Alberti v Cadogan Holdings Ltd [2021] UKUT 0085 (LC); [2021] PLSCS 72 provides a useful illustration of the interplay between the application of section 9(1A)(d) of the Leasehold Reform Act 1967 and the reality principle.
In 1971 the Earl of Cadogan demised to Gerald Scarfe a long lease of 10 Cheyne Walk, London SW3 (number 10) for a term of 49 years. At the material time, number 10 comprised five flats. Scarfe lawfully restored the property back into a house and added a studio. Planning permission was not required for the restoration works in the 1970s because the works did not amount to a material change in the use of the building. By 2014, the Royal Borough of Kensington and Chelsea had changed its planning policy. An application for planning permission to convert flats into a single house would be refused.
On 13 May 2019, Scarfe served notice on Cadogan Holdings Ltd to acquire the freehold of the house. Cadogan admitted the claim. On 2 August 2019, Scarfe executed a transfer of the lease to Fleur Marie Alberti together with the benefit of the claim. Alberti and Cadogan were unable to agree a price for the freehold.
Section 9(1A)(d) requires that the price payable for the freehold of a house be reduced by the extent to which its value has been increased by improvements carried out by the tenant at his own expense. The works carried out by Scarfe to number 10 were improvements for the purposes of section 9(1A)(d).
The reality principle, as explained by the Court of Appeal in Harbinger Capital Partners v Caldwell [2013] EWCA Civ 492 provides that “where an amount is to be ascertained by postulating a hypothetical transaction things are to be taken as they are in reality on the valuation date, except to the extent that the instrument postulating the hypothetical transaction requires a departure from reality”.
As a preliminary issue, the Upper Tribunal (Lands Chamber) had to determine whether it was a necessary consequence of section 9(1A)(d) that a purchaser of number 10, in its assumed condition, would need to obtain planning permission if they wished to carry out work to enable it to be occupied and used as a single house. Alberti argued that they would. Cadogan countered that section 9(1A)(d) was only concerned with the physical condition of the building. The provision did not “require or permit any counter-factual assumption to be made about the use which could lawfully be made of it”.
In finding for Alberti, the UT observed that the manner in which the reality principle was to be applied in the present case depended on the meaning and effect to be given to the statutory direction in section 9(1A)(d). Relying on Shalson v Keepers and Governors of the Free Grammar School of John Lyon [2003] UKHL 32, the UT observed that to identify the extent by which improvements made to number 10 had increased its value required a comparison to be made between its value as it stood and what its value would have been if the improvements had not been made. A prospective purchaser buying the house in its unimproved state; namely five flats, would have been advised that planning permission would not be obtained to convert it into a single dwelling. Accordingly, the best proxy for the value of number 10 in its unimproved state would be a house next door which had been divided into flats on the date the lease was granted and remained in that condition on the valuation date.
Elizabeth Dwomoh is a barrister at Lamb Chambers
