Kutchukian v John Lyon's Charity, Trustees of the [2013] EWCA Civ 90

[2013] EWCA Civ 90

Case No C3/2012/1186

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE UPPER TRIBUNAL (LANDS CHAMBER)

HH JUDGE NICHOLAS HUSKINSON and N J ROSE FRICS

[2012] UKUT 53 (LC)

ON APPEAL FROM THE LEASEHOLD VALUATION TRIBUNAL FOR THE LONDON RENT ASSESSMENT PANEL

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 20 February 2013

Before

LORD JUSTICE LLOYD

LORD JUSTICE SULLIVAN

LORD JUSTICE LEWISON

Between

ALAN KUTCHUKIANApplicant

THE KEEPERS AND GOVERNORS OF THEPOSSESSIONS REVENUES AND GOODS OF THE FREE GRAMMAR SCHOOL OF JOHN LYON (in the capacity of Trustees of John Lyon’s Charity)Respondent

ALAN KUTCHUKIAN Applicant below; Appellant in appeal 1279, Respondent in appeal 1186- and -THE KEEPERS AND GOVERNORS OF THEPOSSESSIONS REVENUES AND GOODS OF THE FREE GRAMMAR SCHOOL OF JOHN LYON (in the capacity of Trustees of John Lyon’s Charity) Respondents below; Appellants in appeal 1186; Respondents in appeal 1279

Jonathan Gaunt Q.C. and Mark Loveday (instructed by Pemberton Greenish LLP) for Trustees of John Lyon’s Charity

Edwin Johnson Q.C.(instructed by David Conway & Co) for Mr Kutchukian

Hearing Hearing date: 18 December 2012

Judgment

Introduction and summary

[1]These appeals from the Upper Tribunal (Lands Chamber) raise issues which affect the price payable on collective enfranchisement of a block of flats under Chapter II of the Leasehold Reform, Housing and Urban Development Act 1993, which I will call the Act. The property in question is a house in Hamilton Terrace, St John’s Wood, London, which comprises four flats. It was converted into flats by stages in the 1950’s and 1960’s. No doubt that was then seen as the most beneficial use of the building. The market for high quality houses in central London has changed since then. Now, it is agreed, the value of the property as four flats is strikingly less than its value as a single dwelling, and even than its value ready for, but before, conversion into that form. As at the relevant valuation date, which in this case is 4 September 2008, the expert valuers agreed that as four flats the property was worth £5.5 million, whereas ready for conversion to a single dwelling it was worth £8.5 million. It is that disparity of value that gives rise to this litigation.

[2]The application to the Leasehold Valuation Tribunal (LVT) was made by Mr Kutchukian in his capacity as the Nominee Purchaser, nominated under provisions of the Act to purchase the freehold of the property. The respondents to that application were the Trustees of John Lyon’s Charity (whom I will call the Trustees) who own that freehold. Neither party was satisfied with the decision of the LVT so both appealed. We too have appeals by both parties before us. The main appeal is by the Trustees. In case their appeal were to succeed, Mr Kutchukian has also appealed against aspects of the Upper Tribunal’s decision.

[3]The dispute is about the price payable on the purchase which is provided for by the Act. The relevant provisions are complicated and I will have to discuss them in detail. They require that the freehold which is to be purchased should be valued (as at the valuation date) on certain assumptions, including assumptions about the leases affecting the property. Some of those assumptions relate to matters which will not arise in practice (if at all) for a good many years. Those are capable of being affected by contingencies as to what turn out to be the relevant facts. The assumptions may also be affected by the view taken of the legal rights and liabilities arising under the leases by virtue of the Act, on points as to which there is or may be doubt and uncertainty, whether because of the terms of the Act or of the leases or both. In essence, the primary dispute, arising on the Trustees’ appeal, is whether, insofar as such legal matters are concerned, the valuation should be carried out with the benefit of a decision as to what the legal position is in those respects, or rather should be approached as a valuer might, faced with such uncertainty, allowing for the uncertainty by applying a discount for the risk of an adverse conclusion. If the right answer to that question is that the legal position needs to be decided rather than just allowed for, then the issues on Mr Kutchukian’s appeal are as to what the correct legal position is.

[4]The Upper Tribunal, in its decision available as

[2012] UKUT 53 (LC)

, decided the first question in favour of Mr Kutchukian, holding that it was right to allow for uncertainty rather than to eliminate it by deciding the point. They applied a discount of 30% in respect of this uncertainty. However they then went on (at least) to express a view on the legal issues, and in that they preferred the submissions of the Trustees. Hence the Trustees appeal on the first point, seeking to establish that the legal issues ought to be decided; Mr Kutchukian appeals on the second point to show that, if the Upper Tribunal was wrong not to value the property on the basis of a decision as to the legal points, then they were also wrong in the conclusions they expressed on the legal points.

[5]As before the Upper Tribunal, Mr Kutchukian was represented by Mr Edwin Johnson Q.C. and the Trustees by Mr Jonathan Gaunt Q.C. leading Mr Mark Loveday. We had clear and helpful submissions, both in writing and orally, from Counsel on both sides, for which I am grateful.

[6]The conclusion which I have reached, the reasons for which I will set out in the rest of this judgment, is that the Upper Tribunal should have decided the legal issues, rather than allowing for uncertainty on these points by a discount for the risk, but that the conclusions they expressed on the points were correct. Accordingly the appeal by the Trustees should succeed and that by Mr Kutchukian should fail.

[7]In order to explain why I have come to that view I need to say something about the facts and rather more about the law.

The facts

[8]The most important facts concern the various leasehold interests in the property and its component flats. They are as follows: i) A headlease of the whole property dated 24 June 1980 for a term from that date to 29 September 2046. At the valuation date, therefore, some 37 years of this term remained unexpired. It contains a covenant that the headlessee will not use the premises, or permit the premises to be used, except as four self-contained private residential flats, each occupied by one family only, and two private garages each for garaging one private motor vehicle only. The headlease was originally granted to Mr Kutchukian’s parents (who had held a previous lease granted in the 1960s); it is now vested in Mr Kutchukian and his wife Mrs Narine Kutchukian. ii) Each of the flats is the subject of an underlease. Originally these were to expire on 26 September 2046, three days short of the term of the headlease. Each has now been extended under the provisions of the Act so as to expire now on 25 September 2138. One of the underleases (of a flat on the first and second floors) is vested in Mr Kutchukian’s sister, Mrs Warman. Another (of Flat 2 on the first floor) was vested in a Jersey company, Zutan Ltd, but was recently transferred to Mrs Kutchukian. A third (the ground floor flat) is held by Whittex Ltd, another Jersey company, and the flat is occupied by Mr Kutchukian and his family. The fourth (the basement or garden flat) was vested in Zaffre Ltd (also a Jersey company) which held it on trust for one of Mr Kutchukian’s children; it is now vested in two Jersey companies, Angelic Ltd and Baleful Ltd. iii) I will need to say a little more about the terms of the underleases but that will make more sense once I have referred to some of the provisions of the Act.

[9]Zaffre Ltd and Zutan Ltd gave notice under section 13 of the Act on 4 September 2008 of their intention to acquire the freehold, and identified Mr Kutchukian as the nominee purchaser.

[10]Before the LVT one matter in dispute was whether the freehold should be transferred subject to a covenant to the like effect as that in the headlease which I have summarised at paragraph [8(i)] above. Mr Kutchukian’s argument against that prevailed in the Upper Tribunal, and that is not now subject to challenge. Therefore the freehold will be acquired without the imposition of any term which would prohibit the conversion of the property into a single dwelling.

[11]The Trustees suggested that Mr Kutchukian and his family intend to convert the property into a single house. He denies having any such intention. Whether there is any such intention is completely irrelevant to the issues on the appeals.

[12]We were told that two abortive attempts had been made to achieve collective enfranchisement, which were frustrated due to failures by the solicitors then instructed by the Kutchukian family (not the same as those now instructed). The new leases were secured under the rights given to individual qualifying tenants by Chapter II of Part II of the Act, in an attempt to mitigate the effects of delay caused by those failures. None of this affects the issues before us, though the fact that the underleases are now new leases granted under the Act does give rise to one of the issues on the appeals.

The law: the terms of the purchase of the freehold

[13]Section 13 of the Act provides that the right to collective enfranchisement of a property consisting of flats is exercisable by a notice given by qualifying tenants of not less than half the number of the flats comprised in the building. The underleases of all four flats were held by qualifying tenants. It was sufficient for the notice to be given by the leaseholders of two flats. Nothing turns on the provisions as to notices or on the terms of the actual notice served in this case. I dare say that all four leaseholders are in agreement as to the desirability of the collective enfranchisement in the present case, even though only two of them were participating tenants at the stage of service of the notice, but this does not matter for present purposes, and there could easily be cases in which not all of the flats in a block are held by qualifying tenants or in which, even though all flats are held by qualifying tenants, by no means all of them wish to have anything to do with the enfranchisement process.

[14]The price payable for the freehold on an acquisition pursuant to a notice served under these provisions is governed by Part II of Schedule 6 to the Act, applied by section 32. Paragraph 2 of the Schedule provides that the price is the aggregate of three amounts:(a) the value of the freeholder’s interest as determined in accordance with paragraph 3,

(b) the freeholder’s share of the marriage value (under paragraph 4) and

(c) any amount of compensation payable to the freeholder under paragraph 5. The provision which is central to the present appeal is paragraph 3(1) which is as follows:

“(1) Subject to the provisions of this paragraph, the value of the freeholder’s interest in the specified premises is 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 no person who falls within sub-paragraph (1A) buying or seeking to buy) on the following assumptions— (a) on the assumption that the vendor is selling for an estate in fee simple— (i) subject to any leases subject to which the freeholder’s interest in the premises is to be acquired by the nominee purchaser, but (ii) subject also to any intermediate or other leasehold interests in the premises which are to be acquired by the nominee purchaser; (b) on the assumption that this Chapter and Chapter II confer no right to acquire any interest in the specified premises or to acquire any new lease (except that this shall not preclude the taking into account of a notice given under section 42 with respect to a flat contained in the specified premises where it is given by a person other than a participating tenant); (c) on the assumption that any increase in the value of any flat held by a participating tenant which is attributable to an improvement carried out at his own expense by the tenant or by any predecessor in title is to be disregarded; and (d) on the assumption that (subject to paragraphs (a) and (b)) the vendor is selling with and subject to the rights and burdens with and subject to which the conveyance to the nominee purchaser of the freeholder’s interest is to be made, and in particular with and subject to such permanent or extended rights and burdens as are to be created in order to give effect to Schedule 7.”

[15]Paragraph 3(1A) excludes the nominee purchaser, any tenant of premises contained in the property to which the notice relates and certain others who might be special purchasers because of an interest which they already own. Paragraph 3(3) provides that in determining the relevant amount such deduction (if any) shall be made in respect of any defect in title as on a sale of the interest on the open market might be expected to be allowed between a willing seller and a willing buyer.

[16]Thus the effect of paragraph 3(1)(a)(ii) is that on the hypothetical purchase of the freehold the headlease and the underleases remain in place. The valuation is therefore affected by their terms. I turn next to the provisions in this regard, which are at the heart of the appeal.

The law: the terms of an extended lease

[17]Chapter II of Part II of the Act confers on qualifying tenants of flats the right to acquire a new lease of the flat on payment of a premium. The underleases were held by qualifying tenants; the head lease was not. The new lease would be for a term expiring 90 years after the term date of the original underleases. Therefore it had to be granted by the owner of a reversionary interest whose interest would last long enough for that extended term to be carved out of it. In the present case that was the freeholder; in another case there might be an intermediate lease with more than 90 years unexpired at the relevant term date. Given the possibility of there being several reversionary interests, section 40 defines “the landlord” for the purposes of Chapter II of Part II. It is as follows:

“(1) In this Chapter “the landlord”, in relation to the lease held by a qualifying tenant of a flat, means the person who is the owner of that interest in the flat which for the time being fulfils the following conditions, namely— (a) it is an interest in reversion expectant (whether immediately or not) on the termination of the tenant’s lease, and (b) it is either a freehold interest or a leasehold interest whose duration is such as to enable that person to grant a new lease of that flat in accordance with this Chapter, and is not itself expectant (whether immediately or not) on an interest which fulfils those conditions. (2) Where in accordance with subsection (1) the immediate landlord under the lease of a qualifying tenant of a flat is not the landlord in relation to that lease for the purposes of this Chapter, the person who for those purposes is the landlord in relation to it shall conduct on behalf of all the other landlords all proceedings arising out of any notice given by the tenant with respect to the flat under section 42 (whether the proceedings are for resisting or giving effect to the claim in question). (3) Subsection (2) has effect subject to the provisions of Schedule 11 to this Act (which makes provision in relation to the operation of this Chapter in cases to which that subsection applies). (4) In this section and that Schedule— (a) “the tenant” means any such qualifying tenant as is referred to in subsection (2) and “the tenant’s lease” means the lease by virtue of which he is a qualifying tenant; (b) “the competent landlord” means the person who, in relation to the tenant’s lease, is the landlord (as defined by subsection (1)) for the purposes of this Chapter; (c) “other landlord” means any person (other than the tenant or a trustee for him) in whom there is vested a concurrent tenancy intermediate between the interest of the competent landlord and the tenant’s lease. (5) Schedule 2 (which makes provision with respect to certain special categories of landlords) has effect for the purposes of this Chapter.”

[18]Section 56 sets out the obligation to grant the new lease, which is imposed on the landlord. The new lease is to be granted in substitution for the existing lease and is at a peppercorn rent. Given that there may (as here) be intermediate leasehold interests, the Act adopts the technique of deeming there to have been a surrender and regrant of any intermediate subsisting lease: see Schedule 11, paragraph 10(1).

[19]Section 57 makes provision as to the terms on which the new lease is to be granted. Among its terms is subsection (7) on which some of the argument before us turned:

“(7) The terms of the new lease shall— (a) make provision in accordance with section 59(3); and (b) reserve to the person who is for the time being the tenant’s immediate landlord the right to obtain possession of the flat in question in accordance with section 61.”

[20]As a matter of fact, three out of the four new leases granted under the Act in the present case failed to comply with the obligation in section 57(7)(b).

[21]Section 61 gives rise to one of the arguments before us as to the effect of the terms of the new leases. It is as follows:

“(1) Where a lease of a flat (“the new lease”) has been granted under section 56 but the court is satisfied, on an application made by the landlord— (a) that for the purposes of redevelopment the landlord intends— (i) to demolish or reconstruct, or (ii) to carry out substantial works of construction on, the whole or a substantial part of any premises in which the flat is contained, and (b) that he could not reasonably do so without obtaining possession of the flat, the court shall by order declare that the landlord is entitled as against the tenant to obtain possession of the flat and the tenant is entitled to be paid compensation by the landlord for the loss of the flat. (2) An application for an order under this section may be made— (a) at any time during the period of 12 months ending with the term date of the lease in relation to which the right to acquire a new lease was exercised; and (b) at any time during the period of five years ending with the term date of the new lease. (3) Where the new lease is not the first lease to be granted under section 56 in respect of a flat, subsection (2) shall apply as if paragraph (b) included a reference to the term date of any previous lease granted under that section in respect of the flat, but paragraph (a) shall be taken to be referring to the term date of the lease in relation to which the right to acquire a new lease was first exercised. (4) Where an order is made under this section, the new lease shall determine, and compensation shall become payable, in accordance with Schedule 14 to this Act; and the provisions of that Schedule shall have effect as regards the measure of compensation payable by virtue of any such order and the effects of any such order where there are sub-leases, and as regards other matters relating to orders and applications under this section. (5) Except in subsection (1)(a) or (b), any reference in this section to the flat held by the tenant under the new lease includes any premises let with the flat under that lease.”

[22]The other provision to which I must refer at this stage is Schedule 14, paragraph 5, which deals with the right to compensation for the termination of the new lease under section 61. “(1) The amount payable to a tenant, by virtue of an order for possession, by way of compensation for loss of his flat shall be the amount which at the valuation date the new lease, if sold on the open market by a willing seller, might be expected to realise on the following assumptions—(a) on the assumption that Chapter I and this Chapter confer no right to acquire any interest in any premises containing the tenant’s flat or to acquire any new lease;

(b) on the assumption that the vendor is selling— (i) subject to the rights of any person who will on the termination of the lease be entitled to retain possession as against the landlord, but otherwise with vacant possession, and (ii) subject to any restriction that would be required (in addition to any imposed by the terms of the lease) to limit the uses of the flat to those to which it has been put since the commencement of the lease and to preclude the erection of any new dwelling or any other building not ancillary to the flat as a dwelling; and

(c) on the assumption that (subject to paragraphs (a) and (b)) the vendor is selling with and subject to the rights and burdens with and subject to which the flat will be held by the landlord on the termination of the lease. (2) It is hereby declared that the fact that sub-paragraph (1) requires assumptions to be made as to the matters specified in paragraphs (a) to (c) of that sub-paragraph does not preclude the making of assumptions as to other matters where those assumptions are appropriate for determining the amount which at the valuation date the new lease might be expected to realise if sold as mentioned in that sub-paragraph. (3) In determining any such amount there shall be made such deduction (if any) in respect of any defect in title as on a sale of that interest on the open market might be expected to be allowed between a willing seller and a willing buyer. (4) In this paragraph “the valuation date” means the date when the amount of the compensation payable to the tenant is determined as mentioned in paragraph 2(1).”

[23]As a result of the exercise of the right to acquire an extended lease on the part of the leaseholder of each of the four leases, the present position is that the Trustees would become the immediate landlord of the occupational underleases, but not until 29 September 2046. If new leases had not been granted, the Trustees would at that time have had the right to possession of the flats, and the head lessor would have had that right three days earlier, but would only be in a position to take advantage of that right for those three days. If, therefore, the property had development value in 2046, the Trustees would have been able to realise it. The point of section 61 is to preserve to the landlord that possibility, subject to the limits on its exercise set out in the Act, despite the grant of the new leases.

[24]As appears from section 61, the landlord may apply to the court for an order declaring that he is entitled to possession of the flat as against the tenant and the tenant is entitled to be paid compensation for the loss of the flat. In practice, to exercise this right the landlord would have to make its application within the period of 12 months ending on 26 September 2046. Schedule 14 contains other provisions as to how this is to happen. If the court makes an order such as is provided for in section 61, the new lease is to come to an end and the compensation is to be payable on a date, after the amount of the compensation has been fixed, either by agreement or by the LVT (and not before the term date of the original underlease), to be fixed by order of the court on application by either landlord or tenant.

The issues of construction

(f) The issues of construction

[25]There are three disputes between the parties as to the rights exercisable in 2046. The Trustees contend that they (or their successors as owners of the freehold) will be able to exercise the right of the landlord under section 61 in 2046. Mr Kutchukian disputes this for two reasons. First, he says that the right under section 61 can only be exercised by the immediate landlord of the relevant leaseholder. Secondly, he says that it cannot be exercised in any event unless the right to do so has been reserved in the underlease in accordance with section 57(7), and he relies on the fact that no such reservation was made in three of the four new leases. Furthermore he says that, even if the right is exercisable, despite those arguments, the tenant’s right to compensation under Schedule 14 paragraph 5 would include compensation for loss of the development value. The Trustees deny all these propositions.

The Trustees’ appeal: a valuation issue or a legal issue?

[26]As appears from paragraph 3 of Schedule 6, quoted above, the amount payable for the freeholder’s interest in the property is to be determined by a hypothetical valuation exercise: the amount which, at the relevant date, the freeholder’s interest might be expected to realise if sold on the open market by a willing seller on given assumptions. Accordingly, so it is contended for Mr Kutchukian, the issue is one of valuation and the determining factor should be the view taken by a hypothetical purchaser as to any issue which might affect the value of what is being sold, which may well involve applying a discount for uncertainty to a figure ascertained by other processes.

[27]Undoubtedly there are uncertainties, as regards the prospective exercise of rights under section 61 as in other respects, for which it may be right to make an allowance by discounting. Thus, there might be a risk that planning policy, which currently presents no obstacle to the conversion of the building back into a single dwelling, might change over time so as to be a problem by 2046. Also, the state of the property market might change so that there was no sufficient margin between the value of the property as flats and its value as a single dwelling, so as to justify the conversion costs, or the same effect might result from changes in construction costs.

[28]In its decision the Upper Tribunal applied two discounts which are not contentious, namely 5% for the risk of changes in planning policy and 35% for the risk of adverse changes in the market. They also applied a discount of 30% for “legal problems” which, it is clear, represents an allowance for uncertainty as to the position under section 61 and under Schedule 14 paragraph 5 as it would be in 2046. This is the element in the calculation which the Trustees challenge by their appeal. Mr Kutchukian argued for a higher discount but does not challenge the lower figure.

[29]The Upper Tribunal identified the issue in this respect at paragraph 64 of its decision. “64. The question arises as to whether Schedule 6 paragraph 3 requires:(1) That it should be definitively decided whether the hypothetical purchaser would succeed in overcoming the identified legal problems under section 61 and Schedule 14 in 2046; and

(2) That it should be assumed (if the decision is that the hypothetical purchaser would so succeed) that the hypothetical purchaser would calculate his bid for the freehold upon the assumption that as a matter of certainty he would so succeed. Unless Schedule 6 paragraph 3 does so require, we conclude that this approach should not be adopted. This is for the simple reason that we are in no doubt that if, as at the valuation date, the freehold had been offered for sale the hypothetical purchaser would not have calculated his bid on this basis. Instead he would have taken advice as to the likely strengths and weaknesses of his position in 2046, both so far as potential legal difficulties are concerned (e.g. section 61 and Schedule 14) and so far as other uncertainties are concerned (e.g. planning, movement of respective values of houses and flats etc) and would have framed a bid on that basis. This would involve identifying the potential gains and the potential difficulties and uncertainties of obtaining these gains and reaching an informed business decision as to how much this chance of a successful redevelopment in 2046 was worth as at the valuation date in 2008.” (1) That it should be definitively decided whether the hypothetical purchaser would succeed in overcoming the identified legal problems under section 61 and Schedule 14 in 2046; and (2) That it should be assumed (if the decision is that the hypothetical purchaser would so succeed) that the hypothetical purchaser would calculate his bid for the freehold upon the assumption that as a matter of certainty he would so succeed.

[30]In paragraph 65 the Upper Tribunal said that if the price to be paid for the property would depend on whether there was an existing right, such as an additional right of way to get to a highway, at the valuation date, then paragraph 3 required that the existence of that right or otherwise would have to be decided, even (if necessary) by court proceedings with the servient owner, pending which the valuation exercise could be adjourned. By contrast, they said at paragraph 66, as at the valuation date the Trustees enjoyed no rights under section 61 against anyone, even if their arguments were correct as to the meaning and effect of that section.

[31]The Tribunal identified three kinds of uncertainty: as to the true meaning of section 61 and Schedule 14; as to how the various underlessees would in fact respond in 2046 to any attempt to use rights under section 61 against them; and as to the factual position in 2046. The last must remain uncertain until 2046, so as to have to be allowed for by valuation methods. They said that even if the first were resolved by a decision as at the valuation date in favour of the freeholder, the uncertainties on the second point could not be resolved in advance. They then said this at paragraphs 69 and 70:

“69. Accordingly even if it is definitively decided as at the valuation date as to how the prospective disputes on construction of section 61 and Schedule 14 will be determined in 2046, this would not leave a clear cut answer as to how happily placed the hypothetical purchaser would actually be in 2046. There would be no such clear cut answer such as would be available in the simple example given above as to whether a second right of way to a highway did or did not exist as at the valuation date. These problems indicate to us that what Schedule 6 paragraph 3 requires is that the price is assessed on the basis that the hypothetical purchaser will acquire on the conveyance of the freehold all of the potential rights which in due course (and absent a change in the law) will arise under section 61 and Schedule 14, such potential rights to be valued for what they are worth at the valuation date with all their respective strengths and weaknesses, rather than the prospective 2046 litigation being effectively decided now by this Tribunal in a decision which will not bind the tenants holding the underleases in 2046. In summary Schedule 6 paragraph 3 does not require the prospective 2046 litigation to be decided definitively as at the valuation date because as at the valuation date no rights existed under section 61 and Schedule 14 – there was merely the prospect of future litigation rather than the presence of existing rights. 70. Accordingly we conclude that the appropriate approach is not for us to decide all the disputed points of law and then assess the price payable under Schedule 6 on the basis of an all or nothing approach, namely that the law was certain and was as decided by us. The appropriate approach is to assess the price by analysing the hypothetical purchaser’s bid in the manner described in the last two sentences in paragraph 64 above.”

[32]With respect to the Tribunal, I find some of this reasoning difficult to follow. One element in their analysis seems to be that a decision on the points of law as between the freeholder and the nominee purchaser cannot bind the underlessees, so that they might produce the same or different arguments on the application of section 61, and the decision of the Tribunal or even of the court on appeal would not preclude the underlessees from putting these matters in issue again, and therefore possibly showing that the result should be different.

[33]Leaving that aspect aside, and ignoring for present purposes any possible change in the law on the basis that, if was to be capable of affecting adversely the landlord’s position, it would have to have retrospective effect, which makes it inherently unlikely, I do not see that the freeholder is to be regarded as not having an existing right under section 61 already at the valuation date. Of course that right will not exercisable until 2046, but it is an incident of the rights of the landlord and the tenant respectively under a lease granted under the Act. While leaving open for the present the question of who can exercise the section 61 rights, whoever that is already had, at the valuation date, the estate or interest in the property by virtue of which the statutory rights would be exercisable. I therefore respectfully disagree with what the Tribunal said in the last sentence of paragraph 69. I also find difficulty with the contrast drawn in paragraph 65 between the present case and one where the problem was caused by uncertainty as to the existence or not of a right of way. It is envisaged that the latter problem could and should be resolved, after the valuation date, by proceedings involving the owners of the allegedly servient tenement, not someone involved in the valuation process. That is surely open to the same comment as is made in respect of the present issues, namely that, as at the valuation date, the position was uncertain, so that if you have to imagine what the hypothetical purchaser would have offered at that date, logically that too is something for which an allowance would be made for any uncertainty of the position, just as it would be for a defect in title: see Schedule 6 paragraph 3(3).

[34]Supporting the Tribunal’s conclusion on this, Mr Johnson argued that the Tribunal was not concerned with the position as at the valuation date but with the hypothetical purchaser’s perception, at the valuation date, of what the position would be in 2046. He identified the correct question as being what he called the Risk Valuation Question. This is the combination of the following two questions:(1) what risks would the hypothetical purchaser have perceived as at the valuation date, in terms of realising an uplift in value based on conversion of the property to a single house in 2046 and

(2) what effect would those risks have had on the bid of the hypothetical purchaser at the valuation date? He argued that the issue of what risks would have had any, and if so what, effect on the mind of the hypothetical purchaser was one for the valuation experts to address and for the Tribunal to decide on the basis of their evidence. He emphasised that the Tribunal was not determining any proceedings under section 61 or a claim for compensation under Schedule 14, and that they did not make a binding decision as to the true meaning or effect of section 61 or Schedule 14.

[35]As against that, it seems to me that the Tribunal does have to take a view as to the effect of the assumptions on which the valuation is to proceed. In particular, as already noted, the freehold is to be sold (hypothetically) subject to the leases subject to which the freeholder’s interest is to be acquired but also subject to intermediate and other leases which will be acquired by the nominee purchaser. An effect of this is that the hypothetical purchase does take effect with and subject to the rights under section 61 which are already in play because of the grant of the new leases under the Act. Accordingly, it seems to me that the valuation exercise is to proceed on the basis of a view as to what the rights under section 61 (and correspondingly under Schedule 14) are, not merely as a factor in the mind of the hypothetical purchaser but in terms of the legal position on the true construction of the Act and, if relevant, of the particular leases.

[36]It is true that this may mean that, if the issue is seriously disputed, the correct assumptions may not be determined without an appeal to the Upper Tribunal or a further appeal to the Court of Appeal, which adds uncertainty to the valuation process. I do not suppose that there will many issues on which this is likely to be the case. On the other hand, on the Tribunal’s view, the outcome would be different in different transactions according to whether the valuation date occurred before or after a determination of the legal issue, whether by the Upper Tribunal or by the Court of Appeal. That would also be inherently unsatisfactory, and difficult to reconcile with the structure of the Act.

[37]For my part, therefore, I respectfully disagree with the Upper Tribunal on this aspect of the case. I see this question, turning on the true construction of the Act and (so far as relevant) the terms of the leases, as one in respect of which the valuation must proceed by taking a view as to what the legal position is, not by treating it as uncertain and allowing for that uncertainty by some appropriate discount. This sort of point is quite unlike an uncertainty as regards what the facts may be at the relevant future time, as to which it is clearly right to identify the relevant uncertainties and apply a suitable discount to allow for them.

[38]For those reasons, therefore, I would allow the Trustees’ appeal.

Who can exercise the rights under section 61?

[39]It is therefore necessary to address the three points of dispute as to the legal position affecting the Trustees’ claim to be entitled, in due course, to terminate the new leases under section 61.

[40]The first question is: who is the landlord that can exercise the section 61 rights? Is it the landlord (who may not be an immediate landlord of the relevant tenant) who is (or before the grant of the new lease was) entitled to a reversion sufficient in duration to grant the new lease, or is it the immediate landlord?

[41]The starting point is that section 61 speaks of “the landlord” as being entitled to the right, and section 40 provides a definition of “the landlord”, which is not the immediate landlord unless he has a reversion of over 90 years. Moreover, section 61 also speaks of a lease of a flat which has been granted under section 56, and that section imposes an obligation to grant the lease on “the landlord”, who in that section must mean the person so defined in section 40. On the face of it, therefore, one would expect the right under section 61 to be reserved in favour of the landlord who granted the new lease under section 56.

[42]A complication is that section 57(7) provides expressly for the reservation of a right to obtain possession in accordance with section 61 in favour of the immediate landlord. In a case (which would be very common) in which the immediate landlord did not have a 90 year reversion, that provision suggests that, if the Trustees are right, and subject to compliance with section 57(7), two different persons may be in a position to exercise the same right over the same property.

[43]It is to be observed that the definition of landlord in section 40 is provided “in relation to the lease held by a qualifying tenant of a flat”. Because it must be either a freehold or a leasehold term long enough to allow the grant of the new lease under the Act, it is clearly addressed, at least primarily, to the position before the grant of a new lease. By contrast, section 61 necessarily applies to the position once a new lease has been granted, so it is not necessarily to be assumed that the definition of “the landlord” in section 40 also applies directly to the phrase “the landlord” in section 61. From the context “the landlord” in section 61 appears to be the reversioner under the new lease, but also someone whose reversionary interest is sufficient to justify a proposal to demolish and reconstruct the whole or a substantial part of the premises and to make it realistic that such an intention could be carried out. Given that it is very common to find a pattern of leases such as exists in the present case, with a head lease which has only a reversion of a few days after the term date of the original underleases, it would be surprising to find that the intermediate lessor was “the landlord” for the purposes of section 61, because his three day reversion could not make it possible, in realistic terms, to exercise the section 61 right. Therefore, if section 61 is to be taken as intended not to deprive a freeholder, or a lessee with a long reversion, of the benefit of a redevelopment opportunity which would or might otherwise arise on the expiration of the leases which have the benefit of the extension provisions of the Act, and of any intermediate leases with nominal or very short reversions, then to construe section 61 as applying only to the immediate landlord would not give effect to the perceived statutory intention, and would allow the right to be exercised only in rather rare and unusual cases.

[44]Mr Johnson drew an analogy and a contrast between the provisions of section 61 on the one hand and those of sections 45 and 47 on the other, which allow the landlord to defeat the tenant’s exercise of his right to an extended lease at the outset if the landlord intends to redevelop the premises in which the flat is contained. If the landlord (who here is clearly the landlord as defined in section 40) does oppose the tenant’s notice by reference to such an intention, the landlord may apply to the court for an order declaring that the tenant’s right is not exercisable for that reason. This only applies if the tenant’s lease is to terminate within five years after the relevant date. It therefore has an analogy in section 61 as regards subsection (2)(b) of that section. More to the point, if there are other landlords in relation to the given tenant, then it is clear from Schedule 11 paragraph 9 that any of the other landlords may bring proceedings under section 47 as if he were the competent landlord and, as regards the counternotice under section 45, any reference to the competent landlord may include a reference to any of the other landlords or to any two or more of the competent landlord and the other landlords acting together. There is no equivalent to this provision in relation to section 61. It is not easy to see why that should be so. The obvious factual difference is that the new lease will have been granted if section 61 is to apply, so there will have been a 90 year extension of the underlease, and there may therefore be expected to be fewer relevant reversionary interests in being, or at any rate fewer such interests which could realistically justify a proposal to demolish and reconstruct the premises in question.

[45]Mr Johnson’s primary argument was that the absence of provisions equivalent to section 47 showed that the section 61 right was not to be exercised by anyone other than the immediate landlord. He contended that section 57(7) showed the intention that the immediate landlord should have that benefit, and that the absence of any other supplementary provision, such as exists in section 47 for a comparable case, showed that no other party could have been intended to have the benefit of the right. He also submitted that, since the remedy under section 61 is a declaration that the landlord is entitled to possession of the premises as against the tenant, it would be very odd for anyone other than the immediate reversioner to have a right to apply for such a declaration.

[46]I see some force in these arguments, and I am puzzled by section 57(7)(b), but I am more impressed with Mr Gaunt’s point that, if the immediate landlord alone has the benefit of the section 61 right, it would attenuate that right severely, and altogether inexplicably. In the very common case (such as the present) where the immediate landlord has a reversion of only a few days, he could not use the right, because he could not plausibly contend that he intended to demolish and reconstruct, with the benefit of only a nominal reversion. On the other hand the party who could demonstrate such an intention, namely the freeholder, who would have been able to carry out such a proposal but for the grant of the new lease, would be excluded from doing so because he would not have the necessary statutory right. Thus, if the point of this provision is to preserve for the freeholder (or a leaseholder with a substantial reversion) the development value that the property may have had at the expiry of the original lease, it would fail to achieve that in all cases except where there is no intermediate lease or where the intermediate lease itself has a long reversion to the original lease, of less than 90 years but still long enough for redevelopment to be a realistic proposition. I decline to accept a reading of the section which has that result. It cannot have been intended, and it does not seem to me that there is anything in the Act which compels such an interpretation.

[47]Section 57(7)(b) remains a puzzle. There would be few (if any) cases in which more than one reversioner could plausibly contend that he had the necessary intention, bearing in mind that there is only (for present purposes) the window of one year up to the original term date for the application to be made. No doubt the intention to redevelop has to be shown as at the date of the hearing (as under section 30(1)(f) in Part II of the Landlord and Tenant Act 1954) or perhaps as at a date some time in the future, given the flexibility afforded by paragraph 2(3) of Schedule 14. But the party making that application would have to have a substantial reversion, either immediate or not far off in the future, in order to make such an intention plausible. The cases in which an immediate landlord would have such a reversion would, it seems to me, be relatively few, but they might exist. In such a case the next reversioner up in the hierarchy (freeholder or lessee) would have an interest which would not fall into possession until a date too far in the future for an intention to redevelop, on his part, to be plausible or realistic. In that sort of case, a reservation under section 57(7) would afford to the immediate landlord a right which arguably he ought to have, but which would only be relevant in a minority of cases.

[48]The Upper Tribunal expressed the view that the rights conferred by section 61 itself are conferred on the competent landlord, not on the immediate landlord (if different), and that section 57(7) can be explained because of the possible need to allow a reversioner with a long headlease to exercise the statutory rights. That is much the same reasoning as leads me to the conclusion that “the landlord” in section 61 means the party who granted the new lease under section 56 who, at that stage, would have been the competent landlord as defined in section 40. On the facts of this case, I conclude that the Trustees as freeholders (or their successors in title) will have the right to rely on section 61 as against the holders of the new leases in 2046.

[49]It also follows, as the Upper Tribunal observed, that the omission from three of the leases of the reservation required by section 57(7)(b) is of no relevance or effect as regards reliance on section 61 by the freeholder.

The right to compensation under Schedule 14

[50]The remaining question is whether, if the new leases were terminated by the exercise of rights under section 61, the tenants would be entitled, as part of the compensation due to them, to be paid something in respect of the development value.

[51]The critical provision of the Act, for this purpose, is paragraph 5 of Schedule 14, which I have set out at paragraph [22] above, and in particular paragraph 5(1)(b)(ii), which requires the assumption that the hypothetical vendor of the new lease is selling “subject to any restriction that would be required (in addition to any imposed by the terms of the lease) to limit the uses of the flat to those to which it has been put since the commencement of the lease and to preclude the erection of any new dwelling or any other building not ancillary to the flat as a dwelling”.

[52]On the face of it, that provision excludes any element of value attributable to the possibility that the building of which the flat forms part could be converted to use other than as comprising (in this case) four separate flats and two garages. Mr Gaunt submitted that this is not only the correct reading but that it is entirely consistent with the policy of the Act in this respect. If the reversioner is to be entitled to recover possession for the purposes of redevelopment, there is no reason why the leaseholder should be regarded as entitled to any share of the profit which might be generated by such redevelopment. In particular, the prospect of such redevelopment, and therefore of the exercise of the statutory break provision, would have had an effect on the price payable for the grant of the new lease, which would exclude any prospect of profit for the leaseholder from any redevelopment.

[53]Mr Johnson’s argument is that the deemed restriction in paragraph 5(1)(a)(ii) should not be taken as excluding the possibility that the hypothetical purchase price would include an element attributable to the prospect of a redevelopment profit. The reason for this, he contended, is that the landlord is in the class of potential purchasers on the hypothetical sale, and the landlord would have on the one hand an incentive to pay more than others, because of the redevelopment prospect and, on the other hand, the prospect of being able to ignore the deemed restriction, because once he had bought the term he would have both the benefit and the burden of the restriction and no-one else could enforce it.

[54]It seems to me that this argument is fallacious, because it is not to be assumed that the deemed restriction is contained in the lease or, if it is, that it is only enforceable by the reversioner. First of all, the restriction is to be in addition to any which is imposed by the terms of the lease. That suggests that the restriction is not to be regarded as taking effect under the lease. Mr Johnson relied on the word “any” as it appears in the relevant passage:

“any restriction that would be required (in addition to any imposed by the lease)”

. He contended that this shows that if there is a restriction in the lease (as there is here) there is no need for an additional restriction to be assumed. He further argued that only the reversioner could enforce the covenant in the lease, so that the reversioner could also waive it, and could ignore it once both term and reversion were in his hands.

[55]I do not accept that argument. It seems to me that Mr Gaunt is right to argue that this deemed restriction is imposed for the very purpose of precluding the hypothetical sale of the lease from reflecting the potential redevelopment profit, the prospect of which for the reversioner is that which has led to his ability to invoke section 61 and thereby to the entitlement of the tenant to compensation. That compensation is to be for the loss of the rest of the term under the new lease, which may be substantial. It is not for the loss of redevelopment value, of which the leaseholder had never had any prospect, and which is therefore not something of which the leaseholder has been deprived by the exercise of the section 61 rights.

[56]In this respect, I agree with the reasoning of the Upper Tribunal who accepted Mr Gaunt’s submissions, as I do also on the issue of the effect of section 61.

Conclusion

[57]Those are the reasons, therefore, for which I would allow the Trustees’ appeal and dismiss that of Mr Kutchukian. The Tribunal helpfully set out the calculation of the price payable on different bases in Appendices to their decision. On the basis of their view, Appendix 1 gave the figure of £143,497 which they held to be correct. This includes the effect of the 30% discount for uncertainty in respect of “legal problems”. On my conclusion as to the correct view, eliminating that 30% discount, the correct figure is given by Appendix 2, and it is £284,592.

[58]I agree with the judgments of both Lloyd LJ and Lewison LJ.

[59]I agree that the Trustees’ appeal must be allowed and Mr Kutchukian’s appeal must be dismissed for the reasons given by Lloyd LJ. I add a few words of my own on the Trustees’ appeal.

[60]Before a valuer can value anything he must know what it is that he has to value. In our case what the valuer had to value was “the freeholder’s interest in the premises”: Schedule 6 paragraph 2 (1) (a). The freeholder’s interest in the premises is the bundle of rights that he has in his capacity as freeholder. Whether those rights are rights exercisable against a neighbour (such as a right of way) or against a lessee (such as the right to a ground rent) does not matter. Nor does it matter whether the origin of those rights is to be found in contract or in statute. Either way the rights must be identified before the valuer can set about his task.

[61]In our case the right in issue was a right which the Trustees said had been conferred upon them by virtue of section 61 of the Act. As Lloyd LJ has explained the right they claimed was a vested right, even though it would not be capable of exercise for many years. Either the Trustees had that right or they did not. In my judgment that was the issue for the Upper Tribunal to decide. I do not consider that it was open to the Tribunal to say (in effect) that there was a 70 per cent chance that the Trustees had the right they claimed.

[62]So far as Mr Kutchukian’s appeal is concerned there is nothing I wish to add to the reasoning of Lloyd LJ, with which I completely agree.