The tenant of a flat holding under a long underlease brought a claim under Chapter II of the Leasehold Reform, Housing and Urban Development Act 1993 seeking to exercise the right to acquire a new and extended lease at a peppercorn rent on payment of a premium. The freeholder admitted the claim but was unable to agree with the lessee under the headlease as to the valuation of their respective interests and therefore the division of the premium payable by the tenant between them. By paragraph 2 of Schedule 13 to the 1993 Act the premium payable for the grant of an extended lease under Chapter II of the Act included the diminution in value of the landlord’s interest in the tenant’s flat, which by paragraph 3(1) of Schedule 13 was the difference between (a) the value of the landlord’s interest in the tenant’s flat prior to the grant of the new lease and (b) the value of his interest in the flat once the new lease was granted. By paragraph 3(2) the value of a landlord’s interest was the amount which at the relevant date that interest might be expected to realise if sold on the open market by a willing seller (with neither the tenant nor any owner of an intermediate leasehold interest buying or seeking to buy) on the assumption, set out in paragraph 3(2)(b), that Chapter I (which conferred the right to collective enfranchisement) and Chapter II of the 1993 Act conferred no right to acquire any interest in any premises containing the tenant’s flat or to acquire any new lease. The First-tier Tribunal held that the assumption in paragraph 3(2)(b) applied, as the headlessee contended, solely to the flat the subject of the new lease claim, and did not extend, as the freeholder contended, to the building of which the flat formed part. The Upper Tribunal decided that issue in favour of the freeholder.
On appeal by the headlessee—
Held, appeal dismissed. It did not follow from the fact that what was being valued was the diminution in value of the landlord’s interest in the tenant’s flat that there was no requirement to switch off rights under Chapters I and II of the Leasehold Reform, Housing and Urban Development Act 1993 which were afforded to other tenants in the same block. Thus paragraph 3(2)(b) of Schedule 13 to the 1993 Act required an assumption that Chapter I conferred no rights to acquire any interest in any premises containing the tenant’s flat. Although the focus of the valuation was still the landlord’s interest in the tenant’s flat, the assumption had to switch off for the purposes of valuation not only the tenant’s collective enfranchisement rights (if he had any), but the rights of all other qualifying tenants in those premises. Such an assumption was necessary, because otherwise the Chapter I rights held by those other tenants would depress the value of the landlord’s interest in the tenant’s flat, even if the tenant himself did not have any Chapter I rights. Thus the scope of the assumption in relation to Chapter I rights plainly extended to qualifying tenants of other flats in the block and had to so extend, if it was to work, at least in the context of Chapter I rights. What was being valued was the diminution in value of the landlord’s interest in the tenant’s flat as a component of the landlord’s interests as a whole. In Chapter II lease extension cases the proper way to value the intermediate landlord’s interests would be as a component of a sale of the landlord’s interest as a whole. Given that approach, it was artificial and unfair to conduct that valuation operation on the basis that it was only the tenant’s flat to which the assumption of “no-Act” applied, rather than the flats of all the tenants in the block. Accordingly, paragraph 3(2)(b) of Schedule 13 did require the assumption of a no-Act building not only for the purposes of Chapter I but also for the purposes of Chapter II rights. Accordingly, the decision of the Upper Tribunal would be upheld (paras 44–48, 60, 68, 69, 70, 71).
Anthony Radevsky and Paul Letman (instructed by Wallace llp) for the headlessee.
Stephen Jourdan QC and Cecily Crampin (instructed by Pemberton Greenish llp) for the freeholder.