82 Portland Place (Freehold) Ltd v Howard De Walden Estates Ltd (2014)
In a collective enfranchisement, no rule of law prohibited a valuation approach incorporating a "purchaser's margin", namely the difference between the amount a purchaser would pay for the freehold of the building with vacant possession of the short leasehold flats and the aggregate value of those flats if sold individually. The factors accounting for such a margin were already accounted for in the deferment rate required for central London valuations in Earl Cadogan v Sportelli  1 E.G.L.R. 153, although in exceptional cases the application of Sportelli could be loosened and a purchaser's margin applied.
The appellant (X), the nominee purchaser of the freehold interest in a block of flats in a collective enfranchisement, appealed against a leasehold valuation tribunal's determination of the price payable to the respondent freeholder (H) under the Leasehold Reform, Housing and Urban Development Act 1993.
The central London property comprised 25 units of accommodation. Fourteen units were held on leases with unexpired terms of 11.82 years at the valuation date, while 11 flats were on long leases expiring in 2111. The tenants of two flats had not at first executed the participation agreement appointing X as nominee purchaser, or given the initial notice of the enfranchisement. However, they subsequently signed a "deed of adherence" stating their wish to adhere to the participation agreement. The tribunal determined that the price payable was £21,340,923. On appeal, the following issues arose: (i) whether, for the purpose of ascertaining marriage value under Sch.6 para.4 of the Act, the leases of the participating tenants should be valued without their benefiting from any rights under the Act, as held in McHale v Earl Cadogan  EWCA Civ 1471,  H.L.R. 14; (ii) whether the tenants who had not joined in the initial notice were nonetheless to be treated as participating tenants for the purpose of ascertaining marriage value; (iii) "relativity", namely the appropriate method of valuing a short lease based on its relationship with the freehold vacant possession value of the flat; (iv) whether a "purchaser's margin", namely the difference between the amount a purchaser would pay for the freehold of the building with vacant possession of the short leasehold flats and the aggregate value of those flats if sold individually, was permissible in principle, or allowable on the facts.
(1) The Supreme Court had granted permission to appeal in McHale, but the appeal was eventually withdrawn. Accordingly, the Upper Tribunal was bound by the Court of Appeal's decision: for the purpose of ascertaining marriage value, the participating tenants' leases should be valued without the benefit of rights under the 1993 Act, McHale followed (see paras 38-40 of judgment). (2) Section 14(3) of the Act required no particular formalities for a third party to become a participating tenant. Only two matters had to be established: election by a qualifying tenant of a flat in the specified premises to participate in the acquisition, and agreement on the part of all the existing participating tenants. Where a qualifying tenant notified the nominee purchaser of his election to participate, under s.14(4) the tenant would be regarded as a participating tenant. The deed of adherence was clearly an election to participate. Further, there had been agreement: it would have been surprising if X had felt entitled to give away part of the benefit of enfranchisement, namely the opportunity to sell new long leases of the additional flats without either sufficient prior authorisation of the participating tenants or their individual approval. Nothing in the participation agreement or deeds of adherence implied that the participating tenants had individually to have agreed to an election to participate. The additional parties had therefore been participating tenants (paras 76-82). (3) A standard valuation technique was to apply an appropriate relativity percentage to a flat's freehold vacant possession value in order to arrive at a value for the lease of that flat for the unexpired term required. There was little agreement over the adjustment appropriate for leases of different lengths or the most appropriate method of determining it. In the absence of better evidence, relativity was best established by doing the best one could with such transaction evidence as might be available and graphs of relativity, Nailrile Ltd v Earl Cadogan  2 E.G.L.R. 151 applied. The parties had agreed that, in the real world, with the benefit of the right to enfranchise under the Act, the short leases were worth 41.25 per cent of the freehold vacant possession value. It was necessary to determine the relativity percentage of those leases in the hypothetical no-Act world. Doing the best with the evidence available, the appropriate allowance to make for the benefit of the Act at 11.82 years unexpired was 20 per cent; applying that to the 41.25 per cent real-world relativity gave a no-Act relativity of 33 per cent (paras 83-85, 88, 92, 134-135, 150-151). (4) The Act did not prescribe a method by which to determine the amount the hypothetical purchaser would pay on the valuation date for the freehold interest. Accordingly, no rule of law prohibited a valuation approach incorporating a purchaser's margin. On the facts, however, it was unnecessary to allow for a margin. X had argued that the hypothetical purchaser would wish to hedge against the view a later purchaser at the short lease reversion date would take of the costs of acquiring the investment, and would wish to achieve a profit on a future sale. However, there was no statutory requirement to assume a further sale, and no justification for doing so. The tribunal had considered that the factors accounting for a margin were already accounted for in the deferment rate required for central London valuations in Earl Cadogan v Sportelli  1 E.G.L.R. 153. That was correct in general, although in exceptional cases the application of Sportelli could be loosened and a purchaser's margin applied, Sportelli considered (paras 185, 194-208). (5) X's appeal succeeded on the relativity issue. The enfranchisement price would be £20,823,592 (paras 209-213).