Construction — Clause in lease — “Market rental value” — Demise of undeveloped land — Land divided into plots — Underlettings for construction of factories and warehouses — Subtenants erecting buildings on their plots at their expense — Whether “market rental value” assessable on demised premises as presently existing — Tenant contending development to be disregarded for rent review purposes — Declaration for the landlord
The landlord’s predecessor in title demised five acres of undeveloped land at Langley Close, Havering, to Havering London Borough Council for a term of 62 years. The council covenanted to divide the land into plots which were to be underlet for the construction of factories and warehouses. Clause 5 provided for a rent review at the end of the 20th and 40th years of the term. The reviewed rent was to be the higher of the current rent and the “market rentable value” at the rent review date. The council underlet to various subtenants, who erected buildings on their plots at their own expense. The council’s rent review clauses with their undertenants expressly provided that the buildings were to be disregarded. The landlord contended that the normal assumption was that the value of premises to be considered was as the premises actually existed at the date of the rent review. The council, on the other hand, contended that they or their undertenants should not have to pay rent for improvements made at their own expense.
Held Declaration for the landlord.
1. The rent review clause referred to the “market rental value” without saying of what and although the lease defined the demised premises to include any buildings on the land during the term, that definition was qualified by applying it only “wherever consistent with the context”.
2. The answer to the question of construction, therefore, depended upon the prima facie assumption made about the intentions of the parties to a rent review clause. Over the years, the courts had formulated various prima facie assumptions as guides to such clauses. Although the construction of a particular document depended upon its own language, the assumptions laid down in the authorities were very important, bringing, as they did, some consistency to the interpretation of leases and enabling parties buying and selling leases and reversions to have more reliable advice on what their rights and obligations were likely to be.
3. There were several cases which had dealt with the correct approach to the question which arose in the instant case. In Ponsford v HMS Aerosols Ltd [1979] AC 63, the rent review clause required the tenant to pay “a reasonable rent for the demised premises”. During the lease, the tenant made improvements at its own expense, but the House of Lords refused to accept that a “reasonable rent” meant one which it was reasonable that the tenant in particular should pay and that it would be “unreasonable” to make him pay rent for his own improvements. The majority supported a prima facie assumption that premises were to be valued as they actually were and that included improvements. A similar construction was put on a demise of land with a cinema which the tenants had built at their own expense: see Goh Eng Wah v Yap Phooi Yin [1988] 2 EGLR 148 and also Ravenseft Properties Ltd v Park [1988] 2 EGLR 164. All the cases were thus consistent with the exception of Ipswich Town Football Club Co Ltd v Ipswich Borough Council [1988] 2 EGLR 146, where the prima facie rule of construction was rebutted by the particular language of the instrument.
4. In Sheerness Steel Co plc v Medway Ports Authority [1992] 12 EG 138, it was stated that there were “clear words” in the lease which showed an intention “to override the normal commercial expectation that a tenant would not be called upon to pay an additional rent for improvements made at his own expense”. However, that passage was not an endorsement of a new prima facie rule which would run contrary to all the earlier authorities. Ponsford was the rule upon which landlords and tenants had acted for many years. It was open to the parties to make the necessary express contrary provision and it would defeat legitimate expectations in the market if Ponsford were to be overthrown.
5. The rent review clause in the instant case was to be construed as requiring the buildings on the land to be included in the valuation.
Michael King (instructed by Binks Stern) appeared on behalf of the landlord; and Nicholas Pattern QC and Timothy Fancourt (instructed by the solicitor to Havering London Borough Council) appeared for the tenants.