[2025] EWHC 2751 (Admin)

The concept of market value

Mr. Stephen Jourdan KC, appearing on behalf of the Abacus claimants, referred to an oft-cited passage from the judgment of Hoffmann LJ (as he then was) in Lady Fox’s Executors v Commissioners of Inland Revenue [1994] STC 360; [1994] 2 EGLR 185 dealing with the concept of open market value in a hypothetical transaction. The case concerned the valuation of an estate for the purposes of capital transfer tax, where the statute simply stipulated that the value should be the price which “the property might reasonably be expected to fetch if sold in the open market” on the valuation date.

Hoffmann LJ summarised how the courts have fleshed out bare provisions of that kind in legislation. Mr Jourdan relied upon this particular passage:

“In all other respects, the theme which runs through the authorities is that one assumes that the hypothetical vendor and purchaser did whatever reasonable people buying and selling such property would be likely to have done in real life. The hypothetical vendor is an anonymous but reasonable vendor, who goes about the sale as a prudent man of business, negotiating seriously without giving the impression of being either over-anxious or unduly reluctant. The hypothetical buyer is slightly less anonymous. He too is assumed to have behaved reasonably, making proper inquiries about the property and not appearing too eager to buy. But he also reflects reality in that he embodies whatever was actually the demand for that property at the relevant time. It cannot be too strongly emphasised that, although the sale is hypothetical, there is nothing hypothetical about the open market in which it is supposed to have taken place. The concept of the open market involves assuming that the whole world was free to bid, and then forming a view about what in those circumstances would in real life have been the best price reasonably obtainable.”

This approach is illustrated by Inland Revenue Commissioners v Clay [1914] 3 KB 466, where a property, in that case a house, had to be valued by assuming a hypothetical sale in the open market between willing parties. The court stated that the purpose of a bare assumption of that kind is to include demand from every person likely to wish to bid for the property. In Clay the value of the house for purchasers wishing to use it as a dwelling was £750. But the open market value had been correctly assessed as £1000, taking into account the motivation of an adjoining nursing home to acquire the property in order to extend their premises. Such a special bid forms part of open market value, subject to any statutory direction to the contrary.

The marriage value arising from the merger of a freehold reversion and a lease is another example of a special bid. It has been described as the additional value to the tenant of acquiring the reversion (Lambe v Secretary of State for War [1955] QB 612; Waters v Welsh Development Agency [2004] UKHL 19; [2004] 1 WLR 1304 at [37]).

In Sportelli Lord Walker stated at [34] that where assets have to be valued for a statutory purpose, Parliament’s usual technique is to start with a simple test of open market value, but to supplement that test by spelling out assumptions that are to be made about that market for the purposes of the hypothetical sale postulated. The LRA 1967 in both its original and amended forms adopted a statutory test of open market value, subject to assumptions [35]. Given that marriage value and hope value relating to a tenant’s bid for the reversion were central to Sportelli, Lord Walker must have had in mind inter alia the alteration to the LRA 1967 made by s.82 of the HA 1969 (see e.g. [49]. [54]. [81]). Thus, Lord Walker treated the term “open market value” as capable of embracing either the inclusion or the exclusion of marriage value attributable to the tenant’s bid for the reversion. Indeed, when Parliament excluded marriage value from the compensation payable to landlords, the HA 1969 amended s.9(1) by inserting the assumption disregarding any demand from the tenant to buy the reversion into a provision which expressly treated the hypothetical sale as a measure of open market value.

Similar flexibility in Parliament’s treatment of open market value can be seen in changes made over time to the legal rules on compulsory purchase compensation. In 1918 a Committee was established under Leslie Scott KC to carry out a review of compensation law, which resulted in the Acquisition of Land (Assessment of Compensation) Act 1919. Section 2 laid down the rules for valuing land acquired compulsorily by a Government Department or public authority under a statute. Rule (2) provided that the value should be assessed by assuming a hypothetical sale of the land in the open market between willing parties. Rule (3) required the valuer to disregard the special suitability of the land for any purpose inter alia “for which there is no market apart from the special needs of a particular purchaser”. That had the effect of disapplying the ratio in Clay, so, for example, a special bid from the owner of adjoining land to use the subject land for a purpose peculiar to that party was excluded from the award of compensation.

The rules in s.2 of the 1919 Act and subsequent legislation were carried forward into s.5 of the Land Compensation Act 1961. But ultimately, that part of rule (3) was repealed by s.70 of the Planning and Compensation Act 1991, so that from then on special bids of the kind addressed in Clay have been included in compensation for compulsory purchase. This legislative exclusion or inclusion of the value of a special bid in the measure of compensation was consistent throughout with the notion of open market value. It is a good example of Lord Walker’s analysis in Sportelli and, moreover, applies to the treatment of marriage value in the law of compensation for compulsory acquisition.

Mr Jourdan referred to another principle of compensation law, the Pointe Gourde or “no scheme” principle ([1947] AC 565 and Waters): the enhancement (or depreciation) in the value of the acquired land solely attributable to the scheme for which the land is expropriated, and the acquiring authority’s special need to use the land for that purpose, are to be disregarded. Mr Jourdan submitted that such an adjustment to market value is reasonably related to market value because the effect of the disregard is to produce fair compensation for the landowner. He sought to distinguish the provisions of the LFRA 2024 because they remove substantial elements from the price payable in an open market sale of the landlord’s reversion simply to make the purchase cheaper for the purchaser. The short answer is that the Pointe Gourde principle does not lend any support to the claimants’ case, because that principle applies in terms to a compulsory purchase for a project, i.e. a “distinct expropriation”. Indeed, Mr Jourdan went on to accept that the concept of a value reasonably related to market value for the purposes of A1P1 depends on the context of the valuation measure, including its aims, which may include social or economic purposes (see Scordino v Italy (No.1) and the distinction referred to at [107] and [179]-[182] above).

The parties have referred to professional standards that address the concept of open market value, notably the RICS’s Valuation – Global Standards (“the Red Book”) and International Valuation Standards. These documents do not assist the court to resolve the issues before it, beyond reflecting the width of the concept of “market value” and the different manifestations of the same general concept. They were not prepared to guide a legislative and political decision on, for example, whether landlords should receive a share of marriage value as part of the price payable for enfranchisement. Nor were they intended to address the issue of whether the inclusion or non-inclusion in that price of a share of marriage value affects the striking of a fair balance for the purposes of A1P1. It has not been shown that the RICS documents assist on the question of whether enfranchisement compensation with the three disputed measures in place would “reasonably relate” to the value of the property taken, as discussed by Laws LJ in SRM at [56]. We must focus on the principles laid down in the jurisprudence on the meaning and application of A1P1.

As we have said, the rationale for developments in enfranchisement law after the LRA 1967 ceased to use the language of “moral entitlement” and the landlord’s compensation was no longer limited to site value. But the economic fundamentals have remained essentially the same (see [114]-[115] above). Leaseholds still represent a wasting asset for tenants, although they have paid a premium which takes into account the cost or value of the dwelling as well as the land and they generally pay for maintenance of, and improvements to, the property throughout the term, as well as some ground rent. Government and Parliament have continued to grapple with what is considered to be a socio-economic imbalance or injustice.

Returning to the principles in Scordino v Italy (No.1) and SRM ([107] and [179]-[182] above), the three measures under challenge are not concerned with “distinct expropriation” or a “micro-economic” setting, where one or a limited number of properties are taken for a specific purpose in a specific location, such as an infrastructure project. Instead, the measures form part of a process of social and economic reform to the relationship between landlords and tenants in respect of long leases of dwellings, a matter of high policy. In this context, the defendant submits that the policy aims of these measures would be undermined or contradicted by a requirement that compensation be based on full market value.