James Souter and Julian Clark consider the valuation issues raised by this long-running case
Much has already been written about the decision of the High Court in Westbrook Dolphin Square Ltd v Friends Life Ltd [2014] EWHC 2433 (Ch); [2014] PLSCS 216, handed down in July. Its relative fame as an address, the size of the complex and the value of the claim have raised interest in the decision beyond the legal world.
Dolphin Square was, until quite recently, the largest block of flats under one roof in the world. It has a prominent position on the Thames only a short walk from the Houses of Parliament and the headquarters of the intelligence agencies MI5 and MI6. As a result, it has been home to a number of well-known politicians and civil servants. All of this provides the perfect backdrop for what was a long-running and hard-fought battle.
The case involved a collective enfranchisement claim for the freehold of Dolphin Square under Part I of the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”). The purchasing entity was an extremely unusual and complex corporate structure devised by Westbrook, which owns a head lease of the Dolphin Square complex. The freeholder, Friends Life, challenged the claim on several grounds, all of which were ultimately unsuccessful.
Now the dust has settled, and the decision has been analysed in more detail, a number of points of considerable interest to the enfranchisement world require further scrutiny. One of the valuation issues raised in the case, which stems from the well-known rule in Cadogan v Morris [1999] 1 EGLR 59, is considered here.
The proposed purchase price
Participating tenants who bring a claim for collective enfranchisement must start the process by serving an initial notice on the freeholder under section 13 of the 1993 Act. Section 13(3)(d) provides that the tenants must specify the price they propose to pay for the freehold.
On several occasions since the 1993 Act came into force, the courts have grappled with this section and the related provision for individual lease extension claims in section 42(3)(c). The main question has been whether the proposal should be tested on a subjective or objective basis. Put simply, should the court have regard to valuation evidence as a means of testing the tenants’ offer objectively?
Cadogan v Morris
Although Cadogan came before the Court of Appeal in 1999, it related to a claim for a lease extension dating back to September 1994, just under a year after the 1993 Act came into force. The tenant’s notice proposed a figure of £100. The landlord challenged the validity of the notice on the basis that the amount offered was too low. When it came to trial it was accepted that the price would be somewhere between £100,000 and £300,000.
The Court of Appeal, unsurprisingly, overturned the decision of the county court, which had decided that the notice was valid. Subsequent cases have thrown some doubt on the precise nature of the test to be applied, but it was unanimously decided that the tenant’s proposal must be realistic. The court referred to “the well-known elephant test… it is difficult to describe but you know it when you see it”.
This is easy to apply in a case where the offer is absurdly low. Unfortunately the Court of Appeal deliberately avoided making any attempt at drawing the line for future cases, although it did not envisage those cases involving detailed valuation evidence.
This has since emerged as the key issue in subsequent cases. It is widely accepted that the First-tier Tribunal (Property Chamber), formerly known as the Leasehold Valuation Tribunal, is the appropriate forum for detailed valuation disputes. The question is how far the courts should delve into valuation matters when considering a challenge that the price stated in the tenant’s notice is not realistic.
Subsequent case law
Cadogan was applied in Daejan Properties Ltd v Bellringer Investments Ltd (2002, Central London County Court, unreported), where permission to appeal was later refused by the Court of Appeal ([2002] EWCA Civ 663). The court heard evidence from the landlord’s valuer that the price should be no less than £60,000 and, as a result, struck down the tenant’s notice offering only £12,000. Cadogan was applied and the offer found not to be realistic.
The high water mark in this line of authorities was Mount Cook Land Ltd v Rosen [2003] 1 EGLR 75, in which a proposal of £100,000 was found to invalidate the tenant’s notice. The valuation evidence given to the court found that the price should have been between £229,000 and £290,000. The county court judge held that to be a “realistic proposal” it had to be supported by valuation evidence. Interestingly, the proposal in this case came from the tenant simply halving the amount of £200,000, which his valuer advised he should pay.
The increasingly vexed question came before the Court of Appeal again in 9 Cornwall Crescent London Ltd v Kensington and Chelsea Royal London Borough Council [2005] EWCA Civ 324; [2005] PLSCS 62. This was a collective enfranchisement claim and unusually involved a challenge by the tenants to the figure contained in the landlord’s counter-notice. The tenants had proposed £210 and the landlord counter-proposed £130,000.
The Court of Appeal decided that, unlike the tenants’ notice, there was no requirement for the figure in a landlord’s counter-notice to be realistic. The main reason being that this could never become the amount that the tenants would pay by default. The position is different with the figure in the tenants’ notice, which can become the amount they pay in a case where the landlord fails to serve a counter-notice. This point has played a significant part in the cases on tenants’ notices, as has the fact that in the case of an individual lease extension claim, the deposit paid by the tenant as security for the landlord’s costs is calculated by reference to the amount proposed.
Having decided the case on different grounds, the Court of Appeal went on to consider the test to apply in the case of the tenants’ notice but this discussion was clearly obiter. They looked in detail at the meaning of the word “propose” in the context of the statute and concluded that the test was simply whether the amount put forward by the tenants was advanced in good faith. They specifically disapproved Mount Cook and held that the proposal did not have to be supported by valuation evidence.
9 Cornwall Crescent was applied in the county court case of Renshaw v Magnet Properties South East LLP [2008] 1 EGLR 42 in which it was held inappropriate to call expert valuation evidence to support the level of price proposed. Again, this case had already been decided by the judge on different grounds and so it was not ultimately necessary for him to decide whether the tenants’ offer of just under £28,000 invalidated the notice where the landlord had counter-proposed £120,000.
Dolphin Square
Next in line was the High Court’s decision in Dolphin Square, where the question of the price offered accounted for a significant part of the lengthy judgment. Interestingly, the judge did hear detailed valuation evidence from four different experts, but ultimately decided that it was not relevant to his decision on the point.
Having grappled with the conflicting cases, and concluded that there was no authority binding on him, he preferred a subjective test and expressed it as “the tenant’s figure must be a genuine opening offer as opposed to a nominal figure”.
He went on to say: “An offer can be a genuine opening offer without necessarily being within a valuation range. In order to be genuine it must be bona-fide in the sense that it will be seen by any reasonable landlord as a real offer and not merely the insertion of numbers in a form.”
The tenants had offered around £111m, which fell just within the bottom end of the valuation evidence before the court, although they are likely to have expected to pay much more. It would be extremely difficult to characterise this offer as nominal in any sense but the real question is where the law now stands.
Valuation evidence
Aside from one now disapproved county court decision, the case law has been unanimous that the courts should not hear detailed valuation evidence. This makes sense given that there is a specialist tribunal to deal with such matters.
However, it creates a conundrum, namely: how can the court determine whether an offer is a “genuine opening offer” without knowing the range of the amount that might be payable and, to a lesser degree, how that has been calculated?
To look into the mind of the person making the offer one needs to understand the advice they have received, if any. Some may argue that an offer can be made in good faith without the benefit of valuation advice, but that is not free from doubt; the 1993 Act contains extremely detailed and complex valuation criteria, which most lay people would have little chance of mastering.
In an open market negotiation, the seller would simply walk away if the first offer wasn’t within touching distance of a figure they recognised as a genuine opening offer. Therefore it is arguable that the test has now developed into something more difficult for a tenant to satisfy.
The absence of valuation advice to support the amount proposed will not of itself render a notice invalid; there may be a variety of explanations that could satisfy judges in future cases. However, without valuation evidence to support their offer, tenants will risk having to justify their proposal on other grounds.
| Case | Offer | Counter offer/valuation range | Valid notice of claim? |
|---|---|---|---|
| Cadogan v Morris [1999] 1 EGLR 59 | £100 | £100,000-£300,000 | No |
| Daejan v Bellringer (2002, unreported) | £12,000 | £60,000 | No |
| Mount Cook v Rosen [2003] 1 EGLR 75 | £100,000 | £229,000-£290,000 | No |
| 9 Cornwall Crescent [2005] EWCA Civ 324 | £210 | £130,000 | Decided on different grounds |
| Renshaw v Magnet [2008] 1 EGLR 42 | £28,000 | £120,000 | Decided on different grounds |
| Dolphin Square [2014] EWHC 2433 (Ch) | £111m | £109m- £185m | Yes |
James Souter is a partner in the property litigation team at Charles Russell Speechlys LLP and Julian Clark MRICS is a partner specialising in enfranchisement at Gerald Eve LLP
