Landlord and tenant — Rent review — Whether expression ground rent meant rent reflecting value of buildings erected at expense of tenant
By a building
agreement dated September 11 1979 the defendant tenant erected at his expense
industrial premises on land belonging to the plaintiff landlords. By a lease
dated January 21 1980 the landlords granted the defendant a term of the land
with the buildings at an initial ground rent of £6,000 pa subject to review
thereafter. The rent review clause provided that the arbitrator was to
determine the ground rental value of the demised premises assuming a value in
the open market for use of the demised premises as a developed site for general
industrial purposes. The landlords contended that the expression ground rental
value in the lease meant the rack-rental value.
excluded. The rent review clause contained provisions which directed that
assumptions which departed from reality should be taken into account. What is
to be taken into account is the potentiality of the land for which the ground
rent is to be assessed to carry out the original building works.
No cases were
referred to in this report.
This was an
application by the landlords, Guildford Borough Council, for a declaration as
to the meaning of a lease dated January 21 1980 held by the tenant, Mr Cobb.
Joseph Harper
QC (instructed by the solicitor to Guildford Borough Council) appeared for the
plaintiffs; Gerald Moriarty QC (instructed by Mackrell Turner Garrett, of
Woking) represented the defendant.
Giving
judgment, JUDGE RICH QC said: In the proceedings, the plaintiffs seek a
declaration as to the construction of a rent review clause in a lease granted
by the plaintiffs to the defendant on January 21 1980. The premises that were
thereby granted are described in the lease as:
All that
piece of land situated in Lissons Avenue Industrial Estate, Ashvale, containing
. . . [and then it gives the areas] as there shown for identification on . . .
[a particular plan] together with the easements and rights specified in the
first schedule hereto, which said land and any alteration thereto and easements
and rights are hereinafter referred to as the demised premises.
I emphasise
that the grant is all the land together with the rights and easements and ‘any
alteration thereto’ because, by the time that the lease was in fact granted,
the land, as it first came into the possession of the defendant, had indeed
been altered by the defendant in compliance with a building agreement that the
defendant had entered into on September 11 1979. Under that agreement, the
defendant bound himself to construct on the land certain industrial premises
and to do so within a limited period of time and the plaintiffs bound
themselves to grant the lease that was in fact granted, which lease I now have
to construe.
The rent
reserved by the lease, which was for a term of 99 years from the date of the
agreement to build, namely September 11 1979, was for the first five years £6,000
a year. The rent was payable as rent by virtue of the terms of the building
agreement from the date of the completion of the buildings and the actual
formal lease was entered into at that later date. Thus, what was taken by the
defendant was the original land plus the alterations, namely the buildings
erected on it by the defendant under the building agreement.
The lease
provided for the rent to be reviewed in accordance with the second schedule of
the lease. That schedule is headed as containing provisions for the variation
of rent and Mr Gerald Moriarty QC, on behalf of the defendant, has made the
point that the original rent was described in the building agreement as a
ground rent and for that reason I should treat the provisions for variation as being
provisions to continue a ground rent properly so called. I do not regard that
approach as helpful to the construction of the second schedule because, if the
terms of the schedule did provide for a variation from what was initially a
ground rent to what was to be a rack rent, then the varied rent would be a rack
rent, and it is necessary to look at the provisions themselves to see whether
that change was or was not to be made after the initial period of five years.
The schedule
provides for the rent in successive periods of five years, after the initial
period, are to be found by the surveyors for the parties reaching an agreement
or, if no agreement is reached, it provides for a process of determination by
an expert appointed for the purpose. The expert who is to be appointed for the
purpose is required specifically by the terms of the schedule to be ‘one
experienced in dealing with properties in similar use and of similar size in
the County of Surrey’. That is certainly a sensible provision, but I do not
find it of great assistance in determining what the appointed surveyor was or
was not to determine. Certainly, if he was to have experience of buildings, one
might think that he was more certainly to be concerned with the valuation of
buildings rather than merely of land. But since the value of land for the
purpose of building is very much tied up with the valuation of the building
which might be erected upon it, I do not find any great assistance from that
requirement as to the kind of person who is to determine the rent in the
absence of agreement between the parties.
The question
of the basis upon which such surveyor is to determine the rent is, in my
judgment, to be determined by reference to the particular words used by the
parties in the provisions for variation of rent which I am called upon to
construe.
They are
required by those provisions to agree a sum as being ‘the then current ground
rental value of the demised premises hereinafter called the ground rental
value’. I have already drawn attention to the provision in the demise which
defines the demised premises as being the land together with the alterations
that have been effected upon the land during the currency of the building
agreement. But what is to be found is the then current ground rental value of
those premises. Ordinarily the word ‘ground rental value’ imports, in my
judgment, a valuation of the land as distinct from the land together with the
buildings erected thereon. Mr Joseph Harper QC, who has appeared for the
plaintiffs, has drawn my attention to the definitions in Stroud’s dictionary of
ground rent in these terms and, as I understand it, is willing to adopt it as
the ordinary meaning of those words. The definition is:
By the
expression of ground rent, if unexplained, is to be understood a rent less than
the rack rent of the premises. Its proper meaning is the rent at which land is
let for the purpose of improvement by building.
That, Mr
Harper concedes, is a definition which can be used to identify a ground rent
even for land upon which a building has already been erected, because it is apt
to identify a particular part of the rack rent which the ground rent is less
than, in accordance with the definition, namely that part which is attributable
to the land as opposed to the building.
There is,
however, this difference between the ground rent of an empty and undeveloped
site and the ground rent of a site upon which a building has already been
erected, namely that in the latter case one has a ready answer to the question:
what is one to assume is to be the pattern of development permitted for the
land? If there were no provision in a
rent review of a ground rent as to the assumed pattern of development, those
charged with determining such ground rent would have to look exclusively to the
guidance of the market for the particular piece of land. In the case of a
review of ground rent, it would, however, commonly accord more closely with the
reality of the commercial transaction that there should be considered not all
potentiality of the particular site but only the value of the particular
potentiality to erect the particular buildings which had in that particular
transaction been erected by agreement of the parties.
As this matter
developed — and it has taken a long time for it to develop and to come before
the court, because the rent review that is being considered was due to take
place in 1985 — the defendant tenant has understood the issue between the
parties to be whether or not there is to be assumed in the valuation of the
site a potentiality for the erection only of the particular buildings which are
found upon the site, or a potentiality to erect whatever buildings might
otherwise lawfully be placed upon it. But as the matter was presented to the
court by Mr Harper in argument today, that was not in fact the issue which the
plaintiffs wish to bring before the court.
The
plaintiffs’ contention was that, in the particular schedule which I have to
construe, there is contained a peculiar — unusual, I mean by that — definition
of ground rent which equates the ground rent so called, in this case, with what
is actually a rack rent for the buildings demised by this lease.
It is
essential to that argument, as Mr Harper conceded in the course of his
submissions, to accept that the definition is concerned with the actual
buildings actually found on the site and that the issue as it had been
presented in an affidavit on behalf of the defendant, namely whether the
potentiality of the site is to be assumed for the actual buildings or for some
hypothetical buildings, if it arose at all, was to be resolved in the way in
which the tenant contends, namely by reference to the actual buildings. It is
necessary therefore for me, in order to construe the clause and resolve the
differences between the parties, only to address the question whether or not
the particular clause in the second schedule upon which Mr Harper relies does
indeed contain a special definition of ground rent, to give to it in the
context of the clause a meaning in effect equivalent to rack rent.
Mr Harper
draws attention to the fact that the surveyors are required by the clause ‘to
assume a value in the open market for use of the demised premises as a
developed site for general industrial purposes’ and he says that that is in
fact a definition for the purposes of this clause of the ground rental value.
In my judgment, it is nothing of the kind. The clause, after saying that what
is to be assessed is the current ground rental value of the demised premises,
goes on then to make a proviso as to how that ground rental value is to be
assessed and it does so by identifying certain matters differing from the
reality of the transaction between the parties which are, for the purposes of
that assessment, to be assumed. Those additional provisions are, in my
judgment, additional to the basic assumption imported by the use of the word
‘current ground rental value’, namely that what is to be assessed by the
valuers is the value of the land as distinct from the buildings placed thereon
at the expense of the defendant.
The additional
assumptions are set out as follows:
Provided
always that in assessing the ground rental value the surveyor shall assume a
value in the open market for use of the demised premises as a developed site
for general industrial purposes and otherwise upon the terms of this lease.
That is the
first proviso and the first variation from reality, because it provides
implicity that the terms of the lease are to be assumed save in respect of one
matter, namely there is to be assumed the value in the open market for use of
demised premises as a developed site for general industrial purposes. That
differs from the covenant contained in clause 3.22 of the lease, which confines
the use of the premises to use for the carrying on of the business of motor
engineers and vehicle repairers and the Department of Transport vehicle-testing
centre and the sale of vehicle spare parts, subject, however, to a right to
change such use with the consent of the council in writing to another user,
within the limits defined by class 3 of the Town and Country Planning Use
Classes Order 1972, which is the use class not for general industrial purposes
but for light industrial purposes. Thus that proviso requires, in my judgment,
an assumption of a right of use of the demised premises for a use different
from that contained in the user clause of the lease.
The other
variations from reality which are required by the clause are the importation,
not entirely appropriately, of disregards which are commonly imported into rent
review clauses, first, of any goodwill attributable to the demised premises;
second, any effects of any improvement to the demised premises carried out by
the lessees or any underlessees otherwise and in pursuance of any obligation
hereunder; and third, any effect on the ground rental value of the fact that
the lessees or any underlessees may have been in occupation of the demised
premises.
I had at first
thought when I read the second of these disregards, namely of any effect of any
improvement to the demised premises, which is said to be required to be
disregarded without reference to the time at which the improvement was carried
out, that those words in themselves required the disregarding of the effect
upon the rent of the work carried out by the defendant tenant under the
agreement to which I have already referred. But Mr Moriarty has not been
prepared to rely upon that route to the result for which he contends and on
reflection I think he was right not so to rely, for I accept that the reference
to the words, ‘any improvement to the demised premises’, are appropriately
construed by considering what were indeed the demised premises at the date when
the lease itself was granted and at that date the demised premises already
included the buildings erected under the agreement made prior to the grant of
the lease. Thus, that second disregard must have reference only to improvements
to the demised buildings made after the date of the commencement of the lease.
Mr Harper
would maintain that that is a clear indication that what is to be valued is in
fact the buildings themselves. But I do not think that that consequence flows
from that analysis of that clause, for this reason. As I indicated, in
assessing a ground rent it is necessary, whether the assessment is made by the
market or by a valuer assessing what the market would do, for those who make
notional bids for the property to have some concept as to the development which
they are proposing to make of the property. Thus, although I do not think that
that second disregard was imported into this clause with as much consideration
as I have since given to it — if I may be forgiven for so putting it —
nevertheless I think that it is meaningful in the sense that it excludes from
the assumed potentiality of development to be taken into account in assessing
the development potential and thus the ground rent of the land, improvements in
the demised premises made by the tenant subsequent to the grant of the lease
unless they are made in pursuance of an obligation under the lease to the
council.
That reasoning
also has some value in the understanding of the effects of the clause, because
I was puzzled why, when I looked for provisions in the lease as to the
potential obligations of the tenant to the council to carry out works of
improvement, the only obligation I could find was an obligation to rebuild in
the case of destruction by fire. If the exception to the disregard does
properly apply to that work of rebuilding which might arise in such
circumstances — although there may be a question as to whether or not that
would or would not be an improvement — it would certainly be appropriate to
exclude it from being disregarded. What is to be taken into account, in my
judgment, as the potentiality of the piece of land for which a ground rent is
to be assessed, is the potentiality to carry out the original building works
or, if those had had to be renewed following a fire, the renewed building
works.
It is for
these reasons that I do not construe the clause as giving a special definition
to ground rental value. I regard the task of the valuers called upon to assess
the ground rental value as being the task of assessing what is the value in
rental terms for the period of the lease and, subject to the special provision
as to assumed user upon the terms of the lease, of the potentiality of using
the land, the subject of the lease, for the development that has actually been
carried out under the agreement and which has in fact been erected on the land.
Thus, I would
answer the questions put to me by making a declaration which will, as I follow
it, conform almost exactly with the words used in the affidavit sworn on behalf
of the defendant in para 8.1. But I will certainly hear argument as to whether
or not that is the form of the declaration which follows from my judgment or
whether there is some variation to the words there used that is appropriate in
the light of my judgment.
