Earl Cadogan and other v Pitts and another; Earl Cadogan and another v Sportelli and another [2008] UKHL 71
Enfranchisement is the process whereby leaseholders can force their freeholder to sell them the freehold of the property. The Leasehold Reform Act 1967 provided for the enfranchisement of leasehold houses whilst those who live in flats can utilise the collective enfranchisement procedure in the Leasehold Reform Housing and Urban Development Act 1993. Alternatively, a leaseholder can seek to force the freeholder to grant an extension to his existing lease, again under the 1993 Act.
The price to be paid for the purchase of the freehold / new lease is calculated in accordance with the provisions of each Act. However, the price is usually made up of three component elements:
(a) a sum representing the ground rent lost by the freeholder as a result of enfranchisement;
(b) the “marriage value” which is – in effect – the additional value of the property to the leaseholder as opposed to any other person who might purchase the freehold;
(c) the “hope value” which is the value of the property to a notional third party purchaser and which might include the prospect of selling the freehold to the tenant at a later date and for an enhanced price. It is particularly revent in cases where there are “non-participating” tenants (i.e. tenants who are not part of the enfranchisement process).
In the Lands Tribunal and Court of Appeal, these cases had been argued on a very wide basis. Was it appropriate for the Lands Tribunal (which is not a court of record) to try and give definitive guidance to Leasehold Valuation Tribunals? What was the appropriate deferment rate (i.e. to what extent should the sums payable by the leaseholder be reduced to reflect the fact that the monies were paid now and not at some future date)? These points were dealt with by the Court of Appeal at [2008] EWCA Civ1042; [2008] 1 WLR 2142 and permission to appeal was not granted. Readers who are interested should go to the Court of Appeal decision.
The only issue before the House of Lords was whether or not “hope value” was properly something that could be claimed by landlords.
Their Lordships have held (Lord Hoffmann dissenting in part – he wouldn’t have allowed hope value in any situation) that:
(a) hope value is not payable by leaseholders when they seek to enfranchise a leasehold house (under the 1967 Act) or when they seek to exercise the individual right to a lease extension (under the 1993 Act);
(b) hope value is only payable in collective enfranchisement cases (under the 1993 Act) in respect of the flats of those leaseholders who are not taking part in the collective enfranchisement.
I’m not going to take you through the reasoning, since it involves very close reading of the (very poorly drafted and confusing) statutory provisions. What is more important is the practical effect of this judgment.
It is clear that individual lease extensions and enfranchisement of houses should now be cheaper which will be good news for leaseholders. Landlords will also take heart from the fact that, in collective enfranchisement claims, the price payable is likely to increase and their freehold interest is better protected.
However, how do you value the hope value of non-participating tenants? What should you do about those leaseholders who have already served their initial notices and which now have suggested a price which is too high / low?
Hope value payable by participating tenants to purchase the freehold of non-participating tenants is double paying for the outgoing freeholder. The freeholder is compensated for loss of ground rent by the term and for loss of lease expiry acquisition by the reversion, payable by the nominated purchaser. The nominated purchaser has paid and can now expect reversion of the lease at expiry. Should a non-partricipating tenant subsequently extend his lease the premium is the compensation for reversion being extended for a further 90 years beyond the original expiry date. Why should the previous freeholder expect to benefit from this premium, he has already been compensated.