Heritable Property – Title conditions – Compensation – Variation by majority of proprietors imposing burdens on warden’s flat and office, guest bedrooms, etc. of sheltered housing development – Unsuccessful application by owners of ‘residual property’ to preserve previous deed of conditions under which not burdened – Deed of variation providing for ‘House Manager’s Apartment Charge’ payable to owners – Valuation of residual property prior to variation, i.e. unburdened – Whether ‘substantial loss or disadvantage’ – Whether just to make award and if so how much –– Title Conditions (Scotland) Act 2003, Section 90(6),(7)

Sheltered Housing Management Limited v Jack
11 October 2007

The applicants were owners of ‘residual property’, including the warden’s flat and office, guest bedrooms, etc., at a sheltered housing development of which they had been managers. The majority owners exercised their right under the 2003 Act to appoint new managers and also, relying on Section 33 of the Act, executed a deed of variation of the existing deed of conditions. The principal effect of the new deed was to impose burdens (which had not previously been in place) restricting use of the residual property to use ancillary to the development. Under the new deed, the applicants, as owners of the residual property, were to receive a ‘House Manager’s Apartment Charge’ of £6,000 p.a. The Tribunal had refused the owners’ application to preserve the previous deed of conditions. In the course of its earlier consideration of the issue on the merits, under Section 98(b)(ii), whether there was unfair prejudice to the applicants, the Tribunal had considered valuation evidence and concluded that a fair rental value for the residual property would be in the region of £6,000 to £8,000. It had been noted that the statutory framework applicable to this type of application included a jurisdiction to award compensation under Section 90(6) and (7) if the application to preserve were unsuccessful.

The applicants applied for compensation. Parties were agreed on the appropriate yield figure at the valuation date, i.e. the effective date of the deed of variation, at 7%, making the residual property worth £85,714 on the basis of the payment of £6,000. The applicants advanced three alternative claims based on different capital valuations (all exceeding £85,714) under the previous deed, as spoken to by valuation surveyors at the previous hearing: firstly, on the basis of cumulative capital values for all the items of residual property, on the basis of an age restriction on occupancy; secondly, on the basis that only the warden’s flat and garage were of any substantial value; and thirdly, again only for the warden’s flat and garage but also deducting 40% from the warden’s flat value on the basis that it might not be capable of occupation by anyone other than a resident warden for the development. The respondent argued that the third alternative valuation of the claim (at £9178) would not be ‘substantial’; and in any event that it would not be just to award compensation because the proprietors should not be required to pay compensation for using the residual property in the natural, originally intended way; alternatively, that any award should be for a nominal sum of £5,000. They argued that even under the previous deed the warden’s flat would not have been available with vacant possession following replacement of the applicants as managers.

Held, awarding compensation of £9178, it was not in dispute that Section 90(6) involved a discretion (Railtrack plc & Ors v AberdeenHarbour Board), but that was not simply a question of fairness in the broadest sense. The main issue was whether it could really be said fairly that the claimants were suffering loss when regard was had to the position before the imposition of the new burdens. It was necessary to look at the position under the previous deed after the applicants had ceased to be managers. This had to be considered on the basis that the applicants were entitled to vacant possession, and might be considered on the basis of aggregating the values of parts of the property. However, a realistic view should be taken. The ancillary nature of the property was highly relevant. There was no reason to depart from the view previously taken that parts other than the warden’s flat and garage were of such an ancillary nature as to have had no real value. Caution should be applied in valuing the warden’s flat to capital on the basis of occupation other than for communal purposes. Problems of such occupation in the circumstances would be a serious negative consideration for potential purchasers. In the real world, the practical reality would be occupation by a warden. The garage, however, could easily be either rented or purchased, even with an age restriction, and could be taken at full value. The direct capital valuations were out of line with valuation on an investment yield basis on the Tribunal’s previous finding as to the range of fair rental values (£6,000-8,000), the applicants having made no attempt at this hearing to dislodge these findings or even establish a figure within the range. However, discounting the capital valuation of the flat (but not the garage) by 40% made fair allowance for the uncertainties, and the resultant claim of £9178, the third alternative claim, fitted in reasonably with that previous assessment of the range of rental values.

The respondent’s submission, under reference to Re Gaffney’s Application, that a loss of £9178 would not be ‘substantial’ was rejected. A proportional approach to the issue whether loss was ‘substantial’ might have some bearing but was not determinative. A reduction of £9178 in a value of £94,892 was substantial. An award of compensation at this level was ‘just’. The majority owners, in providing for the ‘House Manager’s Apartment Charge’, had recognized that it was appropriate to pay a substantial sum, in effect a rental payment, for the use of the residual property, but this had been found to be slightly too low to compensate the applicants for the loss involved. The more general arguments for the respondent amounted to a plea that the applicant should not receive a ‘windfall’ as it had never been intended that they should obtain a separate commercial gain from this property. However, having arrived at a figure which recognized the realities of the particular situation, there was no reason to refuse the claim or reduce it further.

Authorities referred to:-

British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London [1912] AC 673 (Houses of Lords)
Smith v Taylor and Others 1972 SLT (Lands Tr) 34
Re Gaffney’s Application (1978) 35 P & CR 440 (Lands Tribunal, E and W)
Cumbernauld Development Corporation v County Properties Limited 1996 SLT 1106 (Inner House)
Railtrack plc and Others v Aberdeen Harbour Board, 29.8.2002, LTS/LO/13-21,28-31 Graham v Brownson, 20.5.2003, LTS/LO/2002/28
George Wimpey East Scotland Limited v Fleming and Others, 5.5.2005, LTS/LO/2004/19
Agnew, Variation and Discharge of Land Obligations, Ch. 7

See full decision:  LTS/TC/2006/01 (Compensation)