Landlord and tenant — Rent review — Lease required occupation of tenant to be disregarded — Whether goodwill of the tenant should be disregarded
By an
underlease dated June 13 1974 the respondent, Grand Metropolitan Estate Ltd,
held a term of 75 years from June 24 1969 of a public house in Basingstoke. The
underlease provided for a rent review at June 24 1990 and thereafter at 21-year
intervals, the rent review clause directing that any effect on rent of the fact
that the tenant has been in occupation must be disregarded. In accordance with
the provisions for the determination of the rent, the arbitrator determined the
rent at £41,500 pa by the profits’ method. The applicant landlord, Prudential
Assurance Co Ltd, requested that the award be remitted under section 22 of the
Arbitration Act 1950 on the ground that the arbitrator had misunderstood the
landlord’s surveyor’s submissions on the question whether the goodwill and
profit potential deriving from the trading potential of the premises as a
public house fell to be disregarded or taken into account in the arbitration.
It also sought leave to appeal the award under section 1(3) (b) of the
Arbitration Act 1979 on the ground that the arbitrator erred in law in assuming
as a matter of construction of the lease that the premises had not previously
been used as a public house. In his submissions to the arbitrator the
landlord’s surveyor had contended that a prospective tenant would increase his
bid to reflect goodwill inherent in the nature of the demised premises as a
public house (‘the overbid’). In his countersubmissions the landlord’s surveyor
stated that he had not included any goodwill built up by the actual tenant, but
that he had based his overbid on the trading potential of the premises, which
was indicated by his assessment of the fair maintainable trade level. The
arbitrator sought the assistance of a legal assessor and obtained an opinion of
Kim Lewison QC to the effect that if one is to disregard the effect on rent of
the fact that the tenant has been in occupation of the demised premises, it
follows that goodwill generated by that occupation must also be disregarded.
correct. The arbitrator correctly understood the submissions on behalf of the
landlord in deciding that the landlord’s surveyor had wrongly applied a factor
to reflect the absence of an express goodwill disregard in the rent review
clause. The arbitrator was right in law in stating that the disregard of the
occupation included the disregard of goodwill. The arbitrator’s decision that
the premises had not been used as a public house was wrong: he should have
assumed that the tenant had never been in occupation of the premises if and to
the extent that the occupation had an effect on rent. However, leave was
refused to appeal under the 1979 Act in view of a concession by counsel for the
respondent tenant that the landlord would not be issue estopped on the
question at the next review. Leave to appeal the refusal of leave under the
1979 Act was also refused.
The following
cases are referred to in this report.
Barton
(WJ) Ltd v Long Acre Securities Ltd [1982] 1
WLR 398; [1982] 1 All ER 465; [1982] EGD 265; (1981) 262 EG 877, [1982] 1 EGLR
89, CA
Cornwall
Coast Country Club v Cardgrange Ltd [1987] 1
EGLR 146; (1987) 282 EG 1664
King v Thomas McKenna Ltd [1991] 2 QB 480; [1991] 2 WLR 1234;
[1991] 1 All ER 653, CA
This is an
application by the applicant landlord, Prudential Assurance Co Ltd: (1) to
remit an arbitration award under section 22 of the Arbitration Act 1950; and
(2) for leave to appeal under section 1(3)(b) of the Arbitration Act
1979 on the ground of an error of law by the arbitrator, in an arbitration to
determine the rent of premises under an underlease dated June 13 1974 the term
of which was held by the respondent, Grand Metropolitan Estate Ltd.
Simon Berry QC
and Edward Johnson (instructed by Lovell White Durrant) appeared for the
applicant; Paul Morgan QC (instructed by Osborne Clarke) represented the
respondent.
Giving
judgment, JUDGE RICH said: By an underlease dated June 13 1974, the
applicant’s predecessors in title granted to the respondents a tenancy of
premises to be fitted out and used as a public house in the central shopping
area of Basingstoke, for a term of 75 years from June 24 1969, at a rent, for
the first 21 years, of £4,500 a year. Such rent was to be reviewed from June 24
1990 and, thereafter, at 21-yearly intervals to a current market rent as
defined in clause 2(1)(b) of the lease. That definition reads as follows:
‘current
market rent’ shall mean the gross full market rent without any deduction
whatsoever at which having regard to rental values current in the neighbourhood
the demised premises might reasonably be expected to be let at any review date
in the open market without a fine or premium and with vacant possession by a
willing landlord for the term then unexpired of this Underlease under a Lease
on the same terms and conditions in all other respects as this present
Underlease and upon the supposition (if not a fact) that the Tenant has
complied with all the obligations as to repair and decoration herein imposed
there being disregarded:
(i) any effect on rent of the fact that the
Tenant has been in occupation of the demised premises;
(ii) any effect on rent of any improvement of the
demised premises or any part thereof carried out by the Tenant at its own
expense otherwise than in pursuance of any obligation to the Landlord.
The amount of
such rent on review fell to be determined by arbitration by Mr Vincent Rex
[FRICS ACI Arb], who, by a written award, dated October 9 1992, determined it
at £41,500 pa.
He arrived at
this figure by the use of what is called a profits’ method of valuation, fixing
the rent at 50% of the assessed net profit, but increased by a so-called
‘overage’ of 16% of that rent to reflect the unusual period between reviews in
the assumed lease.
The applicant
landlord asks that this award be remitted under section 22 of the Arbitration
Act 1950 for the arbitrator to reconsider, as it has been argued in the event,
on one matter only. That matter is set out in para (3) of the notice of motion
in those proceedings and is said to be:
whether, on
the true construction of the underlease, such goodwill or profit potential
deriving from the trading potential of the demised premises as a public house
fell to be disregarded or taken into account in the Arbitration.
Such goodwill
or profit potential referred to is explained in paras (1) and (2) of the
grounds set out in the notice of motion as follows:
In his
written submission to the Arbitrator dated 27th November 1991, the said Mr C
Willis [FRICS FSCA]
— that is the
surveyor who made representations on the landlord’s behalf —
contended that
the prospective tenant, when bidding rent for a new lease of the demised
premises, would increase his bid to reflect the goodwill inherent in the nature
of the demised premises as a public house. The demised premises have an
inherent goodwill or profit potential by virtue of their status as a trading
asset. The tenant will be willing to pay more for this goodwill or profit
potential on an annualised basis by way of additional rent; (see s.8 of the
written submissions of Mr Willis).
(2) Mr Willis reiterated these contentions in his
additional comments to the Arbitrator dated 4th February 1992, drawing a
distinction between goodwill created by the tenant trading in the demised
premises and goodwill derived from the trading potential of the demised
premises.
I shall call
this alleged increase in the prospective tenant’s bid ‘the overbid’.
It appears in
Mr Willis’s valuation, as placed before the arbitrator, as 60% of the expected
net profit left after paying what I shall call ‘the basic rent’ and after
meeting the cost of the inventory used in the public house. The calculation
which Mr Willis made includes a process of capitalising over the reminder of
the unexpired term and then amortising the resultant figure over the same
period, but as this process, at least in Mr Willis’s valuation, involves
multiplying and dividing by the same figure, it is not a procedure that affects
the essence of the calculation of the overbid. The basic rent to which Mr
Willis sought to apply the overbid is assessed by what is agreed to be a
conventional method for rental valuation of public houses, usually called the
profits’ method, to distinguish it from the valuation by reference to the rents
of comparable properties.
The so-called
‘fair, maintainable trade’ abbreviated to ‘FMT’ is assessed (and valuers
practicing in this field are skillful in making such assessments) and from it a
net profit is derived as a percentage; again, that is a matter of valuing
skill. This net profit is sometimes called ‘the divisible balance’. Mr Willis
took 45% as the landlord’s share of such divisible balance as his assessment of
what he called the, ‘open market rental value assuming five-yearly review with
standard disregards’. It is, as I understand it, a reasonably conventional
figure. The tenant’s valuer actually used a higher figure of 50% and applied it
to a slightly differently defined net profit.
When he had
added the overbid, Mr Willis described the resulting figure as, ‘rental value
reflecting goodwill’. To this he applied an overage to reflect the 21-year
review pattern. Such addition is irrelevant to the present proceedings although
it is worth noticing the result of Mr Willis’s arithmetical calculations led him
to the conclusion that the open market rent would absorb all but £1,000 as his
estimate of the net profit of the public house, which was £102,000. He,
therefore, rejected his own arithmetic and adjusted his valuation down to
£92,000.
Disregarding
the overage for the 21-year review pattern Mr Willis’s rental valuation
amounted to just over 75% of his assessment of net profit and some 22.5% of the
FMT. Mr Willis had in his representation to the arbitrator identified the
overbid as a matter of dispute between the parties, for he said at para 5.1 of
his representations:
A dispute has
arisen due to a difference of opinion in respect of three matters:
(a) the estimated Fair Maintainable Turnover
(FMT) and net profits to be derived therefrom;
(b) the effect on rental value of the lack of a
lack disregard of goodwill (s34, Landlord and Tenant Act 1954);
(c) the correct approach to be adopted to reflect
the 21 year rent review pattern.
The reference
under (b) to a lack of a disregard for goodwill means that although the
definition of current market rent in the underlease, which I have read, does
require there to be disregarded matters which are to all intents the same as
are required to be disregarded by paras (a) and (c) of section 34(1) of the
Landlord and Tenant Act 1954, there is no equivalent to para (b) which for the
purposes of that Act requires that there be disregarded, ‘any goodwill attached
to the holding by reason of the carrying on thereat of the business of the
tenant whether by him or by a predecessor of his in that business’.
It is, as I
read Mr Willis’s representations, at section 8 of them, that he sets out his
case on this aspect in dispute. I describe it as ‘his case’ because the form of
the representations makes little attempt to distinguish mere argument from
valuation opinion or evidence of fact. In that section he refers to a number of
appendices containing information about the terms upon which the rents of
public houses have been reviewed and, also, upon which public houses which had
previously traded, were relet in the open market. Only one case of a letting of
a public house which had not previously, or at least not recently, traded is
referred to. And that case is not analysed for the purpose of assessing the
rental value of the subject premises.
Mr Willis
produced two arbitration decisions in which the arbitrators had determined that
their awards should reflect the value of goodwill attaching to the premises by
reason of the tenant’s
at para (b) of section 34, but did not include an equivalent to para (a)
either. It appears that, at least in the second case, concerning premises in
Bristol, a partner of Mr Willis who gave evidence for the landlord added an
overbid, in effect increasing his estimate of the appropriate landlord’s share
of the divisible balance from 35% to 40%. The arbitrator said that he approved
Mr Willis’s partner’s valuation but did not actually identify his assumption of
the divisible balance, so it is not possible to work out what percentage of the
net profit that arbitrator awarded. His award was, however, 12% of his
assessment of the FMT.
Those
arbitration awards were supported by an opinion given by Mr Robert Prior QC, as
he then was, as to the effect of the absence in the relevant leases of
provisions similar to the disregards required by section 34 of the 1954 Act. He
was asked to confirm that his opinion would be the same in the circumstances of
the provisions of the lease containing the rent review for the present
arbitration. He did so and Mr Willis placed that opinion before the arbitrator.
The tenant’s
valuer thereupon obtained a rival opinion from Mr Paul Morgan QC, which was
placed before the arbitrator. Mr Willis objected to this as ‘new evidence’, but
the arbitrator agreed to receive it, while inviting the parties to make further
representations, which Mr Willis did. The arbitrator then proposed an oral
hearing, but the parties refused it. The arbitrator thereupon decided to seek
the assistance of a legal assessor and having submitted his proposed
instructions to the parties, obtained an opinion from Mr Kim Lewison QC which,
subject to one point which is the subject of an application for leave to appeal
under the Arbitration Act 1950, is accepted by the parties.
Mr Lewison
advised, contrary to the opinion of Mr Prior, that:
If one is to
disregard the effect on rent of the fact that the tenant has been in occupation
of the demised property
— which clause
2(1)(b)(ii) of the underlease does require —
it seems to
me to follow that goodwill generated by that occupation must also be
disregarded.
I agree with
Mr Lewison’s conclusion. It is said, however, in this application, that the
arbitrator misunderstood Mr Willis’s case and so this, ‘aspect of the dispute
which has been the subject of the reference has not been considered and
adjudicated upon as fully or in a manner which the parties were entitled to’.
Those words which I have just used are quoted from a passage in a judgment of
Lord Donaldson MR in King v Thomas McKenna Ltd [1991] 2 QB 480,
the citation being found at p491C.
This claim
arises because it is said that the arbitrator did not understand what Mr Willis
had said in his additional comments on behalf of the landlords. Mr Willis there
asserted that he could summarise the basis of his submissions by the following
three points, and I shall read all the three points:
1. In this
lease there are only two express disregards: the effect on rent of the fact
that the tenant has been in occupation of the demised premises and any effect
on rent of certain improvements.
2. It is
clear that goodwill does not fall to be disregarded, save to the (limited)
extent that goodwill arises solely as a result of the tenant’s occupation of
the premises.
3. My
valuation evidence has not reflected any goodwill which has been built up by
Courage Ltd. It is based upon the trading potential of the unit which is
indicated by my assessment of the fair maintainable trade level.
The proviso to
the second point that Mr Willis makes, that the only goodwill to be disregarded
is that which arises as a result of the tenant’s occupation is, in fact, a very
substantial concession, for Mr Prior’s advice had made no such distinction, nor
had Mr Willis’ original submission sought to identify the basis of his alleged
overbid as being independent of goodwill which arises solely from the tenant’s
occupation, although Mr Prior had, in his opinion, contemplated the possibility
of there being goodwill other than that generated by the actual tenant’s
business. I read from Mr Prior’s opinion at paras 4 to 6:
4. Precisely
what percentage of rental value may be attributable to goodwill, as opposed,
for example, to that attributable to a particularly good site, may be extremely
difficult to determine with any certainty, but the problem does not arise where
the effect of goodwill does not fall to be disregarded and it is only necessary
to determine, as in this case [emphasis supplied], what a willing tenant
would pay and a willing landlord would accept bearing in mind all relevant
features of the premises including their trading history.
5. The
premises must, of course, be assumed to be vacant at the review date but that
does not require the valuers or the Arbitrator to ignore the reality that they
have in fact been used for the business of a public house up until that date.
The fact that the effect on rent of the tenant’s occupation falls to be
disregarded does not require a further disregard of the use which has been made
of the premises and the goodwill, if any, generated thereby. The disregard of
the tenant’s occupation is directed simply to the elimination of any special bid
which the tenant himself might otherwise make in order to secure his tenure of
the premises.
6. The
goodwill element in the value of the premises is not, however, to be treated as
precisely equal to the goodwill generated by the actual tenant’s business, so
as to be calculable precisely by reference to the volume of that business. I
repeat that what must be determined is what the willing tenant would pay and
the willing landlord accept having regard to their knowledge of the trading
history of the premises up to the review date.
I end my
quotation from Mr Prior’s opinion. Mr Lewison, founding himself on the judgment
of Oliver LJ, as he then was, in WJ Barton Ltd v Lonq Acre Securities
Ltd [1982] 1 WLR 398* formed a different opinion. I begin reading from his
citation of Oliver LJ’s judgment in his, Mr Lewison’s, opinion:
So what the
court has to look for is the open market rent of the premises simply as
premises at which a business of the type carried on by the tenant can be
carried on, but that rent is not to be enhanced, reduced or otherwise affected
by the tenant’s own actual occupation of the holding or by any goodwill created
as a result of the business which the tenant has carried on. To put it broadly,
the rent is to be arrived at on the hypothesis that the premises are empty and
without regard to the tenant’s previous trading.
*Editor’s
note: Also reported at (1981) 262 EG 877, [1982] 1 EGLR 89.
That is the
end of Mr Lewisons’s quotation from Oliver LJ. He himself goes on as follows:
Although that
case was complicated by the existence of a ‘disregard’ of goodwill, I consider
that the same reasoning would apply even to a case where goodwill is not
expressly required to be disregarded, because it seems to me that goodwill must
be the product of the tenant’s actual occupation (and trading). If one is to
disregard the effect on rent of the fact that the tenant has been occupation of
the demised premises, it seems to me to follow that goodwill generated by that
occupation must also be disregarded.
8. It does
not follow from this that a profits’ method of valuation is impermissible,
indeed, in cases involving public houses, the profits’ method of valuation is
the normal method, although attempts have been made, from time to time, to
value public houses on a comparable basis. But the profits’ method of valuation
can be applied to a property which has not previously been used for trading,
since it postulates that the incoming tenant will make his own estimate of the
likely level of trade he will achieve. A valuation method along those lines is
not prohibited by the mere fact that the actual tenant’s own occupation is to
be disregarded.
9. In broad
terms, therefore, it will be seen that I agree with the contentions advanced on
behalf of the tenant, and disagree with the contentions advanced on behalf of
the landlord.
10. I do not
consider that it is profitable or desirable to embark upon a discussion of the
meaning of the word ‘goodwill’, particularly since that word is not used in the
lease. The lease, in my opinion, postulates a relatively simple scenario,
namely:
(1) the public house is empty;
(2) the public house has not previously been used
as a public house;
(3) the incoming tenant will form his own estimate
of the level of profit likely to be generated from starting up a public house
venture in the property and will pitch his rental bid accordingly.
11 In his observations on the tenant’s
submissions, Mr Willis has stated:
‘My valuation
evidence has not reflected any goodwill which has been
which is indicated by my assessment of the fair maintainable trade level’.
It is, of
course, a matter for the Arbitrator to decide whether or not this statement is
true. But if it is true, and if Mr Willis has assessed the level of fair
maintainable trade on the assumption that the property is empty and has not
previously been used for trading, then, in principle, there is nothing wrong with
his method of valuation, although the precise method and the figures used are,
of course, a question of valuation opinion for the Arbitrator to decide.
I end my
quotation from the opinion of Mr Lewison.
Thus, Mr
Lewison drew specific attention to the third assertion made by Mr Willis as to
the basis of his submission and invited the arbitrator to consider whether it
was true. In his award the arbitrator at para 3.6, was citing this paragraph of
Mr Willis’s final comments and continued as follows:
3.7. The
arguments presented by Mr Willis appear to demonstrate a calculation of Fair
Maintainable Trade on the basic facts enunciated by Mr Lewison in his Opinion.
Having arrived at his view of the Fair Maintainable Trade, however, he seeks to
apply a factor to reflect the existence of an absence of express goodwill
disregard.
I understand
this paragraph to mean that the arbitrator did accept that Mr Willis had
assessed the FMT without regard to the goodwill generated by the tenant. Once
Mr Willis had arrived at his view of FMT, however, the arbitrator concludes
that Mr Willis then sought to apply a factor to reflect the existence of an
absence of express goodwill disregard. That conclusion seems to me to have been
an entirely proper conclusion from the consideration of the cases asserted by
Mr Willis to demonstrate the existence of an overbid in the market, although
never on the scale which he sought to apply in the present case.
All the cases
set out by Mr Willis were cases where there was some possibility of goodwill
generated by the actual trade of the tenant subject to review, or of his
predecessor in the case of new leases. The concept of an overbid as thus
presented by Mr Willis’s evidence depends on the willingness of the tenant to
pay for the value of the business in addition to the value of the premises.
The arbitrator
is therefore right to say that, ‘Mr Lewison had advised that Mr Willis was
wrong to seek to achieve [or I would say rather ‘to value’] such an element of
goodwill’. And the arbitrator, in saying that, says by way of contrast at para
3.8 of his award that he is, ‘None the less in no doubt as to Mr Willis’s
opinion of FMT’. That is, the arbitrator accepted Mr Willis’s basis of
assessing FMT without recourse to actual accounts, but rejected awarding to the
landlord a part of what on ordinary valuation principles he would treat as the
tenant’s share of the divisible balance. Thus, in the sense in which the
arbitrator is, in my judgment, properly to be understood as using the words, he
was right in finding at para 3.11 of his award that, ‘As a matter of law the
disregard of occupation in this matter [emphasis supplied] includes the
disregard of goodwill’.
There is
before me an application for leave to appeal under the 1979 Act on the ground
that this paragraph of the award contained an error of law. If one notes that
the arbitrator’s finding is directed only to the effect of the disregard of
occupation in this matter, one can see that there is no such error for
the arbitrator has already concluded in para 3.7 that the overbid is seeking
to, ‘apply a factor to reflect the absence of express goodwill disregard’, and
that it falls to be disregarded as a consequence of disregarding occupation if,
as the arbitrator says in para 3.9 of his award, ‘The correct assumptions are
adopted’.
It would
perhaps have been helpful if the arbitrator had seen fit to make his reasons
clear, but I do not find difficulty after studying Mr Willis’s submissions in
seeing that the arbitrator had allowed a proper share of potential profit by
fixing the landlord’s share of the divisible balance, as the arbitrator has
found it to be, at 50% instead of the 45% for which Mr Willis contended,
although in Mr Willis’s case, subject to the adding of a further share of the
tenant’s share which could only be for the goodwill of an actual business.
I accept that
it is not immediately easy to see from the wording of the award precisely what
consideration the arbitrator gave to this aspect of the dispute. Even, however,
if I had been satisfied that he had not properly understood what Mr Willis was
submitting, and I think the truth is rather that Mr Willis had not himself
properly thought through what it was that he was submitting, I still would not
have thought it inequitable to allow the award to take effect without remitting
it for further consideration by the arbitrator. Any failure to consider Mr
Willis’s point arose from the agreed adoption of a procedure which is not
conducive to distinguishing issues of fact and valuation judgment from
argument. The procedure turns the practice of the court on its head by treating
counsel’s opinion as evidence rather than inviting argument which is more
likely to ensure that issues, whether of law or fact, are clearly identified
and joined. But the chosen procedure no doubt has advantages of economy and
speed and that, no doubt, is why the parties agreed it and even rejected the
arbitrator’s proposal for oral hearings.
It would not,
however, now be fair to remit the matter without giving opportunity for a
reopening of the most fundamental issue, which was singularly little explored
in the words of any of those dealing with the matter, what is the right share
of any divisible balance to allocate to rent?
To remit on terms that the whole arbitration was to be reopened and also
that further evidence should be received will, however, offend, in my judgment,
doubly against the presumption in favour of finality with which I would
approach the exercise of any discretion, even if I did think that the
applicants were entitled to make the complaint which they do.
The further
reason for refusing to exercise any discretion even if it arose as, in my
judgment, it does not, is the view which I have formed that a landlord has, on
the arbitrator’s findings as to the FMT, been given a very full rent. The
arbitrator assessed the FMT at £276,500 and fixed the basic rent disregarding
overage at £35,750. That is only just under 13%. That exceeds the proportion of
FMT awarded in 10 out of 15 of the cases analysed by Mr Willis in his appendix
E to his submissions where he scheduled transactions said to included the
benefit of all goodwill. But it appears to me that on that evidence the
arbitrator awarded the landlord a very full rent.
I therefore
refuse to remit the award under section 22 of the 1950 Act and I would refuse
leave to appeal on the ground that the finding of the arbitrator at para 13.11
of his award contains any error of law.
There remains
one other aspect of the award in respect of which the applicant also seeks leave
to appeal under section 1(3)(b) of the Arbitration Act 1979. The
question of law is set out at para 1(d) of the notice of motion under that Act
in the following terms, whether on the true construction of the underlease the
arbitrator was required to assume in the arbitration that the demised premises
had not previously been used as a public house. That assumption was made by the
arbitrator on the advice of Mr Lewison at para 10 of his opinion which I have
already read. He repeated Mr Lewison’s advice at para 3.5 of his award and said
that he had adopted it. I think there is at least a strong case for saying the
advice was wrong or at least insufficient, but whether it is right or wrong I
cannot grant leave under section 1(3)(b) of that Act unless I, ‘consider
that having regard to all the circumstances the determination of the question
of law concerned could substantially affect the rights of one or more of the
parties to the Arbitration agreement’.
The alleged
error is that Mr Lewison’s formulation may be construed as involving a positive
assumption that the premises had been empty, unused and unlet for 21 years from
the commencement of the lease. If so construed, I would think it wrong, but I
do not think that it was, in fact, so construed. There is no issue that the
arbitrator was bound to assume that the public house was empty at the valuation
date, vacant possession is specifically required to be assumed. Likewise, there
is now no dispute that the disregard of the effect on rent of the fact that the
tenant has been in occupation excludes from valuation any goodwill that arises
solely as a result of the tenant’s occupation. Mr Willis, for the purposes of
the valuation, said in terms that: ‘Whether or not Courage Ltd or any other
tenant had been in
Certainly
there is no sign whatever of the arbitrator having adjusted his valuation in
reliance on an assumption that the public house had been unused since the
beginning of the lease rather than merely not adding to the open market value
to reflect the effect on rent of the actual use over that period. I am
certainly not satisfied that the determination of the issue of law would affect
the rights of the parties so far as the present arbitration is concerned
substantially or, indeed, at all. If, however, the landlord were estopped from
arguing that the premises at the next rent review are not to be valued as if
they had been empty and unused from 42 years, that could well have a
substantial effect upon their rights at that date. Whether, if I refuse leave,
they would be so estopped, is not a decided matter, but Mr Morgan QC, on behalf
of the tenants, has undertaken that they will enter into whatever documentation
the landlords may reasonably require in order to ensure that no issue of
estoppel can arise.
I deal with
the matter on that basis and refuse leave, subject only to liberty to apply in
respect of that undertaking.
The
undertaking is, however, in my judgment, essential because I do think that
there is here an error of law, not because what Mr Lewison said is wrong but
because it is not quite complete. I think the correct formulation of the effect
of the disregard is not that it is to be assumed that the public house has not
previously been used as a public house, but rather as Scott J put it in Cornwall
Coast Country Club v Cardgrange Ltd [1987] 1 EGLR 146* at p151E
that:
. . . the
arbitrator should assume that ‘the [tenant has] never been in occupation of the
premises if and to the extent that the occupation had an effect on rent‘.
*Editor’s
note: Also reported at (1987) 282 EG 1664.
I emphasise
the words, ‘if and to the extent that the occupation had an effect on rent’. I
recognise that Scott J, in answering a further question in the very unusual
circumstances of that case, went on to say on the basis of the disregards in
that case that the particular casino premises were to be assumed not to have
been used as a casino. I do not seek to consider whether in the circumstances
of that case the question posed by the parties was necessarily answered or
still less whether on the assumption that it was necessary to answer, Scott J
answered it correctly. There was an express requirement to disregard any addition
to value attributable to the gaming licence which raised special problems in
that case.
I, therefore,
merely say this. There is, in my judgment, too a great a tendency in quite
ordinary rent review cases for the parties and their advisers, both valuers and
lawyers, to engage in legalistic debate as to the assumptions which the
arbitrator is to make in the particular circumstances of a particular review.
Often the process of asking questions about the required assumptions leads to a
development of the assumptions beyond what is required by the words of the
review clause or is necessary for the determination of the rent. Scott J drew
attention to this danger when he said at p149L of the Cardgrange case
that:
. . . a clear
distinction [needs] to be drawn between, on the one hand, hypothetic
assumptions directed by the language of the rent review provisions and, on the
other hand, allegedly consequential assumptions which, it is argued, must
follow the former assumptions. May I try to explain the distinction I have in
mind?
The
hypothetical lease will carry with it the right to vacant possession. It must,
therefore, be assumed that on Decembr 8 1983 30 Curzon Street will be available
for occupation and use by the hypothetical lessee. It is a necessary assumption
that Crockford’s right of occupation, as licensee of the defendant, came to an
end on that date. It must also be assumed Crockford’s actual occupation came to
an end on that date.
Mr
Lyndon-Stanford argued that if the hypothetical assumption were true, Crockford’s
would, in the real world, have established themselves elsewhere and have
obtained a transfer of the 30 Curzon Street gaming licence to other premises.
This, in my opinion, is to confuse reality and hypothesis. Crockford’s
departure from 30 Curzon Street has not happened. It is a hypothetical
assumption, demanded by the rent review provisions. The rent review provisions
do not demand any assumptions at all about Crockford’s situation on or after 8
December 1983 other than its departure from 30 Curzon Street. Crockford’s
establishment elsewhere is nothing to do with the real world. It is simply
another hypothesis. And it is not a hypothesis required by the rent review
provisions.
A similar
approach should, in my view, be applied to the ‘disregards’. The ‘disregards’
are required to be left out of account. They are to be assumed to be
disregarded by the hypothetical lessee in deciding what rent to offer and by
the hypothetic lessor in deciding what rent to accept.
Disregard (a)
— I should
make clear that disregard (a) is any effect on rent of the fact that the tenant
or his predecessor in title or some associate of the tenant has been in
occupation of the holding —
requires any
effect on the rent of the fact that the defendant or Crockford’s have been in
occupation of 30 Curzon Street to be disregarded. Disregard (b) requires any
goodwill attached to 30 Curzon Street by reason of the gaming club user since
March 1 1983 to be disregarded. Disregard (d) requires any addition to the
rental value of 30 Curzon Street attributable to Crockford’s gaming licence to
be disregarded. None of these disregards requires, in terms at least, any
positive hypothetical assumption to be made about the defendant or about
Crockford’s.
I could, no
doubt, usefully continue reading, but I would prefer simply to say this. In the
real world, parties engaging in a real transaction do not, in fact, necessarily
know everything that could conceivably affect their decision as to the proposed
transaction. They assume that they know enough. If the tenant has not been in
occupation then presumably either the premises have been unoccupied or they
have been occupied by someone else. Mr Morgan would say that the arbitrator may
not assume someone else, therefore, they must be assumed to have been empty or
unused. I agree the arbitrator may not assume someone else. No more, however,
may he, in my judgment, assume that they were empty. No one knows. Such
ignorance is common enough, for example, when premises are auctioned. All that
is to be assumed is that any effect on rent of the actual tenant’s actual
occupation is to be disregarded. No other unrequired assumption is to be made
even if failure to make all assumptions leaves some aspect of the history of
the premises unknown.
I do not
believe that treating the history of occupation as unknown and irrelevant will
present any difficulty to the arbitrator. I do, however, believe that a
requirement to make a superficially logical but unintended deduction from what
he is required to disregard might lead the arbitrator to a conclusion as to the
appropriate rent quite remote from the parties’ intentions. The law does not,
in my judgment, require such deductions — by deductions, of course, I mean
logical deductions, not deductions in quantity of rent.
The statutory
disregards are rules for valuation not clues to be used to compile a history of
the hypothetical transaction. If Mr Lewison’s opinion is construed as
suggesting that he does so require, then I would for my part have said that he
fell into error. The question, however, does not properly arise because I have
refused leave on other grounds.
I shall
dismiss the application for remission with costs. I shall dismiss the
application for leave also with costs. The reason why I say that the respondent
should have the costs and full costs of both is that although I appreciate that
the applicant might have partly succeeded but for the concession that was made
and the undertaking given in the course of the proceedings by Mr Morgan, first,
that was only a small part of the totality of the subject-matter of the
application for leave to appeal and, second, although raising an interesting
question it is, in my judgment, on the particular ultimate award an unreal
judgment because I have only held that in my judgment Mr Lewison’s opinion was
wrong if it was construed in a way in which I do not think it was in fact
construed by the arbitrator. In those circumstances, it appears to me that the
applications are necessary and the applicant should pay all the costs.
I shall refuse
leave in the remission matter perhaps with a lighter heart because I know that
if I am wrong the Court of Appeal has the power at least to grant leave. But
what weighs with me particularly is
which has been made on behalf of the applicants even if I have been satisfied
that the complaint itself was justified.
So far as the
application for leave to appeal against my refusal for leave under the 1979
Act, I reach a conclusion adverse to the applicant only with a little
reluctance because it is an extra responsibility to shut the applicant out from
further redress in case I was wrong. But having formed the view that I have
that a question of law could not substantially affect the rights it was not a
question of discretion at all and I, therefore, do not think it an appropriate
case on which to have the matter a subject of further consideration by the
Court of Appeal in circumstances where the parties have elected a procedure
designed to bring finality to the determination of the issues between them, so
I refuse leave on both cases.
