Pricing lease extensions on the assumption that there are ‘no-Act rights’

Chapter II of the Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act) enables qualifying tenants of flats to purchase extended leases at peppercorn rents. The premium payable is calculated by adding together the reduction in the value of the landlord’s interest in the flat as the result of the grant of the extended lease, the landlord’s share of the marriage value, and any sum due to the landlord to compensate it for any loss arising from the grant of the new lease. The landlord’s interests in the tenant’s flat before and after the lease extension are valued in the open market on the assumption that the landlord is a willing seller and that the tenant is not buying or seeking to buy. And, for the purposes of the valuation exercise, the rights conferred by the legislation – either through collective enfranchisement or by the grant of lease extensions – must be ignored (the “no-Act rights” assumption). Crown Estate Commissioners v Whitehall Court London Ltd [2018] EWCA Civ 1704; [2018] PLSCS 132concerned the apportionment of a premium for a lease extension between the head landlord and the freeholder of a large Victorian mansion block in London. The tenant had agreed the premium payable and took no part in the proceedings. Just over half the tenants had exercised their rights to take extended leases at peppercorn rents and the trend was expected to continue, thereby reducing future ground rent receipts. And, for the purposes of deciding how the premium was to be split between the owners of the reversionary interests, it was important to know whether the no-Act rights assumption in the legislation applied solely to the flat itself, or to the rest of the building as well. If the assumption applied solely to the tenant’s flat, the expected erosion of ground rents in the rest of the building (as tenants made claims under the 1993 Act) must be taken into account. But, if the assumption covered the whole building, future reductions in ground rents from other flats fell to be ignored. Both interpretations of the statutory wording – 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” – were feasible. And the First Tier Tribunal and Upper Tribunal disagreed. The First Tier Tribunal had decided that the statutory assumption focused on the flat. But the Upper Tribunal had ruled that the assumption results in a “no-Act building”. Which was right? The Court of Appeal agreed with the Upper Tribunal. It did not follow from the fact that the valuation related to the value of the landlord’s interest in the tenant’s flat that the rights of other tenants in the block should be ignored. The language of the assumption was expansive. It had been included in the 1993 Act to prevent collective and individual enfranchisement rights from depressing open market valuations – and the assumption needed to extend beyond the flat in order to work in the context of rights to collective enfranchisement. Furthermore, collective enfranchisement valuations are made on the basis that none of the tenants have any rights under Chapter I or Chapter II. And it was unlikely that parliament had intended that the overall approaches to valuation in the two types of enfranchisement should be diametrically opposed.   Allyson Colby, property law consultant A version of this article appears in the 4 August 2018 edition of EG with the headline “Pricing lease extensions on ‘no-Act rights’”