Disputes over valuation probably account for most of the disputed enfranchisement cases that are referred to the First-tier Tribunal (Property Chamber). Very often the arguments are over the correct approach to valuing the freehold. In other cases the parties may seek a determination where they cannot agree on the deferment rate to be applied. It is a widely shared experience that landlords, leaseholders and their respective valuers will usually be able to agree on the valuation of the ground rent that the landlord will lose once the freehold is transferred to the leaseholder, or a new lease is granted, as the case may be. It forms part of the premium payable but in comparison to the amount payable for the freehold, it is usually a small part of the premium.
In Plotnek v Govan [2014] UKHT 0332 the Upper Tribunal considered an appeal against a decision on the premium payable for the enfranchisement of a leasehold house under the Leasehold Reform Act 1967. Unusually, the disagreement in this case was over the appropriate way to value the ground rent. The lease contained a ground rent review clause with four review dates during the term of the lease which was granted in 2008 for a 99-year term for a premium of £170,000. The initial ground rent was £125 each year, in other words, a nominal ground rent.
Clause 6 of the lease provided, in summary, that the increase should be linked to the open market value of the lease on certain assumptions. For the landlord freeholder (Mr Plotnek) it was argued that on review the new rent should be assessed on the open-market value of the property, assuming that no new premium is taken. In other words, the reviewed rent could well be something other than a nominal rent and should be a substantial rent that is a full ground rent (with a substantially higher premium).
The Act provides for the assessment of what is known as a “modern ground rent”, which is a market rent that becomes payable where a leaseholder holds over at the end of the lease; it also forms part of the valuation of the freehold. For the landlord, it was argued that this approach should be taken in valuing the likely rent that would be lost.
For the leaseholder, it was argued that the leaseholder’s predecessor had already paid for the house and the land and that it would be unfair to allow the landlord to charge a full ground rent.
Dismissing the landlord’s appeal, the UT decided that the rent review clause must be construed against the background to the original sale of the leasehold house at a substantial premium with a nominal ground rent. Considering the terms of the rent review clause, reasoned the UT, showed that it is expressed in different terms to the modern ground rent provisions in the Act. A reviewed rent should be assessed on the assumption that a premium has been taken. This meant that a nominal rent would be fixed, not a market rent.
Professor James Driscoll is a writer and a solicitor
