A recent post on the discount rate applying to the enfranchisement of residential leases linked to an entirely different limb of the law relating to personal injury awards covering future pecuniary losses saw a change of the discount rate from 2.5% to minus 0.75%. Open this link: https://www.linkedin.com/pulse/time-review-deferment-rate-piers-harrison
In relating such a hypothesis that the discount rate applying to flats from the generic 5% determined in Sportelli to 2% for a potential group of participating tenants I am currently advising wanting to collectively acquire their freehold on long leases already in their ownership of just under 100 years,shows an eye watering increase in the possible quoting premium from around £512,700 to £5,192,400 – a multiple of over 10 times!
At this level – it is unlikely anyone would ever wish to enfranchise especially where they already own long leases | already extended by a further 90 years under the Act aside to the knock on consequence on relativity.
In the case referred to above – the most recent with rights table of relativity published by Savills in 2015 on the back of the Mundy appeals on which they were involved – indicates that these approx. 100 year leases are worth about 94.5% of freehold value; a reduction from their former 2002 with rights table that indicated 97.9%.
Stripping out the nominal passing ground rent together with nominal stepped reviews to equate to a peppercorn rent passing – a relativity of 85.07% would be needed to bring back into balance the value of these leases IF each of the lessees were to acquire their freehold share at par. [As the leases are over 80 years, this doesn’t include any additional deduction | effect on increased premium payable in relation to any released marriage value for which the landlord will receive a half.]
So if this is right – then the new 2015 tables of relativity that Savills now alude to would be far too high when it hasn’t yet been proved that it is even correct at its now lower level (as it hasn’t passed the necessary stress tests and is open to appeal anyway to the Court of Appeal early next year.)
This then leads me onto a further observation. The new without rights table that Gerald Eve quietly released at the end of 2016 last year after everyone had broken up for Christmas puts a 100 year lease WITHOUT the right to the freehold at 98% of freehold value whereas the old 1996 Gerald Eve | John D Wood warhorse now put out to grass as a result of Mundy (which the 2016 table replaces) puts the same lease with no right to the freehold at 97.5% of freehold value.
So how can a lease with the right to the freehold be worth less than one without the right? [Funny isn’t it as this very point was the Achilles heel of the lessees case in one of the conjoined Mundy appeal cases where it tried to argue that the value the same lease without the right was worth more than the value the same lease with the right to a long lease sold for…and as a result lost the ear of the tribunal!]
This not only goes to show that Savills’ old 2002 graph is not only far closer to the mark (and especially on shorter unexpired leases when adjusted to freehold when compared to actual evidence of long lease sales adjusted to freehold [flats] | freehold sales [houses]) but that all of this would now be irrelevant IF indeed it is right for the discount rate to drop substantially.
If this was to be the case, given the delicate economy / central London residential property market at the moment, such a move by landlords especially where the leases are long and the landlord has already extracted added marriage value will in effect shoot themselves in the foot as any group of lessees collectively contemplating the last step to outright freehold ownership will simply not bother to enfranchise.
This if course assumes that the basis of the decision reached in a different limb of the law is correct to cross apply to residential property – an asset class well known to be fraught with added risks such as illiquidity / management problems etc.
Oh and by the way – right now not only am I not aware of any landlord running the point at tribunal but also one leading international firm of valuers acting for a large London landed estate (who quoted a premium in the s45 counter notice clearly based on applying a lower deferment rate in their calculation to extend a lease of around 83.5 years by an additional 90 years) immediately replaced it with a revised offer 2 valuation dropping the quoted premium by nearly 75% when asked to exchange of valuations with the the lessees valuer who came to me for advice.