on a compound basis, to an anticipated future receipt (assessed at current prices) to arrive at the market value of that receipt at an earlier date.
The deferment rate itself is influenced by a number of factors. First, the very fact that the anticipated receipt is a future receipt means that an investor would require a return on his investment to reflect the delay in being able to realise it. This is called the risk-free rate. The appropriate proxy for this component is a zero-coupon government gilt held to redemption. Second, because of the ups and downs of the property market, and the fact that a property investment of this kind is illiquid, there is a risk that the investor will not realise the full value of the investment at any given time. He would thus require an additional return to compensate for that risk. This is called the risk premium. This serves to increase the deferment rate. Third, there is a countervailing factor. The value of the investment will appreciate inherently as the lapse of time before its realisation becomes shorter. But if property prices rise at a rate that exceeds inflation then that increase in value will also feed through to the value of the landlord's interest. So an investor's expectations of real increases in property prices serve to decrease the deferment rate. When the three components are put together the result is the deferment rate.
In the early days of the Act different tribunals adopted different deferment rates, in each case based on the expert evidence called before them. Many of the claims to an extended lease were relatively low value claims. The need to commission bespoke expert evidence was therefore burdensome, and the fluctuations in the deferment rate were an obstacle to out of court settlement. In two cases in the Lands Tribunal (the forerunner of the Upper Tribunal) that Tribunal attempted to give general guidance on the deferment rate to adopt. The first of the cases was Arbib v Earl Cadogan [2005] 3 EGLR 139; and the second was Earl Cadogan v Sportelli [2007] 1 EGLR 154 (Mr George Bartlett QC, Judge Michael Rich QC and Mr Paul Francis FRICS). Both concerned property in the prime central London area ("PCL"). In Sportelli the Lands Tribunal heard extensive expert evidence on both the investment market and the property market. After a comprehensive review it concluded that:
i) The appropriate risk-free rate was 2.25%;
ii) The risk premium was 4.5% but the aggregate of these components was offset by
iii) A real growth rate of 2%.
Accordingly the Tribunal concluded that an appropriate generic deferment rate was 4.75%: see [79]. It described that rate as "a generic deferment rate, applicable to long-term property investments in general": see [80]. The Tribunal then considered what, if any, adjustments needed to be made to that generic deferment rate. It considered and rejected such matters as length of term, location, and obsolescence and condition. I will need to return to these matters in due course. However, it did consider that an adjustment was necessary in the case of reversions to flats as opposed to houses, in order to reflect the increased burden of management of flats. The Tribunal considered that an increase of 0.25% was justified, thus resulting in a deferment rate of 5% for reversions to flats.
The Tribunal then turned to consider the precedential status of its decision. At [114] it pointed out that one of its functions was to promote consistent practice in the application of the law in decisions that fall within its specialist jurisdiction. At [117] it said:
"The function of the tribunal is thus to make decisions on points of law and on what may be called principles of practice to which regard should be had by the first-tier tribunals and by practitioners dealing with claims in any of the tribunal's original or appellate jurisdictions. Such principles of practice are not, in our view, confined to valuation methodology … but may extend to matters of quantification if the considerations underlying the quantification are of general application."
At [121] it said:
"It is obviously undesirable and, indeed, it would be impossible, for the sort of financial and valuation evidence that we have heard to be called and considered in every enfranchisement case. It is, in our judgment, unnecessary that it should be, because LVTs and this tribunal are entitled to rely upon their own expertise, guided by this decision. The prospect of varying conclusions on the deferment rate in different cases reached on evidence that was less comprehensive than that before us can therefore be avoided by LVTs adopting the practice of following the guidance of this decision unless compelling evidence to the contrary is adduced. This is justified because, as we have explained above, the deferment rate is unlikely to vary according to factors particular to the individual case. Some factors, including, in particular, the prospect of long-term growth, will not vary from case to case, while other factors, such as location and obsolescence, will already be reflected in the vacant possession value. … The case for adopting a single deferment rate (with a standard adjustment for flats) for all reversions in excess of 20 years is thus, in our view, strong. Indeed, we think that statutory prescription could well be appropriate and could usefully give a greater certainty to the market than a decision of the tribunal setting a guideline is capable of doing."
Finally it concluded at [123]:
"The application of the deferment rate of 5% for flats and 4.75% for houses that we have found to be generally applicable will need to be considered in relation to the facts of each individual case. Before applying a rate that is different from this, however, a valuer or an LVT should be satisfied that there are particular features that fall outside the matters that are reflected in the vacant possession value of the house or flat or in the deferment rate itself and can be shown to make a departure from the rate appropriate."
The case then went to the Court of Appeal: [2007] EWCA Civ 1042, [2008] 1 WLR 2142. The question of the status of the Lands Tribunal's decision was one of the subjects discussed in the appeal. Carnwath LJ (with whom Ward LJ and Sir Peter Gibson agreed) considered the question at [91] to [102]. He held that, by analogy with country guidance cases in the...
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