Landlord and Tenant Act 1954, Part II–Application by Jewellers for new tenancy of shop premises–Summons in the proceedings by landlords to determine interim rent under section 24A of the Act–Tenants’ originating summons claiming a new tenancy discontinued but summons to determine interim rent for a period of about 2 years 10 months remained alive–Principles laid down by Megarry J (as he then was) in English Exporters (London) Ltd v Eldonwall Ltd, and endorsed by Goff LJ in Fawke v Chelsea (Viscount), applied–Lengthy analysis of expert valuation evidence as to rent under the hypothetical yearly tenancy postulated by section 24A(3)–Judge determined such rent at a figure somewhere between the respective valuations and then ‘tempered’ the result by reference to the existing rent in accordance with the English Exporters principles
In this case
the plaintiffs in respect of the originating summons (which was discontinued)
were the tenants Ratners (Jewellers) Ltd, and the defendants were Lemnoll Ltd,
the landlords. The present report, however, relates to the application made by
the landlords, Lemnoll Ltd, by a summons in the proceedings to determine the
interim rent under section 24A of the 1954 Act.
Michael Beloff
(instructed by Manches & Co) appeared on behalf of the tenants, plaintiffs
in respect of originating summons, respondents to section 24A summons; J E
Rayner James (instructed by Titmuss, Sainer & Webb) represented the
landlords, defendants in respect of originating summons, applicants in respect
of section 24A summons.
Giving
judgment, DILLON J said: These proceedings are concerned with shop premises
known as 128 Market Street, in Manchester. By a lease dated July 15 1968 the
premises were demised by Lewis’s Ltd, a subsidiary of the British Shoe
Corporation, to Collingwood (The County Jewellers) Ltd for a term from July 15
1968 to June 23 1977 at a yearly rent of £10,600 per annum until July 18 1972
and thenceforth £11,250 per annum until the end of the term. The reversion was
recently assigned to Lemnoll Ltd, another subsidiary of the British Shoe
Corporation, but nothing turns on that.
In May or June
of 1973 Collingwoods, the jewellers, assigned the leasehold term to the present
plaintiffs, Ratners (Jewellers) Ltd. Ratners paid a premium of £22,500 on the
assignment. They also incurred substantial expense in carrying out shopfitting
works to the premises including installing a new shopfront and fascia.
Collingwoods, in turn, when they came in, in 1968, had incurred expense on
shopfitting and, because of that, had been allowed an 8-week rent-free period
by the landlords. Before Collingwoods came in, the premises had been used as a
ladies’ outfitters by tenants of the name of Coleridge under an earlier lease.
The requisite
notice under Part II of the Landlord and Tenant Act 1954 to determine Ratners’
tenancy of the premises at June 23 1977 was duly served by the landlords and
after the
by issuing an originating summons claiming a new tenancy of the premises. On
May 27 1977 the landlords issued a summons in the proceedings asking the court
to determine the interim rent which it would be reasonable for Ratners to pay
while their tenancy of the premises continued by virtue of the 1954 Act. The
originating summons is no longer alive, since Ratners ultimately decided that
they no longer desired a new tenancy of the premises. Earlier this year I gave
them leave to discontinue their application, but the summons to determine the
interim rent remains alive and this I have to decide today.
The interim
rent has to be fixed for the period from June 24 1977 to April 14 1980 when the
statutory continuation of Ratners’ tenancy will expire. It is common ground
that the interim rent has to be fixed as at June 24 1977 and in the light of
the circumstances then prevailing.
The relevant
statutory provision as to interim rent is section 24A of the 1954 Act.
Subsection (1) provides:
The landlord
of a tenancy . . . if he has given notice under section 25 of the Act to
terminate the tenancy . . . may apply to the court to determine a rent which it
would be reasonable for the tenant to pay while the tenancy continues by virtue
of section 24 of the Act, and the court may determine a rent accordingly.
Subsection (3)
provides:
In
determining a rent under this section the court shall have regard to the rent
payable under the terms of the tenancy, but otherwise subsections (1) and (2)
of section 34 of the Act shall apply to the determination as they would apply
to the determination of a rent under that section if a new tenancy from year to
year of the whole of the property comprised in the tenancy were granted to the
tenant by order of the court.
Section 34
provides by subsection (1):
The rent
payable under a tenancy granted by order of the court under this Part of this
Act shall be such as may be agreed between the landlord and the tenant or as,
in default of such agreement, may be determined by the court to be that at
which, having regard to the terms of the tenancy (other than those relating to
rent), the holding might reasonably be expected to be let in the open market by
a willing lessor, there being disregarded
(a) any effect on rent of the fact that the
tenant has or his predecessors in title have been in occupation of the holding
(b) 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)
(c) any effect on rent of an improvement to which
this paragraph applies
and that refers
to any improvement carried out by a person who at the time it was carried out
was the tenant, but only if it was carried out otherwise than in pursuance of
an obligation to the immediate landlord.
There are thus
two concepts involved in section 24A: one is the rent payable under a
hypothetical yearly tenancy of the premises; the other is the rent payable
under the terms of the previous tenancy, to which the court is required to have
regard. The interplay of these concepts has given rise to difficulty in the
past. In the present case, however, I merely follow the decision of Megarry J
in English Exporters (London) Ltd v Eldonwall Ltd [1973] 2 Ch
415, which was approved by Goff LJ Obiter in Fawkes v Chelsea
(Viscount) [1979] 3 WLR 508. In the fixing of the yearly rent the rent
under the hypothetical yearly tenancy is to be suitably tempered by reference
to the existing rent. The existing rent is, of course, £11,250 a year.
In answering
the question what rent it would be reasonable for Ratners to pay, I have had
the assistance of the evidence of two surveyors from well-known firms, G J
Burton of Healey & Baker for the landlords and J G W Griffiths of Churston,
Heard & Co for Ratners. Each of them has merely expressed a view on what
the rent under the hypothetical yearly tenancy should be, leaving it to the
court to decide how that should be tempered by having regard to the existing
rent.
The location
of the premises is well shown in exhibit CH2 to Mr Griffiths’ report and in the
key plan which is item 1 in Mr Burton’s report. Market Street is a continuation
to the west of Piccadilly. No 128 is on the south side of Market Street at its
eastern end almost at the corner where Market Street leads out of the Piccadilly
Plaza. The corner building, which belongs to the landlords, is known as Royal
Buildings. Actually on the corner by the Piccadilly Plaza is a shop occupied by
Lewis’s Records. Then there is no 130, to which I shall have to refer; it was
originally occupied by Salisbury’s, who sold handbags and leather goods. In May
1977 they assigned their lease to Kemvend Ltd, who sold high-class Italian
artistic goods. In autumn 1979 Kemvend assigned no 130 to a company called
Lonsdale Belts & Denims Ltd which now uses no 130 for the sale of jeans.
Then there are Ratners’ premises, no 128, and then a fairly large Dolcis shoe
shop. Next to Dolcis, but a bit set back from the road, is no 122, let in
January 1977 for a term from September 29 1976 to Plumbs, who sell curtains,
furnishings and so forth. Then there is Lewis’s well-known department store. On
the north side of Market Street opposite Lewis’s, Plumbs and the Dolcis shop is
Debenham’s department store. There is no doubt at all that up until 1976 the
whole of Market Street and the Piccadilly Plaza constituted the prime
shopping area in central Manchester. In recent years, however, a major shopping
precinct known as the Arndale Centre (which I am told is the largest shopping
precinct in Europe) has been constructed at the west end of Market Street where
Market Street leads into Corporation Street, that is to say at the end of
Market Street furthest from no 128.
The Arndale
Centre was constructed in three phases. By June 1977 phase 1 was completed and
let and phase 2 was under construction. The opening date for phase 2 was in
October 1977 and the second portion of phase 2 was completed in March 1978. The
shops in phase 3 have since been completed, but the car-parking facilities in
the Arndale Centre have not yet been fully brought into use and the proposed
new bus station there has not yet been completed. Many traders from the
neighbourhood have moved into the Arndale Centre including some from Market
Street itself; Salisbury’s from no 130 and Manfields. Other traders have taken
shops in the Arndale Centre while retaining their shops in Market Street. The
Arndale Centre has undoubtedly been highly successful, whatever reservations
may have been felt at the outset. Its success has in part been at the expense
of some nearby streets, particularly Oldham Street.
Mr Griffiths
is of the view that the success of the Arndale Centre has checked the values of
sites at the east end of Market Street including no 128. Mr Burton disagrees
and maintains that the whole of Market Street, including the east end, remains
very much the prime shopping thoroughfare of Manchester. I prefer Mr Burton’s
evidence on this point and I find as a fact that the letting value of no 128
had not been adversely affected by the Arndale Centre by the date with which I
am concerned in June 1977. There are several factors to mention here. In the
first place Mr Griffiths accepts that much of Market Street remains very much
the first-class shopping area. He would draw the line at the intersection of
Market Street with Fountain Street and High Street. But this would involve
treating Lewis’s department store and Debenham’s department store as no longer
in first-class positions, and that is not correct. If, however, the line is
drawn east of these two stores then nos 122 to 130 and Lewis’s Records would be
the only shops in Market Street adversely affected by the Arndale Centre. This,
in turn, is improbable. In the second place, there is an existing bus station
in Parker Street by Piccadilly Plaza, an underground carpark under Piccadilly
Plaza, and, not over far to the east, the Piccadilly mainline railway station.
All of these generate pedestrian flow which will be likely to pass no 128. Mr
Burton’s evidence, which I accept, is that there has, on his observation, been
no fall-off in the pedestrian flow. I prefer his evidence as to the effect of
the Arndale Centre.
In calculating
the rent for a yearly tenancy of no 128 both surveyors have calculated from
comparables a rent for a term
letting. They have then made adjustments for the fact that the hypothetical
tenancy has to be a yearly tenancy and for such special factors in the terms of
the tenancy of no 128 as they consider to require adjustment. Both have used
the normal zoning method of analysing a rent. Mr Griffiths has taken as his
only comparable the letting of no 122 to Plumbs from September 1976. Mr Burton
has taken three comparables, no 122, no 130 and nos 82 to 84.
Both surveyors
agree in their analysis of the rent payable by Plumbs for no 122 before
applying adjustments for the differences between no 122 and no 128 and they
agree on some of the adjustments.
In relation to
no 130 the transaction taken by Mr Burton is the assignment of the lease by
Salisbury’s to Kemvend in May of 1977. The rent then payable under the lease of
no 130 was £10,000 per annum, but Kemvend also agreed to pay Salisbury’s a
premium at the rate of £2,000 per quarter until the next review date. If this
premium is to be treated as rent so as to produce a rental value of £18,000 per
annum at the date of the assignment, then both surveyors are agreed on the
analysis, by zoning, of that £18,000 per annum. But Mr Griffiths says that this
transaction is not comparable and is not fairly to be taken into account in
calculating a rent for no 128 because the premium may include what he calls
‘key money.’ I do not accept this
evidence of Mr Griffiths. I take the view that no 130 is an available
comparable. The decapitalisation of a premium paid on an assignment of a
leasehold term into a rental equivalent is a commonplace of valuation which is
normally reliable. There may be extreme cases where the premium is so large
that it would be misleading to convert the whole of it into rent; so large that
there must be an inference that it is in part attributable to some other
factor. But I see no such special factor in relation to no 130. On the
contrary, the premium is itself payable quarterly rather than as a capital sum
by the agreement of Salisbury’s and Kemvend because of the possibility that the
landlords might determine the lease of no 130 under a special break clause
which has no counterpart in the lease of no 128.
I am unable,
however, to derive assistance from Mr Burton’s suggested other comparable, nos
82/84. The transaction taken by Mr Burton is the granting of a lease from
October 1977 to Wrentree Ltd, who trade as Western Jeans. There are, however,
many differences for which adjustments have to be made. The lease is of the whole
building including first, second and third floors, and the shop frontage is
considerably wider than that of no 128. Beyond that there is a mezzanine area
at the rear of the ground floor extending into zone B. Mr Burton values this
mezzanine area at one-third of the rate per sq ft of zone A, whereas Mr
Griffiths values it at one-eighth of the rate per sq ft of zone A, with a
consequential increase in his rate for zone A. I do not know enough about this
mezzanine and its use to form a view as to the correct fraction of the zone A
rate to be applied to the mezzanine. I therefore disregard nos 82/84.
If the whole
of the £18,000 per annum in respect of no 130 is to be treated as rent, the
agreed analysis of this gives a rate of £28.40 per sq ft for zone A. Mr Burton
considers that this should be increased by 10 per cent or thereabouts in its
application to no 128 because of the 12-months’ break clause in the lease of no
130 which has no counterpart in the lease of no 128. He thus takes a rate per
sq ft of £31.55, 90 per cent of which is £28.40, for zone A, of no 128. Thus,
taking half the zone A rate for zone B, and agreed rates of £1.50 and £1 per sq
ft for basement sales and storage areas, he arrives at a rent of about £25,000
per annum on a letting of no 128 for a term of years, before making the final
adjustments hereinafter mentioned. In relation to no 122 the agreed analysis
gives a rate of £27.63 per sq ft for zone A. The shopfront of no 122 is set
back from the road. Both surveyors agree that if the shopfront were brought
forward and aligned with the shopfronts of nos 128 and 130 the zone A rate
would be £30 per sq ft. Both also agree, however, that the position of no 122
is better than that of no 128 because no 122 immediately adjoins Lewis’s
department store. Both agree that the adjustment for this should be a reduction
of 10 per cent in the zone A rate bringing it back to £27 per sq ft. Mr Burton
makes two further adjustments. He adds 5 per cent bringing the £27 per sq ft up
to £28.35 because the lease of no 122 imposes an obligation to contribute to
the cost of external repairs and the lease of no 128 does not. He then adds a
further 10.35 per cent because of the difference in timing in that the lease of
no 122 was granted from September 1976 whereas the relevant date in relation to
no 128 is June 24 1977. He thus arrives at a rate per sq ft of £31.28 which
would give a rent for no 128 of £24,750 a year. Mr Griffiths makes no
adjustment for timing because he considers that the effect of the opening of the
Arndale Centre would have prevented the rent of no 128 rising over this period.
In relation to the difference in repairing liability he would increase the zone
A rate by 3 or 4 per cent rather than 5 per cent.
In general I
prefer Mr Burton’s evidence to Mr Griffiths’ evidence and I have already
rejected Mr Griffiths’ view of the effect on Market Street of the opening of
the Arndale Centre. But I am not happy with the manner in which Mr Burton has
calculated his adjustment for timing, since that has involved reference only to
no 130 Market Street and averaging the increase of rent of no 130 from
September 1965 onwards. To assess the increase in rent of no 122 from September
1976 to June 1977 by reference to a letting nearly 12 years before, in 1965,
seems to me unsatisfactory. It is safer to take a smaller increase for timing
than Mr Burton has. By way, therefore, of a combined adjustment for the
difference in repairing obligation and the difference in timing, I increase the
£27 per sq ft already mentioned to £29.50 as the zone A rate for no 122.
Applying this to no 128 gives me the following: zone A, 535.75 sq ft at £29.50
= £15,804.62, zone B, 411 sq ft at £14.75 = £6,162.25; basement, stock, 1,000
sq ft at £1.50 = £1,500; staff/kitchen, 58 sq ft at £1 = £58; total £23,524.87,
say £23,500 per annum. Applying, therefore, nos 130 and 122 as comparables, I
arrive at a rent of £24,250 per annum for no 128 on a lease for a term of years
from the relevant date subject to adjustment as hereafter mentioned.
Both surveyors
are agreed that any basic rent arrived at from comparables on an assumption of
a lease for years of no 128 requires to be reduced, firstly because the
hypothetical tenancy under section 24A is merely a yearly tenancy and does not
offer the tenant the security of a term of years, and secondly because the user
clause in the previous lease of no 128 is more stringent than the user clause
in the leases of nos 130 and 122. I return to these factors later.
Mr Griffiths
asserts that there should also be a reduction because the lease of no 128
includes in subclauses (11) and (13) of the lessees’ covenants covenants to
permit the landlord to enter on notice in connection with the maintenance,
repair or alteration of the remainder of the building or any neighbouring
premises, or in connection with the development of the building or any
neighbouring premises. Mr Burton, on his market experience, regards these
clauses as being in all the circumstances no impediment to the letting of the
premises. I accept Mr Burton’s evidence, not least because in 1973 Ratners
themselves were prepared, despite these clauses, to pay a premium for an
assignment of the lease of no 128 and to lay out a substantial sum on
shopfitting and fixtures. Mr Griffiths claims that there should be a deduction
because of the adverse effect on no 128 of the Arndale Centre. This I reject
for the reasons I have already explained. Mr Griffiths also claims that any
high-class jeweller taking these premises would want to lay out a lot of money,
say £30,000, on shopfitting and alterations to make the premises suitable for
the incoming tenant’s trade. In view of this outlay, says Mr Griffiths, if the
incoming tenant could have only a yearly tenancy he would only be prepared to
pay a very low rent. Mr Griffiths consequently suggests that the rent under a
yearly tenancy
annum under the previous lease. I reject this argument. Even if under section
34(2) of the 1954 Act the effect on rent of improvements to the premises
carried out by Ratners and Collingwoods are disregarded, these are premises
which have a shopfront and are capable of occupation. I accept Mr Burton’s
evidence that a yearly tenant could be found and that it would make no
discernable difference to the rent he would pay whether the shopfront in the
premises is the present Ratners shopfront, the previous Collingwoods shopfront
or the Coleridge shopfront which was there when the premises were let to
Collingwoods.
On the deduction
to be made because the hypothetical tenancy is a yearly tenancy and not a
tenancy for years, Mr Burton says that the deduction should be 10 per cent and
Mr Griffiths says that it should be 15 per cent. As to user, the user clause
under the lease of no 128 was strictly limited to use for the tenant’s business
of high-class retail jewellers, watchmakers, silversmiths and diamond
merchants. The user clause in the leases of nos 130 and 122 contain provisos
that with the consent of the landlords, which would not be unreasonably
withheld, the premises might be used for any retail trade or business of a
quiet and inoffensive character except any which conflicts directly with any
trade or business carried on in any other part of Royal Buildings. Mr Burton estimates
that the stringency of the user clause in the lease of no 128 merits a
deduction of 5 per cent only. Mr Griffiths puts the deduction at 15 per cent,
but Mr Griffiths claims that a distinction is to be drawn between high-class
jewellers and mass-market jewellers. He says that Ratners themselves are not
high-class jewellers and though they are the assigns of the lease the business
they carry on in the premises is apparently not warranted by the user clause.
Where two
deductions fall to be made and the resultant figure has then to be tempered by
having regard to the rent under the existing lease, mathematical precision in
computing each deduction is hardly necessary. On a balance of the deductions I
deduct 15 per cent for the difference between a term of years and a yearly
tenancy and 5 per cent of resultant sum for the stringency of the user clause.
This produces a figure of £19,582 which, having regard to the existing rent, I
reduce to £17,500. Had I accepted only a 10 per cent deduction for the difference
between a yearly tenancy and a term of years I would have felt it necessary to
make a higher deduction of 7 per cent for the stringency of the user clause,
and I would then have granted a higher allowance in respect of the existing
rent, and would have reached the same ultimate figure of £17,500 per annum.
I accordingly
determine the rent which it is reasonable for Ratners to pay at £17,500 per
annum.
Ratners
(Jewellers) Ltd, plaintiffs in respect of the originating summons, respondents
to the present section 24A summons, were ordered to pay the costs of the
present summons.
