A recent decision of the Lands Tribunal will bring a welcome rise in the value of most residential investment portfolios.

The Leasehold Reform Acts give the holders of long leases of residential premises the right to extend their leases or purchase the freeholder's interest. As part of the process the statutory valuations require the ascertainment of the amount which at the valuation date the freeholder's interest might be expected to realise if sold on the market by a willing seller.

As part of the calculation it is necessary to value the right to vacant possession at the end of the term of the lease. This is done by determining the value of the freehold interest with vacant possession at the hearing date and adjusting that value to reflect the fact vacant possession will not be available until the end of the lease term. The adjusting factor is the "deferment rate".

For the last 25 years or so, by convention, the deferment rate for prime properties in Central London has been 6%. There was a change in the latter part of 2005 when the Lands Tribunal decided that (on evidence that was criticised by them) for subject prime Central London properties the deferment rate for flats should be 4.75% and for houses 4.5%.

Now in September 2006, the Tribunal has determined that:

  • The deferment rate applicable to the subject properties was 5% for flats and 4.75% for houses.

  • Deferment rates are generally applicable and that before applying different rates a valuer or a Leasehold Valuation Tribunal should be satisfied that there are particular features that fall outside the matters that are reflected in the vacant possession value of the house or flat or in the deferment rate itself and can be shown to make a departure from the rate appropriate.

For some freeholders of prime Central London properties the decision could be seen as disappointing as the deferment rate has moved up by 0.25%. However the Tribunal's determination that rates are generally applicable regardless of location, even regional location, means most freeholders who have traditionally accepted higher deferment rates will benefit from these lower rates and see a significant rise in the value of their reversions.

Law:

Cadogan -v- Sportelli (15 September 2006)
 

Cadogan -v- Arbib (15 September 2005)

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The original publication date for this article was 11/10/2006.