Residential Leasehold extensions – valuation and interpretation issues

4th January 2018

Owners of leasehold flats have a statutory right to extend their lease under the Leasehold Housing and Urban Development Act 1993.  The procedure of lease valuation is becoming increasingly complex but the principles behind valuation are rarely decided by the courts.  In a recent news piece for Lexis Nexis, Caroline DeLaney looks at the first case of its kind – The Crown Estate Commissioners v Whitehall Court London Limited

  • What is the significance of this case? Why is it important for practitioners?

This case is an appeal from the First-Tier Tribunal (Property Tribunal) to the Upper Chamber (Land Chamber) concerning the apportionment of the premium to be paid by a residential tenant for a lease extension under the Leasehold Reform Housing and Urban Development Act 1993 (the 1993 Act) between the freehold owner, the Crown Estate Commissioners, and the head leasehold owner, Whitehall Court London Limited.  Whitehall Court is a well-known Victorian mansion block containing high-value residential flats and offices as well as the Farmers’ Club and is located close to Horseguards Parade in London.

The appeal involves technical valuation issues and the tenant did not take part in the appeal as the premium and terms of the extended lease had already been agreed.  The issue in dispute before the Upper Chamber was the allocation of the premium between the freeholder and the head leaseholder. The 1993 Act allows the freeholder to agree terms with the flat-owner without the agreement of the intermediate lessee but the Crown Estate Commissioners chose not to utilize these statutory provisions and referred the matter to the tribunal instead.

The case is significant because there is little case law on valuation issues under the 1993 Act, particularly at the appeal level.  It considers for the first time the valuation assumption of Schedule 6 para 3 (1) (b) of the 1993 Act.

The case is also of interest to practitioners because it considers the arrangements between the freeholder and intermediate leaseholder in a mixed-use building where they agree that value can be increased and then shared between them by, for instance, the charging of premiums for change of use, corridor leases and other alterations and retrospective licences and premiums. The case undertakes an exercise in lease interpretation and offers a view on what it calls the “torrential style” of lease drafting. It considers the definition of “Net Receipts” and looks at the individual categories of receipts that the parties dispute.

  • How helpful is this judgment in clarifying the law in this area? Are there any remaining grey areas?

The judgment is helpful as it confirms for the first time the valuation assumption of the 1993 Act.  The valuation point before the Upper Chamber was whether the “no- Act” rights assumption extends only to the flat that is applying for the lease extension or whether it extends to the whole block in which the flat is located.  The judgment looks at the authorities quoted by the parties and concludes that commentators such as Hague and Woodfall recite the legislation without actually reaching a conclusion and also that there is no case law on point.

The judgment concludes that the authority on the interpretation of the 1993 Act requires it to apply the 1993 Act fairly against the tenant, but at the same time not to stretch the intention of Parliament and give the tenant an advantage beyond what was intended.

In a similar way to the application of the “presumption of reality” in rent reviews, the Upper Chamber Appeal concludes that “the presence of artificial assumptions necessarily displaces the presumption that any valuation is to be conducted on the basis of reality, but statutory assumptions should not be pressed beyond their natural limits and should be applied to reach a price for the relevant interest that corresponds to market reality as closely as those assumptions permit.”  The tribunal concludes that the “no-Act” rights assumption applies to the whole building, not just the flat.

The judgment contains a detailed analysis of the valuation behind this general principle which will be of interest to valuers.

In addition to its decision on the valuation principle, the Upper Chamber considers the interpretation of the specific provisions of the lease in question.  It discusses what it refers to as the “torrential” style of drafting whereby the drafter attempts to cover all possible types of Net Receipts. It concludes that the whole purpose of that drafting technique is not to miss anything out. The draftsman had tried to pick everything up in the “torrent” and the Upper Chamber concluded that this meant that it would cover categories of Net Receipts not necessarily expressly referred to in the lease.

  • What are the practical implications of the judgment? What should practitioners be mindful of when advising in this area?

The decision, in this case, focuses primarily on the issue of valuation and so the practical implication of the case is primarily for valuers rather than legal practitioners. The supplementary point on the interpretation of the lease, although specific to the drafting of the particular lease and the value sharing assumptions provided for in it, is a useful reminder to practitioners as to how the court approaches the question of interpretation.

  • How does this case fit in with other developments in this area of the law? Do you have any predictions for future developments in this area?

The decision as a valuation case is consistent with the principles applied in other areas of valuation.  It adopts the favoured interpretation of statutes – to reach a conclusion on the wording of the statute that does not go beyond the intentions of Parliament.  In the case of the valuation itself, it follows the same approach as in other areas, the most obvious being valuation on rent reviews.  It endorses the approach, that there is a “presumption of reality” that should only be departed from in the case of express provisions instructing the valuer to do so.

The decision as an interpretation case is consistent with the principles of general contractual interpretation with the Upper Chamber trying to follow what the lease drafter intended.

In the case of both, future cases will hopefully endorse this consistency of approach.

This commentary was first written for Lexis Nexis on 1 December 2017 and published on the following link (Lexis Nexis subscription required)

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