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Session 2008 - 09 Publications on the Internet Judgments PDF Print Version 
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| Judgments - Earl Cadogan (Appellant) v Pitts and another (Respondents) and one other action Earl Cadogan and others (Appellants) v Sportelli and another (Respondents) and two other actions |
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HOUSE OF LORDS SESSION 2008-09 [2008] UKHL 71 on appeal from: [2007] EWCA Civ 1280 OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE Earl Cadogan (Appellant) v Pitts and another (Respondents) and one other action Earl Cadogan and others (Appellants) v Sportelli and another (Respondents) and two other actions Appellate Committee Lord Hoffmann Lord Hope of Craighead Lord Walker of Gestingthorpe Lord Mance Lord Neuberger of Abbotsbury Counsel 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 Hearing dates: 20-22 OCTOBER 2008 ON WEDNESDAY 10 DECEMBER 2008 HOUSE OF LORDS OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE Earl Cadogan (Appellant) v Pitts and another (Respondents) and one other action Earl Cadogan and others (Appellants) v Sportelli and another (Respondents) and two other actions [2008] UKHL 71 LORD HOFFMANN My Lords, 1. 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. 2. 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. 3. 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". 4. 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. 5. 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. 6. 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. 7. 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. 8. 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. 9. 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. 10. 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 market could be relevant in two ways. First, they could be regarded as potential purchasers of the freehold of the building. As such, they would also gain from a marriage value of their leases and the freehold. But this notional value would have to be heavily discounted, because the disinclination of the non-participating tenants to join in the statutory acquisition demonstrated that they did not want to buy the freehold even in co-operation with the participating tenants, let alone on their own. A more practical possibility was that they might seek an extension of their leases. The hope value derived from the possibility that non-participating tenants might some day show an interest in their marriage values was an element to be taken into account in valuing the freeholder’s interest under paragraph 3. 11. The effect of paragraphs 3 and 4 was accurately summed up by Lord Strathclyde in the debate on the 1993 bill in the House of Lords (HL Debates 18 May 1993, col 1679): “When valuing the landlord’s present interests, any hope value element in the open market value of non-participating tenant’s flats is included, as it is only nominee and participating tenants who are assumed not to be in the market.” 12. Paragraph 3 was however amended by section 109(3) of the Housing Act 1996, which extended the exclusion to all tenants, whether participating or not. The effect of this amendment is in my opinion clear. By parity of reasoning with the construction of the same exclusion formula in section 9(1) of the 1967 Act, it removed from the valuation any consideration of participating or non-participating tenants as special purchasers, whether as potential purchasers at the valuation date or as creating hope value based on the possibility of purchase at a subsequent date. Lord Strathclyde’s reasoning had been entirely dependent upon the non-participating tenants not being excluded from the market. Now that they are, the hope value in respect of their tenancies has disappeared. It would be impossible to reconcile a construction of section 9(1) which excludes hope value, as I think it must, with a construction of paragraph 3 which allows it to be taken into account, whether in respect of participating tenants before 1996 or in respect of all tenants after 1996. Again, I understand that in respect of any hope value attaching to the possibility of selling the freehold to the non-participating tenants, your Lordships are agreed. 13. It was however suggested in argument that although the hope value of a possible sale of the freehold to the tenants was excluded, the hope of obtaining a premium on an extension of their leases might not be. Paragraph 3 is said only to exclude them from the market for the freehold. But such a construction would in my opinion defeat the purpose of excluding them from the market. It would be absurd to legislate to exclude from the valuation any consideration that the hypothetical purchaser might hope at some later date to sell them the freehold at a price enhanced by the marriage value, but not to exclude the hope of selling them a lesser reversionary interest (say, a 999 year lease) at a price enhanced by the marriage value. The formula uses the words “not buying or seeking to buy” without saying what they must be taken not to be buying or seeking to buy. That is left to implication. In my opinion it must mean that the tenants are excluded from the market for any interest in the premises which is reversionary upon their leases. 14. My noble and learned friend Lord Neuberger, in paragraph 104 of his opinion, accepts that the words “buying” and “buy” must cover “seeking a 999-year lease at a peppercorn or any similar interest” because “otherwise they would have no real effect". I agree. But he nevertheless concludes that they do not exclude non-participating tenants from the market for some lesser (but unspecified) interest in reversion on their leases. With all respect to my noble and learned friend’s expertise in this part of the law, I cannot understand how he is able to distinguish between participating and non-participating tenants when the statutory assumption of exclusion from the market applies to tenants generally or how he is able to distinguish 999-year leases from shorter leases. 15. Reliance is placed upon paragraph 3(1)(b) of the 6th Schedule, which says that the hypothetical sale is to be on the assumption that — “this Chapter and Chapter II confer no right to acquire any interest in the specified premises or to acquire any new lease (except that this shall not preclude the taking into account of a notice given under section 42 with respect to a flat contained in the specified premises where it is given by a person other than a participating tenant).” 16. The argument is that if all the tenants were excluded from the market for the freehold or new leases, there would be no need for an assumption that they had no statutory right to acquire such interests. But this argument ignores the structure of the statute and the origins and purpose of the formula in paragraph 3(1)(b). 17. It is normal practice, in all statutes which provide for compulsory acquisition at market value, to insert an assumption that the hypothetical vendor is under no obligation to sell. It has always been what Fletcher Moulton LJ described in Re Lucas and the Chesterfield Gas and Water Board [1909] 1 KB 16, 29 as an “absolute rule” that the value of the property is to be estimated “as it stood before the grant of compulsory powers". Thus section 9(1)(a) of the 1967 Act requires it to be assumed that that “this Part of this Act conferred no right to acquire the freehold.” The sale is between a hypothetical willing vendor and a hypothetical willing purchaser and takes place in a market undisturbed by the existence of compulsory powers. 18. The purpose of this assumption is entirely to prevent the value of the property from being diminished by an argument that the price offered by the hypothetical buyer would have been affected by his knowledge that, if he bought the property, he would be liable to expropriation under statutory powers - what might be called no-hope negative value. It is not aimed at the exclusion of an assumption that the beneficiary of the statutory powers is using them as a buyer in the hypothetical sale - that would not be easy to reconcile with the assumption that the sale takes place in the open market - but rather at an argument that the price offered by any purchaser would be reduced by reason of the likelihood that he would have to surrender the property at some future date. 19. On the other hand, the beneficiary of the statutory powers is not assumed to be excluded from the market. His interest in purchasing the property in an open market sale is taken into account, including any special reason which he may have for paying more than others in the market. That is why, despite the assumption in section 9(1)(a) of the 1967 Act that the tenant has no right to buy, his interest in the marriage value was taken into account in Custins v Hearts of Oak Benefit Society (1969) 209 EG 239. 20. A provision such as section 82 of the Housing Act 1969, which excluded the tenant as a potential purchaser in the hypothetical sale, therefore serves an altogether different purpose from the assumption in section 9(1)(a) of the 1967 Act that the Act conferred no right to buy the freehold. The first is to prevent the price from being enhanced by the tenant’s bid and the second is to prevent it from being depressed by the prospect of compulsory purchase. The argument of my noble and learned friends runs the two together. They would presumably argue that once section 82 of the Housing Act 1969 had been passed, the assumption of no right to buy might as well have been repealed. If the tenant was deemed not to be a buyer in the hypothetical sale, it would not matter whether he had a right to buy or not. But I do not think that it would have occurred to anyone to see a link between the two provisions. The primary purpose of the assumption of no right to buy is not to exclude an assumption that the tenant is exercising that right in his capacity as a purchaser in the hypothetical sale (which, as I have said, would be difficult to reconcile with the assumption of an open market) but to prevent an argument (similar in reverse to those which have been heard in this appeal) that the price offered by a third party would be depressed by the existence, exercisable at any future date, of the tenant’s right to buy. The fact that the tenant is assumed not to be a buyer in the hypothetical sale does not touch this argument at all. 21. My noble and learned friend Lord Neuberger bases a further argument upon the exception in paragraph 3(1)(b) which provides that account may be taken of a notice served by a non-participating tenant under section 42 of the 1993 Act, requiring the grant of an extended lease. It should be noted that this is an exception to the rule that the tenants should not be assumed to have the right to new leases. It is an exception to an assumption which prevents the price from being depressed by an argument that the hypothetical purchaser will be obliged under Chapter II to grant extended leases on the terms there provided. It is therefore hard to see how it can form an exception to a different assumption (in paragraph 3(1)) that the tenants are not in the market and thereby to add hope value to the price. It seems to me that my noble and learned friend’s argument again fails to distinguish between the different purposes of the assumption that the tenant has no statutory rights and the assumption that the tenant is not in the market. The two assumptions are quite independent and neither entails the other. 22. The purpose of the exception in paragraph 3(1)(b) seems to me clear enough. If the landlord had actually granted new leases under Chapter II, that would clearly be something which had to be taken into account in a valuation of the freehold. Parliament has decided that once a notice has been served under section 42, the situation is close enough to the grant of a lease to make it unrealistic not to take the imminent grant into account. 23. Even if there were any merit in the argument based on paragraph 3(1)(a), it is hard to see how it enables one to distinguish between the positions of participating and non-participating tenants. Paragraphs 3(1) and 3(1A)(b) exclude all tenants from the market and paragraph 3(1)(b) assumes that no tenant (with one exception) has a right to buy the freehold or an extended lease. If it is accepted that paragraphs 3(1) and 3(1A)(b) exclude tenants as buyers not merely of the freehold but also of economically equivalent leasehold interests, how can that exclusion be confined to participating tenants? My noble and learned friend Lord Walker acknowledges this difficulty (at paragraph 44) but says that the inclusion of participating tenants would “involve the entirely artificial and indeed false assumption that the participating tenants had not, through the nominee purchaser, already embarked on the process of acquiring the freehold…". But that argument, as it seems to me, ignores the fact that the valuation process assumes a hypothetical sale in the open market. In such a sale, everyone is free to bid, including the buyer in the actual sale proceeding under statutory powers. It could equally well have been said in Custins v Hearts of Oak Benefit Society (1969) 209 EG 239 that including the tenant in the open market involved an artificial and false assumption that he had not already embarked on a purchase pursuant to the statute. 24. The other argument relied upon by my noble and learned friend Lord Walker is that the inclusion of hope value generated by the marriage values of participating tenants would involve double counting (because their marriage values are already taken into account) while the inclusion of non-participating tenants would not. But the exclusion of hope value is not based merely upon double counting. It is a consequence of the tenants being treated as excluded from the market. The same language in section 9(1)(a) of the 1967 Act excludes hope value, even though there is no double counting. 25. It is perhaps worth noticing that none of the arguments based on paragraph 3(1)(b) were advanced in the Court of Appeal. Nor did they feature in the printed cases or the argument from the Bar. This alone might incline your Lordships to hesitate before adopting them. It seems to me that your Lordships have formed a view of what construction fairness to landlords requires and have determined to force the language of the statute to yield up such a meaning. I am less confident of what fairness requires. I note that the 1996 amendment, which extended to all tenants the exclusion from the market which had previously applied only to participating tenants, and which undermined the reasoning upon which Lord Strathclyde had three years earlier advised that hope value for non-participating tenants would be taken into account, was not opposed or even debated in its passage through either House. It is hard to believe that its potential consequences had escaped the attention of landlords, who are not without a voice in the counsels of the nation. Not a word of protest appears to have been uttered. Legislation of this kind has usually been the subject of intense negotiation between the interests of landlords and tenants, involving concessions and compromises on both sides. I am therefore not prepared to accept that the apparent mismatch between the inclusion of marriage value (for participating tenants only) and exclusion of hope value (for all tenants) produces such an obvious injustice as to require heroic methods of construction to avoid it. I would dismiss all the appeals. LORD HOPE OF CRAIGHEAD My Lords, 26. There are three distinct elements in the valuation of the freehold interest of premises which are subject to a long lease: the right to receive the ground rent, the right to vacant possession at the term of the lease and the option, or at least the potential, to deal early with the tenant and thus release the marriage value which will be realised at the term before the term arrives. It is the third element which is known colloquially as the hope value. This analysis is the product of valuation practice, not a rule of law. As the landlords point out, it is not set in stone. In practice the first two elements will always require to be valued, subject to any statutory direction to the contrary. Hope value, on the other hand, is a more elusive concept. As the valuations that were referred to in argument have shown, sometimes it is there. Sometimes it is not. Where it does appear, the methods of valuation differ from case to case. In all cases where it does appear, the value that is attached to it is relatively small in the overall valuation context. |
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