Landlord and tenant — Rent review provisions in lease — Construction and effect of review provisions — Difficulties as to the assumptions which should be made by the arbitrator in determining the rent under review — Questions submitted for preliminary determination by the court, by agreement of the parties and consent of the arbitrator, under section 2(1) of the Arbitration Act 1979 — Importance both of distinguishing between the hypothetical tenant and the actual lessee and at the same time ensuring that the hypothesis bears as close a resemblance to reality as possible — Complications in present case owing to the manner in which interests in adjoining premises had become interlinked
brought before the court for preliminary determination in this case arose from
the situation and association of two adjoining properties, the Greyhound Hotel,
Croydon, and shop premises on the ground floor, at 46 and 48 St George’s Walk,
over which part of the hotel extended — There had been a number of dispositions
of interests, but at the material time the plaintiffs, First Leisure Trading
Ltd, had come to hold both a long lease of the hotel premises and a long lease
of the adjoining properties (referred to in the case as ‘the extension’) — The
defendants, Dorita Properties Ltd, held the reversion on the extension — The
reversion on the hotel was held by a group not concerned in the present
proceedings — The rent of the hotel was fixed, but the rent of the extension,
although in the first years fixed but at a rising rate, became subject to
review from the expiry of the
market rent excluding, as is common, the matters mentioned in section 34(1)(a)
to (d) of the Landlord and Tenant Act 1954 — The lease contained a provision
that the use of the premises was to be only as an extension to the Greyhound
Hotel
originating summons raised five questions which are set out in full in the
judgment — The answers to the first three were agreed by the parties — The
remaining questions, 4 and 5, were as follows (question 4 as reformulated by
agreement):
are a possible hypothetical tenant?
possible hypothetical tenants bidding in the open market are restricted to
those persons who are prepared to take the risk of seeking and obtaining the
consent of the owner and occupier of the immediately adjoining premises
formerly known as the Greyhound Hotel to use the demised premises as an
extension to those said adjoining premises?
considering the plaintiffs’ submission that the answer to question 4 should be
‘No’, and examining in detail the decision at first instance and on appeal in F
R Evans (Leeds) Ltd v English Electric Co Ltd, Vinelott J decided that the answer to
question 4 was that strictly the arbitrator was not entitled to assume that
First Leisure either was or was not a possible hypothetical tenant — He was,
however, entitled to find as a fact that a lessee of the Greyhound Hotel,
whoever he might be, would be a potential tenant — It was for the arbitrator to
say what effect that fact, if found, would have as between a hypothetical
willing lessor and a hypothetical willing lessee negotiating the terms of a
hypothetical lease of the extension — It followed that the answer to question 5
must be ‘No’
The following
cases are referred to in this report.
Cornwall
Coast Country Club v Cardgrange Ltd [1987] 1
EGLR 146; (1987) 282 EG 1664
Evans
(FR) (Leeds) Ltd v English Electric Co Ltd
(1977) 36 P&CR 185; [1978] EGD 67; 245 EG 657, [1978] 1 EGLR 93
Inland
Revenue Commissioners v Clay [1914] 3 KB
466; (1914) 83 LJKB 1425; 111 LT 484; 30 TLR 573
Norwich
Union Life Insurance Society v Trustee Savings
Banks Central Board [1986] 1 EGLR 136; (1986) 27n8 EG 162
Raja
Vyricherla Narayana Gajapatiraju v Revenue
Divisional Officer, Vizagapatam [1939] AC 302
This was an
originating summons taken out by the plaintiffs, First Leisure Trading Ltd, for
the purpose of seeking the determination by the court under section 2(1) of the
Arbitration Act 1979 of a number of questions as to the assumptions that should
be made by the arbitrator in determining the rent under the lease of the shop
premises at 46 and 48 St George’s Walk, Croydon, of which the plaintiffs were
the lessees and the defendants, Dorita Properties Ltd, were the lessors.
Christopher
Lockhart-Mummery QC and John Male (instructed by Paisner & Co) appeared on
behalf of the plaintiffs; Kim Lewison (instructed by Brecher & Co)
represented the defendants.
Giving
judgment, VINELOTT J said: This originating summons raises a number of
questions as to the construction and effect of a rent review clause.
The background
is shortly as follows. By a lease dated May 16 1962 Croydon Centre Development
Ltd demised premises, comprising basement, ground, first and mezzanine floors
of a building, part of the Croydon Centre, and known as the Greyhound Hotel, to
Courage Barclay & Simmonds Ltd for a term of 130 years from March 25 1962 at
a fixed rent which is not subject to review. The lease contains covenants by
the lessee, among others: (a) not to alter the main structure or the external
appearance of the demised premises without obtaining the prior approval of the
lessors, such approval not to be unreasonably withheld; and (b) not to permit
the demised premises or any of them to be used other than as a high-class
public house, or for such other purposes as the lessors shall from time to time
in writing agree, such agreement not to be unreasonably withheld. The lease
also contains a covenant in usual form not to assign or underlet without the
lessors’ licence in writing, such licence not to be unreasonably withheld.
The premises
demised by the 1962 lease (to which I shall refer as ‘the Greyhound Hotel’)
extend at first-floor level over shop premises, part of the Croydon Centre
development, which comprise the ground floor of 46 and 48 St George’s Walk. By
a lease dated October 7 1969 and made between the same parties, the lessor demised
the two shops to the lessee for a term of 123 1/4 years from December 25 1968.
The two terms will thus both expire on March 25 in the same year. The rent is a
fixed but rising rent for each of successive periods of seven years and from
the expiry of the 21st year (December 25 1989) a rent ascertained in accordance
with the provisions contained in clause 2. Under clause 2(1), for the first 14
years from the end of the 21st year and for every successive period of 14 years
until the end of the term, the rent is to be the market rent as therein defined
or the yearly rent reserved for the immediately preceding period, whichever is
the greater. The market rent is defined as:
The best rent
that would be expected to be obtained in the open market for the demised premises
excluding all matters referred to in subclauses (a) to (d) of section 34 of the
Landlord and Tenant Act 1954 if let with vacant possession at the end of the
said 21 years or the 35 years or of each successive 14 years on a lease for a
term of 14 years and on similar terms.
The clause goes
on to prescribe the procedure to be followed in ascertaining the market rent.
The lessor is to give notice specifying what it considers to be the market rent
and if the lessee gives notice in writing objecting to it and if the parties
cannot subsequently agree, it is to be determined by arbitration. The clause
does not in terms require the market rent to be ascertained as between willing
lessee and willing lessor, but it is common ground that that requirement is implicit
in the requirement that it be the best rent that could be expected to be
obtained in the open market.
The 1969 lease
provides that:
Except as to
the premises demised the term of years granted and the rent reserved this
demise is made on the same terms and subject to the same reservations and to
the same lessees’ covenants and conditions provisos agreements and declarations
as are expressed and contained in [the lease of the Greyhound Hotel].
In clause 4
the lessee also covenants, among other things:
To use the
demised premises only as an extension to The Greyhound Hotel.
At some time
before March 7 1989 the reversion to the Greyhound Hotel and the reversion to
the premises comprised in the 1969 lease (which I will call ‘the extension’)
was severed. The reversion to the Greyhound Hotel became vested in the Nestle
Co Ltd and the reversion to the extension became vested in the defendant,
Dorita Properties Ltd (‘Dorita’). By a licence dated March 7 1989 and made
between Dorita, Courage Barclay & Simmonds Ltd (which had changed its name
to Courage Group Ltd) and the plaintiff, First Leisure Trading Ltd (‘First
Leisure’), which was then known as Entam Leisure Ltd, Dorita gave its licence
to the assignment of the lease of the extension by Courage Group Ltd to First
Leisure and gave its consent to the carrying out of alterations to the
extension by First Leisure in accordance with annexed plans. The alterations
included the construction of a substantial staircase leading from the centre of
the extension to the first floor above. Then by a deed dated March 8 1989 and
made between the Nestle Co, the Courage Group Ltd and First Leisure, the Nestle
Co gave Courage Group licence to assign the benefit of the lease of the
Greyhound Hotel to First Leisure. The Nestle Group also gave consent: (a) to
the use of the Greyhound Hotel, as to the basement, as a high-class discotheque
incorporating a high-class restaurant and bars and/or beer cellar; as to the
ground floor as a high-class cafe and public bar and reception area; as to the
first floor, as a high-class night-club with bars and restaurants and/or for
private functions, banquets, dinner dances, conferences and exhibitions and/or
offices and staff accommodation ancillary to the business conducted by First
Leisure; and as to the second floor as offices and staff accommodation
ancillary to that business; and (b) for First Leisure to carry out alterations
to the Greyhound Hotel. First Leisure also entered into certain further
covenants with the Nestle Group restrictive of the use of the Greyhound Hotel,
which it is unnecessary to set out.
The position
that has obtained since the alterations were carried out is that the extension,
which is not separated laterally from the Greyhound Hotel, is used as a
reception area where there is a small bar with a commodious staircase leading
from the centre to the night-club and ancillary rooms on the first floor.
The new rent
for the extension was not agreed and an arbitrator was appointed. Questions
having arisen as to the assumptions that
with the consent of the arbitrator, that these questions should be submitted
for determination by the court pursuant to section 2(1) of the Arbitration Act
1979.
Five questions
are asked in the originating notice of motion. The parties are agreed as to the
way in which the first three fall to be answered, but for completeness I will
set them out in the way in which it is agreed they should be answered.
Question 1:
Is the arbitrator required to assume that the use of the demised premises under
the hypothetical lease is restricted for use as a high-class public house or
for such other purposes as the lessor shall from time to time in writing agree,
such agreement not to be unreasonably withheld?
It is agreed
that this question falls to be answered in the affirmative. The 1969 lease
incorporates the covenants in the 1962 lease, including a covenant not to use
the extension for any purpose except that of a high-class public house or for
such other purpose as the lessor may agree. For this purpose, the lessor is the
person for the time being entitled to the reversion to the extension. First
Leisure is in fact in breach of this covenant. The licence of March 7 1989
(unlike the deed of March 8 1989) did not include consent by the lessor to a
change of use of the extension. However, it is common ground that, as the
licence and the deed together with the assignment of the benefit of the two
leases to First Leisure were part of a single transaction, Dorita as lessor of
the extension could not refuse consent for this change of use.
Question 2:
Is the arbitrator required to assume that the demised premises must be used
only as an extension to the immediately adjoining premises formerly known as the
Greyhound Hotel?
It is agreed
that the answer to this question is also in the affirmative. I should perhaps
add that the covenant in the 1969 lease is negative in effect; that is, it is a
covenant not to use the premises otherwise than as an extension to the
Greyhound Hotel and not a positive covenant so to use it. Otherwise there would
be a conflict between this covenant and the covenant as to user incorporated by
reference from the 1962 lease if the lessor of the Greyhound Hotel permitted a
use which the lessor of the extension was not prepared to permit and to which
he could reasonably refuse his consent.
Question 3:
Is the arbitrator required to disregard the actual or former occupation of the
demised premises by the plaintiff?
Dorita accepts
that the answer to this question is also in the affirmative, with the
qualification that the ‘disregard’ is limited to the actual or former
occupation of the extension and not of the Greyhound Hotel itself.
Question 4:
Is the arbitrator required to assume that the plaintiff was a possible
hypothetical tenant in the market for the demised premises on the rent review
date?
Question 5:
Is the arbitrator required to assume that the possible hypothetical tenants
bidding in the open market are restricted to those persons who are prepared to
take the risk of seeking and obtaining the consent of the owner and occupier of
the immediately adjoining premises formerly known as the Greyhound Hotel to use
the demised premises as an extension to those said adjoining premises?
It is agreed
between counsel for Dorita and First Leisure that question 4 is inaptly framed.
The question should be whether the arbitrator can find that the plaintiff is a
possible hypothetical tenant.
Mr
Lockhart-Mummery submitted that the answer to question 4 as reformulated is
‘No’. At the same time the arbitrator must have regard to the fact that in the
real world First Leisure occupies the Greyhound Hotel under a long lease. It
follows that the answer to question 5 is ‘Yes’. The hypothetical new lessee would
be one who is willing to take a lease of the extension on the footing that he
could (subject to obtaining the lessor’s consent) either sublet it to First
Leisure or use it for some purpose ancillary to the use of the Greyhound Hotel
— for instance as a flower shop or selling newspapers or magazines or something
of that sort. The market would thus be very restricted. That is reflected in
the rental value advanced by the expert engaged by First Leisure. He has
advised that the fair rent of the extension ascertained in accordance with the
rent review clause is only £11,000 pa. The expert engaged by Dorita has advised
that the fair rent is £60,000 pa.
The
construction contended for by Mr Lockhart-Mummery has what seems at first sight
a very surprising consequence. The prima facie purpose of a rent review
clause is to enable the landlord to recover an increased rent which will
reflect changes in the value of money and changes in the value of comparable
premises in the neighbourhood. Any increases which stem from the past
occupation of the premises by the lessee or from improvements he has made, or
from goodwill associated in his business, are to be disregarded. The purpose of
providing that the rent is to be assessed on the footing that the premises are
offered with vacant possession and without regard to the matters set out in
paras (a) to (d) of section 34(1) of the Landlord and Tenant Act
1954, is to ensure that the parties so far as practicable are notionally put in
the same position as they were when the rent was initially settled. The rent is
to be the best rent that would be expected to be obtained in the open market;
the effect of so providing is that special features which might make Dorita or
First Leisure an eager or a reluctant lessor or lessee are also disregarded.
But as Hoffmann J observed in Norwich Union Life Insurance Society v Trustee
Savings Banks Central Board [1986] 1 EGLR 136* at p 137, there is ‘a
presumption that the hypothesis upon which the rent should be fixed upon a
review should bear as close a resemblance to reality as possible’. If Mr
Lockhart-Mummery is right, a fact which would have been a material factor in
ascertaining the initial rent, given that the lease contains a qualified
covenant not to use the extension otherwise than as a high-class public house
and a covenant to use the extension only as an extension to the Greyhound
Hotel, has to be left out of account on reviewing the rent.
*Editor’s
note: Also reported at (1977) 245 EG 657, [1978] 1 EGLR 93.
However, Mr
Lockhart-Mummery submitted that the question is concluded in his favour by the
unreported decision of the Court of Appeal, which was given on November 11 1977
upholding the decision of Donaldson J (as he then was) in F R Evans (Leeds)
Ltd v English Electric Co Ltd (1977) 36 P&CR 185*. It is
important in understanding the judgment of Donaldson J and the judgment of
Browne LJ, who gave a leading judgment in the Court of Appeal, to have in mind
the precise question that fell to be decided and the context in which it arose.
The lease in question was a lease of an area of some 60 acres which included
factory premises of nearly 1m sq ft of floorspace. The lease contained a rent
review clause which provided that the rent should be the rent at which the
premises were worth to be let on the open market, as between willing lessor and
willing lessee, but disregarding the matters there set out, which are in
substance the matters set out in paras (a) to (c) of section
34(1). The case came before the court on a special case stated by the
arbitrator after he had heard evidence and argument. He had found facts which
are set out in the special case and of which the following are the relevant
findings:
(1) There is no other property on the market that
provides the accommodation and facilities provided by the subject property.
. . .
(4) Apart from the present tenants, it is very
unlikely on the available evidence and on the state of the market that there
would have been a potential tenant in the market for the subject premises on
the terms of the lease offered.
(5) In October 1976, if the present tenants had
not been in occupation of the subject premises, they would not have made any
bid for the lease being offered.
(6) The present tenants in October 1976 could
have split their operation into parts and could have moved each of those parts
into smaller alternative premises in the United Kingdom.
The rival
contentions are summarised in the judgment of Donaldson J:
The tenants
submit that the arbitrator should assume: (i) that in the hypothetical market
there is at least one hypothetical tenant bidding for the lease, and (if it be
found that there would be no other bidder than the English Electric Co Ltd) that
that hypothetical tenant is the English Electric Co Ltd, and (ii) that the rent
must be determined at an amount that the hypothetical tenant would agree with
the claimants in the light of all the bargaining advantages and disadvantages
that would have existed at October 1 1976, and in particular on the assumption
that, if the parties failed to reach agreement on the rent, the hypothetical
tenant was free to occupy two or more smaller properties as an alternative to
taking a lease of the subject property.
The landlords
submit that the arbitrator should assume: (i) that there is a person (who may
or may not be the English Electric Co Ltd) who is willing to take the subject
property as a whole on the terms of the lease offered (other than rent) and to
enter into meaningful negotiations to arrive at a fair rent, that is to say, a
rent that is fair in all the circumstances of the case including rental values
prevailing in the area, and (ii) that the rent must be determined at an amount
that the claimants would agree with such person in all the circumstances,
including in particular the circumstances (if such be found to exist) (a) that
there is no other person willing to take a lease of the subject property on the
terms of the lease being offered, and (b) that there is no other property on
the market that provides the accommodation and facilities provided by the
subject property, but disregarding the possibility that the parties would fail
to reach agreement on a rent for the subject property.
Donaldson J,
commenting on the arbitrator’s findings of fact, said:
(a) the fact that there is no other property on
the market which provides the accommodation and facilities provided by the
Walton Works is certainly relevant. Its effect on the negotiations has,
however, to be balanced by two [sic] other factors. First, whilst the
hypothetical tenant is a willing lessee, he is not an importunate one. He
wishes to take a lease of the premises, but he is operating in a commercial
field and in deciding what to offer by way of rent will take account, covertly
or overtly, of the alternative of taking a lease of two or more premises. That
is not to say that he would prefer that solution. That will depend on the level
of rent which is under consideration. He is a willing lessee, and is quite
content to take the Walton Works at the right price. It is just that he is not
considering the proposition or negotiating in a vacuum.
(b) The fact that the property could be
subdivided and let in parts or sublet and the advantages and disadvantages of
that approach are irrelevant. The clause contemplates a letting as a whole.
(c) The fact that it is very likely that the
English Electric Co Ltd would have been the only potential lessee is relevant,
but its relevance is indirect. It does not matter whether the only potential
lessee was this company or the XYZ Co Ltd. What matters is that in the state of
the market there was not likely to be more than one willing lessee. The effect
of this fact is not, however, decisive because this single potential lessee is
to be assumed to be a willing lessee — neither reluctant nor importunate, but
willing. Just as the hypothetical lessor cannot rely overmuch on the fact that
no property similar to the Walton Works is available on the market, so the
hypothetical lessee cannot rely too much upon the fact that he has no
competitors — he is, and is known to be, a willing lessee. Furthermore, it is
known that he will remain a willing lessee so long as the willing lessor does
not press his demand for rent beyond the point at which he is ceasing to act as
a willing lessor and at which a willing lessee would cease to be such.
If authority
be required for the proposition that monopoly positions on either or both sides
do not render hypothetical agreements impossible, it is to be found in Tomlinson
v Plymouth Argyle Football Co Ltd [1960] 6 RRC 173, a rating case,
and Inland Revenue Commissioners v Clay [1914] 3 KB 466, a
taxation case.
(d) The fact that if the tenants had not been in
occupation in October 1976 they would not have made any bid for the lease being
offered is wholly irrelevant. I am quite prepared to accept that the tenants
are most unwilling lessees. This does not matter. The arbitrator’s concern is
with the attitude of the hypothetical willing lessee, who is not in
occupation of the premises. The clause assumes that there is such a person, and
it is nothing to the point to prove that there was not.
(e) The fact that the tenants in October 1976
could have split their operation into parts and could have moved those parts
into smaller alternative premises in the United Kingdom is also quite
irrelevant. It is irrelevant because it confuses the hypothetical lessee with
the actual tenants. Certainly the hypothetical lessee would consider this
alternative, and it would affect the amount of the rent which he would be
prepared to offer, but he would remain a willing lessee. The extent of the
influence exerted by this alternative would depend on the extent to which more
than one lease and divided premises might be expected to increase his costs.
And it is not the English Electric Co Ltd’s costs which come into the equation,
but average and assumed costs of a hypothetical potential lessee.
Then,
commenting on the tenant’s contentions, Donaldson J accepted that it was to be
assumed that there was at least one hypothetical tenant bidding for the lease,
and that:
. . . the
arbitrator would be justified in proceeding on the basis that, although there
was one person who was willing to become lessee of the Walton Works, it was
unlikely that there would be more than one.
But he
rejected the proposition that:
. . . the
potential lessee either is, or necessarily has any of the characteristics of,
the English Electric Co Ltd. He is a complete abstraction, and, like the mule,
has neither pride of ancestry nor hope of posterity. He is someone whose needs
are such that, in relation to the Walton Works, he is a willing lessee.
Turning to the
landlords’ contentions, he said:
I accept that
there is a person who is willing to take the Walton Works as a whole on the
terms of the lease offered (other than rent), but I do not accept that that
person may be the English Electric Co Ltd. For the purposes of fixing a new
rent, he is not.
Then a little
later:
I accept that
the rent has to be agreed in the light of all the circumstances which in fact
affect the property and, in theory, affect the hypothetical lessor and lessee.
Any circumstance which affects the actual landlord and the actual tenant but
which would not affect the hypothetical lessor and lessee is irrelevant. I
agree that these circumstances include, but stress that they are not limited
to, the fact that it is unlikely that there will be more than one willing
lessee and that in October 1976, which was the relevant date, there was no other
property on the market which provided the accommodation and facilities provided
by the Walton Works.
I do not think
that the decision of Donaldson J properly considered assists Mr
Lockhart-Mummery. The unusual feature of the case before him was that it was
unlikely that there would be any bidder except the English Electric Co Ltd and
that the English Electric Co Ltd would have been a reluctant bidder. English
Electric tried to build on those foundations the claim that the market rent
should be taken to be the rent that it would have been prepared to pay. The
fallacy in that argument is that it assumed (contrary to the required
hypothesis) that there would be no willing lessee. It was not suggested on
behalf of the landlord or the tenant that the English Electric Co Ltd should be
notionally excluded from the market altogether. I have already set out the
rival contentions but I will repeat the salient points.
It was
contended on the one hand that the arbitrator should have assumed that in the
hypothetical market there is at least one hypothetical tenant bidding for the
lease and (if it be found that there would be no other bidder than the English
Electric Co Ltd) that the hypothetical tenant is the English Electric Co Ltd;
and on the other that the arbitrator should assume that there is a person (who
may or may not be the English Electric Co Ltd) who is willing to take the
subject property as a whole.
The decision
of Donaldson J, as I understand it, does not rest on any principle of law that
the English Electric Co Ltd had to be treated as excluded from the market.
English Electric in effect excluded themselves. The arbitrator had found as a
fact, on the assumptions required by the terms of the rent review clause, that
if English Electric had not been in occupation at the review date they would
not have been potential lessees for the whole of the demised premises.
That this is
the correct analysis of the decision of Donaldson J is, I think, confirmed by
the judgment of Browne LJ in the Court of Appeal. The main contentions advanced
in the tenants’ notice of appeal were:
[Ground 2] The
learned judge erred in law in holding that for the purposes of clause 4(4) of
the said lease and on a proper construction of that clause and having regard to
the facts found by the arbitrator the willing lessee there referred to was an
abstraction or a hypothetical person as opposed to being the appellants.
[Ground 3]
The learned judge erred in law in holding that the fact that if the appellants
had not been in occupation in October 1976 they would not have made any bid for
the lease being offered was wholly irrelevant to the determination of the
reviewed rent.
In opening the
appeal, Mr Glidewell, who appeared for English Electric, described ground 2 as
‘the crux of the case’. Browne LJ observed that ground 3 was of no practical
importance because there were no special factors that would have affected the
landlords. He then summarised the argument of Mr Glidewell in the following
passage:
Mr Glidewell
said in opening that the crux of the case was ground 2 of the grounds of appeal
and the tenants’ contention (a)(i) set out in the second schedule to the award
although, as I have said, in reply he said that ground 6 was the crux. Mr
Glidewell submits that on the facts as found the hypothetical tenant must be
taken to be, or to have the characteristics of, English Electric. If so, the
tenants’ bargaining position would have been much stronger in view of the
findings that if English Electric had not been in occupation they would not
have made any bid for the tenancy and that they could have split their
operations and gone elsewhere into other premises. He says Donaldson J wrongly
deprived the tenants of these bargaining weapons. As I have said, I agree with
Donaldson J’s reasons (which I have already read) for rejecting Mr Glidewell’s
main submission, and my view is reinforced by Mr Bernstein’s respondent
landlords’ counsel’s submissions, which I accept, namely (a) that the fact that
the lease contemplates assignment by either party or both parties suggests that
the parties did not contemplate that the rent to be fixed on review should be
related to the particular circumstances of the landlord or the tenant who
happened to be there at the date of review, especially as there was to be no
review for 9 years after 1976; (b) that the logical result of Mr Glidewell’s
argument is that the premises would not have been let at all in October 1976,
which is contrary to the assumptions required by clause 4(4) and makes nonsense
of the clause; (c) — to some small extent — Mr Bernstein’s point about the
contrast between ‘the lessee’ and ‘a lessee’ in the various
subclauses of clause 4; and (d) clause 4(4)(ii), which I think certainly tends
to support the view that the assessment under the rent review clause is
concerned with hypothetical people and not with the real tenant.
Then a little
later he expanded his reasons by saying:
In my view,
as a matter of general principle, special factors affecting the actual occupier
cannot be attributed to the hypothetical tenant even if there is only one
potential tenant. There must be many factories of which the only likely tenant
is the actual occupier, and I cannot accept that in such a case it would be
right to attribute to the hypothetical tenant, for example, the financial
difficulties or the bad labour relations of the actual occupier. It is not altogether
clear whether Donaldson J was in fact attributing to the hypothetical tenant
the possibility of splitting his operations or whether he was merely saying
that that was something which was inherent in the nature of
was attributing to the hypothetical tenant the characteristic of English
Electric in that respect, I think he may have been too favourable to the
tenant; but I am prepared to assume for the purposes of this case that it is
right to attribute to the hypothetical tenant that he could split his
operations and go elsewhere. I agree with Donaldson J that the finding that if
English Electric had not been in occupation in October 1976 they would not have
made any bid for the tenancy is wholly irrelevant, because clause 4(4) requires
it to be assumed that there was then a willing lessee and of course the
tenants’ argument produces the absurdity to which I have already referred.
Ground 6 on
which Mr Glidewell relied in his reply was that:
The learned
judge erred in law in holding that the possibility of the parties failing to
reach agreement was to be disregarded.
As to that,
Browne LJ said:
As to ground 6
— that is the possibility of not reaching agreement — Mr Glidewell accepts that
the arbitrator must assume that agreement on some rent will be reached, but he
says that the parties must not be assumed to have known this while they were
negotiating and that this would strengthen the bargaining powers of the tenant.
It seems to me that this is really the same point as the points about the
findings that English Electric would not have bid at all if they had not been
in occupation and that they could have moved out.
As I have
said, under clause 4(4) one must assume vacant possession. There is, therefore,
I think, really no distinction between this point about failure to reach
agreement and the point about moving out. It is clearly wrong to talk about the
possibility that English Electric or the hypothetical tenant would consider
moving out — he is never in, on the assumptions. That is really the same point
as saying that English Electric would not have bid at all, and both these
points are really contrary to the fundamental assumptions. But the possibility
of the hypothetical tenant’s breaking off negotiations and going elsewhere was
obviously a point which would affect the negotiations and which it was for the
arbitrator to weigh and decide how much effect it would have on the rent. It
seems to me that on both these points — failure to reach agreement and the
possibility of going elsewhere — what Donaldson J was saying was exactly that,
that they were relevant factors but that the weight to be attached to them was
a matter for the arbitrator.
Mr
Lockhart-Mummery placed considerable reliance on the observations of Browne LJ
that ‘as a matter of general principle, special factors affecting the actual
occupier cannot be attributed to the hypothetical tenant even if there is only
one potential tenant’. I do not think that this passage will bear the weight
he, Mr Lockhart-Mummery, seeks to put on it. In general, special features
peculiar to the lessor or the lessee which, for instance, may make either (in
Donaldson J’s words) ‘reluctant or importunate’ must be disregarded. So the
arbitrator must disregard, for instance, any cash-flow problem which would make
the lessor anxious to obtain a letting or any desire to expand which would make
the lessee anxious to obtain further premises. It does not follow that the
feature which makes the extension of greater value to any lessee of the
Greyhound Hotel must be disregarded merely because First Leisure is the lessee
of the Greyhound Hotel.
Mr
Lockhart-Mummery also relied on the decision of Scott J in Cornwall Coast
Country Club v Cardgrange Ltd [1987] 1 EGLR 146. The facts of that
case are complex and unusual. In 1978 Daejan Investments Ltd (‘Daejan’) granted
a lease for 26 years from December 8 1977 of 30 Curzon Street to Ladbroke
Rentals Ltd (‘Rentals’). Shortly after, Rentals, a member of the Ladbroke
Group, sublet the premises to Ladup Ltd, another member of the Ladbroke Group,
for the same term less three days. The lease contained a rent review clause
similar to the rent review clause in the instant case except that, first, the
‘disregards’ incorporated in the instant case by reference to section 34(1) are
spelled out (subpara (a) required that any effect on rent of the fact that the
tenant or his predecessor in title or some associate of the tenant had been in
occupation had to be disregarded) and, second, that the clause required that
there be disregarded:
(d) Any addition to the value of the demised
premises attributable to the gaming or justices licence which may be held in
respect of such premises if it appears that having regard to the terms of the
current tenancy and any other relevant circumstances the benefit of the licence
belongs to the tenant or some associate of the tenant.
Later the
headlease was assigned to the plaintiff and the sublease was assigned to the
defendant, a member of the Lonrho Group. The premises had then been converted
for use as a gaming club or casino and were occupied by Crockford’s Ltd,
another member of the Lonrho Group. Crockford’s held a gaming licence in
respect of the premises which was renewable annually. The peculiar difficulties
that arose in that case all stem from the fact that Crockford’s held a gaming
licence. The factual setting is summarised by Scott J at p 148K:
There were, I
have been told, in the south Westminster area, on December 8 1983, 19 gaming
establishments including 30 Curzon Street. There were 21 current gaming
licences held in respect of premises in this area, including Crockford’s 30
Curzon Street licence. The holders of two of these licences were, I have been
told, seeking transfer of their licences from the premises in respect of which
the licences had been granted to new premises. This explains the discrepancy
between 19 gaming establishments and 21 licences. I have been told, also, that
the policy of the Gaming Board and of the justices with jurisdiction in south
Westminster was that the number of gaming establishments in this prime area
should be strictly limited. I have been told that these authorities were not
prepared to allow any increase in the number of licensed gaming establishments.
These details may or may not be established by evidence before the arbitrator.
They are by no means all common ground. But if the situation has been correctly
described, the position of Crockford’s and of Crockford’s current gaming
licence becomes highly significant.
One of the
questions asked was whether the arbitrator was ‘entitled to assume and/or find
that the respondent (Cardgrange) was a possible hypothetical tenant in the
market for the property on the rent review date.’ It is on the answer given to that question by
Scott J that Mr Lockhart-Mummery particularly relies. Scott J said [at p 152
G-K]:
Crockford’s is
a real company. Its stature in the gaming world is well known. The ‘vacant
possession’ hypothesis requires it to be assumed that Crockford’s right of
occupation and actual occupation of 30 Curzon Street have ended on December 8
1983. So is Crockford’s to be assumed to be a potential bidder in the open
market for the hypothetical lease of 30 Curzon Street? If it is, then the hypothetical lessee must
outbid Crockford’s. The presence of Crockford’s in the market without any right
of occupation of 30 Curzon Street and without any other gaming premises would
tend to push up the rent the hypothetical lessee would have to pay. Not
surprisingly, Mr Barnes [counsel for the plaintiffs] submitted that I should
answer the question in the affirmative.
In my
judgment, however, the right answer to this question is ‘No’. The open market
must be, so far as is possible, a market which corresponds with reality. The
‘vacant possession’ hypothesis necessarily introduces an element of unreality.
But as I have already tried to emphasise, the various hypotheses must, in my
view, be taken no further than their terms make strictly necessary. It is not
necessary for the purpose of giving effect to the ‘vacant possession’
hypothesis that Crockford’s should be treated as a possible hypothetical
tenant. On the other hand, so to treat Crockford’s introduces hypothesis upon
hypothesis. It requires Crockford’s to be invested with hypothetical qualities
and surrounded by hypothetical circumstances that do not correspond with
reality. Thus the proposition that Crockford’s is a possible hypothetical
tenant requires the hypothesis that it would be in the market for 30 Curzon Street
if 30 Curzon Street were vacant. That latter hypothesis is not a necessary
consequence of the vacant possession hypothesis. It is no more than an arguable
one. The proposition that, if it had to leave 30 Curzon Street, Crockford’s
would try to negotiate a transfer of its gaming licence to the new lessee of 30
Curzon Street is another arguable hypothesis. So is the hypothesis that
Crockford’s would have established itself in other premises and obtained a
transfer of its licence to those premises. None of these hypotheses is the
fact. None is demanded by the terms of the rent review provisions. Each is no
more than an arguable consequence of the ‘vacant possession’ hypothesis. I
reject them all. It is impossible to treat Crockford’s as a possible hypothetical
tenant without inventing for it hypothetical circumstances. So, in my view,
Crockford’s cannot be assumed to be a possible hypothetical tenant.
It is, I
think, clear from the penultimate sentence that Crockford’s had to be excluded
from the market value not because there is any general principle that the
tenant must be excluded but because of the special circumstance that
Crockford’s actually held a current gaming licence and under ‘disregard’ (d)
any addition to the value of the lease attributable to the gaming licence held
by Crockford’s had to be disregarded. The introduction of Crockford’s as a
potential bidder required the hypothesis that Crockford’s did not have any
other premises to which its licence had been or could be transferred. So to
treat Crockford’s as a possible tenant ‘introduces hypothesis upon hypothesis.
It requires Crockford’s to be invested with hypothetical qualities and
surrounded by hypothetical circumstances that do not correspond with reality’.
In my
judgment, therefore, there is no principle of law which requires the
arbitrator, while having regard to the fact that First Leisure is the lessee of
the Greyhound, to assume that First Leisure is not a potential lessee of the
extension. First Leisure cannot be identified as the hypothetical lessee;
adopting Donaldson J’s words, ‘His profile may or may not fit that of First
Leisure’. But in ascertaining the best rent that would be obtainable in the
open
extension to a lessee of the Greyhound Hotel.
I was referred
by Mr Lewison to two other decisions: the decision of the Court of Appeal in Inland
Revenue Commissioners v Clay [1914] 3 KB 466, and the decision of
the Privy Council in Raja Vyricherla Narayana Gajapatiraju v Revenue
Divisional Officer, Vizagapatam [1939] AC 302. In Inland Revenue
Commissioners v Clay, the value of a house had to be ascertained for
the purposes of section 26 of the Finance (1909-10) Act 1910, which required
the value to be ascertained on the footing that it had been sold on the
valuation date in the open market by a willing seller. Its market value as a
dwelling-house was £750; the trustees of an adjoining property run as a nursing
home were willing to pay at least £1,000. The case for the Crown was that the
special needs of the trustees had to be disregarded or alternatively that it
should be assumed that the trustees needed only marginally more than £750 to
secure the property. Both arguments were rejected by the Court of Appeal. Sir Herbert
Cozens-Hardy (as he then was) said at p 472:
An ‘open
market’ sale of property ‘in its then condition’ presupposes a knowledge of its
situation with all surrounding circumstances. To say that a small farm in the
middle of a wealthy landowner’s estate is to be valued without reference to the
fact that he will probably be willing to pay a large price, but solely with
reference to its ordinary agricultural value, seems to me absurd. If the
landowner does not at the moment buy, land brokers or speculators will give
more than its purely agricultural value with a view to reselling it at a profit
to the landowner.
In the Privy
Council case land was compulsorily acquired by harbour authorities because it
contained a spring yielding good drinking water which could be made available
to oil companies and people engaged in harbour works and which had the
particular attraction to the acquiring authority that water could be used to
supply the local population whose wells, a source of malaria-carrying
mosquitos, could then be closed. The fact that malaria was endemic in the area
might otherwise have made the development of the harbour uneconomic. Lord Romer
stated the principle applicable in cases of compulsory acquisition in a
well-known passage:
The
compensation must be determined, therefore, by reference to the price which a
willing vendor might reasonably expect to obtain from a willing purchaser. The
disinclination of the vendor to part with his land and the urgent necessity of
the purchaser to buy must alike be disregarded. Neither must be considered as
acting under compulsion. This is implied in the common saying that the value of
the land is not to be estimated at its value to the purchaser. But this does
not mean that the fact that some particular purchaser might desire the land
more than others is to be disregarded. The wish of a particular purchaser,
though not his compulsion, may always be taken into consideration for what it
is worth.
Inland
Revenue Commissioners v Clay was referred to
by Donaldson J in F R Evans (Leeds) Ltd v English Electric Co Ltd (which
I have cited) as authority for the proposition that ‘monopoly positions on
either or both sides do not render hypothetical agreements impossible’. These
cases are also authority for the proposition that the potentiality of land
which falls to be valued as between willing vendor and willing purchaser — its
value for a particular purpose for a particular purchaser — must be taken into
account. Mr Lockhart-Mummery stressed the danger of taking cases decided in the
field of compulsory purchase or the ascertainment of the value of freehold land
as a guide in the very different field of rent reviews. There there is no
antecedent history to be disregarded and no continuing relationship as there is
between lessor and lessee. But these cases seem to me a guide in determining
the way in which the potential value of land for a particular purpose has to be
brought into account in the hypothetical higgling in the hypothetical market
place.
In my
judgment, therefore, the answer to question 4 is that strictly the arbitrator
is not required to assume either that First Leisure is or that it is not a
possible hypothetical tenant. But he is entitled to find as a fact that a
lessee of the Greyhound Hotel, whoever he might be, would be a potential
tenant. It is for him to say what effect that fact, if found, would have as
between a hypothetical willing lessor and a hypothetical willing lessee
negotiating the terms of a hypothetical lease of the extension.
It follows
that the answer to question 5 must be ‘No’.
