DECISION
1. This is an appeal by Chelsea Properties Limited against a decision of the Leasehold Valuation Tribunal for the London Rent Assessment Committee, determining the premium payable by the appellant for the grant of a new extended underlease of premises known as Flat 5, 70-72 Cadogan Square, London, SW1X 0EA under the provisions of Schedule 13 of the Leasehold Reform, Housing and Urban Development Act 1993 at £1,154,000. The LVT’s decision is contained in a document dated 13 March 2006, as corrected by a certificate dated 12 April 2006, issued under Regulation 18(7) of the Leasehold Valuation Tribunals (Procedure) (England) Regulations 2003 (or purportedly so corrected – there is a dispute as to the validity of this certificate and the correction effected thereby). The appellant’s case was that the premium should be £801,317 (Appendix 1). Although there was no cross-appeal by the respondent freeholders, Earl Cadogan and Cadogan Estates Limited, they contended that the price determined by the LVT should be increased to £1,182,600 or alternatively £1,182,200 (Appendices 2 and 3).
2. Mr Edwin Johnson QC, counsel for the appellant, called one expert witness, Mr K G Buchanan BSc MRICS, a partner in Messrs Knight Frank. Mr Mark Sefton, counsel for the respondents, called two expert witnesses. The first, Mr J M Clark, BSc MRICS, a partner in Messrs Gerald Eve, gave evidence on all aspects of the valuation except the value of the proposed new underlease and the value of the existing underlease. Evidence on those two valuations was given by Ms Frances Joyce, FRICS, an associate partner in Messrs W A Ellis. In company with the two experts we inspected the subject flat internally and externally on 18 July 2007. On the same day we inspected certain other flats which had been referred to as comparables. With one exception all such inspections were external only.
3. From an agreed statement of facts prepared for the purposes of the LVT hearing and from the evidence we find the following facts. Cadogan Square is a prime residential location in central London, within easy walking distance of the restaurant and shopping facilities of Knightsbridge and Brompton Road to the north and west, Sloane Street to the east and Sloane Square and the Kings Road to the south. There are London Transport underground stations at Knightsbridge and Sloane Square and bus routes in Sloane Square, Sloane Street, Kings Road, Knightsbridge and Brompton Road. There is a taxi rank in Sloane Square. There are NCP car parks in Cadogan Place to the east and Pavilion Road to the north. The adjoining property, 68 Cadogan Square, contains Sussex House School, which is a source of noise from children and traffic congestion in the morning and afternoon when children are dropped off and collected.
4. 70-72 Cadogan Square is a converted pair of terraced town houses, built on basement, ground and five upper floors. It is situated on the west side of Cadogan Square, close to its south west corner. The accommodation comprises a caretaker’s flat in the basement and twelve private flats, including the subject flat. A two person passenger lift serves all floors. The entrance to the building is off Cadogan Square.
5. The subject flat is located on the first floor and access is gained from the common hallway via stairs and the lift. At the commencement of the existing underlease the accommodation comprised a drawing room with access to a balcony overlooking the Cadogan Square gardens, a dining room, three bedrooms, two en-suite bathrooms, kitchen and cloakroom/wc. Subsequent to the grant of the underlease, a doorway between the kitchen and the adjacent bedroom was created and the existing door opening from the hallway to the kitchen was blocked up. The effect was that use of that bedroom has been lost and the room is now used for purposes ancillary to the kitchen. The flat is in good repair, with modern kitchen and bathroom equipment. The gross internal floor area of the flat is 2,150 sq ft. The gross area of the balcony overlooking Cadogan Square is 76 sq ft.
6. The flat is held by the appellant under what is effectively a full repairing and insuring underlease for 64 years (less 10 days) from 25 March 1959 at a fixed annual ground rent of £100. The valuation date is 2 July 2004. At that date the unexpired term of the appellant’s underlease was 18.7 years. Under the provisions of the 1993 Act the appellant is to be granted a new underlease with a term extended by 90 years beyond the term date of the existing underlease. Upon the grant of the new underlease the ground rent is to be reduced to a peppercorn. It is agreed that the intermediate leaseholder is to be compensated by way of a pro rata reduction in the head rent payable, with no share of marriage value. The loss in rent of £100 per annum will thus be suffered by the respondents, and the capital value of that lost rental income stream has been agreed at £1,197.
7. The valuation matters in dispute between the parties are the value of the appellant’s existing underlease disregarding the value of tenant’s improvements and the right to enfranchise; the value of the proposed extended underlease disregarding improvements and the relationship between the latter value and the value of the freehold interest in possession.
8. The LVT’s decision was issued before the decision of this Tribunal in Cadogan v Sportelli and Others [2006] RVR 382. The following matters in particular arise from the subsequent decision in Sportelli:
(1) There was at one stage an issue as to the rate at which the freehold reversion should be deferred, but this has now been agreed at 5%, an increase of 0.25% on the rate adopted by the LVT. This deferment rate of 5% has been agreed between the parties for the purposes of the present appeal irrespective of the outcome of the presently pending appeal to the Court of Appeal in the Sportelli case.
(2) The Lands Tribunal in Sportelli decided that, in valuing the landlord’s interest under Schedule 13 to the Act of 1993, no account was to be taken of any hope value or, save as is specifically provided, of marriage value (see paragraph 106). The respondents accept for the purposes of their primary valuation before us that this Tribunal’s decision in Sportelli is correct upon this point, but they reserve their position on the point in case the Court of Appeal reverses the decision regarding the exclusion of hope value.
9. As a result of the matter raised in subparagraph 8(2) above two separate valuation approaches are relied upon by the respondents:
(1) The respondents’ primary valuation involves adopting the Sportelli decision and excluding hope value. On this basis the respondents argue that hope value must be excluded not only from the valuation of the landlord’s reversion on the existing lease (this follows directly from Sportelli) but also by parity of reasoning from the valuation of the tenant’s existing lease. The respondents contend that there should be an exclusion of value over and above the exclusion of the rights conferred by the 1993 Act. The argument being that in a no 1993 Act world (where no statutory rights to an extension existed) there would nonetheless be a potential marriage value to be unlocked if the tenant and the landlord voluntarily (rather than under the compulsion of the 1993 Act) came to terms for an extended lease. It was argued that, although the tenant would have (as it was put) in effect to go cap in hand to the landlord, there would be an incentive for the landlord in this no 1993 Act world to do a deal on terms which gave the tenant at least some proportion of the marriage value existing at the date of the deal. Mr Sefton argued that if Sportelli is correct regarding the exclusion of hope value from the valuation of the landlord’s reversion, then there should also be excluded from the value of the tenant’s existing lease not only the value of the 1993 Act rights to an extended lease but also the value of the hope of doing a deal with the landlord in a no 1993-Act world. This approach led the respondents to advance as their primary case a valuation which (consistent with Sportelli in the Lands Tribunal) did not seek to add any hope value in the valuation of the landlord’s reversion, but which sought to make a reduction to the value which would otherwise be adopted as the value of the tenant’s existing lease in order to strip out this alleged hope value. This approach resulted in the respondents contending before us for a value for the existing lease which was lower than that for which they contended before the LVT (namely £916,000 as opposed to £1m).
(2) As a secondary valuation, in order to cover the position reserved by the respondents (namely that the Lands Tribunal decision in Sportellli is wrong regarding the exclusion of hope value from the value of the landlord’s reversion) the respondents advanced a separate valuation which did not exclude hope value from either the value of the landlord’s reversion or from the value of the existing lease. On this approach the value of the existing lease contended for by the respondents reverted to the figure contended for by them before the LVT of £1m, but the value contended for by the respondents for the landlord’s reversion on the existing lease increased by a figure said to be reflect hope value. As it turned out the two valuations put forward by the respondents came to very nearly the same figure, the primary valuation being £1,182,600 and the secondary valuation being £1,182,200.
10. Bearing in mind that the correctness of the exclusion of hope value, as decided by this Tribunal in Sportelli, is under challenge in the Court of Appeal, we were asked to produce alternative valuations so as to cover the position supposing this Tribunal’s decision in Sportelli was (a) right and (b) wrong so far as concerns the exclusion of hope value. This approach is consistent with the Lands Tribunal Rules 1996, rule 50(4) and we adopt it.
11. The foregoing points advanced by the respondents regarding hope value gave rise to argument between the parties as to the correct approach in law on certain matters. There was also disagreement in law on certain other matters. It is convenient to set out the points of law which were in contention between the parties and to give our decision upon them (insofar as it is necessary to do so) at this stage.
12. The points of legal disagreement may be summarised as follows:
(1) What is the legal status of the purported correction certificate so far as concerns the addition of paragraph 47A into the LVT’s decision (this paragraph sets out the LVT’s reasoning for adopting 2% rather than 1% as the uplift to be applied to the value of the extended lease in order to obtain the value of the freehold reversion)?
(2) The respondents have themselves not sought to obtain permission to appeal against the LVT’s decision. Mr Johnson referred to this Tribunal’s decision in Arrowdell Ltd v Coniston Court (North) Hove Ltd [2007] RVR 39. He argued that we should examine in the light of that decision the question of whether the respondents should be entitled before us to argue for a premium higher than that decided by the LVT, bearing in mind that the respondents had not sought to appeal against that decision. Mr Johnson invited us (albeit recognising the weakness of this invitation) to conclude that the respondents should not be allowed to do so and should be limited to arguing for the figure decided by the LVT.
(3) Mr Johnson pointed out that the respondents were seeking to argue before us for a higher premium than they had argued for before the LVT (there they argued for £1,181,850). Mr Johnson contended that in the light of Pitts and Wang v Cadogan (LRA/79/2006, unreported) the respondents were not entitled to do so (see paragraph 9 of the decision). Mr Johnson developed this argument further and went on to contend that, consistent with the reasoning in Pitts and Wang, the inability in law to argue for a higher ultimate premium than that argued for in the LVT extends to imposing an inability in law to argue for a more favourable figure (ie more favourable to the respondents than that contended for before the LVT) in respect of any of the ingredient values which go to make up the ultimate premium. Mr Johnson contended that, insofar as the respondents’ arguments before us transgress this limitation, they should be disallowed.
(4) There is then the question of whether hope value can be included in the value of the landlord’s reversion on the existing lease. It was accepted by both parties that this is a matter which was decided in the negative by Sportelli and is subject to an appeal to the Court of Appeal. We were therefore invited to follow this Tribunal’s decision in Sportelli but to produce an alternative valuation in case that decision is held to be wrong.
(5) A further point of law regarding hope value arose which was this. Supposing that hope value exists as a matter of valuation in the value of the tenant’s existing lease (ie when valued on a basis excluding 1993 Act rights). Should this hope value be stripped out when valuing the tenant’s existing lease for the purposes of paragraph 4A of Schedule 13 to the 1993 Act?
13. Point (1). So far as concerns the status of the correction certificate, such an argument might be of significance if the LVT’s decision had remained unappealed and a question had arisen as to its true interpretation and effect. However, bearing in mind that there is now this present appeal by way of a re-hearing to the Lands Tribunal, the point can be of no significance. The question whether the proper uplift from an extended lease to the freehold value is 1% or 2% is properly before us for a decision and we have heard evidence and argument upon it. We must reach our own conclusion upon this point. That conclusion will not be influenced by whether there was or was not some irregularity in the certificate from the LVT which added paragraph 47A to the decision (thereby setting out the LVT’s reasoning for taking 2% rather than 1% for the uplift). We would in any event observe that the certificate did not purport to alter the ultimate decision by the LVT as to the premium payable. The uplift adopted originally by the LVT in the figures in its decision was 2% and the uplift adopted after the certificate remained 2% – the certificate merely added a previously omitted paragraph of reasoning. Insofar as it is necessary for us to express a conclusion on the validity of the certificate we conclude that it is valid. However, the question of whether the certificate is valid or not has no effect on our ultimate decision as to the appropriate uplift, which we take in the light of the valuation evidence and the arguments which have been advanced.
14. Point (2). This Tribunal in Arrowdell recognised the problems for a party (R) to an LVT decision where R does not itself wish to appeal notwithstanding that it was not entirely successful in its arguments before the LVT. It may well be that while R does not itself wish to challenge the LVT’s decision, it would wish to resurrect its full arguments if it were taken to the Lands Tribunal by the other side (A). There is no provision under the rules for a cross appeal (ie an appeal by R in response to the grant to A of permission to appeal) and by the time that R gets to know of the grant of permission to appeal to A it will almost certainly be too late for R itself to seek permission to appeal. In Arrowdell this Tribunal drew attention to section 175(4) of the Commonhold and Leasehold Reform Act 2002 and observed in paragraph 15:
“Thus the injustice that would result from there being no provision for cross-appeal in either the LVT Regulations or the Lands Tribunal Rules can be mitigated by virtue of the provision in section 175(4). It is open to the Tribunal to entertain contentions on the part of a respondent that a price more favourable to the respondent than that in the LVT’s decision should be determined and to determine such a price. The respondent, however, has no right in this respect. It is a matter for the Tribunal’s discretion, and clearly the Tribunal would only exercise the power to make a determination more adverse to the appellant than that of the LVT if it was fair to do so.”
15. In the present case we have no hesitation in concluding that the respondents should be entitled to argue for a result more favourable to them than the LVT’s decision. The arguments which the respondents seek to advance before us have been made clear in their statement of case since September 2006. There is no question of the appellant being taken by surprise. There is no prejudice to the appellant in allowing the respondents to argue for a figure higher than the LVT decided and no such prejudice had been contended for by Mr Johnson.
16. Point (3). Mr Johnson’s primary argument, based on Pitts and Wang, is that the respondents are not entitled to argue before us for an ultimate figure for the premium payable which is higher than the figure contended for by the respondents before the LVT. This primary argument has no practical significance in the present case, because the price contended for by the respondents before the LVT was £1,181,850 and the valuations contended for before us by the respondents are only £350 or £750 higher than this figure. Also, and in any event as will be seen from our conclusions on the valuation evidence, the ultimate figure decided upon for the premium payable is lower than the figure of £1,181,850 contended for at the LVT. Accordingly, without re-examining the reasoning in Pitts and Wang at paragraphs 9 and 10, we conclude that we should follow that decision and effectively treat the respondents’ valuations as each being subject to a footnote that they are limited to £1,181,850.
17. We reject Mr Johnson’s more far reaching contention that, not merely are the respondents precluded from contending for an ultimate figure for the premium of more than £1,181,850, but they are also precluded from contending for a figure more favourable to them than they contended for before the LVT in respect of any constituent figure which is part of the valuation process which goes to make up the ultimate premium. We can see no justification for such a limitation either in the words of section 175(4) of the 2002 Act or in Pitts and Wang or at all. If such a restriction applied to an appeal to the Lands Tribunal from the LVT such as the present appeal (which happens to be an appeal regarding the premium payable for an extended lease under Schedule 13 to the 1993 Act) the restriction would equally apply to other appeals to the Lands Tribunal from the LVT. In argument we raised with Mr Johnson an example of an appeal to the Lands Tribunal from a decision by the LVT regarding service charges, where the landlord was forced to concede before the Lands Tribunal that an item of expenditure had been placed in a wrong category in that it had been treated as, say, repairs under the repairing covenant rather than as money payable by way of a contribution to a sinking fund or towards garden maintenance. It would be extraordinary if the expenditure had to be removed from the ingredient figure which represented repairs, but could not be added into the ingredient figure regarding payments to a sinking fund or towards garden maintenance on the basis that this would be allowing the landlord to contend for a higher figure for one ingredient figure than was contended for in respect of that ingredient before the LVT. There is nothing either as a matter of law or as a matter of fairness which requires the respondents to be limited in this manner – indeed we consider it would be unfair to the respondents so to limit them.
18. Point (4). No decision from us is required on this point (see paragraph 12(4) above). We proceed on the basis that this Tribunal’s decision in Sportelli was correct in concluding that hope value was to be excluded from the valuation of the freehold reversion under paragraph 3 of Schedule 13 to the 1993 Act.
19. Point (5). This point only arises as a matter of practical significance if, contrary to Mr Johnson’s arguments, the valuation evidence is such as to indicate the existence of hope value in the value of the existing underlease (ie in the value of the existing underlease when valued ignoring the rights under the 1993 Act). As is shown below when we turn to the valuation evidence, we have concluded that on the state of the evidence in the present case we are not satisfied that such hope value exists and, further, even if such hope value does exist as a matter of theory we are unable to conclude that it can properly be represented by any particular identifiable sum of money. Accordingly point (5) is in fact of no significance to the ultimate outcome of the case. However, as the point has been argued, and in case matters should develop such that out conclusion on this point hereafter becomes relevant to the present case, we consider we should express our conclusions upon it. Mr Johnson contended that there was a distinction between the exclusionary words in paragraph 3 of Schedule 13 as compared with those in paragraph 4A of Schedule 13 such that, on the assumption that this Tribunal’s decision in Sportelli is correct and hope value is to be excluded from the value of the landlord’s reversion, there was no justification for reaching a similar conclusion to the effect that hope value (if it existed) should also be excluded from the value of the tenant’s existing lease. Mr Johnson drew attention to the fact that, while the wording of paragraph 4A required the existing lease to be valued on the assumption that the landlord was not one of the persons seeking to buy, there was nothing to require the existing underlease to be valued on the assumption that the purchaser from the tenant of its existing underlease would not, immediately after such purchase, seek to do a deal with the landlord by way of buying from the landlord an extended underlease. There being no express wording requiring this disregard to be made, Mr Johnson contended that it should not be made. However, a similar argument could be advanced regarding the wording in paragraph 3 concerning the valuation of the landlord’s reversion. While it is to be assumed that neither the tenant nor any owner of an intermediate leasehold interest is buying or seeking to buy, it is not stipulated that the purchaser of the landlord’s reversion will not seek to buy in the tenant’s lease (ie by taking a surrender), thereby enabling the purchaser to enjoy the marriage value by granting a fresh long lease to a new lessee. However, despite this gap in what has to be disregarded, the Lands Tribunal in Sportelli has concluded that hope value must wholly be disregarded so far as concerns the valuation of the freehold reversion. By like token, assuming that the Tribunal’s decision in Sportelli is correct, we conclude that hope value (ie the value representing the possibility of a deal being done between landlord and tenant) must be disregarded so far as concerns valuing the tenant’s existing underlease.
Extended underlease – evidence
20. Mr Buchanan considered that the value of the extended underlease in the subject flat was £1,997,500, or £929 per sq ft. This was based on a consideration of six open market sales which may be briefly summarised as follows:
Address | Floor | GIA Sq ft | Date of Sale | Adjusted price per sq ft | |||
Flat 3, 37 Cadogan Sq | 2 | 1,374 | Feb 2004 | £952 | |||
Flat 6, 70/72 Cadogan Sq | 1 | 1,395 | Jul 2005 | £933 | |||
78 Cadogan Sq | 1 & 2 | Sep 2005 | £638 | ||||
66 Cadogan Sq | G & 1 | 1,097 | Mar 2006 | £775 | |||
Flat 11, 78 Cadogan Sq | 1 | 958 | Apr 2004 | £927 | |||
Flat 3, 74 Cadogan Sq | 1 | 878 | Oct 2003 | £854 | |||
