Enfranchisement — Leasehold Reform, Housing and Urban Development Act 1993 — Intermediate lease — Determination of proportion of premium payable to intermediate leaseholder –Schedule 13 of 1993 Act
The appellant freeholder owned a block of flats subject to an intermediate lease held by the respondent, the intermediate lessor. The intermediate lease was for a term expiring in 2077, but with an option to extend until 2128. It reserved a basic rent of £33,779 (being 9% of the rents payable under the occupational underleases) and an additional rent of 9% of the amount (if any) by which the net received income exceeded the specified total of rents payable by the individual tenants. The intermediate lease provided that so long as the specified underleases subsisted, including any extension pursuant to any statutory provision or otherwise, the terms and provisions of the underleases were relevant to the calculation of the net received income.
One such tenant claimed a lease extension under the Leasehold Reform, Housing and Urban Development Act 1993. The freeholder, the intermediate lessor and the occupying tenant agreed the premium payable in the sum of £136,500, but they disputed their respective share of that sum. The leasehold valuation tribunal apportioned the premium as £2,250 to the freeholder, and £134,250 to the intermediate lessor. In doing so, it accepted the intermediate lessor’s submission that in carrying out the “before” valuation, for the purposes of determining the diminution in the freeholder’s interest under Schedule 13, the underlease of the relevant flat would be statutorily extended at a peppercorn rent under the 1993 Act. The freeholder appealed, contending that the valuation should take place in a “no-Act world”.
Decision: The appeal was allowed.
The “before” valuation of the parties’ respective interests must be of their value prior to the grant of the new lease, and on the assumption that the 1993 Act confers no right to acquire any new lease. Thus, there is, for the purposes of the “before” valuation requirement, no extended lease at a peppercorn rent for the definition of the net received income to bring into account. But, for the purposes of the “after” valuation, which assumes that the new lease has been granted, there is such an extended lease. That was why the freeholder’s interest was diminished by a percentage of the market rental value of the flat. The freeholder’s share of the premium, therefore, was £28,150.
Anthony Radevsky (instructed by Boodle Hatfield) appeared for the appellant; Kenneth Munro (instructed by Denton Wilde Sapte) represented the respondent.
No cases are referred to in this report.
Giving his decision, Judge Rich QC said:
1. The appellant is the freeholder of a block of flats known as Connaught House, of which flat 4 was held by occupying tenants under a long lease dated 16 June 1969, for a term expiring on 14 December 2058 at a yearly rent of £190. On 6 June 1979, the appellant granted to the respondent an intermediate lease of the whole block, and other adjoining properties, for a term expiring on 25 March 2077, but with an option to extend until 25 March 2128.
2. The occupying tenant claimed a new underlease of its flat in accordance with section 42 of the Leasehold Reform, Housing and Urban Act 1993, and, on 28 January 2002, the appellant, as the competent landlord, granted, in accordance with section 56 of the Act and in substitution for the 1969 underlease, a new lease at a peppercorn rent for the extended term of a further 90 years from 15 December 2058, namely until 2148. By agreement among the parties, the total premium payable on the grant of such extended lease was £136,500.
3. Although that sum was agreed by the appellant and the intermediate lessor, they disputed their respective shares of that sum. Accordingly, the intermediate lessor applied under para 7 of Schedule 11 to the Act to appear in the proceedings before the leasehold valuation tribunal (LVT) to determine the amount of the premium. The occupying tenant, having agreed the total premium with both parties, did not appear at the LVT. The tribunal’s decision was therefore entirely as to the share of the agreed sum of £136,500 that was to be paid to each of the reversioners. It apportioned the premium, as to the freeholder, £2,250, and as to the intermediate lessor, £134,250. From that decision, the freeholder appeals. The parties are agreed that if the appeal succeeds the amount to be paid to the appellant should be £28,150, and the amount to be paid to the respondent should be £108,350.
4. The respondent’s lease reserved a basic rent of £33,797 pa, being 9% of the rents payable under the occupational leases, including that of flat 4, which were set out in a schedule to the lease. It reserved also an additional rent, which was to be “9% of the amount (if any) by which the net received income… exceeds [the total of such schedule rents]”. “Net received income” was defined. If any of the premises were let at less than open market rent, then, in respect of such premises, the net received income was to be deemed to be equal to the open market rental value of those premises:
PROVIDED ALWAYS that… for so long as the respective underleases specified in the schedule hereto shall subsist (which shall for the purposes of this proviso include any extension thereto or renewal thereof to which the occupier shall be entitled pursuant to any statutory provision but not further or otherwise) the net received income in relation to the premises comprised in such respective underleases should be calculated by reference to the terms and provisions of such respective underleases…
Mr Kenneth Munro, who appeared before the LVT on behalf of the respondent, is recorded as contending that:
any valuation that ignores the terms of the headlease is a valuation made on a false premise. There is nothing in the Act requiring the LVT to ignore the reality of the headlease terms.
The LVT accepted that submission, and concluded that the agreed premium should be apportioned on the basis that the net received|page:88| income, by reference to which rent was payable under the headlease, should be determined on the basis of a peppercorn only, being the rent receivable for flat 4.
5. It is from that decision that the appellant appeals, contending in its statement of case that “it is necessary to ignore reality and assume, therefore, that the present valuation takes place in a no-Act world”.
6. It appears to me that these rival concepts of “reality” and a “no-Act world”, and the circumstances in which the LVT was effectively called upon to apportion an agreed premium, have led the LVT to mistake the task upon which it was engaged, and therefore to depart from the valuation exercise required by the statute. It is to that that I will therefore now turn.
7. Schedule 13 to the Act makes provision in its three parts for the: “PREMIUM AND OTHER PAYMENTS PAYABLE BY THE TENANT ON THE GRANT OF A NEW LEASE”. Part II provides for the premium that is payable to the landlord. Part III provides for the amount payable to the owner of an intermediate interest. Paragraph 2 in Part II provides for the premium to be the aggregate (so far as material) of:
(a) the diminution in the value of the landlord’s interest in the tenant’s flat as determined in accordance with paragraph 3 [and]
(b) the landlord’s share of the marriage value…
Paragraph 6 in Part III of the Schedule provides that there shall be payable to the owner of any intermediate leasehold interest an amount (so far as here material) equal to:
(a) the diminution in the value of that interest in accordance with paragraph 7…
Paragraph 10 provides for the marriage value, which is part of the landlord’s premium, to be divided between the landlord and the owners of any intermediate interests:
(2)… in proportion to the amount by which the values of their respective interests in the flat will be diminished in consequence of the grant of the new lease.
Accordingly, the respective entitlement of the appellant and the respondent, which has been agreed upon alternative bases, depends entirely upon the valuation of the diminution in value of their respective interests.
8. Paragraph 7 of the schedule provides that:
(1) The diminution in value of any intermediate leasehold interest is the difference between —
(a) the value of that interest prior to the grant of the new lease; and
(b) the value of that interest once the new lease is granted.
(2) Each of those values shall be determined, as at the valuation date, in accordance with paragraph 8.
Paragraph 8 provides that paras 3(2) to (6) shall apply for determining the valuation of any intermediate interest.
9. Paragraph 3(1) defines the diminution in the value of the landlord’s interest as the difference between its value prior to the grant of the new lease and once it has been granted, in the same terms as para 7 in regard to the intermediate landlord’s interest. Thus, both valuations of diminution require a “before” and “after” valuation on different assumptions. Paragraph 3(2) sets out the assumptions upon which the valuation of the interests are to be made, including:
(b) on the assumption that… this Chapter confer[s] no right… to acquire any new lease;
That assumption, in the case of the “after” valuation, that is to say, of the interests “once the new lease is granted”, does not, of course, require the new lease that has been granted to be disregarded, nor, of course, its effect upon the additional rent payable by the respondent. The assumption that no right is conferred affects only the future. It therefore applies to the valuation that has to be made of the interest “prior to the grant of new the lease”, and, thus, what I have called the “before” valuation does require the statutory right to acquire a new lease to be disregarded.
10. The parties are agreed that the respondent’s interest in the flat “once the new lease is granted” is nil, because the rent is a peppercorn, and the term is longer than the respondent’s lease even after the exercise of the option. The appellant’s interest is also more or less nominal, being of a reversion deferred by 147.5 years. It is therefore the value of the respective interests “prior to the grant of the new lease” that are in dispute: the “before” valuations.
11. The respondent’s claim, and the LVT’s decision, is that by reason of the proviso to the definition of “net received income” in its headlease, it has to be assumed in its “before” valuations that the terms of the new lease of flat 4, granted pursuant to statutory provisions for an extended term at a peppercorn, are to determine the amount of net received income in order to determine the additional rent payable under the headlease. That is to say that in calculating, for the purposes of the “before” valuation, the payment to be made as additional rent under the headlease, it is to be assumed that the rent for flat 4 is not as in the 1969 underlease scheduled to the lease, £190 until 2058, and the market rent thereafter until 2128 (after exercise of the option), but is to be a peppercorn only. But this “before” valuation of the parties’ interests, from which the “after” valuation is to be deducted, is of its value “prior to the grant of the new lease” and “on the assumption that chapter [II of the Act of 1993] confers [on the tenant] no right to acquire any new lease”. Thus, there is, for the purposes of the “before” valuation, required no extended lease, at a peppercorn rent, for the definition of net received income to bring into account. On the other hand, for the purposes of the “after” valuation, “once the new lease is granted” there is such an extended lease. That is why the value of the freeholder’s interest is diminished by a percentage of the market rental value of the flat, and the freeholder is entitled to be compensated for such loss in its share of the premium to be paid by the tenant.
12. For these reasons, I allow the appeal. It follows that the appellant’s share of the sum paid by the tenant is £28,150, and the part to be paid to the respondent is £108,350.
13. I announced this conclusion at the end of the hearing, and it is agreed that costs should follow the event. I accordingly determine that the respondent should pay the appellant’s costs of this appeal to be the subject of detailed assessment by the registrar, if not agreed.
Appeal allowed.
