This article may also be viewed in the Landlord and Tenant Review, Volume 11, Issue 6 November/December 2007.

In Stephen Pitts and Yue Wang v. Earl Cadogan [LRA/79/2006] a number of preliminary issues were determined by the Lands Tribunal on 23rd March 2007 in an appeal from the London Leasehold Valuation Tribunal (the “LVT”) who had determined an enfranchisement price of £1,342,895. The issues were the deferment rate that the LVT determined at 4.5%, whether this included hope value, the subsequent freehold price to be paid and whether the Lands Tribunal (the Tribunal) could determine a price higher than that determined by the LVT – that is, a price higher than that the landlord had originally contended at the LVT.

The leaseholders, the appellants , were granted leave to appeal on the issue of the deferment rate as that was already before the Tribunal in the case of Cadogan v. Sportelli [2006] RVR 382. That decision was handed down on 15 September 2006 when the deferment rate was determined at 4.75% for houses and 5% for flats. Hope value was not to be awarded in the case of flats (as it is excluded by the Leasehold Reform, Housing and Urban Development Act 1993 (the “1993 Act”)) but where allowed under the Leasehold Reform Act 1967 (the “1967 Act”), it was determined to be a sum added to the reversionary value before calculating the marriage value.

Prior to Sportelli, Arbib v. Earl Cadogan [2005] 3 EGLR 139 determined the deferment rate to be applied as 4.75% for flats and 4.5% for houses. The Tribunal in the present case felt that it was implicit in Arbib that the deferment rate reflected any hope value. The President of the Tribunal, George Bartlett QC, referred to paragraph 7 of the Sportelli decision where it was said: “In Arbib the Tribunal allowed for any hope value by taking account of it in the deferment rate.”

The LVT had determined that the Tribunal in Arbib expressed the view that each case was to be considered individually and on its own merits and as such, a standard deferment rate should not be applied. Accordingly, it set the deferment rate at 4.5%. The Tribunal stated that it was not explicit that hope value was reflected in the deferment rate but inferred from the evidence of the landlord’s chartered surveyor and the absence of a contrary view by the tenants. The Tribunal felt that the deferment rate may have been lower than it would otherwise have been if hope value had been excluded. It also stated that the LVT may have “had in mind” a deferment rate that included the reflection of hope value. The Tribunal gave permission to the landlord to submit that allowance be made for hope value in the freehold purchase price. The Tribunal refused to proceed to determine whether or not Sportelli decided that hope value might be included in s. 9(1A) and s. 9(1C) (of the 1967 Act) enfranchisements. Instead, it would be determined as a preliminary issue following further directions.

The first issue to be decided was whether the landlord could argue for an additional sum to be added to the reversionary value notwithstanding that leave to appeal was only granted on the issue of the deferment rate. Cadogan was given permission to argue this point because the Tribunal agreed that Sportelli had determined that this was the appropriate method of calculating hope value and not excluded by the wording of the 1967 Act; and that in Arbib it had been ruled that the deferment rate reflected hope value.

The second preliminary issue and arguably the most important for practitioners was the landlord’s contention that it was open to it to argue for a higher price than that determined by the LVT. In it’s submission, the landlord referred to s. 175(4) of the 2002 Act and to the Tribunal’s decision in Arrowdell Ltd. V. Coniston Court (Hove) Ltd. [2007] RVR 39. The landlord attempted to have the price increased even though it accepted the LVT’s decision in its reply to the lessees’ statement of case in the present appeal. The landlord went further by stating, in its reply, that the lessees intended to withdraw their appeal if Sportelli determined a deferment rate below 4.5%. It amended its reply to include an intention to seek a higher price.

In reaching its conclusion, the Tribunal rejected the landlord’s contention that it is entitled to seek a price higher than not only that determined by the LVT but also the amount proposed by the landlord before the LVT. The Tribunal ruled it has the same powers available to an LVT - s. 175(4) of the Commonhold and Leasehold Reform Act 2002 (the “2002 Act”) - but cannot, under s. 21 of the 1967 Act, determine a price higher than that proposed by the landlord. Furthermore, in an inter partes dispute, the dispute must be limited by the prices sought by the parties.

A criticism voiced by the Tribunal was that the landlord, having relied on its valuer’s professional advice (that the overall price included hope value), should now make submissions for an increase in hope value, thus ignoring its valuer’s professional judgment. Having said that, there have been a handful of cases before various LVTs that have determined prices that were either above the price sought by the landlord or below that contended by lessee or nominee purchaser. This decision should iron out what must now be seen as anomalies.

But the all-important effect of the decision in the present case is that practitioners should get their sums right as the judgment in the present case demonstrates that a second bite of the cherry will not be permitted. Most valuers will be able to offer a range of values so problems should not arise. However, those practitioners acting for lessees should beware of the effects of a price that is too low – the notice can be declared invalid if the price stated in the notice is ‘unrealistic’ (Mount Cook Land Limited v. Rosen [2003] 1 EGLR 75 and Cadogan v. Morris [1999] 1 EGLR 59)). There is also the possibility , perhaps distant , that under paragraph 10 of Schedule 12 to the 2002 Act the LVT can impose an order for costs of up to £500 against a party who , in asking too much or offering too little, it feels has acted “frivolously, vexatiously, abusively, disruptively or otherwise unreasonably in connection with the proceedings”.

Although no tribunal can bind another, one of the roles of the Tribunal is to offer guidance to LVTs. Following the decision in Sportelli, it is abundantly clear that LVTs have refused to deviate from the Tribunal’s strong indication that all LVTs fall in line with its conclusions. There have been one or two slight deviations where the deferment rate has been a little above 5% (for flats) but these are a rarity. It would be fair to say that future Tribunal decisions will reflect the decision in the present case. Indeed, on 2nd October 2007, the Tribunal in Chelsea Properties Limited v. Earl Cadogan and Cadogan Estates Limited (LRA/69/2006) upheld the principle that a landlord may not be permitted to contend for a price higher than that sought in the LVT but went further and stated that neither can the tenant seek a price lower than that contended in the LVT. However, so long as the overall price does not step over these parameters, adjustments of the component parts to a valuation will be permitted.