Landlord and tenant — Rent review — Open market rent after expiry of rent-free period — Whether deductions should be made to ‘headline’ rents to reflect concessionary or rent-free periods other than for fitting out
Co-operative
Wholesale Society Ltd v National Westminster Bank plc
The rent
review in the lease dated August 8 1986 provided that: ‘The rental value in the
open market of the demised premises at the relevant date of review for a term …
commencing on the relevant date of review in the open market as between a
willing lessor and a willing lessee with vacant possession on the supposition …
that any rent free period or concessionary rent or other inducement … 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’. Judge Rich (sitting as a judge of the Chancery Division) upheld an
award of the arbitrator, declaring that the clause resulted in the market value
being the headline rent; the tenant appealed.
Broadgate
Square plc v Lehman Brothers Ltd
The rent
review clause in the lease dated December 31 1987 provided: ‘ ‘Open Market
Rent’ means the best yearly rent which would reasonably be expected to become
payable in respect of the premises after the expiry of a rent free period of
such length as would be negotiated in the open market between a willing
landlord and a willing tenant upon a letting of the premises as a whole by a
willing lessor to a willing lessee in the open market … with vacant possession
…’. The tenant appealed from the decision of Harman J that the rent at review
is to be the headline rent.
Scottish
Amicable Life Assurance Society
v Middleton Potts & Co
The rent
review clause in the lease dated September 25 1987 provided that the rent
should be ‘such sum … as representing the best yearly open market rent (at the
rate payable following the expiry of any rent free period or periods at
concessionary rents which might be granted on a new letting …)’. The landlord
appealed the decision of Arden J that a rent-free period did not include such a
concession given to induce the tenant to pay a higher rent.
Prudential
Nominees Ltd v Greenham Trading Ltd
The rent
review clause of the lease dated March 1 1988, after referring to the
definition of the best rent, continued: ‘… upon the assumptions that … (4) no
reduction or allowance is to be made on account of any rent free period or
other rent concession which in a new letting might be granted to an incoming
tenant’. The tenant appealed the decision of Sir Mervyn Davies, who decided
that the review rent was the headline rent.
The following
cases are referred to in this report
Antaios
Compania Naviera SA v Salen Rederierna AB [1985]
AC 191; [1984] 3 WLR 592; [1984] 3 All ER 229; [1984] 2 Lloyd’s Rep 235, HL
Basingstoke
and Deane Borough Council v Host Group Ltd [1988]
1 WLR 348; [1988] 1 All ER 824; (1987) 56 P&CR 31; [1987] 2 EGLR 147; 284
EG 1587, CA
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; 277 EG 980
British
Movietonews Ltd v London & District Cinemas
Ltd [1952] AC 166, CA
Broadgate
Square plc v Lehman Brothers Ltd [1994] 1
EGLR 143; [1994] 04 EG 135
Co-operative
Wholesale Society Ltd v National Westminster
Bank plc [1994] 1 EGLR 154; [1994] 14 EG 130, CA
MFI
Properties Ltd v BICC Group Pension Trust Ltd [1986]
1 All ER 974; [1986] 1 EGLR 115; (1986) 277 EG 862
Bishopsgate
Ltd v Prudential Assurance Co Ltd (1984) 270
EG 950; [1985] 1 EGLR 72; (1985) 273 EG 984, CA
Prudential
Nominees Ltd v Greenham Trading Ltd [1994]
EGCS 84
Scottish
Amicable Life Assurance Society v Middleton
[1994] 1 EGLR 150; [1994] 10 EG 109
tenant would have the expense of moving in and fitting out is more in
accordance with the presumption of reality (see British Gas Corporation
v Universities Superannuation Scheme Ltd [1986] 1 EGLR 120) than one
which does not. On the other hand, a clause which deems the market rent to be
the headline rent obtainable after a rent-free period granted simply to
disguise the fall in the rental value of the property is not in accordance with
the basic purpose of a rent review clause. It enables the landlord to obtain an
increase in rent without any rise in property values or fall in the value of
the money by reason of changes in the way the market is choosing to structure
the financial packaging of the deal. Therefore, in the absence of unambiguous
language, a court should not be ready to construe a rent review clause as having
this effect.
Co-operative
Wholesale Society Ltd v National Westminster
Bank plc
allowed. One is required to assume that any rent-free or concessionary rent
period or other inducement which might be offered in the open market has
expired or been given before the review date. On this hypothesis one cannot
take the headline rent from a comparable which provided for a rent-free period
after the commencement of the term. The assumption that the rent-free period is
past does necessarily imply that the tenant must be treated as already having
moved in. He cannot therefore argue for the equivalent of a rent-free period
for fitting out. The headline rent from the comparables must be discounted to
allow for any rent-free period not attributable to the fact that the
hypothetical tenant has still to enter into occupation of the premises.
Broadgate
Square plc v Lehman Brothers Ltd
dismissed. The open market rent is to be the headline rent. The rent-free
period is not deemed to have expired before the parties negotiate. The rent to
be applied to the whole term is the rent, which would become payable after the
expiry of such rent-free period as would be negotiated on the review date.
Scottish
Amicable Life Assurance Society v Middleton
Potts & Co
dismissed. A new letting means a letting to a new tenant who needs to move in
rather than a renewed letting to a tenant already there. The rent-free period
to which the clause referred was one which was attributable to the letting
being new. It did not, therefore, include a rent-free period granted to induce
the tenant to pay a higher rent than he would otherwise have done.
Prudential
Nominees Ltd v Greenham Trading Ltd
allowed. The effect of the clause is clear: the arbitrator is required in the
first part of the clause to determine the rent which a tenant in the open
market would pay over the whole hypothetical term. There is no warrant in the
clause for increasing the rent he would have fixed if there had been no
question of a rent-free period, because tenants in the market are being given
rent-free periods. The arbitrator must adjust comparables to enable him to fix
the rent which in the market would be paid from day one for a tenancy of the
premises.
These were
conjoined appeals from the decisions of Judge Rich QC ([1994] 1 EGLR 154;
[1994] 14 EG 130), Harman J ([1994] 1 EGLR 143; [1994] 04 EG 135), Arden J
([1994] 1 EGLR 150; [1994] 10 EG 109) and Sir Mervyn Davies ([1994] EGCS 84).
David
Neuberger QC (instructed by Denton Hall and Freshfields) appeared for National
Westminster Bank plc and Lehman Brothers; Kim Lewison QC (instructed by
Linklaters & Paines and Herbert Smith) represented Co-operative Wholesale
Society Ltd and Broadgate Square Ltd; Jonathan Gaunt QC (instructed by Cameron
Markby Hewitt) appeared for Scottish Amicable Life Assurance Society; Paul
Morgan QC (instructed by Middleton Potts & Co and the solicitor to Taylor
Woodrow) represented Middleton Potts & Co and Greenham Trading Ltd; Simon
Berry QC (instructed by Lovell White Durrant) represented Prudential Nominees
Ltd.
Giving the
first judgment at the invitation of Leggatt LJ, Hoffmann LJ said: These four appeals have been heard
together because they involve the construction of provisions in leases which are
intended to deal with a similar problem, namely 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. A rent review clause ordinarily
requires that in default of agreement an arbitrator or expert shall determine
the rent for which, upon various assumptions, the premises could on the review
date be let in the open market with vacant possession. The assumption of a
letting with vacant possession is primarily intended to reinforce the
hypothesis of a letting in the open market. This requires one to assume that
anyone is able to bid for the lease and move in. But the decision of Lloyd J
and the Court of Appeal in 99 Bishopsgate Ltd v Prudential Assurance
Co Ltd (1984) 270 EG 950 and [1985] 1 EGLR 72 drew the attention of
draftsmen to a consequence of the vacant possession assumption, which some
might have overlooked. On a review of the rent of a 30-storey office building
in the City, the arbitrator found that the most likely tenant would have wanted
only part of the building for his own use and would have sublet the rest. He
would have bargained for a rent-free period to cover the time needed to find
subtenants and the rent-free period he would have had to allow them to fit out
their premises. Having regard to the size of the building in relation to the
general supply of similar office space in the City, he would have been able to
secure a 16-month rent-free period on a 14-year letting. The arbitrator
therefore found that if one had to assume that the building was empty one would
have to discount the rent which would have been paid by a tenant whose
activities were already up and running. Lloyd J and the Court of Appeal held
that this necessarily followed from the assumption of a letting with vacant
possession.
Some landlords
regarded this decision as demonstrating an unintended side-effect of the
assumption of vacant possession. In actual fact the tenant was in possession.
Why should the rent be depressed at rent reviews by an assumption that each
time he had to move in again? The matter was taken up in the literature and by
professional bodies. In December 1985 a joint working party of the Law Society
and the Royal Institution of Chartered Surveyors produced a model form of rent
review clause, which required the arbitrator to assume that:
no reduction
is to be made to take account of any rental concession which on a new letting
with vacant possession might be granted to the incoming tenant for a period
within which its fitting out works would take place.
In 1986 a new
landlord and tenant (business tenancies) volume of the Encyclopedia of Forms
and Precedents was published under the editorship of Sir Raymond Walton.
This contained in para 82.3 the following prescient comment on the drafting of
such clauses:
Any attempt to
draft a provision that aims to ensure that the vacant possession assumption
would not bring about a reduction in the revised rent needs to recognise that
rent-free periods are granted essentially for two distinct reasons.
Often the
length of the rent-free period at the commencement of a new letting reflects a
genuine attempt by the parties to estimate the time that it will take for the
tenant to fit out the premises for its proposed use, or, where the tenant will
not be taking possession of the property or all of it, to market the premises.
No such time is needed at the commencement of the rent review period and the
tenant cannot reasonably expect any reduction in rent. The premises should
therefore be assumed to be ready for immediate occupation and use at the
commencement of the hypothetical tenancy …
There are
cases, however, where market conditions are such that an incoming tenant would
be able to obtain a very much longer rent-free period than would be required to
fit out the premises, or some other benefit as an inducement to enter into the
lease … Such inducements are not uncommon because landlords, when operating in
a tenant’s market, frequently prefer quite generous ‘one-off’ incentives at the
commencement of the term (such as rent-free or concessional rent periods, a
payment to the tenant for fitting out or otherwise etc) to a reduction in the
rent they were seeking for the premises. Previously, rents were generally
negotiated to represent the value of the premises and to become payable either
immediately or after a fairly short period for fitting out: any inducement was
a straightforward reduction in the asking rent … Where this state of affairs
exists at the time of the review date in relation to premises of the type in
question, it is submitted that this ought not to be disregarded in determining
the revised rent and that any drafting that sought to provide otherwise would
be an attempt to remove from comparables with such inducements a vital aspect of
those comparables. Such tinkering with the evidence would be likely to cause
numerous legal and valuation difficulties, quite apart from being unfair to the
tenant. And yet, some landlords would argue that providing ‘one-off’
inducements on the grant of leases on a type of premises in a certain area is
no reason for depressing the rent of comparable premises, let some time
previously, that fall to be reviewed while such inducements are being offered.
This
discussion encapsulates the dispute between the landlords and the tenants in
the four cases before us. The landlords, espousing the view attributed to them
by the author, say that the rent review clause means that the reviewed rent
must be the ‘headline rent’ currently obtainable in the market, irrespective of
the length of the rent-free period or other inducement which the tenant has to
be given to secure it. The tenants say that, for the reasons given by the
author, this would be unfair and irrational. They argue that, on their true
construction, the clauses require 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.
Put another way, they modify the assumption of vacant possession by assuming
that the hypothetical tenant is able, instantly and costlessly, to enter into
beneficial occupation of the premises. But they do not require one to ignore
the inducements of which the purpose is simply to inflate the rent above that
which he would otherwise have been willing to pay.
The financial
consequences of choosing one interpretation rather than the other in the
current market for office accommodation in the City appear starkly from the
figures in the Broadgate Square appeal. The arbitrator found that on
December 25 1991, the rent review date, the premises would have been let with a
two and a half year rent-free period, after which the ‘headline’ rent would be
£7,033,300 a year. Six months of the rent-free period would have been
attributable to fitting out and the rest simply in exchange for the tenant
agreeing to pay a higher rent than he would otherwise have done. On the
landlord’s construction, the review rent would be £7,033,300. On the tenant’s
construction, adjusting the headline rent to take into account two years of the
rent-free period, it would be £5,281,365 a year.
There are no
special rules for the construction of rent review clauses. As in any other
contractual document:
… it is
axiomatic that what the court is seeking to identify and declare is the
intention of the parties to the lease expressed in that clause. Thus, like all
points of construction, the meaning of this rent review clause depends on the
particular language used interpreted having regard to the context provided by
the whole document and the matrix of the material surrounding circumstances. We
recognise therefore that the particular language used will always be of
paramount importance. Nonetheless, it is proper and only sensible, when
construing a rent review clause, to have in mind what is normally the
commercial purpose of the clause.
per Nicholls LJ in Basingstoke and Deane Borough Council v Host
Group Ltd [1988] 1 WLR 348* at p353.
*Editor’s
note: Also reported at [1987] 2 EGLR 147.
The decision
of the arbitrators in The Antaios [1985] AC 191 exemplifies this
approach. A charter party said that the owner could withdraw the vessel for
non-payment of hire or ‘on any breach of this charter party’. The question was
whether any breach meant literally any breach or only a repudiatory breach. The
arbitrators held that it meant the latter, saying that:
the owners’
construction is wholly unreasonable, totally uncommercial and in total
contradiction to the whole purpose of the NYPE time charter form. The owners
relied on what they said was the ‘literal meaning of the words in the clause’.
We would say that if necessary, in a situation such as this, a purposive
construction should be given to the clause so as not to defeat the commercial
purpose of the contract.
Lord Diplock
commented:
While
deprecating the extension of the use of the expression ‘purposive construction’
from the interpretation of statutes to the interpretation of private contracts,
I agree with the passage I have cited from the arbitrators’ award and I take
this opportunity of restating that if detailed semantic and syntactical
analysis of words in a commercial contract is going to lead to a conclusion
that flouts business common sense, it must be made to yield to business common
sense.
This robust
declaration does not, however, mean that one can rewrite the language which the
parties have used in order to make the contract conform to business common
sense. But language is a very flexible instrument and, if it is capable of more
than one construction, one chooses that which seems most likely to give effect
to the commercial purpose of the agreement.
The
application of these principles to rent reviews was discussed by Sir Nicolas
Browne-Wilkinson V-C in British Gas Corporation v Universities
Superannuation Scheme Ltd [1986] 1 WLR 398*. He said [at p401]:
*Editor’s
note: Also reported at [1986] 1 EGLR 120
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 property during a long term. Such being the
purpose, in the absence of special circumstances it would in my judgment be
wayward to impute to the parties an intention that the landlord should get a
rent which was additionally inflated by a factor which had no reference either
to changes in the value of money or in the value of property … Of course, the
lease may be expressed in words so clear that there is no room for giving
effect to such underlying purpose. Again, there may be special surrounding
circumstances which indicate that the parties did intend to reach such an
unusual bargain. But in the absence of such clear words or surrounding
circumstances, in my judgment the lease should be construed so as to give
effect to the basic purpose of the rent review clause and not to confer on the
landlord a windfall benefit which he could never obtain on the market if he
were actually letting the premises at the review date …
This approach
has produced what is sometimes called a ‘presumption of reality’ in the
construction of rent review clauses. In the absence of clear contrary words or
necessary implication, it is assumed that the hypothetical letting required by
the clause is of the premises as they actually were, on the terms of the actual
lease and in the circumstances as they actually existed. But there is no doubt
that most clauses require some assumptions which are or may be contrary to
reality. In most such cases, however, there is no conflict between such
fictions and business common sense. If I may quote what I said in MFI
Properties Ltd v BICC Group Pension Trust Ltd [1986] 1 All ER 974*
[at p976]:
*Editor’s
note: Also reported at [1986] 1 EGLR 115
In some cases
it will be easy, even for an outsider who was not privy to the negotiations
between the parties, to see why such an assumption should have been made. For
example, fairness to the landlord might explain an assumption that the tenant
has complied with his repairing covenants even if he has in fact not done so.
Similarly, fairness to the tenant will explain an assumption, which excludes
from consideration any improvements which the tenant has made at his own expense
or his acquisition of a goodwill which he would pay a higher rent to protect.
So, in the
case of rent-free periods, it is easy to see why the parties should not wish to
allow the tenant a reduction simply because the fiction of vacant possession
entails that the incoming tenant would have the expense of moving in and
fitting out. A clause which excludes the assumption that he would have this
expense is more in accordance with the presumption of reality than one which
does not. On the other hand, a clause which deems the market rent to be the
headline rent obtainable after a rent-free period granted simply to disguise
the fall in the rental value of the property is not in accordance with the
basic purpose of a rent review clause. It enables a landlord to obtain an
increase in rent without any rise in property values or fall in the value of
money, but simply by reason of changes in the way the market is choosing to
structure the financial packaging of the deal.
It therefore
seems to me that, in the absence of unambiguous language, a court should not be
ready to construe a rent review clause as having this effect. On the other
hand, it would not be right to treat it as simply preposterous. In 1986–88,
when the four leases in these appeals were granted, rent-free periods beyond
the fitting-out period were relatively uncommon. The parties may therefore have
thought that it was not worth troubling the surveyor to undertake what might be
the difficult task of distinguishing between the fitting-out element
of a rent-free period and what was in effect a reverse premium paid to the
tenant for taking the lease. In the lessor’s market then obtaining, the tenant
may have been content to assume that in practice it would make little
difference. Since then the position has changed. As the arbitrator found in the
Broadgate Square case:
… the market
has become somewhat distorted over the past year or so by the change in
conditions brought about by diminishing demand and increasing supply … It has
been customary for many years for landlords to grant rent-free periods to
assist tenants against the cost of fitting out works. However, the situation
has now changed and landlords are granting relief for periods in excess of the
norm and that extra relief is seen to take the form of an inducement.
However, if
upon its true construction the clause deems the market rent to be whatever is
the headline rent after a rent-free period granted, for whatever reason, then
the tenant cannot complain because in changed market conditions it is more onerous
than anyone would have foreseen. As Viscount Simon said in British
Movietonews Ltd v London & District Cinemas Ltd [1952] AC 166 at
p185:
The parties
to an executory contract are often faced, in the course of carrying it out,
with a turn of events which they did not at all anticipate — a wholly abnormal
rise or fall in prices, a sudden depreciation of the currency, an unexpected
obstacle to execution, or the like. Yet this does not in itself affect the
bargain they have made.
With these
preliminary remarks, I come to the actual words used in the four appeals.
Co-operative
Wholesale Society Ltd v National Westminster Bank plc
The lease is
dated August 8 1986 and the relevant words are as follows:
The rental
value in the open market of the demised premises at the relevant date of review
for a term … commencing on the relevant date of review in the open market as
between a willing lessor and a willing lessee with vacant possession on the
supposition … 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 judgment
of Judge Rich QC, sitting as a High Court judge, is reported at [1994] 1 EGLR
154. The judge upheld an interim award of the arbitrator declaring that, upon
its literal meaning, the clause resulted in the market value being deemed to be
the headline rent. I do not agree. The clause requires one to decide what would
be agreed between a willing lessor and a willing lessee on the relevant date of
review as a fixed rent (subject to further reviews) for a term commencing on
that date. For this purpose, one is required to assume that any rent-free or
concessionary rent period or other inducement which might be offered in the
open market has expired or been given before the review date, ie before the
hypothetical bargain was struck. It seems to me that, in determining what rent,
on this hypothesis, the parties would agree, the valuer cannot simply take the
headline rent from a comparable which provides for a rent-free period after the
commencement of the term. This would not be comparing like with like. Why
should a tenant whose rent-free period or other inducement has already been
enjoyed agree to pay the same rent as one who is bargaining to receive one in
the future? The only basis upon which the learned judge’s construction can be
correct is if one supposes that the bargain had been struck and the tenant had
bound himself to take the lease before he received the benefit of the rent-free
period or other inducement. This means that on the rent review date, after the expiry
of the notional rent-free period, he would already be bound. The rent for the
subsequent term would then have taken the earlier rent-free period or other
inducement into account. But this sequence of events would be inconsistent with
the basic hypothesis of an open market, ie that the hypothetical lessor and
lessee as at the review date were bargaining in conditions which left them free
to contract or not to contract. It does not follow that the provision has no
effect. The assumption that the rent-free period is past does, in my view,
necessarily imply that the tenant must be treated as already having moved in.
He cannot, therefore, argue for the equivalent of a rent-free period for
fitting out. But I do not think that it can mean that, by reason of the
previous rent-free period, the tenant has committed himself to the new term. He
must be treated as free if necessary to move out, instantly and without cost,
if he can obtain comparable premises elsewhere for less.
This
construction gives the clause the effect of negativing the 99 Bishopsgate fitting-out
allowance, but no more. It does so without straining the language of the
clause; indeed, it seems to me in accordance with its literal meaning. I would
therefore allow this appeal and substitute for the interim award a declaration
that the headline rent derived from the comparables must be discounted to allow
for any rent-free period not attributable to the fact that the hypothetical
tenant has still to enter into occupation of the premises.
Broadgate
Square plc v Lehman Brothers Ltd
The lease is
dated December 31 1987 and the relevant words are as follows:
‘Open Market
Rent’ means the best yearly rent which would reasonably be expected to become
payable in respect of the premises after the expiry of a rent-free period of
such length as would be negotiated in the open market, between a willing
landlord and a willing tenant upon a letting of the premises as a whole by a
willing lessor to a willing lessee in the open market at the relevant Review
Date for a term of ten years or a term equal to the residue of the then
unexpired period of the Term (which ever is the longer) with vacant possession
without fine or premium.
I agree with
Harman J*, who allowed an appeal from an award of an arbitrator based upon a different
construction, that these words leave no escape from the conclusion that the
open market rent is to be the headline rent. Unlike the previous case, the
rent-free period is not deemed to have expired before the parties negotiate.
The rent to be applied to the whole term is the rent which would become payable
after the expiry of such rent-free period as would be negotiated on the review
date, ie the headline rent. The reference to the rent-free period being of
‘such length as would be negotiated in the open market’ makes it impossible to
confine the words to rent-free periods attributable to the tenant having to
move in.
*Editor’s
note: Reported at [1994] 1 EGLR 143.
Mr David
Neuberger QC, for the appellant tenants, pointed out that the clause refers to
a rent-free period, but makes no provision for cases in which the headline rent
is purchased by a low rent period, a reverse premium or other inducement. It
might produce an anomalous result if the tenant were offered a reverse premium
instead of a rent-free period. That is true, but I do not see how it advances
the argument in a case in which the arbitrator has found that the parties in
the open market would have negotiated a rent-free period — in this case, for 30
months. Second, Mr Neuberger says that the revised rent must be one which would
be payable ‘in respect of the premises’ and not one which is attributable to a
rent-free period. But there is no dichotomy here: the rent-free period results
in the hypothetical tenant being willing to pay a higher rent in respect of the
premises. Third, he says that the only purpose of the clause is to prevent a
tenant from saying that because he would have received a rent-free period, the
reviewed rent should be zero. This seems to me so far-fetched a construction
that I cannot imagine that the explicit words of the clause were intended only
to counteract it. Furthermore, it would result in the clause being ineffective
even to counteract the decision in 99 Bishopsgate. I would therefore
dismiss this appeal.
Scottish
Amicable Life Assurance Society
v Middleton Potts & Co
The lease is
dated September 25 1987 and the relevant words are as follows:
The New Rent
shall be the greater of (a) the Existing Rent (b) such sum as shall be agreed
by the Lessor and the Lessee or determined as representing the best yearly open
market rent (at the rate payable following the expiry of any
new letting of the Demised Premises or of comparable premises on the relevant
review date) at which the demised premises might reasonably be expected to be
let in the open market on the relevant Review Date without a fine or premium or
value in the nature of a fine or premium …
But
disregarding
(d) any
effect on rent of any initial rent free period or periods at concessionary
rents or other inducements which might be offered in the open market to
prospective underlessees of the Demised Premises or any part thereof or of
comparable premises.
This clause
resembles that in the Broadgate Square appeal in that it clearly says
that the ‘New Rent’ is to be the rent which would be payable after the expiry
of a rent-free period. The question is: what kind of rent-free period? Unlike Broadgate
Square the clause does not simply say it should be whatever rent-free
period would be negotiated as between a willing lessor and willing lessee in
the open market. It says it shall be the rent-free period which ‘might be
granted on a new letting of the demised premises or of comparable
premises’. Arden J* held that a new letting meant a letting to a new tenant who
needed to move in rather than, for example, a renewed letting to a tenant who
is already there. The rent-free period to which the clause referred was one
which was attributable to the letting being new. It did not, therefore, include
a rent-free period granted to induce the tenant to pay a higher rent than he
would otherwise have done, since this would be just as much a characteristic of
a renewed letting to a tenant in occupation as of a letting to a new one. As
the judge said, such an inducement ‘may be contemporaneous with a new letting,
but causally it is distinct from it’.
*Editor’s
note: Reported at [1994] 1 EGLR 150.
I think that
the language of the clause can bear this construction and that, for the reasons
which I gave in the general discussion of construction, Arden J was right to
adopt it. I think it is reinforced by the emphasis on the lease being granted
‘without a fine or premium or value in the nature of a fine or premium’. In my
view, a rent-free period to secure a higher headline rent is value in the
nature of a (reverse) premium. On the other hand, I do not think that a
rent-free period which is genuinely for moving in and fitting out would be
described as in the nature of a reverse premium.
Mr Paul Morgan
QC [for the tenant] submitted that, even if I disagreed with the judge’s
construction, the effect of the clause was neutralised by disregard (d). I do
not think that this can be right. In my view, it refers only to rent-free
periods which the hypothetical tenant might grant to his underlessees. It does
not apply to the rent-free period which he himself enjoys. However, for the
same reasons as the judge, I think that the appeal should be dismissed.
Prudential
Nominees Ltd v Greenham Trading Ltd
The lease is
dated March 1 1988 and the relevant words are:
the best at
which the whole of the premises might reasonably be expected to be let in the
open market on the relevant review date by a willing landlord to a willing
tenant with vacant possession and without taking any fine or premium … upon the
assumptions that …
(4) no
reduction or allowance is to be made on account of any rent free period or
other rent concession which in a new letting might be granted to an incoming
tenant.
The effect of
this clause seems to me perfectly clear. The arbitrator is required in the first
part of the clause to determine the rent which a tenant in the open market
would pay over the whole of the hypothetical term. In assumption (4) he is told
that no reduction is to be made or allowance given because a tenant in the real
market might be given a rent-free period. Reduction from what? In my judgment,
from the figure which he would have fixed in accordance with the earlier
provisions of the clause if there had been no question of a rent-free period.
There is no warrant in the clause for increasing this figure because
tenants in the market are being given rent-free periods. If the arbitrator
wishes to make use as comparables of market lettings which involve rent-free
periods, he must adjust them to enable him to do what the first part of the clause
tells him to do, namely to fix a rent which in the market would be paid from
day one for a tenancy of the premises. Sir Mervyn Davies decided that
assumption (4) required the arbitrator to apply the headline rent after expiry
of the going rent-free period*. I can find no warrant for this in the language
of the clause and would therefore allow the appeal.
*Editor’s
note: Reported at [1994] EGCS 84.
Agreeing, Simon Brown LJ said: I confess to
having had more difficulty than Hoffmann LJ in hacking my way through the
thickets of these rent review clauses. In the end, however, I have reached the
same conclusions upon each.
An appropriate
starting point in one’s approach to these clauses seems to me the
Vice-Chancellor’s judgment in British Gas Corporation v Universities
Superannuation Scheme Ltd [1986] 1 WLR 398 at p401:
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.
The avowed
object of the clauses now at issue is, however, according to the landlords,
precisely the opposite. It is (save as to the clauses’ undisputed effect of
precluding a discount upon the open market rent to reflect allowances commonly
made for a new tenant’s start-up costs — thus counteracting the decision in 99
Bishopsgate) to ‘insulate’ (Mr Jonathan Gaunt QC’s term) the landlord
against any fall in the value of property or, as Mr Kim Lewison QC put it, to
‘… run counter to the market …’.
Clearly, it is
possible to draft a rent review clause to produce that effect, but it is hardly
a provision one would expect to find, distorting, as so radically it does, the
very open market rent for which on review one is ultimately searching. I
recognise, of course, that one’s search is for an open market rent as defined
by the lease and accordingly that certain specified unreal hypotheses are
introduced. But the artificiality of these is ordinarily within relatively
narrow limits; it does not strike at the very heart of a true open market
valuation. I cannot, for example, accept the landlords’ argument that the
clause (as they construe it) is little different to a provision for upward-only
review. That seems to me an altogether different concept: a simple rejection of
the ‘true’ open market value, if it happens to be less than is already payable.
How do the
landlords seek to justify the present clauses (construed as widely as they
would have them construed)? As I understand it, essentially thus: true, they
say, we would now have to induce the hypothetical tenant taking a fresh tenancy
at the time of review not merely with concessions to reflect his start-up costs
but also with an inducement to take the lease; the actual tenant, however,
should not have the benefit of that. But why not? There is no certainty that
the tenant himself will have enjoyed any such inducement at the commencement of
his lease. But even if he has, so what? Whether that was intended for all time
to exhaust the effect of such inducements is surely the question to be answered
on these appeals. The very fact that such further inducements would be
necessary to obtain a fresh letting at the date of review, to my mind,
necessarily demonstrates that the rental value is lower than the headline rent
and it is the former which the tenant ought properly to be paying.
To my mind,
therefore, only the most unambiguous of such clauses could properly be found to
bear the landlord’s construction.
Turning to the
four clauses in question on these appeals, I find relatively little difficulty
with regard to two: the Broadgate clause unambiguously does achieve the
improbable result for which the landlords contend; the Prudential clause
equally unambiguously does not. Before approaching the other two, more
difficult, clauses it is instructive to consider why. I start with the Prudential.
This clause — assumption (4) — expressly prohibits only a ‘… reduction or
allowance …’ from a genuine open market rent, ie one determined
rent-free or other concessionary periods. Provided only and always that it is
possible to distinguish between start-up concessions and inducement concessions
and to speak of one as reducing the open market rent and the other as increasing
it (turning it into an artificially high or ‘headline’ rent), then it follows
that the only effect of assumption (4) is to preclude discounting the true open
market rent by reference to start-up concessions. I believe that one can, and
in this context must, make such a distinction.
In Broadgate
the clause inexorably identifies the open market rent as the headline rent.
The factual hypothesis of the valuation is plain: there is simply no room to
separate out an inducement concession from a start-up concession such as would
be made to a new tenant on a first letting.
What, then, of
the other two clauses? For my part, I would accept that the more obvious
reading of both favours the landlord’s construction. I am persuaded, however,
that they are capable of being, and therefore for the reasons already given
should be, construed differently.
The
supposition required by the Co-operative clause is that all forms of
inducement have expired before the new open market rent comes into force (I
paraphrase). It seems to me possible to construe this provision as precluding
the tenant from seeking a discount upon the open market rental value on account
of start-up costs, but yet not as requiring the valuer artificially to inflate
that value to a headline rent by reference to an inducement concession.
Hoffmann LJ has already fully articulated such a construction and I say no more
about it.
The crucial
words in the Scottish Amicable clause are those in parenthesis. Although
at first blush mirroring the Broadgate clause, I have come to share
Hoffmann LJ’s view that there are differences between them sufficient to allow
the tenant’s construction to prevail. Here, too, I cannot hope to improve upon
Hoffmann LJ’s exposition of the precise form of construction leading to this result.
I recognise
that my own reasoning adds little if anything to Hoffmann LJ’s. I have thought
it right, however, to acknowledge the difficulty that I personally have had on
these appeals and to indicate in broad terms what has brought me to my
conclusions.
Also agreeing,
Leggatt LJ said: As the
skill and learning of five of the advocates most pre-eminent in the field have
demonstrated, the principles to be applied to the construction of commercial
rent review clauses are no different from those applying to the construction of
any other commercial document. The evident purpose of rent review is to enable
the rent to be adjusted from time to time so as to take account of fluctuations
in the value of money and of property during the term of the lease. Departures
from reality which a valuer is required to make are to be examined critically.
So the court will lean against a construction which would require payment of
rent upon an assumption that the tenant has received the benefit of a rent-free
period, which he has not in fact received. It would not be surprising if, when
these leases were entered into, the parties and their advisers did not foresee
that rent-free periods might commonly be granted by way of inducement as well
as for fitting out and what the financial consequences of that might be.
Since the
conclusions to which the court has come in these appeals depend entirely on the
correct construction of the respective rent review clauses, I shall say no more
about them than that for the reasons given by Hoffmann LJ the appeals in the Broadgate
and Scottish Amicable cases should be dismissed, while in the Co-op
and Prudential cases the appeals should be allowed. In the Co-op case
there will be substituted for the interim award a declaration that the headline
rent derived from comparables must be discounted to allow for any rent-free
period not attributable to the fact that the hypothetical tenant has still to
enter into occupation of the premises. In the Prudential appeal there
will be a declaration, if one be required, that any headline rent derived from
comparables must be discounted to allow for any rent-free period, which might
reasonably have been expected to be allowed in respect of a letting in the open
market on the relevant rent review date.
In the Co-op
and Prudential cases, the appeals were allowed; in the Broadgate case the
appeal was dismissed; in Scottish Amicable case the landlords appeal and
tenant’s cross-appeal were both dismissed. In all four cases leave to appeal to
House of Lords was refused.
