Fattal & Anor v Keepers & Governors of the Possessions Revenues & Goods of the Free Grammar School of John Lyon

Under section 9(1A)(d) of the Leasehold Reform Act 1967, the enfranchisement price is reduced only by the increase in value caused by the tenant’s actual improvements. The counterfactual valuation is of the property without those works, but with its existing history and any market value attributable to potential for improvement.

That potential remains part of the unimproved open-market value even where it has been absorbed by the works ultimately carried out. The provision does not prescribe a top-down or bottom-up valuation method. Available planning permission is not itself a physical improvement and is not to be disregarded.

The tenants held long leases of a house in Hamilton Terrace, London. After acquiring the leases, they carried out extensive extensions and improvements. They then exercised their statutory right to acquire the freehold under Part I of the Leasehold Reform Act 1967.

The London Leasehold Valuation Tribunal assessed the price at £2,468,985. On the tenants’ appeal, the Lands Tribunal reduced it to £1,941,655 in proceedings LRA/21/2002. The tenants appealed again, contending that the statutory deduction for their improvements required both development potential and planning permissions to be excluded from the unimproved valuation, and required a particular valuation methodology.

1. The appeal was unanimously dismissed. Sir Martin Nourse held, with Sedley and Buxton LJJ agreeing, that the Lands Tribunal had correctly construed section 9(1A)(d) of the Leasehold Reform Act 1967.

2. The provision requires a calculation of the increase in value caused by the tenant’s improvements. Following the causal comparison described in [2004] 1 AC 802, the comparison is between the property as improved and the property as it would have stood on the valuation date had the physical works not been done.

3. An unimproved property’s open-market value includes its potential for improvement. That potential would affect achieved prices for comparable unimproved properties. It therefore remains in the counterfactual valuation, even though the potential has been realised and absorbed by the actual improvements. The tenant receives a deduction for the additional value caused by the works, not the full value of the works without allowing for that potential.

4. Section 9(1A)(d) does not require the valuer to begin with the improved value and deduct the improvement value. It imposes no legal constraint requiring either a top-down or bottom-up method. The means of establishing the counterfactual open-market value is a matter of valuation judgment.

5. An improvement is a physical concept. Planning permission enabling the works is not part of the physical works and is not to be assumed away. The court regarded [1988] 2 EGLR 153 as confirming that a direction to disregard tenant improvements does not necessarily require planning permission to be disregarded.

The appellants were ordered to pay the respondent’s agreed appeal costs of £36,523.02 including VAT. Permission to appeal to the House of Lords was refused.

• Court of Appeal (Civil Division) — By [2004] EWCA Civ 1530, dismissed the tenants’ appeal and upheld the Lands Tribunal’s construction of section 9(1A)(d) of the Leasehold Reform Act 1967.
• Lands Tribunal — In proceedings LRA/21/2002, allowed the tenants’ appeal from the London Leasehold Valuation Tribunal in part and reduced the enfranchisement price from £2,468,985 to £1,941,655.
• London Leasehold Valuation Tribunal — On 12 February 2002, determined the price payable for the freehold at £2,468,985.