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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27.  It was the elusive, will o'the wisp character of hope value that, for me, created a difficulty at the outset in accepting the respondents’ argument that the effect of the legislation is that it must be disregarded. None of the statutory provisions that are in issue in this case refers to hope value. I found it hard to accept that a tool of valuation to which Parliament does not appear to have addressed its mind at all had been entirely eliminated. The respondents submitted that the phrase “with the tenant and members of this family not buying or seeking to buy” in section 9(1) of the Leasehold Reform Act 1967, as amended, had this effect. This was said to be the natural meaning of those words. But they are directed to the state of affairs at the valuation date, and to one aspect only of the hypothetical transaction. The fact that any special, or enhanced, value that would otherwise be attributed to the fact that the tenant is the actual purchaser is to be disregarded does not seem to me to require the valuer to disregard any of the other elements that would normally be taken into account in a transaction with a third party purchaser.

28.  One can, of course, point to the apparent absurdity of disregarding the tenant’s bid on the valuation date but not the prospect of his making the same bid only one day later: see Carnwath LJ’s comment about the effect of para 3(2) of Schedule 13 to the Leasehold Reform, Housing and Urban Development Act 1993 where the same words appear, as they do also in para 3(1) of Schedule 6 to that Act: [2008] 1 WLR 2142, para 49. But that assumes a degree of precision in this part of the valuation exercise which it does not possess. The elusive character of hope value contradicts that assumption. It looks in an entirely general way into the future and to a transaction which may or may not occur to which persons who cannot yet be identified may be parties. The valuer could, I think, say with some justification that the absurdity that is being pointed to in this example distorts the way that, in practice, a value is attached to this element in the overall analysis.

29.  On the other hand there is much to be said for giving a purposive construction to these words. As my noble and learned friend Lord Neuberger of Abbotsbury points out in para 83 of his opinion, it seems likely that the valuation exercise that section 9(1) of the 1967 contemplated was intended to be relatively simple. The inclusion of a discussion about hope value in the case of relatively low value houses would risk defeating that exercise. My noble and learned friend Lord Walker makes the same point in para 37 of his opinion, and I have found the way he puts the argument equally persuasive. I appreciate too the force of the point that the Tribunal made in para 20 of its judgment in Pitts and Wang on the issue as to whether the appellant was prevented as a matter of law from contending for hope value that, by providing in section 9(1D) of the 1967 Act that the marriage value must be divided equally, the statute envisaged a marriage value without regard to hope value. In effect, Parliament was substituting for the judgmental approach a system of valuation by formula. This indicates an intention to simplify the whole exercise. It leads to the conclusion that, as in the interests of simplicity the valuer’s judgment as to the split of marriage value was to be disregarded, any addition for hope value was to be disregarded too.

30.  In the end, therefore, I have come to be of the opinion that we are indeed dealing here with words that were intended to simplify the valuation exercise, and that the meaning that must be given to them to achieve that result where they appear in section 9 of the 1967 Act must be applied to them in the same way where they appear in Schedules 6 and 13 of the 1993 Act.

31.  I would therefore dismiss the appeals in Pitts and Wang, Atlantic Telecasters and Sportelli. But on the issue on which your Lordships are divided, I agree with Lord Walker and Lord Neuberger, for the reasons they give, that para 3 of Schedule 6 to the 1993 Act permits hope value to be taken into account in the valuation in so far as it is attributable to the possibility of non-participating tenants seeking new leases of their own flats. I would therefore allow the appeal in the Grandeden and 27/29 Sloane Gardens cases to the extent indicated by Lord Neuberger and make the orders that he proposes.

LORD WALKER OF GESTINGTHORPE

My Lords,

Some preliminary observations

32.  The legislation which your Lordships have to construe is set out or summarised in the opinion of my noble and learned friend Lord Neuberger of Abbotsbury, and I gratefully adopt his account of it. The legislation is complicated and has been amended a good deal over the years. The legislative purpose of some of these amendments is far from obvious. That is particularly true of the amendment of Schedule 6, para 3 of the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”) by section 109 of the Housing Act 1996 (“the 1996 Act”) as described in para 12 of the opinion of my noble and learned friend Lord Hoffmann.

33.  I shall come back to that particular riddle (which is the crux of the difference of opinion between your Lordships). Approaching the matter more generally for the moment, I think that there are two particular reasons, beyond the general intractability of this lengthy and much-amended legislation, that have led to the problems which your Lordships have to resolve.

34.  The first is that Parliament has, in this legislation, departed a long way from a simple statutory rule of open market value (calling for expert evidence from valuers). But at the same time it has not entirely displaced open market value by some clear (though arbitrary) statutory rule, such as taking the annual value of a house to be its value as shown in the official rating list, however out of date that list is. Parliament’s usual technique, when assets have to be valued for some statutory purpose, is to start with a simple test of market value, but to supplement that test by spelling out the assumptions which are to be made for the purposes of the hypothetical open market sale which the test postulates. Parliament may direct, for instance, that no reduction is to be made because under the hypothetical sale the whole property is to be put on the market at once; or that a hypothetical purchaser of unquoted shares is to be assumed to have all the information which a prudent purchaser might reasonably require (see for instance Inheritance Tax Act 1984, sections 160 and 168; Taxation of Chargeable Gains Act 1992, sections 272(1) and (2) and 273(3)).

35.  In the Leasehold Reform Act 1967 (“the 1967 Act”), in both its original and its amended forms, Parliament has adopted a statutory test of open market value, subject to modifications. But in the 1993 Act, in both its original and its amended forms, Parliament has to my mind adopted a hybrid technique, combining a mandatory formula (in Schedule 6, para 2 and Schedule 13, para 2) followed by provisions which take open market value as a starting-point, but subject it to some far-reaching statutory assumptions (and the puzzling possibility of further unspecified but “appropriate” assumptions under Schedule 6, para 3(2) or Schedule 13, para 3(4)). It is not surprising that valuers and lawyers have found these provisions difficult. The issue of whether “hope value” should be taken into account in the deferment rate which valuers customarily use (and indeed whether this is a question of law, or a matter within a valuer’s professional judgment) can be seen as symptomatic of the confusion.

36.  The second particular matter giving rise to difficulty is the parliamentary draftsman’s understandable inclination, in framing the detailed provisions of Schedule 6 and Schedule 13 to the 1993 Act, to follow a similar pattern. But Schedule 6 (introduced by section 32, in Part I, Chapter I of the 1993 Act) is typically concerned with the price to be paid by a single purchaser (“the nominee purchaser”) for the freehold of an entire block of flats, whether or not all the tenants are joining in this exercise in collective enfranchisement (in other words, are participating tenants rather than non-participating tenants). By contrast Schedule 13 (introduced by section 56 in Part I, Chapter II) is typically concerned with the premium to be paid by a single non-participating tenant for the grant of a new lease of a single flat in a block of flats. That is the exercise of an individual right, and it is something that may happen to coincide with collective enfranchisement by and on behalf of a group of participating tenants, a possibility noted and provided for in Schedule 6, para 3(1)(b). Because Schedule 6 and Schedule 13 are directed at such different operations, the superficial similarity between their provisions is a little deceptive.

Section 9 of the 1967 Act

37.  Here the argument turns on the meaning and effect of the words “(with the tenant and members of his family not buying or seeking to buy)” in section 9(1) as amended. I agree with all your Lordships that these words must be given a purposive construction. Parliament’s plain intention was to remedy the mischief perceived to have been caused by the decision in Custins v Hearts of Oak Benefit Society (1969) 209 EG 239, and it would frustrate the statutory purpose (and lead to strange mental contortions) if the statutory assumption were somehow to be restricted to the “relevant date” (the date of the tenant’s notice claiming the freehold) to the exclusion of what might happen afterwards. Any potential marriage value or hope value in the house in question is therefore excluded.

Schedule 13 of the 1993 Act

38.  As between the two relevant Schedules of the 1993 Act I take Schedule 13 first, because it is more straightforward. This Schedule is concerned with quantifying the premium to be paid for a new extended lease of a flat. In the simple case where there is no intermediate interest (that is, no head lease interposed between the freeholder and the tenant seeking a new lease) there are only two parties interested in the transaction, the freeholder and the tenant. The other tenants in the block of flats are not concerned. In this respect it is closer to a transaction under the 1967 Act (enfranchisement or grant of an extended lease of a house) where (again, on the assumption of no intermediate interest) only two parties are involved.

39.  Schedule 13, para 2 sets out a formula in three parts, that is the aggregate of

“(a) the diminution in value of the landlord’s interest in the tenant’s flat as determined in accordance with paragraph 3,

(b) the landlord’s share of the marriage value as determined in accordance with paragraph 4, and

(c) any amount of compensation payable to the landlord under paragraph 5.”

It is common ground that your Lordships need not be concerned with head (c). Nor does any serious difficulty arise on head (b) (which incorporates Schedule 13, para 4) though it is to be noted that that paragraph is concerned only with the so-called marriage value in the particular flat in respect of which the new lease is to be granted. There is no question of marriage value in respect of the block of flats as a whole. Moreover the “marriage value” in respect of the particular flat is something of a misnomer, since there is not to be any merger of the freehold and leasehold interests in the flat. The expression is used as a label to describe the effect of a leasehold interest with (say) twenty years unexpired being extended to a total term of 110 years (an interest the value of which is not far short of that of a freehold, the value of the freeholder’s interest in the flat being dramatically reduced by the new lease). In most cases in which a tenant finds it expedient to seek a new lease the aggregate value of the two interests identified in para 4(2)(a)(i) and (ii) is significantly lower than the aggregate value of the two interests identified in para 4(2)(b)(i) and (ii). In some cases, however (especially when the interest at para 4(2)(a)(i) is a long unexpired term) the difference in the two sets of aggregate values is much less significant, and para 4(2A) covers these de minimis cases.

40.  The only real difficulty is on Schedule 13, para 3, and in particular the words “(with neither the tenant nor any owner of an intermediate leasehold interest buying or seeking to buy)” in para 3(2) as amended by section 110 of the 1996 Act. In my opinion these words must be construed in just the same way as s.9(1) of the 1967 Act, on which they are obviously modelled. Any potential marriage value or hope value in the flat in question is excluded under para 3. It comes in exclusively under para 4.

Schedule 6 of the 1993 Act

41.  Why then does not the same symmetrical pattern apply under Schedule 6? In the opinion of my noble and learned friend Lord Hoffmann it does, and I hesitate to differ from the closely-reasoned analysis in his opinion. Nevertheless I do respectfully differ from him, basically because (as I have indicated in my preliminary remarks) the apparent symmetry between Schedule 13 and Schedule 6 is deceptive. Schedule 13, like the 1967 Act, is dealing (typically, that is where there is no intermediate interest) with a bilateral transaction, and the only marriage value to be considered (whether it is true marriage value on the enfranchisement of a house, or so-called marriage value on the grant of a new lease of a single flat) is in respect of a single unit of accommodation in which only the freeholder and the tenant are interested.

42.  Schedule 6, by contrast, is typically dealing with a tripartite transaction in respect of a complex of units—a block of flats which starts off in the ownership of the freeholder, and ends up owned, through the nominee purchaser, by some of the tenants (the participating tenants), subject to the continuing rights of the other tenants (the non-participating tenants). Marriage value as between the freeholder and the participating tenants, so far as attributable to their control of the freehold and their ability to grant themselves advantageous leases (see Schedule 6, para 4(2) and especially para 4(2)(a)) is dealt with exclusively by para 4, as under Schedule 13. But there is to my mind no good reason why any hope value in respect of future deals that may possibly be negotiated between the freehold owner and non-participating tenants (other than those who have actually served section 42 notices before the valuation date) should be disregarded. The possibility of gain (whether large or small) from such negotiated deals will pass from the original freeholder to the nominee purchaser. It is not dealt with in para 4. So I approach Schedule 6, para 3 (and the amendments made to it by the 1996 Act) without any strong expectation of finding a close parallel with Schedule 13, para 3.

43.  Schedule 6, para 3 is concerned with head (a) of the para 2 formula—"the value of the freeholder’s interest in the specified premises” (in the typical case, the whole of a block of flats—see section 13(12) of the 1993 Act). Where the “specified premises” consist of a large block of flats, the prospect of a single tenant being in the market for the freehold of the whole block may be remote—the tenant would often have to pay a very high price to realise a modest marriage value on a single flat. In other cases (such as a large house converted into a small number of flats, with more than one leasehold interest owned by a single person or members of his family) the prospect might be much greater. But whatever the likelihood, that is the transaction to which para 3 is, by its terms, directed: a purchase of the freehold interest in the whole building. If the hope value arising from the possibility of a future negotiated deal with one or more non-participating tenants is to be excluded, then “buying or seeking to buy” the freeholder’s interest in the specified premises must be extended, as a process of construction, in two respects: that is so as to include the grant of a new lease, at a premium, of one or more flats belonging to non-participating tenants. Such a double extension might be fairly easy to make if it accorded with an obvious statutory purpose, but for the reasons which I have tried to explain, I am not satisfied that that is part of the statutory purpose.

44.  It may be said that this argument proves too much, because it would (in the hypothetical world postulated by para 3) apply to possible negotiated deals with participating tenants also. But that 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 in the whole block of flats, giving them freedom to grant new leases to themselves as described in para 4(2)(a). It would also involve an obvious case of double counting.

45.  I would therefore, in agreement with my noble and learned friends other than Lord Hoffmann, hold that para 3 permits the inclusion of hope value, such as it is, in respect of new leases of the flats of non-participating tenants. But that is, I must stress, hope value in respect of deals which might be freely negotiated, rather than leases granted under any statutory right. Para 3(1)(b) excludes statutory rights (except where section 42 notices have already been served) but not the possibility of negotiated contracts. Para 3(1)(b), if read with an emphasis on “right", is not therefore inconsistent with this construction.

46.  If that is the correct construction of Schedule 6, para 3, it helps to explain why the amendment made to it by section 109 of the 1996 Act was regarded (as it seems to have been regarded) as technical and uncontroversial. The amendment recognized that if any tenants were to be excluded from the market as prospective purchases of the freehold of the entire block of flats, for the purposes of the para 3 valuation, then all the tenants (participating and non-participating) should be excluded. But in the average case that was unlikely to make a significant difference to the valuation exercise.

Human Rights Act 1998

47.  I can, without disrespect to the appellants’ submissions, deal quite shortly with the points raised on the Human Rights Act 1998 and Article 1 of the First Protocol to the Convention. This issue was not raised at all below. Before your Lordships the appellants’ position was that they placed most reliance on section 3 of the Human Rights Act, if it was necessary to do so, in relation to Schedule 6 of the 1993 Act. A majority of the House holds that the appellants succeed on the Schedule 6 point on ordinary principles of statutory construction, and without the need to invoke section 3.

48.  In relation to section 9 of the 1967 Act and Schedule 13 of the 1993 Act the appellants’ reliance on section 3, in their oral submissions, was less than whole-hearted, and for good reason. The decision of the Strasbourg court in James v United Kingdom (1986) 8 EHRR 123 presents them with an insuperable obstacle. It is for Parliament as the national legislature to decide on policies to remedy social injustice, with a wide margin of appreciation. Parliament’s conclusions on social policy will be accepted by the Strasbourg court unless manifestly unreasonable. It is true that the scope of leasehold enfranchisement and associated rights has increased greatly since the 1967 Act, especially with the removal of the requirement for occupation by the tenant. But Parliament concluded that that requirement created difficulties in the enfranchisement of large blocks of flats where there was a rapid turnover of some of the flats. Against that the landlord does under section 9(1D) of the 1967 Act and Schedule 13 of the 1993 Act receive half of the marriage value, a provision which cannot be attacked as lacking a reasonable relationship of proportionality (see paras 49 to 54 of the judgment in James).

Conclusion

49.  For these reasons, and for the fuller reasons set out in the opinion of Lord Neuberger, I would dismiss the appeals in Pitts and Wang, Atlantic Telecasters and Sportelli and allow the appeals in Grandeden and 27/29 Sloane Gardens to the extent indicated by Lord Neuberger.

LORD MANCE

My Lords,

50.  I have had the benefit of reading in draft the speeches of my noble and learned friends, Lord Hoffmann, Lord Walker of Gestingthorpe and Lord Neuberger of Abbotsbury. For the reasons given in the speeches of Lord Walker of Gestingthorpe and Lord Neuberger of Abbotsbury, with which I am in full agreement, I consider that the landlords’ appeals in the cases of Sportelli, Pitts and Wang and Atlantic Telecasters should be dismissed, and that the landlords’ appeal in the cases of Grandeden and 27/29 Sloane Gardens should be allowed to the extent that my noble and learned friends indicate.

LORD NEUBERGER OF ABBOTSBURY

My Lords,

51.   These five appeals arise out of legislation enabling residential tenants to acquire new leases or to buy their freeholds. The specific issue raised on each appeal is whether the price payable for the new lease or the freehold, as the case may be, should include what is called “hope value". The Court of Appeal agreed with the tenants (Mr and Mrs Sportelli, 27/29 Sloane Gardens Ltd, Grandeden Property Management Ltd, Mr Pitts and Ms Wang, and Atlantic Telecasters Ltd,) in each case that it should not - see Earl Cadogan v Sportelli [2007] EWCA Civ 1042, [2008] 1 WLR 2142, and Earl Cadogan v Pitts and Wang [2007] EWCA Civ 1280. The landlords (Earl Cadogan in all five cases, together with Cadogan Estates Ltd in three of them) now appeal to your Lordships’ House.

The Leasehold Reform Act 1967

52.   Tenants under long leases, i.e. leases granted for more than twenty-one years, were first given the right to acquire new leases or to buy their freeholds under the Leasehold Reform Act 1967, which applies only to houses. Section 1 of that Act originally contained a number of requirements which had to be satisfied before the right arose, including that the value of the house be below a certain level. Section 9 of the 1967 Act contained the formula for assessing the price which the tenant would have to pay to enfranchise - i.e. to buy the freehold. So far as relevant, in its original form, it was in these terms:

“9(1)  [T]he price payable … shall be the amount which … the house …, if sold in the open market by a willing seller, might be expected to realise on the following assumptions:-

(a)  on the assumption that the vendor was selling for an estate in fee simple, subject to the tenancy but on the assumption that this Part of this Act conferred no right to acquire the freehold …”

53.   Following the passing of the 1967 Act, a number of tenants promptly sought to exercise their right to enfranchise. This occasionally led to disputes as to the purchase price, which at that time were referred to the Lands Tribunal pursuant to section 21. In the first of those cases, Custins v Hearts of Oak Benefits Society (1969) 209 EG 239, the Lands Tribunal decided that the actual tenant could be treated as being in the market as a potential purchaser of the freehold when assessing a price payable under section 9(1). The correctness of that conclusion appears to me to be inescapable. The landlord’s interest has a special value to the tenant, as he is the only person who can unite it with his leasehold interest, thereby producing an unencumbered freehold. Further, given that he has served a notice seeking to enfranchise, the tenant has made it clear that he is indeed interested in acquiring the landlord’s interest..

54.   The assumed presence of the actual tenant as a potential purchaser would accordingly serve to enhance the price payable for the landlord’s freehold interest, in many cases quite substantially. This was not the intention of Parliament, which swiftly acted to reverse the decision. Section 82 of the Housing Act 1969 amended section 9(1) of the 1967 Act to insert “after the words ‘a willing seller’ the words ‘(with the tenant and members of his family who reside in the house not buying or seeking to buy)’ “.

55.   The 1967 Act has subsequently been amended by a number of subsequent statutes, almost all of which included provisions which widened its scope by removing or cutting down the requirements in section 1 (although the long lease requirement has always subsisted). In particular, the Housing Act 1974 brought many, more valuable, houses within its scope. The 1974 Act also introduced a new subsection 9(1A), which contained a different formula for assessing the price payable for the freehold by the tenant for higher value houses. So far as relevant, section 9(1A) was in these terms:

“… [T]he price payable for a [higher value] house … shall be the amount which … the house …, if sold in the open market by a willing seller, might be expected to realise on the following assumptions:

(a)  on the assumption that the vendor was selling for an estate in fee simple, subject to the tenancy, but on the assumption that this Part of this Act conferred no right to acquire the freehold …”

Thus, for present purposes, the only difference between the two provisions was that section 9(1A), unlike section 9(1), did not require one to assume that the actual tenant was excluded from the market.

 
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