Earl Cadogan v Erkman; Erkman v Earl Cadogan

Collective enfranchisement – Valuation of freehold – Marriage value – Leasehold Reform, Housing and Urban Development Act 1993 – Prospect of purchaser of freehold increasing bid on account of possibility of negotiating early lease extension with non-participating tenant where no notice under section 42 yet served by tenant – Premium rounded up to reflect that prospectThe leasehold valuation tribunal (LVT) was asked to determine the terms of acquisition of a property in central London on a collective enfranchisement under the Leasehold Reform, Housing and Urban Development Act 1993. Both the freeholder and the nominee purchaser for the tenants were dissatisfied with the LVT’s decision. The freeholder appealed and the nominee purchaser cross-appealed.A dispute regarding the appropriate deferment rate to be applied when assessing the present value of the freehold reversion was determined in a separate appeal hearing and a 5.25% rate was applied: see Cadogan Square Properties Ltd v Earl Cadogan [2010] UKUT 427 (LC); [2011] PLSCS 62. An issue regarding the correct approach to marriage value was resolved by agreement in the light of the Court of Appeal decision in McHale v Earl Cadogan [2010] EWCA Civ 147; [2011] 05 EG 106, it being accepted that, for marriage value purposes, the existing leases were to be valued disregarding the existence of the participating tenants’ 1993 Act rights.Of the outstanding issues determined at a further appeal hearing, one concerned the correct approach to hope value in respect of a flat held by a non-participating tenant. The issue was whether any hope value should be added in respect of that flat for the prospect that a hypothetical purchaser would increase his bid on account of the possibility of negotiating an early lease extension with the tenant, notwithstanding that the tenant in question had not yet served any notice under section 42 of the 1993 Act claiming a lease extension.Held: The appeals were determined accordingly.The fact that a tenant of a flat had not served a section 42 notice and had not participated in the collective enfranchisement did not mean that he, or his successor in title, might not want to extend the lease in the future. The financial benefits of doing so, in terms of a share of the marriage value, were an attractive incentive, although, in the no-Act world, the tenant had no right to a prescribed share of such value. Although marriage value would decline as the unexpired term of the lease reduced, no evidence had been presented as to how that decline would operate in the instant case. There was evidence that it was very rare, but not unique, for a tenant to let his lease run to term. However, approximately one-third of tenants who served section 42 notices in respect of leases with unexpired terms of 17.33 years or less did so when there were less than 5.75 years remaining on the lease.Given those figures and the current position of the relevant flat, so far as it was known, there was little to encourage a prospective purchaser that he could expect an early approach to extend the lease. A prospective purchaser of the freehold would be cautious about attributing any significant value to the prospect of a single tenant, who held a short lease and had given no indication to date that he wanted to extend his lease, making an early approach to negotiate a new lease and to share the diminishing marriage value. Although such a purchaser might be prepared to make a small allowance for hope value by rounding up his bid, this was unlikely to be greater than £10,000. An allowance to reflect that limited hope value would be made by rounding up the premium of £2,211,556 to £2.22m to reflect hope value for the flat in the sum of £8,444: Blendcrown Ltd v Church Commissioners for England [2004] 1 EGLR 143 considered.Kenneth Munro (instructed by Pemberton Greenish) appeared for the freeholder; Steven Jourdan QC (instructed by Forsters LLP) appeared for the nominee purchaser.Sally Dobson, barrister