Landlord and tenant — Rent review clause — Whether an obligation contained in a licence to reinstate premises at the end of a subtenancy to their former condition should be taken into account in assessing the rent on a rent review — In this case a sublessee was granted a licence by the sublessor and the head landlord to convert part of premises into a dolphinarium, with a dolphin pool and auditorium — Licence contained a covenant by sublessee to reinstate the premises for normal shopping use at the expiration of the underlease — 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 — When the first rent review approached, the parties were unable to agree as to whether the sublessee’s obligation to reinstate should be taken into account or disregarded, the sublessee contending that it should be taken into account (thus depressing the rent) and the sublessor arguing that it should be disregarded (with the opposite result) — Nourse J (as he then was) decided in favour of the sublessor — Before the Court of Appeal the sublessee argued that the covenant in the licence to reinstate should in effect be regarded as one of the covenants contained in the underlease to which the hypothetical term was to be subject — The court rejected this submission and held, affirming the decision of Nourse J, that it could not have been intended that the sublessee, for whose sole benefit the licence was given, should reap an additional benefit in the form of a reduction in the rent which would otherwise become payable on review — In addition, as the judge pointed out, the sublessee’s contention was irreconcilable with the provision in the underlease that there should be disregarded any effect on rent by reason of any improvement carried out by the sublessee in order to put the premises in any better condition — Appeal dismissed
This was an
appeal by Pleasurama Properties Ltd, the plaintiff company in the court below,
the sublessees of premises in Oxford Street and Soho Square, London W1, from a
decision of Nourse J in favour of the respondents, Leisure Investments (West
End) Ltd, the defendant company below, the sublessor of the premises. The
decision of Nourse J was reported at [1985] 1 EGLR 54; (1985) 273 EG 67.
Derek Wood QC
and E J Prince (instructed by Barnett Alexander Chart) appeared on behalf of
the appellants; Leolin Price QC and Isaac Jacob (instructed by Jerrard Saunders
Donn) represented the respondents.
Giving the
first judgment at the invitation of May LJ, LLOYD LJ said: This is a
plaintiffs’ appeal from a decision of Nourse J, as he then was, given on
October 3 1984, whereby he gave judgment in favour of the defendants on a short
point of construction arising on a rent review clause in an underlease dated
May 15 1969. The facts and relevant clauses of the lease are fully set out in
the judgment. I do not intend to repeat them in any detail.
The underlease
relates to commercial premises in Oxford Street and Soho Square. The
plaintiffs, Pleasurama Properties Ltd, are the sublessees. The defendants,
Leisure Investments (West End) Ltd, are the sublessors.
There was a
provision in the lease for additions to the rent at the end of the 14th and
28th years, based on any increase in the then yearly rack rent value of the
premises on the open market. The only clause in the lease which I need set out
is clause 2.
Clause 2(1)
provides:
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(3)
provides:
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 . . .
(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.
The permitted
user under clause 3(13) of the underlease was in wide terms and included use
for the purposes of ‘a high class entertainment and amusement centre and/or
shopping arcade’. At the date of the underlease the premises were, according to
the judge, being used as retail shopping premises.
By a deed of
licence dated September 7 1970, the head landlord and the sublessor gave
permission for the sublessee to convert part of the premises into a
dolphinarium, on terms, inter alia, that the sublessee would reconvert
the premises to shop premises at the expiry of the underlease. The only clause
in the deed of licence to which I need refer is clause 2, which sets out the
covenants entered into by the sublessee. By clause 2(vi) the sublessee covenanted:
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.
It is important
to notice that the sublessor did not stipulate for any payment in return for
its consent.
There was a
subunderlease dated January 16 1973, which was entered into after the
conversion had been completed. The judge did not find it necessary to refer to
the terms of the subunderlease: nor do I.
The question
which arises is whether the obligation to reinstate the premises contained in
clause 2(vi) of the deed of licence should be taken into account in determining
the notional yearly rack rental value under clause 2(3) of the lease. It is in
the plaintiffs’ interest to argue that it should, since it will reduce the
notional yearly rack rent, and thereby reduce the additional rent payable by
the plaintiffs after the 15th and 29th years. It is in the interests of the
sublessors to argue the contrary.
The learned
judge decided in favour of the defendants. He did so on two grounds. Clause
2(3) of the lease provides, as I have already said, that the notional yearly
rack rental shall be calculated on the basis of ‘covenants on the part of the
tenant and conditions similar to those herein contained’. It was common ground
before the judge as before us that there is no specific provision in the lease,
or the licence, that the covenant to reinstate contained in the licence should
be taken into consideration under clause 2(3) of the lease. The judge held that
a reference to that covenant could only be imported or implied in clause 2(3)
if it was necessary to do so in order to give business efficacy to the
agreement between the parties. The judge held that there was no such necessity.
He referred in that connection to Liverpool City Council v Irwin
[1977] AC 239.
The second
reason given by the judge was that to decide in favour of the plaintiffs would
offend against common sense. The defendants were doing a favour to the
plaintiffs by allowing them to convert part of the premises into a
dolphinarium. The defendants got no sort of benefit from the conversion
themselves. It was, in the judge’s view, contrary to common sense that the
defendants should, as a consequence of giving their consent, suffer an
increased burden by reason of the operation of the rent review clause.
Mr Wood for
the plaintiffs has put the emphasis before us somewhat differently. He does not
rely on necessary implication. He submits that he is entitled to succeed on
construction. He puts the argument in two stages. If the lease had been varied
by a deed of variation, then the words ‘herein contained’ would be taken to
refer not just to the covenants contained in the lease at the date of the lease
but also to the covenants contained in the lease as varied at the time of the
rent review. So that if, for instance, the permitted user had been widened by a
deed of variation, then the widened user would be reflected in the notional
yearly rack rent.
The second
stage of the argument was that the deed of licence was on its true construction
a variation of the lease. It is more than a mere personal licence. The
covenants imposed on the underlessee, including the covenant to reinstate, run
with the lease. The covenant to reinstate must therefore be added to clause
2(3) of the lease. By reason of the variation of the lease the covenant became
a covenant ‘herein contained’ on the true construction of that clause.
That, in
outline, is Mr Wood’s argument on construction. But in my judgment it contains
a fallacy. I accept that the words ‘herein contained’ are capable of applying
to the lease as varied. They are not necessarily confined to the covenants at
the date of the lease. I will assume — though I certainly do not accept — that
the deed of licence is to be regarded as a variation of the lease. I prefer the
view that the licence is what it purports to be, namely, a licence granted
pursuant to the lease. But I will assume, as I say, that it was a variation of
the lease. Even so, it does not follow that the covenant contained in the
licence is to be read into clause 2 of the lease. The two steps of Mr Wood’s
argument do not carry him the whole way. There is a third step which he has to
take. We have to see not only whether there has been a variation, which I am
assuming, but what is the nature and extent of the variation.
In the case of
a deed of variation the effect of which was to widen the permitted user, then I
could well understand the courts holding that the words ‘herein contained’
should be read as referring to the covenants as varied. But the same does not
follow in the present case. I accept, of course, that the two documents must be
read together. But they must be read together so as to produce a sensible and
business-like result. The question we have to ask ourselves is whether, on a
fair reading of the deed of licence, the parties intended the covenant in
clause 2(vi) to be brought within clause 2 of the lease. I am quite clear that
they did not. It cannot have been intended that the plaintiffs, for whose sole
benefit the consent was given, should, as the result, reap an additional
benefit in the form of a reduction in the rent which would otherwise become
payable on review. I agree with the judge when he says that so to read the
documents offends against common sense.
Mr Wood argued
that where a tenant applies for consent to carry out improvements or
alterations, there are three possibilities. The first is that the landlord will
refuse consent on reasonable grounds. The second is that he will give
unconditional consent. The third is that he will give conditional consent as
contemplated by section 19(2) of the Landlord and Tenant Act 1927. The first
alternative will not affect the value of the demised premises. The second
alternative will increase the value of the demised premises. So will the third
alternative, but not by so much as the second. Mr Wood argues that the
difference in the increase in value between the second and third alternatives
should be reflected in the rent payable on review. Since under the third
alternative the landlord has given away less than he might, it is reasonable
that there should be a reduction in the rent otherwise payable. I cannot agree
with Mr Wood’s argument. There is still a net benefit to the tenant under
either the second or the third alternative. It does not make sense that the
landlord should have to pay for that benefit.
The argument
which I have just mentioned leads on to the last point. To hold in favour of
the defendants would in my view be
point is put very clearly in a single sentence on the last page of the judge’s
judgment:
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 can find no
answer to that point. Mr Wood argued that the covenant to reinstate is still
there. The burden on the tenant should be reflected at the rent review. But the
covenant to reinstate is only the obverse of the permission to improve. If the
benefit from the temporary improvement is to be disregarded and excluded from
account, it is wholly illogical that the burden of reinstating should be
included.
For the
reasons I have given I would dismiss the appeal.
MAY LJ and
CAULFIELD J agreed and did not add anything.
The appeal
was dismissed with costs. Leave to appeal to the House of Lords was refused.
