Lease of department store — Part of rent assessable as percentage of turnover — High Court granting declaration that calculation of turnover not including VAT — Whether turnover including sums charged to customers as VAT — Appeal allowed.
The appellant was the landlord of a department store in Swindon. The respondents were the successive tenants under a lease, dated April 1971, for a term of 99 years from October 1965. The rent was made up of two elements, namely, a fixed annual amount together with an additional rent calculated as a percentage of the store’s turnover.
“Turnover” was defined in para 3 of a schedule to the lease as the “gross amount of the total sales …”. An issue arose as to whether VAT charged on goods sold to customers should be included when calculating the turnover for the purposes of assessing the rent. The respondents obtained a declaration from the High Court that VAT should be excluded from the calculation, even though purchase tax, the predecessor to VAT, had not been excluded. The judge had held that it was consistent with the commercial purpose of the lease and that it gave effect to the fair and ordinary meaning of the words used in their context: [2004] EWHC 2940 (Ch); [2005] 1 EGLR 26; [2005] 11 EG 182. The appellant appealed.
Held: The appeal was allowed.
In determining what should count as the gross amount for the purpose of calculating the rent, VAT had to be regarded as a substitute for purchase tax and as part of the gross amount.
The lease had to be construed in its 1965 context but its purposes and values were applicable in the changed factual circumstances. The words “gross amount of total sales” were to be construed in their commercial context and the judge had placed too much emphasis on the notion of risk-sharing. What mattered to the businessmen negotiating the lease, or an agreement for a lease, was money. Purchase tax would have had a significant effect upon what was actually paid by way of rent since it was an inbuilt cost to the respondents. Although the respondents could set their own prices, in reality they had to put a mark-up on the price that they paid. In the real world, VAT affected ultimate prices as had purchase tax, although the tax was now levied further down the supply chain: Lynn v Nathanson [1931] 2 DLR 457 and Yates v Yates (1913) 33 NZLR 281 distinguished.
It would be wrong to treat the differences between the incidence and the operation of purchase tax and VAT as being relevant under para 3 of the schedule. One system had replaced the other, with an almost identical effect upon on the final cost to the consumer and upon the total amount of money received by the respondents. If the respondents were correct, the introduction of VAT would potentially have given them an uncovenanted bonus. Whereas rent had originally been calculated by reference to a turnover amount including purchase tax, it would be calculated by reference to a lesser net amount once VAT had been introduced, even though the amount paid by customers to, and received by, the respondents was effectively the same under both systems.
John Furber QC (instructed by Maples Teesdale) appeared for the appellant; Jonathan Brock QC (instructed by Walker Morris, of Leeds) appeared for the respondent.
Eileen O’Grady, barrister
