The rent review clause in McDonalds Real Estate LLP v Arundel Corporation [2008] EWHC 377 (Ch); [2008] PLSCS 153 was drafted to deal with a typical problem. The restaurant chain entered into a lease of a warehouse that was to become its first
The parties dealt with this by directing the valuer to make two different valuations. The valuer was required to place a rental value on the premises and to compare that figure with the rent payable for a modern single-storey warehouse comprising 20,000 net useable square feet, with ancillary offices and all usual amenities. The rent was to be reviewed to whichever was the higher of these figures.
The restaurant chain argued that “warehouse” defined the physical structure and its use as a place where goods are stored. The landlord claimed that the word described a physical entity, without defining the use to which that physical entity might be put. It argued that the valuer should assume that the premises could be put to retail use, which would command a higher rent.
The judge noted that the lease directed the valuer to assume that the warehouse had been constructed in accordance with all statutory consents. He ruled that this must include planning permission: but planning permission for what? Should the valuer assume that the building had planning permission for use within Class A1 or B8? The judge reminded himself that he was dealing with a counter-factual assumption and decided to apply the presumption of reality. Shortly stated, this means that a rent review valuation should adhere as closely as possible to reality and depart from it only to the extent that the rent review clause so requires, either expressly or by necessary implication.
Applying that presumption, the lease did not contain any express or implied assumption that the warehouse enjoyed planning permission for retail use. As a result, the court held that the rent review clause required the valuer to value a warehouse with planning permission for B8 storage. However, this did not mean that the building had to be used for that purpose for ever. In the real world, the occupier would be entitled to apply for planning permission for retail use.
The rent review clause directed the valuer to disregard any restriction on the permitted use of the premises. In addition, the user clause in the lease permitted retail use with the landlord’s consent (which was not to be unreasonably withheld). Consequently, the valuer was not precluded from taking account of the potential for retail use when assessing the warehouse rent.
This case shows how difficult it is to cover all eventualities when drafting rent review clauses that require valuations of hypothetical premises. Time and cost permitting, it is advisable to obtain a second opinion from the surveyors acting for the parties and to check how they might apply the rent review provisions in such cases.
Allyson Colby is a property law consultant
