Enfranchisement: determination of the hope value is fact-specific

In Francia Properties Ltd v St James House Freehold Ltd [2018] UKUT 79 (LC), the Upper Tribunal (Lands Chamber) observed that an assessment of risk was fact-specific. A prospective purchaser was unlikely to have regard to the Tribunal decisions in forming their own commercial judgment. Accordingly, reliance on previous decisions, involving differing factual matrices, were of little relevance. The UT has once again underscored the importance of this observation in House of Mayfair Ltd v Aitchison and others [2021] UKUT 73 (LC). The appellant was the freeholder of a residential block of flats in London SE22. Each of the five flats was let on a long lease. The leaseholder of the top-floor flat was also the director and sole shareholder of the appellant company. The respondents were the long lessees of the remaining flats. On 1 July 2019, the respondents served notice on the appellant to exercise their right to acquire the freehold under the Leasehold Reform and Urban Development Act 1993. The parties were unable to agree the price of acquisition. In November 2019, the respondents applied to the First-tier Tribunal for a determination of the price and other terms of the acquisition. The experts instructed by the parties agreed that the value of the appellant’s interest, disregarding any development value, was £20,000. They were unable to agree on the hope value; namely, whether the price should be increased by an additional sum to reflect the potential, or hope, of further profitable development on the roof of the building. The respondents’ expert argued that the possibility of an upward and rear extension to the development was relatively low. Accordingly, the hope value should be assessed at nil. The expert for the appellant argued that a hypothetical purchaser of the freehold would make a bid reflecting the possibility of an additional flat being constructed on the roof. The roof had no independent access. To overcome the difficulties with access, the appellant’s expert sought to rely on a right of entry reserved in the lease of the top-floor flat, which permitted entry for the purpose of development of adjoining premises. He surmised that a deal could be reached with the tenant of that flat to surrender a part of its demise at no significant extra cost. He suggested an allowance of £10,000 be made to his net development value of £42,257 to reflect that such an agreement would need to be reached. The FTT disagreed. It found that the appellant’s expert had given insufficient thought to how access to any additional flat built on the roof would be achieved. In all likelihood, any development would have to be incorporated within the top-floor flat, and there was no evidence that the tenant of the top-floor flat would be willing to pay for the same. The FTT valued the development hope value at £2,000. The freeholder appealed. Relying on Cravecrest Ltd v Trustees of the Will of the Second Duke of Westminster [2014] Ch 301, the freeholder argued that the FTT had failed to adopt the “hypothetical two-stage process” approach laid down in that case. The FTT failed to consider that a hypothetical prospective purchaser of the freehold would ascertain in advance the likelihood of being able either to acquire part of the top-floor flat or to sell the roof space to the lessee of the top-floor flat. In upholding the decision of the FTT, the UT observed that the facts of Cravecrest were materially different from those of the present case. Whether additional value could be attributed to the prospect of a development based on the acquisition of the freehold and another interest was fact-specific. Although the likelihood of realisation of a development may be greater if the two interests belonged to, or were controlled by, the same person, it did not automatically equate to an attractive development opportunity. In the present case there was no substantive evidence before the FTT of the sums that a prospective purchaser of the freehold would be required to pay to the owner for the development to progress, nor the price the lessee of the top-floor flat would demand to surrender the portion of his flat required to construct an independent roof access. Elizabeth Dwomoh is a barrister at Lamb Chambers