Mountview Estates Plc v W8 Property Limited

This is an appeal from the First-tier Tribunal’s determination of the premium payable by the leaseholder for an extension of its lease under section 42 of the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”). The appellant was represented in the appeal by Mr Stan Gallagher and the respondent by Mr Piers Harrison, and I am grateful to them both.

Kensington Court Gardens is a substantial Victorian red brick mansion block built in the 1880s. Flat 9 (“the Flat”) is on the third floor. It is held under a 70-year lease (“the Lease”) granted in November 1960, and therefore has only a handful of years left to run. The immediate landlord is the appellant, and it holds a 999-year lease of property including Flat 9.

By clause 2(4) of the Lease the lessee covenanted at all times during the Lease” to keep the interior of the Flat including the central heating system and all additions thereto and the lessor’s fixtures and fittings therein in good tenantable repair”. By clause 2(5) the lessee covenanted to decorate the interior of the Flat in the last month of the term.

A notice under the 1993 Act seeking an extended lease was served by the then leaseholder on 13 March 2023, proposing a premium of £2,081,150. The respondent acquired the lease with the benefit of that notice on 23 March 2023 for £985,000. On 16 May 2023 the appellant served a counter-notice proposing a premium of £3,762,000.

An application was made to the FTT to determine the amount of the premium; one of the issues before the FTT, and the only one in issue in the appeal, was the freehold value of the Flat.

Chapter II of Part I of the 1993 Act enables certain leaseholders of flats to acquire a new lease for an extended term, subject to the payment of a premium. Schedule 13 to the 1993 Act makes provision for the determination of the premium. Where the amount of the premium is in dispute, the FTT has jurisdiction to determine it.

One of the ingredients in the calculation of the premium payable by the tenant is the freehold value of the flat with vacant possession. I gratefully adopt from Mr Harrison’s skeleton argument the following summary of the law about that valuation, Mr Gallagher having helpfully confirmed that he agreed with it.

Paragraph 3 of Schedule 13 of the 1993 Act sets out the principles for ascertaining the value of the freehold on the basis of certain assumptions. There is no express assumption as to the state of repair of the flat. Paragraph 3(4) is to the effect that the inclusion of the expressly stated assumptions at sub paragraph 3(2) 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 landlord might be expected to realise if sold on the posited basis.

It is well established in rent review cases that a tenant who has failed to comply with the repairing covenants in his lease cannot rely upon his own default so as to reduce the rent payable on review – see Handbook of Rent Review 4.1.4.2. The principle is based on the maxim that a party should not profit from its own wrong.

That principle has been applied in a different context in the enfranchisement sphere (Henley v Cohen [2013] L & TR 28 at paragraph 61) but there does not appear to be any authority on its application in relation to valuation under Schedule 6 or Schedule 13. Nor is the point addressed in practitioner texts. But the parties agree that the freehold value of the flat has to be ascertained on the assumption that the tenant has complied with its covenant to keep the flat in good tenantable repair.

That means that where the lease of a flat requires the tenant to repair it (or keep it in repair), for the purposes of a valuation under Schedule 13 of the 1993 Act it must be assumed that the Flat has been kept in repair in compliance with that covenant, whether or not that is in fact the case.

Both parties instructed valuers, Ms Jennifer Ellis FRICS for the appellant and Mr Kevin Ryan FRICS for the respondent. They very helpfully agreed the relevant comparables, all of them grand and spacious flats nearby, one of them number 10 Kensington Gardens next door to the Flat, but they disagreed as to how to adjust the comparable values. The outcome of that disagreement was that Ms Ellis put the freehold value of the flat at £4,095,980 and Mr Ryan at £3,562,860.

In her report Ms Ellis described the Flat as:

“in a terrible condition, in disrepair and uninhabitable. I was told it had not been occupied for more than 20 years, and it looked to me as though it had not been maintained for at least 20 years before that. To make it habitable, the Flat required re-wiring, re-plumbing, consequent re-plastering, renewal of all the landlord’s sanitary and kitchen fixtures and re-decoration.”

Ms Ellis did not say anything else about the physical condition of the flat; she did not say why it needed re-wiring or re-plumbing, nor why the bathroom and kitchen fittings needed replacing. She continued:

“4.4.3

In view of the disrepair … I do not value the Flat in its actual condition at the Valuation Date but I assume that the condition of the Flat accords with the repairing covenants in the Underlease so it was in good tenantable repair. As I must adjust the sale prices of the basket of comparable flats to that condition, I need to envisage just what ‘good tenantable repair’ means. …

4.4.7

Assuming the Flat is in good tenantable repair, a complete refurbishment is not a necessity. Importantly, the Flat is capable of immediate occupation by someone whose requirements accord with the location of the Block and the nature of the Flat ie someone who wants (and can afford) to occupy a flat of 2,380 ft sq located in the heart of Kensington, close to Kensington Gardens and Kensington Palace.

4.4.8

Being in good tenantable repair I envisage that the Flat was not newly refurbished but was not ‘tired’ or ‘in need of modernisation’. In creating my ‘picture’ of the Flat I assume that:

i.

The decorations are neutral, clean and tidy and no ‘touching up’ is required.

ii.

The electrical installation complies with up-to-date requirements. There is an adequate number of power outlets in suitable locations and suitable light fittings.

iii.

The kitchen is not of the highest quality but nor is it from a DIY chain. There are some basic in-built appliances.

iv.

The bathroom fittings are modern. There may not be a separate shower or double wash basins, but anyone would be happy to use the bathrooms and all facilities needed are there.

v.

Heating and hot water are supplied from an efficient boiler. There are radiators in all rooms.

vi.

Other landlord’s fitting (such as door furniture) are at least up to date, There are no fitted cupboards in the bedrooms.”

All but one of the comparable properties matched or exceeded Ms Ellis’ description set out above, with modern kitchens and bathrooms, reception rooms with recessed lighting and so on; Ms Ellis adjusted by £50 per sq ft the value of comparables which she felt to be in a better condition than she had described in paragraph 4.4.8 above, and applied a 5% deduction for those that were newly refurbished. She also made some deductions for the provision of bathrooms, and an agreed deduction for floor level, which are not relevant to the appeal. For 10 Kensington Gardens which was, like the Flat, unmodernised she made no adjustment.

Mr Ryan said that the Flat required “total and comprehensive refurbishment”. He said nothing else about its condition in his report although like Ms Ellis he provided photographs which depict an unfurnished flat which has obviously had no attention for many years. The FTT in its decision recorded that the valuers agreed that the Flat was uninhabitable, presumably because Mr Ryan agreed that in cross-examination. He deducted 17.5% from the value of the comparables for their condition, with the exception of 10 Kensington Court Gardens where he made no adjustment for condition.

Under a heading “The assumed condition of the Flat” the FTT said:

“60.

The hypothetical state of the Flat which the 1993 Act requires is that as let in November 1960. The repairs are to be carried out according to the original specification, unless regulatory controls have increased the specification required.”

The FTT then recorded Mr Harrison’s argument that a tenant who has covenanted to keep the flat in repair is not required to repair anything until something is broken. It is not a covenant to modernise, nor to update electrical equipment. The fact that something is old-fashioned, inefficient or unsuitable does not mean it is not in repair. The FTT summarised Ms Ellis’ views at her paragraph 4.4.8 (set out above), and her conclusion “that if the Flat was in repair in accordance with the obligations under the Lease, it would be in a condition similar to the condition of most of the comparables”.

The FTT concluded:

“74.

We prefer the approach of Mr Ryan to that of Ms Ellis. It is not right to compare the condition of the Flat as it ought to have [been] if in repair with the condition of the modernised comparables. We accept Mr Harrison’s arguments above.

75.

We do not agree with the approach set out in paragraph 4.4.8 of Ms Ellis’ report that one assumes that the decorations are neutral, clean and tidy and no touching up is required, or that the electrical installation complies with update requirements, or that the bathroom fittings are modern.

76.

We therefore prefer the figures of Mr Ryan.”

In granting permission to appeal that determination the FTT said that there was one issue, which it expressed as two questions:

“The sole issue is whether the Flat could have been in good tenantable repair even though uninhabitable. Was Ms Ellis correct in making no adjustment to the comparables?”

Mr Gallagher argued that it followed from the FTT’s decision to accept Mr Ryan’s approach to the comparables (making no adjustment to the similar flat next door and deducting 17.5% from the modernised flats) that the FTT thought that the Flat was in good tenantable repair in accordance with the tenant’s covenant, even though the FTT did not say that in terms. He argued that that was wrong; it followed as a matter of necessity from the experts’ agreement that the Flat was uninhabitable, that it was not in good tenantable repair. How could a Flat be “uninhabitable” and yet in repair? Accordingly, it had to be assumed to be in a condition that it was not in fact in – and as to what that condition would look like, Mr Gallagher endorsed Ms Ellis’ paragraph 4.4.8 as a “working summary” of good tenantable repair.

I asked Mr Gallagher if he accepted Mr Harrison’s summary of the law, set out by the FTT at its paragraph 67 as follows:

“(a)

No work is required under the general covenant to repair and keep in repair until there is damage or deterioration to the relevant item of plant or equipment which is the subject matter of the covenant (Woodfall 13.029).

(b)

There is therefore no need to assume a “modernised” condition. Unmodernised does not equate to a want of repair.

(c)

“Absent physical damage, the fact that the building suffers from defects in design or construction, or a lack of amenity, or that it is in some way inefficient, or that it is otherwise unsuitable for, or incapable of, beneficial occupation for its intended use, is irrelevant so far as liability under the covenant to repair is concerned.” (Dowding and Reynolds 8-05).

(d)

The fact that an item of plant is elderly or old-fashioned, or that it is less efficient when compared with its modern equivalent, or that the market would not regard it as suitable, is not, of itself, enough to bring a repair covenant into play (Dowding and Reynolds 13-04).”

Mr Gallagher very fairly agreed that that was a correct summary of the law. However, he argued for the additional principal that repair is location-sensitive. He argued that there is no universally applicable minimum standard of repair; we are here concerned with a repairing obligation that must be sensitive to the location and scale of the flat – hence, he said, the correctness of Ms Ellis’ picture of what good tenantable repair looks like. The standard must be higher than what would be expected in a more modest area. He acknowledged that the covenant to repair would not require the tenant to go beyond the 1960s specification for the property, subject to any changes in regulatory and safety requirements for gas and electricity; but what Ms Ellis described, he said, amounted to the “fairly basic” works required to put the flat into good tenantable repair having regard to its location.

Furthermore, he suggested that there must be an implied term in the lease that the flat must be kept fit for human habitation, which he acknowledged was a lower standard than being in good tenantable repair.

Mr Gallagher acknowledged that there was no evidence before the FTT that anything in the Flat was broken or non-functioning, and he accepted that a covenant to repair is not a covenant to decorate; but he argued that one can infer that there will have been damage to the decoration, such as chipped paint, and that appliances and other fixtures in the Flat must be out of repair after such long neglect. The tenant must be required by its covenant to remedy physical “damage or deterioration”.

Accordingly he argued that Ms Ellis’ approach to the comparables was correct; the condition required as a result of the tenant’s covenant required the actual condition of the Flat to be “uprated”, as he put it. The condition to be assumed was very similar to that of the comparable properties, hence Ms Ellis’ acceptance of the comparable properties with only the limited deductions set out in paragraph 15 above.

Looking at the FTT’s paragraphs 74 and 75, Mr Gallagher argued that if Ms Ellis’ paragraph 4.4.8 is accepted as a description of the condition in which the Flat must be assumed to be in, paragraph 74 cannot stand. Moreover, paragraph 75 does not explain why the FTT rejected Ms Ellis’ careful and nuanced evidence.

Mr Harrison in his skeleton argument started with the FTT’s two questions (paragraph 20 above) and suggested that the first issue does not arise because the FTT did not find that the Flat was in good tenantable repair. On the contrary it found that the Flat was uninhabitable, as the experts agreed. The FTT preferred the larger adjustments to the comparables put forward by Mr Ryan to the more modest ones proposed by Ms Ellis. Had the FTT found that the Flat was in repair there would have been no need for the FTT to refer to its “assumed condition” because no assumption would have been required.

Turning to the FTT’s preference for Mr Ryan’s adjustments, Mr Harrison stood by his analysis in the FTT: no work is required under a covenant to repair until there is damage to the relevant item of plant or equipment, The fact that something needs modernisation or is inefficient is irrelevant, as is the fact that the flat is unsuitable for occupation (see paragraph 23 above). Ms Ellis’ assessment of the work required was not properly evidenced, said Mr Harrison, as no evidence was led as to the state of the appliances; and it was unreliable because Ms Ellis conflated the standard of repair (i.e. the standard to which repairs need to be carried out once the existence of disrepair is shown) with the test for disrepair.

Mr Harrison pointed out that there is of course authority for the standard of repair required being location-sensitive, namely the Court of Appeal decision in Proudfoot v Hart (1890) 25 QBD 42, where Lord Esher MR said at page 52:

“the state of repair necessary for a house in Grosvenor Square would be wholly different from the state of repair necessary for a house in Spitalfields.”

But that is relevant to the standard to be achieved where repair is required. The fact remains that there is no obligation to repair anything that is not broken. Indeed, Ms Ellis’ list of requirements at her paragraph 4.4.8 include works which could only be improvements; and the details in the bundle of the various comparables (other than the flat next door, 10 Kensington Court Gardens) indicated a standard of modernisation far in excess of what is required by a covenant to repair. The condition Ms Ellis thought was to be assumed was a modernised flat, which was not correct.

Despite the FTT not having made an express finding that the Flat was in “good tenantable repair” it is clear to me that the FTT focussed, correctly, on that question; that can be seen from its paragraph 60 (see paragraph 17 above). The reasoning in its conclusion was, as Mr Gallagher put it, sparse; but in preferring Mr Ryan’s approach to the comparables the FTT must have taken the view that the Flat was in the condition required on the basis that the tenant’s covenant to repair had been performed.

So I do not understand Mr Harrison’s argument that the FTT did not decide that the Flat was in repair. That decision follows from its decision that the comparables must be adjusted in accordance with Mr Ryan’s approach, save for the one in similar condition where no adjustment was made, indicating that it too was in repair.

I agree with Mr Harrison that we have to start, not from the standard of repairs to be carried out if repairs are required, but from the law as to when repair is required. Mr Harrison’s analysis, set out at paragraph 22 above, was correct, as Mr Gallagher agreed. And there was no evidence whatsoever in either valuer’s report that anything was broken or that anything did not work. There is not even any evidence that the Flat was not fit for human habitation. It would not be a pleasant habitation, but there is no evidence that there was anything wrong with the water supply or the power supplies and no evidence that it could not be secured and indeed heated. I agree it could be inferred that the paintwork is probably chipped, but that is simply a matter of decoration, and the original parties to the lease chose to provide that the tenant was under no obligation to decorate until the last month of the term (paragraph 3 above).

Ms Ellis’s paragraph 4.4.8 might well depict what a purchaser might expect. But a covenant to repair, or to keep in repair or in good tenantable repair, does not require the tenant to decorate, however tired the decoration may have become. As Cave J put it in Proudfoot v Hart at first instance (at page 45 of the report)

“With regard to paper, as I have said before, I cannot see how in any case a man can be bound to put new paper on the walls simply because the old paper which was on at the time when he took the house, or which he has subsequently put on the walls, has become worn out.”

Nor does a repairing covenant require the tenant to provide up-to-date electrical equipment unless the old equipment is out of repair (as to which there is no evidence), nor to provide additional power points to meet modern expectations, nor to provide built-in appliances in the kitchen if the existing ones (as in this case) are not built-in. There is no requirement to provide modern bathroom fittings, nor an efficient boiler, nor to install radiators. Ms Ellis’ description might reflect the sort of standard that would be expected if, say, the boiler did not work and the tenant replaced it, or if the electrical equipment was out of order. But a tenant’s repairing covenant does not require the tenant to achieve any of the elements in paragraph 4.4.8 unless something is actually in disrepair, and the paragraph does not reflect the condition to be assumed for the purposes of valuation.

I appreciate that there may be something a bit counter-intuitive in saying that the Flat was uninhabitable but was in good tenantable repair. But a dwelling may be uninhabitable for many reasons. A major difficulty with Ms Ellis’ evidence is that she did not say why the Flat was uninhabitable nor indeed exactly what she meant by uninhabitable. In the absence of any evidence that indicated that a repairing obligation had not been complied with the FTT was quite right to accept Mr Ryan’s position on the basis that the Flat was in good tenantable repair and that the comparables, other than 10 Kensington Court Gardens, needed to be adjusted to reflect the actual condition of the Flat.

The FTT’s approach was clearly correct, and in my judgment its explanation at paragraphs 74 and 75 of its reasons for preferring Mr Ryan’s approach was sufficient. Even if one were to take the view that that explanation was just too sparse, there would be no point in disturbing the FTT’s conclusion because it was so obviously correct.

The appeal fails, and the FTT’s determination of the freehold value, and therefore of the premium, stands.