Landlord and tenant — Landlord and Tenant Act 1954 — New lease of electricity substation — Determination of rent — Whether rent should reflect ransom value to tenant — Whether new tenancy should include rent review clause
The appellant landlord gave to the
respondent tenant a notice under section 25 of the Landlord and Tenant Act 1954
terminating a tenancy held by the tenant of an electricity substation. A
restriction in the tenancy prohibited the use of the site other than as an
electricity substation; the rent had been £10 pa. By an originating application
dated September 26 1994 the tenant sought a new tenancy; that application was
not opposed, although the parties could not agree the length of the term of the
new tenancy or the rent. The landlord’s valuer gave evidence at the hearing in
the county court that the rent should be £1,000 pa because, inter alia,
there was no other plot available in the local area which would not involve the
tenant having to pay a substantial premium. There was no other plot where land
could be leased without having to pay a market rent unrelated to the
restriction in the tenancy. The landlord appealed the decision of the county
court judge who ordered a new 14-year tenancy at a rent of £40 pa.
combination of considerations which apply to the court when fixing a rent
preclude a notional lessor unwilling to let the premises for such
restricted use, unless a premium was paid to take into account other potential
uses. The right course is to take the terms of the existing lease as a
sufficient guide and not to make the alteration desired by the landlord. The
court should reject any argument based on a ransom element or any valuation
based on the possibility of a tenancy other than that agreed between the
parties. The court below was entitled to exclude a rent review clause and fix a
rent having regard to the low annual rent without review for the 14-year term.
The following cases are referred to in
this report.
Cardshops Ltd v Davies [1971] 1 WLR
591; [1971] 2 All ER 721; (1971) 22 P&CR 499, CA
Clements (Charles) (London) Ltd v Rank City Wall Ltd
[1978] 1 EGLR 47; (1978) 246 EG 739
This was an appeal by the landlord, Ian
Addison, from a decision of Judge Cartlidge in Gateshead County Court, who
ordered the terms of a new tenancy under an originating application of the
tenant, Northern Electric plc, under Part II of the Landlord and Tenant Act
1954.
Philip Walling (instructed by Patterson
Wolf & Co, of Tyne & Wear) appeared for the appellant; Robin Horner
(instructed by Watson Burton, of Newcastle upon Tyne) represented the
respondent.
Giving the first judgment, POTTER LJ
said: In this judgment I shall refer to the appellant (the respondent in the
court below) as the landlord and to the respondent (the applicant in the court
below) as the tenant. The landlord appeals from an order of Judge Cartlidge
made on November 17 1995, whereby he ordered that a new lease should be granted
to the tenant for a term of 14 years, on the same terms as the previous lease between
them dated September 26 1969, save that the annual rent should be £40 pa with
no review and that the landlord should pay the tenant’s costs on the
appropriate scale.
The lease concerned a small plot of land
of 120 sq yds in an area surrounded by allotment gardens. It had a frontage on
to Thomas Street, Aightom Banks, Gateshead, Tyne and Wear, which was an unmade
road in poor condition. The site lay within a green belt area. It was let to
and used by the tenant as an electrical substation. There was a covenant
against user for any other purpose and there was no clause providing for any
other use, subject to the consent of the landlord.
The substation, which had been built by
the tenant and as such constituted a tenant’s improvement, covered most of the
plot, the balance being overgrown with bushes and rough vegetation. The
original lease was for a term of six years and thereafter from year to year,
unless determined on the sixth or any subsequent year, by either party giving
six months’ notice. The yearly rent reserved was £10, clear of all deductions
with no provision for rent reviews.
The matter came before the judge by way
of an originating application by the tenant, dated September 26 1994, following
the giving of notice by the landlord under section 25 of the Landlord and
Tenant Act 1954, terminating the tenancy on January 31 1995, but indicating
that the grant of a new tenancy would not be opposed. On August 3 1994, the
tenant served the landlord with a counternotice dated August 1 1994 proposing that
a new lease should be granted for a term of 14 years from January 31 1995,
again at a rent of £10 pa, ie unchanged from the previous lease, but otherwise
on the terms of the existing lease.
By the landlord’s answer to the
originating summons, no issue was raised as to the renewal of the lease on its
original terms, save that the landlord proposed a new lease for a term of 15
years at an initial rent of £1,000 pa, but with rent reviews, upwards only, at
intervals of five years. Agreement could not be reached as to an appropriate
rent. The sole matter for the decision of the judge was the term (ie 14 or 15
years), the rent (ie £10 or £1,000 pa) and whether there should be introduced a
provision for a rent review as proposed by the landlord. In the event that a
term of 14 years was granted, a rent of £40 fixed and no provision for rent
review was held to be appropriate.
There was rival expert evidence at the
trial. The tenant called a surveyor, Mr Michael A Blake bsc frics, who
expressed the view that the holding might reasonably be expected to be let in
the open market by a willing lessor, having regard to the terms of the tenancy
and in particular the restriction on user, at a figure of £15 pa. The
landlord’s surveyor, Mr George F White frics
faav, stated that in his opinion the appropriate rent was of the order
of £1,000 pa. The vast difference in the rental levels spoken to by each was
largely accounted for by the argument of Mr White and counsel for the landlord,
that there was a ‘ransom’ element in the relative positions of the parties
which should not be ignored.
The argument in the court below ran as
follows. Although there was a restriction in the lease as to the user which the
land could be put, the simple fact was that, if the landlord refused the terms
offered by the tenant, there was nowhere for the tenant to go without incurring
great expense. First, it would have to remove the substation from the site and
incur considerable expense in setting up a new substation; second, the
geography of the area was such that, while it could not be said that there was
no other plot on which the substation could be put, there was no other plot
available in the local area which would not involve the tenant in having to pay
a substantial premium on what it was paying to the landlord. That was because
there was no other plot in the area where land could be leased without having
to pay a market rent unrelated to the restriction on the land to use it only as
an electricity substation.
There were three further bases of argument
relied upon:
1. That the freehold open market value of
the site was £10,000 and it was reasonable to expect a 10% return on the
notional capital invested.
2. The appropriate level of value for use
as a garden allotment, which was the user of the surrounding land, justified a
range of rent from £25 to £250, increased to allow for the fact that there was
a main road frontage and there were a number of additional use categories which
might be appropriate, in particular car parking.
3. Reliance was placed on a list showing
the level of rental payments currently offered and apparently paid by the
tenant, for wayleave agreements over agricultural land for towers and pylons on
the basis of
of the area of the tenant’s site lease, Mr White calculated a comparable rate
of £670 pa, but increased it on the basis that the site was more valuable than
mere agricultural land in open country.
Basis 3, which I have just outlined,
proved a broken reed in Mr White’s hands because he was obliged to admit at
trial that he had misread the comparable figures as rates per square foot,
whereas the figures were in fact for areas measured as feet square. Adjustment
for that error led to a figure of the order of that put forward by Mr Blake for
the tenant.
Mr Blake’s position was that the site was
a green belt site in an area of high landscape quality on which the council
would resist any development or alternative use, other than as an allotment, it
being the council’s policy to encourage such use in that area. In any event,
the terms of the new lease, including the term restricting user to that of a
substation, were agreed between the parties. Only the rent was in issue.
Mr Blake proffered two lists of
comparables in order to justify his level of valuation:
(a) a list of annual rent charges for
allotment use in the five Metropolitan Council areas of Tyne and Wear (which
includes Gateshead, Newcastle, Sunderland, South Tyneside and North Tyneside),
adjusted upwards to reflect the fact that no rent review was envisaged for the
14 years of the proposed new lease;
(b) the level of rent negotiated and paid
on recent lease renewals on substation sites within the same five areas,
adjusted downwards in any case where they were in an area where there was
potential development value for domestic or commercial use. (This was the list
on which he principally relied.) Most of these were leased at a peppercorn
rent, coupled with payment of a premium which Mr Blake converted into an
effective rent over the period of the lease by decapitalising the premium
figure at a rate of 10%. Two were let at a rent with no premium. All the comparables
were for substantial periods but none had a rent review clause.
Mr Blake’s report was supported by
extensive detail, including maps and photographs of the sites concerned. Both
surveyors stuck firmly to their rival approaches when tested before the judge.
The judge said:
The first observation one makes about the
two experts who have been called is that their valuation for rental purposes is
different by a factor of 50 or more. Mr Blake told me in evidence that he is
unshaken in his opinion that the holding might reasonably be expected to be let
in the open market by a willing lessor, having regard to the terms of the
tenancy, at a figure of £15 pa. Mr White says that his opinion, leads to the
conclusion that the appropriate rental is of the order of £1,000 pa; perhaps a
little less but that sort of figure. The approach of both counsel in the case
is that the court can really only, if it departs at all from either of the
experts, tinker at the edges of their valuations but the difference between them
is so dramatic that the court must either move in the direction of one or the
other. Given the dramatic difference between the two, there is really no room
for any other approach. It seems to me that is right. I have to come down on
one side or the other in making a decision as to whether, in effect, Mr Blake
is in the right range of rent or whether Mr White is in the right range of
rent.
In the event, he accepted the approach of
Mr Blake increasing his figure of £15 spoken to, to £30 adjusted up to £40 in
the light of the absence of a rent review clause (see further below). The basis
for his increasing the figure from that spoken to by Mr Blake was:
If one looks at the sort of figures for
wayleave apparatus negotiated or set in December 1993, one finds that an area
about the same size as this land attracts a rent of £26 annually and while I
know that this is a different arrangement for this is to do with wayleave
apparatus, often a pylon in a farmer’s field, it has been put to me by Mr
Walling that this is really just four legs standing in a field for which the
board say in their codes and current rates that £26 annually is a proper rent.
The other feature to which I have attached some importance is the schedule at
p58 and in 1992 private citizens negotiated with the board for a substation to
be placed at Nelson Avenue, Nelson Village, Cramlington. That is a 34 sq yd
site with an effective annual rent of £20. One looks down through the schedule
and one sees figures which at most go to effective annual rent of £136 for a 35
sq yd site in the middle of industrial Newcastle.
The judge continued:
I incline to the view that there has to
be an adjustment upwards of the figure given by Mr Blake. It cannot be by a
large margin, in my view, because I acknowledge Mr Blake is an expert, but
looking at the schedule on p58 I incline to the view that doubling Mr Blake’s
figure would be a sum which might reasonably be expected as rent for this
holding in the open market by a willing lessor having regard to the terms of
the tenancy and disregarding the fact that Northern Electric have been in
occupation of the site in the past.
That last matter is of course a specific
matter to be disregarded under the terms of the 1954 Act.
Before reaching his conclusion on the
basis of the general approach and supporting detail proffered by Mr Blake, the
judge dealt with such evidence and arguments as had been put to him by Mr White
and by Mr Philip Walling as counsel for the landlord. He rejected the ‘ransom’
point not (as counsel for the tenant had urged him to do) on the ground that
his obligations to fix the rent had to be effected simply ‘having regard to the
terms of the tenancy’, but on a more pragmatic ground as follows:
I wondered at one point whether the
phrase ‘having regard to the terms of the tenancy’ prevented Mr Walling using
this argument but it seems to me it does not. Mr Walling is perfectly entitled,
if there is evidence there, to ask the court to make a decision based on open
market rents having regard to the potential for a landlord saying, albeit there
is a restrictive covenant attached to this lease, ‘See if you can do better
elsewhere’ and in that way the landlord, for all that there is a restrictive
covenant on the lease can increase substantially the market rent.
Having said that, it does seem to me that
if one is to pursue that line of inquiry, one really does need to have more in
the way of evidence about scarcity of suitable land or the prospects for a
landlord adopting that approach. What I have done in trying to arrive at the
open market rent in this case is to compare what is on offer by the tenant by
way of rent with what is paid in relation to similar sites. It seems to me that
in this territory, not free from difficulty, the most reliable way of
proceeding.
That is the way in which he eventually
decided the case.
While the point has not formally been
taken in the form of a notice of additional grounds upon which the judgment
should be supported, in my view, the judge could and should have shut out the
ransom argument for reasons of principle, wider than those urged upon him by
the tenant’s counsel. I propose to deal with the point because the proper basis
of valuation is well and truly raised on this appeal by the landlord’s
pursuance of the ransom point.
The judge’s task under the 1954 Act, on
an application of this kind, is to assess the rent upon the basis of the rent
at which the premises might reasonably be expected to be let on the open market
by a willing lessor. It is to that matter that expert evidence should be
directed: (see generally Woodfall, Landlord and Tenant, vol 2, para
12.148.) As the judge rightly highlighted, it was also his task to determine
that rent, having regard to the terms of the tenancy other than those relating
to rent. Therefore the judge was required to assume a willing lessor of
premises limited to use as an electricity substation, the term already agreed
between the parties.
That combination of considerations
necessarily precluded a notional lessor unwilling to let the premises
for such restricted use, unless a premium was paid to take into account other
potential uses. That is because: (a) such an approach would represent a
qualification on the overall notion of a willing lessor whose willingness falls
to be judged on the assumption that it relates to the lease before the court;
(b) because taking into account other potential uses involves ignoring what are
in fact terms providing for one use and one use only. In this connection, a
passage in Woodfall in the same volume at para 22.153, under the
headings ‘Other terms — Use’, observes:
The restrictions on use should not be
relaxed against the will of the tenant, where the landlord’s reason for wishing
to do so is merely to increase the rent.
In the note below that observation, the
case of Charles Clements (London) Ltd v Rank City Wall Ltd [1978]
1 EGLR 47 is referred to. The passage continues:
Conversely, the restrictions on use
should not be tightened against the will of the landlord where the tenant’s
reason for wishing to do so is merely to reduce the rent.
The relevant passage in the Charles
Clements‘ case, for the purposes of this appeal, appears at p49 in the
judgment of Goulding J, where he observed in relation to arguments concerning
the relaxation of a clause in relation to user and the proposed addition of
words ‘such consent not to be unreasonably upheld’, as follows:
Similarly I think there is an error of
reasoning in the argument that, in the circumstances of this case, the
landlord, if its proposal is not accepted, will be prevented from getting the
open market rent intended by the Act. Section 34 of the Act says that the rent
under the new tenancy, in default of agreement, is to be that at which, having
regard to the terms of the tenancy, the holding might reasonably be expected to
be let in the open market by a willing lessor. That, as Widgery LJ pointed out
— which is a reference to the case of Cardshops
Ltd v Davies [1971] 1 WLR 591 —
presupposes that the terms are known, and
under section 35 the terms of a tenancy granted by order of the court are, in
default of agreement, to be determined by the court having regard ‘to the terms
of the current tenancy and to all relevant circumstances.’ That does not mean
that the terms of the current tenancy are necessarily decisive, because there
may be other circumstances that outweigh them, but it is a guide to the court
that Parliament wanted the terms of the current tenancy to be considered in the
forefront in every case, along with any relevant circumstances of the
particular case. Here I have no evidence of any special facts affecting the
property that are not common to all retail premises in high-class business
areas. If the parties are to be at liberty to insist on changes in the terms of
the existing tenancy simply because they consider them beneficial to
themselves, a field would be opened which I think the court would find it
bewildering to traverse. Every tenant would volunteer to accept increased
liabilities as to this or that matter for the purpose of getting, on terms that
he thought might ultimately profit him, a lower rent; every landlord might
press this or that concession on the tenant because it would enable him to say
the open market rent was a higher rent. It therefore appears to me, for the
purposes of the present case, that the right course is to take the terms of the
existing lease as a sufficient guide in this respect, and not to make the
alteration desired by the landlord since no special reason is shown for it and
the tenant objects to it.
That case involved a position where some
of the terms of the lease, other than rent, were in dispute before the court,
but the logic behind the passage I have quoted applies a fortiori to this
case where the task of the court was simply to deal with the rent on the basis
of terms which had already been agreed between the parties. On that basis, it
seems to me that the judge should have rejected any argument based on a ransom
element, so far as the tenant was concerned, or any valuation based on the
possibility of a term being applicable, other than those agreed between the
parties and set out in the lease before the court. That disposes of the
principal point taken upon this appeal.
In the notice of appeal before the court
there are a number of stated grounds in which points of detail are taken upon
the approach of the learned judge. Most have been abandoned, or not pursued as
discrete points, though a number have cropped up incidentally in the arguments
of Mr Walling. One substantive ground only has been separately pursued, ie that
relating to the question of rent review to which I will refer at the end of
this judgment.
The first two grounds of appeal, the
theme of which has certainly not been abandoned, at least as a matter of
makeweight to the main argument, are that the judge failed to take into account
properly the evidence of Mr White, the landlord’s expert, that the true market
rental value of the site in question is that which could be obtained from
possible alternative uses and that he failed to place sufficient weight on the
landlord’s expert’s evidence of comparable rents which could be achieved in the
open market. It is submitted that the judge failed to have regard or gave
insufficient weight to the landlord’s expert’s evidence for comparable rents
for equivalent sites and that he placed undue weight on the tenant’s evidence
for comparables, which was based solely on the tenant’s experience of
electricity substation sites, negotiated solely by the tenant in what had been
until recently a monopoly market set at historically low and sometimes nominal
rents.
It seems to me that there are no real
grounds for suggesting that the judge did not take into account or give
sufficient weight to those matters. A number of points were made by the
landlord and rejected by the judge, but certainly those I have mentioned were
dealt with in a careful judgment from which I do not seek to quote further at
length. The approach of the judge was rightly conditioned by the fact that his
task was to fix a rent on the basis of the terms of the tenancy which were
otherwise agreed, in particular that relating to the restricted use. On that
basis the judge preferred the evidence of Mr Blake. He had produced comparables
and evidence as to proper rental levels for allotments, which, on the analysis
of the judge’s task as I have stated it above, were probably strictly
irrelevant, but which, by reason of a letter from the local director of
planning (to which the judge referred in his judgment) as well as Mr Blake’s
own assessment in evidence, were in any event the only alternative likely to be
sanctioned by the council.
In grounds 9–11 of the appeal, the
complaint is made that having regard to the fact that the tenant’s expert
provided a report of what he considered to be the true open market value which
was solely based on comparables which had been provided by the tenant, the
judge placed undue weight on the tenant’s expert’s evidence which was not based
on true rents for comparable sites, but merely on the rents which the tenant
had negotiated for electricity substations. The tenant’s expert had taken no
account of the open market rent obtainable from alternative permitted uses. It
is further said that the judge failed to have regard to the fact that the
tenant’s expert provided no countervailing evidence of the rents which could be
obtained from the site for allotment gardens, car parking or garaging.
Finally, it is submitted that the judge
was wrong to hold that if the tenant’s comparables were unsuitable, the
landlord was obliged to request further information relating to other
electricity substation sites; that the tenant’s expert failed to provide such
evidence and therefore, the judge was wrong in holding that the landlord should
have asked for it; also that, having heard uncontradicted evidence of rents
based on alternative uses, the learned judge failed to give proper regard to or
place sufficient weight upon it. This last complaint appears to relate to a
passage at p5E-F of the transcript of the judgment where the judge said:
Having heard Mr Wilkinson, on behalf of
the applicant, it seems to me that these are comparables to which the court can
pay close attention. If the comparables are regarded as unsuitable then it is
open to the respondent to ask for further information about other sites or it
may be, if it is thought the applicant[s] are mean and do not follow a market
rate, one could ask for information in relation to other electricity companies.
But this is the information that I have and to my mind in this application it
is the most reliable piece of information I have been given.
Grounds 9 and 10 are no more than
comments or complaints that the judge favoured the views of the tenant’s expert
over those of the landlord’s expert in a case where there was a clash of
approach. The judge plainly found the former’s evidence more impressive,
helpful and better supported than that of the latter. So far as ground 11 is
concerned, it seems to me again that the judge was doing no more than comment
on points which had been specifically made against Mr Blake’s evidence to the
effect that his comparables were likely to have been selective and/or did not
follow a market rate.
The judge dealt with these en passant.
He explained why he considered it to be a case where comparables were
appropriately to be looked at. The best he had were those provided on behalf of
the tenant which he considered had been provided in good faith. He was in the
position faced by a judge in any case where unusual circumstances prevail and a
choice has to be made between two rival views. In such a case, the court
proceeds as best it can on the material before it. Where there is no real
reason to doubt the authenticity or reliability of ostensibly helpful material
supplied by one side and it is effectively the subject only of
counter-assertion by the other, the court is likely, as well as entitled, to
rely on it in relation to the issues for decision.
I now turn to a point which has been
taken as a freestanding matter on this appeal, the question of rent review. As
already mentioned, the previous lease between the parties, which was for a
period of six years, had been at an extremely low rent with no provision for a
rent review. Six years had elapsed between the end of the period provided for
in the original lease and the application before the court. The judge, having
heard the evidence, had decided that another extremely low rent in current
terms was appropriate. When it came to dealing with the issue as to rent
review, he said:
It seems to me that it is completely
disproportionate to the rental to have regular reviews of this albeit long
maximum length under this part of the lease and I am inclined to the view that
if there cannot be a simple formula to apply to review upwards the rent then
really there should not be a review at all and the court will set what [seems
to] the court to be an appropriate sum having regard to the fact that there
will not be reviews in the future.
He then asked whether either of the
parties wished to address him on the subject and Mr Walling said:
There is nothing I can argue, your
Honour. I just do not accept it.
Judge: So be it. There is no more
to be said then.
Mr
Walling: I have no evidence about it,
that is the difficulty. Mr White did not address his evidence to it
particularly.
Judge: I must do the best I can
with what I have and it seems to me, allowing for the fact there is not to be a
review for the next 14 years, so that there cannot be any uplift — which is
speculation anyway but one would suppose there might be some — I can increase
to £40 the rent which is an accelerated payment to allow for the fact that the
landlord is in effect shut out from arguing for an increase hereafter.
Mr Walling has argued that, where a lease
for a period of 14 years was concerned, the judge was wrong in principle not to
provide for a rent review. However, he acknowledges that in the light of the
level of rent found by the judge, it might well be the case, as the judge
himself elsewhere indicated, that the mere cost of instructing surveyors to
seek to negotiate at each rent review period would far exceed the increase
obtained, particularly if the matter were assessed upon the basis that the
judge assessed it.
It seems to me that, lying behind Mr
Walling’s submissions there is probably the hope that, at the stage of rent
review, the position could be negotiated, or further application made to the
court, on the basis that the manner or amount of the judge’s assessment in this
case was wrong. If that is so, it does not seem an appropriate consideration
for this court to take into account. Having decided that the judge did not err
in the way he approached and dealt with the rest of the case, this court should
look at the associated question of whether a rent review should have been
provided for on the merits and in relation to the level of that which the judge
decided was appropriate.
It was well within the judge’s discretion
to come to the decision he did. It made commercial sense. He had heard no
contrary evidence from Mr White on the topic. He was aware that the comparables
which he had seen and accepted covered agreements of substantial periods which
yet had no rent review; also that, in the case of the original agreement in
this case, after the expiry of the six-year period, a further 20-odd years had
elapsed before the landlord took steps to increase the rent.
On an application of this kind it seems
to me that the judge is entitled to take a broad view. The view which he took
was urged upon him by the tenant. It had merit and the judge was entitled to
reach the conclusion that it would be wrong to provide for a rent review clause
on the basis that something might turn up in the future or that some unforeseen
circumstance might arise about which he had heard no evidence, whereby an
increase would be justified sufficient to recover the costly matter of
renegotiation. Accordingly, I do not consider there is anything in this ground
of appeal and I would dismiss the appeal.
Agreeing, BROOKE LJ said: I agree
that this appeal should be dismissed for the reasons given by Potter LJ. I add
a few words of my own only because this is a case in which the judge himself
granted leave to appeal to this court. He said that these were anxious cases
and he could see that there were a number of electricity substations around and
that if there was any doubt about the method of valuation or the burden that
each party bears for proving a particular set of circumstances, this case
warranted the grant of leave to appeal. The judge made it clear that he was
granting leave on the basis that there might be potential for argument about
the law and the way one values these substations.
In my judgment, this appeal raises no new
point of law. It is simply an illustration of the way in which the provisions
of section 34 of the Landlord and Tenant Act 1954 are to be applied in a
particular case. Once the landlord had conceded that the tenant should be
granted a new tenancy for a term of 14 years on the terms of the old lease,
otherwise than as to rent, the judge had no role to fulfil under section 35 of
the Act. All he had to do was determine, in accordance with the provisions of
section 34(1) of the Act, what the rent for the new tenancy with such a
restrictive and specialist user clause should be. It was therefore a typical
county court case in which a judge has to consider the valuation arguments on
each side and determine the appropriate rent on the basis of the evidence he
prefers.
It raised no new question of law and I
cannot help thinking that the cost of this expensive litigation might have been
greatly reduced if the landlord’s advisers had paid more attention to the very
limited nature of the task left to the judge under the statutory scheme once
they had conceded the terms apart from the rent on which the new tenancy was to
be granted.
Appeal dismissed with costs.
