McHale v Cadogan [2010] EWCA Civ 1471 is turning into a bit of a Jarndyce v Jarndyce. We noted the first part of the Court of Appeal decision earlier in the year here and ended it by saying:
“The appeal also raised another issue, namely whether the intermediate leasehold interest should be valued using the same assumptions as the freehold interest (i.e. that this was a “no Act world”) with no statutory right to enfranchise. That matter is (a) of general public importance and (b) likely to give rise to a much longer judgment than this one. It was adjourned off to a future date”
Well, that date is now. So, here goes my attempt to explain this point.
The Leasehold Reform, Housing and Urban Development Act 1993 makes very detailed (and complicated) provision for calculating the price to be paid by tenants when enfranchising. It includes something called “marriage value”, which is the increase in the value of the freehold that occurs if the leaseholders purchase it (effectively, the special benefit to the leaseholders in owning the freehold, including the right to grant themselves new (long) leases with no ground rent and no forfeiture clause). The value of the (outgoing) freeholders interest is to be calculated on the basis of a “no Act world” (i.e., trying to ascertain the market price that would be payable, but for the interference with the market caused by the 1993 Act). No similar provision is made for assessing how the tenants interest is to be calculated.
Despite this, the Court of Appeal held that a “no Act” assumption must also be made when valuing the tenants interest. Essentially, although the 1993 Act did not say this, to do otherwise would be logically inconsistent. The price to be paid was calculated by looking at the freehold and leasehold values; those had to be valued on the same basis.
And thus, though given the appeal by the tenants this should be obvious, the resulting price to be paid by the tenants could be significantly higher than if the tenants’ interest was valued subject to the 1993 Act (presumably being the value of a leasehold interest without the benefits of enfranchisement – such as free lease extensions etc.). Or have I got the wrong end of the stick?
Yes – that is how I understand it. Marriage value is only payable where there are less than 80 years left on the lease and it is split 50/50 between freeholder and leaseholder. So, if you can get the value of both interests up, there is more money for the freeholder (the leaseholder, of course, is paying for this, so doesn’t want the “uplift” split between him and the freeholder – he doesn’t want to pay an uplift at all).
The Supreme Court granted permission to appeal on 5th July. It is not clear to me whether that is for this part, the other bit or both, but I assume it is this “no Act” assumption point.