Landlord and tenant – Leasehold enfranchisement – House – Claimant seeking to acquire freehold of property converted from flats to single house – Preliminary issue concerning scope of statutory assumption that price payable for freehold diminished by extent to which value increased by improvements made at tenant’s expense – Whether property to be valued as if on valuation date it could be lawfully used only as flats and not as single house – Preliminary issue determined in favour of claimant
In 1971, S took a long lease of a house at 10, Cheyne Walk, in Chelsea which was divided into five separate flats. He restored the property to a single house over a number of years. The local planning authority did not regard the work as involving a material change of use or otherwise as development for which planning permission would have been required.
By 2019 planning policy had changed to favour the retention of flats and against the sort of project S had undertaken in the 1970s. It was lawful for the property to be used as a single house, but if it had still been divided into five flats it was almost certain that planning permission to convert it to a house would not then have been available.
In May 2019, S gave notice to the defendant landlord of his intention to purchase the freehold of the house under the Leasehold Reform Act 1967. Less than two years remained of the lease and the freehold reversion was very valuable. The claimant purchased the remains of the lease from S in August 2019 and pursued the acquisition of the freehold but the parties were unable to agree the price. A preliminary issue arose concerning the scope of the assumption in section 9(1A)(d) of the 1967 Act that the price payable for the house was to be diminished by the extent to which its value had been increased by improvements carried out by the tenant at his own expense. The issue was whether that meant that the property had to be valued as if on the valuation date it could be used only as five flats and could not lawfully be used as a single house.
Held: The preliminary issue was determined in favour of the claimant.
(1) The valuation hypothesis, and the assumptions which it required the valuer to make, were statutory deeming provisions: a state of affairs was to be assumed different in some identified respect from that which existed in reality and a particular question answered on the basis of those modified facts. For a tenant to secure a reduction in the price payable on enfranchisement two conditions had to be satisfied: The tenant had to identify improvements which they or their predecessors had carried out at their own expense; and satisfy the tribunal that but for those improvements the house and premises would have been worth less. The first condition was concerned with physical works, and the second with the effect of those works on value. The comparison was between the value of the house as it stood and what its value would have been if the improvement had not been made: Shalson v Keepers and Governors of the Free Grammar School of John Lyon [2003] UKHL 32; [2004] 1 AC 802 followed.
(2) Things were to be taken as they were in reality on the valuation date, except to the extent that the instrument postulating the hypothetical transaction required a departure from reality. The hypothesis was only a mechanism for enabling one to arrive at a value of particular property for a particular purpose. It did not entitle the valuer to depart from the real world further than the hypothesis compelled. Giving effect to the hypothesis might require a legal impediment to the implementation of the hypothesis to be ignored or treated as overridden; but only to the extent necessary to enable the hypothesis to be effective. Where the hypothesis inevitably entailed a particular consequence, the valuer had to take that consequence into account. But there was a clear distinction between hypotheses expressly directed to be made and assumptions allegedly consequential on the express hypotheses. Where the alleged consequence was not inevitable, but merely possible (or even probable), the consequence could not be assumed to have happened: Cornwall Coast County Club v Cardgrange Ltd [1987] 1 EGLR 146 and Harbinger Capital Partners v Caldwell [2013] EWCA Civ 492 considered.
(3) It was a necessary consequence of section 9(1A)(d) that, in its assumed condition, planning permission and listed building consent would need to be obtained by a purchaser of the property if they wished to carry out work to enable it to be occupied and used as a single house. As far as the works carried out in the 1970s were concerned, the only permitted departure from reality was that it had to be assumed that the house was not converted from a building divided into flats by works rendering it capable of single occupation.
The inevitable consequence of treating the works as if they had never been done was that any occupation of the house between the date on which the works were carried out and the valuation date had to be assumed to have been of the building in its unimproved condition. It followed that the prospective purchaser of the unimproved house on the valuation date would not be advised that, although the building was divided into five flats, it nevertheless had the benefit of an established planning use which would render it lawful, without planning consent, to occupy it as a single house.
(4) The best proxy for the value of the unimproved house 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. The planning status of the two properties would be the same and the defendant should therefore expect to receive the same price on a notional sale of both properties. To credit the defendant in the assessment of the price of the property with the benefit of a planning status which was a consequence of the occupation of the property as a single house, when that style of occupation was enabled only by the improvements carried out by S, would not be to diminish the price by the extent to which the value of the house had been increased by those improvements.
Stephen Jourdan QC and James Fieldsend (instructed by Teacher Stern LLP) appeared for the claimant; Mark Sefton QC (instructed by Cripps Pemberton Greenish) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Alberti v Cadogan Holdings Ltd
