Landlord and Tenant Act 1954, Part II — Application for new tenancy of factory premises — Main issue the length of the term to be granted, the tenants asking for a very short term, expiring on August 31 1986, the landlords submitting that the
term should be of 14 years — Tenants in process of moving to a new location and requiring only enough time to make an orderly departure — Landlord company themselves tenants, having a head tenancy for 150 years at a substantial rent — Landlords argued that the capital value of their interest would be materially diminished if a shorter term than 14 years were granted — Conflict of expert evidence on whether the grant of the short lease required by tenants would diminish the value of the landlords’ asset — The judge’s finding on this issue was that the premises would be of significantly less value if such a short lease were granted, having regard to possible uncertainty as to whether tenants would leave at the end of the term, to the cost of reletting and to the negative cash flow if the premises remained void — Section 33 of the 1954 Act and other relevant sections reviewed and the guidance given by speeches in O’May v City of London Real Property Co Ltd considered — The general result was that it was proper for the landlords to seek to maximise the value of their interests, that the tenants were not to be protected unduly against the market, but ultimately the court must decide what was reasonable in the circumstances, and that the matter ought to be decided with fairness and justice — In the end the judge was persuaded by the tenants’ arguments, including the submissions that the landlords would have effectively 11 months in which to find new tenants; that the prospect of a void was small; that the present tenants would be in difficulties in disposing of what would be a 13-year lease; that the suggested diminution of market value was to some extent a paper transaction; and that the purpose of the Act was to protect the tenant, which meant that he should be given the protection he needed and no more — Term granted to expire on August 31 1986
This was an
application by the plaintiff tenant, CBS United Kingdom Ltd, for a new tenancy
of Units 1 to 6 at the Ladbroke Hall Estate, Barlby Road, London W10, the
defendant landlord being London Scottish Properties Ltd.
David
Neuberger (instructed by Edmonds Bowen & Co) appeared on behalf of the
plaintiff; Kim Lewison (instructed by Jaques & Lewis) represented the
defendant.
Giving
judgment, JUDGE MICKLEM J said: I have before me an application by a tenant of
business premises for a new tenancy. The application is made under the Landlord
and Tenant Act 1954, Part II. The premises are units 1 to 6, Ladbroke Hall
Estate, Barlby Road, London W10.
Unusually,
perhaps, the main issue is the length of the new term and in this case the
tenant is asking for a comparatively short term, that is, until August 31 1986,
whereas the landlord says that the tenant ought to have a 14-year term.
It has been
agreed between the parties what the other terms of the lease shall be if the
term is for 14 years and, equally, what the terms shall be if the grant
ultimately comes out to be to August 31 1986; but if some intermediate date
were to be decided upon there may be some necessity for negotiation and
possible further matters to be decided.
The parties
have agreed that, whatever the term, the rent shall be £260,000 per annum.
There has been some change of front by the parties, as by the originating
summons the tenant originally asked for a 10-year term and then for a
three-year term, but the present application is, as I have said, for a term
expiring on August 31 1986.
The current
lease was made on June 13 1974 and it was a lease for a term of 10 years from
March 25 1974. The landlord is itself a tenant under a headlease. The headlease
was made on June 24 1970; it is for a term of 150 years and there is a
substantial head-rent, payable by the landlord to the head landlord. Notice to
terminate the tenant’s tenancy was in the usual way given in this case and the
originating summons was issued on August 1 1983. There was an application by
the landlord for interim rent, but that is not an issue between the parties.
There is nothing that I have to decide about that, because the parties have
agreed that the interim rent from the expiration of the contractual tenancy is
to be £260,000 per annum.
The reason why
the tenant seeks only a short term is that it is in the process of moving its
business out of the premises to other factory premises which it owns at
Aylesbury. The move has been in contemplation for a long time and now is in
process of being implemented. The critical phase will come in the months of July
and August of this year, because it is in those months that it is proposed to
install a new telephone exchange in Aylesbury and a new computer in Aylesbury.
If the case is that things go according to plan, by the end of August of this
year the really critical matters will have been completed because the exchange
will be in operation and the computer will be in operation, and the rest of the
move, although not unimportant, is really a matter which can be adjusted to
some extent by the tenant. Its present plan is to be out of the premises by the
end of July 1986 — that is bar unforeseen accidents — but — again barring
unforeseen accidents — there would not be undue difficulty in getting out a
little earlier, as far as can be foreseen. All the tenant needs, therefore, for
its business purposes is sufficient time to make an orderly departure.
The landlord’s
case is that the capital value of its interest would be substantially
diminished if the court did not grant the longer term sought by the landlord,
which is, of course, the maximum that the court can order under the Act. The
landlord claims that the diminution in value will be somewhere between £90,000
and £200,000, the wide margin reflecting the inexactitude of the science
applied to the problem by valuation experts.
The buildings
were probably built at some time about 1910. They are old, but they were
refurbished by the landlord in 1970. In another 10 years or so consideration
will have to be given to refurbishing them again. From the point of view of the
landlord the premises constitute a long-term investment, capable of medium and
long-term growth. The landlord has no intention of disposing of its interest in
the premises. The building comprising the premises is partly warehouses and
partly offices, but the building is capable of subdivision and the whole site
is self-contained. The premises contain 104,850 sq ft. Although there is a
considerable amount of property on the market at the present time, there are
comparatively few buildings available with an area in excess of 90,000 sq ft
and, due to the present economic recovery, considerable demand exists for
larger properties. Those which have become available have sold or let without
much difficulty and it is not contemplated that it would be difficult to let
this particular property. The landlord’s expert, Mr R A Newberry [FRICS FSVA
FCIArb], is of the opinion that if the property were put on the market with
vacant possession it would be possible to attract a tenant within a period of
six to 12 months; on the other side the estimate is that it would be possible
to attract a tenant within 12 to 18 months, and it is clear that in about a
year everyone agrees that it is likely that a tenant could be found.
In the absence
of any restriction and if pure market forces were to prevail, the landlord and
any similar landlord would seek to grant a term of from 15 to 20 years, with
rent reviews every five years, for such a property as this and would probably
get it. He would probably get a 15-year term. Again, if only market forces were
at work, no landlord of this sort would let a property of this type for a
period of a year, save in exceptional circumstances and to suit its own
convenience.
The agreed
rent of £260,000 is £10,000 more than the rent which Mr Newberry, the
landlord’s agent, had originally advised was the appropriate rent for the
property, disregarding the tenant’s improvements. The tenant has made
improvements to the property which will enable the landlord to relet the
property to anyone other than the tenant at a rent enhanced by a sum of the
order of £20,000 per annum. Both the landlord and the tenant are substantial
companies. The management of the landlord is, but the management of the tenant
is not, accustomed to dealing with property as a matter of day-to-day business,
although there would be no particular difficulty for the tenant in appointing
agents to negotiate the assignment of the balance of a 14-year term to a
prospective purchaser if occasion arose to do so.
I have had the
advantage of expert evidence from both sides on the question whether the grant
of a lease to August 31 1986 would diminish the value of the landlord’s asset.
Mr W M
Hattersley, the tenant’s expert, was of the view that it would not do so. He
produced figures in support of his conclusion. He is a surveyor of 30 years’
experience, a Fellow of the Royal Institution of Chartered Surveyors and has
for some years been a senior partner in Gerald Eve & Co, and he has
specialised in the valuation of property all his professional life. However, I
think his figures were open to some criticism inasmuch as he proceeded on the
assumption that the landlord held the property at a peppercorn rent,
which is not the fact, and, also on the assumption that the appropriate yield
to take into account in his calculations was 14%, irrespective of the length of
term with which he was dealing. I am satisfied that that figure does not
accurately reflect the market sentiment with regard to this type of property,
which is strongly against very short leases, which are most uncommon, and
against the uncertainty which attends the end of any business tenancy other
than one which has been successfully contracted out of the 1954 Act. I am
persuaded by the evidence of Mr N D Holmes, one of the experts called on behalf
of the landlord, that the market would regard this property in the hands of the
landlord, subject to a lease to August 31 1986 which was not contracted out of
the 1954 Act, as significantly less valuable than the same property subject to
a 14-year lease.
Mr Holmes is
also a Fellow of the Royal Institution of Chartered Surveyors and a senior
partner of Jones Lang Wootton, who practise in London and elsewhere in the
United Kingdom and, indeed, elsewhere in the world. He has been in the
profession since March 1964 and for most of the time he has been a practitioner
in real estate investment in England. For many years he has advised major
pension funds, insurance companies, property firms and property companies in
their involvement in capital transactions in real estate, and it is his
expertise which is focused most directly on the problem with which I am
concerned. His firm has a large practice involved in the valuation of all types
of commercial property and that firm specialises in the investment agency and short
leasehold investment market. His evidence, which I accept, is that although the
transaction in question may be valued adopting conventional methods he
considers that, having regard to the unusual nature of the head leaseholder’s
interest, a discounted cash flow basis should be used, as the assessment of the
diminution in value may be likened, he says, to a transaction in the specialist
short leasehold market.
Mr Holmes
readily admitted that his was not an exact science, but I think that his
evidence reflects the sort of advice that companies in the market for these
sorts of premises are likely to receive at the present time.
I find,
therefore, that the premises would be significantly of less value in the hands
of the landlord if a term to August 31 1986 is ordered than it would be if a
14-year term were to be ordered.
The factors
which weigh with the mind are, broadly speaking, the uncertainty whether the
tenant will actually leave at the end of the term; the certain cost of
reletting and the prospect, in this case, of a negative cash flow of the order
of £75,750 per annum so long as the premises remain void. Those factors are, of
course, all present now, so the case for the landlord is presented not in terms
of loss but in terms of a proper desire on the part of the landlord to maximise
marketability.
I turn to the
law. The section of the Landlord and Tenant Act 1954 with which I am concerned
is section 33. That deals with the duration of the new tenancy. It is in these
terms:
Where on an
application under this Part of this Act the court makes an order for the grant
of a new tenancy, the new tenancy shall be such tenancy as may be agreed
between the landlord and the tenant, or, in default of such an agreement, shall
be such a tenancy as may be determined by the court to be reasonable in all the
circumstances, being, if it is a tenancy for a term of years certain, a tenancy
for a term not exceeding fourteen years, and shall begin on the coming to an
end of the current tenancy.
So the test is
what is reasonable in all the circumstances.
That test is
to be contrasted with the test specified for the determination of rent under
section 34, under which the court has to have regard to the rent at which ‘the
holding might reasonably be expected to be let in the open market by a willing
lessor’.
The test in
section 33 is also to be contrasted with the terms of section 35, which deals
with the other terms of the new tenancy, which again provides that the terms,
in the absence of agreement, are to be such as may be determined by the court,
but ‘in determining those terms the court shall have regard to the terms of the
current tenancy and to all relevant circumstances’.
I was properly
referred to section 34(3), section 35 and section 36(2), but I do not think I
need to state those specifically in this judgment. My attention was also drawn
to section 64 as to the date of determination of the existing contract.
The case was
presented by counsel for the defendant on the footing that it was common ground
— and I think that that is accepted — that it is proper in the present case to
have regard to the length of term for which the premises have been held under
the contractual tenancy. It would be proper to have regard to the fact, if it
were the fact, that the tenant was a one-shop company or to any imbalance in
the bargaining power between the landlord and the tenant, and it is proper to
have regard to the length of time which has elapsed between the end of the
contractual tenancy and the date of the order. But none of those points were
regarded by either side as of especial significance.
Counsel for
the tenant drew my attention to a decision of Danckwerts J in Re Sunlight
House, Quay Street, Manchester (1959) 173 Estates Gazette 311, as an
example of the grant by the court of a very short term in somewhat similar
circumstances, but he did not seek to extract any general principle from the
case and I do not think I need refer to it any further.
Both counsel,
however, relied on passages in speeches in the House of Lords in the case of O’May
v City of London Real Property Co Ltd [1983] 2 AC 726.*
*Editor’s
note: Also reported at (1982) 261 EG 1185, [1982] 1 EGLR 76.
Counsel for
the tenant, although he properly began reading at an earlier point, wished to
draw attention to three general propositions which Lord Hailsham drew in his
speech after a consideration of the terms of sections 32, 33, 34 and 35 of the
Act. On p 740 at D he says:
From these
sections I deduce three general propositions. (1) It is clear from section 34
that, in contrast to the enactments relating to residential property,
Parliament did not intend, apart from certain limitations, to protect the
tenant from the operation of market forces in the determination of rent. (2) In
contrast to the determination of rent, it is the court and not the market
forces which, with one vital qualification, has an almost complete discretion
as to the other terms of the tenancy (which, of course, in turn must exercise a
decisive influence on the market rent to be ascertained under section 34). And
(3) in deciding the terms of the new tenancy, as to which its discretion is
otherwise not expressly fettered, the court must start by ‘having regard to’
the terms of the current tenancy, which ex hypothesi must either have
been originally the subject of agreement between the parties, or themselves the
result of a previous determination by the court in earlier proceedings for
renewal.
That, I think,
is the passage on which counsel for the tenant specifically relies. He says
that the purpose of the Act is to enable the tenant to carry on his business in
the premises and not to put a saleable asset in his hand, and he submits that,
if the landlord could not establish as a fact that the tenant, in asking for a
short tenancy, is substantially affecting the value of the landlord’s interest,
there simply would be no question at all in this case.
I ought to
refer, however, to further passages in the speech of Lord Hailsham on which
counsel for the landlord relies. First of all, he continued the quotation on p
740, which is in these terms at F:
A certain
amount of discussion took place in argument as to the meaning of ‘having regard
to’ in section 35. Despite the fact that the phrase has only just been used by
the draftsman of section 34 in an almost mandatory sense, I do not in any way
suggest that the court is intended, or should in any way attempt, to bind the
parties to the terms of the current tenancy in any permanent form. But I do
believe that the court must begin by considering the terms of the current
tenancy, that the burden of persuading the court to impose a change in those
terms against the will of either party must rest on the party proposing the
change, and that the change proposed must, in the circumstances of the case, be
fair and reasonable, and should take into account, amongst other things, the
comparatively weak negotiating position of a sitting tenant requiring renewal,
particularly in conditions of scarcity, and the general purpose of the Act
which is to protect the business interests of the tenant so far as they are
affected by the approaching termination of the current lease, in particular as
regards his security of tenure.
Counsel for the
landlord relies on ‘so far as they are affected by the approaching termination
of the current lease’.
Lord Hailsham
concludes this passage: ‘I derive this view from the structure, purpose, and
words of the Act itself.’
I interpose
here that the case of O’May, from which the citations are taken, was not
a case where the question arose as to the duration of the lease, but as to the
other terms of the lease, and their lordships’ remarks are primarily directed
to that consideration.
Then there is
a further passage in Lord Hailsham’s speech at p 743 at F where he says:
I wish,
however, slightly to widen my reservations to the approach of the learned
judge. By formulating the questions and answering them in the way he did, I
believe that he had logically, so to speak, painted himself into a corner
before he came to the exercise of any discretion at all . . . Admittedly the
landlord’s desire to vary the terms of the current lease in such a way as to
maximise the value and marketability of his reversion is a perfectly valid and
respectable reason from the landlord’s point of view for seeking to secure the
tenants’ agreement to vary the terms of the tenancy.
I accept that
it is a perfectly valid and respectable reason for seeking to vary the terms of
the tenancy, of course.
Then from the
speech of Lord Wilberforce at p 747 I take this:
The general
purpose and policy of the Act of 1954 is clear. It was to provide security of
tenure for those tenants who had established themselves in business in
leasehold premises so that they could continue to carry on their business
there. This objective was identified in the Leasehold Committee Final Report
(1950) (Cmd 7982) as the principal, indeed the only, objective then recommended
to be achieved by legislation. There was no suggestion, nor did the Act, when
enacted, contain any provisions to the effect that business tenants required
any greater protection than that necessary to enable them to continue their
business; no protection, for example, by way of rent control, or other
modification of contractual terms. I accept therefore the landlord’s contention
that, in principle, tenants are not to be protected from market forces; as
regards rent, indeed, this is expressly laid down in section 34 which requires
that the rent is to be the open market rent, subject to certain specified
‘disregards’. The same underlying principle ought to be applied to the
determination of other terms in the new lease, subject, however, to the
guidelines laid down in section 35 — as to which see below.
Counsel for
the landlord relies on those last words. But what is said thereafter does, to
some extent, affect the generality of those words.
Lord
Wilberforce continues:
The Act, in
the portion (Part II) of it which deals with business tenancies, is in the main
a discretionary Act, giving wide powers to the judge to grant and settle the
terms on which the business tenant is to have a new lease. This applies
particularly to sections 33 and 34, which relate to the duration of the tenancy
and the rent. The crucial section, for the present purposes,
he goes on to
say, is section 35 and, even in relation to that, in the next paragraph, having
said that it is possible to introduce new terms for sufficient reasons, he says
at G:
If such
reasons are shown, then the court, applying the words ‘all relevant
circumstances’, may consider giving effect to them: there is certainly no
intention shown to freeze, or in the metaphor used by learned counsel, to
‘petrify’ the terms of the lease. In some cases, especially where the lease is
an old one, many of its terms may be out of date, or unsuitable in relation to
the new tenancy to be granted. If so or for other good reasons shown, the court
has power to order a modification by changing an existing term or introducing a
new one . . . Before doing so it will consider any objections by the tenant and
where there is an insoluble conflict, will decide according to fairness and
justice.
As a result of
that case, it seems to me that it is perfectly proper for the landlord to seek
to maximise the value of his interest; the tenant is not to be protected unduly
against the market; but ultimately the court has to decide what is reasonable
in the circumstances, and, just as under section 35, so really it goes almost
without saying that the matter ought to be decided with fairness and justice.
So, with that
citation from authority, I turn to the submissions of counsel for the landlord.
He submitted that the question was at large. He said that one of the factors
was the 10-year existing lease and that it was right to weigh the advantages on
both sides. On the one side, there was the tenant’s requirement for a short
period and, on the other side, there was the proper regard of the landlord to
maximise the marketability of his asset. Under section 33 he submitted that the
tenant was not to be protected from market forces and he submitted that the
practice of the market was important and I ought to have regard to what would
happen if there was no protection under the Act. Weighing the factors, his
submission was that there was a significant detriment to the landlord which
could not be compensated because, although the investment value was affected,
rental value was not. Therefore, he said that he ought to be entitled to grant
a 14-year lease. On the tenant’s side he said that he accepted that the
tenant’s need was only for a short time. It is a present need, but not a
certain need. There is no real disadvantage in a longer lease. After all, it
would be a marketable lease and the chances were that it would be readily
marketable on the evidence before me; it would be at a rent which was less than
the rent which could be demanded of any new tenant and there was a demand for
the property; it would be marketable within a year, and he submitted that there
was no real disadvantage in the comparative inflexibility of the position of
the tenant through only having a particular lease of the balance of 13 years
(or nine years, if it were a 10-year lease) to market, and that really all that
the tenant could complain of here was the minor irritation of having to
instruct agents and get on with disposing of the lease. His submission was that
the balance came down heavily in favour of a 14-year term.
All that was
disputed, not surprisingly, by counsel for the tenant. He submitted that the
market forces should only have a very limited effect on the present issue and
that they were not really an important factor. He pointed out that the evidence
is such that the landlord will, in practice, know by the end of September of
this year whether the tenant is actually going out. The tenant has given an
undertaking to keep the landlord informed as to the progress of its move. It is
prepared to give an undertaking to allow the landlord every facility for
showing people round the premises, and he says that the landlord will have,
effectively, 11 months in which to find a new tenant and that the prospect of a
void with negative cash flow is a comparatively small one, and that further the
tenant offers to pay £50,000 if, in the event, the tenant, is not out on August
31 1986. He says that there is a substantial difficulty for the tenant in
dealing with what will then be a 13-year lease. The evidence is that the market
wants at least 15 years — not only the landlord wants it, but tenants of this
sort of property want it — and it is not so easy for him to dispose of that
lease as it would be for the landlord to deal with the premises with complete
flexibility, which it will have. He says that the purpose of the Act is to
protect the tenant and that is a very important consideration and what ought to
be given is the protection that he needs and no more. He points out that the
supposed diminution of market value is to some extent a paper transaction,
because he points out, with force, that the evidence is that there is no
intention of the landlord to part with this property and he says that if a
short term is granted the landlord is adequately protected by a rent of
£260,000, which is more than his expert said it is worth; that there is
unlikely to be a long void, and, although there is some uncertainty, it is an
uncertainty which will be quickly resolved and, once that is resolved, the
experts who, under terms of market sentiment, have valued the property down
will be able to value it up again. It is a postponement of a realisation of an
advantage rather than any actual loss.
I hope I have,
perhaps imperfectly, summarised what has been said on both sides. I have come
to the conclusion that, in all the circumstances, it would be reasonable for
the tenant to have the tenancy for which it asks to August 31 1986. I am
persuaded by the arguments on behalf of the tenant. It will give him the
protection which he actually needs, which the Act is there to provide him with,
and I do not attach great weight to the ‘market forces’ argument. In the
absence of any suggestion that there is going to be a sale, it seems to me
that, for the reasons put forward by the tenant, which I will not repeat, the
landlord is properly protected and it would be reasonable to grant the shorter
term which is asked for and that is what I propose to do.
The tenant
was awarded the costs of that day’s hearing only.
