Cravecrest Ltd v Trustees of the Will of the Second Duke of Westminster
| Jurisdiction | England & Wales |
| Judge | The Chancellor |
| Judgment Date | 19 June 2013 |
| Neutral Citation | [2013] EWCA Civ 731 |
| Docket Number | Case No: C3/2012/2135 |
| Court | Court of Appeal (Civil Division) |
| Date | 19 June 2013 |
[2013] EWCA Civ 731
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (LANDS CHAMBER)
LRA/1672009 and LRA/3/2010
Royal Courts of Justice
Strand, London, WC2A 2LL
THE CHANCELLOR OF THE HIGH COURT
Lord Justice Rimer
and
Lord Justice Mccombe
Case No: C3/2012/2135
Mr Thomas Jefferies (instructed by Maxwell Winward) for the Appellant
Mr Anthony Radevsky (instructed by Messrs. Boodle Hatfield) for the 1 st Respondent
Mr Timothy Dutton QC (instructed by Walker Morris) for the 2 nd Respondent
The Chancellor:
This appeal concerns the collective enfranchisement of 38 Wilton Crescent, London SW1 ("the Property") under Part I of the Leasehold Reform, Housing and Urban Development Act 1993 ("the 1993 Act"). The Appellant is the nominee purchaser for the participating tenants. It raises an important point of principle about the price payable where (1) there are intermediate leases which subsist between the freehold and the leases of the participating tenants and which are to be acquired by the nominee purchaser on the collective enfranchisement, and (2) a single owner of those leases or of those leases and the freehold could realise development value by developing the property for use other than as a building containing separate flats.
In short, the Appellant says that the hope of realising such development value must be ignored in fixing the price to be paid for the two intermediate leases in issue in the present case. They are a long lease of the whole Property, the freehold of which is owned by the First Respondents, who also represent that long intermediate leaseholder, and a long lease vested in the Second Respondent of one of the flats in the Property. The Respondents disagree with the Appellant and say that the development hope value must be taken into account.
There is another valuation issue on the appeal, specific to the facts of the present case, as to the enquiries that a hypothetical purchaser is assumed to make for the purposes of arriving at an open market value of the intermediate leases being acquired on the collective enfranchisement.
The Upper Tribunal (Lands Chamber) ("the Tribunal") in its decision dated 11 May 2012, on appeal from a decision of the Leasehold Valuation Tribunal for the London Rent Assessment Panel ("the LVT") dated 12 September 2010, agreed with the Respondents on both issues. This is an appeal from the Tribunal's decision.
At the heart of this appeal are the meaning and effect of paragraphs 3(1) and (1A) of schedule 6 to the 1993 Act.
The factual and valuation context
The leasehold arrangements at the Property at the relevant time, namely 13 March 2009, which is the date of the statutory notice by the participating tenants of a claim to exercise their right to enfranchisement, were rather complicated. It is sufficient for the purpose of this appeal to summarise the situation as follows.
The Property was laid out as three flats. Flat 1 was on the basement and ground floor. Flat 2 was on the first floor. Flat 3 was on the second and third floors. Each of those flats was held under a separate underlease. In each case, the underlease was for a term expiring on 15 March 2009. The tenant of Flat 1 and the tenant of Flat 2 were participating tenants in the enfranchisement. The tenant of Flat 3 was the Second Respondent, Vowden Investments Limited, which was not a participating tenant.
There was a headlease of the whole Property held by Grosvenor Estate Belgravia ("GEB"). That headlease ("the GEB Lease") was for a term expiring on 25 March 2184, that is to say, it had 175 years to run.
There was an overriding lease of the second and third floors (which for the sake of simplicity may be described as) interposed between the GEB Lease and the occupational lease of Flat 3. That lease ("the ORL") was for a term expiring on 21 March 2130, that is to say it had 121 years to run. It was held by the Second Respondent.
There were two other leasehold interests in the entire Property, both of which were for terms expiring very shortly after the terms of the occupational underleases of the three flats. For that reason they do not play any significant part in the valuation issues which lie at the heart of the Tribunal's decision and form the substance of this appeal. They can, therefore, be ignored and I shall make no further reference to them.
It was agreed between the parties that there is potential to develop the roof space above Flat 3 so as to provide a fourth floor for the Property and extend Flat 3. It was agreed that the "site value" of the roof space and the air space above, with vacant possession and assuming the grant of a 121 year lease (so as to match the duration of the ORL) was £455,000 on the valuation date. As at that date there existed full planning permission and listed building consent (both subject to conditions) for the erection of a mansard roof extension at fourth floor level.
There was no dispute as to the value of the freehold. What is in issue on this appeal is the Tribunal's decision as to the price to be paid on enfranchisement for the GEB Lease and the ORL on the basis that, if those leases were acquired by a developer, the Property could be restored as a single house, including the potential to construct a fourth floor. The value of the Property as a house was far greater than the aggregate value of the individual flats. The value of the Property as a house could, however, only be realised by uniting in one person the GEB Lease and the ORL. Such a person would be able to grant a 175 year lease of the whole Property.
The valuation experts who gave evidence to the Tribunal were all agreed that, if one of those interests came up for sale, then, in the real world, some people in the market would take the view that if they bought that interest there would be some prospect of subsequently acquiring the other interest as well — and thereby unlocking the Property's obvious development value.
The financial advantage of such a course is demonstrated by the following figures, which were agreed by the parties before the Tribunal. The freehold values of the three flats were: Flat 1 –£2,050,000, Flat 2 –£700,000, Flat – 3 £2,200,000 (excluding any additional value attributable to the potential to develop a fourth floor). Those values amount, in aggregate, to £4,950,000. The value of the residue of the participating tenants' existing leases was agreed as nil for the purposes of assessing marriage value.
The freehold vacant possession value of the Property for conversion to a house, including the potential to extend into a fourth floor, was agreed to be £7,000,000. That figure took into account any risks associated with the conversion of the Property, as currently arranged as flats, into a single house, including those risks relating to obtaining any relevant planning consent.
The Appellant said that no part of the substantial potential development value represented by the difference between £4,950,000 and £7,000,000 can properly be reflected in the price to be paid for either the GEB Lease or the ORL. As I have said, the Respondents disagree ("the First Issue").
The Appellant further contended that, in a hypothetical valuation scenario where a purchaser acquires first one of the intermediate leases and at the same time intends and hopes to acquire the other shortly afterwards, whether that be the GEB Lease or the ORL, there would be a significant number of serious risks for the purchaser in anticipating that the owner of the other interest would be prepared to sell at a price at which the purchaser would be prepared to buy. The Respondents' expert valuers, on the other hand, considered there was little risk. They first proceeded on the basis that, before the first purchase, the purchaser would most likely have made enquiries of the owner of the other interest as to its willingness to participate in the realisation of the development value in restoring the Property to a single house by being prepared to sell to the purchaser, and the purchaser would reasonably likely have received a positive response ("the Second Issue"). Their view was that there should be a discount of only 5 per cent. if the assumption was that such enquiries had been made of the second seller before the first purchase, but, if the assumption was that there were no such discussions, there should be a 15 per cent. discount for the risk that the other party might not agree to treat and for the delay involved in a two stage process.
The statutory framework
The decision of the Tribunal sets out the statutory framework in considerable detail. It is sufficient, for the purpose of this appeal, to refer only to the following provisions of the 1993 Act.
Section 1 confers on qualifying tenants of flats in premises to which Chapter 1 of Part 1 applies on the relevant date the right to have the freehold of those premises acquired on their behalf by a nominee purchaser at a price determined in accordance with Chapter 1. Section 1 describes that right as "the right to collective enfranchisement".
Section 2 provides for the acquisition, as part of the collective enfranchisement, of the interest under any lease which is superior to the lease held by a qualifying tenant of a flat contained in the relevant premises.
Section 13 provides for the service of a notice by qualifying tenants of a claim to exercise the right to collective...
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