Summary

When determining the value of a freehold under the Leasehold Reform, Housing and Urban Development Act 1993 Sch.6 it was not right to apply a discount for legal uncertainty regarding the prospective exercise of rights by the freeholder under s.61. The true construction of the Act had to be determined and the valuation carried out accordingly. The landlord in s.61 meant the party who had granted the new lease under s.56 who, at that stage, would have been the competent landlord as defined in s.40.

Facts

The appellant trustees (T) appealed against a decision of the Upper Tribunal concerning the price payable for the freehold by the respondent nominee purchaser (K) on collective enfranchisement of a block of flats, and K also appealed.

T owned the freehold of the block which had been converted from a house into four flats. K and his wife held a headlease of the property expiring in 2046. The flats were held on underleases which originally expired three days before the headlease. The underleases had been extended under the Leasehold Reform, Housing and Urban Development Act 1993 s.56 so as to expire in 2138. As a result of the lease extensions T would become the immediate landlord of the underleases, but only in 2046. If new leases had not been granted, T would at that time have had the right to possession of the flats, and the head lessor would have had that right three days earlier, but would only be in a position to take advantage of that right for those three days. If, therefore, the property had development value in 2046, T would be able to realise it. There were three disputes between the parties as to the rights exercisable in 2046. T contended that they would be able to exercise the right of the landlord under s.61 to apply for possession of the flats for the purpose of redevelopment. K argued that the right under s.61 could only be exercised by the immediate landlord of the relevant leaseholder and that it could not be exercised in any event unless the right to do so had been reserved in the underlease in accordance with s.57(7), which had not been done in three of the four new leases. K further argued that, even if the right was exercisable, the tenant's right to compensation under Sch.14 para.5 would include compensation for loss of the development value. The Upper Tribunal held that, when determining the value of the freehold under Sch.6 para.3(1), it was right to make discounts in favour of K for the uncertainty regarding the prospective exercise of rights under s.61 in 2046, both in respect of factual matters and in respect of the legal position.

T argued that the tribunal should have eliminated the uncertainty in the valuation by deciding the legal issues under s.61 and that they were right on those issues.

Held

(1) The tribunal had erred in applying a discount for the legal uncertainty arising from the s.61 issues. It might well be right to make an allowance by discounting for factual uncertainties such as planning policy and the state of the market. However, in respect of the true construction of the Act and, so far as relevant, the terms of the leases, the valuation had to proceed by taking a view as to what the legal position was, not by treating it as uncertain and allowing for that uncertainty by some appropriate discount (see paras 26-37 of judgment). (2) The landlord in s.61 meant the party who granted the new lease under s.56 who, at that stage, would have been the competent landlord as defined in s.40. In the instant case, T as freeholders, or their successors in title, would have the right to rely on s.61 as against the holders of the new leases in 2046. It followed that the omission from three of the new leases of the reservation required by s.57(7)(b) was of no relevance or effect as regards reliance on s.61 by the freeholder (paras 48-49). (3) If the new leases were terminated by the exercise of rights under s.61, 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 s.61 rights (paras 50-56).

Trustees' appeal allowed, nominee purchaser's appeal dismissed