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To enfranchise under LRA 1967 (or LRHUDA 1993) T has to pay the amount
that L’s interest ‘might be expected to realise if sold on the open market by
a willing seller’. Traditionally, this is made up of two elements:
The right to receive the rent payable under the lease. This is
calculated by capitalising the rent over the number of years left.
The right to vacant possession at the end of the term. This is calculated
by assessing the capital value with vacant possession as of now, and
then applying a ‘deferment rate’ to reflect the fact that the right to vacant
possession will not be available until the end of the term. Thus the
deferment rate is the rate of compound interest that would need to be
earned on an investment made today in order to produce, at the end of
the term, the capital value that has been decided as being the open
market value of the interest at the valuation date.
Thus, it is the ‘deferment rate’ which is key. For many years the convention
had been to apply a deferment rate of 6%, but in Arbib [2005] the Lands
Tribunal made a radical departure by setting a norm of 4.5% for houses and
4.75% for flats in prime central London. That lower rate will also include the
‘hope value’ (ie L’s hope that he will be able to sell to T).
That approach has now been refined by the Lands Tribunal which has
made it clear that it should be imposed countrywide. Thus, the
anticipated distinction between different geographical locations has
virtually been abandoned (as have distinctions based on the length of
the term – provided that there is at least 20 years left). This will have a
big impact outside central London, where, traditionally, much higher
deferment rates had been adopted. The effect will be that many Ts outside London will suddenly find that the cost of buying their freeholds,
or extending their leases, has risen (and so too will the value of L’s
reversion). At the same time, the new approach from the Lands Tribunal
says that ‘hope value’ is to be calculated separately from the deferment
rate (but only in the case of higher-value houses).
It is a complex area. The main point to appreciate, however, is that the
norm for deferment rates will now be 4.5% or 4.75%, nationwide (plus a
small fixed sum for hope value, unless it is a higher-value house). For
detailed commentary on Earl Cadogan v Sportelli [2006] EW Lands LRA
50 2005 see [2006] 179 Property Law Journal 10.
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