As I commented previously in Leasehold Reform News (see the article mentioned elsewhere on this site) the decision in Kelton Court is of interest to any long leasehold flat owners with property outside of Prime Central London (PCL) who are looking to either purchase their freehold or extend their lease.
Essentially, because a 6 percent deferment rate was decided upon in a departure from the standard 5% rate in Sportelli. The Lands Tribunal came to this decision for three reasons; the enhanced risk of obsolescence, the percieved lesser rate of growth outside PCL and the enhanced ‘management risk’ associated with flats.
A higher deferment rate, of course reduces the amount that the flat owners will have to pay as part of the calculation.
Does this affect all property outside PCL?
Not necessarily. Whilst two of the factors, (obselescence and growth rate) are features of any property outside PCL the combined effect of which is to take the deferment rate 5.25%, the enhanced management risk will only be a feature of properties where the landlord is directly responsible for the management. Where there is a head lease, or the leases are fully repairing the ‘management issue’ does not arise and the most the flat owners can argue for is therefore likely to be 5.25%.
The focus on management as an issue is interesting as in reaching this decision the Lands Tribunal looked at evidence of the increased use of the LVT’s service charge jurisdiciton (411 cases in 2007 compared to 232 in 2005 and 27 in 2004). The interesting point is that is that the numbers mentioned relate to applications to the London LVT. Perhaps a better comparable might have been the regional LVT ?
Developments since Kelton Court
Since Kelton Court, we have the decision in Ashdown Hove, (Ashdown Hove Limited v Remstar Properties Limited  37 EG 138) in which 6% was achieved for a block in Hove, the enhanced risk of management being argued for successfully despite their being a management company that was a party to the leases.
The point being made (successfully) that where the lease contains an obligation on the landlord to take on the management company’s obligations in the event of its failure, there is still a risk to the landlord that it may have to be involved in the ‘day to day’ management of the property and that this will therefore ‘taint’ the amount that an investor would pay for the landlord’s interest.
We are now at the point where outside PCL valuers will normally be arguing for 5.25% and if possible, more based on the arguments concerning management. The decision in Ashdown Hove is an LVT decision and arguably slightly unique for a number of reasons. Therefore it may be that Lands Tribunal will need to comment further before there is any greater certainty in this area.
This note (being very general in its nature) is not a complete statement of the law in this area. It is therefore not a substitute for legal advice from a suitably qualified professional and should not be relied upon as such. No liability can therefore be accepted for any actions based on reliance upon it.
If you require legal advice please visit www.bishopandsewell.co.uk