England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE COLCHESTER COUNTY COURT
(HIS HONOUR JUDGE NICHOLAS BRANDT)

		Royal Courts of Justice Strand London, WC2 Thursday, 10th October 2002

Thursday, 10th October 2002

1. LORD JUSTICE MANCE: This is a renewed application for permission to appeal, after refusal by the judge below and by a single judge of this court, against a decision dated 18th July 2002 of His Honour Judge Nicholas Brandt whereby he declared that the notice served by the claimants on 1st December 2000 is a valid notice pursuant to the Leasehold Reform Housing and Urban Development Act 1993, section 33. I will come back in a moment to the question of whether that was an appropriate form in which to draw up the order.
2. The validity of the relevant notice, which was a notice to enfranchise under the 1993 Act, was challenged on two grounds, but the one which came before His Honour Judge Nicholas Brandt pursuant to a preliminary issue was the first, namely that it contained a price for enfranchisement by the tenants in respect of a property called Woodrolfe Park (apparently a large block of what were originally holiday flats and are now effectively retirement homes) which price was wholly unrealistic. That is a ground for challenge which is potentially open to a landlord in circumstances such as the present pursuant to this court's decision in Cadogan v Morris [1999] 1 EGLR 59, though it is acknowledged that it involves overcoming a high hurdle.
3. Unfortunately the applicant landlord failed to serve any counter notice under the 1993 Act so that the route of having the proper enfranchisement price assessed by a valuation tribunal is not open to her. That is: not open unless the present notice is set aside and she can effectively require the tenants to go through the procedure again, in which case no doubt she would on this occasion serve a counter notice. Unfortunately also, the legislation provides that the court is to make any order for enfranchisement on the basis of the price proposed by the tenant in circumstances such as the present, again, if the notice stands.
4. The present appeal relates, as I have said, only to the first of two discrete grounds on which the validity of the notice was challenged. The other, for the record, appears to have been related to the person by or on whose behalf the notice was served. That is an entirely separate point. It seems to me on the face of it that the order that I have just read as drawn was therefore inappropriate, since it contains an out and out declaration of validity, whereas there remains to be tried the second challenge to validity. On the face of it, this ought to be corrected and an application ought to be made to the court below for its correction under the slip rule, assuming that to be, in counsel's view, the appropriate route. I have not heard argument on that point, but that is what appears on the face of it.
5. The existence of the second ground also leads to a preliminary question regarding jurisdiction which counsel, who I understand to be new to the case, has diligently spotted. That is a point which arises under the Statutory Instrument made pursuant to the Access to Justice Act 1999, the Access to Justice Act 1999 (Destination of Appeals) Order 2000 -- that is SI 2000 No.1071. Counsel raises the question whether His Honour Judge Brandt's decision can be regarded as a final decision, meaning a decision of a court that would finally determine, subject to any possible appeal or detailed assessment of costs, "the entire proceedings", whichever way the court decided the issues before it. Depending on how one construes "the entire proceeding", it might be questionable, on the face of it, whether it was a final decision. If "the entire proceedings" meant the whole action, then it would not be; if they meant the whole question of validity of the notice, then it would not be; but if they mean the validity of the notice on the particular ground tried by the judge below, then they would be. Some possible indication of the right answer is found in the next sub-paragraph:

"(3) A decision of a court shall be treated as a final decision where it:

(a) is made at the conclusion of part of a hearing or trial which has been split into parts; and

(b) would, if made at the conclusion of that hearing or trial, be a final decision under paragraph 2(c)."

6. Again I think, purely as a matter of linguistics, it might be said that that does not conclude the position either. However, I have considered the leading authority in this area of Tanfern Ltd v Cameron Macdonald [2000] 1 WLR 1311 at paragraph 17 where Brooke LJ, giving the judgment of the court, said with reference to these paragraphs of the Order of 2000:

"This means that if a judge makes a final decision on any aspect of a claim, such as limitation, or on part of a claim which has been directed to be heard separately, this is a final decision within the meaning of this provision. Mr. Emerson told us that there was concern in some quarters that parts of a final decision might be subjected to one avenue of appeal and other parts might have a different avenue of appeal, but the language in article 1(3) appears to preclude this possibility."

In the light of that guidance it seems to me that a clear interpretation has been put on the 2000 Order which, I must say, is the interpretation which I would also have thought preferable.

7. What then of the merits of this application for permission to appeal? Is there a real prospect of success justifying permission?
8. The matter has been very exhaustively canvassed both in the submissions below, which I have read, and in the grounds and skeleton prepared for this application; and it must not be thought that I have not considered all the points there raised merely because I do not go into them now. Counsel herself has, in my judgment very realistically, confined herself to one particular aspect which she has accepted and submitted is the essence of this application, namely the aspect relating to the marriage value. I will, however, say some words on some other aspects.
9. The basis of the valuation exercise which is required under the statute and at which any notice must, in order to be valid, make at least a realistic stab -- if I may put the matter colloquially -- is set out in Schedule 6 to the 1993 Act. Paragraph 2 identifies the price payable by the nominee purchaser for the premises as the aggregate of:

"(a) the value of the freeholder's interest in the premises as determined in accordance with paragraph 3;

(b) the freeholder's share of the marriage value as determined in accordance with paragraph 4;

(c) any amount of compensation payable to the freeholder under paragraph 5."

10. It is only with (a) and (b) that one is in the present case concerned. As to (a), paragraph 3 provides that:

" ... the value of the freeholder's interest in the specified premises is the amount which at the valuation 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)..."

Certain assumptions are then set out. Assumption (c) is 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."

I should mention that there is among the points raised a suggestion that the tenant's valuer in this case took into account improvements which had not been carried out at the expense of the tenant or any predecessor in title but at the expense of the landlord. That affected the value he put on the premises. However, it seems to me that not only is that the sort of point which is unlikely to justify permission to appeal, but it is unlikely to have real financial significance because the difference in valuation of the market value arises not so much from the absolute figures put on the value of the freehold after enfranchisement and the property as it is now, but from the absence of any real difference in the tenant's valuer's view between the value of the freehold with vacant possession after enfranchisement and the combined value of the freeholder's and leaseholder's interests now. In other words, the tenant's valuer simply thought that there would be no increase in value resulting from enfranchisement; and that is a separate discrete point which arises quite independently of whatever he thought the absolute value of the property was now or after enfranchisement.

11. As to (b), the freeholder's share of the marriage value falls to be determined in accordance with paragraph 4, and the marriage value is there defined as:

" ... any increase in the aggregate value of the freehold and every intermediate leasehold interest in the specified premises, when regarded as being (in consequence of their being acquired by the nominee purchaser) interests under the control of the participating tenants, as compared with the aggregate value of those interests when held by the persons from whom they are to be so acquired, being an increase in value-

(a) which is attributable to the potential ability of the participating tenants, once those interests have been so acquired, to have new leases granted to them without payment of any premium and without restriction as to length of term, and

(b) which, if those interests were being sold to the nominee purchaser on the open market by willing sellers, the nominee purchaser would have to agree to share with the sellers in order to reach agreement as to price."

12. The difference between the valuations on each side can be demonstrated if one runs through the figures involved. As is apparent from what I have just said, the first figure payable is the current value of the freehold. For the moment the freeholder has an assured ground rental income of £1,100 per annum for 68 years, which is the term of the current leases. The other aspect of the value of the freehold is any reversionary value, i.e. any value attributable to the reversion which will only fall in after 68 years. The landlord capitalises the ground rental income of £1,100 per annum by taking a yield of 8% per annum, which on a compounded basis gives a capital value of £13,500. As to the reversionary value, the landlord takes the same yield figure in relation to a value of £3,848,000. That is a value arrived at by reference to a figure of £66,000 a flat for some 50 or 52 flats. The landlord's valuer gets a current figure of £16,000. Totalling those figure, therefore, the current value of the freehold interest is £29,500. The tenant's valuation takes (ultimately) a yield of 13% and so assumes that a purchaser would only be willing to pay £8,459 for the income stream of £1,100 per annum because the purchaser would be requiring a much higher yield. As to the reversionary value, the tenant's valuer starts from a much lower value of the flats, some £50,000 per flat, then reduces that to half that figure (because of what is said to be the effect of the security of tenure of the tenants after 68 years under Part 1 of the Landlord and Tenant Act 1964) and capitalises the resultant figure of £1,330,000 by reference to a 13% yield. On this basis he reaches a value in current terms, bearing mind the figure is postponed for 68 years, of only £323. That may seem a very remarkable figure on the face of it. The total current freehold value that the tenant's valuer arrives at is therefore only £8,782.
13. Moving to the other aspect of the sum payable to enfranchise -- that is the marriage value -- the landlord's valuer starts by concluding that the value per flat would increase after enfranchisement to £74,000. From that figure has to be deducted the current freehold value and the current leaseholder's value, those being the existing interests. The current freehold value is, as I have said, £29,500 on his valuation. The current leaseholder's interest is valued at £66,000 per flat, giving £3,432,000. The net marriage value is therefore the difference between the freehold value after enforcement of £74,000 per flat (that is £3,848,000 in total) and the value of the existing interest (that is £29,500 plus £3,432,000, which is £3,461,500) leaving a net marriage value of £386,500. Half of that is, of course, £193,250. If you add to that the sum payable for the current freehold value (£29,500), that brings you to £222,750.
14. Turning to the tenant's figure, as I have said, the tenant attributes only a very small increase to enfranchisement: indeed from the current value of £50,000 per flat to a post enfranchisement value of £50,500, a 1% increase in value. So the starting figure from which any deductions are made is, on the tenant's view, £2,525,012. I need not go into the £12.00. Then you deduct the current value of the freehold interest (£8,782). You further deduct the leaseholder's current interest at £50,000 per flat (£2,500,000), and the net marriage value is £16,230. Half of that is £8,115. If you add that to the current freehold value of £8,782 you get £16,897. The notice to enfranchise offered £16,000, which happened to be the figure arrived at in a previous valuation by the same tenant's valuer. No-one suggests that the difference between that and his ultimate figure is of any significance, nor could they.
15. When one analyses the reasons for the very substantial difference in figures, one sees that they boil down to this: the difference in yield, the deduction of value in respect of the supposed relevance of Part 1 of the Landlord and Tenant Act 1954 and the difference regarding marriage value. Undoubtedly the judge erred in his reasoning regarding security tenure, because he thought that there would be security of tenure after 68 years had expired. But it seems to me that the figure involved is so small on the tenant's valuer's figures that even if one added back the whole 50% which he deducted -- in fact he only deducted 40% on that score -- it makes no real difference. The £323 would increase at most to £646, unless one changes the yield figure. Even a substantial increase in the enfranchised value would make very little difference, it would appear, if the yield figure which the tenant's valuer took stands. As to that yield figure it is true that the tenant's valuer's first report took a figure for capitalised rental not of £8,459 but of £16,000. At that stage he was attributing a nil marriage value. So one might assume, on the face of it, that he had nearly doubled his yield figure, or rather increased it from 8% (which would give £16,000) to 13%. But matters are not so simple, because he was in fact at that stage, although wrongly, taking a larger rental value. He thought that the rental, which was in fact fixed at £1,100 for the remainder of the 68 year leases, was going to increase. So although he had to admit that he had introduced some increase in yield between reports, one cannot say that it was as substantial an increase as all that.
16. Further, counsel accepts, as I have said in my view realistically, that whatever adjustments might be made to the current freehold value, which is another way in which this aspect of the calculation might be increased (because it affects the reversion value), are not going substantially to add to the valuation. They are not going to add, at any rate, huge sums. Even if they added £10,000 that would seem to me only very questionably to be a basis for seeking permission to appeal, because only very questionably could it go to the realism of the notice.
17. One must bear in mind, mathematically, that every pound you add to the current freehold value by changing the yield figure has to come off the marriage value as to 50%. All these considerations combine to support what counsel accepted, that the essence of this matter relates to the marriage value; and all I need add to them is that, so far as the dispute about yield is concerned, I am unable to conclude that the landlord's tenant's valuer's yield is so obviously wrong that there is an arguable case for saying that the judge who heard the evidence was wrong in accepting it as a reasonable figure. Admittedly the judge may be thought to have put matters rather high when he suggested that an income stream of £1,100 a year was something no-one would buy. It seems to me it must have a capital value. The tenant's valuer was accepting that it had a capital value and was arguing about the appropriate yield. But, even if that were the basis for seeking permission on which counsel relied, which it is not, I do not think it would justify leave; it does not seem to have major financial consequences.
18. Turning to the real point, the essence of the matter lies in a complaint regarding the marriage value of which the tenant must pay half. Contrary to vigorous submissions made below and indeed, I think, in the skeleton for this application, a marriage value could plainly be nothing. That is contemplated by the use of the word "any" in Schedule 6, paragraph 4(2):

"The marriage value is any increase in value."

If one contemplates a 999-year lease, or even a 199 year lease, it is fairly obvious that the marriage value might be effectively nil, or very little. Here the valuer took 1%. Contrary also to the submissions made not by counsel before me but in the documentation prepared by previous counsel, there were arguments put forward by the tenant's valuer for attributing very little or no value to the marriage value. See, in particular, pages 31 to 32 in the bundle -- that is paragraphs 10.20 to 10.23 in the report dated 23rd January 2002. The judge, as I said, heard oral evidence which no doubt elaborated on that, as well as cross-examination.

19. Further, it is submitted that the judge misunderstood the position when he said that the startling difference between the two ultimate valuations here stems from the considerable difference in the respective valuations of the actual flats. But he went on to deal in detail with the defendant's expert Mr Thomas' evidence, saying in the first place:

"I entirely distrust comparison with premises in the more expensive parts of London. It is on such that he relies."

Those comparisons went just as much to the uplift in value on enfranchisement of about 11% or 12%, which Mr Thomas suggested, as to the absolute values. It seems to me that the judge's previous statement regarding the startling difference can be read as referring to the considerable difference in the respective valuations, that is before and after enfranchisement of the actual flats.

20. Looking at the judgment, I think it is fair to say that it would have been desirable for it to have been more fully reasoned with reference to the evidence. However, in spite of counsel's helpful submissions and despite such sympathy as one may have for the landlord (who has now under the existing law to accept what she regards as an unreal price, subject to her second objection to the notice) I have come to the conclusion that a sufficiently real prospect of success on appeal has not been established. I agree intuitively that it seems surprising that the value of the benefit of enfranchisement, particularly the marriage value, should be put as low as the tenant's valuer suggested. But it is not suggested that the valuation was not bona fide, and there seems to me no real prospect that this court would say that it was unrealistic in the extreme sense which would be required to come within the principle elaborated in Cadogan v Morris.
21. For those reasons, I refuse this renewed application for permission to appeal.
Order: Application refused.