Cadogan and another v Sportelli ; Pitts, Atlantic Telecasters Ltd, 27/29 Sloane Gardens Ltd and Grandeden Property Management Ltd v Earl Cadogan
| Jurisdiction | England & Wales |
| Judge | LORD WALKER OF GESTINGTHORPE,LORD MANCE,LORD NEUBERGER OF ABBOTSBURY,LORD HOPE OF CRAIGHEAD,LORD HOFFMANN |
| Judgment Date | 10 December 2008 |
| Neutral Citation | [2008] UKHL 71 |
| Date | 10 December 2008 |
| Court | House of Lords |
[2008] UKHL 71
HOUSE OF LORDS
Appellate Committee
Lord Hoffmann
Lord Hope of Craighead
Lord Walker of Gestingthorpe
Lord Mance
Lord Neuberger of Abbotsbury
and another
and one other action
and others
and another
and two other actions
Appellants:
Kenneth Munro
Philip Rainey
(Instructed by Pemberton Greenish)
Respondents:
(Atlantic Telecasters Limited) Edwin Johnson QC
(Pitts and Wang) Andrew PD Walker
(Sportelli and 27/29 Sloane Gardens) Stephen Jourdan
(Grandeden) Thomas Jefferies
(Pitts and Wang) (Instructed by Bircham Dyson Bell LLP)
(Atlantic Telecasters Limited) (Instructed by Terence St. John Millet)
(Sportelli) (Instructed by Forsters LLP)
(27/29 Sloane Gardens) (Instructed by Rokeby Johnson Baars LLP)
(Grandeden) (Instructed by Maxwell Winward LLP
My Lords,
For my part, I would have been content to dismiss these appeals for the reasons given by Carnwath LJ in his lucid and convincing judgment. But since your Lordships are minded in one respect to differ from his analysis, I must explain why on this point I regretfully feel obliged to dissent. For this purpose, I gratefully adopt the recital of the facts and statutory provisions in the speech to be delivered by my noble and learned friend Lord Neuberger of Abbotsbury, which I have had the advantage of reading in draft.
The Leasehold Reform Act 1967 provided in section 9 that the price payable for the house should be the amount which, on certain specified assumptions, it would be expected to realise if sold on the open market. The open market means everyone who could reasonably be expected to be interested in buying. Among these potential purchasers there will sometimes be one or more to whom the property would be worth more than to others. In IRC v Clay [1914] 3 KB 466, 472, Sir Herbert Cozens-Hardy MR gave the example of a small farm in the middle of a wealthy land-owner's estate. Such potential purchasers are sometimes called "special purchasers". It is well established that the additional value to a special purchaser must be taken into account in estimating what the property would fetch in the open market. What effect it will have depends not only upon its estimated value to the special purchaser (often no easy matter) but also upon the likelihood that he would actually buy on the valuation date. However, even if he cannot be assumed to be the actual purchaser on that date, his presence in the market (if generally known) may cast a shadow because the value of the property to other purchasers ("third parties") may include some prospect of later selling at an enhanced price to the special purchaser. This additional value to purchasers generally is sometimes called "hope value" because it is based upon the hope of a further advantageous transaction. I describe it as a shadow because hope value to a third party is entirely dependent upon the existence of additional value to the special purchaser.
When the property to be valued is a freehold subject to a long lease, there is an obvious special purchaser, namely the tenant. The reversion is worth more to him than to others because his lease is a wasting asset, the value of which will inevitably decline to zero unless reinvigorated by extension or merger with the freehold. Thus the value of the lease merged with the reversion is always greater than the sum of the separate values of the two interests. The difference will vary according to the length of the lease: if the unexpired term is very long or very short, so that the reversion or the lease are respectively worth little, the additional value of merger will be low. But when the unexpired term is about to dip below the length which is regarded as adequate security by lenders in the market, it may be considerable. This difference is called the "marriage value".
Thus the value of the reversion to the tenant will be greater than to a third party who buys purely for the investment value of the rental stream and the right to possession on the expiry of the term. Furthermore, even if there is some reason (for example, lack of funds) why the particular tenant would not buy at the valuation date, the marriage value to him will be obvious to everyone in the market and it will, as I have said, cast a shadow in the form of hope value to other purchasers who take into account the possibility that sooner or later they may be able to sell to the tenant. It is, of course, impossible for both marriage value and hope value to form part of the same valuation. Marriage value represents the additional value to the tenant which supplies the reason why he would bid a sum higher than the pure investment value. Hope value represents the additional value to a third party who contemplates a future sale to the tenant. Taking into account marriage value assumes that the hypothetical purchaser is the tenant, while taking hope value into account assumes that the hypothetical purchaser is not the tenant. These two hypotheses cannot be entertained simultaneously.
There was nothing in the 1967 Act as originally enacted to exclude the assumption that the open market included all potential purchasers, including the tenant himself, and the Lands Tribunal so decided in Custins v Hearts of Oak Benefit Society (1969) 209 EG 239. Parliament immediately reversed this decision by section 82 of the Housing Act 1969. The formula which it used was to add an assumption that the tenant (and members of his family living with him) were "not buying or seeking to buy" It seems to me obvious that the purpose of the amendment was to eliminate any consideration of the marriage value, whether to the tenant or in its shadow form of hope value to others. The submission of the appellants was that because the formula excluded the tenant from the market only at the valuation date, it did not prevent him from being a potential purchaser at a later date, so that the marriage value to him could generate hope value in other hypothetical purchasers. As I understand all of your Lordships to be agreed that this is far too literal a reading of the statutory formula, I need not take further time in dealing with it.
The right to enfranchise under the 1967 Act was confined to houses of low rateable value. The Housing Act 1974 amended the 1967 Act to extend the right to higher value houses, but without the benefit of some of the assumptions which had reduced the price of the freehold. In particular, the valuation provisions for higher value houses under the new section 9(1A) did not include an assumption that the tenant was excluded as a potential purchaser. The marriage value was therefore something to be taken into account.
The way in which it was to be taken into account was at first unstated and provided fertile ground for disputes. However, the Leasehold Reform, Housing and Urban Development Act 1993 inserted a new section 9(1C) into the 1967 Act which provided that the tenant's share of the marriage value was to be not more than half and section 145 of the Commonhold and Leasehold Reform Act 2002 simplified the matter still further by providing that it was to be taken to be half. In my opinion the landlord's right to half the marriage value was intended to subsume what might otherwise have been any effect on the valuation of the existence of a marriage value, whether on the assumption that the tenant would be the hypothetical purchaser or on the assumption that there would be hope value to someone else. For the reasons I have given, if marriage value is taken into account, as the statute requires, it is logically impossible for hope value to form part of the same valuation. It requires mutually inconsistent assumptions about the identity of the hypothetical purchaser. Again, I understand that all of your Lordships are agreed on this point.
The question on which the House is divided arises in connection with the application of these concepts of marriage value and hope value to a collective purchase of the freehold by tenants of flats pursuant to Chapter I of the 1993 Act. These provisions give half or more of the tenants in the building the right to buy the freehold and have it vested in a nominee purchaser on their behalf. The effect is that the nominee purchaser acquires the freehold of the entire building, including the reversions upon the leases of those tenants who did not participate in the purchase.
Schedule 6 to the 1993 Act deals with the price to be paid by the nominee purchaser. Paragraph 2 said that it is to be made up of three elements: the value of the freeholder's interest, the freeholder's share of the marriage value, and certain compensation payments which are not presently relevant. The value of the freeholder's interest is to be calculated in accordance with paragraph 3, which (as originally enacted) contained an assumption that neither the nominee purchaser nor any participating tenant was seeking to buy. The marriage value is defined in paragraph 4(2) as the difference between the sum of the values of the interests acquired and the separate values of those interests, being an increase attributable to the ability of the participating tenants to procure that the nominee purchaser grant them long leases without further payment. Thus the only marriage value which enters into the calculation under paragraph 4 is that acquired by the participating tenants.
Consistently with this restriction on the calculation of marriage value, paragraph 3 originally excluded from the market on a hypothetical sale of the freehold only the nominee purchaser and the participating tenants. The presence of the non-participating tenants in the market remained to be taken into account. Their presence in the...
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Table of Cases
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