Appealing to common sense? -  Sportelli and the  Court of Appeal

This week the Court of Appeal considers the Lands Tribunal decision issued last September. It is important in that it seeks to control the jurisdiction of this Tribunal which is the highest tribunal on the question of valuation.

This is an important appeal for solicitors who practice in the field of residential conveyencing as we think common sense will help to increase the number of lease extensions often crucial in a market which is showing signs of slowing. Of course it is also important to valuation surveyors who with solicitors provide a total service to clients.

What is this all about?

Sportelli, named after one of the respondents in the September 2006 decision, dealt with the deferment rate i.e. the way to find out what someone would pay today with the certainty of knowing that they would get the value of the property at the end of any lease.

For well over 30 years in the prime central London area (PCL) 6% had been used. In outer London and the rest of the Country this had been very much higher although had been reduced over a period of 5-10 years.

Sportelli reduced the 6% to 5%. They basically said that as this part of the calculation dealt with  an event where there was a great deal of certainty or happening  the yield rate should be taken from financial experts and adjusted from risk free gilt rates rather than evidence from valuers using real market evidence. As a follow on they said that as this was a principle this should be used elsewhere outside the PCL unless valuers found good reason to depart from this.

Why did they do this?

The LT is a specialist tribunal with jurisdiction to promote constant practice in the application of law to its decisions (Para 114 Sportelli).

Regard should be had to its principles and practice by all lower tribunals and practitioners. (Para 117 Sportelli)

We believe this decision is wrong and misconstrued.

Basically the lower the deferment yield the higher the price so the problem is that the greater changes in the  rates outside the PCL and the rest of the Country have had a much greater marginal affect on values.

Exercises on the effect of the Sportelli rate have shown an almost negative profit to a lessee when taking the cost of extending the lease from the potential uplift in market value as a result of the lease extension. We feel this is contrary to the spirit of the 1993 Act which after careful consultation sought to divide the spoils more evenly (depending on the length of the lease remaining)

Actual market research by a practitioner introduced at this years LEASE conference in May isolated the deferment rate and in 17 samples in different parts of the country showed a range of 5.1% to 6.75%. Perhaps surprisingly this was lower than expected but still higher than the Sportelli rate of 5%. Another point was that rather than it being fixed as stated by the Sportelli decision it varied by up to 35%.

Part of the calculation is a function of the before and after values. This “marriage value” is excluded by law in calculations for all leases above 80 years unexpired. The logical result of this would be that the price for leases less than 80 years would be more expensive than those with more than 80 years to run. Indeed we have had many urgent jobs for valuation advice so that a formal notice could be served before the 80 year “deadline”.

Guess what? Not so post Sportelli! The way we are required to  value now produces the absurd situation where the premiums or purchase prices are often  more with leases 80 -85 years than they are with shorter leases say 70 – 75 years!

As Expert witnesses at any Tribunal we are to give our independent professional opinion in accordance with our professional standing, rules, and not the least, our indemnity insurers. Currently it is nonsensical to advise clients and solicitors that represent them that notwithstanding our honest opinion there is always the risk that a lower Valuation Tribunal follows the Sportelli decision. In effect we are to provide two figures to the Tribunal!

Common sense therefore must surely prevail and we look forward to a decision which will help solicitor’s valuers and the clients that they represent. Perhaps it is justified to accept a lower deferment rate than used before Sportelli but this should be variable according to the location and the property – indeed as market evidence shows from which we derive market value!

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This is part of a regular series of topical articles provided exclusively by RDN Surveyors. If you would like any further information or add your own comments please reply to this e mail or contact Roger Nelson on 0800 902 0466