Probably the appeals of most concern to leaseholders and freeholders were those of Maybury and 27-29 Sloane Gardens (opposed by both Howard de Walden and Cadogan) against the Lands Tribunal's decision to reject market evidence in fixing the deferment rate.

The Court also considered the status of the Lands Tribunal and it's ability to bind other tribunals.

In addition the appeals concerned the Lands Tribunal's decision that hope value is to be excluded in the premium for collective enfranchisement or a lease extension under the 1993 Act.

Deferment Rate

The Court explained how the Lands Tribunal came to its decision regarding the deferment rate. The Tribunal was offered four models using financial market evidence. It came to the conclusion that only one of them would be appropriate. The model accepted used a basic formula - a risk free rate (based on gilts) of 2.25% minus a real growth rate of 2% plus a risk premium of 4.5% for houses and 4.75% for flats (owing to greater management problems). This led to a deferment rate for houses of 4.75% and for flats, 5%. Only one of the valuers supported the adoption of an analysis of market sales of long-term residential reversions.

The present appeal concerns the rejection of market evidence. Counsel for Maybury Court (henceforth referred to as Maybury) stressed the importance attached to comparable market evidence (Gallagher Estates v. Walker (1978) 28 P&CR 113, 117, 120-122 and Curtis v. London Rent Assessment Committee [1999] QB 92 at 115D - 117A0) and said that such evidence should not have been rejected altogether as the assessment of the risk premium in the methodology adopted was "little more than guesswork". Maybury claimed that the approach was irrational because it would lead to a freehold value without hope value being higher that one with hope value. It would have been possible to arrive at a deferment rate without hope value by stripping it out. Maybury claimed that the Tribunal had erred by failing to use the best evidence and that it was not rational to hold that a freehold reversion of a no-Act building would fetch a substantially higher price (nearly double) than a freehold reversion of a with-Act building. Cadogan and de Walden supported the Tribunal's findings and de Walden went further by asserting that the Tribunal limited itself when accepting the evidence it had before it.

The Court stated that the appeal could only succeed if, by it's reasoning, the Tribunal had erred in law and that this included irrationality and the failure to consider material evidence (Railtrack PLC v. Guinness Ltd [2003] 1 EGLR 124, para 4). The Tribunal concluded that the investment value of a reversion was not the expectation that the reversion will transfer to the landlord at the end of the term but in the prospect of a profit through the early realisation of marriage value. Because of this fundamental difference between the two the Tribunal felt it could not use market evidence as the basis for calculating the deferment rate.

The Court stated that the Tribunal did not go on a frolic of its own and that their approach was in line with all but one of the experts. This made it difficult to find irrationality in their decision and accordingly, the appeal was dismissed.

The precedent of the Tribunal's decision

Although not the subject of the present appeals, Maybury criticised the Tribunal as going beyond its remit by stating that it expected all LVTs to follow its decision. The Court rejected this criticism regarding Prime Central London ("PCL") prices but felt that some qualification was needed in respect of future decisions outside the PCL. Because the Tribunal was concerned only with PCL properties in cases that were fully contested between directly interested parties, and on the evidence available, this will leave the way open for further evidence to be presented when dealing with properties outside the PCL. Although the PCL has never been formally defined, it is considered that it includes the Grosvenor, Howard de Walden and Cadogan estates. Some commentators feel that the Portman estate should also be included and for this reason, the list is not exhaustive. The deferment rates adopted by the Tribunal will be the starting point along with the conclusions on the methodology, including the limitations of market evidence. It is for tribunals to consider such issues as they arise. In effect, this means that if cogent evidence is put before future LVTs, those LVTs can consider such evidence and come to a different conclusion based on such evidence.

Cadogan's application for leave to cross-appeal on the deferment rate was refused. Leave to appeal to the House of Lords by any of the parties was also refused.

Hope Value

The Court considered the development of hope value. The Leasehold Reform Act 1967 (the "1967 Act") allowed the value of a house to be ascertained as if it were for sale in the open market. Early cases held that the tenant was a part of this market and would offer a higher price to purchase an unencumbered freehold interest which became known as "the tenant's overbid." The Housing Act 1969 quickly reversed these decisions by inserting into the 1967 Act, the words, "…with the tenant and members of his family who reside in the house not buying or seeking to buy [the house]."

The 1974 Act extended the right to acquire the freehold of a house to higher value properties (under s. 9(1A) but did not exclude the tenant's overbid (Norfolk v. Trinity College [1976]). The Tribunal in Norfolk accepted as "…wholly logical…" the view of the landlord's valuer who told the Tribunal that the tenant's bid should be valued by the following formula: "To the value of the freehold subject to the tenancy he adds half the difference between (1) the value of the freehold in possession (having deducted the value of improvements) and (2) the value of the leasehold interest in the house (similarly reduced by the value of the improvements) plus the value of the freehold subject to the tenancy…"

The Leasehold Reform, Housing and Urban Development Act 1993 (the "1993 Act") extended the right to acquire the freehold interest and to extend the lease to tenants of flats. Initially, the Act required the open market value of the flat to exclude the participating tenant's bid. However, the Housing Act 1996 restricted this assumed market even further by excluding all the tenants' bids.

Schedule 6 to the 1993 Act provides for the value of flats in both collective enfranchisement and lease extensions to be ascertained, inter alia, as if the lessees do not have the right to acquire the freehold or a new lease under the 1993 Act. This is known as the "no Act world". If a tenant does not have the right to extend the lease, say, a purchaser of the flat would be bound to offer less to purchase that flat in the no Act world. Following the various amendments to the 1967 Act, the value of single dwelling houses for the purpose of evaluating the premium payable for the freehold, the no Act world also applies. It follows, therefore, that a purchaser of a leasehold house would be bound to offer less if there was no right to extend the lease or to enfranchise.

The Court went on to define marriage value (which is not the subject of the appeals). Marriage value is often payable (at 50%) in the premium of the freeholds of houses and flats and the purchase of a new lease.

The Lands Tribunal Appeal

Submissions made by Cadogan and de Walden in the Tribunal included references to statements made by Ministers in the House of Lords during various debates in 1993. It was conceded by the then Minister, Lord Strathclyde, that it would be unfair to landlords to be denied the expectation of non-participating tenants (to enfranchisement) seeking a lease extension either now or in the future. Indeed, the Minster stated, "Marriage value, but not hope value, will be payable for the flats of participating tenants and hope value will be payable for the flats of non-participating tenants."

The Court felt that the Tribunal was correct in excluding hope value under Schedule 6 or 13 (flats) and expressed it's view that hope value and marriage value are closely linked. It stated that hope value was merely the expectation of future marriage value although such marriage value had different meanings under the 1967 and 1993 Acts. Under the former, it was a value arising from the merging of the leasehold and freehold interests whilst under the latter, it was a special value likely to be released by the enlargement of the tenant's interest (control of the freehold or a lease extension of ninety or nine hundred and ninety-nine years). The 2002 Act merely introduced certainty into the market by setting the share of marriage value and by excluding it altogether if the lease is eighty years or more unexpired. Until the commencement of the 2002 Act, marriage value was shared by negotiations between the tenant and the landlord. The 2002 Act legislated that marriage value, where payable, was fixed at 50%.

Although there is no present appeal against the decision of the Lands Tribunal that hope value may be included in the premium payable for the freehold of a house (under the 1967 Act), the Lands Tribunal in a subsequent case (Pitts and Wang v. Cadogan LRA/79/2006, LRA/4/2007, click here to access that decision) determined that this had been wrongly decided and permission to appeal has been granted.

The present Appeals

Cadogan objected to the exclusion of the tenants' overbid but the Court felt that a narrow interpretation of Schedule 13 of the 1993 Act would lead to absurdity. To include hope value would lead to double counting as the landlord receives a 50% share of marriage value. The tenant's overbid is to be excluded for all time and not just on the valuation date. This is in line with the early 1967 Act cases that the draughtsmen of the 1993 Act would have had in mind. The same reading of Schedule 6 should be had too as Cadogan's reading would lead to the exclusion of the tenant's bid for the freehold but not for a 999 year lease whose value is the same. Originally, the 1993 Act excluded only the participating tenants from the assumed market with potential bids for lease extensions from non-participating tenants not excluded. This is in line with what Lord Strathclyde stated in the House of Lords in 1993. However, the 1996 Act has removed the payment of hope value by non-participating tenants that must have been deliberate legislative policy. The Court felt that it could not alter this position.

Although not subject to appeal, the Court agreed with the decision in Pitts and Wang in that the Tribunal was wrong in having regard only to exclusion of the tenant's overbid under s. 9(1A) of the 1967 Act and for ignoring the provision for marriage value.