Lease of department store — Part of rent to be assessed as percentage of turnover — Whether turnover including sums charged to customers as VAT — Tenant seeking declaration that VAT not included — Claim allowed
The claimants were the successive tenants of premises in Swindon under a lease, dated April 1971, for a term of 99 years from October 1965. The defendant was the landlord. The lease restricted the use of the premises to a department store, and provided for part of the rent to be 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… from trade”. A dispute arose as to whether VAT charged on goods sold to customers should be included, or excluded, when calculating the turnover for the purpose of assessing the rent. The claimants sought a declaration that it should be excluded. The predecessor to VAT, purchase tax, had not been excluded.
The claimants contended that sums charged as VAT were not included in the “gross amount of the total sales” because they did not, properly regarded, form part of the price of the goods. They argued that the effect of section 19(2) of the Value Added Tax Act 1994 was that when a customer paid, the sum paid was deemed to include two separate elements, namely the value of the supply together with the VAT charged on that sum. Moreover, they submitted that the inclusion of VAT would be inconsistent with the commercial purpose of a rent based upon turnover, namely to provide a mechanism for landlord and tenant to share the trading risk associated with the premises. The defendant contended that the words “gross amount of total sales” clearly and unambiguously meant everything that was taken at the till, without deduction.
Held: The claim was allowed.
VAT was to be excluded from the calculation of the turnover. This was consistent with the purpose of the lease and gave effect to the fair and ordinary meaning of the words used in their context. The defendant was wrong to suggest that the wording specified in para 3 was unambiguous; words such as “gross” and “sales” could have different meanings in different contexts. Interpreting para 3 in its commercial context, its purpose was to ensure that the landlord and tenant shared the trading risk associated with the premises. To include VAT in the calculation of the turnover would be inconsistent with that purpose, since the tenant would have to pay rent by reference to sums that, over the annual trading period, it would not get to keep, since it would have to account for them to Customs & Excise. Moreover, if VAT rates went up, so would the rent, even if the tenant’s trade had not improved. The reference to turnover was intended to be comparable to the method of calculating the turnover in the company accounts; the profit and loss account was required to give a true account of the profit or loss made by the company, and could not, therefore, include VAT. The situation with purchase tax had been entirely different, since that had been a tax imposed upon wholesalers, and it was the tenant’s suppliers, not the tenant itself, that had been liable for it; unlike VAT, it had been up to the tenant whether to pass on to customers any extra cost incurred in obtaining goods from those suppliers. However, the claimants had erred in their interpretation of the VAT legislation. The price of goods was the actual price paid, and could not be separated from the VAT element: Lynn v Nathanson [1931] 2 DLR 457 distinguished.
Jonathan Brock QC (instructed by Walker Morris, of Leeds) appeared for the claimants; John Furber QC (instructed by Maples Teesdale) appeared for the defendant.
Sally Dobson, barrister
