Landlord and tenant — Rent review — Construction — Whether landlord entitled to assume hypothetical improvements — Whether premises are to be assumed as readwy for immediate occupation and use for any purpose and in any condition that the hypothetical tenant would wish them to be in — Appeal by landlord dismissed
dated May 7 1985 the respondent tenant, Iceland Frozen Foods plc, holds a term
of 25 years from January 25 1985 of premises at 441-447 Brixton Road, London
SW9 — The appellant landlord, Starlight Investments Ltd, holds the reversion to
the lease — The premises are divided into two units, one occupied by the tenant
and the second by a subtenant — The lease provided for five-yearly rent reviews
to an open market rent, being the best yearly rack-rent at which the premises
might reasonably be expected to be let as a whole or in parts and assuming, if
not the fact, that the premises remain in existence and are ready for immediate
occupation and use — Improvements carried out by the tenant with landlord’s
consent are to be disregarded — The landlord had two principal contentions as
to the proper construction of the rent review clause — (1) The ground floor may
be regarded as divided or capable of division into seven units and that tenants
may be prepared to pay a higher rent taking the chance of getting consent from
the landlord for the subdivision, paying a continuous rent but on the basis
that the tenant would be carrying out the works of conversion — (2) That it
must be assumed that the premises are ready for occupation and use
for any purpose and in any condition that the hypothetical tenant would wish
them to be in; therefore it is permissible to take into account hypothetical
works to be carried out after the rent review date by the hypothetical tenant
is not possible to charge rent for actual improvements under the rent review
clause; accordingly it would make nonsense of that clause and of the aim that
the rent on review should be fixed so as to bear as close a resemblance to
reality as possible to charge the actual tenant with rent for hypothetical
improvements which have never been carried out — (2) The words ‘ready for
immediate occupation and use’ amplify ‘remain in existence’ to indicate that it
is not enough that the premises remain in existence as, for instance, a gutted
shell
The following
cases are referred to in this report.
Norwich
Union Life Insurance Society v Trustee Savings
Banks Central Board [1986] 1 EGLR 136; (1986) 278 EG 162
Orchid
Lodge (UK) Ltd v Extel Computing Ltd [1991]
2 EGLR 116; [1991] 32 EG 57
Trust
House Forte Albany Hotels Ltd v Daejan
Investments Ltd (1980) 256 EG 915, [1980] 2 EGLR 123
This was an
appeal by the defendant landlord, Starlight Investments Ltd, from an order of
Judge O’Donoghue (sitting as a judge of the High Court) on the hearing of an
originating summons seeking a declaration as to the meaning of the rent review
provisions in a lease dated May 7 1985 of premises at 441-447 Brixton Road,
Brixton, London SW9, the term of which was held by the respondent tenant,
Iceland Frozen Foods plc.
Nicholas
Dowding (instructed by David Gouldman & Co) appeared for the appellant;
David Gilliland QC (instructed by Bullivant & Co, of Liverpool) represented
the respondent.
Giving
judgment, DILLON LJ said: This is an appeal by a defendant landlord,
Starlight Investments Ltd, from an order of Judge O’Donoghue made on December
11 1990 when he was sitting as a judge of the High Court on the hearing of
proceedings commenced by originating summons relating to a rent review clause
under a lease.
The lease is
dated May 7 1985, and it is a lease of premises known as 441-447 Brixton Road,
Brixton, London SW9. The original landlord was a company called Wade’s
Departmental Stores Ltd. The original tenant was a company called Calmgrove
Ltd. The demise was for a term of 25 years from January 25 1985 with rent
reviews every five years. The questions at issue arise out of the first rent
review due at January 25 1990. By then the reversion on the lease had become
vested in the present defendant, Starlight, and the term of the lease had become
vested in the present respondent, Iceland Frozen Foods. The vesting in Iceland
came about by virtue of the landlord’s consent and licence to assign granted on
September 16 1986. The assignment to Iceland was by Calmgrove Ltd, the original
tenant, acting by its liquidators. At the time of the assignment there were
various variations in the terms of some of the covenants in the lease.
At the time of
the lease in 1985 it was expressed to be granted subject to and with the
benefit of the provisions in an underlease, which was a lease of October 12
1966 made in favour of the mayor, aldermen and councillors of Lambeth London
Borough Council. That has expired and need not now be considered. It related to
certain of the floors of the premises (part of the premises only) used as
offices which are now unoccupied and do not give rise to the difficulty on this
appeal.
The present
condition of the premises, which consist of a large Victorian-looking building
at a corner of the road junction between Brixton Road and Electric Avenue, is
that the upper floors of the Victorian building were used as offices, the
ground floor has been built over what were formerly the gardens of the
Victorian building, and save in so far as part of the ground floor is naturally
required for access to the floors above, the ground floor is divided into two
units. One of those units and the basement are occupied by the plaintiff,
Iceland, for use as a frozen-food store. The other part of the ground floor and
the first floor are occupied by Murray’s Meat Markets Ltd. Murray’s use their
part of the ground floor as a butcher’s shop and their part of the first floor
as their offices and relaxation rooms for the staff and so forth.
It appears
that Murray’s came in under a sublease dated September 18 1986, which was the
day of the various licences to assign granted by Calmgrove to Murray’s for 25
years less 10 days from January 25 1985. The particular question that arises on
this appeal is how, on considering the new rents under the rent review, the ground
floor is to be looked at: is it to be looked at as divided only into two units,
viz one occupied by Iceland and one occupied by Murray’s, or is it, as the
landlord’s surveyors suggest, to be regarded as divided or capable of division
into seven units (or any number greater than two), which in the professional
view of the landlord’s surveyors would yield a greater aggregate rent?
One must have
regard to certain of the provisions in the lease as varied by the licence to
assign to Iceland. Under the lease as so varied the lessee has the right to
underlet parts of the premises at rack-rents subject to the landlord’s consent,
which is not to be unreasonably withheld. Furthermore, there is a provision
barring alterations to the premises or the cutting or maiming of main walls,
and so forth, without the landlord’s consent. Also under the licence and deed
of variation of September 16 1986, which gave consent to the assignment to
Iceland, a new user clause is substituted for the user clause in the lease.
This tenant’s covenant (15) provides in subclause (a):
(a) (i) Not to use the whole or any part of the
Premises for any illegal or immoral purpose
(ii) Not to use the whole or any part of the
Premises for any offensive noisy or dangerous trade business or manufacture
(iii) Not without the previous written consent of
the Landlord and (if applicable) the Superior Landlord (such consent on the
part of the Landlord not to be unreasonably withheld or delayed to a change of
use of the ground floor of the Premises to a use which is permitted under Class
I of the Town and Country Planning (Use Classes) Order 1972):
(1) to use or permit that part of the ground
floor of the Premises sub-demised to Murrays Meat Markets Limited to be used
otherwise than as a Butchers Shop; and
(2) to use or permit the remainder of the ground
floor of the Premises to be used otherwise than as a Freezer Centre; and
(3) to use or permit the upper floors of the
Premises to be used otherwise than as offices within the meaning of Class II of
the said Town and Country Planning (Use Classes) Order 1972.
The crucial
parts of the rent review clause are to be found in a schedule to the lease. The
key phrase is the definition of ‘Open Market Rent’, to which I will come. The
basis of the review at each review date is that there should be an assessment
of the open market rent for the relevant review date and that open market rent
would be the rent from the review date. It was expressly provided that,
however, at no time should the rent decrease below the amount of the rent
payable immediately before the relevant review date.
The scheme
again was that there should be a negotiation for agreement on the rent. Failing
agreement it was to be determined by a surveyor, and in the absence of
agreement between landlord and tenant on the appointment of the surveyor the
surveyor was to be appointed by the president for the time being of the Royal
Institution of Chartered Surveyors. In fact in the present case a surveyor has
been appointed, but the submissions to the surveyor so appointed by the parties
as to the basis on which the open market rent should be calculated differ on a
point of law, and the parties have accordingly agreed that it would be
fruitless for the surveyor to proceed with his assessment of the open market
rent until the question has been decided by the court.
I come back,
therefore, to the definition of ‘open market rent’. With a minor and, for
present purposes, immaterial variation introduced by a deed of variation of
September 18 1986; it reads as follows:
‘Open Market
Rent’ means the best yearly rack rent at which the Premises might reasonably be
expected to be let as a whole or in parts
— I stress
those words —
at the
Relevant Review Date by a willing landlord to a willing tenant in the open
market with vacant possession and without premium or any other consideration
for the grant thereof for a term of years equivalent to the period then
unexpired of this Lease but in any event not less than ten years assuming if
not the fact that the Premises remain in existence and are ready for immediate
occupation and use
— I stress
those words also —
and subject
to the due performance and observance of the covenants and conditions on the
part of the Tenant herein contained (but without prejudice to any rights or
remedies of the Landlord in regard thereto) and on a lease which shall
otherwise contain the same terms and provisions in all respects as this Lease
(other than the amount of rent but including the provisions for
out in paragraphs (a) and (b) of Section 34 of the Landlord and
Tenant Act 1954 (ii) any effect on rent of any improvements carried out by the
Tenant during the term with the Landlord’s consent otherwise than in pursuance
of an obligation under this Lease.
It is accepted
that under that form it would be possible, for instance, for the surveyor to
value the premises either as a whole or in parts. The parts could, for
instance, treat as one part the first floor occupied as its offices by Murray’s
Meat Markets and the three upper floors which are vacant offices. Equally, the
ground floor could be one unit or it could be two units. But the landlord says
that if that would produce the best rent it could be, say, seven units. But the
units envisaged in the landlord’s proposal are units self-contained and
separated off. A sketch plan has been put in evidence by the surveyors which
indicates the general layout, but only as a sketch. Some of the units will have
entrance from Electric Avenue, others from Brixton Road, and in effect two or
three units would be created out of the part of the ground floor occupied by Iceland
and four or five out of the part occupied by Murray’s.
As I see it,
however, the first stage in this is that the assessment of the new rent is to
be on the basis of the rental value of the landlord’s premises in their actual
condition for the time being. That is in accordance with a statement of the law
by Fox J in Trust House Forte Albany Hotels Ltd v Daejan Investments
Ltd (1980) 256 EG 915, [1980] 2 EGLR 123. At p 916 Fox J said:
. . . As to
the protection of the landlord against inflation, I accept that such is the
purpose of the clause, but what is it that is being protected against
inflation? In the absence of clear
language to the contrary, I would assume that it is the rental value of the
landlord’s premises in their actual condition for the time being.
. . . You
protect the landlord against inflation by reassessing every seven years the
rent of the actual premises which he owns and not of other premises. I do not
see why the landlord should get the benefit of assumed alterations which the
landlord has not made.
That passage
was approved by this court in Orchid Lodge (UK) Ltd v Extel Computing
Ltd [1991] 32 EG 57, [1991] 2 EGLR 116*. It was cited by Judge O’Donoghue
in the court below in the present case, together with a statement by Hoffmann J
in Norwich Union Life Insurance Society v Trustee Savings Banks
Central Board [1986] 1 EGLR 136 at p 137 where he referred to the
‘presumption that the hypothesis upon which the rent should be fixed upon a
review should bear as close a resemblance to reality as possible’.
*Editor’s
note: Also reported at [1991] 2 EGLR 116.
It
consequently follows — and this I apprehend is accepted in this court by Mr
Dowding for the landlord — that the rent is not to be fixed on the basis that
either the landlord or the hypothetical tenant will, before the review date,
have carried out the works of conversion necessary to subdivide the premises
into the seven self-contained units on the ground floor envisaged in the landlord’s
surveyor’s suggestion.
So, Mr Dowding
says, we must consider that there may be tenants who would be prepared to pay a
higher rent, or between them pay higher rents collectively, for the ground
floor subdivided into seven units if each one takes the chance that he will get
consent from the landlord for the subdivision of the premises and for any
necessary change of use, that he will pay a continuous rent without any
fitting-out period at a lower rent, and will calculate that rent that he is
prepared to pay on the basis that he, the tenant, will be carrying out the
works of conversion which are necessary and will be putting up with an absence
of return from the unit, whether by trading in it or by subletting, until the
works of conversion have been carried out.
But the
difficulty about that, as it were the Charybdis to the Scylla of the works
being deemed executed before the review date, is that if the execution of these
works will produce a higher rental value for the premises or an improved return
from trading in the premises which will warrant paying a higher rent for the
pleasure of converting the premises, the works of conversion will rank as
tenant’s improvements which are to be disregarded under the express terms of
the rent review clause. Mr Dowding says: ‘But these are merely hypothetical
alterations by a hypothetical tenant under a hypothetical lease. Under the rent
review clause you are only required to disregard actual improvements carried
out by the real tenant.’ But it seems to
me to make nonsense of the rent review clause as drawn and of the aim that the
rent on review should be fixed so as to bear as close a resemblance to reality
as possible, if it is not possible to charge rent for actual improvements but
is possible to charge the actual tenant with rent for hypothetical improvements
which have never been carried out.
The further
point taken by Mr Dowding is this. In the rent review clause it is to be
assumed, if not the fact, that the premises remain in existence and are ready
for immediate occupation. Mr Dowding says that the assumption that the premises
remain in existence no doubt relates to the possibility that the premises,
being a building, have been damaged by fire or an explosion and have had to be
demolished, but the words ‘and are ready for immediate occupation and use’ must
refer to something more and therefore are to be taken as indicating an
assumption that the premises are ready for occupation and use for any purpose
and in any condition that the hypothetical tenant would wish them to be in;
therefore, it is permissible to take into account hypothetical works to be
carried out after the rent review date by the hypothetical tenant.
Again, I am
afraid I do not agree. It seems to me that the words ‘and are ready for
immediate occupation and use’ amplify ‘remain in existence’ to indicate that it
is not enough that the premises remain in existence as, for instance, a gutted
shell.
Accordingly,
for these reasons, which are substantially those of the judge, I would dismiss
the appeal. I agree with the judge’s conclusion in his careful judgment.
STOCKER and BUTLER-SLOSS LJJ agreed and did not add anything.
Appeal
dismissed with costs.
