Collective enfranchisement is the right for leasehold owners of flats to collectively buy the freehold of their block pursuant to the Leasehold Reform, Housing and Urban Development Act 1993 ("LRHUDA"). The price payable may include the potential development value, or ‘hope value’ of the property.
On 22 February 2022, the Upper Tribunal considered the question of how one should account for potential development value in Vectis Property Company Limited v Cambrai Court Management Company Limited  UKUT 42 (LC).
The Court found that the hope value of constructing two new flats on the roof of a building could be included within the premium payable on enfranchisement.
What does this mean for leaseholders and landowners?
The Law Commission, in its report of 20 July 2020 made recommendations on how to reduce the premium payable for acquiring the freehold of a property. One option proposed the abolition of hope value. We are still waiting to see if the government decides to adopt this proposal.
In the meantime, this case highlights the importance of considering the potential for development when negotiating enfranchisement premiums. It demonstrates an opportunity for freeholders to considerably increase the amount payable to them via enfranchisement claims, if they can prove the potential development value of their properties.
The case concerned a block of nine flats. In 2018 a developer obtained planning permission to build two new flats on the roof of the building and offered to purchase the freehold from the owner, Vectis Property Company Limited .
Vectis offered the lessees of the building a right of first refusal to buy the building. The lessees did not accept that offer. Instead, in 2019, the lessees claimed the right to enfranchise the building.
The Landlord admitted that there was a right to enfranchise and that the price payable for the freehold would be £24,500, plus whatever sum was payable for the development hope value of the roof space.
The Landlord claimed that the hope value was worth a further £203,300. The lessees argued it had no value because there was no express right for the Landlord to build on the roof. The lessees also argued that any roof top development would prevent the Management Company from carrying out its obligation to maintain and repair the roof.
The Upper Tribunal’s decision
The Upper Tribunal determined that there was nothing to stop the Landlord from constructing two new flats on the roof of the existing building. The roof and airspace above it had not been demised to the leaseholders and therefore the Landlord could do whatever it wished with the retained parts of the building, provided that it did not interfere with the rights of others.
In relation to the Management Company’s obligation to repair, the Court found that this related to whatever roof was in place from time to time. There would be no interference with the obligation because the roof in question would be the new roof over the additional flats.
Consequently, the Landlord was entitled to an enfranchisement payment that reflected the development value that it was losing.
“The landlord is entitled to be paid a price that reflects the development value that it is losing when it parts with the freehold”.