Fag-end of lease of old-fashioned warehouse sublet by mesne landlords at marked loss in rent — Valuation officer concedes that the transaction was arm’s-length and yielded market rent in circumstances, but not that the circumstances were those of the hypothetical rating tenancy — Subletting held best evidence of hypothetical rent, evidence which in the light of the valuation officer’s concession could not be rejected in favour of comparables — Length of term left immaterial having regard to impact of Landlord and Tenant Act 1954 — No other relevant distinction between hypothetical tenancy and terms actually negotiated — Ratepayers’ appeal allowed
This was an
appeal by Baker Britt & Co Ltd, of London EC3, from a decision of the Lands
Tribunal dated June 4 1974 rejecting a proposal for a reduction in the gross
and rateable values, respectively £11,000 and £9,138, entered in the valuation
list in respect of multi-storey warehouse premises at Fawe Street, Poplar,
London E14.
Mr N Hague
(instructed by Stephenson, Harwood & Tatham) appeared for the appellants,
and Mr A Fletcher (instructed by the Solicitor of Inland Revenue) represented
the respondent valuation officer.
Giving
judgment, BUCKLEY LJ said: This is an appeal from the Lands Tribunal relating
to the rateable value of a multi-storey warehouse in Poplar which was erected
some 70 years ago. It is common ground that the building is now substantial and
in good repair for its age. It was entered in the 1963 rating valuation list at
£12,000 gross value, but in 1966, by agreement, the valuation was reduced to
£11,000 gross, resulting in a rateable value of £9,138. On November 30 1971 the
appellants, who were then the occupiers of the property under a sublease which
I will mention presently, made a proposal for a reduced assessment; a local
valuation court rejected that proposal; the appellants appealed to the Lands
Tribunal, and so the decision from which the present appeal is brought came to
be made.
On July 12
1966 the head landlords granted a lease of the hereditament in question to a
company called Ekco Ensign Electric Ltd, which is a company in the Thorn Group
of companies. The lease was for a term of seven years from June 12 1966, and so
was due to come to an end by effluxion of time on June 12 1973. The rent
reserved by the head lease was £17,500 per annum. The tenant’s covenants
included a covenant to do external decorations in the third year and in the
last year of the term, a covenant to do internal decorations in the sixth year,
and a full repairing covenant subject to the provisions of subclause (7) of
clause 2 of the lease. That subclause contained the ordinary undertaking to
yield up at the end of the term in a proper state of repair and decoration, but
contained this proviso: ‘Provided nevertheless and without prejudice to the
generality of the foregoing covenants that the covenants herein contained for
the repair and decoration of the demised premises shall not render the tenant
liable to keep or deliver up the demised premises or any part thereof at the
end or sooner determination of the term hereby granted in a better state of
repair or condition than the same are in on the date hereof in accordance with
the schedule of condition attached hereto save in so far as the proper
observance by the tenant of its obligations under subclauses (4) and (5)’–those
were the two covenants relating to decorations–‘of this clause may have the
effect of putting the demised premises or yielding them up in a better state of
repair or condition than the same are in at the date hereof.’ As I understand it, the result of that is
that the repairing covenant was subject to a qualification relating to the
schedule of condition, but the decorating covenants were not. The lease also
contained a covenant restricting the user of the warehouse to certain purposes
that were specified, a covenant not to assign or underlet without consent, and
a provision that every assignment or underlease should contain a covenant by
the assignee or underlessee directly with the landlord to observe and perform
the tenant’s covenants contained in the lease. I do not think there is any
further provision that I need refer to in the head lease.
At some time
the term granted by the head lease became vested in a company called Ekco
Lighting Ltd. It is not clear whether that is the original lessee, Ekco Ensign
Electric Ltd having changed its name, or whether it is another company in the
same group, but nothing, I think, turns upon that. In the summer of 1970 the
tenant, having no further use for the warehouse, wished to sublet it, and
efforts were made to sublet it at the rent of £17,500 per annum reserved by the
head lease. But those efforts were unsuccessful, and on two occasions in
October 1970, and two further occasions in February 1971, the warehouse was
advertised for subletting at the very much reduced rent of £6,000 per annum. On
March 15 1971 the appellant company, Baker Britt & Co Ltd, made an offer to
rent the property at £6,000 a year provided that they were relieved of all repairing
liabilities. By a letter of March 18 an offer on those lines was put forward
subject to formal contract, the rent to be £6,000 per annum and the subtenant
to pay a further rent of £3,000 per annum in consideration of being relieved of
the liability to repair; that is to say, the total aggregate rent to be £9,000
per annum. That offer was accepted, and in due course was implemented by some
complicated documents to which I will have to refer. In the first place, a
licence was obtained from the head lessor in March 1972 which authorised the
appellant company to use the warehouse for the purposes for which they were
intending to use them, that is to say, there was a relaxation of the
restrictive covenant as to user contained in the head lease. The licence contained
a covenant on the part of the appellant company with the head landlord that the
appellant company would observe and perform the tenant’s covenants and
conditions contained in the head lease.
That licence,
of course, licensed the underlease. The underlease was dated October 18 1972,
and it was an underlease for a term from July 1 1971 to June 9 1973. The
appellant company had, it appears, gone into occupation of the warehouse on
July 1 1971. Why it took so long to produce these formal documents it is difficult
to understand, but that does not matter. The rent reserved by the underlease
was to be £9,000 per annum for the period July 1 1971 to March 24 1973, and
£17,500 per annum from March 25 1973 to June 9 1973, and the rent for that
broken period from March 25 1973 to June 9 1973 at the rate of £17,500 per
annum would amount to a sum of £3,691.76. That is of some significance when I
come to deal with the next document. The underlease contained a covenant by the
subtenant in clause 2 (4): ‘Not to commit any damage to the demised premises
and to keep the same in no worse state of repair and condition than at the date
hereof damage by any of the risks covered by the landlord’s insurance policy
pursuant to clause 3 (3) hereof excepted.’
It contained a covenant on the part of the mesne landlord in clause 3
(2): ‘At all times hereafter to pay the rent reserved by and to perform and
observe the covenants and conditions on the lessee’s part contained in the
lease’–that is the head lease–and to indemnify the subtenant against all claims
in respect of those matters. The mesne landlord also covenanted by clause 3
(3): ‘To insure and keep insured the demised premises in accordance with the
lessee’s covenants in that behalf contained in the head lease.’ The appellant company agreed to reimburse the
mesne landlords for the premium payable in respect of that insurance.
Upon the same
day as the underlease was executed, October 18 1972, the mesne landlord and the
appellant company entered into a deed of covenant whereby the mesne landlord
covenanted with the appellant company that upon the appellant company paying
the £3,691.76, the rent for the last broken period of the sublease, the mesne
landlord would repay to the appellant company the sum of £1,793.50, being the
difference between the rent payable for such period at the rates of £9,000 and
£17,500 per annum. So although under the underlease the rent for the broken
period was reserved at the rate of £17,500, in effect the subtenants were only
going to pay at the rate of £9,000 per annum for that period. Quite what the
object of that manoeuvre was has not been investigated in the course of this
case, and I do not think it matters, but it is a complicated sort of
arrangement to achieve what appears to be a simple result. The deed of covenant
also contained a covenant on the part of the mesne landlords ‘To repay to the
tenant the total cost incurred by the tenant in carrying out the complete
internal redecoration to the premises during the last year of the term. . . .’ That covenant does not, it will be observed,
cover the cost of the external decorations, and it is not entirely clear to me
precisely what the position of the two parties, the mesne landlords and the
subtenants, was with regard to the obligation to repair the property and to do
the external decorations. It will be remembered that the mesne landlords had
covenanted that they would observe all the covenants in the head lease and keep
the subtenants indemnified; on the other hand, the subtenants had covenanted that
they would keep the property in as good a state of repair as it was in at the
date when the sublease was granted. The matter seems to have proceeded upon the
basis that the subtenants did assume some measure of liability for repairs,
although precisely what that measure was might be a matter for argument. At any
rate, as I say, the subtenants undertook to reimburse the mesne landlords for
the premium on the insurance.
The appellant
company went into occupation of the warehouse on or about July 1 1971, and
remained in occupation thereafter, and as I have already said, they made the
proposal for the reduction in the assessment. The question at what the property
should be valued for rating purposes depends on the provisions of section 19 of
the General Rate Act 1967, under which, it will be remembered, the net annual
value for rating purposes of any hereditament is to be discovered by making a
statutory deduction under subsection (2) of that section from the gross annual
value; and the gross annual value is defined in subsection (6) as meaning, ‘The
rent at which the hereditament might reasonably be expected to let from year to
year if the tenant undertook to pay all usual tenant’s rates and taxes and the
landlord undertook to bear the cost of the repairs and insurance and the other
expenses, if any, necessary to maintain the hereditament in a state to command
that rent’. Mr Botting, the appellant company’s professional valuer attributed
the very marked fall in the rent obtainable for this warehouse to changes in
the methods of transporting and handling goods, and in his evidence he said
that he had assumed throughout that the rent paid for the warehouse was the
very best evidence of its value. He accordingly had made no valuation of his
own, and he had not investigated any comparables. On the other hand, the
respondent in these proceedings, Mr Hampsher, who is the valuation officer, had
made a valuation and had investigated the position of comparable warehouses in
this neighbourhood. A table of suggested comparables is set out at page 6 of
the case, and demonstrates that rentals for this type of property seem to have
been rising from 1965 to 1970, and that the rent per square foot disclosed by
the comparables is a great deal higher than the square foot rental derived from
applying a rental of £9,000 per annum to the particular hereditament with which
we are concerned. The comparables range from £0.279 per square foot to £0.512
per square foot, and the square-foot rent represented by £9,000 per annum on
this particular property works out at only about £0.158 per square foot, so
that there is a very marked discrepancy.
Mr Hampsher
dealt with the matter in this way — and I now read from the case stated: ‘This
analysis, Mr Hampsher said, showed an increase in rental values during the
period 1965 to 1970. This trend was in accord with his experience that in east
London there is still an adequate demand to support the occupation of the
existing older warehouses. Against this analysis was the lower rent of the
appeal property fixed in 1971 at £0.158 per sq ft; he had concluded there was
something exceptional in this letting at such a low rent. The head lease had
but two years unexpired at a rent of £17,500 per annum; this was an
unattractive term to endeavour to sublet, and it seemed to him that the head
lessees had been prepared to cut their losses for the short period. In
cross-examination Mr Hampsher accepted that the letting to the appellants was
an arm’s-length transaction; he accepted that the rent was a market rent and
the best rent in the particular circumstances in which it was negotiated; but
it was his view that the circumstances were different from those in which the
rating hypothetical tenancy was deemed to be negotiated.’ The Lands Tribunal’s conclusion was expressed
in these terms at the end of the case: ‘The 1971 rent is out of line with the
comparable rental evidence; the fact that it is the actual rent payable does
not lead inevitably to the conclusion that it is the rent reasonably to be
expected to be paid in accordance with section 19 (6). Having regard to the
whole of the evidence I attach the greater weight to the evidence of the rents
of the comparables; on this evidence I find that the reasonably expected rent
of the appeal hereditament at the relevant date in accordance with section 19
of the 1967 Act exceeds £11,000 gross value, the ceiling assessment under the
provisions of section 20 and the assessment appearing in the valuation list
prior to 1973. The appeal is accordingly dismissed.’
The authorities,
in my judgment, make it clear that even where the particular hereditament under
consideration has been let at a rack rent, other evidence bearing upon the
value
contemplated by section 19 is admissible. That applies not only to evidence in
the form of comparisons with comparables, but also the application of other
methods of valuation. All relevant evidence is admissible. That is, I think,
supported by the decision of this court in R v Paddington Valuation
Officer [1966] 1 QB 380 and Garton v Hunter [1969] 2 QB 37,
and in particular by what was there said by Lord Denning MR at page 44. So in
the present case I feel no doubt that the evidence of comparables was fully
admissible, and, had Mr Hampsher made no such admission as he did, the weight
to be given to the evidence as to comparables would, I think, have been a
matter exclusively for the Lands Tribunal as the sole judge of fact. The
tribunal might well have thought that the comparables indicated that the
negotiated rent of £9,000 per annum was not a fair or representative indication
of the rent which would be agreed upon in hypothetical negotiations such as are
contemplated by the section, and in such circumstances the conclusion of the
Lands Tribunal would, I think, be unassailable. But Mr Hampsher did make the
concession, or accepted the situation, in the way in which he did in the
passage which I have read from the case. He accepted that the agreement at
£9,000 per annum was an ‘arm’s-length transaction’; that that rent was the
market rent for the hereditament, and that it was the best rent in the
particular circumstances in which it was negotiated. If the sublease was
negotiated in the circumstances in which the hypothetical tenancy under section
19 should be deemed to be negotiated, this would, I think, be the end of the
case. But Mr Hampsher expressed a contrary view, and it seems to me that the
member of the Lands Tribunal who determined this case must have accepted that
as justified. Mr Hague, however, has submitted to us that such a distinction is
not justified, and if Mr Hague’s submission is right, it seems to me that the
Lands Tribunal must have erred in law.
The definition
of ‘gross value’ in section 19 (6) requires one to discover what is the rent at
which the hereditament ‘might reasonably be expected to let from year to year’
upon the hypothesis contained in that definition. This does not mean that the
hypothetical tenant is to be treated as likely to remain a tenant only for a
period of one year. He must be regarded as a tenant who has at least a
reasonable expectancy of continued occupation having regard to the
circumstances of the case. That, I think, appears from the decision in Humber
Ltd v Jones and Rugby RDC (1960) 6 RRC 161, and particularly the
passages at pages 166 and 168. It is true that the mesne landlords had only the
fag-end of a lease to sublet, and that seems to have been a matter which
weighed with Mr Hampsher, for he refers to it in the passage which I have read
as ‘an unattractive term to endeavour to sublet.’ But the subtenants would have had the
protection of the Landlord and Tenant Act 1954, Part II, and they would have
negotiated in the knowledge that if their tenancy were terminated at any time
after the contractual term ran out they would be entitled to a new tenancy at
the market rate; and Mr Hague submits that their position as regards security
of tenure would have been at least as good as, if not better than, that of the
hypothetical tenant from year to year contemplated by section 19. This seems to
me to be so. There can in my opinion be no ground for any suggestion that the
mesne landlords were letting at less than the rent they could have obtained by
keener bargaining. They had, after all, been trying to let the hereditament
since May 1970, and had advertised it extensively. There seems to be no reason
to suppose that they were asking for less rent than they thought they could
reasonably expect to get. I cannot, therefore, see any good ground for saying
that the particular circumstances in which the sublease was negotiated did
differ in any significant way from the circumstances in which any hypothetical
willing landlord of this warehouse would have negotiated with any hypothetical
willing tenant. Accordingly, it appears to me that by accepting as he did that
the rent of £9,000 was a market rent, and the best rent available in the
circumstances in which it was negotiated, Mr Hampsher conceded that it was such
a rent as would have been negotiated in the conditions in which the statutory
hypothetical negotiation should be supposed to take place for the purposes of
section 19 (6). It is consequently not open to him to say that the alleged
comparables demonstrate that some higher rent would have been negotiated in the
same supposed circumstances. Mr Hampsher’s admission in my opinion made it
impermissible for the Lands Tribunal to rely on the comparables in the manner
in which the member did rely on them. The manner in which they were sought to
be used was, I think, irreconcilable with the admission, and in the light of
this I think that the Lands Tribunal’s conclusion was one which could not
reasonably be reached in the light of the evidence, having regard to the
admission.
There remains
only the question as to whether the Lands Tribunal was right in thinking that 5
per cent should be added to the negotiated rent in view of the fact that the
subtenants assumed a measure of responsibility for repairs, or may have assumed
a measure of responsibility for repairs, and that the subtenants agreed as part
of the negotiations to pay the premium on the insurance policy. Under section
19 (6) the gross value is to be ascertained on the basis of the landlord being
responsible for all repairs. Accordingly, since the £9,000 per annum rent was
negotiated upon the basis that I have mentioned, it requires some adjustment.
The amount of the adjustment is, I think, essentially a question of valuation,
that is to say, a question of fact and not of law, and in my judgment we cannot
interfere with the decision of the Lands Tribunal in this respect; in any case,
I see no reason to do so. Accordingly, in my judgment, this appeal succeeds,
and the hereditament should be valued upon a gross value of £9,450.
STEPHENSON LJ:
In dismissing the appellants’ appeal the Lands Tribunal, ‘having regard to the
whole of the evidence,’ attached greater weight to the evidence of the rents of
the comparables than to the actual rent payable by the appellants. If the
tribunal was entitled to take both into account and to weigh the one against
the other, it would be for the tribunal, not for this court, to assess their
respective weights, to decide which outweighed the other, and to draw the right
valuation from the whole of the evidence. On the authorities, particularly Garton
v Hunter, to which my Lord has referred, the tribunal would ordinarily
be not merely entitled but bound, contrary to the opinion upon which the
appellants’ surveyor based his evidence, to weigh the one against the other,
and this court would not be entitled to set aside the tribunal’s conclusion
unless on the evidence no reasonable tribunal could have come to that
conclusion.
That is, in my
judgment, the only ground, the only error of law, on which this appeal can
succeed, and I agree that it does, for the reasons given by my Lord. The
respondent valuation officer has put himself in an insuperable difficulty by
accepting that the letting to the appellants was an ‘arm’s-length transaction,’
and that the rent was the market rent and the best rent in the particular
circumstances in which it was negotiated. He went on to assert that the
circumstances were different from those in which the rating hypothetical
tenancy was deemed to be negotiated, without stating what the difference was;
but Mr Fletcher has not been able to suggest that the tribunal mis-stated the
respondent’s concession, or that there was relevant evidence which is not set
out in the decision or the case, or that the particular differentiating
circumstances were anything but the ‘unattractive’ two years’ terms of the
appellants’ underlease, which the local valuation court also seems to have
regarded as decisive against the appellants’ suggested valuation. That,
however, could properly be considered a circumstance differentiating
the underlease from the hypothetical year-to-year tenancy only if it is
considered in unnatural isolation from the appellants’ opportunity to operate
Part II of the Landlord and Tenant Act 1954, which Mr Hague rightly submitted
went with it. Any reasonable tribunal would, as I see the matter, have to take
that opportunity into account, and taking it would inevitably have concluded
that the actual rent payable was the rent reasonably expected to be paid in
accordance with section 19 (6) of the General Rate Act 1967.
On the
subsidiary point, I agree with my Lord and have nothing to add. I have
considered whether it would be fairer to the tribunal and to the respondent to
remit the case to the tribunal for elucidation of the decision under appeal,
but I have come to the opinion that the appellants are entitled to have their
appeal allowed, with the consequences stated by my Lord.
SIR JOHN
PENNYCUICK: I agree that this appeal should be allowed, and I will only add a
few words in deference to the careful decision of the member of the Lands
Tribunal. There is no doubt that in determining the rent under the hypothetical
tenancy pursuant to section 19 of the General Rate Act 1967 all relevant
circumstances must be taken into account, including not only the actual rent,
but comparables and any other matters. In the present case the member, as I see
it, took a correct view of the principle to be applied. It seems to me,
however, that in his application of that principle he failed to give proper
weight to the concession made in cross-examination by the valuation officer. It
seems to me, further, that that concession is fatal to the valuation officer’s
case. The concession is to the effect that the rent was the market rent and the
best rent in the particular circumstances in which it was negotiated. Where the
valuation officer goes on to say that ‘it was his view that the circumstances
were different from those in which the rating hypothetical tenancy was deemed
to be negotiated,’ he must, I think, be treated as referring to the evidence
which he had given immediately before his concession, namely, ‘The head lease
had but two years unexpired at a rent of £17,500 per annum; this was an
unattractive term to endeavour to sublet, and it seemed to him that the head
lessees had been prepared to cut their losses for the short period.’ There is nothing else in his evidence which
could be relied upon, so far as I can see, as differentiating the particular
circumstances from those in which the hypothetical tenancy must be deemed to
have been negotiated. When one comes to the ground which he does mention, for
the reasons which have already been given by Buckley LJ, it seems to me that
there is nothing in that ground which would justify any qualification of his
concession by reference to the particular circumstances.
In the result,
it seems to me that the concession stands unqualified and that is really the
end of the matter. It is clearly not legitimate, having conceded that the
actual rent was the best rent in the particular circumstances, and no
particular depreciating circumstances having been established, to introduce
comparables at this stage so as to increase the hypothetical lease rent above
the actual rent. In this respect the member erred in law. I agree that the
appeal should be allowed.
The appeal
was allowed with two-thirds of the appellants’ costs of the appeal and no order
for costs before the Lands Tribunal. The valuation officer was refused leave to
appeal to the House of Lords.
