Expert Insight: Up to the Sky – Again!

Introduction

We recently considered the case of Gorst v Knight [2018] EWHC 613 (Ch) in relation to the old legal maxim that the owner of the land also owns everything up to the sky and down to the middle of the earth. That case involved the extent of downward ownership in the context of a leasehold owner wishing to extend downwards, but another recent decision of the Upper Tribunal involved the other extreme – a possible upwards extension of a block of flats.

Francia Properties Ltd  v St James House Freehold Ltd [2018] UKUT 79 (LC)

The case involved a claim by flat tenants for the collective enfranchisement of a purpose built block of 14 flats in Drayton Park, North London. As conveyancers will be aware, the owners of long leases of residential flats have a right to compulsorily acquire the freehold in the block under the Leasehold Reform Housing & Urban Development Act 1993. The right to claim an extended lease is, of course, much used, but collective enfranchisement has, perhaps, taken a back seat since the introduction of the Right to Manage in the Commonhold & Leasehold Reform Act 2002. Why buy the freehold of the block when there are individual rights to extend a lease and this collective right to take over the management of the block?

But there may be big advantages – it may be cheaper in the long run to buy the freehold and then extend the individual flat leases for a nominal premium, rather than individually pay the landlord for the privilege. And if the landlord wishes to exercise his right to extend the block upwards ‘to the sky’ this can be prevented if the flat owners purchase the freehold. But the possibility of an upwards extension will be relevant in deciding the value of the freehold.

Under the Act, the valuation date is the date of the service of the initial notice requesting enfranchisement and the price to be paid consists of three elements:

  • the value of the landlord’s interest in the property; and
  • one half of the marriage value (but see below);and
  • any additional compensation.

Marriage Value is basically the difference between the value of the freehold before enfranchisement and its value to the tenants afterwards. The landlord is entitled to ½ of this figure – but if all the leases of the participating tenants have over 80 years left to run, it is to be assumed that there is no marriage value.

Additional Compensation is based on the reduction in value of any adjoining premises owned by the landlord.

In this case the problem was the value of the upwards extension. There were both engineering risks in carrying out the scheme and also an issue as to whether planning consent could be obtained. The First Tier Tribunal had discounted the value attributed to the possibility of an upward extension by 65% “ to reflect the more than minimal risk involved in the actual carrying out of the scheme having regard both to the previous planning refusals but the significant development to other nearby properties.”

Unfortunately, prior to the valuation date, there had only been one refusal of planning, but with a further three refusals after that date. But the Tribunal had erred, as these could not be taken into account in fixing the valuation as at the earlier date. The landlord appealed to the Upper Tribunal on this basis which upheld the appeal and reheard the issues involved.

The Upper Tribunal held that the development value was between £1.3 million and £1.9 million depending upon whether 2 or 3 new flats were to be constructed. However, various reductions for the costs etc of construction had to be made, including a 65% discount to reflect the engineering and planning risks – ironically the same percentage as the First Tier Tribunal had applied. This left a residual value of either £86,000 or £114,000 respectively. A value of £100,000 was thus decided upon.

This must have been a great disappointment to the landlord, whose valuer had argued for a residual development value of more than £1.3 million. But the decision is once again a reminder that some old legal principles do still have some value.

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