Landlord and tenant — Rent review clauses in two related cases — Construction — Assumptions to be made in the hypothetical leases — The actual leases consisted of the first and second floors respectively of a property the reversion of which was vested in the defendant company — The plaintiff in the second case was a director of the plaintiff company in the first case — The two cases were separate but similar, the leases differing in certain respects — The plaintiffs, the lessees in each case, sought the guidance of the court by originating summons on what assumptions should be made as to user and planning permission in the hypothetical leases postulated for the purposes of rent review — Both floors had been used throughout the leases for offices and showrooms, but in both cases this user was unlawful, the authorised use in each case being for warehouse purposes — No proceedings, however, had in either case been taken in respect of the unlawful user
Ltd v
Guildville Ltd
the lease provided that the premises would not be used otherwise than as
showrooms or offices, but, recognising that there was no planning permission
for such user, it also provided that, if enforcement proceedings required the
termination of office user, the lessees would use their best endeavours to
obtain the necessary permission — The judge considered four possible
assumptions that might be made in the hypothetical lease having regard to the
unlawfulness of the existing office user — He decided in favour of the view that
the valuation should be made on the basis of permitted user for warehouse
purposes only but with the hope that planning permission for office user might
be obtained during the term — No doubt the valuer would note that office user
had in fact been going on with the knowledge of the authorities for some time
without objection, but that was a matter for him
although in the main similar to the other, did not contain the covenant to use
best endeavours to obtain planning permission, but it did expressly direct the
surveyor to determine the review rent on the basis of use as offices — It thus
indicated clearly that the rental value was to be determined on the assumption
of a hypothetical lease allowing for lawful office user — The judge considered
this case indistinguishable in principle from Bovis Group Pension Fund Ltd v GC Flooring
& Furnishing Ltd
were made in answer to questions in the originating summons accordingly
The following
cases are referred to in this report.
Attorney-General v Smith [1958] 2 QB 173; [1958] 3 WLR 81; [1958] 2 All ER
557; (1958) 56 LGR 295; 9 P&CR 439
Bovis
Group Pension Fund Ltd v G C Flooring &
Furnishing Ltd (1984) 269 EG 1252, [1984] 1 EGLR 123, CA
Hill v Harris [1965] 2 QB 601; [1965] 2 WLR 1331; [1965] 2 All ER
358; [1965] EGD 96; (1965) 194 EG 199, CA
The plaintiffs
in these two related cases, 6th Centre Ltd and Badouraly Jeanmamod-Karim
respectively, sought as lessees declarations in regard to the true construction
of provisions in rent review clauses in leases of the first and second floors
respectively of a property known as Lyntonia House, 7/13 Praed Street, London
W2. The defendants in each case were the lessors, Guildville Ltd.
William
Mowbray QC and Christopher Russell (instructed by Raymond Saul & Co)
appeared on behalf of the plaintiffs; Robert Pryor QC and Nicholas Dowding
(instructed by Grangewoods) represented the defendants.
Giving
judgment, JUDGE PAUL BAKER QC said: In these two related cases I am concerned
to determine what assumptions a surveyor should make in fixing the rent under
the rent review clauses in two leases of the first and second floors
respectively of Lyntonia House, 7/13 Praed Street, London W2. The first floor
on February 1 1983 was demised by Amalgamated Estates Public Ltd to Kareex
Services Ltd for a term expiring on October 31 1998 at an annual rent of
£18,000 to November 1 1986 and thereafter subject to upward-only reviews. The
second floor on November 1 1978 was demised by the Amalgamated Stores Ltd to
the plaintiff, Badouraly Jeanmamod-Karim, for a term of 20 years from November
1 1978 at the annual rent of £10,750 from November 1 1978 to November 1 1982
and thereafter subject to upward-only reviews inter alia on November 1
1986. The reversion on both leases is now vested in the defendant, Guildville
Ltd. The lease of the first floor has been assigned to the plaintiff, 6th
Centre Ltd, a company of which the plaintiff in the other case is a director.
The building
was at one time a warehouse. The first and second floors have been used
throughout the leases for offices and showrooms. The planning position appears
from a letter of November 28 1985 from the City of Westminster planning
department. It reads:
According to
my records the authorised use of these floors is for warehouse purposes, and
the current office use is therefore unauthorised and should cease forthwith.
Furthermore, planning permission was refused for office use in 1976 . . .
Despite the
terms of that letter and the implications behind it, in fact no proceedings
have been taken against the tenants in respect of the office user which is
indubitably going on there. That user, as appears from the case of Attorney-General
v Smith [1958] 2 QB 173, is unlawful. Now that is the factual position
and it applies to both the cases.
Bearing that
in mind, I then turn to the relevant provisions of the leases, taking first the
lease of the first floor. There are material differences between the two
leases. Clause 3 contains the lessee’s covenants. Under subclause (5) the
lessee undertakes to comply with all Acts of Parliament, regulations and the
lawful requirements of public, local and other competent authorities. Under
subclause 12(a) the lessee undertakes not to use the premises otherwise than as
showrooms and/or offices. Then subclause 12(d) contains the following
undertaking:
In the event
of an enforcement notice being served by the Local Planning or any other
relevant authority requiring that the office user of the demised premises be
terminated then the Lessee hereby covenants with the Lessor that it will at its
own cost use its best endeavours to obtain planning consent for such office
user including the prosecution of an appeal or appeals as may be requisite but
if after having exhausted all rights of appeal the enforcement notice or any
subsequent enforcement shall be effective then the Lessee will discontinue
forthwith such office user at the demised premises.
This
recognises that the building did not have the benefit of planning permission
for office user. Subclause 15(a) expressly refers to planning. The lessee
covenants:
Not to do or
omit or permit or suffer to be done or omitted any act matter or thing at or in
respect of the demised premises or any part thereof or the user or occupation
of the same required to be done or omitted by or under the Planning Acts or
which shall contravene any provision of the Planning Acts
. . .
The provisions
relating to rent review are to be found in clause 6. The only part I need
specifically cite is subclause (iv):
Such Surveyor
shall . . . determine the then full annual market rack rental value of the
demised premises that is to say the full annual rack rental exclusive of all
outgoings at which the demised premises might reasonably be expected to be let
as between a willing lessor and a willing lessee in the open market with vacant
possession without payment of any premium if so well and substantially
maintained upheld repaired decorated and kept as required hereunder as at the
Review Date for the then unexpired residue of the term hereby granted subject
to review as herein provided . . .
Then there is
disregarded a number of matters — the well-known disregards (if I may call them
that) as taken from the Landlord and Tenant Act 1954, section 34 — and the
subclause goes on:
. . . and
otherwise upon the terms and subject to covenants agreements stipulations and
conditions similar to those in this Lease contained (except as to the amount of
the yearly rent First hereby reserved but including similar provisions for the
review thereof)
and then there
is a proviso to ensure that it is an upward-only review. So what the surveyor
is directed to do is to review on the basis that it will be ‘for the unexpired
residue of the term’ and so forth, and as regards the provisions of the lease,
it is
. . .
otherwise upon the terms and subject to covenants agreements stipulations . . .
similar to those in this Lease contained . . .
So one reads into
the hypothetical lease the covenants in the existing lease, including those
which I have already read out in clause 3.
There has been
put before me, in the originating summons of the tenant and the answering
affidavit of the landlords, a set of four possible assumptions which the
surveyor might make in relation to the unlawfulness of the office user which is
currently going on there. At one extreme the tenant says that the premises
should be valued as a warehouse. That is the only lawful use. There is no
positive covenant to use it as offices, merely a covenant not to use it for any
purpose other than showrooms or offices without the consent of the landlords.
At the other extreme the landlord in his affidavit contends that:
. . . the
reviewed rent . . . falls to be determined on the assumption that the demised
premises may lawfully be used as offices, whether or not such a use is in fact
permitted under planning legislation.
As the
argument developed, Mr Pryor for the landlords felt unable to maintain that the
surveyor could simply ignore the covenants relating to compliance with
statutory provisions and in particular the planning Acts which are deemed to be
incorporated in the hypothetical lease. The surveyor has to assume that there
will be compliance with the covenants and that the use of the building, if used
at all, will be lawful. Therefore, he conceded that it would not be right to
direct the surveyor to value the premises on the assumption that they might
lawfully be used as offices or on the basis that the actual, though unlawful,
use continues during the term but with the possibility that the tenant might be
forced to abandon it. This was one of the suggested intermediate bases. He
submitted that the proper direction was the other modified basis, that the
valuation should be made on the basis that the premises could be used only for
warehouse purposes but that account should be taken of the prospect that
planning permission for offices might be obtained during the term. No doubt in
estimating that hope value, the valuer will note that office user has in fact
been going on to the knowledge of the authorities for some time without
objection, but that is a matter for him. Mr Mowbray did not seriously argue
that the hope value should not be taken into account in that manner. I agree
that it should be, and accordingly, with regard to the lease of the first
floor, I shall make a declaration in the terms of para 2 of the originating
summons*.
*Editor’s
note: Para 2 reads: . . . that upon the true construction of the said Lease,
and in the events which have happened, on review of the rent in accordance with
Clause 6 of the said Lease, a surveyor determining the full annual market rack
rental value of the premises as at 1st November 1986 should determine such
value on the basis that the premises may be used during the hypothetical term
only for warehouse purposes in accordance with the planning permission in force
as at 1st November 1986 but should have regard also to any prospect that
planning permission for use as offices could be obtained during the said term.
I now turn to
the other lease, the lease of the second floor. It was, as I have said, made on
November 1 1978 and the pending review is the second; I have no evidence as to
what happened on the first review. This lease is in virtually identical terms
with the lease of the first floor. There are, however, two very significant
differences. First, the user covenant in clause 3(12) does not contain the para
(d) to be found in the other lease, being the paragraph by which the lessee, in
the event of an enforcement notice being served, covenants to use its best
endeavours to obtain planning permission for office user. It does not seem to
have been contemplated that the showroom/office user was under threat. Second,
and more important, in clause 6(iv) the surveyor is expressly directed to value
the premises ‘for use as offices’. More fully, the surveyor is directed to:
. . .
determine the then full annual market rack rental value of the demised premises
that is to say the full annual rack rental exclusive of all outgoings at which
the demised premises might reasonably be expected to be let as between a
willing lessor and a willing lessee in the open market with vacant possession
without payment of any premium and for use as offices if so well and
substantially maintained and upheld,
and so forth,
for the unexpired residue. And then the disregards (if I may put it shortly
like that) in relation to tenant’s improvements, goodwill and so on. Picking it
up after that:
. . . and
otherwise upon the terms and subject to the covenants and agreements
stipulations and conditions similar to those in this Lease contained . . .
Thus a positive
use as offices is contemplated, not merely a restrictive covenant not to use
otherwise as offices. At this point I can deal with a point of construction on
the word ‘otherwise’ in the above extract. Mr Mowbray submitted that the word
was not sufficient to bear the weight of excluding clause 3(15), which requires
the lessee to conform to planning requirements. The consequence would be that
the assumed office user would be unlawful. I prefer Mr Pryor’s construction
that the valuers are directed to value on the basis of a hypothetical lease allowing
for office user; that the parties must be taken to have assumed that the
proposed user is lawful; that ‘otherwise’ carries the meaning that the
covenants in the lease are incorporated only so far as they are consistent with
that hypothesis. On that basis the case, as it seems to me, is
indistinguishable from the decision of the majority of the Court of Appeal in Bovis
Group Pension Fund Ltd v GC Flooring & Furnishing Ltd (1984) 269
EG 1252, [1984] 1 EGLR 123. In that case a large building was in multiple
occupation for a variety of purposes. There was no planning permission for the
use of
the rent at which the building might reasonably be expected to be let for
office purposes. The majority held that it had to be valued on the assumption
that planning permission had been granted.
Mr Mowbray
suggested to me that the decision in Bovis could not stand with the
earlier decision of the Court of Appeal in Hill v Harris [1965] 2
QB 601. In that case it was held that a covenant in a lease that the tenant
should not carry on any business other than a specified business did not import
an implied warranty by the landlord that that business could lawfully be
carried on. Hence, so the argument runs, there was no implied warranty that
planning permission was available even if a grant is made expressly for office
purposes. I am unable to accept this argument. In my judgment it does not bear
on the artificial hypothesis which the valuer is directed to make. Second, even
if the decisions were inconsistent, the position is not such that if Hill
v Harris had been cited to the Court of Appeal in Bovis the court
would inevitably have come to a different decision. As I understand the per
incuriam rule, it is not sufficient to show that more forceful arguments or
convincing authorities might have been deployed in the later case. It must, as
I have said, be such that the decision would inevitably be different. As I see
it, Bovis is distinguishable from Hill v Harris.
I have come to
the conclusion that in the case of the second floor the surveyor should be
directed that the reviewed rent falls to be determined on the assumption that
the demised premises may lawfully be used as offices whether or not such use is
in fact permitted under planning legislation.
