The Sloane Stanley Estate v Morgan & Anor

Factual and Procedural Background

This opinion concerns an appeal by the Appellants, trustees of an estate, against decisions made by the Leasehold Valuation Tribunal (LVT) regarding the collective enfranchisement of a mansion block known as Vale Court, located in a conservation area in The City. The appeal addresses the determination of the premium payable for the freehold under the Leasehold Reform, Housing and Urban Development Act 1993, focusing on several valuation issues arising from leases with less than five years unexpired, potential development on the roof, hope value, deferment rates, and terms of transfer. The LVT initially set the premium at £2,652,389, later adjusting it to £2,666,407 after considering hope value. The Appellants sought a higher price of £3,568,403. The Upper Tribunal heard evidence and submissions from both parties' valuation, planning, and conservation experts, and inspected the property and its surroundings before issuing this decision.

Legal Issues Presented

1. What is the correct valuation of leasehold vacant possession values for flats with less than five years unexpired?
2. Is there potential for additional residential development on the roof, and if so, what is the value of that potential considering planning prospects?
3. Should hope value be included in the valuation for non-participating flats with leases under 80 years, and if so, at what level?
4. What is the appropriate deferment rate for leases with less than five years unexpired?
5. Are the proposed terms of transfer, including restrictive covenants, appropriate and enforceable?

Arguments of the Parties

Appellants' Arguments

• The LVT erred in relying on other LVT decisions for leasehold valuation relativity without giving parties an opportunity to comment, contrary to established case law.
• The valuation methodology used by their expert, involving capitalising unimproved rental values and adjusting for costs, is appropriate and supported by comparable evidence.
• There is potential for roof development, supported by expert evidence on structural viability, planning, and conservation, and a hypothetical purchaser would value this potential significantly higher than the LVT’s nominal figure.
• The LVT applied an incorrect test for roof development value by not considering the purchaser as reasonably informed but instead relying on a cautious investor’s instinct.
• Hope value should be applied at 20% of marriage value for non-participating flats with short leases, based on market practice, precedent, and the likelihood of lessees seeking lease extensions or enfranchisement.
• The deferment rate for short leases should be based on net rental yields plus an allowance for lack of control during the lease term, resulting in a lower rate than that applied by the LVT.
• The proposed restrictive covenants in the terms of transfer are mandatory under Schedule 7 of the 1993 Act and necessary to materially enhance the value of other estate properties, protecting them from adverse alterations.

Respondents' Arguments

• The LVT’s relativity figure of 11.5% should stand, and the appellants’ lower figure is not supported by the evidence.
• Planning evidence and local council correspondence indicate that roof development would be refused, and the LVT’s nominal valuation of £10,000 for development potential is appropriate.
• Hope value is limited or nil for flats with short leases due to diminished marriage value and market conditions, with only the longer lease flat warranting a modest hope value.
• The deferment rate should be higher (around 7% or more) to reflect anticipated market decline and associated risks at the valuation date.
• The terms of transfer clauses proposed by the appellants are inappropriate and not supported by evidence that they materially enhance the value of other estate properties; the LVT was correct to reject them.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal carefully considered the evidence and submissions on each issue. It found that the LVT’s reliance on other LVT decisions for leasehold valuation relativity was erroneous, as such decisions vary depending on evidence and are not binding or necessarily indicative. The Tribunal preferred the appellants’ expert methodology, which capitalised unimproved rental values with appropriate cost deductions, concluding an 8% relativity was correct for short leases rather than the LVT’s 11.5%.

Regarding roof development potential, the Tribunal acknowledged the appellants’ expert evidence on structural, planning, and conservation matters but found the absence of comprehensive planning history and appeal outcomes problematic. The council’s clear policy presumption against roof extensions in the conservation area and the likelihood of refusal at initial application stage weighed heavily. The Tribunal agreed with the LVT’s cautious valuation of £10,000 for the development prospect, reflecting the risk and uncertainty.

On hope value, the Tribunal analysed the House of Lords’ guidance and subsequent case law, noting that hope value applies to non-participating flats with leases under 80 years. It rejected a blanket 20% rate for all such flats, distinguishing between short leases and a longer lease with recent extension. The Tribunal accepted 20% hope value of marriage value for short leases and 10% for the longer lease, based on the likelihood of lessees seeking lease extensions, market conditions, and precedent.

For the deferment rate, the Tribunal held that the formula from Sportelli, designed for long leases, was inappropriate for very short leases. It concluded that the deferment rate should be based on the net rental yield for the property plus an end allowance for lack of control during the lease term. Using evidence from actual lettings, the Tribunal set the net rental yield at 3.31% and added a 5% end allowance, effectively applying a deferment rate around 3.25% with an additional 5% end allowance rather than the higher rates argued by the parties.

Regarding the terms of transfer, the Tribunal found that the disputed restrictive covenants were not justified under the statutory provisions as they did not constitute rights of light or support but were restrictions on the property itself. The appellants failed to provide evidential support that these covenants would materially enhance the value of other estate properties beyond mere assertions. Consequently, the Tribunal upheld the LVT’s rejection of these terms.

Holding and Implications

The appeal is ALLOWED IN PART. The Tribunal set the enfranchisement price at £2,961,613, reflecting adjustments to the leasehold vacant possession values, inclusion of a nominal development potential value, revised hope value percentages, and a deferment rate appropriate for short leases.

The decision directly affects the parties by determining the premium payable for the freehold of Vale Court under the Leasehold Reform Act but does not establish new precedent beyond clarifying the application of valuation principles to very short lease terms, hope value calculations, and restrictive covenant evidential requirements in this context.