Landlord and tenant — Rent review — Casino premises — Whether assumption that necessary licences have been granted to tenant under hypothetical letting — Meaning of ‘Tenant’
By a lease
dated December 19 1988 the respondents let premises for use as a casino and
licensed restaurant to the appellant tenant for a term of 25 years subject to
provisions for review of the rent. The rent review clause contained an
assumption that the necessary licences had been granted to the Tenant (with a
capital ‘T’). In determining the rent at review, there had to be disregarded
any effect of the fact that ‘the Tenant or its predecessors in title have been
in occupation’ and any goodwill by reason of the business of ‘the Tenant or its
predecessors’. In the court below the judge held that the reference to ‘the
Tenant’ was a reference to the willing tenant to whom the premises may be let
in accordance with the assumption relating to the open market in the rent
review provisions. The tenants appealed.
reference to ‘the Tenant’, in the assumption relating to licences in the rent
review provisions, is a reference only to the actual tenant under the lease.
The following
case is referred to in this report.
British
Gas Corporation v Universities Superannuation
Scheme Ltd [1986] 1 WLR 398; [1986] 1 All ER 978; (1986) 52 P&CR 111;
[1986] 1 EGLR 120; 277 EG 980
This was an
appeal by the tenant, Parkside Clubs (Nottingham) Ltd, from a decision of Judge
Rich QC, sitting as a High Court judge, who decided a preliminary point of law
under section 2 of the Arbitration Act 1979 in rent review arbitration
proceedings with the landlords, Armgrade Ltd.
Paul Morgan QC
(instructed by Wragge & Co, of Birmingham) appeared for the appellant
tenant; Joseph Harper QC (instructed by Evershed Wells & Hind, of
Nottingham) represented the respondent landlords.
Giving
judgment, LEGGATT LJ said: This appeal concerns a narrow point of
construction of a rent review clause. It was raised under section 2 of the
Arbitration Act 1979 as a preliminary point of law in the course of a reference
to arbitration. The clause occurs in the third schedule of a lease dated
December 19 1988 by which the respondents, Armgrade Ltd, as landlords, let to
the appellant, Parkside Clubs (Nottingham) Ltd, as tenant, a casino and
licensed restaurant in Nottingham for a term of 25 years. The relevant review
was to take place on December 19 1993. In default of agreement between the
parties, an arbitrator was appointed to determine market rent in accordance
with the assumptions set out in the third schedule of the lease. It is
axiomatic that the purpose of rent review is, as the Vice-Chancellor said in British
Gas Corporation v Universities Superannuation Scheme Ltd [1986] 1 WLR
398* at p401:
*Editor’s
note: Also reported at [1986] 1 EGLR 120.
There is
really no dispute that the general purpose of a provision for rent review is to
enable the landlord to obtain from time to time the market rental which the
premises would command if let on the same terms on the open market at the
review dates. The purpose is to reflect the changes in the value of money and
real increases in the value of the property during a long term.
In the third
schedule of the present lease, the relevant assumptions are at para 3(A)(i)(a):
… that the Demised Premises:
(a) are
available to let on the open market without a fine or premium with vacant
possession by a willing landlord to a willing tenant for a term of years
equivalent to the then unexpired residue of the term or 15 years whichever is
the longer.
Assumption
(ii) is:
that the
covenants herein contained on the part of the Tenant have been fully performed
and observed.
The fourth
assumption is that no reduction is to be made to take account of any rental
concession which, on a new letting with vacant possession, might be granted to
the incoming tenant for a period within which its fitting-out works would take
place.
Assumption
(v), at the heart of the present dispute, is that the necessary licences had
been granted to the Tenant (with a capital ‘T’). To be disregarded, by force of
para 3(B) are, in particular:
(i) any effect on rent of the fact that the
Tenant or its predecessors in title have been in occupation of the Demised
Premises
(ii) goodwill attached to the Demised Premises by
reason of the carrying on thereat of the business of the Tenant or its
predecessors in title.
To see what,
for purposes of the lease, is the meaning to be attached to the expression ‘the
Tenant’ one turns to the beginning of the lease where the parties are set out.
With reference to the appellants, the second party is described as:
PARKSIDE
CLUBS (NOTTINGHAM) LIMITED …
(hereinafter called ‘the Tenant’
title and permitted assigns of the Tenant and in the case of an individual
shall include his personal representatives).
Two of the
covenants, which by force of assumption (ii) it is assumed were fully
performed, are clause 3(15), which is a covenant:
Not to use or
permit or suffer the Demised Premises to be used for any other purposes than a
casino and licensed restaurant …
and clause
3(38), which is a covenant:
To conduct
the Tenant’s business or cause the same to be conducted in a lawful and orderly
manner and to preserve or cause to be preserved the character of the Demised
Premises with the licensing authorities and the public …
Also to be
noted is subclause (39) which requires the Tenant:
To apply or
cause application to be made at all proper times to the licensing authorities
for the time being and to use all reasonable endeavours to obtain a grant or
renewal of any licences and certificates (‘the necessary licences’) necessary
for the use of the Demised Premises as a casino and licensed restaurant and to
pay all fees and excise duties payable in respect thereof.
To be borne in
mind in relation to this dispute are the provisions of subparas (a) and
(b) of para 20 of the second Schedule to the Gaming Act 1968, which
identify grounds for the refusal of a licence, namely
(a)
that the relevant premises are unsuitable by reason of their lay-out,
character, condition or location;
(b)
that the applicant is not a fit and proper person to be the holder of a licence
under this Act.
The question
asked of the judge which is relevant for present purposes is whether, on the
true construction of the lease dated December 19 1988, and in particular on the
true construction of para 3(A)(v) of the third schedule to the lease, the
reference in the said para 3(A)(v) to ‘the Tenant’ is a reference to the tenant
under the lease, or a reference to the willing tenant to whom the premises may
be let in accordance with the assumption in para 3(A)(i)(a) of the third
schedule to the lease.
Judge Rich QC,
sitting as a judge of the Chancery Division, answered the question by declaring
that the reference is to the willing tenant to whom the premises may be let
(‘the hypothetical tenant’) by contrast with the tenant under the lease (‘the
actual tenant’). For the purpose of answering the question before him, the
judge undertook an elaborate examination, not only of the terms of this lease
but also of earlier authorities, before he came to examine the crucial question
before him which he treated as being: what is the effect of the assumption (v)?
The judge rightly viewed it in its context which immediately precedes the two
‘disregards’ in clause 3(B), which I have read. He then asserted that the
effect of disregarding the occupation and goodwill is to disregard any effect
on rent of the premises having actually been used, but not any effect of their
being acknowledged to be suitable to be used as a casino. It is, I think,
common ground that that is a proper interpretation of those provisions. The
judge added:
That
suitability is established by the fact there is a licence. It is equally
established, however, whether or not there is a specific assumption that it has
at the review date been granted. If the fact is thus to be regarded because it
is a fact, then there is no need to spell it out as an assumption.
No doubt that
proposition is correct if it is a fact that there is a licence, but it has to
be borne in mind that it might not be the fact. The judge then referred to the
submission that in assumption (v) the words are not to be construed as merely
otiose, which it had been submitted they would be were the construction
supported by the present appellants to be adopted. The judge contemplated:
But if, for
example, the licensing justices decided to refuse to renew under the ground
provided in para 21(1)(a) of the schedule of insufficiency of demand, it would
still be assumed for the purposes of assessing rent that they had been
satisfied as to the demand.
From what he
said thereafter, it seems plain that he was concerned with a possible
unfairness to the tenant were such an assumption to be made in the
circumstances that he had postulated. It seems to me, however, that even it
would be possible to discern potential unfairness to a tenant in those
circumstances, it is a consequence which applies whether in assumption (v)
‘Tenant’ is to be construed as meaning that which the capital T requires,
namely the actual tenant, or is, on the other hand, in accordance with the
respondents’ argument, to be construed as extending to a hypothetical tenant.
The judge
said:
… the construction that the hypothetical tenant
is to be assumed at the review date to have a licence does give meaning to the
subparagraph because it involves assuming what would not otherwise be … the basis of assessment of rent.
Upon that
ground, he came to the conclusion which he expressed in this way:
… I find myself compelled to the conclusion
that the only reasonable construction of the subparagraph is that the tenant in
this case includes any hypothetical willing tenant. Accordingly, in spite of
the powerful indications of the use of the capital letter in this otherwise
apparently carefully drafted lease, I must, and do, answer question one — that
is the question which I have read — as contended for by the defendant, the
landlord.
Mr Joseph
Harper QC, for the respondent landlords, seeks in this court to support the
judge’s conclusion by asserting that, although these premises were let and
operated as a casino, it would be the effect of the construction of assumption
(v) for which the appellants contend, that upon a review they would not be
valued as a casino, but only as a potential casino. He acknowledges that in a
proper case absurdity may override clarity and, indeed, that is an assertion
which he is bound to make for that is the effect of the judge’s judgment.
The
propositions upon which Mr Harper founds are that:
(1) prima
facie the starting point in approaching a rent review clause is that the
landlord should be enabled to increase the rent to take account of such
increase in the value of money or of property as may have occurred (that is
uncontroversial); and
(2) there is a
presumption that, unless a clause dictates a construction contrary to reality,
the court will assume reality as the basis of valuation.
Accordingly,
he submits that there is no point in putting a clause into a lease which simply
records reality. To that, in the present context, it must be said that,
although assumption (v) may be expected to accord with reality at each
successive review date, it is easy to contemplate circumstances in which it
might not.
The
respondents’ primary submission is that the appellants’ case leads to the
hypothesis being otiose because it simply records reality. Mr Harper contends
that that is why the judge was driven to conclude that the clause had to be
read in a different way and so chose the only other construction contended for,
namely that it related to a hypothetical tenant.
Mr Harper
points out that the judge adopted a proper test when he said:
If the
reasonable construction of assumption (v) in the lease which I have to construe
requires me to include in the definition of ‘tenant’ any hypothetical willing
tenant, then I think I should so construe it, although having regard to the
context of the different word used in subpara (A)(iv) and the meaning of the
same word in para (B), I should do so only if a reasonable construction
actually requires it.
Mr Harper
contends that the purpose of the rent review was to arrive at what he calls a
casino rent, with the result that if it is not assumed that a casino is being
or can immediately be conducted at the premises, uncertainty is introduced.
Here the premises were let as a casino and so, he submits, there was no need
for an assumption to that effect because the tenant operated a licence to run a
casino.
In a
commendably brief yet effective reply, Mr Paul Morgan QC, for the appellant,
submitted that the position at the commencement of
submission that the tenant’s construction would make otiose assumption (v), is
that the licence might not exist, in which event the purpose of assumption (v)
would be plain. It is legitimate to suppose that assumption (v), though it
catered for a contingency which might be regarded as relatively remote, was
inserted for the avoidance of doubt. That concept has an ironical ring about it
in present circumstances, since it is by reference to construction of that
brief assumption that the intricate legal arguments have been erected in the
present case.
The fact that
the likelihood of the assumption being required is remote, should not result in
the court preferring an assumption which would have the effect that anyone
would be assumed to be licensed to run a casino who cared, at a review date, to
bid to become the tenant.
Mr Morgan’s
third point, to which I have already adverted, is that when the judge made
reference to unfairness, he was not, as Mr Harper at one time appeared to be
contending, referring to unfairness to the landlords, but to unfairness to the
tenants.
It seems to me
that this is not only a narrow point of construction, but essentially a simple
one. The lease stipulates at the outset that the appellants are to be called
the ‘Tenant’ and that the expression shall, where appropriate, include
successors in title and assigns. For my part, I cannot see how, in default of
rectification, the term can then be construed as meaning something else, at any
rate unless in context it would be absurd to treat it as referring to the
actual tenant. Throughout the lease the expression ‘the Tenant’ is used consistently
to refer to the actual tenant. In order to ensure that the benefits that had
flowed from occupation by the actual tenant and from goodwill acquired by him
are not taken into account when assessing the market rent, the assumption in
clause 3(A)(i)(a) refers to ‘a willing tenant’ and when discounting any
concessionary rent during the fitting-out period, clause 3(A)(iv) uses the
expression ‘the incoming tenant’. Yet assumption (v) uses the expression ‘the
Tenant’ as the holder of the necessary licences, a reflection of what is
intended to have occurred.
That clause is
immediately followed by clause 3(B) containing matters to be disregarded in
assessing the market rent, including the effect of rent on the actual tenant’s
occupation and of any goodwill engendered by it. In each of those cases the
draftsman adds after the words ‘the Tenant’, the words ‘or its predecessors in
title’ because the expression ‘the Tenant’ includes only successors in title.
It has not
been demonstrated that it makes a very great difference in practice whether the
licences are assumed to be held by the actual tenant or by the hypothetical
tenant, although no doubt some allowance would have to be made to reflect a
lack of certainty that a hypothetical tenant would be successful in obtaining a
licence. In practice that might be expected to depend on the would-be tenant
demonstrating that he was a fit and proper person to hold the licence. Mr
Harper says that the parties are unlikely to have intended that anything should
be assumed to be let on the open market to a hypothetical tenant ignoring the
actual tenant’s occupation and goodwill, but on the other hand, to have
intended that licences should be assumed to have been granted to the actual
tenant. I do not find it strange at all. It merely achieves the result that,
although the use of the club is disregarded so as not to penalise the tenant
for success, the suitability of the premises is something of which the landlord
is obviously entitled to have the benefit. The assumption is intended to
correspond with what, as is common ground, the position was at the outset and
as it was intended to remain. The tenant is supposed to have used all
reasonable endeavours to obtain the grant or renewal of the necessary licences.
Assumption (v) ensures that he is treated as having done what he covenanted to
do.
I am quite
unable to see why the rent should be assessed on the assumption that the
incoming tenant has been granted the necessary licences. There is an obvious
need to assume that the premises are worthy of a licence, but there is no need
to assume that any hypothetical tenant would necessarily gain acceptance as a
fit and proper person to hold a licence. If the premises had in fact been relet
at the review date, the assumption that the actual tenant held the necessary
licences would be exactly what would be expected to have happened.
The judge
avowedly sought a reasonable construction of assumption (v), but even if his
construction could be considered more reasonable than the meaning which, on the
face of the lease, it bears, that would not suffice to override the ordinary
meaning so as to require the construction adopted by the judge.
In my
judgment, no need arises here, nor has counsel contended that it does, for a
detailed analysis of the authorities or for a syntactical dissection of the
lease in question.
For the
reasons I have briefly given, I would allow the appeal and answer the question
posed by saying that, on the true construction of para 3(A)(v) of the third
schedule to the lease, the reference in that paragraph to ‘the Tenant’ is a
reference only to the actual tenant under the lease.
ROSE AND
SAVILLE LJJ agreed and did not add anything.
Appeal
allowed with costs.
