[2024] UKUT 26 (LC)

The Leasehold Reform, Housing and Urban Development Act 1993 gives to qualifying tenants of flats the right to acquire a new lease on giving notice in accordance with section 42. Section 56 provides that where such notice has been given, a new lease extending the existing lease by 90 years shall be granted and accepted in substitution of the existing lease upon payment of the premium payable under Schedule 13.

The granting of the new, extended lease enhances the value of the tenant’s interest and reduces the value of the landlord’s reversion. Paragraph 2 of Schedule 13 provides that the premium payable for the new lease is the sum of (1) the diminution in the value of the landlord’s interest resulting from the grant, (2) the landlord’s share (50%) of the marriage value, and (3) any compensation payable to the landlord under paragraph 5 (in this case agreed to be nil). In calculating the value of the landlord’s interest and his share of marriage value, any increase in the value of the flat which is attributable to an improvement carried out by the tenant at his own expense is to be disregarded.

Marriage value was explained by Morgan J in Carey-Morgan and Stephenson v Trustees of the Sloane Stanley Estate [2012] EWCA Civ 1181 at paragraphs 17 – 18:

“The concept of marriage value is relatively straightforward in the case of a long lessee acquiring the freehold reversion on his lease (e.g. where the premises comprise a house). If the value of the freehold reversion (ignoring any bid for it by the existing lessee) is £X, if the value of the existing lease is £Y and if the value of the freehold with vacant possession is £Z, then it will often be the case that X + Y is less than Z. … The difference is called the marriage value… Thus, if the existing lessee, who owns a lease with a value of £Y, were to be able to buy the freehold reversion for £X, he would obtain a freehold with vacant possession with a value of £Z and would secure all of the marriage value for himself. In the open market, free from statutory assumptions, it is to be expected that the freeholder would only agree to sell the freehold reversion to the existing lessee on the basis that the marriage value is shared between the freeholder vendor and the lessee purchaser. …

18.

The concept of marriage value is a little more complex where one is concerned not with the purchase of a freehold reversion but instead with the grant of a new long lease or an extended lease to the existing lessee. In the latter type of case, marriage value is the subject of an elaborate definition in para 4 of Sch 6 1993 Act. Where the unexpired term of the existing lease exceeds 80 years, marriage value is ignored. Paragraph 4(1) provides that the freeholder’s share of marriage value is 50 per cent.”

The calculations both of the diminution in value of the landlord’s interest and of the marriage value require a value to be ascribed to the new lease, and thence to the notional value of the freehold interest with vacant possession (“FHVP”). A further component of the calculation of the marriage value is the value of the existing lease. Conventionally that value is ascertained by the use of a “relativity”, that is, a percentage figure that enables the value of the existing short lease to be calculated by reference to the FHVP. The statute also requires that the existing lease be valued on the assumption that there was no right to an extended lease under the 1993 Act (“without Act rights”). That assumption is difficult to value because there is now no market in long leases without Act rights.

As we shall see, all those elements of the calculation were in dispute in the present appeal. We now set out the facts and then our determinations of the points in dispute, and finally set out the calculation of the premium.