Lease of vacant land for 125 years – Rent review clause defining rack-rental value by reference to hypothetical sublettings of commercial buildings as yet unbuilt – Whether valuer should assume subletting for entire residue of original term
On March 15 1989 the appellant council granted to a predecessor of the respondent lessee a 125-year lease of 4.25 acres of empty land near Gloucester. The lease contained no prohibition on building or subletting nor did it require the execution of building work. The reddendum reserved an initial rent of £3,340 pa subject to the five-year upwards-only provisions for rent review whereby the rent for the relevant period was to be the higher of the rent payable up to the rent review date (the passing rent) or 10% of the “rack rental value” (RRV) as defined. For the purpose of ascertaining the RRV at a time when no buildings were present, the assumption had to be made that 63,500 sq ft was covered with five commercial buildings of a certain specification. On that basis the RRV was defined as the aggregate of the rent at which such buildings “might reasonably be expected to be let on the Review Date in the open market by a willing lessor with vacant possession and upon such other terms as herein contained”.
No building being present on the first review date, the parties fell into dispute,inter alia, over the term (duration) for which each subletting should be taken to have been granted it being common ground, given the rack-rent requirement, that a substantial discount would have to be applied if the subletting had to be for the 120-year residue of the headlease. In High Court proceedings in March 1996 the judge rejected the council’s contention that the notional term should be for such term as the landlords might reasonably be expected to grant and the tenant might reasonably be expected to take in all the circumstances. The council appealed.
Held The appeal was allowed.
1. As a requirement of a standard rent review clause, the hypothetical lease should replicate so far as possible the terms and conditions of the existing lease, hence the presumption, in cases of doubt, that the hypothetical term should be for the unexpired residue of the term originally granted: see Norwich Union Life Insurance Society v Trustee Savings Banks Central Board [1986] 1 EGLR 136; British Gas plc v Dollar Land Holdings plc [1992] 1 EGLR 135.
2. However, the present lease was far from standard, the purpose of the clause being to provide an incentive in place of an obligation to develop. It could not therefore have been in the contemplation of the parties that the tenant should obtain such a windfall from the capricious operation of the rent review clause.
3. Accordingly, “terms” as used in the schedule had to be given its narrow meaning to the exclusion of “term” in the sense of duration. With no express provision for term in the latter sense the construction advanced by the council was necessary in order to give effect to the words “reasonably expected to be let”.
Jonathan Brock QC and Leslie Blohm (instructed by the solicitor to Gloucester City Council) appeared for the appellants; Jonathan Gaunt QC (instructed by Dibb Lupton Alsop, of Birmingham) appeared for the respondent.
