The case of Grosvenor Estate Belgravia & anr v Regis Group (Barclays) Ltd [2007] involved consideration of the valuation assumptions to be made under s9 of the Leasehold Reform Act 1967. Although the facts of this case are unlikely to be repeated, the case does deal with a point of principle of general application.

Section 9 of the Leasehold Reform Act 1967

The Leasehold Reform Act 1967 gives long lessees of houses the right to acquire their freehold. Section 9 of the Act provides as follows:

… the price payable for a house and premises… shall be the amount which at the relevant time the house and premises, if sold in the open market by a willing seller… might be expected to realise on the following assumptions – [s9(1)]

On the assumption that the vendor was selling for an estate in fee simple, subject to the tenancy but on the assumption that this Part of this Act conferred no right to acquire the freehold… [s9(1)(a)]

Where, in determining the price payable for a house and premises in accordance with this section, there falls to be taken into account any marriage value arising by virtue of the coalescence of the freehold and leasehold interests, the share of the marriage value to which the tenant is to be regarded as being entitled shall be one-half of it. [s9(1)(d)]

What the Lands Tribunal had to consider was to what extent it could assume the existence of a ‘special purchaser’ for the purpose of determining the price payable for the freehold.

The facts

The enfranchisement claim related to a mews house at 46/47 Belgrave Mews North. The date of the claim to acquire the freehold (and thus the valuation date) was 23 June 2004, when the unexpired term of the lease was approximately four years and nine months. At that date the owner of the leasehold interest was a Mr Lancaster. Before the notice claiming the freehold was served, Mr Lancaster had exchanged contracts with the respondent to sell the leasehold interest for £1.2m.

The houses in Belgrave Mews North abut and originally served the terrace of period houses in Wilton Crescent. The freehold of 47 Wilton Crescent, which backs on to the mews house, had been on the market since October 2002. At the date the notice claiming the freehold was served, contracts had also been exchanged for the purchase of the freehold of 47 Wilton Crescent. The contracting purchasers of the freehold of 47 Wilton Crescent, Mr and Mrs G, were individuals connected with the respondent. For the purpose of the proceedings it was accepted that the respondent and Mr and Mrs G should be treated as one.

The issue

The parties agreed that the value of the leasehold interest in the mews house without 1967 Act rights was £399,000 and with 1967 Act rights £500,000. It followed that the price of £1.2m paid for the leasehold interest in the mews house included a considerable premium being paid because of the opportunity to realise the additional value created by the combining of the interests in the mews house and in the Wilton Crescent house. The appellant landlord’s case was that, in determining the price to be paid for the freehold of the mews house, account should be taken of the fact that Mr Lancaster was a ‘special purchaser’.

He was able to get from the respondent £1.2m for an interest only worth £500,000. The £700,000 was a premium the respondent was willing to pay to be able to acquire the freeholds of both properties. The appellant argued that the sum of £700,000 formed part of the ‘marriage value’ (that is the value ‘unlocked’ by the merger of the leasehold and freehold interests) and the legislation entitled it to half that sum to be added to the value of the freehold.

The Leasehold Valuation Tribunal decision

The LVT determined the price payable for the freehold at £2,383,162. The LVT rejected the landlord’s claim that a further £350,000 be paid (being one-half of the additional marriage value that the landlord claimed was established by the respondent’s ‘overbid’ of £700,000 for Mr Lancaster’s leasehold interest). The LVT came to this decision on the basis that the landlord had sustained no loss that required to be compensated under the Act. It was against this part of the LVT’s decision that the landlord appealed to the Lands Tribunal.

The appellant’s case

In determining the price payable, the statute required there to be an assumption that there was no right under the 1967 Act to acquire the freehold or an extended lease.

Marriage value in the 1967 Act is not a separate statutory concept. It describes the value released when the freehold is combined with the leasehold enabling the owner of the two interests to sell the freehold with vacant possession.

The tenant making a claim under the 1967 Act is a ‘special purchaser’ and is to be treated as a potential bidder in the market.

The appellant relied on the decision of the Court of Appeal in IRC v Clay [1914]. That case involved consideration of a statutory provision that required a house to be valued in terms of the amount that it might be expected to realise ‘if sold in the open market by a willing seller’. The house was worth £750 if sold for use as a private residence, but in fact it was sold for £1,000 to a special purchaser, the owners of an adjoining nurses’ home who wished to extend their premises.

The Court of Appeal in that case held that there was no basis for excluding from consideration the fact that, to an adjoining land owner, the property could be worth more than to anybody else, ie that the fact there was a special purchaser could not be disregarded.

The appellant relied in particular on the following passage in the judgment of the Court of Appeal:

The section means such amount as the land might be expected to realise if offered under conditions enabling every person desirous of purchasing to come in and make an offer, and if proper steps were taken to advertise the property and let all likely purchasers know that the land is in the market for sale. It scarcely needed evidence to inform us – it is common knowledge - that when the fact becomes known that one probable buyer desires to obtain any property, that raises the general price or value of the thing in the market. Not only is the probable buyer a competitor in the market, but other persons, such as property brokers, compete in the market for what they know another person wants, with a view to a resale to him at an enhanced price, so as to realise a profit. A vendor desiring to realise any land would ordinarily give full publicity to all facts within his knowledge likely to enhance the price. The local conditions and requirements, the advantages of the situation of the property for any particular purpose, and the names of the persons who are probable buyers, would ordinarily be matters of local knowledge to the property brokers and agents and speculators. In order to arrive at the amount which land might be ‘expected to realise’, all these matters ought to be taken into consideration. ‘Expected’ refers to the expectations of properly qualified persons who have taken pains to inform themselves of all the particulars ascertainable about the property, and its capabilities, the demand for it, and the likely buyers.

It was the appellant’s case that, in accordance with what was said to be the principle enunciated by the Court of Appeal in IRC v Clay, at the date the notice of claim was served by Mr Lancaster, the freeholder would know of the existence of the special purchaser (Mr and Mrs G/the respondent) in the market. Mr Lancaster was accordingly a special purchaser who would negotiate with the freeholder to acquire the right to the freehold in order to obtain the premium Mr and Mrs G/the respondent were willing to pay for the freeholds of both the Mews House and 47 Wilton Crescent.

The respondent’s case

The respondent argued that IRC v Clay was not authority for the proposition that the existence of a special purchaser and the nature of its particular concern to buy must be assumed to be known by the vendor. It was a question of fact whether or not the vendor was aware of the existence of a special purchaser or the nature of its special interest. It was not a matter for legal presumption.

The respondent relied on the evidence given by the appellant’s expert in cross-examination to the effect that the landlord, as a matter of fact, did not know, on the date the notice claiming the freehold was served, that Mr and Mrs G/the respondent had contracted to purchase both the leasehold interest in the Mews House and the freehold interest of 47 Wilton Crescent. Although the landlord would have known that 47 Wilton Crescent had been on the market since 2002, the landlord’s valuer accepted that in the ‘no-Act world’, which the statute required to be assumed, the landlord would not have known of the price Mr and Mrs G/the respondent were paying for the leasehold interest because both they and Mr Lancaster would have been careful not to tell the landlord about it.

The decision of the Lands Tribunal

The Lands Tribunal rejected the submissions made on behalf of the appellant that IRC v Clay was authority for the proposition that where a sale in the open market is to be assumed, the vendor is presumed to have knowledge of any special purchaser there may be, and what their special interest might be. In IRC v Clay there had in fact been a sale made to a special purchaser at a premium, but the possibility of a special purchaser concealing their identity or the nature of their special interest was not something to which the Court of Appeal had given consideration. The Lands Tribunal referred to the fact that one of the judgments of the Court of Appeal had noted that it was impossible to suppose that the identity and motive of the special purchaser was entirely unknown to those interested in property sales. The Lands Tribunal accepted that this supported the proposition that the question of whether or not there might be a special purchaser was a matter of actual fact rather than presumed knowledge.

The Lands Tribunal held that the evidence given by the appellant’s expert on cross-examination was conclusive of the issue. That evidence was that the appellant did not have actual knowledge of the contracts to acquire the leasehold interest of the Mews House or the freehold interest of 47 Wilton Crescent and that in a no-Act world the landlord would similarly have been unaware of the same. The Lands Tribunal concluded:

We can see no justification for imputing to the estate knowledge that it would not have had. In the no-Act world as a willing seller in the open market it would not have been aware of [Mr and Mrs G’s] interest in acquiring the freehold of the Mews House in order to merge the freeholds with vacant possession of the two properties. There could be no question therefore of a special purchaser’s premium.

Conclusion

Whilst the Lands Tribunal accepted that IRC v Clay was inconclusive on the issue of whether or not the existence of a special purchaser was the subject of actual as opposed to presumed knowledge, it went on the hold that the wording of s9 of the 1967 Act was conclusive. What s9 required to be determined was ‘the price… which at the relevant time the house… if sold in the open market by a willing seller might be expected to realise’. The Lands Tribunal held that those words meant that the market is open in the sense that no potential purchaser is assumed to be excluded. The question to be asked was: if sold in the open market by a willing seller, how much would the property be expected to realise? The Lands Tribunal held:

The words suggest clearly that this is a factual matter to be considered in the no-Act world on the basis of two assumptions only – the market being unrestricted and the seller being willing. No other assumption is implied. If the evidence shows that selling in the open market the seller would not have been aware of the existence of a special purchaser or of his special interest then as a matter of fact he would not have achieved a price that included a special purchaser’s premium. We can see no justification for imputing to him knowledge that he would not have had. © Property Law Journal