Landlord and Tenant Act 1954, Part II — Appeal by landlords of office accommodation in the City of London from a decision of the Court of Appeal allowing an appeal from a decision of Goulding J — Dispute as to terms of new tenancy to be granted to tenants under Part II of the Act of 1954 — Whether, as landlords contended, the terms of the tenancy should be converted on the grant of the new tenancy into a ‘clear lease’ — The object of the ‘clear lease’ arrangement was to shift to the tenants, in return for an adjustment in the fixed part of the rent the burden of fluctuations in the costs of supplying services and providing for the repair and decoration of the exterior and common parts of the building — Tenants would bear, by means of a service charge, appropriate proportions according to their interests of the cost of these items, so that the landlords would receive an income less subject to fluctuations due to outgoings than before — Held that the onus was on the landlords to justify the alteration in the terms of the tenancy required by the ‘clear lease’ proposal — Although the proposed adjustment of the fixed element in the rent might appear to be an adequate compensation for the transfer of the burdens to the tenants, the tenants were being asked to accept risks which were unpredictable and inconsistent with the nature of their interest in the land — Tenants should not be required to accept the grant of a new tenancy on such terms — Appeal from decision of Court of Appeal dismissed
The
appellants, City of London Real Property Co Ltd, were the owners of Knollys
House, an office building situated at 9-12 Byward Street and 14-15 Seething
Lane, EC3, in the City of London. The respondents, who practised as solicitors
under the style of Ince & Co, were the tenants of accommodation forming
part of the building. The proceedings which gave rise to the present appeal
were an application by the respondents as plaintiffs for the grant of a new
tenancy under Part II of the Landlord and Tenant Act 1954. The appellants did
not oppose the grant but proposed that the new tenancy should contain terms of
the ‘cleared lease’ type. Goulding J granted a new tenancy on such terms
((1979) 249 EG 1065, [1979] 1 EGLR 76), but the Court of Appeal reversed his
decision on this point ((1980) 255 EG 151). In the present appeal to the House
of Lords the appellants sought to have the ‘cleared lease’ principle restored.
Ronald
Bernstein QC and Benjamin Levy (instructed by Nabarro Nathanson) appeared on
behalf of the appellants; Derek Wood QC and Jonathan Gaunt (instructed by Ince
& Co) represented the respondents.
In his speech
LORD HAILSHAM LC said: This appeal raises questions as to the proper approach
to be taken by the courts on applications by business tenants for a new lease
under Part II of the Landlord and Tenant Act 1954 as amended in 1969.
The appellants
are the owners of an office building known as Knollys House situated at 9-12
Byward Street and 14-15 Seething Lane, EC3, in the City of London. The
respondents are a wellknown firm of City solicitors practising under the style
of Ince & Co. They are currently the tenants of the fifth floor of Knollys
House together with some spaces for the parking of cars in the basement. The
demised premises are occupied for the purposes of the professional practice of
Ince & Co, and for the purposes of Part II of the Landlord and Tenant Act
1954 the respondents are business tenants.
The
proceedings which are the subject of this appeal were commenced on January 20
1977 by the respondents as plaintiffs against the appellants as defendants by
way of originating summons for the grant of a new tenancy under Part II of the
Landlord and Tenant Act 1954 as amended together with ancillary relief. The
appellants do not oppose the grant of a new tenancy in principle, and as will
be seen comparatively few questions are in issue between the parties. In the
events which happened, by a judgment dated December 18 1978 Goulding J granted
a new tenancy on the terms put forward by the appellants.
The
respondents appealed against this judgment and on June 19 1980 the Court of
Appeal (Civil Division) consisting of Shaw, Brightman and Buckley LJJ
unanimously allowed the appeal and granted the new lease on the modified terms
demanded by the respondents. In either case the new lease will in fact
terminate on March 24 1982, but there are other proceedings pending which may
result in the respondents’ tenancy being prolonged on terms which will no doubt
be influenced by the judgment of your Lordships in the instant appeal.
The tenancy of
the respondents derives from two separate leases dated April 25 1972 dealing
respectively with the office accommodation and the parking spaces. In 1976 the
area occupied by the respondents was increased by two deeds of variation dated
May 27 1976 and the rent correspondingly increased. The term of the new tenancy
is agreed and the dispute revolves around the rent to be paid and the terms to
be embodied in its operative covenants. The real dispute relates to the
covenants.
The origin of
the dispute derives from the desire of the appellants to convert the terms of
the tenancy, which did not previously possess this characteristic, into what is
known as a ‘clear lease’. The effect of giving effect to this proposal would,
according to the evidence, be to enhance the value of the appellants’ reversion
by a sum somewhere between one and two million pounds, and at the same time to
render it more readily marketable partly owing to the increasing part played
(amongst others) by pension funds and life insurance companies in purchasing
office property as an investment. The purpose of a ‘clear lease’ is to render
the income derived from the rent payable by the tenants as little subject to
fluctuation in respect of outgoings as may be possible. The method proposed by
the appellants in the present case is to transfer in effect the risk of
fluctuation of the items in the covenants which in the nature of things will be
executed by the landlord to the respondents by providing that the appellants
should be fully reimbursed in respect of the fluctuating elements by provision
for fluctuations in what has been referred to, perhaps inaccurately, as the
service charge, in return for a flat diminution in the fixed element in the
rent. In return for the transfer of risk, the appellants are prepared to accept
a fixed reduction in the amount of the fixed rent calculated as a matter of
figures at a sum of 50p a square foot, in actual fact reducing the fixed rent
component of the total rent which would otherwise be £10.50 per square foot to
£10.00 if a clear lease were granted. The main bone of contention between the
parties is that
would prefer instead to pay the full fixed rent of £10.50 a square foot in
place of the reduced rent of £10.00.
It goes
without saying that with an office block in multiple occupation by a number of
different business tenants the management of the common parts and the exterior,
and the various services from lifts to lighting, must normally be part of the
responsibility of the landlord. This was so under the terms of the old tenancy
in the instant case, and remains so under the appellants’ proposed terms for
the new. The mechanism for the conversion of the new lease to a clear lease
under the appellants’ proposed terms for the new lease was contained in a
series of provisions forming part of the first and second Schedules to the
draft, the effect of which would be to transfer the risk of fluctuation which
had been a burden borne by the landlord to the respondents as tenants. It is
necessary at this stage to consider in a little more detail how, under the
appellants’ proposed terms, this was to be done. For convenience, I extract the
details and the effect from the judgment of Brightman LJ in the Court of
Appeal:
The term of
the lease is three years from March 1979. There are expressed to be three
rents: first, a fixed rent of £100,700 a year. Secondly, by way of further or
additional rent, a proportionate part of certain insurance premiums paid from
time to time by the lessors in respect of the building of which the demised
premises form part. This is called an insurance rent. Thirdly, by way of
further or additional rent, a service charge calculated and payable in the
manner set out in the First Schedule. Clause 2 contains a covenant by the
lessees to keep the interior of the demised premises in repair and decorated.
Clause 3 contains a number of covenants on the part of the lessors which can be
summarised as follows: (1) to provide heating; (2) to clean the common parts;
(3) to keep the exterior and interior of the building in repair, other than the
demised premises; and (4) to provide the services mentioned in paragraphs 1 and
11 of Part I of the Second Schedule; this is sub-clause (1)(iv), and I shall
have to refer to it later.
The function
of the First Schedule is exclusively to calculate the service charge, as indeed
the opening words of the First Schedule proclaim. Put shortly, the schedule
provides that the service charge is to consist of the fair and reasonable
proportion, to be certified by the lessor’s surveyor, of the total of five
items: item (a), the actual or estimated cost in any year of the term of
providing the services mentioned in paragraphs 1-11 of Part I of the Second
Schedule; these are the services which the lessors covenanted to provide in
clause 3(1)(iv) of the body of the lease; item (b), a management fee, upon
which nothing turns; item (d) (i), an amount, to be revised annually by the
lessors at their discretion, towards the estimated cost of replacing lifts,
boilers and other equipment on the basis of certain life expectancies, and item
(d) (ii), a similar annual amount towards the estimated cost of the decoration
of the exterior and common parts of the interior of the building calculated on
the footing that such work will be carried out at the end of specified periods.
Paragraphs 1 to 11 of the Second Schedule, Part I, which represent item (a)
above, comprise various items of routine expenditure but most importantly
include also ‘repairing, maintaining, cleaning, painting and decorating
the structure exterior and common parts of the building . . . plant and
equipment . . . and all drains, pipes, wires etc.’
The scheme of
the draft, therefore, is to impose on the landlord the obligation to provide
all the services to the building and to repair, maintain and decorate the
building, both externally and internally (except the demised premises); but to
entitle the lessors to recover, as additional rent, a proportion of the money
which is spent on services and on external and internal repairs, plus a yearly
sum which can best be described as estimated provision for depreciation of
lifts, boilers and other equipment and for external and internal decorations.
The service rent so collected from the tenant, though gauged by reference to
actual or estimated expenditure, becomes in the hands of the lessors their
absolute property to deal with as they please. If all leases are on the same
basis, which is not yet the case, the effect will be to extract from the
tenants in each year sums which are calculated to recover or recoup the whole
financial burden of the lessors’ compliance with the covenants of the lease, in
order to leave the fixed rent in the hands of the lessors as clear profit
exonerated from the burden of all outgoings.
I turn now to
the statutory provisions of Part II of the Landlord and Tenant Act 1954. These,
as amended by subsequent enactments are contained in sections 23-46 and are
conveniently set out in the volume of ‘Statutes in Force’ relating to the Law
of Landlord and Tenant at pp 19-41, of which I shall quote the most relevant
sections only.
By way of
preface, I would point out that these provisions are examples of that class of
statute referred to by Lord Simon of Glaisdale in Johnson v Moreton
[1980] AC 37 at pp 65-68 in the context of the Agricultural Holdings Acts, in
which he reflected how in recent years Parliament has thought it right to
reverse the tendency remarked in the famous generalisation in Maine’s Ancient
Law that progressive societies had regularly moved from status to contract by
limiting the freedom of contract in certain areas either for general political
and social reasons of policy or in order to protect a class of persons who were
in a less strong negotiating position from those with whom they had to
negotiate. It is profitless to specify examples, because, as I pointed out at p
60 of the same case, there are few of them in pari materia, but, out of
the large number of such enactments particularly notable are those relating to
employer and employee and to landlord and tenant, and in this field notably in
tenancies of residential accommodation, agricultural tenancies, and business
tenancies. A beginning was made with business tenancies in the Landlord and
Tenant Act 1927, now largely repealed. The Act of 1954 followed chronologically
on the report of the Jenkins Committee (Cmd 7982), but did not exactly embody
its recommendations. The effect was to limit the grounds on which the landlord
of business tenancies might recover possession at the end of a contractual tenancy
and to substitute for the landlord’s freedom of action a right on the part of
the business tenant to secure a new lease, or in certain other cases to claim
compensation for the loss of his security of tenure. The relevant provisions
affecting the terms of the new tenancy are sections 32 which deals with the
property to be comprised, 33 which deals with the length of the tenancy, 34
which prescribes the rent, and 35 which governs the terms of the new lease. Of
these I need only quote part of section 34 and section 35 as relevant to the
present appeal. Section 34 reads as follows:
34(1) The rent payable under a tenancy granted by
order of the court under this Part of this Act shall be such as may be agreed
between the landlord and the tenant or as, in default of such agreement, 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 there being disregarded
. . .
There follow
four disregards irrelevant for my present purpose, and two further subsections,
also irrelevant, respectively dealing with the definition of improvements, and
conferring on the court, in appropriate cases, power to provide for variations
in the rent. Section 35 is as follows:
35. The terms
of a tenancy granted by order of the court under this Part of this Act (other
than terms as to the duration thereof and as to the rent payable thereunder)
shall be such as may be agreed between the landlord and the tenant or as, in
default of such agreement, may be determined by the court; and in determining
those terms the court shall have regard to the terms of the current tenancy and
to all relevant circumstances.
From these
sections I deduce three general propositions.
(1) It is clear from section 34 that, in contrast
to the enactments relating to residential property, Parliament did not intend,
apart from certain limitations to protect the tenant from the operation of
market forces in the determination of rent:
(2) In contrast to the determination of rent, it
is the court and not the market forces which, with one vital qualification, has
an almost complete discretion as to the other terms of the tenancy (which, of
course, in turn must exercise a decisive influence on the market rent to be
ascertained under section 34); and
(3) In deciding the terms of the new tenancy, as
to which its discretion is otherwise not expressly fettered, the court must
start by ‘having regard to’ the terms of the current tenancy, which ex
hypothesi must have been either originally the subject of agreement between
the parties or themselves the result of a previous determination by the court
in earlier proceedings for renewal.
A certain
amount of discussion took place in argument as to the meaning of ‘having regard
to’ in section 35. Despite the fact the phrase has only just been used by the
draftsman of section 34 in an almost mandatory sense, I do not in any way
suggest that the court is intended, or should in any way attempt, to bind the
parties to the terms of the current tenancy in any permanent form. But I do
believe that the court must begin by considering the terms of the current
tenancy, that the burden of persuading the court to impose a change in those
terms against the will of either party must rest on the party proposing the
change, and that the change proposed must, in the circumstances of the case, be
fair and reasonable and should take into account, amongst other things, the
comparatively weak negotiating position of a sitting tenant requiring renewal,
particularly in conditions of scarcity, and the general purpose of the Act,
which is to protect the business interests of the tenant so far as they are
affected by the approaching termination of the current lease, in particular as
regards his security of tenure. I derive this view from the structure, purpose,
and words of the Act itself. But, if I required confirmation of it, I would
find it in the passages cited to us in argument from the judgment of Denning LJ
in Gold v Brighton Corporation [1956] 1 WLR 1291 at p 1295 and of
Widgery LJ in Cardshops Ltd v Davies & Another [1971] 1 WLR
591 at p 596 (also cited with approval by Shaw LJ in the instant case). The
point is also emphasised by the decision in Charles Clements (London) Ltd
v Rank City Wall Ltd (1978) 246 ESTATES GAZETTE 739, where the court
rejected an attempt by the landlord as a means of raising the rent to force on
a tenant a relaxation of a covenant limiting user which would have been of no
value to the particular tenant, and Aldwych Club Ltd v Copthall
Property Co Ltd (1963) 185 ESTATES GAZETTE 219 where the court rejected an
attempt by the tenant to narrow the permitted user with a view to reducing the
rent.
A further
point which was canvassed in argument, and with which I agree, is that the
discretion of the court to accept or reject terms not in the current lease is
not limited to the security of tenure of the tenant even in the extended sense
referred to by Denning LJ in Gold v Brighton Corporation (supra).
There must, in my view, be a good reason based in the absence of agreement on
essential fairness for the court to impose a new term not in the current lease
by either party on the other against his will. Any other conclusion would in my
view be inconsistent with the terms of the section. But, subject to this, the discretion
of the court is of the widest possible kind, having regard to the almost
infinitely varying circumstances of individual leases, properties, businesses
and parties involved in business tenancies all over the country.
This brings me
directly to the judgments of the courts below, and I begin with that of
Goulding J. I was at first of the opinion that, in view of the width of the
discretion conferred by section 35, it would be extremely difficult to justify
interference by an appellate court with the exercise of discretion by a trial
judge of wide experience who had taken infinite pains with the detail of the
case and expressed his views in a judgment rightly characterised by the Court
of Appeal as ‘pellucid’. I must now describe how I have come to change my mind
on this point and now consider the decision of the Court of Appeal as embodying
the correct conclusion.
The learned
judge admittedly arrived at his decision by the application to the facts of the
instant case of four tests or the answers to four questions, after cautiously
and, in my opinion correctly, making it plain that ‘I do not regard them as a
correct scheme of analysis for all similar cases’.
The four
tests, or questions, were as follows:
(1) Has the party demanding a variation of the terms
of the current tenancy shown a reason for doing so?
(2) If the party demanding a change is
successful, will the party resisting it in principle be adequately compensated
by the consequential adjustment of open market rent under section 34?
(3) Will the proposed change materially impair
the tenant’s security in carrying on his business or profession?
(4) Taking all relevant matters into account, is
the proposal, in the court’s opinion, fair and reasonable as between the
parties?
These tests
were accepted as valid by the Court of Appeal, and although, as will shortly be
seen, I have my own reservations as to the appropriateness of this method of
approach, for the moment I am content to say that it is only at the fourth and
last that the learned judge enters into the realm of what he wittily and aptly
describes as:
the realm of
pure discretion, where it is hardest to condense in words the dialogue of the
intra-cranial jury room.
It follows, I
believe, inexorably from this mode of approach that if, as the Court of Appeal
ultimately concluded, the answers proposed by the judge to any of the first
three questions are erroneous, either because the questions themselves are in
some degree defective or because the answers are in some degree mistaken, the
matter of discretion becomes clearly at large for an appellate court, since the
learned judge had entered the ‘intra-cranial jury room’ only on the basis of
the answers he had given to the first three questions he had formulated. In the
event the Court of Appeal concluded, and, as will be seen, I agree, that the
affirmative answer proposed by the learned judge to the second question was one
which they could not accept. In the words of Shaw LJ who, at the request of
Buckley LJ, delivered the leading judgment:
It is here
that, regretfully, I find myself parting company with the learned judge. The
advantage conferred on the landlord by a clear lease is the freedom from
factors which are of uncertain outcome and which elude absolute quantification
and lend themselves to what at best is a conjectural assessment, however
informed the source. That freedom removes an element of risk from the
landlord’s financial situation; but the element of risk is not obliterated. It
is transferred to the tenant. In the outcome, the diminution in the rent,
though ‘fair compensation’ when in prospect, may prove in actuality to be
wholly inadequate as the years go by. If the risk is disadvantageous and
therefore unacceptable to the landlord at a commensurable rent why should it be
more acceptable and less disadvantageous to the tenants albeit at a reduced
rent? This is the more so since they are
not in the business of property management and property dealing.
Brightman LJ
put the same point as follows:
I agree
entirely with my Lord, Shaw LJ, that this case has to be considered under
section 35 and not under section 34, because the substantial issue is not the
amount or calculation of the rent but the incidence of certain unusual
financial burdens which will have the effect of controlling the rent.
Approaching the case on this basis, and applying the three tests enunciated by
Goulding J, I entirely agree with Shaw LJ that a short-term tenant such as the
appellants, is not adequately compensated by a small reduction in rent for the
assumption of the financial risks implicit in the maintenance of the structure
of an office block. Those risks are proper to be borne by the owner of the
inheritance or of a long term of years but are not appropriate to be borne by
one who is in possession for three years and has no further interest save a
limited statutory security of tenure. Such risks are indeterminate in amount
and could prove to be wholly out of proportion to the very limited interest
held by a short-term tenant. No doubt they can be quantified annually when
averaged over a number of years, and better still when averaged over a number
of properties. But they are not capable of being fairly allowed for, by way of
a reduction of rent, when the tenancy has only a few years to run. The tenant
in such a case would be made the insurer of the landlord against unknown
contingencies of undefined cost. I wholly agree with the approach of Shaw LJ,
and I respectfully adopt the entirety of his reasoning. I would accordingly
allow the appeal.
Buckley LJ in
a succinct, but none the less powerful, judgment said:
The effect of
the proposed modification of the terms of the existing tenancy in the present
case is to make the lessee an insurer of the lessor against risks connected
with the structure of the building which under the terms of the existing lease
have to be borne by the lessor. They are risks which are inherent in the
ownership of the building. The reduction in the rental which is said to
compensate the lessee for assuming these risks is far from being an indemnity
against them. The lessee might find himself at any time unexpectedly and
unforeseeably saddled with very heavy capital expenditure for which the
reduction in rent would by no means compensate him, except possibly in the very
long run; but, as has already been pointed out, a particular tenant may fill
that role only for a relatively short period and compensation which is only
compensation on a very long-term basis would be no comfort to him.
The proposed
alterations in the terms of the lease, in my judgment, alter the mutual
relations of the lessor and the lessee so drastically, and so adversely to the
lessee, that the court could not in the exercise of its discretion properly
impose them on the lessee under the Act in the absence of some more cogent reason
than can be discovered in this case.
For these
reasons, and for those already given by my Lords, I agree that this appeal
should be allowed.
For reasons
which I will shortly express in my own words I myself agree with this criticism
of the learned judge’s proposed answer to the second question, and it follows
from this, for the reason I have already given, both that the point was open to
the Court of Appeal and that the appeal to your Lordships’ House must in
consequence be dismissed.
I wish,
however, slightly to widen my reservations to the approach of the learned
judge. By formulating the questions and answering them in the way he did, I
believe that he had logically, so to speak, painted himself into a corner
before he came to the exercise of any discretion at all. Take for instance,
since I will be coming in due course to the crucial question, the way in which
the first and third questions are formulated and answered. Admittedly the
landlord’s desire to vary the terms of the current lease in such a way as to
maximise the value and marketability of his reversion is a perfectly valid and
respectable reason from the landlord’s point of view for seeking to secure the
tenants’ agreement to vary the terms of the tenancy. So, in my view, in Gold’s
case (supra) the desire of the corporation to improve the tone of the
street of which it was an important landlord was a perfectly valid reason in
itself for seeking to secure the tenant’s agreement to vary the terms of the Gold
tenancy. So also in the Clements case (supra) was the desire
of the landlord to increase the rent, and so in the Aldwych Club case (supra)
was the tenants’ desire to diminish the rent. But in my view it was precisely
at that stage and not only at the fourth and last that the ‘intra-cranial dialogue’
should have begun, and the interests of the other, and unwilling, party to the
proposal should have been taken into consideration, and were ultimately so
taken into consideration by the court in the cases cited. The improvement in
the tone of the street was a perfectly valid aim of the landlords. But if done
at the expense of the tenant’s current business it was not a reasonable term to
introduce into a lease against the tenant’s wishes under an Act of Parliament
the purpose of which was to protect the tenant’s interest in carrying on his
existing business. In the other two cases the desire to increase or diminish
the rent was a perfectly legitimate negotiating objective for the landlord or
the tenant respectively, but not, as the court held, by forcing on the opposing
party an unwanted advantage which, in the circumstances, would have conferred
no real benefit on him and to which he did not agree.
When I come to
the third test, the same kind of consideration applies. The security of tenure
which is protected by the Act does not simply mean protection from the danger
of eviction by the landlord. The judgment of Denning LJ in Gold’s case
is enough to establish that. The intra-cranial dialogue which the judge
conducts must in my view enter in at every stage of the analysis, and the
question should be asked: granted that the negotiating objective of the party
proposing a variation is perfectly legitimate, is it reasonable in the
circumstances to impose it willy nilly on a resisting landlord or tenant?
This brings me
to the crucial second question. Here, too, the intra-cranial dialogue is vital.
To some extent the learned judge actually conducted it, since the dialogue is
in a sense implicitly involved in the qualifying adverb ‘adequately’ before the
word ‘compensated’ in the question. But in my view the word ‘adequately’ itself
conceals an ambiguity, and it seems to me that, at the critical point in his
judgment, the ambiguity misled the judge into a question-begging assumption. Of
course, in a sense, the testimony of the experts was agreed. But the transcript
of the evidence is in my view conclusive to the effect that all that was agreed
was if (emphasis mine) a fluctuating obligation was to be replaced by a fixed
figure or insurance premium calculated either at market value (or an estimate
of the chances) made at the commencement of the new term, the sum of 50p
deducted from the rent was adequate compensation. But the real question is
contained in the protasis and not the apodosis of the above conditional clause.
The point at issue was whether it was reasonable under section 35 to impose the
fluctuating burden on the tenant against his will in return for a fixed figure
valid throughout the new tenancy and calculated as at the beginning of the
tenancy. I am not satisfied that in his answer to the second question the
learned judge really considered this point adequately, and perhaps not at all,
and I believe his failure to do so was due at least in part to a
misunderstanding at the critical point of the exact nature of the concession
made in cross-examination of the tenants’ own expert witness. The learned judge
reported this in the following terms:
Nevertheless
he (ie the witness) was satisfied that the agreed rent reduction . . . was a
fair compensation in all the circumstances.
In two
questions and answers which were properly brought to our attention the witness
had said in the first:
Q. Does it not
follow that if my Lord decides to approach this matter in this way: what would
the rent be if the terms were those of form 16; answer £105,000 odd. If I
decide after hearing all the evidence and argument the new tenancy ought to be
on form 20, and if I accept as I presumably must the figure that the two
surveyors have agreed of £100,000 odd, will the tenant be fairly compensated
for the transfer of burdens resulting from the change from form 16 to form
20? The answer to that question ought to
be in the affirmative.
A. It ought
to be in the affirmative, I accept that. But the risk involved in the
transfer of burden over the period of the lease I still maintain cannot be
fully anticipated now. All the market can do is take a view, and it takes a
view in the way it has in terms of the two rents we were talking about.
The emphasis in
the above answer is mine.
The second question
and answer was:
Q. Is £4,950
per annum a figure which taken over the three years this form will operate, is
it likely to produce a net benefit to the tenant or a net loss to the tenant.
If £4,950 is not the right figure, what is the right figure?
A. I think in
terms of the discussions that Mr Perkins and I had, my view was that the
difference of £4,950 was the right difference bearing in mind that we had
previously fixed the rental value in the market. Whether that adequately
compensates the tenant over the term of the lease bearing in mind the transfer
of the burden is something I do not think anybody can necessarily say today. We
would have to wait and see until the end of the lease.
Again the
emphasis added to the answer is mine.
That the
learned judge did so misunderstand the evidence appears not only from the
judgment, but from an interposition by the learned judge recorded on the
following page of the transcript, which, for the reason that it involved quite
a considerable discussion with counsel, I forbear to quote at length.
The matter
thus being clear for an appellate court, I now give my own reasons for agreeing
with the Court of Appeal. It is obvious that in the case of an office block in
multiple occupation by different tenants the actual management of the exterior
parts, common parts, lifts, boilers, and ancillary services will ordinarily
rest in the hands of the landlords who will ordinarily covenant to provide
them. Some of these items are very readily calculable or may readily be made the
subject of insurance. Some may fluctuate enormously and the extent of
fluctuation will, as the tenants’ witness said, only ultimately be
ascertainable at the end of a lease. Obviously it is to the advantage of the
landlord to transfer the financial risk of fluctuation to the tenant, and there
can be no possible reason why, if the tenant agrees (and the evidence was that
many do), he should not do so. But the crucial question is, if the current
lease does not so provide and the tenant does not agree, by what possible
reasoning should the court impose the burden on the tenant against his will as
a condition of his receiving a new tenancy under Part II of the Landlord and
Tenant Act 1954? It may be granted that
the transfer of the risk from the landlord to the tenant is a perfectly
legitimate negotiating aim for the landlord to entertain. But the argument is
two edged. It is equally a legitimate negotiating aim of the tenant to resist
the change. Granted that a reduction in the rent of 50p from £10.50 per foot to
£10.00 per foot is, in the limited sense described, an adequate estimate of the
compensation which a landlord will offer if the risk is to be transferred. But
the argument is again two edged. It may equally be argued that an additional
50p is the adequate estimate of the rent rightly payable to the landlord if the
risk is to be kept where it is under the current lease. But neither of the two
statements assists to answer the question where, in the new lease, is the risk
of fluctuation to lie. If I am correct that the inference from the authorities
is that the language of section 35 requires that the party (whether landlord or
tenant) requiring a change must justify as reasonable a departure from the
current lease in case of dispute about its terms, the answer must be that prima
facie it must lie where the current lease provides, and that a mere
agreement about figures based on either or both of two rival hypotheses does
not shift the burden in any way.
For
completeness I must deal with one remaining point. Canvassed before Goulding J
was a dispute between the parties which I have not hitherto mentioned including
one about the so-called
‘funding provisions’. This dispute was not dealt with in the judgments of the
Court of Appeal, though arguments relating to it are contained in the
respondents’ printed case, and at the hearing before the Appellate Committee
the appellants sought, and obtained, leave to file a supplemental case canvassing
the arguments in detail. If effect were given to them separately it would have
been open to the appellants, driven back from their main case, to adopt an
intermediate position, reverting to the order of Goulding J for certain minor
purposes, but accepting defeat at the hands of the respondents on the main bone
of contention. It became apparent, however, that such an intermediate position
is not really tenable. The case has been conducted throughout, and, in
particular, was conducted in the Court of Appeal on the footing that what the
appellants wanted was a ‘clear lease’, and it was clearly accepted that, if
they failed on that, in effect they failed altogether, since there was neither
material on which the intermediate position could be formulated with adequate
precision nor room at all for effect to be given to it as a separate argument.
As part of the total package designed to impose a clear lease the individual
details formed a legitimate part of the case. As a separate entity they had no
real independent existence, and to give effect separately now would be to give
effect to a new case, not argued in the Court of Appeal, and, so far as one
could judge from junior counsel’s contemporary note, effectively disclaimed as
a separate and alternative case in the exchanges before the Court of Appeal.
In the result
my opinion is that the appeal fails and should be dismissed with costs.
Agreeing that
the appeal should be dismissed, LORD WILBERFORCE said: The facts of this case,
and the relevant statutory provisions, have been fully stated by the Lord
Chancellor and I shall not repeat them. The general purpose and policy of the
Act of 1954 is clear. It was to provide security of tenure for those tenants
who had established themselves in business in leasehold premises so that they
could continue to carry on their business there. This objective was identified
in the Final Report of the Leasehold Committee of 1950 (Cmd 7982), as the
principal, indeed the only, objective then recommended to be achieved by
legislation. There was no suggestion, nor did the Act, when enacted, contain
any provisions to the effect that business tenants required any greater
protection than that necessary to enable them to continue their business: no
protection, nor did the Act, when enacted, contain any provisions, to the
contractual terms. I accept therefore the landlord’s contention that, in
principle, tenants are not to be protected from market forces; as regards rent,
indeed, this is expressly laid down in section 34, which requires that the rent
is to be the open market rent, subject to certain specified ‘disregards’. The
same underlying principle ought to be applied to the determination of other
terms in the new lease, subject, however, to the guidelines laid down in
section 35 — as to which see below.
The Act, in
the portion (Part II) of it which deals with business tenancies, is in the main
a discretionary Act, giving wide powers to the judge to grant and settle the
terms on which the business tenant is to have a new lease. This applies
particularly to sections 33 and 34, which relate to the duration of the tenancy
and the rent. The crucial section, for present purposes, is section 35, which
relates to the terms of the tenancy, other than terms as to duration and rent.
This section contains a mandatory guideline or direction to ‘have regard to’
the terms of the current tenancy and to all relevant circumstances. The words
‘have regard to’ are elastic: they compel something between an obligation to
reproduce existing terms and an unfettered right to substitute others. They
impose an onus upon a party seeking to introduce new, or substituted, or
modified terms, to justify the change, with reasons appearing sufficient to the
court (see Gold v Brighton Corporation [1956] 1 WLR 1291 — on
‘strong and cogent evidence’ per Denning LJ; Cardshops Ltd v Davies
& Another [1971] 1 WLR 591, 596 per Widgery LJ.)
If such
reasons are shown, then the court, applying the words ‘all relevant
circumstances’, may consider giving effect to them: there is certainly no
intention shown to freeze or, in the metaphor used by learned counsel, to
‘petrify’ the terms of the lease. In some cases, especially where the lease is
an old one, many of its terms may be out of date, or unsuitable in relation to
the new term to be granted. If so or for other good reasons shown, the court
has power to order a modification by changing an existing term or introducing a
new one (eg a break clause, cf Adams v Green (unrep) March 20
1978 CA*). Before doing so it will consider any objections by the tenant, and
where there is an insoluble conflict, will decide according to fairness and
justice.
*(1978) 247
EG 49, [1978] 2 EGLR 46.
The question
at issue in this case does not relate to duration or rent. The duration of the
new lease is agreed at five years from March 25 1977: the appropriate rent
follows from determination of the terms. According to whether the terms are
fixed according to the proposals of the landlord, or to those of the tenant,
the amount of the rent follows, the experts being agreed as to the amount. What
the experts were not agreed upon is the prior question whether the tenants can,
in principle, be compensated by any reduction in rent for the greater burden
sought to be imposed on them by the landlord.
The nature of
that burden can be briefly summarised as follows. Instead of the landlord being
responsible (as under the old lease) for repairs, maintenance, and decoration
of the exterior and common parts of the building, and for providing and
maintaining lifts and other plant (including boilers), the tenants are to bear,
by way of service charges, a proportion, attributable to their holding, of the
cost of these items. These costs are to be ascertained by certificate of the
landlord’s surveyor which the tenants have only a limited right to challenge.
There is further proposed a funding provision under which the tenants are to
pay annually an amount based on the assumption that work is done at intervals
or on assumed life expectancies. I do not detail these provisions, because at
this stage the landlord’s proposals must be regarded as one packaged whole and,
if the main provision for shifting the burden is unacceptable, must be rejected
however fair other provisions taken by themselves might be. Mr Bernstein QC did
endeavour to invite us to consider separately one portion of them — namely that
relating to lifts and equipment — but that we cannot do. We can only deal with
the case as presented to and considered by the judge; we cannot exercise an
original discretion upon part of it. Correspondingly, no decision by the House
upon the package as a whole can prevent, or prejudice, a later or separate
application as regards any severable part of the package.
The landlord’s
case for a shift of the burdens, as I have indicated, rests upon two broad
foundations. The first is that such a shift is, for quite genuine and
respectable reasons, in the interest of the landlord. I accept this; I think
that it is shown by evidence that in the present and foreseeable state of the
property market, a freehold interest in commercial property, at least in
London, commands a higher price if let on ‘clear leases’ — ie leases in which
the tenants bear all the costs and risks of repairing, maintaining and running
the building of which their demised premises form part, so that the rent
payable reaches the landlord clear of all expenses and overheads. Thus the
landlord demonstrates a genuine interest in departing from the existing terms
of the lease. Secondly, the landlord asserts that new leases of property, such
as that with which we are concerned, are now granted and accepted by tenants as
‘clear leases’. This, too, is supported by the evidence. But, in my opinion,
though a relevant circumstance it is not decisive. There is no obligation,
under section 35 of the Act, to make the new terms conform with market
practice, if to do so would be unfair to the tenant. And there is no inherent
necessity why the terms on which existing leases are to be renewed should be
dictated by those of fresh bargains which tenants may feel themselves obliged
to accept. The court has to compare the advantage desired by the landlord with
the detriment to be suffered by the tenants and to consider whether any
monetary compensation offered against that detriment ought fairly to be imposed
upon the tenants in exchange for the acceptance of that detriment. That money
is not necessarily fair compensation for a change in existing rights is obvious
in itself and is well recognised by the law in relation, for example, to
compulsory acquisition and to the granting of damages instead of an injunction.
There can be
no doubt in my opinion that this detriment is real
maintaining and repairing the exterior and common parts of the building, to
impose this upon the tenants is something which they may most reasonably
resist. They risk incurring a liability which is unpredictable and which may,
in the event of a structural defect, be very great. They have no power of
precautionary inspection or survey, since they only have access to part of the
building. They have no means of verifying that work for which they are charged
was necessary at the time, or was truly repair and not improvement, the cost of
which ought not to be put on the tenants, nor of controlling what work has been
done or how it has been done. As tenants, carrying on a solicitor’s business,
they have no staff capable of performing these tasks, whereas the landlord, as
the large property company with an interest in over 200 buildings in the City
of London, has. If work can be ordered and effected by persons, other than
those who have to bear the cost, risks of extravagance and misdirection of
effort may be created. The same separation of responsibility necessitates a
system of charging by certificate and preventing challenges, except in rare
cases, which is of its nature onerous and prejudicial.
The character
of the two parties’ interests in the land — the landlord’s an indefinite one by
freehold, the tenants’ a limited one over a comparatively short period, even
though capable of renewal if the tenant so wishes, is such as to call for the
assumption of long term risks by the former: his benefit too is long term and
will not, according to the evidence, emerge till the 1990s. Transference of
these rights to the leaseholders, accompanied, as is inevitable, by separation
of control, creates a risk disproportionate to their interest. If it is
reasonable for the landlord to wish to get rid of these risks in exchange for a
fixed payment (reduction in rent) it must be equally, or indeed more,
reasonable for the tenants to wish, against receipt of that reduction, to avoid
assuming it. The tenants are being asked to bear all the risks of property
management, a business which they have not chosen, being management by others
in the interest of those others. The present distribution of burdens is that
freely and contractually agreed upon so recently as in 1972. To recast it
involves a serious departure from the terms of the current lease. In my
opinion, a court which has to have regard to the terms of the current lease
ought not to sanction such a departure, and such other circumstances as should
fairly be taken into account — the landlord’s wishes and the increasing
acceptance by others, in different situations, of clear leases — are
insufficient to give grounds for so doing.
The balance to
be struck, and the result of striking it, are to my mind clear, and my only hesitation
as to the result of this appeal comes from the fact that the learned trial
judge, whose discretion it was, in a very well reasoned judgment, came to the
conclusion that the landlord’s proposals should be accepted. But I have been
persuaded that he did so partly at least upon a misconception of the effect of
some of the evidence and partly through losing sight at the critical point of
the vital question whether, even for monetary compensation which arithmetically
might be fair, the case for compelling the tenants to accept such compensation
in exchange for the transference of burden was made out. The noble and learned
Lord on the Woolsack has developed the argument on this point in a manner with
which I wholeheartedly agree, and I need not contribute any additional reasons.
I have no doubt that the Court of Appeal, which was, of course, well aware of
the respect to be given to the exercise of discretion by the trial judge, was
entitled and right to take a different view. I respectfully agree with all three
judgments.
I would
dismiss the appeal.
LORD KEITH OF
KINKEL, LORD SCARMAN and LORD BRANDON OF OAKBROOK agreed that the appeal should
be dismissed for the reasons given in the speeches of the Lord Chancellor and
Lord Wilberforce.
