Landlord and tenant — Landlord and Tenant Act 1954 — Terms of new tenancy — Whether rent review clause to be upwards only or upwards or downwards
The plaintiff
applied by originating application for the grant of a new tenancy under Part II
of the Landlord and Tenant Act 1954 following the expiration of a 21-year term
that it held granted from July 1 1970. The parties agree all the terms of the
new lease save for certain provisions of the rent review clause. The defendants
agreed to grant the plaintiff a nine-year term of a shop in the Bettws Shopping
Centre, Newport, at a rent of £4,600 pa subject to a rent review every three
years. The defendants contended that the rent at review should be upwards only,
whereas the plaintiff sought an upwards or downwards clause.
the landlords and would be fair and reasonable in all the circumstances. Such a
clause should therefore be included in the new lease.
The following
cases are referred to in this report.
Amarjee v Barrowfen Properties Ltd [1993] 2 EGLR 133; [1993] 30 EG
98
Blythewood
Plant Hire Ltd v Spiers Ltd [1992] 2 EGLR
103; [1992] 48 EG 117
Boots the
Chemists Ltd v Pinkland Ltd [1992] 2 EGLR
176; 28 EG 118
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
Stylo
Shoes Ltd v Manchester Royal Exchange Ltd
(1967) 204 EG 803
Jonathan Brock
(instructed by Donne Mileham & Maddock, of Brighton) appeared for the
plaintiff tenant; Caroline Stent (instructed by the solicitor to Newport
Borough Council) represented the defendant landlords.
Giving
judgment, JUDGE GLYNN MORGAN said: By originating application dated July
4 1991, the plaintiff applies to the court for the grant of a new tenancy
pursuant to Part II of the Landlord and Tenant Act 1954. The premises to which
the application relates are the Corner Shop, 6-8 Bettws Shopping Centre,
Newport. The defendants had granted a 21-year lease to the plaintiff from July
1 1970 at a rent of £2,200 pa. The lease expired by effluxion of time on June
30 1991. The plaintiff is still in occupation of the demised premises, paying
an interim rent.
It has been
agreed between the parties that the defendants will grant a new lease of the
premises. All the terms of the lease have been agreed save for one, upon which
the decision of the court has been sought. The lease will be for a nine-year
term at a rent of £4,600 pa with a rent review every three years. The sole
issue for the decision of the court is whether, as the defendants contend, at
each review date the rent should be equal to the rent previously payable or
such revised rent as may be ascertained, whichever be the greater, or, as the
plaintiff contends, the rent should be such revised rent as may be ascertained.
In more simple terms, the defendants contend that the rent review should be
upwards only and the plaintiff contends that the rent review should be upwards
or downwards.
Part II of the
Landlord and Tenant Act 1954 which deals with business tenancies gives wide
powers to the court to grant and settle the term on which the business tenant
is to have a new lease. Section 33 relates to the duration of the tenancy.
Section 34 relates to the rent under a new tenancy. Section 34(3), as amended
by the Law of Property Act 1969, provides:
where the
rent is determined by the Court, the Court may, if it thinks fit, further
determine that the terms of the tenancy shall include such provisions for
varying the rent as may be specified in the determination.
Section 35
relates to other terms of a new tenancy.
It was decided
by Cross J in Stylo Shoes Ltd v Manchester Royal Exchange Ltd
(1967) 204 EG 803 that the court, in its discretion, could provide for a rent
review clause which provided for review of the rent downwards as well as
upwards.
I was referred
to a number of cases where an upwards or downwards rent review has been
considered: in Janes (Gowns) Ltd v Harlow Development Corporation
(1979) 253 EG 799 Judge Finlay QC, sitting as a judge of the High Court,
ordered a rent review clause, five-yearly upwards or downwards. In Boots the
Chemists Ltd v Pinkland Ltd [1992] 28 EG 118* Judge Thompson ordered
a rent review clause, five-yearly, upwards and downwards. In Blythewood
Plant Hire Ltd v Spiers Ltd [1992] 48 EG 117† Judge Diamond QC declined to order a rent
review clause upwards or downwards and ordered that the clause to be inserted
in this lease should be an upwards-only review clause. In Amarjee v Barrowfen
Properties Ltd [1993] 30 EG 98** Judge Beddard ordered a rent review
clause, five-yearly, upwards or downwards.
*Editor’s
note: Also reported at [1992] 2 EGLR 176.
† Editor’s
note: Also reported at [1992] 2 EGLR 103.
**Editor’s
note: Also reported at [1993] 2 EGLR 133.
I heard the
expert evidence of Mr Jerry A Burton FSVA ACIArb, on behalf of the plaintiff.
His report dated September 27 1993 with appendices was put in evidence. I heard
the expert evidence of Mr Wayne F Morgan ARICS, on behalf of the defendants.
His report dated October 7 1993 with appendices was put in evidence.
On behalf of
the landlords, Miss Caroline Stent submitted that the purpose of rent review
clauses in business leases was to protect the long-term interest of the
landlord and to protect the value of the landlord’s capital investment and the
yield to be obtained from such capital investment. Where there is a rent review
clause upwards only in a business lease, the tenant is able to procure better
terms of the lease than he otherwise might get, for example in the length of the
lease, the basic rent, repairing and other conditions. Miss Stent submitted
that market conditions in Newport are such that any further decline in rental
values is unlikely and that the demised premises at Bettws were in any event at
the bottom end of the market in Newport, so that there was no justification for
a downwards rent review. Miss Stent further submitted, that market conditions
in Newport were quite different from those which have prevailed and which are
likely to be in future in London and South East England. Hence, the views which
prevailed in all the cases, except that decided by Judge Diamond QC, were not
relevant in consideration of the present case. She submitted that the correct
approach of the court should be to consider the concept of these fairness of
this landlords and to this tenant in the prevailing market conditions and that
such approach must lead to the conclusion that an upwards-only rent review
clause was the fair and appropriate form of order.
Mr Jonathan
Brock submitted, on behalf of the tenant, that except for the decision of Judge
Diamond QC, who decided as he did without hearing any evidence on the point,
that all the recent authorities shewed that an upwards and downwards rent
review clause was appropriate in modern conditions. Only a landlord could
benefit from an upwards-only rent review clause, whereas there were benefits to
landlord and tenant from an upwards and downwards rent review clause. An
upwards and downwards rent review clause necessarily produces a fair market rent.
Why, Mr Brock asked, should a landlord obtain or preserve institutional
benefits at the expense of a tenant?
Market conditions should be considered. Rents have dropped in Newport
over the past few years. Neither of the expert witnesses could guarantee that
rents at Bettws would not go down in three or six years’ time. Where rents are
going down, it would be grossly unfair for rents to go up pursuant to a review.
The facts of this case justify the ratio of all the recent authorities, except
for the decision of Judge Diamond QC. Applying the concept of overall fairness
to both sides, the court should hold in favour of the tenant and to decide that
an upwards and downwards rent review clause was appropriate in this case.
The shopping
centre at Bettws was built in the 1960s to service a large council housing
estate. It comprised a development of 24 trading units, together with a public
library, health centre and a supermarket. Mr Burton annexed a plan dated
September 27 1993 to his report, which set out the occupancy of the trading
units. I am satisfied as to the accuracy of the information shewn in the plan.
Of the original 24 shops, 11 now trade as retail units, four are occupied by
other occupants such as a dentist, five are occupied by the defendant as a housing
office, two are occupied by the police and two are vacant.
In October
1991, William Hill Bookmakers and Gateway Supermarket renewed the leases of the
premises occupied by them for terms of 15 and 20 years respectively subject to
five-yearly upwards-only rent reviews. I accept the view, put forward by Mr
Burton, that at the time when the renewal of these leases was being negotiated
the effects of the recession were not being felt to the same extent as at the
present time and that the prevailing market conditions were different. I also
accept that a three-year rent view, albeit in a
than a five-year review.
In the 1980s
there was a significant growth in business rents in London and South East
England. The content of that growth was not so pronounced in South Wales and in
particular in Newport, though growth there undoubtedly was. I accept the
evidence of Mr Burton that, in general terms, units at the shopping centre at
Ringland, another large council estate in a different part of Newport, are
over-rented, while rents in the centre of Newport at Commercial Street have
dropped. Mr Morgan accepted that rents in the prime areas of Newport have not
risen, and that there were places in Newport where retail tenants were paying
too much rent. He made the point, which I accept, that secondary and tertiary
trading areas do not experience the same peaks and troughs of the local market
as the primary trading areas. I accept that Bettws Shopping Centre is at the
bottom end of the local market.
The effects of
the recession over the past year or two have been more exaggerated in London
and South East England than in South Wales. Neither of the expert witnesses was
confident that the end of the recession is in sight, though Mr Morgan was more
optimistic than Mr Burton. Where there is a conflict between them, I prefer the
view of Mr Burton that ‘the recession is still bumping along the bottom’ and
that Newport is below average in recovering from the effects of the recession.
In O’May
v City of London Real Property Co Ltd [1982] 1 All ER 660* the House of
Lords held that since, under section 35 of the Landlord and Tenant Act 1954,
the court was required to have regard to the terms of the current lease, the
burden of persuading the court to change those terms rested on the party
proposing the change and, although the court had wide discretionary powers to
change the terms and impose new terms, the party proposing the change had to
show that the change was fair and reasonable in all the circumstances. At
p671F-G, Lord Wilberforce said:
There is no
obligation under section 35 of this Act, to make the new terms conform with
market practice if to do so would be unfair to the tenant. And there is no
inherent necessity why the terms on which existing leases are to be renewed
should be dictated by those of fresh bargains which tenants may feel themselves
obliged to accept. The court has to compare the advantage desired by the
landlord with the detriment to be suffered by the tenants, and to consider
whether any monetary compensation offered against that detriment ought fairly
to be imposed on the tenants in exchange for the acceptance of that detriment.
*Editor’s
note: Also reported at (1982) 261 EG 1185, [1982] 1 EGLR 76.
It is the case
that, until about 30 years ago, rent review provisions were not usual in leases
for 21 years or less. But inflation completely changed the position. In the
case of leases which contained no rent review provisions, landlords saw the
return on their investment dwindle to relatively insignificant levels towards
the end of the life of the lease. So the practice grew of incorporating
provisions for rent reviews at various intervals to enable landlords to
maintain the level of their rental return during the period of high inflation.
It is true
that the particular facts of this case can be distinguished in various ways
from the facts of the cases cited to me and to which I have referred. I bear in
mind that I have to have regard to the provisions of the old lease, while at
the same time bearing in mind that all the terms of the new lease, save for the
rent review case, have been agreed. I bear in mind that the order which I make
must be fair and reasonable in all the circumstances.
On the facts
of this case, I have come to the conclusion that to order a rent review clause
upwards only would be unfair to the tenant and would not be fair and reasonable
in all the circumstances. On the other hand, a rent review clause upwards or
downwards would not be unfair to the landlords and would be fair and reasonable
in all the circumstances. It is not inevitable that the rent would be adjusted
downwards on a review. It seems to me that the rent is as likely to be adjusted
upwards as downwards. Like Judge Thompson in Boots the Chemists v Pinkland
Ltd I do not have a crystal ball. It seems to me that an upwards and
downwards rent review clause is fair to both parties; at reviews, the rent to
be determined will largely depend on prevailing market conditions.
Accordingly, I
rule that clause 2 B(b) of the draft lease should be in these terms:
During each
successive review period a rent equal to such revised rent as may be
ascertained as herein provided.
It having been
agreed between the parties that the costs of this application should follow the
event, I order that the defendants pay costs of the plaintiff on County Court
Scale 2.
