Kutchukian v John Lyon's Charity, Trustees of the

In a collective enfranchisement valuation under the Leasehold Reform, Housing and Urban Development Act 1993, legal rights and liabilities affecting the freeholder’s interest must be determined by construing the Act and relevant leases. They are not treated as uncertain risks and discounted. Future factual uncertainties, such as planning, market conditions and construction costs, may be reflected by valuation discounts. The statutory landlord entitled to seek possession for redevelopment under section 61 is the competent landlord who granted the extended lease, including the freeholder, rather than only the immediate landlord. Compensation on termination of an extended lease is for loss of the remaining term, not redevelopment value.

The property comprised four flats held under a headlease and extended underleases. The nominee purchaser sought collective enfranchisement under the Leasehold Reform, Housing and Urban Development Act 1993. The Leasehold Valuation Tribunal determined the price, and both parties appealed.

The Upper Tribunal (Lands Chamber), in [2012] UKUT 53 (LC), treated uncertainty about future rights under section 61 and Schedule 14 as a valuation risk and applied a 30 per cent discount, while expressing views on the underlying legal issues. The central questions were whether the legal position had to be determined for valuation purposes, who could exercise the redevelopment right under section 61, and whether compensation included development value.

Lloyd LJ gave the leading judgment. Sullivan LJ agreed. Lewison LJ agreed with Lloyd LJ and added that the valuer first had to identify the bundle of rights comprising the freeholder’s interest.

1. Valuation of legal rights. The hypothetical valuation under paragraph 3 of Schedule 6 required the Tribunal to determine the legal rights and liabilities affecting the freeholder’s interest by construing the Act and the relevant leases. The statutory rights under section 61 were already incidents of the relevant interests, even though they could not be exercised until a future date. The Tribunal therefore erred in treating legal uncertainty as a risk warranting a discount.
2. Future factual uncertainty. Uncertainty about future planning policy, market conditions, construction costs and the factual response of tenants could properly be reflected in the valuation by suitable discounts. That was materially different from uncertainty about the legal position.
3. Right under section 61. “The landlord” for section 61 purposes was the party who granted the new lease under section 56 and who was the competent landlord under section 40. It was not confined to the immediate landlord. On the facts, the Trustees as freeholders could rely on section 61 in 2046. The failure to reserve the right required by section 57(7)(b) in three new leases did not affect the freeholder’s statutory right.
4. Compensation. Schedule 14 paragraph 5 provided compensation for loss of the remaining term of the new lease. The deemed restriction in paragraph 5(1)(b)(ii) excluded redevelopment value. The tenants had never possessed an entitlement to share in the reversioner’s redevelopment profit.
5. Orders. The Trustees’ appeal was allowed and Mr Kutchukian’s appeal dismissed. Removing the 30 per cent legal-uncertainty discount, the price payable was £284,592.

• Court of Appeal (Civil Division): In [2013] EWCA Civ 90, the Trustees’ appeal was allowed and Mr Kutchukian’s appeal was dismissed. The 30 per cent discount for legal uncertainty was removed and the price was calculated at £284,592.
• Upper Tribunal (Lands Chamber): In [2012] UKUT 53 (LC), the Tribunal applied a 30 per cent discount for uncertainty about future legal rights and expressed views on the legal issues. Both parties appealed.
• Leasehold Valuation Tribunal for the London Rent Assessment Panel: The original valuation decision preceded the Upper Tribunal appeal. Its citation and detailed disposition were not stated in the judgment.