Construction of rent review clause in lease–Whether improvements made at the expense of the tenants had to be taken into account or disregarded in assessing rent for second 7-year period–Majority decision that a "reasonable rent for the demised premises" meant for the premises as improved–Roskill LJ in dissenting judgment shrank from a result "so manifestly unjust" to tenants–Tenants to pay increased rent for improvements made at their expense–Appeal allowed
This was an
appeal by the plaintiffs, lessors of a factory at Barking for a term of 21
years commencing in 1968, from a decision of Whitford J, holding in favour of
the respondents, the lessees, that certain improvements made at their expense
following a fire should not be taken into account in assessing the rent payable
under a rent review clause for the second seven years of the term.
L Price QC and
Bruce Coles (instructed by Gamlens) appeared on behalf of the appellants; D
Nicholls QC and M S Rich (instructed by Tarlo, Lyons & Aukin) represented
the respondents.
Giving
judgment, CAIRNS LJ said: This is an appeal from a judgment of Whitford J in
proceedings to decide the meaning of a rent review clause in a lease. The lease
was dated August 19 1968 and by it the plaintiffs’ predecessors, as lessors,
granted to the defendants, as lessees, a lease of a factory for 21 years from
June 24 1968. The rent was to be £9,000 a year for the first seven years, but
for the second seven years and the third seven years it was to be £9,000 a year
or a reasonable rent for the demised premises if higher. In default of
agreement such rent was to be determined by a surveyor.
In 1969 the
premises were burnt down. They were rebuilt from proceeds of fire insurance,
but, at the expense of the defendants, the factory was improved by making
certain additions. Such improvements required the licence of the lessors, which
was granted. When it came to assessing the rent for the second seven-year
period the plaintiffs claimed that the rent should be assessed as a reasonable
rent for the premises as they then were, without regard to their history. The
defendants contended that the rent should be a reasonable rent for the premises
without the improvements which they had paid for. As the parties could not
agree, a surveyor was appointed, and the plaintiffs then took proceedings by
originating summons to obtain a decision in the court as to which was the
proper basis of assessment for the surveyors to apply. Whitford J decided in
favour of the defendants, and the plaintiffs appeal. There was a second
question raised by the originating summons, but the decision on it is not under
appeal.
The relevant
terms of the lease were as follows. It was a lease of a factory at Barking,
called in the lease "the demised premises," for 21 years from June 24
1968, yielding and paying a yearly rent of £9,000 "during the first seven
years of the said term and during the second and third seven years of the term
. . . the sum of nine thousand pounds aforesaid or such sum whichever be the
higher as shall be assessed as a reasonable rent for the demised premises for
the appropriate period such assessment to be made in the following manner that
is to say: (a) Such assessment as shall be agreed between the parties hereto in
writing"–and there were certain provisions as to the date by which that
agreement should be reached–"(b) In the event of the parties hereto
failing to reach such agreement as aforesaid on or before the dates appointed .
. . then the reasonable rent for the second and third periods shall be fixed or
assessed by an independent surveyor. . . ." Then there followed provisions for the
appointment of a surveyor by agreement of the parties, or failing agreement appointment
by the president for the time being of the Royal Institution of Chartered
Surveyors.
The lessees’
covenants contained a repairing covenant, and a covenant by sub-clause (10)
that the lessees "will not com-
the demised premises without the consent in writing of the Lessor first had and
obtained." Then in sub-clause (21)
a covenant not, without consent in writing, not to be unreasonably withheld, to
erect any further building, erection or improvement, and so forth.
The licence
for the improvements which were in fact made was a document dated November 14
1969, where in clause 1 it is provided: "The Landlords hereby grant unto
the Tenants licence to execute in and upon the demised premises the several
alterations and works indicated in the plan annexed . . . ." And clause 3: "It is hereby agreed and
declared that all the Lessees’ covenants and conditions contained in the Lease
which are now applicable to the premises demised thereby shall continue to be
applicable to the same when and as altered and shall extend to all additions
which may be made thereto in the course of such alterations." The improvements and additions that were made
were substantial and cost the defendants £31,780. It is common ground that once
the improvements had been made the additions to the premises became included in
the demised premises. Considering simply the words of the clause we have to
construe, the rent review clause, I have some difficulty in seeing how a
reasonable rent for the whole of the demised premises can be assessed by
determining a reasonable rent for part of the premises.
In certain
statutes it has been expressly provided that rents to be determined by
arbitration or by the court are to be fixed without regard to improvements made
by the tenant. One such provision is in section 8 of the Agricultural Holdings
Act 1948, which relates to arbitration to assess the rent of an agricultural
holding in certain circumstances. Another is section 34 of the Landlord and
Tenant Act 1954, as amended by the Law of Property Act 1969, which relates to
the assessment by the court of the rent for a new tenancy of business premises
granted under Part II of the Act of 1954. It may be said that those provisions
indicate Parliament’s view that a tenant who has paid for improvements should
not have to pay an increased rent because of them. On the other hand, it may be
said that Parliament by making such express provisions recognised that without
them the arbitrator or the court would have to assess the rent for the premises
as they stood with the improvements.
Whitford J
took into account that if at the expiration of the lease a new lease were to be
granted under the Act of 1954 the improvements would, under section 34, fall to
be left out of account. It would be, he suggested, absurd if the plaintiffs
could obtain for fourteen years a rent bringing into account the improvements,
and then under a new lease that factor had to be left out of account. Mr Price,
for the plaintiffs, points out that this would not necessarily mean that the
rent would have to be reduced for a new lease: by 1989 all rents may have risen
so much that no reduction would occur. Whitford J also considered what the
position would have been if the tenant had allowed the premises to fall into
disrepair. If the defendants are right in their contentions here, would it mean
that if the premises were by their default in disrepair at the end of the first
seven years that disrepair would have to be left out of account in assessing
the revised rent. Mr Price’s answer to that is that in that case the tenants
would be estopped from relying on their own default.
Mr Nicholls,
for the defendants, naturally stresses the apparent unfairness to the
defendants, who by greatly improving the plaintiffs’ property would, on the
plaintiffs’ contentions, have to pay for the improvements twice over, once in
the actual cost of the works and then in an increased rent. That this is hard
on the tenants must be conceded. It is pointed out that under section 19 (3) of
the Landlord and Tenant Act 1927 the plaintiffs could not have required an
increased rent as a condition of granting a licence for the improvements. But
that section is not concerned with rent review clauses, and if the defendants
have in fact agreed to terms which work unfortunately for them it is not for
the court to relieve them of their bargain. Next Mr Nicholls says that the
purpose of rent review is simply to cope with inflation. That is no doubt the
main purpose of such a clause, interpreting the word "inflation" in a
wide sense, to include not only a fall in the value of the pound, but a general
increase in letting values. There can, however, be no doubt that under the
clause we are considering other factors would have to be taken into account when
a reasonable rent is assessed: for example, any improvements made at the
landlords’ expense or any improvements or deterioration in the neighbourhood
which affected the value of the property.
Two cases were
cited to us where the court has considered statutory provisions enabling the
court to fix a reasonable rent, and has interpreted statutory language in a way
which took into account factors other than the market value of the premises at
the time when the rent was assessed. The cases are John Kay Ltd v Kay
[1952] 2 QB 258 in the Court of Appeal, and English Exporters (London)
Ltd v Eldonwall Ltd [1973] 1 Ch 415, a decision of Megarry J. In the
first of these cases the Act concerned was the Leasehold Property (Temporary
Provisions) Act 1951, section 12 of which required the court to consider
"all the circumstances of the case."
The second authority concerned the fixing of an interim rent under
section 24A of the Act of 1954, added by the Law of Property Act 1969, and the
key words were "rent which it would be reasonable for the tenant to
pay." I do not consider that these
authorities assist in the construction of the relevant clause in the present
case.
The nearest
case to the present is another decision of Megarry J in the unreported case of Cuff
v J & F Stone Property Co Ltd, decided on December 13 1973. I shall
read some passages from the transcript of the judgment to show the similarities
with the present case and the differences, and the reasoning by which Megarry J
reached a conclusion consonant with the plaintiffs’ contention here. On p 2 of
the transcript the learned judge said:
In 1945 the
plaintiff, to whom I shall refer as ‘the landlord,’ granted a 21-years’ lease
of business premises to a company called J & F Stone Lighting & Radio
Ltd, which I shall call the ‘Lighting Company.’
The lease was at the modest rent of £275 a year, rising by stages to
£325. In 1954 the Lighting Company sought and obtained the landlord’s
permission to make certain substantial alterations to the premises; and in due
course the work was done. These were building alterations which materially
increased the area of the buildings.
In 1966, when
the lease was running to its end, there were proceedings in the Bow County
Court in which the Lighting Company sought a new tenancy under the Landlord and
Tenant Act 1954. On March 3 1966, the Court made an order for the grant of a
new tenancy at a rent of ‘£2,400 per annum with rent review at the end of
seventh year. New tenancy for 14 years to commence at termination of current
tenancy. (Under s64 of Landlord and Tenant Act).’ The rent fixed by the court no doubt gave
effect to section 34 of the Landlord and Tenant Act 1954, which included a
provision for the disregarding of ‘(c) any effect on rent of any improvement
carried out by the tenant or a predecessor in title of his otherwise than in
pursuance of an obligation to his immediate landlord.’ Having obtained that order for a new tenancy,
the Lighting Company requested the landlord to grant the lease not to it, but
to another company named J & F Stone Property Co Ltd, which I shall call
the ‘Property Company.’ That company is
the defendant to this summons. There is no evidence before me as to the
relationship between these two companies, though one would infer from their
names and the events that there is some connection.
A form of
lease was duly agreed between the landlord and the Property Company, and a
lease for 14 years was granted, bearing date November 21 1966. This was a
demise of ‘all that messuage or dwelling-house shop and premises known as
Number 80 High Street North in the London Borough of Newham together with the
yard or garden thereto.’ In accordance
with the order of the
as follows: ‘Provided also and it is hereby declared that the yearly rent
payable by the Lessee during the last seven years of the term hereby granted
shall be the sum of two thousand four hundred pounds aforesaid or such sum as
shall be assessed as a reasonable rent for the demised premises for the said
period such assessment to be made in the following manner that is to say . . .’
Then there
follow provisions substantially similar to the lease under consideration in
this case. Having cited those terms, the learned judge went on:
When the rent
review clause fell to be operated, there were at first negotiations between the
parties, but in the end a surveyor was appointed. The valuers of each party
nevertheless continued their negotiations, and there is some evidence before me
to the effect that if the improvements are to be disregarded, the rent will be
something of the order of £3,500, whereas if the improvements are to be taken
into account, the rent will be of the order of £4,600.
At the top of
p 4 the learned judge said: ". . . Mr Priday"–who was appearing in
that case for the tenant–"advanced no contention, whether based on section
34 or otherwise, that the improvements should be wholly disregarded. His case
was that while he accepted that the improvements should not be wholly disregarded,
he asserted that, to put it shortly, the surveyor should temper the effect to
be given to the improvements by what he considered to be reasonable." No such concession was made in the present
case.
The learned
judge referred to the case of John Kay Ltd v Kay, quoting from it
the words of Sir Raymond Evershed MR, thus: "The reasonable rent is
arrived at by applying the subjective test of what the judge thinks is right
and fair, as distinct, for example, from the objective test of what the evidence
shows is the market rent."
Megarry J
cited the Eldonwall case, and then continued:
I go back to
the lease. When it was executed, the improvements had already been made some
twelve years earlier. The demise plainly included the improvements as being
part of the premises. Not a word is said in the lease about the improvements.
The provision for assessing the rent is expressed solely in valuation terms.
There is nothing save the expression ‘reasonable rent’ to give colour to the
view that anything save pure matters of valuation are to be considered. The
ancient principle is that what the tenant makes part of the demised premises
enures for the landlord’s benefit, subject to rules such as those relating to
tenants’ fixtures and to any statutory qualifications of the principle. The
limited qualification made by section 34 (c) of the Landlord and Tenant Act
1954 (on which see East Coast Amusement Company Ltd v British
Transport Board [1964] AC 58) admittedly contributes nothing to the
determination of this case. Though this qualification was relevant when the Bow
County Court was determining the initial rent, the rent for the second seven
years is purely a creature of the lease. In those circumstances, it seems to me
to put an impossibly heavy burden on the word ‘reasonable’ in this lease to say
that it allows and requires the surveyor to explore questions of who paid for
the improvements, and in appropriate cases to allow some discount for this,
calculated on an unspecified basis. What sort of deduction should be allowed if
the improvements were paid for by the tenant itself, or partly by the tenant
and partly by a subsidiary company, an associated company, or a related
company, or wholly by such a company? If
one accepts to the full that ‘reasonable’ means ‘right and fair,’ one may still
say that it means ‘right and fair’ in a valuation sense, without extending it
to the whole range of moral and ethical considerations. I say nothing of the
improbable case of a reasonable rent which is to be assessed not by a surveyor
but by a philosopher or theologian; but I do say that in the absence of
provisions sufficiently indicating the contrary, a provision for a reasonable
rent to be assessed by a surveyor to be appointed, in default of agreement, by
the President of the Royal Institution of Chartered Surveyors will not cast the
surveyor loose upon uncharted and perhaps unchartable ethical seas such as
these. The word ‘reasonable’ no doubt requires the surveyor to reject a rent
which, though obtainable in the open market by reason of special circumstances,
appears to him to exceed the rent for the premises which is right and fair; but
I do not think that it does more than that.
Then later Mr
Justice Megarry said: "The question is not that of the rent ‘which it
would be reasonable for the tenant to pay,’ but that of ‘a reasonable rent for
the demised premises,’ and that, as it seems to me, is a matter not affected by
who paid for the premises or any part of them. In my view the surveyor must
take the premises as he finds them, and then determine what he considers to be
a reasonable rent for those premises, regardless of who provided them or paid
for them."
It is true
that Mr Priday had made a concession in arguing that case which may have
hampered his argument; it is true that the improvements in that case had been
made long before the new lease was negotiated; and it is also true that the new
lease was agreed upon following proceedings in court under the Act of 1954 and
the grant of a new lease by the court. But, nevertheless, I find the basis on
which Megarry J reached his decision to be directly applicable to the present
case, and while it is not binding on us, I treat with great respect a decision
of a judge so eminent in the field of landlord and tenant: and, moreover, I find
his reasoning compelling. Here too the assessment is to be made by a surveyor.
Further, the plaintiffs’ case, in my opinion, is strengthened by the terms of
the licence whereby all the conditions contained in the lease are to apply to
the premises "when and as altered" and to extend to "all
additions which may be made thereto in the case of such alteration." It is not without regret that I reach the
conclusion that the appeal should be allowed and judgment entered for the
plaintiffs.
Dissenting,
ROSKILL LJ said: The answer to the question raised in paragraph 1 of the
originating summons taken out by the plaintiff-lessors on June 9 1975 turns
upon the true construction of seven words in clause 1 of the lease dated August
19 1968: "a reasonable rent for the demised premises." That lease was for 21 years from June 24 1968
at a rent of £9,000 per annum for the first seven years, and for each of the
two ensuing periods of seven years that sum or such sum, whichever be the
highest, as shall be assessed as a reasonable rent for the demised premises for
the relevant period, that assessment to be made, if the parties failed to
agree, by an independent surveyor appointed in accordance with the elaborate
provisions in the latter part of clause 1 of the lease.
Shortly after
the inception of the lease the demised premises were damaged by fire. They were
repaired, and in addition the lessees, with the licence of the lessors,
effected extensive improvement to the demised premises at a total cost of just
under £32,000. The licence was granted on November 14 1969. Clause 3 of the
licence, to which my Lord has referred, but which I will read, provides:
It is hereby
agreed and declared that all the Lessees’ covenants and conditions contained in
the Lease which are now applicable to the premises demised thereby shall
continue to be applicable to the same when and as altered and shall extend to
all additions which may be made thereto in the course of such alterations.
The short
point that we have to decide is whether in determining the reasonable rent for
the demised premises for the second seven-year period the improvements thus
effected by the lessees at their own expense are to be disregarded. The lessees
assert, and Whitford J has held, that if those improvements are not disregarded,
they, having spent that not inconsiderable sum the benefit of which is likely
to enure to the lessors upon the expiry of the lease (unless later renewed) in
1989, will have to pay an increased rent on top of their own capital
expenditure, and the lessors will then be getting a double benefit. The
lessors, through the mouth of Mr Price, accept that that is so but assert that
that is the result of the bargain which the parties made when the lease was
entered into in 1968. It must be remembered that this lease was
which the lessees had acquired under the Landlord and Tenant Act 1954.
Two things, at
least, are clear. First, these improvements became, and are, part of the
demised premises. Secondly, all the covenants in the lease (including the
obligation to pay rent and the maintenance and dilapidations obligations) apply
to them. Mr Price’s argument accordingly has the great merit of attractive
simplicity. "Look," he says, "at the demised premises. They
include the improvements. Ask yourself what is the reasonable rent to be paid
for the demised premises, including the improvements. The parties used this
straight-forward language. Effect should be given to that language, which is that
which the parties chose. And if that construction has an untoward result for
the lessees, then that is their misfortune." Whitford J rejected this argument, saying in
effect that the independent surveyor is not only entitled to but must have in
mind that these improvements were wholly paid for by the tenants, and that,
therefore, it would be unreasonable that the landlords should expect not only
the ultimate benefit of the improvements but meanwhile an increased rent,
arising simply because the lessees had made them, with the licence of the
lessors. In the ultimate analysis I think the question resolves itself into
this: do the words "reasonable rent" simply mean a rent which is
reasonable for the demised premises, having regard only to those premises and
to no other considerations; or do they mean a rent which is reasonable for the
lessors to exact and the lessees to pay, having regard to all the circumstances
of the case, and, in particular, to the relationship between them, the relevant
circumstances being that all those improvements were effected at the lessees’
expense?
It is clear
that the parties in drawing up the lease did not anticipate that which has
happened, and accordingly have not expressly provided for the event. The court
has in those circumstances to determine what intention must be imputed to the
parties; that is, what is it that as a matter of the construction of the words
they used in the lease they must be taken to have agreed upon should this
unanticipated event occur. I confess that I shrink from imputing to them a
result which seems to me so manifestly unjust unless either the language used
or binding authority compels me to do so. Such authority as there is, though
entitled to the greatest respect, does not bind me to come to that conclusion,
and if that conclusion is to be reached it must be because of the language of
the lease which I have quoted. If one asks: "What lessees or tenants
seeking a licence to make the improvements at their own expense, which these
lessees made, would think that one result would be a contractual liability
thereafter to pay an increased rent?"
I unhesitatingly answer "None."
Mr Nichols
prayed in aid two anomalies which would follow if the learned judge were wrong.
Mr Price accepted the existence of both these anomalies. First, section 19(2)
of the Landlord and Tenant Act 1927 would have prevented the lessors from
exacting an increased rent as a condition of granting the licence to which I
have referred. Secondly, if in 1989 the Landlord and Tenant Act 1954 is still
in force and the lessees claim a new lease in accordance with its provisions,
section 34(1)(c) of that Act (as amended in 1969) would compel a court in
fixing the new rent for any future lease to disregard these very improvements
which the lessors now claim to have taken into account under the rent review
clause. Thus, if the lessors are right, the rent will be increased from 1975 to
1989 because of the inclusion of the improvement element, and then be (subject,
of course, to any other increases meanwhile due to inflation or to any other
cause) be reduced from 1989 onwards because of the effect of that statute. This
latter anomaly clearly impressed Whitford J. As to the former, it is certainly
remarkable that a rent review clause can afford so easy an escape route from
the fetters by which the lessors are bound under the 1927 Act. Clearly in 1969
when the licence was drafted the lessors could not have exacted this extra rent
as the price of granting the lease. But on the lessors’ argument they can,
through the use of the rent review clause, obtain, albeit in relation to a
later period, the same benefit. An argument founded upon anomaly is never
entirely convincing, because where parties have failed to foresee the
particular event which has happened, and the happening of that event has to be
fitted into a contractual straitjacket, it is likely that anomalies will
follow. On the other hand, when there are such anomalies as these–and Mr Price,
as I have already said, did not challenge that they existed–I find it difficult
to impute to the parties an intention to contract in such a way as to produce
such a result as is contended for by the lessors.
This
consequence can be avoided if one construes the phrase "a reasonable
rent" as meaning a reasonable rent for the demised premises as between the
parties concerned, the one to pay, the other to receive: in other words, as
something different from the open market rent, fixed by, and only by, reference
to what the independent surveyor thinks a willing lessee would be prepared to
pay to a willing lessor for the demised premises for the period in question. I
accept that in some cases what would be a reasonable rent, or what would be a
reasonable price for goods sold and delivered, should and will be fixed by reference
to open market considerations and nothing else as between a willing lessor and
lessee or a willing buyer and seller; but I know of no rule of construction
which compels that result in all circumstances, heedless of the factual
background against which the parties were contracting, which in the present
case includes the demised premises in their original unimproved state.
That being my
impression as a matter of construction, I turn to authority to see whether that
suggests a different conclusion. By far the strongest support against the view
which I am inclined to accept as a matter of construction is in the unreported
decision of Megarry J in Cuff v J & F Stone Property Co Ltd,
decided on December 13 1973 (to which Whitford J’s attention was not drawn),
where the relevant words were identical, though the factual background was
different. Beyond all doubt the reasoning of the learned judge, which on a
matter of this kind is entitled to the greatest weight and respect, is opposed
to the view that I am inclined to take as a matter of the construction of the
present lease. But I regard the different factual background as important.
First, the improvements there in question had been made some 12 years before
the date of the lease, and therefore the phrase "the demised
premises" in the lease clearly included at the date of its execution those
premises as improved 12 years earlier. Secondly, the lease had been entered
into following an application to the court under the 1954 Act at a rental, and
for a period of 14 years (including a rent review clause operative at seven
years), all fixed by the court, though it seems from the learned judge’s
judgment that the terms of the new lease, including the actual terms of the
rent review clause in question, had been a matter of direct negotiation between
the parties. Thirdly, counsel for the lessors appeared to have conceded (see
the judgment at p 4) that those improvements were not simply to be disregarded,
a concession the correctness of which I respectfully question (though Megarry J
did not) having regard to the wide terms of section 34(1)(c) and section 34(2)
of the 1954 Act. One wonders whether had that concession not been made the
learned judge would necessarily have reached the same conclusion, since the
fact that it was made, to my mind, affected the factual background against
which the crucial words had to be construed. If that construction had had to be
approached upon the footing that the improvements in question had to be
disregarded–as presumably they had been disregarded in accordance with the
statute–when the court fixed the first rent of £2,400 the learned judge might,
though I do not presume to say would, have arrived at a different
paragraph in the learned judge’s judgment suggests an approach to the
construction of the relevant words different from that which I am disposed to
take of the matter of the construction of the present lease. I naturally
hesitate to differ from Megarry J on a matter of this kind. Moreover, I do not
think, with all respect to his view to the contrary, that an experienced
surveyor would find it difficult to make the appropriate exclusions when
arriving at what he regarded as the appropriate figure for a reasonable rent.
On the other
hand, the decision of this court in John Kay Ltd v Kay [1952] 2
QB 258, to which Megarry J referred, but which he distinguished, does emphasise
the difference between a market rent and a reasonable rent, which latter rent it
was which was before the court on that occasion, albeit in the very different
context of a statute long since repealed, namely, section 12 of the Leasehold
Property (Temporary Provisions) Act 1951. The relevant passages are in the
judgment of Sir Raymond Evershed, then Master of the Rolls, at pp 266 and 267,
and of Jenkins LJ (as he then was) at pp 275 and 276. In the former passage the
Master of the Rolls said:
I have
referred to the conception of "reasonableness," and he would indeed
be a bold judge who tried to formulate with precision the significance that the
word implies. One is inevitably, sooner or later, thrown back upon generalities
of the kind I have already quoted from Lord Greene MR. This much must be clear:
the standard is that which is regarded as reasonable by the judge who tries the
case, and which is or may be something distinct from standards which may be
found to be appropriate by applying other tests.
Then on p 267
he said:
The market
value of certain premises is one thing, and as I read this Act it seems to me
that the "reasonable" rent may be something different. The reasonable
rent is arrived at by applying the subjective test of what the judge thinks is
right and fair, as distinct, for example, from the objective test of what the
evidence shows is the market value.
Jenkins LJ, in
the first of the passages to which I have referred, at p 275, says:
I cannot
agree that "such rent as the court in all the circumstances thinks
reasonable" means the rent which the property would fetch if put up in the
open market as property to let. If that had been intended by the legislature, I
cannot but feel that the section would have been framed in very different
language.
Then on p 276
he said: "In my view that form of words"–that is, the form of words
in the statute–"was plainly used with the intention of giving the court
the greatest latitude in the matter and not tying it down to the figure found
to represent the actual contemporary letting value in the open market." Finally, on p 277 he said:
If the only
power the court had was to ascertain and fix the open market rent as the
reasonable rent to be paid under a new tenancy, plainly this legislation, so
far as it is concerned with shop tenants, would be in a great measure defeated,
because the whole difficulty which has to be met is that, in conditions of
scarcity, the open market value may be forced up to a point which does exceed
all reason.
This decision
is, of course, in no way conclusive of the present case, for it is a decision
upon a statute quite differently expressed from the language of the present
lease, but it does suggest that it may in some contexts be legitimate in fixing
a reasonable rent not just to look at the open market rent, but to look at what
is reasonable between the parties themselves; what is reasonable for the
particular lessor to exact and the particular lessee to be required to pay.
Accordingly, seeing the anomalies to which the contrary view gives rise, and
the inherently unjust result (as I think) of allowing the lessors to receive
extra rent from the lessees in respect of improvements for which the lessees
alone have paid, I do not feel compelled to yield to Mr Price’s excellent
arguments. In reaching this conclusion I am conscious of the strength of the
opposite view which appeals to my Lords, and I am naturally most hesitant in
not following Megarry J’s reasoning in a field in which he is so expert.
Nevertheless, as a matter of the construction of this lease I find myself in
complete agreement with the conclusion of Whitford J and I would dismiss the
appeal. But, as I understand Sir Gordon Willmer agrees with my Lord, the order
of the court must be as they propose.
Agreeing with
Cairns LJ, SIR GORDON WILLMER said: My Lords have put me in an embarrassing
position. As a casual visitor to the court I find myself in the position of
having to give the casting vote which will determine the outcome of the appeal.
As Roskill LJ has just said, the view which I have taken is in agreement with
that of Cairns LJ. Therefore, in my judgment, this appeal should be allowed.
Like Cairns LJ, I have reached this conclusion with regret, for I am fully
conscious of the fact that prima facie the result may seem to be very
unfair on the lessees, who have made the improvements to the premises and paid
for them for the ultimate benefit of the lessors, and are now invited in
addition to their previous expense to pay a rent which will take into
consideration the very improvements which they themselves have made. I am also
conscious that this decision may be full of possible anomalies at the end of
the 21 years’ term if there should then be an application for a new lease, in
which case, by statute, the value of the improvements will fall to be excluded.
But I do not think emotive considerations such as these help in the solution of
the problem with which we are faced.
This case, in
my judgment, turns upon a pure question of construction of those few words in
the lease to which my Lord has already referred. I have come to the conclusion
that those words which have to be construed, namely, "a reasonable rent
for the demised premises," are too strong and too clear to leave room for
the argument put forward on behalf of the lessees. I need not read clause 3 of
the licence again; all I desire to say is that it does make it quite clear that
the improvements which have been added at the expense of the defendants are now
part of the demised premises.
Our attention
has been drawn, as both my Lords have stated, to the decision of Megarry J in
the unreported case of Cuff v J & F Stone Property Co Ltd
where these very same words were construed by him. I agree that the background
facts in that case were in certain respects materially different from the
background facts in the present case. But the reasoning which impelled Megarry
J to his conclusion seems to me to be abundantly applicable to the
circumstances of the present case. What Megarry J said has already been read,
and I need not read it all again, but I do stress that at the very end of his
judgment he made this remark: "The question is not that of the rent ‘which
it would be reasonable for the tenant to pay,’ but that of ‘a reasonable rent
for the demised premises’"; that is to say, the premises which now include
the improvements. I prefer the reasoning of Megarry J in that case to that of
Whitford J in the present case. It may be that if Whitford J had had the
advantage of seeing Megarry J’s judgment, as we have, he might have come to a
different conclusion.
As I see it,
therefore, the question is not as to the reasonableness of the rent as between
these two particular parties, but what is a reasonable rent for the premises,
that is to say, it is a question to be approached objectively. I venture to
stress that point, because it is not impossible that at some time in the future
this lease may be assigned. That is certainly a matter in the contemplation of
the parties, because there is a clause in the lease which deals with that
possibility. Is it to be said that a possible assignee would be in any way
concerned with circumstances peculiar to these two particular parties who are
before us now? What he would be
concerned
pointed out, the demised premises include the additions and improvements in
accordance with the licence which is stated to be applicable to the premises,
"when and as altered." That,
as has been said, means that the demised premises now include these alterations
and additions, and it is for that that a reasonable rent is to be paid. As I
said before, I find those simple words too strong and too compelling to give
room for the argument on behalf of the lessees.
That being so,
I join with Cairns LJ in the view that this appeal should be allowed.
Appeal allowed with costs in the Court of Appeal
and below. Whitford J’s order varied so as to declare that upon the true
construction of the lease the demised premises for which a reasonable rent was
to be assessed for the second and third periods of the lease included the works
of improvement carried out at the defendants’ expense and that in assessing the
said rent regard must be had to the effect of the said improvements on the said
rent. Leave to appeal to the House of Lords given on condition that rent was to
be paid from June 24 1975 at the rate of £20,000 a year and so continued until
either it was decided not to appeal to the House of Lords or the appeal was
dealt with by the House.
