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

(back to preceding text)

56.   For completeness, it should be added, that more leases, including those involved in the Pitts and Wang and Atlantic Telecasters appeals, were brought within the ambit of the 1967 Act by the Leasehold Reform, Housing and Urban Development Act 1993. In relation to such leases, sections 9(1C) and 9A, added by the 1993 Act, apply. However, it is unnecessary to set out those sections out, as they incorporate the above-quoted part of section 9(1A).

57.   Although the determination of the price payable under section 9 was originally entrusted to the Lands Tribunal, section 21 as amended by section 142 of the Housing Act 1980 now requires the issue to be referred to a Leasehold Valuation Tribunal (“LVT”), against whose decision an appeal lies to the Lands Tribunal.

Marriage value

58.   In three reported decisions over a period of ten years, the Lands Tribunal effectively set the tone for future valuation cases under section 9(1A) of the 1967 Act. In the second of those cases, Lloyd-Jones v Church Commissioners for England [1982] 1 EGLR 209, the tenant’s lease had about twelve years unexpired and was at a rent of £45 per annum. The valuation of the landlord’s reversionary freehold interest involved two stages. The first stage was to assess the so-called investment value of the landlord’s interest. This had two components. The first was the right to receive the rent over the remaining 12 years of the lease, which involved capitalising that future rental stream. The second component was the value of the landlord’s deferred right to possession of the house at the end of the 12 years, which involved applying an appropriate annual deferment rate to the present value of the unencumbered freehold interest.

59.   The second stage of the valuation was required because the tenant was assumed to be in the market. As already mentioned, when it comes to marketing the landlord’s reversion to a long lease, the tenant under the lease can normally be expected to be a special purchaser. It is accordingly clear, if at first sight somewhat counter-intuitive, that, in almost every case, the aggregate of (a) the investment value of the landlord’s interest and (b) the market value of the tenant’s interest is significantly less than the value of the two interests if combined in a single ownership. In Lloyd-Jones [1982] 1 EGLR 209, the market value of the tenant’s interest was £45,000, and the investment value of the landlord’s interest was £84,257, while the value of what the tenant would end up owning, namely the unencumbered freehold interest, was £187,500, which is £58,243 more than the aggregate of those two figures. Accordingly, combining the two interests released a so-called marriage value of £58,243. The question which then arose was the effect of the potential release of the marriage value on the value of the landlord’s freehold interest.

60.   After careful consideration of the evidence and arguments, the Lands Tribunal decided, contrary to the tenant’s case, that the marriage value should be divided equally between the parties, so that the value of the landlord’s interest was increased by £29,121. The Tribunal’s reasoning was expressed in these terms at [1982] 1 EGLR 211M by reference to the evidence of the landlord’s surveyor:

“Mr Hopper’s addition … represents the actual amount which the lessee in friendly negotiations with the lessor would be willing to bid above the amount which any other purchaser would pay: that amount would take his bid well above that of any other potential purchaser. Mr Hopper assumed that the parties were of equal bargaining strengths. I agree: neither can unlock the marriage value without the other. In friendly negotiations they would agree to divide it equally as they had done in the 57 settlements [as between landlords and tenants of other houses where the tenant was seeking to enfranchise].”

61.   In reaching the conclusion that the value of the landlord’s freehold interest should be increased by half the marriage value, the Lands Tribunal was following the approach which it had adopted in Norfolk v Trinity College, Cambridge [1976] 1 EGLR 215. Precisely the same approach was followed in a subsequent Lands Tribunal decision, Lowther v Strandberg [1985] 1 EGLR at 203. In all three cases, the tenant’s argument, that the landlord should receive a smaller proportion than 50% of the marriage value, failed.

62.   In Hague on Leasehold Enfranchisement (2nd edition, 1987), at para 9-55, this was described as “correct as a matter of logic, because the bargaining powers of the freeholder and the tenant…are equal, and the agreement of both of them is required in the hypothetical sale postulated by section 9(1A)", although it was pointed out that, in the end, “the question is properly one of valuation". This view was repeated in the subsequent edition of Hague: 3rd edition, 1999, at para 9-40. Nonetheless, it appears clear that some tenants’ surveyors (and, indeed, when they felt they could justify it, some landlords’ surveyors) continued to argue, albeit unsuccessfully, for an unequal apportionment of the marriage value.

63.   The longer the lease, the smaller the investment value of the landlord’s interest. The proportion of the total value of the landlord’s interest attributable to marriage value increases as the unexpired residue of the lease reduces; it reaches a maximum when the lease has about 35 to 40 years to run, and then the proportion decreases over time. It should also be mentioned that marriage value is released when a tenant under a lease negotiates an extension (or a new long lease) with his landlord. The calculation is a little more complex, but the release of the marriage value is normally a significant feature in the exercise.

64.   By sections 145 and 146 of the Commonhold and Leasehold Reform Act 2002, two further subsections were added to section 9 of the 1967 Act, namely:

“(1D) Where in determining the price payable for a house … in accordance with this section, there falls to be taken into account any marriage value arising by virtue of the coalescence of the freehold and leasehold interests, the share of the marriage value to which the tenant is to be regarded as being entitled shall be one-half of it.

(1E)  But where at the relevant time the unexpired term of the tenant’s tenancy exceeds 80 years, the marriage value should be taken to be nil.”

Section 9(1D) thus put an end to any attempts to split the marriage value other than equally between landlord and tenant under section 9(1A); where section 9(1E) applies, it simply removes marriage value from the valuation exercise.

Hope value

65.   Having discussed marriage value and its treatment under section 9(1A), it is convenient to deal with “hope value". If a landlord is selling his freehold interest subject to a lease, at a time when the tenant is not interested in purchasing the freehold, there is no immediate prospect of releasing the marriage value. That is because the only way in which it can be released is either by the tenant acquiring the freehold interest or by the landlord acquiring the leasehold interest. As it is the landlord who is assumed to be selling, the latter possibility could not arise, and the former possibility is excluded by the fact that the tenant is not, on this hypothesis, in the market at the time of the sale.

66.   However, where the landlord is selling his interest when the tenant is not in the market, a potential purchaser may well think that, in addition to its investment value, the freehold interest carries 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, therefore, it can be said that, even though the tenant is not in the market at the time of the sale, the value of the freehold subject to the lease is 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 additional sum is known as “hope value".

67.   In Lloyd-Jones [1982] 1 EGLR 209, the landlord’s surveyor argued that hope value should be included in the investment value of the freehold. The Tribunal accepted that surveyor’s valuation in its entirety, and, while it is not clear precisely what effect, if any, the inclusion of the hope value had on the valuation, it appears to have been through the medium of a downward adjustment in the rate of deferment (see at [1982] 1 EGLR 210M and 211H).

68.   In a number of subsequent cases (your Lordships were told it was over twenty, most of which were under schedule 6 to the 1993 Act), the Lands Tribunal and the LVT accepted that hope value can be included even where marriage value is taken into account. In Blendcrown Ltd v Church Commissioners for England [2004] 1 EGLR 143, at para 77, the Lands Tribunal described hope value as “a speculative element that does not lend itself to objective assessment” and “essentially a matter of informed opinion” (although 5% of the marriage value was then accorded to the landlord as hope value). And in a number of cases, hope value has not been established on the evidence - see e.g. Gesso Properties (BVI) Ltd v SCMLLA Ltd LRA/13/2003.

69.   In some cases, hope value has been held to justify an increase in the investment value of the freehold by around 15% of the marriage value - see e.g. In Shulem B Association Ltd’s Appeal [2001] 1 EGLR 105. In other cases, the same approach was taken as in Lloyd-Jones [1982] 1 EGLR 209, so the deferment rate was adjusted downwards to allow for hope value - see e.g. Arbib v Earl Cadogan [2005] 3 EGLR 139, para 188. However, in several conjoined appeals from the LVT, including three of the instant cases, Sportelli, Grandeden and 27/29 Sloane Gardens, a three-member Lands Tribunal, presided over by the President, Mr Bartlett QC, convincingly concluded at [2007] 1 EGLR 153, para 112 that, where hope value could be included, it was the former approach which was appropriate.

The Leasehold Reform, Housing and Urban Development Act 1993

70.   Having examined the relevant provisions of the 1967 Act, and explained the nature of marriage value and of hope value, I must now refer to the rather more complex provisions of the Leasehold Reform Housing and Urban Development Act 1993. Whereas the 1967 Act benefited long leaseholders of houses, the 1993 Act benefited long leaseholders of flats. Chapter I of part I of the 1993 Act is entitled “Collective enfranchisement in case of tenants of flats", and chapter II is entitled “Individual right of tenant of flat to acquire new lease". Many of the provisions of part 1 of the 1993 Act to which it is necessary to refer are complicated by the fact that they have to cover cases where there are intermediate interests between the freehold and the leases of individual flats, and cases where the building includes business premises or flats let for short terms. When quoting those provisions, I shall omit or modify them to delete such complicating factors (indicating where I have done so).

71.   It is convenient to deal first with chapter II. Section 39 imposed various conditions which had to be satisfied by a tenant before he could seek a new lease, and, as with section 1 of the 1967 Act, subsequent legislation has removed or modified most of those conditions. The right to acquire a new lease is exercised by the tenant serving a notice under section 42. By virtue of section 56, the price payable by the tenant for the new lease is assessed in accordance with Schedule 13.

72.   Part II of Schedule 13 sets out the basis upon which that price is to be calculated. Paras 2 to 4 were originally in these terms:

“2  The premium payable by the tenant in respect of the grant of the new lease shall be the aggregate of -

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

(b)  the landlord’s share of the marriage value as determined in accordance with para 4 …

3(1)  The diminution in value of the landlord’s interest is the difference between -

(a)  the value of the landlord’s interest in the tenant’s flat prior to the grant of the new lease; and

(b)  the value of his interest in the flat once the new lease is granted.

(2)  Subject to the provisions of this paragraph, the value of any such interest of the landlord … is the amount which … that interest might be expected to realise if sold on the open market by a willing seller (with the tenant not buying or seeking to buy) on the following assumptions -

(a)  …

(b)  on the assumption that Chapter I and this Chapter confer no right to acquire any interest in any premises containing the tenant’s flat or to acquire any new lease;

(c)  on the assumption that any increase in the value of the flat which is attributable to an improvement carried out at his own expense by the tenant … is to be disregarded …

4(1)  The marriage value is the amount referred to in sub-paragraph (2), and the landlord’s share of the marriage value is -

(a)  [to be determined by agreement, or in default of agreement by the LVT], or

(b)  50 % of that amount,

whichever is the greater.

(2)  The marriage value is the difference between the following amounts, namely —

(a)  the aggregate of —

(i)  the value of the interest of the tenant under his existing lease, [and]

(ii)  the value of the landlord’s interest in the tenant’s flat prior to the grant of the new lease …, and

(b)  the aggregate of —

(i)  the value of the interest to be held by the tenant under the new lease, [and]

(ii)  the value of the landlord’s interest in the tenant’s flat once the new lease is granted ….”

73.   Chapter I of part I of the 1993 Act contains provisions whereby long leaseholders of flats in a block of flats can, through a so-called nominee purchaser, acquire the freehold interest in the block - or building as I will refer to it. A specified proportion of tenants - currently at least 50% according to section 13(2)(b) - of flats in the building have to be “participating tenants", that is, they have to join together to exercise their rights under the chapter through the nominee purchaser.

74.   By virtue of section 32, the price payable for the freehold of the building is to be determined in accordance with Schedule 6, part II of which was originally in the following terms:

“2(1)  Subject to the provisions of this paragraph, the price payable by the nominee purchaser for the freehold [of the building] shall be the aggregate of -

(a)  the value of the freeholder’s interest in the [building] as determined in accordance with paragraph 3,

(b)  the freeholder’s share of the marriage value as determined in accordance with paragraph 4 …

3(1)  Subject to the provisions of this paragraph, the value of the freeholder’s interest … is the amount which at the valuation date that interest might be expected to realise if sold on the open market by a willing seller (with neither the nominee purchaser nor any participating tenant buying or seeking to buy) on the following assumptions -

(a)  …

(b)  on the assumption that this Chapter and Chapter II confer no right to acquire any interest in the [building] 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 [building] where it is given by a person other than a participating tenant);

(c)  on the assumption that any increase in the value of any flat held by a participating tenant which is attributable to an improvement carried out at his own expense … is to be disregarded...

4(1)  The marriage value is the amount referred to in sub-paragraph (2), and the freeholder’s share of the marriage value is -

(a) [the proportion determined by agreement or by the LVT], or

(b) 50 % of that amount,

whichever is the greater.

(2)  The marriage value is any increase in the aggregate value of the freehold…[of the building], when regarded as being (in consequence of their being acquired by the nominee purchaser)…under the control of the participating tenants, as compared with the…value of [the freehold] when held by the [freeholder], being an increase in value -

(a)  which is attributable to the potential ability of the participating tenants, once [the freehold has] been so acquired, to have new leases granted to them without payment of any premium and without restriction as to length of time, and

(b)  which, if [the freehold was] being sold to the nominee purchaser on the open market by [a] willing [seller], the nominee purchaser would have to agree to share with the [seller] in order to reach agreement as to price.

… “

75.   Sections 109 and 110 of the Housing Act 1996 made some amendments to para 2 of Schedule 6 and para 3 of Schedule 13. More significant amendments were made by section 109 to para 3 of schedule 6. First, in para 3(1), the words “(with neither the nominee purchaser nor any participating tenant buying or seeking to buy)” were effectively replaced with the words “(with no person who falls within sub-para 1(A) buying or seeking to buy)". Secondly, a new para 3(1A) was added, in these terms:

“A person falls within this sub-paragraph if he is -

(a)  the nominee purchaser, or

(b)  a tenant of premises contained in the [building],

… “

76.   Further amendments were made to Schedules 6 and 13 to the 1993 Act by the 2002 Act. In particular, para 4(1) of each Schedule was amended so that, in effect, it reflected the amendments made by the addition of subsections (1D) and (1E) to section 9 of the 1967 Act. A new para 4(2A) was added to each Schedule, which provides that, where a lease has more than 80 years to run, marriage value is to be ignored, and para 4(1) was amended so that it provides that, in any other case, “the landlord’s share of the marriage value is 50% …".

The issues on these appeals

77.   These appeals require your Lordships to consider whether, when determining the prices to be paid by the tenant under section 9(1) of the 1967 Act, section 9(1A) of the 1967 Act, para 3 of Schedule 13 to the 1993 Act, and para 3 of Schedule 6 to the 1993 Act (in each case in their respective current forms), hope value can, as a matter of principle, be taken into account as a component of the price to be paid to the landlord.

78.   It is (in my view quite rightly) common ground between the parties that:

1.  Under section 9(1), marriage value cannot be taken into account because the tenant is expressly assumed not to be in the market;

2.  Under section 9(1A), marriage value can be taken into account because there is no requirement that the tenant is not in the market;

3.  Under Schedule 13, marriage value cannot be taken into account under para 3 because the tenant is assumed not to be in the market, but it is to be taken into account as directed by para 4;

4.  Under Schedule 6, no tenant of any part of the building is assumed to be in the market for the building under para 3, but at the para 4 stage marriage value is to be taken into account, to the limited extent of the participating tenants being able to enjoy the marriage value through the medium of being granted new leases of their flats.

79.   The nature of the dispute between the parties may be best appreciated by identifying the landlords’ arguments on these appeals, which are, in summary terms, as follows:

1.  Although marriage value is excluded under section 9(1), hope value is not excluded;

2.  The fact that marriage value is taken into account under section 9(1A) does not prevent hope value being included in addition;

3.  Under Schedule 13, the fact that marriage value is specifically included by virtue of para 4 similarly does not exclude hope value being included in para 3;

4.  Under Schedule 6, in addition to the marriage value included in the price through the medium of para 4 in relation to participating tenants, hope value in relation to participating tenants and/or hope value in relation to the non-participating tenants can be included under para 3.

In fact, none of the instant appeals concern section 9(1), but it is sensible to consider that provision, as it was the first of the statutory valuation hypotheses in this field, and the issues raised by these arguments are connected.

80.   Before turning to these four issues, it should be recorded that the questions raised in each of these appeals are whether the landlords are entitled, as a matter of law, to have hope value taken into account as an element in the valuation of their respective interests. If any of these appeals succeed, it would be for the LVT (or, on appeal, for the Lands Tribunal) to decide whether, and if so to what extent, the landlord is entitled to hope value in any particular case.

Section 9(1) of the 1967 Act and hope value

81.   The issue under section 9(1) is whether the words “(with the tenant and members of his family who reside in the house not buying or seeking to buy)", added by the 1969 Act, exclude hope value. In my opinion, the words mean that, not only marriage value, but also hope value, is excluded from being taken into account when assessing the price to be paid by a tenant for the freehold of the house. This conclusion is based on the natural meaning of the words and common sense, which together powerfully justify the conclusion that it is inherently improbable that Parliament, when enacting section 82 of the 1969 Act, intended the landlord to be able to seek hope value.

82.   As to the language, the words inserted into section 9(1) by the 1969 Act are linguistically capable of having the effect that, although the tenant is not interested in acquiring the freehold on the valuation date, he could be interested in a future date. However, the participles “buying” and “seeking” are not necessarily limited to the present, and, in their context, the more natural meaning of the words is that the tenant is not, and will not be, so interested. Even if the verbs had been expressed in the present tense, my view would have been the same. That is best demonstrated by reference to the assumption in section 9(1)(a), that the 1967 Act “conferred” (as at the valuation date) no right to acquire the freehold. Those words cannot mean that it can be assumed that the tenant nonetheless has that right the day after the valuation date.

83.   Common sense confirms this view, even if, as I am prepared to accept, the exclusion of marriage value does not logically and necessarily require the exclusion of hope value. As Carnwath LJ said in the Court of Appeal at [2008] 1 WLR 2142, para 49 (when dealing with the same point under para 3 of Schedule 13 to the 1993 Act), the notion that “the market would disregard the prospect of a bid by the tenant himself on the valuation date, but not the prospect of exactly the same bid the following day” is something of an “absurdity". Further, section 9(1) has always applied to relatively low value houses, and it seems likely that the valuation exercise it gives rise to was intended to be relatively simple. It is clear from many of the Lands Tribunal and LVT decisions in which hope value was an issue that it is a potentially controversial factor, which is often hard to quantify.

84.   Accordingly, I consider that, in relation to a valuation under section 9(1), a landlord is not entitled to seek hope value.

Section 9(1A) of the 1967 Act and hope value

 
Continue  Previous