The Leasehold Reform Act 1967 enables leaseholders to buy the freehold of their houses. Flat owners can invoke the collective enfranchisement procedure in the Leasehold Reform Housing and Urban Development Act 1993. Alternatively, tenants can seek extensions to their leases. The specific issue raised in Earl Cadogan v Sportelli [2008] UKHL 71; [2008] PLSCS 342 was whether the price payable for an extended lease or freehold should include hope value.
Hope value is an elusive concept. A potential buyer, where a landlord is selling its interest when the tenant is not in the market, may take the view that the tenant may want to enfranchise at a later date and might pay more for the reversionary interest than other potential buyers (in order to secure his home and maintain the value of his property, as a lease being a wasting asset). Alternatively, the tenant may be willing to surrender the lease, leaving the landlord with a more valuable asset. Hence the term “hope value”. The expression describes the additional sum that the buyer might pay based on the hope of a further advantageous transaction at some point in the future.
The Leasehold Reform Act 1967 enables leaseholders to buy the freehold of their houses. Flat owners can invoke the collective enfranchisement procedure in the Leasehold Reform Housing and Urban Development Act 1993. Alternatively, tenants can seek extensions to their leases. The specific issue raised in Earl Cadogan v Sportelli [2008] UKHL 71; [2008] PLSCS 342 was whether the price payable for an extended lease or freehold should include hope value. Hope value is an elusive concept. A potential buyer, where a landlord is selling its interest when the tenant is not in the market, may take the view that the tenant may want to enfranchise at a later date and might pay more for the reversionary interest than other potential buyers (in order to secure his home and maintain the value of his property, as a lease being a wasting asset). Alternatively, the tenant may be willing to surrender the lease, leaving the landlord with a more valuable asset. Hence the term “hope value”. The expression describes the additional sum that the buyer might pay based on the hope of a further advantageous transaction at some point in the future. In several conjoined appeals, Earl Cadogan argued that hope value should be taken into account as a component of the price that he was entitled to receive on enfranchisement. Landlords and tenants will each welcome different aspects of the decision, which focused upon complex statutory provisions that are difficult to interpret. Tenants will welcome the House of Lords’ decision that hope value is not payable by leaseholders who are seeking to obtain extended leases or to purchase the freeholds of their houses. As a result, lease extensions and enfranchisement of houses should be a little cheaper. In addition, the lords decided that hope value is not payable in respect of participating tenants in collective enfranchisement cases. However, landlords will welcome the fact that the lords also decided, by a majority, that hope value is payable in collective enfranchisement cases for non-participating tenants’ flats. Lord Neuberger explained the policy reasons for his decision in the following way. In so far as they are purchasing the reversion to non-participating tenants’ leases, the participating tenants are acquiring an investment. In addition, in many cases, all, or at least the majority, of the tenants of flats in a building will want to buy the freehold. However, if they are well advised and hope value were not a component of the purchase price, the tenants (having reached a private agreement) would ensure that only the minimum number formally participate in the purchase. Such an arrangement would artificially reduce the price payable for the freehold. Consequently, it would be unfair to deprive a landlord of hope value in respect of the non-participating tenants’ flats. The decision has clarified the law, although it does not explain how to value hope value in respect of non-participating tenants. Anecdotal evidence suggests that, in some cases, the sums at stake will be substantial. Allyson Colby is a property law consultant
