Landlord and Tenant Act 1954, Part II — Terms of new tenancy — Question as to whether an interim rent should be determined under section 24A of the Act and, if so, the amount of such rent — Plaintiff tenants had at first asked for a new tenancy for 14 years at a rent of £13,500 per annum with a rent review after 7 years, but, after receiving advice that a rent of £57,000 was probable, applied for a term of one year|page:77| only at a rent of £57,500 — Plaintiffs wished to keep options open while looking round for alternative premises — Defendant landlords, who had originally proposed a rent of £25,000 for a 10-year term with a five-year review, now claimed a rent of £125,000 — Subsequently the landlords offered to meet the tenants’ difficulties by inserting a break clause into the new lease enabling the tenant to determine the term on six months’ notice — Held, on the question of rent, after considering conflicting expert evidence, that the rent should be £106,000 per annum for a 10 years’ term, but with an option for the tenant to break on giving six months’ notice, exercisable within one month of the commencement of the tenancy — The judge considered the issue as to interim rent in the light of the wording of section 24A and the judgment of Megarry J (as he then was) in English Exporters (London) Ltd v Eldonwall Ltd — The judge concluded that the correct interim rent would be £40,000 per annum, but decided to make no order to that effect on an undertaking by the tenant to pay £25,000 per annum for a period from 1983 to 1986 and thereafter £40,000 per annum until the end of the current tenancy — Finally, it was decided, in regard to the form of the rent review clause, that the review should be upwards only as in the present lease, that time would be of the essence, and that improvements should be disregarded in accordance with a formula agreed by the parties
The following cases are referred to in this report.
Bloomfield v Ashwright Ltd (1983) 266 EG 1095, [1983] 1 EGLR 82, CA
CBS United Kingdom Ltd v London Scottish Properties Ltd [1985] 2 EGLR 125; (1985) 275 EG 718
English Exporters (London) Ltd v Eldonwall Ltd [1973] Ch 415; [1973] 2 WLR 435; [1973] 1 All ER 726; (1972) 25 P&CR 379; [1973] EGD 439; 225 EG 255 & 433
Janes (Gowns) Ltd v Harlow Development Corporation [1980] EGD 110; (1979) 253 EG 799, [1980] 1 EGLR 52
This was an application by the tenants, Charles Follett Ltd, for a new tenancy under Part II of the Landlord and Tenant Act 1954 of a vehicle repair and service station in part of a basement of a block of flats at 6 Hall Road, St John’s Wood, London NW8. The landlords were Cabtell Investment Co Ltd.
John Colyer QC and David Neuberger (instructed by Howard Kennedy) appeared on behalf of the plaintiff tenants; Michael Barnes QC and E Prince (instructed by Druces & Attlee) represented the defendants.
Giving judgment, MR. T L G CULLEN QC said: This is an application for a new business tenancy under Part II of the Landlord and Tenant Act 1954. The premises are part of the basement, although not wholly underground, of a block of flats known as 6 Hall Road, London NW8. The existing lease dated April 1 1969 is for 14 years from March 25 1969. The plaintiff tenant is an assignee. The rent under the existing lease is £8,500 for the first seven years. At a rent review in 1976 the rent was agreed at £13,500 for the second seven years of the term.
On July 9 1982 the plaintiff served a notice under section 26 of the Act specifying July 7 1983 as the date for the commencement of the new tenancy. The defendant landlord served no counternotice. In the originating summons issued on November 5 1982 the plaintiff asked for a new tenancy for 14 years at a rent of £13,500 with a rent review after seven years and the lease otherwise on the same terms as the existing lease.
On March 10 1983 the defendant issued a summons for interim rent. On April 13 1983 the defendant filed an affidavit in which it proposed a term of 10 years with five-year rent reviews and a rent of £25,000. The parties then entered into negotiations and nothing happened until October 13 1985, when the matter came before the master and the usual directions were given including one as to the exchange of experts’ reports on or before January 31 1986. Experts’ reports were not in fact exchanged until a day or two before the hearing.
The plaintiff’s expert, Mr H K Marsh, made a report dated May 28 1986 in which he concluded that the rent for a 10-or 14-year term with five-year rent reviews but otherwise upon the terms of the existing lease (with the landlord responsible for structural repairs) would be £57,000. Mr Marsh had somewhat earlier conveyed his views to Mr Piggott, the managing director of the plaintiff. Not unnaturally Mr Marsh’s views caused some surprise to Mr Piggott. I recite this history because, as a result, the plaintiff’s application ceased to be one for 14 years with a seven-year rent review at £13,500 and became one for a term of one year at a rent of £57,500. The defendant likewise altered its views on rental value. It still contends for a 10-year term with five-year reviews but says that the rent should be £125,000.
Mr Barnes for the landlord identified five issues. I am content to take them in the order that they were argued before me. The first is the length of term. The second is the amount of rent. The third is whether or not I should make an order for interim rent and, if so, what that rent should be on a hypothetical tenancy year to year. Fourthly, if I made such an order to what extent should I reduce that rent under the hypothetical tenancy and, fifthly, if I granted a 10-year term what form the rent review clause should take.
Taking the first issue, the duration of the term, it is of course odd to find a tenant asking for one year and the landlord saying that the new lease should be 10 years. When the plaintiff opened its case the reason for the tenant’s request was that on learning of its own valuer’s rental, so recently made, it became apparent that the premises were not viable and the plaintiff would have to leave. What was sought therefore was time to enable it to find new premises. I can well understand such a view and have sympathy for it. Effect to such circumstances was given in CBS United Kingdom Ltd v London Scottish Properties Ltd (1985) 275 EG 718*. However, when Mr Piggott came to give evidence, he was not nearly so precise in expressing the plaintiff’s intentions.
*Editor’s note: Reported also at [1985] 2 EGLR 125.
I formed the view that what the plaintiff really wanted was time, not to implement its present intention to vacate but rather time to consider further its position. Indeed, that accords with the practicalities. The evidence from the plaintiff’s witnesses was that these premises were only just fit for its purposes both physically and in view of the planning and other restraints. Even on the landlord’s initially proposed rent of £25,000, they would only just be acceptable.
On the evidence before me, the plaintiff’s prospects of finding alternative premises that are acceptable physically for its purposes and yet at what it considers to be an acceptable rent are remote. Indeed, although Mr Marsh told me that he had expressed his quick view about rental level in early April, the plaintiff had done little in the way of trying to find such premises, or at least I was not told of much if any activity in that direction. Mr Piggott merely said that if the plaintiff got its way on this application it will probably move and he said that the plaintiff will seek seriously for other premises. He produced a board minute of May 30 1986 in which the directors agreed that a probable new rental value of £57,500 for Hall Road would make it unviable, although no final decision would be reached until the result of the impending hearing was known.
It was further agreed that Mr J A Jason [chairman of the plaintiff] would speak to two estate agents to pursue alternative premises. The minute goes on to mention that attempts should continue to be made to acquire from liquidators certain premises as relocation for Hall Road. That minute was passed nearly two months after Mr Marsh told the plaintiff of his view. I cannot see why the plaintiff has to wait to see if it gets its way. If I grant a 10-year term then it will be equally unacceptable or more so. The possibility of my ordering a rent below that of the plaintiff’s surveyor’s valuation could not seriously enter into the plaintiff’s calculations.
The rent of the subject premises which I fix will be the market rent on the available evidence. It is the plaintiff’s valuer’s view of that rent that is said to be unacceptable. Indeed, it is over twice what would have been just acceptable in 1983. Yet the plaintiff will have to pay the market rent of whatever alternative premises it finds. I am told that it cannot operate from premises much worse physically, and therefore commanding a lower rent, than the subject premises. Having heard Mr Piggott, it seems to me that what the plaintiff wants is not time to move out, but merely to keep its options open so that it can make another application for a new tenancy in a year’s time, and in the interim it can look around in case it can find its ideal premises at a more acceptable rent.
During the course of the hearing, the landlord offered to meet the plaintiff’s point by inserting a break clause into the new lease whereby the tenant could determine the lease on six months’ notice|page:78| such notice to be served within three months from today. Mr Neuberger submitted that I should not saddle the tenant with a term longer than it wants. He said that if it were a choice of the tenant having to find an assignee if I granted a 10-year term and the landlord having to find new tenants if I granted a one-year term, then the landlord is in the business of taking property risks and the burden should fall on it. He pointed out that here the landlord has produced no evidence of the loss to its reversion that a one-year term would cause. He accepted that the landlord could hardly have done so in view of the fact that the tenant only amended its application on the first day of the hearing. Mr Neuberger said that the landlord could have sought an adjournment. In fact the landlord’s valuer gave general evidence as to a one-year term, and that was that they simply do not exist in the market place. Mr Barnes relied upon that and on the uncertainty that a one-year term would create. Mr Barnes relied strongly on the contention that all the tenant wants to do is to keep its options open. I have already found that as a fact. Of course, as far as the uncertainty is concerned, it would still be there if the lease contained the tenant’s option to break it. Mr Neuberger said that the tenant’s option suggested by the landlord was not a reasonable one and should be exercisable for two years. I can see the force in Mr Neuberger’s arguments generally, but they do not take into account that the tenant may not find alternative premises and would therefore be making an application for new tenancy, involving perhaps another four-day hearing, during the course of the next 12 months.
As I said, having heard the evidence, that seems to me to be the most likely result of acceding to the plaintiff’s proposal. That view, if anything is reinforced by the plaintiff’s rejection of the proposed tenant’s option and the suggestion that it should be exercisable for two years.
In my judgment the circumstances here are such that it would be reasonable to order a new tenancy for a length acceptable to the landlord and to protect the tenant’s position resulting from the unexpected increase in rental, by giving it an option to break. It would, of course, also have its right of revocation under section 36(2). I should add that the tenant does not ask for its original proposal of 14 years if I reject the one-year proposal. Mr Barnes’ offer was an option to break on six months’ notice exercisable three months from today. I am not too happy about an option to break a term exercisable before the lease comes into existence. The lease I order, subject to any appeal, will commence in some four months’ time.
I propose to order that the option to break should be exercisable within one month of the commencement of the new tenancy. That will in fact give the tenant some five months to find alternative premises and a further six months to vacate.
The next issue is the rent. I heard evidence from Mr G G Reeves who told me about the condition of the property over the past three or four years. However, the valuers saw the premises, took its condition into account and Mr Reeves’ evidence does not seem to add anything.
The plaintiff’s valuer, Mr Marsh, had no recent experience of letting motor repair workshops in the market place.
The defendants called two experts, Mr D S Warren-Thomas and Mr Henry Berney. Mr Warren-Thomas had no recent experience of letting; Mr Berney told me he had considerable recent experience of letting in the market place. All three agreed there was no ideal comparable, indeed that much is evident from the substantial adjustments that both sides made to the comparables that were produced. In such circumstances, I find the evidence of Mr Berney more useful than that of the other two experts.
Having heard all three, the expert eye of someone steeped in current market conditions, applying his judgment, carried more weight than the exercise of making percentage adjustments expressed with precision to rents of admittedly markedly different premises; particularly when such adjustments were being made by witnesses with no recent experience of market conditions. Mr Berney’s view was that the rental levels for premises of this nature and locality were between £4 and £5 a sq ft. He took a middle figure of £4.50. Although in arriving at that figure he said he had allowed for the disadvantages of columns and a low headroom, I do not think he gave sufficient weight to the latter. His view that the premises could be altered did not seem to me to have been fully thought out. I therefore conclude that the right rate is at the bottom of the range, namely £4. From that there must be a deduction for size. Again I accept Mr Berney’s 10%. That gives a rate of £3.60 per sq ft. That rate is based on net internal areas, which is the measurement used by Mr Berney in his comparables, and in the body of his report and his oral evidence before me. I should add that it is common ground that the rental is the same whether the term is 10 years or one year.
I am fortified in that conclusion because if I turn to look at Mr Marsh’s evidence for the plaintiff I arrive at the same result. He started at £5, being the rate per sq ft for premises in Camley Street — a row of nine light industrial units used for the motor trade. He then made a number of deductions — 20% for the location, 10% for restricted hours of work, 20% for the low headroom, 20% for size, and he also made a deduction which he applied to the area in respect of the existence of the columns and the irregular shape. That deduction is in effect another 15 or 20%. I ignore his 20% for the location. Mr Marsh used Camley Street as a starting point, but he also used a recent letting in one of the units as a check comparable after he formed his view. However, at that stage he thought the Camley Street premises were 5% worse than the subject premises. I also ignore the 10% discount for the restricted hours of work. Mr Marsh said he had not checked whether any of his comparables had hours of work restrictions or not, so it could not have been a point of great significance to him, and, in fact, the Camley Street premises used as a check comparable had more stringent restrictions. Mr Marsh did not suggest that the leases of the other Camley Street premises differed in that respect. The next deduction was of 20% for the low headroom. When Mr Marsh formed his view on this he took into account the heating ducts and service pipes, which he said reduced the headroom to 6 ft 7 in, and in one instance to 5 ft 7 in, from the headroom beneath the beams which was 7 ft 5 in. However, those ducts and pipes are tenant’s improvements and should have been ignored by Mr Marsh. I therefore cannot accept his 20% and I reduce it to 15%. As to the discount in size of 20%, I have already said I accept Mr Berney’s 10%. Finally, I cannot accept the 15 to 20% deduction for the columns and irregular shape. The evidence of Mr Piggott did not disclose difficulties in this respect to justify such a figure, nor was there any support for it in any comparable. In my judgment 5% would be the most that could be justified from the evidence.
So in my judgment the justified deductions by Mr Marsh are 15% for headroom and 5% for the columns — a total of 20%, which brings his £5 down to £4. Deducting 10% for size, that comes down to £3.60, which is the figure I reach from Mr Berney’s evidence. That figure is to be applied to the net internal area (I take that from Mr Marsh’s evidence) which, excluding the boiler house, lavatories and columns, is an area of 28,375 sq ft, giving a rent of £102,150. To that something must be added because the lease is only an internal repairing lease. Mr Berney put £5,000 on to his rent of £120,000: I shall put £4,000 on to my rent of £102,000, making it £106,000.
I turn then to the application for interim rent. Under section 24A of the Act I have a discretion as to whether or not to make an order for the payment of an interim rent. In English Exporters (London) Ltd v Eldonwall Ltd [1973] Ch 415 Megarry J at p 432H said on the question of discretion:
In those circumstances, it seems to me that the court ought in this case to determine an interim rent. The choice lies between leaving the tenants to pay their existing rent, which is admittedly far below the value of what they are getting, and requiring them to pay a rent which, by statutory definition, is the rent ‘which it would be reasonable’ for the tenants to pay. In the absence of considerations pointing to any different conclusion, why should the court prefer the inadequate to the reasonable? Without laying down any formal rule that the onus lies on the tenant to show why the discretion should not be exercised, I would say that in most normal cases the court’s discretion under section 24A ought to be exercised, in that to do so will usually promote justice.
In Bloomfield v Ashwright Ltd (1983) 266 EG 1095, [1983] 1 EGLR 82 Lawton L J said at p 1096, when quoting an argument of the landlord’s counsel:
His submission was, and no doubt it was well-founded, that the judge has a discretion to order interim rent. There may be circumstances when it would be unjust to make a tenant pay interim rent. I find it difficult myself to imagine such circumstances; but no doubt others with a more fertile imagination than I have can do so.
The question, therefore, I have to ask myself is whether it would be unjust in the particular circumstances of this case to make the tenant pay interim rent. To decide that it seems to me that I should first decide what that rent would be. Section 24A(1) provides that the court may determine the rent which ‘would be reasonable for the tenant to pay’. That is an unfettered discretion, but section 24A(3) provides:
In determining a rent under this section the court shall have regard to the rent payable under the terms of the tenancy, but otherwise subsections (1) and (2)
of section 34 of this Act shall apply to the determination as they would apply to the determination of a rent under that section if a new tenancy from year to year of the whole of the property comprised in the tenancy were granted to the tenant by order of the court.
In the English Exporters case Megarry J at p 431 (at letter A) said:
For another thing, section 24A seems to me to lay down a far more restricted formula than would be indicated by the phrase ‘which it would be reasonable for the tenant to pay’ simpliciter. As I have mentioned the section gives the court no roving commission, but provides (I put it shortly) for the rent that it would be reasonable for the tenant to pay to be worked out in a particular way, namely, by taking the market rent and then having regard to the existing rent; and that is all. Reasonableness thus operates within a narrowly defined field, though I do not know that this necessarily makes the problem much easier.
Mr Neuberger invites me to not to follow Megarry J, but to hold that subsection (3) of section 24 merely provides a guideline and does not cut down the apparently unfettered discretion in subsection (1). I decline to do that. I do not see that these subsections can be construed in any way other than that found by Megarry J.
I start with the second leg of subsection (3) by finding what the rent would be for a term from year to year commencing on July 7 1983. Mr Warren-Thomas considered that there should be a discount of 25% from the rent payable under a 10-year term granted now. Mr Marsh’s view was that there should be a 33% discount, but that included a tempering of the rent in the light of the current rent. I find that 25% is the right discount: that will be £26,500 based on the rent of £106,000 for a 10-year term. That deduction will give a rent of £79,500, which I round up to £80,000.
The next stage is to apply the other factor in subsection (3). I must have regard to the rent payable under the terms of the existing tenancy, namely, £13,500. Mr Neuberger said in doing that I can and should take into account the fact that the defendant in the affidavit sworn by a property manager of its managing agents on April 13 1983 proposed a rent of £25,000 for a 10-year term; and the fact that it came as a complete shock to the plaintiff to learn in early April that its valuer considered the current rental to be £57,000; and the fact that the defendant did not disclose its valuer’s view that the current rental value was £125,000 until a day or two before the hearing.
Mr Neuberger says that in those circumstances the tenant, until early April, could reasonably expect that the highest rent it would have to pay for its continued occupation under the existing tenancy would be less than twice the rent currently payable and not nearly six times the rent currently payable and that that is a matter within the first leg of subsection (3). I do not accept that. In my judgment, having regard to the tenant’s reasonable expectation that the interim rent would be less than twice the current rent is not ‘having regard to the current rent’. I was taken to a number of authorities in which the court had to decide how it should have regard to the rent payable under the terms of the tenancy. However, in none of these has the court laid down any principles or guidelines save that the market rent should be suitably tempered. Deductions from the rent payable under the hypothetical tenancy from year to year have been made. In those cases where the percentage deductions can be calculated, they range from some 6% to slightly over 10%.
In the present case, the rent will be payable for over three years. Over that period, the current rent would amount to some £40,000. The rent under the hypothetical tenancy from year to year would total some £250,000. I bear in mind that the current rent is a rent agreed on a rent review seven years before the relevant date and is not one dating from many years back.
Given the dramatic increase, it seems to me that simply to make a 10% deduction would be merely paying lip-service to the current rent. In my judgment, if I am to have regard to it I should make a substantial deduction. Normally the two factors would no doubt not be of equal weight; certainly the first would not outweigh the second. Indeed Megarry J said as much in the English Exporters case, at p 434H. However, in the peculiar circumstances of this case I consider that I should deduct 50%. I therefore determine that if I am to order an interim rent, it should be £40,000 per annum.
I return to the question of the exercise of my discretion and ask myself whether in the particular circumstances of this case it would be unjust to make the tenant pay an interim rent of £40,000 a year. Mr Neuberger relies on the same facts here as he did when asking me to have regard to the landlord’s proposals of £25,000 as the rent of a new tenancy, when I was considering the tempering of the market rent. Other than the events I have mentioned, neither side investigated or relied upon any activity or inactivity during the three-year period. Mr Piggott’s evidence was that it came as a complete shock to him to learn of the plaintiff’s valuer’s view that the current rent was £57,500. It was not suggested that that shock was not genuine. Mr Warren-Thomas for the defendant made his report on May 21 1986. His view of rental value as at July 1983 was £95,000 for a tenancy from year to year. If he had been acting for the landlord when the affidavit was sworn his proposed rental would therefore have been in the region of £100,000 for a new 14-year lease. Had the landlord’s affidavit put that figure forward instead of £25,000, I have no doubt whatsoever that the plaintiff would have acted differently. Instead it remained in possession, and, until early April this year, it considered the most it would have to pay for that possession would be £25,000 a year with the probability that it would be less allowing for the discount for the hypothetical tenancy from year to year. Instead if I ordered an interim rent it would have to pay £40,000 a year. It is right that had the tenant reacted by giving up possession then it would have had to pay such an interim rent up to the time it gave up possession. The tenant accepts that it would not be right that the landlord should simply be left with the current rent for the period involved. The tenant offers an undertaking to pay a rent of £25,000 per annum from July 7 1983 up to March 31 1986 and thereafter to pay at the interim rent I have fixed, namely £40,000 per annum. Given that undertaking I consider that the peculiar circumstances here are such that it would be unjust to make the tenant pay interim rent which I would otherwise have ordered.
The last point concerns the form of the rent review clause. That has three points in it, first, should the rent review be upwards only as it is in the present lease? Second, should time be of its essence, as it is in the present lease? Third, what is to be done in relation to the disregarding of improvements which is presently expressed by reference to subsection (c) of the unamended section 34 of the Act? The last point has been disposed of by agreement. Mr Barnes put forward a form of wording acceptable to the tenant. As to the other two points I have an unfettered discretion under subsection (3) of section 34, which simply provides that, where the rent is determined by the court, the court may, if it thinks fit, further determine that the terms of the tenancy should include such provision for varying the rent as may be specified in the determination. Mr Neuberger says I must not place any weight on the terms of the present lease. He points out that under section 35 the court is directed to have regard to the terms of the current tenancy and to all relevant circumstances. He says that here I am not so limited and my approach should not be that prima facie the terms of the existing lease should be carried into the new tenancy. I accept that. But it seems to me that the fact that the existing lease has a rent review in terms agreed between the original landlord and original tenant is a factor; in Janes (Gowns) Ltd v Harlow Development Corporation (1979) 253 EG 799, [1980] 1 EGLR 52 His Honour Judge Finlay, sitting as a judge of the High Court, inserted an up-and-down rent review clause into a lease where the old lease did not have such a clause and there was evidence before the court that rents might go down in that particular area. The judge in terms relied on that evidence. There is no such evidence here and I have a clause which Mr Neuberger accepted was a well-drafted clause in a form which has stood the test of time. I do not consider that I should tinker around with it. It has to be amended to provide for five-year reviews because the valuation evidence was on that basis. It has to be amended in relation to disregarding improvements, but that can be in the agreed form. Other than that I do not propose to alter the rent review clause.
I therefore make an order in the usual form for a new tenancy for some 10 years expressed as expiring on July 1 1996 at a rent of £106,000 a year. The lease is to contain the provision giving the tenant the option to determine it on six months’ notice, such notice to be served within one month of the commencement of the new tenancy. In other respects, the lease is to be on the terms of the current lease save for the two amendments to the rent review clause I have mentioned. In dealing with the defendant’s application for an interim rent, upon the plaintiff’s undertaking to pay rent of £25,000 per annum from July 7 1983 to March 31 1986 and thereafter until the termination of the current tenancy at £40,000 per annum I make no order on the summons. It was agreed that the question of costs be dealt with by agreement, or the parties should come back before me at a time to be fixed. So far as the order is concerned, since it will have to set out the necessary amendments for the rent review position and to deal with the tenant’s option it would be much simpler if the parties
would lodge an agreed minutes of order with the court, the order to be drawn up as soon as possible.
