Improvements – Rent review clause incorporating disregards contained in section 34 of Landlord and Tenant Act 1954 – Property improved by third party pursuant to management agreement concluded with tenant – Arbitrator ruling that improvements were not carried out by tenant – Tenant’s appeal allowed
In October 1979 the appellant tenant (Durley) took a 65-year lease of Durley House, London, on terms restricting use to the provision of 11 serviced apartments. The rent was reviewable every seven years to 5% of the freehold value as at the relevant date, there falling to be disregarded “those matters set out in paragraphs (a) (b) and (c) of section 34 of the Landlord and Tenant Act 1954 as amended…”. In January 1989 Durley entered into a 10-year agreement (the management agreement) with Firmdale Hotels Ltd (Firmdale), whereby Firmdale undertook to manage the property and account to Durley for 12.5% of the gross takings. Firmdale further undertook, within two years, to fit out the apartments to luxury standards equivalent to or better than “the published Egon Ronay 75% deluxe standard for London hotels”, such work to be carried out in accordance with conceptual plans and estimates to be submitted by Firmdale and approved by Durley. In the event of Durley assigning the lease to a party unwilling to adopt the agreement, it was provided that Firmley would be entitled to compensation, such compensation to be on a sliding scale that assumed that the relevant improvements would be fully amortised by January 1999. A similar scale was to be applied should Firmley exercise a right of pre-emption provided for in the agreement.
Having failed to agree a reviewed rent as at 25 March 1993, Durley and the respondent landlord referred the determination to an abitrator, who ruled, inter alia, that the works carried out by Firmdale could not be disregarded when valuing the freehold, as they had not, in the words of section 34, been “carried out by a person who… was the tenant”. Durley appealed to the High Court.
Held: The appeal was allowed.
1. There was no doubt that the reason for including such a provision was to avoid the unfairness of rentalising alterations or improvements effected at the tenant’s expense: see per Dillon LJ in Historic House Hotels Ltd v Cadogan Estates Ltd [1995] 1 EGLR 117 at p117. Furthermore, it was common ground that the work did not have to be carried out physically by the tenant. With those matters in mind, the court could take the provisional view that work carried out by a contractor or other party by arrangement with the tenant fell within the provision, unless the landlord could identify some factor leading to a contrary conclusion. Assuming, in the landlord’s favour, that the tenant had to do more than require a third party to do the work, it could not be said that Durley’s involvement was so limited under the terms of the management agreement, which provided not only for prior approval by Durley but also for subsequent control in the shape of powers to inspect and to terminate if the fitting-out obligations were not fulfilled. It was further made clear elsewhere in the agreement that the improvements, whatever their value, would enure for the benefit of Durley at the end of the agreement.
2. The section was not expressly limited to improvements that had been paid for, nor could any such limitation be implied without posing problems of what was to happen in the case of part payments or indirect payments. There was no machinery for a partial disregard.
3. Durley’s case was further supported by the reasoning of the Court of Appeal in Gilmour Caterers Ltd v St Bartholomew’s Hospital Governors [1956] 1 QB 387 on the analogous issue of a landlord’s intention to demolish and reconstruct where the grant of a new tenancy was opposed under section 30(1)(f) of the 1954 Act.
4. It was doubtful whether a tenant could claim a disregard where he had done no more than require a subtenant or licensee to carry out the work; however, that was not a point that required further consideration in the present case.
Kirk Reynolds QC (instructed by Howard Kennedy) appeared for the appellant; Nicholas Dowding QC and Anthony Radevsky (instructed by Lee & Pemberton) appeared for the respondent.
Alan Cooklin, barrister
