WHAT’S UP IN THE LOFT? FREEHOLD ENFRANCHISEMENT AND DEVELOPMENT VALUE COMPENSATION

Freehold enfranchisement is increasingly popular among leaseholders, who are encouraged by the prospect of owning their own freehold, being able to get rid of their current freeholder and managing agent, being able to extend their leases, and gaining control over how the building they live in is managed. I many cases obtaining the freehold of a converted house or block of flats will be no more expensive than making lease extension claims, and for that reason it is often at the point where leaseholders are considering extending their leases that they start to explore the possibility of freehold enfranchisement. However, some cases are not so straightforward, and many a keen freehold enfranchisement claim has been scuppered by the discovery of development value, which can make what would have otherwise been a simple and straightforward case complicated, contentious and expensive.

What is development value?

In most smaller blocks or converted houses development value arises from the possibility of converting the roof void as an extension of the upstairs flat or the basement as an extension of the downstairs flat. Development value will arise when there is some form of alteration that could be made to the property to increase its value, and that alteration either involves part of the property which is not owned by the leaseholders or involves alterations that are prohibited under the leases. Schedule 6 of the act details the elements of value that a freeholder may claim compensation for. The valuation has three potential components set out under paragraph 3 (the value of the freeholder’s interest), paragraph 4 (marriage value) and paragraph 5 (compensation for other loss).

Development hope value

Most development value claims will be made under paragraph 3 (the value of the freeholder’s interest), on the basis that a hypothetical purchaser of the freehold interest would pay something in the ‘hope’ of obtaining a premium from the leaseholder in question for permission to undertake the development in question. The amount of compensation payable will depend on the value of the potential development and the perceived likelihood of a deal being done to release the value. So, for example, if the leaseholder of a top floor flat had obtained planning permission for a roof space conversion and had previously approached the freeholder for permission a large sum could be payable. If, on the other hand, the leaseholder had expressed no interest in obtaining the roof space and the property happened to be in a conservation area with little prospect of planning being approved for a roof space extension it may be that there is little (if anything at all) payable.

Development marriage value

In some cases the development value claim will be made under paragraph 4 (marriage value). Where development marriage value is payable 50% of the value realisable by the development in question is payable to the freeholder, irrespective of whether in reality the leaseholder has any interest in or intent of undertaking the development. This can result in significant sums of money being payable even where the leaseholder has no interest in undertaking the development, bringing a rapid halt to some enfranchisement claims. Thankfully the cases in which paragraph 4 applies are relatively few and far between as in order for the claim under that paragraph to succeed the leases need to have unexpired terms of less than 80 years and (all importantly) the value will need to realisable by the grant of a new lease (Padmore v Official Custodians for Charities on behalf of the Trustees of the Barry and Peggy High Foundation 2014). Consequently development marriage value will only apply where the value arises from alterations that are prohibited under the leases. In cases where the leases have unexpired terms of above 80 years, or where the value arises from the acquisition of part of the property that is not even owned by the leaseholder the landlord will (somewhat unintuitively) be left to seek compensation under paragraph 3.

Can you avoid paying anything at all?

In most enfranchisement cases we find that no development value compensation is payable. Basement extensions are prohibitively expensive if most areas (even inside London) and in the case of roof space extensions in the event that the ridge height is insufficient or the property is located in a conservation area obtaining planning permission may be no more than a pipe dream. If there is no development potential, no compensation will be payable.

Even where there is development potential it does not necessarily follow that there will be compensation. Where the part of the property in question is owned by the leaseholder’s the freeholder may be unable to prevent development via operation of Section 19 of the Landlord and Tenant Act 1927, in which case no compensation will be due. Even where the part of the property in question is not explicitly demised to the leaseholder in the lease, the demise may be implicit. So, for example, where the tenant has repairing obligations over the roof the airspace above the roof may also be demised by implication (Davies v Yadegar 1989). In such cases, once again, nothing will be payable in development value.

We recently dealt with a case in Fulham where the Landlord claimed some £40,000 in development hope value compensation for the possibility of building a new flat on top of the flat roof of the building in question. The landlord was unwilling to compromise, and the case eventually made its way to the First-tier Tribunal. The Tribunal accepted our evidence (backed by testimony from a local planning consultant) that there was no realistic prospect of planning permission being obtained for the envisaged development and found that a nominal sum of just £1,000 was payable in accordance with our valuation.

Leasehold reform specialist area of valuation, and one which can get a bit complicated at times! Having the right valuer can, in some cases, make the difference between a claim becoming affordably expensive and paying next to nothing (if anything at all) in development value compensation. Our specialist Chartered Surveyors handle hundreds of cases every year, and have an in depth knowledge of the applicable legislation, case law and valuation approaches. You can contact the team on 020 7183 2578 or by email.