21 June 2013

The Court of Appeal considers development value

Cravecrest Ltd v Trustees of the Will of the Second Duke of Westminster and Vowden Investments Limited [2013] EWCA Civ 731

On the 19 June the Court of Appeal gave judgment on an appeal bought by the tenants of a block in Wilton Crescent, London regarding development value.

The appeal, known as Cravecrest Ltd v Trustees of the Will of the Second Duke of Westminster and Anor concerns the development value arising from the potential conversion of a building from flats back into a single house. The facts of the case were unusual in that the building, being situated in prime central London, was worth over £2million more when laid out as a house rather than as flats. The building itself was also subject to two intermediate leasehold interests; a head lease with 175 years left to run and an overriding lease of the second and third floors with 121 years to run.

The Court of Appeal had to consider what price should be paid on enfranchisement for both leases on the basis that, if those leases were acquired by a developer, the property could be restored to a single residence with potential to construct a further floor. In doing so they had to consider in some detail the provisions of Schedule 6 of Leasehold Reform Housing and Urban Development Act 1993 which sets out how the premium payable on a collective claim is valued. In a decision given last year the Upper Tribunal had determined that development value was payable by the tenants and assessed it as an increase in the vacant possession value under paragraph 3 of Schedule 6. The tenants appealed the decision and argued that the value which arose was excluded from paragraph 3 of Schedule 6 and was a form of marriage value which could only be included if it fell within the provisions paragraph 4. The Court of Appeal, in dismissing the tenants’ appeal said that it was necessary to take a purposive approach to the wording of Schedule 6.

They felt that there was no obvious social policy underlying the legislation which allowed the tenants to acquire the freehold but which completely ignored any value attributable to development value. They considered in some detail the wording of Schedule 6, paragraph 3 and specifically the exclusion in paragraph 3(1) and concluded that Upper Tribunal had been right that the hypothetical sale did not fall within the exclusion. They also agreed that development hope value was not a form of marriage value which fell to be valued under Schedule 6 paragraph 4.

As a result of the decision, where a building is subject to intermediate leases that are to be acquired by a nominee purchaser on a collective claim and there is potential to develop the building into a house if those interests are acquired by a single owner, the hope of realising such development value has to be taken into account when determining the premium payable. This is a decision which will please landlords since it is now clear that the presence of intermediate leasehold interests will not prevent them from receiving a share of development value

For more information please contact Natasha Rees

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