Landlord and tenant — Landlord and Tenant Act 1954 — Terms of new tenancy — Whether upwards/downwards or upwards only rent review — Length of hypothetical term at rent review — Whether tenant bound by request for tenure in counsel’s opening submissions
The following
cases are referred to in this report.
Janes
(Gowns) Ltd v Harlow Development Corporation
[1980] EGD 110; (1979) 253 EG 799, [1980] 1 EGLR 52
Leveson v Parfum Marcel Rochas (England) Ltd [1966] EGD 676; (1966)
200 EG 407
Lynnthorpe
Enterprises Ltd v Sidney Smith (Chelsea) Ltd
[1990] 2 EGLR 131; [1990] 40 EG 130, CA
O’May v City of London Real Property Co Ltd [1983] 2 AC 726;
[1982] 2 WLR 407; [1982] 1 All ER 660; (1982) 43 P&CR 351; 261 EG 1185,
[1982] 1 EGLR 76, HL
Stylo
Shoes Ltd v Manchester Royal Exchange Ltd
(1967) 204 EG 803
Tomlin v Standard Telephones & Cables Ltd [1969] 1 WLR 1378;
[1969] 3 All ER 201, [1969] 1 Lloyd’s Rep 309, CA
This case
concerns two consolidated applications by Boots the Chemists Ltd (‘Boots’) and
Thorn EMI plc (‘Thorn’) under Part II of the Landlord and Tenant Act 1954 for
new tenancies of shop premises on the lower-ground floor of the Elephant and
Castle Shopping Centre, Southwark, London SE1.
Edward Cole
(instructed by Lovell White Durrant and Rowe & Maw) appeared for the
applicant tenants, Boots the Chemists Ltd and Thorn EMI Ltd; Steven Whitaker
(instructed by Russell-Cooke Potter & Chapman) represented the respondent
landlords, Pinkland Ltd.
Pinkland Ltd
(‘the landlords’) acquired the Elephant and Castle Shopping Centre (‘the
centre’) by purchase in March 1989 from Land Securities plc. The centre has
never been particularly successful. Since their acquisition of the site the
landlords have made enormous strides to try to increase its popularity by
carrying out extensive repairs and refurbishment, repainting the exterior and
adopting a policy of positive management, which has included provision for
market stalls around the exterior. The layout of the centre is crucifix in form
and the unit occupied by Thorn for their Radio Rentals outlet is situated on
the east side of the north mall opposite, or almost opposite, the anchor
tenant, Tesco. Boots occupy two and a half units on the north side of the west
mall, opposite the return frontage of W H Smith Ltd.
Thorn occupy
unit 303 pursuant to a 21-year lease, granted to Vista Home Rental Ltd on April
3 1964, for an annual rent which at the time of expiry of the lease was £2,600.
The position
of Boots is slightly more complicated. Boots occupy unit 333 pursuant to an
underlease granted to them in February 1965 for a period of 21 years from
December 1964, which was amended by a deed of variation in August 1983. In
addition, Boots occupy unit 334 and part of unit 335 pursuant to an agreement
for lease made in June 1973. The total current rent payable by Boots in respect
of these units is £3,250.
The following
issues arose for decision by the court in addition to the determination of the
rents:
— Positive
trading covenant (Boots only)
—
Upwards/downwards or upwards-only rent reviews (Boots only)
— Hypothetical
term at rent review (Boots only)
— Management
fees
— Length of
term (Thorn only).
When the case
was opened by counsel for the applicants the judge was told that it had been
agreed between the parties that a new lease should be granted to Boots in
respect of the whole of the site presently occupied by them for a period of 14
years to expire on June 24 2006, with two rent reviews, one in June 1997 and
the other in June 2002, and in respect of Thorn that a new 10-year lease should
be granted for a period to expire on June 24 2002 with one rent review on June
24 1997. On day seven of the hearing, after the conclusion of the evidence,
counsel for the applicants informed the judge that Thorn now desired only a
three-year lease. Counsel for the landlords objected to this proposed change of
heart and contended that that aspect had been settled and it was not open to
Thorn to resile from the agreement reached, or whether as Thorn contended,
unless and until the terms have been settled and counterpart leases exchanged,
neither party is bound by any proposed term.
In support of
his contention that there was no agreement for a 10-year lease, counsel for
Thorn submitted that: there had been no binding agreement before the first day
of the hearing; nothing which he had said in opening created a binding
agreement; nothing which had happened since during the course of the hearing
had created one; and if, contrary to that submission, there was a binding
agreement it would make a nonsense of Ord 18 of the County Court Rules, which
provides that the plaintiff in an action or matter may, at any time before judgment
or final order, discontinue the proceedings wholly or in part against all or
any of the defendants thereto. Additionally, he referred to Emmett on Title
and also Foskett on The Law and Practice of Compromise (3rd ed) at para
3. 20, which deals with failure to agree all material terms in the following
way:
Where it is
plain that a material element within negotiations remains unresolved, the Court
is likely to hold that no concluded agreement has been achieved because a
material term has not been agreed.
Counsel also
referred to the judgment of Plowman J in Leveson v Parfum Marcel
Rochas (England) Ltd (1966) 200 EG 407 in which it was held that when
parties were negotiating the terms of a proposed lease the approval of the
draft lease did not conclude a contract between the parties and that the
contract was concluded only upon exchange of lease and counterpart in the usual
way.
For the
landlords it was submitted that the case had proceeded upon the basis of
agreement for the grant of a 10-year lease to Thorn; that there had been a
compromise binding upon the parties. The landlords relied upon section 37 (1)
of the 1954 Act; this provides, subject to certain provisos, that the landlord
shall be bound to execute or make in favour of the tenants, and the tenants
shall be bound to accept, a lease or agreement for a tenancy of the holding
embodying the terms agreed between the landlord and the tenant or determined by
the court in accordance with the provisions of the 1954 Act. Counsel for the
landlords referred to para 3. 29 of Foskett, which sets out the
proposition that it is quite possible for the parties expressly to compromise a
particular element or elements in their dispute without coming to an overall
settlement and that this in no way results in the particular compromise being
regarded as incomplete.
In addition,
counsel referred to Tomlin v Standard Telephones & Cables Ltd
[1969] 1 WLR 1378 where the Court of Appeal, by a majority, held that where the
parties in the course of ‘without prejudice’ correspondence had agreed upon the
issue of liability but were unable to agree damages there was a binding
agreement as to liability with the result that the only issue remaining between
the parties was as to damages.
Continuing his
judgment, JUDGE THOMPSON said: The statement by counsel on behalf of
Thorn in opening the case, that the parties had agreed upon a new 10-year lease
for Thorn, running to June 24 2002, either reflected an agreement which had
already been reached between the parties from which it was not open to the
tenants to resile without the agreement of the landlords or, alternatively, was
analogous to a concession by Thorn that there was no longer any dispute between
the parties on the issues of the length of the lease and that it was not open
to Thorn to withdraw that concession without the leave of the court, which
leave was not sought.
The opening
constituted the framework upon which the case proceeded. I was told which were
the areas of dispute and which were not. It was, of course, open to the parties
at any time to agree upon all or any of the issues which initially had been in
dispute and during the course of the hearing some of the issues which had
originally been in dispute were indeed settled by the parties and form no part
of this judgment.
I have no
means of knowing whether the landlords would have conducted the case any
differently had they known that Thorn intended to resile from the agreement for
a 10-year lease. It may be that the landlords would have cross-examined
differently or called other evidence; it may be that they would have not; but
that is neither here nor there. The landlords were entitled to conduct their
case upon the basis that there was no issue as to the length of the lease and
to make their submissions accordingly.
It seems to me
that if during the course of the hearing Thorn found that the prospect of a new
10-year lease was no longer acceptable to them the stark choice facing them was
as follows. In the first place they could seek to negotiate with the landlords
a revision of the original agreement. If that failed they could avail
themselves of their undoubted right under Ord 18 to serve notice of
discontinuance at any time up to judgment or final order. This they have not
done. Finally, at any time within 14 days of the making of this order, they can
apply to the court under section 36 (2) of the Landlord and Tenant Act 1954 for
revocation of the order if they find it unacceptable and this court is bound to
revoke the order. What it is not open to them to do, in my judgment, is to say
on the penultimate day of the hearing that they no longer intend to be bound by
the agreement for a 10-year lease and to ask the court to determine the issue
on the basis of a three-year one instead.
Alternatively,
if counsel’s opening that there is an agreement between the parties for a
10-year term is to be regarded as analogous to a concession, then that
concession could not be withdrawn without leave of the court. No application
was made (as I have already observed) to me to withdraw that concession. If
such an application had been made I would of course have heard both counsel on
the matter, but my inclination is to think that (without having had the benefit
of argument) I would in all probability in the exercise of my discretion have refused
that application, as it seems to me that it was too late at that stage, the
evidence having closed and it being at least possible that the landlords had
changed their position or alternatively might not have prepared their position
as they would have done if the concession had not been made.
I now turn to
consider the other issues in dispute.
Positive
trading covenant
This dispute
concerns only Boots as Thorn have not sought to resist the inclusion of a
positive trading covenant in their new lease.
The position
in relation to Boots is somewhat complicated. The original 21-year lease
granted to Boots in respect of unit 333 did not contain such a covenant. The
agreement for the lease made in respect of unit 334 and part of 335 in 1973 did
contain such a covenant. The parties are agreed there should be one new 14-year
lease encompassing the whole of the present premises. The landlords are no
longer persisting in their original request for a positive trading covenant in
respect of the whole of the premises and only ask that it should continue to
exist in respect of unit 334 and part of unit 335. Boots for their part seek
that there should be no positive trading covenant in respect of any part of the
premises.
The landlords’
proposition at first blush presents a dichotomy. As the premises are at present
operated, such a covenant would effectively operate in respect of the whole of
the premises. It would, however, be possible to redivide the premises along the
lines of the original units, and should it ever come about that Boots wished to
assign or sublet part of the premises, it would be possible to reinstate that
division. The parties themselves do not regard the condition of the premises as
presenting any insuperable problems in this regard.
At the time
when they entered into the agreement for lease in 1973, Boots were prepared to
accept the positive trading covenant. Since then there has been a change in the
attitude of multiple retailers to a covenant of this kind. I was referred to
two decisions in which substantial damages were awarded against tenants who had
closed shop retail units in breach of such a covenant. As a consequence Boots
now resist the inclusion of such a covenant in their new lease.
Positive
trading covenants redound not only to the advantage of the landlords but also
to other tenants. If the multiple retailers close their outlets in a shopping
mall this is a severe disadvantage to other shopkeepers within the centre, as a
closed unit not only detracts from the attractiveness of the appearance of the
shopping centre but it also results in fewer shoppers being attracted to the
centre.
Having been
referred to O’May v City of London Real Property Co Ltd [1983] 2
AC 726 I am satisfied that it is for Boots to discharge the burden of showing
why this clause should not be incorporated in the new lease. In my judgment,
they have not discharged that burden. The only argument advanced is that it is
now apparent that if, for whatever reason, they close the unit they could be
liable to pay substantial damages for breach of covenant. That is nothing new.
Breach of covenant has always given rise to a claim for damages and I find it
both surprising and somewhat difficult to believe that multiple retailers have
only recently become aware of the fact that they expose themselves to
substantial claims for damages if they accept such covenants and then do not
perform them. I therefore hold that the positive trading covenant should be
incorporated in the new lease in relation to those parts of the premises which
are unit 334 and part of 335.
Upwards/downwards
or upwards-only rent review
Until about 30
years ago rent review provisions were not commonplace in leases for 21 years or
less. In times of rental stability that, no doubt, did not matter. The enormous
inflation which we have experienced over the last 40 years in property prices
and rental values has changed all that. In the case of leases which contained
no rent review provisions landlords have seen the return on their investment
dwindle in real terms to relatively insignificant levels towards the end of the
life of the lease. In order to eliminate that unfairness to the landlords the
practice has grown up of incorporating provisions for rent reviews at every
seven, or five, or even three years. This has enabled landlords to maintain the
real level of their rental return during the highly inflationary years of the
1970s and 1980s.
It has been
agreed between the parties that there should be provision for rent reviews in
the Boots lease in 1997 and 2002. The question which arises is whether those
reviews should only be upwards or whether it should be possible for the rent to
be reviewed downwards as well.
I was referred
to the decision of Janes (Gowns) Ltd v Harlow Development Corporation
(1979) 253 EG 799, [1980] 1 EGLR 52, but, of course, the special circumstances
obtaining in that case (which related to a neighbouring development) do not
apply to the instant case. What I did find particularly helpful was the
quotation cited therein from the judgment of Cross J (as he then was) in Stylo
Shoes Ltd v Manchester Royal Exchange Ltd (1967) 204 EG 803 to the
effect that what is sauce for the goose is sauce for the gander. I also have in
mind that when determining the provisions to be contained in the new lease I
have to have regard to the terms of the old lease (see O’May’s case
referred to above), but I do have wide discretionary powers to change those
terms and impose new terms where appropriate.
I well
understand as rents have marched inexorably upwards over recent years that it
has been commonplace for the rent review provision to be only upwards. It is
also quite clear that over the past couple of years there have been many
instances of falling rents and in particular I was referred to the Hillier
Parker Index, which shows a fairly constant decline in rental values throughout
England from November 1990 onwards.
The difficulty
which faces me is that I do not have a crystal ball. Over the last 40 years
there has been a more or less constant bull market in rents. In any bull market
there are always bear phases, and I have no means of knowing whether the
decline in rental values over the past two years is merely a bear phase in the
continuing bull market or whether it is the beginning of a new bear market,
indicating that the long-running bull market has now come to an end. In order
to do that which is fair and reasonable to the parties it seems to me that it
would be appropriate to incorporate in the new Boots lease provision for the
rent to be reviewed downwards as well as upwards. I come to that conclusion for
this reason. If it be the case that we are now in the incipient stages of a
prolonged bear market then present-day rents will seem exorbitant later in this
decade and in the beginning of the next century. As a consequence, fixed rents,
or rents which can only be revised upwards, will wreak the same sort of
injustice upon tenants
contained no provision for rent review at all. On the other hand, if the
present period of decline in rental values is merely an aberration in a
continuing bull market, the landlords will in no way be prejudiced by the
inclusion of a provision for the rents to be reviewed downwards as well as
upwards. I therefore so hold.
Hypothetical
term
None of the
expiring leases with which I am concerned contained any provision for rent
review. As I have already indicated, it has been agreed between the parties
that in the case of the new Thorn lease there should be one rent review and in
the case of the new Boots lease there should be two rent reviews. Consequently,
a new provision must be incorporated in the leases which was not to be found in
the expired ones. The wording favoured by the landlords is that which they
regard as their standard clause and which I am told they have incorporated in
most of the new leases which have been granted to other tenants in this centre.
The wording (so far as it is relevant) is as follows:
(1) The open market rent shall be the yearly rent
for which the demised premises might reasonably expect to be let on the open
market with vacant possession on the relevant review date by a willing lessor
to a willing lessee for a term equal to the term hereby granted and otherwise
upon the terms and conditions (save as to the amount of rent payable) contained
in this Deed . . .
Mr Whitaker, on
behalf of the landlords, contends that on its true construction this clause
requires that the rent should be assessed at each review upon the basis that a
new lease were being granted for a period equal to the whole of the original
term and not merely for a term equal to the unexpired residue.
Mr Cole, for
the applicants, contends that that is not so and that if the reality of the
situation is that only 10 or five or four, or as the case may be, years remain
it is upon that basis that the new rent should be assessed. Alternatively, he
submits that, if he is wrong in that connection, different wording should be
used to make sure that at rent review the new rent is assessed only upon the
basis of the unexpired term.
Construction
is very often a matter of impression, but I have the advantage in this instance
of some very clear guidance from the Court of Appeal in Lynnthorpe
Enterprises Ltd v Sidney Smith (Chelsea) Ltd [1990] 2 EGLR 131*. The
clause under consideration is not set out in full in the report of the case in
the Court of Appeal, but it had been in the earlier report of the judgment of
Warner J at first instance† . The material wording of the review clause reads
as follows:
The fair
annual market rent for the time being obtainable as between a willing Landlord
and a willing tenant in respect of the demised premises on a letting thereof as
a whole with vacant possession . . . for a term of years equivalent to the said
term . . .
*Editor’s
note: Also reported at [1990] 40 EG 130, [1990] 2 EGLR 131, CA.
† Editor’s
note: Reported at [1990] 1 EGLR 48.
It will be seen
that in that case the wording used was ‘for a term of years equivalent to the
said term’ and in the proposed clause in this case it was ‘for a term equal to
the term hereby granted’. That I regard as a distinction without a difference.
Applying the
principles enunciated in that case, it seems to me that on its true
construction this proposed clause, if incorporated into the Boots lease, would
have the effect that at the review dates in 1997 and 2002 the new rent will be
calculated on the basis of a 14-year lease running from March 25 1992 and in
the case of the Thorn lease at the review in 1997 on the basis of a 10-year
lease also running from March 25 1992, which is the date from which all the
parties have agreed that the new leases should run.
For avoidance
of doubt and to prevent any future dispute as to the meaning of this phrase, I
suggest that the parties either modify the language of this clause and choose
some clear and unequivocal words or, alternatively, note in an addendum that it
is to be construed in this way so as, in the words of Warner J, to give effect
to ‘the presumption in favour of reality’. . .
After deciding
the appropriate level of management charge, the judge determined the rents on
the basis of £25 per sq ft with a 10% deduction for masked areas. He determined
the interim rents in respect of March 1987 at £15 per sq ft zone A with a 5%
deduction for the annual tenancy hypothesis and a further 10% as the ‘cushion’
effect.
Orders
accordingly.
