Summary

In determining the price to be paid by the nominee purchaser exercising a right to collective enfranchisement, hope value attributable to the possibility of non-participating tenants wishing to obtain new leases of their flats in the open market could be taken into account under the Leasehold Reform, Housing and Urban Development Act 1993 Sch.6 para.3.

Facts

The House of Lords was required to determine, in five joined appeals, whether the appellant landlords (L) were entitled to have "hope value" taken into account as an element in the valuation of their respective freehold interests. When a property to be valued was a freehold subject to a long lease, the tenant was a potential special purchaser, because the value of the reversion to him would be greater than to a third party who bought purely for the investment value of the rental stream and the right to possession on the expiry of the term. That difference in value was the "marriage value". The value of the property to third party purchasers might include some prospect of later selling at an enhanced price to the tenant. That additional value was called "hope value". It was common ground between the parties that (i) under the Leasehold Reform Act 1967 s.9(1), which contained the formula for assessing the price which the tenant would have to pay to enfranchise, marriage value could not be taken into account because the tenant was expressly assumed not to be in the market; (ii) under s.9(1A), which dealt with higher value houses, marriage value could be taken into account; (iii) under the Leasehold Reform, Housing and Urban Development Act 1993 Sch.13, marriage value could not be taken into account under Sch.13 para.3 because the tenant was assumed not to be in the market, but it was to be taken into account as directed by Sch.13 para.4; (iv) under Sch.6 of the 1993 Act, which dealt with collective enfranchisement, no tenant of any part of the building was assumed to be in the market for the building under Sch.6 para.3, but at the Sch.6 para.4 stage marriage value was to be taken into account, to the limited extent of the participating tenants being able to enjoy the marriage value through the medium of being granted new leases of their flats. L argued that (1) although marriage value was excluded under s.9(1), hope value was not; (2) the fact that marriage value was taken into account under s.9(1A) did not prevent hope value being included too; (3) under Sch.13, the fact that marriage value was specifically included by virtue of Sch.13 para.4 did not exclude hope value being included in Sch.13 para.3; (4) under Sch.6, in addition to the marriage value included in the price by virtue of Sch.6 para.4 in relation to participating tenants, hope value in relation to participating and/or non-participating tenants could be included under Sch.6 para.3.

Held

(Lord Hoffmann dissenting in part) (1) In s.9(1), the words in brackets meant that not only marriage value but also hope value were excluded from being taken into account when assessing the price payable for the freehold. That conclusion was based on common sense and the natural meaning of the words. (2) If marriage value was taken into account, it was logically impossible for hope value to form part of the same valuation. As half the marriage value was what the tenant would pay if he were in the market, it seemed logically inconsistent that he should have to pay yet more on the basis that, although not in the market, he might be in the future. (3) The arguments about marriage value and hope value where a tenant was seeking a new lease of his flat under Sch.13 were similar to those which could be raised in relation to a tenant's acquisition of the freehold of his house under s.9 of the 1967 Act. The words in brackets in Sch.13 para.3(2) barred marriage value from being included in the valuation of the landlord's interest, and they also barred the inclusion of hope value. (4) Hope value attributable to the possibility of non-participating tenants wishing to obtain new leases of their flats in the open market could be taken into account under Sch.6 para.3. It would be arbitrary and unfair if a landlord, who could recover marriage value in relation to participating tenants' flats, could not recover hope value in respect of the non-participating tenants' flats. Given that Parliament had thought it fair to make the participating tenants pay a share of the marriage value in purchasing the reversion to their own flats, it would be surprising if Parliament did not intend them to have to pay a true market price for the investment part of their purchase, which would include paying for any hope value in respect of the prospect of negotiating new leases of their flats with non-participating tenants. It was not possible to include hope value in relation to participating tenants' flats under Sch.6 para.3, as it had already been subsumed into the marriage value exercise mandated under Sch.6 para.4. (5) (Per Lord Hoffmann) Under Sch.6 para.3 as originally enacted, there was an assumption that neither the nominee purchaser nor any other participating tenant was seeking to buy. Schedule 6 para.3 was amended by the Housing Act 1996 s.109(3), which extended the exclusion to all tenants. To construe Sch.6 para.3 so as to exclude tenants from the market for the freehold only would defeat the purpose of excluding them from the market. It would be absurd to legislate to exclude from the valuation any consideration that the hypothetical purchaser might hope to sell the freehold to the tenants at a price enhanced by the marriage value, but not to exclude the hope of selling them a lesser reversionary interest at a price enhanced by the marriage value.

Appeals allowed in part