The amount of ground rent payable in a long lease is one important part of valuing the premium to be paid for a lease extension under the provision of the Leasehold Reform Housing and Urban Development Act 1993. Specialist valuers undertake the hard work of calculating the capitalisation of the ground rent, but establishing the amount of ground rent that is actually payable, is not always as simple a task as it might sound.
Many leases specify an amount of ground rent. Sometimes this is fixed throughout the term of the lease and other times it might rise during the term by a fixed amount or by reference to a rent review formula.
Some older leases which pre-date 1989 contain what has become known as a cap on the level of ground rent to be paid. It should be remembered at the 1993 Act was not in force at this time.
Broadly, section 78 of the Housing Act 1980 amended section 127 of the Rent Act 1977 to enable assignments of tenancies at a premium. Many long leases therefore capped the amount of ground rent payable to two-thirds of the rateable value so that the lease would fall into this exception created by the 1980 Act and so the lease could be assigned. An unassignable long lease would not attract a market premium nor would it generally be mortgageable.
These provisions are no longer in force. The question therefore is whether the cap which limits the ground rent in this way, is still applicable to limit the ground rent actually payable by long leaseholders to their landlords (and therefore lowers the premium payable for a lease extension) even after the statutory provisions have been repealed.
The answer appears to be – it depends on the wording of the individual lease in question.
There have been several interesting cases recently on this issue.
31 Croydon Road
In the decision of the Leasehold Valuation Tribunal (as it was then called) in 31 Croydon Road Limited v. Sinclair Gardens Investments (Kensington) Limited (2011), the LVT determined that a ground rent cap was permanently effective, notwithstanding the partial repeal of section 78 of the 1980 Act. The provision in the lease itself stated “this provision being made so as to comply with the requirements of section 78 of the Housing Act 1980”. The Tribunal reasoned that the words identifying the reason for the cap were there for guidance only and were relevant at the time the lease was drawn. They held that the words capping the rent would have equal effect whether or not the words relating to section 78 were present and that it was “quite clear” that the capping provision does not fall away just because the particular piece of legislation mentioned had been repealed.
However, the landlord appealed and the LVT’s decision was overturned by the Upper Tribunal in Sinclair Gardens Investments (Kensington) Limited v. 31 Croydon Road Limited (2012) UKUT 310 (LC). Gerald J reasoned that in his judgement the fact that section 78 was referred to in the way that it was in the lease points strongly towards the conclusion that the sole reason for its inclusion was to ensure statutory compliance and not otherwise “almost as if the parties had in mind that if section 78 ceased to apply the whole proviso could simply be ignored”. It was held that “when construed naturally and in context, a reasonable person would conclude that the words were incorporated as part of the proviso not merely by way of guidance.”
71 Cadogan Gardens
Deputy Judge Jonathan Klein in Furlonger v. Pettorelli Lalatta and others (2014) EWHC 37 (CH) noted the long leases in this case contained ground rent provision which referred to the capping of rent to two-thirds of the rateable value. The long leases did not specifically refer to the Rent Act 1977 or the Housing Act 1980, but the head-lease which already existed at the time the subleases were granted did state “for so long as there is legislation imposing conditions on allowable premiums in relation to certain long tenancies…”. The court found that the purpose of the proviso (the cap) “was to ensure that any premiums paid on assignments of the sub-leases were not tainted with illegality”. The court found that a cap did operate, but only as far as the intention of the cap provision was concerned. Because the intention of the provision was to avoid the illegality of premiums, the ground rent would increase in accordance with the rent review provisions in the lease unless it got to a point where a premium on an assignment would be illegal. The practical effect of the decision is that the cap did not operate so as to limit the rent in the absence of any legislative provisions which made premiums on assignment illegal.
9 Granville Road
Interestingly the decision of the First-tier Tribunal (Property Chamber) in Bhatta, Bhatta, Marshall and Eissa v. Raj Properties Limited (2014) was decided after the decision in 71 Cadogan Gardens, but that decision was not mentioned at all. It might be the case that the 71 Cadogan Gardens decision had not been published at the time of the hearing of 9 Granville Road.
There were many issues for the FTT to resolve in this case which are outside of the scope of this note. The ground rent was subject to a provision which appeared to cap the ground rent to two-thirds of the rateable value of the flat “as defined by the Rent Act 1977 or any other statutory amendment or re-enactment thereof then there shall be substituted only for so long as the ground rent exceeds two-thirds of the rateable value so defined….”.
The FTT found that the cap did operate. It was found that the lease did not specify the purpose of the capping provision and the fact that rateable values have been abolished does not assist in construing the parties’ intentions.
One wonders, whether the FTT’s finding that the lease did not specify the purpose of the capping provision (or by implication it was not the parties intentions to include the capping provisions so as to ensure premiums on an assignment were not illegal) would have been different had they have been referred to the decision in 71 Cadogan Gardens.
The issue almost arose in the FTT in De Winter House Limited v. Sinclair Investments (Kensington) Limited (2013) which related to 33 Granville Road but not in the same road as in the case of 9 Granville Road. The applicant lessees appear to raise the issue at the outset. The Tribunal records that the applicant lessees originally asked the Tribunal to make a finding on this issue. The Applicant then appears to have conceded the point in light of the decision in 31 Croydon Road. Interestingly the Tribunal notes that the Applicant’s surveyor had agreed a premium on the basis that no cap operated and that this was “significant factor” in the Tribunals determination as the Tribunal then “makes no reduction in the expert’s agreed purchase price”. This is a surprising conclusion when the Courts and Tribunals have always accepted the operation (or non-operation as the case may be) of what appears to be a cap on ground rent is a question of law and not of expert valuers’ evidence and relates to the precise wording of the lease in question. The Tribunal records that the Applicants would have to go to the Court of Appeal to argue to the contrary of 31 Croydon Road. This decision might have ended differently if the applicant lessee had been represented and it is not clear from the decision what the wording of the actual lease was and whether it mirrored the leases of other cases. If it did not, one questions the outcome of this case and whether the applicant lessees should have conceded the point.
The common theme which does arise in these cases is that the particular words of the lease in question must be carefully considered. Gerald J himself says in 2012 “the fact that rateable values have long-since been abolished does not assist in the construing the parties’ intentions at the time the lease was granted because that is something which could not have been reasonably contemplated at that time (1985) and was therefore outside of the contemplation of the reasonable person. By contrast, the proviso specifically contemplates the possibility that section 78 might no longer need to be complied with”. In fact, in three of the four decisions referred to above, the respective Judges referred to the principles of interpretation of contracts laid down by Lord Hoffman in Investors Compensation Scheme Limited v. West Bromwich Building Society (1998) 1 WLR 896 which very clearly suggests the Judge had in mind what was intended by the parties to the lease when it was granted. This is important in determining and ground rent provision where fixed amounts are not referred to or rents are reviewed by reference to legislative provisions or factual indexes which may no longer exist.
It is important for landlord and leaseholders to obtain specialist legal and valuation advice if a ground rent cap might be an issue with a lease extension or collective enfranchisement claim.
Our award winning Leasehold Enfranchisement team have the specialist knowledge, expertise and experience to advise you in respect of such matters