Landlord and Tenant Act 1954, Part II — Tenants’ request for new lease — Terms of new lease — Whether lease should contain a break clause — Plaintiff tenants sought by originating summons an order for grant of new tenancy, but the present proceedings were concerned only with the trial of a preliminary issue which was directed to be heard — This issue related to the length of the term to be granted; whether or not a break clause for the purpose of redevelopment should be included; and, if so, from what date and on what notice such a break clause should be effective
tenants were underlessees of a car park for a term which had ended and were now
holding over by virtue of a continuation tenancy under the 1954 Act — The car
park was under Paternoster Square in the City of London and adjoined St Paul’s
Cathedral — It was thus situated in a sensitive and,
landlords were the leasehold owners of 4.3 acres out of 7 acres constituting an
island block which the planning authority wished to reconstruct; and the
landlords wished to redevelop the 4.3 acres which they owned — There were
considerable difficulties in the way of such development — Planning permission
had not yet been obtained and there was the serious problem of securing vacant
possession of the mixed batch of properties occupying the site on tenancies for
varying terms and with different expiry dates — However, the Vice-Chancellor
was satisfied that there was a real possibility (as distinct from a
probability) that planning permission would be obtained and that vacant
possession of the whole site would be secured in due course
applicable was clearly established in such cases as Reohorn v Barry
Corporation, Adams v Green and J H Edwards & Sons Ltd v Central London Commercial
Estates Ltd that, if there was a real possibility that the premises in question
would be required during the continuance of the proposed new tenancy, it was
right to include in the terms of the new tenancy a break clause which would
enable such reconstruction to take place — As there was here a real possibility
that the development would be practicable within the next 10 years, it followed
that a break clause should be included in the proposed new tenancy
opposing submissions as to the date from which any such break clause should be
operable — The landlords said that it should be exercisable at any time from
the commencement of the lease — The tenants said that it should be exercisable
only when outline planning consent and vacant possession of the rest of the
properties on the site had been obtained — The Vice-Chancellor accepted the
landlords’ submission — The guiding principle was that the tenants should enjoy
security so long as the car park was not needed for the purposes of
development, but when the landlords were able and ready to proceed with the
development it should not be held up by rights possessed by the tenants — It
had to be borne in mind that the protection given by Part II of the 1954 Act
applied — Even if the landlords had served a notice terminating the tenancy
under the break clause, they would not be entitled to possession unless they
could establish that the case fell within section 30(1)(f) of the 1954 Act, on
which they relied — This was likely to involve a considerable time-lag after
any notice under the break clause had expired — The tenants would be adequately
protected by their statutory rights under the Act if the landlords were given a
general right to break the new contractual term on giving six months’ notice of
their desire to reconstruct the property — The preliminary issue would be
determined accordingly — Whether the new term should be for 10 or 14 years was
left open at this stage
The following
cases are referred to in this report.
Adams v Green [1978] EGD 107; (1978) 247 EG 49, [1978] 2 EGLR 46,
CA
Edwards
(J H) & Sons v Central London Commercial
Estates Ltd (1983) 271 EG 697, [1984] 2 EGLR 103, CA
Reohorn v Barry Corporation [1956] 1 WLR 845; [1956] 2 All ER 742;
[1956] EGD 243; (1956) 167 EG 604, CA
The plaintiffs
in the present case, National Car Parks Ltd, had applied by originating summons
for the grant of a new tenancy, pursuant to Part II of the 1954 Act, of a car
park under Paternoster Square in the City of London. The landlords, The
Paternoster Consortium Ltd, had notified their objections under section
30(1)(f) of the Act. The present hearing was of a preliminary issue which had
been directed to determine whether a break clause should be inserted in any new
lease granted and, if so, from what date such a break clause should be
exercisable.
Terence Cullen
QC and Stephen Furst (instructed by Hamlin Slowe) appeared on behalf of the
plaintiffs; David Neuberger QC and Kirk Reynolds (instructed by Ashurst Morris
Crisp) represented the defendants.
Giving
judgment, SIR NICOLAS BROWNE-WILKINSON V-C said: This is an application
by National Car Parks Ltd (whom I will call ‘the tenant’) under Part II of the
Landlord and Tenant Act 1954 for a new tenancy of a car park under Paternoster
Square in the City of London. The car park is a three-storey purpose-built car
park. The defendants are the Paternoster Consortium Ltd, who are the present
owners of the reversion (whom I will call ‘the landlords’).
The tenant
held the car park under a lease from December 31 1965 for a period of 10 years.
On the expiry of the lease the tenant has continued to hold over under a
continuation tenancy under the 1954 Act. On September 3 1986 the tenant served
a notice under section 26 of the Act requiring a new tenancy. The landlords
gave a counternotice on October 24 1986. On December 9 1986 the originating
summons in this case was issued, seeking a new tenancy.
There was an
order directing a preliminary issue whether the landlords, who had contended
that they had the intention to demolish and reconstruct the premises, could
establish their case. However, in May 1987, the landlords accepted that in the
present state of their proposed development they could not establish with
sufficient clarity their ability to carry out the intended reconstruction. As a
result, a different preliminary issue was directed, which is the preliminary
issue before me: in effect this is an issue as to the length of term which
should be granted by the landlords to the tenant and whether or not a break
clause for the purpose of redevelopment should be inserted in the lease and, if
so, from what date and upon what notice such break clause should be effective.
The car park
lies under Paternoster Square. It is in the centre of an island block amounting
to some 7 acres, adjoining the north side of St Paul’s Cathedral. The southern
boundary is St Paul’s Churchyard. The western boundary is Warwick Lane and Ave
Maria Lane. The north side is Newgate Street. The site is roughly triangular;
the apex on the eastern side is now known as 5 Cheapside. The landlords hold a
leasehold interest, expiring in the year 2235, at a very low rent of £2,000 per
annum. The site owned by the landlords amounts to some 4.3 acres out of the
total 7 acres. The landlords desire to redevelop the whole of the land which
they own.
The site in
question presents difficulties to a developer. First, it is a very sensitive
area from a planning point of view. As I have said, it adjoins St Paul’s
Cathedral and the southern boundary will face on to the cathedral itself. The
whole 7 acres was comprehensively redeveloped in the 1960s, but there is a
widespread feeling that the 1960s’ development was unsatisfactory in a number
of ways. Certainly the planning authority desire to reconstruct the whole of
the 7-acre site. The proposed redevelopment of the site has received
considerable publicity, following in part on comments made on the landlords’
proposals by a wide range of public figures. We therefore start with the
difficulty that the obtaining of planning permission for any given development
on this site is a matter of considerable difficulty.
The second
factor bearing on the proposed redevelopment arises from those properties which
lie within the 7 acres but outside the area owned by the landlords. There are
three major office buildings: Juxon House, on the south-western corner, forms
an important part of the frontage on to St Paul’s Cathedral and its
environment. On the north-west corner is a large building, Sudbury House. On
the eastern side is an office building, 5 Cheapside. As I have said, the
planning authority are anxious that the whole 7-acre site shall be
comprehensively redeveloped, but though I infer that negotiations continue with
a view to incorporating those excluded properties in the development, the
immediate proposal is that planning permission will be sought limited to the
site of 4.3 acres currently owned by the landlords. The impact on the
application for planning permission of those excluded properties may itself be
substantial. The papers that I have seen indicate that there is a difficult
correlation between the plot ratios on the 4.3 acres and the plot ratios
currently existing on the three excluded properties: that may give rise to
problems. It is also clear that the planning authorities are concerned as to
the interface between the properties to be redeveloped and the three properties
outside the site.
In order to
meet this, the landlords have prepared a comprehensive master plan, setting out
the overall development of the whole of the 7 acres as a consistent whole, but
the inability to give effect to that whole plan at this stage may — and I say
no more than may — cause problems.
The next
problem facing the developers of this site is the difficulty in getting vacant
possession of the whole of the 4.3 acres. Those in
five in all — which are subject to leases of varying duration. One of them,
Courtney House, will fall in very shortly, but others have terms stretching to
the beginning of the next century. It is plain that there are negotiations
afoot relating to the surrender of those leases, but there is no finality on
the matter. The probable present position is that the substantial negotiation
will be between Charterhouse Bank Ltd on the one hand and the landlords on the
other. The next type of occupier is the occupier of retail units, many of which
lie under the office blocks, but others, I believe, do not. There are 34 of
those in all, most of which are the subject-matter of separate leases. Finally,
there are car-parking areas, partly in the same area as the tenants — but some
I believe elsewhere — over which third parties have legal rights to park. There
are some 209 of those parking rights to be dealt with. It follows that the
landlords face substantial problems in obtaining vacant possession even of
their 4.3 acres before they can proceed with the comprehensive development of
those 4.3 acres.
There is a
further factor in the matter, namely periodic changes in control of the
landlord company. As their name suggests, the landlords were originally a
consortium of various bodies. The consortium consisted originally of Stockley
Paternoster Ltd, Parkley Holding Ltd — which is a subsidiary of British Land Co
plc — Unilever Superannuation Fund Nominees Ltd, Barclays Nominees, George Yard
Ltd and Unipart Ltd — which was a subsidiary of USF Nominees and Barclays
Nominees. It was that consortium which undertook the initial steps in the
proposed development, employing for that purpose a large and highly skilled
team of surveyors and those skilled in planning and other matters. The project was
under the overall professional control, with project managers, of Stockley
Construction Ltd, a company related to Stockley Paternoster Ltd, a member of
the consortium. Very major steps were taken towards bringing the proposed
development about. An architectural competition was held, and as a result Arup
Associates, the well-known architects, won the competition and produced the
outline master plan for the whole 7-acre site and a further variant of that
master plan. The proposals were exhibited to the public and gave rise to the
public response that I have mentioned, not all of which was favourable to the
plans proposed. The development team has held a series of detailed
consultations with the planning authority, which is the City Corporation.
Stockley Construction and two other agents, Savills and Conrad Ritblat, have
been conducting detailed negotiations with a view to obtaining vacant
possession of the retail units and other parts of the site. There have
obviously been widespread negotiations.
In late 1987
Mountleigh, one of the members of the consortium, took over the share of one
other member, thereby giving itself 50% of the development. In May 1988
Mountleigh acquired the remaining interest of the other members of the
consortium, thereby becoming a 100% owner of the company. There are indications
that in October 1988 Mountleigh obtained a valuation of the development, which
indicated that there might be only a small profit in the carrying out of the
development. On October 18 1988 Mountleigh entered into a contract to sell this
development, among other things, to the Organizacion Diego Cisneros (which I
will refer to as ODC), a Venezuelan organisation related to the Susneros
family. The evidence before me shows that is an organisation with world-wide interests
in a wide range of activities and having very substantial assets. That contract
fixed completion to take place on March 24 1989 and a deposit of, I think, £60m
was paid by ODC. In fact the contract was not completed on March 24 1989. A
notice to complete was served by Mountleigh, but in fact on April 28 1989 a
supplemental agreement was entered into, providing for completion to take place
on October 16 1989. At that time ODC paid a further £20m by way of additional
deposit. There has not been a full investigation of the arrangements between
Mountleigh and ODC. I was told by Mr W T Keyon, who is in charge on behalf of
ODC of the development in the Paternoster Square area, that this was a
perfectly amicable arrangement leading to the postponement.
On top of the
transitional stage in the relationship between Mountleigh and ODC, it is now
clear that ODC is not as a matter of first preference aiming to carry out the
development on its own but is actively seeking an equity participator with
development expertise to assist in the proposed development. Such an equity
partner has not, as I understand it, yet been discovered. One of the reasons
for the postponement of the completion of the contract was to enable such an
equity partner to come in. It is said that that may make it cheaper for ODC to
finance the development, although the evidence before me — which I accept — is
that without the equity participation of another party, ODC would itself be in
a position, either from its own resources or from bank lending, to raise the
necessary finance to carry through this extremely expensive scheme.
That in
outline is the position. It is quite clear that there has been a major effort —
and efforts are still being made — to bring about what is on any footing a
difficult development facing major problems, which may or may not be capable of
being overcome.
The first
question which I have to decide is, whether in those circumstances (where it is
far from certain that a development requiring the possession of the car park under
Paternoster Square will or will not take place, let alone the date on which it
will take place) it is right that there should be a break clause in the new
lease which it is now common ground the tenant should obtain.
There is no
dispute as to the relevant law applicable. In cases where a landlord is unable
to show that he is immediately in a position to effect a desired reconstruction
of the land comprised in the tenancy, if there is a real possibility (as
opposed to a probability), that the premises in question will be required for
reconstruction during the continuance of the proposed new tenancy, it is right
to include in the terms of the new tenancy a break clause which will enable
such reconstruction to take place. It is not the policy lying behind Part II of
the 1954 Act to permit the rights of the tenant under the new tenancy to stand
in the way of reconstruction and redevelopment of commercial property. That law
is clearly established in a number of Court of Appeal decisions: Reohorn
v Barry Corporation [1956] 1 WLR 845; Adams v Green (1978)
247 EG 49, [1978] 2 EGLR 46; and J H Edwards & Sons Ltd v Central
London Commercial Estates Ltd (1983) 271 EG 697.
I have seen a
number of expert witnesses in the box, and there has been quite a detailed
investigation of some aspects of the proposed development, in particular the
ability to get vacant possession and the probability of obtaining the required
planning permission.
The course of
cross-examination indicated that the tenant might be suggesting that the
present state of development and its control might be leading to a position
where there was no genuine intention still to continue with it. That arises
from the changes in ownership of the consortium, which I have mentioned. Before
the buy-out by ODC, the development had, as I have said, given rise to major
activity. What was suggested in cross-examination was that ODC were no longer
pressing ahead with this scheme. Mr Cullen QC, for the plaintiffs, in his
closing speech did not make that point and, as I understand it, he does not
persist in it. But lest this case goes further I should make the finding that,
in my view, ODC is pressing ahead with this development, which it is anxious to
carry through, and is taking all possible steps to achieve that result, having
due regard to the commercial requirements to bring in others if possible.
As to the
planning permission, though nobody has suggested that the position is in any
way open and shut, I am satisfied that there is a real possibility (as opposed
to probability) that planning permission will be obtained: I understand Mr
Cullen no longer disputes that either.
The only point
relied on by Mr Cullen, in seeking to show me that there is no real possibility
of this development taking place during the 10 years for which it is proposed
by the tenant that the new lease should run, is the inability of the developers
to obtain vacant possession of the site. Although it is clear that ODC, like
all other developers, will face formidable difficulties in obtaining possession
from those who have long-running legal rights, I am satisfied that there is a
real possibility that they will achieve that result within the 4.3-acre site. I
have heard evidence from very skilled bodies in the field, who express the view
that there was a real possibility that they would achieve the desired result,
though of course no one can foretell the future with certainty. At the end of
the day it probably comes down to the availability of sufficient money to buy
out those who have adverse rights. I have been told — and it is not disputed —
that a very substantial sum of money has been earmarked for that purpose. I
accept the evidence I have heard that there is a real possibility that vacant
possession of the whole site could be obtained in due course.
There is
nothing on the evidence which manifestly controverts that view. As I have said,
so far as the office premises are concerned the negotiation appears to be
coming down to a negotiation between Charterhouse Bank on the one hand and the
landlords on the other. The evidence is that Charterhouse are not averse in
principle to agreeing to give possession provided that they can be allocated
alternative accommodation in the new development. There is one other tenant,
namely Debenham Tewson & Chinnocks, tenants of Bancroft House, who, as I
understand it, are adopting rather the same view.
As to the
retail units, out of the 34 retail units the landlords have been successful as
regards 20 units in negotiating and incorporating into new leases provisions
whereby the tenants are contracted out of the 1954 Act, and the tenancies
contain break clauses exercisable at any time. There are two further units in
relation to which agreements have been reached but are still awaiting legal
incorporation into executed documents. That leaves of course a substantial
number — 12 units — on which negotiations have not yet proved successful; but
the evidence does not indicate that it is unlikely or impossible for vacant
possession to be obtained in due course, certainly within the 10-year
time-scale.
As to the
car-parking spaces, the position is complicated by the fact that the three
properties outside the 4.3 acres, namely Sudbury House, Juxon House and 5
Cheapside, have certain rights of parking attached to the leases of those
premises; in the case of Sudbury House some 40 spaces, in the case of Juxon
House some 55 spaces and in the case of 5 Cheapside some 20 spaces. The
difficulty is exacerbated by the fact that the new proposals incorporate within
the 4.3-acre site substantially fewer car-parking spaces than are available in
the Paternoster Square parking area. It is clear that certain talks are going
on — what they are exactly I do not know — with those entitled to interests in
the three blocks outside the 4.3 acres; those negotiations would, if
successful, lead presumably to the surrender of the car-parking spaces attached
to those premises.
Other
car-parking spaces are attached to the retail shop units and will no doubt be
taken care of (if at all) in conjunction with the negotiations relating to
those units.
That leaves a
number of car-parking spaces, the rights in which are vested in people having
no direct connection with this development at all. I have seen a little of the
negotiations relating to those matters. It is plain that the negotiations are
not wholly straightforward, but it seems to me entirely possible that they may
lead to the successful acquisition of those rights — possibly by the
substitution of other rights, possibly by some other means.
Therefore,
taking the expert evidence and the objective facts so far as I have seen them,
I am left in no doubt that there is here a real possibility that this
development will be practicable within the next 10 years. I do not think it is
necessary for me to express any view as to when it would be practicable. I
confess that I feel that some of the estimates given to me in the witness box,
as to the speed with which both the necessary preconditions of planning
permission and vacant possession will be satisfied and the ensuing delay before
the start of work on the site, seem to me a trifle optimistic. For my purposes
I do not think it is necessary for me to reach any view on that matter.
It therefore
being a real possibility that the redevelopment can take place, it follows that
a break clause ought to be included, unless there is some major factor pointing
the other way. There is not. The tenant, National Car Parks, would of course
like to keep possession of these car-parking spaces for as long as possible.
But the disturbance element in the case is, as I think it is accepted, very
small compared with the majority of cases. It consists really of closing down
the car-parking activity on the site and terminating or redeploying the
employees, who number nine. There was some mention raised for the first time in
the witness box that the uncertainty of a break clause might preclude the
tenants from installing a new means of computerised payment which they have
installed at three other sites. I do not regard that as being a matter of any
substance.
I therefore
decide that there should be a break clause in the tenancy.
The question
then arises: what should be the terms of that break clause, and in particular
from what date should it be operable?
The landlords
say that it is necessary to have a break clause exercisable at any time from
the commencement of the lease. The tenant, on the other hand, says, first, that
it should not be exercisable at all before December 1993, or alternatively it
should be exercisable only when the landlords have obtained outline planning
consent and are entitled to vacant possession of the rest of the properties on
the site required to permit the development authorised by the planning
permission to take place.
As to the
break clause not being operable until December 1993, I can see no merit in
that. The date is selected, as I understand it, by reference to the date on
which the majority of the existing leases of the retail units expire. As I have
said, it seems to me clear — and indeed experience shows — that the policy is
to seek to get the right to break the leases of the retail units before
December 1993; therefore there is no merit in tying the break clause on the car
park to that date.
That leaves
the other question, which to my mind is the most difficult question: should the
right to terminate the contractual tenancy be dependent upon the landlords
first having got the necessary consent and, second, having got themselves into
a position where they have vacant possession of the rest of the site. It seems
to me that the object which I should seek to obtain is twofold: first, to give
the tenants security so long as the car park is not needed for the purposes of
development; second, to ensure that when the landlord is able and ready to
proceed with the development, the development should not be held up by rights
possessed by the tenants.
There are two
matters which I should take into account in particular. First, on the evidence
before me, on any development taking place, the car-parking area below
Paternoster Square will be one of the first — if not the first — area required.
Access to the site will have to be obtained from the western side. The only
means of access from the western side in the immediate future is over the
access route to the underground car park, the subject-matter of the tenancy. It
is therefore clear on the evidence before me — and of course the position might
change subsequently — that vacant possession of the land comprised in the
tenancy is either the first or one of the first things required to enable the
development, if otherwise practicable, to go forward.
Second, as I
have mentioned, the giving of possession at short notice does not cause a major
disruption in the tenant’s businesses.
It is
fundamental in this case that any new tenancy granted as a result of the order
made by the court in this case will itself be subject to protection under Part
II of the 1954 Act. Therefore if, as the landlords suggest, there is a general
break clause permitting the landlords to give notice terminating the new
contractual tenancy when they wish to redevelop the site, the tenant will still
have his rights under the Landlord and Tenant Act 1954. There are two
consequences: first, even though the landlords have served a notice terminating
the contractual tenancy under the break clause, they will not be entitled to
possession unless they can prove that the case falls within section 30(1)(f)
of the 1954 Act, ie that they have the intention and the ability to carry out
the reconstruction. Therefore the effect of the termination of the contractual
tenancy will not be to give the landlords vacant possession at any time prior
to that on which they can satisfy the court, if necessary, that the proposed
development is practicable.
The second
consequence of the new tenancy being subject to the protection of the 1954 Act
is that the delays inherent in the operation of the statutory scheme laid down
by the 1954 Act involve a considerable time-lag after any notice determining
the contractual tenancy has expired. Thus, say that one included in the break
clause a contractual requirement that, before the notice was served, planning
permission had to be obtained and vacant possession had become obtainable.
After the expiry of that contractual notice, there would be a further delay of
at least six months, during which the tenant has the right under the Act to
apply to the court for a new tenancy and give notice of that application to the
landlords. Thereafter there would be all the delays unhappily inherent in
obtaining a hearing before the court to determine the tenant’s rights.
It therefore
seems that, if there were a contractual prerequisite that planning permission
had been obtained and that vacant possession of the rest of the site was
obtainable, that would afford to the tenant a greater protection than it
deserved, in that it would probably give it the right to remain in possession
for a substantial period after the requirements had been satisfied, thereby
holding up the development.
The
consequences to the developer would be acute. I am told that this development
cannot take place at all without possession of the car park; I can well
understand that, because it is a major area very much in the middle of the
site. As a result, if there is a delay of six months or more in obtaining
possession of the car park after possession of the rest of the site has been
obtained, very large financing costs will be incurred. It looks as though by
that stage, after taking into account what has been paid to obtain vacant
possession of the rest of the site, something like £250m may have been invested
in the project. A delay of six months would involve extra interest charges of
many millions of pounds, however the interest rates stood for the time being. That
is a very substantial detriment to the
that the impact on the tenant of the break clause not being limited in the way
it suggested is very small. The tenant has the protection of the statutory
provisions, which will ensure that in no circumstances are the landlords
entitled to possession before they are ready to demonstrate to the court their
ability to proceed with the development and the degree of disruption involved
in the business of the tenant company is comparatively minor. Therefore, in my
judgment, the tenant will be adequately protected by the rights that it will
enjoy under the Act, if the landlords are given a general right to break the
new contractual term on giving six months’ notice of their desire to
reconstruct the property.
I am not clear
at this stage whether what is proposed is a 10-year term as the tenant was
seeking, or a 14-year term as the landlords were prepared to concede. So far as
I can see, either of those would be appropriate. I will hear counsel further on
the details of the clause to be inserted, if that be desirable at this stage.
