Landlord and tenant — Rent review clause — Construction — Hypothetical tenancy — Length of hypothetical term and provisions as to user — Effect of two deeds of variation on user provisions in underlease — Guidelines laid down by previous decisions in regard to construction of rent review clauses — Appeal from decision of Warner J
underlease containing the rent review provisions in dispute was for a 15-year
term from August 22 1978 — The questions arising under these provisions
concerned the duration of the hypothetical tenancy and the user — The court was
asked for a determination of these questions of construction before the
machinery of the underlease as to agreement on the fair market rent and
possible recourse to an independent expert appointed by the president of the
Royal Institution of Chartered Surveyors was brought into play — So far as the
duration of the hypothetical tenancy was concerned, it was provided that it was
to be for a term equivalent to the term granted by the underlease and subject
to similar covenants and conditions — The question here was whether this meant
a term from the review date or from the original date of the lease — After
referring to a few authorities, Dillon LJ said that the burden of the
guidelines was, if the language permitted, to construe the rent review clause
as requiring the notional letting to be on the same terms (other than as to the
quantum of rent) as those subsisting between the parties in the actual existing
lease
the present case decided that the hypothetical tenancies on the relevant review
dates should be in each case for a term equal to the residue unexpired at that
review date — Dillon LJ, although expressing doubt as to what difference it
would actually make, varied Warner J’s order by substituting a hypothetical
term of 15 years from the original date of August 22 1978 — The landlords’
argument in favour of a term of 15 years from the relevant review date was
rejected
problem in regard to user was that the user provisions in the underlease had
been varied in two deeds of variation — The first deed made some changes but
not such as to raise any particular difficulty — The second deed, however,
removed the qualification ‘not without the landlord’s previous consent in
writing such consent not to be unreasonably withheld’ from the covenant not to
use the demised premises otherwise than for the business of a wine bar and the
sale of snacks, thus changing it into an absolute prohibition — Thus as from
August 22 1986, the date of the second deed, the qualifying proviso must be
treated as excluded from the user provisions in the hypothetical term — The
court rejected a suggestion that this exclusion transformed the covenant into a
purely personal one which did not run with the land, was not a tenant’s
covenant within the meaning of the rent review clause, and so fell to be
disregarded on the rent review
was that the appeal from the decision of Warner J was dismissed save for the
variation proposed by Dillon LJ on the matter of the duration of the
hypothetical tenancy
The following
cases are referred to in this report.
Basingstoke
and Deane Borough Council v Host Group Ltd
[1988] 1 WLR 348; (1987) 56 P&CR 31; [1987] 2 EGLR 147; 284 EG 1587, CA
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
Datastream
International Ltd v Oakeep Ltd [1986] 1 WLR
404; [1986] 1 All ER 966; (1985) 51 P&CR 218; [1986] 1 EGLR 98; 277 EG 66
Equity
& Law Life Assurance Society plc v Bodfield
Ltd [1987] 1 EGLR 124; (1987) 281 EG 1448, CA
Norwich
Union Life Insurance Society v Trustee Savings
Banks Central Board [1986] 1 EGLR 136; (1986) 278 EG 162
Wickman
Machine Tool Sales Ltd v L Schuler (AG)
[1974] AC 235; [1973] 2 WLR 683; [1973] 2 All ER 39; [1973] 2 Lloyd’s Rep 53,
HL
This was an
appeal by the underlessors, Sidney Smith (Chelsea) Ltd, from the decision of
Warner J, reported at [1990] 1 EGLR 148; [1990] 08 EG 93, on the construction
of the rent review clause in an underlease of basement and ground-floor
premises at 52 King’s Road, Chelsea. The respondents were the underlessees,
Lynnthorpe Enterprises Ltd, plaintiffs in the court below.
Gavin Lightman
QC and Justin Fenwick (instructed by Oswald Hickson Collier & Co) appeared
on behalf of the appellants; John Dagnall (instructed by Fuller Buckley, of
Esher, Surrey) represented the respondents.
Giving
judgment, DILLON LJ said: This appeal raises questions as to the
operation of a rent review clause in an underlease. The appeal is from a
decision of Warner J given in the Chancery Division on April 28 1989. The
appellant, a company called Sidney Smith (Chelsea) Ltd, is the landlord. The
respondent, Lynnthorpe Enterprises Ltd, is the tenant by virtue of an
assignment on August 22 1986 of the underleasehold interest.
The premises
in question are premises in King’s Road, Chelsea, consisting of the basement
and ground floor of 52 King’s Road. The underlease is dated August 22 1978 and
was made between the appellant landlords and a company called Nose Wine Bar
Ltd. The underlease granted a term of 15 years from the date thereof, that is
to say, August 22 1978. There was a fixed rent for the first nine months at the
rate of £10,000 a year and then a fixed rent at the rate of £20,000 a year for
the next subsequent nine months (referred to as ‘the second period’). For the
third period, the subsequent one and a half years of the term, the rent was to
be the rent payable immediately prior to the commencement of the third period
or the fair market rent of the demised premises at the commencement of the
third period, whichever is the higher. In effect, therefore, there was a rent
review upwards only at the commencement of the third period and thereafter at
three-yearly intervals; for the fourth, fifth, sixth and last periods, there
were upward-only rent reviews.
The questions
which arise under the rent review provision are on two entirely separate
points. The first concerns the duration of the term and the second concerns the
user.
The
ascertainment of the fair market rent is by the usual formula of a hypothetical
letting by landlord to tenant. The rent, if the parties disagree, is to be
decided by a surveyor, to be mutually agreed by the landlord and the tenant or,
in default of agreement, to be nominated by the president for the time being of
the Royal Institution of Chartered Surveyors and he, whether agreed or nominated,
is to act as an expert and not an arbitrator and his decision is to be binding
on both the landlord and the tenant. However, the parties, differing on points
of law as to the working out of the fair market rent provisions of the
underlease, have raised these questions for the decision of the court, before a
surveyor makes any calculations, so that the surveyor will know the correct
basis on which he is to proceed.
So far as the
duration of the term is concerned, the provision of the underlease is that the
hypothetical tenancy is to be a tenancy for a term of years equivalent to the
said term and subject to similar covenants and conditions to those contained in
the lease, there being disregarded any effect on the rent of certain factors,
which for present purposes are immaterial. The ‘said term’ means the term
granted by the underlease. The question is: is that simply a term of 15 years
or is it a term of 15 years, as stated in the underlease, ‘from the date
hereof’; that is to say, the term to be considered in the hypothetical lease
for the purposes of assessing the fair market rent is to be a 15-year term, but
is it to be a term from the review date or from the original date of the lease?
We have been
taken by junior counsel to a large number of authorities on this topic. I do
not find much help in construing one lease by reference to decisions on other
leases where the wording may be slightly different. Guidelines were, however,
laid down by Sir Nicolas Browne-Wilkinson V-C in British Gas Corporation
v Universities Superannuation Scheme Ltd [1986] 1 WLR 398.* They were approved by this court in Basingstoke
and Deane Borough Council v Host Group Ltd [1987] 2 EGLR 147. The
case is also reported in the Weekly Law Reports. The Vice-Chancellor’s
guidelines were also approved by this court in Equity & Law Life
Assurance Society plc v Bodfield Ltd [1987] 1 EGLR 124 at p 125.
*Editor’s
note: Reported also in [1986] 1 EGLR 120.
The burden of
the guidelines is that the court will have regard, if the language used in the
rent review clause permits, to the underlying purpose of a rent review clause
and therefore will be disposed to construe the rent review clause as requiring
the notional letting to be a letting on the same terms (other than as to
quantum of rent) as those still subsisting between the parties in the actual
existing lease. The parties are to be taken as having so intended, because that
would accord with and give effect to the general intention underlying the
incorporation by them of a rent review clause into their lease. I quote from
the judgment of the court delivered by Nicholls LJ in the Basingstoke and
Deane Borough Council case.
Applying that
principle, I have no doubt that the term in this case is to be 15 years from
the original date of the underlease, August 22 1978, and not 15 years from the
review date in question. In fact there are two review dates in question. A term
of 15 years from the review date in question would give the tenant a longer
term than the tenant actually has, which is no doubt why it is the landlord who
is arguing that, for the purposes of a rent review, the term should be the
longer term of 15 years from the review date. Beyond that, however, the 15-year
term from the review date would run into difficulties, when compared with
reality, in relation to the periods which the actual underlease dealt with as
the initial first nine months at a fixed rent, the subsequent nine months of
the second period at a higher fixed rent, followed by the review after 18
months for the third period of one and a half years. There is no comparable
fixed period of rent or 18 months’ review during the period from the subsequent
review dates with which we are concerned to the next review dates or the end of
the term. Therefore, the correct answer is that the period is a term of 15
years from the original August 22 1978 date.
The order of
Warner J is in a rather different form. His conclusion was to reject the
contention that it should be for 15 years from the review date. In so doing he
was acting in conformity with the principles to which I have referred and also
with certain other decisions at first instance, such as the decision of
Hoffmann J in Norwich Union Life Insurance Society v Trustee Savings
Banks Central Board [1986] 1 EGLR 136. However, it was submitted to him
that the formula of a 15-year term from a date 10 years ago might present
difficulties to a valuer and his attention was drawn to the formula used in the
actual lease in a case called Datastream International Ltd v Oakeep
Ltd, decided by Warner J himself in 1985 and reported in [1986] 1 EGLR 98.
The formula used in the Datastream lease was that the hypothetical
tenancy should be subject to the provisions of the lease, other than the amount
of rent reserved, for a term equal to the residue then unexpired of the term
granted by the lease, but having regard to the lessee’s rights under the
Landlord and Tenant Act 1954. Mr Lightman, for the landlord, conceded that in
fixing the rent under the hypothetical lease in the present case from the date
of the original grant, the valuer would have regard to the fact that at the end
of the hypothetical lease the tenant would have rights under the Landlord and
Tenant Act 1954. He would have a right to a new lease unless, when the
expiration date came, the landlord was able to establish one of the statutory
grounds for opposing the grant of a new tenancy. That was amplified in Warner
J’s order, as drawn up, into a provision that:
the reviewed
rent should be ascertained on the basis of hypothetical lettings of the Demised
Premises in the open market on the relevant review dates (being August 22 1987
and August 22 1990 respectively) on leases in each case for a term equal to the
residue unexpired at the relevant review date of such term of fifteen years
from August 22 1978 but on the basis that the hypothetical tenant would be
treated, on any application for a new tenancy pursuant to the provisions of
Part II of the Landlord and Tenant Act 1954 on the sole question of the length
of term of such new tenancy as the Court might be empowered (if, but only if, a
ground of opposition to such new tenancy had not been made out) to grant to him
as if such hypothetical tenant had originally been granted a lease on August 22
1978 for a term of fifteen years from August 22 1978 rather than a lease on the
relevant review date for a term commencing on the
term of fifteen years from August 22 1978.
Having
considered the discussion which took place after judgment and the terms of
Warner J’s judgment on the final page in relation to what he called ‘the Datastream
formula’, I am satisfied that he used that wording in his order in the belief
that counsel for both parties appearing before him were agreed. He refers to
the degree of consensus between counsel, that that wording reflected, for the
guidance of the valuer, the effect of directing that the hypothetical leases
should be for terms of 15 years from August 22 1978.
On Mr
Fenwick’s submissions in this court, however, it is apparent that that degree
of consensus is not now there, though I have been unable to see what difference
it actually makes whether the formula used is that in Warner J’s order as drawn
up or in the form ‘fifteen years from August 22 1978’. In those circumstances I
would vary Warner J’s order on this point, to substitute for the wording which
I have just quoted a direction that the reviewed rent should be ascertained on
the basis of hypothetical lettings of the demised premises in the open market
on the relevant review dates on leases in each case for a term of 15 years from
August 22 1978. But I would reject the contention for the landlords that the
term should be 15 years from the relevant review date.
I turn to the
question of the user provisions in the hypothetical lease. The problem here
arises on the particular wording that was used in a deed on the date of the
assignment to the present respondents, Lynnthorpe Enterprises Ltd. The question
primarily is: what effect did that deed have on the user covenant in the
underlease itself?
The underlease
is somewhat prolix in its use of words and tends to run a number of concepts
together into one subclause and then deal with cognate concepts in another
subclause. The user clause is clause 2(11) of the underlease, which in its
original form reads as follows:
(a) Not to use or permit the demised premises or
any part thereof to be used for any illegal or immoral purpose or for betting gaming
wagering or for any noxious noisy or offensive trade or business and not
without the Landlord’s previous consent in writing such consent not to be
unreasonably withheld to use the demised premises otherwise than for the
business of a wine bar and the sale of snacks provided always that in any event
the demised premises nor any part thereof shall not
— I am not
sure whether the negative has got a bit tangled at that point —
at any time be
used for any purpose which shall in the reasonable opinion of the Landlord
compete or conflict with any of the Landlord’s businesses or interests from
time to time within 200 yards of the demised premises or which shall be
prohibited by any superior landlords or which shall in the reasonable opinion
of the Landlord not be in keeping with a high class shopping parade.
(b) To ensure at all times during the said term
that the demised premises shall be open for trading at all times during normal
business hours for the locality (public and bank holidays excepted) and that the
display in the windows of the demised premises of any goods or articles shall
be arranged in a neat and attractive manner.
Then there is
subclause (12), which prohibits the doing or permitting or suffering to be done
of
anything in
or upon the demised premises . . . which may be or become a nuisance annoyance
or cause damage or inconvenience to the Landlord or the Superior Landlord (or
various other people) . . . or . . . would constitute a breach of any of the
provisions of any private or public Act or Acts of Parliament.
There are many
other negative provisions, such as not to permit any music to be audible from
outside the demised premises in such manner as to cause a nuisance, not to fix
placards or signs, and so forth, to the demised premises and not to hold or
permit any sale by auction on the demised premises. There are various
restrictions on user and requirements which are to be found throughout the
document.
There was then
a deed of variation of November 6 1981 between the appellant landlords, and it
would seem the original lessees who had by then changed their name to Blushes
Ltd, together with some sureties which, apart from other provisions not
material for present purposes, added to clause 2(11)(a) of the underlease two
further provisions:
(ii) Not to use or permit the demised premises or
any part thereof to be used as a licensed betting office or amusement arcade
nor for the sale or display of pornographic indecent or obscene books video
tapes or films
(iii) To notify the Landlord in writing of all
renewals of licences and of any applications for justices’ on-licences not less
than 21 days prior to renewal or application date.
There is no
difficulty about incorporating those provisions into the underlease and there
would be no difficulty about a valuer taking into account that deed of
variation and the underlease in relation to the user provisions in assessing a
rent.
We then, however,
have a further deed of variation which was made on August 22 1986 between the
appellant landlords, called ‘the Lessor’ of the first part, a company called
Essexpark Ltd, who was called ‘the Assignor’ of the second part, the present
respondents, Lynnthorpe Enterprises Ltd, called ‘the Assignee’ of the third
part, a Mr Garrett and a Mr Barry, who were the sureties at the time of the
deed of variation of November 6 1981, who were called ‘the Original Sureties’
of the fourth part, and two other gentlemen, a Mr Lynn and a Mr Thorpe, who
were called ‘the New Sureties’ of the fifth part. The background to that was
that two days before, on August 20, Essexpark Ltd, who had become assignees of
the underlease in November 1982, had entered into a contract to sell their
business on the demised premises and the underlease to Lynnthorpe Enterprises
Ltd. That contract required the landlord’s licence to assign under the terms of
the underlease, which in the usual way was not to be unreasonably withheld.
That licence was granted by the deed of August 22 1986 and the assignment was
effected by a deed of assignment of that date, August 22 1986. The deed of
August 22 1986 recited the underlease and the licence to assign to Essexpark,
the assignor, and recited the deed of variation of 1981. It recited that the
deed of variation had contained a provision that on any assignment of the
underlease the original sureties would be released from all further obligations
if the lessor was satisfied that the assignee and any sureties (if sureties
were taken) were of at least equal financial standing to the original sureties.
It recited that the assignor desired to assign the underlease to the assignee
and that the lessor was not satisfied that the assignee or the assignee’s
proposed sureties (the new sureties) were of at least equal financial standing
to the original sureties. It appears that at the time of the deed the assignor
was some £10,000 in arrears in payment of the rent under the underlease. That
also appears from the contract of sale between the assignor and the assignee.
It then recited that the lessor, that is to say the appellant, had agreed to
grant the assignor licence for such assignment subject to the parties entering
into the further covenants contained in the deed and the further variations to
the underlease being effected accordingly.
The operative
part of the deed contained six clauses. Clause 1 was concerned with user and is
the important clause for present purposes. By clause 2 the lessor granted the
assignor licence to assign the underlease to the assignee. By clause 3 the
assignee covenanted with the lessor that as from the date when the assignor’s
estate and interest in the underlease should be assigned to it pursuant to the
licence hereinbefore contained and thenceforth during the residue of the term
granted by the underlease, the assignee would pay the rent thereby reserved and
perform and observe the covenants and conditions on the part of the tenant
therein contained as varied by the deed of variation and this deed. By clause 4
the new sureties jointly and severally covenanted with the lessor that from the
date referred to in clause 3 (that is to say, when the assignor’s estate and
interest in the underlease should be assigned to it pursuant to the licence thereinbefore
contained), the assignee would pay the rent on the days and in the manner
provided by the underlease as varied by the deed of variation and this deed and
that the assignee would observe all the tenant’s covenants and conditions
contained in the underlease and the deed of variation and this deed, and in the
event of default the new sureties would make good the default.
By clause 5,
it being acknowledged by the parties that as of the date of the deed the rent
currently payable under the underlease was in arrears to the sum of £10,000,
from the date the underlease was assigned to the assignee as thereby
authorised, the assignee should pay to the lessor £10,000 in 12 equal
instalments commencing on October 1 1986 and monthly thereafter with interest as
there mentioned. And there was a covenant by the new sureties for such
payments.
By clause 6,
for the avoidance of doubt, it is acknowledged and accepted that the original
sureties were not released from their covenants and obligations and should not
be so released in the event of the assignment of the underlease thereby
authorised being completed.
I come back to
the provision of clause 1 as to user. This provides:
1. The
Underlease is hereby varied as follows:
(a) Clause 2(11)(a) of the Underlease shall be
varied so as to permit the
spirits beer cider any fermented distilled or spiritous liquor soft drinks
coffee tea and food (including meals and snacks) subject to substantial food
being available at all times on both floors of the demised premises and subject
also to no intoxicating liquor being sold in the demised premises for
consumption off the premises.
Subclause (b)
then contains covenants by the assignee with the lessor as follows.
(i) Not to use or permit the demised premises to
be used otherwise than in the manner permitted by the preceding clause 1(a)
(ii) That substantial food will at all times be
available on both floors of the demised premises when the demised premises are
open for the sale of intoxicating liquor and that no intoxicating liquor shall
be sold therein for consumption off the premises
(iii) Not to sell or permit the sale of
intoxicating liquor outside the hours permitted by any Justices Licence Certificate
or order in force at any time relating to the demised premises and to close the
demised premises not later than half an hour after midnight on weekdays and not
later than 11.30 pm on Sundays
(iv) To obtain any necessary licence consent or
authority of any person body council corporation or Government Department for
the use permitted by clause 1(a) hereof.
Subclause (c)
purports to provide that the original sureties covenant jointly and severally
with the lessor that the [assignor] will perform and observe the covenants on
the part of the assignor thereinbefore contained. It seems likely that
references to ‘the Assignor’ should be references to the Assignee, because
there have not been any covenants by the ‘Assignor thereinbefore contained’;
nor were there any covenants by the assignor in the deed at all.
Subclause (d)
provides that:
Save as
hereby modified the provisions of the Underlease as varied by the Deed of
Variation shall remain in full force and effect.
The deed of
variation is the 1981 deed, which I have already mentioned.
The crucial
question is whether the effect of subclause (b)(i) is to exclude from the user
clause in clause 2(11)(a) the provision ‘not without the Landlord’s previous
consent in writing such consent not to be unreasonably withheld’ which in the
original underlease qualified the covenant not to use the demised premises
otherwise than for the business of a wine bar and the sale of snacks. The
covenant in clause 1(b)(i) of the 1986 deed of variation ‘Not to use or permit
the demised premises to be used otherwise than in the manner permitted by the
preceding clause 1(a)’ does not contain any comparable qualification as to the
landlord’s previous consent, which is not to be unreasonably withheld. That is
the main problem.
But the secondary
problem is this. It is said for the landlord that if as a matter of
construction clause 1(b)(i) of the 1986 deed does exclude the proviso as to the
landlord’s consent to change the user not being unreasonably withheld, then the
covenants in 1(b) are purely personal covenants which bind only the assignee
itself as the covenantor, and do not run with the land and are not the tenant’s
covenants within the meaning of the rent review clause in the underlease and so
fall to be disregarded on the rent review.
So far as that
latter point is concerned, we have been treated to extensive linguistic
analysis of the 1986 deed by junior counsel on both sides. I do not regard it,
for my part, as at all helpful to attempt to construe such a deed as this,
which has fairly obvious defects as a model of drafting, by the process of mere
linguistic analysis and personally I welcomed the much broader brush approach
of the advocacy of Mr Lightman in this case. The essence of it, as I read it,
is that this clause is to be read in the context that there was, pursuant to
the contract of two days before, a contemporaneous assignment of the demised
premises to the assignee, the present respondents. That was intended and
expected. There was not expected to be any substantial lacuna or punctum
temporis between the two and clauses 3 and 4 of the 1986 deed make it plain
to my mind that the covenants by the assignee contained in the 1986 deed were
to be regarded for all purposes as covenants on the part of the tenant in the
underlease as varied by the 1986 deed, as well as the 1981 deed of variation.
Therefore, I have no doubt that the covenant in clause (b)(i), whatever its
true effect and construction on the crucial point in relation to the landlord’s
consent to change of use and that not being unreasonably withheld, is a
tenant’s covenant for the purposes of the underlease and the rent review. On
the crucial question I am driven, as was the judge, to conclude that the
difference in wording between clause (b)(i) and the absence there of any
reference to ‘without the landlord’s previous consent in writing which is not
to be unreasonably withheld’, compared with clause 11(a) in its original form
where those words qualified the covenant ‘not to use the demised premises
otherwise than for the business of a wine bar and the sale of snacks’, must
have the effect that, as from August 22 1986, the proviso ‘without the
landlord’s previous consent in writing such consent not to be unreasonably
withheld’ has been excluded for the residue of the term from the user clause in
the underlease. Accordingly, on this question of the user clause I agree with
the conclusion of Warner J. It follows that I would vary the judge’s order on
the matter of the duration of the hypothetical lease in the way I have indicated,
but I would otherwise dismiss this appeal.
TAYLOR LJ agreed and did not add anything.
Also agreeing,
STAUGHTON LJ said: Clause 1(a) of the deed of 1986 is clear enough. It
says that ‘the Underlease shall be varied so as to permit the demised premises
to be used as a wine bar for the sale . . . of wine’ and various other drinks.
Standing on its own, it appears to be an extension of what was permitted by the
underlease by introducing an additional permitted use. The trouble is that
clause 1(b) is also clear enough, and that provides that the assignee covenants
not to use or permit the demised premises to be used otherwise than in the
manner permitted by clause 1(a). Purely on a reading of the document I would be
inclined to take clause 1(b)(i) at its face value and conclude that all other
uses were excluded. But Mr Lightman, for the landlords, says that that is a
wholly unreasonable result which the parties cannot have intended, or at any
rate is highly improbable.
In the case of
Wickman Machine Tool Sales Ltd v L Schuler AG [1974] AC 235 at p
251 Lord Reid said:
The fact that
a particular construction leads to a very unreasonable result must be a
relevant consideration. The more unreasonable the result the more unlikely it
is that the parties can have intended it, and if they do intend it the more
necessary it is that they shall make that intention abundantly clear.
However, Mr
Dagnall has persuaded me that the meaning contended for by the tenants is not
unreasonable or improbable; they were coming new to the premises and wanted to
use them for the purposes described in clause 1(a). He argues that one should
not take it as improbable that they were content to agree not to use them for
any other purposes.
One further
consideration induces me to reach that conclusion. I would have thought it
plain that at any rate part (b) of clause 1 was drafted by or on behalf of the
landlord, and it was the landlord who required it to be inserted in the deed.
It lies ill in the mouth of the landlord now to say that what he required to be
included in the lease does not mean what it quite plainly appears to mean. This
is not perhaps the contra proferentem doctrine but a variant of it,
which one might call ‘estoppel by draftmanship’. At all events, I agree that
the judge reached the right conclusion on the meaning of clause 1 of the deed
of 1986.
As to the
argument that the covenant in clause 1(b) is personal to Lynnthorpe Enterprises
Ltd only and therefore should not be taken into account as part of the
hypothetical lease on a rent review, that is advanced on the ground that in
clause 1(b) it is ‘the Assignee’ who covenants and not ‘the tenant’. However,
‘the Assignee’ is the expression used in the deed to refer to Lynnthorpe
Enterprises Ltd. Clause 1(b) is part of a clause providing how the underlease
shall be varied. It is therefore saying that the underlease shall be varied so
as to provide that Lynnthorpe Enterprises Ltd covenants, on the assumption that
Lynnthorpe Enterprises Ltd will then be by assignment the tenant. So as a
matter of construction I would reach the conclusion that this was to be a
tenant’s covenant and not one personal to the assignee.
If that were
not enough, it seems to me that section 79 of the Law of Property Act 1925
produces that result. Subsection (1) provides:
A covenant
relating to any land of a covenantor or capable of being bound by him, shall,
unless a contrary intention is expressed, be deemed to be made by the
covenantor on behalf of himself his successors in title and the persons
deriving title under him or them . . .
It is argued
that at the time when the covenant was made the land was not land of the
covenantor, that is to say Lynnthorpe Enterprises Ltd, nor was it land capable
of being bound by the covenantor at that moment of time. However, all these
matters took place on the same day. It may be that there was a degree of
prolepsis in the deed of variation. It was made in the anticipation that
Lynnthorpe Enterprises Ltd would become the tenants by assignment, and that
did happen almost simultaneously. I see no reason why section 79 should not
apply to such a case.
I turn to the
last issue, as to the length of term which is to be assumed for the
hypothetical lease on a rent review. I assume that if one had gone into the
market-place on August 22 1987 and asked what was an appropriate rental figure
for these premises in pounds per annum per sq ft (or pounds per annum for the
premises as a whole for that matter) one might have been asked, ‘What term do
you have in mind?’ One might well have
been told that it was X pounds for a term of 15 years and Y pounds for a term
of six years. I am inclined to assume that X is greater than Y, if only because
the landlord argues for a result which will produce X and the tenant for a
result which will produce Y.
There is
clearly a presumption in favour of reality. Mr Dagnall calls it commercial
reality, but I am unable to tell how commercial reality differs from any other
reality. The hypothetical lease is to be as near as possible the same as the
actual lease, but of course there must be some differences, if only in the
rent.
Reality, as it
seems to me, points in two different directions. It points to a lease for a
further six years in 1987, because that was the unexpired term at that date.
The fact was that the tenants were going to stay there for a further six years.
On the other hand it points to the rate appropriate for a 15-year term, rather
than the rate appropriate for a six-year term (that is to say to X rather than
to Y), because that was what the tenants were enjoying. If it had been possible
to do so, I would have given greater weight to the second aspect of reality
rather than to the first, because that is more directly connected with the
monetary calculation that has to be done. So I would have wished to reach a
solution whereby the valuer had to go into the market-place and find a 15-year
rent rather than a six-year rent.
Of the three
possible solutions that have been put forward, the first is that the valuer
should consider a hypothetical lease for 15 years from the date of the review.
The second is that he should consider a hypothetical lease for 15 years from
the date of the original lease. The third is that he should consider a
hypothetical lease for the unexpired period of the original term. That, so far
as concerns August 1987, is six years.
I do not feel
able to hold that the first solution is correct (that is to say a period of 15
years from the review date) for two reasons. First, it seems to have been
uniformly rejected by a number of Chancery judges at first instance. Second, it
seems to me impossible to reconcile that with the period for future reviews
which would have to be included in such a hypothetical lease. Dillon LJ has
described the provisions for future reviews which are in the actual lease. If
those were inserted, as they have to be in a hypothetical lease, from the date
of review there would be no sense at all, particularly, as Mr Dagnall points
out, because the first review substitutes an actual figure of £20,000 a year
after nine months for the rent previously paid.
I am left to
choose between solution two and solution three. Both parties agree that
solution two is the proper one and I am content to adopt that. Accordingly, the
hypothetical lease is to be one for a period of 15 years from the date of the
original lease. What effect that will have is not a matter we need to consider
on this appeal, and I would be particularly anxious not to express any view
upon it. We do not have the material to do so. Whether it will produce the
figure which I have described as X (that is to say, the figure appropriate for
a 15-year term) or Y (a figure appropriate for a six-year term) is not a matter
upon which I have anything to say. In agreement with my lords I would dismiss
the appeal, save for the variation in the order of Warner J which Dillon LJ has
proposed.
The appeal
was dismissed with costs save for the variation in the order of Warner J
proposed by Dillon LJ.
