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Court of Appeal Success for The Crown Estate in Whitehall Court London Limited v The Crown Estate Commissioners (2018)

What is the ambit of the “no Act” assumption as set out in paragraph 3(2)(b) of Schedule 13 of the Leasehold Reform, Housing and Urban Development Act 1993?

Part of the exercise to be carried out in order to arrive at the premium payable for an extended lease under Chapter II of the 1993 Act is to value the landlord’s interest in the tenant’s flat both before and after the new lease is granted. This is done by reference to a transaction in the open market but on the basis of two assumptions.

The first is that there is a sale by a willing seller with “neither the tenant nor any owner of an intermediate leasehold interest buying or seeking to buy.” Were it not for this assumption the existence of special purchasers in the market would unduly increase the valuation.

The second is that Chapter I (concerning rights of collective enfranchisement) and Chapter II (the right to an extended lease) of the Act “confer no right to acquire any interest in any premises containing the tenant’s flat or to acquire any new lease.” This is the so-called “no-Act” assumption which ensures that the open market valuation is not reduced by the compulsory acquisition rights which the statute confers.

It is the ambit of second of these two assumptions which has been considered by the Court of Appeal in a Judgment handed down today in the case of Whitehall Court London limited v The Crown Estate Commissioners [2018] EWCA.

In the recent decision of the Court of Appeal in Mundy, Lewison LJ rejected arguments advanced on behalf of the Appellant (in relation to similar assumptions in the context of calculating marriage value) that they preclude the valuer from having regard to any transaction in the real world concerning a lease with the benefit of rights under the Act. He was also unimpressed with the argument that the valuer is required to assume a market in which no one has rights under the Act. Accordingly the “no-Act world”, as it had been paraphrased, was laid to rest.

The issue for the Court of Appeal in Whitehall Court was whether the assumption extends, not to the world, but at least to the building containing the tenant’s flat as contended for by the Respondent freeholder or whether it applies only to the tenant’s flat – the argument advanced by the Appellant who held an intermediate leasehold interest. Whilst acknowledging that both constructions were possible as a matter of language, the court unanimously held that the assumption extends to the building containing the tenant’s flat so that other qualifying tenants are to be treated as not having Act rights.

Although the focus of the valuation is the landlord’s interest in the tenant’s flat, it does not follow that only the tenant is to be assumed to have no Act rights. Paragraph 3(2)(b) requires an assumption that Chapter I confers no right to acquire any interest in any premises containing the tenant’s flat so the Act rights of other qualifying tenants in the building must also be “switched off” otherwise rights held by those other tenants would depress the value of the landlord’s interest in the tenant’s flat if the tenant himself had no Chapter I rights.

The use of expansive language, “any new lease”, and the express reference to only one spatial limitation “premises containing the tenant’s flat” were intended to capture the Chapter II rights of other tenants of flats in the block. Had it been intended to confine the assumption this could have been achieved by a reference to “any new lease of the tenant’s flat”. Arguments by the Appellant based on a comparison between the valuation provisions relating to collective enfranchisement and extended leases (in schedules 6 and 13 of the Act respectively) were rejected. Submissions based upon an analogy with other compulsory acquisition cases where one is required to assume that no “scheme” for such acquisition applies were regarded by the court as not particularly helpful.

It is, perhaps, surprising that although the ambit of the “no Act” assumption has been raised in other cases, this precise point has not actually had to be addressed by the court until now. The clarity provided by this decision is welcome.