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UK court clarifies law regarding collective real estate enfranchisement

The legal judgement is of interest to residential landlords and their lenders whose properties may be affected by a claim of collective enfranchisement and to surveyors.

Lawyers from Walker Morris have successfully defended a major Court of Appeal case for their clients, the joint administrators of Vowden Investments Limited, which determines the way real estate is valued on collective enfranchisement, and could have a significant influence on similar cases in the future.

The case involved the administration of Vowden Investments Limited, a London based property developer, and provided much needed clarification on the interpretation of a complex area of law specifically in relation to the way properties are valued under the statutory collective enfranchisement regime.

Vowden owned a number of prime residential properties in central London. When Vowden was placed in administration by its major creditor, the administrators were faced with a claim for collective enfranchisement in relation to a four storey town house in central London which was divided into three self contained flats.
 
Vowden held a 125 year lease of the top floor flat. The tenants of the other two flats, via a nominee company Cravecrest Limited, exercised their right to acquire the freehold interest of the building which included the acquisition of any intermediary leases.

Due to the structure of the leases, Vowden's lease was an over riding interest which was also capable of being acquired. It was the valuation of these intermediary leases, including Vowden's leasehold interest, that was in dispute.

The Court of Appeal was asked to determine whether the potential increase in value, agreed to be £2 million, by reinstating the property as a single home, and the potential to develop the roof space as a fourth floor, should be reflected in the price being paid to Vowden.

Cravecrest said that it should not, and that the valuation be reduced accordingly. Vowden, together with the other respondent, argued that it should be included. Timothy Dutton QC, instructed by Walker Morris, successfully argued that the interpretation of the relevant statute does allow Vowden to benefit from the ‘development value’. This resulted in a final valuation of £6.85 million of which £3.15 million will be payable to the administrators of Vowden, a gain for the administrators in the region of £1 million.

‘The particular circumstances of this case are unusual in that it involved an overriding leasehold interest, owned by an insolvent entity, that was capable of being acquired, and secondly, that considerable development value existed which had a significant impact on the overall price to be paid,’ said Simon Clark from Walker Morris.

‘The judgement is of interest to residential landlords, and their lenders, whose properties may be affected by a claim of collective enfranchisement which effectively compels them to dispose of a property they may otherwise wish to keep. This reassures them that the Courts will protect their right to receive fair value for the property which includes any potential value derived from future development,’ he explained.

‘The outcome is also relevant to insolvency practitioners and surveyors who may find themselves appointed over a property affected by such a claim,’ he added.

Cravecrest has applied for permission to appeal to the Supreme Court.

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