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Flats less risky


At least less risky for property investors. That is the basis of the Upper Tribunal’s decision in Voyvoda v Grosvenor West End Properties, which we have managed to miss reporting because of the Summer break.

Voyvoda is all about the “deferment rate” used in enfranchisement cases. I am sure most of our readers’ eyes will have already started to glaze over but please keep on reading. Deferment rate is a big deal to leaseholders (and their landlords). 

Looking through NL records I can see that we’ve never explained deferment rates so, with apologies to the enfranchisement mavens, here is a sketch of what it is all about.

The legislative schemes that permit leaseholders to acquire their freehold(s) from their landlords – the Leasehold Reform Act 1967 (for houses) and the Leasehold Reform, Housing and Urban Development Act 1993 (for flats) – tries to make sure that the landlord is compensated fairly for the loss of their freehold.

One loss to the landlord is “the reversion” – the fact that at the end of what might be quite a long lease they will be the absolute owner of the property which they could then sell or rent. There is a wrinkle here that tenants may have some security of tenure (as assured tenants) at the end of a long lease for example under schedule 10 of the Local Government and Housing Act 1989. Let us not worry about that right now.

Compensating the landlord for this loss involves paying them a lump sum. Computing that sum ought to take into account the fact that they have the money now rather than (say) 90 years in the future. Jam today is worth more than jam tomorrow but by how much? One approach is to consider what interest rate the landlord could obtain if they invested the lump sum now for 90 years. That rate is known as the “deferment rate”. We can then calculate how much money they should receive now that, if invested for 90 years, would give them the same value as the reversion they expect to receive.

Note: if you are a leaseholder you want a high deferment rate and if you are a landlord you want a low one. The leaseholder will want to argue that so high is the investment income the landlord should expect to receive that they will need very little money now to compensate them.

What should the deferment rate be? After all one can obtain wildly varying interest rates by investing in different ways. Tribunals have assumed that it is fair enough to consider investment in the same kind of residential property. In other words we need to ask ourselves how much interest a landlord would want before they invested in another residential property in the same area of the same type (i.e. house or flat).

The Lands Tribunal in Cadogan Estates v Sportelli decided to set a standard rate – at least for property in “Prime Central London” (“PCL” as it seems to be known). They calculated the deferment rate as follows:

  • Start with the Risk Free Rate (RFR). This is the rate of interest offered on safe investment in government stock (“gilts”). Our hypothetical investor landlord would expect to get at least that much. 2.25% said the Lands Tribunal.
  • Add a Risk Premium (RP). This represents the “don’t go near with a bargepole” advice any sensible lawyer gives concerning leasehold property. Being a freeholder is risky. Our hypothetical landlord would want a higher rate of interest for a more risky investment. 4.5% for houses said the Lands Tribunal. Flats are more risky though, so the Lands Tribunal added another 0.25% making 4.75% for the risk premium of flats.
  • Now subtract the Real Growth Rate (RGR). Property values grow steadily over time and so our hypothetical investor-landlord will know that they will obtain real capital growth on their investment for which they ought to pay. 2% (over the long term) thought the Lands Tribunal.

In other words we use the formula:

Deferment Rate = RFR + RP – RGR

To obtain 4.75% deferment rate for houses and 5% for flats.

Ever since Sportelli parties in enfranchisement cases have been arguing that for all sorts of reasons things are different in their case from the situation in Sportelli. For example a leaseholder in Bootle might argue that the real growth of property values in Merseyside might be rather less than those in Mayfair. Or a leaseholder might argue that the freehold of a block of leasehold flats is a much riskier propositions than it used to be and so the risk premium should be higher.

The “flats are more risky” argument has had a lot of traction endorsed by a number of Upper Tribunal decisions including that in Zuckerman v Calthorpe Estates which founds (in that case) a risk premium of 0.5% for flats because of the increased management problems associated with them. Many tribunals have been routinely making a Zuckerman addition in consequence.

The Upper Tribunal Voyvoda has put a stop to that. One of the worries associated with flat management is the dreaded service charge consultation requirements found in section 20 of the Landlord and Tenant Act 1985. Particularly worrying (to landlords) was the decision in Philipps v Francis (discussed very clearly by J) which seemed to say that landlords ought to consult on pretty much everything that came their way. But the Supreme Court in Daejan v Benson have given cheer to landlords (see J’s hat-eating post for details) so that although consultation may often be required, forgiveness will often be forthcoming from the First-Tier Tribunal.

In Voyvoda, the Upper Tribunal decided that the present situation is that flats aren’t as risky as all that after all and that the risk premium should generally be 0.25% as in Sportelli. Not so good for leaseholders. Cheering for landlords.


  1. Digitiser

    What is the current view of the percentage rate at which future ground rent payments should be discounted for PCL properties with long leases? Is it the same as this deferment rate of 5%?
    This is another significant component of the freehold value.

  2. AM

    While flats might be “riskier” the structure of the lease is vital and hasn’t been taken into consideration. While Cadogan’s ownership is almost entirely of older premises with conventional Landlord/Tenant structures most modern developments are tripartite, with a resident owned company undertaking all or most of the landlord’s functions, with very little or no “comeback” to the freeholder. Even in SW3, one view might be taken of a Victorian conversion or mansion block and very different ones to a modest purpose built block nearby or a lump of glass and steel on the embankment.


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