Leasehold enfranchisement – Lease extension – “No-Act rights” assumption – Appellant headlessee appealing against decision of Upper Tribunal concerning valuation provisions in Leasehold Reform, Housing and Urban Development Act 1993 – Whether “no-Act rights” assumption in para 3(2)(b) of Schedule 13 applying to whole of building comprising flat – Appeal dismissed
The tenant of a long lease of a flat in a Victorian mansion block which fronted the Victoria Embankment in London applied for a new lease under section 42 of the Leasehold Reform, Housing and Urban Development Act 1993. The freehold of the building comprising the flat was owned by the respondents. The appellant held the headlease which provided for a minimum rent payable by the appellant, as headlessee, but for additional rent to be paid where it obtained profits above a certain threshold from any underlease. The parties were able to agree the total premium that the tenant would pay for the new lease, but the appellant and the respondent were unable to agree the proportions of that sum payable to each under Schedule 13 of the 1993 Act. The dispute was referred to the First-tier Tribunal (FTT) under section 48 of the 1993 Act. The tenant took no part in the proceedings. The key issue was whether the “no-Act rights” assumption in para 3(2)(b) of Schedule 13 to the 1993 Act, made in calculating the premium to be paid for a new lease under the 1993 Act, which ensured that the open market valuation was not reduced by the compulsory acquisition rights that the statute granted, applied to the whole of the building comprising the flat, or only to the flat itself.
The FTT concluded that the relevant assumption did not extend to other flats in the wider building. On appeal, the Upper Tribunal said that the 1993 Act should be interpreted to give effect to the rights Parliament intended to confer on tenants, but not go any further. In the light of the wording of para 3(2)(b) and taking into account the purpose underlying the assumption, namely to ensure the result of the valuation was fair to the person whose interest was being expropriated, the wording of the relevant provision was ambiguous. The underlying purpose of the assumption was determinative. Accordingly, the “no-Act rights” assumption applied not just to the subject flat, but the whole of the premises comprising it: [2017] UKUT 242 (LC). The appellant appealed.
Held: The appeal was dismissed.
(1) The valuation exercise required by Schedule 13 of the 1993 Act in the present case was to calculate the diminution in value of the parties’ respective interests in the flat as a result of the grant of the new lease. One effect of the grant would be the loss of the ground rent payable by the tenant under the underlease. The valuation of that loss depended on the probability that the appellant’s net receipts would exceed the threshold rent. If the assumption in para 3(2)(b) extended to other flats in the block, the likely erosion of ground rents in those other flats (as tenants made claims under the 1993 Act) would fall to be ignored, and those ground rents would make more of a contribution to net receipts. If, on the other hand, the assumption was limited to the tenant’s flat, the real erosion of the ground rents had to be taken into account. If transactions which were not permitted under the terms of the headlease could nevertheless be treated as net receipts, the probability of net receipts exceeding the threshold rent in any year was increased.
(2) Paragraph 3(2)(b) required the open market valuation to take place under certain assumptions. It did not follow from the fact that what was being valued was the diminution in value of the landlord’s interest in the tenant’s flat that one was not required to switch off Chapter I and Chapter II rights which were afforded to other tenants in the same block. Thus para 3(2)(b) required an assumption that Chapter I conferred no rights to acquire any interest in any premises containing the tenant’s flat. Although the focus of the valuation was still the landlord’s interest in the tenant’s flat, the assumption had to switch off for the purposes of valuation not only that tenant’s collective enfranchisement rights (if he had any, which he might not if he did not have the right sort of underlease) but the rights of all other qualifying tenants in those premises. Such an assumption was necessary, because otherwise the Chapter I rights held by those other tenants would depress the value of the landlord’s interest in the tenant’s flat, even if the tenant himself did not have any Chapter I rights. Thus the scope of the assumption in relation to Chapter I rights plainly extended to qualifying tenants of other flats in the block. The language of the assumption was the same as the language of the assumption to be made in respect of collective enfranchisement in para 3(1)(b) of Schedule 6 for the purposes of valuing the freehold interest as a whole. The expansive language “any new lease” was there intended to capture any Chapter II rights in any part of the specified premises, and therefore the Chapter II rights of tenants of other flats in the block. What was being valued was the diminution in value of the landlord’s interest in the tenant’s flat as a component of the landlord’s interests as a whole. It was both artificial and unfair to conduct that valuation operation on the basis that it was only the tenant’s flat to which the assumption of “no-Act” applied, rather than the flats of all the tenants in the block.
(3) The headlessee had to include payments received from transactions entered into in breach of covenant when accounting for income received. The parties would have understood that, where a breach of covenant occurred, the freeholder could waive the breach, thereby making the transaction lawful. It was no bar to inclusion in the income that was to be taken into account in calculating the rent that the income had been obtained in a way not envisaged as lawful by the leasehold covenants.
Anthony Radevsky and Paul Letman (instructed by Wallace LLP) appeared for the appellant; Stephen Jourdan QC and Cecily Crampin (instructed by Pemberton Greenish LLP) appeared for the respondents.
Eileen O’Grady, barrister
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