Landlord and tenant — Rent review — Construction — Effect of disregard of any notional rent-free concession or fitting-out period
By a lease
dated July 24 1988 the respondent tenant, Bryanston Insurance Co Ltd, holds
from the applicant landlord a term of 25 years of premises at 27 Leadenhall
Street, London EC3; the lease contains provisions for rent review every five
years. In providing for the determination of the rent at review, clause (1)(b)
of the fourth schedule to the lease provided that the current market rental
value shall be the best yearly rent which would reasonably be expected to be
payable after the expiration of any rent-free concession or fitting-out period
which might be given. The clause contained a number of assumptions and
disregards. The fifth assumption was that at the review date the premises are
suitable and available for immediate occupation and use. The fourth disregard
was of any notional rent-free concession or fitting-out period for which
allowance would or might be given to the tenant if the demised premises were
let in the open market with vacant possession
By an interim
award, Mr Geoffrey Perkins FRICS, as arbitrator, determined the rent payable
from the first rent review at £479,678. In making his award, the arbitrator had
the benefit of a written opinion of Mr D M Barnes QC to the effect that no
reduction was to be made to the rent for the absence of any rent-free period
for fitting out in the hypothetical lease; the rent was to be determined as the
rent which would have been paid in the absence of any further rent-free period
or other inducement to the hypothetical tenant to take the subject lease. The
arbitrator concluded that a 12-month rent-free period would have been given, of
which three months would be required for fitting out; nine months was
equivalent to 15% and he deducted this percentage from the open market rent of
£564,327 by way of allowance for this in arriving at his award. The landlord
appealed, contending that the rent to be determined under the lease was the
current rack-rental value after the expiry of any rent-free period.
City
Offices plc v Allianz Cornhill International
Insurance Co Ltd
By a lease
dated July 10 1986 the defendant tenant holds from the plaintiff landlord a
term of the fourth floor in 27 Leadenhall Street, London EC3; the provisions
for review being substantially the same as those in the lease held by Bryanston
Insurance Co Ltd. The plaintiff sought a declaration as to the meaning of
provisions similar to those in issue in City Offices plc v Bryanston
Insurance Co Ltd.
appeal was dismissed. The rent has to be the best yearly rent payable after the
expiry of any rent-free period whether provided as a fitting-out period or not.
The periods referred to in the fourth disregard have to be disregarded for all
purposes in the rent determination, the period of payment and the amount of
payment. In arriving at the rent of £564,327 the arbitrator concluded that in
the hypothetical negotiation the hypothetical landlord had conceded nine
months’ free rent and a further three months for fitting out. Those notional
periods have to be disregarded. Necessarily the disregarding of the notional
free periods results in an adjustment of the rent. Upon the literal meaning of
the lease the approach of the arbitrator was correct.
plc v Allianz Cornhill International Insurance
Co Ltd. The difference between the two leases was not material to the point
of construction. The fourth disregards in the Allianz lease must
therefore be construed as contended for by the defendant.
The following
case is referred to in this report.
Basingstoke
and Deane Borough Council v Host Group Ltd
[1988] 1 WLR 348; [1988] 1 All ER 824 (1988) 56 P&CR 31; [1987] 2 EGLR 147;
284 EG 1587, CA
In City
Offices plc v Bryanston Insurance Co Ltd there was an appeal by the
applicant, City Offices plc, against an interim award of an arbitrator
determining the rent at review in a lease held by the respondent, Bryanston
Insurance Co Ltd. In City Offices plc v Allianz Cornhill
International Insurance Co Ltd the plaintiff, City Offices plc, sought a
determination by originating summons of the construction of a lease held by the
defendant, Allianz Cornhill International Insurance Co Ltd.
Terence Cullen
QC and Nicholas Dowding (instructed by Herbert Smith) appeared for City Offices
plc; Hazel Williamson QC (instructed by Stephenson Harwood) appeared for
Bryanston Insurance Co Ltd; David Neuberger QC (instructed by Beachcroft
Stanleys) represented Allianz Cornhill International Insurance Co Ltd.
Giving
judgment, ALDOUS J said: First I will give judgment on the appeal by
City Offices plc against the interim award dated March 21 1992 of Mr Geoffrey
Perkins FRICS sitting as an arbitrator. He determined that the rent payable
under the rent review provisions of a lease dated July 24 1988 should be
£479,678. I will then go on and decide the construction summons between City
Offices and Allianz Cornhill Insurance Co Ltd.
The parties to
the July 1988 lease were the landlords, City Offices plc, and Bryanston
Insurance Co Ltd, the tenants. It demised to Bryanston the ground, upper
mezzanine, first floor and basement of the building known as 27 Leadenhall
Street, London EC3, for 25 years at a yearly rent of £459,571 or such greater
yearly rent as shall be agreed or determined in accordance with the provisions
of the fourth schedule of the lease. The rent was to be paid quarterly in
advance, but the first payment was deferred to August 14 1986.
Part I of the
fourth schedule to the lease contained provisions for rent reviews. Clause
(1)(a) provided that for the first five years the yearly rent should be
£459,571. The relevant parts of clause (1)(b) are as follows:
For the next
five years of the term and for each subsequent period of five years of the term
(hereinafter called the review period) such rent as shall have been agreed
between the Landlord and the Tenant or determined as hereinafter provided to be
the current market rack rental value of the demised premises at the review date
and for this purpose current market rack rental value shall mean the best
yearly rent which would reasonably be expected to be payable in respect of the
demised premises after the expiry of any rent free concession or fitting out
period which might be given to the Tenant if a letting of the demised premises
were negotiated in the open market between a willing landlord and a willing
tenant upon a letting on the review date . . .
The clause
continues:
. . . on the
assumptions if not in each case of fact that: . . .
I will not
read the first four assumptions, but the fifth assumption is in this form:
(5) that the
demised premises are suitable and available for immediate occupation and use
and are fully carpeted and that the demised premises incorporate on each floor
boxes appropriate and suitable for servicing the demised premises as first
class offices (judged in the light of standards prevailing at the relevant
review date) . . .
Thereafter,
there are set out five matters to be disregarded. The fourth is in this form:
(iv) any notional rent free rent concession or
fitting out period for which allowance would or might be given to the Tenant if
the demised premises were let in the open market with vacant possession.
The schedule
also provided that the rent should be payable on the days and in the manner
provided in clause 2 of the lease.
The schedule
goes on to lay down the procedure that should be followed for the rent review.
As the parties could not agree what the new rent should be, Mr Perkins was
appointed as the arbitrator and he resolved a number of issues between the
parties and gave his conclusion in an interim award. He concluded, having had
the advantage of the written opinion of Mr D M Barnes QC, that:
No reduction
is to be made to the rent for the absence of any rent free period for fitting
out in the hypothetical Lease, but the rent on review is to be determined as
the rent which would have been paid in the absence of any further rent free
period or other inducement to the hypothetical Tenant to take the subject
Lease.
Upon the
evidence he concluded that at the review date the hypothetical landlord would
have given to the hypothetical tenant a rent-free inducement of not less than
12 months to take the hypothetical lease, but that three months of that would
have been for fitting out. He went on to conclude that a nine-month inducement
period was equivalent to a reduction in rent of 15% over the review period. He
valued the market rent for the premises at £564,327.60 pa. Thus, if a 15%
allowance were made for the inducement period, the rent payable came to
£479,678.46 pa. He therefore held that the rent should be the £479,678 to which
I have referred.
The applicant,
the landlords, had contended that any inducement period that might have been
offered should be ignored. Upon the assumption that that construction was
right, the arbitrator concluded that the appropriate rent was £564,327 pa.
The dispute
before me is whether the rent should be assessed taking into account the value
of an inducement period.
The applicant
submitted, both before the arbitrator and before me, that, upon the proper
construction of the fourth schedule to the lease, the rent was to be determined
as the current market rack-rental value after the expiry of any rent-free
concession. Thus, if the hypothetical landlord would have agreed to a
nine-month rent-free period as an inducement to take the lease and thereafter a
rent of, say, £40 per sq ft, the rent would be £40 per sq ft payable from the
review date. The respondent submitted that the arbitrator was right and that
the rent should be assessed on the basis that no rent-free period was given as
an inducement. Thus, on the example I have taken, the hypothetical landlord
would seek and obtain, say, £35 per sq ft payable from the rent review date.
Clause (1)(b)
of the fourth schedule provides that the rent for the next five years shall be
the current-market rack-rental value of the premises at the review date. For
the purpose of the lease, that is defined as the best yearly rent payable after
the expiry of any rent-free concession or fitting-out period, which might be
given to the tenant in open market conditions.
The reason for
choosing the period after any rent-free concession or fitting-out period may
well be to ensure that, at the start of the period to be considered, rent would
be payable. If the review date had been chosen, it could have been argued by
the tenant that at that date no rent was payable because the hypothetical
landlord would have agreed with the hypothetical tenant that no rent should be
paid for, say, three months for fitting-out or for, say, nine months as an inducement.
Thus, the best rent would be less than the current rent.
The rent
review clause also provides that the best yearly rent shall be determined upon
five assumptions, one of which is that the premises are suitable and available
for occupation. Thus, if it be assumed in the hypothetical negotiation that the
landlord would grant one year free as an inducement, the best rent referred to
in clause (1)(b) would be calculated after the one year had elapsed, but upon
the assumption that the premises would be ready for occupation. Thus, no
fitting-out period would be needed and the tenant could not claim an allowance
for the cost of fitting out.
The clause
also has five disregards. I have read the fourth, which is the crucial clause
so far as the dispute before me is concerned. It lays down that any notional
rent-free, rent-concession or fitting-out period, if the premises were let on
the open market, must be disregarded. Thus, the best yearly rent payable from
the review date has to be determined upon the assumption that no rent-free or
other like period would or might be given.
The fourth
disregard when read with the opening part of clause (1)(b) charts a somewhat
tortuous path, but I believe that its effect is clear. That effect is best
explained by adopting the figures found by the arbitrator, namely that the
market rent would be about £560,000 pa, but that a fitting-out period of three
months would be required and a further nine months, rent-free period. Thus, the
hypothetical tenant would pay about £560,000 pa for four years of the five-year
lease.
The opening
parts of clause (1)(b) state that the rent payable from the review date shall
be the best yearly rent after any rent-free concession or fitting-out period
has expired. That rent would be about £560,000 pa. Assumption (5) requires the
arbitrator to assume that the premises are fitted out. Thus, the hypothetical
tenant cannot seek a reduction of that rent for the three months that would be
necessary, nor could the parties pray in aid the cost of fitting out. Disregard
(iv) requires the arbitrator to disregard any notional rent-free,
rent-concession or fitting-out period. To arrive at the figure of £560,000 pa
the arbitrator, using comparables, concluded that in the hypothetical
negotiation the hypothetical landlord had conceded nine months free of rent as
an inducement and a further three months for fitting out. Those notional
periods have, according to the fourth disregard, to be disregarded. Necessarily
the result of disregarding the notional free periods results in an adjustment
of the rent. In this case it means a reduction of 15% to about £480,000. By
that route the draftsman artificially fixed the date at which the rent was to
be valued, in this case the review date plus one year, but said that the valuation
had to be made on the assumption that the premises were fitted out and no
rent-free period or the like had been, or would be, given. Thus, the
hypothetical landlord and tenant must be assumed to agree that the rent was
payable yearly for each of the five years and was the best rent obtainable upon
that assumption.
There was
before me considerable argument as to the phrase ‘after the expiry of any
rent-free concession or fitting-out period’. Both parties pointed out that a
fitting-out period was a rent-free period. On behalf of the respondent, it was
submitted that the phrase should be read as a whole and, if so, referred to a
rent-free period granted to cover a period for fitting out and to that alone.
That appears to have been the meaning given to the phrase in the opinion of Mr
Barnes. I believe that submission to be wrong. In my view, it violates the
language used, which is clear. The rent has to be the best yearly rent payable
after the expiry of any rent-free period whether provided as a fitting-out
period or not.
There was also
argument as to the meaning to be given to the words ‘rent-free concession’,
because the parties appeared to accept that a fitting-out period was a
rent-free period which the applicant believed to be a concessionary period. Of
course, a fitting-out period involves a rent-free concession, but the lease is
its own dictionary. It uses the words ‘any rent-free concession’ as meaning
something different to a fitting-out period. That does not create a difficulty
even though the draftsman could have used a composite phrase to include all
rent-free periods.
I have
construed the opening words of clause (1)(b) in the way which the applicant
submitted that they should be construed. However, I have construed the fourth
disregard in a manner that results in the whole clause having the meaning for
which the respondent sought. The applicant submitted that such a construction
was wrong and that all that the fourth disregard did was to make it
plain that the rent was to be paid as from the first day of the five-year
period. The fourth disregard may have the effect for which the applicant
contends, but it is not limited to that effect. The periods referred to in the
fourth disregard have to be disregarded for all purposes of the rent determination.
Thus, it is relevant to both the period of payment and the amount of payment.
I have tried
to construe the lease purposefully. In so doing I believe that my approach and
the result accord with the judgment of Nicholls LJ in Basingstoke and Deane
Borough Council v Host Group Ltd [1988] 1 WLR 348. At p353 he said:
The question
raised on this appeal is one of construction of a rent review clause in a
lease. In answering that question it is axiomatic that what the court is
seeking to identify and declare is the intention of the parties to the lease
expressed in that clause. Thus, like all points of construction, the meaning of
this rent review clause depends on the particular language used interpreted
having regard to the context provided by the whole document and the matrix of
the material surrounding circumstances. We recognise, therefore, that the
particular language used will always be of paramount importance. Nonetheless it
is proper and only sensible, when construing a rent review clause, to have in
mind what normally is the commercial purpose of such a clause.
That purpose
has been referred to in several recent cases, and it is not in doubt. Sir
Nicolas Browne-Wilkinson V-C expressed it in these terms in British Gas
Corporation v Universities Superannuation Scheme Ltd [1986] 1 WLR
398, 401:
‘There is
really no dispute that the general purpose of a provision for rent review is to
enable the landlord to obtain from time to time the market rental which the
premises would command if let on the same terms on the open market at the
review dates. The purpose is to reflect the changes in the value of money and
real increases in the value of the property during a long term.’
To the same
effect Dillon LJ said in Equity & Law Life Assurance Society Plc v
Bodfield Ltd [1987] 1 EGLR 124, 125:
‘There is no
doubt that the general object of a rent review clause, which provides that the
rent cannot be reduced on a review, is to provide the landlord with some
measure of relief where, by increases in property values or falls in the real
value of money in an inflationary period, a fixed rent has become out of date
and unduly favourable to the tenant. The exact measure of relief depends on the
true construction of the particular rent review clause’.
Upon the
conclusions of fact arrived at by the arbitrator, the market rent of the
premises which could have been obtained, on the assumption that it was fitted
out, was about £480,000 pa. The submission of the applicant was that the tenant
should pay about £560,000 pa even though such a rent could not have been
obtained in the open market. Thus, the landlord would obtain, upon the
landlord’s submissions, a windfall profit with resulting loss to the tenant not
only in the amount of rent payable but also in the cost of any assignment of
the lease.
Nicholls LJ in
the Basingstoke and Deane case went on to hold that, save in cases where
a rent review clause expressly or by necessary implication stated the contrary,
the parties are to be taken as having intended the letting to be on the same
terms, the reason being that accorded with the general intention underlying the
inclusion of rent review clauses.
Similar
reasoning is applicable to the facts of this case. Construction of the lease so
that the tenant paid £560,000 pa for five years, as sought by the applicant,
would give to the applicant rental income, which did not reflect the changes in
property values and the value of money. That is reflected by a rent of about
£560,000 for four years, amounting to about £480,000 for five years as awarded
by the arbitrator. I conclude that, upon the literal meaning of the lease, the
approach of the arbitrator was correct. Further, that meaning coincides with
the presumed intention of the parties. I therefore dismiss the appeal.
In the
construction summons, City Offices plc is the plaintiff and Allianz Cornhill
International Insurance Co Ltd is the defendant. By that summons they seek
construction of the rent review provisions of a lease dated July 10 1986
relating to the fourth floor of 27 Leadenhall Street, London EC3.
It is
therefore not surprising that the Allianz lease is very similar to the
Bryanston lease which I have already construed. Further, it is not surprising
that the matters in dispute concern the construction of the rent review clause
in clause (1)(b) of the fourth schedule.
The opening
words of clause (1)(b) differ slightly to the words used in the Bryanston
lease. It provides that the reviewed rent should be:
. . . the
current market rack rental value of the demised premises at the review date and
for this purpose current market rack rental value shall mean the best yearly
rent which would reasonably be expected to become payable in respect of the
demised premises after the expiry of a rent free period of such length as would
be negotiated in the open market between a willing landlord and a willing
tenant upon a letting on the review date . . .
The difference
between the two leases is that in the Allianz lease it is required that the
rent be the best yearly rent ‘after the expiry of a rent free period of such
length as would be negotiated in the open market between a willing landlord and
a willing tenant upon a letting on the review date’; whereas the Bryanston
lease required the best yearly rent to be ascertained ‘after the expiry of any
rent free concession or fitting out period which might be given to the Tenant
if a letting of the demised premises were negotiated in the open market between
a willing landlord and a willing tenant upon a letting on the review date’. In
both leases the assumptions and disregards are the same.
The difference
between the Allianz and Bryanston leases is not material to the point of
construction I have to decide. Having regard to the way I have construed the
fourth disregard in the Bryanston lease, the same conclusion must be reached
for similar reasons to those given, namely the defendants’ view as to the
effect of the lease is correct. Therefore, I will make an appropriate
declaration to that effect.
Declaration
accordingly certificate and leave to appeal granted under section 1(7)(b) of
the Arbitration Act 1979.
