Rent review–‘Reasonable rent for the demised premises for the appropriate period’–Whether surveyor (appointed in default of agreement between the parties) should determine the rent on the basis that it reflected the value of improvements made by the lessees at their own expense–Majority of House of Lords decide that he should do so
This was an appeal
by HMS (Aerosols) Ltd from a majority decision of the Court of Appeal (ESTATES
GAZETTE, September 3 1977 p 743) that the ‘reasonable rent’ assessed on a rent
review under the terms of a lease of factory premises at Barking should include
the value of improvements which the lessees had carried out at their own
expense under a licence from the lessors. The Court of Appeal had allowed an
appeal from the decision of Whitford J that the value of such improvements
should not be reflected in the rent assessed on the review.
The lease was
for 21 years from June 24 1968, at a rent for the first seven years of £9,000
per annum and, for the second and third seven-year periods, £9,000 ‘or such sum
whichever be the higher as shall be assessed as a reasonable rent for the
demised premises for the appropriate period.’
Shortly after
the lease was granted the factory premises were destroyed by fire. The lessors,
having received some insurance money, undertook to reconstruct them, but at the
same time the lessees decided to make certain improvements, and a licence for
this purpose was granted by the lessors on November 14 1969. The improvements,
consisting of a new bay, sprinkler system and central heating, cost some
£32,000 and were paid for by the lessees.
Their Lordships
dismissed the appeal by a majority (Lord Wilberforce and Lord Salmon
dissenting).
Peter Millett
QC and Michael Rich (instructed by Tarlo Lyons & Aukin) appeared for the
appellant lessees; Leolin Price QC and Bruce Coles (instructed by Gamlens)
represented the respondent lessors.
LORD
WILBERFORCE, giving the first speech (dissenting), said that parties must have
known:
1. That a
lessee had the right to make improvements subject to the lessors’ approval,
which could not be unreasonably withheld. The lessors could not as a condition
of granting approval demand an increased rent. They did not of course do so in
1969.
2. If, when
the lease expired, the lessee was in a position to call for a new lease, the
rent then payable must be fixed without regard to the improvements (Landlord
and Tenant Acts 1954-1969).
3. If, when
the lease expired, the lessee went out, he might be entitled to compensation in
respect of the improvements to the extent to which they added to the letting
value.
These facts
would be known to any surveyor called on to fix a reasonable rent.
In the light
of this, one had to ask: would a rent, taking into account the physical
existence of the improvements and nothing more, be a reasonable rent? The answer to this was surely negative. It
was not reasonable: (a) for a lessee who had spent £32,000, at an interest cost
maybe of £3,200 pa to pay rent on the product of this expenditure for the rest
of the term–even if he got some compensation at the end of the lease; (b) for a
lessee, who on a renewed lease would pay rent on a basis which disregarded the
improvements, to pay rent during the current lease on a basis which did not
disregard them; (c) for a lessor, who could not exact an increased rent on
licensing the improvements, to obtain one at a later date by use of the rent
review clause, the purpose of such a clause being to adjust the rent for
inflation and market changes.
Clear words
might sometimes force the courts into solutions which were unjust, and in such
cases the court could not rewrite the contract. But this was not such a case.
His Lordship would not attribute any other meaning to ‘reasonable rent’ in this
context than one which took into account (or disregarded) what any lessor,
lessee or surveyor would consider it reasonable to take into account (or
disregard). In this case the surveyor should disregard any effect on rent of
improvements carried out (viz paid for) by the lessee.
His Lordship
would allow the appeal.
VISCOUNT
DILHORNE said it was common ground that the improvements made by the lessees
formed part of the demised premises. Their Lordships’ task was to decide the
meaning of the words ‘assessed as a reasonable rent for the demised
premises.’ That meaning was not altered
or affected by the fact that in 1954 Parliament decided that in assessing the
rent of a new tenancy granted under the Landlord and Tenant Act, the effect of
improvements such as those made in this case was to be disregarded. Lessors and
lessees were usually advised by lawyers on the terms of leases. If the parties
to this lease had agreed that the effect of improvements was to be disregarded
in assessing the rent, that could easily have been stated and if that had been
agreed his Lordship expected it would have been. A precedent which could be
adapted was in section 34 of the Landlord and Tenant Act 1954. In the absence
of any such express provision as Parliament thought it necessary to include in
section 34, one was not entitled to conclude that by the use of the words
‘assessed as a reasonable rent for the demised premises’ the parties were
seeking to express their agreement that in assessing the rent the effect of
improvements made by the lessees was to be disregarded.
Rent review
provisions were now commonly included in leases at the instance of lessors to
give them some protection against inflation. If they were not included,
landlords might only be disposed to let for a shorter term. Their object was to
secure that in real terms the rent payable did not fall below that initially
agreed on. In making an assessment, a surveyor would be assessing the
reasonable rent that others, not just the sitting tenant, would be prepared to
pay for the use and
separately.
It might be
said that this was treating a reasonable rent for the demised premises as the
rent obtainable on the open market and that the decision in John Kay Ltd
v Kay [1952] 2 QB 258 showed this to be wrong. That was a decision on
section 12 of the Leasehold Property (Temporary Provisions) Act 1951, which
gave the court power to grant a tenancy ‘at such rent and on such terms and
conditions as the court in all the circumstances thinks reasonable,’ and it was
held that that did not mean the rent which the property would fetch if offered
in the open market as property to let. If the wording of this lease had been
similar to that, the surveyor would, in his Lordship’s opinion, have been bound
to have regard to the particular circumstances of the tenant. His Lordship did
not think that the decision in that case afforded any support for the view that
the task of the surveyor under the lease was not to assess what would be paid
in rent for the use and occupation of the demised premises if offered to let on
the open market. What significance then was to be attached to the word
‘reasonable’? His Lordship thought it
was included to give the surveyor some latitude. He might know that if the
premises were to let, there was someone who would be prepared to offer an
exceptionally high rent for their use. The use of the word ‘reasonable’ would
enable him to disregard that.
In Cuff
v J & F Stone Property Co Ltd (Note) [1978] 3 WLR 256 Megarry J, in
considering a provision for the review of rent in a lease in all material
respects similar to that under consideration in this case, said: ‘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.’
His Lordship
agreed with Megarry J’s reasoning and would dismiss the appeal.
LORD SALMON,
dissenting, said ‘a reasonable rent’ could, and in this case did, mean
something quite different from an open market rent. Although there might be
cases in which a rent review clause had provided for review on the basis of a
reasonable rent, his Lordship had been unable to discover any such case which had
come before the courts other than the present case and Cuff v J &
F Stone Property Co Ltd. One, if only one, of the reasons why that case was
apparently thought not to be worth reporting might have been that its rent
revision clause might have seemed to be sui generis.
A lease
constituted a contract between a landlord and a tenant, binding them, their
successors and assigns, under which it was agreed that the landlord should let
and the tenant should rent premises on the terms set out in the lease. If the
lease provided for a rent review, in the same terms as the lease under
consideration, the surveyor who, in default of agreement between the parties,
assessed the reasonable rent could not do so in blinkers or in a vacuum. He
necessarily must have regard to the relevant circumstances of the case. His
Lordship knew of no other method of deciding what ‘reasonable’ meant in a
contract, whether it were ‘reasonable time,’ ‘reasonable price’ or ‘reasonable
rent.’
No doubt, in
many cases, the reasonable rent would turn out to be the open market rent of
the demised premises–but not always; certainly not if the demised premises, as
in the present case, had been extended and improved by the tenant at his own
expense. It was well settled law that the extension and improvements enured for
the benefit of the landlord–but not twice over, unless this had been expressly
agreed to by the tenant, as, for example, when the rent review clause provided
that the rent should be reviewed to coincide with the open market rent at the
date of the review.
‘I imagine,
however, that even in such a case, a tenant who proposed spending a substantial
sum of money in making additions and improvements to the demised premises
would, before carrying them out, if properly advised by his solicitors,
normally insist upon the landlords entering into an agreement that any increase
in the open market rental of the premises caused by these additions and
improvements should be disregarded in future rent reviews.’
His Lordship
agreed entirely with Roskill LJ that the reviewed rent must be reasonable as
between the parties to the lease–a reasonable rent for the lessors to accept
and for the lessees to pay, having regard to all the relevant circumstances of
the case existing at the date of the rent review.
His Lordship
thought that any competent and experienced surveyor would estimate the open
market rent of the whole of the demised premises at the date of the review and,
in fixing the reasonable rent, would discount from the open market rent that
part of it attributable solely to the additions and improvements which had been
made at the tenant’s expense. This appeared to his Lordship to accord with
common sense and justice.
His Lordship
considered that the decision in Cuff’s case was wrong and that the
grounds on which it was based were unsound. To assess ‘a reasonable rent’ did
not call for the surveyor to embark upon charted or unchartable moral or
ethical seas. All he had to take into consideration were the relevant business
factors applying to the case. His Lordship could not see that it would cast any
great burden on the surveyor to find out (as easily as the judge did) what
additions and improvements the tenant had made to the demised premises at his
own expense, and then to assess a reasonable rent on the basis outlined above.
He would allow
the appeal.
LORD FRASER OF
TULLYBELTON, agreeing with Viscount Dilhorne, said there was no dispute that
‘the demised premises,’ which originally meant the factory described in clause
1 of the lease, now meant the factory as rebuilt after the fire, including the
improvements made at the expense of the tenants, with the approval of the
landlord given in a licence dated November 14 1969. The premises would have
included the improvements without express provision to that effect, on the
principle that anything made part of the premises by the tenants enures to the
landlord, but provision to that effect was in fact made in clause 3 of the
licence.
The question
therefore became: what was meant by ‘a reasonable rent’ in the context? The reference to the demised premises was
relevant only as part of the context. In his Lordship’s opinion the words
pointed unambiguously to the result contended for by the landlords (the
respondents), and they meant the reasonable rent assessed on an objective
basis, without reference to the particular landlord or the particular tenant or
to the history of how the premises came to be built or paid for. Regard must,
of course, be had to the terms of the lease, because its provisions with regard
to duration, responsibility for repairs and other matters might affect the
rent, but their effect would be the same whoever the landlord or the tenant
might be. It was true that the words ‘for the demised premises’ did not add
anything new, because there was no doubt about the identity of the premises for
which the rent was payable, but the words were of importance because they
emphasised that the assessment was to be made by reference to the premises and
not by reference to wider considerations or what would be reasonable between
this particular landlord and tenant. His Lordship agreed with Sir Gordon
Willmer in the Court of Appeal, and with Megarry J in his opinion in Cuff
v J & F Stone Property Co Ltd that the position might have been
different if the lease had provided for the rent fixed on a review to be that
‘which it would be reasonable for the tenants to pay.’ The emphasis would then have been shifted to
the circumstances affecting the particular tenant as in John Kay Ltd v Kay.
But those were not the
He would
dismiss the appeal.
LORD KEITH OF
KINKEL, also agreeing with Viscount Dilhorne, said that in his opinion the
words ‘a reasonable rent for the demised premises’ simply meant ‘the rent at
which the demised premises might reasonably be expected to let.’ Considering that the demised premises
necessarily included the improvements, to arrive at a lower rent by reason that
the tenants paid for the latter would in substance mean that a rent for part
only of the demised premises was being assessed. The fact that the assessed
rent led to an unreasonable result as between the particular tenant and the
particular landlord did not mean that it was not a reasonable rent for the
premises. The unreasonable result was due to circumstances which were not in
contemplation when the terms of the rent review clause were agreed, and which
were therefore not expressly provided for. They might have been expressly
provided for at the stage when the licence for the improvements came to be
granted, but they were not. The construction which the tenants would place upon
the review clause involved a severe straining of the language used and was not
the correct one, in his Lordship’s view.
He also would
dismiss the appeal.
The appeal
was dismissed.
