IN THE HIGH COURT OF JUSTICE
ON APPEAL FROM THE LANDS TRIBUNAL
Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
LADY JUSTICE ARDEN
LORD JUSTICE ELIAS
and
LORD JUSTICE PITCHFORD
Between :
(1) MR HENRY McHALE & ANR (2) SLOANE GARDENS MANAGEMENT CO LTD | Appellants |
- and - | |
THE RIGHT HONOURABLE CHARLES GERALD JOHN EARL CADOGAN - and - (1) BETUL ERKMAN Intervener (2) CADOGAN SQUARE LIMITED | Respondent |
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Mr Henry McHale (Appearing as litigant in person and for the second appellant)
Mr Anthony Radevsky (instructed by Messrs Pemberton Greenish) for the Respondent
Mr Stephen Jourdan QC (instructed by Messrs Forsters) for the Interveners
Hearing date: 4 October 2010
Judgment
Lady Justice Arden:
The subject matter of this appeal is the interpretation of the requirements in schedule 6 of the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”) for determining the marriage value which forms part of the price payable by qualifying tenants for the freehold interest on exercise of the right of collective enfranchisement. This judgment represents the last stage in the appeal brought by the appellants, who are the nominee purchaser and an intermediate lessee. The first part of the appeal was determined by another constitution this court (Rix, Rimer and Patten LJJ) by order dated 21 January 2010.
The precise point at issue is whether the tenants’ interests, like the freehold interest, should, for the purpose of ascertaining the marriage value, be valued on what has been called a “no Act rights assumption”, that is, on the basis that the rights to enfranchisement under the 1993 Act do not exist. There is a specific direction that this assumption should be made when determining the value of the freeholder’s interest (schedule 6, paragraph 3(1)(b) of the 1993 Act) but the same schedule is silent as to whether the same assumption should be made when valuing the tenants’ interests.
Background
10 Sloane Gardens, London SW1 is a building divided into six flats of which the Respondent, the Rt Hon Earl Cadogan, is the freeholder. The first appellant, Mr McHale, is the intermediate landlord under a headlease. The second appellant, 10 Sloane Gardens Management Co Ltd, is the nominee purchaser for the purposes of the collective enfranchisement of the property under s 24 of the 1993 Act. I refer to the two Appellants as simply “Mr McHale”.
Five of the six flats are underlet on long leases. By an initial notice served on 20 July 2004, three of the tenants sought to acquire the freehold of the premises under the 1993 Act. On 15 December 2004 the freeholder applied to the Leasehold Valuation Tribunal (“the LVT”) to determine the enfranchisement price under schedule 6 to the 1993 Act. The terms of the transfer, other than price, were agreed on 16 May 2006, which thereby became the valuation date for the purposes of schedule 6.
In its decision dated 17 January 2007, the LVT determined the enfranchisement price in the sum of £770,940. In the course of its decision, the LVT rejected the submissions of Mr McHale that the tenants’ interests should not be valued on the no Act rights assumption. It held that the marriage value should be obtained by applying the same assumptions to the current lease value as are required to be made to the freehold interest under paragraph 3(1) of schedule 6 to the 1993 Act, that is, as unaffected by rights given by the 1993 Act.
On 7 February 2007 Mr McHale submitted an application for leave to appeal which the LVT granted on 23 February 2007. On 30 October 2008 the Lands Tribunal (George Bartlett QC, President, and PR Francis FRICS) (“the LT”) dismissed the appeal, but adjusted the enfranchisement price because of a small mathematical error to £780,405.
On the no Act rights assumption, the LT held :
“17. We accept Mr Radevsky’s submission. What paragraph 4(2) provides for is the assessment, as marriage value, of any increase in the aggregate value of the freehold and intermediate leasehold interests, and subparagraphs (3) and (4) provide for the application and the paragraph 3(1) assumptions in determining the value of those interests. The provisions do not prescribe the format in which the marriage value is to be determined, and it says nothing about the valuation of the participating tenants’ current leasehold interests. But it is clear that the value of those current interests need [sic] to be brought into the calculation for the purpose of determining what increase in value of the freeholder’s and intermediate leaseholder’s interest will result from a marriage of those interests. For the purpose of valuing the freeholder’s and intermediate leaseholders’ interests it must be assumed that Chapters I and II confer no right to acquire any interest in the demised premises.
18. It follows that that assumption must be made throughout the valuation of those interests and where, as part of that valuation, the value of the participating tenants’ current interests is brought into the reckoning, it must apply there. It is moreover implicit in paragraph 4(2)(a) which refers to the increase in value attributable to the potential ability of the participating tenants, post-enfranchisement, to have new leases granted to them that the before valuation must be done on the basis that they have no such rights. In any event it would, in our view, be contrary to the scheme of the provisions to do otherwise than to assume throughout the valuation that Chapter I and II rights do not exist in relation to the premises. The Act provides for the acquisition of the freeholder’s and intermediate leaseholder’s interests, and so they must be compensated for what they have lost by reason of the provisions of the Act that enable the acquisition to take place. To import into the valuation of the interests before acquisition values that derive from the provisions of the Act itself would be inconsistent with objective and there could be no justification for it. The LVT was undoubtedly right, in our judgment, in approaching the matter on the basis that the paragraph 3(1)(b) assumption was to be applied to the value of the participating tenants’ current interest in determining marriage value.”
Statutory framework
For simplicity I omit (where possible) references to the intermediate interest as they do not affect the analysis. I set out the relevant provisions as amended by the Commonhold and Leasehold Reform Act 2002 as it has not been suggested that those amendments have any material effect for the purposes of this appeal.
Paragraph 2(1) of schedule 6 provides that the price payable by the participating tenants for the freehold interest on collective enfranchisement comprises three elements which are to be ascertained by separate consecutive paragraphs of the same schedule:
“(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, and
(c) any amount of compensation payable to the freeholder under paragraph 5.”
As we are concerned with the freeholder’s share of the marriage value, paragraph 4 of schedule 6 applies. The valuation exercise to be performed is identified in sub-paragraph (2):
“Freeholder’s share of marriage value
4 (1) The marriage value is the amount referred to in sub-paragraph (2), and the freeholder's share of the marriage value is 50 per cent of that amount.
(2) Subject to sub-paragraph (2A), the marriage value is any increase in the aggregate value of the freehold and every intermediate 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.
(2A) Where at the relevant date the unexpired term of the lease held by any of those participating members exceeds eighty years, any increase in the value of the freehold or any intermediate leasehold interest in the specified premises which is attributable to his potential ability to have a new lease granted to him as mentioned in sub-paragraph (2)(a) is to be ignored.
(3) For the purposes of sub-paragraph (2) the value of the freehold or any intermediate leasehold interest in the specified premises when held by the person from whom it is to be acquired by the nominee purchaser and its value when acquired by the nominee purchaser —
(a) shall be determined on the same basis as the value of the interest is determined for the purposes of paragraph 2(1)(b) …; and
(b) shall be so determined as at the relevant date .
(4) Accordingly, in so determining the value of an interest when acquired by the nominee purchaser —
(a) the same assumptions shall be made under paragraph 3(1) … as are to be made under that provision in determining the value of the interest when held by the person from whom it is to be acquired by the nominee purchaser ; and
(b) any merger or other circumstances affecting the interest on its acquisition by the nominee purchaser shall be disregarded.”
As paragraph 4(2) demonstrates, the rationale behind the sharing of marriage value is that on collective enfranchisement the participating tenants obtain the right to grant 999 year leases to themselves without any ground rent, restrictive covenants, premium or forfeiture clause and the right to vacant possession on termination of that lease. Moreover, the tenant under an existing lease is likely to pay more for this right than any other purchaser and so the value of the freehold interest to the tenant is more than the market value of that interest and that of the tenant’s interest taken together. This gives rise to the marriage value which is required to be shared between the owner of the freehold interest and the participating tenants.
To carry out the valuation direction in paragraph 4(2) both the freehold interest and the tenants’ interests need to be valued. There are no special directions about the valuation of the tenants’ interests, but full directions as to the way in which the freehold interest is to be valued.
Paragraph 4(4)(a) thus incorporates or borrows three specific assumptions in paragraph 3, which so far as material provide:
“Value of freeholder’s interest
3 (1) Subject to the provisions of this paragraph, the value of the freeholder's interest in the specified premises is the amount which at the relevant date that interest might be expected to realise if sold on the open market by a willing seller (with no person who falls with sub-paragraph (1A) buying or seeking to buy) on the following assumptions—
(a) on the assumption that the vendor is selling for an estate in fee simple—
(i) subject to any leases subject to which the freeholder's interest in the premises is to be acquired by the nominee purchaser , but
(ii) subject also to any intermediate or other leasehold interests in the premises which are to be acquired by the nominee purchaser ;
(b) [ the “no Act rights” assumption] on the assumption that this Chapter and Chapter II confer no right to acquire any interest in the specified premises or to acquire any new lease (except that this shall not preclude the taking into account of a notice given under section 42 with respect to a flat contained in the specified premises where it is given by a person other than a participating tenant ) ;
(c) [the “improvements” disregard] on the assumption 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;…
(5) [the so-called “anti-increase disregard”] The value of the freeholder's interest in the specified premises shall not be increased by reason of—
(a) any transaction which—
(i) is entered into on or after the date of the passing of this Act (otherwise than in pursuance of a contract entered into before that date), and
(ii) involves the creation or transfer of an interest superior to (whether or not preceding) any interest held by a qualifying tenant of a flat contained in the specified premises; or
(b) any alteration on or after that date of the terms on which any such superior interest is held…” (italicised words in brackets added)
The issue in this case is whether the no Act rights assumption ought also to be made when valuing the tenants’ interest for the purpose of carrying out the valuation exercise in paragraph 4(2).
Schedule 6 is to be contrasted with schedule 13. It concerns the premium payable in respect of the grant of a new lease. Although schedule 13 has always contained the trio of assumptions – the no Act rights assumption, an improvements disregard and an anti-increase direction – to be applied when valuing the landlord’s interest (see paragraph 3), schedule 13 did not, as originally enacted, provide for the same trio to be applied when valuing the tenants’ existing lease for the purpose of the marriage value calculation. Schedule 13 was amended by the Housing Act 1996 by the insertion of a new paragraph 4B, which provides for the tenant’s interest to be valued on the no Act rights assumption. Changes were also made to schedule 6 by the Housing Act 1996, but those changes did not include the introduction of a provision applying the trio of assumptions to the valuation of the tenants’ existing interests for the purpose of ascertaining marriage value.
Schedule 13 as amended by the Housing Act 1996 contains the same structuring of the separate components of the premium payable by the tenant on obtaining a lease extension. It provides in material part:
“Premium payable by tenant
2 The premium payable by the tenant in respect of the grant of the new lease shall be the aggregate of—
(a) the diminution in value of the landlord's interest in the tenant's flat as determined in accordance with paragraph 3,
(b) the landlord's share of the marriage value as determined in accordance with paragraph 4, and
(c) any amount of compensation payable to the landlord under paragraph 5.
Diminution in value of landlord’s interest
3 (1) The diminution in value of the landlord's interest is the difference between—
(a) the value of the landlord's interest in the tenant's flat prior to the grant of the new lease; and
(b) the value of his interest in the flat once the new lease is granted.
(2) Subject to the provisions of this paragraph, the value of any such interest of the landlord as is mentioned in sub-paragraph (1)(a) or (b) is the amount which at [the relevant date] that interest might be expected to realise if sold on the open market by a willing seller (with [neither the tenant nor any owner of an intermediate leasehold interest] buying or seeking to buy) on the following assumptions—
(a) on the assumption that the vendor is selling for an estate in fee simple or (as the case may be) such other interest as is held by the landlord, subject to the relevant lease and any intermediate leasehold interests;
(b) on the assumption that Chapter I and this Chapter confer no right to acquire any interest in any premises containing the tenant's flat or to acquire any new lease;
(c) on the assumption that any increase in the value of the flat 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; and
(d) on the assumption that (subject to paragraph (b)) the vendor is selling with and subject to the rights and burdens with and subject to which the relevant lease has effect or (as the case may be) is to be granted.
(3) In sub-paragraph (2) “the relevant lease” means either the tenant's existing lease or the new lease, depending on whether the valuation is for the purposes of paragraph (a) or paragraph (b) of sub-paragraph (1).
(4) It is hereby declared that the fact that sub-paragraph (2) requires assumptions to be made as to the matters specified in paragraphs (a) to (d) of that sub-paragraph does not preclude the making of assumptions as to other matters where those assumptions are appropriate for determining the amount which at [the relevant date] any such interest of the landlord as is mentioned in sub-paragraph (1)(a) or (b) might be expected to realise if sold as mentioned in sub-paragraph (2).
(5) In determining any such amount there shall be made such deduction (if any) in respect of any defect in title as on a sale of that interest on the open market might be expected to be allowed between a willing seller and a willing buyer.
(6) The value of any such interest of the landlord as is mentioned in sub-paragraph (1)(a) or (b) shall not be increased by reason of—
(a) any transaction which—
(i) is entered into on or after the date of the passing of this Act (otherwise than in pursuance of a contract entered into before that date), and
(ii) involves the creation or transfer of an interest superior to (whether or not preceding) any interest held by the tenant; or
(b) any alteration on or after that date of the terms on which any such superior interest is held.
Landlord’s share of marriage value
4. (1) The marriage value is the amount referred to in sub-paragraph (2), and the landlord's share of the marriage value is 50 per cent of that amount.
(2) Subject to sub-paragraph (2A), the marriage value is the difference between the following amounts, namely—
(a) the aggregate of—
(i) the value of the interest of the tenant under his existing lease,
(ii) the value of the landlord's interest in the tenant's flat prior to the grant of the new lease, and
(iii) the values prior to the grant of that lease of all intermediate leasehold interests (if any); and
(b) the aggregate of—
(i) the value of the interest to be held by the tenant under the new lease,
(ii) the value of the landlord's interest in the tenant's flat once the new lease is granted, and
(iii) the values of all intermediate leasehold interests (if any) once that lease is granted.
(2A) Where at the relevant date the unexpired term of the tenant's existing lease exceeds eighty years, the marriage value shall be taken to be nil.
(3) For the purposes of sub-paragraph (2)—
(a) the value of the interest of the tenant under his existing lease shall be determined in accordance with paragraph 4A;
(aa) the value of the interest to be held by the tenant under the new lease shall be determined in accordance with paragraph 4B;
(b) the value of any such interest of the landlord as is mentioned in paragraph (a) or paragraph (b) of sub-paragraph (2) is the amount determined for the purposes of paragraph 3(1)(a) or paragraph 3(1)(b) (as the case may be); and
(c) the value of any intermediate leasehold interest shall be determined in accordance with paragraph 8, and shall be so determined as at the relevant date.
4A (1) Subject to the provisions of this paragraph, the value of the interest of the tenant under the existing lease is the amount which at [the relevant date] that interest might be expected to realise if sold on the open market by a willing seller (with neither the landlord nor any owner of an intermediate leasehold interest buying or seeking to buy) on the following assumptions—
(a) on the assumption that the vendor is selling such interest as is held by the tenant subject to any interest inferior to the interest of the tenant;
(b) on the assumption that Chapter I and this Chapter confer no right to acquire any interest in any premises containing the tenant's flat or to acquire any new lease;
(c) on the assumption that any increase in the value of the flat 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; and
(d) on the assumption that (subject to paragraph (b)) the vendor is selling with and subject to the rights and burdens with and subject to which any interest inferior to the existing lease of the tenant has effect.
(2) It is hereby declared that the fact that sub-paragraph (1) requires assumptions to be made in relation to particular matters does not preclude the making of assumptions as to other matters where those assumptions are appropriate for determining the amount which at [the relevant date] the interest of the tenant under his existing lease might be expected to realise if sold as mentioned in that sub-paragraph.
(3) In determining any such amount there shall be made such deduction (if any) in respect of any defect in title as on a sale of that interest on the open market might be expected to be allowed between a willing seller and a willing buyer.
(4) Subject to sub-paragraph (5), the value of the interest of the tenant under his existing lease shall not be increased by reason of—
(a) any transaction which—
(i) is entered into after 19th January 1996, and
(ii) involves the creation or transfer of an interest inferior to the tenant's existing lease; or
(b) any alteration after that date of the terms on which any such inferior interest is held.
(5) Sub-paragraph (4) shall not apply to any transaction which falls within paragraph (a) of that sub-paragraph if—
(a) the transaction is entered into in pursuance of a contract entered into on or before the date mentioned in that paragraph; and
(b) the amount of the premium payable by the tenant in respect of the grant of the new lease was determined on or before that date either by agreement or by a leasehold valuation tribunal under this Chapter.
4B (1) Subject to the provisions of this paragraph, the value of the interest to be held by the tenant under the new lease is the amount which at the relevant date that interest (assuming it to have been granted to him at that date) might be expected to realise if sold on the open market by a willing seller (with the owner of any interest superior to the interest of the tenant not buying or seeking to buy) on the following assumptions—
(a) on the assumption that the vendor is selling such interest as is to be held by the tenant under the new lease subject to the inferior interests to which the tenant's existing lease is subject at the relevant date;
(b) on the assumption that Chapter I and this Chapter confer no right to acquire any interest in any premises containing the tenant's flat or to acquire any new lease;
(c) on the assumption that there is to be disregarded any increase in the value of the flat which would fall to be disregarded under paragraph (c) of sub-paragraph (1) of paragraph 4A in valuing in accordance with that sub-paragraph the interest of the tenant under his existing lease; and
(d) on the assumption that (subject to paragraph (b)) the vendor is selling with and subject to the rights and burdens with and subject to which any interest inferior to the tenant's existing lease at the relevant date then has effect.
(2) It is hereby declared that the fact that sub-paragraph (1) requires assumptions to be made in relation to particular matters does not preclude the making of assumptions as to other matters where those assumptions are appropriate for determining the amount which at [the relevant date] the interest to be held by the tenant under the new lease might be expected to realise if sold as mentioned in that sub-paragraph.
(3) In determining any such amount there shall be made such deduction (if any) in respect of any defect in title as on a sale of that interest on the open market might be expected to be allowed between a willing seller and a willing buyer.
(4) Subject to sub-paragraph (5), the value of the interest to be held by the tenant under the new lease shall not be decreased by reason of—
(a) any transaction which—
(i) is entered into after 19th January 1996, and
(ii) involves the creation or transfer of an interest inferior to the tenant's existing lease; or
(b) any alteration after that date of the terms on which any such inferior interest is held.
(5) Sub-paragraph (4) shall not apply to any transaction which falls within paragraph (a) of that sub-paragraph if—
(a) the transaction is entered into in pursuance of a contract entered into on or before the date mentioned in that paragraph; and
(b) the amount of the premium payable by the tenant in respect of the grant of the new lease was determined on or before that date either by agreement or by a leasehold valuation tribunal under this Chapter.”
Submissions
Not surprisingly, both sides have approached this appeal on the basis that it is a simple question of statutory construction on which they come to opposite results.
Opening the appeal and supporting the position of the appellants, Mr Stephen Jourdan QC addressed us on behalf of the interveners, who are tenants of another property where the same point is being taken before the LT. The disparity in the provisions of schedule 6 and schedule 13 constitutes the kernel of his case. Mr Jourdan submits that the natural meaning of paragraph 4 of schedule 6, when read on its own and in the context of the 1993 Act (particularly schedule 13), is that the no Act rights assumption and improvements disregard only apply in valuing the freehold interest, and not to the valuation of the tenants’ interest. Accordingly marriage value is calculated under schedule 6 on a different basis from that applying when a tenant of a high value house buys the freehold (see s 9 of the Leasehold Reform Act 1967) or a tenant of a flat acquires a new lease in it and schedule 13 applies. He submits that that result is not surprising or unfair and is not a reason to depart from the natural meaning of schedule 6 paragraph 4. The reasoning in paragraph 18 of the LT decision is wrong as there is nothing implicit in paragraph 4(2)(a) (setting out what I have called the valuation exercise) leading to valuation of the existing leasehold interests on a no Act basis.
Amplifying his submissions on schedule 13, Mr Jourdan further submits that, when schedule 6 is compared with schedule 13, it is clear that the trio of assumptions, which are to be used under schedule 13, are not to be used under schedule 6, paragraph 4 when valuing the tenants’ interests. Schedules 6 and schedule 13 form part of the same statute and should be read as one. Further paragraph 4 (4) (b) provides that in determining the value of an interest when acquired by the nominee purchaser "any merger or other circumstances affecting the interest of its acquisition by the nominee purchaser shall be disregarded." So, existing leases of the participating tenants are treated as remaining in existence throughout the valuation process, as on his submission the LT correctly held in 45 Holdings Ltd v Grosvenor (Mayfair) Estate [2009] UKUT 234 (LC) at [24(2)].
Mr Jourdan also invokes the principle of valuation that valuation should take place on the basis of reality in the absence of contrary indication (Laura Investment Co Ltd v Havering LBC [1992] 1 EGLR 156)). Accordingly he submits that the tenants’ interests should be valued on the basis of reality in the absence of contrary indication in the statute. There is no market for the tenants’ interests on the no Act rights basis.
He submits that the leading text of Hague on Leasehold Enfranchisement was persuaded to change its mind on this issue, and that its first thoughts were better than its second thoughts. In the third edition (1999) at page 408, the editors (Mr Radevsky and Mr Damian Greenish) expressed the view that the no Act rights assumption did not apply to the valuation of leasehold interests under collective enfranchisement. In the fourth edition (2003) they noted that it was arguable that, in valuing the existing leases of the participating tenants, the relevant disregards were not to be taken into account. The editors stated that the main reason for this argument was that, in the case of a new lease claim, the 1993 Act makes specific provision that the disregards are to apply in the valuation of the leaseholder’s interest as to that of the freeholder (schedule 13, paragraphs 3, 4A(1) and 4B(1)). However, in a supplement issued in 2005, the authors stated that they had reconsidered their criticisms:
“The authors have reconsidered their criticism of the drafting, as set out in the third paragraph on p.440. It is considered that the fact that the increase in price which represents the marriage value must be based on the same assumptions as under paragraph 3(1) makes it clear that the relevant disregards apply throughout the calculation. The corresponding provision in Sch. 13 is distinguishable insofar as the definition of marriage value therein contains a specific direction to value the interest of the tenant under the existing lease. In consequence, it is necessary to set out the assumptions to be made in calculating that value.”
Further matters were referred to by both Counsel, such as passages in Hansard and decisions of the LVT, which, while often helpful, appear on the point to go either way. We were also referred to the Leasehold Reform Act 1967, which made different valuation assumptions, but detailed reference to that Act is not essential for the purposes of my conclusions. It is clear that Parliament can enact that different assumptions be made for the valuation of marriage value at different times and for different purposes. Both sides also referred to Earl Cadogan v Pitts and Sportelli [2010] 1 AC 226, but that case does not deal with the assumptions to be made when determining the marriage value under schedule 6 and thus cannot help us resolve the issues in this case.
Mr Jourdan, an experienced practitioner in the field of landlord and tenant, submits that it is possible that Parliament intended that there should not be consistency in this field. Marriage value, he submits, is a “political hot potato” and there are different policy considerations which apply to collective enfranchisement from those applying to lease extension. This could be, as he put it, a case of swings and roundabouts. Parliament may simply have wished to be more generous in this context to the tenant. The issue in this case was known to be a problem in 2002 when the Commonhold and Leasehold Reform Act 2002 made certain immaterial amendments to schedule 6, but Parliament decided not to deal with it. Strictly, I think he meant that Parliament failed or omitted to deal with it.
Mr Jourdan submits that it does not help to refer to the principle of compulsory purchase valuation that when valuing land taken compulsorily any increase in value due to the scheme for which the land was taken should be disregarded (the Pointe Gourde principle).
Mr McHale made helpful submissions to us, primarily based on fairness. The purpose of the marriage value valuation is to value the increase attributable to the right of the participating tenants to grant themselves new leases. That can only be done by reference to the market value of their new 999 year leases compared with the market value of their existing leases. There is no express provision requiring paragraph 3(1)(b) of schedule 6 to be taken into account. He submits the marriage value is profit. It has to be a real profit, not a profit increased by some notional amount. It is unfair to hold that there is some notional element. The leaseholder has already paid for that when he bought his interest. The 1993 Act was intended to be for the benefit of tenants with long leases but it cannot be for the benefit of tenants if the respondent is right. The freeholder should not obtain the benefit of an increase in value by reference to a market which does not exist in reality. Otherwise the freeholder obtains a windfall. A tenant should only have to share a real profit. On Mr McHale’s submission, paragraph 4(2)(b) refers to a real profit. The trio of assumptions in paragraph 3 are thus inapposite when valuing the tenants’ interest. If it was intended that the statutory rights should be disregarded, express words would have made this clear.
Mr Antony Radevsky, for Earl Cadogan, also contends that this is a simple question of statutory interpretation which can be answered by reference only to schedule 6. He starts with paragraph 4(2) of schedule 6. This defines marriage value by reference to the increase in value of the freehold interest when it comes under the control of participating tenants on collective enfranchisement as compared with its value when held by the freeholder. That increase in value is specifically determined to be an increase in value attributable to the ability of the participating tenants to issue new leases to themselves in circumstances where, if the transaction had indeed taken place on the open market, the increase in value would have had to have been divided between the seller and the purchaser to persuade the seller to sell. The valuation exercise in paragraph 4 (2) cannot properly be carried out unless the no Act rights assumption is made. Only then is the whole of the value of the tenants’ ability to issue themselves with new leases ascertained in relation to the participating tenants’ interests as well as the freeholder interest. The 1993 Act does not direct that it is the existing interests of the tenants which have to be valued. Thus the LT was entirely correct in paragraph 18 of its decision.
Mr Radevsky supports his argument by reference to the "the Pointe Gourde principle" that the value of an asset being compulsorily acquired is not increased by the fact that it is subject to acquisition. He submits by analogy that the 1993 Act reflects this principle. When this assumption applies, the principle of actual reality does not apply. Taking the improvements disregard, schedule 6 is indeed a case of swings and roundabouts since normally the landlord would get the benefit of improvements when the lease came to an end. The improvements disregard does not normally have a great effect on value but it is for the benefit of the tenant.
Moreover, as a subsidiary point, he submits that, if he is right, the valuation would be carried out on consistent principles. It is the normal expectation, in the absence of some explicit indication to the contrary, that where different interests in the same property fall to be valued as part of the same valuation exercise they will be valued on a consistent basis (see Fattal v John Lyon Free Grammar School [2005] 1 WLR 803 at [18]). Schedule 13 provides that in carrying out the marriage value calculation the same assumptions must be applied to the landlord’s interest and the tenant’s interest but that schedule is structured in a different way. It has a different statutory history since schedule 6 replicates the structure of the valuation provisions in s 9 of the Leasehold Reform Act 1967.
Conclusions
In my judgment we should focus on the issue of the true interpretation of schedule 6 of the 1993 Act as it stands rather than schedule 6 read with schedule 13. Schedule 13 is of course as part of the same statute and the normal principle of statutory interpretation is, as Mr Jourdan and Mr McHale both submit, that, in the absence of contrary indication, an Act of Parliament must be read as a whole. In other words, in the absence of contrary indication, where Parliament enacts a single statute, it must be taken to intend to enact a single consistently-expressed code of provisions. The central argument on this appeal is that, because under schedule 13 Parliament has specifically provided (by amendment) that the no Act rights assumption will apply to the valuation of the tenant’s interest, that assumption cannot apply to the valuation of the tenants’ interests under schedule 6 because schedule 6 makes no provision for the same specific assumption.
Schedule 13 was the subject of substantial amendment in 1996. The normal principle of statutory interpretation described above can still apply to provisions introduced into a statute by later amendment (see for example, Bennion, Statutory Interpretation (5th edition) at page 290). It is then the statute as amended which is to be read as a consistent whole from the effective date of amendment.
This principle of statutory interpretation can, however, be excluded by the context, such as when it is clear that two sets of provisions operate independently and in different circumstances or have different statutory forbears. It follows that we should not start the process of interpreting schedule 6 on the basis that an assumption which is expressly stated in schedule 13 does not apply unless we have first examined schedule 6. To take schedule 13 into account at the first stage would in my judgment be to put the cart before the horse. This is confirmed by the fact that that schedule 13 is dealing with a similar valuation exercise but it is not one which has any link with any valuation actually performed under schedule 6. Moreover the statutory directions in schedule 13 are different. In particular, schedule 13 paragraph 4 starts from a valuation of the tenant’s existing lease, which necessarily carries with it statutory rights, unless they are excluded by some other provision, as indeed is the case under paragraph 4(3)(a) and 4A(b). Thus schedule 13 is structured in an entirely different way. It is perfectly possible in such circumstances and without creating absurdity for Parliament to use different statutory language in one schedule from that in another, and to do so without enacting a substantially different effect.
So the starting point must be schedule 6 and, within schedule 6, the description of the valuation exercise described in paragraph 4(2). What has to be valued is not an item of existing property but the increase in value of two items of property taken together, namely the freeholder’s interest, valued on the basis of (inter alia) the no Act rights assumption, and the participating tenants’ interests. These two items together form a single package which has to be valued on two different bases. We know that the second basis is that spelt out in paragraph 4(2)(a) and (b), and it involves a determination of the element in the increase in value following collective enfranchisement which is attributable to the potential ability of the participating tenants to grant new leases to themselves and which, if there had been a transaction in the open market, would have to have been divided through a process of negotiation between the seller and the purchaser. The first element of value is clearly intended to give a comparable figure before enfranchisement. The market may very well discount the prospect of enfranchisement in the values of the two interests to be valued, in which case the comparison on the basis of market values may be without much meaning. However that may be, Parliament has specifically excluded the prospect of enfranchisement from the valuation of the freehold interest by incorporating paragraph 3. In order to produce a consistent valuation, the second element in that package of property must be valued in the same way. Otherwise Parliament's obvious purpose of identifying the marriage value on a principled basis would be thwarted.
Reference has been made to the policy reasons for particular bases of valuation in relation to marriage values. If the basis turns out to have a result which is more generous to a party than it needed to be, that is not a matter with which we can be concerned. The stronger principle in the process of statutory interpretation is the application of a presumption that Parliament intended to act in a principled and consistent way. On this interpretation, the valuation of the interests of the freeholder and the participating tenants will have achieved internal consistency. Moreover, the result would be to achieve consistency with the approach in schedule 13. We have not had full submissions about the Pointe Gourde principle, but, on the face of it, it is a logical principle and so the point can validly be made that an additional, if minor, merit of this interpretation of schedule 6 is that it achieves consistency with that principle as well. It is the same point as that made by the LT in the third and fourth sentences of paragraph 18 of its decision. Further, the presence of artificial assumptions necessarily displaces the presumption that the valuation is to be conducted on the basis of reality. It is clearly a generous result to the freeholder, but it has to be borne in mind that he only obtains 50% of the marriage value.
There is the further point made by the LT that the element of increase attributable to the potential ability of the tenants to grant themselves new leases cannot be fully achieved without valuing the participating tenants’ interests on the basis of a no Act rights assumption. I agree with this point, taken, as the LT took it, with the point that, unless the contrary intention is indicated, Parliament is presumed to have intended to achieve a valuation which is internally consistent.
Mr McHale submits that to read schedule 6 as requiring a valuation of the tenants’ interests on the no Act rights basis is unfair because the tenants have already paid for their rights when they acquired their interests. The difficulty with that argument is that paragraph 4(2) is clearly introducing a price which is not the actual value of any item that anyone could obtain in the market because it is referring to a transaction which is taking place under statutory compulsion so far as the freeholder is concerned and not in the open market. Parliament was clearly trying to strike the balance being freeholder and the tenants: that is apparent from the provision that freeholder and the participating tenants should share the marriage value. If that was something for which the tenant paid in the market when he acquired his leasehold interest it was not a payment made to the freeholder. He could not have obtained the freehold interest in the open market. I accordingly reject Mr McHale's argument on this point.
I do not consider that this conclusion is undermined by the fact that paragraph 4(4)(b) of schedule 6 does not refer to the valuation of the existing leases on the basis of a no Act rights assumption because this provision is for the purpose of valuing the interest to be acquired by the nominee purchaser which does not form part of the package to which I have referred.
In the circumstances I would dismiss this appeal.
Lord Justice Elias:
I agree.
Lord Justice Pitchford
I also agree.