Landlord and tenant — Rent review — Rent at review to be open market rental value after expiry of rent-free period of concessionary rent — Whether headline rent should be discounted
By a lease
dated August 8 1986 the respondent tenant held a term of 25 years of premises
from the applicant landlord. The lease contained provisions to review the rent
to the rental value in the open market with vacant possession on the
supposition, inter alia, that any rent-free period or concessionary rent
or other inducement which may be offered in the open market shall have expired
or been given immediately before the relevant date of review. In his award
determining the rent at review, the arbitrator found that the effect of the rent
review clause was that the open market rental value should be the ‘headline
rent’. The applicant contended that if the object of the review clause is to
arrive at the open market rental value let in the open market with vacant
possession, and if it is the purpose to use comparable transactions in order to
arrive at that conclusion, it is necessary to have regard to the practice of
letting with rent-free periods; if what is truly a rental value is to be
arrived at, then it is necessary to discount the headline rent to arrive at the
true market value of the premises let without a rent-free period.
date any rent-free period has expired. That is the literal meaning of the
clause and that is how the arbitrator construed it with the benefit of legal
advice. There was no reason to depart from that literal meaning.
The following
cases are referred to in this report.
British
Gas Corporation v Universities Superannuation
Scheme Ltd [1986] 1 WLR 398; [1986] 1 All ER 978; (1986) 52 P&CR 111;
[1986] 1 EGLR 120; (1986) 277 EG 980
City
Offices plc v Bryanston Insurance Co Ltd
[1993] 1 EGLR 126; [1993] 11 EG 129
Daejan
Investments Ltd v Cornwall Coast Country Club
(1984) 50 P&CR 157; [1985] 1 EGLR 77; (1984) 273 EG 1122
This was an
appeal by the tenants, National Westminster Bank plc, against an arbitrator’s
interim award in a rent review; the landlords were Co-operative Wholesale
Society.
David
Neuberger QC (instructed by Denton Hall, of Milton Keynes) appeared for the
applicants; Kim Lewison QC (instructed by Linklaters & Paines) represented
the respondent.
Giving
judgment, JUDGE RICH said: This is an appeal brought by agreement
against the interim award of an arbitrator appointed to determine the rent
review under a lease dated August 8 1986 in respect of premises in the City of
London let by Co-operative Wholesale Society Ltd to National Westminster Bank
at an initial rent of some very substantial sum.
The
arbitrator’s interim reward was concerned with the interpretation of a
particular clause within that review found at clause 6(2)(d), which provided:
The open
market rental value of the demised premises shall be the rental value in the
open market of the demised premises at the relevant date of review for a term
equal to the unexpired residue of the term commencing on the relevant date of
review on the open market as between a willing lessor and a willing lessee with
vacant possession without payment of fine or premium and having regard to the
degree and terms of the actual availability of car parking for the tenant and
on the suppositions if not facts: . . .
(d) that any rent-free period or concessionary
rent or any other inducement whether of a capital or revenue nature which may
be offered in the case of a new letting in the open market at the relevant date
of review shall have expired or been given immediately before the relevant date
of review.
The arbitrator
determined that the effect of the clause was, as he put it, that the open
market rental value as defined in clause 6 shall be the ‘headline rental value’
and that no discount shall be made for any rent-free periods or other
inducements, whether they be of a capital or revenue nature. That determination
involves an understanding of what the arbitrator meant by a headline rent, but
it is in effect to be understood, in the case, for example, of the grant of a
rent-free period, to be the rent at which the parties are agreed the premises
shall be let and which is to be payable after the expiry of the rent-free
period provided for in the lease. It is thus, in the treatment of comparable
transactions for the purpose of determining the rental value at the relevant
date, to be contrasted with what would otherwise be appropriate for the valuer
to do, namely to consider the true rental effect over the period of the lease
whether to the next review or for its whole term and to discount the so-called
headline rent to reflect the value of the rent-free period, which is granted to
the tenant in return for the payment of the headline rent over a period shorter
than the term for which he will actually enjoy occupation of the premises.
Before turning
to the words which the arbitrator was required to construe, it is, I accept,
helpful to remind oneself of the purpose for which it is well understood that
rent review clauses have now habitually been incorporated into leases granted
for periods of years greater than three or five years, which are the common
periods between reviews. This present lease was granted for a term of 25 years
or thereabouts.
The familiar
references for reminding oneself of that purpose are some observations of the
then Vice-Chancellor, Sir Nicolas Browne-Wilkinson, in British Gas
Corporation v Universities Superannuation Scheme Ltd [1986] 1 WLR
398*, at p401G where he said:
There is
really no dispute that the general purpose of a provision for rent review is to
enable the landlord to obtain from time to time the market rental which the
premises would command if let on the same terms on the open market at the
review dates. The purpose is to reflect the changes in the value of money and
real increases in the value of the property during a long term.
*Editor’s
note: Also reported at [1986] 1 EGLR 120.
Starting from
that general purpose of a rent review, a question arises, if that is the
objective of the parties, whether in the face of the common practice which has
now arisen of granting rent-free periods at the outset of a lease, it is appropriate
to assume at each review date the enjoyment of a further rent-free period at
the beginning of the review period. The arguments as to how far such assumption
would or would not succeed in properly reflecting changes in the value of money
and real increases in the value of the property during a long term may often
turn out to be circular because it is necessary, on the grant of the lease with
its review periods and its review provisions, to have in mind whether the first
rent-free period that is being granted is to be taken as the once for all
rent-free period or whether successive rent-free periods are to be assumed for
the purposes of each review and the appropriate initial rent will presumably
reflect the purposes of the parties in so considering.
Mr David
Neuberger QC, who, as I observed in indicating to counsel for the respondent to
this appeal that I need not trouble him, has presented a case for saying that
the arbitrator’s construction was wrong in a way which turned what seemed to
me, on the face of the words of the clause, almost unarguable into a case where
at least it was clearly arguable. I hope I have understood his argument. The
point that he makes immediately is that, if the object of clause 6(2) is to
arrive at the open market rental value of the demised premises let in the open
market with vacant possession as at the review date, and if it is the purpose
to use comparable transactions in order to arrive at such conclusion, it is
necessary to have regard to this practice of letting with rent-free periods;
and if what is truly a rental value is to be arrived at, then it is necessary
to discount the headline rent in the way that I have indicated in order to
arrive at the true market value of the premises let without a rent-free period.
Accepting that
that is true, does not, however, involve a conclusion as to what is the purpose
of this particular review because, as I have indicated, even taking as the
overall and general intention of review clauses to be that which was stated in
the British Gas Corporation case, namely to reflect changes in the value
of money and real increases in the value of the property during a long term,
does not answer the question which I sought to pose as to what at the outset of
the initial term the parties may regard as being the appropriate way of
treating further rent-free periods that might in the reality of the market at
each review date normally be expected to be granted.
It is for that
reason that it appears to me that it is essential to look at the specific words
of the clause. I am reinforced in my construction of the clause by the decision
of Aldous J in City Offices plc v Bryanston Insurance Co Ltd
[1993] 1 EGLR 126. In that case there was a clause which provided that the rent
to be determined was:
such as
should reasonably be expected to be payable in respect of the demised premises
after the expiry of any rent-free concession or fitting-out period which might
be given to the tenant if a letting of the demised premises were negotiated in
the open market between a willing landlord and a willing tenant upon a letting
on the review date.
In spite of a
written opinion of counsel, which was apparently before the arbitrator, and
upon which the arbitrator had relied as to the meaning of those words, Aldous J
felt constrained by those words to construe the clause as meaning that the rent
has to be the best yearly rent payable after the expiry of any rent-free period
whether provided as a fitting-out period or not, that is to say, he construed
that clause as providing for the headline rent, as I have so far defined it.
The actual
decision in that case was not, however, that the headline rent was payable,
because in that case there was also a requirement for a disregard to be made
which Aldous J construed as contradicting what would otherwise be the effect of
the words which I have just read. The clause required that there should be
disregarded any rent-free concession or fitting-out period for which allowance
would or might be given to the tenant if the demised premises were let in the
open market with vacant possession. Aldous J held that that
period contradicted what would otherwise have been the effect of the words
which he construed in the sense which I have indicated as leading to the
headline rent.
In the present
case, there is only the requirement to determine the rental value on the
particular supposition contained in clause 6(2)(d). Mr Neuberger points out
that the supposition is, on its face, a supposition not as to matters of actual
fact, but matters of a hypothetical nature.
That is partly
true. It is only partly true in the sense that the conclusion as to the
hypothetical transaction which the arbitrator is to assess is to be drawn almost
inevitably from actual transactions in the market and it is, in my judgment, as
to that with which the provision in clause 6(2)(d) deals. In referring to ‘. .
. any rent-free period . . . offered in the case of a new letting’, it means
offered not only in the case of the hypothetical new letting but also
notionally likely to be offered, having regard to the practice of the market
from which evidence is to be drawn as to rental value in the active market. It
is the supposed rent-free period or concessionary rent which, in accordance
with the practice of the market, would be offered in the case of the
hypothetical new letting which is to be treated for the purpose of the
assessment of rental value as if at the relevant date of review of such period
it has already expired, and likewise that any inducements shall have been given
immediately before the relevant date of review.
Mr Neuberger
has very helpfully assisted me as to how that somewhat difficult supposition is
to be made. Its difficulty lies in the requirement to consider rental value as
at a particular date, namely the review date, on the basis of a transaction
made between a willing lessor and a willing lessee at that same particular date
for a tenancy to begin also at that same particular date, and yet to assume
that the rent-free period has already been enjoyed. He drew my attention to the
decision of Peter Gibson J (as he then was) in Daejan Investments Ltd v Cornwall
Coast Country Club [1985] 1 EGLR 77 where at p80 he made this observation,
with which I have the very greatest sympathy, at least in the context of that
case, in respect of the arguments adduced in that case before him.
In some
respects the arguments between the parties, particularly in the pleadings,
touched on the meta-physical, disputing as they were how to reconcile the
hypothesis with dates in the real world. To my mind, much of such disputation
misses the point. If the hypothesis requires one to assume that the casino user
[which was there in issue, so far as valuation is concerned] is lawful, then it
is necessary to assume that all preliminary steps, however complex, enabling
such lawful user to be made will have been taken in a dateless continuum of
time immediately before the letting.
It is, in my
judgment, into that dateless continuum of time that any rent-free period that
would be offered in the case of a new letting in the open market is packed
immediately before the review date, by reference to which the valuation was to
be made in the present case; and the valuation is to be made on the basis that
by that date of review such period shall have expired. That appears to me to be
the literal meaning of this clause. It was so construed, for reasons with which
I agree, by the arbitrator and by counsel advising the arbitrator. It does not
appear to me that there is any reason to depart from that literal meaning, nor
do I think there is any reason for me to assume that that literal meaning is
inconsistent with the purpose of the parties when they subscribed to this
particular form of words.
