Enfranchisement: Where a landlord intends to develop a property, how should enfranchisement consideration be calculated? (Vectis Property Company Ltd v Cambrai Court Management Company Ltd – 2022)

In a case where leaseholders were exercising their right to enfranchisement of a block of flats, how should consideration be calculated if the landlord is able to demonstrate a wish to develop the property further to increase its value?

The background

In Vectis Property Company Ltd v Cambrai Court Management Company Ltd [2022], a block contained 9 flats each let on long leases in largely identical terms. The appellant company was the landlord, and the respondent was the purchasing company, and management company, for leaseholders who wished to exercise their right to enfranchisement of the property. Under each lease, the landlord retained possession of the flat roof of the building.

Planning permission was obtained by a developer which wished to build two flats on the building’s roof and offered to purchase the freehold. The landlord served notice on the lessees to give them a right of first refusal under s.5A of the Landlord and Tenant Act 1987, and the lessees, acting by the respondent, then served notice of its intention to enfranchise.

The purchase price was to be determined by the First-tier Tribunal, after the parties had agreed a freehold value of £24,500 but could not agree whether any sum was payable in respect of development ‘hope’ value. The landlord claimed that this amounted to an additional £203,300, but the leaseholders disagreed and stated that there was no hope value. At FTT, the court found that a sum for hope value of £49,500 was payable, but that this could be increased to £166,725 if the leases permitted development of the two new flats. The landlord appealed, stating that the lease terms did not prevent it from developing the roof and claiming the increased total of £191,225.

The decision

The Upper Tribunal allowed the landlord’s appeal, finding that the landlord was not prevented from developing two new flats on the roof of the building and that it was entitled to a sum in respect of lost development value on completion of the leaseholders’ enfranchisement.

The leases did not contain an express right for the landlord to develop the roof. The leaseholders argued that the landlord could not develop the roof with no express right reserved; however, as the landlord had not demised the roof to leaseholders, it did not need to reserve development rights in respect of the roof structure or the air space above it.

The leaseholders further argued that, were the roof to be developed, this redevelopment would prevent the management company from exercising its right of access to the roof for the purposes of maintenance and repair in accordance with its obligations under the leases. The UT found that construction of two new flats would not interfere with the management company’s right to access the roof, and that simply the obligation to repair the roof would extend to the new roof formed on top of the new flats.

In review of the letting scheme for the building, the UT further found that there was no restriction on the landlord’s construction of further flats, and the respondent management company would join in the leases of new flats made in the same terms as the existing tenancies.

The UT found that the FTT’s assessment of the development value was within an acceptable range, and so found in favour of the landlord that the development was permitted under the terms of the leases and was entitled to development hope value as part of the enfranchisement purchase price.

Advice and action for landlords

This is a helpful decision for landlords, establishing that development hope value can be factored into a purchase price on enfranchisement of a freehold.

Where roof space is not demised, even with no express right to develop contained in the lease, a landlord may successfully argue that it is entitled to develop the roof and air space and that such development need not interfere with management company rights of access to repair and maintain.