This is an issue that has emerged in enfranchisement circles following the guidance to valuers by the Upper Tribunal in Mundy last year where it stated at paras:-
“168 Fourthly, in some (perhaps many) cases in the future, it is likely that there will have been a market transaction at around the valuation date in respect of the existing lease with rights under the 1993 Act. If the price paid for that market transaction was a true reflection of market value for that interest, then that market value will be a very useful starting point for determining the value of the existing lease without rights under the 1993 Act. It will normally be possible for an experienced valuer to express an independent opinion as to the amount of the deduction which would be appropriate to reflect the statutory hypothesis that the existing lease does not have rights under the 1993 Act.
and
169 Fifthly, the more difficult cases in the future are likely to be those where there was no reliable market transaction concerning the existing lease with rights under the 1993 Act, at or near the valuation date. In such a case, valuers will need to consider adopting more than one approach. One possible method is to use the most reliable graph for determining the relative value of an existing lease without rights under the 1993 Act. Another method is to use a graph to determine the relative value of an existing lease with rights under the 1993 Act and then to make a deduction from that value to reflect the absence of those rights on the statutory hypothesis. When those methods throw up different figures, it will then be for the good sense of the experienced valuer to determine what figure best reflects the strengths and weaknesses of the two methods which have been used.”
I act for a client who acquired the existing lease for a price that was in my view not an open market transaction and was therefore not “..a true reflection of market value for that interest” as the vendor, I say, did not go about marketing the flat in the normal way.
The seller did not list an asking price, instruct any firms of estate agents as sales agents, advertise the property on any of the common property websites or in any of the property marketing media read by the lay person. All the vendor did was place an advertisement in the Estates Gazette (& Egi) – read principally by property professionals only – requiring a short period for offers to be received by tender of about 5 weeks.
My client, who heard of the availability of the availability of the property through the porter, was successful in her bid. Prior to completion the seller served and assigned a s42 notice for an extended lease.
The price my client paid was approx. £600,000 | over 15.5% less than a similar property sold on the same length of unexpired lease just 6 months earlier in a totally unmodernised condition marketed through a local agent and advertising in the normal property press read by the lay person.
If the subject property had been marketed in the normal way and the vendor had instructed a local agent – the agent would have been well aware of the price achieved of the similar property sold 6 months prior, advised the vendor accordingly, marketed it though all the right portals to reach the lay buyer and acted in the vendors best interest to achieve a similar result.
What is certain is the market has not dropped anywhere near as much as 15% (about 5.5%) in the intervening 6 months between the two sales.
In relativity terms, after adjusting for rights, the price paid throws up a differential between approx. 8 to 12 percentage below the latest graphs of relativity depending on which graph one adopts.
So how can it be right that the landlord should profit by receiving an increased premium by adopting a lower relativity than it would adopt if the sale had not been at the time of the s42 notice seeking the extended lease as outlined under para 169 above?
Watch this space.