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 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 LVT 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 Upper Tribunal dismissed the appellant’s appeal against that decision: [2014] UKUT 394 (LC); [2014] PLSCS 317. The appellant appealed.
Held: The appeal was dismissed.
(1) Although the letting value of the land was to be expressed as an annual rent, it had to be derived from (or at least to be in accordance with) the notional capital value of the vacant site, without any buildings upon it but with the benefit of planning permission for residential development. The agreed formula for ascertaining the reviewed rent involved the making of two hypotheses: first, that the property was a vacant site; and secondly, that the site was available for residential development. Further, both the annual letting value of the notionally vacant site and its capital value were to be values on the “open market”. The concept of the open market involved assuming that the whole world was free to bid, and then forming a view about what in those circumstances would in real life have been the best price reasonably obtainable. Though it was assumed that there was a market, there was no assumption required as to how lively that market was. The strength of the market and the rental value of the premises in the market were matters for the valuer’s discretion based on his own knowledge and experience of the letting value of such premises: Inland Revenue Commissioners v Gray [1994] STC 360 and Hoare (Valuation Officer) v National Trust (1997) 77 P & CR 366 applied. Dennis & Robinson v Kiossos Establishment [1987] 1 EGLR 133 followed.
(2) The word “representing” in clause 1(b) of the lease signified no more than that the open market letting value of the vacant site was necessarily a hypothetical open market value, because the land subject to the lease in fact had the property standing upon it. Therefore, the annual rent was not intended to be a proxy for the open market letting value of the land. On the contrary, the open market letting value was to be ascertained making the specified assumptions, and the sum thus ascertained then represented, or was to be taken as being, the annual rent. The absence of comparable transactions in the real world was irrelevant. The parties to the lease agreed on the hypothesis which had to be made and there was nothing hypothetical about the open market as such. The case was therefore on all fours with Kiossos, because it required the assumption of a market in which the hypothetical letting value would be agreed. That kind of hypothetical exercise was one which expert surveyors were well accustomed to undertake, and the fact that the parties’ surveyors were able to reach agreement on the basis of the LVT decision showed that the exercise was not inherently impossible.
(3) The purpose of the rent review clause in the lease was to ascertain the rent payable for the 74 years of the term running from 24 June 2015 until its expiry in June 2089. There was no good reason to suppose that the parties would have had in mind for that purpose provisions of the 1967 Act which could apply only to the further notional term of 50 years which one had to imagine thereafter for certain purposes of the 1967 Act. Moreover, there was no reference to the open market anywhere in section 15(2), whereas the draftsman of clause 1(b) of the lease placed the open market at the centre of the rent review provision, using it both in relation to the annual letting value of the land and the capital value of the vacant site. The fact that the lease might initially have been granted on favourable terms in 1991 was irrelevant to the true construction of the rent review provisions. The notional open market value might be difficult to ascertain but on no view could it be greater than market value. That would be to contradict the hypothesis which had to be applied. Therefore, the Upper Tribunal had come to the correct conclusion.
Mark Loveday (instructed by SE Law Ltd, of Northwich) appeared for the appellant; Barry Denyer-Green (instructed by Hugh James, of Cardiff) appeared for the respondents.
Eileen O’Grady, barrister
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