Open market rent — Award by arbitrator — Whether account taken of rent-free periods when calculating rent payable — Rent-free period to new tenant upon determination of current market rent at rent review — Court of Appeal holding that presumption of reality applied — Departure from reality would be examined critically
These four appeals questioned the effect of the common practice of allowing a rent-free period to a new tenant upon the determination of a current market rent at a rent review. The landlords said that the rent review clause meant that the reviewed rent must be the “headline rent” currently obtainable in the market, irrespective of the length of the rent-free period or the inducement which the tenant had to be given to secure it. The tenants said that that would be irrational and unfair. They argued that on their true construction the clauses required one to ignore only the inducement a tenant would need to compensate for the fact that, before he could have the full beneficial use of the building, he would have to move in or find subtenants.
Held The appeals in the Broadgate and Scottish Amicable cases were dismissed. The appeals in the Cooperative and Prudential cases were allowed.
1. The principles to be applied to the construction of commercial rent review clauses were no different from those applying to the construction of any other commercial document. The evident purpose of a rent review was to enable the rent to be adjusted to take account of fluctuations in the value of money and property during the term of the lease. Departures from reality which a valuer was required to make were to be examined critically.
2. Therefore, the court would lean against a construction which would require payment of rent upon an assumption that the tenant had received the benefit of a rent-free period, which he had not in fact received.
3. In the Co-operative case: see [1994] 14 EG 130, the appeal was allowed and a declaration made that the headline rent derived from the comparables be discounted to allow for any rent-free period not attributable to the fact that the hypothetical tenant had still to enter into occupation of the premises.
4. In the Broadgate case: see [1993] EGCS 209, the reference to the rent-free period being of “such length as would be negotiated in the open market” made it impossible to confine the words to rent-free periods attributable to the tenant having to move in. The appeal was dismissed.
5. In the Scottish Amicable case: see [1994] EGCS 19, the judge held that “a new letting” meant a letting to a new tenant who needed to move in. The language of the clause could bear that construction and the appeal was dismissed.
6. In the Prudential case: see [1994] EGCS 84, there was no warrant for the view that the assumption required the arbitrator to apply the headline rent after expiry of the “going rent-free period”. The appeal was allowed.
David Neuberger QC (instructed by Denton Hall and Freshfields) appeared for National Westminster and Lehman Brothers; Kim Lewison QC (instructed by Linklaters & Paines and Herbert Smith) appeared for Co-operative and Broadgate; Jonathan Gaunt QC (instructed by Cameron Markby Hewitt) appeared for Scottish Amicable; Paul Morgan QC (instructed by Middleton Potts and the solicitor to Taylor Woodrow) appeared for Middleton and Greenham; Simon Berry QC (instructed by Lovell White Durrant) appeared for Prudential.
