Landlord and tenant – Rent review – Leasehold enfranchisement claim – Price payable to acquire freehold of house – Value of appellant’s freehold interest partly depending on effect of rent review clause in existing lease held by respondents – Construction of rent review clause – Proper method of assessment of reviewed rent – Whether LVT properly construing clause as requiring assessment of “marketable rent” based on hypothetical letting in open market on terms of existing lease save as to rent – Appeal dismissed
The leasehold valuation tribunal (LVT) was asked to determine the price payable by the respondents to acquire the freehold of a semi-detached house in Cardiff from the appellant under the leasehold enfranchisement provisions of Part I of the Leasehold Reform Act 1967.
The lease in question had been granted in 1991, for a term of 99 years from 1990, in return for a modest premium of £600 and a ground rent of £45 pa, but with provision for upwards-only rent reviews after 25, 50 and 75 years. The first review was due in 2015, with the reviewed rent to represent “the open-market letting value of the land hereby leased as if it were a vacant site without any buildings thereon… to be assessed in accordance with current open market values of the Site at each relevant Rent Review Date… as if it were at such Rent Review Date available for residential development for purposes authorised by the Town and County Planning Act”.
A preliminary issue was tried to determine the meaning of the rent review clause and its consequent effect on the proper valuation of the appellant’s freehold interest. The appellant contended that the clause required the assessment of a rent akin to the “modern ground rent” that would have been payable, under section 15(2) of the 1967 Act, had the respondents sought to acquire a lease extension instead of the freehold. The appellant therefore argued for an assessment by reference to the rate of return that a freeholder could achieve on the capital value of the site if let in the open market on a 50-year lease.
The LVT rejected both the appellant’s case and that of the respondents, who had argued that only a nominal ground rent was payable. It held that the rent was to be a “marketable ground rent” on an assumed letting between a willing landlord and a willing tenant, representing the highest ground rent at which a purchaser in the hypothetical open market would be willing to acquire a lease of the site as a plot of land on the same terms as the existing lease save in respect of the rent, and therefore taking into account that the letting was at a premium of £600 and with rent reviews after 25, 50 and 75 years. The appellant appealed.
Held: The appeal was dismissed.
(1) There was no procedural irregularity in the LVT’s approach to valuation notwithstanding that it had taken a different approach from either of the parties. Fair procedure required that the parties should be able to make submissions on any specific matters that subsequently formed the basis of its determination. However, there was a distinction between reaching a decision on the basis of evidence not adduced by the parties, and on which they had not had the opportunity to comment, and arriving at a conclusion on the meaning of a document that fell somewhere between the alternative submissions made by professional advocates who appeared before the LVT. Where both parties were represented by experienced counsel, who had submitted opening and closing arguments orally and in writing, the LVT was entitled to assume that they had addressed it on all of the points that they considered necessary. It was self-evident that there might be other interpretations of the language of the rent review clause that fell between the extremes for which the parties argued and the LVT had specifically raised that possibility with the parties. Both parties therefore had the opportunity to make any alternative or additional submissions that they considered appropriate before the LVT provided the assistance to the valuers which it had specifically been invited to provide. It would have been a disservice to the parties for the LVT to limit its conclusion to a rejection of both the nominal ground rent case advanced by the respondents and the section 15 methodology proposed by the appellant.
(2) The LVT’s valuation approach could not be faulted. The lease required that the annual rent should be a sum representing the open market letting value of the land as if it were a vacant site without any buildings, assessed in accordance with “current open market values” of the site. The LVT had been entitled to hold, in light of the use of the word “values” in the plural, that the valuation exercise should to be carried out by reference to the sale values of plots of land without buildings, rather than by the use of formulae such as the “standing house method”. Its conclusion on that matter was consistent with the language and intent of the rent review clause.
Moreover, the rent review clause assumed that the rental value of the land would be capable of being arrived at by first considering the capital value of the land. Although the LVT had disapproved the use of formulae in addressing the current open market value of the land, it had not ruled out the use of a formula to convert the capital value of the site, assessed in accordance with current open market values at the review date, into a rental value. It did not preclude the adoption of the second stage of a conventional section 15 valuation, which was common to both the “cleared-site” and the “standing house” method, and which sought to convert the value of the site into a rental value by de-capitalising the site value using the presumed rate of return that the site owner would require if he were to let it for a term of years.
The fact that the experts could not find “comparable” cleared sites at the relevant time was of little significance. The experts did not suggest that there was no evidence of sales of plots of land for development, but only that there was no evidence of such sales reserving a modern ground rent. That did not rule out evidence of freehold sales of more or less comparable sites that might inform an assessment of the capital value of the subject site. Moreover, even if there were no sales of vacant plots of land in or before 1991, the parties could not be taken to have assumed that such evidence would not be available at the review dates.
(3) The LVT had also been entitled to conclude that the reviewed rent should be a “marketable rent” of the kind that it described. It had used the phrase “marketable rent” as a synonym for “open market letting value”. The absence of evidence of lettings either at a modern ground rent or a “market” rent did not matter since the LVT was not being asked to consider evidence of value, but only to provide assistance to the parties in preparing a valuation. The LVT was very experienced and would have been very well aware of the levels of ground rents calculated employing the conventional section 15 approach. It had said no more than that rents calculated on that conventional basis were higher than rents which would be agreed in the open market. It was right to emphasise that the rental value to be ascertained on each review date was to be a rent that would be agreed in the open market, on a letting that had to be assumed to take place; any technique yielding a result that, viewed objectively, simply would not be agreed in the open market was either flawed or wrongly employed. It did not matter that such a transaction would never be encountered in the open market, since the parties had agreed that the assessment of the rent was to be undertaken on that basis and it was therefore necessary to assume that a letting would be achieved between a willing landlord and willing tenant. A letting value therefore had to be assessed for a parcel of land of a certain capital value, which had to be adequately reflected in the return to the landlord. Since the hypothetical parties were assumed to have reached agreement, the rent to be determined under the rent review clause had to represent not only the highest ground rent at which a lessee would be willing to take the land, but also the lowest ground rent at which a freehold owner of the site would be willing to part with it for the duration of the hypothetical lease. If there was a gap between those figures, the valuer had to consider at what point that gap would be bridged in a successful negotiation between willing parties.
(4) Although it had made no difference in the instant case, the LVT had erred in assuming the payment of a 600 premium for the hypothetical lease by reference to the “presumption of reality”. Although a premium of £600 was paid on the grant of the actual lease in 1991, no further premium would become payable on the first review date in 2015 or on subsequent review dates. The assumption that such a premium would be paid by the hypothetical tenant taking a new lease for a term of 99 years from the review date was not required by the express terms of the lease and did not reflect the reality of the terms still subsisting between the parties: Plotnek v Govan [2014] UKUT 0322 (LC) distinguished.
(5) In light of the above conclusions, it was agreed that the respondents were entitled to acquire the freehold interest in the property for £10,530.
Mark Loveday (instructed by SE Law Ltd, of Northwich) appeared for the appellant; Barry Denyer-Green (instructed by The William Ricketts Partnership, of Cardiff) appeared for the respondents.
Sally Dobson, barrister
Read the transcript: Clarise Properties Ltd v Rees and another