ANALYSIS OF THE COURT OF APPEAL’S DECISION IN THE CASE OF EARL CADOGAN v SPORTELLI

This case concerned two aspects of valuing the premium/price that is payable upon the purchase of a freehold, whether collectively (i.e. on behalf of a block of flats) or in relation to a single house (more commonly referred to as enfranchisement), and upon the extension of a lease of a flat.

The appeal to the Court of Appeal concerned the following:
(i)whether “hope value” should be included in the valuation calculation; and
(ii)what the “deferment rates” should be.

On 25th October 2007 the Court of Appeal handed down its judgment and held that:

1.Hope value (that is the future expectation of a freeholder receiving a 50% share of the marriage value from leaseholders who have yet to enfranchise) should be excluded in collective enfranchisements and lease extensions.

However, for single enfranchisement applications in relation to higher-value houses, hope value could be taken into account. It should be borne in mind that there was no specific appeal to the Court in relation to higher-value houses and the Lords Justices therefore upheld the Lands Tribunal’s finding that it should be included. The Court of Appeal, however, did caution that they preferred the finding of an earlier conflicting Lands Tribunal decision in which hope value was excluded for these type of claims altogether.

2.The Court set guideline deferment rates of 5% for flats and 4.75% for houses. The deferment rate is based on the freeholder’s diminution in value of his interest if an enfranchisement/lease extension application proceeds because the freeholder will lose the expectation of acquiring vacant possession (or postponing this as in the case of a lease extension) and will lose its entitlement to receive the ground rents. In practice, prior to the Sportelli decision, deferment rates were often as high as 9% or 10% in areas outside London and the Home Counties. Typically deferment rates in the Prime Central London (“PCL”) area were 6%. The lower the deferment rate, the higher the premium payable.

These guidelines were meant to create an element of stability but in giving its judgment the Court has expressly left the door open for higher rates to be applied in locations outside the PCL if the parties can produce evidence justifying the application of a different rate. This has clarified the position for tenants outside the PCL area that if their expert can provide the evidence that a higher deferment rate should be applied then it may mean that they can pay less for their freehold or new lease than was thought before the appeal. Regardless of where the property is it has also clarified that landlords should no longer attempt to introduce a hope value element to increase the amount payable.

Reported at; EARL CADOGAN v SPORTELLI [2007] EWCA Civ 1042.
For more information about what this means please contact Claire Lamkin or David Wadsworth