Leasehold enfranchisement – Leasehold Reform Act 1967 – Enfranchisement of house – Price – Rent review clause – Respondent exercising right to acquire freehold of house from appellant under 1967 Act – Existing lease granted at substantial premium at nominal rent and containing rent review clause – Effect of rent review provisions on price payable for freehold – Whether effectively requiring review to modern ground rent on same basis as section 15(2) of 1967 Act – Whether review to assume letting with payment of premium – Appeal dismissed
The respondent held a house in Birmingham on a lease granted in 2008, at a premium of £170,000, for a term of 99 years from May 2002. A nominal rent of £126 pa was reserved, subject to review in May 2012, 2037, 2062 and 2087. The respondent exercised his right to acquire the freehold of the property under the Leasehold Reform Act 1967; the leasehold valuation tribunal (LVT) was asked to determine the price payable to the appellant freeholder, for which purpose it had to determine the effect of the rent review provisions in the lease.
The rent was reviewable in May 2012, 2037, 2062 and 2087 to the current open market letting value of the land as if it were a vacant site without any buildings, to be demised as such on the assumptions that: (a) it was available to let on the open market for residential development for purposes authorised by the Planning Acts for a term of 99 years; and (b) it was “to be let as a whole subject to the terms of this lease (other than the Term and the amount of the Rent hereby reserved) but excluding the provisions for rent review at the prescribed intervals”.
The appellant argued that the purchase price should be £35,367, based on a reviewed rent of £1,966 pa at May 2012, representing a full ground rent assessed on the assumption that the property was let at no premium for 99 years, and otherwise on the terms of the lease, but with no provision for rent review. It submitted that the lease effectively required the assessment of a modern ground rent in the same manner as section 15 of the Leasehold Reform Act 1967.
The LVT decided that the reviewed rent at May 2012 was £350 pa and the purchase price was £6,843. It found that the rent review clause was ambiguous and that a reasonable man in possession of all the relevant background knowledge would not have taken a lease on terms that required him not only to pay a premium substantially above market value but also exposed him to a disadvantageous rent review in only three years’ time. It accordingly held that the rent review clause did not direct the parties to the statutory world but required an assessment of the rent payable in the open market in the real world; it found that a prospective developer would not be willing to pay a rent analogous to a section 15 rent. The appellant appealed.
Held: The appeal was dismissed.
The rent review clause had to be construed by reference to what it would convey to a reasonable person having all the background knowledge that would have been reasonably available to the parties entering into the lease. The relevant background facts included the fact that the original lease was granted at a full premium, having regard to property values at the date of the lease, with no reduction to reflect an onerous ground rent. Moreover, there were obvious and substantial differences in wording between the rent review clause and section 15(2) of the 1967 Act. In particular, the lease required the reviewed rent to be assessed by reference to the current open market values of the site on certain specified assumptions, including that in para (b). If the draftsman had wished to ensure that the reviewed rent was assessed as though it were a modern ground rent under section 15(2), express provision could have been made to that effect or the rent review clause could have used precisely the same language as section 15(2). Neither of those approaches had been followed. It followed that the rent review clause could not be construed as bringing into operation the machinery that was applied for assessing a modern ground rent under section 15(2) of the 1967 Act.
That conclusion was supported by the state of the relevant case law, in which the approach under section 15(2) had been rejected in respect of rent review clauses similar to that in the respondent’s lease. If the parties had wished to achieve a result different from those cases, such that the section 15(2) approach for assessing the reviewed rent was to be adopted, they could reasonably be expected to have made that clear: Jarrett v Burford Estates & Property Co Ltd [1999] 1 EGLR 181 and Elmbirch Propertes plc v Schaefer-Tsoropatzadis [2008] 1 P&CR 8; [2007] 2 EGLR 167 considered.
Although the rent review clause in the respondent’s lease expressly excluded certain terms of the lease, namely the term, the rent and the provisions for rent review, it did not exclude the provision for payment of a premium. It followed that, when para (b) required the assumption of a letting of the site “as a whole subject to the terms of this lease…”, the terms to which it referred included the provision for payment of a premium. That was the natural meaning of the language used and also made commercial sense because it involved the rent in a lease granted at a full premium being reviewed by reference to rent levels payable in respect of the site if let at a premium: Hill v Booth [1930] 1 KB 381 and Manson v Duke of Westminster [1981] QB 323 distinguished. The wording of the rent review clause was clear on that matter but, even if it had been ambiguous, the same result would have been reached by construing the clause against the appellant under the contra proferentem rule.
The reviewed rent was therefore to be assessed by reference to a letting of the site in accordance with the assumptions laid down in the rent review clause, which included a letting for 99 years from the review date with no provision for rent review and on payment of a premium. However, it did not have to be assumed that the premium would be the same as the sum of £170,000 actually paid by the respondent. A letting of the cleared site at such a premium would attract no bids in the market and the rent would necessarily be nil, or negative. On the proper application of the rent review clause, it was a task for the valuer determining the rent to decide, in accordance with current open market values, what premium and rent could reasonably be expected to be paid in the open market at the review date. Where the LVT had concluded that only £350 pa would be payable even without a premium, it was not possible to find that a letting at a premium would command a rent of more than that sum, and the respondent did not argue for a lower rent. The appellant had failed to show that the LVT was in error.
Ellodie Gibbons (instructed by Bureau Property Consultants, of Cardiff) appeared for the appellant; Nina Turkson MRICS appeared for the respondent.
Sally Dobson, barrister
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