Landlord and Tenant Act 1954, Part II–Determination of rent and other outstanding terms of a new lease–Zoning method of rental valuation explained–Properties which should properly be treated as comparables–Additions to rental value for return frontages and rising rents and deductions for quantity–No deduction in the circumstances for lack of depth in comparison with frontage–Rent review clause to provide for movement downwards as well as upwards, but with no consequential adjustment of rent on that account–Factors to be considered in determining interim rent under section 24A–Application of English Exporters (London) Ltd v Eldonwall Ltd–Term of 20 years ordered by agreement–Rent under new lease of £12,500 per annum (previous rent £2,100) and interim rent £9,200–Useful judgment for valuers concerned with business premises and the 1954 Act
This was an
application by the plaintiff company, Janes (Gowns) Ltd, under Part II of the
Landlord and Tenant Act 1954 for the grant of a new lease. The grant was not
opposed by the landlords, Harlow Development Corporation, but there were
certain disputed matters outstanding concerning the terms of the new lease. The
premises in question were 5 and 6 Market House, The High, Harlow, Essex.
G N Huskinson
(instructed by Stanley Tee & Co, of Bishop’s Stortford) appeared on behalf
of the plaintiffs; D R Hands (instructed by the solicitor to Harlow Development
Corporation) represented the defendants.
Giving
judgment, JUDGE FINLAY said: On September 28 1955 the Harlow Development
Corporation granted to the plaintiff company, Janes (Gowns) Ltd, a lease of
premises known as 5 and 6 Market House, The High, Harlow, Essex, for a term of
just over 21 years to commence on September 14 1955 and to end on September 29
1976 at a rent of £2,100 per annum. On March 2 1976 the landlords, who are the
defendant corporation, served upon the tenants, who were at that time still in
occupation under the lease which I have mentioned, a notice under section 25 of
the Landlord and Tenant Act 1954 specifying the date of termination of the
tenancy as September 29 1976, that is to say the date upon which in fact the
tenancy would but for the statutory provisions in any event have come to an
end. By a notice dated April 2 1976 the plaintiff company notified the
defendants that they would not be willing at the date of termination to give up
possession of the property, and on June 25 1976 the plaintiffs applied for the
grant of a new lease. The landlords do not oppose the grant of a new lease, and
indeed but for three matters the terms of the new lease are agreed.
The
outstanding matters on which the parties are not agreed are the amount of rent
payable under the lease; and, secondly, whether, as it is agreed that there
should be a rent review provision in the lease, that review provision should
contemplate that the rent could be varied downwards as well as upwards, or
alternatively, that there should, in the event that the review clause provided
only for an upward movement of the rent, be a provision entitling the tenant to
give notice breaking the lease, that is to say, notice terminating the tenancy.
The third matter which arises for determination is whether any order should be
made for payment of interim rent, and if so in what amount, and that arises
under and by reason of an application made in the proceedings by the landlords
dated October 5 1976.
At the
commencement of the proceedings there were also in issue two other matters. One
was that there was a difference between the parties as to whether the rent
review should be at intervals of five or seven years, but in the course of the
hearing the plaintiffs accepted that the rent review should be at five-yearly
intervals. And furthermore, in the initial stages the plaintiffs’ claim for a
rent review provision to provide for a downwards review was coupled with and
not alternative to the contention that the lease should contain a provision
entitling the tenants to bring it to an end at the rent review date.
The major
problem, on which the others, in my judgment, to a large extent turn, is what
rent should be paid under the lease?
Here again there is a certain measure of agreement between these parties
as to this problem. Both experts–and I say both, not for the moment taking
account of a third expert who gave evidence on behalf of the plaintiffs,
because he did not make an initial but merely certain corroborating
evaluations–both experts who gave evidence before me, that is to say P F Jones
[MA FRICS], who was called by the plaintiffs, and D J Green [BSc (Est Man)
ARICS], who was called by the defendants, were agreed that an appropriate
approach is that which is referred to as a zoning method. This is a process
whereby a notional superficial area of the premises is determined with a view
to ascertaining the proper rent by applying
the premises which is designated as zone A. Zone A is that part of any premises
which is bounded by the front of the premises and is to a depth of 15 ft
therefrom. If zone A is to be let at the rate of £X per sq ft, then the next
zone is the next 25 ft in depth, which is, it is agreed, to be charged at the
rate of half of £X per sq ft. And the next zone, which is the remainder of the
shop depth (apart from the two zones which I am about to mention), is to be
charged at one quarter of the rent per sq ft appropriate to zone A, ie £1/4X
per sq ft. There are therefore three zones, all differentiated according to the
depth from the front of the shop. A fourth zone is that comprising ancillary
accommodation within the shop, the interior ancillary accommodation of offices,
lavatories and the like, and that is charged at the rate of one-sixth of the
rent appropriate to one sq ft of zone A. And finally the fifth zone is that of
outside ancillary accommodation, and that is charged at the rate of one-tenth
of the rent appropriate to zone A. The notional superficial area is accordingly
ascertained by adding together the area of zone A, that is the part of the
premises within 15 ft of the frontage, to one-half of the actual area of the
part which falls within 15 and 25 ft in depth from the front and one-quarter of
such area, if any, as falls more than 40 ft from the front, and further adding
one-sixth of the area of any ancillary interior accommodation and one-tenth of
the area of any outside ancillary accommodation. When all these various areas
are added together one has a notional area which, when multiplied by the
ascertained amount appropriate to one sq ft of zone A will yield the basic
rent. It is further agreed that although this is a proper approach particular
circumstances may require modification either upwards or downwards of the basic
rent thus arrived at. In determining whether any such modification should be
made it is appropriate, in my judgment, and I do not think that there was
disagreement with this by any of the experts, that regard should be had to any
user covenants which there may be in the lease.
The covenant
as to user contained in the lease which I have mentioned and which is, it is
agreed, to be maintained in the new lease was a covenant by the tenant to use
the demised premises for the purposes only of a retail lock-up shop and offices
in connection therewith for the sale of fashions, ladies’ and children’s wear
and accessories ‘provided that the main characteristic of the shop is fashion’
and subject to a further proviso that the user should be conducted so as not to
contravene the provisions of a covenant contained in the lease, in common form,
against the use of the premises in such a manner as to cause nuisance and noise
or the like.
Applying these
principles as to how the area of the premises in terms of zone A is to be
ascertained, both parties arrived at the conclusion that there are 1,628 sq ft
in terms of zone A. Mr Jones for the plaintiffs took the view that the
appropriate rent per sq ft of zone A was £7. Mr Green for the defendants said
the appropriate rent was £8.59 per sq ft. The difference of £1.59 gives rise to
a basic difference of £2,588.52 per annum for the area of 1,628 sq ft. These
differences, which I should say are not the only differences between the two
experts, arise from four matters. The first is this, that both experts arrive
at their conclusion as to what the appropriate rent for one sq ft of zone A
should be by comparing the rents of other premises in the neighbourhood. But
the comparables, if I can so call them, to which Mr Jones has had regard
include four properties, nos 2, 3, 4 and 5 The Rows, which are not included
among those considered by Mr Green. The second point is that Mr Jones did and
Mr Green did not make an allowance for the return frontage which one finds in
two properties, namely nos 1 and 2 Market House and nos 6 and 14 The Rows. Both
Mr Jones and Mr Green made allowance for the return frontage of no 11 and no 15
Adams House. The point about a return frontage allowance as I understand it is this,
that if there is a return frontage it is regarded as advantageous to the tenant
and accordingly should result in some increase in the rent. If therefore one is
considering the rent that has been agreed in respect of premises which have a
return frontage and endeavouring to arrive at what is the rent per sq ft of
zone A of the premises, it is necessary first to deduct from the rent payable
the allowance for the return frontage and then to divide what is left by the
notional zone A area to arrive at the rent per zone A sq ft.
The third
point of difference is that Mr Green has treated one of the properties which is
regarded as comparable by both himself and Mr Jones, namely 10 The Rows, as
being notionally two properties and not one only; and he has done so because at
some date since the new lease of 10 The Rows was granted, that lease being one
dated May 3 1976, there has been an assignment of the lease, and on the
assignment a premium was paid. Mr Green took the view that it would be
appropriate to regard that premium as indicating that as from the date of the
assignment the premises should be treated as let at a rent equal to that
reserved by the lease plus an addition representing the annual value throughout
the residue of the term of the premium that had been paid. Accordingly he
treated 10 The Rows as furnishing evidence not only of the rent at which it was
let by the lease dated May 3 1976 but also as let by the joint effect of that
lease and the assignment upon which the premium was paid. Mr Jones did not view
the matter in that way, and accordingly there is in effect an additional
comparable in Mr Green’s calculations that does not occur in Mr Jones’s.
The fourth
point of difference was that Mr Jones made no allowance in his calculations for
the fact that rents have risen since the dates when the comparable rents
selected for comparison were arrived at, that being at the end of 1976 or early
in 1977, although the exact dates when the various agreements were made was not
in evidence before me and some may have been made at dates later than 1977. Mr
Green on the contrary made an allowance of what appears to have been a little
over 15 per cent because his basic rent in terms of zone A is £7.44 and he
increased that, as I indicated, by an addition to allow for a rise in rents to
£8.59. There is a further point that I should mention as to the manner in which
Mr Green arrived at the rent of the basic £7.44 per sq ft of zone A. He did so
by taking (i) an average of the comparable properties in Market House betwixt
and between, that average being £7.53; (ii) an average of the four properties
(treated as five) in The Rows, the average being £7.36; and (iii) an average of
the five properties in Adams House, that average being £7.46. He then added
together the three averages and divided the total by three to arrive at £7.44.
I am not satisfied that that is an appropriate way to arrive at the average. It
appears to me that the proper way would be to take the rent per sq ft in terms
of zone A for each of the 12 properties, or, if it be right–and I have not yet
come to this point–to treat one of them as two, the 13 properties, and then
divide the total by 12 or 13. That would produce a slightly different answer.
As to the
points of difference, it is said that it is wrong to include the properties 2,
3, 4 and 5 The Rows. They are in a side street that leads off Market Square. It
is said that they are properties let for quite different purposes than those
that we find in the Market Square, and in any event they are not part of the
enclave of properties that front on to Market Square. There is I think some
force in that argument and I have come to the conclusion that the proper course
is to exclude from consideration two of these four properties, namely 2 and 3,
but to include 4 and 5 The Rows. I do so for this reason. The two properties I
have last mentioned front on to The Rows and do so opposite the return frontage
window and the return frontage of the premises with which I am concerned, 4 and
5 Market House. They are in my judgment properly to be regarded in comparing
rents in the neighbourhood because in a very real sense they are adjacent to 4
and 5 Market House. I do not think, however, that the same can be said of 2 and
3 The Rows, which are removed from it not only by being on
side windows of 4 and 5 Market House look.
As to the
second point, in my judgment it is proper to make allowance, as Mr Jones has
done, for the return frontages, not only to the premises 6 to 14 The Rows,
occupied by McHarris Motorcycles, but also the return frontage of the premises
1 and 2 Market House occupied by Eastern Electricity Board. So far as the
McHarris Motorcycles property is concerned, that return frontage appears to me
to have no features that would entitle one to disregard it. It is said in
relation to 1 and 2 Market House that the return frontage looks only upon an
alley way. I do not regard that as a reason for disregarding the return
frontage and making no allowance for it, because a return frontage may be of
utility to the occupier and an attraction to his customers, not merely because
the paths along the thoroughfare pass the return frontage but also because the
customers are attracted to the side window by looking first at the window in
front.
As to the
third point, in my judgment it is not right to treat 10 The Rows as two
properties and to introduce a second comparable by reason of the consideration
of the terms of the assignment on which a premium was taken. I have no evidence
before me as to the reasons or basis on which that premium was paid or
calculated. And in my judgment the proper course is to have regard to 10 The
Rows as furnishing evidence of the state of the market so far as rents are concerned
by considering the terms of the original letting for the lease dated May 3 1976
and not speculating upon the reasons for the payment of the premium at some
later stage.
As to the
fourth point, it is in my judgment proper to make some allowance for rising
rents. I have come to the conclusion, however, on the evidence which I have
heard that the allowance of 15 per cent is too much. Mr Jones accepted that
some allowance should be made for rising rents, and, having regard to the
evidence he gave and also the evidence of Mr Green as to this matter, I have
come to the conclusion that the appropriate allowance for the rise in rents is
an allowance of 10 per cent.
Bearing in
mind what I have said about making allowances for return frontage, a matter
which affects not only 6 to 14 The Rows and makes the appropriate sq ft rate in
respect of that property a rate of £6.72 and not the £6.78 shown in Mr Green’s
schedule, an allowance should also be made for the return frontage in respect
of 1 and 2 Market House, which means that the appropriate rate per sq ft in
terms of zone A is £7.50 and not £7.84 as shown in the schedule. Further, the
appropriate terms to consider in relation to 10 The Rows are those in the
original letting. That results in my view in a rate per sq ft in terms of zone
A of £6.68 and not a rate of £6.89 as shown in Mr Green’s schedule, because I
calculate, as apparently does Mr Jones. that to take the average of the rents
reserved over the first five years results in a figure of £6.68. Bearing these
various circumstances in mind, I find that the rent per sq ft indicated by the
comparables that can properly be regarded, that is to say the properties shown
on Mr Green’s schedule and also 4 and 5 The Rows, and taking the average of the
various rents per sq ft in respect of all these properties, is in terms of zone
A £7.23, 1,628 sq ft at such a rent gives a figure of £11,770.
I now come to
the further matter of disagreement which arises not in arriving at the basic
rent per sq ft but in the view taken as to whether any deductions should be
made from the figure thus arrived at in respect of two matters. Mr Jones gave
evidence that he thought deductions should be made in respect of the quantity
of the property demised and also in respect of its shape or configuration. So
far as the latter point is concerned, his evidence is not supported by that of
the other expert called on behalf of the plaintiffs, R A Childs [FRICS], who
did agree that some deduction should be made for quantity. I do not think,
although Mr Green contended that no such deduction should be made, that he did
so with quite the enthusiasm with which he differed from Mr Jones’s view on
certain other matters. I find that it is appropriate to make some deduction for
quantity. It is a matter of advantage to a landlord to let property in larger
units rather than in a number of small units, and the tenant is in my judgment
entitled to some allowance for that advantage which the landlord has. I accept
Mr Jones’s evidence that an appropriate deduction for quantity is 5 per cent.
So far as the
question of the shape of the premises is concerned, I am unable to accept the
evidence that a deduction of 15 per cent should be made for that. It is I think
to be noted that there is no suggestion that, in the course of a period of more
than 20 years that the plaintiff company has occupied these premises, they have
made any attempt to alter the internal arrangements in any radical way. The
shape of the premises, having, as it has, a large frontage and not perhaps a
correspondingly large depth, may well be apt for the nature of the trade
carried on by the plaintiff company. The trade of selling ladies’ and
children’s wear and fashion goods is no doubt one where facilities for display
play a prominent part in the success of the venture, and I am not satisfied
that it is appropriate to make any deduction by reason of the fact that there
is a large frontage to this property and not a relatively large depth to go
with it. I do not overlook the fact that the result of the large frontage is
that a large part of the premises falls to be charged at the zone A rate, or
rather I should say that a large part of the premises falls within zone A. That
is no doubt disadvantageous to the tenant, but the disadvantage is of course
compensated by the amenity produced by the large display area.
Accordingly I
consider that there should be deducted from the figure of £11,770, which I have
stated is arrived at in the way I have indicated, 5 per cent for quantity. That
amount is £588, leaving a balance of £11,182. Furthermore it is appropriate in
my judgment to add the figures for the return frontage, and I think the
appropriate figure is £190, being £10 per ft for a return frontage of 19 ft. So
far that produces a figure of £11,372. However, I have already indicated that
there should be an addition to that of 10 per cent to allow for the rise in rents
in the period between the time when the comparable rents were arrived at and
the date when the new lease will commence, which is in February 1980. That
produces a figure of £12,509, which I propose to call £12,500.
In my
judgment, therefore, the appropriate rent under the new lease is £12,500.
I turn now to
the question whether there should be provision, not only for a rent review,
which it is agreed there should be at five-yearly intervals, but for a review
down as well as up. It was decided by Cross J, as he then was, in Stylo
Shoes Ltd v Manchester Royal Exchange Ltd, reported in (1967) 204 EG
803, that in determining the terms appropriate under a new lease granted under
this jurisdiction the court could in its discretion provide for a rent review
clause which provided for review of the rent downwards as well as upwards. The
nub of the decision is stated by Cross J in these terms: having said that he
did not think that the courts had ever hitherto addressed themselves to the
question, he said it was a rather academic matter because he saw no reason why
sauce for the goose should not be sauce for the gander. It is to be borne in
mind that under section 34(3) of the Landlord and Tenant Act 1954 (as amended
by the Law of Property Act 1969) it is provided that: ‘Where the rent is
determined by the court, the court may, if it thinks fit, further determine
that the terms of the tenancy shall include such provisions for varying the
rent as may be specified in the determination.’
In my judgment
it is appropriate that the rent review clause should deal with the possibility
of rent being varied downwards as well as upwards. And I reach that conclusion
because of the evidence which I have heard about the development of what is
called the Harvey Centre in the near neighbourhood of the demised premises, a
development which may well have the result of rendering a rent calculated prior
to that development taking place inappropriate in future years. In short the
rents may in the neighbourhood of the Harvey Centre go down; equally they may
go up. Having regard to
provide for the review in either direction. It is submitted, however, that if
such provision is inserted in the lease then some quid pro quo by way of
increase in the rent should be allowed, because the provision of such a clause
is an advantage to the tenant. It is said that the comparable rents which have
been considered in arriving at the appropriate rent for these premises were all
contained in leases which contained rent review clauses providing for revision
of the rent upwards, and that no doubt was an advantage to the landlords which
should be taken into account in arriving at these comparable rents. I am not
satisfied that that is the right approach to take to this matter. In my
judgment the only way to find out what is the appropriate rent is to have
regard to the rents of neighbouring property and in doing so to arrive at a
view as to what rent the holding might reasonably be expected to be let at in
the open market. In conditions where it is expected that rents will over the
period of the lease continue to rise it is no doubt common to insert rent
review clauses to provide for an upgrading of the rent at appropriate
intervals. I am by no means satisfied that the insertion of such a provision
leads to any reductions in the rent paid under the lease. It is in my view more
likely that in a particular state of the market leases are simply only granted
on the basis that the rent review clause is inserted. Twenty-five years ago it
was a provision that was rarely if ever come across. In the last 15 years it
has become so common as to be a matter of common form. I am not satisfied on
the evidence before me that the insertion of rent review clauses for review in
one direction only have affected the rents which have been payable, and
accordingly I think that the appropriate course to take is to insert a rent
review clause in this lease to provide for variation in either direction but to
make no consequential adjustment to the rent which I have already indicated is
the appropriate rent.
I come now to
the third and last matter in dispute, which is whether any interim rent should
be payable and, if so, what amount. I have been referred to the decision of
Megarry V-C in English Exporters (London) Ltd v Eldonwall Ltd
[1973] Ch 415. That decision makes it clear that it is a matter for the
discretion of the court as to whether any interim rent should be ordered
between the dates when the application by a landlord is made and the date when
the new lease takes effect. Further, I collect from that judgment the
conclusion that a case can in appropriate circumstances be made out for
tempering the market rent by some amount. That is so because the exercise that
has to be carried out by the court, if it determines that an interim rent is
appropriate, is that indicated in the 1954 Act as amended by the Law of
Property Act 1969, in section 24A which is inserted in the 1954 Act by the Act
of 1969. That provides in subsection (1) that: ‘The landlord of a tenancy to
which this Part of this Act applies may–(a) if he has given notice under
section 25 of this Act to terminate the tenancy,’ which is the case here, ‘. .
. apply to the court to determine a rent which it would be reasonable for the
tenant to pay while the tenancy continues by virtue of section 24 of this Act,
and the court may determine a rent accordingly.’ Subsection (2) provides that: ‘A rent
determined in proceedings under this section shall be deemed to be the rent
payable under the tenancy from the date on which the proceedings were commenced
or the date specified in the landlord’s notice or the tenant’s request,
whichever is the later.’ It is common
ground that the effect of that provision is that the interim rent, if any is
awarded, will be payable as from October 5 1976. Subsection (3) provides that:
‘In determining a rent under this section the court shall have regard to the
rent payable under the terms of the tenancy, but otherwise subsections (1) and
(2) of section 34 of this Act shall apply to the determination as they would
apply to the determination of a rent under that section if a new tenancy from
year to year of the whole of the property comprised in the tenancy were granted
to the tenant by order of the court.’
Section 34 is
the provision under which the rent payable under a tenancy granted by order of
the court falls to be determined, and subsection (1) of that section provides
that it ‘shall be such as may be agreed between the landlord and the tenant or
as, in default of such agreement, may be determined by the court to be that at
which, having regard to the terms of the tenancy (other than those relating to
rent), the holding might reasonably be expected to be let in the open market by
a willing lessor, there being disregarded’ certain matters set out in the
subsection.
I have already
held that the appropriate rent under the new tenancy is the rent of £12,500 per
annum, but what has to be determined for the purposes of a determination of
interim rent is a rent determined in the same manner as is provided for by
section 34 but on the footing that the new tenancy is a tenancy from year to
year. There is, however, this point to be borne in mind, that in arriving at
the figure of £12,500 per annum I did so having first ascertained that the
appropriate rent payable without regard to the circumstance that rents have
risen in the meantime would have been £11,372. The date from which the interim
rent should be payable will be the date on which application is made by the
landlord for its determination, that is to say October 5 1976. If the matter
had been dealt with at that date and there had been then available the
information as to comparable rents which has been before me, I consider that
the conclusion arrived at would have been that the rent for a new tenancy for a
fixed term of years falling to be paid at that time would have been £11,372.
The rent is, however, to be determined as that appropriate to a yearly tenancy,
not a tenancy for a term of years. It is appropriate, in my judgment, to make a
deduction to give effect to that circumstance, and the appropriate deduction I
find is one of 10 per cent. Accordingly the rent which I consider would have
been payable for a yearly tenancy ordered to be granted in October 1976 would
have been £10,235.
The court is,
however, directed in determining a rent under section 24A to have regard to the
rent payable under the terms of the tenancy, that is to say the rent payable
under the terms of the tenancy granted in 1955. In my judgment the effect of my
having regard to the rent payable under that tenancy, which it will be recalled
is a rent of £2,100 per annum, is that there must be a substantial difference
between the rent payable under the original tenancy and the rent payable under
any new tenancy granted under the statutory provision. That, I think, operates
in two ways. It indicates, I think, that some reduction should be made from the
figure that would be arrived at by ascertaining what is the appropriate rent
payable in respect of a yearly tenancy. But simply because the difference is so
large the deduction cannot in my judgment be of a very substantial amount. If
it were, then the effect would be that the tenants would be continuing to
occupy the premises under a rent more nearly comparable to the rent appropriate
some 20 or more years ago than that appropriate for the present time.
Nevertheless, the process does appear to be, and I am fortified in this view by
what is said by the Vice-Chancellor in the case which I have mentioned, to be
one of tempering the effect of the statutory provision. An appropriate mode of
tempering in my judgment would be to make a further reduction of 10 per cent.
If that is made from £10,235, one arrives at £9,212; thus in my judgment the
appropriate amount of the interim rent would be £9,200.
I indicated at
the beginning of this judgment that there was a large measure of agreement
between the parties on many matters. I have dealt, I think, with those which
were outstanding. One matter on which the parties were agreed was that the new
term should be a term of 20 years. I had some doubts as to whether there was
jurisdiction to make an order for the grant of a term of 20 years, but both
counsel have pressed me to do so and bearing in mind that if I were to make an
order for the grant of a term of 14 years, which is the maximum term that can
be ordered under section 33,
should take effect and be brought into operation as one of 20 years, I have
come to the conclusion that there is no reason why, provided that the order
recites that the parties by their counsel agree that the term to be ordered
should be one of 20 years, an order for a 20-year term should not be made.
Accordingly I
will order that there should be a new lease on the terms of the existing lease
but with the addition of a rent review clause which I understand has already
been agreed between the parties to provide for revision of the rent at
five-yearly intervals either in an upwards or in a downwards direction as may
be appropriate and that there be no break clause in the lease, because having
directed a rent review clause in that form the plaintiffs do not apply for any
provision for the term to cease at their option. The rent payable under the
lease will be, as I have already indicated, £12,500 and I further order that
the interim rent as from October 5 1976 until the new tenancy takes effect
shall be £9,200 per annum.
I will order a
new lease, terms as in 1955 with deletion of clause 2(1) and the addition of an up-and-down rent review
clause at five-yearly intervals, at a rent of £12,500 per annum; and an interim
rent from October 5 1976 at a rate of £9,200.
