Leasehold enfranchisement – Collective enfranchisement – Development hope value – Appellant landlord appealing against decision of First-tier Tribunal determining price payable by respondents to acquire freehold of building – Whether additional sum payable to reflect value of potential development of roof of building – Appeal dismissed
A property known as 22 Underhill Road, London SE22, was a modern detached apartment block comprising five self-contained flats including a two-bedroom flat on the third floor. The building was in a predominantly residential area with gardens at the front and rear. The flats were reached by a common internal staircase which reached the third floor but not the flat roof above. The building had no lift. Each of the five flats was held on a lease for a term of 125 years from 1 January 2009. On 30 March 2012, the appellant acquired the freehold of the building, subject to the occupational leases, for the price of £14,500.
The lease of flat 5 on the third-floor flat was held by R, who was the sole director and shareholder of the appellant. The respondents were the leaseholders of the remaining four flats. In July 2019, they gave notice to the appellant that they wished to exercise their right to acquire the freehold of the building under section 24 of the Leasehold Reform, Housing and Urban Development Act 1993. The appellant did not dispute that entitlement but the parties could not agree a price. The respondents applied to the First-tier Tribunal (FTT) to determine the price and other terms of the acquisition. A question arose whether the price should be increased by an additional sum to reflect the potential, or hope, of further profitable development on the roof of the building.
The FTT determined that the respondents should pay £22,000, to include £2,000 as the value attributable to the small possibility that the building might be capable of development by adding a further storey to create either a new self-contained flat or additional accommodation to the existing top-floor flat.
The appellant appealed, contending that a value of £35,000 ought to have been attributed to the development hope value.
Held: The appeal was dismissed.
(1) By para 2(1) of schedule 6 to the 1993 Act, the price payable for the freehold of the premises specified in the leaseholders’ notice of claim was to comprise the value of the freeholder’s interest in the premises determined in accordance with para 3, the freeholder’s share of the marriage value determined in accordance with para 4 and any compensation payable under para 5.
(2) Relying on the decision in Cravecrest Ltd v Trustees of the Will of the Second Duke of Westminster [2013] 3 EGLR 47, the appellant argued that the FTT had failed to adopt the “hypothetical two-stage process” approach laid down in that case. The FTT failed to consider that a hypothetical prospective purchaser of the freehold would ascertain in advance the likelihood of being able either to acquire part of the top-floor flat or to sell the roof space to the lessee of the top-floor flat.
Whether additional value could be attributed to the prospect of a development based on the acquisition of the freehold and another interest was a question of fact. The fact that the two interests currently belonged to, or were controlled by, the same person might make the achievement of any development more likely, but it did not mean that the existence of an attractive development opportunity could be assumed. The building in the present case was not ripe for redevelopment, with the occupational leases on the point of falling in and a substantial uplift in value in prospect. Even on the most optimistic assessment, there was no substantial development value to be realised. After making a very significant discount for risks, the appellant’s valuer put the net development value at only £35,000. There was no evidence that R was interested in realising additional value by carving up or extending his flat. He appeared to have taken no steps in the 10 years of his ownership of his flat and the seven years of his ownership of the freehold of the building as a whole to progress any such scheme.
(3) The two-stage approach which the appellant argued the FTT should have adopted depended on there being evidence of what a prospective purchaser of the freehold would anticipate having to pay the owner of the other interest to enable the development to progress. There was no evidence about the price the lessee of flat 5 might require to surrender a sufficiently large portion of his flat to enable independent access to the roof of the building, apart from the ex tempore suggestion of the appellant’s expert of £10,000, which had not formed part of his considered written evidence and on which the respondent’s expert had had no opportunity to comment.
(4) Given the way the evidence of the appellant’s expert about purchasing the cooperation of the leaseholder emerged, the appellant’s contention that the FTT was obliged to adopt his assessment of the allowance required was rejected. The FTT rejected the suggestion that the roof of the building could be developed as a self-contained flat. The premise of the assessment that £10,000 would be enough to purchase the necessary surrender of part of flat 5 was necessarily rejected by the FTT when it found that any development would have to be incorporated as an extension to the existing flat.
The appellant’s expert provided no assessment of the difference that such a development, or the hope of such a development, would make to the price the freehold of the building would fetch in the open market. Even accepting his approach to development costs, it was impossible to know whether such a development would have yielded a positive value, taking account of the loss of the separate value of flat 5. The FTT assessed the prospect of a development of the roof as being “very small”. There was no reason for the suggestion that it was obvious that a person in R’s position would want to realise the development value on the facts. The FTT’s assessment of the prospects of achieving a development as very small indicated that it was not persuaded that all of the uncertainties and problems could be solved by a payment of £10,000 to one leaseholder. On the evidence, the FTT was entitled to determine the premium payable for the collective enfranchisement to be £22,000.
Piers Harrison (instructed by Thirsk Winton LLP) appeared for the appellant; Ellodie Gibbons (instructed by Tolhurst Fisher LLP) appeared for the respondents.
Eileen O’Grady, barrister
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