Landlord and Tenant Act 1954, Part II–Application for new lease of offices occupied by solicitors in the City of London–Agreement on alternative rents of £10 and £10.50 per sq ft according to whether the court did or did not approved landlords’ proposals for a variation of terms under which the lease would be a ‘clear lease’ making tenants liable for comprehensive variable contributions to the costs of repair and decoration of the exterior, the structure and the common parts and management, as well as costs of services–Buildings subject to ‘clear leases’ more marketable–Tenants’ contention that landlords of a whole building should accept risks of fluctuations in costs–Observations on tenants’ right to challenge surveyors’ certificate and certified accounts, subject to restrictions–Held that landlords’ proposals satisfied four tests: (1) reason shown for variation, (2) tenants compensated by adjustment of rent, (3) security for carrying on profession not impaired and (4) proposals fair and reasonable between the parties–New tenancy ordered to be granted on landlords’ terms
This was an
application by originating summons by a firm of solicitors, Ince & Co, of
Knollys House, 11 Byward St, London EC3, for a new lease of offices on the
fifth floor of Knollys House. The plaintiff tenants’ landlords were the City of
London Real Property Co Ltd. The issue between the parties as to the terms of
the new lease is set out in detail in the judgment of Goulding J.
D Wood QC and
J Gaunt (instructed by Ince & Co) appeared on behalf of the plaintiffs;
Ronald Bernstein QC and B Levy (instructed by Nabarro & Nathanson)
represented the defendants.
Giving
judgment, GOULDING J said: This is an application for a new tenancy made under
Part II of the Landlord and Tenant Act 1954 by the plaintiff tenants, who are a
firm of solicitors practising under the style of Ince & Co. The defendant
landlord is the City of London Real Property Co Ltd. It is agreed to be a
long-established and perfectly reputable concern. The demised property which is
the subject of the application is the fifth floor of a modern office building
called Knollys House, together with car-parking space in the basement of the
building. The premises are occupied by the tenants as their professional offices.
Knollys House was erected in the years 1960-62. It is situated near the Tower
of London. The tenants also occupy part of the fourth floor of the building,
but that occupation is under a different title and has not entered into the
argument of this case.
The current
tenancy for the purposes of the Act was granted by two leases (one of the fifth
floor, the other of the parking space) both dated April 25 1972. It was granted
for five years from Lady Day 1972. The area occupied by the tenants was
extended, and the rent payable was accordingly increased, by two deeds of
variation dated May 27 1976. The total yearly rent payable thereafter was
£92,871, which, by my arithmetic, is about £9.39 per sq ft of office space.
I need not
take time to state the procedural history of the application. It is agreed that
the new tenancy to be ordered by the court shall continue until March 24 1982.
The rent is not itself the subject of dispute, but its amount will depend on
the other provisions to be inserted in the new lease. The parties are agreed on
a rent of £10.50 per sq ft if the provisions ordered by the court are those
desired by the tenants, that is, if the stipulations in the leases of 1972 are
reproduced with certain agreed modifications. The parties are also agreed on a
smaller rent, namely £10 per sq ft, if the landlord has its way and the
provisions of the new lease relating to service charges are substantially
different from those hitherto in force. The landlord initially proposed a
printed standard form of lease identified as Form 20 C. Late in the hearing a
revised draft of the two schedules to Form 20 C was produced, and I gave it the
name of Document Z. It makes substantial concessions to the tenants’ criticisms
of the original form. I shall refer shortly to the provisions contained in Form
20 C, modified as regards the schedules by Document Z, as the landlord’s
terms.
I should add,
though it will not (I think) affect the form of the court’s order, that the
parties have agreed out of court that an interim rent of £90,500, now payable
under contractual arrangements between them, shall continue until March 25 1979
in lieu of any rent reserved by the new lease, and also (in effect) that no
other terms of the new tenancy differing from those of the current tenancy shall
be enforced in respect of any period before that date.
The main point
of contention arises thus. When an owner of tenanted office premises in London
desires to sell them, willing purchasers are most easily found among pension
funds and life assurance companies. The nature of their business makes them
favour an investment yielding a steady and predictable income in money terms.
They do not want to suffer fluctuations of income due to variations from year
to year in the costs of maintenance, repairs, insurance, management, and the
like. It is well known that such items have greatly increased in recent years
and are difficult to predict accurately for the future. Hence owners of office
property favour leases that throw the responsibility for paying fluctuating
outgoings on the tenant. That means, of course, accepting a lower rent than if
the landlord bore the outgoings, in return for certainty of annual income. When
an entire building is let to one tenant, the owner’s requirement is simply met
by imposing covenants that oblige the tenant to do and pay for external and
internal repairs and all the other things that require a variable expenditure.
But when, as at Knollys House, one large building is divided between a number
of tenants under separate lettings, the landlord cannot well avoid the need to
carry out the maintenance, management, and so on, himself. The simple solution
here is to require the several tenants to reimburse all the landlord’s
expenses, bearing the burden in proportionate shares among themselves. The
aggregate fixed rent reserved by the several lettings thus remains as a clear
profit in the landlord’s hands. Leases that attain this result, not always
perfectly, have been referred to by witnesses at this hearing as clear
leases and I adopt that as a convenient term to indicate them. I shall also
employ the term service charge for a tenant’s periodical contribution to
some or all of the landlord’s outgoings.
The evidence
shows that the owner of such a building as Knollys House, on letting vacant
accommodation therein, will nowadays insist on a clear lease so that his
property may command a readier market if he has to sell it. But what is to
happen when the tenancy of a sitting tenant approaches its contractual end, and
the tenant applies for a new tenancy under the Act of 1954? Landlords naturally want to introduce clear
leases on that occasion also, just as though the premises were vacant. I have
been told that many tenants, in such circumstances, have accepted a clear lease
in place of one in less modern form, the revised rent being of course fixed
with due regard to the change. But the tenants in the present case do not want
a clear lease. They ask the court to determine the terms of the new tenancy
pursuant to section 35 of the Act of 1954. They say that the court, in the
exercise of its discretion, should reject the landlord’s proposal for a clear
lease.
I need not
read the relevant provisions of the Act of 1954, for they are now well known.
The important thing to remember is that section 35 commands the court, when
determining the terms of a new tenancy (other than the duration of the new
tenancy and the rent) to ‘have regard to the terms of the current tenancy and
to all relevant circumstances.’ I must,
however, state the landlord’s proposal in more detail.
Under the
current tenancy the tenants pay, in addition to their fixed rent, a service
charge in respect of three matters only, described as follows: ‘(a) cleaning
the public parts of the building and general services of the housekeeper,’ ‘(b)
lighting the general parts of the building,’ and ‘(c) heating the demised
premises by hot water radiators.’ Items
(a) and (b) are based upon the landlord’s scale of charges, revised annually.
The scale specifies an amount payable for each unit of 200 sq ft of floor
space. It is estimated on what is called a portfolio basis, ie from the
landlord’s expenditure not only on Knollys House, but also on other buildings
owned by the landlord. Item (c) on the other hand is determined by a formula in
which the only variable is the current cost of fuel oil to the landlord. By the
terms of the current tenancy the tenants covenant to do internal repairs and
decoration of the demised premises; the landlord covenants to provide central
heating, to clean and light the common parts of the building, and to keep the
exterior and the common parts in repair. The lease contemplates fire insurance
by the landlord, who does not, however, expressly covenant to insure.
Under the
landlord’s terms the tenants are to pay a comprehensive service charge
recoverable as additional rent, and defined as fair and reasonable proportions,
to be certified from time to time by the landlord’s surveyor, of the actual
and/or estimated cost of providing a long list of services. They include water,
heating, cleaning, staff; repair and decoration of the structure, the exterior,
and the common parts of the building; lighting of the common parts; lifts;
rates and other outgoings in respect of common parts; security, and some other
matters. Up to 10 per cent of the total is to be added as a management charge,
and VAT will also be added. The tenants’ proportionate share of premiums for
insuring the building against fire and other risks is separately reserved as
additional rent. The tenants covenant to do internal repairs and decoration of
the demised premises; the landlord covenants to provide, manage and operate the
various services in accordance with the principles of good estate management
and to insure.
The strictness
of the new form as a clear lease is, however, relaxed, as to certain outgoings,
by what I shall refer to for brevity as a funding provision. Instead of
a share of the actual cost in each year, the service charge is to include an
annual amount (to be revised annually by the landlord) towards the estimated
cost of replacing lifts, boilers and other equipment, and towards redecoration
of the exterior and common parts. The annual sums are to be calculated on a
conventional life expectancy, 30 years for lifts, 15 years for boilers and
heating equipment, 5 years for external decoration, 7 years for decoration of
interior common parts.
I must also
mention what has been conveniently referred to as the challenge provision
contained in the landlord’s terms. The landlord is in each year to serve on the
tenants an account showing the amounts of the different items that make up the
service charge and the proportions attributable to the demised premises. That
account is to be certified by the landlord’s accountants. If the tenants want
to challenge either the surveyor’s certificate or the certified account, the
dispute is to be referred to an independent surveyor or consulting engineer,
acting as an expert and not as an arbitrator. The tenants are not entitled to
question any item on the sole ground that it could have been provided at a
lower cost than that actually incurred or estimated in good faith by the
landlord. Subject only to the challenge provision that I have just summarised,
the certificates of the landlord’s surveyor and accountants are to be final and
binding on the parties.
The landlord’s
reason for desiring to alter the terms of the tenancy clearly appears from the
following evidence of Mr Temple, a valuer who was called on the landlord’s
behalf. I read from a proof of evidence which he repeated in the witness box.
Mr Temple said:
Major
investors in my experience are tending to seek investments where there are
clear leases and are less willing to purchase properties where some or all of
the leases are not clear leases. Investors are able to evaluate their
investment more easily where the clear leases give a net investment return
simply calculated as the aggregate of true rents reserved. This attitude in the
market has two major effects on the value of properties as investments. First,
the marketability of a property is markedly affected by whether or not the
lettings are under clear leases. Clear leases considerably improve the
marketability of a property as such investments appeal to major investors.
Moreover, value is particularly affected by the prospect of sale on a falling
market since it is in periods of financial stringency and recession that a
property investment company is likely to require to realise its asset. In those
conditions the marketability of the investment is of major importance. Second,
the value of a property is directly affected as to quantum by the presence or
absence of clear leases. I have inspected Knollys House situate at Byward
Street in Seething Lane and 46-48 Mark Lane. If the property were let on clear
leases, as compared with being let on leases where the tenants pay service
charges but the landlord bears the cost of repairs, insurance and management,
there would be a difference in the value in the market of the order of two or
more years’ purchase. I am informed that the present annual aggregate rental
income of the whole building is approximately £800,000. In my opinion there
would be a difference of the order of £1m to £2m in the market value of the
whole building if let on clear leases as against leases where the costs of
repairs, insurance and management are not fully recoverable.
The tenants’
witnesses do not impeach the factual basis of the landlord’s case. It is,
however, argued for the tenants that, whatever the practice of the open market,
it is not easy to justify a substantial departure from the terms of the current
tenancy in a new tenancy ordered under the Act of 1954. And here, it is
submitted, the landlord’s proposal should be rejected, because the major risks
(in the sense of uncertainties) of upkeep and management of a big building are
not suitable to be borne by the occupying tenants, each occupying a part
only–and it may be a small part–of the property. The risks should fairly be
assumed, say the tenants, by the owner of the whole building, who is in the
best position to investigate and assess them and to provide for them by
charging a proper fixed rent. That is one, and I think the main, objection that
I have to bear in mind. I may say at once that the superiority of the
landlord’s position for estimating future uncertainties is almost obvious, and
was frankly accepted by the very experienced estate agent, Mr Perkins, who gave
evidence for the landlord. He went so far in cross-examination as to say that a
landlord is better equipped to bear the burden of future uncertainty than the
tenant. The point is strengthened by the fact that the landlord in the present
case employs a skilled professional staff to look after its buildings.
A second and
subsidiary objection to the landlord’s terms is that a clear lease may incline
a landlord, even unconsciously, to extravagance in maintenance and management,
so that the service charge may needlessly increase without the tenants having
any opportunity to control it. A less scrupulous landlord, it is argued, might
gradually improve the building in the guise of mere maintenance, thus leading
to the unjust result that a tenant, continuing in the same premises, might,
under a future tenancy, have to pay a market rental enhanced by works effected
at his own expense. That also is an objection that I must bear in mind. The
landlord’s counsel and witnesses say that neither the landlord nor any probable
investor in property in the City of London would behave in such a way, but I
attach little weight to that contention. After all, the purpose of legal
contracts is to reduce the mutual dependence of parties on one another’s
morality. The second argument of the tenants is put forward, like their first,
as a reason why the court should not order a clear lease against their wishes
and in departure from the terms of the current tenancy. It is used in the
alternative as an objection to the challenge provision contained in the
landlord’s terms. The tenants say they should be at entire liberty to challenge
the correctness of the landlord’s figures, or the reasonableness of the
expenditure, by ordinary legal process in the courts.
The tenants
say further that, if a clear lease is to be forced on them at all, they object
to the funding provision. They point out that the actual life of a lift or of a
boiler may be quite different from its conventional estimated life, and indeed
it may never be replaced at all if the building is reconstructed or demolished.
Moreover, a short tenancy, such as that now desired, may well run its whole
course before the time for replacement arrives and the landlord incurs any
relevant expenditure. The tenants object to paying an additional rent estimated
by reference to the landlord’s future expenditure for specific purposes, when
the landlord is bound by no trust or other obligation to retain and use their
contributions for such purposes, nor to account for interest upon them.
The tenants
observe generally about the landlord’s terms that they are put forward because
of the state of the property market or current business usage. But you cannot,
they argue, justify a substantial transfer of risk or burden from landlord
to tenant on those grounds. To do so is to disregard the terms of the current
tenancy to an extent not allowed by section 35 of the Act of 1954. In any case,
it is submitted, the supposed benefit of the landlord’s terms to the landlord
is illusory. On the evidence, the value of Knollys House as an investment will
not be much enhanced until all, or nearly all, the tenants hold on clear
leases, and there is no prospect of getting anywhere near that position in the
next three years. So the tenants are asked to suffer a disadvantage that they
do not want, for the duration of the new tenancy, without any countervailing
benefit to the landlord in that time.
Such, in
short, are the contentions of the opposing parties. Under section 35 of the Act
of 1954 the terms of the new tenancy are, in default of agreement, to be
determined by the court as there directed. Having regard, in obedience to the
section, to the terms of the current tenancy, and having regard likewise to all
the relevant circumstances proved or admitted at the hearing, I have come to
the conclusion that the terms of the new tenancy shall be the landlord’s terms.
In deciding to
exercise the court’s discretion in that manner, I have sought to give proper
weight to all the evidence and arguments that I have listened to. If obliged,
as I think I am, to state concise explicit reasons for my decision, I would
subject the facts of the present case to four tests, while making it plain that
I do not regard them as a complete scheme of analysis for all similar cases.
The first test is this. Has the party demanding a variation of the terms of the
current tenancy shown a reason for doing so?
Widgery LJ, as he then was, said in Cardshops v Davies
[1971] 1 WLR 591, at 596: ‘Section 35, to which I have already referred, shows
that the terms of the new tenancy must be fixed having regard inter alia to
the terms of the current tenancy; and a departure from the terms of the current
tenancy is something which in my judgment requires to have a reason attributed
to it.’ Re No 1 Albemarle Street
[1959] Ch 531 is a good example of a case where the court refused to allow a
change in the terms of the tenancy because the party proposing it simply failed
to show any real reason for making the change. Should the first question be
answered in the affirmative, my second is whether, if the party demanding a
change is successful, the party resisting it will in principle be adequately
compensated by the consequential adjustment of open market rent under section
34 of the Act. It is not very difficult to imagine stipulations so inconvenient
or humiliating to a tenant, or so restrictive or capricious in relation to a
landlord, that a pecuniary retribution ought not to be forced on the unwilling
party.
My third test
asks whether the proposed change will materially impair the tenant’s security
in carrying on his business or profession. If it will, I conceive that the court
will ordinarily be hesitant to accept it, since the discretion given by the
statute is part of the legislative machinery for protecting business and
professional tenants as such. Thus an alteration desired by the landlord was
refused in Gold v Brighton Corporation [1956] 1 WLR 1291, not
only because the landlord had shown insufficient reason for it, but also
because it would have narrowed the scope of the tenant’s existing trade.
Similarly, in Cardshops v Davies, already cited, the landlord’s
proposal failed because it might have prevented the preservation and eventual
sale of the goodwill of the tenant’s business. And in Charles Clements
(London) Ltd v Rank City Wall Ltd (1978) 246 EG 739, [1978] 1 EGLR
47, the landlord’s proposal, which was rejected, would have burdened the
tenant’s business by a substantial additional rent in return for the relaxation
of a restrictive covenant that would have been of no value to the tenant as
long as the business was still carried on.
If a proposed
change in the terms of a tenancy passes all three of the tests I have
suggested, it seems to me that there is a prima facie case for allowing
it. Reading the provisions of section 34 of the Act, which adopts the open
market as the determinant of rent, together with those of sections 33 and 35,
which give the court a wide discretion over other matters and little guidance
as to its exercise, I am of opinion that Parliament did not by this legislation
intend to petrify the economy of business premises. I think rather that the intention
was to leave the market to develop freely, subject only to the overriding
protective policy of the Act. Some support for that interpretation is perhaps
to be found in Hyams v Titan Properties (1972) 24 P & CR 359.
The three
tests I have so far formulated, or any others framed with like particularity,
may condemn a proposal, but can at the best establish no more than a prima
facie case for allowing one. For there must always remain the residual and
comprehensive question: taking all the relevant matters into account, is the
proposal, in the court’s opinion, fair and reasonable as between the parties?
Let me now
apply my four questions to the facts in the present case. The landlord has in
my judgment proved a definite reason for departing from the terms of the
current tenancy, namely a wish to bring them into line with the present
practice of itself and other landlords, and thereby to make the reversion a
more valuable and readily-marketable asset. I am not persuaded by the tenants’
objection that no appreciable improvement of the reversion is on any view
attainable during the short time of the tenancy now to be granted. As Mr
Perkins said in cross-examination, you must start somewhere, and the result of
the present application may considerably affect the prospects of introducing
clear leases on subsequent occasions.
Secondly, the
tenants can in principle be adequately compensated for the proposed change of
terms by a diminution of the open-market rent to be fixed under section 34 of
the Act. The tenants’ own expert witness, Mr Baker, found no difficulty in
agreeing a figure for that purpose. He was very conscious of the tenants’
objection to the uncertainties of the comprehensive service charge and to their
lack of control of the landlord’s future expenditure. Nevertheless he was
satisfied that the agreed rent reduction of 50p per sq ft. or £4,950 in all,
was a fair compensation in all the circumstances. If I have understood
correctly the figures produced by Mr Treagus, the landlord’s chief surveyor and
one of its directors, the acceptance of the landlord’s terms would increase the
service charge by about £2,700 per annum on the basis of figures relating to a
year which ended in March 1978. The remaining £2,250 (approximately) per annum
can be regarded as compensation, and is agreed to be a fair compensation, for
the transfer of uncertainties from the landlord to the tenants in respect of
the three years to end in March 1982.
I turn to my
third test. It is apparent, and it was not disputed by Mr Perkins, that under
some circumstances the imposition of a clear lease would materially impair a
tenant’s security in carrying on his business or profession. Imagine a
newly-established, or financially-insecure, or highly-speculative, business
carried on in part of an old and already dilapidated building. The replacement
of part of a fixed rent by a fluctuating contribution to the actual costs of
maintenance and management, even if absolutely fair in purely financial terms,
might well in such a case threaten the security of the business by the
insupportable risk of a very bad year. But in the present case the tenants are
a well-established firm of solicitors in the City of London, willing to pay a
yearly rent of £100,000 for a floor in a modern building less than 20 years
old. There is no suggestion in the evidence that it was not well built or that
it has not been well maintained. In my judgment the landlord’s terms will not
in fact adversely affect the tenants’ security in carrying on their profession.
So I come to
the final and comprehensive question, whether the proposed variation of terms
is fair and reasonable as between the parties. One is here in the realm of pure
discretion, where it is hardest to condense in words the dialogue of the
infra-cranial jury room. On the main question
reasons against the tenants’ objections, taking into account the terms of the
current tenancy, and remembering the compensating diminution of fixed rent, I
think it fair and reasonable to adopt the landlord’s terms, and I cannot see
that any other elements of the case point to an opposite conclusion.
As to the
challenge provision I think it is reasonable to place some limitation on
disputes about the amount of a service charge. The landlord’s terms have in
this respect been considerably improved, from the tenants’ point of view, by
the concessions embodied in Document Z, and are now more liberal (so far as my
experience goes) than those usually found in modern leases. I do not feel it
necessary to modify them further.
Nor do I see
any objection to the funding provision. It is indeed a not inconsiderable
mitigation, in favour of the tenants, of the very uncertainties that are their
main complaint against clear leases generally. There is to my mind nothing
unfair in asking a tenant who enjoys the use of equipment during a term of
years to pay an annual rent reflecting the estimated cost of replacing the
equipment, whether in the event it is replaced in the tenant’s time, or
afterwards, or for some reason not at all. Whether the proposed provision for
replacement will prove excessive, adequate, or insufficient in the hands of the
landlord one cannot tell, because the outcome depends on future rates of
interest, on future rates of inflation or deflation of the currency, and on the
future physical history of the articles in question, all of which are the
subject of uncertainties carried by the landlord. But I can find nothing
inherently unfair or unreasonable in the scheme of the funding provision as it
stands.
Accordingly,
while acknowledging that a different judge might without error have come to a
different conclusion, I am of opinion for my part that the landlord’s terms
should prevail.
In conclusion
I must make it clear that this case has been argued on a tacit agreement that
the reservation of a service charge, in the sense in which I have used the
expression, is one of the terms of the tenancy other than rent, which fall to
be determined under section 35 of the Act. The landlord has not suggested that
the rent at which, for the purposes of section 34, the holding might reasonably
be expected to be let in the open market by a willing lessor must, on the
evidence, consist of a fixed rent plus a variable sum, reserved as additional
rent, to reimburse a proportionate share of the landlord’s outgoings.
Subsection (3) of section 34, no doubt introduced in 1969 with rent review
clauses in mind, might not be immaterial in this connection. There may be good
reasons why such a contention is not admissible, but I have not heard the point
argued and express no opinion upon it.
Subject to any
submissions of counsel about the form of order, I will order the grant of a new
tenancy of the holding mentioned in the originating summons, to begin (as it
must) on the coming to an end of the current tenancy, and to expire on March 24
1982, at an annual rent of £100,700, the other terms of the new tenancy to be
those contained in a draft lease to be prepared and signed by junior counsel
for the parties. The draft is to reproduce the provisions of Form 20 C, as
modified by Document Z, with such further modifications if any) as may have
been, or may be, agreed between the parties not later than a specified date,
possibly December 31 1978 or January 31 1979. I will direct that my order is
not to be drawn up before the specified date without the agreement of both
parties. The case may, if necessary, be mentioned to me informally pending the
drawing up of the order.
Counsel for
both parties accepted that the specified date for agreeing the draft should be
January 31 1979. The order for costs was that no order should be made as to
costs up to and including the date of the adjournment of the originating
summons into court, but that the plaintiff tenants should pay half the
defendant landlords’ costs subsequent to the adjournment of the summons into
court.
