If you have ever been involved in a collective enfranchisement application, either as a landlord or a participating tenant, then you will know that the most contentious issues is the price payable for the freehold interest. The price payable is based upon a statutory formula and calculated by expert enfranchisement surveyors.
Valuation is of course not an exact science but that is not helped in enfranchisement claims by legal arguments about valuation methodology, the rules that the surveyors should follow.
A recent case has helped clarify one point of contention between tenant’s surveyors and landlord’s surveyors. One of the constituent parts of the price paid by tenants when acquiring the freehold from their landlord is the marriage value, ie an amount of money to reflect the enhanced value of the merged freehold and leasehold interests.
The methodology for the calculation of this figure set out in Scheudle 6 of the Leasehold Reform Housing and Urban Development Act 1993 and requires the surveyor to value both the landlord’s and tenant’s interests based upon valuation assumptions. Schedule 6 states that the landlord’s interest should be valued ignoring the tenants’ rights to enfranchise or to claim a new lease. However, it does not state that the same assumption is to apply when valuing the tenants’ interests. Whether this is the correct approach for calculating the marriage value was questioned in the recent case of McHale and another v Cadogan and others decided by the Court of Appeal in December 2010.
The tenants were claiming their interests should be valued on the basis of reality, rather than on the assumption that they had no rights. While I am not an expert in the black art of enfranchisement valuation (that being the domain of my surveying cousins), my understanding is that the marriage value of the tenants interests will be higher when the right to extend their leases or to buy their freehold is disregarded. The tenants contention in this case was that this was not fair as it created a notional profit for a landlord because in the marketplace the tenants do in fact have these rights and so the calculkation of marriage value was entirely artificial.
The Court of Appeal decided not to interfere in the plain wording of the legislation, deciding that if Parliament had meant the “no Act rights” disregard to apply then it would have included that provision in the relevant section. Not an earthshattering decision but shows that when dealing with six figure premiums (in this case the premium was in excess of £700,000) then there is considerable scope for argument and often a commercial incentive to seek a judicial determination.