Furlonger v Pettorelli Lalatta and others [2014] EWHC 37 (Ch) CHANCERY DIVISION Jonathan Klein (Sitting as a Deputy Judge of the Chancery Division) 24 January 2014 APPROVED JUDGMENT I DIRECT THAT PURSUANT TO CPR PD 39A PARA 6.1 NO OFFICIAL SHORTHAND NOTE SHALL BE TAKEN OF THIS JUDGMENT AND THAT COPIES OF THIS VERSION AS HANDED DOWN MAY BE TREATED AS AUTHENTIC. MR JONATHAN KLEIN: 1. This is a judgment following the trial of a Part 8 Claim brought by the Claimant relating to the construction of the rent review provisions in a number of sub-leases of flats (“the sub-leases”) at 71 Cadogan Gardens, London, SW3 2RB. 2. At the trial the Claimant was represented by Mr. Robert Lamb and the First, Second and Fourth Defendants (“the Defendants”) were represented by Mr. Daniel Dovar. The claim against the Third Defendant, Rumley Properties Ltd., has been discontinued on terms agreed between it and the Claimant and so the Third Defendant took no part in the trial. 71 Cadogan Gardens 3. There is no dispute between the Claimant and the Defendants about Cadogan Gardens or about the Property. I derive the following information from the report prepared for the trial by the Claimant’s expert. 4. Cadogan Gardens is close to Sloane Square. The neighbouring Cadogan and Eaton Squares are prestigious residential addresses. Whilst Cadogan Gardens is not so prestigious it is, nevertheless, an attractive residential address. 5. 71 Cadogan Gardens was built in the late 19th century in a fairly quiet section of the street and faces communal gardens. It backs on to church buildings across Draycott Terrace. It is divided into flats. The first floor flat (flat 71b) (the flat sub-let to the First and Second Defendants) has the best ceiling height and best outlook. Flat 71d (the flat sub-let to the Fourth Defendant) is on the third floor of the property. Agreed Facts and List of Issues 6. The Claimant and the Defendants have produced a comprehensive statement of agreed facts which also contains an agreed list of issues. It seems appropriate therefore that I set out that statement substantively in full here: 7. As the submissions of the parties developed, it seemed to me that the issues they ask me to determine can be recast, to the same effect as in the agreed statement, as the following questions: I consider these three questions in this judgment. 8. The agreed statement records that the passing rent for each flat is £2,870 p.a. The agreed statement also records that (i) in each of the sub-leases the rent review provisions are upwards only and (ii) the Defendants now contend that the rent for flat 71b should be £508 p.a. and for flat 71d should be £425 p.a. It appears, from the agreed statement, that the Claimant claims that the rent for each of the flats should be £6,369.80 p.a. I am not asked to consider, and do not consider, the consequence of the parties having agreed the passing rent, when taken together with the upwards only rent review provisions of the sub-leases. Nor do I think that it is relevant, for the purpose of answering the three questions I have identified, that the parties may have agreed a particular sum for rent. In this case there has been much discussion about protected tenancies under the Rent Act 1977. Indeed, I consider the terms of that Act in some detail in this judgment. The fact that now the Defendants may have protected tenancies, by virtue of their agreements as to rent with the Claimant, does not, in my view, affect the answers to the three questions. Factual Matrix and the Purpose of the Proviso 9. Quite properly, there is no dispute between the parties that, in construing the Proviso, I need to consider the factual background against which that provision was agreed. 10. Some of the factual background is set out in the agreed statement. The following is also relevant. 11. The sub-leases were entered into on the same day as or, in the case of the sub-lease of flat 71b, within a year of, the making of the Headlease. The sub-leases each recite the Headlease. It is reasonable to infer, and I do infer, that the sub-tenants investigated title and, in doing so, saw the Headlease (or a draft in the same terms) before executing the sub-leases and so knew the terms of the Headlease; including the proviso in clause 4. 12. The Headlease and the sub-leases were entered into shortly after the coming into force of the Rent Act 1977 and shortly after, the parties accepted, amendments to that Act by the Housing Act 1980. There are a number of provisions of the 1977 Act, as amended by the 1980 Act, which or which may touch on the construction of the Proviso. (I now set out, so far as possible, the relevant text of the 1977 Act as amended only by the 1980 Act). 13. Section 5 of the Rent Act 1977 provided: 14. Section 25 of the 1977 Act provided: 15. Section 120 of the 1977 Act provided: 16. Section 127 of the 1977 Act provided: 17. This judgment is not the opportunity to explore the rather complex legislative history and provisions of Part IX of the 1977 Act. I think that it is enough to say that, at the time the sub-leases were made, there were provisions which, in certain circumstances, in effect made assignments at a premium illegal and there were further provisions which in effect saved such premiums from illegality. 18. I take the view that the provisions of the 1977 Act which I have quoted formed part of the factual background against which the parties made the sub-leases. 19. In fact, I go further because, to do so is, as I shall explain, necessary for the third of the questions I have to consider. It seems to me that the general purpose behind the Proviso was to engage those provisions by which premiums on assignment were saved from illegality. Put simply, I conclude that the purpose of the Proviso was to ensure that any premiums paid on assignments of the sub-leases were not tainted with illegality. It is to be remembered that the sub-leases in this case are long leases. It is reasonable to suppose, particularly bearing in mind the location of the flats, that they might be assigned for considerable sums. I do not think it is a coincidence that a large part of the language of the Proviso is identical to a large part of the language of section 127(3D)(c) of the 1977 Act. I am fortified in this conclusion by the even clearer language of the proviso in clause 4 of the Headlease, which makes express reference to allowable premiums, which provision, I have found, the sub-tenants were aware of when the sub-leases were made. I did consider whether the purpose of the Proviso was to ensure that the sub-leases remained within the low rent provisions of the 1977 Act; in particular, section 5, but, for the reasons I have already set out, I prefer the view that the purpose of the Proviso was to meet the illegal premium provisions of the 1977 Act. To this extent I agree with what Mr. Dovar said in paragraph 27(c) of his skeleton argument; namely: 20. It is to be noted that, as I understand it from the parties, the illegal premium provisions of the 1977 Act no longer apply and that they have been repealed. Whilst this might be relevant to the practical effect of this judgment, this should not affect, in my view, the answers to the three questions I have to consider. Construction of the Proviso – General 21. I turn to the first of the three questions I have to answer; namely, what is the proper construction of the Proviso? 22. I hope I do not do a disservice to the eloquence and subtlety of counsel’s submissions (which I have fully considered) by summarising those submissions as follows. 23. Mr. Lamb submitted, in effect, that the Proviso requires that the increase in rent (otherwise than in respect of rates, services, repairs, or maintenance) is capped at each review date at two-thirds of the valuation, as at the review date, of the demised premises calculated in accordance with the formula for calculating rates in section 19 of the General Rate Act 1967. 24. Mr. Dovar submitted, in effect, that the Proviso requires that the increase in rent (otherwise that in respect of rates, services, repairs, or maintenance) is capped, in the circumstances which have happened, at two-thirds of the rateable value of the demised premises as shown in the 1973 valuation list. Construction of the Proviso – Discussion and Conclusions 25. The parties accept, properly in my view, that the starting point for any consideration of the construction of the Proviso is what Lord Hoffman said about the construction of documents in his often-quoted speech in Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 WLR 896, 912g-913e: 26. It might be tempting perhaps to conclude that the proper construction of the Proviso is one which gives effect to its purpose as I have found it above to be. It might be tempting perhaps therefore to conclude that the proper construction of the Proviso is one which ensures that any increase in rent under the sub-leases is capped at an amount which ensures that there will be no illegal premium. But, because of Lord Hoffman’s fourth principle, I do not think I can reach that conclusion. I do not think that I can ignore the words: “the rateable value of the demised premises comprised herein at the date when the variation is made”. 27. I have concluded, having regard to the factual background as I have set it out above, that, properly construed, the Proviso should be read as preventing any increase in the rent payable under the sub-leases (otherwise than in respect of rates, services, repairs, or maintenance) beyond two-thirds of the sum shown as the rateable value of the relevant demised premises on the valuation list which is the valuation list being used, at the review date, by the local authority for the purpose of collecting domestic rates. 28. I cannot agree with Mr. Lamb that, properly construed, the cap in the Proviso imposes a limit by reference to a valuation which happens to have been carried out in accordance with section 19 of the General Rate Act 1967 as at the relevant review date. This fails to take into account in particular section 127(3D)(c) of the 1977 Act by which “rateable value” was to be determined by reference to the valuation list as it happened to exist at the rent review date. 29. I cannot agree with Mr. Dovar that, properly construed, the cap in the Proviso imposes a limit by reference to the 1973 valuation list. I understood Mr. Dovar to rely on the 1973 list, in this context, because it is the last valuation list which was compiled before the abolition of domestic rating. Mr. Dovar’s submission fails to take into account that the 1977 Act does not define “valuation list” and can only be taken to have used that phrase, at the time the sub-leases were made, as a reference to the valuation list compiled for rating purposes. At the time of the making of the sub-leases, such a valuation list was maintained in accordance with the General Rate Act 1967. Section 67(1) of the 1967 Act provided: It is not disputed that no valuation list is now being maintained for the purposes of domestic rating. The 1967 Act was repealed by the Local Government Finance Act 1988 and domestic rates were replaced with the community charge (commonly known as the poll tax) which, in turn, has been replaced with council tax. 30. Mr. Dovar referred me to a passage in the judgment of Arden LJ in Lymington Marina Ltd. v. MacNamara [2007] EWCA Civ 151 at [33]: 31. Mr. Dovar relied on this passage to submit that the parties to the sub-leases must have had in mind that the method for domestic property taxation might change (and domestic rates might be abolished) so that, in construing the Proviso, he submitted, I ought to conclude that the parties to the sub-leases must have had in mind that the valuation list might become only a historical record. It follows therefore, he argued, that, in the circumstances which have happened, the parties must have had in mind that the Proviso is to operate by reference to the 1973 valuation list. 32. It is to be noted that, in terms, Arden LJ, in the passage I have quoted, appears to be considering the question of the implication of contractual terms not the construction of contractual terms. Arden LJ went further in the passage and held: Neither of these principles bears on my conclusion as to the construction of the Proviso. 33. In any event, whilst I do not doubt that, as part of the factual background, the court ought to have in mind that the parties to the agreement in question are likely to have appreciated that statute law might change, to my mind that does not outweigh, in this case, the other parts of the factual background which I have already set out. Nothing in what Arden LJ said leads me to alter the conclusion I have already expressed. (Indeed, in reaching my conclusion as a matter of fact I did have in mind the passage from Lymington which I have just quoted). Breakdown of Machinery 34. I turn to the second of the three questions I have to answer; namely, has the machinery by which the Proviso is to operate broken down? 35. An astute reader of this judgment will already have appreciated that this second question has blended into the first question which I have answered above. That astute reader will probably also have appreciated that I have concluded that the machinery by which the Proviso is to operate has broken down. 36. That the machinery by which the Proviso is to operate has broken down seems to me to be the inevitable consequence of construing the Proviso in the way I have done. Put simply, there is no valuation list being used by the local authority for the purpose of collecting domestic rates because domestic rating has been abolished. 37. The fact that it is possible to obtain a copy of the 1973 valuation list, perhaps from the archives of a local authority, does not give it the status of a valuation list being used by a local authority for the purpose of collecting domestic rates. 38. In deference to Mr. Dovar I deal further with his submission that the 1973 valuation list is still a live list (my words) rather than merely a historic document. 39. Mr. Dovar referred me to section 5 of the 1977 Act, which I have quoted above, and he pointed out that valuation lists are still being used today to determine whether a tenancy is or is not at a low rent for the purposes of the 1977 Act. About this he is right of course. But that does not take matters any further because the relevant valuation list for the purposes of that section is the valuation list as at “the appropriate date” which is a historic date; so that, for the purposes of that section, the valuation list which has to be referred to is a historic list. The 1973 valuation list is not any more a list which meets the requirements of the Proviso as I have construed it just because it has to be referred to for the purposes of section 5 of the 1977 Act. 40. Mr. Dovar also referred me to provisions of the Leasehold Reform Act 1967 but, again, they require a consideration of a historic list which was in existence at “the appropriate date” (see, for example, section 1(4) of the Leasehold Reform Act 1967). 41. Finally, Mr. Dovar referred me to Schedule 8 to the Housing Act 1974 which he said allowed the valuation officer now to alter the 1973 valuation list. It is not clear to me that Schedule 8 continues to operate because it appears to have been incorporated in the 1974 Act by the original section 118 of that Act. The current section 118, following amendment, makes no reference to Schedule 8. In any event, Schedule 8 requires the valuation officer to consider the valuation list as at a specific date; namely 1st April 1973 and, further, as Mr. Lamb submitted, the schedule does not allow the valuation officer to change the 1973 valuation list in my view. It only has the effect of deeming that list to say something it does not say; it seems, for certain purposes. Substitute Machinery 42. The parties agree that, if the machinery by which the Proviso is to operate has broken down, it falls to me to devise substitute machinery. They also agree, sensibly in my view, that, if the original purpose of the Proviso can be ascertained, I should devise substitute machinery which, as nearly as possible, achieves that original purpose. 43. Both Mr. Lamb and Mr. Dovar referred me to and rely on Sudbrook Trading Estate Ltd. v. Eggleton [1983] AC 444. I agree with both Mr. Lamb and Mr. Dovar in their analysis of that case; namely, that it requires the court, when devising substitute machinery, to consider the original purpose of the provision the machinery of which has broken down (see per Lord Fraser of Tullybelton at p.483F and Lord Scarman at p.487H). However, there are some passages in their Lordships’ speeches which could be taken to suggest that the court is merely required to give effect to the proper construction of the provision in question (see per Lord Diplock at p.477C (although his Lordship seems to have treated the construction of the provision in question and the implication of a term into it as synonymous for these purposes), per Lord Fraser at p.483H and per Lord Scarman at p.487G). Adopting this approach could well result, in a case such as the one I am now considering, in a different result to the one which might be reached if the original purpose of the provision in question is the focus of the court’s attention. 44. The difficulty which Sudbrook may present seems to me to have been resolved by the decision of the Court of Appeal in R&A Millett (Shops) Ltd. v. Leon Allan International Fashions Ltd. [1989] 1 EGLR 138. 45. In that case the court was required to consider the following rent review clause: 46. By the time of the trial, the lessors had surrendered the superior lease. The superior lease which had been surrendered had itself contained the following rent review clause: 47. It seems to me that, for the majority (Lloyd LJ and Sir George Waller), however their Lordships articulated their views, the issue was not one of construction. The issue was whether the rent review clause could operate following the surrender of the superior lease. In effect, the majority took the view that it could not without the imposition of substitute machinery, as to which Lloyd LJ said at p.139M: 48. It can be seen that the approach which Lloyd LJ took in that case was to investigate the original purpose of the provision in question. 49. For present purposes, the agreed statement adequately sets out the parties’ respective positions as to the substitute machinery. 50. I heard evidence from an expert for each side. I heard from Mr. Peter Beckett, chartered surveyor, of Beckett & Kay for the Claimant. I heard from Mr. Simon Purcell, chartered surveyor, for the Defendants. 51. The purpose of the Proviso, as I have found it, was not a purpose contended for by either party. In the result, their instructions to their respective experts were not on directly on point and so, for this reason, whilst I found the evidence of both experts interesting and informative, in my view their evidence was not on point. I think that Mr. Lamb was prescient when he wrote in paragraph 14 of his skeleton argument: 52. I have already found the purpose of the Proviso was to ensure that premiums paid on assignments of the sub-leases were not tainted with illegality. As a result, I have concluded that the substitute machinery should operate in each of the sub-leases so as to cap any increase in the rent, on each review, to the maximum amount that will not expose: to the risk, as at the review date, of committing a criminal offence in relation to that premium or loan as the case may be. 53. To my mind, such substitute machinery best gives effect to the purpose of the Proviso as I have found it to be and recognises that the criminal sanctions which it seems the parties to the sub-leases wished to avoid were those contained in section 120 of the 1977 Act. 54. The effect of my decision may be that, at the moment, there is no operative cap, because, the parties told me, the provisions about premiums tainted with illegality have been abolished. I do not think, however, that the abolition of those provisions affects my conclusion. Neither I nor the parties can speculate about what legislation may be introduced in the future. ; 55. At my direction, this judgment has been handed down in the absence of the parties. I direct the parties to agree and sign a draft order recording the effect of this judgment and to provide it, for my approval, to my clerk by 4 p.m. on 31st January 2014. There will need to be a further hearing to deal with consequential matters. I order, therefore, that the determination of all matters consequential on this judgment is adjourned to a further hearing before me on a day to be fixed by the court. In respect of the further hearing I direct as follows:
Furlonger v Pettorelli Lalatta and others
[2014] EWHC 37 (Ch)
CHANCERY DIVISION
Jonathan Klein (Sitting as a Deputy Judge of the Chancery Division)
24 January 2014
APPROVED JUDGMENT
I DIRECT THAT PURSUANT TO CPR PD 39A PARA 6.1 NO OFFICIAL SHORTHAND NOTE SHALL BE TAKEN OF THIS JUDGMENT AND THAT COPIES OF THIS VERSION AS HANDED DOWN MAY BE TREATED AS AUTHENTIC.
MR JONATHAN KLEIN:
1. This is a judgment following the trial of a Part 8 Claim brought by the Claimant relating to the construction of the rent review provisions in a number of sub-leases of flats (“the sub-leases”) at 71 Cadogan Gardens, London, SW3 2RB.
2. At the trial the Claimant was represented by Mr. Robert Lamb and the First, Second and Fourth Defendants (“the Defendants”) were represented by Mr. Daniel Dovar. The claim against the Third Defendant, Rumley Properties Ltd., has been discontinued on terms agreed between it and the Claimant and so the Third Defendant took no part in the trial.
71 Cadogan Gardens
3. There is no dispute between the Claimant and the Defendants about Cadogan Gardens or about the Property. I derive the following information from the report prepared for the trial by the Claimant’s expert.
4. Cadogan Gardens is close to Sloane Square. The neighbouring Cadogan and Eaton Squares are prestigious residential addresses. Whilst Cadogan Gardens is not so prestigious it is, nevertheless, an attractive residential address.
5. 71 Cadogan Gardens was built in the late 19th century in a fairly quiet section of the street and faces communal gardens. It backs on to church buildings across Draycott Terrace. It is divided into flats. The first floor flat (flat 71b) (the flat sub-let to the First and Second Defendants) has the best ceiling height and best outlook. Flat 71d (the flat sub-let to the Fourth Defendant) is on the third floor of the property.
Agreed Facts and List of Issues
6. The Claimant and the Defendants have produced a comprehensive statement of agreed facts which also contains an agreed list of issues. It seems appropriate therefore that I set out that statement substantively in full here:
“This Part 8 Claim seeks the court’s opinion as to the meaning and effect of a proviso within the subleases of each of the Defendants and, in the event that the court shall determine that the machinery laid down in the proviso for providing a limit on rent has broken down, whether and, if so, what alternative machinery should be fixed by the court.
The only evidence on the claim (other than expert evidence) is the witness statement and exhibit of Rosalind Paterson-Morgan made on 30 April 2013.
FACTS: 71 Cadogan Gardens (“the Property”) comprises premises on Lower Ground, Ground and 4 upper floors. In 1981 Felix David Furlonger (the deceased husband of the Claimant) held the headlease of the Property direct from the Cadogan Estate. In 1981 he took a new headlease from the Cadogan Estate and sublet flat b (First Floor), flat c (Second Floor) and flat d (Third Floor) to the persons who had previously been the tenants of those flats or their nominee.
The documents that achieved this result were:
(i) The Lease dated 17 December 1981 (“the Headlease”) demised the Property to the Felix David Furlonger (of whom the Claimant is the successor in title) for a term a term of 61 years and 2 quarters from 25 March 1981 at a premium of £170,000 and at a rent subject to review of £1,000 p.a.
(ii) The Underlease dated 29 November 1982 demised flat b to the First [and Second] Defendants for a term of 61 years and 2 quarters from 25 March 1981 at premiums of £47,500 paid to the Lessor and £52,500 paid to a previous Lessee and at a rent subject to review of £200 per annum.
(iii) The Underlease dated 17 December 1981 demised flat c to Dinah Bridge (of whom the [Third] Defendant is the successor in title) for a term of 61 years and 2 quarters from 25 March 1981 at a premium of £48,500 and at a rent subject to review of £200 per annum.
(iv) The Underlease dated 17 December 1981 demised flat d to David George Price, Daniel Somerset Leggatt and Angus Kenneth Gordon (of whom the [Fourth] Defendant is the successor in title) for a term of 61 years and 2 quarters from 25 March 1981 at a premium of £74,000 and at a rent subject to review of £200 per annum.
The general scheme in the Headlease and the 3 Underleases was that the rents were subject to an upward only review every 10 years on the same date i.e. on 25 March 1991, 2001, 2011 etc.
The review provisions in the Headlease appear in Clause 4… The revised rent was to be:
“.40% of “the total price which could reasonably be obtained by the Lessee selling separately on the revision date the five self-contained flats (including all landlord’s fixtures therein)…in the open market and on the assumption that each unit…is available to let for a term of sixty one and half years (less three days) from the revision date at a peppercorn rent throughout such term…PROVIDED ALWAYS that for so long as there is legislation imposing conditions on allowable premiums in relation to certain long tenancies whereby the terms of the tenancy must ensure at the time when it is granted it is a tenancy at a low rent and that any variation of that sum otherwise than in respect of the rates services repairs or maintenance cannot lead to that sum exceeding an annual rate of two-thirds of the rateable value of a dwellinghouse at that date when the variation is made and for so long as each and every Underlease granted by the Lessee…is granted at a low rent and contains a proviso whereby any variation of the rent payable thereunder otherwise than in respect of rates services repairs or maintenance as aforesaid cannot lead to such sum exceeding an annual rate of two-thirds of the rateable value of the premises comprised in such Underlease at the date when the variation is made THEN any variation of the rent payable under this Lease on the revision dates shall not lead to such sum exceeding an annual rate of two-thirds (less Five pounds) of the total rateable values of the five self-contained units … at the date when such variation is made” (clause 4 E).
The review provisions of the Underlease of flat b appear in the 3rd Schedule…. Paragraph 3 of that schedule commences:
“1. (a) ‘the revision date’ shall mean the date of expiration of the 10th 20th 30th 40th 50th and 60th years of the said term calculated from the 25th of March 1981 and ‘revision date’ shall have a corresponding meaning …
(d) ‘the leasehold value on the revision date’ shall mean the total price which could reasonably be obtained by the Lessor selling separately on a revision date the five self-contained flats (including all landlord’s fixtures and fittings therein) in the open market and on the assumption that each unit is vacant fully repaired and available to let for a term of sixty one and one half years (less three days) from the revision date at a peppercorn rent throughout such term …
3. The revised rent to be determined at the revision date shall subject as hereinafter mentioned be such yearly amount as is the greater of: – (i) 0.08% of the leasehold value on the revision date or (ii) the yearly rent payable hereunder immediately before the revision date”.
Paragraph 3 continues and introduces the proviso under consideration (“the Proviso”), which differs from the proviso in the Headlease and reads:
“3….PROVIDED THAT any variation of the rent payable hereunder otherwise than in respect of rates services repairs or maintenance cannot lead to such sums exceeding an annual rent of two-thirds of the rateable value of the demised premises comprised herein at the date when the variation is made”.
Further paragraph 4 of the 4th Schedule provides:
“in the event of any dispute or difference arising between the parties in respect of any valuation in connection with the revised rent such dispute or difference shall be referred to a duly qualified independent surveyor to act as sole arbitrator in such dispute under the Arbitration Act 1950 or any statutory modification or re-enactment thereof for the time being in force …”.
The comparable provisions of the Underlease of flat c are materially identical to those of flat b….
The comparable provisions of the Underlease of flat d are identical to those of flats b and c except for one matter. The Headlease and the definition of “the leasehold value” in the Underleases of flats b and c use for review purposes a hypothetical lease of 61 ½ years less 3 days from the revision date. The Underlease of flat d uses a hypothetical lease “…for the then residue of the term hereby granted (less three days)”….
The rents due under the Headlease were reviewed in 1991 and 2001, when the formula [in the Headlease] set out above…was applied to fix the revised rent. The long proviso in the Headlease did not have any effect to limit the revised rent as the legislation imposing conditions on allowable premiums had by then been repealed. After the reviews in 1991 and 2001, one-fifth of that rent was paid in respect of each of flats b, c and d. Felix Furlonger had, in 1992, advised the under lessees that the Headlessor had confirmed that the proviso was no longer to be applied in relation to the rent increase from 25th March 1991. In 1991, the amount paid was £1,080 per flat and in 2001, £2,870 per flat.
In 2011, the rent payable under the Headlease was reviewed and fixed at £31,849 per annum. The Defendants refuse to pay one-fifth of that sum and have paid the Claimant the amount of ground rent that they say is correctly due with reference to the cap in the leases, being £508 per annum for flat b and £425 per annum for flat d (One-fifth of that sum is being paid in respect of each of flats a and e, let on leases in different terms). In 1993, flat a was sold and the Lease of flat a did not include the proviso. Flat e is owned by the Claimant. In the result the Claimant is suffering a shortfall in rents.
In April 1973 the Royal Borough of Kensington and Chelsea compiled its valuation list of properties within its area and assessed the rateable values of the flats as follows:
(i) Flat B £763
(ii) Flat C £730
(iii) Flat D £638.
In doing so it applied the method of assessment laid down by section 19 of the General Rate Act 1967.
No subsequent valuation list has been compiled as a result of the abolition of domestic rates in 1990 and their replacement by the community charge and subsequently by council tax.
Revaluation of domestic rateable values occurred in 1939, 1963 and 1973.
Council tax banding was last revalued in April 1991.
Rateable value continues to be applied for non-domestic properties and revaluation of commercial properties was undertaken in 2000, 2005 and 2010 with antecedent valuation dates of 1998, 2003 and 2008 respectively.
ISSUES: The Defendants do not, for the purposes of these proceedings, dispute the quantum of the review under the Headlease but claim that the limit on rent that appears in the proviso applies. Messrs Child & Child for the Defendants have written:
“the issue in dispute is not the method used to arrive at these figures, or their quantum; it is whether or not the cap limiting the ground rent to 2/3 of the rateable value applies.”…
The Claimant accepts that the proviso provides a limit on the rents under the 3 subleases, which is “two-thirds of the rateable value of the demised premises comprised herein at the date when the variation is made”.
The first issue for the court is whether the quoted words can be ascertained for the review dates of 25th March 2011, 2021 etc. and, if so, by what method. The Claimant says that [they] can be ascertained by applying the definition and method of assessment set out in section 19 of the General Rate Act 1967 to be applied as at 25th March 2011, 2021 etc. The Defendants say that the quoted words can be ascertained by taking the figures from the valuation list compiled in April 1973.
The second issue, is whether the machinery set up by the quoted words has broken down and should be replaced by new machinery in accordance with the court’s power laid down by the House of Lords in Sudbrook Trading Estate v. Eggleton [1983] 1 AC 444. The Claimant says that the machinery must have broken down if the quoted words provide a limit frozen in time whilst the rents increase at every review; and further that the new machinery should invoke the definition and assessment set out in section 19 of the General Rate Act to be applied at the review dates.
The Defendant says the replacement mechanism should be:
(i) 2/3rds of the Council Tax and any replacement tax or assessment made on residential property; or alternatively:
(ii) 2/3rds of an amount, calculated by uplifting the 1973 RV figures by a suitable index such as the RPI to either the date of the last period of review for Council Tax banding; or alternatively, the last period of revaluation for non-domestic rates.”
7. As the submissions of the parties developed, it seemed to me that the issues they ask me to determine can be recast, to the same effect as in the agreed statement, as the following questions:
i) What is the proper construction of the Proviso?
ii) Has the machinery by which the Proviso is to operate broken down?
iii) If the machinery has broken down, what should be the substitute machinery?
I consider these three questions in this judgment.
8. The agreed statement records that the passing rent for each flat is £2,870 p.a. The agreed statement also records that (i) in each of the sub-leases the rent review provisions are upwards only and (ii) the Defendants now contend that the rent for flat 71b should be £508 p.a. and for flat 71d should be £425 p.a. It appears, from the agreed statement, that the Claimant claims that the rent for each of the flats should be £6,369.80 p.a. I am not asked to consider, and do not consider, the consequence of the parties having agreed the passing rent, when taken together with the upwards only rent review provisions of the sub-leases. Nor do I think that it is relevant, for the purpose of answering the three questions I have identified, that the parties may have agreed a particular sum for rent. In this case there has been much discussion about protected tenancies under the Rent Act 1977. Indeed, I consider the terms of that Act in some detail in this judgment. The fact that now the Defendants may have protected tenancies, by virtue of their agreements as to rent with the Claimant, does not, in my view, affect the answers to the three questions.
Factual Matrix and the Purpose of the Proviso
9. Quite properly, there is no dispute between the parties that, in construing the Proviso, I need to consider the factual background against which that provision was agreed.
10. Some of the factual background is set out in the agreed statement. The following is also relevant.
11. The sub-leases were entered into on the same day as or, in the case of the sub-lease of flat 71b, within a year of, the making of the Headlease. The sub-leases each recite the Headlease. It is reasonable to infer, and I do infer, that the sub-tenants investigated title and, in doing so, saw the Headlease (or a draft in the same terms) before executing the sub-leases and so knew the terms of the Headlease; including the proviso in clause 4.
12. The Headlease and the sub-leases were entered into shortly after the coming into force of the Rent Act 1977 and shortly after, the parties accepted, amendments to that Act by the Housing Act 1980. There are a number of provisions of the 1977 Act, as amended by the 1980 Act, which or which may touch on the construction of the Proviso. (I now set out, so far as possible, the relevant text of the 1977 Act as amended only by the 1980 Act).
13. Section 5 of the Rent Act 1977 provided:
“Tenancies at low rents
(1) A tenancy is not a protected tenancy if under the tenancy either no rent is payable or, the rent payable is less than two-thirds of the rateable value which is or was the rateable value of the dwelling-house on the appropriate day.
(2) Where–
(a) the appropriate day in relation to a dwelling-house fell before 22nd March 1973, and
(b) the dwelling-house had on the appropriate day a rateable value exceeding, if it is in Greater London, £400 or, if it is elsewhere, £200,
subsection (1) above shall apply in relation to the dwelling-house as if the reference to the appropriate day were a reference to 22nd March 1973.
(3) In this Act a tenancy falling within subsection (1) above is referred to as a “tenancy at a low rent”.
(4) In determining whether a long tenancy is a tenancy at a low rent, there shall be disregarded such part (if any) of the sums payable by the tenant as is expressed (in whatever terms) to be payable in respect of rates, services, repairs, maintenance, or insurance, unless it could not have been regarded by the parties as a part so payable.
(5) In subsection (4) above “long tenancy”, means a tenancy granted for a term certain exceeding 21 years, other than a tenancy which is, or may become, terminable before the end of that term by notice given to the tenant.”
14. Section 25 of the 1977 Act provided:
“Rateable value and meaning of “appropriate day”
(1) Except where this Act otherwise provides, the rateable value on any day of a dwelling-house shall be ascertained for the purposes of this Act as follows:–
(a) if the dwelling-house is a hereditament for which a rateable value is then shown in the valuation list, it shall be that rateable value;
(b) if the dwelling-house forms part only of such a hereditament or consists of or forms part of more than one such hereditament, its rateable value shall be taken to be such value as is found by a proper apportionment or aggregation of the rateable value or values so shown….
(3) In this Act “the appropriate day”–
(a) in relation to any dwelling-house which, on 23rd March 1965, was or formed part of a hereditament for which a rateable value was shown in the valuation list then in force, or consisted or formed part of more than one such hereditament, means that date, and
(b) in relation to any other dwelling-house, means the date on which such a value is or was first shown in the valuation list.
(4) Where, after the date which is the appropriate day in relation to any dwelling-house, the valuation list is altered so as to vary the rateable value of the hereditament of which the dwelling-house consists or forms part and the alteration has effect from a date not later than the appropriate day, the rateable value of the dwelling-house on the appropriate day shall be ascertained as if the value shown in the valuation list on the appropriate day had been the value shown in the list as altered….”
15. Section 120 of the 1977 Act provided:
“Prohibition of premiums and loans on assignment of protected tenancies.
(1) Subject to section 121 of this Act, any person who, as a condition of the assignment of a protected tenancy, requires the payment of any premium or the making of any loan (whether secured or unsecured) shall be guilty of an offence.
(2) Subject to section 121 of this Act, any person who, in connection with the assignment of a protected tenancy, receives any premium shall be guilty of an offence….”
16. Section 127 of the 1977 Act provided:
“Allowable premiums in relation to certain long tenancies.
(1) Where a tenancy is both a long tenancy within the meaning of Part I of the Landlord and Tenant Act 1954 and a protected tenancy, then–
(a) if the conditions specified in subsection (2) below are satisfied with respect to it, nothing in this Part of this Act [which includes section 120] or in Part VII of the Rent Act 1968 (provisions superseded by this Part) or the enactments replaced by the said Part VII shall apply or be deemed every to have applied to the tenancy;
(b) if any of those conditions are not satisfied with respect to it, Part II of Schedule 18 to this Act shall apply and, if the tenancy was granted before the passing of this Act, be deemed always to have applied to it.
(2) The conditions mentioned in subsection (1)(a) above are–
(a) that the tenancy is not, and cannot become, terminable within 20 years of the date when it was granted by notice given to the tenant; and
(b) that, unless the tenancy was granted before 25th July 1969 or was granted in pursuance of Part I of the Leasehold Reform Act 1967, the sums payable by the tenant otherwise than in respect or rates, services, repairs, maintenance or insurance are not, under the terms of the tenancy, varied or liable to be varied within 20 years of the date when it was granted nor, thereafter, more than once in any 21 years; and
(c) that the terms of the tenancy do not inhibit both the assignment and the underletting of the whole of the premises comprised in the tenancy.
(3) Where the condition specified in subsection (2)(b) above would be satisfied with respect to a sub-tenancy but for a term providing for one variation, within 20 years of the date when the sub-tenancy was granted, of the sums payable by the sub-tenant, that condition shall be deemed to be satisfied notwithstanding that term, if it is satisfied with respect to a superior tenancy of the premises comprised in the sub-tenancy (or of those and other premises).
(3A) If the conditions in subsection (3B) below are satisfied in respect of a tenancy, this Part of this Act shall not apply to that tenancy and, together with Part VII of the Rent Act 1968 and the enactments replaced by Part VII, shall be deemed never to have applied to it.
(3B) The conditions are that–
(a) the tenancy was granted before 16th July 1980;
(b) a premium was lawfully required and paid on the grant of the tenancy;
(c) the tenancy was, at the time when it was granted, a tenancy at a low rent; and
(d) the terms of the tenancy do not inhibit both the assignment and the underletting of the whole of the premises comprised in the tenancy.
(3C) If the conditions in subsection (3D) below are satisfied in respect of a tenancy, this section shall have effect, in relation to that tenancy, as if for the words “20 years” and “21 years”, in subsection (2)(b) and (3) above there were substituted, respectively, the words “6 years” and “7 years”
(3D) The conditions are that–
(a) the tenancy is granted after 15th July 1980;
(b) at the time when it is granted it is a tenancy at a low rent; and
(c) the terms of the tenancy ensure that any variation of the sums payable by the tenant otherwise than in respect of rates, services, repairs or maintenance, cannot lead to those sums exceeding an annual rate of two-thirds of the rateable value of the dwelling-house at the date when the variation is made.
For the purposes of this subsection the rateable value of a dwelling-house shall be ascertained in accordance with section 25 of this Act (disregarding subsection (4)) by reference to the value shown in the valuation list at the date when the variation is made….”
17. This judgment is not the opportunity to explore the rather complex legislative history and provisions of Part IX of the 1977 Act. I think that it is enough to say that, at the time the sub-leases were made, there were provisions which, in certain circumstances, in effect made assignments at a premium illegal and there were further provisions which in effect saved such premiums from illegality.
18. I take the view that the provisions of the 1977 Act which I have quoted formed part of the factual background against which the parties made the sub-leases.
19. In fact, I go further because, to do so is, as I shall explain, necessary for the third of the questions I have to consider. It seems to me that the general purpose behind the Proviso was to engage those provisions by which premiums on assignment were saved from illegality. Put simply, I conclude that the purpose of the Proviso was to ensure that any premiums paid on assignments of the sub-leases were not tainted with illegality. It is to be remembered that the sub-leases in this case are long leases. It is reasonable to suppose, particularly bearing in mind the location of the flats, that they might be assigned for considerable sums. I do not think it is a coincidence that a large part of the language of the Proviso is identical to a large part of the language of section 127(3D)(c) of the 1977 Act. I am fortified in this conclusion by the even clearer language of the proviso in clause 4 of the Headlease, which makes express reference to allowable premiums, which provision, I have found, the sub-tenants were aware of when the sub-leases were made. I did consider whether the purpose of the Proviso was to ensure that the sub-leases remained within the low rent provisions of the 1977 Act; in particular, section 5, but, for the reasons I have already set out, I prefer the view that the purpose of the Proviso was to meet the illegal premium provisions of the 1977 Act. To this extent I agree with what Mr. Dovar said in paragraph 27(c) of his skeleton argument; namely:
“…the cap [in the Proviso] was to ensure that the lease was not caught by the unlawful premium trap.”
20. It is to be noted that, as I understand it from the parties, the illegal premium provisions of the 1977 Act no longer apply and that they have been repealed. Whilst this might be relevant to the practical effect of this judgment, this should not affect, in my view, the answers to the three questions I have to consider.
Construction of the Proviso – General
21. I turn to the first of the three questions I have to answer; namely, what is the proper construction of the Proviso?
22. I hope I do not do a disservice to the eloquence and subtlety of counsel’s submissions (which I have fully considered) by summarising those submissions as follows.
23. Mr. Lamb submitted, in effect, that the Proviso requires that the increase in rent (otherwise than in respect of rates, services, repairs, or maintenance) is capped at each review date at two-thirds of the valuation, as at the review date, of the demised premises calculated in accordance with the formula for calculating rates in section 19 of the General Rate Act 1967.
24. Mr. Dovar submitted, in effect, that the Proviso requires that the increase in rent (otherwise that in respect of rates, services, repairs, or maintenance) is capped, in the circumstances which have happened, at two-thirds of the rateable value of the demised premises as shown in the 1973 valuation list.
Construction of the Proviso – Discussion and Conclusions
25. The parties accept, properly in my view, that the starting point for any consideration of the construction of the Proviso is what Lord Hoffman said about the construction of documents in his often-quoted speech in Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 WLR 896, 912g-913e:
“The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of “legal” interpretation has been discarded. The principles may be summarised as follows.
(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the “matrix of fact,” but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co. Ltd. v. Eagle Star Life Assurance Co. Ltd. [1997] A.C. 749.
(5) The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera S.A. v. Salen Rederierna A.B. [1985] A.C. 191, 201:
“if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.”” (emphasis added).
26. It might be tempting perhaps to conclude that the proper construction of the Proviso is one which gives effect to its purpose as I have found it above to be. It might be tempting perhaps therefore to conclude that the proper construction of the Proviso is one which ensures that any increase in rent under the sub-leases is capped at an amount which ensures that there will be no illegal premium. But, because of Lord Hoffman’s fourth principle, I do not think I can reach that conclusion. I do not think that I can ignore the words: “the rateable value of the demised premises comprised herein at the date when the variation is made”.
27. I have concluded, having regard to the factual background as I have set it out above, that, properly construed, the Proviso should be read as preventing any increase in the rent payable under the sub-leases (otherwise than in respect of rates, services, repairs, or maintenance) beyond two-thirds of the sum shown as the rateable value of the relevant demised premises on the valuation list which is the valuation list being used, at the review date, by the local authority for the purpose of collecting domestic rates.
28. I cannot agree with Mr. Lamb that, properly construed, the cap in the Proviso imposes a limit by reference to a valuation which happens to have been carried out in accordance with section 19 of the General Rate Act 1967 as at the relevant review date. This fails to take into account in particular section 127(3D)(c) of the 1977 Act by which “rateable value” was to be determined by reference to the valuation list as it happened to exist at the rent review date.
29. I cannot agree with Mr. Dovar that, properly construed, the cap in the Proviso imposes a limit by reference to the 1973 valuation list. I understood Mr. Dovar to rely on the 1973 list, in this context, because it is the last valuation list which was compiled before the abolition of domestic rating. Mr. Dovar’s submission fails to take into account that the 1977 Act does not define “valuation list” and can only be taken to have used that phrase, at the time the sub-leases were made, as a reference to the valuation list compiled for rating purposes. At the time of the making of the sub-leases, such a valuation list was maintained in accordance with the General Rate Act 1967. Section 67(1) of the 1967 Act provided:
“For the purposes of rates, there shall be maintained for each rating area a valuation list prepared, and for time to time caused to be altered, in accordance with this Part of this Act by the valuation officer” (emphasis added).
It is not disputed that no valuation list is now being maintained for the purposes of domestic rating. The 1967 Act was repealed by the Local Government Finance Act 1988 and domestic rates were replaced with the community charge (commonly known as the poll tax) which, in turn, has been replaced with council tax.
30. Mr. Dovar referred me to a passage in the judgment of Arden LJ in Lymington Marina Ltd. v. MacNamara [2007] EWCA Civ 151 at [33]:
“In my judgment there can be no necessary implication that, where parties come to an agreement, that agreement must be interpreted on the basis of the law as it stood when the agreement was made as if it were in some time warp. It is part of the factual matrix known to both parties that both statute law and the common law develop over time. Developments in the common law apply retrospectively unless, exceptionally, the court makes an order for prospective overruling: see generally re Spectrum Plus [2005] 2 AC 680. If the parties have been content to leave a matter to the general law, they must be taken to have agreed that their agreement should be interpreted in the light of the general law from time to time.”
31. Mr. Dovar relied on this passage to submit that the parties to the sub-leases must have had in mind that the method for domestic property taxation might change (and domestic rates might be abolished) so that, in construing the Proviso, he submitted, I ought to conclude that the parties to the sub-leases must have had in mind that the valuation list might become only a historical record. It follows therefore, he argued, that, in the circumstances which have happened, the parties must have had in mind that the Proviso is to operate by reference to the 1973 valuation list.
32. It is to be noted that, in terms, Arden LJ, in the passage I have quoted, appears to be considering the question of the implication of contractual terms not the construction of contractual terms. Arden LJ went further in the passage and held:
i) That, as a general proposition, the courts declare the common law. They do not change it prospectively;
ii) That, as a general proposition, a court asked to construe an agreement must do so by reference to the state of the law (including, presumably, as to the construction of documents) as at the time it is asked to do so.
Neither of these principles bears on my conclusion as to the construction of the Proviso.
33. In any event, whilst I do not doubt that, as part of the factual background, the court ought to have in mind that the parties to the agreement in question are likely to have appreciated that statute law might change, to my mind that does not outweigh, in this case, the other parts of the factual background which I have already set out. Nothing in what Arden LJ said leads me to alter the conclusion I have already expressed. (Indeed, in reaching my conclusion as a matter of fact I did have in mind the passage from Lymington which I have just quoted).
Breakdown of Machinery
34. I turn to the second of the three questions I have to answer; namely, has the machinery by which the Proviso is to operate broken down?
35. An astute reader of this judgment will already have appreciated that this second question has blended into the first question which I have answered above. That astute reader will probably also have appreciated that I have concluded that the machinery by which the Proviso is to operate has broken down.
36. That the machinery by which the Proviso is to operate has broken down seems to me to be the inevitable consequence of construing the Proviso in the way I have done. Put simply, there is no valuation list being used by the local authority for the purpose of collecting domestic rates because domestic rating has been abolished.
37. The fact that it is possible to obtain a copy of the 1973 valuation list, perhaps from the archives of a local authority, does not give it the status of a valuation list being used by a local authority for the purpose of collecting domestic rates.
38. In deference to Mr. Dovar I deal further with his submission that the 1973 valuation list is still a live list (my words) rather than merely a historic document.
39. Mr. Dovar referred me to section 5 of the 1977 Act, which I have quoted above, and he pointed out that valuation lists are still being used today to determine whether a tenancy is or is not at a low rent for the purposes of the 1977 Act. About this he is right of course. But that does not take matters any further because the relevant valuation list for the purposes of that section is the valuation list as at “the appropriate date” which is a historic date; so that, for the purposes of that section, the valuation list which has to be referred to is a historic list. The 1973 valuation list is not any more a list which meets the requirements of the Proviso as I have construed it just because it has to be referred to for the purposes of section 5 of the 1977 Act.
40. Mr. Dovar also referred me to provisions of the Leasehold Reform Act 1967 but, again, they require a consideration of a historic list which was in existence at “the appropriate date” (see, for example, section 1(4) of the Leasehold Reform Act 1967).
41. Finally, Mr. Dovar referred me to Schedule 8 to the Housing Act 1974 which he said allowed the valuation officer now to alter the 1973 valuation list. It is not clear to me that Schedule 8 continues to operate because it appears to have been incorporated in the 1974 Act by the original section 118 of that Act. The current section 118, following amendment, makes no reference to Schedule 8. In any event, Schedule 8 requires the valuation officer to consider the valuation list as at a specific date; namely 1st April 1973 and, further, as Mr. Lamb submitted, the schedule does not allow the valuation officer to change the 1973 valuation list in my view. It only has the effect of deeming that list to say something it does not say; it seems, for certain purposes.
Substitute Machinery
42. The parties agree that, if the machinery by which the Proviso is to operate has broken down, it falls to me to devise substitute machinery. They also agree, sensibly in my view, that, if the original purpose of the Proviso can be ascertained, I should devise substitute machinery which, as nearly as possible, achieves that original purpose.
43. Both Mr. Lamb and Mr. Dovar referred me to and rely on Sudbrook Trading Estate Ltd. v. Eggleton [1983] AC 444. I agree with both Mr. Lamb and Mr. Dovar in their analysis of that case; namely, that it requires the court, when devising substitute machinery, to consider the original purpose of the provision the machinery of which has broken down (see per Lord Fraser of Tullybelton at p.483F and Lord Scarman at p.487H). However, there are some passages in their Lordships’ speeches which could be taken to suggest that the court is merely required to give effect to the proper construction of the provision in question (see per Lord Diplock at p.477C (although his Lordship seems to have treated the construction of the provision in question and the implication of a term into it as synonymous for these purposes), per Lord Fraser at p.483H and per Lord Scarman at p.487G). Adopting this approach could well result, in a case such as the one I am now considering, in a different result to the one which might be reached if the original purpose of the provision in question is the focus of the court’s attention.
44. The difficulty which Sudbrook may present seems to me to have been resolved by the decision of the Court of Appeal in R&A Millett (Shops) Ltd. v. Leon Allan International Fashions Ltd. [1989] 1 EGLR 138.
45. In that case the court was required to consider the following rent review clause:
“The rent payable by the Lessee as from the 25th day of March 1983 shall be seventy-eight eighty-fifth parts of the rent payable by the Lessor as from such date in respect of the principal premises as fixed in the manner provided by the said Superior Lease or the rent of £7,800 per annum (whichever shall be the greater).”
46. By the time of the trial, the lessors had surrendered the superior lease. The superior lease which had been surrendered had itself contained the following rent review clause:
“(a) Upon the request of the Lessors made not earlier than twelve months nor later than six months immediately preceding the expiration of the fourteenth year of the said term each party shall within fourteen days appoint a duly qualified Valuer to negotiate and endeavour to reach agreement with the Valuer of the other party as to the fair market rack rent of the premises at that time for a Lease for the residue of the said term without taking a premium and disregarding the effect on rent of any alterations carried out by the Lessees (other than in pursuance of any obligation to the Lessor) or any change of use consequent thereon or any goodwill attached to the premises by reason of the Lessee’s occupation thereof on the same terms and conditions (save for this proviso) as are herein contained. And in the event of such Valuers not having reached such agreement by the expiry of the period of six weeks they shall agree upon an umpire to settle the question whose decision shall be final and binding upon both parties;…
(c) The rent payable under the Lease from the expiration of the fourteenth year of the said term shall be the rent fixed in manner aforesaid or the rent of £8,500 per annum (whichever shall be the greater).”
47. It seems to me that, for the majority (Lloyd LJ and Sir George Waller), however their Lordships articulated their views, the issue was not one of construction. The issue was whether the rent review clause could operate following the surrender of the superior lease. In effect, the majority took the view that it could not without the imposition of substitute machinery, as to which Lloyd LJ said at p.139M:
“The purpose of referring to 78/83ths of the rent payable by the lessor in [the rent review clause under consideration] is not, as Mr. Evans-Lombe argued, to ensure that the plaintiffs do not recover more than the designated fraction of what they actually pay. The purpose is different. It is to enable the rent to be ascertained by reference to the premises as a whole, and not by reference to part of the premises. What [the] clause of the underlease requires is, therefore, a valuation of the fair market rent of the premises as a whole, followed by the application of the designated fraction. This is a sensible construction. It does not involve writing anything into [the] clause. It involves no more than giving the meaning which the existing words bear.
Once it is accepted that the clause requires the defendants to pay 78/83ths of a fair market rent for the premises as a whole, then the case is on all fours with Sudbrook….”
48. It can be seen that the approach which Lloyd LJ took in that case was to investigate the original purpose of the provision in question.
49. For present purposes, the agreed statement adequately sets out the parties’ respective positions as to the substitute machinery.
50. I heard evidence from an expert for each side. I heard from Mr. Peter Beckett, chartered surveyor, of Beckett & Kay for the Claimant. I heard from Mr. Simon Purcell, chartered surveyor, for the Defendants.
51. The purpose of the Proviso, as I have found it, was not a purpose contended for by either party. In the result, their instructions to their respective experts were not on directly on point and so, for this reason, whilst I found the evidence of both experts interesting and informative, in my view their evidence was not on point. I think that Mr. Lamb was prescient when he wrote in paragraph 14 of his skeleton argument:
“The Claimant’s position regarding expert evidence is that such evidence, coming from persons who have day to day conduct with property, might just assist the court with the practicalities of possible new mechanisms. However, the need for a new mechanism and the terms of it are…entirely in the hands of the court and it may well turn out to be unnecessary for the court to make findings as to the difference between [the experts].”
52. I have already found the purpose of the Proviso was to ensure that premiums paid on assignments of the sub-leases were not tainted with illegality. As a result, I have concluded that the substitute machinery should operate in each of the sub-leases so as to cap any increase in the rent, on each review, to the maximum amount that will not expose:
i) any person who as a condition of a future assignment may require the payment of any premium or the making of any loan (whether secured or unsecured); or,
ii) any person who, in connection with a future assignment, may receive any premium;
to the risk, as at the review date, of committing a criminal offence in relation to that premium or loan as the case may be.
53. To my mind, such substitute machinery best gives effect to the purpose of the Proviso as I have found it to be and recognises that the criminal sanctions which it seems the parties to the sub-leases wished to avoid were those contained in section 120 of the 1977 Act.
54. The effect of my decision may be that, at the moment, there is no operative cap, because, the parties told me, the provisions about premiums tainted with illegality have been abolished. I do not think, however, that the abolition of those provisions affects my conclusion. Neither I nor the parties can speculate about what legislation may be introduced in the future.
;
55. At my direction, this judgment has been handed down in the absence of the parties. I direct the parties to agree and sign a draft order recording the effect of this judgment and to provide it, for my approval, to my clerk by 4 p.m. on 31st January 2014. There will need to be a further hearing to deal with consequential matters. I order, therefore, that the determination of all matters consequential on this judgment is adjourned to a further hearing before me on a day to be fixed by the court. In respect of the further hearing I direct as follows:
i) The time estimate for the hearing is 1 hour;
ii) Counsel must prepare written submissions briefly identifying the consequential orders they intend to ask for and their reasons for so doing;
iii) The written submissions must not exceed 4 A4 pages and otherwise must be strictly in accordance with Appendix 7 of the Chancery Guide;
iv) At least 1 day before the hearing, the parties must mutually exchange and provide to my clerk a copy of their written submissions.
