LRA Flashcards

1
Q

What are deferment rates

A

“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”)

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2
Q

How is the Sportelli deferment rate comprised?

A

Risk Free Rate = 2.25%
Risk Premium = 4.5%
Real Growth Rate = 2%

(0.25% management risk for flats)

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3
Q

What case established the components determining capitalisation rates?

A

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)

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4
Q

Which two Upper Tribunal cases have challenged Sportelli principles with differing outcomes?

A

Zuckerman v Calthorpe Estates Trustees (2009)

Llangewydd Court Ground Rent Estate v Ralph (2021)

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5
Q

Briefly explain why marriage value is shared between the LL and the TT.

A

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.

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6
Q

Provide a two sentence summary of the UT case ‘Mundy’

A

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

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7
Q

Provide a brief summary of the findings in the UT case ‘Zucconi’

A

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.

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8
Q

Where does the data come from that informs the ‘Zucconi’ graphs?

A

Savills graphs - 5,000 central London properties

Gerald Eve graphs - primarily from the Great Estates (originally commissioned by Grosvenor)

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9
Q

Name four potential changes that could occur under the forthcoming leasehold reform proposals.

A
  1. Statutory calculation methodology
  2. 990 years extensions to the existing term
  3. Statutory right to a Deed of Variation to remove onerous GR terms (without having to extend the lease)
  4. Expansion of the pool of qualifying tenants
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10
Q

How would you define marriage value, in the context of Leasehold Reform Act cases?

A

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
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11
Q

Define relativity

A

[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.

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12
Q

How, in practical terms, does one determine the appropriate capitalisation rate?

A

Through auction sales of freehold interests

Taking the GR income and the Freehold transactional value to determine a capitalisation rate

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13
Q

What are the three primary categories of comparable evidence?

A

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

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14
Q

Which Schedule of the 1993 Act provides the valuation methodology?

A

Schedule 13

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15
Q

What is the 3 bullet point summary of the lease extension valuation method provided at Schedule 13 of the 1993 Act?

A

The premium payable by the tenant in respect of the grant of the new lease shall be the aggregate of—

(a) the diminution in value of the landlord’s interest in the tenant’s flat as determined in accordance with paragraph 3,

(b) the landlord’s share of the marriage value as determined in accordance with paragraph 4, and

(c) any amount of compensation payable to the landlord under paragraph 5.

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16
Q

What types of loss is Schedule 13 referring to in the 1993 Act, in relation to Paragraph 5,

(“(c) any amount of compensation payable to the landlord under paragraph 5.”)

A

The kinds of loss falling within that paragraph include loss of development value in relation to the tenant’s flat

17
Q

What must a Section 42 Notice contain?

A
  • Your full name and the address of the flat.
  • Enough information about the flat to identify the property the application relates to.
  • Details of the lease (e.g. start date and term)
  • The premium you are proposing for the new lease
  • The terms you are proposing for the new lease
  • The name and address of your representative
  • The date by which the landlord must give their counter-notice, which must be at least two months from the date of the tenant’s notice.
18
Q

How long must the leaseholder allow for the freeholder to respond to a SLE claim with a S45 Counter Notice

A

At least 2 months

19
Q

What happens if the Landlord fails to serve a S45 counter-notice?

A

The court may, on the application of the tenant, make an order determining, in accordance with the proposals contained in the tenant’s notice, the terms of acquisition

(Provided they are satisfied that the Tenant correctly complied with the legislation)

20
Q

Which Section of the 1993 Act states the terms under which the new lease will be granted (90 years & peppercorn GR)?

A

Section 56

21
Q

What part of the 1993 Act states how tenant’s improvements should be treated during lease extension claims?

A

Schedule 13, Paragraph 3(2)(c)

“on the assumption that any increase in the value of the flat which is attributable to an improvement carried out at his own expense by the tenant or by any predecessor in title is to be disregarded”

Note - it does not qualify this with reference to authorised vs. unauthorised improvements.

22
Q

What does ‘without prejudice’ mean?

A

The without prejudice (WP) rule will generally prevent statements made in a genuine attempt to settle an existing dispute from being put before the court as evidence of admissions against the interests of the party which made them.

Exists to encourage settling without litigation.

23
Q

What is the Red Book definition of Marriage Value, or ‘Synergistic Value’?

A

Synergistic value, or marriage value, arises from the combination of two or more assets to create a new asset that has a higher value than the sum of the individual assets

24
Q

What is the potential impact of undertaking desktop valuations? What considerations should be made?

A

Although statutory, so not compliant - the Red Book principles apply. Under VPS 3 - any ‘Material Uncertainty’ must be recorded within the valuation report. State the limitations.

25
Q

A client wishes for you to inflate a valuation above a level you consider reasonable, during negotiations. What should you do.

A

You are able to seek whatever figure your client wishes in open negotiations. In an LRA context - the purpose of the ‘realistic’ settlement figure is it shows what I am comfortable defending at the FTT (where my obligation is to the Tribunal, not my client.

In an agency scenario, the vendor / landlord is able to target whatever value they wish. You should advise them that this practice is unsustainable in relation to retention though.

26
Q

Which component of the deferment rate has been challenged since Sportelli?

A

Risk Free Rate

The tribunal in Sportelli derived the risk free rate from index-linked government bonds. There has been marked downward trend in real gilt yields since the Sportelli decision.

Challenged in Llangewydd Court.

27
Q

What are the three key comparables referenced in your case study presentation?

A
28
Q

Once you have established the appropriate yields (deferment rate & capitalisation rate), what next steps do you take when undertaking a lease extension?

A

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