One of the valuation issues that is unique to the freehold enfranchisement process is the potential for the existence of compensation for development value. In smaller blocks and period conversions development value will often arise from the potential to convert the roof space as an extension of the upper flat, to develop the basement as an extension of the ground floor flat, or to undertake alterations which would otherwise be prohibited by the leases. Compensation for development value can amount to a significant amount of money. In some (thankfully rare) cases it will be the largest component of the final premium.
The basis of valuation is contained within Schedule 6 of the Act. Under schedule 6, 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 marriage value
Where the leases have under 80 years to run development value will almost invariably be calculated under paragraph 4. This is known as ‘development marriage value’. The starting point will be to assess any inherent development value in the property. So, for example, where a roof space is owned by the freeholder, and could be converted as an extension of the top floor flat, what would the value of the roof space be if such a scheme was proposed? That value is known as ‘development marriage value’. Under paragraph 4 the freeholder is entitled to 50% of the marriage value, irrespective of whether, in reality, the lessee has any intention of undertaking the development (Padmore v Official Custodians for Charities (on behalf of the Trustees of the Barry and Peggy High Foundation 2014).
Development hope value
Where the leases have unexpired terms of more than 80 years no compensation is payable under paragraph 4, and the freeholder will be left to seek compensation under paragraph 3. This is known as ‘development hope value.’ The question, in this instance, is what (if anything) an investor buying the freehold would pay in the ‘hope’ of undertaking the development himself, or of extracting a premium from a leaseholder who proposed to undertake the development, at some point in the future. The compensation for development hope value under paragraph 3 will in most cases be significantly less than that payable for development marriage value under paragraph 4. In some (relatively rare) cases the leaseholder might be well advised to extend his or her lease before making the claim to acquire the freehold, in order to bring the unexpired term of the relevant lease above 80 years and thus alter the basis of value.
Is anything payable at all?
In the majority of small scale enfranchisement valuations we find that no compensation is payable. In many cases there is simply no scope for further development. Basement level extensions are (depending on location) often prohibitively expensive. In the case of an undemised roof void, if the ridge height is insufficient, planning permission for a loft conversion may be no more than a pipe dream. If there is no development potential, no development value can be payable.
Even where there clearly is development potential the leaseholders may not need to despair. Where the part of the property in question is owned by one of the leaseholders the freeholder may be precluded from demanding a premium for consent to develop via the operation of Section 19 of the Landlord and Tenant Act 1927. 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 a roof is demised 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.
Leasehold enfranchisement is a complex and specialist area of valuation. Having the right representation can, in some cases, make the difference between paying a small fortune in compensation for development value and paying nothing at all! 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.