John Lyon’s Charity v Alamouti [2014] UKUT 87 (LC)

IN THE MATTER OF APPEALS AGAINST THREE DECISIONS OF THE LEASEHOLD VALUATION TRIBUNAL FOR THE LONDON RENT ASSESSMENT PANEL
UT Neutral citation number: [2014] UKUT 87 (LC)
Between
John Lyon’s CharityAlamouti
Before: Martin Rodger QC, Deputy President and A J Trott FRICSMr Mark Loveday , instructed by Pemberton Greenish LLP for the appellant in LRA/135/2011 and LRA/168/2011 and for the respondent in LRA/176/2011Mr Edwin Johnson QC , instructed by David Conway & Co for the respondent in LRA/135/2011 and LRA/168/2011 and for the appellant in LRA/176/2011
[183]Before considering those issues it is necessary to recall that the underleases of three of the flats at No. 106 have been the subject of statutory extension and to highlight the effect of section 61 of the 1993 Act in those circumstances.[184]The new underleases granted pursuant to section 56 of the 1993 Act are for terms expiring 90 years after the term dates of the original underleas es which they replaced, which will therefore expire in 2136. The new underleases are at peppercorn rents and include the term provided for by section 57(7)(b) which reserves to the tenant’s immediate landlord the right to obtain possession of the flat in question in accordance with section 61 of the 1993 Act.185. Section 61 enables the immediate landlord (or the superior landlord where there is an intermediate lease) of a lease granted under section 56 of the 1993 Act who wishes to redevelop the flat in question to apply to the court for an order declaring that the landlord is entitled as against the tenant to obtain possession of the flat, and giving the tenant an entitlement to compensation for the loss of the flat in accordance with Schedule 14 of the 1993 Act. An application for such an order may be made at any time during the period of 12 months ending with the term date of the original lease (section 61(2)(a)).186. If in due course the court makes an order under section 61, the new underleases of the three flats would come to an end and compensation would be payable to the tenants under the provisions of Schedule 14 of the 1993 Act. The date of termination would be fixed by the court on an application made by either landlord or tenant; it cannot be before the term date of the original underleases, and must be after the amount of the compensation has been fixed, either by agreement or by the LVT. If the tenants did not admit that the landlord had the necessary intention, it would be necessary for the Landlord to prove that intention to the satisfaction of the court.187. In Kutchukian v John Lyon’s Charity [2013] EWCA Civ 90 the Court of Appeal held that, in a situation where there are both freehold and headleasehold interests in a property divided into flats, the rights under Section 61 are available to the freeholder. It also held that the compensation payable to tenants pursuant to Schedule 14 is confined to the values of their flats and does not include any share of the uplift in the value of the property as a whole which would be realized on the freeholder securing vacant possession of the individual flats. The Court of Appeal held (reversing the decision of the Tribunal on this point in Kutchukian v John Lyon’s Charity [2012] UKUT 53 (LC) ) that the statutory valuation exercise had to be conducted on the basis that these conclusions about the effect of section 61 and Schedule 14 were not matters which could be treated as uncertain in the mind of the purchaser at the valuation date.188. In this case, where the original underleases of the three flats were for terms expiring on 21 March 2046, the freeholder will enjoy a statutory right to terminate the new underleases on that date if it can demonstrate a sufficient intention to demolish or reconstruct the whole or a substantial part of No. 106 or to carry out substantial works of construction which could not reasonably be done without obtaining possession of the flats. An intention to undertake the type of conversion and extension projects which have recently been implemented at other substantial properties in Hamilton Terrace would seem very likely to satisfy the requirements of section 61.189. The outcome of the statutory procedures for early termination of an extended lease are not entirely free of uncertainty and potential for delay if the freeholder wished to terminate the flat underleases in 2046. Nonetheless, it will be remembered that both the underlease of the remaining flat and the headlease of No. 106 will also expire in 2046. As at the 2009 valuation date with which we are concerned, a well advised purchaser of the freehold interest in No. 106 would therefore have been aware of the opportunity which section 61 creates for it to acquire possession of all four flats in or around 2046 in order to undertake a substantial redevelopment of the building. That opportunity, and the effect it has on the value of No. 106, is thus of significance in this appeal.190. With that introduction it is now possible to describe the respective contentions of the parties.191. The reasons for the significant difference between the experts’ positions on the price payable for the freehold interest (£243,801 as against £2,262,528) are two-fold. First there is a fundamental disagreement over the FHVP value which mirrors the disagreement in the other two appeals. Secondly, the experts take radically different views of the attitude which a prospective purchaser of the freehold of No. 106 would adopt to the risk that the opportunity to maximise the value of the property by redeveloping and extending it might never be capable of being taken advantage of, or might be realised only after significant delay. FHVP value192. Mr Buchanan said that the FHVP value of No. 106 as flats, but with the potential to convert to a house, was £5m. Mr Hamilton said that the FHVP value of No. 106 was £9m.193. Mr Buchanan said that the best evidence for the FHVP value of unimproved houses were the sales of Nos. 38 and 106 Hamilton Terrace. We have already rejected the use of No. 106 as a comparable because of the circularity of the analysis (see paragraph 132). Mr Buchanan also relied upon the sales of Nos. 98 and 102. Mr Hamilton relied upon Nos. 38, 98 and 102 as comparables as well as No. 68. We rejected the sale of No. 68 as being too remote from the valuation dates of 70 and 110 Hamilton Terrace, but the valuation date of No. 106 is some 18 months earlier (14 April 2009) than the other two appeal properties. In this case the date of sale of No. 68 is only 21 months earlier than the valuation date. The second sale of No. 38 (1 August 2011) and the sale of No. 98 (28 June 2011), both of which are relied upon by the valuation experts, are 27 months and 26 months after the valuation date respectively. In our opinion it is reasonable to take account of the sale of No. 68 as a comparable for the valuation of No. 106, although we give it less weight because of the turbulence in the market between the date of its sale and the valuation date.194. We first consider the two bottom up comparables at Nos. 38 and 68. We only consider the second sale of No. 38 in August 2011 for the reasons given in paragraph 130 above. Neither No. 38 nor No. 106 had off-street parking and so no adjustment is required for this factor. Mr Buchanan makes a 5% deduction for the lack of planning permission at No. 106. We do not consider that such an adjustment for the lack of planning permission to convert flats into a house is justified for the reasons stated in paragraph 167 above.195. In our opinion the most significant difference between Nos. 106 and 38 (and the other comparables) are the rights that the lessee of 10 Abercorn Close had over the back garden of No. 106. This went beyond the overlooking of the rear of No. 106 and extended to the shared use of the entire garden. Mr Buchanan said in his report that the shared garden was “an important factor which would be considered by a hypothetical purchaser of the freehold interest in the Property at the Valuation Date.” He continued “… I consider that this factor alone (the problem of the shared garden use) amply justifies a separate discount of 30%.” Mr Buchanan applies this discount as one of the risks when considering the possible future exercise of section 61/Schedule 14 rights by the purchaser under the 1993 Act (see paragraph 232 (ii) below).196. Mr Hamilton makes a fixed deduction of £170,000 from each of his comparables to allow for the rights of the lessee of 10 Abercorn Close over the rear garden of No. 106. Mr Hamilton said that there had been a sale of 9/10 Abercorn Close in June 2009 for £900,000 which he adjusted for time to March 2010 to give £1,028,216. According to the Land Registry the sale price of £6.6m for No. 106 and 9/10 Abercorn Close in March 2010 had been apportioned as to £1.2m for the mews houses. Mr Hamilton took the rounded difference between £1.2m and £1.028m as being “the value the vendors put on the value of the garden rights.”197. In our opinion Mr Hamilton has approached this adjustment in the wrong way. What matters is not just the value that the leasehold owners of 9/10 Abercorn Close may place upon their garden rights but also the effect of those rights on the value of No. 106, viewed as a building suitable for conversion to a house. As flats, No. 106 would have a shared garden in any event and the fact that the mews house at the end of the garden also had such rights would not have been so significant. But the effect on No. 106 viewed as a house is very different as the occupier of so substantial and prestigious a property simply would not countenance a garden sharing arrangement. In our opinion the most likely solution would be for the owner of No. 106 to transfer part of the rear garden to the owner of 9/10 Abercorn Close in return for the extinguishment of the rights over the remaining garden of No. 106. That would create a separate garden for the mews house similar to that already behind 9 Abercorn Close, and would provide a real benefit to both parties. Nonetheless the risk that the lessee of 9/10 Abercorn Close would not reach a satisfactory agreement regarding the exclusive use of the garden by the owner of No.106 would undermine the project to restore No. 106 to a single house and in our opinion a prospective purchaser of No. 106 would make a significant discount from the purchase price to reflect that risk.198. Quantifying this discount is a difficult exercise because, in reality, a purchase of this type would be undertaken on the basis of an option or conditional contract, but no such device is available on the statutory assumption of a simple sale in the open market. The LVT allowed the sum of £250,000 “to properly reflect the amount which would persuade the owner of 10 Abercorn Close to release the easement.” We do not consider that this fully reflects the risk to the purchaser of No. 106. In our opinion an appropriate allowance for this risk would be 25% of the difference between the FHVP value of No. 106 as a house (as derived from each comparable) and the agreed FHVP value of the four flats (£3.7m). This adjustment reflects the risk that the enhanced value of the conversion of No.106 to a house (which would be affected by shared garden rights) might not be realised and that the value of No.106 would then be for its continued use as flats (which would not be affected by shared garden rights).199. The experts agreed that planning permission similar in scope and nature to that granted for 100 Hamilton Terrace be expected to be granted for No. 106, i.e. for a GIA of 10,836 sq ft. Mr Buchanan did not accept that this necessarily meant that a development of that scale would actually be in the mind of the successful purchaser and he preferred to make direct comparisons between the adjusted sale prices of the comparables and No. 106 rather than apply a derived rate per sq ft. In our opinion, given the lack of physical constraints at No. 106 such as tree roots, it is reasonable to assume that a development of similar size to No. 100 would take place at No. 106. We therefore adopt a GIA of 10,836 sq ft.200. The other bottom up comparable is No.68. Mr Hamilton deducted 5% from the value of No.68 to reflect the fact that, unlike No.106, it had planning permission for redevelopment when it was sold. He also allowed for off-street parking which we take at 10%. In addition we make the 25% adjustment in respect of garden rights as described in paragraph 198 above. Mr Buchanan did not rely upon No. 68 as a comparable.201. No. 68 had a GIA of 5,345 sq ft when it was sold in July 2007 with planning permission for redevelopment to 6,400 sq ft. Planning permission was subsequently granted in January 2008 for a redevelopment of 8,708 sq ft. We accept Mr Hamilton’s opinion that it is likely that the purchaser had in mind this larger development when purchasing the property and we adopt the higher figure of 8,708 sq ft in our analysis.202. Mr Hamilton indexes No. 68 for time by reference to the date of the exchange of contracts in March 2007. Consistently with other comparables we prefer to index the price from the date of completion of the sale in July 2007.203. There are two top down comparables: 98 and 102 Hamilton Terrace. Both experts made deductions from the value of No. 98 for planning and off-street parking. We take 5% and 10% respectively and also allow 25% for garden rights as explained at paragraph 198 above. We adopt the same approach to the analysis of this comparable as we used in the valuation of Nos. 70 and 110.204. Similarly we adopt our previous approach to the analysis of the sale of No. 102 by analysing the combined sale of the house and the mews properties at 6/7 Abercorn Close. As before we analyse the sale of No. 102 on both a top down and a bottom up basis. When analysing on the former basis we deduct 5% for planning, 10% for off-street parking and 25% for garden rights as explained at paragraph 198 above. When valuing on the latter basis we make no deduction for planning.205. The results of our analysis of the comparables at Nos. 38, 68, 98 and 102 Hamilton Terrace are shown in Appendix 3. They are summarised below: Comparable FHVP value of No.106 No. 38 (bottom up) £ 6.86m No. 68 (bottom up) £ 6.72m No. 98 (top down) £ 5.73m No.102 (top down) £6.945m No. 102 (bottom up) £8.905m In our opinion the sale of No. 68 is the most helpful comparable, and this analysis supports a FHVP value of £6.75m for 106 Hamilton Terrace. Development hope value206. The element of value attributable to the potential to redevelop No. 106 into a larger and more valuable single residence was referred to in argument as “development hope value”. The same expression has recently been adopted by the Tribunal in similar cases ( Padmore v Official Custodian for Charities [2013] UKUT 646 (LC) at paragraph 3, and Cravecrest Ltd v Duke of Westminster [2012] UKUT 68 (LC) in particular at paragraph 115) to refer to the premium which it was assumed that a purchaser of an interest in a building subject to collective enfranchisement would pay because of the prospect of being able soon after the purchase of that interest to acquire other interests in the building and to enjoy in consequence a significant development value. Mr Loveday also drew our attention to the decision of the Lands Tribunal (His Honour Judge Huskinson and Mr A J Trott FRICS) in Earl Cadogan v 2 Herbert Crescent Freehold Limited (2009) LRA/91/2007 which describes the relevant actions and thought processes of hypothetical purchasers contemplating a bid for the freehold of a building with development potential:
“71. Such hypothetical purchasers will accordingly recognise, when deciding how much to bid for the freeholder’s interest, that there may be a justification to bid more for the freeholder’s interest than the sum which represents the value of the freeholder’s interest calculated on the basis that the Building will remain as flats. In deciding whether in fact to bid more in this manner a hypothetical purchaser would be likely to seek advice as to the risks that the hypothetical purchaser might not be able to carry out the proposed redevelopment at the end of the headlease because of identifiable potential problems, these here being the risk of being unable to obtain vacant possession of one (or both) of the Basement Flat and Flat 1 at the end of the headlease or within a reasonable time thereafter and the risk of having to pay to the lessee of Flat 1 compensation which included a ransom value, and also the risk of being unable to obtain any necessary planning permission .” 207. Where development hope value was assessed, as it was by Mr Buchanan, on the basis that it would be capable of being realised only at the expiry of the leases to which the freehold interest was subject, it was referred to before us as “development value on reversion”
. We adopt that expression as a helpful shorthand in preference to other candidates which were mentioned in argument (including “ Kutchukian value”, or “section 61 value ”, neither of which we find attractive). 208. The major obstacles to any redevelopment of No.106 at the valuation date were the fact that a purchaser of the freehold interest would not acquire vacant possession but would be subject to the headlease and the underleases of the four flats and, moreover, would find that the use of the garden was shared with the owners of 9/10 Abercorn Close. When quantifying development hope value Mr Buchanan took the view that a purchaser would have regarded these obstacles as insuperable in the short term; while a purchaser would have had in mind the potential to redevelop No. 106 it would have been assumed that the earliest opportunity at which that potential could be realised would not arrive until 2046. 209. Mr Hamilton attributed much greater significance to development hope value than Mr Buchanan. He assumed that a hypothetical purchaser would contemplate negotiating (after the acquisition of the freehold) to buy in all the necessary leasehold interests significantly earlier than 2046, either within a period of five years or immediately. It was acknowledged that this approach might be complex and expensive, and that the headlessee and the underlessees of the four flats would expect to be paid some share of the development uplift to co-operate with a scheme promoted by the hypothetical purchaser. Nevertheless at the valuation date all of the leasehold interests in No.106 and in 9/10 Abercorn Close were owned or under the control of two experienced property investors and (whether this fact was known or not) it would have been obvious, Mr Hamilton suggested, that an opportunity for a relatively early realisation of the development potential of the property presented itself. If such a scheme was viable a hypothetical bidder who took too pessimistic an approach to the prospects of achieving it, and who assumed that a development project could not be implemented until 2046, would be likely to be outbid by one who took the view that it could be carried out within a much shorter timescale. 210. Mr Hamilton considered three alternative valuation hypotheses, two of which assumed an acquisition of the freehold by a purchaser intent on an early development of No.106 while the third was similar to Mr Buchanan’s approach being based on the development value on reversion in 2046. 211. On the assumption that a hypothetical purchaser would intend to buy in the necessary leasehold interests as opportunities arose in the relatively short term, Mr Hamilton determined a price for the freeholder’s interest of £2,538,699. This figure (which he referred to as Valuation 1) represented the value of the property for conversion less the costs of acquiring vacant possession (as it was assumed that a deal would be done with the leaseholders at a relatively early stage for them to surrender their interests, it was not necessary to take into account the benefit of the rental income which the hypothetical purchaser would become entitled to). 212. Both of Mr Hamilton’s development hope value assessments assumed an FHVP value for No.106 of £9m, which is considerably higher than the figure we have settled on. In his Valuation 1 he deducted from the FHVP value a cost of securing vacant possession of £4.68m, that being the sum which Mr Hamilton considered would be required to buy in the headlease and the underleases of the four flats. The figure of £4.68m was itself based on the price of £6.6m actually paid by Mrs Alamouti to acquire those interests in March 2010 (together with the leasehold interest in 9/10 Abercorn Close). In order to arrive at a figure for the value of No. 106 alone at the date of Mrs Alamouti’s contract Mr Hamilton took the sum of £900,000 which had been proposed by Mr Buchanan in his evidence to the LVT and accepted by it as the value of 9/10 Abercorn Close in June 2009 and adjusted it for market movement to March 2010, before deducting it from the price paid by Mrs Alamouti for the combined interests at that date. That process enabled Mr Hamilton to arrive at a figure of just over £4.3m as representing the net value of the freehold interest in No.106 after the acquisition of the leasehold interests. 213. The figure of £4.3m was then discounted by Mr Hamilton by 25% to reflect the hypothetical purchaser’s assessment of the risks associated with the purchase of the freehold in the expectation of being able to deal with the leaseholders. He explained the basis of his assessment of that risk in paragraph 15.5 of his report, as follows: “Although at the valuation date two underlessees were prepared to sell, the hypothetical purchaser could not be certain that all interests could be obtained immediately. I therefore assumed that it might take five years to acquire all the interests although all those interests were sold within about a year of the valuation date. The hypothetical purchaser would incur a risk that it might take longer and cost more to acquire the leasehold interests and I allowed 25% for risk to the hypothetical purchaser even though the cost I have allowed of £4.68m is well in excess of the agreed existing lease values….” 214. It can be seen that Mr Hamilton had well in mind the willingness of the owners of the leasehold interests to dispose of them, as demonstrated by the agreement for sale which they entered into with Mrs Alamouti eleven months after the valuation date. His assessment also depended on values derived from Mrs Alamouti’s own purchase. On reflection Mr Hamilton stated in cross examination that he was uncomfortable in using those figures as a primary element in his valuation as they could not have been known to a purchaser in April 2009. He therefore suggested that his Valuation 1 should be used only as a check. 215. Mr Hamilton’s alternative assessment of development hope value was contained in his Valuation 3 (as revised and dubbed 3A in a supplemental report dated 5 December 2013) and was said to have been based on the approach adopted by the Tribunal in Cravecrest . It proceeded on the assumption that a purchaser of the freehold interest in No. 106 would expect to acquire the leasehold interests as soon as possible after acquiring the freehold. The catalyst for that expectation was the knowledge that the leasehold interests in the building were controlled by two property investors who, on the statutory assumption required by paragraph 3(1) of Schedule 6 to the 1993 Act, were not themselves interested in acquiring the freehold reversion . Valuation 3 therefore assumed that the owners of all of the relevant interests in the property (i.e. the hypothetical purchaser of the freehold, the two property investors who owned or controlled the leases at No. 106, and the owners of 9/10 Abercorn Close who would be required to give up their interest in the garden) would collaborate and would agree an equal three-way division of the development uplift to be achieved by the merger of their various interests. 216. Mr Hamilton deducted from his FHVP value of £9m the sum of £3,290,203 in respect of the value of the headlease and the leasehold interests in Flats 1 to 4. (In our opinion the correct figure should be £3,357,703, being the agreed value of those leasehold interests at the valuation date.) Mr Hamilton also deducted his assessment of the value of the freeholder’s interest disregarding the potential for immediate development but assuming a development opportunity in 2046 (£649,264). This produced a figure of £5.06m as the uplift attributable to the immediate development opportunity. The resulting figure was then apportioned equally between the three interested parties to produce a profit of £1.686m for each of them. This, Mr Hamilton explained, was not because he envisaged a joint venture between the various owners for the development of No. 106, but because in calculating what he would be willing to pay for the freehold the hypothetical purchaser would take into account the need to buy out the leasehold and garden interests and would anticipate the need to share the development profit equally in order to reach agreement. 217. In his original and supplemental valuation reports Mr Hamilton considered that, in purchasing No. 106 in the expectation of acquiring the interests of others and so releasing the development opportunity, a hypothetical purchaser would incorporate an allowance for risks of 5%. He explained the basis of that allowance in paragraph 15.14 of his original report, as follows: “The purchaser would be risking the possibility that the owners of the leasehold interests and the owner of the rights over the garden might demand more than an equal share in the uplift from conversion. The risk is in part balanced by the possibility that the lessees might accept a smaller sum (as in fact they did). I think it unlikely that they would be unreasonable in their demands as to do so would put their own investment in buying the leasehold interests at risk. The only way they can realise a profit on their investment is by selling.” 218. Deducting the allowance of 5% from the hypothetical purchaser’s share of the development profit left (in round terms) a figure of £1.6m. When the value of the freeholder’s interest disregarding the potential for conversion was added back to this figure it produced an enfranchisement price of £2,251,766. This figure was not significantly different from the price of £2,538,699 produced by Mr Hamilton’s Valuation 1 hypothesis, which he considered encouraging. 219. Mr Hamilton’s attribution of an allowance of only 5% for risks was the subject of sustained criticism by both Mr Buchanan and Mr Johnson QC. The same allowance had been made by the Tribunal in Cravecrest on the basis of agreement between the experts that it was the appropriate allowance for risk on the facts of that case (see paragraph 120). As Mr Buchanan pointed out, the facts of Cravecrest were very different and the development opportunity which was being assessed was impeded by occupational flat leases which had only a few days to run at the valuation date. Mr Buchanan suggested that the opportunity for collaboration between the owners of the superior leasehold interests and the hypothetical purchaser of the freehold was much greater, and the risk of disruption by the flat leaseholders was much lower than was the case at No. 106. 220. In cross examination Mr Johnson pointed out, and Mr Hamilton agreed, that if he was right that the value of the landlord’s interest assuming development in 2046 was £649,264, a purchaser paying £2.25m for the freehold interest was risking £1.6m on the willingness of the owners of the other relevant interests to cooperate. If Mr Buchanan was right about the value of the landlord’s interest the sum at stake was closer to £2 million. Even if it was assumed that the hypothetical purchaser was aware of the ownership structure of the various interests (which Mr Johnson did not accept was a legitimate assumption as Mr Hamilton had not been aware of those details when he gave his evidence before the LVT in 2012) in the real world a purchaser would never take the risk Mr Hamilton was assuming but would proceed on the basis of an option or a conditional contract for the acquisition of the freehold rather than gambling so substantial a sum. Mr Hamilton stoutly resisted Mr Johnson’s proposition that 5% was a wholly inadequate allowance for risks and in answer to the telling question whether he would advise a bank to lend £2.25 million on such a project he said (after rather a long pause for reflection) that he thought he would for three reasons: the fact that the owners of the leasehold interests were known to be property investors; the fact that those investors were to be assumed not to be in the market to purchase the freehold of No. 106; and the fact that the development opportunity was intrinsically such an attractive one, as witnessed by the development of similar houses in the immediate vicinity. 221. Mr Hamilton’s determination to maintain his 5% allowance for risk in the face of Mr Johnson’s questioning evaporated in response to questions from the Tribunal. He acknowledged that the property investors who owned the interests which had to be acquired were knowledgeable and would be expected to seek to maximise the return to them. In April 2009 the market was very depressed and investors might be disinclined to sell into such a market; indeed, they might view an approach at that stage as unattractively opportunistic. On reflection, and after only the most gentle coaxing, Mr Hamilton agreed that an allowance of 20% or 25% might be more realistic. Having reached that conclusion Mr Hamilton later produced a revised version of his Valuation 3A incorporating an allowance of 25% for the risks associated with buying in the necessary interests. This had the effect of reducing the development hope value, or the sum which a hypothetical purchaser would be willing to pay in the expectation of early release of the development opportunity, to £1.265m and the price payable to the freeholder for the £1,914,398. 222. Mr Loveday acknowledged in his closing submissions that a key assumption which underlay Mr Hamilton’s assessment of development hope value in this case was knowledge on the part of the prospective purchaser that the leasehold interests in the flats and the headlease were under the control of two property investors acting in concert. The relevant facts concerning the ownership of the various interests were recorded in paragraph 15.12 of Mr Hamilton’s report. Each of the four flats was registered in the name of a different owner. The leaseholders of two of the flats (Flats 1 and 3) had separately entered into contracts to sell their interests to a Mr Brooks, who was the registered proprietor of the leasehold interest in Flat 2. The contract in relation to Flat 3 had subsequently been varied to provide for a sale to a subsidiary company of Dorlake Ltd, which was itself the registered proprietor of Flat 4. Dorlake Ltd and Mr Brooks were shareholders in 106 Hamilton Terrace Management Ltd, which owned the headlease. Mr Hamilton considered that these facts would become known to a prospective purchaser making enquiries in anticipation of making a bid to acquire the freehold interest in No. 106. 223. In its decision in Cravecrest the Tribunal said, at paragraph 118, that the hypothetical purchaser would take all the steps and make all the enquiries that a reasonably prudent purchaser could be expected to take before committing to a purchase. On the facts of that case the Tribunal was satisfied that the purchaser would have obtained a clear indication from the owner of the only other interest in the property which had to be acquired in order to release development value, as to whether or not they would be willing to sell their interest once the freehold had been acquired. On the facts in Cravecrest (which crucially included a very short window of opportunity for the owners of the necessary interests to share in a substantial development uplift before their interests expired) the Tribunal took the view that there was a very high likelihood that the owner of the other interest would be willing to cooperate and would inform the hypothetical purchaser. The Court of Appeal subsequently endorsed the Tribunal’s approach in Cravecrest v Duke of Westminster [2013] 2 P&CR 16 at paragraph 79 and emphasised that the enquiries which a purchaser would make, and the answers it would have received, are partly matters of fact and partly matters of expert evidence. 224. We agree that the hypothetical purchaser would make such enquiries as a reasonably prudent purchaser would make in the circumstances, but we are much less confident that such enquiries would have left the purchaser in possession of all of the information Mr Hamilton assumed. On consulting the proprietorship registers for each of the registered titles of the flats, the purchaser would discover that they were registered in four separate names. We were not provided with any evidence that it was apparent from the registered titles that two of those proprietors had contracted to sell their interest to a third, nor were we shown the contracts themselves. Even if we assume that the lessees of each of the flats would have been receptive to enquiries regarding their interests and intentions, we are not convinced that a reasonably prudent purchaser would have succeeded in tempting them into a deal at that point in the market. We think it likely that the owners of the leasehold interests would have been happy to wait until the market improved before disposing of their interests, or at the very least would have insisted on favourable assumptions being made concerning the value of their interests as the price of their agreeing to sell them at such an unfavourable time. In Cravecrest there was an immediate and wasting opportunity to amalgamate the various interests in order to take advantage of a valuable development in the very short term. No such wasting opportunity existed on the valuation date in the case of No. 106, and the only incentive which the purchaser would have been able to offer to the owners of the leasehold interests to secure their cooperation would be a more favourable price than they might have expected at a later date. 225. Nor do we accept that a reasonably prudent purchaser would have been prepared to acquire the freehold interest in No. 106 without a very much greater assurance of the cooperation of the owners of the other interests than can be assumed to have been available. The statutory valuation hypothesis does not permit the assumption that the purchaser would already have entered into binding arrangements with those owners before agreeing to acquire the freehold for a substantial sum, yet that is how such a transaction would be likely to be structured in reality. We therefore agree with Mr Buchanan and Mr Johnson that a prospective purchaser would see very considerable and unquantifiable risks that the various interests might not be capable of being bought in after the acquisition of the freehold, or might not be acquired at the sums which the price paid for the freehold had assumed. The allowance of 5% which Mr Hamilton originally attributed to those risks is clearly inadequate, and we have no confidence that the alternative figures of 20% or 25% would be adequate either. 226. The conclusion we have reached, in agreement with Mr Buchanan, is that no reasonably prudent purchaser would have been prepared to acquire No. 106 in April 2009 at a price which was dependent on the achievement in the near future of an agreement with experienced property investors for the acquisition of the headlease and the leases of the four flats, as well as for the release of the rights which the owners of 9/10 Abercorn Close enjoyed over the garden of No. 106. The prospect of achieving the necessary agreements was too speculative and the potential for ransom too great for there to be any realistic prospect of a bank or institutional funder being prepared to back such a scheme at a time of such extreme economic uncertainty; nor would a developer have been willing to stake his own capital on such a venture. For these reasons we reject Mr Hamilton’s development hope value valuations. 227. We see no inconsistency between this conclusion and what is now known to have happened after the valuation date. The contract which Mrs Alamouti entered into on 17 March 2010 was very different in its structure and attendant risks from the arrangements which Mr Hamilton assumed would be in the mind of a hypothetical purchaser. It is true that Mrs Alamouti did acquire the right to all of the interests necessary to achieve the development of No. 106 in the short term, and the willingness of the owners of those interests to sell them is now apparent, but the necessary rights had already been assembled over a number of years and were presented to her as a package. The hypothetical purchaser on the valuation date had no such advantage. The only risks Mrs Alamouti took were over the assessment of the price for the freehold and the outcome of the County Court proceedings to ascertain the meaning of the user covenant in the headlease and she may have taken comfort from knowing that an adverse outcome on the issue of construction would be likely to depress the price payable for the freehold. Development value on reversion 228. Both Mr Hamilton and Mr Buchanan considered that a purchaser of the freehold interest in No.106 in 2009 would have been willing to pay more for the property to reflect the development opportunity which may exist in 2046 when the extended leases of the flats will be capable of being determined in reliance on section 61 of the 1993 Act. Such a purchaser would calculate the sum he was prepared to pay for the freehold on the assumption that the property would be held as a long term investment until the original term date of the extended leases and would then be converted and extended to create a substantial house in single occupation. Given the lapse of time before the realisation of that ambition it was common ground that a hypothetical purchaser would heavily discount the anticipated profit from the prospective redevelopment to reflect a number of specific risks, as well as deferring it to reflect changes in the real value of money. 229. The starting point for the assessment of the price would be the FHVP of No. 106 at the valuation date of 14 April 2009, which we have already determined to be £6.75m. Thereafter, both valuers adopted an approach consistent with the decision of the Court of Appeal in Kutchukian (in which they had both given evidence to the LVT and the Tribunal). They first deducted from the FHVP an agreed sum representing the compensation for early termination payable under schedule 14 of the 1993 Act to the lessees of the three flats in the event of their early termination under section 61; that sum was agreed to be £2,764,500 (at 2009 values) After deducting the compensation sum from the FHVP the resulting figure of £3,985,500 represents the increase in the value of No. 106 in the event of its conversion from four flats to a house for single occupation. 230. That development uplift will not be available, in reliance on section 61, until 21 March 2046 at the earliest. Mr Hamilton said, and we accept, that the risk of delays in obtaining vacant possession in 2046 should be reflected by adding one year to the deferment period and it is therefore necessary to defer its receipt for 37.94 years to arrive at a net present value of the same sum. The valuers agreed that a deferment rate of 5% was appropriate. The resulting sum is £626,122. 231. The valuers also agree that a purchaser of the freehold interest in No. 106 in April 2009 would discount the development uplift which he hoped to achieve in 2046 for the risk that circumstances may change in the intervening period. Mr Hamilton and Mr Buchanan agreed, as they had in Kutchukian , that an allowance of 5% was necessary to reflect the risk that changes in planning policy may make it more difficult to obtain planning permission to return the property to its original configuration as a house in single occupation. They also adopted the allowance of 35% which was found by the Tribunal in Kutchukian (at paragraphs 102 to 103) to be necessary to reflect the serious risk that the market’s current strong appetite for properties such as these to be returned to single occupation may be diminished or reversed by 2046. 232. Mr Buchanan identified the following additional issues and uncertainties which he considered a purchaser would reflect in the price he would be willing to pay for the freehold interest in No.106 to reflect its development potential in 2046: (i) The risks and delays associated with employing the section 61 procedure in 2046 to secure vacant possession of the three flats whose tenants have exercised the right to acquire an extended lease under the 1993 Act. He considered that a further discount of 5% was required to take this into account. (ii) The risk that it might not prove possible to resolve the problem of the shared use of the garden at No.106 with the owners of 9/10 Abercorn Close. If that issue could not be overcome by 2046, the conversion of No.106 back to a house for single occupation would simply not be feasible. Mr. Buchanan considered that this risk justified a further discount of 30%. (iii) Finally, Mr Buchanan pointed out that it could not be assumed that the tenant of Flat 3 (who had not exercised the right to obtain an extended lease) would willingly vacate at the expiry of the contractual term of his underlease in 2046. There was therefore some risk that that tenant might claim statutory security of tenure as an assured tenant pursuant to Schedule 10 to the Local Government and Housing Act 1989, although Mr Buchanan did not seek to quantify any specific allowance which ought to be made for such a risk. 233. Aggregating all of these risk factors produced a composite allowance for risk of 75% and Mr Buchanan’s evidence to us was that a purchaser would therefore make only a modest addition to the price he would be willing to pay for the freeholder’s interest in No. 106 at the valuation date to reflect the potential, or hope, of undertaking a substantial redevelopment on the reversion in 2046. Based on his assessment of the FHVP value Mr Buchanan thought that a purchaser would be prepared to enhance the price by only £55,658 to reflect future development potential. When added to the other components identified in paragraph 2(1) of Schedule 6 to the 1993 Act this produced a total price of £243,801. 234. We should add that Mr Buchanan’s original view was that a further substantial discount would be required by a purchaser to reflect uncertainty, at the valuation date, over the two legal issues which were later resolved by the Court of Appeal in Kutchukian (whether the right of termination under section 61 is available to a freeholder, and whether the leaseholders are entitled to a share in the development value). The Court of Appeal determined both of those issues in favour of the freeholder and in light of its decision Mr Buchanan revised his evidence to reflect the composite allowance for risks of 75% which we have referred to above. 235. Mr Hamilton accepted that some additional allowance was appropriate to reflect the uncertainty and delay which would be encountered in connection with the termination of the extended leases in reliance on section 61. He regarded Mr Buchanan’s 5% discount as excessive and preferred to add a further year to the period of deferment of the proceeds of development to reflect the need to secure vacant possession if the leaseholders did not leave voluntarily on the original term date. This was the approach the Tribunal had taken to the same risks in Kutchukian at paragraph 106 where it had accepted Mr Hamilton’s evidence (at paragraph 96) in preference to the much larger discount for this and other legal uncertainties contended for by Mr Buchanan. 236. In his closing submissions Mr Johnson emphasised the potential for delay and upset which might attend up to three contested applications to the county court under section 61(2). The landlord would have to establish the necessary intention to carry out sufficient works of development, and if he succeeded in doing so he would then face additional delay while the compensation payable to the leaseholders was determined by the relevant tribunal. Against that, as Mr Loveday pointed out, the type of scheme which a purchaser would have had in mind in 2009 would be likely to justify a high degree of confidence in the outcome of any contested application under section 61(2) which it may be necessary to make in 2046. The view we take, on the facts of this case, is that a prospective purchaser would be likely to receive advice that, with an appropriate scheme of redevelopment and proper preparation, there was no significant risk of serious delay in recovering possession in or around 2046. Since the design of the scheme of redevelopment and the energy to be devoted to its implementation would be within the control of the purchaser, the risks would be adequately accounted for by adding one year to the deferment period. 237. As for the additional risk of the purchaser not being able to reach agreement with the owners of 9/10 Abercorn Close for the release of their rights over the garden of No. 106, we agree with Mr Hamilton that this factor is already taken into account in the FHVP and no further allowance is required. 238. We are therefore satisfied that the need to allow for risks in assessing the uplift in the value of the freeholders interest to reflect development value on the reversion is adequately accommodated within the 40% allowance agreed by the experts for changes in the planning regime and changes in the market’s preference for houses over flats. 239. The result of applying the same valuation approach to No. 106 taking its FHVP value at our figure of £6.75m is to enhance the enfranchisement price for No. 106 by a further £288,086 as development value on reversion, calculated as shown in Appendix 5. Determination 240. We determine the appeals and cross-appeals as follows. 70 Hamilton Terrace 241. We determine the FHVP value of 70 Hamilton Terrace in the sum of £10.75m and the enfranchisement price as £2,862,260 as set out in Appendix 4. The appellant Landlord’s appeal is therefore allowed in part and the respondent’s cross-appeal is dismissed. 110 Hamilton Terrace 242. We determine the FHVP value of 110 Hamilton Terrace in the sum of £7.75m. The parties agreed that the FHVP value should constitute the enfranchisement price. The appellant Landlord’s appeal is therefore dismissed and the respondent’s cross-appeal is allowed in part. 106 Hamilton Terrace 243. We determine the FHVP value of 106 Hamilton Terrace in the sum of £6.75m and the enfranchisement price as £480,882 as set out in Appendix 5. The appellant’s appeal (Mrs Alamouti) is therefore allowed in part. 244. The Landlord requested that if the Tribunal finds, as it has done, that there is no value on the basis of development hope value it should still provide a worked valuation to a nil figure. We agree with the appellant that to provide such a valuation in circumstances where we have found that there is no value on this basis is not appropriate. Dated 28 April 2014 Martin Rodger QC Deputy President A J Trott FRICS APPENDIX 1 70 HAMILTON TERRACE - ANALYSIS OF COMPARABLES 1. 38 HAMILTON TERRACE (B ottom up) Freehold sale on 1 August 2011: £7,700,000 Indexation to valuation date (1 November 2010) Multiply by 172.0 £6,788,314 195.1 Adjustments (i) Off-street parking: + 10% (ii) Site size: + 5% + 15%: £1,018,247 Adjusted FHVP value at valuation date: £7,806,561 Divide by potential GIA of No.38 7,500 sq ft FHVP value per sq ft £1,041 Multiply by GIA of No.70: 9,519 sq ft £9,909,279 FHVP value of No.70, say £9,910,000 2. 98 HAMILTON TERRACE (Top down) Freehold sale in June 2011: £14,425,000 Value as fully modernised: £16,000,000 Indexation to valuation date (1 November 2010) Multiply by 172.0 £14,318,418 192.2 Adjustments (i) Site size: +5% £ 715,921 Adjusted FHVP value at valuation date: £15,034,339 Divide by GIA: 8,300 sq ft Improved FHVP value per sq ft: £1,811 Multiply by GIA of No. 70: 9,519 sq ft Improved FHVP value of No. 70: £17,238,909 Unimproved FHVP value @ 50%: £ 8,619,454 FHVP value of No.70, say £ 8,620,000 3. 102 HAMILTON TERRACE (Top down) Freehold sale of No.102 and leasehold sale of 6/7 Abercorn Close in January 2010: £16,000,000 Add for value of freehold of 6/7 Abercorn Close: £ 500,000 £16,500,000 Indexation to valuation date (1 November 2010) Multiply by 172.0 £17,453,875 162.6 Adjustments (i) Site size: + 5% £ 872,694 Adjusted FHVP value @ valuation date: £18,326,569 Divide by GIA of No. 102 and mews houses: 8084 sq ft Improved FHVP value per sq ft £2,267 Multiply by GIA of No. 70: 9,519 sq ft Improved FHVP value of No. 70: £21,579,573 Unimproved FHVP value of No.70 @ 50% £10,789,786 FHVP value of No.70, say £10,790,000 4. 102 HAMILTON TERRACE (Bottom up) Adjusted FHVP value of No.102 and 6/7 Abercorn Close: as before (Valuation 3): £18,326,569 Add for planning: 5% £ 872,694 £19,199,263 Divide by GIA of No. 102 and mews houses per March 2012 planning permission (11,030 sq ft + 1,880 sq ft): 12,910 sq ft Unimproved FHVP value of No. 102 per sq ft £1,487 Multiply by GIA of No. 70 9,519 sq ft £14,154,753 Unimproved FHVP value of No. 70, say £14,155,000 APPENDIX 2 110 HAMILTON TERRACE - ANALYSIS OF COMPARABLES 1. 38 HAMILTON TERRACE (B ottom up) Freehold sale on 1 August 2011: £7,700,000 Indexation to valuation date (6 October 2010) Multiply by 171.2 £6,756,740 195.1 Adjustments (i) Overlooking: -5% £ 337,837 Adjusted FHVP value at valuation date: £6,418,903 Divide by potential GIA of No. 38 7,500 sq ft FHVP value per sq ft £ 856 Multiply by GIA of No. 110 9,000 £7,704,000 FHVP value of No. 110, say £7,705,000 2. 98 HAMILTON TERRACE (Top down) Freehold sale in June 2011: £14,425,000 Value as fully modernised: £16,000,000 Indexation to valuation date (6 October 2010) Multiply by 171.2 192.2 £14,251,821 Adjustments (i) Planning: -5% (ii) Off-street parking: -10% (iii) Overlooking: - 5% -20% £ 2,850,364 Adjusted FHVP value at valuation date: £11,401,457 Divide by GIA 8,300 sq ft Improved FHVP value per sq ft: £ 1,374 Multiply by GIA of No.110 9,000 sq ft Improved FHVP value of No.110 £12,366,000 Unimproved FHVP value @ 50%: £ 6,183,000 FHVP value of No.110, say £ 6,185,000 3. 102 HAMILTON TERRACE (Top down) Freehold sale of No. 102 and leasehold sale of 6/7 Abercorn Close in January 2010: £16,000,000 Add for value of freehold of 6/7 Abercorn Close: £ 500,000 £16,500,000 Indexation to valuation date (6 October 2010) Multiply by 171.2 £17,372,694 162.6 Adjustments (i) Planning: -5% (ii) Overlooking: -5 % (iii) Off-street parking: -10% -20% £ 3,474,539 Adjusted FHVP value @ valuation date: £13,898,155 Divide by GIA of No.102 and mews houses: 8,084 sq ft Improved FHVP value per sq ft £ 1,719 Multiply by GIA of No.110 9,000 sq ft Improved FHVP value of No.110 £15,471,000 Unimproved FHVP value of No.110 @ 50% £ 7,735,500 FHVP value of No.110, say £ 7,735,000 4. 102 HAMILTON TERRACE (Bottom up) Adjusted FHVP value of No. 102 and 6/7 Abercorn Close: as before (Valuation 3): £13,898,155 Add back deduction for planning: £ 868,635 £14,766,790 Divide by GIA of No.102 and mews houses per March 2012 planning permission (11,030 sq ft + 1,880 sq ft) 12,910 sq ft Unimproved FHVP value of No.102 per sq ft £ 1,144 Multiply by GIA of No.110 9,000 sq ft £10,296,000 Unimproved FHVP value of No.110, say £10,295,000 APPENDIX 3 106 HAMILTON TERRACE – ANALYSIS OF COMPARABLES 1. 38 HAMILTON TERRACE (Bottom up) Freehold sale on 1 August 2011: £7,700,000 Indexation to valuation date (14 April 2009) Multiply by 138.8 £5,478,011 195.1 Divide by potential GIA of No.38: 7,500 sq ft FHVP value per sq ft: £730 Multiply by GIA of No.106: 10,836 sq ft £7,910,280 Less adjustment for garden rights @ 25% of the difference between FHVP value as a house (£7,910,280) and FHVP value as flats (£3.7m): £1,052,570 £6,857,710 FHVP value of No.106, say £6,860,000 2. 68 HAMILTON TERRACE (Bottom up) Freehold sale on 26 July 2007: £8,750,000 Indexation to valuation date (14 April 2009) Multiply by 138.8 £7,303,067 166.3 Adjustments (i) Planning -5% (ii) Off-street parking -10% -15% £1,095,460 Adjusted FHVP value at valuation date: £6,207,607 Divide by potential GIA of No.68: 8,708 sq ft FHVP value per sq ft: £ 713 Multiply by GIA of No.106: 10,836 sq ft £7,726,068 Less further adjustment for garden rights @ 25% of the difference between FHVP value as a house (£7,726,068) and FHVP value as flats (£3.7m): £1,006,517 £6,719,551 FHVP value of No.106, say £6,720,000 3. 98 HAMILTON TERRACE (Top down) Freehold sale in June 2011: £14,425,000 Value as fully modernised: £16,000,000 Indexation to valuation date (14 April 2009) Multiply by 138.8 £11,554,631 192.2 Adjustments (i) Planning: -5% (ii) Off-street parking: -10% -15% £ 1,733,195 Adjusted FHVP at valuation date: £9,821,436 Divide by GIA: 8,300 sq ft Improved FHVP value per sq ft: £ 1,183 Multiply by GIA of No.106: 10,836 sq ft Improved FHVP value of No.106: £12,818,988 Unimproved FHVP value @ 50%: £6,409,494 Less further adjustment for garden rights @ 25% of the difference between FHVP value as a house (£6,409,494) and FHVP value as flats (£3.7m): £ 677,373 £5,732,121 FHVP value of No.106, say £5,730,000 4. 102 HAMILTON TERRACE (Top down) Freehold sale of No.102 and leasehold sale of 6/7 Abercorn Close in January 2010: £16,000,000 Add for freehold value of 6/7 Abercorn Close: £ 500,000 £16,500,000 Indexation to valuation date (14 April 2009) Multiply by 138.8 £14,084,871 162.6 Adjustments (i) Planning - 5% (ii) Off-street parking -10% -15% £ 2,112,731 Adjusted FHVP value @ valuation date: £11,972,140 Divide by GIA of No.102 and mews houses: 8,084 sq ft Improved FHVP value per sq ft: £ 1,481 Multiply by GIA at No.106: 10,836 sq ft Improved FHVP value of No. 106: £16,048,116 Unimproved FHVP value of No. 106 @ 50%: £ 8,024,058 Less further adjustment for garden rights @ 25% of the difference between FHVP value as a house (£8,024,058) and FHVP value as flats (£3.7m): £ 1,081,014 £ 6,943,044 FHVP value at No. 106, say £ 6,945,000 5. 102 HAMILTON TERRACE (Bottom up) Adjusted FHVP value of No.102 and 6/7 Abercorn Close as before (valuation 4): £11,972,140 Add back deduction for planning: £ 704,244 £12,676,384 Divide by GIA of No.102 and mews houses for March 2012 planning permission (11,030 sq ft + 1,880 sq ft): 12,910 sq ft Unimproved value of No.102 per sq ft: £ 982 Multiply by GIA of No.106: 10,836 sq ft £10,640,952 Less further adjustment for garden rights @ 25% of the difference between FHVP value as a house (£10,640,952) and FHVP value as flats (£3.7m): £ 1,735,238 £ 8,905,714 Unimproved FHVP value of No.106, say £ 8,905,000 APPENDIX 4 70 HAMILTON TERRACE – ENFRANCHISEMENT PRICE 1. FREEHOLDER’S PRESENT INTEREST (i) Capital value of ground rent (agreed): £3,371 (ii) Reversion to FHVP value: £10,750,000 X PV £1 in 37.91 years @ 4.75%: 0.1722 £1,851,150 Value of freehold interest £1,854,521 2. MARRIAGE VALUE FHVP value: £10,750,000 Less (i) Freeholder’s present interest: £1,854.521 (ii) Lessee’s present interest (agreed @ 64% relativity): £6,880,000 £ 8,734,521 Marriage value: £ 2,015,479 Freeholder’s share at 50% £1,007,739 Enfranchisement price: £2,862,260 APPENDIX 5 106 HAMILTON TERRACE – CALCULATION OF ENFRANCHISEMENT PRICE INCLUDING DEVELOPMENT VALUE ON REVERSION 1. FREEHOLDER’S CURRENT INTEREST (i) Capital value of ground rent (agreed): £ 2,923 (ii) Reversion to FHVP of Flat 3: £850,000 x PV £1 in 36.94 years @ 5%: 0.1649 £140,165 (iii) Reversion to FHVP of Flats 1, 2 & 4: £2,850,000 x PV £1 in 126.94 years @ 5%: 0.00204 £ 5,184 £148,902 2. VALUE OF HEADLEASEHOLDER’S INTEREST Agreed: £ 703 3. DEVELOPMENT VALUE ON REVERSION Reversion to FHVP house value: £6,750,000 Less cost to acquire Flats 1, 2 & 4 (agreed): £2,764,500 £3,985,500 x PV £1 in 37.94 years @ 5%: 0.1571 £ 626,122 Less value of reversion as flats £ 145,979 £ 480,143 Deduct 40% for risks (planning policy (5%) and market change (35%)): £ 192,057 £288,086 4. MARRIAGE VALUE £NIL 5. HOPE VALUE FOR FLAT 3 FHVP value of Flat 3 (agreed): £ 850,000 Less: (a) Value of freehold interest: £140,165 (b) Head leases interest: £ 703 (c) Existing lease value of Flat 3: £535,500 £676,368 Marriage value: £173,632 Hope value (agreed @ 25%) £ 43,408 Freeholder’s share in proportion to value of interests: £43,191 Total enfranchisement price: £480,882

Cited in 1 later judgment