Cadogan v Sportelli - Lands Tribunal, 15th September 2006

The Court of Appeal decision on Sportelli is now available. Click here to access the decision. Click here for the LEASE report.

This decision is, effectively, "Arbib 2" and confirms deferment rates at 5% for flats and 4.75% for houses. It is clearly intended by the Tribunal that the ruling should be accepted as a guideline to be followed by valuers and LVTs.

The rate is derived entirely from financial evidence and the Tribunal emphatically reject property market transaction evidence; "the market in the real world is substantially different from the one to be envisaged in the hypothetical no-Act world". The determined rate is derived from a risk free rate, derived from gilts, of 2.25%, adjusted for growth and the risks relevant to property. "Our conclusion is that the market in such investments would require a risk premium of 4.5%. Overall, therefore, we would take a risk premium of 4.5%, in combination with a risk-free rate of 2.25% and a real growth rate of 2%, providing a generic deferment rate of 4.75%". There is "a generalised 0.25% addition for flats".

The Tribunal found no justification for variation of the rate in respect of length of term, location or condition.

Although the decision is not and cannot form any binding precedent on the market or on Leasehold Valuation Tribunals, the LT appear to propose a much closer adherence to this determination than Arbib.

"The prospect of varying conclusions on the deferment rate in different cases reached on evidence that was less comprehensive than that before us can therefore be avoided by LVTs adopting the practice of following the guidance of this decision unless compelling evidence to the contrary is adduced" ... "Before applying a rate that is different from this, however, a valuer or a LVT should be satisfied that there are particular features that ... can be shown to make a departure from the rate appropriate."

Capitalisation rates

The decision makes clear that it does not refer to or rule on capitalisation rates; "Nothing that is said in this decision has any direct application to capitalisation rates. Market evidence should be more readily available for those..." There is, perhaps, an anomaly in the reliance on market evidence for capitalisation but rejection of market evidence for deferment.

In respect to the 4¾ rate for houses it seems clear that, as the decision related to valuations under S9(1A) of the 1967 Act, the rate is not necessarily applicable to valuations under S9(1), original valuation (site value) basis.

However, in case number 570 on the 1967 Act schedule the LVT felt bound to apply Sportelli to a determination under S9(1).

Hope Value

There was a secondary issue relating to hope value and the Tribunal found no case for inclusion of hope value in cases under 1993 Act jurisdiction in that no reference to hope value is included in the statutory provision for the assessment of value in Schedules 6 and 13.

LVT determinations

The first reference to Sportelli in a LVT determination is case number 1154 in the LEASE 1993 schedule heard the day following the publication of the decision; the parties agreed a deferment rate of 5%.

In case number 1159 the applicant's valuer said that "despite his misgivings and those of many in the profession about the Sportelli decision, it would be difficult in the present case for the Tribunal to adopt a rate higher than 5%, given the strongly expressed views of the Lands Tribunal". The determination says, "We agree, and consider that we are, if not legally bound, obliged to follow the guidance of the Lands Tribunal and we have adopted a deferment rate of 5%". However, capitalisation was taken at 6.5%.

In case number 1160 the Tribunal said "we consider ourselves obliged, in the absence of compelling evidence to persuade us to adopt a higher rate, to adopt a deferment rate of 5%". Capitalisation taken at 8%.

In case number 1188 the parties agreed deferment at 5% and Tribunal determined capitalisation at 7%.

Case number 1189, a paper hearing, took deferment at 5% and capitilisation at 7.5%. Case 1190 takes deferment at 5% and capitalisation at 8%.

From the small number of cases then heard post-Sportelli it seemed that the deferment rate is, in practical terms, fixed at 5% but capitalisation rates remain fluid. But, in case number 1204 the Tribunal determined deferment at 6% on the basis that the landlord's valuer had presented no evidence to challenge tenant's case for 7%, simply relying on Sportelli. Case number 1207 finds deferment at 5.5% and case number 1208 at 5.25%.

More recently, senior LVT Chairmen have begun to distance themselves from Sportelli. In case number 1443 the panel expressed "misgivings about the 'one-size fits all' deferment rate" and went so far as to include a second "non-Sportelli" valuation; "had it not been for Sportelli we have little doubt that we would have determined a deferment rate at 7% or thereabouts".

In case number 1444 the Tribunal was satisfied that the location, condition and history of the block "could not possibly equate the value of the investment with the Sportelli figure of 5%", and determined reversion at 6.5%.

Appeals

Three elements of Sportelli have been appealed to the Court of appeal; the reversion rate and the ability of the Lands Tribunal to bind LVTs, both contested by the tenants and the decision on hope value contested by the landlord.

The appeal was heard on 23rd – 26th July 2007; the decision is not expected before September. If the appeal is successful, the case will be probably be referred back to the Lands Tribunal for reconsideration.

As soon as the judgment is handed down, LEASE will post the news on this website.