Development Value in Enfranchisement Claims

2. VALUE RELEASED BY THE MARRIAGE OF INTERESTS – PARAGRAPHS 3 AND 4
Development value can also arise where a party to a lease wants to develop but the development is only possible if the developer, (whether landlord or tenant) acquires land or a release of a covenant from the other party. For example, a basement extension to the ground floor flat where the Landlord owns the subsoil; there is an absolute covenant against alterations; or a short lease making the project uneconomic. Another example is converting a building containing flats to a single house, but needing a release of covenant.

There are two elements to such valuation, which is also subject to a risk discount:

• The value to the landlord of carrying out development at the end of the tenants’ leases (Paragraph 3). (Often minimal because development cannot be carried out for many years).
• The additional value released by an immediate marriage of the interests (Paragraph 4).

The distinction between paragraph 3 and 4 is critical. Using marriage value, the amount due to the freeholder will be automatically halved.
Development value as marriage value has two surprising and probably unintended consequences. First, under paragraph 4(2A), where a lease has an unexpired term of more than 80 years, no marriage value is payable.

Can the freeholder in such circumstances recover development value as hope value? If so, then why cannot every landlord claim hope value where marriage value is excluded? Lord Neuberger considered this in relation to the similar provisions of the Leasehold Reform Act 1967 in Cadogan v Sportelli:

“... it appears...unreal to attribute to Parliament the intention to allow ...marriage value..., when it has specifically excluded marriage value from the valuation exercise.”

Those comments, however, are obiter dicta and thus, although persuasive, not binding. Also, although he considered Schedule 6, paragraph 4 in detail he did not repeat those comments in that context.

As the amounts at stake are often not trifling, those advising a freeholder should continue to contend for hope value until there is binding case law. Valuers are accustomed to calculating the ‘hope’ that development value will be released.
That leads to the second unintended oddity. For marriage value, whether the tenant is likely to carry out the development is immaterial, whereas for hope value it is crucial. If there is no evidence a tenant wants to carry out a development, it is unlikely hope value would be awarded. LVTs sometimes fail to appreciate this distinction and, when assessing marriage value, wrongly apply a discount because the development may not happen

.
Finally, development value is also released by converting a house from flats to a single house. This involves a consideration of paragraph 3 and 4. In 31/37 Cadogan Square development value was awarded under paragraph 3 as there was only a short time until reversion. There was no consideration of development marriage or hope value. In Themeline Limited v Vowden Investments the President ruled that development marriage value was not payable where there is an opportunity to convert flats into a house, but on a case on similar facts an argument for development hope value  succeeded in Cravecrest Limited v The Duke of Westminster.
Cravecrest concerned the enfranchisement of a house worth £4.9m as flats and £7m as a single residence. Was such development claimable as marriage or hope value? The Tribunal followed Themeline, so development value could not be claimed as marriage value, but analysing Sportelli found it was no bar to recovering development hope value.

3.  ADJACENT LAND – PARAGRAPH 5
Often valuation reports lump all development value under paragraph 5 because it is headed “Compensation for loss” and is the only paragraph explicitly mentioning development value. This is a mistake and it is ironic it hardly ever applies.
It clearly only applies where the freeholder has other property, not the subject of the enfranchisement: (paragraph 5 (2)).
Paragraph 5 is only concerned with damage to the freeholder’s other property interests caused by the loss of the specified premises (damage caused by the loss of additional property such as appurtenant gardens is dealt with separately). For example, where the premises are a terraced house and the landlord owns the house(s) next door and demonstrates he could have released value by knocking them down or together. The freeholder could claim compensation for the loss of development opportunity for both the specified premises and the neighbouring property.
It is vital to ascertain the correct basis for claiming development value, as it makes a great deal of difference to the end result.

Development Value - Calculations

Example 1:
Tenant has planning permission for a straightforward basement extension.
 

Example 2:

As above, but requiring freeholder’s permission. No marriage value, but hope value could be awarded.
          

Example 3:

Two terraced houses (no.s 12 and 14). No. 12 is the subject of collective enfranchisement. Evidence shows houses worth more knocked together, but doubt over planning permission.

Piers Harrison is a Barrister at Tanfield Chambers.  This article is based on a presentation given to the Leasehold Forum in November 2012.