Landlord and tenant — Rent review — Whether improvements carried out by tenants and predecessors to be disregarded at review
By a lease
dated January 30 1979 the plaintiffs held a term of premises known as the
Cadogan Hotel, London SW1, for 60 years from December 25 1978. The lease
contained provisions for a five-yearly review of the rent from December 25 1985
to a yearly rent at which the premises might be expected to let in the open
market, there being disregarded any alterations or improvements made by the
lessees (otherwise pursuant to any obligation of the lessees) since the
commencement of the term at the sole expense of the lessee and with the
previous consent of the lessors. Pursuant to seven licences granted by the
defendant landlords, the plaintiffs or its predecessors carried out
improvements to the premises. Each licence provided that upon completion of the
permitted works the provisions of the lease should apply to the premises as if
the premises in their altered state had originally been comprised in the lease.
The defendant landlords contended that accordingly the direction in the rent
review clause to disregard improvements did not apply.
that the premises in their altered state had originally been comprised in the
lease, was to ensure that all the covenants and provisions of the lease
(including the disregard provision in the rent review clause) were to operate
in relation to the altered premises. The rent review disregard provision
applied to the improvements carried out since the commencement of the term.
The following
cases are referred to in this report.
Equity
& Law Life Assurance Society plc v Bodfield
Ltd (1987) 54 P&CR 290; [1987] 1 EGLR 124; 281 EG 1448, CA
Godbold v Martin (The Newsagents) (1983) 268 EG 1202, [1983] 2 EGLR
128
This was an
originating summons of the plaintiffs, Historic Houses Hotels Ltd, seeking a
declaration as to the meaning and effect of a lease dated January 30 1979 and
licences to carry out improvements to the Cadogan Hotel, the reversion of which
was owned by the defendants, the Cadogan Estates and Viscount Chelsea.
Hazel
Williamson QC and Edward Denehan (instructed by Travers Smith Braithwaite)
appeared for the plaintiffs; David Neuberger QC and Erica Foggin (instructed by
Stone Porter) represented the defendants.
Giving
judgment, KNOX J said: The originating summons before the court raises
the question whether internal alterations to the Cadogan Hotel, London SW1,
carried out pursuant to seven licences granted by the landlords (Viscount
Chelsea and Cadogan Estates Ltd) and executed by the tenants (Historic Houses
Hotels Ltd or their predecessors), at the tenants’ expense, fall to be
disregarded for the purpose of rent reviews under the lease of the premises
dated January 30 1979 and made between Lord Chelsea and Cadogan Estates and
Scottish & Newcastle Breweries Ltd.
Under the
lease alone the alterations plainly would fall to be disregarded for rent
review purposes, pursuant to a common-form provision to that effect based
loosely on sections 34(1) and (2) of the Landlord and Tenant Act 1954. The
economic justification for such a disregard is not far to seek. It is not
particularly fair that a tenant, who, at his own expense, voluntarily improves the
demised premises, should thereafter have to pay rent not only on what the
landlord contributed, the unimproved premises, but also on the improvements.
That is
consistent with the general purpose of rent review provisions, which has been
stated to be to provide the landlord with some measure of relief where by
increases in property values or falls in the real value of money in an
inflationary period a fixed rent has become out of date and unduly favourable
to the tenant. The exact measure of relief depends on the true construction of
the particular rent review clause: see per Dillon LJ in Equity & Law
Life Assurance Society plc v Bodfield Ltd [1987] 1 EGLR 124 at
p125*.
*Editor’s
note: Also reported at (1987) 281 EG 1448.
The problem in
this case is not caused by the lease but by the terms of the seven licences
granted for the alteration of the premises, which included a provision that all
the provisions contained in the lease were to be applicable to the demised
premises in their altered state in the same manner and as fully and extensively
as if those premises, in their altered state, had originally been comprised in
the lease. What appears to be involved is a notional antedating of the
execution of the alterations.
The lease was
dated and made between the parties as already mentioned. The premises, the
Cadogan Hotel, are described in some little detail. The term granted was one of
60 years from December 25 1978 and the reddendum originally was in the
following terms:
. . .
yielding and paying therefor during the said term and so in proportion for any
less time than a year (but subject to the provisions for rent revision
hereinafter contained) the yearly rent of £21,500
and then there
is provision for the usual quarterly payments.
The tenants’
covenants have nothing very remarkable or significant. There should be
mentioned clause X which was in the following terms:
. . . not at
any time during the said term to cut or injure, or permit to be cut or injured,
any of the walls, timbers or roof of the demised premises; and not to alter, or
permit to be altered, the plan, layout, height or elevation of the demised
premises or the architectural appearance or the architectural decoration thereof;
and not to erect, or permit to be erected, any internal partitions for dividing
rooms and not to erect, or permit to be erected, any additional building upon
the site of the demised premises; and not at any time during the said term to
fix, or permit to be fixed, any projecting flue pipe, fan or ventilator on or
through the external face of the walls or windows of the demised premises
provided that the lessee may make internal alterations to the demised premises
with the previous consent in writing of the Company, such consent not to be
unreasonably withheld.
If the rent
hereby reserved, or any part thereof, shall be unpaid for 21 days after
becoming payable, whether formally demanded or not, or if any covenant on the
lessee’s part herein contained shall not be performed or observed then it shall
be lawful for the lessor or the company at any time thereafter to re-enter upon
the demised premises . . .
I should
mention in passing that ‘the lessor’ was defined in terms of Lord Chelsea and
the company, Cadogan Estates Ltd.
One then comes
to the rent review provision, which is in fairly common form. It is only
necessary to read the first part of it; the machinery provisions are not
relevant to anything I have to decide. It is contained in proviso D. Subclause
(1) reads:
In this
Clause: —
‘Review Date’
means the Twenty fifth day of December in the year One thousand nine hundred
and eighty five and in every fifth year thereafter of the term hereby granted.
‘Review
Period’ means the interval between Review Dates and the interval between the
last Review Date and the expiry of the said term.
‘Market Rent’
means the yearly rent at which the demised premises might reasonably be
expected to be let in the open market upon the relevant Review Date by a
willing landlord on a lease for a term equal to the remainder of the said term
unexpired at the relevant Review Date but otherwise upon the terms and
conditions contained in this Lease and upon the assumption that the demised
premises were vacant and unlet and fully repaired in accordance with the
Lessee’s covenants herein, but disregarding:
(a) the fact that the Lessee shall have been and
will remain in occupation of the demised premises
(b) the fact that goodwill may have become
attached to the demised premises by reason of the Lessee having carried on
business therein
(c) any alterations or improvements to the
demised premises made by the Lessee (otherwise than pursuant to any obligation
of the Lessee to carry out such work) since the commencement of the said term
at the sole expense of the Lessee and with the previous consent in writing of
the Lessor or the Company.
Then the
operation of the rent review clause is contained in the next clause, (2):
From each
Review Date the yearly rent hereby reserved shall for the ensuing Review Period
be whichever is the greater of:
(a) the yearly rent payable in the year of the
said term immediately preceding the relevant Review Date or
(b) the market rent
I shall call
the provision in clause D(1)(c) ‘the disregard provision’.
The rent was
reviewed from December 25 1985 at an agreed figure of £240,000 pa. The first of
the seven licences, which are relevant for present purposes, was granted on May
18 1979. It recited, first, that the licence itself was supplemental to the
lease (which I have read extracts from), that the lease contained the covenant
(which I have read) not to make alterations or additions to the premises, that
the reversion was vested in Lord Chelsea as trustee for the company (Cadogan
Estates Ltd) and that the residue of the term was vested in Scottish &
Newcastle Breweries Ltd (the original tenants), and that the lessee had applied
to the lessor and the company for permission to make, or permit to be made,
alterations to the said premises and that the lessor in the company had agreed
to grant such permission in manner and subject as thereinafter appearing.
The licence
then contains the usual grant to the lessee for licence to make, or permit to
be made, to the premises referred to in part of the schedule, works and alterations
shown in drawings referred to in another part of the schedule. Nothing turns on
the terms in which the licence itself was granted.
There are then
six covenants by the lessee concerning the way in which it is to execute the
permitted alterations and, indeed, the timing within which it is to be done.
The first covenant is to obtain necessary permissions, notably under the Town
and Country Planning Acts. The second one should perhaps be read in full. It
reads as follows:
To carry out
or cause to be carried out the said works and alterations as soon as
practicable after obtaining any necessary further consents and in any event
before the date shown in Part IV of the said Schedule hereto and strictly in
accordance with the said Drawing or Drawings with the best materials and
workmanship available and to the reasonable satisfaction of the Company’s
Surveyor . . .
The rest of the
clause I do not propose to read. It is all concerned with the way in which the
works are to be carried out.
The next four
covenants all concern such matters as putting up screens to reduce the amount
of dust, storing goods and materials, the limitations on boards and notices and
hours of work. Nothing in particular turns on the details of that.
I now come to
the most importance clause, which is clause (g) in this licence, which reads as
follows (it is, of course, governed by the words ‘the lessee hereby covenants
with the lessor’):
That when the
said works and alterations have been completed all the restrictive and other
covenants and provisions contained in the said Lease (including the power of
re-entry which shall be deemed also to arise if there shall be a breach of any
of the covenants or conditions herein contained and on the part of the Lessee
to be observed and performed) shall be applicable to the said premises thereby
demised in their then altered state in the same manner and as fully and
extensively as if the said premises in their then altered state had
originally been comprised in the said Lease PROVIDED ALWAYS that this Licence
shall extend only to the permission hereby actually given and shall be without
prejudice to the rights or remedies of the Lessor or the Company under or by
virtue of the said Lease in the event of any breach or non-observance of any of
the covenants or conditions in the said Lease and on the part of the Lessee to
be observed and performed.
Then there is
a restrictive covenant concerning the fixing of projecting flues, pipes and
ventilators, on which, I think nothing turns.
The schedule
contains particulars of the lease, a description (very briefly) of the Cadogan
Hotel, details of the drawings in accordance with which the works had to be
done and a brief description of the works and alterations which reads:
. . . to
provide bedrooms with en suite bathrooms to certain of the rooms on the first,
second, third, fourth and fifth floors and to improve the staff rooms in the
basement.
The date for
completion of the works and alterations was Christmas 1979.
The other
licences need not be read in details. They provided, of course, for somewhat
different works, all, I think, less extensive but certainly all only internal
works. They all contained the clause (g) (which I have read in full from the
licence) of May 18 1979. There were certain minor differences in the
terminology of the other covenants, but nothing, in my view, turns on those
differences.
I can dispose
at once of an argument that was advanced on behalf of the landlords, namely
that because of the covenant by the tenant in the licence to execute the works
by a particular date and up to certain standards, the alterations came within
the parenthesis in the disregard provision ‘otherwise than pursuant to any
obligations of the said lessee to carry out such work’. I do not accept that
submission. The transaction needs to be seen as a whole and remains essentially
a licence. It was described as such. The obligations were concerned with the
mode of execution of what was licensed. There is a decision to very much this
effect of Judge Blackett-Ord, sitting as a High Court judge, Godbold v Martin
(The Newsagents) (1983) 268 EG 1202, [1983] 2 EGLR 128, with which I
respectfully agree.
The main point
argued was whether, as Mr Neuberger QC for the landlord submitted, the effect
of clause (g) of the licence is to require the rent review clause to be
operated as if the alterations, the subject of the licences, had been effected
at the outset of the term and therefore thereafter fell outside the disregard
provision. That, he submitted, was the plain natural meaning of the clause and,
however surprising, it was what the parties had adopted as their agreement.
Miss
Williamson QC submitted that this was not one’s first impression on reading the
clause. I find that a rather imprecise and dangerous yardstick for it is likely
to be affected by the degree of care with which one approaches this task. I
entirely agree that my first impression of what I should have expected the parties
to agree to is not in line with the construction argued for by Mr Neuberger,
but that is not the same thing, nor would that consideration be a safe guide to
the construction of the clause. I prefer to base my decision on an examination
of what the clause says.
Equally, the
fact that section 58 of the Law of Property Act 1925 requires the lease to be
treated as fully recited in the licences does not seem to me to advance matters
much. The statutory shorthand of section 58 only creates a recital and not an
operative provision.
It was also
common ground that the rent review clause contained provisions within the
meaning of the expression in the licences, ‘provisions contained in the lease’.
The hypothetical state of affairs which is introduced by clause (g) in the
licence — that is to say the fiction that the premises in their altered state
after the improvements, or alterations, had been completed — had been
originally comprised in the lease is one whose function was to preserve the
manner and the extent to which the covenants and provisions contained in the
lease were to apply. The purpose of the clause was therefore to ensure that all
the covenants and provisions in the lease (including, one may add by way of
parenthesis, the disregard provision in the rent review clause) were to operate
in relation to the altered premises. In saying that I do not overlook the fact
that the word ‘same’ in the phrase ‘in the same manner’ goes grammatically with
the following ‘as if the said premises had originally been comprised in the
lease’, and does not mean literally ‘in the same manner as heretofore’ or
anything to that effect. Nevertheless, the overall intention to preserve the
full operation of all the provisions of the lease is, in my view, quite
apparent.
To give effect
to the disregard provision according to its natural meaning on a rent review
plainly does not reduce the extent to which it applies. On the contrary, the
landlords’ contention that the disregard provision does not apply to these
improvements because they are notionally to be regarded as having been in place
at the beginning of the term involves a reduction in the operation of the
disregard
have applied. The problem, therefore, resolves itself into one whether the
preservation of the manner in which the provisions of the lease (and in
particular the disregard provision) are to be applied requires the hypothetical
state of affairs to apply to the rent review process and annul what would
otherwise be the clear effect of the disregard provision. If so there would be
an element of conflict between the evident requirement that all the provisions
of the lease should apply to the altered premises and this requirement that the
disregard provision to that extent should not.
It is, of
course, clear that no total elimination of the disregard provision is involved
on the landlords’ construction because any other improvements (the licence for
which did not include such a clause as clause (g) in the licence on May 18 1979
and the experience of these proceedings would doubtless reduce the likelihood
of that occurring again) would still be the subject of the unimpaired operation
of the disregard provision. This is not therefore, in my view, a cause of
mutually irreconcilable provisions, one of which therefore falls pro tanto
to be disregarded or modified, and I therefore am not assisted by authorities
cited to me dealing with that aspect of the matter. Rather, this is a case
where the evident purpose of the clause — namely the preservation of the same
manner of operation of all provisions of the lease — should be treated as
governing the extent to which the postulated hypothesis needs to be applied.
The manner in which the covenants and provisions were to apply was, in my view,
looking to such matters as the operation of the covenant not to alter the
premises in clause X of the lease.
Such a limited
reading of the effect of the hypothesis is, in my view, justified by a
comparison with the rest of clause (g) in the licence and in particular the
parenthesis therein. It reads as follows:
. . .
including the power of re-entry, which shall be deemed also to arise if there
shall be a breach of any of the covenants or conditions herein contained and on
the part of the lessee to be observed and performed.
That
parenthesis does two quite separate things. First of all, it includes among the
provisions of the lease the re-entry clause. This might be regarded as some
indication that without it the re-entry clause would not have been imported.
Miss Williamson, for the trustees, wisely (as it seems to me), did not rely on
that aspect partly, no doubt, because it is difficult to see how the re-entry
clause could fail to continue in operation because of some internal operations.
The second
purpose achieved by the parenthesis in clause (g) was to make the re-entry
clause applicable to breaches of the covenant in the licence, all of which were
concerned, in one way or another, with the way in which the licensed alterations
were executed. That leads to the not very surprising conclusion that where the
operation of the lease was intended to be altered, in this respect extended,
the parties took pains to say so in terms. There is also force in the
submission that had the somewhat startling result contended for by the
landlords been intended the parties would have been very likely to say so in
terms.
Mr Neuberger,
with becoming modesty, described the result for which he contended as in the
nature of a windfall for the landlords. I agree it would be a windfall but, in
my view, the apple stays on the tree. I propose to make the declaration asked
for in para 1 of the originating summons.
Declaration
accordingly.
