GROSVENOR WEST END PROPERTIES v WHISTON PROPERTIES LIMITED LRA/41/2001
[1]The appellants are the freeholders of a block of flats known as Connaught House of which Flat 4 was held by occupying tenants under a long lease dated 16 June 1969, for a term expiring on 14 December 2058 at a yearly rent of £190. On 6 June 1979 the appellants granted to the respondents an intermediate lease of the whole block and other adjoining properties for a term expiring on 25 March 2077, but with an option to extend until 25 March[2]The occupying tenants claimed a new underlease of their flat in accordance with section 42 of the Leasehold Reform, Housing and Urban Act 1993, and on 28 January 2002 the appellants, as the competent landlord, granted, in accordance with s.56 of the Act, in substitution for the 1969 underlease, a new lease at a peppercorn rent for the extended term of a further 90 years from 15 December 2058, namely until 2148. By agreement amongst the parties the total premium payable on the grant of such extended lease was £136,500.[3]Although that sum was agreed by the appellants and the intermediate lessors, they disputed their respective shares of that sum. Accordingly the intermediate lessors applied under paragraph 7 of Schedule 11 of the Act to appear in the proceedings before the Leasehold Valuation Tribunal (“LVT”) which were to determine the amount of the premium. The occupying tenants having agreed the total premium with both parties, did not appear at the LVT. Its decision was therefore entirely as for the share of the agreed sum of £136,500 which was to be paid to each of the reversioners. They apportioned the premium as to the freeholders £2,250 and as to the intermediate lessors £134,250. From that decision the freeholders appeal. The parties are agreed that if the appeal succeeds the amount to be paid to the appellants would be £28,150 and the amount to be paid to the respondents should be £108,350.[4]The respondents’ lease reserved a basic rent of £33,797 per year being 9% of the rents payable under the occupational leases, including that of flat 4, which were set out in a schedule to the lease. It reserved also an Additional Rent which was to be “9% of the amount (if any) by which the net received income … exceeds [the total of such schedule rents]”. “Net received income” was defined. If any of the premises were let at less than open market rent, then, in respect of such premises, the net received income was to be deemed to be equal to the open market rental value of those premises “PROVIDED ALWAYS that … for so long as the respective underleases specified in the schedule hereto shall subsist (which shall for the purposes of this proviso include any extension thereto or renewal thereof to which the occupier shall be entitled pursuant to any statutory provision but not further or otherwise) the net received income in relation to the premises comprised in such respective underleases should be calculated by reference to the terms and provisions of such respective underleases…” Mr Munro, who appeared before the LVT on behalf of the respondent is recorded as contending that 2 “any valuation that ignores the terms of the headlease is a valuation made on a false premise. There is nothing in the Act requiring the LVT to ignore the reality of the headlease terms”. The LVT accepted that submission and concluded that the agreed premium should be apportioned on the basis that the net received income by reference to which rent was payable under the headlease should be determined on the basis of a peppercorn only being the rent receivable for Flat 4.[5]It is from that decision that the appellants appeal contending in their statement of case that “it is necessary to ignore reality and assume, therefore, that the present valuation takes place in a no Act world.”[6]It appears to me that these rival concepts of “reality” and a “no Act world”, and the circumstances where the LVT was effectively called upon to apportion an agreed premium, have led the LVT to mistake the task upon which it was engaged and therefore to depart from the valuation exercise required by the statute. It is to that, which I therefore will now turn.[7]Schedule 13 to the Act makes provision in its three parts for the “PREMIUM AND OTHER PAYMENTS PAYABLE BY THE TENANT ON THE GRANT OF A NEW LEASE”. Part II provides for the premium which is payable to the landlord. Part III provides for the amount payable to the owner of an intermediate interest. Paragraph 2 in Part II provides for the premium to be the aggregate (so far as material) of “(a) the diminution in the value of the landlord’s interest in the tenant’s flat as determined in accordance with paragraph 3 [and](b) the landlord’s share of the marriage value …” Paragraph 6 in Part III of the Schedule provides that there shall be payable to the owner of any intermediate leasehold interest an amount (so far as here material) equal to “the diminution in the value of that interest in accordance with paragraph 7”. Paragraph 10 provides for the marriage value which is part of the landlord’s premium to be divided between the landlord and the owners of any intermediate interests “in proportion to the amount by which the values of their respective interests in the flat will be diminished in consequence of the grant of the new lease.” Accordingly the respective entitlement of the appellants and the respondents which has been agreed on alternative bases, depends entirely on the valuation of the diminution in value of their respective interests. 3[8]Paragraph 7 of the schedule provides that “(1) The diminution in value of any intermediate leasehold interest is the difference between(a) the value of that interest prior to the grant of the new lease; and(b) the value of that interest once the new lease is granted. (2) Each of those values shall be determined, as at the valuation date, in accordance with paragraph 8.” Paragraph 8 provides that paragraphs 3(2) to (6) shall apply for determining the valuation of any intermediate interest.[9]Paragraph 3(1) defines the diminution in the value of the landlord’s interest as the difference between its value prior to the grant of the new lease and once it has been granted in the same terms as paragraph 7 in regard to the intermediate landlord’s interest. Thus both valuations of diminution require a before and after valuation on different assumptions. Paragraph 3(2) sets out the assumptions on which the valuation of the interests are to be made, including “…(b) on the assumption that … this chapter confer[s] no right … to acquire any new lease.” That assumption in the case of the “after” valuation, that is to say of the interests “once the new lease is granted”, does not of course require the new lease which has been granted, to be disregarded, nor, of course, its effect upon the additional rent payable by the respondent. The assumption that no right is conferred affects only the future. It applies therefore to the valuation which has to be made of the interest “prior to the grant of new the lease”, and thus what I have called “the before valuation” does require the statutory right to acquire a new lease to be disregarded.[10]The parties are agreed that the respondents’ interest in the flat “once the new lease is granted” is nil, because the rent is a peppercorn and the term is longer than the respondents’ lease even after the exercise of the option. The appellants’ interest is also more or less nominal, being of a reversion deferred by 147½ years. It is therefore the value of the respective interests “prior to the grant of the new lease” which are what is in dispute: the “before valuations”.[11]The respondents’ claim, and the LVT’s decision is that by reason of the proviso to the definition of “net received income” in their headlease, it has to be assumed in these “before valuations”, that the terms of the new lease of flat 4 granted pursuant to statutory provisions for an extended term at a peppercorn, are to determine the amount of net received income, in order to determine the additional rent payable under the headlease. That is to say that in calculating for the purposes of the “before valuation”, the payment to be made as additional rent under the headlease, it is to be assumed that the rent Flat 4 is not, as in the 1969 underlease scheduled to the lease, £190 until 2058, and the market rent thereafter until 2128 4 (after exercise of the option), but is to be a peppercorn only. But this “before valuation” of the parties’ interests from which the after valuation is to be deducted is of its value “prior to the grant of the new lease” and “on the assumption that chapter [II of the Act of 1993] confers [on the tenant] no right to acquire any new lease”. Thus there is, for the purposes of the “before valuation” required, no extended lease at a peppercorn rent for the definition of net received income to bring into account. On the other hand for the purposes of the “after valuation” “once the new lease is granted”, there is such extended lease. That is why the value of the freeholders’ interest is diminished by a percentage of the market rental value of the flat, and the freeholders are entitled to be compensated for such loss in their share of the premium to be paid by the tenant.[12]For these reasons I allow the appeal. It follows that the appellants’ share of the sum paid by the tenants is £28,150 and the part to be paid to the respondents is £108,350.[13]I announced this conclusion at the end of the hearing and it is agreed that costs should follow the event. I accordingly determine that the respondents should pay the appellants’ costs of this appeal to be the subject of detailed assessment by the Registrar, if not agreed. Dated: 10 May 2002 His Honour Judge Michael Rich QC 5