Cravecrest Ltd v Duke of Westminster and others

Collective enfranchisement – Leasehold Reform, Housing and Urban Development Act 1993 – Purchase price – Development value – Tenants’ leases of individual flats having only a few days to run at valuation date – Whether price payable for two intermediate leasehold interests to take into account prospect of reconversion to single house – Whether excluded on assumption that owner of neither interest individually able to unlock development value – Assumptions in para 3 of Schedule 6 to 1993 Act – LVT including development value – Appeal dismissed In March 2009, the tenants of flats in a converted house in London SW1 served an initial notice, under section 13 of the Leasehold Reform, Housing and Urban Development Act 1993, claiming the right to acquire the property by collective enfranchisement. The tenants nominated the appellant as purchaser for that purpose. By their counternotice, the landlords admitted the tenants’ right to acquire the first respondents’ freehold interest plus two intermediate leasehold interests, namely: (i) a headlease of the entire property; and (ii) the second respondent’s overriding leasehold interest in the third floor. The leasehold valuation tribunal (LVT) determined that a price in excess of £6.927m was payable on enfranchisement, with £2,190 going to the first respondents for the freehold, £3.741m to the headlessee and £3.184m to the second respondents for their long leasehold interest. In calculating the enfranchisement price under Schedule 6 to the Act, the LVT took into account development value flowing from the prospect of reconverting the property to a single dwelling. It reasoned that the participating tenants’ leases had only a few days left to run as at the valuation date and that, if the headlease and the overriding lease were treated as a single merged interest, then in the absence of the enfranchisement claim the owner of that interest would almost immediately be have been able to enjoy vacant possession of the property, with the consequent ability to seek reconversion. The appellant appealed. It contended that, on a proper application of para 3 of Schedule 6, in particular the bracketed words “(with no person who falls within sub paragraph (1A) buying or seeking to buy)”: (i) the headlease and overriding lease had to be valued separately; (ii) the owner of neither interest could be assumed to be seeking to buy the other, such that the price should be calculated on the assumption that the development value was not available to either; and (iii) accordingly, both interests fell to be valued on the assumption that the property would continue to be configured as flats. On the appeal, the second respondent sought to argue for the first time that its overriding lease was not an interest that the appellant was entitled to insist on acquiring under section 2 of the Act. It sought the permission of the tribunal to take that point. Held: The appeal was dismissed. (1) The 1993 Act contemplated the parties reaching a finally concluded position as to some or all of the terms of acquisition before any binding contract incorporating those terms was entered into: see section 24(3) and (6). Notwithstanding the terms of section 38(4), stating that agreement in relation to all or any of the terms of acquisition was agreement subject to contract, an agreement between the parties as to the terms of acquisition could be final and binding for the purposes of section 24. In the instant case, the parties had reached a final and binding agreement that the appellant was to acquire the second respondent’s overriding lease. Final agreement on the point had been reached in writing in a manner that was not contingent on agreement or determination of some other term or terms. By the date of commencement of the LVT hearing, at the latest, the point had been finally agreed and that agreement could not be withdrawn. Accordingly, the second respondent should not be permitted to amend its statement of case since the proposed amendment sought to assert a point that was not open to it: Westminster City Council v CH2006 Ltd [2009] UKUT 174 (LC); [2010] PLSCS 13 and Pledream Properties Ltd v 5 Felix Avenue London Ltd [2010] EWHC 3048 (Ch); [2011] 1 EGLR  42; [2011] 12 EG 116 applied. (2) It was common ground that the freehold vacant possession value of the property at the valuation date, with the possibility of reconversion to a single house, was £7m. It was permissible to take that value into account when calculating the price payable for the headlease and overriding lease. In the real world, if the overriding lease were offered for sale at the valuation date, then it was likely that the headlessee would purchase it so as to unlock the development value; and vice versa with a sale of the headlease. Moreover, the hypothetical purchaser of either interest, at the valuation date, would increase its bid to reflect the prospect of being able to unlock development value by doing some deal with the owner of the other interest. When valuing the overriding lease, it had to be assumed that the headlessee was not buying or seeking to buy either at the valuation date or thereafter, either by itself or its successors in title: Earl Cadogan v Sportelli [2008] UKHL 71; [2009] 1 EGLR 137;  [2010] 1 AC 226 applied. However, that did not mean that it had also to be assumed that the headlessee was not seeking to sell. It did not have to be assumed that the overriding lease and headlease would continue to be owned by different persons forever, and that those persons would forever refrain from acting in the manner that they would in fact act in their own interests in the real world, namely by coming together to unlock the large and immediate development value available at the property. The assumption that a person was not buying or seeking to buy a particular interest in a property was different from an assumption that a person was not selling or seeking to sell a different interest in the property. The latter assumption was not required by the words in brackets in para 3. To go from an assumption that the headlessee was not buying or seeking to buy the overriding lease to an assumption that it was not seeking to sell its own interest involved an impermissible extension of the bracketed words. Although a separate valuation exercise had to be performed in respect of each of the headlease and the overriding lease, that said nothing about how the valuation exercise in respect of each interest as to be performed and did not require valuation on the assumptions contended for by the appellant: Jones v Wrotham Park Settles Estates [1979] 1 All ER 286 and Grosvenor Estate Belgravia v Klaasmeyer [2010] UKUT 69 (LC); [2010] 16 EG 107 (CS) distinguished. Accordingly, in valuing the headlease and the overriding lease, it was proper to include such extra value as the hypothetical purchaser of the relevant interest would be willing to pay to reflect the prospect of being able, soon after its purchase of that interest, to acquire the other interest and to enjoy in consequence the development value.  The LVT had been correct so to decide. (3) The relevant valuation could not assume that an agreement for the joint sale of both interests was in place at the valuation date, but it could be assumed that, if the hypothetical purchaser of either interest had made an enquiry as to the willingness of the owner of the other interest to sell to enable a reconversion to a single house, then that owner’s reaction would have been highly favourable in principle. The valuation had to take into account an additional element of risk, over and above those otherwise accounted for, where, on purchase, the two interests were not conjoined and one purchase therefore had to be concluded before the other. However, the owner of the second interest would be almost certain to agree to sell. It could be assumed that the second deal would take place almost immediately, thus not requiring any adjustment for time. It was appropriate to split the increased development value 50/50 between the two interests. Thomas Jefferies (instructed by Maxwell Winward LLP) appeared for the appellant; Anthony Radevsky (instructed by Boodle Hatfield) appeared for the first respondent; Timothy C Dutton (instructed by Walker Morris, of Leeds) appeared for the second respondent. Sally Dobson, barrister