The deferment rate issue had been exercising valuers since before the 2004 decision of the Lands Tribunal in Blendcrown v The Church Commissioners in which the Lands Tribunal first recognised that commonly applied deferment rates were too high.

The importance of the decision in Sportelli was reinforced by the Lands Tribunal’s gathering together of a number of appeals involving a house, individual lease extensions and collective enfranchisements of blocks of flats, with the intention of giving guidance to practitioners and Leasehold Valuation Tribunals. It was clear before and during the hearing that the Lands Tribunal wanted to give guidance on enfranchisement valuations that would limit the number of disputed claims (and appeals) for a goodly period of time.

In the Court of Appeal counsel for one of the tenants mounted a vigorous attack on the right of the Lands Tribunal to give guidance. The Court of Appeal had no hesitation in rejecting that attack. Carnwarth LJ (now the President of the new Superior Tribunals) said that “It was entirely appropriate for the Tribunal to offer guidance as they have done in this case, and, unless and until the legislature intervenes, to expect leasehold valuation tribunals to follow generally that lead.” That statement was made subject to one caveat: most of the evidence before the Lands Tribunal had concerned prime Central London property. Nevertheless, the Lands Tribunal had said that the same deferment rate should be applied right across the country.
 

PRIME CENTRAL LONDON

The Court noted that the cases related entirely to properties within the Prime Central London area (PCL) and the evidence had been directed principally to the market within that area. Unfortunately the Court did not identify what it meant by PCL.

The Court of Appeal rejected a tenants’ appeal against the choice of deferment rate, 4.75% for houses and 5% for flats. It was clearly concerned that there might be evidence to justify different rates outside PCL and left open the possibility of different deferment rates in different parts of the country. The result is that for reversions of between 20 years and something over 70 years (effectively the length of reversions in issue in Sportelli) the deferment rate is fixed for some indeterminate future unless there is credible evidence showing that the rate should be different.
 

HOPE VALUE

The Lands Tribunal had decided that although hope value existed as part of the value of a reversion it was irrecoverable under the statutory valuations. The Court of Appeal agreed. Although strictly obiter (because there was no appeal involving a house), the Court opined that it was also irrecoverable under the 1967 Act.
Whither now ? A few weeks after the decision in Sportelli the Court of Appeal had to rule on two appeals involving hope value and houses. Given the indication already given, the result was inevitable: the Court of Appeal dismissed the Landlords’ appeal. The Landlords petitioned the House of Lords for leave to appeal in both Sportelli and Cadogan v Pitts & Wang. The House of Lords has granted the petition in Cadogan v Pitts & Wang and indicated that it is minded to grant leave to appeal the hope value issue in Sportelli. Hope value is therefore very much back on the agenda.

The issue of the correct deferment rate is even more difficult. Unsurprisingly, outside London, landlords have used Sportelli to support what are often very substantial drops in the deferment rate and equally substantial increases in the premium or price payable. The reactions of LVTs outside London has been mixed. Some have followed loyally the Sportelli guidance. Some have looked for evidence to justify a departure from it, either finding or not finding the evidence. Some seem to have come perilously close to ignoring Sportelli altogether. Where LVTs outside London have found evidence to justify a departure from Sportelli, the evidence appears less than convincing.

In London there have been three main debates. They are: can tenants’ valuers show that there is evidence justifying a departure from Sportelli? What is PCL? What, if any, adjustment should be made where the reversion has less than 20 years unexpired?

The results have been mixed. With some exceptions the LVTs have followed Sportelli. Where they have departed from Sportelli the evidence and reasoning has been less than convincing.

NO COMMON DEFINITION

The question of what is PCL is important because the Court of Appeal did not define it. There is no common definition, though FPD Savills’ research department’s is probably the most widely used. The Lands Tribunal had to revisit the subject in a claim relating to a large block of flats in Hampstead. The Lands Tribunal concluded that Hampstead was not within PCL but rejected the tenants’ evidence in support of a deferment rate of more than 5%.
The adjustment, if any, to be made where the reversion has less than 20 years unexpired has been equally problematic. There is now another series of appeals waiting for hearing dates in the Lands Tribunal. The adjustment is one of the issues in those appeals. Like Sportelli, there will be financial evidence as well as evidence from property valuers.

An essential element of any deferment rate is the real growth rate assumed from valuation date to term. In Sportelli the Lands Tribunal assumed that over time the same real growth rate will apply across the country. It is likely that the appeals will be used to examine whether that assumption was correct and whether it is right to assume different growth rates for different unexpired terms. It is possible that that will involve revisiting the Sportelli deferment rate and considering whether it was too high.

Sportelli answered a number of questions. It left some unanswered. It raised yet others. It can only be hoped that the House of Lords and the Lands Tribunal provide the answers sooner rather than later.