Underlease — High court holding that rent-free periods referring to concessionary periods for fitting out of premises — Valuer to make adjustment to eliminate effect on rent of tenant’s need to give similar rent-free period to subtenant
An underlease was made, dated September 25 1987, between the plaintiff lessor, the defendant lessees and others of premises at 3 Cloth Street, London EC1. Clause 3(2) directed that on review the rent was to be “the best yearly open market rent (at the rate payable following the expiry of any rent free period at concessionary rents which might be granted on a new letting of the demised premises or of comparable premises in the open market on the relevant review date) at which the demised premises might reasonably be expected to be let on the open market …”. In assessing the rent to be paid disregard (d) held that “any effect on rent of any initial rent free period or periods at concessionary rents or other inducements which might be offered in the open market to prospective underlessees of the demised premises … or of comparable premises”. A dispute arose whether the reference to rent-free periods or concessionary rents was to be interpreted as limited to such rent-free periods or concessionary rents as a willing lessor would give to reflect the fact that the willing lessee would not be able to make full, beneficial use of the demised premises until after completion of his fitting-out works. A further question arose on the construction of disregard(d).
Held The court determined that the periods referred to were fitting-out periods.
1. The exclusion of inducement periods resulted in a bonus to the lessor. If an inducement period had any effect on rent, it would be to increase the market rent artificially in the lessor’s favour. The lessor could not obtain the increased rent on a new letting without suffering a rent-free period additional to a fitting-out period. Moreover, the ascertainment of the open market rent at the rate payable following expiry of an inducement period was not part of the process of reflecting changes in the value of money or real increases in the value of the property. In the present underlease it created a difficulty for subletting. With all those factors in mind, unless clause 3(2)(b) otherwise required, the bracketed words should be confined to the fitting-out periods.
2. The words “on a new letting” meant “attributable to” (and only to) a new letting. There was nothing in clause 3(2) to prevent that construction and it had not been suggested that it would be unworkable. In those circumstances the periods referred to in the bracketed words were fitting out periods.
3. Further, in the context of this particular underlease, the word “underlessee” more naturally referred to subtenants for the lessee than to the lessee himself. Where the latter was referred to the words “willing lessee” were used. The reference to comparable premises served the purpose of limiting a discount for rent-free periods to sub-tenants found in comparables. Accordingly, disregard (d) required the valuer to make any adjustment to the tenant’s need to give any rent-free or concessionary period or other inducement to a subtenant.
Jonathan Gaunt QC (instructed by Cameron Markby Hewitt) appeared for the plaintiff lessor; Paul Morgan QC (instructed by Middleton Potts) appeared for the respondent lessees.
