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Valuation (other points)

This page deals with a number of valuation points:
  • Freehold to be valued
  • Intermediate leasehold interests
  • Improvements - John Lyons v Shalson and Fattal v John Lyons
  • Higher sums on appeal
  • Marriage value - development
  • Price agreed but terms not - effect of determination of terms on the price
  • Development value - dispute as to whether development legally possible: The Tribunal’s function is not to resolve the points of law but to decide in a broad brush way what the hypothetical purchaser would have been advised and how he would have acted as a result.
  • Development value - if single owner might chose to develop into a single residence.
  • Relativity - comparables - powers of Lands Chamber on Appeal.
  • Discount for legal uncertainty: When assessing the price payable under a collective enfranchisement it was not appropriate to apply a discount for legal uncertainty. The proper approach was to resolve the issue that was uncertain.


Freehold to be valued

West Hampstead Management Co. Ltd v Pearl Property Ltd
[2002] EWCA Civ 1372

Schedule 6 to the 1993 Act, para 1, states that the valuation date for determining the price to be paid is the date when it is determined, either by agreement or by a leasehold valuation tribunal what freehold interest in the specified premises is to be acquired by the nominee purchaser. That phrase is not limited to the extent of the physical premises. It is necessary to wait until both the extent of the premises and the terms of the acquisition have been determined.
    "If it was simply a question of determining the physical premises, then the word what freehold interest in, appearing in para (a), would not have been inserted. Accordingly, in my judgment, it must be the quality of the freehold interest that is being referred to, and such questions as whether it is encumbered or not." (Arden LJ, para 57).

Intermediate leasehold interest

Nailrile Limited v Earl Cadogan
LRA/114/2006, LRA/47/2007, LRA/89/2007, LRA/90/2007, LRA/106/2007

Summary

In this decision five conjoined appeals raising various issues as to the valuation of intermediate leasehold interests (or “ILI”) on an individual lease extension under the 1993 Act were dealt with together.

Main issue – valuation approach

On an individual lease extension, the owner of the intermediate interest immediately superior to the lease of the qualifying tenant loses both the expectation of possession of the flat and his entitlement to rent but remains liable to pay rent to his landlord. As a result the value of the interest after the grant of the new lease will often be negative. The main issue on these appeals was how to value an ILI where the rent payable by the leaseholder to the freeholder exceeds the rent that it receives from the tenant following the abatement of the tenant's rent to a peppercorn under s56(1) of the 1993 Act.

The amount payable to the owner of an ILI is determined in accordance with Part III of Schedule 13 to the Act, but there is still room for disagreement over the method of valuation. In three of the appeals the LVT had followed the approach approved in the sole Lands Tribunal decision, Visible Information Packaged Systems Ltd v Squarepoint (London) Ltd [2000] 2 EGLR 93. This approach involves the capitalisation of the leaseholder's loss of rental income using a dual rate years' purchase. On appeal to the Lands Tribunal the leaseholders argued that this approach was wrong. In four of the appeals they contended that the appropriate valuation method is to calculate the amount which a purchaser of the ILI would require in order to establish a fund (to include costs and the VAT on any reverse premium) sufficient to meet the leaseholder's continuing obligation to pay rent while at the same time producing an adequate return for the purchaser (referred to as the reducing fund approach). In the remaining appeal, the leaseholder's approach is to capitalise its negative income flow at the risk free rate of 2.25% adopted by the Tribunal in Cadogan v Sportelli [2006] RVR 382. This gives the amount of the reverse premium that it would have to pay a purchaser of its interest.

Although this would appear to be a matter of fine detail the adoption of each different approach can lead to wildly differing valuations, which explains the interest of the parties in pursuing the matter to the Lands Tribunal (and further one suspects).

One of the consequences of the Lands Tribunal’s approach in allowing conjoined cases is that they sometimes find that there is no answer to fit all facts. Regrettably that was the case here and there is no simple answer to which valuation approach is appropriate, rather it depends on the facts. That leads to a mind-numbingly long judgment.

The Tribunal’s main conclusions may be summarised thus:
  • If the hypothetical seller of the ILI could be expected to have an interest not just in the subject flat but also in the other flats in the block and if it could be expected also that he would only sell his interest in the block as a whole, the proper way to value the ILI is as a component of such a sale of the intermediate interest; and in this respect Squarepoint is to be followed;
  • Compensation may be payable under paragraph 5 of Schedule 13 if, as a consequence of the lease extension, the landlord may receive less on a subsequent collective valuation and the market value of his interest after the lease extension is diminished in value for this reason;
  • The capitalisation approach is to be preferred to the Squarepoint gross rent approach in order to provide for situations where reviews of the rent and the headrent take place at different times;
  • The reducing fund approach ought not to be followed since, through failure to have proper regard to the positions of the hypothetical seller and the hypothetical purchaser, it produces unrealistic results;
  • Either the capitalisation approach or the total profit rent approach is properly to be applied where the ILI is to be valued as a component of the intermediate interest and the value of the intermediate interest remains positive after the grant of the new lease;
  • When applying the capitalisation or total profit rent approaches the remunerative rate to be used is a matter of market evidence but is likely to be the same as that used to capitalise the value of the leaseholder's existing interest: the accumulative (asf) rate should be the risk-free rate of 2.25% taken in Sportelli ; and any reversion to a higher fixed headrent should be valued as though it is an increased profit rent;
  • Where the intermediate interest has a negative value after the grant of the new lease the ILI should be valued using the single rate approach;
  • The capitalisation rate in the single rate approach should be the yield on 2.5% Consolidated Stock, but this should be adjusted downwards where necessary to reflect future uncertain rent liabilities;
In the interests of brevity (!) I have picked out what I regard as the main conclusions. There are further points in the judgment relating to the valuation of ILIs and MILIs (minor intermediate leasehold interest), which I have left out.

Deferment rate in relation to a leasehold reversion

As an ancillary issue in one of the appeals, the appellants contended that the deferment rates alluded to in Sportelli, were applicable to freehold interests, and that those appropriate in the case of a 54-year leasehold reversion should be higher. The Tribunal agreed and awarded a deferment rate of 5.5%

Relativity – theoretical approach or market

In one of the appeals there were a number of subsidiary issues relating to relativity. The Tribunal found that the theoretical basis for determining relativity put together by the appellant’s valuer was unsound but also that the transaction evidence was of limited assistance and did not reveal consistent patterns of value or relativity. Relativity was best established by doing the best one could with such transaction evidence as there was available and graphs of relativity.


Improvements

House enfranchisement

John Lyons Charity v Shalson
[2003] UKHL 32

Works which restored the property to its former state, following works done by the tenants predecessors in title which had depressed the value of the property, were improvements for the purposes of s9(1A)(d) of the Leasehold Reform Act 1967. The concept of "improvements" connotes additions or alterations that go beyond mere renewal or repair. It is a physical and not an economic concept and refers to the work themselves; not the effect, if any, which they have on the value of the premises.
    "What does it mean to say that the value of the house and premises has been increased by the improvement? In my opinion, it signifies a simple causal relationship: but for the improvement, the house and premises would have been worth less. The comparison is between the value of the house as it stands and what its value would have been if the improvement had not been made." (Lord Hoffman at para 19)


Fattal v Keepers and Governors of the Free Grammar School of John Lyon
[2004] EWCA Civ 1530

Section 9(1A) of the Leasehold Reform Act 1967 states: the price payable for a house and premises [of higher rateable value] shall be the amount which at the relevant time the house and premises, if sold in the open market by a willing seller, might be expected to realise on the following assumptions (d) on the assumption that the price be diminished by the extent to which the value of the house and premises has been increased by any improvement carried out by the tenant or his predecessors in title at their own expense

In this case the tenant had carried out improvements which increased the value of the house. In making the calculation under the section it is necessary to look at the value of the house with the improvements and the value without them and to calculate the difference. The problem in this case was that both valuers agreed that the valuation of the unimproved house would include an element of value arising from the potential for improvement. The consequence was that the increase in value arising from the actual improvement had to be compared to the value without the improvement but with the value for potential for improvement. The potential could not be disregarded.


Higher sums on appeal

Chelsea Properties Limited v Cadogan
Lands Tribunal
2 October 2007
LRA/69/2006

Summary

This case raises three legal issues:
  • Does a respondent in a LT case have the right to argue for higher premium than that awarded by LVT in absence of a cross-appeal? (It does at the discretion of the LT)

  • Does the respondent in a LT case have the right to argue for higher premium and/or more favourable components of valuation than contended for before LVT (No to higher premium - Yes to higher components)

  • Should hope value in a tenant's existing underlease be disregarded? (No - no evidence of hope value)
Arguing for higher premium than awarded by LVT

Following the decision in Arrowdell Ltd v Coniston Court (North) Hove Ltd [2007] RVR 39 (LRA 72 2005), the LVT had a discretion to allow the respondent to argue for a higher premium than that awarded by the LVT notwithstanding that the respondent had not appealed the LVT decision.

Arguing for higher premium than contended for before LVT

The appellant cited Pitts and Wang v Cadogan (LRA/79/2006) as authority for the proposition that the respondent could not argue for a higher premium than it had contended for in front of the LVT. As on the facts of this case the Tribunal did not award a higher figure it was happy to follows Pitts and Wang. However, the Tribunal expressly rejected the appellant's argument that not only could the respondent not argue for a higher overall valuation than it had advanced in front of the LVT but also that it could not argue for a higher figure in respect of the constituent parts of the valuation.


Amendments to statement of case – expert evidence challenging guidance in Sportelli

Cadogan v Erkman
LRA/56/2007; LRA/68/2007

Summary

In this appeal from the LVT to the Lands Tribunal two points arose for decision: (i) whether either the freeholder or the nominee purchaser ought to be allowed to amend its pleading so as to enable it to contend for a deferment rate which was lower/higher than that contended for in front of the LVT and (ii) whether the freeholder ought to be allowed to rely on an expert report which challenged the guidance on deferment rate given by the Lands Tribunal in Sportelli.

Issue (i)

The starting point for issue (i) is the principle laid down in Arrowdell Ltd v Coniston Court (Hove) Ltd [2007] RVR 39. This is to the effect that the LT may determine a price that is higher or lower than that determined by the LVT but it cannot determine a price that is higher than that contended for by the freeholder (or lower than that contended for by the nominee purchaser) before the LVT.

In this case the NP had contended for a deferment rate of 5.5% in front of the LVT and the freeholder had contended for 5%. The LVT had awarded 5%. On the appeal the freeholder was contending for 4%.

One might have thought that the LT would not allow the freeholder to argue for a deferment rate lower than that it contended for in front of the LVT but the LT drew a distinction between contending for a lower overall price and contending for a lower element of that price:
    " . . . the Tribunal has power to entertain evidence that would justify a deferment rate outside the range of the rates for which the parties contended before the LVT and to determine a rate outside this range. It could not, however, as a consequence of this determine a price that was outside the range of those contended for. The question, therefore, is whether either party should be permitted to amend its pleadings so as to enable it to contend for a deferment rate lower than 5% (in the case of the freeholder) or higher than 5.5% (in the case of the nominee purchaser)."
It then went on to conclude, however, that there was no good reason to allow such a departure:
    "We can see no justification for permitting such amendments. In neither case is there any suggestion that the evidence on which it is sought to rely could not have been put before the LVT. The parties established their respective stances on the deferment rate before the LVT and maintained those stances in their applications for leave to appeal and in their pleadings. There is no reason why they should be allowed to alter them at this stage."
Issue (ii)

Counsel for the NP argued that allowing the freeholder to call expert evidence on deferment rate, which contradicted the guidance given in Sportelli amounted to an abuse of process.

The LT rejected this but came to the conclusion that the evidence should not be admitted on very similar grounds. It pointed out that the LVT has powers to control the procedure, under reg 14(7)(a) of the Leasehold Valuation Tribunals (Procedure) (England) Regulations 2003. The power is stated to be subject to the Regulations, and reg 14(7)(c) provides that a person appearing before the tribunal may give evidence on his own behalf, call witnesses and cross-examine any witnesses called by any other person appearing. The LT concluded that:
    "This does not, however, mean in our judgment that such person has unlimited power to call evidence and to cross-examine. That would be unthinkable. An LVT has power, like any other court or tribunal, to control the procedure, and this includes, for instance, the power to exclude irrelevant evidence and to limit cross-examination. Every LVT will be used to doing both these things.

    The 'public interest in avoiding wasted expenditure, and the risk of inconsistent results, in successive LVT appeals on an issue such as that of deferment rates' (see per Carnwath LJ [in Sportelli in the Court of Appeal]) means that an LVT or the Lands Tribunal ought in general, in the exercise of its power to control the procedure, to exclude evidence designed to show that the guidance is wrong. Another reason for doing so is that of fairness. A party is entitled to expect that the guidance will be followed, and it would be unfair if it were compelled or felt the need to adduce evidence on the deferment rate, or to cross-examine such evidence, in order to counter a challenge to the guidance by the other party. Two things, however, must be noted. Before excluding evidence the tribunal must satisfy itself that it is indeed designed to show that the guidance is wrong. And, secondly, any such exclusion is a matter of discretion, so that the tribunal needs to consider whether there are any exceptional circumstances that would justify the evidence not being excluded."

Marriage value

Development

Forty Five Holdings Limited v Grosvenor (Mayfair) Estate
[2009] UKUT 234 (LC)
LRA/161/2008

Summary

The issue in this case was whether the LVT should or should not have taken into account in assessing the marriage value in a collective enfranchisement claim the development value of £472,500 which could be released by developing up into the roof space and creating a further floor.

Facts

The case concerned two mews properties in Mayfair. But for the fact that they shared an entrance and landing they would have been treated as houses. The roof space of each property was demised to the tenant and the only factor that prevented the tenant from developing without recourse to the landlord was the existence of a covenant against making alterations. The relevant statutory provision was paragraph 4 (2) of Schedule 6:
    "(2) Subject to sub-paragraph (2A), the marriage value is any increase in the aggregate value of the freehold and every intermediate leasehold interest in the specified premises, when regarded as being (in consequence of their being acquired by the nominee purchaser) interests under the control of the participating tenants, as compared with the aggregate value of those interests when held by the persons from whom they are to be so acquired, being an increase in value –
      (a) which is attributable to the potential ability of the participating tenants, once those interests have been so acquired, to have new leases granted to them without payment of any premium and without restriction as to length of term, and

      (b) which, if those interests were being sold to the nominee purchaser on the open market by willing sellers, the nominee purchaser would have to agree to share with the sellers in order to reach agreement as to price."
The tenants advanced two arguments:
    (1) That the matters stated in paragraph 4(2)(a) were exhaustive i.e. they were the only matters which could give rise to marriage value. In this case, the cause of the tenants enjoying the potential development value after enfranchisement was not a matter falling within paragraph 4(2)(a) (i.e. a matter attributable to the potential ability to enjoy new leases) but would instead derive from the ability of the nominee purchaser to grant consent to the alterations necessary to the development. As the tenants and the nominee purchaser in this case were one and the same the chosen method of releasing the development value may not be to grant new leases but to collapse the leases altogether. The tenants conceded that they would in fact enjoy the development value in the roof space, but submitted that the cause of this enjoyment would not flow from or be attributable to anything which was specifically mentioned in paragraph 4 when calculating marriage value.

    (2) That, even if the foregoing were wrong and it is necessary to look at what if any value is carried into the hands of the tenants which is attributable to the potential ability for new leases to be granted, then the answer is no such value is attributable because the new leases must (on the wording of paragraph 4(2)(a)) be assumed to be on the same terms as the old leases, save only as regards the premium and the length of the term, such that the hypothetical new leases would once again have the absolute prohibition against alterations.
Decision

The judge (HHJ Huskinson) rejected the first argument for the following reasons:

(1) Paragraph 4 of the Sixth Schedule proceeds on the assumption that there will be a potential ability for the participating tenants, once the freehold has been acquired, to have new leases granted to them. That assumption should continue to be made notwithstanding that, either by chance or deliberate design, the nominee purchaser is identical to one (or perhaps all, as here) of the participating tenants.

(2) Subparagraph 4(4)(b) expressly requires that there is to be disregarded any merger or other circumstances affecting the interest on its acquisition by the nominee purchaser. Thus if in actual fact (by reason of identity between nominee purchaser and participating tenant) there is a merger, this is to be disregarded. The valuation exercise under paragraph 4 is to proceed on the basis that the old leases remained unmerged. Consistently with this the nominee purchaser would not enforce the terms of the old lease against the participating tenants.

(3) The purpose of paragraph 4 is to assess what increase in value of the freehold is attributable to the matters there mentioned, which involves a comparison between how happily placed the participating tenants are under their old leases and how happily placed they could become under the new leases contemplated in paragraph (a).

He also rejected the second argument that the new leases contemplated under paragraph 4(2)(a) must be assumed to be on the same terms as the old leases save only as regards duration and premium, saying as follows:
    “The words are perfectly general. What one is concerned with is any increase in value attributable to the potential ability of the participating tenants “to have new leases granted to them without payment of any premium and without restriction as to length of term”. If it had been intended to be a valuation assumption that these new leases should be assumed to be on the same terms as the old, then this would need to have been expressly provided for. It would be a remarkable assumption to make, namely to see what value was attributable to the prospect of new leases being granted but being granted upon terms which might well be (indeed would be likely to be) wholly different from the terms on which such new leases would actually be granted. It is unlikely that the new leases would be granted on precisely the same terms as the old in circumstances where the old leases had been granted many years ago and it will be particularly unlikely for this to occur if, for instance, the terms of the old leases were badly drafted and had caused problems over the years. To carry out the valuation exercise under paragraph 4(2) on an assumption that something will happen when it plainly will not happen is something the draftsman could have provided for by express words, but the draftsman should not be assumed to have made such a remarkable provision in the absence of such words. The fact that the draftsman did not intend such a result is confirmed by the fact that the draftsman did make express provision as to the terms of any new lease granted by way of an extension, see section 57, whereas in contrast there is no such limitation on the terms of the notional new leases under paragraph 4(2)(a) of Schedule 6."

Price agreed but ..

Terms disputed

Broomfield Freehold Management Limited v Meadow Holdings Limited
13 November 2007
LRA/148/2006

Summary

Agreement as to price but subsequent disagreement as to terms of transfer, which would affect the price. Is the price truly agreed? Short answer (on these facts): No.

The detail

This was a case decided by the Lands Tribunal on appeal from the LVT and concerned collective enfranchisement of a block of flats in Stanmore. At the LVT there were two disputes.

Firstly whether the freeholder should be allowed expressly to exclude in the conveyance any rights of light or air or other easement which would restrict or interfere with the transferor's use of certain retained land (ie rights which would otherwise be included by virtue of section 62 of the Law of Property Act 1925 should be excluded). The LVT ruled against the freeholder on this point and this was not appealed.

The second point was whether the freeholder was bound by an agreement reached by surveyors employed by the respective parties as to the price payable on enfranchisement. That agreement had been arrived at before the dispute as to the exclusion of s. 62 rights had arisen. The exclusion of such right would have an effect on the value of the retained land and the diminution in value of retained land was a matter which would normally be taken into account on a valuation.

The Lands Tribunal sensibly ruled that as the surveyors had not had in their contemplation the effect on valuation of the inclusion or exclusion of s62 rights the agreement was not enforceable and the LVT had jurisdiction to reach its own conclusion on valuation.

Comment

This case underlines the importance of reaching agreement as to price in conjunction with agreement as to the terms of acquisition. The best practice is to include a draft transfer with the initial notice and counter notice so that disputes as to terms are thrashed out at an early stage.


Valuation – agreement as to price and terms of conveyance

Westminster City Council v CH2006 Ltd
[2009] UKUT 174 (LC)

Summary

Two issues arose in this case. The first concerned an issue relevant in many claims namely; when is it that terms are agreed between the parties? The second is of less general interest and concerns the terms of a leaseback to a local authority landlord and is not summarised here.

When are terms agreed?

In this case an agreement was reached on the price payable on collective enfranchisement in respect of the specified premises and part of the appurtenant property. The agreement was not expressly stated to be contingent on reaching agreement on the price of payable in respect of other part or other issues such as the terms of the conveyance. The LVT held that where there was agreement it ousted their jurisdiction and they had power to determine only the terms of the acquisition in dispute and this could include constituent elements of the purchase price when some, but not all, were agreed between the parties.

Upper Tribunal

The Upper Tribunal concurred. Where there is agreement in relation to price, even if only in respect of part of the premises to be acquired, then that agreement, although not necessarily contractually binding, binds the parties and ousts the jurisdiction of the LVT to re-determine the issue agreed. It would, however, be otherwise if the item agreed were expressed to be contingent on agreement on other issues. No doubt parties not wishing to be held to a partial agreement would therefore be best advised to express it to be contingent on agreement on other issues.

Discussion

It could be said that this decision is inconsistent with Broomfield Freehold Management Ltd v Meadow Holdings Ltd (LRA/148/2006). In that case the parties agreed the price before discussing the terms of the conveyance. When they moved on to discussing those terms they disagreed on certain terms which would affect the price payable. The Tribunal allowed them to resile from the earlier agreement on the basis that the surveyors had not had in their contemplation the effect on valuation of the other terms. These two decisions could perhaps be reconciled on the basis that agreement as to price in Broomfield was implicitly contingent on agreement on other price sensitive terms.

Criticism

Although s38(4) is referred to in the judgment there is no proper exploration of its meaning. That section provides any reference “to agreement in relation to all or any of the terms of acquisition is a reference to agreement subject to contract”. The normal understanding of the phrase “subject to contract” is that either party is free to depart from the agreement so described. If the words were given their normal meaning that would mean that terms could be agreed at one point in time but later resiled from. There are difficulties in such an interpretation e.g. what happens if a party resiles from agreement after the deadline for applying to the LVT in respect of terms in dispute? Such difficulties could be avoided by construing the words “subject to contract” in a different way.

HHJ Alice Robinson held:
    “In my judgment the scheme of section 24 is such that an agreement as to terms of acquisition must be binding in the sense that it can be enforced by application for a vesting order. To hold that a party could resile from an earlier agreement would result in uncertainty and potentially render the enforcement mechanism ineffective which cannot have been intended.”
It could be said that the judge has substituted her own definition for “agreement” rather than construe the statutory definition in s38(4). Although the statutory definition has its difficulties so does the judge's own definition. In the case itself she found that there was agreement in respect of part of the price. Does that meet her own criteria of an agreement capable of being enforced by application for a vesting order? Obviously not, since one can only apply for a vesting order when all the terms are agreed or determined.

The Act envisages that in a normal case there will first be an agreement “subject to contract” and that this will later be reduced to writing in a binding contract. In a purely contractual setting the parties would not be bound by earlier drafts of an agreement which was expressed to be “subject to contract”. This writer would have thought that there is a reasonable argument that the wording of the Act does not drive one to this conclusion either and that the parties are free to resile from any partial agreement during the period when an application to the LVT to determine terms could still be made.


Development value

Dispute as to whether development legally possible

The Earl Cadogan v 2 Herbert Crescent Freehold Limited
Lands Tribunal
LRA 91 2007
15 May 2009

Summary

In a collective enfranchisement claim, how should a tribunal quantify the sum which a hypothetical purchaser would pay for development value when there is a substantial disagreement on points of law as to whether the development was possible? Answer: The Tribunal’s function is not to resolve the points of law but to decide in a broad brush way what the hypothetical purchaser would have been advised and how he would have acted as a result.

Facts

In this case the Lands Tribunal was asked to assess the price payable by the nominee purchaser on collective enfranchisement. In particular there was a dispute between the parties as to the extent to which the hypothetical purchaser of the building would be deterred from purchasing the building with a view to redeveloping it back to a house. This arose because of doubts as to whether the purchaser would be able to obtain vacant possession of a flat occupied by the headlessee at the end of the headlease. The doubts arose out of whether the hypothetical purchaser would have been successful in an application under s61 of the 1993 Act in an application for possession on the grounds of redevelopment. The redevelopment, if possible, would have unlocked substantial value.

Decision

The Lands Tribunal declined to reach final conclusions upon the points of law raised holding that it would only need to reach a conclusion on the s61 point if this were a case in which a landlord was seeking to exercise s61 against a lessee. The function of the tribunal was at one remove and it was necessary to decide in a very broad way what advice it was likely that the hypothetical purchaser would have been given and in an equally broad way to decide how this would have affected the bid he would make.

Comment

For anyone particularly interested in the exact approach of the Tribunal the reasoning as to what advice the purchaser would have received and how it would have affected his bid is at paragraph 73 of the decision.


Development into single residence

Cravecrest Limited v Trustees of the Will of The Sixth Duke of Westminster
[2013] EWCA Civ 731

Summary

The value of a property should take into account that it had a development value if the single owner might chose to develop it into a single residence. The development value could be recovered as a species of hope value.

Facts

This case concerned the collective enfranchisement of a house laid out as flats. If the house remained as flats it was worth £4.9m. If it were converted to a single residence it would be worth £7m. On collective enfranchisement the nominee purchaser would be able to develop the house into a single residence.

First instance

The question in the Upper Tribunal was whether this development value could be claimed either as marriage value or hope value. The key to the development was the purchase of two intermediate interests. The Tribunal followed the decision in Themeline v Vowden Investments Ltd [2011] UKUT 168, to the effect that the development value could not be claimed as marriage value. It did, however, allow the development value to be recovered as hope value. The hypothetical purchaser of each intermediate interest would have appreciated that the holder of the other intermediate interest would have been a willing seller and would have upped his bid in anticipation of being able to release development value by purchasing that interest (or selling the interest he was acquiring). This was referred to as the two-stage valuation approach.

The nominee purchaser appealed the decision to allow hope value.

Decision on appeal

The Court of Appeal upheld the decision of the Upper Tribunal.

The nominee purchaser argued, inter alia, that the Upper Tribunal’s decision was inconsistent with obiter dicta in Earl Cadogan v Sportelli [2007] 1 EGLR 153 to the effect that where marriage value is not recoverable then one could not recover hope value as an alternative. Rejecting this argument the Court held that it was not the intention of the Act to allow the nominee purchaser to acquire a development opportunity without paying anything for it.

The nominee purchaser also argued that it was wrong to assume that the hypothetical purchaser of either interest would have consulted the other prior to purchase. On this point the Court held that the Tribunal was entitled to “postulate what enquiries the reasonably prudent buyer would have made of whichever of them would be the potential second seller and what the reaction would have been.”


Relativity

Comparables – powers of Lands Chamber on appeal

Shoa v Nikoltseva
[2012] UKUT 73 (LC)

Summary

This case concerned a lease extension of a maisonette flat. The points in issue were:
  • The LVT’s decision on relativity.
  • The LVT’s decision on the freehold vacant possession value of the Flat.
  • Whether the LC could award more than the freeholder had contended for in front of the LVT.
Relativity

The LC disapproved of the LVT’s reliance on four graphs drawn from the RICS research report. On the facts of the case none of the graphs was ideal. The LVT had admitted in evidence the Savills With Rights Table of Relativities (Spring 2003), and both experts had agreed that the appropriate discount for rights was 2½%.

Deducting that percentage from the with rights relativity was, therefore, preferable to reliance on the inapposite graphs. The LVT had determined a relativity without rights of 89.35% based on the graphs. This was more than its determination of 89.03% with rights. As Mr Rose said “that was illogical and must be wrong.”

Vacant possession value of the Flat

The LVT concluded that the best starting point in was the leasehold sale price of the appeal property itself, from which it deducted 5% for improvements and then converted to the freehold equivalent using the Savills 2003 Table. The LC approved this approach stating that “the evidence provided by the sale of the appeal property itself, very close to the valuation date, is likely to provide the best available evidence”.

The LVT had been told that contracts for the sale of the appeal property were exchanged 9 weeks before the valuation date but had omitted to increase the value.
The LC calculated the increased value over that period using the Savills PCL Residential Capital Value Index for Kensington, Holland Park and Notting Hill flats.
Whether the LC could award more than the freeholder had contended for in front of the LVT.

This led to a figure that was greater than £58,000, which was the sum the freeholder had contended for in front of the LVT. Mr Rose said:
    “The right of appeal to the Lands Tribunal from a decision of the LVT was given by section 175(1) of the Commonhold and Leasehold Reform Act 2002. Section 175(4) of that Act as amended provides that: ‘On the appeal the Upper Tribunal may exercise any power which was available to the Leasehold Valuation Tribunal.’ It would not have been open to the LVT to determine a premium in excess of £58,000 in the light of the evidence before it. It follows from section 175(4) that I do not have power to award a premium in excess of £58,000.”
Although he did not refer to them, this is in line with earlier LT decisions in Pitts and Wang v Cadogan (LRA/79/2006) and Chelsea Properties Ltd v Cadogan (LRA/69/2006).

Enfranchisement

Discount for legal uncertainty

Kutchukian v Free Grammar School of John Lyon
[2013] EWCA Civ 90

Summary

When assessing the price payable under a collective enfranchisement it was not appropriate to apply a discount for legal uncertainty. The proper approach was to resolve the issue that was uncertain.

Background

The freeholder appealed against the decision of the Upper Tribunal in relation to the price to be paid on a collective enfranchisement.

The hypothetical purchaser of the freeholder’s interest would be interested in the ability to operate the right to obtain possession against leaseholders under the statutory right granted by s61 of the Leasehold Reform Housing and Urban Development Act 1993. At the valuation date there were various aspects of how that right could be exercised which remained uncertain. The Upper Tribunal had followed the approach of earlier tribunals in holding that there was no need to resolve those uncertainties on the basis that they would not have been resolved for the hypothetical purchaser.

Decision on appeal

The Court of Appeal allowed the appeal and held that as the uncertainties were matters of construction of the Act they ought to be determined. The two matters of uncertainty were:
  • Which landlord had the right to operate s61? This was resolved by the Court and it was held that the relevant landlord for the purposes of s61 meant the party who granted the new lease under s56 who, at that stage, would have been the competent landlord as defined in s40.

  • Whether the compensation payable to the tenants would include anything in relation to development value? The Court held that the tenants would not be entitled, as part of the compensation due to them, to be paid something in respect of the development value. The entitlement of the tenant to compensation was to be for the loss of the rest of the term under the new lease, which might be substantial. It was not for the loss of redevelopment value, of which the leaseholder had never had any prospect, and which was therefore not something of which the leaseholder had been deprived by the exercise of the s61 rights.

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