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The Crown Estate Commissioners v Whitehall Court London Limited [2017] UKUT 242 (LC)

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10th January 2018

Summary

Amidst a host of other circumstance-specific determinations, the UT decided a single important point of law: that for the purposes of Schedule 13 Paragraph 3(2)(b) of the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”), the “no-Act rights” assumption extends not only to the subject flat, but also to any other flats in the same building.

This is relevant to the valuation of a headlease of premises comprising the subject flat and other flats capable of obtaining lease extensions in the same building.

Facts

A tenant of a long lease of a flat in a Victorian mansion block applied for a new lease under Section 42 of the 1993 Act. The Appellant was the freehold owner of the building comprising the flat, and the Respondent held the headlease of those premises.

The parties were able to agree the total premium that she would pay for the new lease, but the freeholder and headlessee were unable to agree the proportions of that sum payable to each under Schedule 13 of the 1993 Act. Accordingly, the terms of acquisition were not able to be agreed. The freeholder chose not to agree the proportions with the tenant pursuant to Schedule 11 Paragraph 6 of the 1993 Act, but instead to refer the dispute to the First-tier Tribunal (“FTT”) under Section 48 of the 1993 Act.

The tenant took no part in the proceedings. The dispute was between the freeholder and headlessee both at first instance and on appeal.

The rent payable under the headlease was important to the dispute. The headlease provided for a minimum rent payable by the headlessee, but for additional rent to be paid where the headlessee obtained profits above a certain threshold from any underlease.

Issues

Both at first instance and on appeal there were six core issues in dispute related to the premium apportionment calculation to be made under Schedule 13 of the 1993 Act, but on appeal a seventh issue materialised:

1. Whether the “no-Act rights” assumption at Schedule 13 Paragraph 3(2)(b) applies to the whole of the building comprising the flat, or only to the flat itself;
2. The frequency with which a hypothetical purchase of the freehold or of the headlease would anticipate that profits obtained under any underlease would trigger higher rent to be payable under the headlease;
3. Whether and to what extent additional payments by tenants to the headlessee constituted relevant profits under the headlease, which could then lead to a higher rent becoming payable to the freeholder;
4. Whether the ground rent payable under the lease by the tenant was to be treated as an anticipated potential profit income under the headlease, capable of triggering higher rent becoming payable to the freeholder;
5. Whether in years where no additional rent is payable by the headlessee to the freeholder, it should be assumed that a purchaser of the headlease will receive, on average, 90% of the ground rent from the tenant;
6. How, in years where additional rent is payable by the headlessee to the freeholder, the ground rent payable by the tenant should be accounted for when calculating the value of the headlease; and
7. (On appeal only) How it should be taken into account that the provisions of the headlease result in the freeholder suffering a delay in receiving additional rent in years where the headlessee has made sufficient profit, but the tenant’s ground rent has increased (which happens on 3 occasions under the tenant’s lease).

First instance

The decision of the FTT was as follows:

1. The relevant assumption did not extend to other flats in the wider building. The FTT placed reliance, inter alia, on the approach of the Upper Tribunal (“UT”) in The Trustees of the Sloane Family Estate v Mundy [2016] UKUT 223 (LC), which accepted that experts must value the existing lease in the real world rather than a “no-Act world”, and that it is only the present transaction that is assumed to take place in that “no-Act world”;
2. The FTT preferred the freeholder’s evidence that this would be expected to happen every 2 years, to the headlessee’s evidence that this would be expected to happen every 8 years;
3. Relevant profits were held to include all premium income apart from any unlawful premiums charged for licenses permitting non-structural alterations, making all possible additional payments relevant profits (and so further issues did not arise for determination);
4. As a matter of common sense, it did not. The ground rent payable was never an anticipated profit, as relevant profits are only sums above and beyond the ground rent payable;
5. The FTT accepted the headlessee’s evidence that 90% was appropriate; and
6. The FTT made a mistake in failing to properly take this into account.

Decision on appeal in the Upper Tribunal

Issue 1

The UT accepted that Mundy was not determinative of this issue, and at [48] made clear that the 1993 Act should be interpreted to give effect to the rights Parliament intended to confer on tenants, but not to go any further. This meant not pressing artificial assumptions “beyond their natural limits” so the price ascertained for relevant interests should correspond “to market reality as closely as those assumptions permit”.

With this in mind, the UT considered the wording of Schedule 13 Paragraph 3(2)(b) closely at [51]. It also took into account the purpose underlying the assumption at [55], namely to ensure the result of the valuation is fair “to the person whose interest (or interests) was (or were) being expropriated.”

The UT concluded that the wording of the relevant provision is ambiguous, and can support either conclusion. The underlying purpose of the assumption was determinative: the “fairness which underlies the Pointe Gourde principle applies with equal force if the ability to enfranchise other flats in the Building would depress the price payable to the freeholder.”

Accordingly, the UT overturned the FTT’s decision, and held that the “no-Act rights” assumption applies not just to the subject flat, but the whole of the premises comprising it.

Issues 2 – 7

Additional evidence was permitted to be adduced by both parties, and on the basis of that evidence the FTT considered that a profit every two in five years was anticipated until 2029 (the date of the next rent review under the headlease), thereafter a profit above the threshold was anticipated every year;

The UT upheld the FTT’s decision, save that it removed the exception of unlawfully charged premiums as it could not see a logical justification for including this (and so, again, further issues did not arise for determination);

The UT overturned the FTT’s decision, on the basis that the loss of this ground rent after the grant of the tenant’s new lease will materially affect the income of both parties in every year in which the headlessee receives a profit over the relevant threshold;

The UT overturned the FTT’s decision on the basis of further evidence that as a matter of fact the tenant had paid 100% of the ground rent every year, finding that a purchaser of the headlease would expect the same;

The UT corrected the FTT’s mistake, and held that in years where the profit threshold is met, the additional rent payment does detract from the value of the ground rent received, and this must also be taken into account; and

The UT considered the effect of this delay de minimis, and that a hypothetical purchaser of the freehold would not take this nuance into account.

Comment

Issues 2 – 7 are clearly fact/lease specific, and discussion of the decisions in respect of these is unlikely to be of general application.

Issue 1 addresses an esoteric ambiguity that will only be relevant in a minority of cases where a headlease of a building is more than a convenient device, but is instead a valuable investment in its own right (here with added unusual rental provisions). The decision favours the freeholder, resulting in a marginally smaller proportion of the premium payable by the tenant going to the headlessee.

It should be noted that the UT admitted to wavering in deciding Issue 1 (at [53]), which begs the question of whether we will see this issue will rear its head again in future for more confident determination.

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