McHale and another v Earl Cadogan

Leasehold Reform, Housing and Urban Development Act 1993 – Collective enfranchisement – Block of flats – Determination of purchase price – Deferment rate – Marriage value – Whether grounds for departing from generic deferment rate – Whether participating tenants’ current interests to be valued on assumption that no 1993 Act rights applying for purpose of calculating marriage value – Whether positive value to be applied to caretaker’s flat – Appeal dismissedThe second appellant company was the nominee purchaser for the purpose of an application by qualifying tenants of three flats in a block to acquire the freehold under section 24 of the Leasehold Reform, Housing and Urban Development Act 1993. The block contained five flats that were let on long underleases and a caretaker’s flat. The participating tenants consisted of two long leaseholders and the first appellant, who held the headlease of the block for a term of 62.5 years from 1983 and was a qualifying tenant of the caretaker’s flat. The headlease contained covenants obliging the first appellant to use his best endeavours to provide a resident caretaker, who was to reside in the caretaker’s flat rent-free on a service basis. The underleases required the lessees to pay a contribution to the first appellant’s expenses and outgoings in respect of “the costs of employing a housekeeper and…the accommodation (if any) to be provided for such housekeeper” along with “the cost to the Lessor of outgoings for such accommodation (including loss of rack rent thereon)”.The leasehold valuation tribunal (LVT) determined the enfranchisement price at £777,940. In doing so, it: (i) applied the generic deferment rate of 5% laid down for flats in Earl Cadogan v Sportelli [2007] 1 EGLR 153; (ii) assessed the value of the participating tenants’ current interests, for the purpose of calculating the marriage value, on the assumption, in para 3(1) of Schedule 6 to the Act, that there were no rights of collective enfranchisement or lease extension under the Act; and (iii) determined the current lease value of the caretaker’s flat for that purpose as nil, on the ground that the first appellant had no power, under the terms of the headlease or underleases, to charge a rent for that flat.The appellants appealed on all three matters. With regard to the deferment rate, the first appellant contended that a rate of 8 – 10% should be applied, not by virtue of evidence showing factors specific to the property in question that required a departure from the generic 5% rate but because that rate failed to reflect alternative investment opportunities and the disadvantages of an investment in reversions compared with equities.Decision: The appeal was dismissed. (1) The factors relied upon by the first appellant regarding the appropriate deferment rate had been the subject of extensive evidence and argument in Sportelli. His contentions in that respect brought nothing new to the debate and provided no basis for a conclusion that the LVT had been wrong to adopt the 5% generic rate.(2) The LVT had correctly applied the para 3(1) assumption to the value of the participating tenants’ current interests when determining marriage value. The calculation of marriage value under para 4(2) of Schedule 6 to the Act, required the assessment of any increase in the aggregate value of the freehold and intermediate leaseholder interests on the assumptions set out in para 3(1). Although para 4(2) did not prescribe the format in which marriage value was to be determined and said nothing about the valuation of the participating tenants’ current leasehold interests, it was clear that they needed to be brought into the calculation in order to determine what increase in the value of the freeholder’s and intermediate leaseholder’s interest would result from a marriage of those interests. Since it had to be assumed, for the purpose of valuing the freeholder’s and intermediate leaseholder’s interests, that Chapters I and II of the Act conferred no right to acquire any interest in the demised premises, it followed that that assumption should be made throughout the valuation process, including where, as part of that valuation, the value of the participating tenants’ current interests were brought into the reckoning. It would be contrary to the scheme of the provisions to do otherwise. The freeholder and intermediate leaseholders had to be compensated for what they had lost by the acquisition of their interests under the Act. To import into the valuation of the interests before acquisition values that derived from the provisions of the Act would be inconsistent with that objective and could not be justified.(3) On the correct construction of the headlease and underleases, the first appellant was not entitled to charge a rent for the caretaker’s flat or to include a notional rent for it in the service charge. He was not entitled to charge a rent owing to his obligation, imposed by the terms of the headlease, to use his best endeavours to provide a resident caretaker to live in the property rent-free. Nor was such a sum chargeable under the underleases as part of the outgoings in respect of accommodation to be provided for a housekeeper. The terms of the underleases did not oblige the first appellant to provide a resident housekeeper within the block, whereas he was obliged to perform and observe the covenants in the headlease. Since the caretaker’s flat could not be let out by virtue of the headlease, the head lessee could not recover in respect of “loss of rack rent” under the service charge provisions. Accordingly, the current value of the first appellant’s interest had properly been assessed at nil.The first appellant appeared in person on behalf of the appellants; Anthony Radevsky (instructed by Pemberton Greenish) appeared for the respondent.Sally Dobson, barrister