Landlord and tenant — Construction of rent review clause in lease — The difficulty in this case arose in determining what exactly were to be the terms of the hypothetical lease which had to be assumed in arriving at the ‘commercial yearly rent’ for the purpose of the rent review clause — After providing that such rent should be the open market rent of a lease for a term equal to the residue of the actual term of the current lease, the review clause stated that the hypothetical lease was to be ‘in the same terms in all other respects as these presents’ — Thus the tenant’s covenants in the hypothetical lease were to be the same as those in the existing lease — The construction problem was due to the fact that both the user covenant and the assignment covenant contained a specific reference to the lessee by name, ‘the British Crafts Centre’ — The user covenant permitted the use of the premises for storage, sale and display of craftsmen’s work while the lessee was the British Crafts Centre — The assignment covenant permitted the sharing of occupation with a holding or subsidiary company ‘but only whilst the lessee is the British Crafts Centre’ — The relevance of the point was that the broader the class of potential lessees the higher the rent that might be expected to be obtained — The tenants accordingly contended that the provisions should be construed narrowly as directed to the particular personal position of the British Crafts Centre, whereas the landlords argued that they should be taken to refer to the lessee who took the hypothetical lease, whoever that lessee might turn out to be — In the event the judge decided that the two covenants should be applied differently in this respect — Held that in the case of the user covenant it was intended to grant a personal privilege to the Centre and that the hypothetical lease should contain a similar restriction — Held, however, that in the case of the assignment covenant the hypothetical lease should leave blank the name of the lessee, the intention being to prevent the privilege of sharing occupation to be enjoyed by anyone other than the original lessee, whoever the original lessee might be — The Law Land Co Ltd v Consumers’ Association Ltd considered
This was an
originating summons by which the plaintiff landlords, Robert Hedley James and
Christopher Brian Carr, sought declarations as to the true construction of
provisions in a rent review clause in a lease to the defendant tenants, British
Crafts Centre, of premises at 43 Earlham Street, Covent Garden, London WC2.
J P Whittaker
(instructed by Hempsons) appeared on behalf of the plaintiffs; Paul de la
Piquerie (instructed by Sacker & Partners) represented the defendants.
Giving
judgment, SCOTT J said: I have before me a short question of construction of a
lease. The plaintiffs, Robert Hedley James and Christopher Brian Carr, are the
landlords in respect of the lease — not the original landlords, but the
landlords under a subsequent transfer. The defendant, British Crafts Centre, is
the original lessee under the lease. The lease was dated August 12 1977. The
premises comprised therein are 43 Earlham Street, Covent Garden, WC2. Those
premises comprise four floors. There is a basement, a ground floor, a first
floor and a second floor. At the date of the lease it appears that the
defendant was already in occupation of the basement and ground floor. At the
date of the lease the first floor was let to a company called High Vision Ltd.
There are in evidence planning permissions relating to the first floor and to
the basement and ground floors. The planning permission relating to the first
floor is dated September 16 1975. It authorises the use of the first floor by
High Vision Ltd as a studio and ancillary offices and it contains the condition
that the permission granted should be personal to High Vision Ltd and that upon
cessation of the use permitted for High Vision Ltd the premises should not,
without some further permission, be used for any other purpose than the
established use. There is no evidence of the established use, but I think it
must be the case that the established use, varied by that planning permission,
is use for office purposes. The other planning permission was dated September 8
1971. It was granted to Craft Centre of Great Britain, the same organisation as
is now known as British Crafts Centre, the defendant in this action. That
planning permission was expressed to authorise the continued use of the ground
floor and basement of the premises for the display and selling of craftsmen’s
work. That was the position on the date on which this lease was granted. The
parties to the lease were the predecessors in title of the plaintiffs of the
one part and British Crafts Centre of the other part. It seems from the
description of British Crafts Centre given in the lease that it is a
corporation. Since the word ‘limited’ is missing, I imagine it must be
established for charitable purposes, although there is no evidence of that.
After the name of the defendant, British Crafts Centre, its registered office
is given, 43 Earlham Street. There is then in parenthesis the usual provision
‘(hereinafter called ‘the lessee’
body in whom the term hereby granted may from time to time be vested)’.
Under this lease
a term of 14 years from September 29 1976 was granted to British Crafts Centre.
The lease reserved an initial yearly rent of £10,500. That was subject to a
rent review clause which has given rise to the difficulties leading to this
construction summons.
The rent
review clause is to be found in clause 5 of the lease. It provides for a rent
review to be carried out in order that a new rent may be fixed as from review
dates. The first review date for this purpose was the date on which the fifth
anniversary of the grant of the lease expired, that is to say on September 29
1981. That first rent review brought to light the difficulty of construction
that I must resolve.
The rent
review provision in clause 5 of the lease provided for the lessors to give
notice of their wish to have a rent review at any time during the year
preceding the review date and contained a definition of ‘the commercial yearly
rent’, which was to be the new rent as from the review date provided that it
exceeded the previous rent. The review provisions in this lease, as is commonly
the case, provided only for an upward review.
The definition
reads thus:
‘The
commercial yearly rent’ means the clear yearly rent at which the demised
premises, assuming the due performance and observation of the covenants on the
part of the lessee and conditions contained in these presents, might reasonably
be expected to be let at the review date by a willing landlord in the open
market with vacant possession and without premium or any other consideration
than that evidenced by execution of a lease thereof to a willing tenant for a
term equal to the residue then unexpired of the term hereby granted by a lease
in the same terms in all other respects as these presents (including this
subclause), there being disregarded (i) any effect on rent of the fact that the
lessee or any other person may have been in occupation of the demised premises
and (ii) any goodwill attached to the demised premises by reason of the user of
the demised premises by the lessee or any other person or the purposes for
which the demised premises may have been used and (iii) any effect upon the
rents of any improvement carried out by the lessee after the commencement of
the term hereby granted otherwise than in pursuance of an obligation under the
terms of this lease.
Provision was
made in the clause for the new rent, assessed in accordance with that
definition, to be determined by surveyors acting for the respective parties.
The surveyors who have been instructed by the respective parties to determine
the commercial yearly rent as at September 29 1981 have met difficulties as to
the approach that they should adopt.
It is common
ground that for the purpose of fixing the commercial yearly rent there must be
assumed to be a hypothetical lease being offered to potential lessees. The
object of the notional exercise is to determine what the market rent for a
lease on those terms would be. The difficulty in the present case arises in
deciding exactly what would be the terms of that hypothetical lease. The
definition of ‘the commercial yearly rent’ that I have read contemplates that
the hypothetical lease should be ‘a lease in the same terms in all other
respects as these presents’. That contemplates that the hypothetical lease will
contain the same tenant’s covenants as the tenant’s covenants contained in the
existing lease.
I turn to the
tenant’s covenants which have caused problems. Clause 2(16) contains the user
covenants in the lease. By that clause the lessee covenants, so far as material
to the point now in issue:
not to use or
permit or suffer the demised premises or any part thereof to be used for any
purpose other than (i) for high class business, commercial or professional
offices (subject to compliance with the provisions of clause 2(13) hereof) or
(ii) in respect of such part of the demised premises as shall for the time
being be occupied and used by the lessee (here meaning the British Crafts
Centre party hereto) for storage, sale and display of craftsmen’s work and
ancillary offices and in respect of the first floor of the demised premises
(whilst not occupied and used by British Crafts Centre) as an office and studio
for the trade or business of designers, advertising and press agents.
Clause 2(13),
to which reference was made under subclause (i) of this user covenant, is a
covenant by the tenant ‘To comply in all respects with the provision of every
enactment’, which, in this subclause, means ‘(every Act of Parliament already
or hereafter to be passed, and any byelaws, statutory instruments, orders,
rules and regulations and any notices, orders, directions, licences, consents
or permissions made or given under or by virtue thereof) so far as the same
shall affect the demised premises’; in effect, a covenant to comply with
current planning permissions.
Subclause (17)
of clause 2 of the lease contains covenants by the lessee in respect of
assignments and parting with possession. Sub-subclause (A)(i) is a covenant
‘Not to assign or (subject to the provisions of paragraph (v) of this subclause
(17)(A)) demise, underlet or otherwise part with possession of any part of the
demised premises, here meaning a portion only and not the whole thereof, or,
subject to the provisions of paragraph (ii) of this subclause (17)(A), share
occupation of the whole or any part thereof for all or any part of the said
term’. Paragraph (ii) there referred to is in these terms: ‘Notwithstanding the
provisions of paragraph (i) of this subclause (17)(A) but only whilst the
lessee is the British Crafts Centre the lessee may share occupation of the
demised premises or any part thereof with a holding or subsidiary company of it
or a subsidiary of such holding company.’
There are then various provisos that I need not, I think, read.
The problem is
this — and I will explain it by reference, first, to subclause (16)(ii), the
user clause: should the hypothetical lease on the basis on which the market
rent is to be ascertained specify the British Crafts Centre as the party whose
use of the premises for storage, sale and display of craftsmen’s work and
ancillary offices is to be permitted, or should the name of the person whose
use of the premises for those purposes is to be permitted be left blank on the
footing that it will be the new lessee whose use of the premises for those
purposes will be permitted under this clause?
The relevance
of the point goes to the class of persons who might be expected to be
interested in becoming lessees. Plainly enough, I suppose, the broader the
class of potential lessees, the higher the rent that might be expected to be
obtained. The larger the class of potential lessees, the greater will be the
competition; and supply and demand no doubt influence rent levels as it does
the price of most commodities.
The definition
in the lease of ‘the commercial yearly rent’ requires, it will be recalled,
that the hypothetical lease be in the same terms in all other respects — the
‘other’ can, for this purpose, be disregarded — as the instant lease.
Accordingly it is submitted by Mr de la Piquerie for the tenant that the
express reference to the British Crafts Centre which is to be found in the
existing lease should be retained in the hypothetical lease. If that is so, it
would not be possible for any person or company, other than the British Crafts
Centre, who wanted to use the premises for storage, sale and display of craftsmen’s
work, to take a lease. At any rate, it would be a foolish thing for any such
person or company to do because they would not be able to use the premises for
those purposes. So, if Mr de la Piquerie is right, the potential class of
lessees would be reduced accordingly. On the other hand, Mr Whittaker for the
landlords contends that the clause in question should simply be regarded as a
clause restricting the use of the premises for storage, sale and display of
craftsmen’s work to use for those purposes by the original lessee of the lease.
He points out, correctly, that the British Crafts Centre was the original
lessee in the actual lease and accordingly the hypothetical lease, which is in
all respects, so far as can be achieved, to be in the same terms as the actual
lease, should leave a blank for the name of the lessee whose use of the
premises for storage, sale and display of craftsmen’s work is to be permitted.
As it seems to
me, both approaches require to some extent a rewriting of this clause. It does
not seem to me possible for the hypothetical lease to follow, ipsissima
verba, the words of this subclause. Mr de la Piquerie’s approach would
require the words ‘used by the lessee (here meaning the British Crafts Centre
party hereto)’ to be deleted and for there to be substituted simply the words
‘used by the British Crafts Centre’. It could not be assumed that the British
Crafts Centre would be the lessee or would be a party to the hypothetical
lease. Accordingly, the clause could do no more than simply reproduce the name
of the party whose use of the premises for those purposes was intended to be
permitted. Mr Whittaker, on the other hand, would simply delete from the
provision the words ‘the British Crafts Centre’. He would leave a blank in
place of those words on the footing that that blank could not be completed
until it were known who would be the lessee.
Neither
approach permits literal effect to be given to the requirement in the
definition of ‘commercial yearly rent’ that the hypothetical lease be ‘a lease
in the same terms in all other respects’ as the existing lease.
In order to
decide which approach is the right one to adopt, it seems to me that I must
direct my attention to the substance of the user provision contained in
subclause (16)(ii).
It was said by
Mr Whittaker that, in order to determine the market rent of the premises, one
could not cut down or ought not to cut down
proposition, so broadly stated, cannot, in my view, be right. The hypothetical
lease is intended to contain (inter alia) the tenant’s covenants in the
original lease. If the effect of those covenants, properly construed, is to
limit the class of persons who would be interested in the lease, which, to some
extent, must, I would think, be true of virtually every lease there has ever
been of business premises, then it follows that, to that extent, the number of
persons interested is going pro tanto to be cut down. The question then
is to determine the real nature of the provision agreed upon by the parties to
the lease and incorporated therein as subclause (16)(ii) of clause 2.
Mr de la
Piquerie has submitted that the subclause was directed to the particular
personal position of the British Crafts Centre. It was intended, he submitted,
to allow use of the premises by the British Crafts Centre for its business,
which must have been well known to the lessors, namely, storage, sale and
display of craftsmen’s work. It was not intended, he said, thereby to permit
any use of the premises for those purposes other than use by the British Crafts
Centre. The nature of the user restriction embodied in clause 2(16) was, he
submitted, that use by anyone else for storage, sale and display of craftsmen’s
work was prohibited.
In my view,
that is a correct analysis of clause 2(16). It would seem to me to make very
little sense to argue that any original lessee would have been permitted to use
the premises for storage, sale and display of craftsmen’s work. The primary use
authorised by this user covenant is the use authorised in subclause (i),
namely, use ‘for high class business, commercial or professional offices’.
There are likely to be a number — probably a very large number indeed — of
entirely suitable and desirable lessees who would wish to use the premises for
those purposes and to whom use for storage, sale and display of craftsmen’s
work would be a complete irrelevance. In the course of argument — and I may
have been responsible for this particular direction of argument myself — the
position of solicitors was considered. Use of these premises by solicitors
would no doubt be regarded as use ‘for high class . . . professional offices’.
But a provision in the lease under which use of the premises by those
solicitors for storage, sale and display of craftsmen’s work was permitted
would seem silly. On the other hand, given that the British Crafts Centre was
in occupation of the premises on the date of the lease, it makes sense that
there should have been an exception to permit the British Crafts Centre, the
particular party in occupation, to continue to use the premises for the same
business purposes for which it was then using those premises. Hence, I think,
the drafting and incorporation in the lease of subclause (ii) of this user
covenant.
I was referred
by Mr Whittaker to The Law Land Co Ltd v Consumers’ Association Ltd
(1980) 255 EG 617, [1980] 2 EGLR 109. This case, too, involved a rent review.
In this case, too, the lease contemplated the determination on the rent review
date of the open market rent of the premises. Here, too, the open market rent
was to be decided by considering what rent would be obtainable on a lease of
the same terms as the lease in question. Under the lease in question the
tenant, the original lessee, was the Consumers’ Association. The lease
contained a clause under which the tenant covenanted not, without the prior
written consent of the landlord, to use or permit the demised premises or any
part thereof to be used other than as offices of the Consumers’ Association and
its associated organisations. It was argued in this case by the tenant that the
hypothetical lease on the basis of which the open market rent was to be
assessed should contain a similar clause, restricting use of the premises to any
use other than as offices of the Consumers’ Association and its associated
organisations. If that had been the right approach, there could have been only
one possible lessee, only one possible person who would be interested in taking
this hypothetical lease, namely, the Consumers’ Association. Nobody else would
have been interested because nobody else, otherwise than by breaking the user
covenant, could have used the premises. The Court of Appeal rejected the notion
that a hypothetical lease with such a restriction could be used as the basis
for determining an open market rent. It was plainly the intention of the
parties to the lease that an open market rent should be ascertained for the
purpose of the rent review. That could be done only if some modification were
made to the user covenant. Accordingly, it was concluded that, for the purpose
of the rent review, the user covenant should be regarded as imposing a
restriction on use of the premises otherwise than as offices for the lessee who
took the hypothetical lease, whoever that might turn out to be. That approach
opened up the area of potential lessees and would permit an open market rental
to be assessed.
Mr Whittaker
urged me to adopt the same approach in this case. He referred me in particular
to a passage in the judgment of Buckley LJ in which Buckley LJ indicated that
the hypothetical lease, for the purposes of the case with which he was
concerned, should be a lease which contemplated that the name of the lessee
would be specified in the user covenant. On the footing that the lessee had not
yet been identified no name, Buckley LJ held, should be incorporated into the
user covenant. For the purpose of the rent review the name should be left
blank. However, the whole purpose of the approach in that case was to enable
sense to be made of the requirement in the rent review clause that an open
market rent be ascertained. That could not be done if the lease in its actual
form were regarded as the hypothetical lease.
In the present
case that approach is not necessary. There is bound to be a market — and, I
would think, a substantial market — for a lease of premises which can be used
‘for high-class business, commercial or professional offices’. The fact that a
provision limiting use for storage, sale and display of craftsmen’s work to use
by the British Crafts Centre is included in the lease does not, to my mind,
advance at all the proposition that a lease so restricted cannot be used for
the purpose of assessing an open market rent.
I do not,
therefore, regard the reasoning and approach in The Law Land Co Ltd v Consumers’
Association case as relevant to the problem before me.
As I have
said, I think the nature of the user restriction here under review is that it
was intended to grant a personal privilege to the British Crafts Centre to use
the premises for storage, sale and display of craftsmen’s work. It was not
intended that anyone else should use the premises for that purpose.
Accordingly, I
think the hypothetical lease should contain a similar restriction.
I now turn to
subclause (17)(A)(ii), the assignment clause. Mr de la Piquerie argued that the
same approach as I have found correct in the case of the user covenant should
be applied here. The point is, in my view, a fine one; but I do not feel
confident when reading subclause (17)(A)(ii) that the privilege of sharing
occupation with subsidiary companies or holding companies was intended to be
personal to the British Crafts Centre. A landlord can, of course, accept or
reject a tenant as he or it wishes. When faced with a prospective tenant a
landlord will take up references and make inquiries about that prospective
tenant. If a landlord concludes that a tenant is not suitable to be granted the
benefit of being allowed to share occupation with associated companies, then,
if the lease is to include such a provision, that prospective tenant will not
be granted the lease. The argument that the privilege of sharing occupation
with associated companies granted under (17)(A)(ii) should be regarded as a
personal privilege intended for the British Crafts Centre does not seem to me
to be on all fours with the comparable argument regarding (16)(ii). It seems to
me that the intention of the parties lying behind (17)(A)(ii) was to restrict
the privilege of sharing occupation there granted from being enjoyed by anyone
other than the original lessee, whoever the original lessee might be.
Accordingly,
it seems to me that the hypothetical lease, so far as subclause (17)(A)(ii) is
concerned, ought not to specify the British Crafts Centre but ought to leave
blank the reference to the name of the lessee. I am not satisfied, as I am in
regard to subclause (16)(ii), that the privilege was intended to be personal
and restricted to the British Crafts Centre as such, as opposed to restricted
to the person who happened to be the first lessee under the lease.
I would
accordingly make declarations for the purposes of assessment of the open market
rent on the rent review in accordance with this judgment, that is to say, that
the hypothetical lease should contain a provision as to user on the lines of or
in the words of subclause (ii) of clause (16), but substituting simply a
reference to the British Crafts Centre for the extended description in the
actual lease, namely, ‘the lessee (here meaning the British Crafts Centre party
hereto)’, and that the hypothetical lease should contain, so far as subclause
(ii) of (17)(A) is concerned, simply a reference to the lessee with the name
left blank.
I will leave
counsel to draft declarations, if they think it appropriate to do it, in more
formal form.
There was no
order as to costs.
