Negligence — Expert determination of rent review — Whether wrong to use overall rather than zoning method — Whether wrong to reject assumption that hypothetical tenant would subdivide — Whether negligent in relation to meaning and effect of Iceland Frozen Foods plc v Starlight Investments Ltd
The plaintiffs are the owners of a long
leasehold interest in a shopping centre which included a unit (unit 62) let to
Marks & Spencer (M&S) for a term of 100 years from July 3 1972 at a
rent after the first 14 years of £35,000 subject to review. Unit 62 has a
frontage of 145 ft to the main shopping mall and a depth of 84 ft; it provides
a rear extension to an existing store owned and occupied by M&S; there is
no formed separating wall between unit 62 and the main store. By the terms of
the underlease, M&S were entitled to underlet unit 62 in not more than
three separate parts with the landlord’s consent. The rent at review was the
sum at which the premises might reasonably be expected to be let as a shell
building on the same terms of the underlease. In the course of the 1993 rent
review the plaintiffs’ valuer submitted that the market rent was £835,000 and
the valuer on behalf of M&S that it was £212,000. The defendant, who was
appointed as an expert under the rent review provisions, determined the market
rent at £250,000. The plaintiffs brought proceedings against the defendant
alleging that he was in breach of his duty of care in that he: (1) valued unit
62 by the overall method whereas he should have used the zoning method; (2) failed
to take legal advice as to the relevance of Iceland Frozen Foods plc v Starlight
Investments Ltd [1992] 1 EGLR 126 to the appropriate valuation method; (3)
failed to take into account that unit 62 could be underlet in not more than
three separate parts; (4) failed to have regard to comparable transactions; (5)
wrongly deducted the notional cost of building a separating wall; and (6)
wrongly deducted 5% in respect of a positive covenant to keep open.
was necessary to consider whether the specific allegations of negligence were
established and, whether these were made out, to also consider whether the
valuation was outside the permissible bracket. It could not be said that in
relation to allegations (5) and (6) no reasonable surveyor would have made the
deductions made by the defendant. In relation to allegation (1), the
defendant’s decision to value by the overall method was carefully arrived at
and a reasonable surveyor could take the view that, having regard to the large
size of unit 62 and its long frontage, the overall method was the most
appropriate method. Allegations (2) and (3) also take in allegation (1) on an
alternative basis if the defendant should have taken into account the right to
convert unit 62 because on the subdivision the subunits would be more
appropriately valued by the zoning method. The defendant was not negligent in
concluding
that a hypothetical tenant might choose to subdivide unit 62. In Iceland
the judgment of Dillon LJ confused rentalising improvements with rentalising
the right to carry out improvements; the reasoning and decision of the Court of
Appeal was contrary to the very principle which the court was purporting to
apply. Accordingly, a court of first instance was not bound to follow Iceland,
and it produces the wrong answer in the present case. In the light of the
evidence the defendant’s decision not to seek legal advice about subdivision
was not negligent; he had obtained legal advice as to whether it could be
assumed that a hypothetical tenant would erect a dividing wall and that advice
contained a conclusion as to the effect of the Iceland case. There was
no negligence in relation to allegation (4) because of the defendant’s
conclusions on the subdivision issue. Overall, and aside from the specific
allegations, the defendant’s assessment of the market rent could not be
regarded as so low as to be below the figure which a reasonably competent and
careful surveyor could have determined.
The following cases are referred to in
this report.
Ashville Investments Ltd v Elmer Contractors Ltd
[1989] QB 488; [1988] 3 WLR 867; [1988] 2 All ER 577, CA
Aspden v Seddon (1875) 10 Ch App 394
Craneheath Securities v York Montague Ltd
[1996] 1 EGLR 130; [1996] 07 EG 141, CA
Equity & Law Life Assurance Society
plc v
Bodfield Ltd (1987) 54 P&CR 290; [1987] 1 EGLR 124; 281 EG 1448, CA
Iceland Frozen Foods plc v Starlight Investments Ltd
[1992] 1 EGLR 126; [1992] 07 EG 117
Norwich Union Life Insurance Society v Trustee Savings Banks
Central Board [1986] 1 EGLR 136; (1986) 278 EG 162
Pioneer Shipping v BTP Tioxide Ltd (‘The
Nema’) [1982] AC 724; [1981] 3 WLR 292; [1981] 2 All ER 1030; [1981] 2
Lloyd’s Rep 239, HL
Singer & Friedlander Ltd v John D Wood & Co
[1977] 2 EGLR 84; [1977] EGD 569; (1977) 243 EG 212 & 295
Zubaida v Hargreaves [1993] 2 EGLR 170;
[1993] 43 EG 111
This was a claim by the plaintiffs,
Lewisham Investment Partnership Ltd and Riverdale Centre (Three) Ltd, for damages
for negligence against the defendant, Peter Leonard Wilton Morgan.
Kirk Reynolds QC and Nicholas Dowding QC
(instructed by Nabarro Nathanson) appeared for the plaintiffs; Michael Douglas
QC (instructed by Hammond Suddards) represented the defendant.
Giving judgment, NEUBERGER J said:
The plaintiffs, who are both wholly owned subsidiaries of Slough Estates plc,
are the joint long leasehold owners of a shopping centre known as the Lewisham
Centre (the centre) in South London. By an underlease (the lease) made on April
9 1979, the predecessors of the plaintiffs let unit 62 in the centre (unit 62)
to Marks & Spencer plc (M&S) for a term of 100 years (less 20 days)
from July 3 1972 at a rent of £25,000 pa for the first seven years, £30,000 pa
for the next seven years, and thereafter £35,000 pa subject to review.
Unit 62 is roughly rectangular in shape
and has a frontage of 145 ft on to the central mall of the centre and a depth
of 84 ft. The net internal ground-floor area is 11,760 sq ft. It has two small
upper floors with net internal areas of 2,080 sq ft and 1,350 sq ft. There is
also a mezzanine loading bay with an area of 770 sq ft. Accordingly, the total
net internal area of unit 62 is 15,960 sq ft. Unit 62 was built as an extension
to the rear of what was already a store (owned and occupied by M&S) at 122–126
Lewisham High Street (the main store). The main store and unit 62 are, and have
been at all times since the grant of the lease, used as a single ‘walk-through’
store.
Apart from its unusual duration, the
lease is on terms which were substantially unexceptionable for the letting of a
retail unit in a shopping centre 25 years ago. I should refer to three of the
tenant’s covenants:
4.9 Not to assign charge or underlet or
part with or share the possession or occupation of:
4.9.1 Any part (as distinct from the whole)
of the demised premises
4.9.1.1 Provided Always that with the
previous consent of the Landlord the Tenant may underlet not more than 3
separate parts of the demised premises each being of an area not less than
2,000 square feet.
4.12 Not to use or authorise or suffer to
be used demised premises other than as a retail shop or store and/or for such
other uses as may be permitted within Class 1 of the Town and Country Planning
Use Classes (Order) 1972 and the upper floors thereof as ancillary office or storage
… and to carry on such shop or procure the same to be … open for trade during
the normal shopping hours of the tenant …
4.15 Not at any time … without the
previous consent in writing of … the Landlord (such consent … not to be
unreasonably withheld) to put up any new erection nor to make any alteration in
or upon the demised premises.
In clause 15 of the lease there was
provision for review of the rent on every 21st anniversary of the term of the
lease. Although the provisions were somewhat convoluted, the rent was to be
reviewed on each review date to ‘the market rent’ which was defined in clause
15.1 as:
The rent … at which the demised premises
might … reasonably be expected to be let as a shell building in the open market
by a willing lessor to a willing lessee by an underlease in the terms of this
present underlease … for a term of years equal to that then remaining unexpired
hereunder and with vacant possession but disregarding:
15.1.1 Any effect on rent of the fact
that the Tenant shall have been in occupation of the demised premises
15.1.2 Any goodwill that shall have
become attached to the demised premises for the carrying on of the business of
the Tenant thereon and
15.1.3 Any effect on rent of the demised
premises of any improvement thereto that shall have been carried out by the
Tenant … otherwise and in pursuance of any obligation under this underlease.
In the event of the parties being unable
to agree the reviewed rent, there was provision for its determination by an
independent surveyor, acting as an expert and not as an arbitrator.
On March 8 1993 the plaintiffs served
notice on M&S initiating the rent review due with effect from July 3 1993
and, on June 15 1993, the plaintiffs’ agents, Healey & Baker, wrote to
M&S proposing that the reviewed rent be £900,000 pa. As the parties were
thereafter unable to agree, an application was made to the president of the
Royal Institution of Chartered Surveyors for the appointment of an independent
expert to determine the reviewed rent. On April 6 1993, the defendant, Mr Peter
Morgan FRICS, a director of DTZ
Debenham Thorpe plc, was appointed to determine the market rent of unit 62 as
at July 3 1993 pursuant to the provisions of the lease (the market rent).
Although it will be necessary to go into the history in a little more detail
during the course of this judgment, a brief summary of the procedural history
of the determination was as follows. As often occurs when the reviewed rent is
determined by an expert, it was agreed that the parties would each make
representations and counter-representations to the defendant before he made his
determination.
On June 1 1994 submissions were
exchanged. Mr RS Forbes FRICS, of
Healey & Baker, on behalf of the plaintiffs, provided a detailed submission
contending that the market rent was £835,000 pa. Mr GJ Phillips FRICS, of Churston Heard, on behalf of
M&S, also provided a detailed submission, in which he contended for a
market rent of £212,000 pa. On July 8 1994 Mr Forbes and Mr Phillips each made
counter submissions.
As it appeared to the defendant that
there was not merely a disagreement as to valuation between the two parties but
also possible differences with regard to points of law, he gave each party an
opportunity to make legal submissions. He then took legal advice from a
solicitor, Mr Stephen Fogel, a partner of Titmuss Sainer Dechert. Having
considered the submissions, the counter submissions, the legal submissions and
advice, and having made some inquiries of his own, the defendant, on January 16
1995, formally determined the market rent at £250,000 pa.
The defendant’s detailed valuation notes
show that the basis of this determination was as follows:
1. The defendant considered the rents
achieved on two reviews in respect of two other units in the centre, unit 11
(occupied by Woolworth plc) and unit 59 (occupied by WH Smith plc). He looked
at the rents achieved on some other units in the centre, to satisfy himself as
to the reliability of those rent reviews. Then, in each case, he devalued those
reviewed rents in two ways. First, to arrive at a rate per square foot for the
overall gross internal area; second, to arrive at a rate per square foot for
the ground-floor gross internal area. He adjusted those rates to allow for the
fall in the market and the better pitch and long frontage of unit 62;
2. He took the gross internal overall
area of unit 62, 17,627 sq ft, and multiplied it by £16.98 per sq ft, producing
£299,306 pa;
3. He then took the gross internal
ground-floor area of unit 62, 12,015 sq ft, and multiplied it by £23.70, making
£284,755 pa;
4. He averaged the two figures, producing
£292,031 pa;
5. He then made adjustments to that
figure as follows:
|
|
|
|
(i) |
|
|
(ii) |
+10% |
|
(iii) |
–15% |
|
(iv) |
+2.5% |
|
(v) |
|
|
(vi) |
–£6,500 pa |
|
(vii) |
–5% |
|
(viii) |
–5% |
|
|
6. Applying these deductions to the
£292,031 pa produced a figure of £250,627 pa, which he rounded down to £250,000
pa.
Plaintiffs’ claim
The plaintiffs contend that the defendant
was in breach of his duty of care to the plaintiffs in having assessed the
market rent at such a low level. The defendant rightly does not dispute that he
owed the plaintiffs a duty to use reasonable skill and care in making his
determination. The nature of his duty is conveniently summarised in Jackson
& Powell on Professional Negligence (4th ed) at para 3–49:
the standard required of a surveyor is
that of the ordinary skilled man exercising the same skill as himself. He is
variously described in the cases as the ‘reasonably skilled’, ‘competent’,
‘prudent’ or ‘average’ surveyor.
The plaintiffs’ case in these proceedings
is that the market rent was £430,000 pa and that the rent determined by the
defendant was lower than that which a reasonably competent surveyor in the
defendant’s position could have determined. Six specific allegations are made
against the defendant’s valuation in the statement of claim; they are as
follows:
1. The defendant valued unit 62 by using
the overall method, whereas he should have used the zoning method;
2. The defendant failed to take legal
advice on the issue of whether, and in what way, the decision of the Court of
Appeal in Iceland Frozen Foods plc v Starlight Investments Ltd
[1992] 1 EGLR 126 was relevant to the question of which method he should adopt,
and wrongly considered that the effect of that decision precluded him using the
zoning method;
3. The defendant failed to take into
account the fact that, under the terms of the hypothetical lease to be valued
for rent review purposes, the tenant would be permitted to underlet unit 62 in
not more than three separate parts;
4. The defendant failed to have proper
regard to certain comparable transactions put before him, and in particular the
rent reviews at unit 12 and unit 36/7 of the centre;
5. The defendant wrongly deducted £5,600
in respect of the notional cost of constructing a wall to the rear of unit 62;
6. The defendant wrongly deducted 5% from
the rent he would otherwise have fixed, in respect of the positive covenant to
keep open, at the end of clause 4.12 of the lease.
In practice, allegations 1, 2 and 3 are
connected. Between them, they represent one of the two main specific complaints
of the plaintiffs. The second main specific complaint of the plaintiffs is
contained in allegation 4: it ties in both with allegations 1, 2, 3, and also
with the plaintiffs’ more general contention that the defendant fixed an
indefensibly low rent. Allegations 5 and 6 may fairly be described as more
minor complaints.
In the course of discovery and inspection
in these proceedings, the defendant has disclosed the notes and correspondence
relating to his determination. Apart from his frequent annotations on the
submissions and counter submissions provided to him, there are some 50 pages of
handwritten notes (including charts and graphs), most of them closely written,
some 11 pages of typewritten notes and notes of discussions with his
colleagues, as well as seven letters written by him to retailers (most of which
received detailed replies) inquiring as to their attitude to the taking of
leases for long terms and to infrequent rent reviews, as well, of course, as
his correspondence with Mr Forbes, Mr Phillips and Mr Fogel.
The plaintiffs called Mr Michael Green FRICS, of Hardacres, to support their
case. He provided a detailed report in which he discussed, and substantially
supported, the complaints which the plaintiffs maintain against the defendant,
made specific criticisms of the defendant and provided his own assessment of
the market rent at £430,000 pa. For the purpose of that assessment, he divided
the ground floor of unit 62 into four zones, zones A, B, C and remainder and
considered that the appropriate zone A rate was £90 per sq ft. His valuation
was as follows:
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Zone A |
2,873 sq ft |
£90 |
£258,570.00 |
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Zone B |
2,873 sq ft |
£45 |
£129,285.00 |
|
Zone C |
2,873 sq ft |
£22.50 |
£64,732.50 |
|
Remainder |
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Zone |
3,339 sq ft |
£11.25 |
£37,563.75 |
|
First floor |
2,345 sq ft |
0£4 |
£9,380.00 |
|
Second floor |
2,322 sq ft |
0£2 |
£4,644.00 |
|
£504,175.25 |
|||
|
Less 15% for quantum and shape |
£75,626.29 |
||
|
£428,548.96 |
|||
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Say |
£430,000.00 |
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Apart from the defendant, the defence
also called expert evidence. Mr Philip Walmsley FRICS, a partner in Jones Lang Wootton, until his recent
retirement, provided a detailed report in which he concluded that the market
rent was £250,000 pa, precisely the same figure as the defendant’s
determination. His valuation was as follows:
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Second floor |
01,350 sq ft |
0£2 psf |
£2,700 |
|
First floor |
02,080 sq ft |
0£4 psf |
£8,320 |
|
Ground floor |
11,760 sq ft |
£18.07 psf |
£212,503 |
|
£223,523 |
|||
|
Adjustment to allow for 21 |
|
||
|
review |
plus 12% |
£26,823 |
|
|
£250,346 |
|||
|
Say |
£250,000 |
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The law
In Craneheath Securities v York
Montague Ltd [1996] 1 EGLR 130, Craneheath advanced money for the
acquisition of a property which was valued at £5.25m by the defendant. At
p132C-E, Balcombe LJ said:
Since Craneheath did not establish that
the figure of £5.25m was wrong, then … Craneheath’s action must necessarily
fail. It would not be enough for Craneheath to show that there had been errors
at some stages of the valuation, unless they can also show that the final
valuation was wrong. If authority be
Corporation Ltd v Brian Cooper & Co [1992] 2 EGLR 142, at
pp144–5 and 149.
In the circumstances it is not strictly
necessary for me to consider the substance of Craneheath’s attack on the
valuation. I do so briefly, not only out of deference to the arguments of
[counsel], but because if Craneheath had not fallen at the first hurdle it
would, in my judgment, have fallen at the second and each subsequent hurdle.
In Singer & Friedlander Ltd v John
D Wood & Co [1977] 2 EGLR 84, at p85G–J, Watkins J said:
The valuation of land by trained,
competent and careful professional men is a task which rarely, if ever, admits
of precise conclusion. Often beyond certain well-founded facts so many
imponderables confront the valuer that he is obliged to proceed on the basis of
assumptions. Therefore, he cannot be faulted for achieving a result which does
not admit of some degree of error. Thus, two able and experienced men, each
confronted with the same task, might come to different conclusions without
anyone being justified in saying that either of them has lacked competence and
reasonable care, still less integrity, in doing his work. The permissible
margin of error is said by [the expert surveyor witnesses in that case] to be
generally 10 per cent either side of a figure … which at the time of valuation
is the figure which a competent, careful and experienced valuer arrives at
after making all the necessary inquiries and paying proper regard to the then
state of the market. In exceptional circumstances the permissible margin, they
say, could be extended to about 15 per cent, or a little more, either way. Any
valuation falling outside what I shall call the ‘bracket’ brings into question
the competence of the valuer and the sort of care he gave to the task of
valuation.
In light of these authorities, it might
be thought that the proper approach in a case, where the issue is whether or
not a valuation was negligent, is for the court to carry out its own valuation,
to decide on the permissible ‘bracket’ either side of that valuation, and then
look to see whether the surveyor’s valuation is within the bracket: if it is,
then the claim will fail, whereas if it is not, the claim should, at least in
the absence of special circumstances, succeed.
However, in Zubaida v Hargreaves
[1993] 2 EGLR 170, Hoffmann LJ (with whom the other members of the Court of
Appeal agreed) said, at p128A-B:
In bringing this appeal, [the plaintiff]
faces a formidable difficulty in the standard which the law requires of a
professional man conducting a valuation like this. In an action for negligence
against an expert, it is not enough to show that another expert would have
given a different answer. Valuation is not an exact science; it involves
questions of judgment on which experts may differ without forfeiting their
claim to professional competence. The fact that a judge may think one approach
better than another is therefore irrelevant … The issue is not whether the
expert’s valuation was right, in the sense of being the figure which a judge
after hearing the evidence would determine. It is whether he has acted in
accordance with practices which are regarded as acceptable by a respectable
body of opinion in his profession.
In the present case, the plaintiffs
effectively mount two types of attack on the defendant’s valuation. The first
relates to the various steps which the defendant took in arriving at his
figure: these are contained in allegations 1 to 6 set out above. The second
type of attack is of the overall figure at which the defendant arrived. It can
be said with force that one is ultimately not so much concerned with the steps
which the defendant took in order to arrive at his figure, but, both as a
matter of commercial reality and as a matter of law, with the figure he fixed
as the market rent. However, in any particular case, it may be that there are
two alternative valuation hypotheses either of which a surveyor could adopt
without being negligent, which could result in significantly different
valuations. Further, one can well see that, illogical though it may be in
theory and undesirable though it may be in practice, there may be two perfectly
acceptable methods of valuation in respect of a particular property, and use of
one of those methods could properly produce a figure which, if one used the
other method, might be indefensibly high or low.
In agreement with counsel, I consider
that the appropriate course for the court to take in this case is to consider
first whether any of the specific allegations against the defendant are made
out. However, my conclusions on the specific allegations will not necessarily
be an end of the inquiry. If I were to conclude that the defendant was
negligent in respect of one or more of the specific allegations, it would still
be necessary to consider whether his valuation fell within the permissible
bracket because, if it did, then the defendant would still escape liability:
see the observations of Balcombe LJ. Equally, even if the defendant was not
negligent in respect of any of the specific allegations, the plaintiffs could
still succeed on the basis that his overall figure was outside the permissible
bracket. One can imagine a case where the valuation involves a number of
components and where the valuer has not been negligent in respect of his
determination of any of those components, but his valuation is none the less
outside, even well outside, the permissible bracket.
Even in relation to the overall
valuation, however, care must be employed when it comes to consideration of the
permissible bracket. In Mount Banking itself, at p145H, Mr Robin Stewart
QC, sitting as a deputy judge of the High Court, after considering Singer,
said this of the margin of error of 10%:
The problem that this raises, it seems to
me, is: 10% (or whatever margin may be thought to be appropriate) of what? …
the real question, in my judgment, is whether the valuation was that which a
competent valuer, using proper skill and care, could properly have reached … If
the valuation is too high, is it too high by such a margin as to be categorised
as negligent? The margin of error approach is thus a useful tool, for in most
straightforward cases it can reasonably be expected … that competent surveyors
acting with proper skill and care, and thus acting on all relevant evidence,
will come within a moderate bracket of each other. But there is a danger in the
margin of error approach, to which I have alluded … I do not think it proper to
apply it mechanistically in any case, so as to say that any valuation outside
the consensus of the experts or, if they differ, outside their average
valuation by more than 10% is prima facie negligent. Rather … I think
the judge must approach the question, first, by asking where the proper
valuation or bracket of valuation lies. Then, if the defendant is more than the
permitted margin outside that proper figure, the inference of negligence should
be drawn.
He then went on at p145J-L as follows:
This is not merely an academic matter.
Take the value of an office rent in a prime location in a stable market. It may
be thought that the margin between competent surveyors as to what the rent
should properly be ought to be very small. But where many assumptions have to
be built into a property the range of acceptable proper valuations may be quite
large. An illustration of this is provided by the discussions in the evidence
of the proper valuation to be placed on the next-door offices … , where the
capital value per sq ft ranged from £110 to £167, each valuation being reached
by a proper process by a properly qualified valuer.
In my judgment, therefore, I should avoid
seeking a mean figure between valuations and applying a margin of error, even a
broad margin of error, to that. I should rather assess here whether [the
defendant’s] approach was proper and what a competent approach could properly
have resulted in. If [the defendant’s] end result was within a modest margin of
that figure, then he is not to be adjudged negligent. This, it seems to me, is
the way in which the margin of error principle is to be applied.
Allegations 5 and 6
It is convenient to deal with these
first, if only to get them out of the way. Although these allegations were made
in the pleading, Mr Green accepted that, while he would not have made either of
the two deductions in question, he could not in fairness say that no reasonable
surveyor could have done so. In these circumstances, it must follow that I must
find for the defendant on allegations 5 and 6, and I did not understand Mr Kirk
Reynolds QC, for the plaintiffs, to argue otherwise.
Allegation 1 alone: zoning in principle
Before making certain adjustments (which
resulted in a net aggregate reduction of £41,404 pa) it will be recalled that
the defendant arrived at a figure of £292,031 pa as the market rent. His
primary basis for arriving at that figure was averaging the results of
two calculations. The first calculation involved taking the overall area of
unit 62 and valuing it at £16.98 per sq ft; the second calculation involved
taking the ground-floor area only and valuing it at a rate of £23.70 per sq ft.
The defendant arrived at these two rates per square foot by considering the
rents achieved on two other units in the centre.
Allegation 1 is that the defendant was
wrong in valuing unit 62 by the overall method, ie by taking a single rate per
square foot (whether the lower rate applied to the whole internal area of unit
62 or the higher rate applied to the ground-floor internal area alone). The
plaintiffs contend that any competent surveyor would have valued unit 62 by the
zoning method. Zoning is a technique of valuation frequently applied to retail
premises and is intended to reflect the fact that, at least in the case of
fairly standard sized and shaped shop units, ground-floor space is more
valuable at the front of the unit than at the rear. The technique normally
involves taking successive 20 ft zones from the front of the shop and, as one
goes from one zone to the next, halving the applicable rate per square foot, as
was done by Mr Green in his valuation.
As I have mentioned, in order to
establish that the defendant was negligent in this connection, the plaintiffs
must show that no reasonable surveyor in the position of the defendant could
properly have valued unit 62 on the overall, as opposed to the zoning, method.
The first question I have to consider is whether (in the absence of allegations
2 and 3) the defendant was negligent in valuing unit 62 by the overall method.
I am clearly of the view that this allegation is not made out against the
defendant.
First, the defendant himself impressed me
as a careful surveyor, both by the copious and detailed notes he made and by
his oral evidence. As his notes show, he had carefully considered the effect of
valuing unit 62, both on a zoning method and on an overall method. When he
looked at the rents agreed on comparable properties, devalued those rents on
the zoning basis and translated those rents to unit 62, he concluded that this
produced a rental value for unit 62 which was, in his view, much too high. On
the other hand, when he devalued the comparables on the overall basis and
applied the resultant rate per square foot to unit 62, it produced a result
which he thought justified. On the face of it, therefore, the decision to value
by the overall method was not only carefully arrived at but was also decided on
after considering the zoning method.
Second, while, as I have mentioned, there
is no doubt that standard shops are almost always valued by the zoning method,
it is clear that unit 62 was not a standard shop. Although there is a
difference between the views of the defendant and Mr Walmsley, on the one hand,
and Mr Green, on the other hand, it appears to me that the combination of the
large overall size of the ground floor of unit 62 (around 12,000 sq ft) and its
unusual shape (having a frontage virtually double its depth) meant that a
reasonable surveyor could take the view that the overall method was the most
appropriate approach to its valuation.
So far as the area is concerned, it is
common ground between all three surveyors who gave evidence before me that,
save in exceptional circumstances, retail units with an area of 5,000 sq ft or
less should always be valued on the zoning basis. Mr Green’s view was that the
zoning method was equally appropriate for units up to a size of 20,000 sq ft,
but the defendant and Mr Walmsley said that, once the area was more than 5,000
sq ft, the overall method was often at least as appropriate as the zoning
method. Clearly, it is a matter of judgment as to what is, at least normally,
the minimum area at which one would expect to value by the overall basis. Even
a surveyor who has his own fairly strict view as to the minimum area for
applying the overall method must accept that there is a grey area where either
method is appropriate (possibly depending on circumstances) or both methods
should be used. Indeed, all three surveyors agreed that, whatever the
appropriate minimum size for normally using the overall method, it was normally
appropriate, when carrying out a valuation, to look at what each method
produced, at least where the area of the unit was in that grey area. No
textbook or manual has been produced to suggest that one particular view is
correct. The defendant himself is co-author, with Anthony Waker, dip arch riba of a book, Retail Development, 1988, which
contains a discussion of the zoning method and, consistently with his evidence
before me, provides worked examples for areas ranging between 1,000 and 5,000
sq ft, but no more. In light of the evidence of the three surveyors, I consider
that a competent surveyor in the defendant’s position could have taken the view
that the overall method of valuation was appropriate for a retail unit of this
size, provided he also considered the zoning method (as, of course, the defendant
did).
However, it is not merely a question of
size. Unit 62 has an unusual shape, in the sense that its frontage is
substantially greater than its depth. The standard retail unit is substantially
deeper than it is wide. If one adopted the zoning method of valuation (without
any adjustment) in relation to two units, each with the precise configuration
of unit 62 but one of which had the same frontage to depth ratio as unit 62,
and the other of which was unit 62 turned through 90 degrees, the former unit would
have a rental value which was more than 50% greater than the latter unit. That
point illustrates what is agreed between all three surveyors who gave evidence
before me, namely that to use the zoning method to value a shop with the
unusually high frontage to depth ratio of unit 62 will produce an unjustifiably
high rental value unless one applies some discount to it. In a lecture which he
gave in 1994, Mr Green himself emphasised the danger of using the zoning method
in circumstances where significant adjustments then had to be made to take into
account this sort of factor. He specifically referred to the sort of adjustment
which called the zoning method into question as being 20% or more. In the
present case his valuation involves an adjustment of 15% for size and shape;
however, both the defendant and Mr Walmsley said that a much larger adjustment
would have been necessary if one used the zoning method.
Third, there is the evidence of different
surveyors’ approaches in relation to unit 62 itself. Mr Forbes, who made the
submissions for the plaintiffs in the rent review determination, valued unit 62
by the zoning method. However, Mr Phillips valued unit 62 by the overall
method. Neither of them gave evidence in this case and neither of them were
making submissions on oath to the defendant. Accordingly, the valuation method
which each of them adopted is of very limited value so far as the present
inquiry is concerned. None the less, it is not, I think, impermissible to
observe that, as Mr Green very fairly accepted, the defendant is a reputable
and experienced retail valuation surveyor; in those circumstances, one would
have thought that Mr Phillips would not have put forward a valuation based on
the overall method unless it was an approach which he felt he could justify to
a respected professional surveyor. However, as the very figure which Mr Forbes
advanced as the market rent demonstrates, submissions made by surveyors to
experts on rent review determinations are, regrettably, often rather
unrealistic.
The defendant and Mr Walmsley both gave
evidence stating that they considered that the overall method was the most
appropriate way of valuing unit 62, albeit that it was right to check the
eventual rent produced by that method against other evidence. At first sight,
it might seem that relying on the defendant’s evidence would involve permitting
him to pull himself up by his own boot straps in these proceedings. One must,
of course, be careful of relying on the defendant’s evidence in this
connection, bearing in mind his strong and direct interest in these
proceedings. However, I am bound to say that he struck me as a very careful and
honest witness, who was consciously trying to do his best to be impartial in
circumstances where it was obviously difficult for him to be so. So far as Mr
Walmsley is concerned, he is a highly experienced and respected surveyor in the
field of retail property valuation, and therefore the fact that he considered
the overall method to be the appropriate way of valuing unit 62 is of weight.
However, I am bound to say that the effectiveness of his evidence was reduced
to a significant extent by what appeared, at least to me, to be a decidedly
partisan attitude in the witness box.
As for Mr Green, he made out what I
thought was a convincing case for valuing unit 62 by reference to the zoning
method and it is only fair to him that I should say that if it were for me to
decide how to
have heard in this case, have thought it right to give more weight to the
zoning method than to the overall method. However, as Hoffmann LJ said in Zubaida,
that view is strictly irrelevant to the inquiry upon which I am embarking.
It seems to me that the essential point
in relation to Mr Green’s evidence is that he accepted that, in the absence of
the plaintiffs succeeding on allegation 2 and/or allegation 3 (to which I shall
shortly turn) he could not say that no reasonable surveyor could have assessed
the market rent of unit 62 on the overall method, although he, Mr Green, would
still have valued it by the zoning method.
The plaintiffs understandably made much
of the fact that all the rents agreed for the units in the centre, which were
cited as comparables, appear to have been agreed by reference to the zoning
method, as opposed to the overall method. There are, I think, four answers to
that point. The first is that, as is clear from the evidence before me,
different surveyors can genuinely have different views as to the maximum size
of unit for which the zoning method is appropriate. Accordingly, the fact that
the zoning method may have been used by the surveyors who agreed the reviewed
rents on the other units in the centre which were of the same sort of size as
unit 62 does not seem to me to take matters much further, although it is fair
to say that it certainly supports the proposition that the zoning method was an
appropriate method for valuing unit 62. The second answer is that it is by no
means clear that the rent review agreements on these other units were actually
agreed by reference to the zoning method. Even in the cases of unit 11
(occupied by Woolworths) and unit 12 (occupied by Littlewoods) where the
surveyors who negotiated the rent agreed not only the overall area of the unit
but also the areas of each zone, the agreements (and, so far as I can tell, the
negotiations) appear to have been conducted on the basis of an overall rental
figure, and not a zone A rental figure. Third, throughout his workings prior to
the making of his determination, it is clear that the defendant considered the
rents agreed on units 11 and 59 on the zoning basis as well as on the overall
basis. He also considered the rents for units 11 and 59 by reference to the
rents fixed on smaller units as devalued on the zoning basis. Fourth, when
taking the comparable rents, the defendant’s primary interest was in the rent
which had been agreed; it was then up to him to decide how best, in his
opinion, to analyse that rent so as to assist him in arriving at the market
rent for unit 62. No doubt, many surveyors might be influenced, even heavily
influenced, by the fact (if it be one) that the parties who had agreed a
particular rent had also agreed a particular method of arriving at that rent.
However, it cannot, to my mind, be right to say that because parties have
agreed to a particular level of rent and also agreed the method of arriving at
that rent, a surveyor subsequently analysing that agreement in relation to a
valuation problem is bound to use the same method.
Allegations 1, 2 and 3: zoning and the
right to underlet
Introduction
Allegations 2 and 3 raise the plaintiffs’
contention that the defendant wrongly carried out his valuation without taking
into account the tenant’s right to convert unit 62 into a number of smaller
units (subunits) and to sublet up to three such subunits. These allegations
also provide another basis for allegation 1, the complaint that the defendant
did not value by the zoning method.
The plaintiffs contend that the valuation
exercise being carried out by the defendant involved deciding what rent would
have been fixed between parties agreeing a hypothetical lease under which it
would have been open to the hypothetical tenant to divide up unit 62 into two,
three or (provided he occupied one of them) four subunits, and to sublet up to
three of the subunits which he had created. The plaintiffs contend that the
defendant’s failure to take this into account had two consequences. The first
is that the rent which the defendant fixed was too low because it did not take
into account this potentially valuable right.
The second consequence is more subtle:
given that unit 62 could be divided into three (or more) subunits, each subunit
would have a fairly conventional frontage to depth ratio (given that the depth
of each subunit would be substantially the same as that of unit 62, whereas the
frontage of each subunit would be much less than that of unit 62, bearing in
mind that one would have to allow for the erection of walls between each
subunit and, possibly, for the creation of a passageway). Accordingly, runs the
plaintiffs’ argument, it would on any view have been appropriate to value by
the zoning method. That is because the size and configuration of the three
subunits which could have been created by the hypothetical tenant would have
been less than 5,000 sq ft in area and of normal shape: hence, even on the
defendant’s view, they should have been valued by zoning. The importance of
this point is graphically illustrated by the fact that (as I have mentioned) Mr
Green accepted that, if he was wrong in his understanding that the tenant’s
right to divide up the unit into subunits can be taken into account, then the
defendant’s decision to value on an overall method was not one which he could
criticise as unreasonable.
The defendant’s first answer to this line
of argument is that, properly construed, the lease did not permit unit 62 to be
used as two or more separate shops, given the limitation in the user covenant
to use of the unit ‘as a retail shop or store’. I reject that argument.
In clause 2.7 of the lease, it is expressly stated that, unless the context
otherwise requires, the use of the singular in the lease includes the plural. I
can see no basis for saying that the singular ‘a shop’ should not include the
plural. Indeed, the user and alienation covenants have to be read together and
it would be unreal to construe them in such a way as to conclude that the
landlord had permitted the tenant to divide the unit into three separate
subunits, but that the three subunits still had to be used as a single shop.
Further, unit 62 was clearly intended to be used from the inception as part
of a shop or store, which strongly suggests that ‘a retail shop or store’ is
not to be given a strict meaning. Quite apart from this, the user covenant also
expressly permits unit 62 to be used ‘for such other uses as may be permitted
within Class 1 of the … Use Classes Order 1972’. In fairness to the defendant,
I should say that the argument that the lease precluded the use of unit 62 as
three separate retail units never occurred to him.
The defendant’s second answer, which
appears to raise an issue of some importance in the rent review field, is that
he took the view that he was precluded from taking into account the fact that
the hypothetical tenant (like the actual tenant) could convert the premises
into two or more self-contained subunits (up to three of which could be sublet)
by the decision and reasoning of the Court of Appeal in Iceland. In the
absence of that decision, it would seem to me, with all respect to the Court of
Appeal, tolerably clear that one could, indeed should, take into account the
fact that the hypothetical tenant had the right to convert unit 62 into
subunits (up to three of which he could sublet) when assessing the reviewed
rent. The rent review clause expressly required the defendant to value unit 62
as it was (subject to the express disregard of tenant’s improvements and
subject to the implied assumption that the tenant has complied with its repairing
covenants) assuming that it was let on the terms of the lease; those terms
included the right in the tenant to divide the unit and use the divided unit as
two or three separate retail shops. I therefore find it hard to understand why
one should not assume, when assessing the reviewed rent, why the hypothetical
tenant has not got those rights. However, Mr Michael Douglas QC, for the
defendant, contends that this was the very argument unsuccessfully advanced by
the landlord in Iceland where a rent review clause, as here, required
the valuation to be carried out disregarding improvements. It therefore is
necessary first to consider Iceland.
Iceland Frozen Foods plc v Starlight
Investments Ltd
In Iceland [1992] 1 EGLR 126, the
property in question consisted of a first floor (which was in one occupation)
and the ground floor (which was in two separate occupations). The lease under
consideration contained a rent review clause which provided for the rent to be
reviewed to the ‘open market rent’, which was the rent at which the property
could be let ‘as a whole or in parts’ in the open market subject to fairly
similar assumptions and disregards as are in
tenant’s improvements. The issue before the Court of Appeal was described by
Dillon LJ, at p127G:
The particular question that arises on
this appeal is how, on considering the new rents under the rent review, the
ground floor is to be looked at: is it to be looked at as divided only into two
units … [as then occupied] or is it, as the landlord’s surveyors suggest, to be
regarded as divided or capable of division into seven units (or any number
greater than two), which in the professional view of the landlord’s surveyors
would yield a greater aggregate rent?
He then went on to consider the terms of
the lease in that case with regard to user and alteration (and, in this
connection, I do not think that they differed in any significant way from the
provisions of clauses 4.12 and 4.15 of the lease) and certain other cases on
rent review construction.
Dillon LJ then said, at p128D-G:
the rent is not to be fixed on the basis
that either the landlord or the hypothetical tenant will, before the review
date, have carried out the works of conversion necessary to subdivide the
premises into the seven self-contained units on the ground floor envisaged in
the landlord’s surveyor’s suggestion.
So [counsel] says, we must consider that
there may be tenants who would be prepared to pay a higher rent, or between
them pay higher rents collectively, for the ground floor subdivided into seven
units if each one takes the chance that he will get consent from the landlord
for the subdivision of the premises and for any necessary change of use, that
he will pay a continuous rent without any fitting-out period at a lower rent,
and will calculate that rent that he is prepared to pay on the basis that he,
the tenant, will be carrying out the works of conversion which are necessary
and will be putting up with an absence of return from the unit, whether by
trading in it or by subletting, until the works of conversion have been carried
out.
But the difficulty about that … is that
if the execution of these works will produce a higher rental value for the
premises or an improved return for the trading in the premises which will
warrant paying a higher rent for the pleasure of converting the premises, the
works of conversion will rank as tenant’s improvements which are to be
disregarded under the express terms of the rent review clause. [Counsel] says:
‘But these are merely hypothetical alterations by a hypothetical tenant under a
hypothetical lease. Under the rent review clause you are only required to
disregard actual improvements carried out by the real tenant.’ But it seems to
me to make nonsense of the rent review clause as drawn and of the aim that the
rent on review should be fixed so as to bear as close a resemblance to reality
as possible, if it is not possible to charge rent for actual improvements but
is possible to charge the actual tenant with rent for hypothetical improvements
which have never been carried out.
Stocker and Butler-Sloss LJJ agreed with
Dillon LJ’s judgment.
Course taken by the defendant
Having explained and discussed the
decision in Iceland, I must now set out in a little detail the course
taken by the defendant when determining the market rent, following receipt of
the submissions from Mr Forbes and Mr Phillips on June 1 1994.
On June 15 1994 the defendant wrote to Mr
Forbes and Mr Phillips, quoting from clauses 15.1.3 and 4.9.1.1 of the lease.
He then continued as follows:
I wish to have legal advice as to
whether, bearing in mind the two extracts from the [Lease] given above, it is
proper to value the property on the assumption that any increase in value
generated by the improvements to the property involved in the creation of up to
three sublettings can be considered. I propose to consult [Mr] Fogel [a
solicitor and partner of Titmuss Sainer Dechert] … Before I submit this matter
to Mr Fogel I would like to hear from both parties that they have no objection
to using him and further would invite submissions from both parties on the
point raised. If either party does not wish to make a submission on the point
made, please let me know.
The defendant therefore, of his own
motion, raised the issue as to whether the market rent could be assessed on the
basis that the hypothetical tenant might be someone who would, during the
currency of his lease, wish to subdivide unit 62 into a number of subunits of
which he could sublet up to three (the subdivision issue).
M&S’ solicitors replied to the
defendant on June 22 1994, enclosing a copy of the decision in Iceland
and stating that, as the rent review clause required actual improvements to be
disregarded, ‘it is not possible to have regard to hypothetical improvements
which have never been carried out’. On June 24 1994, the plaintiffs’ solicitors
replied to the defendant stating that it was hoped that ‘the parties’ attitude
on the point raised … will be clear from the submissions and
counter-submissions’. This letter concluded:
If after considerations of these
submissions there are legal points to be determined, then at that stage it is
hoped that you will consult with the parties and thereafter seek legal advice
if this is necessary. It should be pointed out that neither party’s original
submission raised the point … For the avoidance of doubt we confirm that there
are no existing works of subdivide and division at present.
Thereafter, on July 5 1994 Mr Forbes and
Mr Phillips sent the defendant their counter submissions. In his counter
submissions, on behalf of M&S, Mr Phillips referred to one of the
comparable rents relied on by Mr Forbes, unit 12, and contended that it was not
of assistance because it was a reviewed rent agreed on the basis that the
hypothetical tenant would be able to divide up the units into several subunits,
an option which, he said, should not be taken into account when assessing the
reviewed rent for unit 62, in light of the decision in Iceland. In his
counter submissions, Mr Forbes made no reference to this point.
However, on July 18 1994, Mr Forbes wrote
to the defendant dealing, for the first time, with the subdivision issue. He
said:
Mr Phillips is wrong to infer … that the
rent [agreed on the review of unit 12] does not accurately reflect the rent at
which the Unit could have been let as a whole … It does exactly that. The ability
to sublet was taken into account. Differentiation should be made between that
scenario and that considered in Iceland … to which Mr Phillips refers.
That case clearly confirmed that it was wrong to assume the premises to be
valued had been subdivided that the valuation of the entire premises was merely
the aggregate rental of each of the individual units. Clearly the ability to
sublet may be taken into account. In arriving at the agreed rental on the
Littlewood’s store, the rentalised cost of subdivisions was taken into account.
This contrasts with the approach that was pursued in … Iceland …
Mr Phillips replied to this, maintaining
the position on behalf of M&S that the reviewed rent under unit 12 had been
agreed on a basis which was inconsistent with the decision of the Court of
Appeal in Iceland, namely that one could assume that the hypothetical
tenant taking unit 12 would be prepared to incur the expense of dividing it up
into a number of subunits, some or all of which he would sublet.
It is clear from the contemporaneous
notes which the defendant made, as well as from his oral evidence, that he had
reached the firm, albeit provisional, view that the submissions made on behalf
of M&S on the subdivision issue were correct.
Meanwhile, another point had arisen.
Attached to his letter of August 19 1994, Mr Phillips had included legal
submissions which contended that, as a result of the decision in Iceland,
one was not entitled to assume that the wall dividing unit 62 from the main
store could be removed by the hypothetical tenant. In fact, these legal
submissions were prepared under a misapprehension: there was no wall dividing
unit 62 from the main store. However, it raised a point of concern to the
defendant, namely that the effect of these submissions was that the
hypothetical tenant, if it was not M&S, would wish to build a wall (the
wall) to make unit 62 self-contained, but, on the basis of Iceland, this
was not something which one was entitled to assume that the hypothetical tenant
could do. M&S then sent the defendant legal counter submissions, in which
it was contended that, properly analysed, the decision in Iceland did
not prevent the market rent being assessed on the assumption that the
hypothetical tenant could, albeit at his own expense and in his own time,
construct the wall.
The defendant then consulted Mr Fogel on
two points in connection with the rent review. One of those points is of no
direct relevance to the current proceedings; the other point was the issue
relating to the wall (the wall issue). On that latter issue, Mr Fogel provided
the defendant with over four pages of advice on October 24 1994. In summary,
his opinion was that, in the absence of Iceland, he would have had no
hesitation in agreeing with the plaintiffs’ legal
take the view’ that the legal counter submissions of M&S were correct. In
particular he said:
The similarity between the two cases is
that in Iceland the landlord suggested a notional future division of the
property and in this case it might be an advantage for the landlord to suggest
that the premises be value on the basis of a notional enclosure of the demise.
He then said that he was ‘not convinced’
by the grounds put forward on behalf of the plaintiffs for distinguishing the
two cases. Quoting from the plaintiffs’ legal counter submissions, he said:
[I]f the parties to the lease in the Iceland
case have provided for alternative bases of valuation, but have specifically
provided that for the purposes of rent review necessary works of subdivision
were to be disregarded, then one can well see why it might seem strange that
wholly notional works of an identical character were to be allowed to alter
the nature of the physical premises which were being valued. But, upon
reading the Iceland case and the extract of the review clause set out in
the judgment, it is clear that the parties had not specifically provided
for works of subdivision to be disregarded. There was in that case, as here,
simply a general direction to disregard the effect on rent of improvements.
While I agree with the approach of the counsel to the landlord as set out in
that case, the landlord lost. The judge was (regrettably in my view)
disinclined to restrict the improvements disregard to the actual tenant.
Instead, he ruled that the effect of the disregard was to prevent the
hypothetical tenant bidding upon the basis that he was attracted by the
prospect of undertaking hypothetical works.
Thereafter, there was further discussion
between the defendant and Mr Fogel on the wall issue. The defendant was anxious
to avoid, if at all possible, the conclusion reached by Mr Fogel, because it
seemed to him that it would be wholly unrealistic to fix the market rent
without assuming that the hypothetical tenant, if it was not M&S, was able
to build the wall so as to render unit 62 self-contained. He understandably
felt that valuing unit 62 on such a basis would be unrealistic in practice and
would result in a rent far below that which the parties must have anticipated.
After fairly substantial further discussions, the defendant and Mr Fogel agreed
that, despite the reasoning in Iceland, it would be open to the
defendant to assess the market rent on the assumption that the hypothetical
tenant be able, at his own expense, to build the wall, essentially on two
grounds. The first ground was that, even though it would involve substantial
work, the construction of the wall could be treated as part of the hypothetical
tenant’s fitting out works and, whatever the effect of the decision in Iceland,
it must have been intended that the hypothetical tenant would carry out fitting
out works to enable him to use unit 62 as a shop. Second, they relied on what
Mr Fogel referred to as ‘the current mood of the court to look for the
underlying purpose of the rent review’, and that to assess the market rent on
the hypothesis of the hypothetical tenant could not make unit 62 self-contained
was so contrary to commercial reality, and therefore to the evident purpose of
the rent review provisions, that, notwithstanding Iceland, one should
assume that the hypothetical tenant was entitled to construct the wall.
Accordingly, as is clear from the defendant’s valuation notes, he found in
favour of the plaintiffs on the wall issue.
Effect of Iceland
The defendant concluded that the effect
of the decision of the Court of Appeal in Iceland was that, when
assessing the market rent, he could not take into account the fact that the
hypothetical tenant might choose to divide unit 62 into subunits. The question
which I have to decide is whether or not the defendant was negligent in
reaching that conclusion. However, before turning to that question, I think it
is right to deal with the effect of Iceland, not only because it seems
to me helpful in resolving the question I have to decide, but also because, as
appears clear from the history of this case, Iceland has had a
significant effect in the field of rent review valuation generally.
The first question is what the Court of
Appeal actually decided in Iceland. The second question is whether the
decision and reasoning in Iceland are effectively binding on me (and
therefore on the defendant). I shall consider those two questions in turn.
Mr Reynolds argued that, on proper
analysis, Iceland did not decide that the reviewed rent in that case was
to be fixed on the basis that the ability of the hypothetical tenant to carry
out improvements was to be disregarded. In effect, he put his case in two ways.
First, he said that the Court of Appeal did not reject the argument that a
single hypothetical tenant might take the whole of the ground floor with a view
to subdividing it and subletting it in parts: what the Court of Appeal rejected
was the hypothesis that separate hypothetical tenants might take separate parts
of the ground floor with a view to making them self-contained. Second, he
argued that the Court of Appeal, while rejecting the contention that the
hypothetical tenant or tenants could be a person or persons who would intend
forthwith to subdivide the ground floor, that did not exclude the hypothetical
tenant being someone who was going to occupy the ground floor, but was prepared
to pay for the ability to subdivide (and sublet) it sometime during the
currency of the hypothetical lease.
Attractively though Mr Reynolds presented
his case, and much as I would like to accept it, I consider that it must be
rejected. First, I have already referred to the issue in Iceland as
summarised by Dillon LJ, at p127G: in rejecting the landlord’s case it seems to
me that he held that, when carrying out the rent review valuation, one could
not regard the ground floor of the property in that case as ‘capable of
division into seven units’. Second, even if the reasoning of Dillon LJ appears
to be directed more to the hypothesis of several tenants bidding for different
parts of the ground floor and all of them intending to carry out works of
division, he also appears to be dealing with the possibility of a single
tenant. Third, the logic of his conclusion must apply equally to a single
tenant who has no immediate intention to carry out any works of subdivision,
but may well do so in the future: the essence of the judgment is that one
should not be able to value premises on the basis of their potential for
improvement, because any improvement would be carried out by the hypothetical
tenant and the parties cannot have intended such enhanced value to be taken
into account, given that they have expressly required actual improvements by
the actual tenant to be disregarded.
It seems to me, with respect, that this
reasoning confuses rentalising improvements with rentalising the right to carry
out improvements. Improvements are physical things which, under the terms of
the instant rent review clause and that in Iceland, must not be rentalised;
the right to carry out improvements is wholly different. The logic of the
decision would seem to lead to surprising conclusions. For instance, it would
appear to follow that one should disregard the hypothetical tenant’s rights to
occupy, and to build up goodwill in, the premises, because the actual tenant’s
occupation and goodwill must, under the terms of the rent review clause, be
disregarded. Also, as Mr Reynolds pointed out, it would appear that where, as
here, the premises to be valued are a ‘shell’ one could not take into account
the possibility (which in practice would be a certainty) that the hypothetical
tenant would effect immediate and substantial improvements to the
premises. Further, the very existence of the wall issue in the instant
determination also shows the difficulties if Iceland is correct.
I find the observations of Dillon LJ all
the more puzzling in light of the fact that, as is clear from the passage I
have quoted, the Court of Appeal was clearly presented with what I would regard
as the right arguments. Furthermore, Dillon LJ himself quotes, at p128D, an
observation of Hoffmann J (in Norwich Union Life Insurance Society v Trustee
Savings Banks Central Board [1986] 1 EGLR 136, at p137) as to the existence
of a ‘presumption that the hypothesis upon which the rent should be fixed upon
a review should bear as close a resemblance to reality as possible’. In my
judgment, in Iceland, as here, the ‘reality’ was that the premises were
not divided but that the tenant had the right at any time during the lease to
carry out works of alteration to subdivide the premises into a number of
different units, and then to sublet those units. Accordingly, it does appear to
me that the reasoning
principle which the court was purporting to apply.
In light of these observations as to the
effect and the reasoning in the decision of the Court of Appeal in Iceland,
as I understand it, it might be thought appropriate to reconsider my rejection
of Mr Reynolds’ arguments as to the more limited effect of the decision.
However, it seems to me that even if the decision in Iceland is given
the more limited effect for which he contends, it still suffers from what I
would respectfully characterise as the logical and commercial flaws mentioned
above. By the same token, the logic of the decision, even if it is limited to
the extent for which Mr Reynolds contends, would still suggest that the wider
interpretation, which I have reluctantly accepted, logically flows from it.
That, then, brings me to the second
point, namely whether the defendant as a surveyor appointed as an expert to
determine a reviewed rent was bound by the reasoning and decision in Iceland.
I propose to decide first whether a court at first instance would follow Iceland
if it had to decide the subdivision issue in the present case.
On the basis of anxious consideration of
the decision in Iceland, my conclusion is that, were it necessary for me
to decide the subdivision issue, I would hold that, in considering the proper
approach to the assessment of the market rent under the instant rent review
provisions, I was not bound by the decision and reasoning in Iceland,
and that in those circumstances I would have concluded that the market rent
could, indeed should, be assessed on the basis that the hypothetical tenant
taking a lease of unit 62 could be someone who intended forthwith to convert it
into a number of subunits, of which he could sublet up to three. My reasons for
reaching that conclusion and for differing from the approach of the Court of
Appeal in Iceland are, I hope, clear from what I have already said.
However, it is right to explain briefly why I, as a first instance judge, would
not feel myself bound by the decision and reasoning of the Court of Appeal in Iceland.
It is, of course, well established that a
judicial conclusion as to the meaning of words in the context of one document
is not binding or conclusive as to the meaning of similar words in another
document, even where the words being construed and the nature, and indeed the
terms, of the two documents are very similar. There are numerous cases where
the courts have deprecated attempts to construe a contract by reference to
judicial decisions as to the meaning of similar words in another contract: see,
for instance, per Lord Roskill in Pioneer Shipping v BTP
Tioxide Ltd (‘The Nema’) [1982] AC 724, at p749G and the graphic
observations of Sir George Jessel MR in Aspden v Seddon (1875) 10
Ch App 394, at pp396 to 397n–398n. In the context of rent review clauses
themselves, this approach was approved by Dillon LJ himself; in Equity &
Law Life Assurance Society plc v Bodfield Ltd [1987] 1 EGLR 124, at
p125C, he said:
to refer to authorities on other
documents merely for the purpose of ascertaining the construction of a
particular document is to be deplored as a wrong approach and likely to lead to
confusion and error.
Where the Court of Appeal has reached a
clear and reasoned conclusion on an identical, or very similar, issue relating
to a rent review clause in very similar terms, it is highly desirable for a
judge at first instance to follow that reasoning, in the absence of unusually
compelling reasons to the contrary. Consistency of reasoning and certainty of
outcome are obviously desirable features of any civilised system of law and, if
inferior tribunals are prepared to depart from the decisions and principles
laid down by superior ones too readily, it is detrimental to the public
interest: see the observations to this effect of May LJ in Ashville
Investments Ltd v Elmer Contractors Ltd [1989] QB 488, at p495A–C.
None the less, given that I would not as
a matter of strict law be bound to follow Iceland and bearing in mind my
clear view that it produces the wrong answer in the present case and is very
difficult to reconcile with the very presumption which Dillon LJ expressly
approved (and has been approved and applied on a large number of occasions in
the field of rent review, namely ‘that the hypothesis upon which the rent should
be fixed upon a review should bear as close a resemblance to reality as
possible’), I would have arrived at a conclusion which, with respect to the
Court of Appeal, appears to me to be clearly right in the instant case — viz
that the market rent should be assessed on the basis that the hypothetical
tenant could be someone who wants or might want to subdivide unit 62 into a
number of subunits (and to underlet up to three of them).
Conclusions on allegations 2 and 3
On the face of it, it seems to me very
difficult to contend that an expert surveyor assessing the reviewed rent for a
property was negligent if he followed the reasoning and approach of the Court
of Appeal in Iceland, as I (and indeed the defendant and Mr Fogel)
understand it to be. At least in the absence of special circumstances, I
consider that it would be well-nigh impossible to fault a surveyor entrusted
with carrying out a valuation, if he carried it out applying the same
principles as had been applied by the Court of Appeal in a similar case.
The fact that I would have been prepared
to decline to follow the reasoning in Iceland if it had been up to me to
assess the market rent does not, in my judgment, assist the plaintiffs. The
very fact that I would have found it difficult not to follow the reasoning in Iceland
emphasises how hard it would have been for the defendant, as a surveyor, to
refuse to follow the reasoning. That point is also underlined by the fact that
Mr Fogel, very understandably, felt himself reluctantly bound by the decision
in Iceland to give the advice he gave on October 24 1994.
Even if I were wrong as to the effect of
the decision in Iceland, and Mr Reynolds were right in either or both of
his arguments as to the effect of Iceland, it would still seem to me
very difficult, on the face of it, to conclude that a surveyor who construed Iceland
as having a particular effect, which he then applied to the valuation he was
instructed to carry out, was negligent, unless his conclusion as to the effect
of Iceland was not merely wrong, but was unreasonable.
These are, however, no more than prima
facie views. Clearly there could be various reasons, in light of the facts
of a particular case, why a surveyor determining a reviewed rent could be
negligent even though he honestly applied what he believed was the reasoning in
a reported case. One particular circumstance which could result in the surveyor
not escaping liability is where he should, bearing in mind the facts
surrounding his determination, have sought independent legal advice and/or have
reverted to the parties for further submissions. Although the plaintiffs and
M&S had agreed in the lease that they were entrusting the assessment of the
market rent to a surveyor, this would obviously not exonerate him if he erred
in law when making his determination, if it can be shown that he did not seek
independent legal advice and/or he did not discuss the matter with the parties,
and that a competent, careful surveyor would have done so. That is the basis of
Mr Reynolds’ complaint on behalf of the plaintiffs against the defendant in
this case.
In summary, he contends: (1) that the
defendant should have contacted the parties some time after the end of June
1994 to ask for further submissions on the subdivision issue, and, in any
event, he should have asked Mr Fogel as to whether he could value unit 62 on
the assumption that the hypothetical tenant would convert it into subunits (up
to three of which he might sublet); and (2) that, had the defendant done so,
there was, to put the point at its lowest, a real chance that he alone or he
and Mr Fogel might have concluded that he could, indeed should, value on that
basis.
So far as the first component of that
argument is concerned, Mr Reynolds relies on the following facts. First, by
virtue of the correspondence which took place after exchange of counter
submissions, it was clear to the defendant that there was a real dispute of
principle between the parties on this issue. Second, he should have appreciated
that it was an issue which could have a significant effect on his eventual
determination. Third, the defendant himself had
topic, yet he did not take such advice. Fourth, the plaintiffs could reasonably
have assumed that he would seek further submissions from them on the
subdivision issue if it was important to the defendant’s determination. Had
that happened, Mr Reynolds argued, there would have been further detailed legal
submissions which would have inevitably led to the defendant reconsulting Mr
Fogel.
As to what would have happened if the
defendant had taken such legal advice, Mr Reynolds, while accepting that Mr
Fogel’s initial and full response on the wall issue was unhelpful to his case,
understandably relies on the fact that, in the end, Mr Fogel advised the
defendant that he could value on the assumption that the hypothetical tenant
could erect the wall, notwithstanding the decision in Iceland.
Although these arguments were presented,
as were all the plaintiffs’ arguments, attractively and effectively, I have
reached the conclusion that I should reject them. As to the complaint that the
defendant did not recontact the parties and did not get legal advice on the
subdivision issue, it seems to me that there are two answers, which are to some
extent connected. The first arises from his communications with the parties in
the course of the determination. The defendant had not merely given the parties
the normal opportunity of making submissions and counter submissions, but he
had also permitted the plaintiffs, through Mr Forbes, to answer M&S’
counter submissions, and in his answer Mr Forbes had specifically dealt with
the subdivision issue. Furthermore, even after the end of June 1994, the defendant
had permitted the plaintiffs to submit fairly detailed legal counter
submissions and, while it is true that those counter submissions dealt with the
wall issue and not with the subdivision issue, it seems to me to place a wholly
unreasonable burden on the defendant if he is to be blamed for not having given
the plaintiffs a final specific opportunity to deal with the subdivision point.
This point is reinforced by the responses the defendant received from his
letter of June l5 1994. M&S’ solicitors made it clear what their argument
was, supporting it with an authority. The plaintiffs’ solicitors’ letter of
June 24 appeared to suggest that they were content to leave it to the defendant
to decide whether there were in fact any legal issues he needed determined, and
could reasonably have given the defendant to understand that the plaintiffs
were not particularly concerned about the point. Accordingly, as the defendant
had formed a firm (if provisional) view as to the effect of Iceland,
which accorded with that of an experienced colleague to whom he had talked and,
indeed, accords with my view as to the effect of Iceland, it is, I
think, hard to characterise his decision not to seek legal advice as negligent,
even without the second factor to which I now turn.
The second answer to the plaintiffs’
complaint is that the defendant sought the advice of Mr Fogel on the wall
issue, which, of course, turned on the proper interpretation of Iceland.
Even if (which I do not believe to be the case) the defendant could otherwise have
been criticised for not having sought Mr Fogel’s advice on the subdivision
issue, it seems to me that, having sought and obtained detailed advice from Mr
Fogel on the wall issue, the defendant was entitled to assume that the
provisional conclusion he had reached as to the effect of Iceland on the
subdivision issue was very substantially reinforced, and indeed effectively
confirmed, by the conclusion and reasoning contained in Mr Fogel’s advice of
October 24 1994. Mr Fogel’s conclusion as to the effect of Iceland
appears to me to have been clear and unequivocal and he equally clearly advised
the defendant that he was bound by it.
I also reject Mr Reynolds’ contention
that, had Mr Fogel been asked about the effect of the reasoning in Iceland
on the subdivision issue, he would have advised that the plaintiffs’ argument
was correct. If anything, the discussions between the defendant and Mr Fogel
after October 24 1994, in relation to the wall issue, suggest to me that Mr
Fogel would have stuck to the initial advice that he would have given as to the
subdivision issue had it been sought, namely that the reasoning in Iceland
precluded the defendant from valuing unit 62 in the way for which the
plaintiffs contended. It does not seem to me that, in concluding that the
defendant could take into account the possibility of the wall being erected, Mr
Fogel was departing from his full and reasoned conclusions in his report of
October 24. All he did was to accept that the conclusion was so inappropriate
with regard to the wall that, in some way or another, the court would find a
way of distinguishing the reasoning in Iceland. However, neither of the
reasons which he was effectively persuaded by the defendant to adopt for
distinguishing Iceland on the wall issue could reasonably have been
applied to the subdivision issue: the reason for the defendant’s desire to
distinguish Iceland when it came to the wall issue, namely the
commercial absurdity of valuing an unencloseable unit on the open market, would
not have applied to the subdivision issue. Furthermore, the decision in Iceland
was concerned with the very issue of subdivision of the premises to be valued
for rent review.
Before leaving this topic, I ought to
deal with the suggestion made on behalf of the plaintiffs, that unit 62 could
have been sublet in parts without any physical divisions of the nature which
constituted improvements. As I understood it, the argument was that unit 62
could have been divided into subunits without any structural alterations, ie
with divisions which remained chattels. That was not a point developed in the
evidence or in argument, even less was it a point put during the course of the
determination by the plaintiffs to the defendant. Further, it does not seem
realistic: the main thrust of the plaintiffs’ case is that unit 62 could be
converted into three or four retail subunits of a standard size and shape, each
capable of independent occupation. I would have required cogent evidence before
being satisfied that non-structural alterations could have achieved this, not
least because of the requirement that each subunit should have its own
plumbing.
In these circumstances, I have reached
the clear conclusion that neither allegation 2 nor allegation 3 is made out.
Ignoring other transactions and fixing
too low a rent
Units 12 and 36/7: the narrow issue
I now turn to allegation 4, under which
the plaintiffs contend that the defendant gave insufficient weight to two
specific comparables and the allegation that the defendant fixed too low a
rent. The two specific comparables are unit 12 and unit 36/7.
As to unit 12, it is, at first sight,
surprising that the defendant did not rely on it when assessing the market
rent. It is not only close to unit 62, but it also has a frontage on to the
central mall and is, and was constructed as, an annex to a store (in this case
Littlewoods) fronting the High Street, so as to enable it to be a ‘walk
through’ store. Given that the terms upon which unit 12 was let were very
similar to those of unit 62, the only significant difference would appear to be
that unit 12 is significantly less wide than unit 62 and is therefore rather
smaller and, while it has an unusually high frontage to depth ratio, it is not
as high as that of unit 62. It is quite clear from the evidence of Mr Green,
and indeed from the evidence of Mr Walmsley, that, unless there is some further
explanation, the reviewed rent agreed in relation to unit 12 makes the market
rent as assessed by the defendant seem significantly too low.
In my judgment, the answer to this
allegation is to be found in the defendant’s own notes, which effectively
explained his final thoughts leading to the determination. He identified three
relevant comparables, based on size and type of property, namely units 11, 12,
and 59. As I have already mentioned, his eventual determination was based on
units 11 and 59 alone. He specifically set out his reasons for rejecting unit
12 as a comparable in the following terms:
Littlewoods was valued prior to the Iceland
case and a break-up was assumed. Post Iceland we are not allowed to make
this assumption, so Littlewoods is not much help.
Thus, it seems to me that the defendant
rejected unit 12 as a comparable on the ground that he believed that it had
been valued on the basis that the hypothetical tenant could subdivide it into
self-contained units. It is true that, if the defendant’s view as to the effect
of Iceland were correct, then unit 12 itself should not have been valued
on this basis (given that the terms upon which it was let were
the defendant’s notes record, the reviewed rent on unit 12 was agreed prior to
the decision in Iceland.
The evidence I have seen, and which the
defendant saw when he was making his determination, suggests pretty clearly
that unit 12 was indeed valued specifically on the hypothesis that the
hypothetical tenant taking the unit would forthwith divide it up into subunits,
which he could then expect to sublet. The reviewed rent agreed on unit 12 was
explained and justified, at least by the surveyor acting for Littlewoods, on
the basis that one took zoned areas which were reduced to allow for notional
partitioning, passageways and lavatories (all of which would have been
necessary if unit 12 was to be divided into a number of subunits) and having
thus arrived at an appropriate aggregate rent, there had to be deducted the
annualised cost of subdividing the unit and a further sum to allow for
management, risk of voids etc.
It might be said that there is a certain
inconsistency between my conclusion that the defendant was entitled to devalue
on the overall basis, rents on other units which had been agreed by the zoning
method, while, at the same time, holding that he was entitled to reject the
reviewed rent agreed on unit 12 on the grounds that it had been agreed on an
inappropriate basis for the purpose of the instant rent review. However, I do
not believe that there is any inconsistency. If the defendant justifiably
believed that the reviewed rent agreed on unit 12 was fixed too high because it
was assessed on the basis of an assumption which was wrong in law, then it
seems to me that it was then a matter for the defendant whether to reject unit
12 as an unhelpful comparable (as he did) or whether to try to adjust the level
of rent agreed on unit 12 so as to provide a useful comparable. Given that it
appears clear that the defendant considered that he had sufficient comparable
evidence without unit 12, I consider that he cannot be criticised for rejecting
it as a comparable.
Unit 36/7 is directly opposite unit 62,
is of a more regular shape and is rather less than a third of the size. Its
rent was subject to review on September 29 1990, and a rent of £198,500 pa was
agreed. Even allowing for the fact (which is agreed) that there was a
significant fall in the rental value of units in Lewisham Centre (in common
with the retail market throughout most of the country) between 1990 and 1993,
the fact that unit 36/7, with an area less than a third of that of unit 62,
commands a rent of nearly 80% of the rent fixed as the market rent for unit 62
by the defendant, is somewhat striking. Clearly, if unit 62 could indeed have
been treated as capable of conversion forthwith into three subunits, each of
which would have the approximate shape and dimensions of unit 36/7, one can see
a powerful argument for saying that £250,000 pa is simply too low a rent for
unit 62.
Once again, however, one comes back to
the fact that the defendant regarded unit 36/7 as unhelpful in this connection,
because he believed that the decision and reasoning in Iceland prevented
him from assuming that the hypothetical tenant would bid for unit 62 in the
expectation of dividing it into subunits, each of which would be very similar
indeed to unit 36/7.
Accordingly, in so far as the defendant
rejected unit 12 and unit 36/7 as useful comparables because he thought that
unit 62 could not be valued on the basis that the hypothetical tenant could not
be someone who would take into account his ability to divide unit 62 into
subunits, it seems to me that the plaintiffs cannot succeed against the
defendant essentially for the reasons I have already rejected their case on,
allegations 1, 2 and 3. However, there is also a wider point to be considered.
Wider issue
There still remains the question as to
whether, even if the defendant could reasonably have valued substantially by
the overall method, it still can be said that he arrived at a figure which was,
in all the circumstances and, in particular, in light of all the evidence
available to him, lower than that which any reasonably competent and careful
surveyor could have fixed as the market rent: in other words, even though the
defendant was not negligent in his approach, that his eventual figure was outside
the permissible bracket.
Given my conclusions so far, it would, I
think, be difficult, but none the less possible, to conclude that the defendant
did arrive at a figure which was indefensibly low. In this connection, it is
right to record that I was impressed not only with Mr Green’s reasons for using
the zoning method, but also with his assessment of the market rent. Given that
he made no deduction for the back wall or for the keep open clause, it seems to
me that his figure £430,000 pa should be reduced to £400,000 pa to make it
strictly comparable with the defendant’s assessment of the market rent at
£250,000 pa. That is a wide disparity. However, the disparity is not as great
as it seems once one bears in mind the fact that Mr Green valued on the assumption
(which I believe to be correct) that the hypothetical tenant would include
someone who could convert unit 62 into subunits (which he could then sublet),
whereas the defendant carried out his valuation on the basis that this
assumption was impermissible in light of Iceland. Furthermore, although,
as I have already mentioned, Mr Walmsley did not strike me as an impartial
witness, it is certainly of some assistance to the defendant’s case that,
making the same assumption on the defendant in light of Iceland, Mr
Walmsley arrived at precisely the same figure for the market rent.
So far as the comparables are concerned,
there is force in Mr Green’s point that, even allowing for the fact that the
defendant was entitled to reach the conclusion that he did as to the effect of Iceland
on the right to subdivide unit 62, it is, on the face of it, quite hard to
reconcile the rent of £198,500 pa for unit 36/7 with the defendant’s assessment
for a unit over three times the size (and with the benefit of extra frontage)
at about a mere 25% more. None the less, as the defendant and Mr Walmsley said,
the defendant was concerned with fixing the rental value of unit 62, which, by
its size and shape would, at least in the defendant’s view, have appealed to a
different market from unit 36/7, particularly in light of the assumption he
made as to the effect of Iceland; in his view, the market for unit 62
was much closer to the market for units 11 and 59, which he took as his
comparables.
Quite apart from this, the defendant was
faced with a number of different comparable transactions and, as anyone who has
been involved in valuation of property knows, where one has a number of
comparable transactions it is frequently very difficult to reconcile all of
them satisfactorily. In the present case, the defendant took those comparables
which seemed to him to be most helpful and, having satisfied himself that the
rents agreed on those two comparables were not substantially out of line with
the rental market in the centre as a whole, he based his valuation on those two
comparables. It seems to me that that was something he was entitled to do,
particularly as he considered all the comparables put to him before he reached
that conclusion.
In all these circumstances, I consider
that the defendant’s assessment of the market rent at £250,000 pa cannot be
regarded as so low as to be below the figure which a reasonably competent and
careful surveyor could have determined. It is not really appropriate or
necessary for me to identify the permissible bracket in this case, in light of
the fact that I had no evidence about it from Mr Green or Mr Walmsley. Adopting
the approach suggested in Mount Banking, this a case where, in light of
the evidence and arguments, I consider it appropriate simply to conclude that
the defendant’s approach to assessing the market rent was proper and that his
resultant determination was, in light of that approach, one which he could
reasonably have fixed.
I ought finally to mention that it was
contended on behalf of the defendant that even if he had distinguished, or
refused to follow, Iceland, it would not have altered his valuation
approach or his ultimate determination. Neither the defendant nor Mr Walmsley
had known of a case where a retailer had leased a unit larger than he required
with a view to dividing it and occupying part and subletting the remainder. I
must confess to considerable doubts about this contention of the defendant.
Bearing in mind the evidence relating to unit 12 and unit 36/7, I find it a
little hard to believe that if he had decided the subdivision issue in favour
of the plaintiffs, it would not
fact that the defendant himself raised the subdivision issue with the parties
and rejected unit 12 as a comparable on that very ground. Further, there is no
reason why the hypothetical tenant could not have been an investor or a
developer who would have sublet all the units he created. As Mr Reynolds
pointed out, if the plaintiffs’ case on the subdivision issue had been accepted
by the defendant, he would presumably have appreciated that the landlord in the
hypothetical negotiations would have pointed out the profit that the tenant
could have made by subdividing unit 62. However, the fact that I am very
doubtful about the defendant’s case and evidence on this point does not, in the
event, alter my conclusions. Given that the defendant was entitled to find for
M&S on the subdivision issue, the point is academic. As to his evidence on
this point, it only concerned what he thought he would or might have done;
almost all the rest of his evidence concerned his valuation practice or his
actual thoughts and actions in connection with this particular determination.
Conclusion
In these circumstances, the plaintiffs’
claim is dismissed.
