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Court of Appeal Finally Hands Down Judgment in Sportelli
21 11 2007
On 25/10/07 the Court of Appeal gave its long awaited decision in the case of Earl Cadogan and another v Sportelli and others.
Many of our Enfranchisement Department's clients will have been waiting in eager anticipation for this decision because of the enormous impact it has on the premiums payable by leaseholders in lease extension and purchase of freehold cases.
In brief, the question before the Court of Appeal was twofold: a) whether a landlord could claim ‘hope value’ on a purchase of a freehold by the leaseholders, and b) what the appropriate deferment rate should be in either a freehold purchase or a lease extension matter.
Broadly speaking the amount payable by the leaseholders for either their freehold or a lease extension is made up of three elements:
1) The value of the freeholder’s interest
2) Marriage Value
3) Compensation
These elements are explained in greater detail elsewhere on our website. Put simply however, the value of the freeholder’s interest can be broken down into two elements. Firstly the freeholder’s loss of ground rent and secondly the value of the flat that the freeholder can expect to get back when the lease runs out.
The Law calculates the value of the second of those elements by reference to a ‘deferment rate’ which is a discount rate applied to the value of the flat to reflect the fact that the freeholder is getting his or her money now, rather than having to wait until the end of the lease.
‘Hope value’, on the other hand, is a concept which has sprung up not from the legislation but from case law arising out of the legislation. It is well settled that non-participating tenants in a collective enfranchisement claim do not have to pay marriage value. Landlords have long considered this unfair and have sought to have the value of their investment in relation to those flats recognised by the Courts. They have sought to do this by applying a sum of money in respect of the ‘hope value’ that, one day, the tenant of that non-participating flat will want to extend the lease and have to pay a premium to the freeholder when they do.
The Court of Appeal in Sportelli decided simply that the correct deferment rate for flats was to remain at 5% (unless very cogent evidence could be supplied for properties outside Central London to suggest why this should not be the case). It also decided to abolish the practice of ‘hope value’ altogether.
The decision is considered therefore only a partial success for landlords and tenants alike. On the one hand the deferment rate was kept low at 5% (the lower the rate, the higher the price to pay), but on the other hand tenants no longer have to pay hope value.
A full version of the judgment can be downloaded at http://www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWCA/Civ/2007/1042.html&query=sportelli&method=boolean