Landlord and tenant — Rent review — Arbitration — Application under section 1(2) of Arbitration Act 1979 to set aside arbitrator’s award — Construction of rent review provisions — Restrictive user covenant and absolute covenant against assignment in lease — Whether user covenant to be assumed for the purpose of the hypothetical letting should, as arbitrator decided, be a radical redrafting of the actual covenant — Decisions in Law Land Co Ltd v Consumers’ Association Ltd and Sterling Land Office Developments Ltd v Lloyds Bank plc considered — Arbitrator’s award upheld and appeal dismissed
question in this case, of premises in Harlow, was for a term of 20 years from
June 24 1978, the lessors being Harlow District Council and the lease being
vested in Post Office Counters Ltd, a wholly-owned subsidiary of the Post
Office — The lease provided for rent reviews at five-year intervals and the
present proceedings related to the 1988 rent review — The original rent of the
lease was £5,000 pa — The user covenant provided that the lessee was ‘To use
the demised premises for the purposes only of a Branch Post Office and offices
in connection therewith’ — The covenant against assignment etc was of the absolute
kind — A somewhat unusual feature was an agreement by the parties before the
arbitrator as to what the reviewed rent would be if the user and restriction of
assignment covenants had been different from what they actually were — It was
agreed that, if the user covenant had restricted user to any one of a number of
particular trades or uses and if the restriction on assignment had been
qualified instead of absolute, the reviewed rent would be £10,380 pa — This was
called ‘the base rent’ and provided a quantified, albeit conditional, basis for
calculations, depending on what assumptions were made
arbitrator decided that for the purpose of the hypothetical letting the user
covenant should be assumed to be ‘to use the demised premises for the purposes
only of the business to be carried on by the hypothetical tenant’ — He relied
on the cases of Law Land Co Ltd v Consumers’ Association Ltd and Sterling Land Office Developments
Ltd v
Lloyds Bank plc in making this considerable revision of the actual covenant — This
assumption justified an increase of 7 1/2% on ‘the base rent’ of £10,380 —
However, the substitution of the absolute covenant against assignment for the
qualified covenant assumed in ‘the base rent’ warranted a reduction of 7 1/2% —
As the 7 1/2% increase and 7 1/2% reduction cancelled out, the arbitrator
determined a review rent of £10,380
judgment in the appeal Mr Gavin Lightman QC referred to the guidance on the
principles of construction given by Nicholls LJ in Basingstoke and Deane Borough
Council v Host Group Ltd and by Templeman LJ in Law Land Ltd v Consumers’
Association Ltd — The first principle was that the proper approach was to
assume that the hypothetical letting was to be on the terms of the actual
letting, including user, unless the contrary intention appeared — Second, such
a contrary intention may be afforded where the user covenant restricts user
specifically to the business of the identified original lessee whereas the rent
review clause provides for a hypothetical letting at an open market rent with
vacant possession — Third, such consequential radical redrafting of the user
covenant is permissible only where necessary to give effect to the requirement
of the rent review clause for a hypothetical open market and to avoid frustration
these principles, noting that the review provisions did require a hypothetical
letting on the open market conditions with vacant possession, and construing
user as ‘a Branch Post Office’ to mean a branch of the Post Office, not a post
office or sub-post office, the result was to justify the arbitrator’s decision
— The user covenant in its actual form would limit user to that of the original
lessee, the Post Office, and this was clearly incompatible with a letting on
the open market with vacant possession — The arbitrator’s redrafting of the
user clause for the purpose of the hypothetical lease was a correct course in
law and the lessee’s appeal was dismissed
The following cases are referred to in
this report.
Basingstoke and Deane Borough Council v Host Group Ltd
[1988] 1 WLR 348; [1988] 1 All ER 824; (1987) 56 P&CR 31; [1987] 2 EGLR
147; 284 EG 1587, CA
James v British Crafts Centre (1987) 55
P&CR 56; [1987] 1 EGLR 139; 282 EG 1251, CA
Law Land Co Ltd v Consumers’ Association
Ltd (1980) 255 EG 617, [1980] 2 EGLR 109, CA
Sterling Land Office Developments Ltd v Lloyds Bank plc
(1984) 271 EG 894, [1984] 2 EGLR 135
This was an appeal by Post Office
Counters Ltd, the lessee, under section 1(2) of the Arbitration Act 1979,
seeking to set aside the award of an arbitrator, Mr Brian Dadd, in a rent
review arbitration concerning the lease of premises on the ground floor at 1-2
Corner House, Bush Fair, Harlow, Essex, of which the respondents, Harlow
District Council, were the lessors.
Jonathan Gaunt QC (instructed by
Kingsford Stacey) appeared on behalf of the appellant; Anthony Magee
(instructed by the solicitor to Harlow District Council) represented the
respondent council.
Giving judgment, MR GAVIN LIGHTMAN QC
said: This is an application by the applicant, Post Office Counters Ltd, made
pursuant to leave granted on June 29 1990 by Mr Gilliland QC, sitting as a
deputy High Court judge, under section 1(2) of the Arbitration Act 1979 to set
aside the award dated January 25 1990 made by Mr Brian Dadd as arbitrator in a
rent review arbitration and to remit the arbitration to Mr Dadd for
reconsideration. The arbitration arises out of a rent review provision in a
lease dated August 6 1980 made between the respondents, Harlow District
Council, as landlords, and the Post Office, as tenant, of premises situated at
the ground floor, 1-2 Corner House, Bush Fair, Harlow. The lease is now vested,
by virtue of the provisions of section 60 of the British Telecommunications Act
1981 and the Post Office Counter Scheme 1987, in the applicant, Post Office
Counters Ltd, a wholly-owned subsidiary of the Post Office.
By the lease the premises were let for a
term from June 24 1978 until June 23 1998 at a yearly rent of £5,000 subject to
review. The lease contains the following provisions which are material. I have
omitted from my citation passages in the lease which are irrelevant. The second
party is referred to thus:
. . . The Post Office whose principal
office is at 23 Howland Street London W1P (hereinafter called ‘the Lessee’ which
expression shall where the context so admits include its successors in title) .
. .
In the parcels there is included:
. . . the rights and consents (a) to
place bring fit and fix (in such manner as the Lessee may deem necessary or
expedient) under upon and over the demised premises . . . cables wires ducts
pipes tubes telegraphic lines (as defined in the Telegraph Act 1878) apparatus
appliances and things (hereinafter collectively referred to as ‘Post Office
fittings’) and (b) to use maintain alter and remove all Post Office fittings
already or at any time hereinafter under upon or over the demised premises . .
.
In clause 3, being the lessee’s
covenants, the lease covenanted:
(12)
To use the demised premises for the purposes only of a Branch Post
Office and offices in connection therewith.
. . .
(15)
Not to assign underlet or part with the possession of the demised premises
or any part thereof.
In clause 5, which is the rent review
clause, it is provided:
(1)
At the expiration of the fifth tenth and fifteenth years of the term
hereby
amount equal to whichever shall be the greater of
(i)
the then rack rent value of the demised premises based on the open
market conditions with vacant possession for the unexpired portion of the said
term . . . or
(ii)
the rent payable by the Lessee to the Landlord immediately before the
relevant date of review.
. . .
(4)
Any notice under this Lease shall be . . . sufficiently served if sent
by recorded delivery or registered post or left addressed to the Lessee at the
demised premises or The Director, The Post Office, Eastern Postal Region,
Charles House, St Peter Street, Colchester CO1 1EP or such other address as
shall be notified by the Lessee for the service of notices.
. . .
(6)
In this Lease where the context so admits the expression ‘the Lessee’
shall include the plural as well as the singular the feminine as well as the
masculine and in cases where there are two or more Lessees the covenant on
their part shall be deemed to be joint and several.
The parties submitted, pursuant to the
provisions of the lease, the 1988 rent review to the arbitration of Mr Brian
Dadd. After reference to comparables both parties agreed that the reviewed rent
should be £10,380 if, in place of clause 3(12), there was a covenant
restricting user to any of a number of particular trades or uses and if, in
place of clause 3(15), there was a qualified instead of an absolute covenant
against assignment. I shall refer to £10,380 as ‘the base rent’.
Where the parties differed was in three
respects: first, over the question whether, upon the true construction of the
lease, the provisions of clause 3(12) should be imported into the hypothetical
letting; second, whether if it were so imported, what impact that would have on
the base rent; third, the impact of the covenant in clause 3(15). The landlord,
in short, submitted that clause 3(12) should not be incorporated save in an
abridged form, and the effect of such incorporation and the absolute covenant
should be to leave the reviewed rent at the base figure of £10,380. On the
other hand, the tenant said that the user covenant should be incorporated in
whole and, consequent upon its incorporation and having regard to the absolute
covenant against assignment, the base rent should be reduced by 50%.
On this application I am concerned only
with the first of these questions, namely that of construction of the lease.
The arbitrator held, in answer to that question, having first obtained the
advice of his solicitors, Denton Hall Burgin & Warrens, that the rent
review should proceed on the basis that in the hypothetical letting the user
covenant should read not as ‘To use the demised premises for the purposes only
of a Branch Post Office and offices in connection therewith’ but as ‘To use the
demised premises for the purposes only of the business to be carried on by the
hypothetical tenant’. This radical redrafting of the user covenant, as
incorporated in the hypothetical lease, was justified by the decision of the
Court of Appeal in Law Land Co Ltd v Consumers’ Association Ltd
(1980) 255 EG 617, [1980] 2 EGLR 109 and of Harman J in Sterling Land Office
Developments Ltd v Lloyds Bank plc (1984) 271 EG 894. On this basis
the arbitrator determined that the agreed base rent of £10,380 should be
increased by 7 1/2%. He then decided that the absolute covenant against
assignment required a discount of 7 1/2% of the base rent of £10,380.
Accordingly, allowing the increase and discount to cancel each other out, he
awarded a reviewed rent of £10,380.
The applicant in the originating notice
of motion challenges the arbitrator’s construction of the rent review clause
and his reliance on the two authorities. Mr Gaunt QC fairly and responsibly
acknowledged that his application, for its success, rested on this challenge
and that if this challenge failed the application should be dismissed.
The principles of construction applicable
to determining the user clause to be assumed in a hypothetical letting for the
purposes of a rent review clause are reasonably clear. First, the proper
approach is to assume that the hypothetical letting is to be upon the terms of
the actual letting, including user, unless the contrary appears. The law was
stated in this regard by Nicholls LJ in Basingstoke and Deane Borough
Council v Host Group Ltd [1988] 1 All ER 824 at p 829*:
Of course rent review clauses may, and
often do, require a valuer to make his valuation on a basis which departs in
one or more respects from the subsisting terms of the actual existing lease.
But if and in so far as the rent review clause does not so require, either
expressly or by necessary implication, it seems to us that in general, and
subject to a special context indicating otherwise in a particular case, the
parties are to be taken as having intended that the notional letting postulated
by their rent review clause is to be a letting on the same terms (other than as
to the quantum of rent) as those still subsisting between the parties in the
actual existing lease. The parties are to be taken as having so intended,
because that would accord with, and give effect to, the general intention
underlying the incorporation by them of a rent review clause into their lease.
*Editor’s note: Also reported at [1987] 2
EGLR 147 at p 149 (C-D).
Second, such a contrary indication may be
afforded where the user covenant restricts user specifically to the business of
the identified original lessee and the rent review clause provides for a
hypothetical letting at an open market rent with vacant possession. In such a
situation — and I quote from Templeman LJ in Law Land Co Ltd v Consumers’
Association Ltd at p 617:
There would be no market rent or open
market if the premises could not be used by the hypothetical lessee, and there
would be no point in offering vacant possession to the hypothetical lessee if
the premises could only be occupied and used by [the original lessee in that
case] the Consumers’ Association and its associated organisations before and
after the grant of the hypothetical lease to the hypothetical lessee.
He went on at p 623 to say:
. . . the rent review clause [in this
situation] requires the surveyor to assume that the open market hypothetical
lessee would become entitled to a lease in the form of the existing lease, save
that his name would be substituted for the name of [the original lessee] in the
opening words of the lease, and that his name would be substituted for the
words ‘Consumers’ Association’ in [the user covenant].
Third, such radical redrafting of the
user covenant is permissible only where necessary to give effect to the
requirement of the rent review clause for a hypothetical open market and to
avoid frustration. In James v British Crafts Centre [1987] 1 EGLR
139 Bingham LJ said, at p 142:
Effect must be given as closely as
possible to what the parties have agreed; otherwise there would be a disparity
between the effect of the actual lease under which the rent is after all to be
paid and the effect of the hypothetical lease, which is to provide a measure of
that rent. It would seem to be anomalous if an assignee of this term were,
following a rent review, obliged to pay rent based on an assumption that a user
was permitted because permitted to a hypothetical lessee although not actually
permitted to him. Such an anomaly should, I think, be avoided unless one is
driven to it.
Applying those principles, it is to be
noted that the rent review clause in this case does require a hypothetical
letting on the open market conditions with vacant possession. Turning to the
user covenant in the lease, the restriction is to user as ‘a Branch Post
Office.’ Two alternative constructions
of this clause are proffered. Mr Magee, for the landlords, argues that it means
a branch of the Post Office. If this is correct it is, I think, clear — and
this is fairly conceded by Mr Gaunt — that the user covenant cannot be
incorporated in the hypothetical letting for the purpose of the rent review,
for the covenant would limit user to user by the original lessee, the Post
Office, and this would be incompatible with a letting on the open market with
vacant possession. In accordance with the decisions relied on by the
arbitrator, the user covenant would require redrafting and take the form, in
the hypothetical lease, of a covenant restricting user to user for the purposes
of the hypothetical lessee’s business.
Mr Gaunt, however, argues that the phrase
‘a Branch Post Office’ is indicative only of a generic use, namely a use by
anyone as a branch or sub-post office. The user is not restricted to user by
the original lessee, the Post Office, for the purpose of its business. It
extends to user by anyone carrying on this type of business. He points out that
in the Town and Country Planning Orders 1972 and 1987 user as a post office is
a specified form of user as a shop and that in the 1987 Post Office Counter
Scheme there is recognition that the business of the Post Office may be carried
on at sub-post offices by duly appointed agents of the Post Office. If Mr Gaunt
is correct, then he says, in my view correctly, that the covenant can and
should be incorporated in the hypothetical letting, for it is in no way
incompatible with the existence of an open market letting with vacant
possession postulated by the rent review clause.
My mind has wavered between these two
constructions in the light of the persuasive arguments addressed to me by both
counsel. At the end of the day I have reached the firm conclusion that Mr Magee
is correct. In the context of the lease as a whole, it does seem to me that the
phrase ‘a Branch Post Office’ does mean a branch of the Post Office. The
principal factors which have persuaded me are as follows. First, the expression
‘a Branch Post Office’ is used. No evidence or argument has been addressed,
either to the arbitrator or to me, as to the structure of the Post Office or of
any technical
matter of ordinary English, and in the context of this lease the term appears
to connote a local office of the Post Office. It is, I think, significant that
the term used is ‘a Branch Post Office’ and not simply ‘a post office’ or ‘a
sub-post office’ and that capitals are used. It seems to me that the term
‘Branch’ is used to indicate that the user will be as a branch of the Post
Office, rather in the same way that premises may be used as a branch of a
specified bank or of a specified building society.
Second, the existence of the absolute
covenant against assignment lends colour to the user covenant and reinforces my
view on construction, for it is indicative of the scheme of the lease that
throughout its term the user shall be by the original lessee for the purpose of
its business and by no one else for any other purpose. I acknowledge that in
the definition of ‘the Lessee’ in the parties and in clause 5(6) of the lease
the term ‘Lessee’ is defined to include successors in title, and this does
suggest that the parties may have contemplated a possible assignment with
consent. I am, however, far from satisfied that the adoption of these perhaps
common form definitions to any significant extent detracts from the force of
the absolute covenant against assignment.
Third, the reference to ‘Post Office
fittings’, with the ‘P’ and ‘O’ in capital letters, in the parcels clause again
reinforces the view that user by the Post Office with Post Office fittings for
the duration of the lease was anticipated. Fourth, I have lent some
consideration to the provisions for notice in clause 5(4), but at the end of
the day I do not think that this provision adds anything either way.
I therefore reach the conclusion that the
arbitrator was correct in law in his construction of the lease and that the
tenant cannot, therefore, establish the necessary error of law to found his
claim to relief. I must therefore dismiss this application.
As an alternative to his argument on
construction, Mr Magee submitted that even if ‘Branch Post Office’ means in
effect a post office carried on by anyone, whether the Post Office or anyone
else, the same result should ensue, for the Post Office, he says, has a
monopoly and the existence of such a monopoly brings into play the two
authorities relied on by the arbitrator to the same extent as if the user
clause had restricted user to the business of the identified original lessees.
It is unnecessary to consider this argument in view of the conclusion which I
have reached on construction, but I should say briefly that I agree with Mr
Gaunt that this argument must fail for two reasons. First, as a matter of fact,
there is no finding by the arbitrator of the existence of such a monopoly or
that post offices or sub-post offices cannot be carried on by persons other
than the Post Office in premises let to them. The material before him in this regard
was to a degree contradictory and the contradiction was left unresolved. The
factual basis necessary to underlie this argument is accordingly lacking.
Second, as a matter of law it seems to me that the user covenant in the lease
can only be incorporated in the hypothetical lease for rent review purposes in
a modified form if the covenant as drawn creates an artificial limitation on
the available market to one person, the original lessee, not by reason of the
character of the business carried on by him, but specifically by restricting
user to user by that identified lessee for the purpose of his business. There
can be no modification to preclude the user clause operating according to its
terms merely because the user specified is in fact carried on by only one
person. In that case the landlord must reap what he has sown: he obtains the
rent which on the open market is available for a lease with the restrictions
which he has himself imposed on user.
For these reasons I would dismiss this
application.
