Landlord and tenant — Rent review — Disregard of improvements — Section 34 of Landlord and Tenant Act 1954 incorporated by reference — Improvements carried out by third party under agreement with tenant — Whether tenant ‘carried out’ improvements — Whether tenant must pay for improvements — Whether arbitrator erred in deciding that improvements not to be disregarded
By a lease dated 25 March 1979 the appellant tenant held a 65-year term of a building used as 11 serviced apartments. Under the rent review provisions, the rent was to be reviewed to 5% of the freehold value of the property as at the relevant review date on certain assumptions and disregarding those matters in paras (a), (b) and (c) of section 34(1) of the Landlord and Tenant Act 1954. Para (c) concerns improvements within the meaning of section 34(2) carried out by a person who, at the time they were carried out, was the tenant.
In January 1989 the tenant entered into an agreement with F Ltd under which F Ltd would carry out refurbishment works and manage the property, paying the tenant 12.5% of gross takings. In respect of the rent review for 25 March 1993, the arbitrator held that certain improvements carried out by F Ltd should not be disregarded, as F Ltd was not the tenant under the lease at the time the improvements were carried out. The tenant was granted leave to appeal that decision.
Held: The appeal was allowed and the matter was remitted to the arbitrator for reconsideration. Given the statutory language of section 34 of the 1954 Act, a tenant will normally satisfy the statutory requirement if he can establish that he physically effected the works himself or got a third party to do so. However, a tenant may well not satisfy section 34(2) in a case where he got a third party to do the improvements unless he can establish some involvement in identifying, supervising and/or financing them. The extent of the involvement of the tenant in this case was quite sufficient to say that it ‘carried out’ the improvements. It was not necessary for the tenant to have paid for the relevant improvements.
This was an appeal by the tenant, Durley House Ltd, from a decision of an arbitrator, Mr Alan F Daniels FRICS, in a rent review arbitration with the respondent landlord, Viscount Cadogan.
Kirk Reynolds QC (instructed by Howard Kennedy) appeared for the tenant; Nicholas Dowding QC and Anthony Radevsky (instructed by Lee & Pembertons) represented the landlord.
Giving judgment, NEUBERGER J said: This is an appeal brought by Durley House Ltd (Durley), the tenant, under a lease dated 9 October 1979 (the lease) granted by Viscount Cadogan and Cadogan Estates Ltd (Cadogan) for a term of 65 years from 25 March 1979 at an initial rent of £5,000 pa subject to review every seven years.
The property demised by the lease is Durley House (the property), whose use thereunder is limited to 11 serviced apartments. The rent review provisions state that the rent is to be reviewed to 5% of the freehold value of the property as at the relevant review date on certain assumptions and ‘disregarding those matters set out in paras (a), (b) and (c) of section 34 of the Landlord and Tenant Act 1954 as amended by the Law of Property Act 1969.’
The parties were unable to agree the reviewed rent as at 25 March 1993, and, in accordance with the terms of the lease, the determination of that rent was referred to an arbitrator, Mr Alan F Daniels FRICS. One of a number of issues for the arbitrator was whether certain improvements (the relevant improvements) should be taken into account, as Cadogan contended, or whether they should be disregarded, as Durley argued. The answer to that question turns upon the proper construction of section 34 of the Landlord and Tenant Act 1954 (the 1954 Act) and the circumstances surrounding the effecting of the relevant improvements. Section 34 of the 1954 Act (section 34) contains the formula for calculating the rent to be paid under a new tenancy granted to a business tenant under the 1954 Act. As amended by the Law of Property Act 1969, and so far as is relevant for these proceedings, section 34 provides that the rent is to be the market rent disregarding the effect on rent of ‘any improvement carried out by a person who at the time it was carried out was a tenant but only if it was carried out otherwise than in pursuance of an obligation to his immediate landlord and if it was carried out during the current tenancy’.
On 20 January 1989 Durley entered into an agreement (the agreement) with a company called Firmdale Hotels Ltd (Firmdale), whereunder Firmdale agreed to manage the property. References to clauses hereafter are to clauses of the agreement. Clause 1(g) defined an improvement as:
Any improvement carried out by a person who at the time it was carried out was a tenant but only if it was carried out otherwise and in pursuance of an obligation to the immediate landlord and if it was carried out during the current tenancy.
Clause 2 provided that the agreement was conditional on Durley approving conceptual plans and estimates to be submitted by Firmdale for the upgrading and refurbishment of the apartments. Clause 1(f) is expressed in such a way as to suggest that Durley has agreed and approved these conceptual plans and attachments.
Clause 3(2) required Firmdale to fit out the apartments to luxury standards equivalent to, or better than, the published Egon Ronay 75% de luxe standard for London hotels.
Clause 4(1) stated that the agreement was to last for 10 years.
Clauses 5 and 6 set out the detailed management obligations of Firmdale, including, in clause 5(1)(i), a duty to upgrade and refurbish the apartments as necessary to achieve and maintain the apartments to the required luxury standards.
Clause 10(1) imposed on Firmdale the obligation to undertake such works as might be required to upgrade and refurbish the apartments so that they attained the required luxury standard, such work to be carried out in accordance with the conceptual plans and estimates approved by Durley pursuant to clause 2. The detailed plans for such work had to be submitted to Durley and its landlord for approval, and approval of Durley was not to be unreasonably withheld. The work had to be completed, in any event, within two years.
Clause 12 dealt with the sums due to Durley under the agreement. Basically, Durley was to be paid 12.5% of the gross takings enjoyed by Firmdale from the property, subject to a minimum figure.
Clause 14 was concerned with determination. Durley could determine, inter alia, if the apartments were not maintained to a luxury standard. Clause 15 was concerned with assignment and provided, inter alia, that Firmdale was to have a right of pre-emption, and also a right to compensation if an assignee of Durley failed to novate the agreement. Clauses 14 and 15 each contained a provision for a sliding scale of compensation for Durley in certain circumstances. In the first case, the scale appeared to assume that the relevant improvements would be fully amortised by July 1996. In the latter case, the date was January 1999.
The issue between the parties before the arbitrator was whether the improvements effected by Firmdale pursuant to clause 10(1), namely the improvements that were to be completed within the first two years of the agreement and that were to be the subject of the plans referred to in clauses 1 and 2 and 10(1), should be disregarded on the review. The arbitrator held that, as Firmdale was not the tenant in accordance with the terms of the lease at the time the work was carried out, all the relevant improvements should not be disregarded in calculating the freehold value of the property. Durley sought leave to appeal on this issue, and was granted such leave by Mr David Donaldson QC, sitting as a deputy judge of the High Court. Its appeal now comes before me.
The issue between the parties, therefore, is whether, in light of these facts, the works involved in effecting the relevant improvements, which I shall call ‘the relevant works’, can be said to have been carried out by Durley within the meaning of section 34(2). As with many questions of construction, the issue is easier to state than to resolve. As with any question of construction, one must resolve the issue by reference to the words themselves, taking into account their context, the purpose of the provision of which they form part, commercial common sense, and also relying on such assistance as is available from previous decisions.
The reason for including a provision such as that under consideration in this case is not in doubt. In Historic Houses Hotels Ltd v Cadogan Estates [1995] 1 EGLR 117* at p117K-L Dillon LJ said:
The obvious reason is that if a lessee carries out alterations or improvements to the premises at his own expense, and the alterations or improvements will enure to the benefit of the landlord after the expiration of the lease, it would not be fair or reasonable that the rent should be increased on rent review [or, I would add, on renewal of the lease] — so that, [I omit words for reasons which will be apparent to readers of the original]… the alterations or improvements can be rentalised for the rest of the lease.
* Editor’s note: Also reported at [1995] 11 EG 140
Hoffmann LJ said much the same thing at p118F, also referring to improvements made at the tenant’s own expense.
However, the words used by the draftsman are not ‘paid for’ but ‘carried out’. Given that it is (quite correctly, in my judgment) common ground that these statutory words do not require the tenant himself to have physically done the works concerned, the point that must be addressed is what the tenant has to do in relation to improvements in order to have carried them out for the purpose of section 34.
Both Mr Kirk Reynolds QC, who appears for Durley, and Mr Nicholas Dowding QC, who appears for Cadogan with Mr Anthony Radevsky, contend that that must be determined by reference to the facts of the particular case. While I accept that that is clearly right, it seems to me that it may be possible to identify some principles of general application, always accepting that one must be careful not to rewrite the statute or to put any unjustified gloss on the words used by the legislature. Given that it is common ground that the tenant need not physically have done the works himself, and given the statutory language, it appears to me that, in the absence of good reason being shown to the contrary, the tenant will, at least normally, satisfy the statutory requirement if he can establish that he either physically effected the works himself, or got a third party to do so. The tenant will usually satisfy that test if he can show that he had entered into an arrangement with a third party, which arrangement will typically be, but need not necessarily be, a contract, under which that party agreed with the tenant to do the specific works involved in effecting the improvements. Once it is accepted, as it is and plainly must be, that an arrangement under which the tenant gets a building contractor to do the works would not take the tenant out of the ambit of section 34(2) in a particular case, I do not find it easy, at any rate at first sight, to see at what point, or on what logical basis, it could be said that any arrangement with a third party under which the tenant gets that third party to effect the works would take the tenant out of the section. If that is indeed the correct approach to the construction of section 34, and, in particular, the words ‘carried out by the tenant’ in section 34(2), then it seems to me to follow that the result contended for on behalf of Durley in the present case is correct, unless there is some factor that Cadogan can identify that leads to the contrary conclusion.
With that provisional view in mind, I now turn to the arguments raised by the parties as to the construction of section 34 and as to the facts of this case. First, it is said on behalf of Cadogan that this construction does not give the words ‘carried out’ their natural meaning, and that if one gives the words their natural meaning, then, on the facts of this case, one could not say that the relevant improvements were carried out by Durley: they were carried out by Firmdale.
While accepting that arranging for the carrying out of works is not the same as carrying out works, it does not seem to me that the two concepts are so different that to to construe the latter as embracing the former would involve any significant violence to the language used. This is particularly true in the context of section 34(2), where, in almost all cases where the words in question fall to be applied, the works will have been physically effected by a third party, namely a builder. Essentially, the same point applies to the contention that, as a matter of normal language, it was Firmdale that carried out the relevant works. There is no reason why more than one person cannot be said to carry out works. If a tenant employs a builder who physically effects the work, there is no reason, as a matter of ordinary language, and a fortiori in the context of section 34, why one should not be able to say that the work was carried out by each of them.
Second, it is said on behalf of Cadogan that it was Firmdale that decided what works would be carried out; Firmdale that controlled when the works were carried out; Firmdale that chose the builders; Firmdale that paid for the works; and that it was to Firmdale that the benefit of the works solely or principally accrued. Accordingly, it is argued, in light of the lack of any real involvement on the part of Durley in the execution of the relevant works, and as there is no basis for thinking that it paid for, or even contributed towards, those works, both the language of section 34(2) and its purpose as explained in Historic Houses demonstrate that the improvements in this case do not fall to be disregarded under the rent review provisions in the lease. Mr Dowding also points out that the terms of the agreement indicate that Durley would not benefit from the relevant improvements.
Those arguments were very attractively advanced by Mr Dowding, and they have undoubted force. However, I have reached the conclusion that they are not sufficient to dispel the provisional conclusion that I have reached.
So far as the actual involvement of Durley in the relevant works themselves is concerned, it seems to me arguable that all that would be required of a tenant to bring himself within section 34(2) is that he either physically effects the works himself or gets a third party to do so. However, assuming in Cadogan’s favour that more is required of a tenant, it appears to me that the terms of the agreement demonstrate that Durley was more involved in the relevant works than merely requiring them to be done.
First, Durley had to approve the conceptual plans and estimates for the relevant works, as clause 1(f) suggests, or it had to approve them, as clause 2(a) indicates. Second, the carrying out of the relevant improvements was part of the initial condition for the grant of the agreement: to that extent, they differed from any less specific, subsequent improvements that formed the right to carry out. Third, the effect of clause 10(1)was that even the detailed plans for the relevant works required the approval of Durley and that they had to be completed within a specific time. Fourth, the nature and standard of the relevant improvements had, at least to some extent, already been laid down by Durley in clause 3(2). Fifth, the termination provisions in clause 14(1)(a) clearly enabled Durley to put an end to the agreement if Firmdale failed to comply with its obligations in connection with the relevant works. Sixth, Durley had the right to inspect the relevant works.
Seventh, as clause 15(3) recognised, the relevant improvements enured for the benefit of Durley when the agreement expired, at which point the lease would still have some 45 years to run. Indeed, given that Durley was entitled to 12.5% of the gross profits made by Firmdale, and that the improvements were obviously intended to increase the profitability of the business, the beneficial effects of the relevant improvement would have been enjoyed by Durley during the currency of the agreement. So far as the reversionary benefit of the relevant improvements to Durley is concerned, I accept that it is possible, particularly in light of the amortisation provisions in clause 14, that, as at January 1989, the value of the relevant improvements would have been perceived to be of uncertain, if any, value 10 years later. But it is fanciful to think that the parties would have been confident or even that they would have expected that the relevant improvements would have had no significant value by then.
It seems to me that it would be right to add this. A tenant may well not satisfy section 34(2) in a case where he has got a third party to do the works unless he can establish some involvement in identifying, supervising and/or financing the works resulting in the specific improvements concerned. Further, I must admit to real doubt as to whether a tenant could merely rely upon a covenant, such as clause 5(i) in the present case, to justify the contention that improvements carried out by a subtenant or licensee could be treated as having been carried out by him. As I see it, ‘carrying out’ specific improvements can fairly be argued to imply a degree of involvement in their execution. However, that is not a point that needs to be further considered in this case for the reasons I have given; the extent of Durley’s involvement in the relevant works appears quite sufficient for its argument to succeed whatever the minimum standard.
I turn to Mr Dowding’s third argument, namely that section 34(2) cannot apply as Durley did not pay for the relevant improvements. The section does not, as I have mentioned, refer to payment. However, the legislature clearly had the unfairness of double payment in mind: see the remarks that I have quoted from Historic Houses. None the less, if the legislature had had in mind that the question was to be solely whether the tenant had paid for the improvements, it would no doubt have said so. Further, there will be cases where, on any view as to the meaning of section 34(2), improvements will have been carried out by the tenant even though he has not paid for them; for example, where a third party does the works as a favour to the tenant or where a friend or relation of the tenant pays for the work.
I would go along with Mr Dowding to this extent: there is a strong case for saying that section 34(2) should be construed in such a way as to apply normally only to cases where the tenant has contributed towards the cost of the works. However, the very way I have put the point illustrates a practical problem with simply implying a requirement that the tenant pay for the works. What is to happen if the tenant pays for or contributes towards only a proportion of the cost of the works? There is no machinery for a partial disregard. Further, it is hard to believe that the legislature intended there to be a detailed investigation into the terms negotiated between the tenant and a third party for the works in order to decide whether, and, if so, to what extent, the tenant paid for, directly or indirectly, the works.
In my judgment, the requirement that the tenant arranges for the works to be effected not only satisfies the actual words that the legislature has used. It will normally carry with it the consequence that he will have contributed in some way and to some extent to the cost of the works, either by forgoing some benefit or by incurring some liability. Indeed, the facts of this case illustrate the point. If the agreement had not contained the various obligations on Firmdale in respect of the relevant works that it did, one presumes that that would have been reflected in the terms that the parties agreed. Of course, as Mr Dowding said, many of the relevant works may have had to have been carried out in any event, but, at the very least, the requirement to do work within a specific period to a defined standard and in accordance with the reasonable requirements of Durley, and to receive no compensation in respect of them save in very limited circumstances, must, in all probability, have played some part in the parties’ minds during negotiations leading to the agreement.
Mr Reynolds argues that his case derives some support from the decision of the Court of Appeal in Gilmour Caterers Ltd v St Bartholomew’s Hospital Governors [1956] 1 QB 387. The issue in that case was whether a landlord could oppose a new tenancy, and establish that it intended to demolish and reconstruct within the meaning of section 30(1)(f), where it proposed to let a third party do the work, following which the landlord was to grant the third party a building lease. The court unanimously held that the landlord in those circumstances fell within the statutory words.
I agree with Mr Reynolds. Each member of the court used words that have a resonance in this case. Denning LJ said at p391: ‘He [the landlord] intends to have it demolished and reconstructed, and that is sufficient’. At p393, Morris LJ said: ‘It is really a mere matter of machinery, and… in every reasonable sense it is proper to say that the landlords are shown to intend to demolish and reconstruct…’. On the same page, Parker LJ said: ‘the landlord must show that he intends to cause the demolition or reconstruction… whether by a building contractor or in some other way’.
I note that section 30(1)(f) also entitles the landlord to oppose the grant of a new tenancy if he can establish that he intends to ‘carry out’ substantial works of construction. Clearly, the observations I have quoted apply equally to that part of the same paragraph, and one would expect the same words in another part of the same statute to have the same meaning, at least on the face of it.
Mr Dowding advances two arguments for distinguishing that case and those observations. First, he refers to passages in the judgments that emphasise the importance placed by all three members of the Court of Appeal on the control that the landlord had over the proposed demolition and reconstruction: see pp391 and 393. I accept, as does Mr Reynolds, that the landlord had a rather greater degree of control over the work in that case than Durley had over the relevant works in this case, but it does not strike me as at all likely that the court would have reached a different conclusion if the extent of the landlord’s control had been no more than in this case. Certainly, I can see no reason in principle and practice justifying a different result.
Second, it is said that the court is more ready to give a generously wide meaning to section 30(1)(f) because the 1954 Act is not intended to confer security of tenure on tenants at the expense of impeding redevelopment, and no such policy reason applies to the construction of section 34(2). I am not impressed with that argument. Such policy considerations do not seem to have played any part in the reasoning of the Court of Appeal in Gilmour. Further, just as it can be said to be in the public interest to encourage redevelopment, so it can be said to be in the public interest to encourage improvement of property.
In these circumstances, for the reasons I have set out, I consider that Durley’s argument is to be preferred. It follows, I believe, that this appeal must be allowed and the matter remitted to the arbitrator for reconsideration of this award arising out of this decision.
Appeal allowed.
