Landlord and tenant — Construction of rent-review clause in lease of shop premises — Question as to rent from review date — Construction of provision that any effect on rent of any improvement carried out by the tenant, or carried out by the landlord at the expense of the tenant, should be disregarded — The improvements in the present case consisted of the removal of a lift hoist and removal of surrounding walls, resulting in an increase of the floor area of the basement and ground floor and an extension of the length of the ground-floor shop window facing the street — The prospective tenants were allowed into possession to carry out these works, and the works were completed except for a comparatively small job, before the grant of the lease — Landlords argued that these improvements should not be disregarded, on the ground that the review clause referred to ‘any improvement carried out by the tenant’ and that when the improvements were carried out the prospective tenants were not yet ‘the tenant’ within the meaning of the clause — Decisions in the cases of Euston Centre Properties v H & J Wilson Ltd and Brett v Brett Essex Golf Club Ltd considered but found not to be relevant — Decision of House of Lords in Re ‘Wonderland’, Cleethorpes also considered but held not to afford guidance in a case where improvements are carried out shortly before the current tenancy by a person who is allowed into possession for the purpose of carrying out the improvements in order to adapt the premises for his use as tenant — Held that both on a literal reading of the present lease, in which the expression ‘the tenant’ was defined to mean the defendant tenants eo nomine, and on the construction of the lease in the light of its factual matrix, the improvements in question fell to be disregarded — The opposite conclusion would be close to an unconscionable attempt by a landlord to take advantage of a situation which it had itself encouraged by consenting to its tenants going into possession and commencing the shopfitting works in advance of the lease
The
plaintiffs, Hambros Bank Executor & Trustee Co Ltd, the lessors, sought a
decision on the time construction of provisions in the rent-review clause of a
20-year lease of property at 14 and 16 Powis Street, Woolwich, London SE18. The
defendants, Superdrug Stores Ltd, were the lessees.
Kirk Reynolds
(instructed by Linklaters & Paines) appeared on behalf of the plaintiffs;
Jonathan Brock (instructed by David Alterman & Sewell) represented the defendants.
Giving
judgment, SCOTT J said: The case before me raises a question of construction of
a rent-review clause in a lease. The plaintiffs, lessors under the lease, are
Hambros Bank Executor & Trustee Co Ltd. The defendants, tenants under the
lease, are Superdrug Stores Ltd. The lease in question was dated September 15
1976. It was made between Kenfield Properties Ltd, the predecessors in title of
the plaintiffs, of the one part, and the defendants of the other part. It is
important in this case to notice that the lease defines the defendants,
Superdrug Stores Ltd, as ‘the tenant’.
The lease
granted the defendants a term of 20 years from September 29 1976 in respect of
property known as 14 and 16 Powis Street, Woolwich. The rent reserved was the
sum of £19,000 for the first five years of the said term and — I now cite from
the lease —
(2) such other rent as may become payable under or by virtue of the provisions
set out in the schedule hereto to be paid clear of all deductions by equal
quarterly payments’. The provisions there referred to are the provisions for
rent review.
Before I read
those provisions I should refer, first, to the definition clause in this lease.
Clause 4(9) reads thus:
In this lease
where the context so admits the expression ‘the landlord’ shall include the
reversioner for the time being immediately expectant on the term hereby created
and the expression ‘the tenant’ shall include the successors in title and assigns
of the tenant and where there are two or more individuals included in the
expression ‘the tenant’ covenants herein expressed to be made by the tenant
shall be deemed to be made by such persons jointly and severally.
Pausing,
therefore, to rehearse the position as to definitions, the original tenants,
Superdrug Stores Ltd, are defined in the lease as ‘the tenant’. The expression
‘the tenant’ is then by clause 4(9) expanded so as to include the successors in
title and assigns of Superdrug Stores Ltd. This reference to ‘successors in
title and assigns’ plainly means, as Mr Reynolds submitted, the successors in
title and assigns of Superdrug Stores Ltd to the tenancy created by this lease.
The schedule
to the lease contains the provisions for rent review. The rent-review dates are
identified; the first of these fell on September 29 1981. The argument before
me concerns the question of what the rent should be as from that rent-review
date. The schedule then contains a definition of the ‘open market’ rent. I need
not read that definition. After that has been dealt with the schedule then sets
out three matters required to be disregarded in arriving at the ‘open market’
rent. The first is any effect on rent of the fact that the tenant has been in
occupation of the demised premises. The second is any goodwill attached to the
demised premises by reason of the carrying on thereat of the business of the
tenant. The third is any effect on rent of any improvement carried out by the
tenant or carried out by the landlord at the expense of the tenant. The
question raised in this action concerns that third matter that requires to be
disregarded on any rent review, the effect on rent of any improvement carried
out by the tenant.
The matter
arises in this way. The premises in question, 14 and 16 Powis Street, are shop
premises and were previously occupied by a tenant of the then freeholders,
Kenfield Properties Ltd. That tenancy was due to expire or was proposed to be
surrendered, and negotiations were underfoot between Kenfield Properties Ltd
and the defendants for the grant to the defendants of a lease of the premises.
The defendants required the premises for the purposes of conducting their own
shop business. They proposed, therefore, to make various improvements to the premises
to render them more suitable for that business. The proposed improvements,
described in the correspondence as ‘shopfitting’, were set out on a plan, dated
June 1976, prepared by surveyors acting for the defendants. The plan shows the
alterations intended to be carried out to the basement and ground floor of the
premises. The alterations shown on the plan include the removal from the
basement and ground floor of a lift hoist. The lift hoist was situated fairly
near the front wall of the premises facing the street. It was surrounded by
walls which had some structural function in regard to the support of the ground
floor. The defendants proposed to remove the lift hoist, to remove the
surrounding walls and thereby to increase the floor area both of the basement
and, more important, of the ground floor. One effect of increasing the floor
area of the ground floor would be to extend the length of the ground-floor shop
window facing the street. The extension of the shopfront facing the street and
the increase in the area of the ground floor near the shop entrance from the
street, both of which would be brought about by the removal of the lift hoist
and its surrounding walls, are matters which the parties and their professional
advisers agree would, if the improvements were to be taken into account, have a
significant effect on the open market rent for the premises.
The
correspondence shows negotiations between the parties by their respective
solicitors or agents as to the terms of the new lease. The correspondence opens
in May 1976. The terms of the lease were under discussion. There is no doubt
that the correspondence opened on a ‘subject to contract’ basis so far as the
contractual arrangements between the parties were concerned. In due time the
correspondence shows agreement between the parties as to the terms to be
contained in the proposed lease. The correspondence shows also discussion
between the parties as to the shopfitting intended to be done by the defendants
on being admitted into the premises as tenant. The plan outlining the intended
alterations was submitted by the defendants to Kenfield Properties Ltd for
approval and was approved.
The defendants
were anxious to be allowed into possession of the premises as soon as possible
so as to be able to get on with the shopfitting works, including the removal of
the lift hoist and walls. Discussion about this can also be found in the
correspondence. The defendants were anxious to have a rent-free period to take
account of the length of time that might be spent in the shopfitting, a time
during which the shop would not be open for business and would not, therefore,
be earning any money for the defendants. Agreement was come to between the
parties that a rent-free period would be allowed. It was, however, agreed that
the rent-free period would come to an end either three months from the
commencement of the lease or at such earlier time as the shop might be opened
for business. It was therefore desired by both sides that the shopfitting
should be done as quickly as possible and the shop opened as soon as the
shopfitting had been completed.
The defendants
went into possession of the premises on about August 23 1976. A few days
before, on August 18, the defendants had submitted to the local authority a
building notice which indicated their intention to commence the shopfitting
works on August 23. Between August 23 and 27 clearance works took place at the
premises. The old partitions and shopfittings used by the previous tenant were
pulled down and removed. Evidence was given before me by Mr Trimming, a
structural engineer, who was an assistant to the district surveyor and whose
duties included supervision of the structural works being done at 14-16 Powis
Street in the course of the defendants’ shopfitting. He told me that the real
work at the premises began on about August 31, and that the first thing that
had to be done was to remove the lift hoist and its surrounding walls. He told
me that by September 7 the lift hoist and the surrounding walls had been
removed. The hole in the floor of the ground floor that had been left after the
removal of the lift hoist had been filled in with concrete. He was not,
however, satisfied with the nature of the infilling. It lacked the
reinforcement which he thought necessary for structural reasons. He therefore
required the builders who were doing the work for the defendants to remove the
original infilling and to provide appropriate steel reinforcement before
reconcreting the hole.
Mr Trimming
inspected the site on September 13. He found that the hole had been provided
with the necessary steel reinforcement. It was ready on that date, he told me,
for the concrete to be poured. He was unable to say of his own certain
observation that the concrete was poured on that date, but he was sure that it
would have been poured either on that date or very soon thereafter. The
importance of this is that the date of the lease was September 15, and the
plaintiffs were concerned to establish the amount of work in connection with
the lift hoist that had been done before the commencement of the lease.
I am prepared
to infer on a balance of probabilities that the concrete infilling after the
proper steel reinforcement had been provided was carried out before the grant
of the lease on September 15.
The work consequent
upon the removal of the lift hoist was not all completed by that date. There
remained the matter of a reinforced steel joist which Mr Trimming thought
necessary to be placed in the ceiling of the basement where the lift hoist had
been in order to provide additional support to the ground floor. It is not
certain exactly when that reinforced steel joist was installed. It is probable
that this took place some time in December, and it seems certain that it was
after September 15. The work involved in inserting the necessary reinforced
steel joist was work which would have taken two workmen between half a day and
a full day. The cost of materials would have been very little.
Accordingly,
the lift hoist and its surrounding walls had been removed before the
commencement of the lease on September 15. The floor area of the ground floor
had been increased by that removal before the commencement of the lease. The
reinforced steel joist had not been put in, but that was a small and relatively
trivial job. Thereapart, nothing else needed to be done to make the extra floor
area usable for shop purposes.
Counsel has
told me, and I think it is accepted, that the removal of the lift hoist and
surrounding walls has added some 70 sq ft of usable floor-space to the ground
floor. I take it there has been the same addition of usable floor-space to the
basement. The effect of this, if it
would be to add to the rent to be paid under the lease as from September 29
1981 a sum of some £3,000 per annum. There would also, of course, be an effect
on subsequent rent reviews.
The question,
therefore, is whether or not under the rent-review provisions of the lease the
works relating to the removal of the lift hoist and surrounding walls fall to
be disregarded. Mr Reynolds, for the plaintiffs, submits that they do not fall
to be disregarded. He directed my attention particularly to the wording of the
rent-review clause. What is to be disregarded is ‘any effect on rent of any
improvement carried out by the tenant’. ‘The tenant’ in that context, he submitted,
meant the person who, at the time the works were carried out, was the tenant
under the current tenancy. Since the lease was not granted until September 15
the defendants were not, he argued, when the relevant improvements were carried
out, ‘the tenant’ for the purposes of this provision. It would follow that the
improvements were not improvements carried out by ‘the tenant’ and did not fall
to be disregarded.
In my view,
for a number of reasons, this argument cannot be accepted. First, I will
consider how the matter stands on a literal reading of the lease without
recourse to any factual matrix to assist construction. The original tenants
were the defendants. The defendants are named in the lease, Superdrug Stores
Ltd. The defendants are not called ‘Superdrug Stores Ltd’ throughout the lease;
they are defined as ‘the tenant’. ‘The tenant’, therefore, becomes the
expression which when used in the lease means Superdrug Stores Ltd. True it is
that the expression ‘the tenant’ includes, under clause 4(9), the successors
and assigns of Superdrug Stores Ltd. But Superdrug Stores Ltd has no successors
or assigns as yet and the primary meaning of ‘the tenant’ remains Superdrug
Stores Ltd.
So, if the
contents of the lease are read literally, the provision in the rent-review
clause requires to be disregarded any effect on rent of any improvement carried
out by Superdrug Stores Ltd. The removal of the lift hoist and the surrounding
walls, the increase of the ground-floor area and the extra length given to the
shopfront represent improvements which, it is common ground, were carried out
by Superdrug Stores Ltd. So far as the literal meaning of the lease is
concerned, therefore, in my judgment, the plaintiffs’ case fails.
Mr Reynolds
submitted that the factual matrix of the lease was neutral. It gave no
indication, he submitted, whether the parties would have regarded the
improvements in question carried out by Superdrug Stores Ltd before the actual
date of the lease as appropriate to be disregarded on a rent review or appropriate
to be taken into account on a rent review. That submission I regard as flying
in the face of the facts. The correspondence put before me shows that the
original rent of £19,000 per annum was asked for by Kenfield Properties Ltd for
the premises as they then stood. The improvements, the shopfitting works, were
undertaken by Superdrug Stores Ltd for their own purposes with a view to
becoming tenants of the premises under the lease eventually granted on
September 15 1976 and with no other view whatever. Consent to those shopfitting
works being carried out was granted by Kenfield Properties Ltd on the footing
that Superdrug Stores Ltd would become tenants of the premises under that
lease. At the relevant time all the terms of the lease had been agreed. The
factual matrix to the lease suggests that both parties thought that the
defendants would be doing the shopfitting works as tenants under the
prospective lease.
I do not think
that the factual matrix leaves any room for doubt but that both parties to the
lease regarded the shopfitting works as works which would constitute an
improvement carried out by the tenant for the purposes of the rent-review
provision in the lease and required to be disregarded on any rent review.
Mr Reynolds
referred me to certain authorities which I should mention. The first was a
decision of Cantley J in Euston Centre Properties v H & J Wilson
Ltd reported at (1981) 262 EG 1079, [1982] 1 EGLR 57. In that case there
was a rent-review clause in the lease which required to be disregarded ‘the
matters referred to in section 34(a), (b) and (c) of the Landlord and Tenant
Act 1954’. The learned judge construed that provision as referring to the 1954
Act as amended. Paragraph (c) of section 34 as amended requires to be
disregarded ‘any improvement carried out by a person who at the time it was
carried out was the tenant’. That statutory provision is clear and unambiguous.
It requires the person to be the tenant at the time the improvement is carried
out. Cantley J so held. His decision does not seem to me to be relevant to the
construction of the rent-review provision with which I am concerned.
The second
rent-review case referred to by Mr Reynolds was Brett v Brett Essex
Golf Club Ltd reported at (1984) 273 EG 507, [1985] 1 EGLR 63. That, too,
was a case where a rent-review clause in a lease incorporated by reference the
provisions of section 34 of the 1954 Act. His Honour Judge Finlay, sitting as a
judge of the High Court, came to the conclusion that the reference in the lease
was to the 1954 Act as originally enacted and not as amended. He concluded that
the relevant provisions of section 34 as originally enacted meant that an
improvement was to be disregarded if it was an improvement made by the tenant
at any time, whether or not made by him in his capacity as tenant of the
current tenancy. I do not regard that decision either as of any real relevance
for the purposes of the present case; but, if it has any weight at all, it is
against the submissions made by Mr Reynolds.
The third case
was a case in the House of Lords, Re ‘Wonderland’, Cleethorpes [1965] AC
58. That was a case where a tenant had made an application for a new lease and
the provisions of section 34 of the 1954 Act came directly into play. That was
a case before the 1969 amendment was enacted. It was held by Viscount Simonds
that the provision in paragraph (c) of section 34 requiring improvements
carried out by a tenant to be disregarded for the purposes of assessing the
rent of the new tenancy, was a provision which related only to improvements
carried out by the tenant during the current tenancy. The point in issue in
that case, however, was whether various works carried out many years previously
by the person who in fact was the tenant under the current tenancy fell to be
disregarded by reason of the statutory provision. The House of Lords concluded
that they did not.
I am not clear
that the dicta and principles expressed by their lordships in that case
indicate what their view would have been had the improvements been carried out
shortly before the current tenancy by the person shortly to become the current
tenant and with a view to the grant of the current tenancy. The example I am
contemplating is that of a tenant who negotiates a tenancy with a landlord and
is allowed into possession before the grant of the lease in order to carry out
various improvements to adapt the premises for his use as tenant. Let it be
supposed that the term originally granted expires, that there is no provision
in the lease for renewal or rent review and that the tenant, relying on his
statutory rights, applies for a new tenancy. I do not take the Wonderland
case as any authority for the proposition that in assessing the rent for the
new tenancy the improvements made by the tenant in those circumstances fall to
be taken into account on the ground that they were improvements carried out
before the grant of the lease. That was not the factual situation with which
the House of Lords in the Wonderland case was concerned. It is a factual
situation which raises, to my mind, quite different considerations from those
with which the House of Lords was concerned. I do not regard the dicta by
Viscount Simonds and Lord Morris to which Mr Reynolds referred me as having any
bearing on the facts in the present case.
I return
briefly then to those facts. Kenfield Properties Ltd agreed, albeit, perhaps,
subject to contract, to grant to the defendants a lease containing the
rent-review provision I have read and allowed the defendants into possession in
advance of the final grant of the lease to enable the defendants to carry out
shopfitting works in anticipation of their use of the premises after the grant
of the lease. The lease was then granted. The proposition that the landlord can
then turn round and say ‘Now I am entitled to take advantage of all the
improvements you have done before we actually got around to executing the lease
because those improvements do not fall to be disregarded on the rent review’ is
one which I find quite unacceptable. It is near to being, in my view, an
unconscionable attempt by a landlord to take advantage of a situation which it
has itself encouraged by consenting to its tenant going into possession and
commencing the shopfitting works in advance of the lease.
I am
satisfied, however, that under the lease of September 15 1976, whether read
literally or construed in the light of its factual matrix, the removal of the
lift hoist and the surrounding walls represents an improvement which under the
terms of the lease falls to be disregarded on the rent review.
The plaintiffs’ claim was dismissed with costs.
