How Much Is a Freehold Interest Worth? Court of Appeal Clarifies the Law

Where a tenant exercises its right to buy a freehold, the sum payable is calculated on the basis of the property’s open market value, subject to the existence of the tenancy. But what happens if the original tenancy has been extended for a longer period? The Court of Appeal considered that issue in an important test case.

It was common ground that the tenant of a large house had validly exercised its right to acquire the freehold under the Leasehold Reform Act 1967. However, the sum due to the freeholder – a housing charity – was disputed. The lease in respect of the property, granted in 1935, had originally been due to expire in 2016. In the late 1980s, however, it had been extended for a further 50 years.

The charity argued that its freehold interest should be valued on the assumption that the lease expired in 2016 and that almost £2.9 million was thus payable by the tenant. The latter, however, submitted that it should only have to pay about £1.75 million on the basis that the lease did not in fact expire until 2066. The First-tier Tribunal preferred the charity’s arguments, but its decision was subsequently overturned by the Upper Tribunal (UT).

In dismissing the charity’s appeal against the latter ruling, the Court upheld the UT’s interpretation of the relevant terms of the Act, as amended by a number of more recent statutes. Construing the thicket of statutory provisions in the light of the Interpretation Act 1978 led to the conclusion that the tenant’s arguments were correct and that the lower price was therefore payable.