Landlord and tenant — Rent review clause in lease — Construction and application — User clause — Complications arising from licence to assign the term and to vary existing use — Effect of permission given to assignees to carry out extensive alterations to premises — Licence for change of use provided for rent to be reviewed on the basis of the authorised use at the review date, the assignee acknowledging that the demised premises were fit for use and occupation — At the same time the review clause required improvements to be disregarded — Dispute as to condition which premises should be assumed to be in for the purpose of the hypothetical lease — Appeal from decision of judge below allowed; cross-appeal dismissed
question in the present case was in fact an
from events which took place some 10 years after the commencement date of the
term in 1975 — The term of 35 years was divided into 7-year periods for the
purposes of rent review — The rent review clause was one which provided for the
rent to go up but not down — The ‘fair open market rental value’ was defined in
a familiar manner, the hypothetical term being related to the unexpired residue
of the actual term at the review date — The original user clause of the lease
restricted the use of the premises to use for warehousing and distribution,
with certain ancillary purposes — A licence in 1985 provided for a change to
use restricted to offices, with storage and car-parking facilities, the actual
purposes being the computerised collation and distribution of information — The
vital question which arose on the appeal was what physical condition of the
premises should be assumed for the purpose of the hypothetical lease under the
review clause — Extensive and very expensive alterations had been made to the
premises, but the review clause provided that improvements must be disregarded
— The view of the judge below was that the surveyor appointed as an expert to
determine the rent had to consider what would be necessary to put the premises
in a reasonable state for use as offices and storage with car-parking
facilities; this might or might not be the condition to which the premises had
been brought by the alterations actually carried out — The Court of Appeal
disagreed — The correct view was to take the premises as they were before the
alterations had been carried out — Any other approach would bring in
improvements, which had to be disregarded, or would produce a hypothetical
building in a dreamland of the surveyor’s own construction — The court’s
approach was consistent with the decision in Trust House Forte Albany Hotels
Ltd v
Daejan Investments Ltd — Appeal allowed
also to consider a cross-appeal by the respondents against the decision of
Judge Bromley — The lease contained a qualified covenant against assignment and
underletting with a proviso excluding from the restriction transactions with
any associated or subsidiary company of the ‘tenants’, defined by name as the
company which was the predecessor of the present tenants — There was a somewhat
similar point in regard to the user clause — The user clause, incorporating a
planning permission, had the effect, when read across into the hypothetical
lease, of producing a user covenant which permitted use only by the subsidiary
named in the planning permission, Extel Financial & Business Services Ltd,
a subsidiary of the appellant tenants — The identification of the ex tenants in
the qualified covenant against assignment did no harm when read into the
hypothetical lease — The reference to the tenants’ subsidiary in the user
clause, however, was a different matter — It would have the effect of
restricting the user to a single company, which was wholly inconsistent with a
market rental — It must therefore be dealt with, as in Law Land Co Ltd v Consumers’
Association Ltd, by substituting a reference to ‘the hypothetical tenant’ — The
respondents’ cross-appeal was dismissed
The following cases are referred to in
this report.
James v British Crafts Centre (1987) 55
P&CR 56; [1987] 1 EGLR 139; 282 EG 1251, CA
Law Land Co Ltd v Consumers’ Association
Ltd (1980) 255 EG 617, [1980] 2 EGLR 109, CA
Trusthouse Forte Albany Hotels Ltd v Daejan Investments Ltd
(1980) 256 EG 915, [1980] 2 EGLR 123
This was an appeal by the defendants,
Extel Computing Ltd, and a cross-appeal by the plaintiffs, Orchid Lodge (UK)
Ltd, from the decision of Judge Bromley QC, sitting as a judge of the High
Court, in the matter of the construction and application of the rent review
clause in an underlease of which the defendants were the tenants and the
plaintiffs were the landlords. The subject premises were at Fitzroy House,
13-17 Epworth Street, London EC2.
Kim Lewison (instructed by Theodore
Goddard) appeared on behalf of the appellants (defendants); Terence Cullen QC
and Miss Carolyn Walton (instructed by Julian Holy) represented the respondents
(plaintiffs).
Giving judgment, DILLON LJ said:
The court has before it an appeal by the defendant in the proceedings, Extel
Computing Ltd, currently the lessee, against a decision of His Honour Judge
Bromley QC, sitting as a judge of the High Court in the Chancery Division,
given on November 23 1990 in respect of the construction and application of a
rent review clause in a lease. The court also has before it a cross-appeal by
the landlord, Orchid Lodge (UK) Ltd, against a decision of Judge Bromley on the
same occasion on a completely different point in relation to the application of
the same rent review clause.
The lease in question is an underlease
dated September 30 1968 made between Arger Building Co Ltd, who are the
predecessors of the present plaintiff, and Electrocomponents Associated Ltd,
who are the predecessors of the present defendant.
That underlease granted to the original
lessee a term for 35 years from April 11 1975 in certain premises known as
Fitzroy House, 13-17 Epworth Street, London EC2. The underlease was thus a
reversionary underlease in that it granted a term to commence from a date which
at the date of the grant was a future date.
The underlease contained rent review
provisions which, in the light of recent decisions of the courts and if
circumstances had remained the same as they were at the time the underlease was
granted, would probably not have presented any difficulty. The term was divided
into seven-year periods and the scheme of the lease is as follows. The
reddendum provided for the payment to the landlord of:
(a)
During the first seven years of the . . . term either the clear yearly
rent of Sixty seven thousand pounds or a clear yearly rent equal to the fair
open market rental value of the . . . property to be ascertained at the
commencement of the term . . . whichever is the greater.
That was for the first seven years down
to 1982. Then similarly in (b) for the next seven years down to 1989 the rent
was to be during those seven years:
either the said clear yearly rent
ascertained at the commencement of the said term or a clear yearly rent equal
to the fair open market rental value of the said property to be ascertained at
the expiration of the said seventh year of the said term whichever is the
greater.
Then we come to (c), which is the one now
relevant, because (b) will have taken the position down to 1989:
(c)
During the next seven years of the said term either the said clear
yearly rent ascertained at the expiration of the seventh year of the said term
or a clear yearly rent equal to the fair open market rental value of the said
property to be ascertained at the expiration of the fourteenth year of the said
term whichever is the greater.
It follows that it is a rent review
clause under which the rent may go up but cannot come down. Then there are
alternative provisions for the further two seven-year periods of the term.
The term ‘fair open market rental value’
is then said to mean:
the rent at which the demised premises
are worth to be let in the open market as a whole (whether for occupation or
subletting) at the best rent reasonably obtainable without taking any fine or
premium for a term of years not exceeding the then unexpired residue of the
term hereby granted at the expiration of the relevant period of seven years and
upon the terms of this Lease (except as regards rent) there being disregarded
the matters referred to in paragraphs (a) (b) and (c) of section 34 of the
Landlord and Tenant Act 1954.
Para (c) of section 34 required that
tenants’ improvements be disregarded.
So that is the basic rent review
provision. Then there is the question of how that was to be ascertained. That
was dealt with as follows:
. . . such rent or rents being agreed
between the respective surveyors of the Landlords and Tenants or if such
surveyors are not able to agree upon such a sum as aforesaid within two months
of the relevant date or if the Tenants shall have failed to nominate a Surveyor
within such period such sum as shall be determined by a single surveyor acting
as an expert and not as an arbitrator to be nominated by the President for the
time being of the Royal Institution of Chartered Surveyors.
The parties are in disagreement about the
rent for the 1989 rent review, and that will fall to be determined by a
surveyor acting as an expert, but the parties have agreed that before the
surveyor attempts to reach any decision the court should be asked to give
guidance on certain disputed questions as to the matters which the surveyor is
entitled to take into account when he makes his calculations.
I will endeavour to deal first with the
appeal. In relation to that it is necessary to have regard first to the user
clause in the underlease, clause 2 (13)(a). That provided originally:
Not to use or allow to be used the said
property or any part thereof for any purposes whatsoever other than for
warehousing and distribution with ancillary offices loading and car parking
facilities for use in connection therewith and with a caretaker’s flat which
shall only be used and occupied by a resident caretaker for the . . . property.
So the premises were initially let for
use only for warehousing and distribution and the ancillary purposes there
mentioned. What has caused the present complications is that in 1985 the premises
came to be assigned to the present defendant. The defendant wanted to use the
premises for a different purpose and also wanted to carry out very extensive
alterations to the premises to render them for at any rate the defendant’s
purposes more suitable for the new user. Mr Cullen, appearing for the landlord,
referred to the tenant’s desires as a ‘Rolls-Royce job’ for the conversion for
changed user.
Be that as it may, the upshot was that,
after there had been an application for planning permission in relation to the
alterations of the premises and the change of use, there was a licence of
November 5 1985. That was made between Turnshire Ltd (who, by that time held
the reversion immediately expectant upon the determination of the lease) of the
first part, Electrocomponents Ltd (who were, I think, the original lessee but
with a change of name) called ‘the lessee’ of the second part, and the
defendant called ‘the assignee’ of the third part.
That licence recited the relevant terms
of the lease, including the review provisions for, among other years, 1989, and
the user clause which I have mentioned. It provided in the operative part by
clause 1 that the lessor granted licence for the assignment of the benefit of
the lease by the lessee to the assignee. Clause 2 provided that ‘the Lessor
granted unto the Assignee licence to vary the existing user’ — which was that
in clause 2(13)(a) of the underlease — ‘to that specified in the Schedule to
the licence’. That consent to change of use was subject to three provisos (a),
(b) and (c). Clause 3 provides covenants by the assignee with the lessor that
from and after the completion of the assignment and throughout the residue of
the term the assignee would pay the rents and observe the covenants, and so
forth, in the lease, and clause 4 contained a similar covenant by the lessee
with the lessor.
The schedule, which is relevant to the
change of use, is in the following terms:
Not to use or allow to be used the said
property or any part thereof for any purpose other than for offices storage and
car parking facilities for use in connection therewith together with a flat in
accordance with Planning Permission Number TP/77182/03 1/RA.
The actual purpose for which the offices
and so forth were to be used relates to the computerised collation and
distribution of information. The details of that do not matter.
So far as the alterations are concerned,
there was, after the premises had been assigned by Electrocomponents plc to the
defendant, a licence for alterations of July 30 1986 whereby, subject to
certain terms which do not matter, the defendant was granted permission to
carry out various alterations of a very extensive nature to the premises. The
estimated cost of those alterations, according to the documents annexed to the
licence, was £2.85m before adding on preliminaries and contingencies, the total
given being £3.3m, and later documents indicate that the actual cost was over
£4m.
I come back to the provisos to the
permission for change of use in the licence of November 5 1985. I should read
proviso (a) in full because it is on that that the argument on the appeal has
largely turned:
Whilst it is authorised to use the
Demised Premises for the purposes authorised in the Schedule hereto and the
Assignee does in fact occupy the Demised Premises for those purposes the rent
payable pursuant to the terms of the Lease will be reviewed in accordance with
the provisions for review contained therein on the basis of the authorised use
at the relevant Review Date (the Assignee hereby acknowledging that the Demised
Premises are fit for use and occupation therefore) assuming a willing Lessor
and a willing Lessee but disregarding any improvements carried out to the
Demised Premises by the Tenant otherwise than in pursuance of an obligation to
the Landlord.
It is common ground that the improvements
actually carried out by the defendant pursuant to the licence to make
alterations, which I have mentioned, were not carried out within the meaning of
that proviso (a) in pursuance of an obligation to the landlord, although of
course there were obligations to carry out the work properly and with due
expedition according to an appropriate timetable, and so forth.
Proviso (b) deals with the situation
‘should the Assignee vacate the Demised Premises at any time during the term of
the Lease or any statutory continuation thereof or be prevented by any other
reason whatsoever from using the Demised Premises for the purposes authorised
in the schedule [to this licence]’. In that event the assignee is to be entitled,
but not obliged, to serve a notice requiring a review of the rent to take
effect from the date of service of the notice, and upon service of such a
notice under proviso (c) ‘the authorised use of the Demised Premises [is to] be
deemed to revert to the Existing User’, that is to say the warehouse user, and
the rent is to be reviewed on that basis.
Those events have not happened, and it is
to be taken that the defendant does in fact occupy the premises for the
purposes authorised in the Schedule.
The question then arises, so far as the
appeal is concerned, what physical condition of the premises is the valuer
carrying out the 1989 rent review to assume?
The theoretical alternatives would be
threefold — the existing condition of the premises before any alteration by the
defendant in accordance with the licence to make alterations, or the current
condition of the premises after they have been altered by the defendant in the
way they actually have been altered under the licence to make alterations, or a
condition at the date of the grant of the hypothetical lease which was
reasonable to enable the hypothetical lessee to carry on the business
authorised by the user clause. That was the alternative which Judge Bromley
upheld by the judgment that is appealed against. The alternative for which Mr
Lewison contends, on behalf of the lessee, is the existing condition of the
premises before the alterations were carried out.
The final condition of the premises after
the alterations had been carried out, their actual condition in effect at the
time of the 1989 review, cannot be asserted as the directly relevant condition
under proviso (a) because proviso (a) in its last lines expressly requires that
any improvements carried out to the premises by the tenant must be disregarded.
Therefore, it cannot be right to take the existing condition of the premises,
with the benefit of the alterations, as the starting point.
The judge’s view was that the premises
cannot be looked at for the purposes of a rent review on the basis of a fair
open market rental for a certain business use unless they are in a reasonable
state for such a use. Therefore, the surveyor had to take into consideration
what would be necessary to put the premises into a reasonable state for use for
the purpose of offices, storage and car-parking facilities, that being the use
referred to in the schedule. The surveyor would have to consider what he
thought would be a reasonable condition for the premises to be put into, and,
as the judge said at the very end of his judgment, ‘which may or may not be the
condition to which the premises were raised by the alterations actually carried
out’. But that has inherently in it the possibility that the surveyor may
choose a state which does indeed take into account the improvements actually
carried out to the demised premises by the tenant, and that is contrary to what
subclause (a) stipulates.
Mr Lewison therefore says that the correct
view is to take the premises as they were before those alterations were carried
out, because that is what the landlord granted. Anything else brings in the
improvements or, alternatively, involves the surveyor going off on a frolic of
his own, dreaming up some form of alteration of these premises for office use
which pays no regard to the plans lodged with the planning permission that had
been granted, and no regard to anything that anyone else has even thought of
doing with the premises, or applied to do with the premises, but is a
hypothetical building in a dreamland of his own.
Mr Lewison also says that the words in
brackets, as I understand his submissions, favour his approach, because the
judge was saying that the premises have to be in a reasonable state for the
use, and the lessee has acknowledged by the words in parenthesis that the
demised premises ‘are fit for use and occupation therefor’. He says that that
acknowledgment is in the present tense referring to the condition of the
premises at the time of that 1985 licence before the works of conversion were
carried out.
Mr Cullen, on the other hand, submits
that all the wording of the proviso is to relate to the future time when the
review takes place, and it may possibly be that the review takes place before
the works have been completed, but none the less the tenant is bound to
acknowledge
purpose.
The judge seems to have felt that the
words in brackets were directed to depriving the assignee as tenant of an
argument which he might deploy on a future rent review in the obvious possible
circumstance that the adaptation of the premises would not be carried out. But
as to that, with all respect, the wording of the proviso makes it applicable on
a rent review only if at the relevant time the assignee does, in fact, occupy
the demised premises for the purposes authorised in the schedule — that is to
say, for offices, storage and car-parking facilities etc — which necessarily supposes,
to my mind, that the works had indeed been carried out. There is, in fact, no
doubt that they were carried out.
I do not, therefore, find Mr Cullen’s
approach happy in relation to the words in parenthesis. The trouble about those
words, on which much of the argument has turned, is that, as it seems to me, to
the draftsman of proviso (a) it was blindingly obvious that they were necessary
to cover some point, and it was so blindingly obvious that he did not find it
necessary to offer any clue to posterity what the point was. But on the whole
it seems to me that the point indicated is on the lines Mr Lewison has
suggested. The defendant acknowledges that they are fit for use and occupation
and cannot therefore claim any discount on the basis that works will need to be
done. If it is viewed that way round, it is not necessary to require any
acknowledgment on the part of the landlord in a comparable sense, because the
landlord is bound by the obligation to disregard any improvements carried out
to the demised premises by the tenant.
This approach is, to my mind, consistent
with the decision of Fox J in Trust House Forte Albany Hotels Ltd v Daejan
Investments Ltd (1980) 256 EG 915, [1980] 2 EGLR 123. The problem there,
under a rent review clause in an underlease of premises which included the
Strand Palace Hotel, was as to the basis on which certain areas comprised in
the underlease, though not the hotel itself, were to be valued. The clause in
the underlease provided that the premises not actually used for the purposes of
the hotel were to be valued on the basis that they were actually let, or
available for letting, for shopping and retail purposes. They included premises
which were used in fact as a branch of a bank, and the issues were summarised
by Fox J as follows:
. . . is the valuation to be made on the
basis of the premises in their actual physical state, or is it to be made on
the basis that such part of the premises as is not now let as shops is . . . to
be treated as being in a state reasonably appropriate for such use? The dispute is limited to those parts of the
premises not already in use as shops. It is agreed that the latter must be
valued in their actual physical state.
His conclusion was that it was desirable
to proceed on the actuality of what was there. He said:
In the absence of clear language to the
contrary, I would assume that it is the rental value of the landlord’s premises
in their actual condition for the time being . . .
I cannot see any satisfactory basis upon
which I should read in words to give the landlord the rental benefit of
physical premises other than those actually contained in the underlease.
Then he goes on:
You protect the landlord against
inflation by reassessing every seven years the rent of the actual premises
which he owns and not of other premises. I do not see why the landlord should
get the benefit of assumed alterations which the landlord has not made.
Therefore, he rejected the landlord’s
contention.
The case is not a complete parallel,
because here, of course, because the very expensive alterations have been
carried out by the lessee, something has to be valued which is not what is
there now because the tenant’s improvements have to be disregarded.
I see no need, however, for bringing into
the computation some other hypothetical building fit for use for the scheduled
purposes, which has never existed and never will exist, to compensate the
landlord for the fact that he cannot claim a rent by reference to the
improvements carried out to the demised premises by the tenant.
For these reasons, therefore, I would
allow the appeal.
I come now to the cross-appeal and to
understand that it is necessary to have in mind both the user clause in the
lease, the user clause in the licence to assign and the provisions in the lease
in relation to assignment and subletting.
The user clause in the lease, clause
2(13)(a), which I have read, contains no reference at all to who is using the
premises. It is simply in the terms:
Not to use or allow to be used the said
property or any part thereof for any purposes whatsoever other than for
warehousing and distribution with ancillary offices loading and car parking
facilities for use in connection therewith and with a caretaker’s flat which
shall only be used and occupied by a resident caretaker for the said property.
The covenant against assignment and
subletting is in clause 2(16). Clause 2(16)(a) contains a complete prohibition
on assignment of the property in separate parts. Subclauses (b), (c) and (d)
contain various restrictions which are not relevant to this particular issue.
Subclause 2(16)(e) is relevant and reads as follows:
Not (but without prejudice to the
foregoing)
— that does not matter —
to assign the whole of the said property
or underlet or part with the possession of the said property or any part
thereof nor to vary the terms of any such letting or parting with possession
without the previous written licence of the Landlords (such consent not to be
unreasonably withheld) and to pay for every such licence the sum of Five guineas
PROVIDED that any assignment underletting or parting with or sharing possession
of the said property or any part thereof to an associated or subsidiary Company
of the Tenants (here meaning Electrocomponents Associated Limited) without the
Landlords’ and the Superior Landlords’ consent shall not be deemed to be a
breach of the provisions of this sub-clause 2(16).
So that was an express proviso limited to
Electrocomponents Associated Ltd authorising assignment, underletting or
parting with or sharing possession with associated or subsidiary companies.
I pass now to the schedule to the licence
to assign of November 5 1985. The user clause there I have already read:
Not to use or allow to be used the said
property or any part thereof for any purpose other than for offices [etc], in
accordance with Planning Permission Number TP/77182/03 1/RA.
That permission, and it is one of the
oddities of this case, was a permission which granted planning permission for
development, as shown on the plans submitted, subject to certain conditions,
and of those conditions no 3 was the following:
This permission shall operate for the
benefit of Extel Financial and Business Services Ltd only and shall not enure
for the benefit of the land nor of any other person for the time being having
an interest therein.
Extel Financial & Business Services
is a subsidiary of the defendant and not the defendant itself.
That condition was waived on a subsequent
planning application, but that does not affect the present problem.
The first limb of the problem is this. It
is said: ‘Well we have clause 2(16)(e). That has got to be updated and it is
silly to have it referring to the original lessee, who ceased to have any
interest in the premises some years ago. So, either by adaptation of 16(e) or
by adaptation of the user provision which is to go into the hypothetical lease,
there should be imported a reference to user by the hypothetical lessee or any
subsidiary or associated companies of the hypothetical lessee.’ We were assured that that wording would
considerably affect, in the view of the expert advisers of the parties, the
rent that is to be fixed by the surveyor acting as an expert.
The other limb to the problem is that if
you read into the user clause in the licence to assign of November 5 1985 the
conditions of the planning permission, as the parties agreed that you should,
and if you then read the whole of that across into the hypothetical lease, you
have a user covenant in the hypothetical lease which only permits user by the
subsidiary of the defendant named in the planning permission, Extel Financial
& Business Services Ltd.
In this connection, we have been referred
to two decisions of this court which were concerned with different aspects of a
similar problem. One is Law Land Co Ltd v Consumers’ Association Ltd
(1980) 255 EG 617, [1980] 2 EGLR 109, and the other is James v British
Crafts Centre [1987] 1 EGLR 139.
In the Law Land case the user
covenant in the lease contained a clause which restricted the use of the
premises to use by the Consumers’ Association, the present tenants, and
associated organisations for office purposes. It was held that since the object
of the rent review clause was to find a market rent, it would be repugnant that
the user should be limited to use by the Consumer’s Association and associated
organisations only, because there would be in effect no market available.
Therefore, a rent had to be achieved under a marketable lease, and that was
done by construing the user clause as providing for user as offices by the
hypothetical lessee and its associated organisations.
In James v British Crafts
Centre, on the other hand, the user covenant forbade user for any purpose
other than
(i) high class business commercial or
professional offices . . . or (ii) in respect of such part of the demised
premises as shall for the time being be occupied and used by the Lessee (here
meaning The British Crafts Centre party hereto) for storage sale and display of
craftsmen’s work and ancillary offices.
It was held there that since there was a
perfectly viable commercial user permitted for high-class business, commercial
or professional offices, it was unnecessary to mould the user provision in the
second alternative to provide for user for storage, sale and display of
craftsmen’s work in respect of such part of the premises as should from time to
time be occupied and used by the hypothetical lessee. In other words, the
reference to the British Crafts Centre could remain in relation to that.
I deduce from taking the two cases
together, in particular from James v British Crafts Centre, that
an alteration to the terms of the actual lease on translating them into the
hypothetical lease in order to ascertain an open market value is to be carried
out only where it is necessary to prevent the object of the lease being
stultified.
The proviso to clause 2(16)(e) of the lease
which refers to associated and subsidiary companies of Electrocomponents
Associated Ltd is merely a proviso to the usual covenant against assigning the
whole of the premises or underletting or parting with possession of the
property or any part thereof without previous written licence of the landlord,
such consent not to be unreasonably withheld. It is a perfectly common clause
without benefit of the proviso, and there is nothing stultifying in reading
that across into the hypothetical lease, either with the proviso in its
existing form, which is not likely ever to be applicable unless by some fluke
Electrocomponents Associated Ltd reacquires the premises, or with the proviso
struck out. It is not necessary to alter that or to achieve the effect of an alteration
by an alteration to the user clause.
Then one comes to the condition of the
planning permission. If the planning permission condition is read in literally,
the user clause in the hypothetical lease would be restricted to user by Extel
Financial & Business Services Ltd, and that would be as objectionable in
relation to ascertaining a market rental as the provision in the Law Land
case restricting user to user as offices of the Consumers’ Association.
I do not think it matters on this aspect
of the argument that Extel Financial & Business Services Ltd happens to be
a subsidiary of the defendant and not the defendant, now the lessee itself. The
point is the same, that it is repugnant to an open market rental to have a user
clause limited to a single company. Therefore, that must be dealt with, as in
the Law Land case, by substituting a reference to the hypothetical
tenant. That is what the judge did and his form of order in this respect, which
was tailored from the terms of the schedule to the November 1985 licence,
permitted user by the hypothetical tenant.
Mr Cullen says he should have gone
further and brought in the subsidiary or associated companies of the
hypothetical tenant, but I do not see why. In the Law Land case that was
done because it was expressly envisaged in the user clause that the user might
be by the Consumers’ Association or associated organisations. But that is not
envisaged in this user clause. It is specific to the one company named in the
planning consent. It matters not, as I have already indicated, that associated
companies or subsidiaries of the original lessee were dealt with in the proviso
to clause 2 (16)(e).
As between the parties, it so happens
that it is the defendant and not the subsidiary which is the lessee. Obviously
in the context it could not be suggested that there was a breach of covenant in
that one company is the lessee while the user clause provides for user by
another company or, conversely, that the user is by the subsidiary whereas the
lease is to the parent, the defendant.
I regard the actualities as between the
defendant and its subsidiary named in the planning permission as irrelevant to
the alteration that is needed, so that the permission in the hypothetical lease
is not stultified by limiting it to the one company. That it is not so
stultified will be achieved if the valuation is on the footing that the
hypothetical tenant will be able to use the property for the permitted purpose,
notwithstanding that the hypothetical tenant is not the defendant’s subsidiary
named in condition 3 in the planning permission.
Accordingly, I would dismiss the
cross-appeal.
Agreeing, NOURSE LJ said: I do not
wish to add anything to Dillon LJ’s reasoning in regard to the cross-appeal.
Since we are differing from the view of Judge Bromley, I add some observations
of my own in regard to the appeal.
The material words in proviso (a) to
clause 2 of the licence dated November 5 1985 are:
. . . the rent payable pursuant to the
terms of the Lease will be reviewed in accordance with the provisions for
review contained therein on the basis of the authorised use at the relevant
Review Date (the Assignee hereby acknowledging that the Demised Premises are
fit for use and occupation therefor) assuming a willing Lessor and a willing
Lessee but disregarding any improvements carried out to the Demised Premises by
the Tenant otherwise than in pursuance of an obligation to the Landlord.
Bearing in mind that the licence did not
mention any alterations which were necessary in order to enable the premises to
be used in accordance with the newly authorised user, far less gave any consent
to the making of any such alterations, I am unable to construe the words ‘on
the basis of the authorised use’ as meaning ‘on the basis of the notional
physical state in which the premises would be if they were being used in
accordance with the newly authorised user at the relevant review date’. That is
expressing in my own words the construction favoured by the learned judge as
put forward in the argument of Mr Cullen in this court.
In my view, such an interpretation
involves reading into the words which the parties have used something which is
not there and something which cannot be supplied on conventional principles of
construction. I think that the words ‘on the basis of the authorised use’
require no more than that, for rent review purposes, you look at the premises
in their physical condition as at the date of the licence and apply to them not
the originally permitted user (ie as a warehouse) but the newly authorised user
(ie as offices). That construction of those words is consistent with the words
in parenthesis ‘the Assignee hereby acknowledging that the Demised Premises are
fit for use and occupation therefor’, which I agree with Mr Lewison must be
supposed to have been included in order to prevent the assignee from claiming
on a subsequent rent review that the newly authorised user could not have
become a practical possibility unless and until substantial alterations had
been made. Mr Lewison says that it is not clear that the premises were not fit
for use and occupation as offices at the date of the licence. He may or may not
be right about that. I rather suspect that he is wrong. But either way his
argument is unaffected. I think that his explanation of the words in
parenthesis is at the least more probable than any other which has been
proffered and they are, as I have said, consistent with the construction which
I have put on the words ‘on the basis of the authorised use’.
That leaves the final words of proviso (a)
‘. . . but disregarding any improvements carried out to the Demised Premises by
the Tenant otherwise than in pursuance of an obligation to the Landlord.’ At the outset of the argument I was impressed
by Judge Bromley’s view of those words. At p 14G of the transcript, having said
that he was unable to put on the parenthetical acknowledgment by the
prospective tenant a construction which bound both parties to proceeding in the
future on the 1985 state of the premises, the learned judge continued:
My view is, I think, supported by the
repeat of disregard of tenant’s improvements. That includes future improvements
and protects the tenant from the revised basis for future rent review being
used without the saving for tenant’s improvements. Why, I ask rhetorically,
should it have been thought necessary to insert that further saving if the 1985
condition of the property was to be the basis?
Mr Lewison frankly accepts that on his
construction the final words of proviso (a) are unnecessary. I certainly agree
with that. But after reflecting on the matter I also agree that the presence of
those words does not invalidate his argument. I think that he is right in
saying that they were simply put in to emphasise the fact that the tenant’s
improvements of the character mentioned were to be left out of account.
I am bound to say that I have not found
the question at all easy. As with many questions of construction, it would be
possible to redraw proviso (a) in a much more artistic form. In the end,
although my mind has wavered during the course of the argument, I have come to
the conclusion that the tenant’s view of it is to be preferred to that of the
landlord.
RUSSELL LJ agreed with both judgments and did not
add any observations of his own.
The appeal was allowed and the
cross-appeal dismissed; declaration 2 in the judge’s order deleted; appellant
to have costs of the appeal and cross-appeal and three-quarters of the costs
below.
