Leasehold enfranchisement – Determination of purchase price – Hope value – Section 9(1A) of Leasehold Reform Act 1967 – Schedules 6 and 13 to Leasehold Reform, Housing and Urban Development Act 1993 – Whether hope value to be included when valuing landlord’s interest – Appeals allowed in Schedule 6 cases
In two decisions concerning leasehold enfranchisement claims under the Leasehold Reform, Housing and Urban Development Act 1993 and the Leasehold Reform Act 1967 respectively, the Lands Tribunal determined that, in assessing the price payable by the tenant, no addition should be made to reflect hope value, namely the value arising from the option that a freeholder would have had, in the real market, to sell the freehold or a leasehold extension to the tenant at a future date. The Court of Appeal dismissed an appeal by the landlords in the 1993 Act cases: see Earl Cadogan v Sportelli [2007] EWCA Civ 1042; [2008] 1 EGLR 137. In the light of views expressed in that judgment, an appeal in the 1967 Act case was subsequently dismissed by consent: see note to Pitts v Earl Cadogan [2007] 3 EGLR 86; [2007] 42 EG 296 and [2007] EWCA Civ 1280; [2007] RVR 244.
The landlords appealed to the House of Lords. The appeals concerned the inclusion of hope value in valuations under: (i) section 9(1A) of the 1967 Act, for an enfranchisement of a higher-value house; (ii) Schedule 6 of the 1993 Act, for a lease extension; and (iii) Schedule 13 of the 1993 Act, for a collective enfranchisement by tenants of flats in a block.
Held: Three of the appeals were dismissed; two relating to collective enfranchisement claims under Schedule 13 to the 1993 Act were allowed (Lord Hoffmann dissenting on that issue).
(1) Where a landlord was selling its interest, and the tenant was not in the market to purchase it, a potential purchaser might think that, in addition to its investment value, the freehold also carried the potential benefit of a possible future sale of the freehold to the tenant or one of the tenants’ successors in title, thereby enabling a release of the marriage value in the future. In such instances, it could be said that even though the tenant was not in the market at the time of the sale, the value of the freehold subject to the lease was greater than the aggregate of the capitalised rental stream and the deferred right to possession at the end of the term, and that something should be added for the possibility of a purchaser benefiting from a release of the marriage value. This was “hope value”.
(2) On a valuation under section 9(1A) of the 1967 Act for a higher-value house, no addition could be made for hope value. The landlord was already entitled to half of the marriage value on the assumption that the tenant would pay this if it were in the market. It was logically inconsistent that the tenant should have to pay more, as part of the investment value of the property, by reference to an assumption that it was not in the market at that moment but might be in the future. To award an additional amount for hope value would involve double-counting. Nor could hope value be awarded in cases where marriage value was excluded under section 9(1E).
(3) On an application for a new lease of a flat under Schedule 13 to the 1993 Act, hope value was barred from the valuation of the landlord’s interest by virtue of the words “with the tenant not buying or seeking to buy” in para 3(2) of Schedule 13. Those words, which carried the same force as the similar wording of section 9(1) of the 1967 Act, required it to be assumed that the tenant was not, and would not in the future be, interested in purchasing, and therefore excluded both marriage value and hope value.
(4) On a collective enfranchisement claim, to purchase the freehold of a block of flats under Schedule 6 to the 1993, hope value was payable in respect of the flats of the non-participating tenants. Although para 3(1) and 3(1A) indicated that each tenant of every flat in the building, whether or not participating in the proposed purchase, was deemed to be out of the market when valuing the landlord’s interest, para 3(1)(b) indicated that this did not extend so far as to prohibit taking into account the possibility of non-participating tenants seeking to negotiate new leases of their respective flats. There was a symmetry between para 4, which required marriage value to be taken into account in respect of the participating tenants, although only so far as it was attributable to their ability through the nominee purchaser to obtain new long leases of their flats, and para 3, which entitled the landlord to seek hope value in respect of the non-participating tenants, again limited to the prospect of their seeking new leases of their respective flats. Including hope value in respect of the flats of non-participating tenants was fair: with regard to those flats, the participating tenants were acquiring an investment and it was appropriate that they should pay a true market price for the investment part of their purchase.
Per curiam: Although none of the current appeals concerned section 9(1) of the 1967 Act, that provision excluded not only marriage value but also hope value when assessing the price to be paid by a tenant for the freehold of a house that did not fall into the higher value bracket.
Kenneth Munro and Philip Rainey (instructed by Pemberton Greenish) appeared for the appellants; Stephen Jourdan (instructed by Forsters LLP and Rokeby Johnson Baars LLP) appeared for the respondents in the lease extension case and one of the collective enfranchisement cases; Thomas Jefferies (instructed by Maxwell Winward LLP) appeared for the respondent in the other collective enfranchisement case; Edwin Johnson QC and Andrew PD Walker (instructed respectively by Terence St John Millett and Bircham Dyson Bell LLP) appeared for the respondents in the two cases involving enfranchisement of a single house.
Sally Dobson, barrister
