Fattal & Anor v Keepers & Governors of the Possessions Revenues & Goods of the Free Grammar School of John Lyon

This appeal raises questions of construction on section 9(1A)(d) of the Leasehold Reform Act 1967 (“the 1967 Act”), a provision recently considered by the House of Lords, though in relation to a different question, in Shalson v Keepers and Governors of the Free Grammar School of John Lyon [2004] 1 AC 802 (“Shalson”).

The present case, like Shalson, is concerned with a house and premises in Hamilton Terrace, London NW8, in this case number 81 (“the property”), of which the respondents (“the landlords”) are the freehold owners. The enfranchisement price payable by the tenants, Mr and Mrs Fattal, for the freehold interest in the property was determined by a decision of the Lands Tribunal (Mr PR Francis FRICS) dated 14^th January, 2004, on an appeal by Mr and Mrs Fattal against a decision of the London Leasehold Valuation Tribunal (“the LVT”) dated 12^th February 2002. With the permission of this court, Mr and Mrs Fattal appeal against the decision of the Lands Tribunal.

Mr and Mrs Fattal are tenants under two leases executed in 1927 and 1928 respectively, each for a different part of the property and each for a term of 80 years expiring on 28^th September 2007, at fixed annual ground rents of £50 and £5 respectively. Nothing turns on the fact that there are two leases and not one. Under each of them the tenants are permitted to carry out improvements to the property with the landlords’ consent, not to be unreasonably withheld.

In 1927 the property comprised a gross internal area of 3,834 square feet. At that time it was a four bedroom house with no bathroom or garage and only basic services. Between 1927 and 1993 various extensions and improvements were effected and made by the tenants for the time being, but they were, for the most part, demolished and removed in order to carry out the far more extensive works carried out by Mr and Mrs Fattal after they had acquired the leases in January 1993. Those works comprised the addition of, first, a new second floor over the original house, secondly, an extension on lower ground, upper ground and first floors, thirdly, a swimming pool complex linked to the main house and, fourthly, two garages (one on each side of the main house) and an in and out forecourt. By 2002 the property had seven bedrooms and seven bathrooms with a gross internal area of 7,041 square feet, or 9,192 square feet including the swimming pool complex and the adjacent linking covered way.

Mr and Mrs Fattal did not begin to occupy the property as their residence until May 1997. On 31^st August 2000 (“the valuation date”) they duly served notice under Part 1 of the 1967 Act of their desire to have the freehold. The effect of the notice was to give rise to a statutory contract for the purchase of the freehold, subject to the leases, at a price to be agreed or, in default, determined by the LVT as at the valuation date.

The parties having been unable to agree the price, the matter was referred to the LVT who determined it at £2,468,985. On Mr and Mrs Fattal’s appeal to the Lands Tribunal the price was reduced by £527,330 to £1,941,655. Pursuant to Rule 50(4) of the Lands Tribunal Rules 1996, which provides that, where an amount determined by the Lands Tribunal is dependent upon its decision on a point of law, it must ascertain and state in its decision any alternative amount which it would have determined if it had come to a different decision on the point of law, the member stated that, if he had accepted the first or second basis of valuation put forward by Mr and Mrs Fattal, he would have determined a price of £1,376,855, alternatively of £1,765,155, which would have resulted in a further reduction of £564,800, alternatively of £176,500. It is clear from these figures that the appeal is of great importance to both sides.

In his decision (para 116) the member said that Mr and Mrs Fattal’s case raised two points of principle: first, whether development potential, including in particular, the value of any planning permission was to be left out of account in valuing the property; second, whether the value of the property should be assessed by taking its improved value and then deducting the value of tenant’s improvements.

Subsection (1A) of section 9 was inserted into the 1967 Act by the Housing Act 1974. It applies to houses of higher rateable values and thus to the property. It provides that the price payable “shall be the amount which at the [valuation date] the house and premises, if sold in the open market by a willing seller, might be expected to realise” on six assumptions. The only two of them to which reference has been made in the present case are (a) and (d). Assumption (d), which it was correctly observed in argument is in reality a direction to valuers, is in these terms:

“on the assumption that the price be diminished by the extent to which the value of the house and premises has been increased by any improvement carried out by the tenant or his predecessors in title at their own expense.”

In Shalson the question was whether the reconversion to a single undivided house of one which had previously been divided into five flats was an “improvement” within assumption (d). It was held that it was. That was a different question from any that arises here. But both Lord Hoffmann and Lord Millett made general observations about the assumption. At [2004] 1 AC, p809, Lord Hoffmann said:

“19…. What does it mean to say that the value of the house and premises has been increased by the improvement? In my opinion, it signifies a simple causal relationship; but for the improvement, the house and premises would have been worth less. The comparison is between the value of the house as it stands and what its value would have been if the improvement had not been made.

20.

The hypothetical house envisaged by this comparison is in my opinion one which has all the features of the real house, including its history, save for one: that the improvement in question had not been made…..”

At p814, Lord Millett said:

“40…. The ‘extent to which the value of the house and premises has been increased’ by an improvement is simply the difference between the value of the property with the improvement in question and the value of the property without it.”

On the basis of those observations each side accepts that a comparison must be made as at the valuation date between the value of the property in its improved state and the value it would have had if it had not been improved. The essential dispute is as to whether, in making the unimproved valuation, there should or should not be included an element for the potential to make improvements. The dispute can be illustrated by a hypothetical example put forward by Mr Driscoll QC on behalf of Mr and Mrs Fattal, in which the following assumptions are made: (A) the value of the improved property is £500,000; (B) the value of the unimproved property is £300,000; and (C) the value of the unimproved house with the potential to improve it is £350,000. The question is whether assumption (d) requires a comparison between (A) and (B), so that the diminution is £200,000, or between (A) and (C), so that it is £150,000. Mr Driscoll has argued for the former comparison and Mr Gaunt QC, on behalf of the landlords, for the latter.

The Lands Tribunal held that the latter comparison was correct. In para 119 of his decision, in deciding the first point in favour of the landlords, the member said:

“In its assumed unimproved state the house would have had the potential for improvement, and any planning permissions which would have been granted for such improvements would fall to be taken into account. The fact that planning permission had already been granted is plainly relevant. I do not accept the appellants’ argument that because the permissions had been implemented, they have to be ignored.”

On that basis he determined the unimproved freehold vacant possession value of the property to be £2.75m. After adjustments to take account of the 7.07 years of the terms which were still to run and adding in marriage value, he determined the price at £1,941,655. If he had decided the first point in favour of Mr and Mrs Fattal, the member would have determined the price at £1,376,855; see para 6 above.

Does assumption (d) require the value of the potential for improvement to be excluded from the valuation of the unimproved house? That, without doubt, is a question of law. But if there is no such requirement, the matter becomes one of valuation according to the statutory assumption. For much of the argument I was of the provisional view that such a requirement ought to be implied. But on reflection I have come to the conclusion that there is no legitimate basis on which such an implication can be made.

What assumption (d) requires is a calculation of the amount of the increase in value caused by the improvements. That necessarily involves a valuation of the property as it would have been on the valuation date if it had not been improved. Before the Lands Tribunal both valuers agreed that any potential for improvement would be included in the achieved sale prices of unimproved properties; in other words, that a valuation of an unimproved house and premises would include the value of any such potential. It follows that an increase in value caused by an actual improvement must be calculated as an excess over the unimproved valuation (including the value of the potential for improvement), notwithstanding that the potential is merged in or absorbed by the actual improvement. As the Lands Tribunal decided, the correct comparison is between (A) and (C) in Mr Driscoll’s example.

In essence, Mr and Mrs Fattal’s case on the first point, as advanced by Mr Driscoll, is that the policy behind the legislation is that, on exercising his statutory right to acquire the freehold of his own home, a tenant should not be required to pay a price for it which reflects the increase in its value attributable to improvements that he himself has carried out and paid for out of his own pocket. That case has been supported in several different ways, including a reliance on assumption (a), which requires it to be assumed that the landlord is selling for an estate in fee simple, subject to the tenancy, with the potential for development being owned, so it is said, by the tenant, who cannot have been intended to pay for something which is already his own or which at any rate has ceased to exist on the valuation date.

While I have felt the force of Mr and Mrs Fattal’s case, I do not think it is open to them on the true construction of assumption (d). That provision does not credit the tenant with the value of the relevant improvements, but only with the increase in value they have caused. That increase can only be calculated in the manner already stated.

It is important to understand how the potential for improvement was valued. Although Mr Gaunt thought that the methodology was perhaps unusual, the valuers were agreed that it should be valued as a percentage of the value of the improvements themselves. The landlords’ valuer said it should be 40%, but the Lands Tribunal accepted the view of Mr and Mrs Fattal’s valuer that it should be 25%. In the result Mr and Mrs Fattal were credited with 75% of the value of the improvements.

In his decision the member dealt with the second point as follows:

“120.

As to point 2, the argument was advanced by the appellants that the words ‘that the price be diminished’ required the valuer to start with the value of the house as improved, and then diminish it by the value of those improvements. The appellants said that their arguments on valuation methodology in this context had not previously been tested before the Tribunal or the courts, and in response to the question as to why it had not been, it was submitted that it was the subject of development value, that had only recently been included in enfranchisement valuations, that made it necessary for a precedent to be established. Just because a particular valuation practice had developed by convention over many years, the appellants said, did not make it right.

121.

The suggestion that there was a statutory obligation restricting the valuer in his analysis to this basis, thus preventing him from considering unimproved comparables, is plainly wrong. What the valuer has to establish in order to apply the provision in (d) is ‘what its value would have been if the improvement had not been made’ (see Lord Hoffmann at Shalson para 19 above). How that value is established is clearly a matter of valuation, and the valuer is not constrained by law to adopt a particular method in doing so. Indeed both Mr Buchanan and Mr Briant admitted they adopt either method (described in evidence as valuing from the top-down or from the bottom up) depending upon the circumstances, in enfranchisement valuations.

122.

It seems to me that the appellants are simply trying to force an interpretation of the wording of (d) that imposes a restriction on how a valuer arrives at the open market value of the house…..”

Mr Driscoll has submitted that the approach of the Lands Tribunal in valuing the property as if it had never been improved at all was erroneous. I reject that submission. Assumption (d) simply requires that the price be diminished by the extent stated. It does not impose any requirement that the house and premises shall be valued either from the top down or from the bottom up. The method adopted is a matter of valuation, not of law. Moreover, it appears that the method adopted here has been the standard method adopted by the Lands Tribunal ever since its decision in Norfolk v Trinity College, Cambridge (1976) 32 P&CR 147; see Hague on Leasehold Enfranchisement, 4^th ed. (2003), p 225:

“The manner in which the assumption is given effect is for the property to be valued (at all stages of the valuation – including the calculation of the marriage value) as if the improvements had not been made.”

On the footing that the Lands Tribunal’s decision on the first point was, as I have held, correct, Mr Driscoll raised a third point. He submitted, in the alternative, that the Lands Tribunal ought to have assumed, not only that the improvements had never been carried out, but also that the planning permissions which enabled them to be carried out had never been obtained. Mr Driscoll said that the member had incorrectly treated this third point as part and parcel of the first. Assuming that it is indeed a separate point, I would reject it. It being clear (see Shalson, para 18) that an improvement is a physical concept, I agree with Mr Gaunt that it is the increase in value caused by the physical works which has to be subtracted; the existence or availability of planning permission is not part of those works. By way of confirmation of this view, Mr Gaunt relied on the decision of Knox J in Railstore Ltd v Playdale Ltd [1988] 2 EGLR 153, where it was held that a rent review clause containing a direction to disregard any effect on rent of any improvements carried out by the tenant did not require the arbitrator to disregard the existence of a planning permission for the buildings which the tenant had built and was occupying.

I would dismiss this appeal.

I agree.

I also agree.