Landlord and tenant — Rent review clause in lease — Construction — Unusual formula for determination of hypothetical rent — Judgment in favour of construction put forward by plaintiff lessees — Building now completed — Local authority landlord
question, a 99-year building lease from April 1 1973, was originally granted to
a development company, but the present lessors were the Borough of Preston —
The rent was at first a peppercorn rent and then a rent of £28,000 a year, as a
specified figure for ground rent, with provision for rent reviews at 14-year
intervals — The present issue had arisen in respect of the first rent review —
There had been a failure to agree and a reference to arbitration — The court
was being asked to make a declaration on construction in order to provide
guidance for the arbitrator
intention of the parties in regard to rent review was that the proportion borne
by the ground rent of £28,000 to the rack-rental value of the building should
be maintained throughout the term of the lease — Effect was given to this
conception by a formula — The reviewed rent was to be equal to £28,000
multiplied by a fraction of which the numerator would be the market rental
value at the date of review and the denominator would be the initial
rack-rental value — The amount of the initial rack-rental value was agreed
between the parties at £172,000 a year — The questions arose in regard to the
ascertainment of the market rack-rental value at the date of the review — It was
relevant to bear in mind in this connection that the building was intended to
be occupied by a number of different subtenants
accepted the submission that the rent should be ascertained by considering the
value of the premises on a hypothetical vacant-possession basis — It was,
however, to be an investment rent, based on the rent that could be obtained for
the premises as a whole (if somebody would wish to take the premises as a
whole) or in individual units, either as at present organised or in some other
reasonable organisation — The total occupation rent would then form the basic
guide to the rent that an investment lessee would be willing to pay for the
premises as a whole — In other words, the assumed letting would be to an
investment lessee who would be guided as to what he would pay by his assessment
of the income which he would receive from the letting of the subunits —
Declaration to be framed accordingly
The following
case is referred to in this report.
Scottish
& Newcastle Breweries plc v Sir Richard
Sutton’s Settled Estates [1985] 2 EGLR 130; (1985) 276 EG 77
This was an
originating summons by which the plaintiffs, Hill Samuel Life Assurance Ltd,
lessees of the Links Site, Guild Complex, Preston, sought a declaration on
questions of construction in regard to the rent review clause in the lease of
the premises. The defendants, the Borough of Preston, were the lessors.
Kirk Reynolds
(instructed by Jaques & Lewis) appeared on behalf of the plaintiffs; Peter
W Smith (instructed by the chief executive, Preston Borough Council)
represented the defendants.
Giving
judgment, SCOTT J said: I have before me a question of construction
concerning the terms of a rent review clause in a lease. The lease was dated
February 27 1974 and was granted by the Mayor, Aldermen and Burgesses of the
Borough of Preston to a development
from April 1 1973. The present lessee under that term, and successor in title
to the original lessee, is Hill Samuel Life Assurance Ltd, the plaintiffs in
the proceedings before me. The Borough of Preston are the defendants.
At the time of
the lease the demised premises were a development site. The lease was a
building lease. It was contemplated that the builder, Commercial Development
Projects Ltd, would build a substantial building on a number of floors. The
lease imposed on the builder the contractual obligation to complete the
development in accordance with the plans and specifications which had been agreed
upon. It was contemplated also, of course, that the builder, the original
lessee, would then realise its investment in the site. In the event it did so
by assigning the lease to Hill Samuel Life Assurance Ltd. But the terms of the
lease as a whole justify the conclusion, as both counsel before me have
accepted, that the lessee for the time being would be holding the premises.
That is a
relevant and important matter to bear in mind in considering the true
construction of the rent review clause. It is part of the matrix of fact that
it is legitimate and necessary to take into account as an aid to construction.
The lease
provided that the rent payable during the first 18 months of the term would be
the rent of one peppercorn. That was the period during which it was
contemplated that the lessees would be completing the building in accordance
with its contractual obligations. Thereafter the ground rent of £28,000 per
annum was reserved as the rent payable under the lease.
Para 2 of the
lease provided for rent reviews at 14-year intervals throughout the period of
the lease. The issues that have arisen for decision before me have arisen in
connection with the first rent review. The £28,000 specified ground rent was,
of course, nothing like the rack-rental value of the new building at the date
when the ground rent became payable. Proper reward had to be given to the
building lessees for the substantial cost incurred in constructing the
building. Put broadly, the evident intention of the parties was that the
proportion borne by the ground rent of £28,000 to the rack-rental value of the
building when completed would be maintained throughout the period of the lease.
The machinery
for rent review involved the service by the lessors of a notice requiring the
review and required that the notice be accompanied by a certificate specifying
the amount of the new rent to be payable. The new rent was to be ascertained by
means of a formula. It was to be equal to £28,000 multiplied by a fraction, of
which the numerator would be the market rack-rental value at the date of review
and the denominator would be the initial market rack-rental value, as
respectively defined in the lease. Accordingly, for the purpose of implementing
the rent review procedure, it is necessary to ascertain those two amounts.
The amount of
the initial market rack-rental value was agreed between lessors and lessees and
recorded in a letter dated July 30 1978 sent by the Borough of Preston to
agents for the lessees. The letter recorded that the figure of £172,000 per
annum had been agreed as representing the initial market rack-rent of the
premises.
Although the
amount of the initial market rack-rent had been agreed, it is none the less
necessary to pay attention to the directions contained in the lease as to how that
amount is to be calculated. The reason for their continued relevance is that
the directions given as to the calculation of the market rack-rental value at
the date of review contain a reference to the way in which the initial market
rack-rental value is to be calculated.
The critical
matters for decision on this lease, the points of construction that arise,
relate to the language used regarding the ascertainment of the market
rack-rental value at the date of review. Before I come back to that, it is
convenient for me to refer briefly to some of the other provisions of the
lease, in the context of which the true construction of the rent review
provision must be considered.
Clause 3
contains lessees’ covenants. Subpara (3) contains the obligation imposed on the
lessees in relation to the completion of the building development. I need not
read it all, but it commences thus:
The Lessees
shall commence and complete the development on the premises as hereinafter
stipulated, and shall forthwith erect thereon, or on some part thereof, a
building or buildings to be used, on the basement, floor, as a discotheque,
snooker hall and restaurant premises; on the ground and first floor as separate
retail shops or shop and/or restaurant premises; and on the second and upper
floors as offices and/or caretaker’s flat premises, together with the said
pedestrian subway, stairway and footway respectively, with access points and
all necessary offices and outbuildings, sewers and drains and boundary walls
and fences.
That language
shows clearly enough that the building was to contain a number of different
types of subunits. The contemplation must have been that the building would be
occupied by a number of different tenants.
Subpara (27)
of clause 3 contains a covenant controlling assignment. It provides that the
lessees are:
not to
assign, transfer, under-let or part with possession of the premises or any part
thereof after the completion of the development of the premises without the
previous consent in writing of the Lessors, such consent not to be unreasonably
withheld.
Subpara (30)
relates to user and provides that the lessees are:
not, without
the Lessors’ previous written consent, such consent not to be unreasonably
withheld, to use or permit or suffer to be used:
(a) the basement floor of the premises in part
for any purpose other than that of a discotheque, snooker hall and restaurant
premises and in part for the parking of cars:
(b) the ground and first floors of the premises
for any purpose other than that of separate retail shops or shop and/or
restaurant premises and for the purpose of access to the upper parts of the
buildings erected on the premises, and in particular not to use the same or
permit or suffer the same to be used for the purposes of a fried fish shop, pet
shop or cat- or dog-meat shop without the previous consent in writing of the
Lessors; and
(c) the second and upper floors of the premises
for any purpose other than as offices and/or caretaker’s flat or any other reasonable
purpose to accord with the practice of good estate management, to be approved
in writing by the Lessors, such approval not to be unreasonably withheld.
That user
provision underlines the point I made earlier, namely that it was in the
contemplation of the parties that the different units comprised in the new
building would be in disparate occupation.
I think there
is nothing else in the lease to which I need refer, save for the critical
provisions of the rent review clause. I propose to read in full the provisions
relating to the ascertainment of the initial market rack-rental value and the
market rack-rental value at the date of review. The provisions are these:
(b) The initial market rack-rental value shall
mean an exclusive rent for the premises ascertained on the footing that the
sub-lessees or tenants by which the same is payable are liable to bear the cost
of:
(i) All outgoings of whatsoever nature which may
be incurred or become payable in respect of the premises comprised in the
underlease or tenancy agreement under which the said rent shall be reserved or
become payable, and whether payable by a landlord or tenant;
(ii) All repairs to the said last-mentioned
premises, including those in respect of common services; and
(iii) Insurance of the said last-mentioned premises
in accordance with the Lessees’ obligations by virtue of sub-clause (5) of
Clause 3 hereof.
(c) The market rack-rental value at the date of
the review shall be the rent at which the premises might reasonably be expected
to be let in the open market by a willing Lessor for a term of years not
exceeding the residue of the term at the date of review, subject to covenants
and conditions other than the amount of the ground rent similar to those set
out in this Lease, and shall be agreed between the Lessors and the Lessees, or
in default of agreement as hereinafter provided, and shall also be ascertained
on the same basis as is stipulated in the preceding paragraph (b) of this
sub-clause.
Provided that
in ascertaining such value there should be disregarded:
(i) The fact that the Lessees or their
predecessors in title or any persons claiming under or through them are or have
been in occupation of the premises;
(ii) The value of any rental on the premises of
any part thereof by reason of any trade or business carried on thereon;
(iii) The effect of rental value of any work or
improvements carried out after the date of agreement or ascertainment of the
initial market rack-rental value, other than any carried out in pursuance of
Lessees’ repairs or any other obligations under this Lease; and
(iv) Any value attributable to trade or other
fixtures or fittings installed in the premises.
There then
followed provision for arbitration in case the lessors and lessees should fail
to agree on the relevant figures. There has on this first rent review been a
failure to agree. The matter has been referred to the court for decision on a
point of construction of the relevant provisions. The relief sought on this
application takes the form of a declaration intended to provide guidance for
the arbitrator.
I have been
referred by Mr Reynolds and Mr Smith to a number of cases dealing with rent
review clauses in other leases. Those cases are of value, I think, to this
limited extent, that they establish that the expression ‘market rack-rental
value’ means, usually, the best rent reasonably obtainable for the premises and
may carry the implication
That is no more than a possible implication which may or may not be consistent
with the particular rent review clause as a whole.
Bar the
assistance, such as it is, in the respect I have just mentioned, I am bound to
say that I do not find the cases of much assistance in the construction of the
rent review clause in the present case. This clause seems to me to present
different problems from those which arose in the case to which I have been
referred.
I should start
by commenting on the provision regarding the initial rack-rental value. It
seems to me that the provision is contemplating that the ‘exclusive rent’ is to
be the sum of the rents obtainable on lettings of the individual parts of the
newly constructed building to the intended sublessee occupants thereof. I
derive that conclusion from the words ‘the same’ in the third line. In
addition, the conclusion seems to me to be supported by the reference to ‘the
underlease or tenancy agreement’ in subpara (i) and by reference to ‘the said
rent’ in the same subpara.
Mr Reynolds
submitted that the words ‘the same’ should be read as a reference to ‘the cost’
which follows the use of those words. I think that is a grammatically possible
construction, but I am not persuaded it is the right one. It seems to me more
natural to read the words ‘the same’ as referring back to the ‘exclusive rent’.
Also, the reference in subpara (i) to ‘the said rent’ seems to be a reference
to ‘the exclusive rent’.
Accordingly, I
think that by ‘the exclusive rent’ the draftsman meant the sum of rents payable
under underleases of the various units in the building and that the exclusive
rent on the one hand and the individual rents of the respective units on the
other hand were all approached on a hypothetical basis. If that had not been so
it would not have been necessary to have directed that the rent be ‘ascertained
on the footing . . .’.
Then I come to
the more critical matter of the meaning to be attributed to the ‘market
rack-rental value at the date of the review’.
There are two
points of dispute between the parties in this connection. First, it is an issue
whether the rent should be ascertained by considering the value of the premises
on a vacant-possession basis. Second, it is an issue whether the valuer should
look at the premises as a whole on a vacant-possession basis or whether he
should look at the premises unit by unit, according to the units in which the
premises are at present sublet, and consider the rent that could reasonably be
obtained for each of these units on a vacant possession basis.
I deal first
with the vacant-possession issue. Mr Smith, for the Borough of Preston, has
submitted there is no justification in the language here found for requiring
the valuation to be made on the hypothesis that vacant possession can be
offered to the hypothetical lessee.
I do not agree
with that. I start with the inclination to find, from the expression ‘market
rack-rental value’, that a vacant-possession basis of valuation was contemplated.
I accept that that is no more than a possible implication and must give way to
any indication to the contrary to be found in the language of the provision.
But the first disregard seems to me to reinforce rather than detract from that
implication. I read again the disregard. There must be disregarded:
(i) The fact that the Lessees or their
predecessors in title or any persons claiming under or through them are or have
been in occupation of the premises.
The sublessees,
whose de facto possession Mr Smith contends should not be disregarded
but should be taken into account, are persons claiming under or through the
lessees or the lessees’ predecessors, in title and are in occupation of the
premises. The clear language of this disregard, given its natural meaning,
requires, in my opinion, that the valuation proceed on a vacant-possession
basis.
Mr Smith
supported his argument to the contrary by reference to cases dealing with the
somewhat comparable disregard to be found in section 34 of the Landlord and
Tenant Act 1954. But that disregard does not have the critical word ‘are’; it
is simply directed to disregarding the fact that the tenant has been in
occupation. So I do not find the section 34 cases of assistance.
Nor do I find
of assistance the other authority referred to in this connection, Scottish
& Newcastle Breweries plc v Sir Richard Sutton’s Settled Estates*,
a decision of Judge Paul Baker QC, where again the disregard related to past
occupation on the part of the lessee and did not refer, as the present
disregard does, to current occupation of the occupying subtenant.
*Editor’s
note: Reported at [1985] 2 EGLR 130.
Accordingly,
in my judgment, Mr Reynolds is justified in seeking to incorporate in his
proposed declaration a provision to the effect that the valuation is to proceed
on a vacant-possession footing. That is, however, subject to this limitation —
if it is correct to call it a limitation. As I have already said, and repeat,
the valuation should proceed on the footing that the rent reserved under this
headlease is an investment rent and is not to proceed on the footing that that
lessee would be willing to pay a rent for occupation of the premises itself.
The investment
approach means, in my judgment, necessarily that the valuer must consider the
occupancy rent that could be obtained from the premises, whether as a whole —
if somebody could be found who wanted to take the premises as a whole, which
seems to me extremely unlikely, although it is in the end, I think, a valuation
matter — or in individual units, either as at present organised or in some
other reasonable organisation of them. The total occupation rent will then form
the basic guide to the rent that an investment lessee would be willing to pay
for the premises as a whole.
I am not
entirely clear whether the declaration, as drafted by Mr Reynolds and
incorporated into the originating summons, produces that result. The reference
is to ‘the letting as a whole, with vacant possession’. For the reasons I have
explained, I agree with the reference to vacant possession. The reference to
letting as a whole is correct, in my view, provided it is understood that the
letting as a whole is to a lessee who is taking it for investment purposes, and
that the basis for calculation of the rent for the letting as a whole must be
the occupancy rents for the units in which the premises could reasonably be let
for occupation.
I am willing
to make a declaration in order to give effect to the conclusions that I have
expressed, and I will hear counsel on whether there is any amendment to the
proposed declaration in order to do that.
