England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		Wednesday, 28 June 2006

THE DEPUTY JUDGE:

Introduction

1. This is the hearing of an inquiry as to damages occasioned by the conversion of a share transfer form and share certificate relating to 100 shares in Maycrown Developments Limited ("Maycrown"). As at 1 November 1996, these amounted to a 10 per cent shareholding in Maycrown. There have been two previous trials: (1) a trial on liability in which Etherton J gave judgment for the claimant and by order dated 17 May 2002, directed an inquiry as to damages; (2) a trial of preliminary issues in the inquiry in which Laddie J gave judgment on 18 November 2004. Laddie J ruled that damages were to be assessed on the inquiry on the basis of a permanent deprivation of the 100 shares. He also ruled that the date at which damages were to be assessed was 1 November 1996 and that the recoverable loss was to be the benefit (if any) which Circle Trade Inc ("Circle") would have obtained from the headlease of a residential property at 55/57 Melbury Road, London W14 ("the property").
2. On this hearing, two questions arise: (1) did the Landlord and Tenant Act 1987 (as amended) prevent Circle from obtaining any benefit from the head lease; (2) if not, what benefit would Circle have obtained from the head lease?

The Inquiry

3. Helpful written opening and closing submissions were provided by counsel on both sides. Oral evidence was heard from three witnesses on 26 June 2006. At the conclusion of the argument on 27 June 2006, I announced that the claimant was entitled to succeed on the inquiry to the extent of £39,950 for reasons which I would give on 28 June 2006. These are my reasons.

The witnesses

4. Mr David Akerob gave brief oral evidence. He was an honest witness. The other witnesses were expert valuers, Mr Eric Shapiro and Mr Anthony Ford.

Mr Shapiro

5. Mr Shapiro was an extremely impressive witness. His report was fair, authoritative and well-reasoned. He plainly had a considerable grasp of the facts and issues in the inquiry and has much experience. Under cross-examination he appeared anxious to assist the Court. He made concessions where he thought they were justified. He was, to my mind, an ideal expert witness.

Mr Ford

6. Mr Ford's report was less satisfactory. He accepted that it had been prepared in a hurry and that in places it was short on detailed explanation. Whilst Mr Ford was plainly trying to assist the court, I found his evidence to be, in general terms, less impressive than that of Mr Shapiro.
7. In these circumstances, in considering the valuation issues which arise, I am inclined as a matter of general approach to attach more weight to the evidence of Mr Shapiro than that of Mr Ford. Of course, that does not mean, as Mr Thom QC accepted, that my general preference may not need to give way in relation to the merits of any particular issue. As will be seen, in some respects I have not accepted the views of Mr Shapiro in their entirety.

The Landlord and Tenant Act 1987 (as amended) ("the 1987 Act").

8. The 1987 Act was amended by Schedule 13, Housing Act 1988. By 1 November 1996 it had also been amended by the Housing Act 1996, which amendments came into force on 1 October 1996: see SI 1996/2212 Article 2(2).

Part I of the 1967 Act.

9. Section 1(2) of the 1967 Act provides that Part I applies to premises if: (a) they consist of the whole or part of a building; (b) they contain two or more flats held by "qualifying tenants"; and (c) the number of flats held by such tenants exceeds 50 per cent of the total number of flats contained in the premises. Accordingly, Part I would only apply if, on the relevant date (ie, 1 November 1996) more than 50 per cent of the flats were occupied by "qualifying tenants".

"Qualifying Tenants"

10. Section 3 of the 1987 Act (as amended) reads:

"(1) Subject to the following provisions of this section, a person is, for the purposes of this Part a qualifying tenant of a flat if he is the tenant of a flat under a tenancy other than -

(a) a protected shorthold tenancy as defined in section 52 of the Housing Act 1980;

(b) a tenancy to which Part II of the Landlord and Tenant Act 1954 (Business Tenancies) applies;

(c) a tenancy terminable on the cessation of his employment; or

(d) an assured tenancy or assured agricultural occupancy within the meaning of Part I of the Housing Act 1988.

(2) A person is not to be regarded as being a qualifying tenant of any flat contained in any particular premises consisting of the whole or part of a building if, by virtue of one or more tenancies, none of which falls within paragraphs (a) to (d) of subsection (1), he is the tenant not only of the flat in question but also of at least two other flats contained in those premises.

(3) For the purposes of subsection (2), any tenant of a flat contained in the premises in question who is a body corporate, should be treated as the tenant of any other flat so contained and let to an associated company.

(4) A tenant of a flat whose landlord is a qualifying tenant of that flat, is not to be regarded as being a qualifying tenant of that flat." [Quote unchecked]

11. Thus, in order for the 1987 Act to apply to the property, it is necessary to determine how many of the eight flats were let to qualifying tenants on 1 November 1996 and how many were not.
12. In the light of the applicable statutory provisions, it is common ground that five of the eight flats in the property were occupied by qualifying tenants and so over 50 per cent of the flats were so occupied. Part I of the 1987 Act accordingly applied to the premises.

Qualifying Majority

13. Section 18A of the 1987 Act defines the requisite majority of qualifying tenants as "qualifying tenants of constituent flats with more than 50 per cent of the available votes". "Available votes" are equal to the total number of constituent flats let to qualifying tenants on the relevant date: see section 18A(3). So there is one vote per flat. The constituent flats are the flats let to qualifying tenants at the time when the right is triggered: see sections 5(1) and 11(1).
14. Circle had two votes. Mr Akerob says, and I accept, that Circle would have voted against the exercise of rights of first refusal for the reasons given in paragraph 7 of his third witness statement.
15. Each of the other three qualifying tenants had one vote. Because section 18A of the 1987 Act, defines the requisite majority of qualifying tenants as "qualifying tenants of constituent flats with more than 50 per cent of the available votes", only a vote by all three other tenants could have defeated Circle's two votes. In other words, all three other tenants had to combine for Circle to lose the head lease. Only one flat had to abstain for Circle to get it.
16. There is no evidence as to the position of two of the other three tenants. That leaves Peninsula Enterprises Inc ("Peninsula") which was the tenant of Flat 4. Peninsula was controlled by Mr Caspi, on whose behalf Circle held 200 out of its 300 shares in Maycrown. Flat 4 had been charged by Peninsula to the first defendant ("Mirelis") who had apparently obtained a possession order against Peninsula which had defaulted on its obligations under its lease.
17. Mr Thom QC submitted that Peninsula would not have voted for the exercise of rights of first refusal for the following reasons.

(1) Mirelis wanted the transaction to go through;

(2) It seems plain that Peninsula would not have been willing or able to lay out money on the purchase of the headlease when it could not keep up with its existing obligations;

(3) It is very unlikely that Peninsula would have wanted to vote adversely to Mirelis' interests while in such a vulnerable position.

18. I find this reasoning compelling.
19. In these circumstances, I am satisfied that Peninsula would not have voted for the exercise of rights of first refusal, or at any event would have abstained. In either event, Circle could get benefit from the headlease.
20. Having decided the threshold issue of whether the 1987 Act (as amended) prevented Circle from obtaining any benefit from the headlease in favour of the claimant, I now turn to the alleged benefits relied upon.

The Alleged Benefits

21. The claimant relies on three heads of claim. These are: (1) the roof terrace claim; (2) the notional rent claim; and (3) the leasehold extension/ enfranchisement claim. A further claim (rent increase on a sub-letting of Flat 6) was not pursued. I deal with each of the three claims below.

Opportunity to build a roof terrace

22. Circle's flat, Flat 6, occupies the top floor and gallery of the property. As such, there is scope for the creation of a terrace on the flat roof surrounding the gallery part of the flat. The claimant's case is that, if Circle owned the headlease, it would have been possible for Circle to have created a roof terrace and that this would have increased the value of Flat 6. This claim is for the increased value of the flat, less the cost of creating the roof terrace, which comprises building costs, surveyor's fees, legal costs and VAT. The claim is for £31,400.
23. The experts were agreed that the correct way to value this benefit was as follows: (1) to establish the value of the flat; (2) to determine the gross enhancement by applying an uplift percentage; and (3) to deduct costs. Mr Shapiro and Mr Ford agreed the area of the flat and were very close on the rate per square foot. The difference between them lay in Mr Shapiro's uplift of 12.5 per cent to account for what he regarded as the superiority of Flat 6 over other flats at the property, such as Flats 2 and 3.
24. The following points are material and, in my judgment, justify Mr Shapiro's approach.

(1) The accommodation in Flat 6 is effectively on one floor only, with only a nominal amount of accommodation on the gallery above, whereas the accommodation in Flats 2 and 3 is spread over three fours, including the lower ground floor.

(2) Flat 6 has the advantage of the lift opening directly into the flat, but the level of natural lighting is poor because the flat is located within the third floor roof space. Only the reception room and the principal bedroom suite have good natural lighting.

(3) Flat 6 has two garages as opposed to one garage in the case of Flats 2 and 3, and also an independent staff flat.

(4) The extra garage was a major factor.

I therefore accept Mr Shapiro's figure of £792,000.

25. As to the gross enhancement, there is, to my mind, real force in Mr Shapiro's comments about ambience. Being "at the top" of the building has a special feel. There would clearly be a more open feel about the roof terrace compared to the enclosed balcony and the ability to stroll around three sides of the roof and have the evening sun, even standing, is a real benefit. I therefore agree with Mr Shapiro's view that the extension of a roof terrace would have increased the capital value of Flat 6 by 10 per cent.
26. As to costs, Mr Shapiro allowed a total of £20,500, inclusive of VAT for construction, supervision and legal fees. Mr Ford allowed a total of £22,375. This is too high on the licence fees, because Circle would not need to pay lawyers to deal with itself. This reduces Mr Ford's figure by £587.50. In addition, Mr Shapiro allowed separately for the Illchester Estates' legal fees, so, as Mr Thom submits, to compare like with like, the better course is to take that figure out of Mr Ford's global costs figure and deduct it separately. That would reduce Mr Ford's figure at this stage to £21,300. Very roughly, splitting the difference, the deduction for all costs including construction, except for Illchester's premium and costs, amounts to £20,900.
27. I accept Mr Shapiro's analysis and evidence that the Illchester premium would have been £26,400 and Illchester's costs £587.50. Deducting these matters, one arrives at the sum of £31,400 which is claimed on this inquiry.

Notional rent on the porter's flat.

28. It is common ground that Maycrown was charging in the service charges paid by the flat owners, and receiving, a notional rent for the flat occupied by the resident caretaker. It is claimed that a buyer of the headlease would reckon this as an income stream derived out of the headlease, and would therefore allow an element in his bid for this. Accordingly, if Circle had acquired the headlease in 1996, it could have continued Maycrown's previous practice and charged such a rent.
29. After the decision in Agravil Investments v Corner in 1975, (unreported) 3 October 1975, it was a generally held view that a notional rent for accommodation occupied by a porter or caretaker would usually be recoverable under a service charge: see, for example, Lewison (now Lewison J) Drafting Business Leases, Oyez 1980 at page 90. And in Lloyds Bank v Bowker Orford [1992] EGLR 44, Mr Neuberger QC (now Neuberger LJ) held that the landlord was entitled to recover a due proportion of the notional rent of the caretaker's flat.
30. Mr Shapiro confirmed that as at 1996, the market would have expected a notional rent to be chargeable and I accept his evidence. Accordingly, if, as at 1 November 1996 the market, or even an optimistic section of the market, would have regarded the ability to charge a notional rent as an incident of the headlease, then any bid would have been increased to reflect this, and this would follow through into increased value.
31. The experts agreed that if the value of the notional rent was chargeable, it was £60,000 in the case of Mr Shapiro or £48,000 in the case of Mr Ford. To my mind, the safe course in the circumstances is to take a yield of 9 per cent. This produces an end figure of £54,000.

Opportunity to benefit from leasehold extension/enfranchisement.

32. The Leasehold Reform and Urban Redevelopment Act 1993 granted the right to certain tenants to extend their leases individually and to enfranchise, ie, buy in the freehold and any intervening interests, collectively. If Circle had had the headlease and if any tenant had applied for an extended lease, then, it is said, Circle would have been entitled to a share of the premium for the extended lease, which would have been granted at a peppercorn rent. Circle would have remained liable for the ground rent under the headlease. Thus the benefit to Circle under this head would consist of the value of the possible premiums for extension, less the capitalised rental deficit arising from the difference between the peppercorn rent and the ground rent formerly payable.
33. The position, agreed by the experts, is as follows:

(1) on lease extensions (new leases) a share of marriage value would be payable without any notional rent on the porter's flat. This is because marriage value would be apportioned between the freeholder and the head leaseholder, and for this purpose account is taken of the loss for reduction of the underlease rent to a peppercorn. The effect will be greater when the reviewed ground rent (.5 per cent of capital value) comes into effect in March 2008, because the ground rents will increase sharply;

(2) On block enfranchisement, there would be no share of marriage value if there was no notional rent on the porter's flat;

(3) On lease extensions, a share of marriage value would also be payable if there was a notional rent on the porter's flat;

(4) On block enfranchisement there would be a share of marriage value payable if there was a notional rent on the porter's flat;

(5) So if a notional rent was payable, the head lessee would get a payment if there was either an individual lease extension or enfranchisement;

(6) If no notional rent is payable, the head lessee only gets a payment on lease extension and gets nothing in the event of block enfranchisement.

34. I have already found that a notional rent was payable in the circumstances of this case.
35. In his report, Mr Shapiro set out detailed calculations for the lease extension payments which could have been expected from Flat 6 as at 1 November 1996. He then used a broad brush multiplication to reach a total figure of £291,000 and a "hope" value of 10 per cent of that figure.
36. I accept Mr Shapiro's approach, but I think that a 10 per cent "hope" value is too great. To my mind, a 5 per cent figure is the appropriate, ie, fairer and more realistic one in the circumstances of this case. The amount that the claimant can recover under this head is £14,550.

The results of the Inquiry

37. The claimant is entitled to recover £31,400 in respect of the roof terrace claim, £54,000 in respect of the notional rent claim, and £14,550 in respect of the opportunity to benefit from the leasehold extension/enfranchisement claim. These total £99,999. From this figure it is common ground that £59,990 (I have rounded this up to £60,000) needs to be deducted as the agreed price of the headlease. The claimant is accordingly entitled to recover £39,950.
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