Landlord and tenant — Rent review — meaning of assumption relating to fit for immediate occupation and use
By a lease
dated August 19 1986 the applicants, London & Leeds Estates Ltd, granted a
term of 25 years from August 8 1986 of premises at 33 Wigmore Street, London
W1, to the respondents, under their then name of Banque Paribas Capital Markets
Ltd. The lease provided for five-yearly rent reviews and, where the reviewed
rent could not be agreed, a reference to arbitration. The lease, in directing
the determination of the open market rent between a willing landlord and a
willing tenant at review, required at clause 6(b)(1), an assumption that the
demised premises are fit for immediate occupation and use and that all fitting
out and other tenant’s works required by a willing tenant had already been
completed. The clause further provided that there shall be disregarded: (a) any
increase in value attributable to the existence of improvements at the relevant
review date; and (b) any effect on rent of the absence of any rent-free period
or contribution towards fitting-out costs. In respect of the first review on
August 8 1991, the appointed arbitrator gave consent under section 2(1)(a)
of the Arbitration Act 1979 for the determination of preliminary points of law.
The respondents appealed from the decision of Mr Martin Mann QC (sitting as a
deputy judge of the Chancery Division) that it was to be assumed that the
fitting out and other tenant’s works required by the willing lessee had not
been carried out at the expense of the willing lessee. He also held that the
landlord was entitled to the increase in the rental value attributable to the
fitting-out works and that the increase was not to be diminished if and to the
extent that those works were found by the arbitrator to be the same as the
actual fitting-out works carried out by the tenant.
of the lease is: (1) that the demised premises are fit for immediate occupation
and use and in a good state of repair and condition; and, (2) that all fitting
out and other tenant’s works required by such willing tenant have already been
completed. The purpose of the second part of the subclause is to preclude the actual
tenant from arguing for a discount on the ground that the hypothetical tenant
would have required further or different works from those carried out by the
actual tenant, the cost of which would necessarily be borne by the hypothetical
tenant, with a corresponding reduction in the rent that he would be willing to
pay.
The following
case is referred to in this report.
99
Bishopsgate Ltd v Prudential Assurance Co Ltd
[1985] 1 EGLR 72; (1985) 273 EG 984, CA
This is an
appeal by the respondents, Paribas Ltd, with leave from Mr Martin Mann QC
(sitting as a deputy judge of the Chancery Division) under section 2(3) of the
Arbitration Act 1979, who had determined certain preliminary questions of law
following an application by originating notice of motion by the applicants,
London & Leeds Estates Ltd, under section 2(1) of the 1979 Act: see [1993]
04 EG 119.
Kim Lewison QC
(instructed by Linklaters & Paines) appeared for the appellants; Michael
Barnes QC (instructed by Titmuss Sainer & Webb) represented the respondent.
Giving
judgment, NOURSE LJ said: This is an appeal from an order made on July
23 1992 by Mr Martin Mann QC, sitting as a deputy judge of the Chancery
Division, on an application under section 2(1) of the Arbitration Act 1979 for
the determination of questions of law arising on rent review provisions in a
lease of office premises. The judge determined the questions in favour of the
landlord. Pursuant to section 2(3) of the 1979 Act, he certified that they were
of general importance and gave the tenant leave to appeal to this court.
The premises
are at 33 Wigmore Street, London W1, being part of a larger building known as
27-37 Wigmore Street. By a lease dated August 19 1986 and made between the
applicants London & Leeds Estates Ltd (therein and hereinafter called ‘the
landlord’) of the first part, the respondents under their then name of Banque
Paribas Capital Markets Ltd (therein and hereinafter called ‘the tenant’) of
the second part and Banque Paribas as guarantor of the third part, the premises
were demised by the landlord to the tenant for a term of 25 years from August 8
1986 at an initial yearly rent of £2,003,880 subject to variation as
thereinafter mentioned.
The rent
review provisions, expressed in the form of a proviso, are contained in clause
6 of the lease. Clause 6(a) provides that with effect from August 8 1991, 1996,
2001 and 2006 the yearly rent for the time being payable shall be reviewed; and
from and after each such date of review shall be an amount equal to whichever
is the greater of: (i) the yearly rent payable immediately prior to such date
of review; and (ii) the rack-rental market value of the premises at such date
of review. Clause 6(b) provides that the rack-rental market value of the
premises at each date of review shall be such an amount as may be agreed
between the landlord and the tenant or determined by arbitration in accordance
with clause 6(c) as representing:
the best open
market rent at which the demised premises might if available reasonably be
expected to be let as at such Date of Review for a term having the unexpired
residue of this term or of 15 years whichever shall be the longer with rent
reviews every five years at the relevant Dates of Review as between a willing
landlord and a willing tenant with vacant possession without taking a fine or
premium and subject to the provisions of this Lease (other than the term and
the amount of rent but including these provisions for rent reviews) and upon
the following assumptions (if not a fact in each case) namely . . .
There are then
set out six assumptions, of which the first is that on which the outcome of
this appeal depends:
6.(b)(1) That the demised premises are fit for
immediate occupation and use and in a state of good repair and condition and
that all fitting out and other tenant’s works required by such willing tenant
have already been completed.
The six
assumptions are immediately followed by five matters of which no account is to
be taken. It is necessary to refer only to the second and fifth of these
disregards:
6.(b)(ii) any
increase in rental value of the demised premises attributable to the existence
at the relevant Date of Review of any improvements to the demised premises or
any part of them carried out (with consent where required) otherwise than in
pursuance of an obligation to the Landlord or its predecessors in title by the
Tenant . . .
6.(b)(v) any
effect on rent of the absence of any rent free period or contribution towards
fitting out costs or other inducement which might then be the practice in the
open market to make or allow tenants on a new letting with vacant possession.
The first date
of review was August 8 1991. Between September and November 1991, by which time
it had become clear that the amount of the rack-rental market value could not
be agreed and an arbitrator had been appointed, there was correspondence
between surveyors acting for the landlord and the tenant respectively with a
view to identifying the legal framework within which the arbitrator’s valuation
should take place. A number of questions were disposed of by agreement, but
three major issues of principle remained in dispute. On December 18 1991 there
was a preliminary hearing before the arbitrator, Mr G R Stanton [FRICS] of John
D Wood, and by a letter of the following day he formally gave his consent,
pursuant to section 2(1)(a) of the 1979 Act, to an application being
made to the High Court for the determination of three preliminary points of law
arising on clauses 6(b)(1) and 6(b)(ii) of the lease. On January 20 1992 the
landlord issued an originating notice of motion in the Queen’s Bench Division
Commercial Court raising those points under six separate questions. The
proceedings were later transferred to the Chancery Division.
From the start
both sides proceeded on the footing that the assumption made in clause 6(b)(1)
required the arbitrator, in making his valuation, to determine what fitting out
and other tenant’s works would have been required by the hypothetical willing
tenant. The essential dispute between the parties was whether it was to be
assumed that those works, once identified, had been carried out at the cost of
the hypothetical willing tenant or whether no assumption ought to be made as to
how that cost had been borne. Thus, the first and principal question raised by
the notice of motion was expressed as follows:
Whether it is
to be assumed that the fitting out and other tenants’ works required by the
willing lessee (‘the hypothetical fitting out works’) have been carried out at
the expense of the willing lessee.
The hearing
before the learned deputy judge proceeded on that footing. He answered the first
question in the negative and made a declaration accordingly. He also declared
that the rack-rental market value of the premises was to be assessed on the
assumption that the landlord was entitled to the increase (if any) in the
rack-rental market value attributable to the hypothetical fitting-out works;
and, further, that the increase was not to be diminished if and to the extent
that those hypothetical works were found by the arbitrator to be the same as
the actual fitting-out works (or other work of improvement) carried out by the
tenant. Finally, the judge made a declaration in answer to a further question
as to which there had been no dispute before him. The judge’s decision having
been a victory for the landlord, the tenant was ordered to pay the costs of the
application.
Mr Lewison
QC’s opening of the tenant’s appeal in this court also proceeded on the footing
that the arbitrator was required to determine what fitting out and other
tenant’s works would have been required by the hypothetical willing tenant. It
was only when we were being addressed by Mr Barnes QC, on behalf of the
landlord, that it was put to him by the court that there was an altogether
simpler view of clause 6(b)(1), which did not require the arbitrator to enter
upon any determination as to hypothetical fitting-out works or the like. That
view, being one which would have led to a result unfavourable to the landlord,
was not accepted by Mr Barnes. But Mr Lewison espoused it in reply as an
alternative route to the result for which he contended. Having taken time to
consider the matter, and with the diffidence that befits the adoption of any
point taken for the first time by this court, I have come to a clear opinion
that the simpler view of clause 6(b)(1) is correct.
I start by
observing that the assumption required by clause 6(b)(1) is twofold: first,
that the demised premises are fit for immediate occupation and use and in a
good state of repair and condition; second, that all fitting out and other
tenant’s works required by such willing tenant have already been completed.
Next, what the arbitrator is required to determine is the best open market rent
at which ‘the demised premises’ might, if available with vacant possession,
reasonably be expected to be let, but on the six assumptions and with the five
disregards. Except so far as is required by those assumptions and disregards,
the valuer is to look at the demised premises, that is to say the premises in
the state that they are at the date of review.
The clear
purpose of the first part of clause 6(b)(1) is to preclude the actual
tenant from arguing before the arbitrator that the hypothetical tenant
would be entitled to a discount on the best open market rent on account of the actual
state of repair and condition of the premises. It is impossible to read
that provision as having any other purpose or effect. Equally, the purpose of
the second part of clause 6(b)(1) must be to preclude the actual tenant from
arguing for a discount on the ground that the hypothetical tenant would have
required further or different works from those carried out by the actual
tenant, the cost of which would necessarily be borne by the hypothetical
tenant, with a corresponding reduction in the rent that he would be willing to
pay. There is simply no warrant for reading into the second part of clause
6(b)(1), any more than into the first part, some requirement for the arbitrator
to determine what hypothetical works the hypothetical tenant would have
required. If the parties had intended that there should be such a requirement,
they could and should have made express provision for it.
Mr Lewison
referred us to the decision of this court in 99 Bishopsgate Ltd v Prudential
Assurance Co Ltd (1985) 273 EG 984*, where it was held that a rent review
provision in a lease of a substantial tower office block in the City of London
which required the arbitrator to have regard ‘to rental values current as at
such day for property let without a premium with vacant possession’ meant that
the new rent had to be assessed on the basis that the office block was vacant,
with the result that the hypothetical willing tenant would have had to sublet
parts of it on a floor by floor basis, giving each subtenant a rent free period
for fitting out. Mr Lewison submitted, no doubt correctly, that the disregard
contained in clause 6(b)(v) of the lease in this case was introduced in order
to counteract the effect of that decision. And he also submitted, again
persuasively, that similar thinking was behind the inclusion of the second part
of clause 6(b)(i) as well. However you look at it, that provision cannot have
the effect of requiring the arbitrator to determine what fitting out and other
tenant’s works the hypothetical willing tenant would have required.
*Editor’s
note: Also reported at [1985] 1 EGLR 72.
The footing on
which the case was argued in the court below having been incorrect, I see no
useful purpose in considering the questions decided by the judge. For my part,
I would allow the tenant’s appeal and grant such declaratory relief as is
appropriate to the simpler view I have expressed.
STUART-SMITH and WAITE LJJ agreed and did not add anything.
Appeal
allowed with costs. It was declared that: (1) it is to be assumed that the
hypothetical tenant does not require further or different fitting-out work from
that carried out by the actual tenant; (2) there is to be disregarded any
increase in rental value of the demised premises attributable to the existence
at the relevant date of review of any improvements to the demised premises or
any part of them carried out (with consent where required) otherwise than in
pursuance of an obligation to the Landlord of its predecessors in title by the
Tenant but (3) there is also to be disregarded any effect on rent of the
absence of any rent-free period or contribution towards fitting-out costs or
other inducement which might then be the practice in the open market to make or
allow tenants on a new letting with vacant possession.
