The most reliable method of valuing property is to discern what someone is willing to pay for it on the open market – but what happens if the same property is sold twice in quick succession for very different prices? The Upper Tribunal (UT) considered that issue in a guideline case.
A 16.23-year lease of a residential flat was sold privately for £112,000. Two weeks later, it was sold on for £175,000 at auction. The dramatic difference in the prices paid gave rise to a dispute as to how much the flat’s tenants should be required to pay to their landlord for the right to extend the term of the lease by 90 years.
Following a hearing, the First-tier Tribunal (FTT) found that the price paid at auction was the best guide to the value of the very short lease. Taking this and other factors into account, it ruled that the tenants were required to pay a premium of £128,774 in order to obtain the lease extension. The landlord challenged that outcome.
Ruling on the matter, the UT noted that the case raised an interesting valuation conundrum: where a property has been sold twice within the space of two weeks at radically different prices, which transaction, if either, presents a more reliable indication of its true market value?
The UT ruled that neither sale price, taken in isolation, was reliable. The lease had been openly marketed for some months, but it was nevertheless possible that the private sale was at an undervalue. However, it was equally possible that the tenants had overpaid at the subsequent auction.
In upholding the appeal, the UT acknowledged that the prices were so far apart that any attempt to find a middle ground between them would be arbitrary. The FTT had, however, erred in focusing solely on the auction price. On the particular facts of the case, the price paid on the private sale provided a better measure of value. The premium that the tenants were required to pay was increased to £153,498.
The UT recognised that the sum that the tenants would in the end have to pay for the property with an extended lease – the auction price plus the premium – exceeded by a considerable distance the value of the long lease that they would obtain. There was, however, no reason why the landlord should be penalised for the tenants’ decision to pay the price they did at auction.