Landlord and tenant
By a lease dated
April 25 1978 the respondent tenant held premises from the applicant landlords
subject to provisions for rent review. At review the arbitrator was to
determine the annual rental value of the premises ‘in the open market as
between a willing landlord and a willing tenant … on a lease for a term [of 56
years]… such lease being on the same terms and conditions … as this present
demise …’. By a deed dated December 11 1991, expressed to be supplemental to
the lease, certain options were granted; it was agreed that the options were
not merely personal to the parties to the deed, but were enforceable by, and
binding on, the successors in title to the landlords and tenant under the
lease. The landlords contended that an arbitrator was required to take into account
the options on a rent review.
deed and other documents, the options in the deed were to be taken into account
in determining the rent at review. The words ‘this present demise’ refer not to
the lease as a document, but to the grant effected by it. The fact that the
provisions of the options were not expressly and specifically incorporated by
amendment into the lease was not decisive of the question whether they were
terms and conditions of the demise. The expression ‘terms and conditions of
this lease’ would include subsequent variations of the lease: see Lynnthorpe
Enterprises Ltd v Sidney Smith (Chelsea) Ltd [1990] 1 EGLR 148.
The following
cases are referred to in this report.
Evans (FR) (Leeds) Ltd v English Electric
Co Ltd (1977) 36 P&CR 185; [1978] 1 EGLR 93; [1978] EGD 67; 245 EG 657
Lynnthorpe
Enterprises Ltd v Sidney Smith (Chelsea)
Ltd [1990] 1 EGLR 148; [1990] 08 EG 93
This was an
application by Commercial Union Life Assurance Co Ltd and Pearl Assurance plc
for the determination of a preliminary issue of law and construction arising in
a rent review arbitration with the respondent, Woolworths plc.
Kirk Reynolds
QC (instructed by Stones Porter) appeared for the applicants; Jonathan Gaunt QC
(instructed by Olswang & Co) represented the respondent.
Giving
judgment, MR STANLEY BURTON QC said: This application is for the
determination of a preliminary issue of law and construction arising in a rent
review arbitration. The facts relevant to the issue I have to decide are
helpfully set out in an agreed written statement of facts and issues, and it is
unnecessary for me to repeat them here. The parties to this application are the
present landlords under the lease dated April 25 1978, who are the
applicants, and the tenant, who is the respondent. I shall refer to the lease
as ‘the lease’ and to the deed of surrender dated December 11 1991 as ‘the
deed’.
Clause 2(H) of
the lease defined the expression ‘open market rent’ to which the rent payable
thereunder was to be reviewed by arbitration in default of agreement as
whichever is the greater of:
(a)
the annual rental value of the demised premises in the open market as
between a willing landlord and a willing tenant at the review date on a lease
for a term of years certain commencing on the review date and continuing
thereafter for (56 years) with vacant possession at the commencement of the
term but upon the supposition that the premises are a new shell … such lease
being on the same terms and conditions (other than as to amount of rent and
length of term) but including the same provisions for rent review as
this present demise without the payment of any fine or premium and
(b) the rent
payable (thereunder) immediately prior to the review date.
The question
raised on this originating motion is whether the arbitrator on a rent review
pursuant to the provisions of the lease is required to take into account the
options conferred on the applicants by clauses 2 and 3 of the deed. The deed is
expressed to be supplemental to the lease and it is agreed that these options
are not merely personal to the parties to the deed, but are enforceable by, and
binding on, the successors in title to the landlord and the tenant.
The words
‘this present demise’ refer not to the lease as a document, but to the grant
effected by it. It refers to the demise created by the lease. It follows that
the fact that the provisions of the option were not expressly and specifically
incorporated by amendment into the lease is not decisive of the question
whether they are terms and conditions of the demise. Mr Kirk Reynolds QC, for
the landlords, pointed out that the lease does not use the word ‘demise’
consistently. In clause 4(22)(c), for example, reference is made to ‘the covenants
… and conditions contained in this lease’, while clause 4(22)(f) refers to ‘the
provisions herein contained’. It may be that no real distinction was intended
between these expressions; but I must interpret the words of the lease as I
find them.
Even if the
words used in the rent review provision were ‘the terms and conditions of this
lease’, they would include subsequent variations of the lease. This was common
ground (see Lynnthorpe Enterprises Ltd v Sidney Smith (Chelsea)
Ltd [1990] 1 EGLR 148); and indeed any other construction would be
uncommercial and unreasonable.
These
considerations do not however entitle the arbitrator to take into account
purely personal rights, obligations or restrictions of the parties, at least in
a case such as the present where the terms of the relevant clause refer to ‘a
market rent as between a willing landlord and a willing tenant’.
The presumption is of course subject to the express terms of the rent review
provision in question, which may require the rent to be assessed on a basis
which does not entirely reflect the actual rights and obligations of the
parties at the review date. Here, for example, the lease clearly requires the
arbitrator to assume that the hypothetical lease is for a term of 56 years
irrespective of the actual residue of the term remaining at the review date.
However, I do not construe the lease as requiring the options, as agreements
between the landlord and tenant and binding on them as such, to be disregarded.
I should also
prefer not to have to draw a distinction between a deed which expressly varies
the terms of a lease and a deed which, while not expressed to vary the lease,
has precisely the same legal effect. To do so would be to introduce an
unnecessary technicality into rent reviews, and could result in there being a
substantial difference between the practical effect of a deed expressed to vary
a lease and of one containing precisely the same provisions but which was not
so expressed. Indeed, in the present case it is clear that clauses 1 and 2 of
the deed, at least, did vary the lease; the only question, therefore, is
whether some, but not all, of its provisions, binding on the landlords and
tenant as such and on their successors in title, are to be taken into account.
The options are terms as between landlords and tenant as such, and other things
being equal should be taken into account.
In the present
case the tenant is subject to the options, as would be his assignee. The
landlords have the benefit of the options, as would their successors in title.
Those options have a substantial affect on the rental value of the demised
premises. The presumption is that they should be taken into account.
I turn to
consider whether there is anything indicating a contrary conclusion. Mr
Reynolds argued that the options were provisions ‘as to … length of term …’
within the meaning of clause 2(H)(4) of the lease. If so, they would be
excluded even if they had been expressly incorporated in the lease. His
argument was that the effect of the options, when exercised, is to determine
the term created by the lease in relation to the premises to which the options
relate. While this may be so, the options when exercised equally reduce the
demised premises. Furthermore, the term in relation to the premises which are
not subject to the options is unaffected by the options. I do not think that
the options are provisions which one would naturally describe as relating to the
length of the term. In my view, if the options had been incorporated in the
lease, the arbitrator would have been bound to have regard to them. If they are
within the expression ‘the same terms and conditions … as this present demise’,
they are not excluded from his consideration as being provisions as to the
length of the term.
Mr Reynolds
argued that clause 2(H)(4) required a determination of the rent as between ‘a
willing landlord’ and ‘a willing tenant’, who were not required to be either
the actual landlord and tenant or their successors in title. He relied on the
decision of Donaldson J in FR Evans (Leeds) Ltd v English
Electric Co Ltd (1977) 36 P&CR 185*, which emphasised the hypothetical
nature of the landlord and tenant who are to be considered by an arbitrator on
a rent review such as the present. Mr Reynolds drew a distinction between
restrictions affecting the demised premises in rem, such as planning
restrictions and restrictive covenants affecting any landlord and any tenant of
the demised premises, and restrictions affecting only the actual parties
personally or their successors in title. It was, I think, common ground that
personal rights and obligations are to be ignored under the rent review
provisions of the lease: they do not affect the hypothetical landlord and
tenant and are not terms or conditions of the demise. I draw the line between
such personal rights and obligations and those which are binding on the
landlord and tenant as such and their successors in title: the latter are to be
taken into account under the rent review provisions as being terms or
conditions of the demise.
*Editor’s
note: Also reported at [1978] 1 EGLR 93
Mr Jonathan
Gaunt QC, for the tenant, relied on the contemporaneous side letters. He argued
that the parties clearly intended the provisions of the deed to be relevant to
the 1989 review, since they expressly agreed by the letters that for the
purposes of the 1989 review the deed should be deemed to have been entered into
on May 1 1989, that is a few days before the 1989 review date at which the rent
was to be assessed under the rent review machinery. He contended that if the
parties had intended certain of the terms of the deed to be ignored on the rent
review, and specifically the option provisions in clauses 3 and 4, they would
have expressly so provided. I accept the first part of this argument; but I
decline to follow Mr Gaunt further. I infer that the parties did envisage that
the deed was relevant to the 1989 rent review; and indeed some of its terms
were manifestly relevant, such as the reduction in the demised premises and the
change in the rent review period. However, this does not tell me whether they
were agreed that all, or some only, of its terms were relevant. I do not accept
that if they had thought that some only were relevant they necessarily would
expressly have so provided. If they had considered that on its true
construction the lease did not permit the options to be taken into account,
they would have had no need to specify that they should be excluded from
account. I find the side letters to be neutral on the question I have to
decide, as is the deed executed by the second applicant.
Mr Reynolds
argued that the respondent’s interpretation produced an unreasonable result
which the parties could not have intended. Under clause 3.4 of the deed, in the
event of the exercise by the landlords of the first option they are to
reimburse to the tenant the percentage of the rent paid by the tenant attributable
to the surrendered premises from the date of the deed to completion of the
surrender. A similar provision is contained in clause 4.4 in relation to the
additional option. He argued that if the tenant is entitled both to a reduction
of the rent payable by him on account of the options on a rent review, and to
reimbursement of rent on exercise of the options, he receives a ‘double
benefit’ which the parties are unlikely to have intended. However, it seems to
me that no question of a ‘double benefit’ arises. On a rent review the
arbitrator must take into account all the terms of the options, both their
burden and the potential financial benefit to the tenant, including the
substantial reimbursement of rent to be received by the tenant on their
exercise. The assessment of the effect of the options on the market rent must
take into account the fact that the tenant receives a substantial reimbursement
of rent on completion if the options are exercised. There is therefore no
double counting. Moreover, as Mr Gaunt pointed out, the options are exercisable
at the will of the landlords. They may never be exercised, in which case the
tenant suffers the burden, or disadvantages, of the options without receiving
the reimbursement payable on completion.
I find nothing
to suggest that the construction of the lease which I prefer is uncommercial or
produces unreasonable results which the parties could not be expected to have
intended. The terms of the deed and of the side letters do not indicate that a
contrary construction is appropriate.
I conclude
that on the true construction of the lease, the deed, the side letters and the
deed executed by the second applicant and dated December 12 1991 and in the
events which have happened the option provisions contained in clauses 3 and 4
of the deed are to be taken into account in determining the open market rent of
the demised premises payable by the respondent under the lease from May 5 1989
and I answer the question raised by the notice of originating motion
accordingly.
