In the first of two articles, Tim Dutton QC and Maxim Cardew assess Cravecrest and ask when hope value can be included in a valuation
The Supreme Court was due to hear the appeal from Cravecrest v Trustees of the Will of the Second Duke of Westminster [2013] EWCA Civ 731; [2013] 03 EGLR 47 in January 2015, but it settled beforehand. This presents a good opportunity to consider what the Court of Appeal decided in the case, its potential significance, and the way it has so far been relied on in the Upper Tribunal.
Cravecrest was about development hope value: the amount that a purchaser would be prepared to pay, over and above a property’s current use value, in the hope of being able to use the property in some other (and more valuable) way. It concerned a claim for the collective enfranchisement of a building used as a block of three flats whose aggregate value was £5.75m. However, a more valuable use of the building was as a single house; and viewed in that way the unencumbered freehold was worth £7.35m in its actual condition and without the benefit of planning permission.
Intermediate leasehold interests
The issue between the parties in Cravecrest was whether (and how) this £1.6m development hope value affected the price payable on enfranchisement. To understand the Court of Appeal’s decision, three facts need to be borne in mind.
First, there were intermediate leasehold interests, the effect of which was that the freehold would not become an interest in possession for many years to come. Therefore, even though the parties agreed that the building’s freehold vacant possession value was £7.35m, the present value of the right to vacant possession (in 175 years’ time) was modest.
Secondly, it was possible that the building’s development value might be realised before the freehold became an interest in possession. However, this would only be possible if two of the intermediate leasehold interests came under the same ownership or control. The main issue in Cravecrest was whether this possibility could be taken into account when valuing these intermediate leasehold interests under Schedule 6 to the Leasehold Reform, Housing and Urban Development Act 1993 (the “1993 Act”).
Thirdly, those two intermediate leasehold interests were the only interests that needed to come under the same ownership or control in order to unlock the development hope value.
The case turned on the valuation assumptions to be made when valuing each of the intermediate leasehold interests under paragraph 7(1) of Schedule 6 to the 1993 Act. Under that paragraph each intermediate leasehold interest is to be valued in conventional fashion, by hypothesising a sale of that interest in the open market on the valuation date – making a number of specific assumptions as provided by paragraphs 7(1) and 3 of Schedule 6.
One of those assumptions is that no one who currently owns an interest in the building is “buying or seeking to buy” – an assumption that clearly excludes the possibility that the hypothetical purchase will itself unlock the property’s development hope value: see [3(1) and 3(1A)].
However, does it follow that each interest must be valued on the basis that the development hope value can never be unlocked? The Upper Tribunal thought not, and valued each interest on the basis that it would be bought by someone who was aware of the development hope value, who hoped to unlock that value by acquiring the other interest at a later date and who was prepared to pay something to reflect that hope.
The nominee purchaser argued that the Upper Tribunal had misapplied Schedule 6, arguing that “buying or seeking to buy” should be interpreted widely so as to refer to any transaction (including a sale), which would have the economic effect of generating marriage value. It bolstered that argument by reference to Earl Cadogan v Sportelli [2008] UKHL 71; [2009] 1 EGLR 153, where Lord Neuberger had stressed that the expression “buying or seeking to buy” should be interpreted widely and purposively. The Court of Appeal rejected that argument.
Application of Schedule 6
The Court of Appeal accepted that Schedule 6 required each intermediate leasehold interest to be valued on the assumption that the owner of the other intermediate interest was not in the market to buy the interest being valued. It held that there was nothing in the 1993 Act to require the valuation of one interest to proceed on the assumption that the owner of the other interest would never be in the market to sell the other interest at some future date. It followed that the Upper Tribunal had not misapplied the 1993 Act.
In reaching that conclusion, the Court of Appeal gave considerable attention to what the House of Lords had decided in Sportelli. As Sir Terence Etherton C noted:
“The ratio of Sportelli… is that Schedule 6 to the 1993 Act does not exclude hope value from the enfranchisement price to the extent that the hope value reflects the hope of receiving marriage value from non-participating tenants; but hope value which can be taken into account has to be limited to the hope of transactions with non-participating tenants because there would otherwise be double counting. There cannot be both a right to marriage value under paragraph 4 of Schedule 6 and the right to hope value as at the valuation date reflecting the potential release of the same marriage value in the future.” [74]
This passage is an accurate distillation of Lord Neuberger’s reasoning in Sportelli [112] and to a lesser extent Lord Walker’s [42 and 44]: speeches with which Lords Hope and Mance agreed. The double-counting being referred to in the passage would arise if the enfranchisement price included both a share of marriage value (under paragraph 4 of Schedule 6) and something to reflect the hope of generating that same marriage value in the future. The passage reflects the fact that under Schedule 6 the price only includes a share of marriage value in relation to transactions with the participating tenants.
In Sportelli, the House of Lords was considering the value (in the eyes of someone buying the landlord’s interest) of a future deal with one of the qualifying tenants who was not participating in the enfranchisement, so that hope value attached to only one of the interests being acquired by the nominee purchaser.
By contrast, in Cravecrest, the hope value being considered related to a deal between two intermediate leasehold interests, so that the inclusion of hope value affected the value of two of the interests being acquired by the nominee purchaser. However, in both cases the inclusion of hope value in the enfranchisement price did no more than require the nominee purchaser to pay the same price that anyone else would have been required to pay for each of the interests – something which is hardly unfair.
Implications
The implications of Cravecrest have not yet been considered in the Upper Tribunal. Indeed, at the moment there are only two Upper Tribunal decisions that refer to Cravecrest at all and in neither case did the Court of Appeal’s decision have any effect on the outcome of the case. In Padmore v Official Custodian for Charities [2013] UKUT 211 (LC); [2014] 1 EGLR 129 the development hope value in the building could only be realised if the freehold and the interests of the participating tenants came into the same hands, and the issue between the parties was whether it constituted marriage value within the meaning of paragraph 4 of Schedule 6.
In Trustees of John Lyon’s Charity v Alamouti [2014] UKUT 87 (LC); [2014] PLSCS 170, the development hope value in the building could only be realised by terminating three leasehold interests of which two were held by participating tenants, but since those three leases each included a redevelopment break clause the landlord could unlock that value without having to buy-in any interests.
The Supreme Court has not explained why it gave the nominee purchaser permission to appeal from the Court of Appeal’s decision. Perhaps it wanted to use the case as an opportunity to put the House of Lords’ decision in Sportelli on a clearer footing. However, permission to appeal is only given in cases of general public importance and it is probably only a matter of time before Cravecrest starts being referred to more widely.
There are five important things to note about the decision in Cravecrest:
- Its reasoning only matters if there is valuation evidence that a possible future transaction between the owners of superior interests – ie intermediate leasehold interests or the freehold – would generate marriage value.
- Its reasoning is not limited to the hope of generating any particular type of marriage value and can therefore include: the hope of generating marriage value generated by assembling a development site; the hope of generating marriage value by the extension of an intermediate lease (this is only likely to arise if the lease carries with it the ability to occupy the property for several years once the occupational leases have expired); or the hope of generating marriage value by varying the terms of an intermediate lease (including a reduction in rent).
- Where the hope of releasing future marriage value affects the value of more than one interest being acquired by the nominee purchaser, the effect is cumulative. This is demonstrated by what happened in Cravecrest, where the hope value attaching to the two intermediate leasehold interests added up to 95% of the total marriage value.
- In other cases the hope will only affect one of the interests being valued: either because the other interest is held by a (non-participating) qualifying tenant; or because the other interest is valued on a special basis, for example, if it has a negative value (see paragraph 14 of Schedule 6 to the 1993 Act). Therefore, there may be some cases where the decision in Cravecrest reduces the significance of the point considered by the Lands Tribunal in Nailrile Ltd v Earl Cadogan [2009] 2 EGLR 151.
- As in Sportelli, the possible transactions that can produce hope value do not include transactions involving the participating tenants.
Part two will appear in next week’s Estates Gazette
Tim Dutton QC and Maxim Cardew are barristers at Maitland Chambers
