Landlord and Tenant Act 1954, Part II – New tenancy – Rent – Whether claimant market tenants being entitled to rent reduction on account of income received by defendant landlords from non-market commercial lettings – Whether rents payable including service charge – Preliminary issues determined in favour of the defendants
The claimants were tenants of stalls, shops and offices at Smithfield Market in London who applied to the defendant landlords for new business tenancies to be granted at rents and on terms to be determined by the court under Part II of the Landlord and Tenant Act 1954. There was an extensive car park under the market with spaces for 525 cars and vans. It was used by the claimants and the defendants but was also open to the public to use in return for a charge. The defendants operated the market subject to their obligations under the Metropolitan Meat and Poultry Market Act 1860.
The parties agreed that new business tenancies fell to be granted to the claimants under the 1954 Act. The defendants proposed, inter alia, that there should be a basic rent set together with a service charge varying from year to year to reflect the actual running costs of the market, divided up between the claimants. The claimants proposed that there should be a simple rent with no service charge.
In advance of the main hearing, two preliminary issues were ordered to be tried: (i) whether the claimants were entitled to have their rents reduced on account of income received by the defendants from the market buildings used for non-market purposes, including income from the car park and offices let for non-market purposes, i.e. from commercial offices let to commercial tenants; and (ii) whether the rents to be fixed by the court should be all-inclusive or exclusive, with the tenant’s contribution to services covered by a separate service charge.
Held: The preliminary issues were determined in favour of the defendants.
(1) The claimants’ contention, that the operation of the 1860 Act had the effect that the rents to be set in relation to new tenancies under the 1954 Act should be lower, was flawed and would be rejected. The defendants had acted lawfully in relation to their powers under the 1860 Act. As the market authority, they were entitled to seek to make a profit or to recover their costs or to minimise their losses. It was therefore open to the defendants to use the money from the letting of commercial premises and from the car park to meet part of their expenditure on the cost of maintaining and operating the market and to pay the equivalent sums received as rent or service charges from the claimants into the defendants’ general funds to use in other ways: R v City of London Corporation, ex parte Brewster [1993] EGCS 207 applied.
There was no provision in any of the claimants’ leases that the rent or service charge paid to the defendants had itself to be treated as funds to be spent directly on market purposes. Although the defendants were obliged to provide the services stipulated in the leases, and would have to spend money to do so, the leases did not specify where that money was to come from. Nor was there any statutory limitation in the 1860 Act, as amended by the City of London Act 1963, on the amount which the defendants could charge its tenants, e.g. to restrict it to charging whatever might be the sum required to maintain and operate the market after taking into account what it received from letting the commercial premises or from the car park. Moreover, since the defendants were not under any legal obligation to use the relevant commercial office and car park income for the benefit of the tenants, in order to lower their rents, there was no reason why the existence of obligations under the 1860 Act would cause a lower rent to be agreed by a notional willing landlord and a notional willing tenant for the purposes of setting rent under section 34 of the 1954 Act.
(2) Section 34(l) of the 1954 Act, which provided for the rent payable under a new tenancy to be determined by the court, if not agreed, presupposed that the terms of the tenancy had to be determined and known before the court could determine the rent which was to be set, because the amount of the rent would critically depend upon the package of rights and obligations contained in the terms of the tenancy which was to be granted pursuant to the order of the court under section 35: O’May v City of London Real Property Co. Ltd [1982] 1 EGLR 76; (1982) 261 EG 1185 applied.
As the House of Lords made clear in O’May, the court should not generally exercise its discretion under section 35 to change the basic parameters of the commercial arrangement between the landlord and the tenant. However, there were significant differences between the present case and the position in O’May. Applying the guidance in O’May as a whole, the defendants had shown that there were good and sufficient reasons to justify a change in the payment structure under the new tenancies back to the original structure of a rent and variable service charge which had formed part of earlier leases between the parties. The choice between the different payment structures contended for by the two sides did not involve the same substantial shift in the basic parameters of the commercial arrangement as had been in issue in O’May. This was an unusual case for the purposes of applying section 35 and the same weight could not be attached to the existing terms of the leases as would be appropriate in a more typical case.
The principle governing the new tenancies was that the defendants should be able to recover in full from the claimants the ongoing operational and maintenance costs of running the market and that principle would most fairly and accurately be reflected by the defendants’ proposal that the payment terms should include a variable service charge. Current market practice supported the inference that adoption of a variable service charge to cover the provision of services by a landlord to a tenant in multi-occupied commercial premises was generally regarded as fair both by landlords and tenants: Hyams v Titan Properties Ltd (1972) 24 P & CR 359 considered.
James Dingemans QC and Paul Letman (instructed by Kidd Rapinet) appeared for the claimants; Martin Rodgers QC and Joseph Ollech (instructed by Field Fisher Waterhouse LLP) appeared for the defendants.
Eileen O’Grady, barrister
