In Cravecrest Ltd v Trustees of the Will of the Second Duke of Westminster [2013] EWCA Civ 731; [2013] 3 EGLR 47, the Court of Appeal considered two issues about development hope value that arose in the context of a collective enfranchisement under the Leasehold Reform, Housing and Urban Development Act 1993 (the “1993 Act”).
The case concerned an aspect of site assembly – the acquisition of various property interests so as to create a development site. The site itself was a building currently configured as three flats, which was ideally suited for reconversion to a house.
To be able to carry out that reconversion, a developer would need vacant possession of the whole site. To achieve this it would need to acquire two existing leasehold interests: a lease of the whole building (with 175 years left to run) and an underlease of one of the flats in the building (with 121 years left to run).
Once under common ownership, those two interests would constitute a leasehold development site worth £6.9m – a value £1.6m higher than the aggregate value of the two leasehold interests if they remained forever separate.
The Upper Tribunal ([2012] UKUT 68 (LC); [2012] PLSCS 171) did not value them on the basis that they would remain forever under separate ownership. Rather it valued each interest on the basis that if put on the market it would be bought by someone who would see acquiring the interest as the first step towards assembling the development site – someone who would pay something for the hope of unlocking the £1.6m development value.
Valuing hope
The main issue in the Court of Appeal (considered in “The assessment of hope”, 14 February, p74) was whether the valuation assumptions in the 1993 Act required this development hope value to be left out of account; it held that they did not.
The effect of the Court of Appeal’s decision on the first point was that the Upper Tribunal had been right to ask itself how much the buyer of one interest would pay for the hope of being able to acquire the second interest subsequently, ie, the hope that the owner of the second interest would be prepared to sell it.
The second issue in the Court of Appeal was whether the Upper Tribunal had used the right methodology when forming an assessment of the strength of that hope – an issue of general valuation principle which is not confined to valuations in enfranchisement claims.
The Upper Tribunal’s approach recognised that there is a possible distinction between the way things are assumed to have been on the valuation date, and the way people in the market would have perceived those things.
As to the first, it noted that the carrot of the substantial development value
that would be unlocked, coupled with
the fact that such an opportunity would only be short lived, would be almost certain to result in the owner of the
second interest readily agreeing to sell [116].
As to the second, it concluded that the hypothetical purchaser of one interest would seek (and obtain) clear confirmation from the owner of the other of its willingness to sell [117]. Putting those two points together, the Upper Tribunal concluded that the hope of being able to assemble the development site was a near-certainty – something that was reflected by making a relatively small discount (5%) for risk.
Assumption v perception
Before considering the appellant’s challenge to the Upper Tribunal’s approach it is worth taking a closer look at the distinction between an assumed state
of affairs and the market’s perception of that state of affairs, and the circumstances in which that distinction may be important.
When identifying the state of affairs
that is to be assumed for valuation purposes, the normal starting point is to consider the state of affairs as it actually existed on the valuation date. That actual state of affairs will include property’s
actual physical condition and configuration on that date, and any rights enjoyed with the property or burdens to which it was subject: see, for example, Duke of Buccleuch v Inland Revenue Commissioners [1967] 1 AC 506, and Spirerose Ltd (in administration) v Transport for London [2009] UKHL 44; [2009] 3 EGLR 103.
However, the actual state of affairs will also include the potential for change, provided it is recognised that the potential has not yet been realised: Fattal v Keepers and Governors of the Possessions, Revenues and Goods of the Free Grammar School of John Lyon [2004] EWCA Civ 1530; [2005] 1 EGLR 51. If realising future potential is dependent (or partly dependent) on the actions or co-operation of third parties, then the valuation effect of that possibility must be discounted to reflect the level of uncertainty (see Spirerose).
Having identified the actual state of affairs as existing on the valuation date, adjustments are made so as to accord with the assumptions and disregards identified in the valuation machinery, including the almost universal assumption that the interest being valued is owned by the hypothetical seller, rather than its actual owner. However, in the absence of a specific assumption, the valuation is to proceed on the basis that other
property interests are owned by the people who actually did own them on the valuation date: see Trocette Property Co v Greater London Council (1974) 28 P&CR 408 (CA).
Imperfect knowledge
In the real world there are many situations where people in the market have imperfect knowledge. Sometimes the nature of the information that is needed makes it difficult to obtain: such as the presence of a building defect which can only be discovered if there is an invasive survey; or the subjective state of mind of another property owner.
Sometimes it is practically impossible for people in the market to get a complete picture. A building may suffer from a latent defect that only becomes
detectable after the valuation date. Or the existence of ancillary rights may turn on a document which is so badly drafted that its meaning can only be made certain by going to the expense of getting a court ruling.
In situations like this valuers need to know what to assume about the hypothetical purchaser’s state of knowledge. Is it assumed to have perfect knowledge, or is it merely assumed to know what people in the market would have been able to find out before buying on the valuation date? In Salvesen’s Trustees v Commissioners of Inland Revenue [1930] SLT 387, it was said that the hypothetical purchaser is to be assumed to have informed itself of all relevant facts. However, this has been qualified in two subsequent lines of case.
One line of cases, including Lynall v Inland Revenue Commissioners [1972] AC 680; [1971] 3 All ER 914 establishes that the hypothetical purchaser is only assumed to know things which it could have acquired itself – ie, information that would be available to any hypothetical purchaser who made a reasonable effort
to find it (excluding information that might be supplied to some people but not others).
The other line of cases establishes that, so far as concerns the physical or legal nature of the thing being valued, the hypothetical purchaser is to be assumed to have a complete and perfect understanding: see Kutchukian v Keepers and Governors of John Lyon Free Grammar School [2013] EWCA Civ 90; [2013] 2 EGLR 97.
Cravecrest
In Cravecrest, the critical piece of information had nothing to do with the physical or legal nature of the interest being valued. Rather it was concerned with the state of mind of the person who owned the other interest; as a result of which there was no legal reason why the hypothetical purchaser had to be assumed to have perfect or complete knowledge of what the owner of the second interest was thinking. But the Upper Tribunal held there was a practical reason for assuming that the hypothetical purchaser would acquire this knowledge, ie, it would have become clear in the
course of the hypothetical purchaser’s enquiries.
The appellant argued that the Upper Tribunal had, in effect, valued each interest on the basis that it would be bought by someone who was already in advanced negotiations for the purchase of the second interest – even though no such negotiations had taken place in real life. Relying on the Court of Appeal’s decision in Van Dal Footwear Ltd v Ryman Ltd [2009] EWCA Civ 1478; [2009] PLSCS 338, the appellant contended that such an assumption (being counter-factual) should not be made.
The Court of Appeal rejected the appellant’s argument in short order, explaining that the tribunal was perfectly entitled to postulate what enquiries the reasonable prudent buyer would have made and what the reaction would have been – these being matters of fact and expert opinion rather than matters of law.
Ultimately Cravecrest is a reminder that all valuations involve an element of the counter-factual, ie, they all proceed on the hypothesis that the relevant interest is owned by someone who does not in fact own it, and that the interest (which in reality may not even have been on the market) is sold to someone whose existence is hypothetical. But these non-people are representative of the market, and should be assumed to have the same information as would be available to anyone else in the market. In cases such as Cravecrest, there may be reason to think that (in the real world) the very request for information would trigger an important event, eg the swift agreement of terms to buy another interest. Applying the Van Dal principle, it would not be right to value the property on the basis that this event has already occurred – but that is no justification for assuming that the request has not been made or has been ignored. So in a case like Cravecrest the appropriate course to take is exactly the one taken by the Upper Tribunal: ie to assume that the hypothetical purchaser would know that the event was very likely to happen.
Quantification
There are three things we can learn from Cravecrest, in relation to the quantification of development hope value:
l The prospects of being able to realise the development value are to be assessed through the eyes of the hypothetical purchaser.
l Although the hypothetical purchaser is not assumed to be omniscient, it is assumed to be reasonably prudent and to make appropriate enquiries – including enquiries of anyone whose co-operation
is needed in order to realise the development value. Exactly what enquiries would be made is a matter of expert opinion.
l The people to whom those enquiries would be made are real people, rather than hypothetical people – and the way they would respond to such an enquiry is a question of fact.
Tim Dutton QC and Maxim Cardew are barristers at Maitland Chambers
