Rent review clause in lease–Revision to represent ‘the full yearly market rental’ of the premises (factory buildings and land in Liverpool) let with vacant possession on open market as a whole between a willing lessor and willing lessee–Questions as to assumptions to be made by arbitrator appointed to determine the rent at the end of third year of 21 years’ term–Importance of keeping in mind the distinction between the actual landlord and tenant and the hypothetical willing landlord and tenant–The latter abstractions ‘in the hypothetical life of hypothetical higglers’–Illuminating judgment by Donaldson J (later approved by Court of Appeal: see below)
This case came
before the High Court because the arbitrator, Roger Weston FRICS, appointed in
default of agreement between the parties to determine the revised annual rent
payable in pursuance of a rent review clause in respect of ‘The Walton Works’
in Liverpool, stated his award in the form of a special case raising a question
of law for the decision of the court. The landlords were F R Evans (Leeds) Ltd
and the tenants English Electric Co Ltd. The facts as to the lease, the
contentions of the parties before the arbitrator, the arbitrator’s findings,
and the question of law for the decision of the court are fully set out in the
judgment of Donaldson J. It will be seen from the note at the end of the
judgment that it was approved by the Court of Appeal, who dismissed the
tenants’ appeal against it.
I Glidewell QC
and M Barnes (instructed by Lewis Lewis & Co) appeared for the plaintiffs;
R H Bernstein QC and E Nugee (instructed by Travers Smith, Braithwaite &
Co) represented the defendants. The same counsel and solicitors appeared in the
appeal to the Court of Appeal.
Giving
judgment, DONALDSON J said: This case is concerned with the meaning and effect
of a rent review clause. The parties were unable to agree upon the amount of a
revised annual rent and, in accordance with the terms of the lease, the matter
was referred to the arbitration of Roger Weston FRICS. He has stated an award
in the form of a special case.
The subject
matter of the lease is ‘The Walton Works,’ which comprises land and factory
buildings in Liverpool. The works are exceptionally large premises–60 acres in
all, with buildings providing nearly 1m sq ft of floorspace. The lease, dated
February 7 1974, is for a term of 21 years from October 1 1973. It gave both
parties the right to require a review of the rent at the end of the third and
12th years of the term. The lessee had the further right to determine the lease
at the end of the 14th year of the term. This case concerns the review at the
end of the third year. English Electric Co Ltd are the original lessees and F R
Evans (Leeds) Ltd are the assignees of the interest of the original lessor, the
Secretary of State for Defence. I shall refer to them respectively as the
tenants and the landlords rather than as lessee and lessor, because the
similarity of the latter terminology makes for confusion.
The
arbitration lasted for nine working days. The original rent was £90,000 per
annum. The landlords contended that this should be raised to about £700,000.
The tenants contended that the new rent should be £180,000. On evidence and
facts with which I am not concerned, the arbitrator found that on no view
should the rent be more than £515,000 or less than £290,000. Which, if either,
was appropriate, depended upon the answer to a question of law which appears in
the special case. Only a small part of the lease is relevant to a decision on
this question of law. That part is as follows:
4(2) As from the end of the third year . . . of
the said term the yearly rental hereunder shall if either party so desires . .
. be revised so as to represent the full yearly market rental as hereinafter
defined of the demised premises as they shall be at the end of the third . . .
year of the said term . . . (assuming the demised premises to be fully
maintained and repaired in accordance with the lessee’s covenants in this lease
contained).
4(4) The full yearly market rental for the purpose
of this lease shall mean the rent at which the demised premises are worth to be
let with vacant possession on the open market as a whole between a willing
Lessor and a willing Lessee for the remainder of the said term outstanding at
the end of such third or twelfth year of the said term as the case may be upon
the terms and conditions of this lease (excepting stipulations in this lease as
to the amount of the rent but including like provisions as to rent revision
from any later date herein specified) without any fine or premium being taken
and there being disregarded:
(i) any effect on rent of any tenants or trade
fixtures or fittings installed in the demised premises by the Lessee or any
occupying tenant or of any improvement or additions carried out to the demised
premises not more than twenty-one years before the First day of October one
thousand nine hundred and seventy-six otherwise than in pursuance of any
obligation under this lease.
(ii) any effect on rent of the fact that the
Lessee or its tenant has been in occupation of the demised premises and
(iii) any goodwill attached to the demised premises
by reason of the business carried on thereat.
The issue of
law between the parties concerns the assumptions which are to be made in
assessing this full yearly market rental as defined.
The tenants
submit that the arbitrator should assume:
(i) that in the hypothetical market there is at
least one hypothetical tenant bidding for the lease and (if it be found that
there would be no other bidder than English Electric Company Limited) that that
hypothetical tenant is English Electric Company Limited: and
(ii) that the rent must be determined at an amount
that the hypothetical tenant would agree with the claimants in the light of all
the bargaining advantages and disadvantages that would have existed at the 1st
October 1976 and in particular on the assumption that, if the parties failed to
reach agreement on the rent, the hypothetical tenant was free to occupy two or
more smaller properties as an alternative to taking a lease of the subject
property.
The landlords
submit that the arbitrator should assume:
(i) that there is a person (who may or may not be
English Electric Company Limited) who is willing to take the subject property
as a whole on the terms of the lease offered (other than rent) and to enter
into meaningful negotiations to arrive at a fair rent, that is to say a rent
that is fair in all the circumstances of the case including rental values
prevailing in the area: and
(ii) that the rent must be determined at an amount
that the claimants would agree with such person in all the circumstances, including
in particular the circumstances (if such be found to exist)
(a) that there is no other person willing to take
a lease of the subject property on the terms of the lease being offered and
(b) that there is no other property on the market
which provides the accommodation and facilities provided by the subject
property but disregarding the possibility that the parties would fail to reach
agreement on a rent for the subject property.
The question
of law is whether either and, if so, which of these submissions is correct.
As I have
already said, the arbitrator heard a considerable body of evidence and found
facts with which I am not concerned. The only facts material to this question
of law have been found by the arbitrator and are set out in the special case.
They are that:
1. There is
no other property on the market which provides the accommodation and facilities
provided by the subject property,
2. If the
subject property had been vacant and in hand on the 1st October 1976:
(a) the landlords could have adapted the property
for letting in parts and could thereafter have let it in parts and
(b) It is possible but unlikely that the
landlords could have let the property on long lease to a single tenant who
would thereafter adapt the property for subletting in parts and sublet it in
parts.
3. The
Findings set out in 2 above are subject to the following observations:
(a) That in adapting the subject property for
letting or subletting in parts the landlords or their single tenant would need
to demolish parts thereof in order to provide access ways and loading
facilities.
(b) That any letting or sub-letting of the
subject property in parts would entail considerable delays in finding tenants
for all the various parts.
(c) That any single tenant intending to adapt the
subject property for sub-letting in parts would require a lease for a term of
much longer than 18 years and would expect a rent free period and a reduced
rent during the early years of the term.
4. That apart
from the present tenants it is very unlikely on the available evidence and on
the state of the market that there would have been a potential tenant in the
market for the subject premises on the terms of the lease offered.
5. That in
October 1976 if the present tenants had not been in occupation of the subject
premises they would not have made any bid for the lease being offered.
6. That the
present tenants in October 1976 could have split their operation into parts and
could have moved each of those parts into smaller alternative premises in the
United Kingdom.
Curiously
there is no authority giving guidance upon how a rent review clause of this
nature is intended to be operated. Despite the diligent research of counsel,
all that has been discovered are authorities on rating valuation, compulsory
purchase and taxation. These authorities are not irrelevant, but they apply
only by analogy. In the circumstances, I propose to start by examining the
instructions contained in the lease. The first, and most important, instruction
is that the new rent is to be that which the premises are worth for letting on
the open market with vacant possession on October 1 1976. It is implicit in
this instruction, and is expressed in the later part of clause 4 (4), that the
tenants are to be deemed to have moved out or to have never occupied the
premises. The second instruction is that the premises are being offered in
their actual condition (subject to the assumption as to maintenance and repair)
on an 18-year lease, having the same terms mutatis mutandis as the
present lease. The third instruction is that there is in fact a rent upon which
a willing lessor and a willing lessee could and would agree as being the rent
which the premises were worth on October 1 1976 for an 18-year term. This is
implicit in the clause and is confirmed in fact by the arbitrator’s alternative
findings.
The first, and
perhaps the most important, conflict between the parties is whether, in the
application of the clause, the willing lessor is to be identified with the
landlords and the willing lessee with the tenants. In a sense the willing
lessor must be the landlords because only they can dispose of the premises, but
for the purposes of the clause the landlord is an abstraction–a hypothetical
person with the right to dispose of the premises on an 18-year lease. As such
he is not afflicted by personal ills such as a cash flow crisis or importunate
mortgagees. Nor is he in the happy position of someone to whom it is largely a
matter of indifference whether he lets in October 1976 or whether he waits for
the market to improve. He is, in a word, a willing lessor. He wants to let the
premises at a rent which is appropriate to all the factors which affect
marketability of those premises as industrial premises–for example,
geographical location, the extent of the local labour market, the level of
local rates, and the market rent of competitive premises, that is to say,
premises which are directly comparable or which, if not directly comparable,
would be considered as viable alternatives by a potential tenant.
Similarly, in
my judgment, the willing lessee is an abstraction–a hypothetical person
actively seeking premises to fulfil needs which these premises could fulfil. He
will take account of similar factors, but he too will be unaffected by
liquidity problems, governmental or other pressures to boost or maintain
employment in the area and so on. In a word, his profile may or may not fit
that of the English Electric Co Ltd, but he is not that company.
Against this
background I turn to the findings of fact in order to consider their relevance:
(a) The fact that there is no other property on
the market which provides the accommodation and facilities provided by the
Walton Works is certainly relevant. But its effect upon the negotiations has to
be balanced by two other factors. First, while the hypothetical tenant is a
willing lessee, he is not an importunate one. He wishes to take a lease of the
premises, but he is operating in a commercial field and in deciding what to
offer by way of rent, will take account, covertly or overtly, of the
alternative of taking a lease of two or more other premises. This is not to say
that he would prefer that solution. This will depend upon the level of rent
which is under consideration. He is a willing lessee and is quite content to
take the Walton Works at the right price. It is just that he is not considering
the proposition or negotiating in a vacuum.
(b) The fact that the property could be
subdivided and let in parts or sublet and the advantages and disadvantages of
that approach are irrelevant. The clause contemplates a letting as a whole.
(c) The fact that it is very likely that English
Electric Co Ltd would have been the only potential lessee is relevant, but its
relevance is indirect. It does not matter whether the only potential lessee was
this company or the XYZ Co Ltd. What matters is that in the state of the market
there was not likely to be more than one willing lessee. But the effect of this
fact is not decisive because this single potential lessee is to be assumed to
be a willing lessee–neither reluctant nor importunate, but willing. Just as the
hypothetical lessor cannot rely overmuch upon the fact that no property similar
to Walton Works is available on the market, so the hypothetical lessee cannot
rely too much upon the fact that he has no competitors–he is, and is known to
be, a willing lessee. Furthermore, it is known that he will remain a willing
lessee so long as the willing lessor does not press his
lessor and at which a willing lessee would cease to be such.
If authority
be required for the proposition that monopoly positions on either or both sides
do not render hypothetical agreements impossible, it is to be found in Tomlinson
v Plymouth Argyle Football Co Ltd [1960] EGD 330, a rating case, and in IRC
v Clay [1914] 3 KB 466, a taxation case.
(d) The fact that if the tenants had not been in
occupation in October 1976 they would not have made any bid for the lease being
offered is wholly irrelevant. I am quite prepared to accept that the tenants
are most unwilling lessees. This does not matter. The arbitrator’s concern is
with the attitude of the hypothetical willing lessee, who is not in
occupation of the premises. The clause assumes that there is such a person and
it is nothing to the point to prove that there was not.
(e) The fact that the tenants in October 1976
could have split their operation into parts and could have moved those parts
into smaller alternative premises in the United Kingdom is also quite
irrelevant. It is irrelevant because it confuses the hypothetical lessee with
the actual tenants. Certainly the hypothetical lessee would consider this
alternative and it would affect the amount of the rent which he would be prepared
to offer, but he would remain a willing lessee. The extent of the influence
exerted by this alternative would depend upon the extent to which more than one
lease and divided premises might be expected to increase his costs. And it is
not English Electric’s costs which come into the equation, but average and
assumed costs of a hypothetical potential lessee.
I now turn to
the respective contentions of the parties.
The
tenant’s contentions
(i) I accept that it is to be assumed that there
is at least one hypothetical tenant bidding for the lease. Indeed I would go a
little further than the tenants have gone. On the findings of fact, which were
of course unknown to the tenants when their contention was formulated, the
arbitrator would be justified in proceeding on the basis that, although there
was one person who was willing to become lessee of the Walton Works, it was
unlikely that there would be more than one.
I reject
entirely the proposition that the potential lessee either is, or necessarily
has any of the characteristics of, the English Electric Co Ltd. He is a
complete abstraction and, like the mule, has neither pride of ancestry nor hope
of posterity. He is someone whose needs are such that, in relation to the
Walton Works, he is a willing lessee.
(ii) I accept that the rent must be determined at
an amount which the hypothetical tenant–the willing lessee–would agree. I do
not accept that the person with whom he has to agree that rent is the landlord.
Such a concept imports the personal circumstances of F R Evans (Leeds) Ltd. The
willing lessee has to agree this rent with a hypothetical landlord–the willing
lessor.
The
negotiations are assumed to be friendly and fair, but, subject to that
qualification, would be conducted in the light of all the bargaining advantages
and disadvantages which existed on October 1 1976. But these advantages and
disadvantages are those which affected the property and any lessee of that
property. The existence or absence of rival potential lessees of the property
is merely one indication of the balance of advantage and disadvantage and by no
means one which is necessarily decisive.
I do not agree
that the hypothetical negotiations–or ‘higgling of the market place’ to use the
delightfully archaic phrase which occurs in some of the authorities–are to be
conducted on the assumption that if the parties failed to reach agreement on
the rent, the hypothetical tenants will be free to occupy two or more smaller
properties as an alternative to taking a lease of the Walton Works. The parties
will reach agreement and the willing lessee will not take up any of the
alternative options. However, in the course of the higgling, he will point out
to the willing lessor, and the willing lessor will accept, that taking two or
more alternative properties is a theoretically available alternative option,
the relative advantage or disadvantage of which will be reflected in the rent
which is ultimately agreed. In the absence of real higglers, it is for the
arbitrator to assess the reality of such an alternative option, its relative
advantage or disadvantage and the extent to which the new agreed rent would
reflect those facts.
The
landlord’s contentions.
(i) I accept that there is a person who is
willing to take the Walton Works as a whole on the terms of the lease offered
(other than rent), but I do not accept that that person may be the English
Electric Co Ltd. For the purposes of fixing the new rent, he is not.
I accept that
this person is willing to enter into meaningful negotiations, much though I
dislike the word ‘meaningful’, which in this context I take to mean neither
more nor less than ‘genuine.’
I accept that
the negotiations are designed to arrive at the appropriate rent in all the
circumstances which in fact affect the property and in theory affect the
hypothetical lessor and lessee. I would not myself have used the expression
‘fair rent’ which, like ‘meaningful,’ has in recent years been much bandied
about in the political arena and may have become distorted in the process.
However, I do accept that the appropriateness of the rent is to be judged in
the light of all the circumstances of the case–other than those relating to the
landlord and tenant as actual juridical persons–and that one of those
circumstances is the rental values prevailing in the area. There are, of
course, many others. The rent for which each is negotiating is that which is
high enough to be acceptable to a willing lessor and low enough to be
acceptable to a willing lessee. In the hypothetical life of hypothetical
higglers, there is always one rent and never more that one rent which meets
these criteria. If the arbitrator is heard to murmer ‘Oh happy hypothetical
higglers’ this is only too understandable. He has my sympathy.
(ii) I do not agree that the rent is one which F R
Evans (Leeds) Ltd would agree. The person who has notionally to agree the rent
is the hypothetical willing lessor.
I accept that
the rent has to be agreed in the light of all the circumstances which in fact
affect the property and in theory affect the hypothetical lessor and lessee.
Any circumstance which affects the actual landlord and the actual tenant, but
which would not affect the hypothetical lessor and lessee is irrelevant. I
agree that these circumstances include, but stress that they are not limited
to, the fact that it is unlikely that there will be more than one willing
lessee and that in October 1976, which was the relevant date, there was no
other property on the market which provided the accommodation and facilities
provided by the Walton Works.
I also agree
that the possibility of the parties’ failing to reach agreement is to be
disregarded–to borrow and adapt an immortal phrase ‘We are not interested in
the possibilities of a failure to reach agreement. They do not exist.’ But as the negotiations proceed each will be
considering whether it would not be better at a given level of rent to break
off the negotiations. True it is that they will resist these temptations, but
the extent to which they operate upon their respective minds will be reflected
in the rent which will, notionally, be agreed in the end.
My comments on
the respective contentions of the parties have involved some degree of
repetition because these contentions overlap in some respects. For this I
apologise. It will be seen that I do not wholly agree with either party’s
contentions and in some ways my disagreement is as much or more with what is
omitted than with what is included.
I have been
much pressed to decide in favour of one or other contention as this would avoid
a remission to the arbitrator with some degree of further delay and expense.
However, what is at stake is £225,000 per annum for a period of nine years–over
£2m. I am inclined to think that the views which I have
sure that the arbitrator would adhere to his provisional assessment of £515,000
per annum if he were to read and apply those views. Justice therefore requires
that the award be remitted to him for the making of a final award. Let me
stress that he is completely free to adhere to the figure which he previously
thought was appropriate or to substitute any other figure. He has heard all the
evidence and I do not contemplate that he will require further evidence or
argument, although I do not wish to fetter his discretion in any respect.
I therefore
answer the question of law by holding that it is not correct to adopt wholly
the contentions of either party and that, within the scope of disagreement
indicated by the special case, the assumptions which should be made are those
set out in this judgment.
Note
An appeal from
the above decision of Donaldson J came before the Court of Appeal on November
11 1977. The Court of Appeal consisted of two judges only, this being
technically an interlocutory appeal. The judgment of the court was given by
Browne LJ at the invitation of Stephenson LJ. The court fully approved the
decision and reasoning of Donaldson J and rejected criticisms made on behalf of
the appellants. The appeal was dismissed with costs in the Court of Appeal and
the court below. Leave to appeal to the House of Lords was refused. It is not
proposed to report the Court of Appeal judgment. It may be noted that, following
the judgment of Donaldson J, the arbitrator, on September 22 1977, made an
award determining a rent of £515,000 per annum.
