Collective enfranchisement – Leasehold Reform, Housing and Urban Development Act 1993 – Leasehold valuation tribunal determining price payable on collective enfranchisement of building – Correct approach to calculation of marriage value – Whether leaseholders not party to initial notice subsequently becoming participating tenants by election under section 14(3) of 1993 Act – Appropriate percentage to adopt for relativity in valuing short unexpired lease terms – Whether permissible to include deduct “purchaser’s margin” for costs and risks when valuing freeholder’s interest – Appeal allowed in part
The appellant was a company formed by long leaseholders of flats in a purpose-built, 1920s mansion block in London W1 to act as nominee purchaser on a collective enfranchisement claim to acquire the freehold of the building under Chapter 1 of Part 1 of the Leasehold Reform, Housing and Urban Development Act 1993. The respondent was the current freeholder and there was also a headlease of the whole building held by an intermediate landlord for a term expiring in July 2021. Each of the participating tenants in the claim was a member of the appellant and had entered into a participation agreement providing for the appellant’s conduct of the enfranchisement claim. The agreement contained a clause irrevocably authorising the appellant to enter into such agreements as might be necessary or appropriate to ensure that finding was available to cover the proportion of the enfranchisement price that was attributable to any non-participating flat.
The leasehold valuation tribunal (LVT) determined an enfranchisement price of £21,340,923 under Schedule 6 of the Act, calculated at the relevant valuation date in September 2009. It apportioned sum that as to £21,170,501 to the freehold and £170,422 to the headlease.
In calculating the “marriage value” component of the price, under para 4 of Schedule 6, the LVT applied the artificial assumption in para 3(1)(b) and (c) of Schedule 6 that the Act conferred no right to acquire any interest in the specified premises or to acquire any new lease; it therefore disregarded the effect on that value of rights under the Act. In doing so, it rejected the appellant’s submission that it should depart from the decision of the Court of Appeal in McHale v Earl Cadogan [2010] EWCA Civ 1471; [2011] L&TR 18; [2011] 1 EGLR 36, which had been the subject of an appeal to the Supreme Court that was later compromised.
The LVT also considered whether, for the purpose of ascertaining marriage value, the participating tenants should be taken to include leaseholders of two adjoining flats which had had not been party to the initial notice of the claim served on the respondent under section 13 of the Act but had since, in December 2009, entered into deeds of adherence with the appellant by which they undertook to adhere to the participation agreement. It concluded that those leaseholders should be treated as participating tenants since they had elected to participate with the agreement of the original participating tenants, pursuant to section 14(3) of the Act.
In valuing the leasehold interests in certain flats that were due to expire in 2021, the LVT was assisted by evidence of “real world relativity”, namely the relationship, as a percentage, between the freehold vacant possession (FHVP) value of a flat and the value of a lease with 11.82 years of the term unexpired, in the real-world situation where the provisions of Chapters 1 and 2 of Part 1 of the 1993 Act applied to the leases. It found that the short flat leases were worth 38% of the FHVP value in the real world, with the right to enfranchise, but 28.5% on the hypothesis that the tenants had no right to enfranchise.
In valuing the freeholder’s interest in the building, the LVT declined to deduct a “purchaser’s margin” from the aggregated FHVP values of the constituents parts of the building; it held that such a reduction was impermissible and unnecessary because it was already accommodated in the 5% deferment rate laid down in Earl Cadogan v Sportelli [2007] 1 EGLR 153 for properties in prime central London (PCL). Both parties challenged the LVT’s decision on appeal.
Held: The appeal was allowed in part.
(1) The tribunal was bound to follow the Court of Appeal decision in McHale; consequently, under para 4 of Schedule 6 to the 1993 Act, the leases of the participating tenants should be valued without the benefit of rights under that Act.
(2) Section 14(3) of the 1993 Act required no particular formalities to be observed for a third party to become a participating tenant. Only two matters had to be established: first, that a qualifying tenant of a flat contained in the specified premises had elected “to participate in the proposed acquisition”; and, second, that it had done so with the agreement of all of the persons who were for the time being participating tenants. The deed of adherence satisfied the first requirement since the leaseholders of the two flats had, by its terms, chosen to take on all of the obligations and to receive all of the benefits of participation. As to the second requirement, while there was no evidence that the original participating tenants had given their individual approval to the election, the matter fell within the irrevocable authorisation that they had given to the appellant to enter into such agreement as might be necessary or appropriate to ensure that funding was available to cover the proportion of the price attributable to any non-participating flat. One effect of the deeds of adherence was to ensure that an additional source of funding was available which would cover the proportion of the price attributable to the two flats. They were therefore agreements of a type already contemplated by the participation agreement and there was no need for the appellant to seek the individual approval of each participating tenant before entering into them. It followed that the two flats were participants in the enfranchisement.
(3) Real-world relativity could assist in the valuation of the existing leases notwithstanding that, for the purposes of ascertaining marriage value, the leases had to be valued in the “no-Act world” on the assumption that the rights conferred by the 1993 Act did not apply. The ascertainment of relativity in the notional no-Act environment was complicated by the passage of time since such conditions existed, by the very limited availability of reliable valuation data, and by the consequent difficulty of testing the subjective analyses of those whose relevant market experience pre-dated the 1993 Act. Evidence was, however, available to establish the relativity of short leases to FHVP value in current conditions. Consequently, one of the methods of valuing a lease with only a short unexpired term in the “no-Act world” was to make an adjustment to a real-world relativity established by evidence of market sales of short leases. In order to undertake that exercise, it was first necessary to establish the real-world relativity at the relevant lease length and then adjust it to reflect the no-Act hypothesis.
The parties now agreed, based on evidence of short lease sales in the building prior to the valuation date, that, in the real world, the two leases with 11.82 years unexpired, and enjoying rights under the 1993 Act, were worth 41.25% of the FHVP value of the same flat. In assessing the discount to be made from that real-world relativity figure, to take account of the statutory assumption that none of the tenants enjoyed rights under the Act, it was appropriate to characterise the benefit of the Act as akin to an option to acquire a new long lease at a price assessed under the 1993 Act and to make a discount by reference to the value of such an option. An approach that sought to quantify the benefit of the Act in terms of a proportion of marriage value would be unsound because, especially in the case of short lease terms, such an approach failed to take into account the real benefits that the Act secured; moreover, there was no evidence that the opportunity to profit by sharing in marriage value that would not otherwise be available was a significant motivating factor in enfranchisements under the Act. As the term of the lease became shorter, the immediate benefits of the statutory option to extend the lease increased, whereas the marriage value fell as the term diminished. It was therefore necessary to supplement the tenant’s share of marriage value to reflect other benefits of the Act: Nailrile Ltd v Earl Cadogan [2009] 2 EGLR 151 applied.
Evidence of the appropriate relativity could be derived from the available graphs of relativity in PCL, which, taken as a whole, represented the collective efforts of a large group of knowledgeable valuers adopting different methods and using slightly different base data. The average of the figures produced by those graphs was 33.5%. That reinforced the evidence of the parties’ experts as to the appropriate “no-Act world” reduction. Doing the best that was possible with the evidence available, the appropriate allowance for the benefit of the Act, for a lease with 11.82 years unexpired, was 20%. Applying that to the agreed real-world relativity of 41.25% gave a no-Act relativity of 33%.
(4) Although the 1993 Act did not prescribe a method of valuation by the freehold value, on the statutory assumptions, was to be ascertained, and there was no rule of law prohibiting the adoption of an approach that incorporated a “purchaser’s margin”, such an approach was in practice unnecessary. The purchaser’s margin reflected the difference in the amount that a dealer or an investor might pay to acquire the freehold of the building with vacant possession at the date of reversion of the short leases and the aggregate value of the individual components which a purchaser would acquire on such a sale. It might comprise a number of elements, which could be divided between costs and profit, including the purchaser’s acquisition costs, its re-sale costs, interest on money borrowed to finance the purchase and any element of profit that it might expect to achieve. To the extent that such matters were already accommodated within the risk premium included in the deferment rate, no further allowance should be made, since to do so would involve double counting. While the Lands Tribunal in Sportelli had acknowledged the possibility that exceptional features of a building might require special consideration so as to justify a different deferment rate or a separate allowance, and while a purchaser’s margin might be included in exceptional cases if the facts and evidence clearly demonstrated that the Sportelli risk premium was inadequate, there were no grounds for taking that course in the instant case. There was no evidence that a purchaser of the property at the present day would deduct hypothetical costs and profits on a hypothetical future sale at the reversion of the short leases.
Stephen Jourdan QC (instructed by TLT LLP) appeared for the appellant; Michael Pryor (instructed by Speechly Bircham LLP) appeared for the respondent.
Sally Dobson, barrister
Read the transcript: 82 Portland Place (Freehold) Ltd v Howard de Walden Estates Ltd
