Underlease — Public house — Whether goodwill to be taken into account in calculating rent review — Arbitrator disregarding goodwill — High Court holding that arbitrator right to find that as a matter of law the disregard of occupation in this matter included disregard of goodwill
An underlease in respect of a public house known as the Night Jar, 1/2 Fulham House, Basingstoke, Hampshire, was made on July 13 1974. The term of the underlease was 75 years from June 24 1969. The reversionary interest in the underlease was vested in the applicant. The underlease was vested in the respondent. It provided for rent reviews after 21, 42 and 63 years and for the appointment of an arbitrator in default of agreement as to the level of the review rent. The rent review clause contained no disregard for goodwill in the valuation although occupation and improvements were to be disregarded. This gave rise to a dispute whether and how goodwill was to be taken into account by the arbitrator in valuing the reviewed rent.
In its written submissions to the arbitrator the applicant argued that the basic rent should be assessed by the profits method, ie the Fair Maintainable Trade (FMT) was assessed and from it a net profit was derived as a percentage (the divisible balance). In addition to a basic rent there was to be an increase to reflect the inherent goodwill or profit potential of the premises by virtue of their status as a trading asset (the overbid). The arbitrator took his own legal advice relating to the absence of goodwill disregard and eventually calculated the rent at £41,500 disregarding occupation and as a consequence goodwill. The applicant sought an order that the matter be remitted to the arbitrator on the question of goodwill.
Held The application was refused.
1. The arbitrator was right in finding that as a matter of law the disregard of occupation in this matter included the disregard of goodwill. Once it was noted that the arbitrator’s finding was directed only to the effect of the disregard of occupation in this matter it could be seen that there was no error of law for the arbitrator had already concluded that the overbid was seeking to apply a factor to reflect the absence of express goodwill disregard, and that it fell to be disregarded as a consequence of disregarding occupation if the correct assumptions were adopted.
2. The arbitrator had allowed for a proper share of the potential profit by fixing the landlord’s share of the divisible balance at 50% instead of the 45% for which the landlord had itself contended.
3. In determining the valuation the arbitrator should assume that the tenant had never been in occupation of the premises if and to the extent that the occupation had an effect on rent: see Cornwall Coast Country Club v Cardgrange Ltd[1987] 1 EGLR 147 at p151.
Simon Berry QC and Edwin Johnson (instructed by Lovell White Durrant) appeared for the applicant; Paul Morgan QC (instructed by Osborne Clark) appeared for the respondent.
