Commercial lease – Rent review – Lease of amusement arcade – Rent payable to claimant landlord reviewable to open market rent under hypothetical letting of retail shop plus 25% uplift – Increase in rent attributable to uplift proviso to be disregarded on review – Whether disregard meaning proviso to be excluded from terms of hypothetical lease – Whether rent on review constituing open market rent of retail shop plus 25% – Claim allowed
The claimants were the landlords and the defendant was the tenant of premises that were used as an amusement arcade, as required by the user clause in the lease. The lease provided for upward-only rent reviews every four years to a figure that, if not agreed by the parties, was to be the “open market yearly rent” as determined by an arbitrator. The open market yearly rent was defined by reference to a hypothetical letting in the open market at the relevant review date for the longer of 10 years or the unexpired term of the actual lease and on the terms and conditions of the actual lease, including the provision for rent review but assuming a permitted use as retail premises. Various matters were to be disregarded on the review, including “the proviso contained at the end of clause 6.3 hereof and any increase in rent made or to be made pursuant thereto”. The proviso in question provided for a further sum to be added to the open market yearly rent, representing 25% of the sum so determined, resulting in a rent of 125% of that sum.
In 2005, a dispute arose as to how the rent review provisions were intended to operate. The parties agreed a hypothetical lease of retail premises for a term of 10 years from December 2005 with reviews in 2009 and 2013. However, they disagreed as to whether the disregard of the proviso carried through to the hypothetical lease, such that it had to be excluded as a term of that lease. The defendant argued that: (i) the hypothetical lease included the proviso for a 25% uplift over the open market yearly rent; (ii) that was an onerous clause justifying an initial rent under the hypothetical lease that was lower than the rent of £x that would otherwise be payable; and (iii) therefore, on the 2005 review, 125% of that reduced sum fell to be paid, rather than 125% of £x. The claimants contended that the proviso was to be disregarded in the hypothetical lease, such that the rent payable under that lease was £x; consequently, 125% of £x was payable on the 2005 review. They sought a determination on the issue under section 45 of the Arbitration Act 1996.
Held: The claim was allowed.
On a rent review under the lease, the hypothetical lease that had to be assumed was to be based upon the terms of the actual lease, including the rent review clause. The meaning of the relevant clause of the actual lease, which required any increase in value attributable to the proviso for a 25% uplift to be disregarded when carrying out a rent review, was that the proviso fell to be disregarded not only with regard to its effect in 2005 but also as a term appearing in the hypothetical lease. Consequently, the correct approach under the rent review provisions was to assume that the hypothetical lease did not repeat the proviso from the actual lease. Moreover, since the words of the relevant clause required the proviso to be disregarded in respect of any increase in rent made “or to be made” thereunder, and those words naturally applied also to future occasions upon which an increase in rent might fall to be made, there was no warrant for confining them to the occasion of the current rent review. Consequently, the claimants’ construction of the rent review provisions was to be preferred.
That construction did not offend against commercial common sense. The rent review provisions departed from reality in that the premises let under the hypothetical lease were assumed to be a retail shop and not an amusement arcade. The language of the relevant clauses of the lease showed that the parties had considered it at least possible that an amusement arcade might be more valuable than a retail shop. The possibility of an increased value for an amusement arcade had been arrived at by carrying out a conventional valuation of a retail shop and adding 25% to reflect the possible additional value. To reduce the rent for a retail shop because of an onerous rent review provision and then to add back 25%, as the defendant contended, did not make commercial sense in that context.
Mark Loveday (instructed by Butcher Burns) appeared for the claimants; Adam Rosenthal (instructed by the legal department of Ablethird Ltd, of Watford) appeared for the defendant.
Sally Dobson, barrister
