Earl Cadogan and another v Cadogan Square Ltd; Cadogan Square Ltd v Earl Cadogan and another

Collective enfranchisement – Marriage value – Non-participating tenants – Determination of premium payable on enfranchisement – Whether hope value to be attributed to flats of non-participating tenants – Whether tenant of flat in respect of which section 42 notice served to be regarded as participating tenant for purposes of calculating marriage value – Appeals disposed of accordinglyOn a collective enfranchisement claim under the Leasehold Reform, Housing and Urban Development Act 1993, the leasehold valuation tribunal (LVT) determined the terms on which the nominee purchaser could acquire, on behalf of the participating tenants of flats in the building, the freehold of a Grade II listed Victorian terraced property in London SW1. Of the total premium determined by the LVT, a little more than £1.836m was attributable to the freehold interest; the rest related to an intermediate landlord’s interest under a headlease.Both the freeholder and the nominee purchaser appealed against the LVT’s determination on various grounds. The issues arising on the appeals included: (i) whether the freehold value should be increased to take account of the hope value of the two flats held by non-participating tenants, which had unexpired terms of 108 and 18 years respectively at the valuation date; and (ii) the correct approach to the marriage value of a another flat, whose tenant had, in 2004, served a notice under section 42 of the Act seeking to exercise her right to a lease extension, prior to the initiation of the collective enfranchisement claim in 2005. The freeholder had admitted the right to a new lease of the flat, but had disputed the premium that the tenant proposed. Although the tenant had participated in the subsequent collective enfranchisement, she had subsequently assigned her lease, and the benefit of the section 42 notice, to a family company, and the nominee purchaser had notified the freeholder that the company had not become a participating tenant in accordance with section 14(8)(a). The issues in respect of that flat were whether the section 42 notice could be taken into account and whether the new tenant should be treated as a “participating tenant” for the purposes of calculating marriage value.Held: The appeals were determine accordingly.(1) In valuing the freeholder’s interest under para 3 of Schedule 6 to the 1993 Act, the hope of granting new leases of individual flats to non-participating tenants and thereby releasing marriage value could be taken into account. That hope value should be calculated as a proportion of marriage value rather than by an adjustment to the deferment rate: Earl Cadogan v Sportelli [2007] 1 EGLR 153 (LT) and [2008] UKHL 71; [2009] 1 EGLR 153 (HL) applied. There was no “cut-off point” concerning the length of an unexpired term above which the flats of non-participating tenants should be regarded as having no marriage value. However, there was no evidence that a tenant with a lease of 108 years unexpired would be interested in seeking a lease extension. The amount of hope value attributable to such a flat would be insignificantly small and no allowance for hope value should be made in respect of it in the instant case.(2) As to the other non-participating flat, the fact that the tenant had not served a section 42 notice seeking a lease extension, where he was entitled to do so, did not mean that he had no interest in extending the lease. It was rare for a tenant to allow a lease to run to term. The hypothetical purchaser of the freehold would consider it probable that the tenant of a flat with 18 years to run would seek a lease extension before the expiry of the term and would include hope value in its bid accordingly. However, it was not certain that the tenant of the flat would seek to extend the lease or, if he did do so, when this would take place. The fact that the tenant had not participated in the collective enfranchisement and had not served a section 42 notice by the valuation date suggested that no such action was imminent, although other factors than marriage value, such as the desire to retain a home or benefit from expenditure on improvements, would encourage the tenant in that direction. The marriage value in which the purchaser could share would decline at an increasing rate as the lease shortened. The longer the tenant delayed in seeking to extend his lease, the more the marriage value, and with it the hope value, would diminish. It would eventually disappear and the purchaser would lose the money that it had paid as hope value if the tenant did not proceed with a lease extension. Since the purchaser was considering the prospect of only one tenant seeking to extend a lease, the risk could not be spread across many non-participating tenants. The combined effect of those factors suggested that a purchaser would be cautious about attributing significant hope value to the prospect of the tenant of the flat seeking to extend his lease in the near future and would make only a small allowance to reflect such limited hope value. Assessing that allowance at 5% of the potential marriage value produced a hope value of £9,863 for the flat: Culley v Daejan Properties Ltd [2009] UKUT 168 (LC); [2009] 3 EGLR 165 applied; Blendcrown Ltd v Church Commissioners for England [2004] 1 EGLR 143 and Re Shulem B Association Ltd’s Appeal [2001] 1 EGLR 105; [2001] 11 EG 175 distinguished.(3) The tenant who had served a section 42 notice had originally been a participating tenant but had ceased to be a qualifying, and hence participating, tenant when she assigned her lease to the company: see section 14(1)(b). Since the company had decided not to participate in the collective enfranchisement, from the date of the assignment there was no participating tenant in the flat. Paragraph 4(2) of Schedule 6 permitted marriage value to be taken into account in respect of a flat only where there were “persons who are participating tenants immediately before a binding contract is entered into in pursuance of the initial notice”. Since there were no such persons, the flat could not be included within the marriage value calculation even though there had been a participating tenant at the “relevant date” and the value of the freeholder’s interest was calculated under para 3 of Schedule 6 on the basis that the leasehold interest was that of a participating tenant. Nor would the nominee purchaser pay hope value in respect of the flat, since that fell to be determined by reference to the status of the leaseholder of the flat as a participating tenant at the relevant date. It followed that the section 42 notice should not be taken into account in calculating marriage value.Kenneth Munro (instructed by Pemberton Greenish LLP) appeared for the freeholder; Stephen Jourdan QC (instructed by Forsters LLP) appeared for the nominee purchaser.Sally Dobson, barrister