Landlord and Tenant Act 1927, section 18(1) — Claim by landlords for damages for breach of covenant to repair and deliver up in repair — Tenants’ liability to repair and the cost of carrying out repairs were admitted — Issue was as to the impact on damages of section 18(1) — The lease in question was for 13 years expiring on June 24 1982 and tenants had given notice under section 26 of the Landlord and Tenant Act 1954 requesting a new tenancy — Landlords did not oppose and an application to the court by the tenant was duly made, so that the tenancy continued pending the final determination of the proceedings — The complications and delay which arose in the present case were due partly to initial doubts as to whether the tenants, a bank, would decide to give up their premises, facing a substantial bill for dilapidations, or continue as tenants at a much increased rent — Tenants eventually decided to give up the tenancy and they did so on June 1 1984 — Landlords found new tenants, a leading building society which, in consideration of a reduction in rent during the first four years of the new lease, covenanted to carry out repairs and to introduce improvements on a substantial scale — The improvements cost more than twice what the repairs by themselves would have cost and there was no practicable way by which the premises could have been first repaired without any improvement and then improved without any element of repair — No attempt was made by evidence to identify pure repairs which could have been carried out before the building society began operations and which would have survived such operations — The investment value of the landlords’ reversion following the letting to the building society, capitalising the cash flow and taking a 7 per cent yield, produced a valuation well above that for the property repaired but unimproved — The judge held that the landlords’ claim failed under the first limb of section 18(1), the value of the reversion not having been diminished by the breach of covenant — As regards the alternative ground under the second limb of section 18(1) (the question whether structural alterations rendered valueless repairs covered by the covenant), the judge was restricted by an order made by Knox J to making a decision only on the issue whether there was an intention at the material date by the landlords or the building society to make alterations to the demised premises — According to Knox J’s order the effect of any such alterations was a matter to be tried separately — Judge Paul Baker decided that the relevant intention had been established — Landlords’ claim dismissed — Judgment includes detailed consideration of rival valuations
The following
cases are referred to in this report.
Betty’s
Cafes Ltd v Phillips Furnishing Stores Ltd
[1959] AC 20; [1958] 2 WLR 513; [1958] 1 All ER 607; [1958] EGD 92; (1958) 171
EG 319, HL
Cunliffe v Goodman [1950] 2 KB 237; [1950] 1 All ER 720, CA
Haviland v Long [1952] 2 QB 80; [1952] 1 All ER 463, CA
Jones v Herxheimer [1950] 2 KB 106; [1950] 1 All ER 323, CA
Keats v Graham [1960] 1 WLR 30; [1959] 3 All ER 919, CA
Landeau v Marchbank [1949] 2 All ER 172
Salisbury (Marquess of) v Gilmore [1942] 2 KB 38
Smiley v Townshend [1950] 2 KB 311; [1950] 1 All ER 530; [1950] EGD
139; (1950) 155 EG 110, CA
This was an
action by Mr E J Mather and others, trustees of a 1963 settlement by Viscount
Folkestone (now the Earl of Radnor), as landlords, claiming damages against
Barclays Bank plc, for alleged breach of repairing covenants in respect of
premises at 311-312-313 High Holborn, occupied by the bank at the north-east
corner of Chancery Lane and Holborn.
T H K Berry
(instructed by Boodle Hatfield) appeared on behalf of the plaintiffs; Robert
Pryor QC and Paul Morgan (instructed by Campbell Hooper Wright &
Supperstone) represented the defendants.
Giving
judgment, JUDGE BAKER QC said: In this action the plaintiffs are claiming
damages for breach of covenant to repair and deliver up in repair certain
premises which were held under a lease by the defendants, Barclays Bank.
Liability is admitted and the cost of doing the relevant works is agreed, but
the matter before me concerns the impact on the claim of section 18 of the
Landlord and Tenant Act 1927.
Before I refer
to the section more fully, I will deal with the facts leading up to the leaving
of the premises by the defendant bank. They held under a lease dated June 26
1970. The landlords are the trustees of the Viscount Folkestone 1963
Settlement. Viscount Folkestone, as I understand, is now eighth Earl of Radnor,
and that family has owned the demised property and adjoining properties for a
good long time.
The property
in question is 311-312-313 High Holborn and is, in fact, the north-east corner
of Chancery Lane and Holborn. It was until December 1983 a branch of Barclays
Bank. It consisted of a basement, ground and four upper floors. The main
entrance was right on the corner of Chancery Lane and Holborn but there were
other entrances, one in Chancery Lane and one in Holborn. The lease was for 13
years from June 24 1969, and therefore was due to expire at midsummer 1982. The
rent was £12,500 pa and the lease contained full repairing covenants on the
part of the tenants, but I need not refer to them in any greater detail.
On September
11 1981 the tenants, the bank, served a notice under section 26 of the Landlord
and Tenant Act 1954 requesting a new tenancy. The landlords did not give any
notice of opposition, and in due time the appropriate application to the court
was made under the 1954 Act. That had the effect, through the operation of
section 64 of the Act, of extending the lease until those proceedings were
finally disposed of.
While all that
was going on, there were negotiations a foot, both for the comprehensive
redevelopment of that and other sites which the landlords owned, and also, more
narrowly, there were negotiations going on over the terms of the new lease
which Barclays Bank were entitled to. The former set of negotiations in fact
came to nothing. There was a suggestion that there should be a consortium
including the bank, but the bank withdrew at a relatively late stage.
As regards the
negotiations for the new lease, I must go into the correspondence in a little
detail. On July 28 1982 the landlords, the trustees, served a notice under
section 146 of the Law of Property Act
new rent in the sum of £45,000. That was described as made with ‘tongue in the
cheek’; everyone expected that the rent would be considerably higher than that.
Then, in December
1982 there is a report internal to the bank which deals with dilapidations. The
bank had engaged agents to do the negotiations for them, a firm called Richman
Conway & Co, but here is the regional manager reporting to his local
directors:
The agent’s
view is that he will probably settle at around £75,000 pa against an asking
price of £95,000.
Then he
attaches the report.
Essentially I
feel there are two figures we must consider. If the bank decides not to renew
their lease and vacate the premises the current opinion is that we shall have
to make a payment in lieu of dilapidations of possibly £620,000 although this
is seen as the most pessimistic figure. If the bank decides to renew its lease,
the figure is seen as £285,000. These estimates are based on the Schedule of
Dilapidations as served to us by our landlord.
Then in March
1983 it would seem that Mr A I Conway of Richman Conway & Co had received
an offer from the landlords for a rent of £71,000, which Mr Conway regarded as
a little on the high side. He goes on:
Accordingly .
. . I would suggest that a further effort is made, by me, to obtain a lower
rental figure; if the landlords do not agree, then, at that stage, further
consideration must be given as to whether or not the bank accepts the £71,000
per annum level quoted.
On April 11
1983 we get an indication, foreshadowed in the document which I have just read
out, that the bank is strongly considering giving up the lease altogether,
despite their application to the court. It is in the form of an instruction to
their agent as follows, from the regional manager:
Further to
your letter of March 28 I can only agree that we should continue to seek the
lowest possible rent figure, albeit we are strongly considering leaving the
site. Clearly we must continue to keep our options open until the last possible
moment and to that end if a sudden change of policy by the bank occurs then we
shall be faced with entering into a new lease which naturally we shall wish to
agree in terms most favourable to the bank.
So one sees
there that the bank is minded to leave: they were strongly considering that,
but they deliberately did not disclose that to the landlords.
Then I go to a
proposal by the landlords:
We would
confirm the reduction on our last proposal to £70,000 per annum . . . which
represents the minimum rent acceptable to our clients.
On June 20
there is a counteroffer by Mr Conway and it contains this paragraph:
As a result
of considering all of the numerous factors relating to this particular
property, my Clients have therefore instructed me to make one final offer to
you in the sum of £67,500 . . . to represent the rent for this property based
on a new lease to be agreed between the respective parties’ Solicitors.
So there the
range of negotiations had come to £67,500 offered by the bank and £70,000
demanded by the trustees. The landlords’ agents respond that:
the rental
offer of £67,500 per annum is less than that acceptable to the Trustees;
however, I feel that if that rental were to commence at June 25 1982, our
clients may be persuaded of the merits in accepting a compromise.
So they are
suggesting a back-dating to the contractual termination of the lease.
Then there is
a letter on June 22 1983 in which Mr Conway reports to the regional manager of
the bank on the various options which, as he sees it, seem to be available. He
identifies three options:
a) Accept that the new Lease is to commence
from June 25 1982, at a rent of £67,500 per annum exclusive . . .
b) Insist that the new Lease is to commence
from completion of the documentation which would then, presumably, result in
the Bank having to pay at least £70,000 . . .
c) The Bank could state, categorically, that
they are only prepared to pay a rent of £67,500 . . . on the basis that the
Lease term is to commence from completion of documentation.
This approach
would, I feel, probably result in the Landlords resorting to Court which would
then provide the best opportunity to delay for the maximum period of time,
during which period the dilapidations negotiations could . . . be progressed
and finalised . . .
Additionally,
bearing in mind that the Bank will wish to vacate, and having regard to the
fact that I am anxious to at least attempt to reach agreement on the
Dilapidations question before such news is made public, it is relevant, I feel,
to secure the maximum negotiating time which I feel is best obtained by option
c) — whereas delays can be achieved by agreeing the revised rent now and then
negotiating the Lease terms, they may not be as great as could be achieved by a
Court process — notoriously slow.
Those are the
options, and that third option was accepted by the bank as the most convenient
from their point of view, after having considered the ethics of the matter at a
fairly high level. They decided to play it that way, and the reaction of the
landlords can be seen:
At the last
Trustees’ meeting I reported that I still hoped to achieve a rent of the order
of £70,000. From the market evidence I have collected, this is a figure for
which I felt we could make out a reasonable case. However, the indications are
that the Lessees have now made their best offer and if we press for an
improvement, the matter will have to be referred to the courts.
Judging from
previous experience, it is apparent that the courts tend to compromise between
two parties’ valuations, and undoubtedly in this case the Lessees will produce
evidence to support a much lower rental. Thus, depending on the quality of that
evidence, it is possible that the rent eventually awarded would be below the
£67,500 already offered.
Of course, the
landlords were totally unaware at that stage that the lessees were seriously
considering giving up the lease altogether.
Lord Radnor
accepted that advice. I need not go through the correspondence. Eventually there
is an exchange of letters between the respective agents, which agrees the rent
at £67,500. That took it to November 1983.
Having reached
that, on December 5 the bank dropped their bombshell and sent a letter via
their solicitors, Campbell Hooper, to the landlords’ solicitors, Boodle
Hatfield, in which they say:
We confirm our
telephone conversation with Mr Radcliffe on Friday when we advised you that
instructions had been received from the bank that they had now decided not to
proceed with renewal of the Lease.
The Bank
would like to remain in occupation of the premises until June 1 1984.
That, indeed,
is the date at which they gave up the premises. I think they physically moved
out a little before, but they paid the rent up to June 1 1984, then surrendered
the lease. And they went out leaving very substantial dilapidations.
These are
agreed, and I can therefore take the agreed cost of doing these dilapidations
from para 7 of the points of claim. The cost of works was £191,401. Then there
was VAT, as to which there might be a query if it really had to be sorted out,
but we have not gone into that; that is £28,710, making £220,111. Then there is
claimed — and if the cost of works was an admissible claim, this part of the
claim also would be agreed — fees amounting to some £12,000-odd, and then a
period of time for the carrying out of the works assessed at 30 weeks at
£67,500, which is £38,942, making a grand total of £271,211.78.
As I said, the
issue before me is not the cost of those works but whether section 18 of the
Landlord and Tenant Act 1927 has any bearing. Subsection (1) is in two parts,
both of which are relevant to the issues which I have to try:
Damages for a
breach of a covenant or agreement to keep or put premises in repair during the
currency of a lease, or to leave or put premises in repair at the termination
of a lease, whether such covenant or agreement is expressed or implied, and
whether general or specific, shall in no case exceed the amount (if any) by
which the value of the reversion (whether immediate or not) in the premises is
diminished owing to the breach of such covenant or agreement as aforesaid;
That is the
first part. The second:
and in
particular no damage shall be recovered for a breach of any such covenant or
agreement to leave or put premises in repair at the termination of a lease, if it
is shown that the premises, in whatever state of repair they might be, would at
or shortly after the termination of the tenancy have been or be pulled down, or
such structural alterations made therein as would render valueless the repairs
covered by the covenant or agreement.
The first part
prescribes a ceiling on the measure of damages. One can say that the cost of
repairs necessary to comply with the repairing covenant at the end of a lease
is prima facie the measure of damages to the reversion if, but only if,
those repairs are going to be done, whether by the landlord or by an incoming
tenant. I think the authorities have established that beyond challenge. There
was, in fact, another view taken by Lynskey J in Landeau v Marchbank
[1949] 2 All ER 172, but the present position is, I think, sufficiently set out
in Haviland v Long [1952] 2 QB 80, where Somervell LJ says at p
82:
This is a
case where the building is still required in substantially the same form and
where the repairs which the tenant failed to do had to be done in order to put
the building into a state which will enable it to be used in the manner in
which it is required at present to be used; whereas the Act was passed to meet
primarily a case where the building was going to be pulled down or turned to
some different purpose, so that the repairs were not required and the sum
which the landlords recovered under the covenant would not be expended in whole
or in part on the repairs covered by the covenant.
If, however,
the premises are going to be altered, then other considerations arise and it
becomes necessary to value the reversion. In a case which arises on the
termination of a lease as opposed to one where the lease is still current, the
reversion is the value of the land with vacant possession. One has to value
that land in its repaired state and in its unrepaired state, and then to
consider the difference.
At this point
I think I can consider the value of the land and building as it stood in June
1984 on the basis that it had been properly repaired, but before I do so I must
refer to one or two further facts. The landlords, having been advised by their
agents that the tenants were leaving, had to find a new tenant urgently or had
to suffer a void for some period. The agents accordingly got busy looking for a
new tenant. They immediately had an inquiry about it. Mr R J West [FRICS] of De
Groot Collis, who had been previously interested in this property, came forward
again on January 4 1984, so it was known to him within a month that the property
was becoming vacant.
Mr W P Siegle
[ARICS], who is on the agency side of the firm of managing surveyors that
advised the landlords here, did a spot valuation on February 1 to determine
what rent it would be right to ask and came up with £75,000. Very shortly
afterwards, that was being quoted to Mr West, who had in the meantime found
another possible tenant in the shape of the Halifax Building Society. On
February 8 Mr West is writing to Mr H L B Kale [FRICS], who is the local
surveyor of the Halifax Building Society, suggesting that the property is
coming on the market and setting out the details. Then he says:
Having spoken
to the freeholders, I understand they are prepared to grant a new lease for a
term of approximately 20 years, subject to five yearly upward only rent
reviews. I have not, as yet, been able to obtain a quoting rent, but I should
be able to obtain this should you feel the property is of interest.
It undoubtedly
was of interest because the Halifax Building Society were currently having difficulties
of their own with their properties in Holborn, and on February 14 Mr West is
writing to Mr R A S Brock [FRICS], the senior partner of the landlords’ agents,
Daniel Smith, and saying:
Thank you for
arranging for me to look over the building with my clients, the Halifax
Building Society.
They are very
interested in pursuing this and your Mr Leefe.–
he is a
colleague of Mr Siegle’s in the agency department of the surveyors —
is arranging
to let me have copies of the floor plans, confirm the floor areas and let me
have as much information as possible regarding the repairs required.
To this end,
it would be helpful if I could have a copy of the structural engineer’s report
so that my clients can ascertain more clearly the work needed. You will
appreciate that they will wish to satisfy themselves as to the structural
condition of the building . . .
I understand
your clients are prepared to let this property for a term of nineteen and a
quarter years from June 1984 and that you are quoting a rent of £75,000 per
annum exclusive.
Having obtained
confirmation that that was the quotation of the rent, Mr West conveyed that to
his clients and their attitude was that the rent was acceptable, but the
society would be looking for a substantial rent-free period to give it time to
carry out the works required to the structure and also to carry out the
alterations ‘to alter the building to our purposes’. The parties never departed
from that rent as the starting point of negotiations, although, as we shall see
later, substantial concessions had to be made in relation to it owing to the
works which were required to be done by the Halifax.
Having gone
that far with the facts, I can now come to the determination of the market rent
of a fully repaired but unimproved building as at June 1 1984. That is the
starting point of a valuation of the reversion which is repaired but
unimproved. The plaintiffs, through Mr W A Suttill [FRICS], a partner in Daniel
Smith who is their chief valuation expert, say that that rent should be £75,000,
basing themselves on the rent which has been negotiated with the Halifax. The
defendants, through Mr T J L Roberton [FRICS], who is the valuer who has given
evidence here on behalf of the bank, say that the rent I should take is
£67,500, being the agreed rent, as we have seen when going through the earlier
correspondence. And it is claimed that both of these rents were based on arm’s
length negotiations.
I am bound to
say I do not find either of those rents entirely satisfactory for the purpose.
Mr Roberton himself did not do an independent valuation of it. As I understood
his evidence, he just accepted it as a negotiated figure, having studied the
correspondence. He told me ‘I arrived at £67,500 by being advised of the
correspondence between two professionals’; that is to say, Mr Conway and his
opposite number with Daniel Smith.
It is indeed
criticised by Mr Berry for the landlords and by Mr Suttill on two separate
grounds. The first is that it was a rent determined as at June 1982 when the
negotiations started, and there is some rise between then and June 1984. As
against that, witnesses have told me that the market was stodgy — that is the
way one described it. I think Mr Siegle described it as ‘patchy’ in the course
of his evidence. The other criticism that I think could be made of that figure
is that it was not a rent intended to be accepted by the bank, although it was
apparently agreed. The advice the bank received, if they were really going to
take this lease up, was that they would have to settle at £70,000. We have seen
the letter about that from Mr Conway to them. But it was thought tactically
advantageous to dig in for £67,500, not because the bank particularly wanted
the lease, but because it would give further time for them to make up their minds
and to negotiate the dilapidations.
The defendants
agreed to it very reluctantly because they did not think it was the true market
rent, but obviously the only option open to them was to go into court, where
they did not evidently have great faith in the result the court was likely to
reach. What I find as to that is that the parties would have agreed at £70,000
if the bank had, in fact, been wanting to take the new lease, as it was giving
every appearance — to the landlords — of wishing to do.
As to the
£75,000, Mr Siegle told me that, having done his valuation, had he been
marketing this property he would have asked something more than that, so the
asking price would have been something higher. He suggested a figure of
£77,500, and persisted in that in cross-examination. But I find that very
difficult to accept. As it seems to me, we have here a special property being
marketed, initially at any rate, by a placing. There was some approach to
another building society and it would only be marketed, as I would see it, if
very desirable tenants like major building societies, which obviously were
first-class tenants from the landlords’ point of view, were not interested. It
is not obvious that it would have achieved more by open marketing. And the rent
was, in fact, quoted by Mr Leefe at £75,000 to the Halifax. It would be
difficult then, it would seem to me, to depart from that asking price. Be that
as it may, £75,000 certainly was the asking price and it was accepted in the
manner which I have already said.
The criticism
that can be made of that as a rent which we are seeking — that is to say, the
property repaired but otherwise unchanged — was that neither the landlords nor
the prospective tenants, the Halifax, were expecting the property to stay the
same in the circumstances that had occurred. Mr Suttill told me in
cross-examination:
we were
looking for a definite redevelopment. We always had it in mind for
redevelopment. The Halifax scheme worked out nicely. There were no surprises in
factual terms as to what has happened. We would not have spent it ourselves.
The trustees always look for an investment.
So, although
the figure was not an improved value in any sense because the improvements had
not been done or arranged for at that stage, the parties were looking to some
extent, as I find, at the potential of this building for improvements. Indeed,
the £75,000 was not the final agreed rent; it was merely a starting point for
the negotiations.
I think also
it can be said — and this links with what I was saying earlier about the asking
price — the Halifax were a more than willing tenant, because they had
difficulties of their own, as I have alluded to, with their other properties
and they were having to come to some major decisions about their representation
in Holborn.
Having those
considerations in mind and going back to the other, which was a direct
negotiation on exactly what we are looking for — that is to say, the property
in repair but otherwise unchanged — I would accept the £70,000 that I have
mentioned as the most realistic figure for the property as it stood in 1982-83,
when those negotiations took place. I would add a small amount, which I put at
£1,000, for the further period to 1984. As Mr Suttill conceded, I think, in his
cross-examination, as regards the subject premises ‘There was not much
fluctuation in June 1983-85. Had there been much fluctuation, and if the matter
had dragged on for two years, then we would have looked again at the rent we
negotiated. Had there been a marked change we would have noticed it.’ But nevertheless, it seems to me that some
uplift is justifiable and therefore I would find that as at June 1984 the
market rent of these premises in repair but unimproved was £71,000 a year.
That, as I
said, is the starting point of the valuation of the reversion. There is a
well-tried method of determining the capital value of a property which produces
a rental income. As I have had it explained to me and I hope I have understood,
one determines the percentage rate of return which a purchaser would be looking
for, and the poorer the property, the higher the rate that he would expect. The
rate is determined by such factors as the location of the property, its age,
the income stream expected from it and the rate at which that stream would grow.
The purchaser of prime properties — ie ones that are newly done up and are in a
good position and are let to first-class tenants such as major banks and
building societies — would simply look for a lowish 4% to 5% as the rate of
return. On older properties which are unimproved one gets into the region of 9%
or 10% or even more.
The percentage
rate in a valuation exercise is a matter of judgment of the valuers. A low
percentage — 4 to 5 — produces a high capital value on a given rent, and, of
course, a high percentage produces a low capital value, there being a direct
relationship between the percentage and the multiplier that one applies to the
capital value; that is to say, for 4% there is a multiplier of 25, for 7% there
is a multiplier of 14.2 and for 9% a multiplier of 11.1 which is applied to the
rent.
Doing this
exercise, the landlords’ surveyors used 6% for the investment value of the
property repaired but unimproved. That produced £1.25 million in value. But the
bank’s surveyor, Mr Roberton, used 9% with an 11.1% recurring multiplier to
produce £730,000. I should say that in these valuations it is proper and is
done in all these cases to take off the purchase costs, because a purchaser
would expect to have to pay those in order to get the property having this
income. They are put on at 2.75%. There has been no argument about that. The
valuations of £730,000 and £1,250,000 have no deductions for costs.
However,
having seen the report by Mr Roberton, the landlords’ surveyor, Mr Suttill,
revised his views on the matter and submitted a revised valuation for this,
which is to be found in his supplemental report. He gave as his reasons:
First, that
on further reflection, I do not now consider some of the figures correct, and
second, that in an effort to cut out one area of contention between the
surveyors, I would suggest using rates percent adopted by Richard Ellis —
that is Mr
Roberton’s firm. And he applied that to the figure of £75,000 he was using and
produced a valuation of £810,000. The difference, of course, is solely
accounted for by the fact that Mr Roberton was basing his on the £67,500, as I
mentioned. I see no reason to depart from that percentage. I would not presume
to do so now that both surveyors have agreed. I find it a little surprising that
Mr Suttill so readily made that very significant shift in his evidence, but
there it is. They are both now agreed, and I accept that 9% is the appropriate
rate and, as I work it out, on the £71,000 which I have found is the true
market rent, it gives £788,881, less the costs, putting them at about £20,000.
So we say £770,000. And that is what I find to be the value of the reversion,
repaired but unimproved, as at June 1 1984. If I may mention in passing, the
percentage for its improved value has been agreed by the valuers at 7%.
But before I
deal with the improved valuation, I will have to go on with the facts through
the rest of the correspondence. Before I do that I must take a greater look at
the second part of section 18 because the facts that I am now going into relate
to the case on that part as well as to the case in relation to the improved
value of the reversion for the purposes of the first part. I think we must be
clear exactly what we are looking for in relation to the second part.
There was no question
in this case of pulling down the premises. The case here was whether such
structural alterations would be made therein which would render valueless the
repairs covered by the covenant or agreement. Would there be structural
alterations made at or shortly after the termination, and would those
alterations be such as would render valueless the repairs covered by the lease?
Whether they
would or would not be made has been held to be a question of intention on the
part of the landlords. I ignore cases — because they do not arise here — where
the structural alterations or, more usually, the actual demolition of the
premises is being brought about by some superior authority which has powers to
compel landlords to pull their premises down. So I leave that case, which is
also covered by the section, on one side. But where it is within the volition
of the landlords whether the premises are improved or not improved or changed
or demolished, then one has to consider the question of the intention on the
part of the landlord to bring those states of affairs about. The leading case
on this is Salisbury v Gilmore [1942] 2 KB 38. The circumstances
are quite different from what we have here because there was a question of a
major change of intention. The landlord intended to pull the property down and
redevelop just before the war. The war intervened and frustrated that, and the
question was whether, the lease having in the interval come to an end, he could
then change his mind and say he wanted to keep them and have the tenant repair
them. The importance of the case for my purposes arises from the observations
of Lord Greene MR at p 47, where he says:
The question
then arises, what is the test by which the fate of the building as at the
relevant date — namely, the date at which the covenant ought to be performed —
is to be ascertained?
I pause there
to say that that is an important point which comes out of the case. It is the
date when the covenant ought to be performed, ie when the lessees go out. Lord
Greene continues:
I have
already pointed out that a building may be destined for demolition either
because the landlord has so determined or because some extraneous authority has
decided to exercise its powers in that behalf. I have also pointed out that the
crucial date is the date of the termination of the lease. Once that date has
passed, the tenant is no longer in a position to fulfil his covenant: and if it
is shown that before that date arrives the landlord has decided to pull down
the building and that this intention is still existing at that date, the
requirements of the subsection are in my opinion satisfied.
That then is
the test. It was elaborated in the well-known case of Cunliffe v Goodman
[1950] 2 KB 237, where the landlord, when the lease was coming to an end, was
toying with a scheme of reconstruction which if it had come about would have
relieved the tenant from the covenant under section 18, but it had run into
difficulties. The first scheme, which would have been profitable, was in fact
turned down by the planning authority or some authority of that sort, and it
looked as though other schemes would not be so profitable and, all in all, the
landlord, Lady Cunliffe, had not really got to the position where she could see
a viable scheme afoot. And that was the situation when the lease ended.
Cohen LJ at p
252, dealing with the matter of intention, puts it this way:
It is, I
think, clear that the intention which must be proved against the landlord is a
definite intention. This intention may be revocable, but it must not be
provisional. Reading the correspondence as a whole, I have come to the
conclusion that the plaintiff never reached more than a provisional decision.
She would obviously not rebuild unless the proposed scheme would provide an
adequate return on the capital she would have to sink in it . . . The financial
aspect was plainly present to her mind throughout . . .
Asquith LJ, at
p 253 on the same subject, says:
An ‘intention’
to my mind connotes a state of affairs which the party ‘intending’ — I will call
him X — does more than merely contemplate: it connotes a state of affairs
which, on the contrary, he decides, so far as in him lies, to bring about, and
which, in point of possibility, he has a reasonable prospect of being able to
bring about, by his own act of volition.
X cannot,
with any due regard to the English language, be said to ‘intend’ a result which
is wholly beyond the control of his will. He cannot ‘intend’ that it shall be a
fine day tomorrow.
Continuing at
p 254:
This leads me
to the second point bearing on the existence in this case of ‘intention’ as
opposed to more contemplation. Not merely is the term ‘intention’ unsatisfied
if the person professing it has too many hurdles to overcome, or too little
control of events: it is equally inappropriate if at the material date that
person is in effect not deciding to proceed but feeling his way and reserving
his decision until he shall be in possession of financial data sufficient to
enable him to determine whether the project will be commercially worth while.
Then he goes
on with a metaphor which has become famous, but I cannot resist the temptation
of reading it again:
Neither
project moved out of the zone of contemplation — out of the sphere of the
tentative, the provisional and the exploratory — into the valley of decision.
That was a
case really of obstacles as much as a case of incomplete negotiations. The
landlord could not see her way at the critical time to a viable and profitable
scheme. That case has been adapted and used in cases which arise under the 1954
Act where the court is required directly to find intentions in certain cases
where the landlord intends some time in the future to demolish or to
reconstruct his premises or
there is, of course, that difference, the element of futurity there which makes
those cases useful perhaps only by way of analogy, but my intention was called
by Mr Pryor to one or two of the cases under that, and a passage which I think
may be helpful in these circumstances is the judgment of Lord Evershed MR in
the case of Betty’s Cafes Ltd v Phillips Furnishing Stores Ltd
[1957] Ch 67, which was subsequently affirmed by the House of Lords in [1959]
AC 20. There is an observation of Lord Evershed at p 99 of [1957] Ch 67:
The relevant
word is ‘intends’, a simple English word of well understood meaning. The
question whether the intention is at the relevant date proved has, in my
judgment, to be answered by the ordinary standards of common sense. If there
are conditions to which the course proposed is subject, but if the landlord has
no reason to suppose that there would be difficulty in their fulfilment, then prima
facie, in my view, the landlord would not fail to prove intention within the
meaning of the section merely because he could not prove, at the date in
question, that all steps had been taken to satisfy the conditions. But it might
well be otherwise if the course proposed were conditional upon other things
being done which were by no means matters of course; for example, the
successful raising of large sums of money not presently available to him.
Looking back
at what Lord Greene said in Salisbury v Gilmore, at p 47, where
he equates ‘decision’; he has decided to pull down the building and this
intention is still existing. It is not a decision on all the details; it is
merely a decision to take a course of action and it can be classed as an
intention if there are no obstacles in the way which it is unlikely that he is
not going to be able to surmount.
With that
introduction, I can now come back to the facts of the matter. I left it where
the Halifax Building Society on February 14 1984 were showing a definite
interest in the property. The rent was not unacceptable, but they were looking
for a rent-free period to give them time to carry out works. I can then go to
March 15, when a team from the Halifax Building Society consisting of the
agents, De Groot Collis, and architects, consulting engineers and quantity
surveyors, all assembled on the instructions of the Halifax Building Society to
give the building a going over and make their appraisals of it. Noting that
amount of interest on the part of the Halifax, the landlords ceased any
marketing. On March 15 Mr West is reporting to his clients:
I have spoken
to Daniel Smith today and have been told that at the trustees’ meeting
yesterday they did agree to delay any formal marketing until your professional
team has reported.
And they did
report fairly soon. By March 23 the architects, Gale Heath & Co, were
submitting a feasibility study and plan. That was accompanied by a quantity
surveyor’s report which analyses the figures required to repair, £180,000, and
other substantial sums amounting in the aggregate to £795,000, on one basis or
£680,000 on another. They include substantial amounts of improvements and
refurbishment.
Now I can pick
up the negotiations again. The basis on which the parties approached the
negotiation one can see from a report by Mr Kale, the London surveyor of the
building society, to Mr A Brooke [FRICS], the chief surveyor in the Halifax,
who has given evidence here. Mr Kale reports:
Without
knowing how much the outgoing tenants are paying to the landlords for
dilapidations under the claim that has been made, it is difficult to say
whether or not the figure given above would be covered. As I have mentioned to
you it is intended that we negotiate on the basis that any payment made by the
bank to the landlords is immediately passed to us and we could perhaps get more
than the figure mentioned above. It could also be said that some of the work
contained in the second and third items could be shifted into the first figure,
and the Quantity Surveyor’s breakdown which I am awaiting but which I have
discussed with him does give some indications on this point.
Then Mr Kale
instructed De Groots on April 2 1984:
You will
appreciate that some of the fitting out work that we may decide to do could
well conflict with some aspects of the dilapidations claim and it could be
argued, perhaps, that no payment was required on account of what the society
propose to do in any event. I would not like to argue on this basis but would
prefer to see one sum representing the cost of putting the premises into
whatever type of repair is specified in the current lease and for that sum to
be made available to us.
That shows the
line they hoped to negotiate along, and it also shows that they saw the dangers
that have emerged in this case.
I think I can
go then to where De Groots make their report to their clients on May 2. They
make a full report so that the society can decide whether to negotiate further.
They give it as their view that the rental value is £85,000, but it was
explained in evidence that that figure would not be achieved from the property in
its then condition. In ‘Recommendation’ they say to their clients:
In our
discussion with the freeholders’ surveyors they have indicated that as their
clients are trustees they are reluctant to become involved in carrying out the
repairs and decorations to the property and have proposed that an offer be
submitted on the basis of a capital payment by the landlords to take account of
the cost of these works with a suitable rent free period to reflect the time
taken to carry this out. On this basis a rental of £75,000 per annum has been
quoted. Should your Society decide to proceed with negotiations, we would
suggest that an offer be made on the basis proposed and that rather than
negotiate on the rental which we consider to be below the market value, that more
emphasis be put on the capital payment . . .
He refers in
some detail to the proposed improvements at an earlier page of his report which
discloses that there is to be a new lift, new toilets and kitchens created at
the rear. There is gas-fired central heating and the entrance hall is to be
given a special finish.
Mr Kale
reports to Mr Brooke in Halifax on May 4 with his own comments on the report
that I have just looked at:
It is
unsatisfactory, in so far as we are unable to obtain from the other side any
details of the capital payment which is likely to be made to take account of
the cost of making good dilapidations and wants of repair on the termination of
the lease of Barclays Bank. The report speaks for itself as to the way in which
the society could negotiate and you will see the optimistic, but, I think,
justified views of the value on the current open market rental of the total
block and the likely rental we could receive on subletting.
One notices in
the last paragraph:
No doubt you
will want to digest this report and I would be very happy to have a meeting
with you perhaps with our valuer in London, to discuss the extent to which we
can give further instructions to negotiate at this stage. Alternatively, you
may well want to put this straight to the Executive for a decision and I await
your further instructions.
So at all
events, Mr Kale, who is an important figure in this, thought the matter had
proceeded far enough there for the executive to make a formal decision about
it. But that was not the view that Mr Brooke took of the matter because his
reply reads:
It seems to
me the proposals are satisfactory as far as they go but the crux of De Groot
Collis’ advice at the moment is that we should find out what the capital sum
proposed is and we must satisfy ourselves that it covers the works which we are
advised must be carried out. When this information is confirmed it seems that
Mr Cartwright could let the matter go forward for a blue.
That is their
jargon for meaning sending it to the directors or general managers for
approval, such approval being necessary in this case. Then I think I can go to
where the surveyor, Mr Kale, on May 17 is advising the branch manager in
Holborn, who will have to move into this place if it is taken:
We have
progressed to the extent that Head Office are basically in favour of
proceeding, subject to the financial details being hammered out.
So that seems
to be the position on May 17 within the building society.
Meanwhile, in
the landlords’ camp the difficulties were of a somewhat different nature. The
landlords, it would seem, were accepting that there would have to be some
substantial concession, either a rent-free period or a reduced rent or even a
payment to the Halifax to get them to go in and repair and improve the premises,
but they could foresee some tax disadvantages unless the matter were carefully
looked at and structured with a view to minimising that. Consequently, on May
24 Mr Siegle, who had charge of the negotiations at this point, sought the
advice of the trustees’ accountant, a Mr Oldfield of Dixon Wilson. I do not
think I need go into the details of that, but just record the fact that that is
why the landlords were delaying: they wanted to get some advice from tax
consultants, not, as I would read it, in the expectation that they would be
advised not to go ahead at all but simply to get advice how best to structure
the deal.
Mr Oldfield
took some time over the matter and as a consequence the Halifax got restive. On
May 30 Mr Kale writes to Mr West:
I think we are
now at the point where unless we get some further information from Barclays
Bank and/or the landlords of the above property, we will have to forget about
this. We have alternative proposals concerning our existing Holborn office,
which we have been holding in abeyance now for three months. This is causing us
some difficulties and I had hoped that we would get an early decision
concerning the Barclays Bank premises which would enable us to move ahead
swiftly. If you cannot obtain the relevant information from the other side,
then I am not in a position to put the matter to my directors and we will have
to withdraw.
I think it
would be fair to say that that alarmed the landlords’ surveyors when it was
reported to them because one sees a letter on
date in this case, when Barclays’ term ended. In the letter of June 5 one sees
that Mr Siegle for the landlords is writing to Mr West, the Halifax’s agent:
I understand
that your clients are anxious to try to progress matters and I hope we will be
in a position to come back to you shortly with a firm proposal. As we have
discussed, we need to obtain an opinion from our clients’ tax advisers and I am
also awaiting confirmation of the revisions to the dilapidations schedule . . .
. I think it is sensible to clarify these points first before putting forward
any proposals for your clients’ Board approval.
That was sent
by Mr West to Mr Kale.
Of these
transactions, Mr Siegle said in his evidence to me:
West was
pressing us for a firm proposal and I said we are taking tax advice. I told him
that over the telephone. I had reasonably frequent contacts with him. I would
say that Mr West was aware that a concession of that nature was most likely to
come. West was left in doubt as to the form of the concession, not that one
would eventually be made.
Mr Brooke said
of the letter of May 30, when they threatened that if they did not get some
movement they would have to pull out and look elsewhere, that that letter was
written in accordance with his instructions and wishes. ‘It was a statement of
our attitude at the time.’ He also said:
‘The Halifax had not then decided to go ahead with the transaction. It could be
said that we very much hoped we would be in a position to go ahead.’ That was the attitude of the Halifax at the
time. That was in chief. In cross-examination he said: ‘It was wrong to say
that I hoped it would not go through, but we were running out of patience.
There was no indication it was going to settle. We were getting to the stage
where one despaired.’
On June 21 the
landlords did get the tax advice which they were seeking. This was the final
advice; there had been some in the meantime. The matter thereafter did proceed
fairly quickly to the next stage. There is an internal memorandum from Mr
Siegle to his senior partner in which he says:
I have spoken
with Mr West and he believes his clients would agree to a transaction whereby
they do all the necessary works together with their own improvements at their
own cost without any payment from our clients. In return they would receive a
rent free period and/or a reduction in the rent agreed for the property in good
repair which we shall say is £75,000 per annum. This would obviously be a
simpler transaction. If one assumes an increase from say £40,000 pa to £75,000
pa as a result of the tenants’ obligation to repair then the value of the
difference namely £55,000 pa in perpetuity deferred 19 years could be
approaching £200,000, which is not an insignificant sum
He says he is
consulting the landlords’ solicitors to make sure it is all right from that
angle.
That was
cleared and eventually an offer was made to Mr West. Then on July 2 it is
reported to Mr West by Mr Kale that the matter had been put forward to the head
office. One sees that transaction on the same date, July 2, Mr Kale sending to
Mr Brooke what is called an agenda note, which is the note prepared in order to
get the approval of the general manager. Among the general comments one sees
that:
The landlord
is prepared to accept reduced rent for the first four years as a contribution
towards structural repairs and making good dilapidations, viz: £20,000 1st
year, £25,000 2nd year, £30,000 3rd year, £50,000 4th year. Total £170,000.
That was after
the agenda note had been revised by Mr Brooke when it got to Halifax. The final
agenda note was on July 10 and one sees it as approved by the general manager.
It has not
been suggested by Mr Berry on behalf of the landlords that thereafter there was
any doubt about the Halifax’s intention to go ahead, although the final deal as
worked out was not quite in conformity with that in the agenda note. Therefore
I can turn at once to look at the final transaction as was entered into on the
following November 12.
It was done by
means of a lease in a normal form at the full rent of £75,000. The term was to
run from September 29 1984 for 18 3/4 years at the basic rent of £75,000, and
the lease contained the usual covenants for repair and not to make alterations
without the consent of the landlords. But the remission of rent was dealt with
by a supplemental deed which I must look at in a little more detail. The first
operative clause says:
In the event
of the Tenant carrying out within eighteen months of the date hereof to the
reasonable satisfaction of the Landlord such repairs as shall be necessary to
put the demised premises into a state of good repair and decorative condition
there shall be payable throughout the first four years of the term demised by
the Lease (instead of the rent reserved by the Lease) the following reduced
rents:
from the 29th
day of September 1984 . . . the sum of £10,000 . . .
from the 29th
day of September 1985 . . . the sum of £15,000 . . .
from the 29th
day of September 1986 . . . the sum of £20,000 . . .
from the 29th
day of September 1987 . . . the sum of £30,000 . . .
ALL such
reduced rents to be paid in accordance with the provisions otherwise contained
in the Lease in substitution for reserved annual rent of £75,000 . . .
So that the
£75,000 would be paid in the final year of the first five years until the first
review came. Then clause 2:
WHEREAS THE
Tenant intends to carry out improvements to the Demised Premises . . . and
whereas the Landlord has agreed in principle to the carrying out of the
Improvements subject only to formal approval of detailed plans and
specifications . . . In the event of the Improvements being carried out to the
reasonable satisfaction of the Landlord . . . then in substitution for Clause
7.1.1. of the Lease the following Clause shall apply:–
‘7.1.1. From
and after each Review Date the Basic Rent shall be whichever shall be the
greater of the amount of the Basic Rent payable during the twelve months
immediately preceding such Review Date or 75 per cent of the open market rental
value of the Demised Premises at such Review Date’.
So that instead
of, as is common and is indeed directed in the case of rent valuations under
the 1954 Act, the tenants’ improvements being disregarded, the reviewed rent
was reduced to 75% of the full market rent. That is the way the tenants were
ostensibly compensated in respect of the improvements that they were proposing
to do.
There was some
delay, but the plans that they proposed were finally approved — about a year
later. On November 22 1985 there is the landlords’ approval to the plans. They
were extensive plans and I have them here. The works were done, both the
repairs and the improvements together, and they cost, as I am told, £750,000
including VAT. That included some £100,000 or thereabouts for special fittings
in connection with the tenants’ business.
Quite apart
from those, there were substantial further improvements in that the lift was
renewed, and not only repaired but shifted to another place; the lift shaft was
moved. There was an extensive rearrangement of the toilet accommodation and
upgrading of it. The banking hall, as I have mentioned, was quite changed to
suit the Halifax’s business. Central heating was put in throughout. There was
some degree of air conditioning, not full air conditioning. There was a new
flat roof, partly necessitated, as I understand it, by the new lift shaft that
was being put in. And there were more open offices in the upper floors; and the
previous lavatory accommodation was all rearranged and the small offices were
made more convenient. Common sense dictates that the Halifax and its builders
would not have done the repairs first and separated them out as the
supplemental deed did, and then done the improvements. The whole place was
stripped out as far as was necessary to effect the scheme of works and then the
improvements were done, and finally the place was put into a good decorative
condition and finish. As I said, common sense tells one that is how it was
done. As it happens, I do have evidence that that is what did happen. The
quantity surveyor, Mr Reynolds, for example, said: ‘We would strip out the
parts not required and then carry out the new works’. So if the repairs had
been done by the tenants, and then this scheme of work had been put into
operation, a large part of those repairs would have had to be done again.
Those are the
facts. Now I must deal with the actual valuations of the reversion as at June 1
1984. For this purpose I have been offered three different methods of
valuation. The first one stands on its own, and the other two are linked to the
transaction with the Halifax which I have just gone through.
The first one
is what is known as a residual valuation, based on the maximum possible
refurbishment and improvement to the premises. On that basis, Mr Roberton has
offered me a residual valuation in the sum of £810,000, and Mr Suttill on the
same basis has offered me a valuation of £588,000. Of course, if that last
figure is correct, then that value is well below the value of the property
repaired and unimproved. No one would think of doing that scheme because, as I
have indicated, in my judgment the value of the property repaired but
unimproved is £770,000.
The
differences between these gentlemen I think reside partly in the rentals which
are said to be achievable, though that is not a very great difference. I think
with Mr Roberton it is £150,000, with Mr Suttill it is £145,000. The main
difference resides in the way that the construction costs have been treated.
These are commonly assessed at so much per gross sq ft and there is a
considerable difference between these gentlemen: one had taken 13,000 and the
other had taken 14,878, and when you apply figures like £50 or £60 per sq ft to
differences of that sort, you soon run into quite large figures.
I have had a
lot of evidence about the merits of this and that detail of it, and I do not
propose to go through it in detail for this reason, that I do not think in the
circumstances of this case that this first method is the proper method of
arriving at the value of the reversion here. In the first place, this is part
of a larger site which will fall in in 18 years’ time, and it is not
reasonable, in my judgment, that the landlords should be required or expected
to invest such substantial funds as are involved in a scheme of this nature in
the property. Furthermore, the witnesses, I think, agreed that this type of
valuation is very speculative. It just gives an idea of whether there is some
residual value in the site to someone who wants to know that, but before one
could get down to figures which really were firm, one would need to spend even
more money in the shape of professional fees and investigations to get a much
more precise figure. Indeed, one notices, of course, the wide margin that
exists between these two gentlemen, both of whom are exceptionally well
qualified. And one cannot help but notice that various schemes were afoot for
the development of this property and other properties round about, but they did
not, for one reason or another, get off the ground.
Finally, I
would think, even on Mr Roberton’s figure of £810,000, the difference between
that and the £770,000 which I have found is not enough margin over the
unimproved but repaired value really to justify the risks of such a venture.
Therefore, I would not myself find it reasonable to say that that was the way
to value the reversion for the purposes of section 18.
It is more
realistic, in my judgment, to look to see what happened, in particular, to see
how the reversion was exploited on the departure of Barclays Bank. The valuers
have done residual valuations based on what the Halifax had done. Mr Roberton’s
valuation on that basis came up with £860,000, doing the residual valuation on
the Halifax scheme. Mr Suttill’s final figures again show a wide divergence:
£375,000. It seems a somewhat surprising figure, in that the residual valuation
should be that as a result of the works that the Halifax had done. Be that as
it may, one looks to see where the difference resides, and it is because, as we
have seen, an essential part of this operation is to start by trying to
estimate the rental value that will be achieved by the scheme. Mr Roberton’s
estimate of that would be £130,000 a year and Mr Suttill’s £95,000.
That estimate
depends on comparables. Mr Roberton relied, I think wholly, on one comparable,
on the opposite side of the street, called Swan House, of which I have had a
lot of evidence and details and pictures and so forth. This comparable Mr
Suttill found unacceptable, mainly because, as I understood it, it was far too
good a comparable, being of a much higher standard in all respects and
therefore not a true comparable. He put forward others in and about Holborn of
which I have a schedule here.
On this I am
bound to say that I much prefer Mr Roberton’s evidence. It seemed to me, when
listening to Mr Suttill and the submissions made about this, that my attention
was called to a large number of detailed differences which, if I may
respectfully say so, did at points verge on the ridiculous as between the
fittings in the one and the fittings in the other and the carpets and so forth.
Of course, I accept that one looks at the matter as a whole, and I am not
ignoring Mr Reynolds, the quantity surveyor, telling me in a more general way
in his supplemental report as to the finishings, of which so much was made:
The quality
of the finishings selected is generally lower than would normally have been
expected.
He is talking
about the subject premises, not about Swan House.
In
particular, the use of exposed grid fibrous tile suspended ceilings and cord
carpet generally are well below the standards that would have been necessary to
achieve good rental values.
I must observe,
however, that he did not come before me as a valuer of rental values, but came
to assess the cost of various things.
As against
that, it seemed to me that Mr Roberton’s approach to this was much more
sensible. In describing the subject premises, he said:
It has
attractive features. It has a unique address. It does not have a messy ground-floor
shop like the place opposite as you go in. The subject property provides
accommodation which would attract a section of the market looking for a good
pitch but a smaller letting.
This was
referring to small lettings by the floor. He thought it would attract lettings
of that sort and would find a ready taker. And I notice it did indeed find one.
The buildings
are different, as between Swan House and this. The Halifax, in my view, has
done a very tasteful job here. They have not extracted the last potential foot
out of it, but it is a nice conversion.
I must
recognise in relation to Mr Suttill that he did come very late in the day to
this. An amendment to the pleadings during the course of the trial introduced
this valuation into the case, whereas there were good grounds for supposing on
the landlords’ side that it was not going to be introduced before. Therefore I
recognise that Mr Suttill did not have the time for consideration of this that
Mr Roberton has had.
Nevertheless,
having seen all these gentlemen — Mr Reynolds, Mr Suttill and Mr Roberton — in
the box and considered those matters, I would prefer the evidence of Mr
Roberton in this matter. But, once again, for much the same reasons as I gave
in regard to the other residual valuation, it does not seem to me that this is
the correct way to value the reversion for the purposes of this case. I
therefore turn to the third valuation.
The final
valuation was based on the investment value of the landlords’ reversion
following the letting to the Halifax, and this consists of capitalising the
cash flow taking a 7% yield. It is a more complex valuation than the other one,
but I think that I can merely state the result. There was no criticism of the
methods. Mr Roberton produces a valuation of £1,205,000. Mr Suttill produces
£933,000. In this case, both those figures are well above the £770,000 which is
the valuation for the property repaired but unimproved, so that I do not think
it is necessary for me, as valuations, to look into them in detail and to
analyse out exactly where the difference comes. It comes in the way the fifth-
and sixth-year valuations are treated.
But I cannot
just conclude the matter at that point and say, well, the valuation improved is
higher than the valuation unimproved and therefore the landlords have not
suffered any loss, in fact they have got a better property than they had. It is
said that the landlords had to concede rent reductions attributable to the want
of repair, amounting to £186,000, which they would not have had to do if the
bank had complied with the covenants. £186,000 is the capitalised value of
those rent remissions over four years. I think they added up to £225,000, but
there is an element of deferment and the immediate cash value of those would be
£186,000 as at the grant of the lease. So it is said that if the property had
been in repair they would have got an even higher rent, hence a larger capital
value than has been found to be so.
Mr Berry puts
it this way in his submissions to me:
Even if the
cost of repairs is not itself the measure of damages, then it is the starting
point and it may have to be scaled down. But if it is scaled down it cannot be
scaled down beyond the diminution value brought about by the Halifax letting,
in particular the rent allowance that had to be made, because that negotiation
throws the best possible light on the amount of the diminution.
In support of
that he referred me to Smiley v Townshend [1950] 2 KB 311, which
was a case of property which was under requisition when the lease ended so that
the question was whether the landlord was entitled to the full amount of the
repairs or some discounted value. Denning LJ, as he then was, said:
In cases
where it is open to question whether the repairs will be done by the landlord,
as in the present case, then the cost may afford a starting figure
that is, the
cost of the repairs,
but it should
be scaled down according to the circumstances, remembering that the real
question is: what is the injury to the reversion? That is what the judge did here, as I read
his judgment: he used the cost merely as an aid in assessing the diminution. I
do not think that I should myself have given so much weight to the cost of the
repairs; or, at any rate, having regard to the requisition, I should have
scaled down the figure considerably just as damages for breach of covenant to
keep in repair during the term are scaled down according to the length of time
unexpired.
Of course, I
accept that, as I am bound to, but it does not seem to me to touch the point at
all, if I may respectfully say so. There was no question in that case of the
property being improved. In Smiley v Townsend no one was
suggesting that the property was going to be demolished or improved or altered
in any way. The sole question in that case was what was the liability for
repairs, given the rather unusual feature that the premises were then in
requisition and that some contribution to the repairs could be expected from
the requisitioning authority. Therefore, the landlord, it was being suggested,
could not really get his repairs twice over: he was entitled to have his
property in repair but he could not expect them twice over, and the court, at
the time it came to judgment in the matter, had to make an assessment on how to
scale down the tenant’s contribution.
sort of circumstance one looks at what a tenant who is going to do substantial
improvements has managed to extract from the landlord by way of contribution
towards the dilapidations which also had to be remedied. One gets no assistance
from being able to measure the effect of that on the reversion.
There is no
knowing what would have happened if Barclays Bank had left the place in full
repair. It is possible that the Halifax would have taken it as it stood. In
that case, the landlord’s reversion would be worth £770,000. No attempt has
been made to identify any repairs which had to be done in any event and which I
suppose could have been done before the Halifax went in and would survive the
Halifax’s operations. I think Mr Suttill agreed in the course of his evidence
that unless you can identify what works the landlord intends to do, the cost of
repairs is not a safe guide to diminution in value.
One notices
here that no reference was made to the schedule of dilapidations in the course
of negotiations. On the contrary, the schedule was expressly withheld from the
Halifax, so there was no way of relating the works for which Barclays Bank were
responsible with those carried out by the Halifax. If they had all been done,
it is probable, for example, that most of the decorations would have had to be
done again after the Halifax had carried out their improvements. If one is
going to make an allowance on the rental for repairs, one has to go through a
two-stage process before it can be said that the value of the landlords’
reversion has been diminished by the outgoing tenant’s breach. It has to be
shown, as I see it, what repairs are to be done for which the tenant is
responsible and which would survive the improvement works. And then the cost of
those repairs has to be evaluated. Then I could see there might be some direct
relationship between the cost, either paid or allowed for repairs, and the
diminution in the value of the reversion. But I have had no evidence from
valuers as to that.
At this point,
I should perhaps notice the submission of Mr Berry as to onus of proof. He said
that once the landlords had established a diminution in value, the onus shifted
to the tenant to show that the diminution was less than the cost of the
repairs. He referred me to a number of cases on this, of which Jones v Herxheimer
[1950] 2 KB 106 was the latest. This is a case where the landlord had to do
some repairs to relet the premises. They were, I think, quite modest repairs.
But, again, there was no question there of improvements to the premises. The
Court of Appeal were concerned to dispose of a submission that in every case
there had to be evidence of values of the reversion, such as I have got here. You
cannot start off just by saying this is the cost of the repairs, ergo
that is the cost of diminution of the reversion. That had been suggested in the
earlier case that I mentioned, Landeau v Marchbank, by Lynskey J,
but that idea was exploded in the Court of Appeal. They held that there are
cases where the cost of repairs does afford prima facie evidence of the
diminution in value, and those cases are where the premises are going to remain
the same but where the landlord is going to do the repairs or have them done.
In that case, he had in fact done them.
Therefore, one
can quite see in that sort of situation that once the landlord has proved those
facts, the burden should shift to the tenant then to show that the reversion
has not been diminished at all by the repairs because he has done repairs that
were totally unnecessary or something of that sort and they have not added to
the value of the reversion at all. In that situation one would expect the
tenant to have the burden of showing that that was so. But I cannot apply it to
the situation here where the premises are inevitably going to be improved, and
substantial works, costing well over twice what the repairs are going to cost,
are going to be carried out by the Halifax. There is no onus in those circumstances
on the tenant, once the landlord has shown that some allowance has been made to
the tenant, even though it has been structured in a form attributing the rent
allowance to the want of repairs. It has not been proved that any diminution in
the value of the reversion is attributable to the allowance for the repairs.
So I have to
say at the end of it that the claim fails on the first limb of section 18(1).
But in case it goes further, I must deal with the alternative point under the
second limb of section 18(1). This is pleaded under para 5 of the pleadings, by
the bank.
As at June 1
1984 it was intended by the Plaintiffs and by the Halifax Building Society as
intended Lessees of the premises from the Plaintiffs that structural alterations
would be made to the premises which would render valueless the repairs covered
by the aforesaid covenant.
The landlords’
pleading was that the Halifax did not intend to make the structural alterations
and the issue was limited for my purposes by an order made by Knox J a short
while before this action came on on February 20 1987 in the following way:
‘. . .
whether there was any intention on the part of the Plaintiffs or the Halifax
Building Society as at June 1 1984 that any alterations at all be made to the
demised premises’ to the intent that the question whether any intended
alterations were within section 18(1) of the Landlord and Tenant Act 1927 and
the effect if any thereof be tried separately after the said hearing.
So the sole
issue is whether there was this intention. I do not have to look into the
question, assuming I find an intention, whether the structural alterations
would have the effect of rendering valueless all or any of the repairs for
which the bank is liable.
On this aspect
of the matter, Mr Berry submitted that the test is intention. He took two
points on this, that overall the intention had not been shown at the critical
date; they had not got out of the zone of contemplation into the valley of
decision, especially having regard to the letter of May 30, which I read out,
and the evidence of Mr Brooke and the Halifax’s attitude at the time. Then he
took a point on admissibility of evidence that when it is clear what the
intention is at the time, then evidence of subsequent events is not admissible;
it is only admissible to cast light on what the position actually was at the
material date when the facts are uncertain and, in particular, where there is
no direct evidence as to the facts on the material date. But he says here that there
was direct evidence in the shape of Mr Brooke and the letters that I have
mentioned.
I deal first
with the point of admissibility. It was supported by a reference to Keats
v Graham [1960] 1 WLR 30. There the situation was that there was
existing an extension to a house which had been used for some industrial
purpose but which, under the terms of the planning permission by which it was
enjoyed, had to be removed at the conclusion of the lease. Therefore,
naturally, the tenant took a point that he did not have to pay for the cost of
putting it into repair when it was manifest that it had to be removed. No
evidence was called as to the likely attitude of the authorities if it was not
removed; the landlords did not want to remove it. But it looked as if it was a
case where they would be forced to. At some subsequent time, the permission to
retain it was renewed and therefore, in the event, it was not removed. There
were certain observations, particularly of Lord Evershed MR and I think Sellers
LJ, where they say — this is the headnote:
Evidence of
events occurring after the termination of a tenancy would normally be
inadmissible for the purposes of deciding whether section 18(1) applied,
although rarely they might be used to clarify and explain an ambiguity in what
had gone on before.
Where there is
some subsequent event of that nature which changes the intention, one can
certainly see an argument — and it may be correct — that evidence of that
should be excluded. One gets the situation of that in both Keats v Graham
and also in Salisbury v Gilmore itself. But it does not seem to
me that that would have any application where there is one continuous
negotiation going on. Of course, if the letter of May 30 had said, for example,
‘We’re pulling out’ or something like that, there would be no intention to go
ahead on June 1-2. But it is much less strong than that. This is to Mr West:
I think we
are now at the point where unless we get some further information from Barclays
Bank and/or the landlords of the above property, we will have to forget about
this. If you cannot obtain the relevant information from the other side, then I
am not in a position to put the matter to my directors and we will have to
withdraw.
There is no
question then of saying ‘we are withdrawing’ or anything of that sort, but that
the option of withdrawing will have to be considered. I have already commented
on the effect that had on the landlords, who at the bottom are the people whose
intention one has to consider. It is the landlords’ intention that is the prime
intention that has to be considered. The Halifax’s intention, as I see it, is
only relevant in this sense, that for the landlords’ intention to be effective
does require the agreement of the Halifax. The Halifax’s agreement is one of
the obstacles that the landlord has to get over in order to come to a decision
or to have its intention fulfilled. At the end of the day it was the landlords
who controlled these premises and they had the Halifax eager to have the
property but complaining that they were not given enough information for the
Halifax then to come forward with a suitable proposal.
When one looks
at the correspondence as a whole, one sees a continuous negotiation with
hiccups, but overall both the landlords and the Halifax were anxious that the
deal should succeed. In the case of the landlords, they had on offer a
first-class covenant. They had
June 1984. They were dealing with people, the Halifax, who had a very
businesslike approach to the negotiations, as indeed the landlords had. And the
Halifax were proposing some refurbishment which the landlords saw as necessary
and desirable, and it had got so far that the Halifax had sent in a team of
suitable experts to assess the refurbishment. On the Halifax’s side, they were
in current difficulties in Holborn. They had to come to a quick decision as to
whether they were going to spend a lot of money on their existing premises or
get new ones, and it would seem that these premises were more satisfactory from
their point of view than any others that they had available at that time. And,
of course, there is no question about anybody’s financial ability to carry
through the deal.
On June 1 the
Halifax were getting frustrated and in despair, but the landlords were far from
frustrated. They were clearly going to make a concession which the tenants were
likely to accept, and they were seeking advice on how to structure it. When the
Halifax did complain, as they did, they were at once on the telephone to them
to persuade the Halifax that they were going ahead.
Referring once
again to the judgment of Asquith LJ in Cunliffe v Goodman at p
253 which was put in the forefront of Mr Berry’s case on this aspect of the
matter:
An ‘intention’
to my mind connotes a state of affairs which the party ‘intending’ — I will
call him X — does more than merely contemplate: it connotes a state of affairs
which, on the contrary, he decides, so far as in him lies, to bring about, and
which, in point of possibility, he has a reasonable prospect of being able to
bring about, by his own act of volition.
The landlords,
as I find, on June 1 had decided to bring about a letting to the Halifax in
this sense. They had not agreed the details of it, but they had it in their
grasp to bring that about. As soon as they had got the necessary advice, they
could go to the Halifax and be confident that they would get a suitable deal
arranged. The landlords were not inflexible; we have seen that in other
negotiations they undertook. They wanted a fair deal and they had there the
Halifax, who were a very businesslike organisation.
It is true
that Daniel Smith at the time would have had to refer, and did refer, the
details of the deal to Lord Radnor and to the trustees, but there was no reason
to suppose in June that they would make difficulties about it if Daniel Smith
were advising them that it was a suitable deal. And so it seems that at the
beginning of June they did have a reasonable prospect of being able to bring about
the deal and get the agreement of the Halifax, who were more than willing to
agree. It was just that they had not got the material on which to formulate
their proposals. I find therefore the intention, as explained in the
authorities, to be established. And it is borne out, of course, by the fact
that as soon as they had got their tax position sorted out, the matter went
ahead very quickly and firmly.
Therefore,
although I can appreciate and have some sympathy with the situation of the
landlords, it does not look to me as though they suffered any loss. Therefore,
I shall have to dimiss the claim, but having regard to the arrangement that I
have come to with counsel, I shall adjourn the consideration of costs.
