Casestudy Flashcards
What are deferment rates
“the annual discount applied, on a compound basis, to an anticipated future receipt (assessed at current prices) to arrive at its market value at an earlier date”.
Deferment Rate = Risk Free Rate (“RFR”) + Risk Premium (“RP”) – Real Growth Rate (“RGR”)
How is the Sportelli deferment rate comprised?
Risk Free Rate = 2.25%
Risk Premium = 4.5%
Real Growth Rate = 2%
(0.25% management risk for flats)
What case established the components determining capitalisation rates?
Nicholson and Bunbury vs. Wilkes (2006), established the factors that determine the appropriate capitalisation rate as:
Lease length
The security of recovery
The size of the ground rent (larger = more attractive)
Whether there’s provision to review the GR (and if so, the nature of it)
What are the different types of rent reviews?
Fixed increases
Index-review
Open market
(Commercial - turnover related)
Which two Upper Tribunal cases have challenged Sportelli principles with differing outcomes?
Zuckerman v Calthorpe Estates Trustees (2009)
Llangewydd Court Ground Rent Estate v Ralph (2021)
Briefly explain why marriage value is shared between the LL and the TT.
Since there are two parties with an interest in the property (the landlord and the leaseholder) both would potentially benefit from the increase in value. However, only the leaseholder would benefit from the increase when it comes to selling the property, even though the increase is due to the landlord’s obligation to grant a new lease. The law recognises this as unfair, and that the landlord should also benefit from the increase in the value of the combined estates, and the profit, or marriage value, should be shared equally between the parties. It follows that the leaseholder should pay the Landlord 50% of the marriage value as part of the extension application.
Provide a two sentence summary of the UT case ‘Mundy’
The leaseholder was seeking to rely on the Parthenia model (suggested that the Act had distorted the market to such an extend that the pre-Act world should replace the No Act world when calculating marriage value.
The UT rejected this claim, but suggested that short lease evidence should be relied upon in the first instance, followed by No Act graphs, or Act graphs with No Act deduction
Provide a brief summary of the findings in the UT case ‘Zucconi’
The UT found that the graphs based on prime central London evidence should not be disregarded outside of PCL. It pointed to the earlier Ironhawk decision and Midland vs Speedwell.
Where does the data come from that informs the ‘Zucconi’ graphs?
Savills graphs - 5,000 central London properties
Gerald Eve graphs - primarily from the Great Estates (originally commissioned by Grosvenor)
Name four potential changes that could occur under the forthcoming leasehold reform proposals.
- Statutory calculation methodology
- 990 years extensions to the existing term
- Statutory right to a Deed of Variation to remove onerous GR terms (without having to extend the lease)
- Expansion of the pool of qualifying tenants
How would you define marriage value, in the context of Leasehold Reform Act cases?
The 1993 Act specifically defines marriage value as the difference between two amounts:
The first of these amounts is the aggregate of:
The value of the interest of the tenant under his existing lease;
The value of the landlord’s interest in the tenant’s flat prior to the grant of the new lease; and
The values prior to the grant of the new lease of any intermediary leasehold interests
The second is the aggregate of:
The value of the interest to be held by the tenant under the new lease;
The value of the landlord’s interest in the tenant’s flat once the new lease is granted; and
The values of any intermediary leasehold interests once the new lease is granted
Define relativity
[The percentage used to determine] the relative value of a lease when compared to one held on a very long term.
If there is short lease sales evidence valuers can use this to calculate relativity.
A number of organisations publish graphs of relativity, showing their views, which may be based on market transactions, settlements, expert opinion and / or Tribunal decisions.
The assessment of the value of the tenant’s existing lease (the appropriate relativity) is often problematic.
Why is relativity required?
As per Schedule 13 of the Act, the Freeholder is entitled to a share (50%) of the marriage value produced, as a result of the statutory lease extension.
In order to work out the marriage value payable, it is necessary to consider the value of the remaining years on the lease (the existing interests).
How, in practical terms, does one determine the appropriate capitalisation rate?
Through auction sales of freehold interests
Taking the GR income and the Freehold transactional value to determine a capitalisation rate
What are the three primary categories of comparable evidence?
o Direct comparables of contemporary transactions similar to the SP
o General market data that can provide some guidance (published sources, commercial databases)
o Other sources – evidence from other data types – index rates, yields
What guidance is there on the comparable method?
RICS Professional Statement: Comparable Evidence in Real Estate (1st Edition) 2019
Which Schedule of the 1993 Act provides the valuation methodology?
Schedule 13
Once you have established the appropriate yields (deferment rate & capitalisation rate), what next steps do you take when undertaking a lease extension?
You use the accepted valuation tables (Parry’s) to identify the correct YP (Years Purchase) multiplier.
The ground rent (cap rate), or the FHVP value (deferment) is then multiplied by the appropriate YP figure.
E.g. 81.88 years at 5% = 0.0184
So multiply FHVP value by 0.0184 for the subject property
