Summary

In determining the price to be paid by a nominated purchaser under the Leasehold Reform, Housing and Urban Development Act 1993 for intermediate leases between the freehold and the leases of the participating tenants, the tribunal was to take into account the development value that could be realised if a single owner of the intermediate leases chose to develop the property for use other than as a building containing separate flats.

Facts

The appellant (C) appealed against a decision of the Upper Tribunal concerning the price it was to pay, as a nominee purchaser under the collective enfranchisement provisions in the Leasehold Reform, Housing and Urban Development Act 1993, for intermediate leases between the freehold and the leases of the participating tenants.

The first respondent (S) was the freehold owner of a central London house divided into three flats. The headlease was held by a company (G), and each flat was held on a separate underlease. The tenants of Flats 1 and 2 were participating tenants under the collective enfranchisement provisions and C was their nominee purchaser. The second respondent (V), held an overriding lease of Flat 3. The dispute arose from the fact that the aggregate value of the flats was less than the value of the property were it to be redeveloped as a single dwelling. The tribunal held that in determining, under Sch.6 of the Act, the price to be paid by C for the headlease and the overriding lease, it had to include the development-hope value of making the property a single dwelling. It held that the valuation of the intermediate leases should be carried out on the basis of a two-stage transaction in which the hypothetical purchaser would acquire one soon after the other. While it accepted that there was a risk that both transactions might not take place, it assumed that the purchaser would obtain a clear indication from the owner of the second intermediate lease that he would be prepared to sell once the first purchase had been completed. On that basis, it accepted expert evidence that only a five per cent discount should be applied. The issues were whether (i) development-hope value was to be taken into account in determining the price to be paid for the intermediate leases; (ii) the tribunal had taken the correct approach to the discount for the risk involved in the two-stage transaction.

Held

(1) While the instant case raised an important point of principle, it nonetheless had some important features that were not common to most collective enfranchisements. First, the value of the property as a single house was far greater than the aggregate values of the flats within it; and second, the participating tenants had no statutory protection entitling them to remain after the expiry of their leases, and they had exercised their right to collective enfranchisement only days before their leases expired. Had the leases expired, S,V and G would have been entitled to the financial benefit of the development potential of the property within days. Had there been no intermediate leases, the price of the freehold would have reflected that entitlement, there being nothing in the Act requiring that development-hope value should be ignored. The question was whether C should be in a better position because of the existence of the intermediate leases. While Sch.6 of the Act had to be interpreted purposively, it was difficult to find some implication or obvious intention of Parliament leading to either the inclusion or exclusion of development-hope value from the price payable for intermediate leases by the nominated purchaser. Nevertheless, there was no social policy underlying the Act so as to confer on tenants the right to acquire the freehold and intermediate leases at a price which ignored the development value if those interests, or some of them, were vested in the same person. Parliament had not intended to give the occupying tenants the right to acquire inherent development-hope value without paying for it. The tribunal's hypothetical two-stage open market sale of the headlease and overriding lease to the same purchaser did not contravene the express terms of the bracketed words in Sch.6 para.3(1), because that prohibition only applied to the first intermediate interest notionally to be sold. The notional development-hope value was dependent on the subsequent sale of the second intermediate interest, but the express terms of the bracketed wording did not apply to the second sale, and nor would it be appropriate to extend them to do so. C could derive no assistance from Pitts v Earl Cadogan [2008] UKHL 71, [2010] 1 A.C. 226, in which the facts, the dispute and the arguments were very different. In that case, Lord Neuberger had not directed his mind to the type of hypothetical two-stage purchase in issue in the instant case, let alone indicated that it would be excluded by the bracketed words in Sch.6 para.3(1). None of the speeches in that case contained any express conclusion that the bracketed words in para.3(1) extended to marriage by sale, and, moreover, the ratio of Pitts had nothing to do with the facts of the instant case, Pitts distinguished. Nor was any assistance to be derived from Grosvenor Estate Belgravia v Klaasmeyer [2010] UKUT 69 (LC), [2010] 16 E.G. 107 (C.S.) or Jones v Wrotham Park Settled Estates [1980] A.C. 74, neither being concerned with the hope of releasing development value, Klaasmeyer and Jones considered (see paras 59-62, 66-78). (2) The tribunal had not erred in relation to the discount for risk issue. It had been entitled to postulate what enquiries the reasonably prudent buyer would have made of the potential second seller, and what the reaction would have been. The valuation consequence was a matter for expert evidence (paras 79-80).

Appeal dismissed