Lease extension on flats — Premium — Sum payable affected by rent provisions of existing lease — Provision for rent review to “increased market rental value” — Leasehold valuation tribunal assessing premium on basis of review to nominal ground rent — Whether proper interpretation requiring full market rent for lease of land with right to construct flat — Appeal dismissed
The respondents were the lessees of two residential flats in a development of four blocks owned by the appellant landlord. They applied, under section 42 of the Leasehold Reform, Housing and Urban Development Act 1993, to extend their leases for 90 years. Unlike the existing leases, the extensions would not contain any provision for the payment of rent; that element was instead to be taken into account in valuing the respondents’ existing interests when calculating the premium payable for the lease extensions.
A dispute arose between the parties over the interpretation of the rent review provisions in the existing leases. Those leases had been granted in 1973, when the flats were being built, for terms of 99 years at premiums in excess of £10,000, with a small sum payable as annual rent. The leases expressly excluded the foundations and soil beneath the buildings. The rent was reviewable at 20-year intervals by a “revision… in the amount” to such sum “as shall equal the increased market ground rental value” at the date of the review. The annual rents for the two flats had been reviewed in 1993 to £125 and £112.50, with the next review being due in 2013. The respondents contended that the rent payable on review was a “nominal” ground rent in a sum similar to those payable for comparable properties nearby that were let on relatively long leases at a premium, producing figures of £220 pa and £200 pa. The landlord argued that that interpretation failed to give effect to the word “market” in the rent review provisions, since nominal ground rents were arbitrary and did not correlate to the value of the property. It contended for a substantial increase, amounting to 3,900% of the current rent, on the basis of a market rent for a lease of the land with the right to construct the flat in question. On that approach, it submitted that the premiums for the new leases should be £68,000 and £58,000. The leasehold valuation tribunal found for the respondents and determined the premiums at £12,374 and £11,534 respectively. The appellant appealed.
Held: The appeal was dismissed.
The rent review clause fell to be interpreted in its matrix of surrounding circumstances and in a manner consistent with other terms of the lease. The original rent had undoubtedly been intended as a nominal rent, which was neither a full rent of the site value of the flat in question nor a “concessionary” rent at less than the going rate for a ground rent of that kind. The wording of the rent review provision connoted that it was the amount only and not the basis of the payment that was to be revised on review. The nature of the bargain had been that the tenant would pay a premium for the lease, together with a very modest annual rent. In effect, the tenant was purchasing the lease for a capital sum.
There was a market for such transactions, and, therefore, for such rents. No conflict arose between the concept of a nominal ground rent and a market value ground rent. Although the rent in such transactions was not calculated by any process of valuation, and could fall within a range of figures, those figures would not be more than the market could take. In the instant case, had the rent been much higher, it would have substantially affected the level of the premium. The landlord’s contention, that the only “market” was a market in which there was no trade-off between the charging of a premium and the charging of rent, was fallacious. The rent review clause was directed to identifying a nominal ground rent, assessed as the ground rent payable in the market as part of a bargain whereby a long leasehold was sold at a premium. It did not reflect any value to be ascribed to any part of the site as the value of the potentiality of using the land subject to the lease for the development that had actually been carried out under the agreement: Basingstoke and Deane Borough Council v Host Group Ltd [1987] 2 EGLR 147; (1987) 284 EG 1587 and Jarrett v Burford Estates & Property Co Ltd [1999] 1 EGLR 181 applied; Guildford Borough Council v Cobb [1994] 1 EGLR 156; [1994] 16 EG 147 distinguished.
Edward Peters (instructed by Shoosmiths, of Fareham) appeared for the appellant; Anthony Radevsky (instructed by Hadgkiss Hughes & Beale, of Birmingham) appeared for the respondents.
Sally Dobson, barrister