Landlord and tenant — Landlord and Tenant Act 1954 — Application to fix an interim rent
The following
cases are referred to in this report.
Bocardo
SA v S&M Hotels Ltd [1980] 1 WLR 17;
[1979] 3 All ER 737; (1979) 39 P&CR 287; [1979] EGD 500; 252 EG 59, [1979]
2 EGLR 48, CA
Charles
Follett Ltd v Cabtell Investments Ltd (1987)
55 P&CR 36; [1987] 2 EGLR 88; 283 EG 195, CA
Clements
(Charles) (London) Ltd v Rank City Wall Ltd
(1978) 246 EG 739, [1978] 1 EGLR 47
English
Exporters (London) Ltd v Eldonwall Ltd
[1973] Ch 415; [1973] 2 WLR 435; [1973] 1 All ER 726; (1972) 25 P&CR 379;
[1973] EGD 439; 225 EG 255 & 433
Evans
(FR) (Leeds) Ltd v English Electric Co Ltd
(1977) 36 P&CR 185; [1978] EGD 67; 245 EG 657, [1978] 1 EGLR 93
Granada
TV Network Ltd v Great Universal Stores Ltd
[1963] EGD 520; (1963) 187 EG 391
Guardian
Assurance Co Ltd v Gants Hill Holdings Ltd
(1983) 267 EG 678, [1983] 2 EGLR 36
Halberstam v Tandalco Corporation NV [1985] 1 EGLR 90; (1984) 274 EG
393, CA
Janes
(Gowns) Ltd v Harlow Development Corporation
[1980] EGD 110; (1979) 253 EG 799, [1980] 1 EGLR 52
O’May v City of London Real Property Co Ltd [1983] 2 AC 726;
[1982] 2 WLR 407; [1982] 1 All ER 660; (1982) 43 P&CR 351: 261 EG 1185,
[1982] 1 EGLR 76, HL
Plinth
Property Investments Ltd v Mott, Hay &
Anderson (1978) 38 P&CR 361; [1979] EGD 111; 249 EG 1167, [1979] 1 EGLR
17, CA
Ratners
(Jewellers) Ltd v Lemnoll Ltd (1980) 255 EG
987, [1980] 2 EGLR 65
Woodbridge v Westminster Press Ltd [1987] 2 EGLR 97; (1987) 284 EG 60
Bernard
Cunningham (instructed by the Treasury Solicitor) represented the applicant;
Shane Dougall (instructed by Berwin Leighton) represented the respondent.
This was an
application to fix an interim rent under Section 24A of the Landlord and Tenant
Act 1954. The valuation evidence was given by Mr Stuart Sandler FRICS, a senior
partner in Smith Melzack, the landlord’s valuer, and Mr J E C Carlton FRICS,
principal estates surveyor at PSA (Building Management) Estates on behalf of
the tenant, the Department of the Environment.
The subject
premises are 154/156 The Broadway, West Ealing, London W13. They comprise the
whole of 156, ie ground, first and second floors and the first and second
floors of 154. The Department of the Environment occupies and uses the ground
floor of 156 as a job centre and all the upper floors as offices. The premises
were built in about 1935 in a distinctive 1930s architectural style.
The premises
were originally let to the ‘Minister of Works’ by a lease dated May 5 1949.
This granted a term of 42 years from September 29 1947, subject to an option to
the minister to break, which was never exercised. The rent under the lease was
a fixed rent of £1,150 throughout the term (ie without review), plus an
insurance rent. The lease contained a full repairing covenant and other
covenants of a common kind which I need not mention. But in addition, it
contained (in clauses 6 and 15) unusual tenant’s covenants as to user and
assignment.
6. Not
without the previous written consent of the lessor to use or permit the said
premises hereby demised, or any part thereof, to be used as a school or suffer
or permit any business to be carried on thereon but shall use the said premises
as and for an Employment Exchange.
. . .
15. Not
without the previous consent in writing of the lessor to assign, underlet or
part with the possession of the said demised premises or any part thereof but
such consent shall not be unreasonably withheld in the case of a proposed
assignment or underlease to a respectable and responsible tenant, and PROVIDED
that the Minister shall not be deemed to have assigned, underlet or parted with
possession of the said premises by reason of the occupation of the said
premises by any Ministry, Government Board or Department or Civil Service
organisation occupying the said demised premises with the permission of the
Minister.
The lease
followed by a ‘form of offer’ made by the original lessor in a printed form
used by the minister, with amendments,
term at the fixed rent of £1,150 pa. But it did not mention any user clause and
only mentioned a rather different assignment clause. The clauses set out above
appear to have been added later, perhaps pursuant to clause 7 of the form of
offer which reads:
The terms of
this offer, after acceptance on behalf of the Minister, are to be incorporated
in a formal Lease which shall contain in addition to the terms herein specifically
set forth clauses and covenants common to leases of business premises let at
rack rents.
The defendant
landlord served a section 25 notice terminating the tenancy on November 7 1989
and stating that it would not oppose the grant of a new tenancy. The tenant
duly served a counternotice and applied to the High Court for a new tenancy. On
October 23 1989 the landlord made this application for an interim rent.
The proper
construction and effect of the user clause was a matter of potential
importance, for clearly a restricted user may affect the rent. Clause 6 has two
limbs: (i) the negative limb, prohibiting use as a school or carrying on a
‘business’ without the previous written consent of the landlord and (ii) the
positive limb, requiring use as ‘an Employment Exchange’. The requirement of
the landlord’s consent in the first limb is subjected by section 19(3) of the
Landlord and Tenant Act 1927 to a proviso that no premium can be demanded for
the consent, unless the change of user involves structural alterations.
The judge
accepted the argument of Mr Cunningham, counsel for the Department, that in the
context ‘an Employment Exchange’ means only a Government-run centre, such as
the present ‘Job Centre’ and does not include a privately run employment
agency. Nevertheless, reading clause 6 together with the proviso to clause 15,
it was, in his judgment the intention of the parties (despite the wording of
the second limb of clause 6) that the use could be changed without the consent
of the landlord to that of another government department. In the context, the
word ‘business’ is confined to the normal meaning of trade or profession, and
does not have the wider meaning conferred on it by section 23(2) of the 1954
Act. A non-trading activity of a Government department is thus not a ‘business’
for the purposes of clause 6. However, this alternative Government use would
not, the judge thought, have much material effect on the rent.
Mr Dougall, on
behalf of the landlord, submitted that the first limb of clause 6 should be
read subject to an implied proviso that the landlord’s consent is not to be
unreasonably withheld, on two alternative grounds. First, he relied on some obiter
remarks of Megaw LJ in Bocardo SA v S & M Hotels Ltd [1980]
1 WLR 17 at p 22. After analysing the effect of a covenant not to assign
without the landlord’s consent, and the proviso that such consent is not to be
unreasonably withheld imported by section 19(1) of the 1927 Act, Megaw LJ there
concluded:
It seems to
me to follow that the effect of Section 19(1) of the Act of 1927, on its true
analysis, was merely to make statutory an implied term which must already have
been implied, if the express words were to have any sensible purpose.
So, said Mr
Dougall, by a parity of reasoning, a similar proviso must be implied into a
covenant not to change the user without consent. The judge did not agree. To
start with he could not accept the reasoning of Megaw LJ and his remarks were
not binding on him. Megaw LJ’s suggestion of an implied proviso was entirely
novel, unsupported by any authority, and contrary to the basis of the enactment
of section 19. Furthermore the contrast between the wording of subsections (1)
and (2) of section 19 on the one hand, and subsection (3) on the other,
precludes the implication of the suggested proviso; the express incorporation
of such a proviso by subsections (1) and (2) makes it impossible to suggest the
implication of a similar proviso in subsection (3), where the same appropriate
words have been deliberately omitted. This point came before Mervyn Davies J in
Guardian Assurance Co Ltd v Gants Hill Holdings Ltd (1983) 267 EG
678, [1983] 2 EGLR 36, in which he refused to follow Megaw LJ’s dicta and
held that no proviso that consent is not to be unreasonably withheld could be implied
in a covenant not to change the user without consent. The judge followed and
applied that decision.
Mr Dougall’s
second argument for implying such a proviso rested on clause 15. That clause
provides for consent to an assignment not to be unreasonably withheld. So, said
Mr Dougall, unless such a proviso is implied in clause 6 also, the proviso in
clause 15 is effectively a dead letter. In the judge’s judgment, it was an
insufficient justification for reading into clause 6 words which the parties
have chosen not to include in the clause. The same argument was addressed to
and rejected by Pennycuick J in Granada TV Network Ltd v Great
Universal Stores Ltd (1963) 187 EG 391, and the judge followed and applied
his decision: see also the well-known rent review decision in Plinth
Property Investments Ltd v Mott, Hay & Anderson (1978) 38
P&CR 361, per Lord Denning, MR at p 371.
It follows
that, in the judge’s judgment, only a use as a job centre or other Government
offices is permitted without consent and this factor has to be taken into
account in determining the interim rent. The position was thus akin to that in
the Plinth case. That, however, was a case of an absolute prohibition
against any change of use, and it was said by Lord Denning MR, at p 372, that the
landlord could demand a premium for any consent to a change, and by Brandon LJ
at p 373 that no change of use at all could be contemplated. This case was
different, as a change with consent is expressly contemplated and no premium
can be charged (unless there are alterations), so those remarks do not apply.
The possibility of the landlord consenting to a change of use has be to
envisaged. However, the landlords cannot unilaterally give a general consent
and it is the hypothetical landlord, not the present defendant landlord, whose
consent would be relevant.
Under section
34(2) ‘any improvement carried out by a person who at the time it was carried
out was the tenant, but only if it was carried out otherwise than in pursuance
of an obligation to his immediate landlord’ during the current tenancy falls
within para (c) of section 34(1). The effect of such an improvement on
rent has to be disregarded. The improvements which the department sought to
have disregarded under these provisions were: (1) central heating, including
the building of a boiler-house; (2) some external storage spaces; (3) some
suspended ceilings; and (4) double-glazing in the upper-floor windows.
The evidence
as to when the central heating was installed and the external storage spaces
built was rather sketchy. However, the department’s files revealed that
planning consent for the boiler-house and storage spaces (together with some
lavatory accommodation) was obtained at the end of January 1949, following
which Treasury approval was sought. There was an internal handwritten note
which states simply: ‘Treasury approve Estimate £24,000. Work commencing
15.8.49’. The lease, which was dated May 5 1949, had a plan annexed showing the
area now occupied by the boiler-house, the storage spaces and the lavatory
accommodation as ‘Garden’. Mr Dougall suggested that work might have begun when
planning consent was granted and before Treasury approval had been obtained,
but this seemed to the judge to be unlikely. The judge found, on the balance of
probabilities, that these improvements were done after the lease had been
granted.
The
double-glazing and suspended ceilings were installed only fairly recently. The
double-glazing consisted of the removal of the existing windows and their
replacement by sealed double-glazing units with stainless steel surrounds:
these were improvements as opposed to replacements coming under the covenant to
repair.
Mr Dougall
pointed to an obligation in the prior form of offer to restore alterations at
the end of the term, which was effectively repeated in clause 10 of the lease.
He argued that these were ‘obligations’ to the landlord within the meaning of
section 34(2), so that the improvements did not fall to be disregarded. The
judge rejected that argument. The words ‘in pursuance of’ in section 34(2) made
it clear that the only kind of obligation referred to is a positive contractual
obligation to make the specific improvements. The judge then considered the
location of the subject premises which are situated on the north side of Ealing
Broadway, at the junction with Eccleston Road.
Valuations
Both Mr
Sandler and Mr Carlton approached their valuation by applying a £ per sq ft
figure to each of the floor areas, on the basis of a reasonable length lease
with five-yearly rent reviews and then making adjustments. The valuations,
slightly rearranged for ease of comparison, were as follows:
Findings
After
considering the valuation evidence the judge made the following findings: the
approach of both valuers was first to determine separate figures for the
various floors on the footing of a reasonable length lease with a five-yearly
rent review pattern, and then adjust that to an annual tenancy rent. The judge
followed that course, bearing in mind that the effect of the improvements on rent
must also be ignored, but on the other hand assuming that there is no user
clause restriction. Thereafter other adjustments are made.
As regards the
two upstairs floors, he preferred the evidence of Mr Carlton. For the sort of
A2 user which might reasonably be expected, he did not consider that these
floors would attract more than a normal office rent, and it seems to him that
the only real guidance as to that in this area is to be gathered from the rent
review of West Ealing House and 43 Broadway even though these suffer from not
being market lettings. Some attempt was made in cross-examination of both
valuers to extract from them percentage deductions attributable to the various
improvements, but they were both understandably reluctant to commit themselves
to figures. However, bearing in mind that the effect on rent of the
improvements has to be ignored, as well as the other differences between the
subject premises and these two comparables, the judge concluded that Mr
Carlton’s figures were well justified and reasonable and he adopted them. He
also accepted his evidence that the absence of a lift justified a reduction in
the per sq ft figure for the second floor.
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Mr |
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Mr |
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Ground floor: |
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2,303 sq ft |
@ |
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@ |
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First-floor offices: |
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2,558 sq ft |
@ |
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@£11 |
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Second-floor offices: |
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2,527 sq ft |
@ |
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@ |
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Ground-floor store |
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88 sq ft |
@ |
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@ |
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Ground-floor |
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outhousing |
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258 sq ft |
@ |
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@£1 |
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3 car-park spaces |
@ |
= |
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– |
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£138,278 |
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£79,175 |
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say |
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say |
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Less |
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Less |
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10% |
15% to a tenancy |
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say |
£124,450 |
year to year |
12,000 |
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15% having |
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regard to |
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current rent |
12,000 |
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£56,000 |
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As regards the ground floor, the judge found himself in some
difficulty. He accepted to a certain degree Mr Sandler’s evidence as to an A2
user, but he had no comparable evidence from either valuer of the sort of rents
agreed by A2 users for ground-floor premises in the area. All the comparables
related to purely office use.
He came to the
conclusion that the ground floor would attract a differential to the first
floor and could not accept Mr Carlton’s valuation with a nil differential. But
he thought Mr Sandler had overestimated the attractions of the ground floor and
its return frontage to Eccleston Road and his figure, of course, took no
account of the improvements. The judge proposed to adopt a figure of £15 per sq
ft.
As regards the
ground-floor internal store, he preferred Mr Sandler’s figure of £5 per sq ft.
As regards the external stores, these were part of the improvements. Mr Dougall
pointed out that if they were not there, there would be extra car-park spaces
and he thought there was something in that point. However, the car-park area
was rather inconvenient to use and unattractive, and he did not think that Mr Sandler’s
figure of £500 per space was really justifiable. He fixed the rent of the
external area, allowing for any extra car parking in place of the storage
spaces, at £1,000.
As regards the
appropriate deduction to convert to an annual tenancy, in view of the rarity of
comparable lettings on that basis, that is a matter not capable of proof and
therefore one of judgment and opinion for valuers. Mr Sandler thought the
appropriate reduction was 10% and Mr Carlton thought it should be 15%. The
judge found it impossible to choose between them. He therefore split the
difference and made a deduction of 12 1/2%.
Reduction
for restricted user
This,
likewise, was a very difficult matter to quantify. Nowadays, few if any
landlords would let with such a restriction, knowing of its likely depreciatory
effect on a rent review (as in the Plinth case) or on a renewal under
the 1954 Act (as in Charles Clements (London) Ltd v Rank City Wall
Ltd (1978) 246 EG 739, [1978] 1 EGLR 47, referred to with approval in O’May
v City of London Real Property Co Ltd [1983] 2 AC 726 at p 741). Mr
Carlton made it clear that conversely he would not accept such a restriction in
view of the property management problems it can create, so there are no
comparable lettings. Nevertheless, the statutory hypothesis of section 34 of
the 1954 Act requires an assumption that there will be a letting by agreement
with such a restriction: cf FR Evans (Leeds) Ltd v English Electric
Co Ltd (1977) 36 P & CR 185.
This matter,
too, is not one capable of proof and therefore is one of judgment and opinion.
In relation to a tenancy of reasonable length with a five-year review pattern
Mr Sandler thought that the reduction would be 10% to 15%, but he was always
unwilling to accept the hypothesis of a restricted user and the judge thought
that Mr Cunningham was justified in describing his figure as ‘glossed’. Mr
Carlton adopted the same figure as found by the arbitrator in the Plinth case,
ie 31%, or at any rate something in the region of 25%.
Neither valuer
really dealt with the effect on an annual tenancy, as opposed to a longer
tenancy, and the judge agreed with Mr Dougall that this makes a difference,
for, the shorter the term, the less obviously is the disadvantage to the
tenant. Bearing in mind that the judge was dealing only with an annual tenancy,
and that (as he had held) regard can be had to the possibility of the landlord
granting consent and his being unable to charge a premium, he held that an
appropriate deduction would be 10%.
The judge,
therefore, held that under section 34 of the 1954 Act and before having regard
to the rent under the current tenancy, the rent on the basis of an annual
tenancy should be as follows:
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Ground floor |
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2,303 sq ft |
@ £15 per sq ft = |
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First floor |
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2,558 sq ft |
@ £11 per sq ft = |
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Second floor |
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2,527 sq ft |
@ £10 per sq ft = |
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Ground-floor store |
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88 sq ft |
@ £5 per sq ft = £440 |
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Yard, including car-park spaces |
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£1,000 |
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£89,393 |
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Less |
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£11,174 |
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£78,219 |
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Less 10% reduction by |
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£7,822 |
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£70,397 |
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(say) |
£70,400 |
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The judge thought the deductions should be made from the net figures
arrived at, not from the gross figures as in Mr Carlton’s valuation.
‘Cushion’
deduction under section 24A(3)
The judge then
under section 24A(3) had to ‘have regard to the rent payable under the terms of
the tenancy’ ie the £1,150 paid since the grant of the lease in 1949. On this
aspect of the case he was referred to the Eldonwall case Janes
(Gowns) Ltd v Harlow Development Corporation (1979) 253 EG 799,
[1980] 1 EGLR 52; Ratners (Jewellers) Ltd v Lemnoll Ltd (1980)
255 EG 987; Woodbridge v Westminster Press Ltd [1987] 2 EGLR 97*
and the Charles Follett case. The Charles Follett case is the
leading case in which the purpose of the above words was considered in some
detail by Nourse LJ (with whom the other members of the Court of Appeal
agreed), but the judge thought that, when considering his remarks, it must be
borne in mind that that was a most unusual case on the facts. The lease in that
case, granted in 1969, reserved a rent of £8,500 pa, which was increased on a
review in 1976 to £13,500 pa. The rent originally proposed by the landlords for
the new 1954 Act tenancy was £25,000 pa, but this was subsequently increased to
no less than £125,000 pa. The judge at first instance determined the section 34
annual tenancy rent at £80,000 but fixed the interim rent at £40,000 allowing a
cushion deduction of 50%. The Court of Appeal held that the matter was one for
his discretion and that although the cushion was much higher than normal, in
the unusual circumstances of the case his discretion has been properly
exercised.
*Editor’s
note: Also reported at (1987) 284 EG 60.
In the Eldonwall
case, Megarry J (as he then was) had said at p 433H:
I doubt if
the two elements of market rent and existing rent are intended to be given
equal weight. Section 24A(3) provides that Section 34 ‘shall apply’ to the
determination in the manner stated, and merely requires the court to ‘have
regard’ to the existing rent. I think the process envisaged is not that of
striking a balance between two factors of equal weight, but is that of applying
one factor, namely, the market rent, and, where appropriate, suitably tempering
it by reference to the existing rent. On the facts before me, I do not think
much of a case for tempering the market rent by any very substantial amount has
been made out; there is some case, but not much.
He reduced
what he called ‘the interim market rent’ by 6.66%. Deductions of approximately
10% were made in the Janes (Gowns) and Ratners cases. In Janes
(Gowns) the previous lease was a 21-year lease at a fixed rent and
therefore the nearest in that respect to the present case, but that
circumstance was not one which Judge Finlay made any particular reference to.
In Halberstam v Tandalco Corporation NV (1984) 274 EG 393
(referred to in the Charles Follett case) Goff LJ at p 394 said:
It is to be
observed that the Vice-Chancellor, in the Eldonwall case, did not state
that a ‘cushion’ had to be provided in every case; indeed, he made it plain [at
p 434 of the report] that the market rent was to be suitably tempered by
reference to the existing rent ‘where appropriate’.
In that case
the landlord had not applied for an interim rent for well over three years
after the application for a new tenancy had been made so the old rent continued
to be paid during that period. The Court of Appeal upheld the decision of the
judge at first instance that in those circumstances no cushion was appropriate.
Nourse LJ, in
the Charles Follett case, said at p 92:
I start by
observing that the having of a regard to the old rent is mandatory. It then
becomes a matter for the judge’s discretion to decide what, if any,
consequences that regard ought to have on the interim market rent.
Later on he
said:
What was the
intention of Parliament in requiring regard to be had to the old rent? Whilst sympathising with the pleas for
clarification which have been made by Megarry J and others, I think the
circumstances in which section 24A came into existence provide a reliable answer
to this question. By 1969 it had been demonstrated that a tenant, in times of
inflation, could readily spin out the steps prescribed by the 1954 Act and the
rules of court, so as unfaily to prolong the continuation of the old rent under
section 24. The defeat of such practices was the primary legislative purpose of
section 24A. At the same time it was recognised that, while inflation benefits
the tenant during the currency of a lease at an uninflated rent, it exposes him
to an inordinate shock if its consequences are visited on him in full directly
the lease has determined. The legislative purpose of the requirement that
regard should be had to the old rent was, where appropriate, to cushion the
tenant against that shock.
Nourse LJ
upheld a decision of the judge at first instance in the particular
circumstances of that case ‘including no doubt the fact that the old rent had
been agreed on a rent review not much more than seven years beforehand’, a
matter mentioned by the judge at first instance.
Mr Cunningham
said that in all the cases there had in one way or another been a cushion. When
properly analysed the case of Halberstam did in fact have a cushion
because of the long period of continuation of the original rent which the judge
had mentioned. In the case of the Woodbridge he said that there had been
a benefit of a reduction for some ‘propping’ in year one which was carried
forward into subsequent years and that is correct, but it is not the whole
position. Judge Baker in that case also mentioned (and the judge thought that
this was one of his grounds for saying that tenants do not need a cushion) that
‘the original rent was an old rent, the judge thought it had stood for 14 years
in times of great inflation’.
It was clear,
in the judge’s judgment, from the passages he read that there is no mandatory
obligation on a judge to include a cushion and he need not do so where it would
not be appropriate, and he did not accept Mr Cunningham’s argument that there
must be a reduction for the cushion effect in one way or another. On the
specific facts of this case he came to the conclusion that no cushion deduction
is appropriate for two main reasons:
(1) The tenant has already had the very
considerable benefit of a low rent in inflationary times. That has been not
only of benefit to him, of course, but of considerable detriment to the
landlord. The case is as different as it could be from the Charles Follett case
and it seemed to the judge that in the circumstances of this case the
suggestion of a shock element is really rather unreal. He thought that there
was really no reason to perpetuate what inflation and the passage of time have
turned effectively into an injustice to the landlord.
(2) The prior form of offer which the judge
mentioned contained provision for the rent to be at £1,100, fixed before the
user limitation was introduced. The judge thought the consequences of that
limitation on a rent were entirely unforeseen and unexpected and really for
practical purposes something of a windfall to the tenant in the result. He had
already made an allowance in respect of that and he took that into account also
in coming to the conclusion that there is already sufficient cushion.
Mr Dougall in
his argument also said that it would be inappropriate in this case because the
original lease was granted before the 1954 Act was passed. The judge doubted if
that was really a relevant consideration and he did not take it into account.
Conclusion
For those
reasons the judge fixed the interim rent at £70,400 pa.
