Collective enfranchisement – Purchase price – Restrictive covenants – Leasehold Reform, Housing and Urban Development Act 1993 – Enfranchisement of property comprising four flats – Restrictive covenant limiting property to such use – LVT determining sum payable to acquire freehold – Whether such covenant to be included in transfer – Whether tribunal properly allowing discount for uncertainties – Whether tribunal erring by failing to determine legal issues – Respondents’ appeal allowed – Appellant’s appeal dismissed
The appellant and his wife held a headlease of a detached property for a term expiring in September 2046. The respondent was the freeholder. The property had originally been built as a single dwelling but had been converted into flats; the headlease contained a covenant not to use the property other than as four self–contained private residential flats. The flats were let to tenants on leases that had been extended, on applications under the Leasehold Reform, Housing and Urban Development Act 1993, to run until 2136. On a subsequent collective enfranchisement under the Act, the appellant acted as the nominee purchaser for the tenants for the purpose of acquiring the freehold.
The leasehold valuation tribunal (LVT) determined that £51,800 was payable to acquire the freehold. It imposed a restrictive covenant in terms that permitted use of the property as four self–contained flats or a single private dwelling–house. However, it discounted by 90% the value attributable to the prospect of reconversion to a single dwelling in 2046. The discount took into account uncertainties as to: (i) the ability of the hypothetical purchaser to exercise the right of “the landlord”, under section 61 of the Act, to apply for possession of the flats in the last year of the original lease on the ground of an intention to redevelop the property; (ii) whether, if it could do so, it would effectively have to pay a ransom or marriage value to the tenants as compensation, by virtue of Schedule 14; (iii) the future planning position, market conditions and redevelopment costs; and (iv) whether an estate management scheme, to which the property would be subject after the transfer, might be amended before 2046 to prevent reconversion.
Neither party was satisfied with the decision of the LVT and both appealed. The Upper Tribunal decided in favour of the appellant that it was right to allow for uncertainty rather than to eliminate it by deciding the legal point and applied a discount of 30% in respect of that uncertainty. However the tribunal went on to decide to express a view on the legal issues in favour of the respondent: [2012] UKUT 53 (LC); [2012] PLSCS 73. Both parties appealed.
Held: The respondents’ appeal was allowed. The appellant’s appeal was dismissed.
The Upper Tribunal should have decided the legal issues but the conclusions it expressed on those points had been correct.
(1) A valuer had to know what it was that he had to value, in the present case “the freeholder’s interest in the premises” (Schedule 6, paragraph 2 (1) (a)) which was the bundle of rights that he had in his capacity as freeholder. In this case, the right in issue was a right which the respondents said had been conferred upon them by virtue of section 61 which was a vested right, even though it would not be capable of exercise for many years. Whether the respondents had that right was a question for the Upper Tribunal and it was not open to the LVT to say in effect that there was a 70% chance that the respondents had the right they claimed.
(2) The LVT had to take a view as to the effect of the assumptions on which the valuation was to proceed. In particular, the freehold had to be sold hypothetically subject to the leases subject to which the freeholder’s interest was to be acquired but also subject to intermediate and other leases which would be acquired by the nominee purchaser. The hypothetical purchase took effect with and subject to the rights under section 61 which were already in play because of the grant of the new leases under the 1993 Act. Accordingly, the valuation exercise was to proceed on the basis of a view as to what the rights under section 61, and correspondingly under Schedule 14, were in terms of the legal position on the true construction of the Act and, if relevant, of the particular leases.
(3) The landlord in section 61 meant the party who granted the new lease under section 56 who, at that stage, would have been the competent landlord as defined in section 40. A complication was that section 57(7) provided expressly for the reservation of a right to obtain possession in accordance with section 61 in favour of the immediate landlord. However that could be explained because of the possible need to allow a reversioner with a long headlease to exercise the statutory rights. On the facts of the present case, the respondents as freeholders, or their successors in title, would have the right to rely on section 61 as against the holders of the new leases in 2046.
(4) Paragraph 5(1)(b)(ii) of Schedule 14 required the assumption that the hypothetical vendor of the new lease was selling subject to any restriction that would be required to limit the uses of the flat to those to which it has been put since the commencement of the lease and to preclude the erection of any new building not ancillary to the flat as a dwelling. The deemed restriction precluded the hypothetical sale of the lease from reflecting the potential redevelopment profit, the prospect of which for the reversioner was that which had led to his ability to invoke section 61 and thereby to the entitlement of the tenant to compensation. That compensation was for the loss of the rest of the term under the new lease, which might be substantial. It was not for the loss of redevelopment value, of which the leaseholder had never had any prospect, and which was not something of which the leaseholder had been deprived by the exercise of section 61 rights.
Edwin Johnson QC (instructed by David Conway & Co) appeared for the appellant; Jonathan Gaunt QC and Mark Loveday (instructed by Pemberton Greenish LLP) appeared for the respondents.
Eileen O’Grady, barrister