Landlord and tenant — Questions arising in rent review arbitration — Arbitration Act 1979, section 2 — Determination of matters of law by the court — Premises in Curzon Street, Mayfair, used as a gaming club or casino — Rent review clause in sublease — Gaming activities conducted by Crockford’s, a licensee of the sublessee — Questions submitted to court with a view to clarifying the situation after sublessor’s expert put forward an open market rental value of £3,000,000 per annum and sublessee’s expert a figure of £180,000 — There were eight questions designed mainly to elucidate the hypotheses and assumptions on which the rental value was to be assessed — Many of the complications arose from the fact that Crockford’s held a gaming licence in respect of the premises and the effect of a requirement in the review clause that there should be disregarded any addition to the value attributable to the gaming or justices’ licence which might be so held if it appeared, having regard to the terms of the tenancy and any other relevant circumstances, that the benefit of the licence belonged to the subtenant or any associate — The judge was asked to consider such questions as whether it should be assumed that Crockford’s had never been in occupation or that someone other than Crockford’s held the gaming licence or that Crockford’s did not in fact hold the gaming licence, or whether it should be assumed that the number of casino licences in the London casino circuit was one less than the number actually in existence — In considering in detail the answers to the questions posed the judge emphasised the importance of adhering strictly to the limits of the hypotheses required by the review clause and of refraining from deducing elaborate consequences from them as if the original hypotheses had an independent existence as actual features of the real world — This would result in the creation of fictitious situations or circumstances not within the contemplation of the review clause — After detailed consideration the judge summarised the assumptions on which the arbitrator should regard the parties to the sublease as ‘higgling’ — A separate question put to the judge was whether the arbitrator was entitled to value the demised premises by reference to, or in reliance on, profits made by the sublessee or an associate carrying on a business therein — This question was associated with an appeal by the sublessees against a refusal by the arbitrator to order specific discovery of the full management accounts and supporting basic records of the casino undertaking — After considering authorities, the judge held that the admissible evidence as to profit-earning capacity would be that which is available to prospective tenants in the hypothetical open market — Whether that would extend to Crockford’s private trading records would be
a matter for the arbitrator — Unless it did so extend in the arbitrator’s opinion the documents would not be discoverable — As regards the discovery appeal itself, the arbitrator had refused discovery for the wrong reasons (no evidence of absence of comparables, expense and unlikelihood of saving costs) and the appeal would have to be allowed on that ground — The judge did not, however, propose to remit the discovery application for rehearing, as it was extremely unlikely that an arguable case could be made that these trading records would have been available to prospective lessees in the hypothetical open market
The following
cases are referred to in this report.
Barton
(WJ) Ltd v Long Acre Securities Ltd [1982] 1
WLR 398; [1982] 1 All ER 465; [1982] EGD 265; (1981) 262 EG 877, [1982] 1 EGLR
89, CA
Evans
(FR) (Leeds) Ltd v English Electric Co Ltd
(1977) 36 P&CR 185; [1978] EGD 67; 245 EG 657, [1978] 1 EGLR 93
Harewood
Hotels Ltd v Harris [1958] 1 WLR 108; [1958]
1 All ER 104, CA
Lynall v Inland Revenue Commissioners [1972] AC 680; [1971] 3 WLR
759; [1971] 3 All ER 914, HL
Norwich
Union Life Insurance Society v Trustee Savings
Banks Central Board [1986] 1 EGLR 136; (1986) 278 EG 162
Scottish
& Newcastle Breweries plc v Sir Richard
Sutton’s Settled Estates [1985] 2 EGLR 130; (1985) 276 EG 77
In these
proceedings, in which the plaintiffs were Cornwall Coast Country Club,
sublessors of 30 Curzon Street, Mayfair, London W1, and the defendants were
Cardgrange Ltd, the sublessees, the court was asked to determine a number of
questions of law pursuant to section 2 of the Arbitration Act 1979. There was
also an appeal from the arbitrator’s refusal to order discovery of certain
documents.
Michael Barnes
QC and Ian Glick (instructed by Stilgoes) appeared on behalf of the plaintiffs;
M A F Lyndon-Stanford QC and Kim Lewison (instructed by Cameron Markby)
represented the defendants.
Giving
judgment, SCOTT J said: I have before me for decision a number of questions
which have arisen in the course of a rent review arbitration. The plaintiff,
Cornwall Coast Country Club Ltd, is the sublessor of 30 Curzon Street, Mayfair.
The defendant, Cardgrange Ltd, is the sublessee.
The headlease
of 30 Curzon Street, dated January 27 1978, was granted by Daejan Investments
Ltd to Ladbroke Rentals Ltd. The term granted was 26 years from December 8
1977. The rent reserved was £130,000 pa. The headlease provided for rent
reviews to take place on December 8 1983 and thereafter at five-yearly
intervals.
The sublease,
dated October 9 1980, was granted by Ladbroke Rentals Ltd to Ladup Ltd, also a
member of the Ladbroke Group of companies. The sublease granted a term of 26
years from December 8 1977 less three days. The rent reserved was £130,000 with
rent reviews on the same dates as were provided for under the headlease.
The rent
review provisions in the headlease and in the sublease were identical. They
required the ‘Rack Rental Value’ of 30 Curzon Street to be ascertained by a
chartered surveyor acting as an arbitrator.
‘Rack Rental
Value’ was defined in subclause (5) of clause 6 as follows:
The highest
rent at which at the rent review date the premises might reasonably be expected
to be let in the open market by a willing lessor, with vacant possession, for
the residue of the term hereby granted, and upon the terms and conditions
including provision for rent review of this lease, it being assumed that the
demised premises have been put into a state of repair and condition consistent
with full performance of the obligations of the tenant under this lease, but
there being disregarded
(a) any effect on rent of the fact that the
tenant or his predecessor in title or some associate of the tenant has been in
occupation of the holding;
(b) any goodwill attached to the holding by
reason of the carrying on thereat of the business of the tenant or some
associate of the tenant, whether by him or by a predecessor of his in that
business;
(c) any effect on rent of any improvement carried
out by the tenant;
(d) any addition to the value of the demised
premises attributable to the gaming or justices licence which may be held in
respect of such premises if it appears that having regard to the terms of the
current tenancy and any other relevant circumstances the benefit of the licence
belongs to the tenant or some associate of the tenant.
I need not read
the rest of the rent review provisions. They provided broadly for upwards
adjustments of rent, with the rack rental value at the relevant review date
being substituted for the rent previously payable. The new rent to be payable
as from the first review date, December 8 1983, was to be at least £170,000.
The user
covenants in the headlease and in the sublease are to the same effect. They
authorise user of the property or any part thereof as a gaming club or casino,
as a non-residential club of some other description, as offices, as a
restaurant, as licensed bars, as staff rooms, as showrooms and as residential
premises.
By assignment
dated August 26 1983 the headlease was assigned by Ladbroke Rentals Ltd to the
plaintiff, also a member of the Ladbroke Group.
By assignment
dated November 3 1982, the sublease was assigned by Ladup Ltd to the defendant.
The defendant is a member of the Lonrho Group of companies.
No 30 Curzon
Street comprises a basement, a ground floor and four upper floors. The top
floor consists of a residential flat. The rest of the property consists of a
gaming club or casino.
Conversion of
the premises to enable its use as a gaming club or casino took place over the
period 1978 to 1980. The gaming use did not, however, commence until after the
assignment of the sublease to the defendant and the defendant had carried out
additional alterations and refurbishments. A gaming licence for 30 Curzon Street
was obtained by Crockford’s Club Ltd (also a member of the Lonrho Group) on
June 29 1982. A liquor licence was obtained in February 1983. Use of 30 Curzon
Street as a gaming club and casino began on March 1 1983 and has continued ever
since.
The gaming activities
at 30 Curzon Street have been and are being conducted by Crockford’s, the
holder of the gaming licence, rather than by the defendant, the sublessee.
Nothing turns on this. Crockford’s, as a gaming club, is a household name.
Before moving to 30 Curzon Street, Crockford’s had conducted a gaming club from
premises in Carlton House Terrace.
The first rent
review date both under the headlease and under the sublease was December 8
1983. The headlease rent review has been completed. The arbitrator was Mr J G
Powell, chartered surveyor. He was appointed on January 18 1984. A number of
questions of law arose in the course of the arbitration. Those questions were,
with the consent of the parties, Daejan Investments Ltd and the plaintiff,
submitted to the High Court for determination. The case came before Peter
Gibson J, who gave judgment on December 14 1984. I have been supplied with a
transcript of his judgment. One of the questions raised the point whether in
disregard (d) of subclause (5) the reference to ‘the tenant or some associate
of the tenant’ should be read as including a sublessee or a licensee of a
sublessee. Peter Gibson J held that ‘tenant’ in the headlease meant the tenant
under the headlease and did not include a sublessee.
This point is
significant because it has the consequence that the respective rent review
clauses in the headlease and the sublease, although in identical terms, will
produce different, perhaps very different, results. In the sublease rent
review, the effect on rent of the occupation of 30 Curzon Street by Crockford’s
is required to be disregarded. Not so in the headlease rent review. Crockford’s
is not, for the purposes of the headlease, ‘the tenant or his predecessor in
title or some associate of the tenant’. Nor is the defendant. In the sublease
rent review, any addition to the value of the demised premises attributable to
Crockford’s gaming licence is to be disregarded. Not so in the headlease rent
review.
The arbitrator
in the headlease rent review gave his award dated May 9 1985. He found the rack
rental value, for the purposes of the headlease, to be £900,000 pa.
The
arbitration procedure, for the purposes of the sublease rent review, has not
yet been completed. The arbitrator, Mr V D Revell, chartered surveyor, was
appointed on December 19 1985. On January 7 1986 a preliminary hearing took
place at which pleadings were directed. These have been served. It was directed
that proofs of evidence of the expert witnesses be exchanged. This has been
done. On the plaintiff’s side Mr R John Stephenson, a chartered surveyor and
partner in the firm Grant & Partners, has submitted a proof. It ends with
Mr Stephenson’s conclusion that on December 8 1983 the rental value of 30
Curzon Street for the purposes of the sublease rent review was the sum of
£3,000,000 pa exclusive.
On the
defendant’s side there are two expert witnesses. Mr J R Trustram Eve, senior
partner of J R Eve, chartered surveyors, has submitted a proof setting out the
manner in which, in his view, a valuer should proceed to calculate the rental
value of 30 Curzon Street in accordance with the terms of the sublease rent
review clause. Mr Leslie Aarons, a chartered surveyor and partner in Baker
Lorenz,
the correct approach. Mr Aarons has arrived at the conclusion that the rental
value as at December 8 1983 would be represented by the sum of £180,000 pa.
The valuers on
either side may be assumed to be experienced and competent professional
valuers. The startling discrepancy in their conclusions is attributable to the
different assumptions and hypotheses used by the respective sides. Very
sensibly the parties have endeavoured to resolve these differences by
submitting a number of questions of law to the court for determination pursuant
to section 2 of the Arbitration Act 1979. These are quite different questions
from those submitted to Peter Gibson J in connection with the headlease rent
review arbitration.
There are
eight questions in all. Counsel before me, Mr Barnes for the plaintiff and Mr
Lyndon-Stanford for the defendant, have rightly treated questions 1 to 6 as
associated. This group of questions endeavours to clarify the hypotheses and
assumptions on which the estimate of the rental value ought to be based.
Questions 1 to
6 are in these terms:
1 Does the stipulation in clause 6(v) of the
underlease, that the premises are to be assumed to be let with vacant
possession, require the arbitrator to assume that the respondents as
Crockford’s Club Ltd have never been in occupation of the premises;
2 Does the stipulation in clause 6(v)(a) of the
underlease, that there is to be disregarded any effect on the rent of the fact
that the tenant or his predecessor in title or some associate of the tenant has
been in occupation of the holding, require the arbitrator to assume that the
respondents, as Crockford’s Club Ltd, have never been in occupation of the
premises;
3 Is the arbitrator entitled to assume that
some person other than the respondents and/or Crockford’s Club Ltd held the
gaming and justices licence in respect of the premises and carried on gaming
there up to the review date;
4 Is the arbitrator required to assume that the
respondents and Crockford’s Club Ltd did not hold a gaming or justices licence
in respect of the premises;
5 Is the arbitrator required to assume or
entitled to find that in considering for the purposes of the rent review the
London casino market as a whole, the number of gaming licences in existence on
the rent review date was one less than the number of such licences actually in
existence on that date;
6 Is the arbitrator entitled to assume and/or
find that the respondent was a possible hypothetical tenant in the market for
the property on the rent review date.
Counsel are
agreed that I should not regard myself as bound strictly by the wording of
these questions. In the course of the hearing before me, areas of common ground
have emerged and the real issues between the two sides have seemed in many
cases to be more narrowly defined than in the questions. Counsel have invited
me not only to answer the actual questions but also to try to resolve the other
issues of principle which have emerged from the arguments before me. It is
recognised that the valuation process is a matter for the arbitrator, but it is
hoped that the result of this reference to the court will be to settle the
outstanding points of principle as to the basis on which the valuation should
be made.
For reasons
that I need not take time to explain, question 7 cannot usefully be proceeded
with at this stage.
Question 8 is
in these terms:
Is the
arbitrator entitled to value the demised premises by reference to or in
reliance upon profits made by the tenant or an associate of the tenant in
carrying on a business therein.
This question
is associated with an appeal by the plaintiff against a refusal by the
arbitrator to order certain specific discovery. General discovery took place
between the parties following the close of pleadings. The defendant’s list of
documents did not include any documents relating to the profits earned by the
gaming business carried on at 30 Curzon Street. The plaintiff applied to the
arbitrator for specific discovery of the ‘full management accounts and
supporting prime or other basic records of the casino undertaking’. The
application was not limited to documents in respect of the period March 1 1983
to December 8 1983. As I understand it, all documents and records from March 1
1983 to date were sought. The plaintiff’s contention was that an estimate of
rental value could be based on or supported by evidence of the profitability of
30 Curzon Street as a casino. The documents of which discovery was sought were,
it was said, relevant to that issue. The overlap with question 8 is patent.
By an interim award
given on June 18 1986 the arbitrator (inter alia) refused the
application for this specific discovery.
The plaintiff,
leave having been given by Millett J on November 18 1986, has appealed against
the arbitrator’s refusal of discovery. That appeal, too, is now before me. It
has been argued by counsel in conjunction with their arguments on question 8.
Before me the plaintiff has limited its discovery claim to documents in respect
of the period March 1 1983 to December 8 1983.
Many of the
complications in the rent review arise, directly or indirectly, from the fact
of Crockford’s gaming licence in respect of 30 Curzon Street. The licence was
first granted on June 29 1982. Gaming licences are annual licences. They must
be renewed each year. On the review date, December 8 1983, Crockford’s held a
current licence due to expire in May or June 1984. The exact date does not for
present purposes matter.
Gaming
licences are governed by the Gaming Act 1968, as amended by the Gaming
(Amendment) Act 1982. I have been supplied by counsel with an agreed statement
of facts which sets out, under para 5, the relevant practice regarding the
application for and grant of gaming licences. I think I ought to read the whole
of that paragraph:
5.1 – The
Gaming Act 1968 Schedule 2 lays down a two-stage procedure for the obtaining of
a new gaming licence;
5.2 – The
first stage is for application to be made to the Gaming Board for Great Britain
for a certificate of consent, consenting to the applicant applying for a gaming
licence in respect of the particular premises. If and when this is obtained the
applicant is then enabled to make application to the Licensing Justices for the
appropriate area for a gaming licence to be granted in respect of the
particular premises;
5.3 – Since August
28 1982 an application could be made at any time to the Gaming Board for a
certificate of consent in respect of particular premises;
5.4 – Subject
to the above, in determining whether to issue a certificate the Gaming Board
shall ‘have regard only to the question whether in their opinion the applicant
is likely to be capable of and diligent in securing that the provisions of the
Gaming Act and of any regulations made under it will be complied with, that
gaming on those premises will be fairly and properly conducted and that the
premises will be conducted without disorder or disturbance’;
5.5 – For this
purpose the Gaming Board in particular take into consideration ‘the character
reputation and financial standing’ of (inter alia) the applicant, but may also
take into consideration any other circumstances appearing to them to be
relevant in determining whether the applicant ‘is likely to be capable of and
diligent in securing the matters’ mentioned in the above paragraph;
5.6 – A
certificate of consent was granted to Crockford’s Club Ltd as dated February 15
1982;
5.7 – It will
be an issue in the arbitration whether and if so to what extent the number of
gaming licences granted by the relevant justices is limited. Pursuant to para
19 of Schedule 2 to the 1968 Act, the Gaming Board give advice to the justices
as to the extent of demand at least once a year. The justices are required to
take account of such advice, but are not bound by it.
There were, I
have been told, in the south Westminster area, on December 8 1983, 19 gaming
establishments including 30 Curzon Street. There were 21 current gaming
licences held in respect of premises in this area, including Crockford’s 30
Curzon Street licence. The holders of two of these licences were, I have been
told, seeking transfer of their licences from the premises in respect of which
the licences had been granted to new premises. This explains the discrepancy
between 19 gaming establishments and 21 licences. I have been told, also, that
the policy of the Gaming Board and of the justices with jurisdiction in south
Westminster was that the number of gaming establishments in this prime area
should be strictly limited. I have been told that these authorities were not
prepared to allow any increase in the number of licensed gaming establishments.
These details may or may not be established by evidence before the arbitrator.
They are by no means all common ground. But if the situation has been correctly
described, the position of Crockford’s and of Crockford’s current gaming licence
becomes highly significant.
It is common
ground that use of 30 Curzon Street as a casino would justify a higher rental
value than would be justified by any other use permitted under the sublease. It
is common ground that a casino use would not be possible without a consent from
the Gaming Board and a licence from the justices. So, on what basis ought the
valuer to proceed so far as use of 30 Curzon Street as a casino is
concerned? The rack rental value for the
purposes of the rent review is required by the terms of the rent review clause
to be ascertained on a hypothetical basis. The hypothesis is that 30 Curzon
Street is available on the rent review date for letting in the open market by a
willing lessor to a willing lessee for a term of years equal to the residue of
the term of the sublease and with vacant possession given on the rent review
date to the new lessee. The terms of the hypothetical letting are all, bar one,
supplied by the relevant provisions of the rent review clause. The missing term
is that of the rent. The rent is to be the highest rent that the hypothetical
lessee would be willing to pay. But here the four ‘disregards’ come into play.
The rent that
the hypothetical lessee would be prepared to pay would depend upon the use to
which the property could lawfully and profitably be put. A casino use is
authorised by the sublease. So should it be assumed that the hypothetical
lessee would succeed in obtaining the necessary certificate of consent from the
Gaming Board and the necessary gaming licence from the justices? This was a question put to Peter Gibson J for
the purposes of the headlease rent review. He answered ‘No’ and it is common
ground before me that the same answer must be given to that question for the
purposes of the sublease rent review. Peter Gibson J expressed his conclusion
thus, and I read from p 15 of the transcript:
I have no
doubt that clause 6(5) does not require or permit the arbitrator to assume that
the hypothetical lessee will take possession with a gaming licence already in
his possession. That does not however mean that the arbitrator cannot take into
account evidence tending to show the existence in the market of persons who
might stand a good chance of obtaining a certificate of consent and a gaming
licence, if they obtained an interest in the premises. The arbitrator’s
valuation will no doubt reflect that fact if established. It will no doubt take
account of the uncertainty that attaches to any applications for a certificate
of consent and a gaming licence.
Counsel before
me have not directed any criticism to the correctness of my learned brother’s
analysis. They have, I think, accepted it as correct. So, it follows that for
the purposes of the sublease rent review, the hypothetical lessee will be a
person anxious to use 30 Curzon Street as a casino and anxious to obtain as
soon as possible the necessary consent and gaming licence that, on the rent
review date, December 8 1983, he does not yet hold. The uncertainty, of which
the hypothetical lessee will be well aware, as to whether he will be able,
lawfully, to use 30 Curzon Street as a casino is critical. The existence of
this uncertainty is common ground. The arbitrator will have the task of
assessing its extent and its effect on the rent that the hypothetical lessee
would be prepared to offer for the hypothetical lease. But the parties are
miles apart as to the basis on which the arbitrator should approach this
critical question.
On the
defendant’s side it is said that the arbitrator should consider the hypothetical
lessee’s chances of obtaining a gaming licence on the footing that there were
21 current licences and 19 current gaming establishments in south Westminster.
Since 30 Curzon Street is to be available to the hypothetical lessee with
vacant possession, the hypothesis requires that Crockford’s right to be in
occupation has come to an end. So, says the defendant, Crockford’s must be
assumed to have obtained the necessary consents to the transfer of its gaming
licence to premises elsewhere in south Westminster. Thus the number of current
licences and current gaming establishments is unaffected by the vacant
possession hypothesis. The defendant, relying on the very restrictive policy of
the Gaming Board and of the justices to which I have referred, will seek to
satisfy the arbitrator that the hypothetical lessee would have, and would know
he had, little chance of obtaining a gaming licence for 30 Curzon Street. That
being so, the hypothetical lessee would not be willing to pay a rent
appropriate to casino premises but only a rent applicable to premises to be
used for, say, offices or, perhaps, a restaurant.
This is the
basis, broadly, on which Mr Aarons’ assessment of the rental value was made.
The
plaintiff’s approach is quite different. The fact of Crockford’s occupation of
30 Curzon Street and of Crockford’s gaming licence must, it is said, be ignored
— disregards (a) and (d) are relied on. So, contrary to the fact, it must be
assumed that there were only 18 gaming establishments in south Westminster and
only 20 gaming licences. Consistently with the alleged policy of the Gaming
Board and of the justices, there was clearly room for one more gaming
establishment and one more gaming licence. Moreover, the suitability of 30
Curzon Street for casino use is known and established. So the hypothetical
lessee would have a very strong expectation of succeeding in obtaining the
necessary gaming licence. There would, it is accepted, remain some unavoidable
uncertainty. But it would be very small and would not justify much, if any,
reduction in the rental value of 30 Curzon Street from that which would reflect
an established lawful casino use. This seems to be the basis on which, broadly,
Mr Stephenson proceeded.
Mr Barnes and
Mr Lyndon-Stanford helpfully prefaced their respective arguments with a general
review of authority. I will do the same.
The rent
provisions in the sublease are based upon the terms of section 34(1) of the
Landlord and Tenant Act 1954 (as amended). Slight alterations have been made to
the wording of the four ‘disregards’ but thereapart there is no material
difference between the relevant language of the section and that of the
sublease.
Guidance as to
the right approach to the operation of rent review provisions in this form may
be found in the judgment of Donaldson J in F R Evans (Leeds) Ltd v English
Electric Co Ltd (1977) 36 P & CR 185*. On appeal Donaldson J’s judgment
was affirmed by the Court of Appeal without significant comment.
*Editor’s
note: Also reported at (1977) 245 EG 657, [1978] 1 EGLR 93.
A particular
feature of the case was that, having regard to the peculiar nature of the
demised premises, a willing lessee would, in reality, have been very difficult
to find. The actual lessee would have been delighted to be rid of the premises
and, in the assumed market, would not have made any offer at all. Against this
factual background Donaldson J emphasised that the particular circumstances of
the actual lessee were irrelevant. He said at pp 190-191:
The
arbitrator’s concern is with the attitude of the hypothetical willing lessee,
who is not in occupation of the premises. The clause assumes that there is such
a person, and it is nothing to the point to prove that there was not.
At p 192
Donaldson J said this:
I accept that
the rent has to be agreed in the light of all the circumstances which in fact
affect the property and, in theory, affect the hypothetical lessor and lessee.
Any circumstance which affects the actual landlord and the actual tenant, but
which would not affect the hypothetical lessor and lessee, is irrelevant. I
agree that these circumstances include, but stress that they are not limited
to, the fact that it is unlikely that there will be more than one willing
lessee, and that in October 1976, which was the relevant date, there was no
other property on the market which provided the accommodation and facilities
provided by the Walton Works. I also agree that the possibility of the parties
failing to reach agreement is to be disregarded. To borrow and adapt an
immortal phrase, ‘We are not interested in the possibilities of a failure to
reach agreement. They do not exist.’ As
the negotiations proceed, however, each will be considering whether it would
not be better at a given level of rent to break off the negotiations. True it
is that they will resist these temptations, but the extent to which they will
operate on their respective minds will be reflected in the rent which will
notionally be agreed in the end.
In Norwich
Union Life Insurance Society v Trustee Savings Banks Central Board
[1986] 1 EGLR 136, Hoffmann J said this at p 137:
There is, I
think, a presumption that the hypothesis upon which the rent should be fixed
upon a review should bear as close a resemblance to reality as possible.
In my view,
these passages justify, and require, an approach in which, first, the
hypotheses required by the rent review provisions are strictly adhered to but,
subject to that, the real circumstances of the case are taken into account.
This approach requires, I think, a clear distinction to be drawn between, on
the one hand, hypothetical assumptions directed by the language of the rent
review provisions and, on the other hand, allegedly consequential assumptions
which, it is argued, must follow the former assumptions. May I try to explain
the distinction I have in mind?
The
hypothetical lease will carry with it the right to vacant possession. It must,
therefore, be assumed that on December 8 1983 30 Curzon Street will be
available for occupation and use by the hypothetical lessee. It is a necessary
assumption that Crockford’s right of occupation, as licensee of the defendant,
came to an end on that date. It must also be assumed that Crockford’s actual
occupation came to an end on that date.
Mr
Lyndon-Stanford argued that if the hypothetical assumption were true,
Crockford’s would, in the real world, have established themselves elsewhere and
have obtained a transfer of the 30 Curzon Street gaming licence to other
premises. This, in my opinion, is to confuse reality and hypothesis.
Crockford’s departure from 30 Curzon Street has not happened. It is a
hypothetical assumption, demanded by the rent review provisions. The rent
review provisions do not demand any assumptions at all about Crockford’s
situation on or after December 8 1983 other than its departure from 30 Curzon
Street. Crockford’s establishment elsewhere is nothing to do with the real
world. It is simply another hypothesis. And it is not a hypothesis required by
the rent review provisions.
A similar
approach should, in my view, be applied to the
to be assumed to be disregarded by the hypothetical lessee in deciding what
rent to offer and by the hypothetical lessor in deciding what rent to accept.
Disregard (a)
requires any effect on rent of the fact that the defendant or Crockford’s have
been in occupation of 30 Curzon Street to be disregarded. Disregard (b) requires
any goodwill attached to 30 Curzon Street by reason of the gaming club user
since March 1 1983 to be disregarded. Disregard (d) requires any addition to
the rental value of 30 Curzon Street attributable to Crockford’s gaming licence
to be disregarded. None of these disregards requires, in terms at least, any
positive hypothetical assumption to be made about the defendant or about
Crockford’s.
But, it is
said, hypothetical assumptions have to be made because Crockford’s is a real
company, an important operator in the London gaming club world, and, in
argument, part of the open market in which the hypothetical lessee is competing
for the lease of 30 Curzon Street. The hypothetical lessee must outbid
Crockford’s as well as the other companies in the market.
So some
assumptions about Crockford’s must, it is said, be made. Crockford’s cannot,
for the purposes of this hypothetical competition for the lease, be invested
with its actual characteristics. To do so would be to ignore disregards (a),
(b) and (d). So hypothetical circumstances have to be attributed to
Crockford’s, eg the transfer to and conduct of a gaming business from other
premises.
I reject this
approach. It was made clear by Donaldson J in the English Electric case
that the hypothetical tenant must not be invested with the qualities of the
actual tenant. The qualities of the actual tenant cannot be attributed to the
hypothetical lessee either to suppress the rent (as the lessee sought to do in
the English Electric case) or to inflate the rent. The hypothetical
lessee, and the hypothetical lessor for that matter, is an abstraction. One of
the questions I am asked is whether the arbitrator should assume that
Crockford’s is a possible hypothetical tenant in the market. Mr Barnes has
asked me to answer that question ‘Yes’. But if the answer is ‘Yes’ then
Crockford’s must be invested with fictitious qualities and fictitious
circumstances. Crockford’s becomes, I suppose, the hypothetical underbidder. Mr
Lyndon-Stanford invited me to answer the question ‘No’. But although he did not
want Crockford’s in the market as a bidder, he did want Crockford’s in the
market as a disincentive to other bidders. For that purpose, he invested
Crockford’s with a number of fictitious qualities and circumstances, ie the transfer
to other gaming premises.
I reject both
approaches. Reality must be adhered to so far as possible. It would, in my
view, be wrong to regard the market as containing a hypothetical Crockford’s,
whether as a bidder or as a gaming presence elsewhere.
With those
preliminary observations I turn to the six questions:
Question 1
Both counsel
are agreed that I should answer this question in the negative. I agree. The
‘vacant possession’ hypothesis requires that Crockford’s right to occupy and
its actual occupation have come to an end on December 8 1983, but requires no
other assumption.
Question 2
Mr Barnes
invites me to answer this question ‘Yes’. He relies on the literal meaning of
disregard (a). Crockford’s occupation of 30 Curzon Street from March 1 1983 to
December 8 1983 is a fact. It is also a fact, but one on which nothing turns,
that either the defendant as sublessee or Crockford’s as its licensee was in
occupation from the date of the sublease to the commencement of the gaming user
on March 1 1983. If Crockford’s occupation from March 1 1983 to December 8 1983
is relevant at all on this rent review, its relevance must be attributable to
some argument relating to the rental value of 30 Curzon Street on December 8
1983. But disregard (a) requires ‘any effect on rent’ of that occupation to be
disregarded. So, it is argued, the arbitrator must assume that Crockford’s has
never been in occupation.
Mr
Lyndon-Stanford, on the other hand, submits that the answer should be in the
negative. He relies on authority which, he submits, establishes that the broad
literal meaning should not be given to disregard (a). First, there is Harewood
Hotels Ltd v Harris [1958] 1 WLR 108, a decision of the Court of
Appeal. The question was whether, for the purpose of fixing the rent of a new
tenancy under section 34 of the Landlord and Tenant Act 1954, evidence of the
tenant’s business trading accounts during the previous five years had been
rightly admitted. It was held by the Court of Appeal that the trading accounts
were probative of the earning capacity of the premises and had been rightly
admitted. The argument that to admit the accounts would permit the fact of the
tenant’s previous occupation of the premises to have an effect on the new rent
was dealt with by Lord Evershed MR in this way:
It has been
Mr King-Hamilton’s main argument that the terms of paragraph (a) upon their
ordinary sense must exclude any evidence at all about the occupation of the
tenant, because its only possible admission could be to affect the rent, and it
is said, according to the argument, that one cannot allow the quantum of rent
to be affected in any way by considerations derived from the tenant’s
occupation. If that argument is right then I think it would follow that the
judge here must be treated as having in that regard misdirected himself and
even though, in the end of all, the right sum should turn out not to be very
different from that awarded, still I think that Mr King-Hamilton would be
entitled to have the matter remitted for reconsideration. But I am not, for my
part, able to go as far with Mr King-Hamilton as to produce a total exclusion
of any evidence based upon or derived from the tenant’s previous occupation.
After
referring to a passage from Woodfall’s Landlord and Tenant, Lord Evershed
said:
If the
evidence was led for the purpose of showing that these tenants ought to be
granted some concession because of some particular hardship that they had
suffered, that might be another matter. And I agree also that the terms of the
paragraph serve to exclude the consideration that a tenant might be expected to
be willing to pay rather more than an outsider, because he would not wish to be
disturbed in his occupation. But, in my judgment, it is plainly legitimate for
a judge to hear evidence which bears upon the question which he has to decide,
namely, what would the particular holding reasonably be expected to be let at
in the open market? Plainly I should
have thought in arriving at a conclusion upon that question it is legitimate to
hear evidence of what similar premises which are being let for a particular
purpose, as the one in suit is, can be expected to earn for a potential lessee
in the market in the place where the premises are. And if so, then similar
evidence is in my judgment admissible for proving the same point about the
premises in suit. In other words, if the purpose of the evidence of the figures
was for that limited objective, then I think for my part that they were
perfectly admissible and that no objection can be made to them.
Romer LJ at p
114 said:
It seems to
me that paragraphs (a) and (b) are really directed to saying that, for example,
the fact that the sitting tenant has been in occupation for some time past and
has built up a goodwill is to be disregarded in assessing the rent which he is
to pay under the new lease. Normally, of course, a man who is in the position
of sitting tenant and has built up a business and has been there for some years
and established himself, would be prepared to pay a higher rent than anybody else
then coming in for the first time. It is that kind of thing, in my view, to
which paragraph (a) and (b) are directed.
Harewood
Hotels Ltd v Harris was given careful
attention in W J Barton Ltd v Long Acre Securities Ltd [1982] 1
WLR 398, also a decision of the Court of Appeal. This case, too, involved a
section 34 new tenancy. The question was whether discovery should be ordered of
the tenants’ business accounts and records for the previous three years. The
Court of Appeal distinguished Harewood Hotels Ltd v Harris on
grounds which I will examine when dealing with question 8 and the discovery
appeal, and refused to order the discovery. But the Court of Appeal accepted in
principle that there might be cases where trading documents were relevant and
ought to be produced on discovery. Oliver LJ, who gave the judgment of the
court, described the problem at p 401. He said:
So what the court
has to look for is the open market rent of the premises, simply as premises at
which a business of the type carried on by the tenants can be carried on, but
that rent is not to be enhanced, reduced, or otherwise affected by the tenant’s
own actual occupation of the holding, or by any goodwill created as a result of
the business which the tenant has carried on. To put it broadly, the rent is to
be arrived at on the hypothesis that the premises are empty and without regard
to the tenant’s previous trading.
This
immediately raises the question in one’s mind of what relevance to such an
inquiry are the tenant’s trading results. The court is not concerned with the
tenant’s ability to pay rent but the rent which a willing lessor could command
for these premises in the hypothetical open market and there is a perfectly
well recognised way of arriving at that, by reference to the rents payable for
similar premises in the vicinity.
Indeed if one
is to take into account the results of the tenant’s trading as a relevant
factor in arriving at the open market rent, the elimination from that
consideration of any effect on rent from the tenant’s occupation and from the
goodwill involves an extraordinarily difficult practical exercise.
In his
judgment the judge observed:
It is highly
material to know in order to ascertain the open market rent what the trading
position is.
A little later
he said:
In a case of
this sort where the open market rental value is in dispute evidence of trading
is relevant and admissible to consider and show what the open market is.
We confess
that, for our part, we are entirely unable to follow this in the case of a
property such as this where there are, as it is conceded that there are, plenty
of comparable premises in the vicinity from which the open market value of
premises of this type can be deduced. No doubt evidence of the tenant’s trading
would indicate whether his business had been successful or unsuccessful, and so
might be a pointer to the rent which this particular individual tenant might be
prepared to pay in order to spare himself the disruption of moving to other
similar premises in the area, but that has nothing to do with the open market
rent which the court is directed by the Act to ascertain.
Of the Harris
decision Oliver LJ said at p 403:
The landlord
appealed on the grounds that the evidence was irrelevant and that, in any
event, the judge was precluded from considering it by the provisions of section
34(a) and (b) to which reference has been made above. The court dismissed the
appeal. We cannot, however, read the decision as supporting any general
proposition that evidence of this type is relevant and admissible in every
application under the Act. It was relevant in that case because of the absence
of any comparable premises and of the nature of the business under
consideration; and the effect of the decision appears to us to be only this,
that where such evidence is required in order to establish the open market
rent, there is nothing in section 34 which prohibits its reception for this
limited purpose.
At p 404
Oliver LJ goes on, having cited from the judgment of Romer LJ in the Harris
case:
Certainly the
decision shows that there may be cases where the production of trading figures
may be both relevant and admissible and that where that is so section 34 does
not inhibit the consideration of such evidence for the narrow limited purpose
described above, even though the exclusion of any consideration of the effect
of the tenant’s occupation and of goodwill may present the judge with a very
difficult task.
In Scottish
& Newcastle Breweries plc v Sir Richard Sutton’s Settled Estates
[1985] 2 EGLR 130, His Honour Judge Paul Baker, sitting as a judge of the High
Court, said this about disregard (a) at p 136 at E:
Then it was
suggested to me that with regard to the first disregard, he has got to
disregard any effect on rent of the fact that the tenant or any person deriving
title under it has been in occupation of the demised premises, and if that
requires him to assume that it is with vacant possession it ignores any sort of
occupation that has been or is going on. That, in my judgment, is not a
legitimate use of that disregard, indeed not the purpose of it, which is
limited to negating the special effect of the tenant’s own occupation, because
that might either enhance the value in that he is likely to make a special bid
and thereby increase it, or his occupation might diminish the value of the
premises in that he had been in any way unsatisfactory in his occupation and
thereby the premises had deteriorated. It is really directed at those sorts of
considerations and not to conclude the question as to whether it is with or
without vacant possession that the arbitrator is to review the rent.
Disregard (a)
requires that in considering the rent the hypothetical lessee would offer, in
considering what rent any other bidders on the open market might offer, the
arbitrator must ignore any effect of the fact of Crockford’s or the defendant’s
past occupation. But the authorities, to which I have referred, establish, in
my judgment, that disregard (a) does not necessarily require the exclusion of
all evidence ‘based upon or derived from the tenant’s previous occupation’ (per
Lord Evershed at p 111).* The assumption
expressed in question 2 is in wider terms than is justified by the language of
disregard (a) or is consistent with these authorities. I would therefore answer
the question ‘No’.
*Editor’s
note: This refers to p 111 of Harewood Hotels Ltd v Harris [1958]
1 WLR 108.
If, however,
the question had asked whether the arbitrator should assume that ‘the
defendants and Crockford’s have never been in occupation of the premises if and
to the extent that the occupation had an effect on rent’, I would have answered
the question in the affirmative.
Question 3
I answer this
question ‘No’. No one, other than Crockford’s, has ever held a gaming licence
in respect of 30 Curzon Street. So why should the arbitrator proceed on the
basis of a false assumption?
Mr Barnes
asked me to answer this question in the affirmative. The reason was that he
wanted the arbitrator to take account of the fact that from March 1 1983 to
December 8 1983 30 Curzon Street had been used as a casino. But if it had been
used as a casino, the operator/occupant must have had a gaming licence.
Disregards (a), (b) and (d) together require that any enhancement of rental
value attributable to Crockford’s gaming activities or gaming licence should be
disregarded. So, it was argued, the arbitrator should proceed on the assumption
that some other innominate person had held the necessary gaming licence. In
that way, it was submitted, the arbitrator would be able to take account of the
fact that 30 Curzon Street had been used as a casino while none the less
honouring the disregards.
The real
question, in my view, is whether the arbitrator ought to assess the rental
value on the basis of a gaming user of the premises from March 1 1983 to
December 8 1983 or whether the disregards require that fact to be ignored.
On what basis
are the hypothetical lessee and the hypothetical lessor to be taken to be
assessing the rent they are prepared to pay and to receive respectively? They must be taken to leave out of account
the fact of Crockford’s occupation (disregard (a)). They must be taken to leave
out of account any goodwill attached to 30 Curzon Street by reason of its use
as a casino (disregard (b)). And they must be taken to leave out of account any
enhancement of rental value attributable to the fact that Crockford’s held a
gaming licence in respect of 30 Curzon Street (disregard (d)). If all this is
to be left out of account, what is left of the fact that the premises were used
as a casino from March 1 to December 8 1983?
In my view, nothing. If and to the extent that the hypothetical lessee
would be prepared to pay more rent, or the hypothetical lessor would expect to
receive more rent, on account of the fact that for the nine months or so before
the review date 30 Curzon Street had been used as a casino, they would, I
think, thereby be taking into account the combined effect of Crockford’s
occupation, gaming activities and gaming licence. It follows, in my judgment,
that the arbitrator is not entitled to assess the rent on the basis that the
hypothetical parties are taking into account that 30 Curzon Street was used as
a casino for the period March 1 to December 8 1983.
So far as this
point is concerned, the hypothetical parties must, in my view, be taken to be
contemplating a lease of premises suitable for use as a casino but which have
not yet been used as a casino.
Question 4
Mr Barnes
invited the answer ‘Yes’. An affirmative answer is required, he submitted, by
disregards (a) and (d). Mr Lyndon-Stanford, on the other hand, said that the
answer should be ‘No’. Disregard (a) requires only that the effect on rent of
Crockford’s gaming licence be disregarded. As to disregard (d), he pointed out
that it was only an enhancement of rental value attributable to a gaming
licence that must be disregarded. If Crockford’s possession of a gaming licence
would tend to depress the rental value, disregard (d) does not apply.
Both of Mr
Lyndon-Stanford’s points are, in my view, good ones. But the disregards must be
applied consistently. The hypothetical lessee is deciding what rent to offer.
He is ‘higgling’ with the hypothetical lessor about rent. What facts will
influence his thinking? Will he take into
account that 30 Curzon Street is the subject of a current gaming licence held
by Crockford’s? If he does take that
into account, the fact that the premises have been regarded as suitable for
gaming by the Gaming Board and the justices may tend to reduce the uncertainty
as to whether he, the hypothetical lessee, will succeed in obtaining a gaming
licence and, accordingly, to enhance the rental value. This would be contrary
to disregard (d). On the other hand, the fact that Crockford’s current licence
in respect of 30 Curzon Street will not expire until May or June 1984 may tend
to increase the relevant uncertainty and to depress the rental value. This
would not be contrary to disregard (d). It is, in my view, a question for the
arbitrator whether the fact of Crockford’s current gaming licence in respect of
30 Curzon Street would, on balance, enhance or depress the rental value. I
would, however, emphasise that it is the gaming licence alone which is here in
point. The use, pursuant to that licence, of 30 Curzon Street as a casino must,
as I have held, be disregarded. There is, I think, no inconsistency in so
holding. The proprietor of a gaming licence may or may not exercise the right
granted by the licence. From June 1982 to March 1983, for example, Crockford’s
held a gaming licence, but 30 Curzon Street was not being used as a casino.
In my view,
therefore, Question 4 cannot be answered with a definite ‘Yes’ or ‘No’. The
arbitrator must make up his mind whether the fact of Crockford’s current gaming
licence in respect of 30 Curzon Street will, on balance, increase or reduce the
rent which
then the arbitrator must assess the rent the hypothetical lessee would offer
without regard to it. But if not, then, since the licence is a fact and part of
the real world, and since none of the disregards would require it to be
disregarded, the licence’s effect on the rent the hypothetical lessee would be
prepared to pay should be taken into account. If, however, the licence is taken
into account it must be taken into account for its rent-enhancing as well as
its rent-depressing implications, although it must not have, on balance, a
rent-enhancing effect.
Question 5
The answer to
this question depends, in my opinion, on the answer to Question 4. The fact is
that on December 8 1983 there were 21 current gaming licences in respect of
premises in the south Westminster area. The ‘higgling’ between hypothetical
lessee and hypothetical lessor is assumed to be taking place in the real world,
except to the extent that the rent review provisions require otherwise. Mr
Barnes relied on disregards (a) and (d) as requiring the hypothesis of only 20
gaming licences. His reliance on disregard (a) is, in my judgment, misplaced.
It is the effect on rent of occupation, not of gaming licences, that must be
disregarded. As to disregard (d), it requires any addition in rental value
attributable to the licence to be disregarded. But Mr Barnes wants the licence
disregarded in order to increase the rental value. This is topsy-turvy.
It may be,
however, that, pursuant to the approach I have outlined under Question 4, the
arbitrator will conclude that Crockford’s gaming licence in respect of 30
Curzon Street would tend to increase the rental value of the premises. In that
event, disregard (d) requires that increase to be disregarded. The rent the
hypothetical lessee would be willing to pay for the lease of 30 Curzon Street
would have to be assessed on the footing that 30 Curzon Street was not on
December 8 1983, and never had been, the subject of a gaming licence.
As I have
already remarked, the hypotheses required by the rent review provisions must,
in my view, be applied consistently. If the hypothetical lessee, in considering
what rent he will pay, is to be taken to be contemplating 30 Curzon Street
without any gaming licence, he cannot, in my view, be taken to be contemplating
a south Westminster area with 21 gaming licences. The 20 other gaming licences
and the premises to which they respectively relate are facts of the real world.
Nothing in the rent review provisions requires them to be left out of account.
Crockford’s gaming licence in respect of 30 Curzon Street is a fact of the real
world. If disregard (d) requires that fact to be left out of account, it must,
in my judgment, be left out of account for all purposes of the assessment of
rental value. If that were not so, to what premises would the 21st licence in
the south Westminster area be taken to relate?
There is no such thing as a gaming licence at large. If the gaming
licence in respect of 30 Curzon Street is to be left out of account, then it
must follow, in my judgment, that the hypothetical circumstances of the
‘higgling’ involve 20 and not 21 gaming licences in the south Westminster area.
There are,
therefore, two possible hypotheses, so far as Crockford’s gaming licence is
concerned. One is that the ‘higgling’ is taking place on the footing that
Crockford’s held a gaming licence in respect of 30 Curzon Street and that there
were 21 current gaming licences in the south Westminster area. The other is
that Crockford’s did not hold a gaming licence in respect of 30 Curzon Street
and that there were 20 gaming licences in the south Westminster area. The first
hypothesis accords with reality and, prima facie, should be adopted. But
if it would result in a higher rental value being attributed to 30 Curzon
Street than the second hypothesis, the arbitrator must, in my judgment,
pursuant to disregard (d), adopt the latter.
There is
another point thrown up by question 5. The number of gaming establishments in
the south Westminster area on December 8 1983 was, in fact, 19. One was 30
Curzon Street. 30 Curzon Street is, however, assumed to be available on
December 8 1983 for letting with vacant possession. In my view this ‘vacant
possession’ hypothesis reduces, for the purposes of the hypothetical higgling,
the number of gaming establishments on December 8 1983 by one.
The 18 other
gaming establishments are part of the real world that the hypothetical lessee
must take into account. The 19th, 30 Curzon Street, is assumed to be vacant on
December 8 1983. So, in my view, the hypothetical lessee must be taken to be
assessing the rent he is prepared to pay on the basis that on December 8 1983
the south Westminster area includes the 18 gaming establishments and no more.
It will be for the arbitrator to assess the effect of this on the view the
hypothetical lessee would take of his chances of obtaining a gaming licence for
30 Curzon Street.
Question 6
Crockford’s is
a real company. Its stature in the gaming world is well known. The ‘vacant
possession’ hypothesis requires it to be assumed that Crockford’s right of
occupation and actual occupation of 30 Curzon Street have ended on December 8
1983. So is Crockford’s to be assumed to be a potential bidder in the open
market for the hypothetical lease of 30 Curzon Street. If it is, then the
hypothetical lessee must outbid Crockford’s. The presence of Crockford’s in the
market without any right of occupation of 30 Curzon Street and without any
other gaming premises would tend to push up the rent the hypothetical lessee
would have to pay. Not surprisingly, Mr Barnes submitted that I should answer
the question in the affirmative.
In my
judgment, however, the right answer to this question is ‘No’. The open market
must be, so far as is possible, a market which corresponds with reality. The
vacant possession hypothesis necessarily introduces an element of unreality.
But as I have already tried to emphasise, the various hypotheses must, in my
view, be taken no further than their terms make strictly necessary. It is not
necessary for the purpose of giving effect to the ‘vacant possession’
hypothesis that Crockford’s should be treated as a possible hypothetical
tenant. On the other hand, so to treat Crockford’s introduces hypothesis upon
hypothesis. It requires Crockford’s to be invested with hypothetical qualities
and surrounded by hypothetical circumstances that do not correspond with
reality. Thus the proposition that Crockford’s is a possible hypothetical
tenant requires the hypothesis that it would be in the market for 30 Curzon
Street if 30 Curzon Street were vacant. That latter hypothesis is not a
necessary consequence of the vacant possession hypothesis. It is no more than
an arguable one. The proposition that, if it had to leave 30 Curzon Street,
Crockford’s would try to negotiate a transfer of its gaming licence to the new
lessee of 30 Curzon Street is another arguable hypothesis. So is the hypothesis
that Crockford’s would have established itself in other premises and obtained a
transfer of its licence to those premises. None of these hypotheses is the
fact. None is demanded by the terms of the rent review provisions. Each is no
more than an arguable consequence of the vacant possession hypothesis. I reject
them all. It is impossible to treat Crockford’s as a possible hypothetical
tenant without inventing for it hypothetical circumstances. So, in my view,
Crockford’s cannot be assumed to be a possible hypothetical tenant.
Summary
In my view,
therefore, the arbitrator, in considering what rent the hypothetical lessee
would be prepared to pay and the hypothetical lessor would be prepared to
accept, should regard them as higgling on this footing:
(i) Vacant possession of 30 Curzon Street can be
given on December 8 1983;
(ii) 30 Curzon Street is suitable for casino use
but has not previously been used for that purpose;
(iii) There are, on December 8 1983, 18 licensed
gaming establishments operating in the south Westminster area;
(iv) The competitors for the new lease do not
include Crockford’s;
(v) Crockford’s have not established themselves
elsewhere;
either (vi)
Crockford’s hold a gaming licence in respect of 30 Curzon Street in which case
21 licences are, on December 8 1983, held in respect of premises in the south
Westminster area;
Or (vii)
Crockford’s do not hold a gaming licence in which case 20 licences are held in
respect of premises in the south Westminster area. The correct alternative as
between (vi) and (vii) will be that which would, on balance, result in the
lower rental value.
(viii) In any event, no one else has held a gaming
licence in respect of 30 Curzon Street.
Question 8
and the discovery appeal
Basic to this
question is the proposition that the earning capacity of commercial property is
relevant to the level of rent that the property will command. This proposition
is, in my view, self-evident. But although the earning capacity may be relevant
to the rent level, it is not easy to translate that relevance into a sum of
money, nor is it easy to be certain what would be the perception of a
hypothetical tenant as to the earning capacity of a particular commercial
property.
A common,
perhaps the most common, tool used by valuers in order to form an opinion, or
to justify an opinion, on the value of a
the price obtained on the letting or selling of comparable property. But the
weight of comparables is obviously variable and will depend upon the extent to
which the circumstances of the comparable transaction match the circumstances
of the hypothetical transaction under review.
A valuer may
or may not be satisfied with the evidence of the available comparables. He may
look for some other tool by which to assess the rental value. He may look for
evidence of the profit-earning capacity, either in an income or in a capital
sense, of the property with which he is concerned. He may look at the
development potential of the property. He may try to assess the trade turnover
of which the property is capable. Evidence on these lines may tend to confirm
or to invalidate the evidence of the available comparables.
There is not,
in my view, any doubt but that the arbitrator in valuing 30 Curzon Street is
entitled to take into account the income-earning capacity of the premises. The
question is whether the arbitrator is entitled, in forming a view of the
premises’ income-earning capacity, to take into account the actual profits made
by Crockford’s. Mr Barnes submitted that he is. A possible objection is that
that would be to allow Crockford’s occupation of 30 Curzon Street to have an
effect on rent, contrary to disregard (a). In answer to that objection Mr
Barnes relied on Harewood Hotels Ltd v Harris and W J Barton
Ltd v Long Acre Securities Ltd. In the former case the Court of
Appeal held that the tenant’s trading accounts for the preceding five years had
been properly admitted in evidence. The objection based on disregard (a) was
not accepted. I have already cited the relevant passages from the judgments of
Lord Evershed MR and Romer LJ. In the Barton case the Court of Appeal
refused to uphold an order for discovery of the tenant’s accounts for the three
previous years. But it did so not on the ground that the trading accounts were
in principle inadmissible but on the narrow ground that they were not necessary
because adequate comparables were available. As Oliver LJ said at p 402:
It is
conceded that there are plenty of comparable premises in the vicinity from
which the open market value of premises of this type can be deduced.
These two
Court of Appeal authorities establish the proposition, binding on me, that
disregard (a) is no reason for excluding from evidence the trading accounts of
Crockford’s at 30 Curzon Street.
Mr
Lyndon-Stanford submitted that trading accounts should be admitted as evidence
of value only where adequate comparables were not available. He relied on the Barton
case as authority for this submission. But in Barton the adequacy of
available comparables seems to have been conceded. In the present case, it is
certainly not conceded by Mr Barnes that adequate comparables are available.
The probative weight of the available comparables will, in due course, have to
be decided by the arbitrator. He may or may not regard them as constituting
compelling evidence of the rental value of 30 Curzon Street. His decision
cannot be prejudged and the plaintiff is, in my view, entitled to place before
him evidence of the income-earning capacity of 30 Curzon Street in order to
supplement, discredit or qualify the evidence of the available comparables. The
Barton case is not authority to the contrary.
Mr Barnes
naturally relied on Harewood Hotels Ltd v Harris as authority for
the admissibility into evidence of Crockford’s trading accounts. He pointed out
that the Court of Appeal had upheld the reliance by the trial judge on the
tenant’s trading accounts.
Mr
Lyndon-Stanford, however, mounted a full-scale attack on Harewood Hotels Ltd
v Harris. The case was, he submitted, wrong in principle and was decided
per incuriam. His attack was based on the nature of the ‘open market’ in
which the ‘higgling’ between hypothetical lessee and lessor is to be assumed to
be taking place. The hypothetical lessee must be taken to be in possession of
all information about the premises that either would be available to the public
at large or would be supplied to prospective lessees by the hypothetical
lessor. The previous tenant’s statutory accounts would fall into the first
category. Prospective lessees could obtain these from Companies House. But the
previous tenant’s trading accounts and records underlying the statutory
accounts or additional to the statutory accounts would not be available to the
public. They would be private documents. Nor would they be available to the
lessor. The proposition that an outgoing tenant would make his trading accounts
and records available to the lessor so as to enable the lessor to supply them
to prospective new tenants has only to be stated to be seen to be devoid of any
reality. These trading documents would be neither public nor available to the
lessor for supply to prospective lessees. In the real world they would play no
part in the ‘higgling’ between lessor and prospective lessees.
These
arguments seem to me, I am bound to say, almost self-evidently right. The
‘higgling’ is to be assumed to be taking place in the real world. A previous
tenant’s private trading records would not, in the real world, be available
either to lessor or to prospective lessee. So how can it be right that they
should be admitted into evidence for the purpose of fixing rental value whether
for the purposes of a section 34 new tenancy or for the purposes of rent review
provisions such as those in the present case?
Mr
Lyndon-Stanford’s point does not seem to have been argued either in Harewood
Hotels Ltd v Harris or in the Barton case. It does, however,
have support from Lynall v IRC [1972] AC 680, a decision which post-dated Harewood
Hotels Ltd v Harris and was not cited to the court in Barton.
In Lynall
v IRC the House of Lords was dealing with a question which had arisen on
the valuation for estate duty purposes of shares in a private company. Section
7 (5) of the Finance Act 1894 required the shares to be brought into account at
the value ‘such property would fetch if sold in the open market at the time of
the death of the deceased’. The shares were a minority holding and their value
on an open market sale would have been increased if a public issue were likely.
Private documents of the directors in existence at the date of death indicated
that a public flotation was under active consideration. The question was
whether in assessing ‘the open market’ value of the shares regard should be had
to these private documents. Plowman J held that regard should only be had to
published information and to information which the directors would in fact have
given in answer to reasonable questions. He held that the directors would not
have disclosed the private documents and that the documents were not,
therefore, admissible in evidence. The Court of Appeal reversed his decision,
but the House of Lords restored it. All five members of the House of Lords
agreed that, for the purposes of the hypothetical sale in the open market, the
hypothetical purchaser could not be treated as having access to confidential
information.
Lord Reid at p
695 said this:
If the
hypothetical sale on the open market requires us to suppose that complete
competition has been invited, then we have to suppose that steps have been
taken before the sale to enable a variety of persons, institutions or financial
groups to consider what offers they would be prepared to make. It would not be
a true sale in the open market if the seller were to discriminate between
genuine potential buyers and give to some of them information which he withheld
from others, because one from whom he withheld information might be the one
who, if he had the information would have made the highest offer.
The
respondent’s figure of £4 10s per share can only be justified if it must be
supposed that these reports would have been made known to all genuine potential
buyers, or at least to accountants nominated by them. That would only have been
done with the consent of Linread’s board of directors. They were under no legal
obligation to make any confidential information available. Circumstances vary
so much that I have some difficulty in seeing how we could lay down any general
rule that directors must be supposed to have done something which they were not
obliged to do. The farthest we could possibly go would be to hold that
directors must be deemed to have done what all reasonable directors would do.
Then it might be reasonable to say that they would disclose information
provided that its disclosure could not possibly prejudice the interests of the
company. But that would not be sufficient to enable the respondents to succeed.
Not all
financiers who might wish to bid in such a sale, and not even all the
accountants whom they might nominate, are equally trustworthy. A premature
leakage of such information as these reports disclose might be very damaging to
the interests of the company, and the evidence in this case shows that in
practice great care is taken to see that disclosure is only made to those of
the highest repute. I could not hold it right to suppose that all reasonable
directors would agree to disclose information such as these reports so widely
as would be necessary if it had to be made available to all who must be
regarded as genuine potential bidders or to their nominees. So in my opinion
the respondents fail to justify their valuation of £4 10s.
Lord Morris at
p 699 said:
The somewhat
limited issue as between the two figures of £3 10s or £4 10s mainly depends
upon the question whether knowledge of the category B documents and of the
information which they contained would be ‘open market’ knowledge. The
conclusion of the learned judge was that as such knowledge was not published
information and as (on Mr Alan Lynall’s evidence, which the learned judge
accepted) it would not in fact have been elicited on inquiry, it ought not to
enter into the calculation of price and value.
referred to, of the practice of boards of directors to answer reasonable
questions in confidence to the advisers of an interested potential purchaser.
If this is the practice, and even if the sought for information may be given in
confidence to an interested potential purchaser himself, I cannot think that
this equates with open market conditions. It was said that it should be assumed
that a purchaser would make reasonable inquiries from all available sources and
that it must further be assumed that he would receive true and factual answers.
If, however, the category B documents and the information contained in them
were confidential to the board, as they were, the information could not be made
generally available so that it became open market knowledge.
Lord Dilhorne
at p 701 said:
On a sale in
the open market is it to be assumed that possible purchasers would have
information as to the contents of the reports of McLintocks and Cazenoves? They were confidential to the directors. All
the shareholders in Linread were directors, but it is not to be assumed that
they would disclose confidential information they possessed to the public
without the consent of the board; nor is it to be supposed that the board would
have given its consent to the disclosure of the contents of those reports. In
the light of the evidence given by Mr Alan Lynall, whose evidence was tendered
and accepted as being the evidence of the board, and accepted by Plowman J . .
. it is clear that that would not have been given.
It was agreed
that if it were held that it is to be assumed that purchasers would have
knowledge of those reports in a sale on the open market, the shares were to be
valued at £4 10s a share, but that if no such assumption was to be made, their
value was £3 10s a share.
Lord Donovan
agreed. He said at p 702:
I concur in
the view that confidential information ought not to be regarded as available to
a hypothetical purchaser under section 7 (5) of the Finance Act 1894; though I
would think it right not to treat as confidential information for this purpose
accounts of the company already prepared and awaiting presentation to the
shareholders. I have in mind the accounts of the present company for the year
to July 31 1961.
Lord Pearson
at p 705 said:
The crucial
question, therefore, is whether this information should be deemed to be
available to participants in the hypothetical market.
He answered
the question at p 706. He said:
In the present
case, however, the company’s board of directors had received reports and advice
which were obviously of a confidential character and the board had come to no
decision as to whether they would act on the advice or not but were maintaining
their cautious and uncommitted attitude. It is reasonable to imagine that in
that situation the board would have kept these matters confidential and would
have been unwilling to disclose the reports and advice which they had received,
and in particular unwilling to make them available to participants in the open
market. Prima facie the information would not have been available.
It is,
however, suggested that it would have been available in two ways: first it is
said that the likely purchasers might have included a director of the company
and he would have had the information ex officio. But unless others also
knew it, his possession of the information would not materially affect the
market price, which he or any other purchaser would have to pay.
Then a little
later on he said:
In my opinion
the reasonable supposition is that the information would not be available in
the hypothetical open market, and so the assessment should be £3 10s and not £4
10s.
The ratio of
each of the judgments delivered in Lynall v IRC was that
confidential information was not to be admitted into evidence unless it
represented information which would be available in the hypothetical market.
The principle applies, in my judgment, in the present case. If and to the
extent that the decisions in Harewood Hotels Ltd v Harris and W J
Barton Ltd v Long Acre Securities Ltd are to the contrary effect, I
agree with Mr Lyndon-Stanford that they should be regarded as decided per
incuriam. I would observe, however, that the trading accounts admitted into
evidence in Harewood Hotels Ltd v Harris may have been the
statutory accounts or directors’ accounts which subsequently became the
statutory accounts. It is not in dispute that accounts of this character are
admissible (see Lord Donovan in Lynall v IRC at p 702C). And the
decision of the Court of Appeal in W J Barton Ltd v Long Acre
Securities Ltd was to exclude the trading records in question. The Lynall
v IRC point represents an additional ground upon which that decision
could have been based.
I must now
return to question 8. It is not, in my view, a question to which at this stage
a firm answer can be given.
First, there
is nothing necessarily contrary to principle in an assessment of rental value
being based on the profit-earning capacity of 30 Curzon Street. Evidence of its
profit-earning capacity may, therefore, be admissible in evidence.
Second, the
only admissible evidence as to the profit-earning capacity of 30 Curzon Street
will be evidence available to prospective lessees in the hypothetical open
market. This will include evidence available to the lessor and which the lessor
would be likely to make available to prospective lessees.
Whether
Crockford’s trading records would, in the real world, be made available by
Crockford’s to all prospective lessees is, strictly, a matter to be decided by
the arbitrator. I cannot at the moment think of any reason at all why
Crockford’s should be willing to release its records to all or any prospective
lessees and Mr Barnes, not surprisingly, could not suggest a reason. But unless
the arbitrator can come to the conclusion that Crockford’s private trading
records would be available to prospective lessees in the hypothetical open
market, the documents would not, in my judgment, be admissible in evidence and
would not be discoverable.
Third, it will
be for the arbitrator, having considered all the admissible evidence, both of
the profit-earning capacity of 30 Curzon Street as well as of the available
comparables, to decide what, if any, weight ought to be attributed to the
evidence of the property’s profit-earning capacity.
I must now
deal with the discovery appeal. The arbitrator refused discovery of Crockford’s
trading records on the ground, first, that no evidence of the absence of
available comparables had been put forward and, second, that the discovery
sought would be time-consuming, expensive and unlikely to save costs. The
arbitrator did not have the advantage of the arguments on law that have been
addressed to me. Counsel for the defendant submitted to the arbitrator that
trading records would be admissible only in the absence of adequate evidence of
comparables. The arbitrator accepted this submission. In doing so he was, I
think, in error in that the adequacy of the available comparables could not be
gauged at that stage. But the point that could have been, but was not, made was
that the accounts would not have been available in the hypothetical open
market. If that point had been made and if the arbitrator had accepted it the
accounts would have been inadmissible whether or not adequate comparables were
available.
Since, in my
judgment, the arbitrator misdirected himself I must, I think, allow the appeal.
I do not, however, propose to remit the discovery application to the arbitrator
for rehearing, since, as at present advised, I think it unlikely in the extreme
that any arguable case could be put forward that these trading records would
have been available to prospective lessees in the hypothetical open market. If
the plaintiff thinks otherwise, it can renew its discovery application to the
arbitrator.
