West Law Report

Landlords not entitled to ‘hope value’ element

Posted in House of Lords (case), Times Law Report by mrkooenglish on December 20, 2008

From The TimesDecember 17, 2008

Landlords not entitled to ‘hope value’ element
House of Lords
Published December 17, 2008
Earl Cadogan and Another v Sportelli and Another and Other Appeals
Before Lord Hoffmann, Lord Hope of Craighead, Lord Walker of Gestingthorpe, Lord Mance and Lord Neuberger of Abbotsbury
Speeches December 10, 2008

Landlords and freeholders were generally not entitled to so-called “hope value” as an element in the value of their interest in determining the price payable by the tenants for leasehold enfranchisement.

The House of Lords dismissed three appeals by landlords and allowed in part (Lord Hoffmann dissenting in part) two further appeals from decisions of the Court of Appeal in Earl Cadogan v Sportelli (Lord Justice Ward, Lord Justice Carnwath and Sir Peter Gibson) ([2008] 1 WLR 2142) and Earl Cadogan v Pitts (Lord Justice Carnwath) ([2007] EWCA Civ 1280).

Mr Kenneth Munro and Mr Philip Rainey for Earl Cadogan and Cadogan Estates Ltd; Mr Andrew Walker for Stephen L. Pitts and Yue Wang; Mr Edwin Johnson, QC, for Atlantic Telecasters Ltd; Mr Stephen Jourdan for Michele Francisco Sportelli, Lara-Lynn Victoria Lamont Sportelli and 27/29 Sloane Gardens Ltd; Mr Thomas Jefferies for Grandeden Property Management Ltd.

LORD NEUBERGER said that tenants under long leases were first given the right to acquire new leases or buy their freeholds under the Leasehold Reform Act 1967, which applied only to houses. In determining the price payable under section 9, in almost every case the aggregate of the investment value of the landlord’s interest and the market value of the tenant’s interest would be significantly less than the value of the two interests if combined in a single ownership.

Combining the two interests released a so-called “marriage value”. By section 9(1D) of the 1967 Act, added by section 145 of the Com-monhold and Leasehold Reform Act 2002, the marriage value was to be split equally between landlord and tenant. If a landlord was selling his freehold interest subject to a lease when the tenant was not interested in purchasing the freehold, there was no immediate prospect of releasing the marriage value.

However, a potential purchaser might well think that, in addition to its investment value, the freehold interest carried with it the potential benefit of a possible future sale of the freehold to the present tenant or a successor in title, or, indeed, the acquisition of the leasehold interest, thereby enabling a release of the marriage value in the future.

In such a case, it could be said that the value of the freehold subject to the lease was greater than the aggregate of the capitalised rental stream and the deferred right to possession at the end of the term and that something should be added for the possibility of a purchaser benefiting from a release of the marriage value. That was “hope value”.

Whereas the 1967 Act had benefited long leaseholders of houses, the Leasehold Reform, Housing and Urban Development Act 1993 had benefited long leaseholders of flats.

The appeals required their Lordships to consider whether, when determining the prices to be paid by the tenant under sections 9(1) and (1A) of the 1967 Act, added by section 118(4) of the Housing Act 1974, and paragraph 3 of Schedules 6 and 13 to the 1993 Act, hope value could, as a matter of principle, be taken into account as a component of the price to be paid to the landlord.

None of the instant appeals concerned section 9(1) of the 1967 Act, applicable to lower value houses, but it was sensible to consider that provision as it had been the first of the statutory valuation hypotheses in the field and the issues raised were connected.

The issue under section 9(1) was whether the words “(with the tenant and members of his family … not buying or seeking to buy)”, added by section 82 of the Housing Act 1969, excluded hope value.

In his Lordship’s opinion, the words meant that not only marriage value but also hope value were excluded from being taken into account. Their natural meaning, and common sense, justified the conclusion that it was inherently improbable that Parliament, when enacting section 82, had intended the landlord to be able to seek hope value.

As to section 9(1A), on higher value houses, the tenants’ argument, accepted by the Court of Appeal, was that the landlord could not claim hope value in addition to marriage value because it was subsumed by it.

At first, that contention had seemed to his Lordship to be unanswerable, particularly now that the landlord was entitled to half the marriage value under section 9(1D). As Lord Justice Carnwath had put it, at paragraph 48, to include a further element of hope value would involve double counting.

His Lordship had come to the conclusion that that was correct, though he had found the point more difficult than it had originally seemed. There was considerable force in the point that hope value was not the same as marriage value.

If it could be shown that the valuation of the tenant’s interest included hope value and that that was illogical and unfair on the landlord, an adjustment would have to be made.

The arguments about marriage value and hope value where a tenant was seeking a new lease of his flat under Schedule 13 to the 1993 Act were similar, in valuation terms, to those that could be raised under section 9 of the 1967 Act, though the calculation was a little more complex.

There was no doubt that the words “(with the tenant … not buying or seeking to buy)” in paragraph 3(2), as in the case of the very similar words inserted into section 9(1) by section 82 of the 1969 Act, barred marriage value from being included in the valuation of the landlord’s interest, and for the same reasons his Lordship considered that they also barred the inclusion of hope value.

As to Schedule 6, the Court of Appeal had concluded that hope value could not be taken into account under the paragraph 3 valuation, whether it was attributable to the ability of either participating or nonparticipating tenants to acquire new leases.

That conclusion had been primarily based on their view that the exclusion of all such tenants, whether participating or not, from the market under paragraph 3(1) and (1A)(b), added by section 109(3) of the Housing Act 1996, meant that they were excluded for the purposes of any hope value, consistently with their conclusion in relation to Schedule 13.

In his Lordship’s judgment, it would be both arbitrary and unfair if a landlord, who could recover marriage value in relation to the participating tenants’ flats, could not recover hope value in respect of the nonparticipating tenants’ flats.

Given that it had been thought fair to make the participating tenants pay a true market price for the reversions to their own flats, it would be surprising if they did not have to pay a true market price for the investment part of their purchase.,That would include paying for any hope value for the prospect of negotiating new leases of their flats with nonparticipating tenants. By the same token, it would be unfair on the landlord.

On a fair reading of paragraph 3 of Schedule 6, hope value could be taken into account in so far as it was attributable to the possibility of nonparticipating tenants seeking new leases of their respective flats by negotiation, not as of right under Chapter II of the Act.

If the bracketed words in the opening part of paragraph 3(1) did not exclude the possibility of taking into account hope value arising from nonparticipating tenants seeking new leases, the same conclusion must apply to participating tenants.

However, the effect of paragraph 4 meant that, for the reasons given in relation to section 9(1A) of the 1967 Act, it was not possible to include hope value in relation to participating tenants’ flats under paragraph 3 as it had already been subsumed into the marriage value exercise mandated by paragraph 4.

Accordingly, the appeals in Grandeden and Sloane Gardens must to that extent be allowed. The other appeals were dismissed.

LORD HOFFMANN, dismissing all the appeals, that it was not possible to distinguish between participating and nonparticipating tenants when the statutory assumption applied to tenants generally.

Lord Hope delivered an opinion agreeing with Lord Walker and Lord Neuberger. Lord Walker delivered an opinion agreeing with Lord Neuberger. Lord Mance agreed with Lord Walker and Lord Neuberger.

Solicitors: Pemberton Greenish; Bircham Dyson Bell LLP; Terence St John Millett; Forsters LLP and Rokeby Johnson Baars LLP; Maxwell Winward LLP.

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