Disregarding improvements can play an important role in rent reviews
Just when it seemed that there was a shortage of rent review topics to argue over, along comes another one, this time concerning the correct approach to that familiar rent review creature – the disregard of improvements.
Prior to 10 May 2006, owners or tenants of retail warehouses were able, in certain circumstances, to install mezzanine floors without applying for planning permission. Where warehouses were let on leases containing rent review clauses, with covenants permitting such improvements to be carried out, this regime was beneficial to both parties because it enabled: (i) the tenant to increase its retail area without the cost, delay and uncertainty of applying for planning permission and (ii) the landlord, upon review, to argue for a higher rent that took into account the right to improve, if not the improvement itself.
New provisions
However, the Town and Country Planning (General Development Procedure)(Amendment)(England) Order 2006, which came into effect on 10 May 2006, states that alterations to increase the gross floor space of a building that is used for selling goods (but not hot food) by more than 200m2 will constitute development and require planning permission. Parties wishing to take on a tenancy of a retail warehouse will have to weigh up the prospect of obtaining planning permission for the installation of a mezzanine floor.
The same consideration will apply to hypothetical tenants in a post-9 May 2006 rent review, in circumstances where the premises had been previously improved by the addition of a mezzanine floor installed by the tenant. Could the tenant succeed in arguing that: (i) the existing floor should be disregarded as a tenant’s improvement and (ii) the hypothetical tenant would reduce the rental bid it would otherwise have made because it appreciates that there would be no prospect of gaining planning permission for a mezzanine in the future? If so, the actual tenant would pay a rent upon review that would have no regard to its enjoyment of the mezzanine in the real world, afforded partly by its own improvement, and partly by the capacity of its landlord’s building.
The “disregard of improvements” will usually be shorthand for what the rent review clause will express as the disregard of the “effect on rent of improvements”. GREA Real Property Investments Ltd v Williams [1979] 1 EGLR 121 and Estates Projects Ltd v Greenwich London Borough [1979] 2 EGLR 85 suggest that, in considering such a disregard, it will rarely be appropriate for rent review valuers to disregard the very existence of the improvements. So far so good. But where the disregard is of the improvements, and not merely their effect on rent, what will happen?
It is difficult, but not impossible, to argue that the mezzanine should be disregarded, with all that that entails. No reported decision considers this point, perhaps because such drafting is seldom encountered. However, it may make a dramatic difference in its application to mezzanines, which now need planning permission that may be difficult or impossible to obtain by the review date.
This conundrum also occurs whenever legislation is introduced, which prospectively makes life more difficult or expensive under new leases, and thus enables the actual tenant to contend that the hypothetical tenant would bid less, even if the former is wholly unaffected.
Favouring presumptions
The saviour in such circumstances may be that old rent review spectre, the presumption in favour of reality. The role of this presumption has come to dominate the stage of rent review, and it is certain to have at least a bit part in the dénouement of this particular sideshow.
Railstore Ltd v Playdale Ltd [1988] 2 EGLR 153 is an example of the presumption in a similar planning field. Although the disregard was of the effect on rent of the improvements rather than of the improvements themselves, the judgment attributed no significance to the difference, and analysed the problem by reference to the “strong presumption against either the landlord or the tenant obtaining an advantage which is referable to a factor which has no existence as between the actual landlord and the actual tenant”.
We shall have to wait and see whether the same approach will apply in the case of an express disregard of the improvements.
Guy Fetherstonhaugh QC is a barrister at Falcon Chambers
