Landlord and tenant — Whether a subtenant’s obligation to reinstate premises to their former condition in accordance with a licence should be taken into account in assessing the rent on a rent review — Construction of underlease and licence — In this case a subtenant was granted a licence by the sublessor and the head landlord to convert part of premises used for retail shopping into a dolphinarium, with a dolphin pool and auditorium — The licence contained a covenant by the sublessee to reinstate the premises for normal shopping use at the expiration of the underlease — The licence contained no provision for monetary consideration either by increased rent or a premium, the sublessor and head landlord apparently being content with the sublessee’s obligation to reinstate at his own expense — There was a rent review clause in the underlease, providing for the appointment of an independent valuer if the parties were unable to agree on the rent — In fact they were unable to agree whether the valuer should be instructed to take into account the sublessee’s obligation to reinstate or to disregard it — The sublessee, who was the plaintiff in the present action, contended that the obligation should be taken into account (thereby reducing the rent) while the sublessor, the defendant, argued that it should not be taken into account (with the opposite effect on the rent) — There being no express provision on the point in the licence, it was a question of deciding what was the probable intention of the parties in the light of the licence and the underlease and the nature of the transaction — Held that the true construction was that the sublessee’s obligation to reinstate should be disregarded in assessing the review rent — In coming to this conclusion the judge was influenced, inter alia, by the consideration that it was unlikely that the parties intended that the sublessor should not only do the sublessee a commercial favour without charging additional rent or a premium but should also suffer the detriment of receiving less rent on that account in subsequent rent reviews — Declaration accordingly
In this action
the plaintiff company, Pleasurama Properties Ltd, the sublessee of premises in
Oxford Street and Soho Square, London W1, sought a declaration that in fixing
the rent payable on a rent review an obligation to reinstate the parts of the
premises converted into a dolphinarium should be taken into account. The
defendant company, Leisure Investments (West End) Ltd, was the sublessor.
Gerald M
Godfrey QC and E J Prince (instructed by Barnett & Barnett) appeared on
behalf of the plaintiff company; Leolin Price QC and Isaac Jacob (instructed by
Jerrard Saunders Donn) represented the defendant company.
Giving
judgment, NOURSE J said: The question in this case is whether a tenant’s
obligation to reinstate premises pursuant to a covenant contained in a
landlord’s licence to alter them ought to be taken into account in a subsequent
rent review. That question depends on the true construction and effect of the
lease and licence read together.
The premises
are the basement and ground floor of 63, 65 and 65a Oxford Street and 10 and
10a Soho Square, London W1. The lease and licence are dated May 15 1969 and
September 7 1970 respectively. The lease is in fact an underlease and I will
henceforth describe it as such. The head landlord has at all material times
been the Co-operative Insurance Society Ltd. The underlease and licence were
both made between predecessors in title of the defendant and the plaintiff
respectively, and the head landlord joined in the licence as well. The
plaintiff, Pleasurama Properties Ltd, is the present sublessee under the
underlease, and the defendant, Leisure Investments (West End) Ltd, is the
present sublessor. There is a curious feature of the case in that the defendant
is also the plaintiff’s tenant under a subunderlease. The defendant is in
possession of the premises under that subunderlease. However, the arguments
have not identified that additional relationship as a significant feature of
the case and I do not propose to refer to it again.
The material
provisions of the underlease are these. In clause I the demised premises are
defined to include:
. . . any
alterations in or additions to or reconstruction of the buildings now standing
on the lands hereby demised and all other buildings for the time being thereon
whether erected in addition to or in substitution for the said buildings now
standing thereon . . .
The term is 35
years from March 1 1969. The reddendum provides for the payment of an initial
rent of £30,000 per annum and an additional rent to be calculated and paid in
accordance with clause 2. Clause 2(1) is in these terms:
the
additional rent to be paid for the period commencing at the beginning of the
fifteenth year of the said term and continuing for the remainder of the said
term shall be a yearly rent equal to the amount (if any) by which the yearly
rack rent value as hereinafter defined of the demised premises (hereinafter
called ‘the yearly rack rent value’) at the end of the fourteenth year of the
said term shall exceed the initial rent.
Clause 2(2)
makes a similar provision for the additional rent to be paid for the period
commencing at the beginning of the 29th year of the term. Clause 2(3), which is
the most important provision of the underlease for present purposes, is in
these terms:
In this
clause the expression ‘yearly rack rent value’ means such an amount as shall be
agreed by the parties hereto to represent the yearly rent which ought
reasonably to be expected to be obtainable for the demised premises let as a
whole in the open market as between a willing Landlord and a willing Tenant
without taking any fine or premium for a lease for a term equal to the residue
unexpired of the term hereby demised at the end of the fourteenth and
twenty-eighth years of the said term (as the case may be) and subject to
covenants on the part of the Tenant and conditions similar to those herein
contained and for the purpose of carrying on therein the same trade or trades
as that or those being carried on therein by the then occupier but disregarding
. . .
There are then
three lettered subparagraphs referring to certain matters which are familiarly
disregarded in cases of this nature. I need not read subparagraphs (a) and (b),
which played no noticeable part in the argument. Subparagraph (c) is in these
terms:
(c) any
effect on rent by reason of any improvements or other work carried out by the
Tenant or any person deriving title under it after the date of this Underlease
in order to put the demised premises in any better condition than they are now
in.
Clause 2 then
goes on to provide for the event that the current annual market rent shall not
have been agreed between the parties, in which event the matter is to be
referred to the decision of an independent qualified valuer agreed by the
parties or, in default of agreement, nominated in a familiar manner.
Clause 3 of
the underlease sets out in 26 numbered subclauses the tenant’s covenants. The
following require mention. Subclause (1) contains a covenant to pay the rents
reserved by the lease. Subclause (3) contains a full repairing covenant.
Subclause (11) contains a covenant not without the previous consent in writing
of the sublessor or the head landlord and any necessary planning permission or any
other consent which is required, to build or erect or permit or suffer to be
built or erected any other building on the demised premises or to make or
permit or suffer to be made any alterations or additions to or in them.
Subclause (13) contains a covenant not without previous consent in writing of
the head landlord and the sublessor to use or permit to be used the demised
premises or any part or parts thereof for any purpose or purposes other than as
a high-class entertainment and amusement centre and/or shopping arcade.
Subclause (14) contains a covenant at all times to comply with any conditions
which may be attached to any permissions or licences obtained under the
provisions of subclause (13). Subclause (25) contains a covenant at the end or
sooner determination of the said term to surrender up the demised premises well
and tenantably repaired and so forth in accordance with the foregoing
covenants. I need not refer to any other provisions of the underlease.
Although, as
appears from clause 3(13), the permitted user of the demised premises was
wider, they were in fact being used at the date of the underlease as retail
shopping premises. However, in 1970 the head landlord and the then sublessor
gave their consents to the conversion of part of the premises by the then
sublessee to use as a dolphinarium, that being effected by the licence of
September 7 1970. By clause 1 of the licence the sublessee was licensed to
carry out the necessary alterations by reference to two attached drawings. In
clause 2 it entered into certain covenants with the head landlord and the
sublessor, including the following covenant, which is found in subclause (vi):
at the
expiration or sooner determination of the said Underlease unless released from
compliance with this stipulation by the Society and the Tenant at its own cost
and to the reasonable satisfaction of the Society and the Tenant to reinstate
and make good the dolphin pool and the auditorium only to such a state (which
shall be to the reasonable approval of the Society’s and the Tenant’s
respective Surveyors) as shall be consistent with normal shopping standards
that is to say to construct a level basement floor and a ground floor on the
same level as Oxford Street together with such a connecting staircase as may be
reasonably required and in such a manner as shall be to the reasonable
satisfaction of the local authority’s town planning and bye law requirements to
enable the demised premises (as so reinstated) to be utilised for the retail shopping
purposes thereafter.
The only other
provision of the licence which I need mention is clause 4(1), which contains an
agreement and declaration:
that all the
lessee’s covenants and conditions contained in the said Lease and Underlease
respectively which are now applicable to the premises respectively demised
thereby shall continue to be applicable to the same when and as the alterations
hereby authorised shall have been carried out and shall extend to all additions
which may be made thereto in the course of such alterations.
It is to be
noted that the licence made no provision for any monetary consideration to
change hands, either by way of an increased rent or by way of premium. The head
landlord and the sublessor appear to have been content with provisions which
would procure the reinstatement of the premises on the determination of the
underlease, while putting them to no additional expense in the meantime.
The present
position is that the first additional rent, if there is to be one, became
payable as from March 1 1983. However, the plaintiff and the defendant have
been unable to agree a rent between themselves and, moreover, have been unable
to agree whether the independent valuer, who must now decide the matter, should
be instructed to take into account the plaintiff’s obligation to reinstate the
premises or to leave it out of account. It is the interest of the plaintiff as
the present sublessee under the underlease to contend that the obligation ought
to be taken into account, because an obligation of that kind will doubtless
reduce the yearly rent which ought reasonably to be expected to be obtainable
for the demised premises in the open market. Conversely, it is the interest of
the defendant as the present sublessor under the underlease to contend to the
contrary effect.
As earlier
stated, the question depends on the true construction and effect of the
underlease and licence when read together. Mr Godfrey for the plaintiff submits
that the licence had a permanent effect on the interests of both grantor and
grantee so as to bind any successor to either interest, with the result, among
other things, that the grantee’s interest in the premises as offered on the
open market would have to be valued by taking the obligation to reinstate into
account. Alternatively (it may be a different way of expressing his first
submission), Mr Godfrey says that the licence operated as a variation of the
essential terms of the underlease so that the matter had thenceforth to be read
and construed with reference to the variations so effected.
There is to
some extent no divergence between the submissions of Mr Godfrey and those of Mr
Price for the defendant. It is obvious that some at least of the terms of the
underlease were permanently varied by the licence. It is also obvious that, as
a matter of contract, it was open to the parties to vary any of the terms of
the underlease in any manner and to any extent which they might mutually agree.
If you look only at clause 2(3) of the underlease, the obligation to reinstate
must be left out of account because the covenant by which the plaintiff is
committed to that obligation is not a covenant ‘on the part of the tenant . . .
similar to those herein contained’. The question which I have to decide is
whether, by the licence, the parties have evinced a mutual intention that the
covenant to reinstate contained in that document should be treated as if it was
a covenant on the part of the tenant contained in the underlease.
It is agreed
between Mr Price and Mr Godfrey that there is no specific provision to that
effect. The first way in which Mr Godfrey seeks to achieve it is by a method
which he claims, perhaps correctly, does not involve any process of
implication. He says that it is simply a question of reading the two documents
together in a fair way and deciding what is their combined effect. He says
that, if you do that, clause 2(vi) of the licence is found to be an express
provision which, although not specifically achieving the desired effect, does
nevertheless achieve it mainly by construing the two documents together.
Alternatively, he submits that if it is necessary for him to rely on a process
of implication then the plaintiff still passes the necessary test.
In relation to
implication Mr Godfrey has referred me to a valuable passage in the speech of
Lord Wilberforce in Liverpool City Council v Irwin [1977] AC 239
at p 253E-F. There Lord Wilberforce states that there are varieties of
implications which the courts think fit to make and that they do not
necessarily all involve the same process. His lordship identifies four
different categories of implication, or rather four shades on a continuous
spectrum. However, it appears from a later passage in his speech at p 254F, to
which Mr Price referred me, that Lord Wilberforce was of the view that an
implication could only be made in that case if there was a necessity for it. In
my view, that is the basic requirement of any species of implication, whether
under the doctrine of The Moorcock (1889) 14 PD 64 or otherwise.
At the end of
the day, whichever way it is put, I have to be satisfied that, by the licence
read in the light of the underlease, the parties to the licence intended that
the obligation to reinstate was to be taken into account for the purpose of
fixing the additional rent. There is certainly no necessity for that. I am
bound to say that Mr Godfrey has failed to satisfy me that that was their
intention. Indeed, I have been satisfied by the argument of Mr Price that their
intention must be taken to have been to the contrary effect.
Mr Price
submitted that it was obvious that the parties intended, first, that the
sublessee should have all the benefits to be derived from the alterations, in
exchange for which it should bear the burden of having to reinstate the
premises on the determination of the underlease, and, secondly, that while the
sublessor should not receive any benefit from the alterations it was not to
suffer any burden or detriment from them either. Clearly the sublessee would
never have requested permission to make the alterations if it had not thought
that they would render the premises more profitable to it. If that be right,
the sublessor was doing it a favour by allowing it to make them. Why should the
parties be taken to have intended that the sublessor should not only do the
sublessee a favour without charging it any premium or additional rent, but
should also itself suffer a detriment by exposing itself to the probability of
receiving less rent than it would otherwise receive on subsequent reviews of
the existing rent?
While Mr
Godfrey’s first argument has an intellectual attraction, it does not stand up
to the test of commonsense. His second argument fails for lack of necessity. It
seems to me that Mr Price’s approach is the only one which the court can adopt.
To do otherwise would be to fly in the face of ordinary commercial commonsense.
I do not
propose to go into any of the other arguments, none of which appear to me to be
decisive, except to say this. It seems to me
resolved in favour of the defendant by the provisions of subclause 2(3)(c) of
the underlease. That provision — which requires that there should be
disregarded any effect on rent by reason of any improvements carried out by the
tenant in order to put the demised premises in any better condition — is simply
not reconcilable with the notion that regard should be had to an obligation to
eliminate such improvements and reinstate the premises to their former
condition. I find it very hard to see how that result could have been achieved
by the licence without some specific provision which made it clear that that
was what the parties intended.
For the
reasons which I have endeavoured to express, I decide this case in favour of
the defendant and I will make whatever declaration is appropriate to reflect
that decision.
The plaintiff
company was ordered to pay the defendant company’s costs.