Landlord and Tenant Act 1954 — Determination of new rent and interim rent — Whether county court judge erred in determining rents
In 1981 the
appellant took an assignment of a lease of unit 11, Kingfisher Walk, in the
Kingfisher Shopping Centre, Redditch, for a term of 14 years from May 2 1973.
Since 1985 the landlords have been the respondents. By a notice given under
section 25 of the 1954 Act they duly terminated the tenancy at the expiration
of the contractual term on May 2 1987. The annual rent payable during the last
seven years of the contractual term had been £10,475, a figure agreed for rent
review purposes between the tenant and the then landlords, Redditch Development
Corporation, in September 1981. The appellant is a retail fruiterer. The
Kingfisher Centre is a large development of shops and supermarkets with
adjoining car parks. Unit 11 comprises a shop arranged on ground, first and
basement levels. The interim rent fell to be assessed on May 2 1987, at which
date the premises adjoining unit 11 on its west side, units 12 and 13, were a
supermarket occupied by J Sainsbury plc. In Redditch County Court Judge Roy
Ward QC determined the interim rent at £28,500 and the rent under the new
tenancy, the grant of which the respondents did not oppose, at £36,098. The
appellant appealed against the determination of the rents contending: (1) in
regard to the interim rent that the valuation in terms of zone A of £51.50 per
sq ft was too much and that the deduction of 3.275% of the interim market rent
was too small a cushion; and (2) in relation to the rent under the new tenancy,
the judge recognised the fact that, in a time of recession, retailers are not
ready and willing to take leases of inferior sites, but did not, in fact, make
anywhere near a sufficient reduction in that respect, and did not deal
adequately with a transaction involving the unit originally occupied by J
Sainsbury plc.
the judge’s notes of evidence, although it could not differ from any finding of
the judge which was based on demeanour or reliability of the witnesses; in this
type of case such findings are rare and the appellate court is in as good a
position as the trial judge to assess the merits of the expert evidence and
make findings on it accordingly. The judge was wrong to place reliance on two
comparables while at the same time disregarding a further comparable. He was
also wrong to pay no regard to the known fact in May 1987 that J Sainsbury plc
were to move out of their unit On May 2 1987 the value of unit 11 was £51.50
per sq ft ITZA and, after the 10% agreed reduction for the tenancy from year to
year, the unit should be valued at £45.90 per sq ft ITZA, resulting in an
interim market rent of £26,195. A cushion of 10%, to have regard to the old
rent, should be made, leaving an interim rent of £23,576. In relation to the
rent under the new tenancy, the judge had accepted that there should be some
reduction in recognition of the fact that, in a time of recession, retailers
are not ready and willing to take leases of inferior sites, but he did not, in
fact, make anywhere near a sufficient reduction in that respect. On the
evidence before the court, the unit should be valued in November 1991 at the
rate of £56 per sq ft ITZA, resulting in a new rent of £31,858.
The following
cases are referred to in this report.
Charles
Follett Ltd v Cabtell Investments Ltd (1987)
55 P&CR 36; [1987] 2 EGLR 88; (1987) 283 EG 195, CA
English
Exporters (London) Ltd v Eldonwall Ltd
[1973] Ch 415; [1973] 2 WLR 435; [1973] 1 All ER 726; (1972) 25 P&CR 379;
[1973] EGD 439; 225 EG 255 & 433
This was an
appeal by the applicant, Mr Anthony John French, from orders made by Judge Roy
Ward QC in Redditch County Court whereby he determined an interim rent and rent
under a new tenancy of premises in the Kingfisher Shopping Centre at Redditch
owned by the responents, Commercial Union Life Assurance Co plc and Shell
Pensions Trust Ltd.
John West
(instructed by Wallis Robinson & Morgan, of Solihull) appeared for the
appellant; David Smith (instructed by Stones Porter & Co) represented the
respondents.
Giving the
first judgment, NOURSE LJ said: This is an appeal by a tenant against
the amounts of an interim rent and a new rent determined by the court on his
application for a new tenancy of business premises under section 24(1) of the
Landlord and Tenant Act 1954.
The tenant is
Mr Anthony John French. In 1981 he took an assignment of a lease of unit 11,
Kingfisher Walk, in the Kingfisher Shopping Centre, Redditch, for a term of 14
years from May 2 1973. The landlords since 1985 have been the respondents,
Commercial Union Assurance Co plc and Shell Pensions Trust Ltd. By a notice
given under section 25 of the 1954 Act they duly terminated the tenancy at the
expiration of the contractual term on May 2 1987. The annual rent payable
during the last seven years of the contractual term had been £10,475, a figure
agreed for rent review purposes between the tenant and the then landlords,
Redditch Development Corporation, in September 1981.
The tenant,
who has seven shops in the West Midlands, is a retail fruiterer trading under
the name or style of ‘Fresha Fruits’. The Kingfisher Centre is a large
development of shops and supermarkets with adjoining car parks, the whole of
which is owned and managed
Worcester Square in the east, the units being numbered consecutively from east
to west on the north side and then back again along the south side. At about
its middle point Kingfisher Walk widens into an area about 53 ft x 53 ft known
as Clock Court. Unit 11, which comprises a shop arranged on ground, first and
basement levels, is on the north side of Clock Court at about its middle point.
On the determination of the contractual term on May 2 1987, the date at which
the interim rent falls to be assessed, the premises adjoining unit 11 on its
west side, ie units 12 and 13, were a supermarket occupied by J Sainsbury plc.
The tenant’s
application for a new tenancy was heard by Judge Roy Ward QC in Redditch County
Court in September and November 1991. The landlords did not oppose the grant of
a new tenancy, which it was agreed should be for a term of five years. There
was also agreement on all other matters except the interim rent, the new rent
and the tenant’s claim that the new lease should incorporate an additional
term. In his judgment delivered on November 18 Judge Ward refused to include
the additional term. He fixed the interim rent at £28,500 and the new rent at
£36,098. The tenant has not appealed against the judge’s refusal to include the
additional term, but he claims that both the interim rent and the new rent are
too high.
The judge had
the evidence of expert valuers on each side. Each expert expressed his views
fully in writing and then gave extensive oral evidence as well. We have all the
written material and the judge’s notes of evidence. Not having seen and heard
the witnesses give their evidence, we could not differ from any finding of the
judge which was based on demeanour or reliability. But in this type of case
such findings are rare. Broadly speaking, the appellate court is in as good a
position as the trial judge to assess the merits of the expert evidence and
make findings on it accordingly.
Interim
rent
Although the
judge dealt first with the new rent, in this court Mr West, for the tenant,
started with the interim rent. I find it convenient to follow the same course.
The court’s power to determine an interim rent is given to it by section 24A of
the 1954 Act, which was added by section 3(1) of the Law of Property Act 1969.
Section 24A is in these terms:
(1) The landlord of a tenancy to which this Part
of this Act applies may —
(a) if he has given notice under section 25 of
this Act to terminate the tenancy; or
(b) if the tenant has made a request for a new
tenancy in accordance with section 26 of this Act;
apply to the
court to determine a rent which it would be reasonable for the tenant to pay
while the tenancy continues by virtue of section 24 of this Act, and the court
may determine a rent accordingly.
(2) A rent determined in proceedings under this
section shall be deemed to be the rent payable under the tenancy from the date
on which the proceedings were commenced or the date specified in the landlord’s
notice or the tenant’s request, whichever is the later.
(3) In determining a rent under this section the
court shall have regard to the rent payable under the terms of the tenancy, but
otherwise subsections (1) and (2) of section 34 of this Act shall apply to the
determination as they would apply to the determination of a rent under that
section if a new tenancy from year to year of the whole of the property
comprised in the tenancy were granted to the tenant by order of the court.
The effect of
section 34(1) and (2) of the Act is that the rent payable under a tenancy
granted by order of the court shall, in default of agreement, be such as may be
determined by the court to be that at which, having regard to the terms of the
tenancy (other than those relating to rent), the holding might reasonably be
expected to be let in the open market by a willing lessor, certain standard
matters being disregarded.
Although the
determination of an interim rent is a matter for the discretion of the court,
the tenant has throughout accepted that one should be determined in this case.
It is also agreed that the rent will run from May 2 1987 (being the date
specified for the termination of the tenancy in the landlords’ notice under
section 25) until the expiration of three months beginning with the date on
which the application is finally disposed of: see section 64(1) of the Act.
Thus the interim rent will run for another three months from today, making a
period of nearly six years in all. As to the amount of the interim rent, the
parties are agreed that under section 24A (2) and (3) the court must assess the
section 34 market rent for a tenancy from year to year commencing on May 2 1987
(‘the interim market rent’ and then decide what, if any, consequences are to
flow from the obligation to ‘have regard to’ the old rent of £10,475. The first
part of this exercise is one of valuation depending on the evidence of experts;
the second is a matter for the judgment of the court.
Ignoring at
present those parts of the premises not falling in ‘zone A’, the method of
valuation adopted by the experts on both sides was to make a valuation per
square foot of floorspace in terms of zone A (‘ITZA’), as if for a term of
years, and then to discount it by 10% in order to tailor it to a tenancy from
year to year. The judge arrived at a valuation ITZA of £57.30 per sq ft which,
after deducting 10%, he rounded down to £51.50. For an agreed zone A area of
530 sq ft, that produced a figure of £27,295, to which he added £2,170 for the
first floor and basement, making a total interim market rent of £29,465.
In carrying
out the second part of the exercise, the judge took the increase of £19,000
over the old rent of £10,475 and, for the period from May 2 1987 to November 18
1991, multiplied it by four and a half. Having thus calculated that the tenant
would have to find some £85,500 over and above the old rent, at p11H of the
transcript he continued:
To some
extent clearly he should, as a shrewd businessman, have contemplated an
increase and made provision against it of a considerable part of that sum.
Nevertheless, it seems to me to give rise to such a substantial immediate
demand on his resources that he should be cushioned to some extent against the
shock. Having regard to the fact that he should, it seems to me, have
contemplated an increase in the region of £17,000 a year on his own advisers’
calculations, it would be appropriate to allow a cushion of a further 5% of the
capital sum. Doing that in round terms it would reduce the appropriate interim
rent to £28,500 pa.
So the judge
deducted 5%, not of the interim market rent of £29,465 but of the £85,500 extra
which the tenant would have to find over the period of four and a half years.
That produced a deduction of £4,275 which, averaged over the four and a half
years, was the equivalent of an annual reduction of £950, thus producing an
interim rent of £28,515, which the judge rounded down to £28,500. Viewed as a
percentage of the interim market rent, the reduction was only 3.275%.
The first
point to be made about the judge’s interim rent is that the parties are agreed
that the figure of £2,170 for the first floor and the basement was wrong, the
right figure being £1,868. Mr Smith, for the landlords, therefore accepts that
the interim rent ought to be reduced to £28,230, say £28,250. The tenant’s
outstanding complaints in regard to the interim rent are twofold: first, that
the valuation ITZA of £51.50 per sq ft was too much; second, that the deduction
of 3.275% of the interim market rent was too little.
Under the
first of these complaints, Mr West, having pointed out that the judge’s figure
for the interim market rent (£29,465) was higher than that put forward by the
landlords’ expert, Mr John Tinley [ARICS] (£29,348), made three main
submissions. First, he submitted that the only two comparables considered by
the judge were not, as the judge thought, the best; that he ought to have
considered three different and better comparables; and that the calculation by
which he applied the comparison was in any event arbitrary and unsound. Second,
Mr West submitted that the judge wrongly disregarded what has been called ‘the
Sainsbury factor’. Third, he submitted that the judge wrongly disregarded what
has been called ‘the refurbishment factor’.
The judge
thought that the best comparables were units 5 and 7. Unit 5 was let on June 24
1987 for a term of 20 years at an agreed rent ITZA of £63.25 per sq ft. Unit 7
was the subject of an agreement as to an interim rent, as at February 1987, but
before any discount for an annual tenancy, of £61.30 per sq ft ITZA. On the
face of them, those dates were near in time to May 2 1987. However, Mr West
argued that the rent for unit 5 was agreed nearly two months later at a time of
rising values and that the interim rent for unit 7, although assessed as at
February 1987, was not agreed until more than two years later. His more
substantial complaint was that units 5 and 7 were not truly comparable, being
situated some way to the east of unit 11 and not in Clock Court, unit 5 being
next door to Boots. Moreover, he criticised the judge’s method of discounting
the values on the basis of £1 per sq ft for every unit between units 5 and 7
respectively and unit 11, for which purpose he pointed to the judge’s own
description of it as arbitrary. Thus unit 5, being six units away, was
discounted from £63.25 to £57.25 and unit 7, being four units away, was
discounted from £61.30 to £57.30. It was thus that the judge arrived at his
figure of £57.30 already referred to.
Mr West
submitted that the better comparables were units 10, 29, and 26. Unit 10,
immediately to the east of unit 11 and also in Clock Court, was let in November
1985, 18 months earlier, at £36 per sq ft ITZA. Unit 29, almost opposite unit
11 on the other side of Clock
three months rent free. In his oral evidence Mr Tinley said that agreement as
to that rent might have been reached later. Earlier he had described the
next-door unit, unit 30, which is immediately opposite unit 11, as ‘the mirror
image’ of unit 11. Unit 26, which is in the western part of Kingfisher Walk and
on the other side to unit 11, was let in April 1987 at £44 per sq ft ITZA. Mr
West was prepared to accept that neither unit 10 nor unit 26 was especially
helpful, the date of the former being too early and the latter, like units 5
and 7, being too far away. But he placed great reliance on unit 29, which was
close both in date and location.
Sainsbury
moved out of units 12 and 13 in July 1989. It is agreed that in May 1987 it was
generally known that they were going to move. The tenant’s expert, Mr Richard
Hardwick [FRICS] said that, since the move was anticipated, any tenant from
year to year would have expected a discount rather greater than the normal 10%.
The judge did not act on that view. He said, at p5D:
The
unfortunate applicant in this case was badly affected, sustaining a 40% loss in
turnover which has never recovered. However, the applicant knew at the time of
his assignment that Sainsbury were going to leave at some time in the future
and that it was their national policy to move to purpose-built sites, and he
contemplated at that time a drop in his own profits, although not appreciating
that it would be as severe as he had not contemplated. I do not think that he
can here complain that the eventual effect was worse than he foresaw. It might
have proved to be better. I do not think that this is a factor which can properly
influence my judgment either on the new rent or as to the interim rent. It was
a matter entirely for the commercial judgment of the applicant.
Mr West
criticised that passage on two grounds. First, he submitted that the judge had
failed to understand the true nature and effect of the Sainsbury factor, which
was simply that a prospective tenant in May 1987 would have required a discount
on account of the damage to his turnover, whatever it might have been
beforehand, that would be suffered when Sainsbury moved out. Second, Mr West
said that the judge’s misunderstanding of the Sainsbury factor was illustrated
by his mistaken belief that it could have an effect not only on the interim
rent but also on the new rent. It was never suggested that it could have an
effect on the new rent.
The
refurbishment factor was said to be of a similar nature and effect. In May 1987
it was known that there was going to be a major refurbishment of the centre, in
particular around Clock Court. Again Mr Hardwick maintained that that prospect
would also have depreciated the amount which a prospective tenant was prepared
to pay at that time.
In my view,
there is substance in some of Mr West’s criticisms of the judge’s approach to
the assessment of the interim market rent. I think that he was wrong to place
reliance on units 5 and 7 and to apply the arbitrary £1 per unit discount,
while at the same time disregarding unit 29. I think that he was also wrong to
pay no regard to the Sainsbury factor. The valuation of unit 29 some five months
earlier at £49 per sq ft ITZA, which would itself have been influenced by the
Sainsbury factor and, if it had any influence, by the refurbishment factor,
cannot be disregarded. Doing the best I can on the evidence available to the
judge, I would value unit 11 on May 2 1987 at £51 per sq ft ITZA. It follows
that, after the 10% agreed reduction for the tenancy from year to year, unit 11
should be valued at £45.90 per sq ft ITZA. If that valuation is applied to the
530 sq ft in zone A and the agreed £1,868 for the first floor and the basement
is added on, the result is an interim market rent of £26,195.
The question
then is whether any deduction ought to be made as a result of the statutory
obligation to have regard to the old rent of £10,475. That is a question which
has caused difficulty in other cases: see, for example, English Exporters
(London) Ltd v Eldonwall [1973] Ch415*. However, both sides have
accepted as a correct statement of Parliament’s intention in requiring regard
to be had to the old rent the following passage in my judgment (with which Fox
LJ and Sir Denys Buckley agreed) in Charles Follett Ltd v Cabtell
Investments Ltd (1987) 55 P&CR 36† , at p42:
By 1969 it
had been demonstrated that a tenant, in times of inflation, could readily spin
out the steps prescribed by the 1954 Act and the rules of court, so as unfairly
to prolong the continuation of the old rent under section 24. The defeat of
such practices was the primary legislative purpose of section 24A. At the same
time it was recognised that, while inflation benefits the tenant during the
currency of a lease at an uninflated rent, it exposes him to an inordinate
shock if its consequences are visited on him in full directly the lease has
determined. The legislative purpose of the requirement that regard should be
had to the old rent was, where appropriate, to cushion the tenant against that
shock.
*Editor’s
note: See also [1973] 225 EG 255 & 433.
† Editor’s
note: See also [1987] 2 EGLR 88.
The facts of Charles
Follett Ltd v Cabtell Investments Ltd were recognised by this court
to have been exceptional. The old rent agreed on a rent review not much more
than seven years beforehand had been £13,500 and the interim market rent had
been assessed by the judge at £80,000. The judge had then reduced that figure
by 50%, arriving at an interim rent of £40,000. It was thought by this court to
be an exceptional case if only for the reason that a reduction of 50%
necessarily produced an interim rent nearer to the old rent than the interim
market rent. But we decided no more than that the judge did not err in
principle or exercise his discretion in a manner which was plainly wrong.
Mr West has
relied on the following passage in my judgment at p44:
Certainly I
would agree that to make a 10% reduction, a mere £8,000, would be paying no
more than lip service to the old rent or, if you prefer it, not providing the
plaintiff with any real cushion at all.
That does not
mean that a 10% reduction or even less would not, in other cases, be
appropriate. In that case the stark fact was that a reduction of only 10% would
still have left the tenant paying an interim rent of more than five times the
rent which had been agreed not much more than seven years beforehand. The judge
was entitled to take the view that that would have been an inordinate shock to
him and that the cushion must be appreciably larger than 10%. On the other
hand, I would very much doubt that a cushion as large as 50% could be sustained
in any but the rarest of cases.
In the present
case the difference between the old rent (£10,475) and the proposed interim
market rent (£26,195) is £15,720. Thus the interim market rent is almost
exactly two and a half times the old rent.
Ought there to
be a cushion in this case and, if so, what should it be? Mr Smith has not suggested that there should
be no cushion. He says that the judge’s approach was correct. As I have said,
the judge calculated his cushion by reference to the aggregate amount of the difference
between the old rent and the interim market rent over the four and a half year
period between May 1987 and November 1991. Although I believe that it is usual
to assess the amount of the cushion by taking a percentage of the interim
market rent, I do not say that the judge’s method of calculation was not open
to him. However, it is preferable to express the deduction as a percentage of
the interim market rent. On that footing the cushion was 3.275%.
In arriving at
his figure, the judge, in the passage from his judgment already quoted, seems
to have placed reliance on the fact that the tenant should, on his own
advisers’ calculations, have contemplated an increased rent in the region of
£17,000 a year. Inferentially the judge suggested that the £19,000 increase
awarded ought not, therefore, to have come as a shock to the tenant. But that
is not the shock with which the statute is concerned. It is the shock of having
to pay a greatly increased rent, irrespective of whether the tenant has been
forewarned of it or not. I therefore think that the judge’s calculation of the
cushion proceeded on an error of principle. In any event, a percentage of no
more than 3.275 was, in all the circumstances of the case, far too little.
That means
that we in this court must exercise an original discretion as to the amount of
the cushion. What figure should we adopt?
One of the most significant features of the case is that the interim
rent will be payable for a period of nearly six years. In other words, the
landlords will have been kept out of the new rent for a period very much longer
than is either usual or desirable. Surely the obligation to have regard to the
old rent must include a regard for the period after the end of the contractual
term during which the old rent has continued. We must therefore take into
account the cushion which the tenant has already received in not having to pay
anything more than the old rent until November 1991, when we were told that he
had, by agreement, started to pay an increased amount. Without speculating as
to what might have been appropriate in any other case, or in this case had the
circumstances been different, I think that we should fix the cushion at 10%.
That means that £2,619 should be deducted from the interim market rent of £26,195,
leaving an interim rent of £23,576.
The new
rent
I turn to
consider the new rent, which fell to be assessed as at the date of the hearing
in November 1991. Before dealing with
affecting unit 11. He started with its location. Although he did not think that
the location, close to a corner, would make a significant difference to a
retail fruiterer, he accepted that for many other retailers it would make a
less desirable site, that the field of potential lessees would be reduced and
certainly that they would not be prepared to pay the same rent as they would
for better sites. Having said that in times of a buoyant market that might not
matter, he continued, at p3H:
In a time of
recession, however, it might make a significant difference and pro tanto
substantially affect the balance of supply and demand. I do not regard it as
pure coincidence in this case that two of the corner shops, numbers 12 and 31,
have long been unlet. It is, in my judgment, [a] clear indication that
retailers are not ready and willing to take leases of those premises at any
rate at the rents which the landlords are presently demanding. There should
accordingly be some reduction in recognition of that factor.
Next, the
judge referred to a pedestrian flow count commissioned by the tenant’s advisers
and carried out on a Thursday in October 1988. Although in broad terms he
accepted that the findings of that count, which showed that many pedestrians
passed by unit 11 without going in, were evidence of the general pedestrian
flow, he remained sceptical as to the proper inference to be drawn from it. He
was certainly not prepared to accept Mr Hardwick’s suggestion that the rent
should be discounted by 20%, which he described as arbitrary.
Having then
dealt with the Sainsbury factor, which I repeat was immaterial to the new rent,
the judge turned to the impact of rates and service charges, as to which he
rejected the submissions of Mr West on behalf of the tenant. Finally among the
special and general factors affecting unit 11, the judge considered the impact
of the recession. Having said that he must limit himself to the overall effect
of the evidence in the case, he continued, at p6H:
That evidence
is to the effect that business is in recession, that shops are standing empty,
that tenants of some shops are offering incentives by way of reverse premiums
to anybody willing to take leases off their hands. Of that I am quite satisfied
and there is, in my judgment, no useful purpose to be served in examining all
the specific particulars of individual cases.
The judge then
considered other individual sites, starting with the Sainsbury site and the
Milletts Camping site. After Sainsbury had moved out in the autumn of 1989,
their premises were empty for about 12 months. Later the major part of the
premises was divided into two, part being let to Peacocks and part to Argos.
That left unit 12, a small part in the shape of a dogleg immediately adjoining
unit 11 to the west, which, shortly before the hearing below, was agreed to be
let from September 29 1991 to Milletts at a rent of £70 per sq ft ITZA. The
judge accepted that the Argos and Peacock leases were on far more favourable
terms than the leases of smaller units, but on reflection he thought that he
should discount that fact, on the ground that tenants such as they would be
likely to have been treated by the landlord as loss leaders. He also found that
he did not gain any assistance from the Milletts transaction. Although Mr West has
argued to the contrary, I see no reason for differing from the judge over the
leases to Argos and Peacocks. On the other hand, the Milletts transaction
merits careful consideration and I will come back to it in due course.
The judge then
considered units 32 and 30. I agree with him that unit 32 was of no positive
assistance. Unit 30 is a more problematical case. That was let to Hogg Robinson
in March 1990 at £65.76 per sq ft ITZA. As I have said, Mr Tinley described it
as the mirror image of unit 11, being directly opposite it on the other side of
Clock Court. Accordingly, on the face of it, the rental valuation of unit 30 in
March 1990 ought to have been of some assistance in making a rental valuation
of unit 11 in November 1991. However, the judge was not happy about the
evidence as to this unit, thinking it proper to infer that there was some sort
of a package deal which he could not assess. He therefore eliminated unit 30
from his consideration. At the same time he observed that unit 31 still remained
unlet despite having been advertised by the landlords for nearly two years.
At p9A the
judge turned to the effect of the recession generally, reciting the experts’
views:
But Mr
Hardwick’s view was that the property market reached its peak in September 1989,
that it is still declining and that market prices at the moment are some 15% to
20% off the market at its peak. Mr Tinley’s evidence is not very different. He
accepts that the peak was in autumn 1989. He thinks the downward trend has now
ceased and has done for some three or four months, and he puts the drop from
peak times at some 10%.
The judge
concluded that his proper approach ought to be to fix the rent by reference to
comparables, making a further reduction, first, in respect of the inferior
location of the tenant’s site as opposed to prime sites and, second, in
recognition of the recession and the consequent downturn in the market. Having
referred to the evidence before him as to the 34 individual shops in Kingfisher
Walk, he was prepared to accept that, by and large, those of the same size were
originally let at much the same rents. He then said that if he excluded
consideration of leases or rent reviews more than 18 months before November
1991 he was left with units 9, 15 and 28. At p10C, he continued:
That would be
an inadequate sample, it seems to me, and I propose to cast the net wider and I
propose to have regard to other Zone A assessments as indicated on the plan . .
. Doing my best to make a proper allowance for the slump in property prices and
for a differential to affect the diminution in value attributable to its
position in the square, I arrive at a Zone A assessment per square foot ITZA of
£64.
The judge then
applied that valuation to the 530 sq ft in zone A and added on £2,178 for the first
floor and the basement, arriving at a new rent of £36,098.
In this court
Mr West has advanced a number of criticisms of the judge’s approach to the
assessment of the new rent, both in regard to the special and general factors
affecting unit 11 and in regard to the comparables. He complains in particular
of the judge’s omission to state to which other zone A assessments he had had
regard. For my part, I do not see that criticism as being of any substance.
Looking at the plan for myself, I would think it to be a matter of no great
difficulty to see what other units the judge took into account.
In my view, Mr
West’s criticisms are, in two important and related respects, valid. First, I
think that he is correct in saying that, although at pp3H and 6H the judge had
accepted that there should be some reduction in recognition of the fact that,
in a time of recession, retailers are not ready and willing to take leases of
inferior sites (he instanced units 12 and 31 as having long been unlet), he did
not, in fact, make anywhere near a sufficient reduction in that respect.
Second, there
is the important matter of the Milletts’ site. As I have said, unit 12 was
agreed to be let to Milletts from September 29 1991 at a rent of £70 per sq ft
ITZA. On the face of it, that letting of immediately adjoining premises of much
the same size so soon before the hearing below ought to have had a decisive
effect on the valuation of unit 11. No doubt the landlords, who put it forward
as a comparable, hoped that it would. However, the matter was by no means as
simple as that.
For some years
Milletts had occupied a site at the north-eastern corner of Worcester Square,
near the principal entrance to the Kingfisher Centre. After a rent review in
1987 they found that the rent there had reached a level at which their profits
had become marginal. In 1990 they instructed Mr D C Haynes [FRICS], the senior
partner in Kingstons, chartered surveyors, to dispose of the premises. He gave
evidence in the court below. I take up the story in the words of the judge, at
p7F-G:
As a result of
negotiations they have agreed to move to unit 12 which has now been empty for
some two years. That agreement is by way of a package deal. The [landlords] are
to pay Milletts a capital sum by way of premium of £62,500 for surrender of
their present site. That has advantages to the [landlords] in that they will
recover a presently untenanted 4,000 sq ft of first floor space, plus an
ability to redevelop that site with its adjacent premises just outside the
shopping centre which also are currently standing empty.
Coupled with
that payment of a capital sum is an agreement to rent to Milletts unit 12 at a
rent of £42,000 pa, but with a rent-free period of nine months. I do not
propose to examine the various permutations (which seem to me to be endless) of
the consequences of that package deal, but I am bound to say that like Mr
Haynes I find it impossible to accept that there was not in some substantial
degree an incentive by the [landlords] given to Milletts to enter into a
tenancy of 12 Kingfisher Walk; and that incentive is calculated to distort the
apparent market rents available. On the other hand, I cannot find it a useful
exercise to show what market rent it really represents. That depends entirely
on how one splits up the capital sum and the rent finally agreed.
It is
significant that the judge agreed with Mr Haynes that the landlords must have
given Milletts a substantial incentive to enter into a tenancy of unit 12. Of
course the judge was right to imply that it is very difficult to say with what
result in terms of open market rental valuation the package should be broken
down. But some attempt must be made. Mr Haynes himself suggested that it might
have resulted in a valuation of £42.41 or even £32.81 per sq ft ITZA. For my
part, I am unable to go anywhere near so far as Mr Haynes, not least because Mr
Hardwick’s own valuation was £51 per sq ft
it was a particular example of the general proposition, accepted by him, that
in a time of recession retailers are not ready and willing to take leases of
inferior sites without some substantial incentive, an incentive which, in terms
of section 34, can be only by way of a substantial reduction in rent. As I have
said, I do not think that the judge made anywhere near a sufficient reduction
in that respect.
Doing the best
I can on the evidence available to the judge, I would value unit 11 in November
1991 at £56 per sq ft ITZA. If that valuation is applied to the 530 sq ft in
zone A and the judge’s figure of £2,178 for the first floor, and the basement
(to which no objection has been made) is added on, the result is a new rent of
£31,858.
In summary, I
would reduce the interim rent determined by the judge from £28,500 to £23,576
and the new rent from £36,098 to £31,858. I would allow the appeal accordingly.
RUSSELL J agreed and did not add anything.
Appeal
allowed with costs.
