[2000] EWLands LRA_37_1998 (16 February 2000)
LRA/37/1998

	
	LANDS TRIBUNAL ACT 1949
	
LEASEHOLD ENFRANCHISEMENT - basis of calculation of value of intermediate leasehold interest - whether gross rent or profit rent is correct test - Leasehold Reform, Housing and Urban Development Act 1993.  Schedule 13.  Interim decision - gross rent to be taken - further submissions sought and received regarding effect on valuation - Decision - premium payable £4,967

	IN THE MATTER of an APPEAL from a DECISION of the
 LONDON LEASEHOLD VALUATION TRIBUNAL

BETWEEN	VISIBLE INFORMATION 	Appellant
	PACKAGED SYSTEMS LIMITED
			
	and
		
	SQUAREPOINT (LONDON) LIMITED  (1)	Respondents
	IAN SCOTT WILSON AND DEBORAH SUZANNE BRADSHAW  (2)

	Re: Flat 22 Howard Court, Peckham Rye, London SE15  3PH

	Tribunal Member: P.R. Francis FSVA

	Sitting at: 48/49 Chancery Lane, London WC2A  1JR
	on 8 September 1999

Appearances:	Martin Wynne Jones instructed by Hill Lawson, Solicitors of Ewell for the 			Appellant.
	Ian Scott Wilson for himself as second respondent.
	The first respondent did not appear, and was not represented.

DECISION

1.	This is an appeal from a decision of the London Leasehold Valuation Tribunal (“LVT”) on an application made under section 48 of the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”).   The applicants were Ian Scott Wilson and Deborah Suzanne Bradshaw, the tenants of a flat, 22 Howard Court, Peckham Rye, London SE15.   They applied to the LVT for a determination of the premium to be paid to the freeholder, Squarepoint (London) Limited, and to the intermediate leaseholder, Visible Information Packaged Systems Limited (“VIP Ltd”) in consideration for the grant of a new ninety year lease, and for a determination in respect of disputed terms within the new lease.
2.	The LVT determined the disputed terms of the lease, as far as its jurisdiction allowed, together with the premium payable by the tenants to the freeholder at £4,690, the compensation payable to the intermediate leaseholder at £184, and the part of the landlord’s share of the marriage value payable to the intermediate leaseholder at £3,226.  The LVT’s valuation is set out at Appendix 1.
3.	The intermediate leaseholder, VIP Ltd (“the appellant”), now appeals against this decision.   It does so in relation to one matter only – the LVT’s assessment of £184 as the value of its interest (shown at 1 (a) (2) of the LVT’s valuation).    The contention is that the figure should have been £256.   Mr. Martin Wynne Jones of counsel appeared for the appellant and called Mr. Nigel Patrick Shepherd, Company secretary to the appellant Company.   Mr. Jones submitted that the LVT, in using profit rental in calculating this aspect of the valuation, when all parties had agreed that the gross rent should be taken, by convention, had approached the matter wrongly in law, or alternatively, on the basis of no evidence.   The freeholder did not appear.   The tenant, Mr. Wilson did appear, and whilst expressing his agreement with the LVT’s decision, offered no evidence or argument.
4.	Mr. Jones quoted the section of the LVT’s decision that related to the appeal issue (at para 22): 
“In valuing the income stream both the freeholder and the applicants had taken the full ground rental income to which he intermediate landlord was entitled during the pendency of the intermediate lease. It seemed to the tribunal that this approach was wrong and that the income to be valued, as reflecting the value of the intermediate leasehold in the flat, was the profit rental income.     Any purchaser purchasing the intermediate interest would be interested in the profit rent which he could obtain, rather than the gross rent……………..”
5.	The relevant provisions are to be found in Schedule 13 to the 1993 Act:
Amount payable to owner of intermediate interest
6.	In connection with the grant of the new lease to the tenant there shall be payable by the tenant to the owner of any intermediate leasehold interest an amount which is the aggregate of – 

(a)	the diminution in value of that interest as determined in accordance with paragraph 7; and
(b)	any amount of compensation payable to him under paragraph 9.

Diminution in value of intermediate interest
7.-(1)	The diminution in value of any intermediate leasehold interest is the difference between-

(a)	the value of that interest prior to the grant of the new lease; and
(b)	the value of that interest once the new lease is granted.

(2)	Each of those values shall be determined, as at the valuation date, in accordance with paragraph 8.

Value of intermediate interests
8.-(1)	Subject to sub-paragraph (2), paragraph 3(2) to (6) shall apply for determining the value of any intermediate leasehold interest for the purposes of any provision of this Schedule with such modifications as are appropriate to relate those provisions of paragraph 3 to a sale of the interest in question subject to the tenant’s lease for the time being and to any leases intermediate between the interest in question and that lease.

(2)	The value of an intermediate leasehold interest which is the interest of a tenant under a minor intermediate lease shall be calculated by applying a formula set out in sub-paragraph (6) instead of in accordance with sub paragraph (1).
It is to be noted (a point to which I shall return) that para 8(2) provides that if the interest is a minor intermediate interest (under a lease with not more than one month to run and a profit rent of not more than £5 per annum) its value is to be calculated under a formula set out in para 8(6).   This formula includes as one of its elements, the profit rent.   In the present case the intermediate interest, however, was not a minor intermediate interest.
6.	Para 3(2) to (6) provides as follows:
3 -(2)	Subject to the provisions of this paragraph, the value of any such interest of the landlord as is mentioned in sub-paragraph (1) (a) or (b) is the amount which at the valuation date that interest might be expected to realise if sold in the open market by a willing seller (with [neither the tenant nor any owner of an intermediate leasehold interest] buying or seeking to buy) on the following assumptions –

(a)	on the assumption that the vendor is selling for an estate in fee simple or (as the case may be) such other interest as is held by the landlord, subject to the relevant lease and any intermediate leasehold interests;
(b)	on the assumption that Chapter 1 in this Chapter confer no right to acquire any interest in any premises containing the tenant’s flat or to acquire any new lease;
(c)	on the assumption that any increase in the value of the flat which is attributable to an improvement carried out at his own expense by the tenant or by any predecessor in title is to be disregarded; and
(d)	on the assumption that (subject to paragraph (b)) the vendor is selling with and subject to the rights and burdens with and subject to which the relevant lease has effect or (as the case may be) is to be granted.

(3)	In sub paragraph (2) “the relevant lease” means either the tenant’s existing lease or the new lease, depending on whether the valuation is for the purposes of paragraph (a) or paragraph (b) of sub- paragraph (1).

(4)	It is hereby declared that the fact that sub-paragraph (2) requires assumptions to be made as to the matters specified in paragraphs (a) to (d) of that sub-paragraph does not preclude the making of assumptions as to other matters where those assumptions are appropriate for determining the amount which at the valuation date any such interest of  the landlord as is mentioned in sub-paragraph (1)(a) or (b) might be expected to realise if sold as mentioned in sub-paragraph (2).

(5)	In determining any such amount there shall be made such deduction (if any) in respect of any defect in title as on a sale of that interest on the open market might be expected to be allowed between a willing seller and a willing buyer.

(6)	The value of any such interest of the landlord as is mentioned in sub-paragraph (1)(a) or (b) shall not be increases by reason of -   

(a)	any transaction which –

(i)	is entered into on or after the date of the passing of this Act (otherwise than in pursuance of a contract entered into before that date), and
(ii)	involves the creation or transfer of an interest superior to (whether or not preceding) any interest held by the tenant; or

(b)	any alteration on or after that date of the terms on which any such superior interest is held.
7.	In the light of these provisions Mr. Jones contended that the LVT had erred, in rejecting without hearing argument, the assumptions of experts for the both the freeholder and the intermediate leaseholder, that the valuation be based on the loss of gross rental income.  The fact that both had made that assumption (and indeed the freeholders expert was an acknowledged authority, being the co-author of “Valuations – Principles into Practice” and a contributor to the next edition of “Modern Methods of Valuation” – the standard textbook on the subject), ought properly to have been taken into account in applying the market value test under para 3(2) of the 1993 Act.  Also, it should have been taken into account in accepting such assumption as a proper assumption under paragraph 3(4).
8.	In effect, the LVT had applied its own assumption that the profit rental was the appropriate figure, whereas it was common ground between the parties that the correct assumption was to take the gross rental.  The LVT in respect of this part of the decision was, therefore, wrong. Furthermore, he said, there was no evidence adduced to lead the LVT to that conclusion.     
9.	Mr. Jones said that, in any event, the only reasonable way to value the loss to the intermediate leaseholder is by reference to the gross rental received.   This is because the intermediate leaseholder holds a single lease of all those flats at 17 – 31 Howard Court, (flat 22 therefore being only one of fifteen flats held under the same headlease), and the LVT therefore had to make an artificial assumption as to the proportion of the headrent payable to the freeholder which might apply to the subject flat.   This had been calculated by the LVT at £15, thus leaving a profit rent of £20.     The intermediate leaseholder’s interest has properly to be determined by reference to its lease, and not notionally, as the LVT had done, by reference to some artificial suggestion that the intermediate leaseholder only has a lease of the premises in question.   The diminution in value of the intermediate leaseholder’s interest must therefore be the market value of his interest before and after the receipt of the ground rent income.
10.	Thus, he said, if paragraph 3(2) fails to require a market valuation based upon these considerations, the LVT was bound to take the same into consideration of the true market value under paragraph 3(4).
11.	Mr. Nigel Shepherd said that the argument adopted by the LVT might be valid if the intermediate interest consisted of only the reversion on the flat concerned, but in this case, the intermediate landlord’s interest is a lease of a total of fifteen flats.   Thus the total rents receivable by the intermediate landlord were £379 which, after deducting the head-rent payable to the freeholder, gave a profit rent of £154.   After the grant of the extended lease on flat 22, the rent receivable will be reduced by the £35 applicable to that flat, and thus the profit rent on the whole intermediate lease will be reduced by the same £35.   Thus, he said, there was no need for the LVT to assume an apportionment of the profit rent, and indeed it was inappropriate for them to do so.   The loss of the £35 gross rent was the figure to be used.
12.	He handed in a “proposed” agreed statement of issues, setting out only the parts of the LVT’s valuation that were in question i.e., the value of the intermediate leaseholders interest, the diminution in the value of the freehold (agreed), and the apportionment of marriage value, together with the corresponding figures in support of the appellants case.  The figures relating to the apportionment of marriage value in the appellants case, both as originally typed, and as amended in ink, gave a total marriage value figure (£4,611) the same as in the LVT valuation.  As will be seen from my comments later in the decision, any alteration to the value of the intermediate leasehold interest will have an affect on the marriage value.  The respondent had not seen the schedule prior to the hearing, but after having time to read it he confirmed he was in agreement.
13.	Mr Shepherd referred to the re-worked valuation that had been submitted with the notice of appeal, this showing, at 1 (a) (2):
	Diminution in value of Intermediate Leasehold Interest

	Profit ground rent	£  35.00
	YP to first review at L/H rate [14.5%]	      2.4636	
			£  86.00

	Profit ground rent	£  70.00
	YP to 2nd review @ L/H rate	5.1602
	PV of £1 for 1st term @ L/H rate	0.4438	       2.29
			£160.00

	Profit ground  rent	£ 140.00
	YP to lease end @ L/H rate	4.6599
	PV of £1 for 2nd term @ L/H rate  0.0150	        0.07005	
			£  10.00
	Total payable by tenant to owner of Intermediate Interest	£256.00
14.	Thus, the appellant’s submission was that, based upon the accepted methodology, the appropriate figure was £256, and not £184 as had been decided by the LVT.   In all other respects, he said, the LVT’s decision was not in question.

Decision
15.	I think it is important to set out firstly some principal aspects of the nature and extent of the jurisdiction of the Lands Tribunal, on appeal from a decision of a leasehold valuation tribunal.   I gained the impression that the parties may have considered the appeal to be a review of the LVT’s decision rather than, as it actually is, a re-hearing. 
16.	In all cases, the burden of proof is on the appellant.   If the Lands Tribunal is satisfied on such evidence as may be before it that the decision of the LVT is wrong, it must allow the appeal; otherwise it must dismiss the appeal: see Trustees of the Eyre Estate v Saphir [1999] 34 EG 71; Wellcome Trust Limited v Romines (LRA/8/1998), unreported).   The Lands Tribunal will treat the  appeal as a fresh hearing of the issues to which the application to the LVT gives rise (except where leave has been granted on conditions that limit the appellant to particular grounds) and for this reason it will often not be helpful for parties to orientate their evidence and arguments to a review of the reasons set out in the LVT decision.   In most cases it is unlikely to be necessary to refer to the evidence that was given before the LVT hearing, and to do so may extend the length of the hearing and obscure the issues, however reference to where the appellant considers the LVT to have erred, in law or fact, is helpful in crystallising this Tribunal’s thinking.
17.	It follows that the appeal is to be determined by this Tribunal on the evidence presented to it, and without regard to the evidence given before the LVT.    The decision stands until it is shown to be wrong by the evidence presented to it at the re-hearing.
18.	In my judgment, the appellant has shown in evidence that the LVT was wrong.   The LVT’s approach in applying a profit rent was contrary to the uncontested expert evidence before it.   The fact that para 8(6) includes the profit rent in the formula that applies to minor leasehold interests does not imply that the profit rent is relevant for calculations done under para 3(2) to (6).    Indeed, para 8(2) makes it clear that what is provided for in para 8(6) is a formula specifically designed for minor intermediate leases.
19.	In the present case – as no doubt in many others – the intermediate leaseholder’s interest is a single lease for a number of flats, of which number 22 is but one, as pointed out in Mr. Shepherd’s evidence.    It is this interest that has to be valued, and not a notional lease of number 22 alone.   The diminution in the value of this interest is in my judgment properly to be measured on a before and after basis (as set out in para 7(1)(a) and (b) of the 1993 Act), taking into account the gross rental of the premises.   
20.	Thus, on the basis of the evidence before me, I am satisfied that the decision of the LVT was wrong in relation to this aspect of its valuation, and the correct approach is to take the loss of the gross rent receivable by the intermediate leaseholder.   The appeal must accordingly be allowed.      I determine that the value of the intermediate leaseholder’s interest in flat 22 Howard Court, Peckham Rye was, as set out in para 13 above, £256 (two hundred and fifty six pounds). 
21.	This revised figure changes, albeit slightly, the marriage value, and the apportionment thereof.   Therefore the altered figures submitted by Mr Shepherd showing the total marriage value to be the same as that set out in the LVT’s decision cannot be correct.   Whilst this was not a point at issue in this appeal, I am unable to issue an award without considering the consequences on the valuation as a whole.
22.	It is unfortunate that the appellant did not submit, in evidence, a re-worked valuation which included the effect that a determination in its favour on the value of the intermediate leasehold interest would have on the diminution in value of the freehold interest, on the same basis. The calculations submitted with the appeal documents, and the evidence given at the hearing, suggested the LVT’s figures for part 1 (a) (1) were agreed, but this was on the basis of a profit rent, which I have determined to be an incorrect approach in respect of part 1 (a) (2).
23.	I therefore direct the parties to submit revised calculations of the whole valuation relating to flat 22 Howard Court for my consideration, taking into account the effect of my determination of the appeal issue, within 28 days of the date of this interim decision.	   
24.	What I have said so far concludes my determination of the issue raised by the appellant in this case.   It remains for me to determine the terms of my award in the light of the parties’ further submissions.   My decision will take effect when that is done, and at that point, but not before, the provisions relating to the right of appeal in section 3 (4)of the Lands tribunal Act 1949 and Order 61 rule 1 (1) of the Civil Procedure Rules will come in to operation.
25.	I heard submissions on costs from the appellant, but will not deal with this aspect until the final award is made.
			DATED 16 February 2000

			(Signed) P R Francis FSVA
ADDENDUM
26.	I received revised calculations of the whole valuation relating to Flat 22, Howard Court from the second respondent, which concurred with my own assessment.  No response was received from the appellant.
27.	I determine that the total premium payable shall be £4,967, apportioned as £1,171 payable to the freeholder and £3,796 to the intermediate landlord, calculated in accordance with the valuation at Appendix 2.
ADDENDUM AS TO COSTS
28.	At the hearing, the appellant submitted that, whatever the outcome, costs should be awarded against the respondent, as he had appeared, and although he had not given oral evidence, had submitted a document requesting the Tribunal to find in accordance with the LVT decision.
29.	The respondent, in a written submission accompanying his revised valuation calculations, said the appellant would have incurred its costs whether or not he had appeared, and given that he offered no oral evidence or argument, no additional time or expense was caused.  It would  therefore be harsh to burden him with the appellant’s costs.
30.	In anything other than exceptional circumstances, costs follow the event, and because the appellant was successful it would normally be this Tribunal’s practice to award the appellant his costs of the hearing.  However in this case I have some sympathy with the respondents’ submissions.  Furthermore I take account of the fact that the appellant did not respond to the direction given in the interim decision for revised calculations, despite the fact that it was its failure to provide, at the hearing, a re-worked valuation that necessitated the interim decision being issued.
31.	I therefore consider it appropriate to make no order as to costs.
			DATED

			(Signed) P R Francis FRICS

APPENDIX  1

APPENDIX 6
FLAT 22, HOWARD COURT, PECKHAM RYE
DETERMINATION BY THE LEASEHOLD VALUATION TRIBUNAL OF THE PREMIUM PAYABLE BY THE TENANT IN ACCORDANCE WITH SCHEDULE 13 OF THE LEASEHOLD REFORM HOUSING AND URBAN DEVELOPMENT ACT 1993

INPUT FORMATION

Date of Valuation: 26.9.97
Unexpired Term: -50 years
Apportioned ground rent receivable by freeholder: £15 p.a.
Intermediate Leasehold Profit Rent : £20 p.a. 1 £55 p.a. / £125 p.a.
Capitalisation -Rate :	Freehold : 13%
	Leasehold : 14.5% 1 2. 5% (tax @ 40%
Current leasehold value ( unimproved ) : £26,000
Current Value ( ex-tended lease ) ( unimproved ) : £35,600

1 (a)	(1) Schedule 13 para. 2(a) : Diminution in Value of Freehold Interest

Value of freehold interest prior to grant of new lease :
Apportioned ground rent		£15 p.a.
YP 50 yrs @ 13%		  7.675	£115

	Reversion to capital value		£35,600
	PV £1 in 50 years @ 13%		0.0022186	£  79
				£194

	Diminution in value of freehold :				£79
1(a)	(2) Diminution in value of Intermediate Leasehold Interest :

Profit ground rent		£20 p.a.
YP 6yrs @ 14.5%/2.5%	2.4636		£  49
Profit ground rent		£55 p.a.
YP 25yrs @ 14.5% / 2.5%	5.1601
PV £1 in 6yrs @ 14.5%	0.4438	  2.29	£126
Profit ground rent :		£125 p.a.
YP 19yrs @ 14.5%12.5%	4.6898
PV £1 in 3lyrs @ 14.5%	0.0150	0.069897	£    9

	Total payable by tenant to owner of Intermediate Interest:		£184
2.	Freeholders Share of Marriage Value

Value of the extended lease			£35,600
Value of freehold interest under new lease		         nil
Value of intermediate leasehold interest		         nil
under new lease
				£35,600

LESS

Value of tenant's current interest		£26,000
Value of freehold interest (as above)		£194
Value of intermediate leasehold interest		£184	£26,378

Marriage Value			£  9,222

Freeholders share @ 50%				£4,611

3.	Compensation under Schedule 13 paras. 5 and 9			      nil

Total premium payable to freeholder:	£4,611+£79= £4,690		£4,690

Apportionment of marriage value of 	£4,61 1
Freehold : 79 : 263	£1385
intermediate leasehold : 184 : 263	£3226

Freeholder to pay Intermediate Landlord :			£3226

APPENDIX  2

FLAT 22, HOWARD COURT, PECKHAM RYE, LONDON SE18

Input information - Headlease

Date of valuation 	26 September 1997
Unexpired Term	50 years
Rent receivable by headlessee	£35 for 6 yrs /£70 for 20 yrs/£140 for 19 yrs
Capitalisation rate - 	Freehold	13%
		Leasehold	14.5% + 2.5% (Tax @ 40%)

Current leasehold value (unimproved)		£26,000
Correct value at extended lease (unimproved)	£35,600

l  (a)(1) - Diminution in value of Landlord’s interest

Reversion to freehold value 	£35,600
RV £ 50 yrs @ 13%	       .0022186
				£   79

1 (a)(2) - Diminution in value of intermediate leasehold interest

Loss of Ground Rent	 35
YP for 6 yrs @ 14.5%/2.5/40%	   2.4636
				      86

Loss of ground rent	 70
	YP for 25 yrs	5.1602
	RV at £1 for 6 yrs	  .4438	  2.29
				    160

Loss of ground rent	140
	YP for 19 yrs	4.6599
	RV at £1 in 31yrs	  .0150		  0.07005
					      10
						£  256

Total value of landlord’s interests				£  335

2.  Calculation of Marriage Value
	Extended lease value		35600
	Less-Landlord’s present interests   335	
	Underleasees present interest	26000	20286

	Marriage value		£9,265
	@ 50%				£4,632

Apportionment of marriage value:

(i)	Freeholder	 79  × 4.632  =			£1,092
		335

(ii)	Intermediate	256  × 4.632  =			£3,540
	Leaseholder	335

Premium payable to freeholder:

	Diminution in freehold interest			  79
	Plus Freeholders share of marriage value		1092
						£1,171

Premium payable to intermediate leaseholder

	Diminution in intermediate leaseholders interest		  256
	Plus intermediate leaseholders interest		3,540
						£3,796

Total payable by Claimant:

	(i)  To freeholder	£1,171
	(ii)  To intermediate leaseholder	£3,796
		£4,967