Rent review clause in lease of premises to the Secretary of State–Appeal from a decision of Phillips J–Question of law raised in award by arbitrator in the form of a special case under section 21(1)(b) of the Arbitration Act 1950–Rent from review date to be the ‘rack rental market value,’ being the best rent at which the demised premises might reasonably be expected to be let in the open market for a term not exceeding 5 1/2 years–Question as to whether account had to be taken of the possibility of the tenancy being continued or renewed under Part II of the Landlord and Tenant Act 1954–Held, dismissing the appeal, that the lease must have envisaged that the commonly accepted methods of valuation would be applied in assessing the ‘rack rental market value’–Valuers would take account of the effects of the rights given to tenants by Part II of the Act (rights, strictly speaking, to the grant of new tenancies, not, save in limited circumstances, to continuation or renewal)–This was not to assess the rent for a term longer than 5 1/2 years, but to assess it for a term of 5 1/2 years with the potentialities provided by the Act–Hence the rent should be the higher of the two rents mentioned in the arbitrator’s award, in accordance with the judgment of Phillips J
This was an
appeal by the Secretary of State for the Environment from the decision of
Phillips J, reported at (1980) 253 EG 373, [1980] 1 EGLR 83, on the point
raised in the special case stated by the arbitrator in an arbitration between
Pivot Properties Ltd and the Secretary of State.
The dispute
related to the construction of the rent review clause in an underlease between
Pivot Properties Ltd as lessors and the Secretary of State as lessee of Lunar
House and Apollo House in Croydon. The facts and figures are given in the
judgment of Lawton LJ.
M A B
Burke-Gaffney QC and J Grove (instructed by the Treasury Solicitor) appeared on
behalf of the appellant; J S Colyer QC, G W Seward and K M J Lewison
(instructed by Goodman, Derrick & Co) represented the respondents.
Giving the
judgment of the court, LAWTON LJ said: This is an appeal from an order of
Phillips J, made on July 31 1979, whereby having answered an arbitrator’s
question of law relating to the construction of a rent review clause in an
underlease dated August 4 1971, he adjudged that it should be construed in the
way for which the respondents, Pivot Properties Ltd, had contended, and that
the rent reserved by the underlease for the period June 24 1978 to June 23 1985
should be at the annual rate of £2,925,000.
By the
underlease under consideration in this appeal Pivot Properties Ltd demised to
the Secretary of State for the Environment for a term of 42 years from August 5
1971 two very large buildings in Croydon to be used by him for offices. The
rent for the first year was to be £785,000 and thereafter during the remainder
of the term £1,570,000 per annum, subject to review. By clause 7(1) the lessors
had the right to call for a review of the yearly rent on each of a number of
dates, the first of which was June 24 1978. In the underlease as typed the
intervals between the review dates were to be five and a half years, but as
executed the intervals were irregular. Provision was made for the lessors to
give notice requiring a review. Clause 7(3) provided as follows:
If and so
often as the Lessors shall give to the Lessee such notice as aforesaid then
from and after a review date this Lease shall be read and construed and shall
take effect in all respects as if the yearly rent for the time being payable
hereunder had from such review date been the rack rental market value (as
hereinafter defined) of the demised premises but without prejudice to any of
the other terms and conditions contained in this Lease and so that in no event
shall the rent payable by the Lessee to the Lessors after a review date be less
than the rent payable by the Lessee to the Lessors immediately before a review
date.
Clause 7(4),
which is the important one for the purposes of this appeal, was in these terms:
For the
purpose of this clause the rack rental market value of the demised premises at
any review date shall (subject as hereinafter provided) be the amount which
shall be agreed between the Lessors and the Lessee (or in default of agreement
be determined by arbitration as hereinafter provided) to be the best rent at
which the demised premises might reasonably be expected to be let in the open
market as a whole for a term not exceeding five years and one half of another
year and subject to similar covenants and conditions (other than the amount of
the rent and the provisions of this present clause for reviewing the rent) to
those contained in this Lease there being disregarded. . . .
There were
three specific matters which are not directly relevant for the purposes of this
appeal.
In 1978 the
lessors gave a valid written notice asking for a review. Both parties retained
valuers to advise them as to what was then the rack rental market value. They
could not agree what it was. Arbitration followed. The arbitrator made his
award in the form of a special case, the parties having
Whether upon
the true construction of the underlease made on August 4 1971 the rack rental
market value of the premises (which is to be assessed on the assumption that
they are to be let as a whole for a term of 5 1/2 years) is also to be assessed
upon the assumption that no account is to be taken of any possibility of the
tenancy being continued or renewed under the provisions of Part II of the
Landlord and Tenant Act 1954.
The arbitrator
made alternative awards: if this question was to be answered in the affirmative
the yearly rent for the period June 24 1978 to June 23 1985 was to be
£2,100,000; if in the negative, it was to be £2,925,000.
Phillips J
answered the question in the negative. The Secretary of State as lessee
appealed to this court and, through counsel, has submitted that an affirmative
answer should have been given.
The
submissions of counsel on both sides ranged widely. A number of authorities
were referred to, most of which had little relevance to the construction of the
relevant clauses of the underlease. The court’s task has been to find out what
the parties to the underlease intended when they executed it on August 4 1971.
This has to be done by considering the words they used, regard being had to the
purpose of the underlease and the circumstances in which it was made.
When making
the underlease both parties must have envisaged that, at the review dates, they
would have to retain the services of professional valuers who would be likely
to apply, when assessing the rack rental market value of the demised premises,
such methods of valuation as were from time to time commonly accepted by
valuers. Counsel for the lessee accepted that one method of valuation applied
in 1978 was to take into account the rents of comparable properties, if there
were any–and in this case there were none directly comparable. Another method
was to assess the general level of rents for properties used for similar
purposes in the neighbourhood. He conceded before Phillips J, and again before
us, that in 1978 valuers could be expected to take into account in the ordinary
way of their work, when assessing what rents should be paid, the effect upon
demised premises of any relevant legislation. In 1978 valuers would have taken
into account the effect upon the rents of demised premises occupied for
business purposes of the rights given to tenants by Part II of the Landlord and
Tenant Act 1954. These rights included, subject to such rights as the Act gives
to landlords, the grant of a new tenancy comprising the property, or part of
it, in the tenancy which has come to an end: see sections 29 and 30. The
question asked by the arbitrator (which was drafted by counsel) is not
accurately worded. The 1954 Act does not continue, save in limited
circumstances, or renew tenancies: it provides for the grant of new tenancies.
Counsel’s concession was stated by Phillips J in these terms:
There is no
doubt that the existence of the Act of 1954 has an effect on the level of rents
of business premises. Thus, assuming business premises to be offered for a term
of five years, a bidder in the market, bearing in mind the possibilities of a
continuation or renewal of the tenancy, will tend to offer more than he would
do if the Act did not exist and there was no such possibility.
Mr
Burke-Gaffney (the lessee’s counsel) agreed that this is so.
It is against
a background provided by these considerations that clauses 7(3) and (4) of the
underlease have to be construed. Clause 7 itself must have been inserted to
provide the lessors with some protection against inflation. The rent would have
to be assessed at the specified intervals. Clause 7(4) set out how the
reassessment was to be done. The parties were to envisage the demised premises
(that is the buildings which were being occupied for business purposes) being
put on the market as a whole for a term not exceeding five and a half years and
then to decide what was the best rent at which such buildings could be expected
to be let. A bidder would be likely to have in mind the possibility that a new
tenancy might be granted under the Landlord and Tenant Act 1954 at the end of
the term and increase his bid to take account of this possibility. Counsel for
the lessee agreed that this was the ordinary way in which valuers worked. The
rent the bidder would offer to pay was a rent for a term not exceeding five and
a half years, not a rent for that term plus a further term which might be
granted under the Landlord and Tenant Act 1954.
This was the
way in which Phillips J dealt with the construction. He said:
. . . to take
account of the possibilities under the Act of 1954 is not to assess the rent
for a term longer than five and a half years, as Mr Burke-Gaffney contended,
but to assess the rent for a term of five and a half years, one of the
potentialities of which is that it may be continued or renewed.
In our
judgment this was the right construction. It disposes of this appeal. A
negative answer to the question asked by the arbitrator is the result of
applying the method of assessment set out in clause 7(4) of the underlease.
This method may be difficult to apply. Mr Burke-Gaffney submitted that, if this
method were used, the parties’ valuers would be given such a difficult task
because of the speculative elements necessarily involved in assessing
possibilities that clause 7(4) should not be construed according to the literal
meaning of the words used. The reasoning behind this submission was that the
parties could not have intended to commit themselves to make or receive
payments which had been fixed by guesswork. We do not agree. The valuers
produced figures. The arbitrator accepted those of the lessee’s valuer and
marked down those of the lessors. The task was done; which is the best answer
to the submission that it was too difficult to do.
We dismiss the
appeal and affirm Phillips J’s order.
The appeal
was dismissed with costs. Leave to appeal to the House of Lords was refused.