This article covers some case law and legislative developments over the last 12 months relating to enfranchisement:
Leasehold Reform (Ground Rent) Act 2022 – this has now become law and the operative parts will be in force from 30th June 2022. It will set the ground rent at nil in effect (a peppercorn) for most new residential leases granted after that date; there are some exceptions. There are some traps for unwary landlords for example they need to tread carefully when considering whether to agree to make variations to an existing lease as they may inadvertently terminate their ability to collect the existing ground rent.
Voluntary lease extensions are still possible but care needs to be taken around the ground rent to be specified; only a peppercorn can be specified within the extended element of the lease term; broadly speaking the pattern and level of ground rent within what was the remainder of the existing lease term cannot exceed the current ground rent arrangement.
Enfranchisement & Commonhold reforms – The April 2022 announcement around the above Act reiterates the Government’s intention to introduce wider reforms to leasehold law:
“The move forms the first part of the government’s reform package that will make homeownership cheaper, fairer and more secure. Future measures, announced last year, include a new right for leaseholders to extend their leases to 990 years at zero ground rent and an online calculator to help leaseholders find out how much it would cost to buy their freehold or extend their lease.”
These are promised for later in this Parliament.
It remains to be seen which of the Law Commissions recommendations and valuation options the Government opts to proceed with. They may make it much cheaper for flat owners to extend their lease.
Deferment Rate Challenge – while a private landlord’s recent challenge to the rate was unsuccessful for want of compelling evidence it may herald a challenge by a better resourced and motivated landlord and it has sign posted what they need to demonstrate.
The premium payable by residential leaseholders to their landlords is in part a product of the deferment rate and so a change in that can have a large effect on the premium payable.
The deferment rate is used to discount the current value of the freehold reversion to the end of the lease term when the landlord could have expected to receive the benefit of it so as to calculate how much money needs to be paid now to compensate for the loss of that future value. The lower the deferment rate the higher this element of the premium will be and vice versa.
There are two moving parts; the deferment rate currently in use under the statutory valuation framework is prone to challenge; it may also be fixed as part of the government’s reforms around enfranchisement law. The former may affect the latter and so give landlords an incentive to challenge the deferment rate in the hope of setting it at a favourable level before the government fixes it as part of the reforms to be introduced in this area. That might put pressure on the government as to the level at which they set the deferment rate.
In the freehold house case of Llangewydd Court Ground Rent Estate v Ralph UKUT0251 (LC) the landlord sought to challenge the prevailing deferment rate. It was relevant to calculate two reversionary components of the price; following conventional valuation practice (re Clarice Property Limited’s appeal [2012] UKUT0334 (LC)) this involved valuing three elements, first the value of the existing ground rent receivable for the remainder of the original term (the term), secondly the present value of the modern ground rent that would have been receivable for the extended lease period of 50 years from the end of the original term had the tenant chosen to extend the lease (first reversion) and thirdly the present value of the freeholder’s reversion to the house with vacant possession when the lease fell in (the freehold reversion). So the deferment rate was used to calculate the current value of the first reversion and the freehold reversion to reflect that delayed receipt.
The guidance case of Sportelli (L Cadogan and The Cadogan Estates Limited v Sportelli [2007] 1EGLL153) set a deferment rate of 4.75% for houses and 5% for flats after an 11 day trial with 8 expert witnesses covering the fields of valuation, finance and economics. While Sportelli didn’t create a legal precedent as such the Tribunal made it a guidance case which the First-tier Tribunal is to follow “unless compelling evidence to the contrary is adduced”. This was said to be justified as the Tribunal felt the deferment rate unlikely to vary according to factors particular to an individual case.
The Sportelli deferment rate is a product of a 2.25% rate of return for risk free investment (based in particular on evidence of the returns on index linked guilt edged investments) plus a 4.5% risk premium (recognising a landlord would be accepting some risk by investing the property) minus 2% to reflect long term growth in property values.
The Court of Appeal highlighted that Sportelli was a decision about a property in “prime Central London” so it left the door open for a different deferment rate in another location. The challenge to the deferment rate made in R (on the application of Wellcome Trust Limited) v Upper Tribunal (Administrative Appeals Chamber) [2013] EWHC 2803 (admin) made it clear that while “compelling justification” would be required to challenge the correctness of Sportelli as a whole “a more relaxed test may be appropriate if the question is where there is some specific feature in a particular case which is said to make the guidance inapplicable although otherwise correct”.
This more relaxed test was employed in Zuckerman v Calthorpe Estates Trustees (2009) UKUT235 (TC) where a 0.5% addition to the deferment rate was allowed to reflect poorer long term property growth in the West Midlands. While that isn’t a guidance case subsequent cases noted that in Clarice it was seen as providing evidence in its own right as to the deferment rate.
In the Llangewydd Court case the landlord challenged the Sportelli decision itself rather than basing their challenge on the property itself or the locality. The valuer for the landlord asserted that the risk free rate was no longer correct on the basis of national economic factors; he asserted that risk free returns had reduced in the 14 years since Sportelli, borrowing costs were much lower, that 50 year fixed rate bond yields were 3-3.5% lower than in the time of Sportelli, that 5 year national savings index linked bonds were much lower and finally that the discount rate fixed by the Lord Chancellor for personal injury damages under the Damage Act 1996 (as amended by the Civil Liability Act 2018) was set at 2.5% in 2001 before falling to -0.25% in 2019 and having fallen as far as -0.75% in the last five years indicated that the Sportelli rate was incorrect.
Unfortunately the evidence adduced was not sufficient. The only expert evidence was provided by a valuer; there was no evidence from experts in the fields of finance and economics. Only the first and last points were capable of corroboration. Newspaper articles were used as evidence as to the other points.
Unsurprisingly this wasn’t accepted as “compelling evidence” required to potentially move away from the deferment rates set in Sportelli. The Upper Tribunal therefore upheld the decision at first instance reinforcing that they were correct to follow the guidance case rather than make a finding as to what the risk free rate then was.
The Upper Tribunal have made the evidential bar clear “such evidence would have to be given by one or more experts with experience in economics and financial forecasting rather than only in valuation and would be supported by robust and properly attributed data”. The Lord Chancellor’s discount rate was acknowledged as an important point but the Tribunal needs evidence to be able to interpret it. So the decision in Sportelli stood.
The Upper Tribunal’s closing comment is interesting “whether any landlord would think it worthwhile in future to mount such an argument at time when reform of the whole basis of the premium payable on enfranchisement is on the cards we do not know” – the incentive for an estate landlord to make this challenge would be the hope that they might succeed in setting a much lower deferment rate which then puts pressure on the government when considering the reforms to set the deferment rate at or near that level rather than the current Sportelli rate. We will have to watch and see.
Right to Manage – a breach of the statutory framework is fatal to a claim?
The right to manage is simple in concept but unfortunately complex in its application as there are a lot of procedural hurdles that participating flat owners can fall at and this can lead to litigation as of course their landlord needs to be sure whether management will validly vest. Consequently there are a huge number of cases taken by landlords challenging the validity of claims which some might find surprising.
The case of Eastern Pyramid Group Corporation SA v Spire House RTM Company Limited is the latest in a long line. It has clarified whether a breach of the statutory framework is fatal to a claim being valid.
In this case the RTM company gave a claim notice seeking to exercise the right to manage in respect of a block of 23 flats laid out over six floors. The landlord gave a counter notice challenging its validity. Consequently the RTM company then purported to withdraw that claim notice and serve another. The landlord challenged the effectiveness of the second notice on the basis, among other things, that the first notice hadn’t been validly withdrawn at the time it was given so preventing the second claim notice from being valid as there can only be one live claim at any one time.
Having failed before the First-tier Tribunal and the Upper Tribunal the landlord appealed to the court of appeal. The issue that remained to be determined was whether the notice of withdrawal of the first claim notice was valid despite it only having been given to the landlord by the time the second claim notice had been given. The reason the landlord could take a point here was that the relevant section (86) required that the notice of withdrawal be given to the qualifying tenants of the flats in the building in addition to the landlord and this only occurred the day after the second claim notice had been given.
The landlord’s position was that the notice of withdrawal couldn’t be effective until all the qualifying tenants were served so that strict compliance with the relevant section was required.
This was rejected; the Court of Appeal determined that where there has been a failure to comply with a statutory requirement then the right way to analyse a case concerning private rights such as these is to determine the legislative intention as to the consequences of non-compliance in the light of the statutory scheme as a whole (following Elim Court RTM Co Limited v Avon Freehold Limited [2017] EWCA Civ 89 which at paragraph 52 cited Natt v Osmond [2014] EWCA Civ 1250).
Every defect however trivial does not invalidate the step in question necessarily. It is for the court to decide whether the step is wholly valid or not. Prejudice in a generic sense may be relevant.
The “fundamental question is the role and importance of the relevant step in the context of the procedure as a whole” (paragraph 39) and “the legislator can be taken to have assumed that the courts would take a realistic and pragmatic approach in determining the significance of different steps in a procedural scheme laid down by statute. A result which is impractical or unrealistic is unlikely to be what was intended” (paragraph 40).
Applying those principles to the issue in hand while a failure to give a notice of withdrawal to the landlord would be fatal, the reality was that it was being given to the qualifying tenants for their information only; Once the right to manage procedure reaches the stage of service of a claim notice the qualifying tenants’ position is subordinated to that of the RTM company as is shown by them receiving any copies of the claim notice when served (section 79). It does not have an effect on any decision they must make or action they must take. Service a day late as in this case wouldn’t make any practical difference to anyone.
It was also relevant that there was no provision in the Act whereby the date on which the qualifying tenants are given notice of withdrawal is to be communicated to the landlord. In this case the landlord only knew as a consequence of the proceedings taken by it.
In conclusion this case and those before emphasise the importance of taking care to comply with all of the statutory requirements precisely so as to close off the risk of a negative counter notice being given and proceedings ensuing at significant cost to the qualifying tenants.
Are Landlords Entitled to Build Additional Flats on the Roof?
The Upper Tribunal reached a number of interesting findings around a Landlord’s ability to build additional flats on the roof of an existing block of flats in the case of Vectis Property Company Ltd v Cambrai Court Management Company Ltd [2022] UTUK 42 (LC).
The case the development value payable by the flat owners acquiring it forcibly pursuant to an enfranchisement claim via their nominee purchaser Cambrai Court Management Company Limited (Cambrai) which was also the management company appointed under the flat leases.
Cambrai contended that a number of issues arising from the flat leases stood in the way of the landlord being able to create new flats and so no development value was payable in that regard. These were rejected:
- The landlord didn’t need an express right in this regard to have been reserved by the lease – no such rights were required as the landlord hadn’t let any part of the roof or airspace above to any of the flat owners and so he could do what he wished with the land as long as he didn’t interfere with the rights granted to flat owners via their leases. Nor was the landlord restricted by the development right that was reserved to it by the lease (it referenced development of other parts of the estate, i.e. the grounds, and the tenants contended that as the roof was not covered by this right the landlord was prevented from so developing).
- Cambrai’s management function would not be frustrated by the development - Creating the new flats would not prevent Cambrai from being able to access and repair the roof. The terms of its repairing obligation meant nothing more than it was obliged to prepare whatever roof might be in place from time to time i.e. the new roof above the flats to be created and so this didn’t prevent the landlord from developing the property.
- The Lease terms did not restrict the number of flats that could be built and Cambrai would have to join in the new leases to give like management obligations.
So the landlord’s appeal succeeded and the premium would need to reflect the development value. As the Upper Tribunal put it “of course (Cambrai) does not face the prospect of having to put up with that development because it is going to buy the freehold and will be able to refuse whatever temptations and developer purchaser can offer. The landlord is entitled to be paid a price that reflects the development value it is losing when it parts with the freehold”.
This case will give comfort to landlords that they can develop the roof space despite the issues that the tenants in this case asserted stood in the way of its ability to do so.
Had the Upper Tribunal decided otherwise then the flat owners via Cambrai would have effectively acquired the freehold with paying very little for the development value that they could then either realise themselves or sell on by granting a development lease to enable a developer to implement the development and share the profit with them instead.
The tenants may have wished that they claimed the freehold before planning permission was obtained and a developer deal agreed so as to potentially achieve a lower development value figure for planning and construction risk.
Flat owner’s ability to create permanent rights and so improve on their leasehold position by collectively enfranchising the freehold – flat owners’ right to collectively acquire the freehold extends to areas they use in common as of right under the terms of their flat leases i.e. parking and garden areas.
The freeholder can satisfy that claim with an offer of permanent rights. Either way the freeholder’s ability to develop any retained land may be stymied as a result. The extent of existing lease rights can be unclear; they may be implied so not apparent on the face of the leases. Freeholder’s who have granted licences, i.e. to park, can be surprised to find these permissions converted into permanent rights.
In the Upper Tribunal case of Ashford v Mill Court Walton Ltd [2021 UKUT 0011] the claiming flat owners argued that they had an implied right to park. They relied on the planning consent for the development requiring parking spaces to be laid out and made available for use before the dwellings were first occupied on conversion, certain pointers in the lease and evidence that the original freeholder had permitted parking. The Upper Tribunal found against them. It didn’t help that the lease of Flat 1 held by the freeholder benefitted from an express right to park. So the flat owners were left disappointed and with unfortunate clarification they had no such right under their leases which no doubt adversely affected the value of their flats.
The position would have been very different if the original freeholder’s consent to park had been continued by the current one as in that case the licence might have been converted to a permanent right following Trinity House of Deptford Strond v 4-6 Trinity Church Square Freehold Limited where the flat owners managed to acquire permanent rights to use a garden they had only been permitted by a revocable licence to use previously.
Unfortunately the lesson for landlords is to revoke any such licences so that they don’t lose more land than they might on an enfranchisement claim.
Hope development value – the Upper Tribunal decision of House of Mayfair Limited [2021 UKUT 0073] is unfortunately another example of enfranchisement rights pitting a group of flat owners against another who held the freehold; the top floor flat owner had acquired the freehold nine years earlier for £14,500 before being dispossessed by the other four flat owners via an enfranchisement claim for £22,000.
He was disappointed, appealing on the basis the figure should have been £11,000 higher at £33,000 to reflect the possibility of creating another flat at roof level despite not having sought planning for that during his period of ownership and it only being possible to develop in this way if the top floor flat owner gave up part of their land to enable the access stairs to be extended up to that level.
The case demonstrates that freeholders pushing for compensation under this heading need to think carefully about the development that might realistically be undertaken and provide evidence as to the value that will flow from that into the freehold interest. In this case an extension of the top floor flat was seen as the only potential development but this wasn’t relied on by the freeholder in evidence.
Valuers working up the residual valuation were reminded not to rely on figures from other FtT decisions; here the valuer adopted development costs from its decision in Francia Properties Limited v St James House Freehold Limited despite the Tribunal having explained in that case why Tribunal decisions on factual matters such as that can’t be relied on. It was pointed out that was in a different location and already had access to the roof.
Freeholders may be motivated in cases like this to make the physical changes to enable their preferred development to proceed where they can and to obtain planning for that and as insurance against the freehold claim being made.
Disregarding tenant’s improvements – the Upper Tribunal’s decision in Alberti v Cadogan Holdings Limited [2021 UKUT0085] determined that a house must be valued as it was laid out prior to the tenant’s improvements being undertaken and consequently the authorised planning use that flowed from those improvements should be ignored. The Court of Appeal has upheld this decision.
This had a huge impact on the price payable as the cartoonist and illustrator Gerald Scarfe had over a number of years restored 10 Cheyne Walk to a single house from its original layout as five separate flats and it had acquired authorised use to that end. If you assumed the house was laid out as flats now he wouldn’t be able to get planning to put it back into use as a single house.
The valuation gap was £2.6million v £11million. That drove the case as evidenced by Martin Roger QC’s comment that it was not a controversial proposition that the value of improvements must be disregarded at each stage of the assessment of the price in view of the Land Tribunal’s decision in Sharp v Cadogan concerning another house claim; the various other authorities from different statutory and contractual context submitted by the respective parties were found not to assist.
When calculating marriage value for an enfranchisement claim outside prime Central London in the absence of comparable evidence then the Prime Central London graphs of relativity produced by Savills and Gerald Eve should be used instead of the five non-PCL graphs of relativity from the RICS 2009 report in this regard (Deritend Investments (Berkdale) Limited v Treskonova [2020] UKUT164 (LC)).
