When calculating the premium for a residential statutory lease extension, valuers will disregard tenant improvements –but does a landlord realise the potential for future improvements at the date of valuation or at the end of a lease term?
In Hanson & Anor v Harding & Ors [2025] UKUT 78 (LC), the Upper Tribunal (Lands Chamber) (the UT) has overturned a decision of the First Tier Tribunal (FTT) regarding the calculation of compensation payable for a loss in development value in a statutory lease extension claim under the Leasehold Reform Housing and Urban Development Act 1993 (the 1993 Act), finding that this compensation can only be realised by a landlord at the end of a lease term and its net present value should therefore be reduced to reflect this.
The appellants, who are leaseholders of the property, had sought to extend their lease on a statutory basis under the 1993 Act. As the respondent landlords could not be found, the appellants were required to issue a claim for a vesting order to allow the County Court to act as landlord and grant a new lease of the property. The County Court referred the issue of the lease terms to the FTT.
The appellant's valuer had calculated the value of the premium payable to extend a lease on a statutory basis for a period of 90 years ("the Premium") to be in the region of £10,000. However, the appellants had converted the roof space of the property into an additional flat. Such tenant improvement works are not typically factored into the calculation of the Premium, but the appellant's valuation report had stated that the improvement works had necessarily highlighted a potential for development work. If there is a potential for development works, the granting of a new lease to the appellants would constitute a loss to the landlord, as they are prevented from performing their own development works to increase the value of the property. The valuer had found that the potential for improvement works would increase the freehold vacant possession value ("FHVP") of the property by £60,000, and that fair compensation for a loss of development value caused by the extension of the lease would be £20,000. However, the valuer stated that as this increase in FHVP would only be realisable by the landlord at the expiry of the initial term of the lease, this payment should be diminished for each remaining year of the initial term, effectively reducing the compensation for the loss in development value to zero.
In the absence of the landlord respondent, the FTT assumed the role of seeking to secure appropriate compensation for the extension of the lease of the property. The FTT's decision was that the compensation for the loss of development value calculated at £20,000 was payable immediately and without reduction, in addition to the Premium calculated in the value of £10,584. Permission to appeal was initially refused by the FTT on the basis that the roof space was not demised to the appellants, that permission for alterations was required from the landlord prior to works being performed, and, principally, that because the works had been completed, the loss in development value was to be factored in at the valuation date.
After permission to appeal was eventually granted, the UT overturned the decision of the FTT. Although it was correct that compensation for the loss in development value was payable under the 1993 Act, the UT agreed with the appellant's submissions that the principles set out in Earl Cadogan v Sportelli [2007] 1 EGLR 153 would apply. As the increase in the FHVP would only be realisable by the landlord at the end of the term, Cadogan provides that the compensation payable for a loss in development value for a flat should diminish at a rate of 5% per annum, effectively reducing the £20,000 to zero in the context of sums payable alongside the Premium. With respect to the FTT's points that the tenant works would constitute a breach of the lease, the UT did not consider these to be relevant, and the UT likewise found that the upstairs flat which was developed likely was demised to the appellant and this was not relevant to the concerns of the FTT.
The calculation of sums payable under the 1993 Act to a landlord in a statutory lease extension can often be based on highly hypothetical sums, which, particularly for properties in London, can stretch to significant sums of money. The UT's decision in Harding highlights that a good valuer is essential when looking to bring a statutory lease extension claim, as even the FTT can misinterpret legislation.
