John Lyon's Charity (Respondents) v. Shalson (Appellant)
34. In my opinion, the reconversion of the property to a single undivided house was unquestionably an improvement carried out at the expense of the tenant which increased the value of the property and which should therefore result in a diminution of the enfranchisement price. But the subsection refers to "any improvement carried out by the tenant or his predecessors in title" (emphasis added). It is not sufficient to have regard only to the most recent improvement. The tenant is entitled to have account taken of any relevant improvement which satisfies the statutory criteria. The real question is whether the earlier work of subdividing the house into flats also constituted an improvement; and if so what effect if any it should have on the price.
35. My Lords, the concept of an "improvement" is a very familiar one in the law of landlord and tenant. It connotes additions or alterations which are not merely repairs or renewals. Whether an "improvement" really improves the property is considered from the point of view of the tenant alone, so that work may constitute an improvement although it does not increase the value of the property at all or even reduces it: see Balls Brothers Ltd v Sinclair  2 Ch 325. As my noble and learned friend Lord Hoffmann observes, the concept is a physical and not an economic one.
36. Accordingly the works by which the house was divided into flats constituted an "improvement" within the meaning of the subsection. And they were carried out by a predecessor in title of the enfranchising tenant. But they do not fall to be taken into account in determining the amount of the enfranchisement price for two separate and independent reasons: (i) they were not carried out at the tenant's expense; and (ii) had the house still been divided into flats at the valuation date they would not have increased the value of the property as at that date but reduced it.
37. The subdivision of the house into flats was carried out by the tenant as a term of the grant of the 1947 lease. It was, therefore, carried out not merely pursuant to a contractual obligation in that behalf but in consideration for the grant of the tenancy. Had the work been carried out by the landlord, he would either have charged a premium or an increased rent. Thus the work must be taken to have been carried out by the tenant in return for the grant of the tenancy at a reduced rent and without a premium, in other words at the expense of the landlord: see Rosen v Trustees of Camden Charities  Ch 69, CA.
38. Even if this had not been the case, however, and the work had been carried out by the tenant at his own expense, the result would have been the same. It may be assumed that, when the work of subdivision was originally carried out, it did increase the value of the property. As the years passed, however, market conditions changed; and the extent to which the subdivision increased the value of the property gradually dwindled and eventually vanished altogether. By the valuation date, it would have reduced the value of the property.
39. Had the tenant served an enfranchisement notice at any time when the property was still worth more subdivided into flats than as a single house, he would have obtained a reduction of the price to reflect the remaining value attributable to the work of subdivision. But by the time he began the work of reconversion to a single house, the property was worth less as a house subdivided into flats than it would have been as a single house. He could not have obtained the benefit of a diminution of the enfranchisement price by virtue of the subsection, since his predecessor's expenditure was no longer reflected in an increase in the value of the property at the relevant time. He would still have obtained a diminution of the price as the result of the expenditure, of course, but by a different means; had it not been carried out the house would have remained undivided and worth more, so that the price would have been higher.
40. The Lands Tribunal compared the property at the valuation date with the property as it was when originally let. But there is no warrant for this approach in the wording of the subsection either. The "extent to which the value of the house and premises has been increased" by an improvement is simply the difference between the value of the property with the improvement in question and the value of the property without it. The problem to which the approach of the Lands Tribunal gives rise is that it may take account of improvements in the distant past which have long since ceased to have any effect on the value of the property, and accordingly do not satisfy the conditions of the subsection. If the tenant constructs a home extension on a part of the lawn backing onto the rear wall of his house, for example, it will not help the landlord to show that a conservatory had originally stood on the site but had long since been pulled down.
41. On the other hand, the tenant is entitled to take advantage of any improvement, however ancient, which satisfies the conditions of the subsection. It must have the effect directly or indirectly of increasing the value of the property at the valuation date, but it need not have physically survived to that date. If a former tenant had increased the value of the house by adding a conservatory, and the enfranchising tenant increased the value of the house still further by demolishing the conservatory and erecting a home extension in its place, he would be entitled to a reduction in price which reflected the combined effect of both improvements. His own improvement would consist of works of demolition and reconstruction; but it would not be fair to reduce the price by an amount which reflected only the difference between the value of the house with a conservatory and the house with the benefit of the home extension. Had he not demolished the conservatory and built the home extension, he would still have been entitled to a diminution in the price to reflect the increase in the value of the house brought about by the construction of the conservatory.
42. This, of course, presupposes that the earlier work also increased the value of the property and did not reduce it. There is no question of netting off an increase against an earlier reduction. The landlord gets the worst of both worlds; he receives a lower price if the tenant carries out alterations which reduce the value of the property, and does not receive the benefit if the tenant carries out alterations which increase it. The Court of Appeal were troubled by this. They took the case of a tenant who, for his own eccentric reasons, significantly altered the property in a way which materially reduced its value. They did not think that it would be sensible for a later tenant, let alone the same tenant, to obtain a reduction in the enfranchisement price merely by "putting that right".
43. But with respect it is not a question of putting anything right. The landlord must have consented or at least not objected to the earlier works which reduced the value of the property. Any diminution in the price which he receives is the result of the tenant's having lawfully carried out works which reduced the value of his reversionary interest. The landlord can avoid this result by taking a covenant in the lease that the tenant should obtain his prior consent to any works of improvement, and either refusing his consent or imposing a condition that the tenant restore the property to its former state at the termination of the tenancy. Even if the works of restoration should still fall to be treated as being carried out at the tenant's expense, as to which I prefer to express no opinion, the obligation would severely limit and perhaps eliminate any effect the works would have on the value of the landlord's reversionary interest.
44. The Court of Appeal expressed caution about taking account of works carried out in the distant past, on the ground that this would only be possible if a reliable history of the property was available. This is true, but it does not, with respect, affect the principle that every improvement, however ancient, which satisfies the statutory criteria and has the effect of increasing the value of the property at the valuation date may be taken into account. It must be remembered that the landlord is prima facie entitled to the full value of his interest in the property as it stands at the valuation date. If the tenant claims a diminution in the price he must establish the facts which entitle him to it.
45. For these reasons, and also for the reasons given by my noble and learned friend Lord Hoffmann whose speech I have had the advantage of reading in draft, I would allow the appeal.
LORD SCOTT OF FOSCOTE