Landlord and tenant — Construction of rent-review clause in lease — Rent at review dates to be 75% of the ‘full current market rack rental value’ of the demised premises — Demised premises, let for 99 years from 1969, consisted of a warehousing estate of 130,000 sq ft comprising 32 units, 18 of which were let at the date of the lease — It was agreed for the purposes of the summonses before the court that the ‘full current market rack rental value’ was the rent at which the demised premises would be let as a whole on a single lease by a hypothetical willing landlord for a term of years beginning on the relevant review date — It was also agreed that the rent should be ascertained on the basis that the premises were being let with vacant possession without the benefit of any of the actual subleases to which the premises might be subject at the review date — Landlord submitted that on the basis of the hypothetical letting required by the rent-review clause the hypothetical lessee would be likely to be an investor seeking an income from the subletting of the units — The 25% discount must be taken to cover such matters as the costs of arranging the sublettings and periods when units were not let — To avoid a double discount the full current market rack rental value must refer to the gross rent receivable from the sublettings — Tenant contended that the ‘full current market rack rental value’ had its ordinary meaning of the rent which a hypothetical tenant, taking the entire premises under a single lease, would pay — The judge preferred the tenants’ contentions — The words should be given their ordinary meaning and there may be other reasons for the 25% discount than that suggested by the landlord — The rental value of the demised premises on the open market must be ascertained having regard to all the persons likely to be in the open market, whether investors or persons wishing to occupy the premises, or part of them, on their own account — Declarations accordingly
These were two
originating summonses for construction, the plaintiff in one being the tenant,
Bryant Samuel Properties (Coventry) Ltd and the defendant being the landlord,
Royal Exchange Assurance, and in the other the landlord being the plaintiff and
the tenant the defendant. The premises consisted of just under 130,000 sq ft of
land in Strawberry Lane, Willenhall, Wolverhampton, with the buildings thereon,
known as the Strawberry Lane Industrial Estate.
DMW Barnes QC
and JC Harper (instructed by Herbert Smith Co) appeared on behalf of the
landlord, Royal Exchange Assurance; Derek Wood QC and Miss Joanne Moss
(instructed by Evershed & Tomkinson, of Birmingham) represented the tenant,
Bryant Samuel Properties (Coventry) Ltd.
Giving
judgment, PETER GIBSON J said: I have two originating summonses before me. In
one the plaintiff is Bryant Samuel Properties (Coventry) Ltd (‘Bryant Samuel’)
and Royal Exchange Assurance (‘Royal Exchange’) is the defendant; in the other
Royal Exchange is the plaintiff and Bryant Samuel is the defendant. By those
originating summonses the court is asked to determine the construction of a
rent-review clause under a lease.
The lease is
dated May 21 1969. It was made between Royal Exchange as landlord of the first
part, David Charles Property Investments Ltd as tenant of the second part, and
David Charles Ltd as surety of the third part. By the lease Royal Exchange
demised to the tenant just under 130,000 sq ft of land in Strawberry Lane,
Willenhall, Wolverhampton, together with buildings then recently erected or
then in the course of erection thereon and known as the Strawberry Lane
Industrial Estate. The tenant was to hold the same subject to, so far as
material, leases, particulars of which were set out in the second schedule to
the lease. Eighteen of the 32 units were then let. The term of the letting by
Royal Exchange was 99 years from May 21 1969. The rent was £34,600 per annum
subject to 14-year rent reviews.
The tenant’s
covenants included in clause 2(10) a covenant against alteration or building
without the written consent of the landlord, such consent not to be
unreasonably withheld; in clause 2(11) a covenant against change of user of the
demised premises from warehouse units without the prior written licence of the
landlord; and in clause 2(20) a covenant against assignment or underletting or
parting with possession without the prior written consent of the landlord, such
consent not to be unreasonably withheld.
Clause 6
contained the provisions for rent review. Clause 6(a) provided that the rent
should, at the option of the landlord, be revisable at rent revision dates at
each of the dates of expiration of the 14th, 28th, 42nd, 56th, 70th and 84th
years of the term, and the rent payable for the periods following the rent
revision dates should be:
(i) Thirty-four thousand six hundred pounds
(ii) the rent then payable or
(iii) seventy-five % of the full current market rack
rental value of the demised premises at the rent revision date commencing such
period whichever shall be the greater.
Clause 6(b)
contained three matters to be disregarded in ascertaining the full current
market rental value. I need refer to only the first two:
(i) any effect on rent of the fact that the
Tenant has or its predecessors in title have been in occupation of the holding
(ii) any goodwill attached to the holding by
reason of the carrying on thereat of the business of the Tenant (whether by the
Tenant or a predecessor in title in that business).
Clause 6(c)
provided that the landlord could give the tenant a notice of the rent the
landlord proposed; and clause 6(d) provided for the service of a counternotice
by the tenant either agreeing to pay the proposed rent or calling upon the
landlord to agree a new rent not less than the previous rent and, in default of
agreement, the amount of rent was to be referred to a surveyor appointed by the
president of the Royal Institution of Chartered Surveyors to act as an expert.
Certain
improvements were made to the demised premises and on October 21 1971 it was
agreed between the original parties to the lease that the lease should be
varied so as to substitute the figure of £38,500 for the figure of £34,600
where it appeared in the lease.
In 1976 the
residue of the term of the lease was assigned to Bryant Samuel, which thereupon
became tenant. The first rent revision date was March 25 1983. On September 22
1982 Royal Exchange served a rent-review notice specifying £225,000 as the rent
it proposed. At the rent revision date the 32 units were fully sublet for a
little over £169,000. Bryant Samuel did not agree the proposed rent and the
matter, therefore, falls to be determined by the expert. But the parties have
not been able to agree the correct approach to be adopted by the expert on his
valuation. Hence the applications to this court.
The
rent-review clause is in what might be termed an unsophisticated form, lacking
several of the elaborations commonly found in a modern rent-review clause, in
particular as to the basis of the rent review. However, the parties are agreed
on certain propositions on or consequent upon the rent review and, as I am not
called upon to determine their correctness, I shall simply record them without
comment:
(1) for the purposes of clause 6 of the lease,
the ‘full current market rack rental value’ of the demised premises is the rent
at which the demised premises would be let as a whole on a single lease by a
hypothetical willing landlord to a hypothetical willing tenant for a term of
years commencing on the relevant review date and expiring on March 21 2068 upon
the terms of the lease but disregarding the matters specified in clause 6(b)
thereof;
(2) the said rent is to be ascertained on the
assumption that the premises are being let as aforesaid with vacant possession
and without the benefit of any subleases to which the demised premises are or
may be subject on the relevant review date;
(3) the rent payable by Bryant Samuel as lessee
for a period of 14 years from March 25 1983 under the lease is 75% of the full
current market rack rental value of the demised premises ascertained in
accordance with the two previously mentioned principles as at March 25 1983.
What the
parties cannot agree is a fourth proposition put forward by Royal Exchange, as
to the meaning of the expression ‘full current market rack rental value’. In
its final form the proposition advanced by Mr Barnes on behalf of Royal
Exchange was this: the ‘full current market rack rental value’ means an
aggregation of the market value of the individual units of the demised premises
as they form part of the demised premises at the rent revision date, whether or
not such units are sublet at that date, and no further deductions from such
total sum for the purposes of landlords’ costs, fees, expenses, profit or other
matters may be made other than the 25% deduction allowed for in clause
6(a)(iii). Mr Barnes submits that the court should make a declaration in that
form.
The reasoning
underlying that submission is this. The demised premises consisted of a
warehousing estate of 32 units, rather more than half of which were, at the
date of the lease, sublet. On the hypothetical letting required by the
rent-review clause, the hypothetical lessee would be likely to be an investor
seeking an income from the subletting of the units. Such an investor would, in
bidding for the demised premises, take account of the gross income receivable
from the sublettings of the units and would not be prepared to pay to the
landlord a rent equal to that gross income. He would want a discount therefrom
to cover such matters as his own costs and expenses in making the sublettings,
the risk that there might be periods when units were not let, the risk of
defaults, and the lessee would want to make a profit on the transaction. The
25% discount must be taken to cover those matters. To avoid a double discount
for the same matters, the full current market rack rental value must refer to
the gross rent receivable by the hypothetical lessee from sublettings.
Mr Barnes
submitted that that proposition was justified, having regard to:
(1) the factual context for which he relied only
on the facts as to the state of the demised premises at the time of the lease,
which facts appeared in the lease;
(2) the context in which the phrase ‘full current
market rack rental value’ appears in the lease, that is to say that it follows
the words ‘seventy-five per cent of’; and
(3) the use of the word ‘full’ which, it is
suggested, meant ‘undiscounted’.
Mr Wood
appearing for Bryant Samuel submitted that the words of the lease were clear
and the position was simple. The ‘full current market rack rental value’ of the
demised premises had its ordinary meaning of the rent which the hypothetical
tenant taking the entire demised premises under a single lease would pay. It is
for the expert to determine on ordinary valuation principles what that amount
is. Once that amount is ascertained, Bryant Samuel must pay 75% thereof as the
rent.
Attractively
though Mr Barnes presented his submissions, I am satisfied that Mr Wood’s
submissions are to be preferred. What clause 6(a)(iii) requires to be
ascertained first is the full current market rack rental value of the demised
premises at the relevant rent revision date. The demised premises are the
entire premises let by the landlord to the tenant, regardless of whether the
tenant has in fact sublet all or any of the units forming part of the demised
premises, as the parties are agreed that the premises are to be valued with
vacant possession. It is common ground that the valuation exercise contemplated
by the clause involves a hypothetical single letting by a hypothetical lessor
to a hypothetical lessee. The value is measured by the rent payable by the
lessee to the lessor on that letting. It is well established that the market in
which such hypothetical letting takes place is the open market, from which no
one is excluded. Investors seeking an investment income may well be in such
market and will, no doubt, measure their bids having regard to the income they
will receive and the costs, risks and profit to which Mr Barnes referred. But I
find it impossible to say that clause 6(a)(iii) was framed on the footing that
an investor would be the lessee. Why should not the hypothetical lessee be a
person wanting to occupy the whole or part of the demised premises for his own
purposes when the lease itself expressly contemplates that the tenant might
occupy the holding (clause 6(b)(i)) and might carry on business thereat (clause
6(b)(ii))? In this context it must be borne in mind that the lease is for a
term as long as 99 years and that the lease expressly contemplated that there
might be changes both in user and to the state of the buildings, albeit only
with the landlord’s consent. The parties cannot be taken to have contemplated
that, throughout the term, the premises would only be sublet by the tenant for
warehousing use to provide the tenant with an income.
Mr Barnes
accepts that the premises might be let to a tenant wanting to occupy all or
part of the demised premises and his proposition, referring as it does to
market value, is intended to cover this possibility. But, to the extent that
the hypothetical tenant might not be an investor but a person wanting to occupy
the premises for himself, the suggested justification for the 25% discount,
that is to say to allow for costs, risks and profit of an investor, would go.
The parties have not explained in the lease why the 25% discount has been
allowed or what it was intended to cover. Royal Exchange, unlike Bryant Samuel,
was an executing party to the lease; but it has not sought to put in any
evidence of the factual background to the lease from which the intention of the
parties might be ascertained objectively. I have no material on which I could
form any view as to whether 25% is a likely estimate of the sort of discount an
investor would require from gross rents. It seems to me somewhat improbable that
the rent-review clause was framed on the basis that the tenant would be willing
to commit himself for 99 years to a rent formula under which, as an investor,
he would receive a fixed percentage discount of 25%, when the matters suggested
as being covered by the discount are somewhat imprecise and liable to
fluctuation over the years. If the 75% of the gross rents is intended to
produce the amount which an investor might be prepared to pay, why did the
draftsman not simply use the ordinary formula of the open market rent without
any reference to a discount?
So, too, from
the landlord’s point of view, the rigidity of the suggested meaning of the rent
formula would appear unsatisfactory, given the possibility at some future rent
revision date that a higher rent might be obtainable from a tenant occupying
the premises for his own business. Further, as Mr Wood pointed out, there could
be many reasons other than that suggested by Mr Barnes why a 25% discount was
given. From the lease, it appears that some of the buildings on the
estate had not been completed by the time of the lease. It may be that an
inducement had to be given to a tenant to take the whole estate. The first
tenant may have made some contribution to the development of the estate such as
would warrant that tenant receiving some part of the rental value of the
estate. On what is known to me, it is impossible to say what was the thinking
behind the 25% discount. I cannot, therefore, attach the significance which Mr
Barnes urges on me as to the 25% discount.
Mr Barnes also
laid stress on the word ‘full’. He pointed out that the rack rental value means
the full rental value, even without the word ‘full’; and he submitted that, to
give meaning to that word, it must have the special meaning of ‘undiscounted’.
It seems to me that he must go further than that, for what he was suggesting is
that ‘current market rack rental value’ does not have its ordinary meaning of
what the hypothetical lessee is willing to pay the hypothetical lessor for the
whole of the demised premises and, as the parties have agreed, by a single
letting, but means instead what the hypothetical lessee will receive on, it may
be by a number of, the sublettings of the individual units which make up the
demised premises. I accept Mr Wood’s submission that Mr Barnes attaches more
significance to the word ‘full’ than it can reasonably bear. I do not see that
‘full’ has more significance than that it comes after ‘seventy-five per cent’
and so emphasises that it is the fraction of the whole current market rack
rental value that is to be paid by way of rent. I accept that, so construed,
‘full’ is not strictly necessary, but then not all the other parts of the
cumbersome phrase ‘current market rack rental value’ are strictly necessary.
What else could the value expressed to be ascertained at a particular date be
but current without words to the contrary? ‘Market’ does not add anything of
great significance to ‘rack’ or ‘rack’ to ‘market’. In my view, therefore, it
would be wrong to interpret the phrase ‘full current market rack rental value’
in the very special and, to my mind, unnatural way for which Mr Barnes
contends.
In my
judgment, therefore, the words of clause 6(a)(iii) should have their ordinary
meaning. The expert must ascertain the rental value of the demised premises in
the open market, having regard to all the persons likely to be in the open
market, be they investors or persons wanting to occupy the premises or part of
them on their own account. The highest rent thus obtainable is the full current
market rack rental value. If, as seems inevitable, 75% of that is higher than
£38,500, that will be the rent payable.
The
landlord’s summons was dismissed and orders were made in the terms of the
tenant’s summons. The tenant was awarded the costs of both summonses.
