Landlord and tenant — Covenant against subletting without landlord’s consent — Whether landlord entitled to withhold consent where reasonable belief held that subletting at rent less than open market value and subletting would detrimentally harm reversionary interest
By an
underlease dated September 16 1994 the plaintiff tenant holds a 15-year term of
commercial premises at a rent of £115,000 pa from the defendant landlord,
subject to covenants against alienation. These provide that the tenant may not
underlet without the landlord’s consent ‘such consent not to be unreasonably
withheld or delayed’, and that the rent of every underlease shall not be less
than the open market rental value to be approved by the landlord. On the
tenant’s application to underlet at a rent of £75,000 pa, the landlord refused
consent on the grounds that: (1) the proposed underletting would detrimentally
affect the reversionary value; and (2) the rent of £75,000 is, or is reasonably
believed by the landlord to be, less than the open market rental value. The
tenant applied for a declaration that the landlord had unreasonably withheld
consent.
unreasonably withheld consent. (1) The proposed subletting would not detrimentally
affect the reversionary interest of the landlord. It was not reasonable for the
landlord to require the tenant to postpone subletting until rents improved so
as to increase the value of the landlord’s reversion. (2) On the evidence, the
rent of £75,000 was not below the open market rental value. But on the proper
construction of the alienation covenants, the landlord was entitled to withhold
consent if it believed at the time it withheld consent that the rent was less
than the open market rental value; its ‘approval’ of the rent was required.
However the landlord could not rely on this aspect of the second ground because
it was not a ground in its mind at the time of its refusal, it had not stated
the ground in its letter of refusal, and, in any event, if the landlord had had
such view in mind at the time, it was not a reasonable view.
The following
cases are referred to in this report.
Air India v Balabel [1993] 2 EGLR 66; [1993] 30 EG 90, CA
Bromley
Park Garden Estates Ltd v Moss [1982] 1 WLR
1019; [1982] 2 All ER 890; (1982) 44 P&CR 266; [1983] 1 EGLR 65; [1983] EGD
492; 266 EG 1189, CA
International
Drilling Fluids Ltd v Louisville Investments
(Uxbridge) Ltd [1986] Ch 513; [1986] 2 WLR 581; [1986] 1 All ER 321; (1985)
51 P&CR 187; [1986] 1 EGLR 39; 277 EG 62, CA
Ponderosa
International Development Inc v Pengap
Securities (Bristol) Ltd [1986] 1 EGLR 66; (1985) 277 EG 1252
This was an
application by the tenant, Blockbuster Entertainment Ltd, for declaratory
relief and damages in proceedings against the landlord, Leakcliff Properties
Ltd.
Alexander
Hill-Smith (instructed by Brookstreet des Roches, of Witney) appeared for the
tenant; Michael Driscoll QC (instructed by Pulver & Co, of Watford)
represented the landlord.
Giving
judgment, NEUBERGER J said: The issue in this case is whether the
defendant, Leakcliff Properties Ltd (‘the landlord’) is entitled to withhold
its consent to the proposed subletting of premises known as The Pyramid, High
Street, Watford (‘the premises’), by the plaintiff, Blockbuster Entertainment
Ltd (‘the tenant’), to Byte Computer Stores Ltd (‘Byte’).
The landlord,
who holds the premises under a headlease, granted an underlease (‘the lease’)
of the premises to the tenant on September 16 1994 for a term of 15 years at a
rent of £115,000 pa subject to upward-only reviews every five years, with a one
month rent-free period. Clause 5.8 of the lease is a covenant by the tenant
regulating alienation and two of its subclauses are directly relevant to the
point at issue. Clause 5.8.3. is a covenant by the tenant
not to
assign, underlet or charge the whole of the premises without the prior written
consent of the landlord, such consent not to be unreasonably withheld or
delayed.
Clause 5.8.6
is a covenant by the tenant:
that each and
every permitted underlease should be granted without any fine or premium at a
rent not less than the then open market rental value of the premises to be
approved by the landlord prior to any such underlease, such approval not to be
unreasonably withheld or delayed (save that in the case of the renewal of any
permitted underlease under the provisions of the 1954 Act … the prior approval
of the landlord to the rent payable under the renewed underlease shall not be
required where the rent is determined by the court …) …
On July 1 1996
the tenant agreed to grant an underlease of the premises to Byte, subject to
obtaining landlord’s consent within a specified period, at an initial rent of
£75,000 pa, but otherwise on terms which effectively reflect the terms of the
lease.
The landlord
has refused consent to this proposed underletting and puts its case effectively
on two grounds. The first ground is that the proposed underletting will, or the
landlord reasonably believes that it will, detrimentally affect the value of
the landlord’s reversionary interest in the premises. The second ground is that
the rent of £75,000 pa to be reserved under the proposed underlease is, or is
reasonably believed by the landlord not to be, less than the ‘open market
rental value of the premises’.
It is common
ground between the parties that the proposed underletting would be in breach of
covenant if it is at a rent lower than the open market rental value of the
premises. That appears to me to be right in light of the words ‘at a rent not
less than the open market rental value of the premises’ in clause 5.8.6.
It is
convenient, in my judgment, to consider initially the second ground advanced by
the landlord for two reasons. First, the second ground involves issues of fact
and expert evidence, but does not raise any question of construction. Second,
if I am in the landlord’s favour on this second ground, it is really an end of
the matter; conversely, if I am in favour of the tenant on this second ground,
my conclusion will, I think, have some part to play when I turn to consider the
first ground.
Open
market rental value of the premises
The case for
the tenant is in summary form that the premises were extensively marketed by
the tenant and by experienced and competent surveyors, Johnson Fellows &
Co, in early April 1995 and that this marketing campaign resulted in a number
of bids. The highest of these bids was the £75,000 pa received from Byte at the
beginning of June 1996. (It is right to say that there was another rental bid
at that level, but it was for a use not permitted under the lease). The tenant
also relies on expert valuation evidence of the surveyor, namely Mr Timothy
Frost [FRICS] of Brasier Harris,
who valued the premises at £60,000 pa.
The landlord’s
contention that the open market rental value of the premises is significantly
more than £75,000 pa rests on the following factors. First, the rent of
£115,000 pa payable under the lease was negotiated in the open market and is
therefore good evidence of the rental value of the premises when the parties
bindingly agreed to enter into the lease, which was in December 1993. Basing
its argument on rental evidence in central Watford, the landlord contends that
it is inconceivable that the rental value of the premises can have fallen by
one-third from December 1993 to 1995 or 1996.
Second, the
landlord, partly through cross-examination of the tenant’s witnesses and partly
through the expert evidence of Mr Colin Buckle [FRICS FSVA ACIArb] of Colin
Buckle & Co, contends that the marketing campaign conducted by and on
behalf of the tenant was effected in a manner which was not appropriate for the
particular premises, and which cannot, at its lowest, be relied on to have
produced the best rent which could have been obtained from the market. The
landlord’s case is that the marketing campaign has produced rental bids, all of
which, including Byte’s offer, are well below the best rent which could have
been obtained for the premises.
Third, the
landlord relies on the expert opinion of Mr Buckle, which is to the effect that
the open market rental value of the premises is £95,000 pa.
I have reached
the clear conclusion that the tenant’s best evidence of what a particular
property is worth on the open market is the rent payable under a binding
agreement for the letting of the property after it has been properly exposed to
the market. Of course, if it can be shown that the property has been marketed
incompetently or that, for some special reason of the intending lessor, the
property has not been properly exposed to the market, one may well conclude
that the highest firm bid received as a result of the marketing exercise does
not in fact represent the market value of the property concerned.
In this case I
am not impressed by the criticisms which have been levelled against the
marketing exercise conducted by and on behalf of the tenant in 1995 and 1996.
The way in which a property is marketed is very much a matter of judgment and,
unless the result of a particular marketing exercise is unusually good, it is
no doubt always possible, with the wisdom of hindsight, to criticise aspects of
the exercise. In the present case that observation is, I believe, reinforced
when one takes into account the fact that, as all the surveyors who gave
evidence before me agreed, the premises are very exceptional. This is partly
due to their location, an island site at the southern end of the High Street
and abutting the ring road, and partly due to the nature of the premises, a
striking steel-framed glass pyramid on a brick base with a ground floor of just
over 5,000 sq ft and a mezzanine floor of just over 1,350 sq ft. The premises
would not appeal to most normal retailers and, particularly in light of the
fact that the premises only include nine car parking spaces, they are not well
suited for retail warehouse use.
It is said
that it was inappropriate for the tenant to have employed Johnson Fellows &
Co, in part because they are based in Birmingham and in part because they are
not a firm which specialise in marketing first class or flagship properties
such as the premises. I do not accept that. I heard evidence from Mr Andrew
Heaney [ARICS], the partner at
Johnson Fellows & Co who handled the marketing. He appeared to me to be
competent and to have given the marketing of these premises a high priority,
not least because he valued the tenant as an important client. His marketing
campaign appeared to me to have method and it produced a number of rental bids.
He contacted a very large number of retailers as well as agents and restaurant
and brewery business operators. It is also said that the tenant should not have
marketed the premises on the basis of a use which required planning permission
and licensed change of the use under the
that, if a restaurant or brewery had been prepared to bid for the premises, the
chances are that it would have bid more than a retail user. I cannot therefore
see why it was unwise to proceed in that way. In any event, I am not persuaded
that the initial marketing of the premises for a restaurant or brewery purposes
resulted in retail users not being prepared to bid for the premises thereafter,
or lowering their bid for the premises thereafter.
The tenant was
also criticised for advertising the premises from January 1996 at too low an
asking rent, namely £75,000 pa. I am not impressed with that point either. The
figure of £75,000 pa was arrived at by Mr Heaney after it was clear to him from
various bids which have been put forward that the market was thinking in terms
of around £50,000 pa as the appropriate rent for the premises. Further, as is
clear from Mr Buckle’s own evidence relating to another property in Watford
(153 Harlequin Centre) if there is a demand for a property, it will often be
let at a rent substantially higher than the asking rent. The evidence on that
transaction involved two interested parties effectively bidding the property up
against each other. It is interesting to note that it was on a somewhat similar
basis that Byte was persuaded in the present case to go as high as £75,000 pa.
Various other
criticisms were made of the marketing campaign such as the fact that the wrong
retailers were targeted and that the marketing campaign was too impersonal. I
am not impressed with these criticisms. There is no evidence to suggest that
anyone would have been prepared to pay more than £75,000 pa. While I quite see
the point made by Mr Buckle to the effect that it is not for the landlord to
market the premises for the tenant, I consider that the criticisms made of the
marketing exercise fall well short of causing me to doubt its effectiveness. It
does not seem to me that Mr Buckle identified any significant number of
organisations which should have been contacted, let alone any organisation which
might have been interested in bidding for the premises, and certainly none
which might have been prepared to contemplate paying more than £75,000 pa.
As to the
expert opinions as to the open market rental value of the premises, I regret to
say that I did not find the evidence of Mr Buckle or Mr Frost particularly
helpful. They both accepted that the combination of location, construction and
shortage of car parking spaces rendered the premises not so much unusual as
unique in valuation terms. Accordingly, the valuations were all effected very
much on the basis of general experience and, having decided that the marketing
campaign was an effective one that produced the open market rent, it seems to
me that the weight to be given to the expert evidence is comparatively slight
on this issue.
In making
these observations about the evidence of Mr Buckle or Mr Frost, I am not in any
way adversely criticising them. They were both doing their best in difficult
circumstances. However, when one has premises for which there are no
comparables because of location, size, construction and lack of car parking
spaces, the evidence of the rent thrown up by what I conclude was competent
marketing, provides a more useful guide to market value than the opinion
evidence of surveyors, however experienced they might be.
The reliance
placed by the landlord, and indeed by Mr Buckle in his expert evidence, on the
rent of £115,000 pa agreed for the subject lease in December 1993 appears to me
to be ill founded. The rental value of any particular property must, as a
matter of economic logic, ultimately be based on the profit which a retailer
assesses he can make from that property. When the rent of £115,000 pa was
bindingly agreed in December 1993, the premises were in the process of construction
and the site had little if any, relevant history. It is fair that it had retail
purposes in the past, but the buildings on the site prior to the premises being
constructed were antiquated.
By March 1995,
on the other hand, when the tenant decided to seek to sublet the premises, the
tenant had been trading from the premises for several months. It appears to me
that there is a considerable difference between assessing the profit-making
potential of a property which is not yet built and assessing its potential once
it has been built and traded from. That is all the more true in a case of
premises where the site is as unusual as the present one. It is clear from the
evidence before me that the tenant has not been able to trade profitably from
the premises and, while the precise figures showing the tenant’s turnover and
losses may well not be known in the market, it would have been obvious, it
seems to me, to anybody considering taking an underlease of the premises after
March 1995 that the previous occupier had not found the premises profitable.
Quite apart from that, Mr Buckle’s contention that rents have not fallen in
Watford over the period 1993 to 1996 appears to me to be an unhelpful
generalisation. Rents may well have risen quite significantly over that period
in parts of the Harlequin Centre, Watford, but it does not seem to me, from the
evidence I have seen, that rents in the High Street, Watford, and indeed in
some other parts of the Harlequin Centre, have risen. On the contrary, although
it is impossible to identify with accuracy the degree and times, it does appear
that the market has fallen between the date the lease was bindingly agreed and
the date on which the landlord refused its consent. Furthermore, I accept the
evidence of Mr Frost, who was the only surveyor witness who specialised in
letting and acquiring properties specifically in the Watford area, that the
fall in rents probably occurred after the opening of one phase of the Harlequin
Centre. The opening took place in 1992 and he said that the market rents fell
after that period in parts of the High Street, and in particular in the part
near the subject premises. Quite apart from that, Mr Buckle himself appears to
think that the premises have fallen in value by nearly 20% in the relevant
period, given that he values the premises in terms of current rental value at
£95,000 pa. Once one accepts that there has been a fall of that magnitude, it
is difficult to see how one can place much weight at all on the £115,000 pa as
a guide to the current level of rental value.
In these
circumstances, it follows that I reject the landlord’s case so far as it rests
on what I have called the second ground, because I am of the view that the rent
under the proposed underlease, namely £75,000 pa, is the open market rental
value of the premises.
Of course, the
concept of an open market rental value of the property does not necessarily
involve a specific figure. Normally, there is a band of value. It is right to
say that, on the evidence I have heard, I am not merely of the view that the
rent of £75,000 pa is within the band of what properly could be described as
the open market rental value of the premises; I think that it is towards the
higher end of that band. I am of that view for three reasons. First, £75,000 pa
is substantially higher than any bid which was received prior to June 1996 for
any retail user. Second, the bid is as high as the highest bid put forward on
behalf of a restaurant or brewery use which, as is agreed by all parties, would
be likely to command a higher rent than retail use. Third, the £75,000 pa was a
bid made by Byte in circumstances where there were two interested competitors
in the premises, that being a circumstance which the experts who gave evidence
were inclined to think would be conducive to obtaining a high rent.
Landlord’s
view of the open market rental value
This is not
necessarily the end of the second ground, because the landlord contends that,
even if £75,000 pa is the open market rental value of the premises, it is none
the less entitled to withhold its consent to the proposed subletting on the
basis that, at the time it refused its consent, the landlord reasonably
believed, and indeed the landlord still reasonably believes, that £75,000 pa is
not the open market rental value of the premises. This aspect of the second
ground involves the resolution of an issue between the parties relating to the
construction of the two provisions of the lease which I have quoted. I
therefore turn to that issue of construction.
The tenant
contends that, on the true construction of clause 5.8.6, once it has been
established that the rent to be paid under the proposed underlease is the open
market rental value of the premises, it is no longer open to the landlord to
object to the proposed subletting. The landlord contends that clause 5.8.6
effectively lays down two conditions which have to be satisfied by a
subletting. The first is that the subletting must be at a rent at least equal
to the open market rental value of the premises; the second is that the rent
payable under the proposed underlease must first be approved by the lessor,
such approval not to be unreasonably withheld. If that is right, then, even
though I have decided that £75,000 pa is the open market rental value of the
premises, the landlord is still entitled to object to the proposed subletting
if he can show that he objects to that level of rent and that his objection is
reasonable.
The drafting
of clause 5.8.6 is not conspicuously elegant. However, it does seem clear that
what has to be ‘approved by the landlord’ is the ‘rent’ to be reserved under a
proposed underlease. Further, it is difficult to see what word other than
‘rent’ is governed by ‘to be approved by the landlord’. The latter part of the
clause emphasises the point. I think that the natural way in which to read
clause 5.8.6 is, as Mr Michael Driscoll QC contends, as if the words ‘not less
than the open market rental value of the premises’ were, as it were, in
parentheses. Accordingly, I accept the landlord’s contention on this issue of
construction.
It is fair to
say that this reading of clause 5.8.6 appears to make it somewhat onerous. The
lessee would appear to be rather disadvantaged by the lessor having the right
to maintain an objection to the proposed rent, even if it were at market
levels. None the less, the parties may have envisaged that circumstances could
arise where the lessor would have reasonable grounds to objecting to the level
of rent under a proposed underlease, notwithstanding that level of rent reflected
the market. Indeed, the landlord contends that the present facts provide an
example of why they should be so. Whether or not the landlord is right in the
present case, I do not think the result of the natural meaning of the word used
in clause 5.8.6 is so surprising or unfair that I should depart from the
natural meaning. After all, whatever the ambit of the lessor’s right to object,
he is constrained by reasonableness.
Having reached
the conclusion that, even if the rent payable under the underlease is the
market rental value, the landlord can object to the subletting on the basis
that he reasonably believes that it is not, I consider that on the facts of
this case the landlord’s reliance on that contention faces insuperable
obstacles.
The first
problem for the landlord is that at the time of the refusal he did not consider
whether or not £75,000 was the market rental value of the premises in any sort
of way other than a most perfunctory one. Shortly before his consent was sought
to the underletting to Byte, the landlord was asked to consent to another
underletting, but at £60,000 pa. The surveyor then advising him, a Mr Peter
Brown [ARICS] of Aitchisons
Raffety Buckland, thought that £60,000 pa was probably below the market rental
value of the premises but stated that further investigation was required.
In relation to
that proposed subletting and in relation to the proposed subletting to Byte at
£75,000 pa, the landlord sought the advice of Mr Rodney Symondson [fsva] of Smith Melzack. He gave
evidence before me and stated that he was an investment surveyor and, although
he had a view as to the rental value of the premises, he very fairly said that
it would be wrong to place much reliance on it as he does not pretend to be an
expert on rental values in Watford. His advice to the landlord in connection
with the proposed subletting to Byte was based on the effect of the subletting
at £75,000 pa on the value of the landlord’s interest and not as to the rental
value of the premises.
In these
circumstances, I do not consider that it is now open to the landlord to rely on
this ground as a reason for refusing consent, as it was not a ground in his
mind at the time of his refusal: see Bromley Park Garden Estates Ltd v Moss
[1982] 1 WLR 1019*.
*Editor’s
note: Also reported at [1983] 1 EGLR 65
A second
possible problem for the landlord is that, in giving its reasons for refusing
consent to the underletting, the landlord stated in terms in a letter dated
July 4 1996 that consent was being withheld under clause 5.8.3 and not clause
5.8.6. In those circumstances, it seems to me that there are difficulties in
the landlord seeking to justify refusing consent under clause 5.8.6, although I
am attracted to the point made on behalf of the landlord in argument, namely
that it would be unfortunate if this case had to be decided on that sort of
technical point.
The third
problem, in my view, for the landlord is that I do not think that the
landlord’s view (if he had one) to the effect that £75,000 pa was less than the
open market rental value of the premises was or would have been a reasonable
view. At the time its consent was refused, namely in June 1996, the landlord
had not obtained full and proper advice as to the rental value of the premises
from a surveyor who claimed expertise in that field. He had received from the
tenant copies of three independent rental valuations commissioned from
Chestertons, Richard Ellis and Hillier Parker, all of whom had arrived at a
rental value for the premises of between £50,000 and £63,000 pa. Further, the
landlord was no doubt aware of the fact that the premises had been extensively
marketed and that the tenant obviously wished to get as high a rent as he
possibly could on a subletting.
Based on these
factors, I conclude that, if the landlord had refused consent in June 1996 to
the proposed underletting on the grounds that he believed that the rent of
£75,000 pa was less than the market rental value of the premises, that ground
would have been unreasonable. It may be contended that the landlord’s view
cannot have been unreasonable because it was supported by Mr Buckle’s evidence
as to the open market rental value. I do not accept that contention. Clearly, a
landlord cannot say that his view on valuation matters is reasonable merely
because it is supported by the evidence or advice of a valuation surveyor. One
has to consider whether the surveyor’s view is reasonable. Although I have no
doubt that Mr Buckle is an honest and experienced surveyor, I consider that on
this occasion his view as to the rental value of the premises is an
unreasonable one. I have already given my reasons for that conclusion.
Accordingly, although I accept the landlord’s case on the construction of clause
5.8.6, I reject the landlord’s case on this aspect of the facts.
Diminution
in the value of the landlord’s interest
The landlord
wishes to sell its head leasehold interest and is concerned that the proposed
underletting to Byte of £75,000 pa will diminish the value of its interest and
hence the amount which the landlord will realise on such a sale. Accordingly,
the landlord argues that it is entitled to withhold consent under clause 5.8.3
and/or under clause 5.8.6.
The landlord
relies on the following three principles. First, it is normally reasonable for
a lessor to object to a proposed subletting in circumstances where he
reasonably believes that the proposed transaction will reduce the market value
of his interest: see Ponderosa International Development Inc v Pengap
Securities (Bristol) Ltd [1986] 1 EGLR 66. The landlord accepts that the
position may be different where the lessor does not in fact wish to sell his
interest: see International Drilling Fluids Ltd v Louisville
Investments (Uxbridge) Ltd [1986] Ch 513*. But, says the landlord, that is
not the case here on the facts.
*Editor’s
note: Also reported at [1986] 1 EGLR 39
Relying on International
Drilling at p520D as followed and applied in Air India v Balabel
[1993] 2 EGLR 66 at p69A–F, the landlord’s second contention is that it is
enough for his view to be one which a reasonable lessor could have, a lessee
does not succeed in showing the lessor to be unreasonable merely because some,
or even many, people in the lessor’s position may have held a different view
from that of the lessor.
The third
contention of the landlord is that the fact that a lessor’s concern about the
depreciatory effect of the proposed transaction is illogical or is founded on a
misunderstanding of the law does not render the lessor’s concern unreasonable;
provided the lessor can show that, because of the market’s attitude, there
actually will, or there is a real chance that there will, be a depreciatory
effect on its interest as a result of the transaction that is sufficient. For
this contention the landlord relies again on Ponderosa.
In my
judgment, each of these contentions is right in principle. However, although
the landlord puts its case on this aspect in a number of ways, I do not
consider that they justify the refusal of consent of the
even if £75,000 pa is the open market rental value of the premises, a
subletting at £75,000 pa will make it clear to any potential purchaser of the
landlord’s interest that only £75,000 of the current rent of £115,000 pa is
‘hard core’, and the balance of £40,000 is ‘froth’. When assessing the value of
the landlord’s interest the market will apply a lower yield or a higher year’s
purchase to the ‘hard core’ than to the ‘froth’ rent. If no underletting takes
place, then it is possible that someone will be found who assumes that more
than £75,000 of the current rent of £115,000 is hard core and therefore the
landlord may well realise a higher price for his reversionary interest than if
the froth is, to use Mr Michael Driscoll QC’s words, crystallised by an actual
subletting.
Quite apart
from its unattractive nature, that argument is not supported by the facts. (I
do not need, therefore, to decide whether it is a good argument in principle.)
After the landlord’s interest was initially marketed, it was withdrawn because
of poor market sentiment. Once sentiment improved it was not remarketed because
it was learned that the tenant wished to sublet. Quoting from the landlord’s
own surveyor’s evidence, Mr Symondson said:
When it was
learned that the tenant was looking to underlet the premises, it was still not
practicable to market the premises until the details of the subletting were
known. The reason that this is so is because of the uncertainty created not
only as to who the occupying tenant would be and the strength of its covenant,
but also the fact that the tenant was seeking to move out of the premises so soon
after taking up occupation. Uncertainty affects the ability to dispose of the
property at the optimum price. Accordingly, the landlord has not been able to
date to seriously embark on the marketing of its reversion. This is unfortunate
because the landlord is anxious to sell its reversion as soon as I am able to
advise that the market conditions are such that that the optimum price for the
landlord’s reversion might be obtained.
This is
consistent with the evidence of Mr Pulver, the managing director of the
landlord, who in cross-examination somewhat hyperbolically described the
landlord’s interest as ‘unsaleable’ in light of the uncertainties described in
the passage of Mr Symondson’s evidence which I have quoted.
The effect of
the evidence, in my view, is that an underletting of the premises at £75,000 pa
would actually increase the value of the landlord’s interest or, to use Mr
Pulver’s language, would transform the landlord’s interest from its present
unsaleable state to a state where it could be sold. It is also consistent with
the evidence of Mr Simon Taylor [FRICS],
an investment surveyor and a partner in the firm of Richard Ellis, who gave
evidence to the same effect and which I accept. Even Mr Buckle, at the end of
his cross-examination, appeared to accept that a subletting on the premises at
the market rental value would not detrimentally affect the value of the
landlord’s interest.
The landlord’s
second argument is that, on the assumption that the tenant cannot get more than
£75,000 pa in the current market, it is entitled to require the tenant to
postpone any subletting until the market improves because this would enable the
tenant to get a higher rent on a subletting which in turn would increase the
value of the landlord’s reversion.
I reject that argument
because I do not consider that this is a reasonable ground in principle upon
which a lessor can withhold consent to a subletting. It would mean that in any
case where a lessor wished to sell its interest in the future and anticipated
that the market was going to rise, he could effectively prevent the lessee from
subletting. The lessee could not even sublet at a rent higher than the market
rent with a reverse premium, because any prospective purchaser would appreciate
that such an arrangement would demonstrate the open market rental value of the
premises just as surely as a straightforward underletting with no reverse
premium and at a lower rent. It seems to me that the landlord’s argument on
this point runs into the same sort of problem as that identified by Mr Edward
Nugee QC, sitting as a deputy judge at first instance, and approved by the
Court of Appeal in International Drilling at pp521H to 522B. It
effectively deprives the lessee of the right to sublet for the foreseeable
future.
The third contention
of the landlord is really based on the proposition that the investment value of
its interest would be damaged because the rent payable under the proposed
underlease will be less than the market rent. I have already concluded that the
proposed rent of £75,000 pa is the market rental value of the premises and,
accordingly, this argument fails.
Conclusion
The tenant is
entitled to the declaratory relief it seeks. There is also a claim for damages
under the Landlord and Tenant Act 1988 which the parties have very sensibly
agreed should await the outcome of this hearing. I will hear counsel on the
form of order and any directions which should be made.
