Landlord and tenant — Rent review — Whether rent to be assessed on assumption that premises are let with vacant possession or subject to underleases existing at date of review
By a lease
dated June 14 1972 a predecessor in title to the plaintiffs demised to the
defendants 5 acres of undeveloped land at Langley Close, Havering, for a term
of 62 years. By clause 3(b) of the lease the defendants covenanted to underlet
the demised premises in separate plots. By clause 3(h)(iii) the defendants covenanted
not to underlet without written consent, such consent not to be unreasonably
withheld. By clause 3(i) the lease recited that consent was given less a few
days to H P Borey & Co Ltd. Further underleases of other plots were granted
to other tenants in 1977, 1979 and 1981. In Laura Investment Co Ltd v Havering
London Borough Council [1992] 1 EGLR 155 Hoffmann J declared that the rent
at review should be assessed on the assumption that buildings erected on the
land since the grant of the lease were included in the hypothetical demise.
Following an adjournment of the originating summons, and by an amendment, the
defendants contended that the rent should be assessed on the assumption that
the premises are let subject to the tenancies which exist at the date of the
rent review.
lease that underlettings were contemplated, indeed mandated, and the parties
intended the rent to be calculated on an assumption of reality, assuming the
underlettings were in place. The landlords’ power to refuse consent to an
underletting unless they were being unreasonable gave them control over the
terms of the future underleases such as to enable them to protect their
position on a rent review from arbitrary damage. Unless the rent review
provision is construed to assume that the premises are in fact underlet, the
defendants were bound to be putting themselves in a position in which, on a
rent review, they would be paying to the
The following
cases are referred to in this report.
Ayon
County Council v Alliance Property Co Ltd
(1981) 258 EG 1181, [1981] 1 EGLR 110
Forte
& Co Ltd v General Accident Life Assurance
Ltd [1986] 2 EGLR 115; (1986) 279 EG 1227
Laura
Investment Co Ltd v Havering London Borough
Council [1992] 1 EGLR 155; [1992] 24 EG 136
Scottish
& Newcastle Breweries plc v Sir Richard
Sutton’s Settled Estates [1985] 2 EGLR 130; (1985) 276 EG 77
This was an
adjourned originating summons seeking a declaration as to the proper
construction of a lease held by the defendants, Havering London Borough
Council, from the plaintiffs, Laura Investment Co Ltd.
Michael Barnes
QC (instructed by Binks Stern) appeared for the plaintiffs; Nicholas Patten QC
and Timothy Fancourt (instructed by the solicitor to Havering London Borough
Council) represented the defendants.
Giving
judgment, HOFFMANN J said: This is the adjourned hearing of an
originating summons on the construction of a rent review clause. The first
question raised by the plaintiffs was whether the rent should be assessed on
the assumption that buildings erected on the land since the grant of the lease
were included in the hypothetical demise. On March 13 I decided this question
in the affirmative and gave a judgment which is reported at [1992] 1 EGLR 155*.
*Editor’s
note: Also reported at [1992] 24 EG 136, [1992] 1 EGLR 155.
I must now
answer the second question, which has been raised by amendment on behalf of the
defendants. This is whether the rent should be assessed on the assumption that
the premises are let with vacant possession or subject to the tenancies which
exist at the date of the rent review.
As appears
from my earlier judgment, the lease was granted on June 14 1972 by the Greater
London Council, the defendants, to Havering London Borough Council. It was a
demise for 62 years of about 5 acres of undeveloped land. The GLC wanted the
land developed for industrial purposes and, by clause 3(b), the tenants
covenanted:
as speedily
as possible, subject to the provisions of subclauses 3(h), 3(n) and 3(s)
hereof, to underlet the demised premises in separate plots and to cause to be
erected on each of such plots factory or warehousing premises together with
associated premises.
Clause
3(h)(iii) was a covenant not to underlet without written consent, not to be
unreasonably withheld. At the time of the execution of the lease, the
defendants had already entered into a building lease agreement with a company
called H P Borey & Co Ltd, by which they were to grant in consideration of
the erection of a building on one plot an underlease for the whole 62-year
term, less a few days.
Clause 3(i) of
the lease recited that consent to that underletting had been given. The
underletting to H P Borey & Co Ltd was completed by the grant of an
underlease dated March 23 1973. The rent no doubt reflected the fact that the
tenants had been obliged to erect the building.
There were
15-year rent reviews which required the rent to be assessed on the assumption
that the premises were a bare site. Further underleases of other plots were
granted to other tenants in 1977, 1979 and 1981. For present purposes the terms
were not materially different.
The rent
review clause does not say that the hypothetical letting is to be with vacant
possession. It is remarkably terse and simply speaks of ‘the market rental
value’ at the rent review date. The only expressed assumption is that all
covenants and conditions in the lease have been duly observed and performed. It
was the absence of any express assumption that improvements made by the tenants
were to be disregarded which led to my decision on the first question.
The landlords
here say that, in the absence of express words, there is a presumption that the
hypothetical letting is to be with vacant possession. I was referred to three
cases in which judges have had to consider whether such an assumption should be
made or not. In chronological order they were: Avon County Council v Alliance
Property Co Ltd (1981) 258 EG 1181, [1981] 1 EGLR 110, a decision of Judge
Mervyn Davies QC, sitting as a High Court judge; Scottish & Newcastle
Breweries plc v Sir Richard Sutton’s Settled Estates [1985] 2 EGLR
130*, a decision of Judge Paul Baker QC, sitting as a High Court judge; and Forte
& Co Ltd v General Accident Life Assurance Ltd [1986] 2 EGLR
115† .
*Editor’s
note: Also reported at (1985) 276 EG 77.
† Editor’s
note: Also reported at (1986) 279 EG 1227.
In the second
of those cases Judge Baker accepted the submission of Mr Barnes that vacant
possession valuation
is likely to
be the intention unless it is expressed to the contrary.
The learned
judge added:
Were it
otherwise the landlord would be in the position on a review of rent of being in
the hands of the tenant if the tenant decides what terms he is to arrange with
the subtenant.
Likewise in
the Forte case, Peter Gibson J said at p116J:
. . . I accept
that the ascertainment of an open market rental of premises which were let with
vacant possession would ordinarily involve . . . an assumption [of vacant
possession] . . .
In a case where
the premises are, in fact, underlet at the rent review date, such a presumption
would, on the face of it, conflict with what has been called the presumption of
reality, which is that one normally assumes for the purposes of the
hypothetical letting that circumstances are what they are in real life.
It can be
said, however, that the reason which Judge Baker gave for a presumption of
vacant possession, namely that otherwise it would be entirely within the
control of the tenant to determine the rental value of the land by agreeing
such terms as he pleased on an underletting, is such a powerful one that it
would inevitably rebut any presumption of reality.
Having said
that, I do not think that it matters a great deal whether in this case one
starts with a presumption in favour of vacant possession or a presumption of
reality. All the cases emphasise that the question must turn upon the terms of
the individual lease, and a presumption in favour of vacant possession is
somewhat weakened if the terms of the lease protect the landlord against being
made subject to the arbitrary acts of the tenant in the terms on which he
underlets.
In the Forte
case Peter Gibson J regarded the fact that the premises were already underlet
at the-time of the grant of the lease for a term, which extended beyond the
review date, as an indication that the parties intended the review rent to be
assessed on the assumption that that underletting continued to exist. He said
at p116J:
. . . it
seems to me that different considerations apply when part of the premises is
let already subject to a tenancy in favour of a third party, the term of which
will continue beyond the review date. It is not a necessary part of the
hypothesis of an open market letting that such a tenancy should be ignored, and
in my judgment reality should not be departed from more than is necessary to
give effect to the assumptions required by the rent review clause.
What indication
do we get from the terms and surrounding circumstances of this lease? First, it is clear that underlettings were
contemplated, indeed mandated, by the terms of the lease. The terms of one such
underletting had already been agreed.
Second, the
landlords’ power to refuse consent to an underletting unless they were being
unreasonable gave them control over the terms of future underleases such as to
enable them to protect their position on a rent review from arbitrary damage
inflicted by the terms on which the tenants chose to underlet. It would, in my
judgment, have been reasonable for a landlord to object to the grant of a lease
at a lower rent in return for a premium if, upon the true construction of this
lease, the review rent had to be assessed on the assumption that the premises
were underlet. This would have been true both of an original underlease and any
subsequent underlease granted on the expiry or surrender of an earlier one. On
the other hand, it would not have been open to the landlords to object to a
lower rent in consideration of the erection of buildings, which the lease
itself contemplated.
The next
significant factor is that the rent review clause, as I decided on the last
occasion, required the rent to be assessed on the assumption that the demised
premises included the buildings which the undertenants were going to erect. On
the other hand, it could not have been contemplated by the parties that the undertenants
would be paying a rent which was calculated on the assumption that there had
been demised to them the buildings for which they themselves have paid. It was
clear from the terms of the underlease which the landlords had already approved
that no such assumption could be made.
Unless,
therefore, the rent review is construed to assume that the premises are in fact
underlet, the defendants were bound to be putting themselves in a position in
which, on a rent review, they would be paying to the landlords a higher rent
than they were receiving from their tenants.
This would be
an uncommercial thing to do. It might be the consequence of the express
language of the lease or the clear presumption of construction such as I
applied in the first question on the summons. In a question such as this,
however, where one has to deduce the intention of the parties from all the
circumstances, including their agreement that the buildings are presumed to be
included in the demise, I think that one is free to assume that they intended a
fair and commercial result rather than an unfair one.
I do not think
that it is possible to draw a hard and fast line between cases such as Forte
in which there is an existing underletting at the time of the grant, and cases
in which the underletting is contemplated or even agreed, but not yet actually
completed.
In my
judgment, the terms of the underlettings contemplated by this lease, when
related to the rent review provision of this lease, point to the conclusion
that the parties intended the rent to be calculated on an assumption of
reality, that is to say, assuming the existing underlettings to be in place. I
shall declare accordingly.
Declarations
accordingly.
