Enfranchisement Valuation for the Jocasta Grimeley-Ffiennes - Case Study Example

Enfranchisement Valuation for the Jocasta Grimeley-Ffiennes Jocasta Grimeley-Ffiennes, one of the 2-bedroom flat tenants of Cameron House, is a holder of a 99 year lease since April 24, 1988. She is the chairwoman of the tenants association, a practising Barrister, and a formidable opponent. Leasehold enfranchisement has been defined as: ‘The purchase by the holder of a long-term lease of the freehold interest (or strictly a fee simple) of the property that is the subject of the lease, subject to the payment of compensation to the landlord for the loss of his right to rent for the term of the lease and the value of the property at the end of the term (the 'reversionary value')’ (Leasehold Enfranchisement 2013). The Leasehold Reform Act of 1967 has conferred to tenants of leasehold houses the right to acquire on fair terms the freehold of the house and the premises under certain conditions (Leasehold Reform Act of 1967 c. 88, Part 1 (1)). Moreover, the same law defined a house as follows: ‘(1)For purposes of this Part of this Act, “house” includes any building designed or adapted for living in and reasonably so called, notwithstanding that the building is not structurally detached, or was or is not solely designed or adapted for living in, or is divided horizontally into flats or maisonettes; and— (a) where a building is divided horizontally, the flats or other units into which it is so divided are not separate “houses”, though the building as a whole may be; and (b) where a building is divided vertically the building as a whole is not a “house” though any of the units into which it is divided may be’ (Leasehold Reform Act of 1967 c. 88, Part 1 (2)). As stated in the above definition, flats or units composing a building which is divided horizontally, like the Cameron House, are not considered as separate houses; therefore, individual tenant of a flat, like Jocasta, does not have enfranchisement right. The tenant, however, can either extend the lease to 90 years or cooperate with his neighbours to purchase the freehold of the entire block (Knight Frank n.d.). The law that has conferred the right to collective enfranchisement is the Leasehold Reform, Housing and Urban Development Act of 1993, as amended. Under the said statute, the tenants must meet the following in order to qualify for collective enfranchisement: a) A self-contained building with two or more flats; b) The non-residential use of the building must not exceed 25%; c) At least two-thirds of the flats are held by qualifying tenants; and d) A qualifying tenant, as a rule, is one who has held a long lease or a lease with a term exceeding 21 years (Leasehold Reform, Housing and Urban Development Act of 1993 c. 28, Part 1, Chapter 1, Preliminary, as amended). The Cameron House has 75 flats let on varying terms. 30 units are let on Assured Shorthold Tenancies and the remaining 45 units are let on regulated tenancies. In order to qualify for collective enfranchisement, at least 50 tenants must have held a long lease. Therefore, the tenants of Cameron House do not qualify for collective enfranchisement. Given the circumstances, Jocasta Grimeley-Ffienes can only extend her lease for another 90 years at peppercorn rent. Assuming that Jocasta Grimeley-Ffiennes decided to extend her lease for another 90 years, she has to pay a premium which is calculated in accordance with the statute. The Act of 1993, as amended, has provided that the premium to be paid by the tenant for the grant of the new lease shall be the sum of – a) The diminution in value of the landlord’s interest in the tenant’s flat, b) The landlord’s share of the marriage value, and c) Any amount of compensation payable to the landlord (Leasehold Reform, Housing and Urban Development Act of 1993, Schedule 13, Part II). The diminution in value of the landlord’s interest is the difference between the values of landlord’s interest in the tenant’s flat prior to the grant of the new lease and of his interest in the flat once the new lease is granted (Ibid.). The freehold interest subject to a long lease has no intrinsic value other than the value of the right to receive rental income during the term and the value of the right to repossess the property at the end of the term (The Leasehold Advisory Service 2012). To get the value of the right to receive rental income during the term, the rent is capitalised by multiplying it with Years Purchase. It is assumed that the relevant yield percentage is 7%. On the other hand, the reversion value is fixed by taking the vacant possession value and adjusting said value with a deferment rate (OLSWANG 2008). Following the Cadogan vs. Sportelli case, the deferment rate used in this report is 5%. Computation for Freeholder’s Interest: Open Market Value with Vacant Possession: £875, 000 Ground Rent: £300 (fixed) Unexpired Balance of Lease: 72 years Years purchase for 72 years at 7% is 14.1763 (Davidson 2013) Ground Rent £300 Years Purchase 72 years @ 7% 14.1763 £4, 252.89 Open Market Value with Vacant Possession £875, 000 Present Value of £1 deferred 72 years @ 5% 0.029811 £26, 084.26 Freeholder's Interest £30, 337.15 The value of the landlord’s interest in the flat once the new lease is granted, on the other hand, is the value of the reversion at the end of the new term. The new term will be 162 years. This is the sum of the remaining 72 years and the additional 90 years. Open Market Value with Vacant Possession £875, 000 Present Value of £1 deferred 162 years @ 5 % 0.000369261 Freeholder's Interest £323.10 Therefore, the diminution in value of the landlord’s interest in the tenant’s flat is £30,014.05. This value is arrived at by subtracting £323.10 from £30, 337.15. As regards the marriage value, it can be described as ‘the additional value generated when an enfranchising leaseholder owns both the leasehold and freehold estates. The value of the leasehold and freehold estates in separate ownership is less than in common ownership, as the leaseholder is considered to be a ‘special purchaser’ who would be prepared to pay more than an investor for the freehold’ (Barry 2011). According to the Act of 1993, ‘the marriage value is the difference between the following amounts, namely— (a) the aggregate of— (i) the value of the interest of the tenant under his existing lease, (ii) the value of the landlord’s interest in the tenant’s flat prior to the grant of the new lease, and (iii) the values prior to the grant of that lease of all intermediate leasehold interests (if any); and (b) the aggregate of— (i) the value of the interest to be held by the tenant under the new lease, (ii) the value of the landlord’s interest in the tenant’s flat once the new lease is granted, and (iii) the values of all intermediate leasehold interests (if any) once that lease is granted’ (Leasehold Reform, Housing and Urban Development Act of 1993, Schedule 13, Part II). The landlord’s share in the marriage value is 50% of such value (Ibid.). The leasehold interest is valued using the graphs of relativity. RICS (2009) has compiled the relativity graphs of WA Ellis, Knight Frank, Cluttons, John D. Wood/Gerald Eve, John D. Wood, and Charles Boston as shown below. The types of property analysed by WA Ellis were all houses, whereas Knight Frank, John D. Wood/Gerald Eve, John D. Wood, and Charles Boston were combinations of both houses and flats. Only Cluttons has a specific and separate data for flats. The graph produced by Cluttons is shown below. Jocasta has an unexpired term of 72 years. As shown above, the relativity of the lease with unexpired 72 years is between 86.2% and 89.65%. Approximately, the relativity of Jocasta’s lease is 87.58 %. Therefore, the value of Jocasta’s interest in the existing lease is £766,325 (87.58% of £875, 000). As regards the new term, it is provided that there is no agreement on the maximum percentage of freehold value that should be adopted for unexpired terms of over 90 years and that it usually ranges from 95% to 100% (RICS 2009). For purposes of this report, 100% will be adopted in determining Jocasta’s interest under the new lease for the simple reason that she will virtually become the owner of the flat. As stated above, marriage value is the difference between the aggregate of tenant’s and landlord’s interests under the existing lease and the aggregate of tenant’s and landlord’s interests under the new lease. New Lease Tenant's interest £875, 000 Landlord's interest £323.10 £875, 323.10 Existing Lease Tenant's interest £766, 325 Landlord's interest £30, 337.15 £796, 662.15 Marriage Value £78, 660.95 Thus, the marriage value is £78, 660.95. The landlord’s share in the marriage value, as stated in the statute, is half of such value or £39,330.48. As for compensation payable to the landlord, absent any evidence showing loss or damage to the landlord with the grant of lease extension, this will not be taken into account in computing the payable premium. Briefly, the premium payable by Jocasta Grimeley-Ffiennes for her lease extension is £69,344.53. This is the aggregate amount of the diminution in value of the landlord’s interest, which is £30, 014.05, and of the landlord’s share in the marriage value, which is £39, 330.48. VALUATION OF THE FREEHOLD INTEREST OF HOSPESTAN INVESTMENTS Hospestan Investments is the new owner of Cameron House, a large Edwardian block of flats, located in Prime Central London. It acquired said property from Blekinshop Holdings during the latter’s voluntary liquidation. The Cameron House is a five-storey building which consists of the following: Fifth floor: 10 x 1 bed flats; 5 x 2 bed flats Fourth floor: 10 x 1 bed flats; 5 x 2 bed flats Third floor: 10 x 3 bed flats Second floor: 10 x 3 bed flats First floor: 10 x 3 bed flats Ground floor: 10 x 1 bed flats; 5 x 2 bed flats Basement: 400 square meters of storage; could be converted subject to normal approvals being obtained. All the one-bedroom flats are let on Assured Shorthold Tenancies at a current rent of £2,000/calendar month inclusive; whereas, all the two-bedroom and three-bedroom flats, except for Jocasta’s, are let on regulated tenancies at the current fair rent of 100/week inclusive and 150/week inclusive respectively. These rents are presumably inclusive of the 10% annual repair expenses and the 12% management costs. On the other hand, Jocasta’s flat, which is a two-bedroom flat, is let on a 99 year lease beginning April 24, 1988 at a ground rent of £300 per annum. Moreover, it is presumed that the remaining terms are 12 months for Assured Shorthold Tenancies and 30 years for regulated tenancies. Furthermore, it is to be noted that at the time of valuation, the 20 % increase in fair rent has not yet been approved. The prevailing market values for well-modernised flats in well-modernised blocks are as follows: a) Three-bedroom flat circa £1, 250, 000 b) Two-bedroom flat circa £875, 000 c) One-bedroom flat circa £575, 000. It is fairly assumed that the above-stated values are also the open market values with vacant possession of the Cameron House’s three-bedroom, two-bedroom and one-bedroom flats respectively. The purpose of this report is to determine the freehold interest of Hospestan Investment in all the flats of Cameron House. Freehold is defined as ‘the purest form of title which can be held, and represents absolute title in England and Wales’ (GVA n.d.). The owner of the freehold interest may grant lease on the property to another person thereby creating a Landlord-Tenant relationship (My Property Guide 2014). The vacant possession value, on the other hand, is the maximum value which any property can have under ordinary circumstances. When the property is let on Assured Shorthold Tenancy, the discount to be taken from the vacant possession value is dependent upon the length of the tenancy and the quality of the tenant. Usually, the freehold property let on an Assured Shorthold Tenancy is 90% - 95% of the property’s vacant possession value (ed. Hayward n.d.). In this report, 90% is used on the assumption that the remaining periods for all Assured Shorthold Tenancies are 12 months and that the tenants are willing to vacate the premises upon court order. The freehold interest subject to a long lease, however, has no intrinsic value other than the value of the right to receive rental income during the term and the value of the right to repossess the property at the end of the term (The Leasehold Advisory Service 2012). The value of the right to receive the rental income is fixed by multiplying the rent with the Years Purchase (Ibid.). It is assumed that the relevant yield percentage for purposes of this valuation is 7%. The value of the right to repossess the property at the end of the term is usually calculated by taking the ‘open market value of the freehold interest with vacant possession at the valuation date’ and ‘adjusting that value downwards by application of a deferment rate’ (OLSWANG 2008). Following the Cadogan vs. Sportelli case, the deferment rate used in this report is 5%. Calculation for the Freehold Interest: One - Bedroom Flat x 30 units: Open Market Value with Vacant Possession: £575, 000 x 30 = £17, 250, 000 £17, 250, 000 x 90% = £15, 525, 000 Jocasta Grimeley_Ffienes’ Flat: Open Market Value with Vacant Possession: £875, 000 Ground Rent: £300 (fixed) Unexpired Balance of Lease: 72 years Years purchase for 72 years at 7% is 14.1763 (Davidson 2013) Ground Rent £300 Years Purchase 72 years @ 7% 14.1763 £4, 252.89 Open Market Value with Vacant Possession £875, 000 Present Value of £1 deferred 72 years @ 5% 0.029811 £26, 084.26 Freeholder's Interest £30, 337.15 Two - Bedroom Flat x 14 units: Open Market Value with Vacant Possession: £875, 000 x 14 = £12, 250, 000 Rent: £100/week inclusive or £5, 200 per annum x 14 = £72, 800 inclusive £72, 800 Less: Annual Repairs £7, 280 Management Costs £8, 736 Annual Net Rental Income: £56, 784 Unexpired Balance of Lease: 30 years Years purchase for 30 years at 7% is 12.4090 (Davidson 2013) Annual Net Rental Income £56, 784 Years Purchase 30 years @ 7% 12.4090 £704, 632.7 Open Market Value with Vacant Possession £12, 250, 000 Present Value of £1 deferred 30 years @ 5% 0.231377 £2, 834, 374 Freeholder's Interest £3, 539, 006 Three - Bedroom Flat x 15 units: Open Market Value with Vacant Possession: £1, 250, 000 x 30 = £37, 500, 000 Rent: £150/week inclusive or £7, 800 per annum x 30 = £234, 000 inclusive £234, 000 Less: Annual Repairs £23, 400 Management Costs £28, 080 Annual Net Rental Income: £182, 520 Unexpired Balance of Lease: 30 years Years purchase for 30 years at 7% is 12.4090 (Davidson 2013) Annual Net Rental Income £182, 520 Years Purchase 30 years @ 7% 12.4090 £2, 264, 891 Open Market Value with Vacant Possession £37, 500, 000 Present Value of £1 deferred 30 years @ 5% 0.23137745 £8, 676, 654 Freeholder's Interest £10, 941, 545 Succinctly, the freehold interest of Hospestan Investment in the Cameron House is £30,035,888.15. This value is arrived at by summing up £15,525,000 in the one-bedroom units, £30,337.15 in the Jocasta’s unit, £3,539,006 in the remaining two-bedroom units, and £10,941,545 in the three-bedroom units. References Barry, P. 2011. What is Marriage Value?. 11 January. Peter Barry. [Online]. [Accessed 28 December 2014]. Available from: http://www.peterbarry.co.uk/blog/2011/jan/11/how-marriage-value-calculated-when-extending-lease/ Davidson, A 2013, Parry’s Valuation and Investment Tables, 13th edition, Estates Gazette.[Online]. [Accessed 28 December 2013] Available from: https://www.safaribooksonline.com/library/view/parrys-valuation and/9780415540476/xhtml/ch0005.xhtml GVA n.d., Guide to Valuation Terminology[PDF]. [Online]. [Accessed 28 December]. Available from: https://www.google.com.ph/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&uact=8&ved=0CDYQFjAE&url=http%3A%2F%2Fwww.gva.co.uk%2Fvaluation%2Four-guide-to-valuation-terminology&ei=9bWfVLH7Oqa1mwXppYKABA&usg=AFQjCNFS3fDUHZlrwpx7pwJk1bDbXYbwlA&sig2=8mdUtn-yNYC_y2LXNo7Nqg&bvm=bv.82001339,d.dGY > Hayward, R. (ed.) n.d., Valuation: Principles into Practice 6th edition. [Online]. [Accessed 28 December 2014] Available from: https://books.google.com.ph/books?id=Zle3AwAAQBAJ&lpg=PA29&ots=SpuES_ZIdb&dq=freehold%20interest%20let%20on%20regulated%20tenancy&pg=PA33#v=onepage&q=freehold%20interest%20let%20on%20regulated%20tenancy&f=false Knight Frank n.d., Leasehold Reform. [Accessed 25 December 2014]. Available from: http://www.knightfrank.co.uk/residential/leasehold-reform/frequently-asked-questions/ Leasehold Reform Act of 1967 Leasehold Reform, Housing and Urban Development Act of 1993 My Property Guide 2014, What is the difference between leasehold and freehold?. [Accessed 28 December 2014]. Available from: http://www.mypropertyguide.co.uk/articles/display/10106/what-is-the-difference-between-leasehold-and-freehold.htm OLSWANG 2008, "Hope value" and "deferment rates" in enfranchisement and lease extensions for residential property. [Accessed 28 December 2014] Available from: http://www.olswang.com/articles/2008/01/hope-value-and-deferment-rates-in-enfranchisement-and-lease-extensions-for-residential-property/ Real Estate Defined International Real Estate Terms (2013), Leasehold Enfranchisement (or leasehold reform) [online]. [Accessed 23 December 2014] Available from: https://www.realestatedefined.com/html/terms_defined/leasehold_enfranchisement.html RICS 2009, ‘Leasehold Reform: Graphs of Relativity’, RICS Research [PDF]. [Online]. [Accessed 28 December 2014]. Available from: http://www.rics.org/ph/knowledge/research/research-reports/leasehold-reform-graphs-of-relativity/ The Leasehold Advisory Service 2012, Valuation for Leasehold Extension. [Accessed 28 December 2014]. Available from: http://www.lease-advice.org/publications/documents/document.asp?item=10 Read More