We have a big problem:
In the real market place, unquantifiable risks (e.g., no valid planning consent, engineering risks, lessee resistance risk, etc.) are not taken by willing buyers acting knowledgeably and prudently. They enter into an option or conditional contract for a small option fee or returnable deposit plus the liability to pay for the work necessary to eliminate (or minimise to acceptable levels) the risk – or walk away. Inevitably time limits are involved. But there must be a prospect of proportionate profit if the risks are favourably resolved.
In a statutory valuation, there is a fixed valuation date. No options. No conditional contracts. Unquantifiable risks at that date must be quantified or, in some other way, taken into account. Of the cases which go to tribunals for determination, it is typically the case that the landlord is claiming £X00,000s and the nominee purchaser is countering £0.
452 Finchley Road, London NW11 8DG
Reference: LON/00AC/OCE/2023/0089: July 2025
Only the roof space in dispute. Landlord: £450,000. NP: £0. Planning, engineering, construction cost risks amongst others in contention. Residual valuation: Tribunal calculating minus £4,000.
Although we are satisfied that the residual calculation shows no residual value, we do not consider that to be the end of the matter. In our view, planning evidence from (landlord’s planning expert) is strong enough to support the additional of a modest premium in the calculation…We think that there is sufficient ‘hope value’ that would justify the addition of £20,000 to a premium which would represent the amount that a hypothetical purchaser would pay in respect of the potential of the site for future development either for the proposed or a differently designed scheme possibly on the basis of future change in planning policy or building costs.
Flats 1-24 St Matthews Court, London N10 1NW
Reference: LON/00AP/OCE/2023/0004: February 2024
Roof Development and Garden Development in dispute. Landlord: £1,048,288. NP: £0. Evidence: planning, building costs, engineering and valuation in contention. No Pl. Perm. at val. date (9/5/22) Pl. Perm. granted on appeal 3/5/23 for 8 x 1-bed flats. Market evidence rejected. Residual valuation accepted.
Tribunal: £699,703 for roof; £62,500 for garden. NP withdrew. Landlord commenced roof development Summer/Autumn 2025. Present position (March 2026) is that the outside works are close to completion, scaffolding coming down in parts, no estate agent sale boards on site when I last passed by. No garden development, no planning application or approval.
The ‘Gambling Chip’ Principle
This expression is more widely used in casinos and is an amount which a gambler is prepared to lose knowing that he will double his money if an evens chance (red or black) is successfully played, or will return multiple times his stake if he backs the right number or line of numbers. The gambler knows the amount he is prepared to stake and that is fixed, he also knows the odds (and therefore his return) if the gamble is successful.
Vale Court, London SW3 6AL (2011) UK UT 415 (LC)
Several matters in dispute but this paper is concerned with roof development prospects. On roof space issue: landlord’s claim £664,746. NP £0/£10,000. Evidence: engineering, planning, Conservation Area status and valuation. No pl. perm. at V. date (Sep 2007).
Letter from Area Planning Officer:
I would accordingly advise that an additional storey would not preserve or enhance the character or appearance of the Conservation area and would infringe policies CD57, CD61 and CD62.
A pre-ap meeting had been held in October 2006, also negative in outcome. LVT decision: Considered that a ‘cautious and prudent investor’ would reject a residual valuation as too unreliable and would rely on their instinct and knowledge of the market and would allow no more than £10,000 for the prospect.
Landlord submitted appropriate test was, from Philips -v- Brewin Dolphin (2001) 1 WLR 143: Lord Scott:
The value of an asset that is being offered for sale is, prima facie, not less than the amount that a reasonably informed purchaser is prepared, in arm’s length negotiations, to pay for it.
UT accepted the test of ‘a prudently and reasonably informed purchaser’ (Para 65): The LVT concluded that a purchaser might be prepared to offer a ‘gambling chip’ in the light of the prospect that at some time in the future an application might be treated more sympathetically. The sum of £10,000 was the LVT’s opinion of this nominal amount, and the respondents accept this. We therefore include that amount in our valuation.
Note: no evidence from NP that the residual valuation showed nil or negative value/return. Landlord’s valuer had put site value with planning permission at £1,676,250 (Para. 60). So the ‘gambling chip’ odds were: 1,676,250:10,000 or 167:1. By comparison, 452 Finchley Road was: -4,000:20,000 or a guaranteed loss of minus £1 for every £5 stake!!
Examples of failed gambles
65 York Road Barnet EN5 1LN
Two-storey block of flats under pitched and tiled roof with Pl. Perm. for six flats. Freeholder granted 125-year development lease of roof space and submitted to auction. Sold by Auction House February 2018 for £521,000.
Freeholder sells freehold to lessees who threaten developer with an injunction and obtain an engineer’s report that the building has some structural cracks and cannot support the additional load. Submitted to auction December 2021: withdrawn prior. Submitted to auction February 2022: unsold. No change in ownership as of Land Registry Title search last week.
Spring Apartments, Hornsey, London N8 7QU – Strettons Auction: September 2022
Three-storey block of flats with Pl. Perm. for one additional flat on existing flat roof. 999-year lease at peppercorn. Guide price £115,000 plus: sale price £192,000.
The approved plans had the common staircase conveniently shown for the development but not as it was in reality. The first and second-floor levels would have to be taken down, redesigned and rebuilt. The second-floor flat would have to have its front door moved, plus internal alterations and the purchasing developer’s proposal was to put a pre-formed module on the existing timber roof! Privately financed. No development has taken place.
381 Southwark Park Road, London SE16 2JT (HT-2022-000311/HT- 2022-000254)
Three-storey block of flats under a flat roof: Pl. Perm. for three flats. A freeholder’s associated (SPV) company erects scaffold, sets the support points, fixes the steels, lays the platform and orders the pre-formed modules to be craned into position.
One weekend in July, the scaffolding is removed, the road closed for the crane which starts raising the modules just as storm conditions (forecasted) deluged the property. Top flats uninhabitable, other flats damaged. Insurers for building, developer and builder all refused to accept liability.
Somehow the new flats are sold but freehold company is then dissolved, so is associated developer company, and the builder. The High Court action was against the holding company. Receiver appointed. Discovered that the structural supports have been negligently built in and remedies can only be effected from below (through the existing top-floor flats). Substantial damages for remedial works to common parts and individual flat owners found. Further litigation outstanding and to follow.
So, what’s the answer?
- In real life, roof developments have a complex range of high-risk issues rarely met in cleared site or vacant building developments. These risks are rarely fully explored and quantified in Tribunal evidence. And sometimes not explored by auction purchasers.
- Rarely is there agreement, or a clear statement, about the ‘market value’ definition to be followed (Vale Court UT definition: a prudently and reasonably informed purchaser?).
- It is not uncommon to find that planning applications/permissions are based on plans which have important inaccuracies. They need checking in every case.
- In real life, well organised lessee resistance is a major impediment and cause of unbudgeted cost extras. If present, good quality witness statements should be obtained. On the other hand, some lessees actually support a new roof and other benefits at no service charge costs.
- If a lift is necessary, the spatial and cost consequences can be considerable. If the new floor height engages the Building Safety Act (11 m above ground level) there are important consequences. H & S compliance can result in major extra cost. These matters need checking.
- Do existing leases need variations: service charge proportions? Management responsibilities?
- Tribunals seem to have moved away from market comparisons and tend to give greater weight to residual calculations. That is consistent with conventional funding sources who usually want to see a credible viability study and a credible cash flow forecast. Risks need to be identified and credibility assessed.
- In real life, considerable use is made of conditional contracts and options. Not so in statutory valuations. That creates huge issues between theory and practice.