Landlord and tenant — Rent review — Whether direction to determine open market rent was a reference to rent after expiry of rent-free periods or concessionary rents referable to fitting-out or additionally to inducements — Whether disregard of rent-free periods and concessionary rents applied to inducements to be offered by hypothetical underlease to subtenants
By an
underlease dated September 25 1987 the defendant tenants held the term of four
floors at 3 Cloth Street, London EC1, from the plaintiff landlord subject to
provisions for the review of the rent. At review clause 3.2(b) of the
underlease directed that the rent was to be determined ‘. . . the best yearly
open market rent (at the rate payable following the expiry of any rent free period
or periods at concessionary rents which might be granted on a new letting . .
.’ but disregarding, inter alia, ‘(d) any effect on rent of any initial
rent free period or periods at concessionary rents or other inducements which
might be offered in the open market . . .’. The court was asked to determine
the following questions: (1) whether the reference in clause 3.2(b) to
rent-free periods or concessionary rents was to be interpreted as limited to
fitting-out periods; (2) whether disregard (d) was
need for a landlord to offer rent-free periods, concessionary rents or other
inducements to ‘prospective underlessees’; (3) whether disregard (d) applies to
fitting-out periods or to all rent-free periods, concessionary rents and
inducements; and (4) what was the true meaning of clause 3.2(b).
and referred to in clause 3.2(b), are restricted to fitting-out periods and do
not include further inducement periods which may be given to increase the
‘headline’ rent; (2) the word ‘underlessee’ refers to subtentants from the
underlessee and not the underlessee himself and therefore the cost to the
hypothetical underlessee in giving inducements to his subtenants is
disregarded; (3) having regard to the answer to question (1), this question was
not answered; (4) under clause 3.2(b) the market rent is to be at the rate
payable following the expiry of any rent-free or concessionary rents for
fitting-out, and by disregard (d) any effect on rent attributable to the
tenant’s need to give rent-free or other inducements to a subtenant must be
eliminated.
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
British
Gas Corporation v Universities Superannuation
Scheme Ltd [1986] 1 WLR 398; [1986] 1 All ER 978; (1986) 52 P&CR 111;
[1986] 1 EGLR 120; 277 EG 980
Broadgate
Square plc v Lehman Brothers Ltd [1994] 1
EGLR 143; [1994] 04 EG 135
City
Offices plc v Bryanston Insurance Co Ltd
[1993] 1 EGLR 126; [1993] 11 EG 129
Glofield
Properties Ltd v Morley (No 2) [1989] 2 EGLR
118; [1989] 32 EG 49
London
& Leeds Estates Ltd v Paribas Ltd [1993]
2 EGLR 149; [1993] 30 EG 89, CA
MFI
Properties Ltd v BICC Group Pension Trust Ltd
[1986] 1 All ER 974; [1986] 1 EGLR 115; (1986) 277 EG 862
99
Bishopsgate Ltd v Prudential Assurance Co Ltd
[1985] 1 EGLR 72; (1985) 273 EG 984, CA
This was an
application by the landlord, Scottish Amicable Life Assurance Society, with the
consent of the defendant tenants, William Middleton, Christopher Reginald
Potts, David Nigel Godfrey and Derek Buckle West, and of the arbitrator,
Geoffrey Barron Perkins, under section 2(1)(b) of the Arbitration Act
1979 to determine questions of construction arising in the course of an
arbitration between the parties.
Jonathan Gaunt
QC (instructed by Cameron Markby Hewitt) appeared for the plaintiff; Paul
Morgan QC (instructed by Middleton Potts) represented the defendants.
Giving
judgment, ARDEN J said: This is an application to determine points of
construction on a rent review clause (clause 3.2) in an underlease dated
September 25 1987 between the plaintiff (‘the lessor’), the defendants (‘the
lessees’) and others, of premises on four floors at 3 Cloth Street, London EC1.
Dispute has arisen as to these points of construction in a pending arbitration.
The arbitrator, Mr Geoffrey Barron Perkins [FRICS], and the parties consent to
the determination of these questions by the court. The questions which I am
asked to determine do not require me to find or assume any facts: indeed no
evidence has been placed before me for this purpose. Moreover, I am told that,
if the questions are decided now, there will be substantial costs savings.
There will be no need for the arbitrator to sit with a legal assessor and (if
the decision is in favour of the lessor) there would be no need for certain
evidence to be called. In the circumstances I am satisfied that I should
determine the questions on this application pursuant to section 2(1)(b)
of the Arbitration Act 1979.
The rent
review clause is in these terms:
3.2. The
Existing Rent shall be reviewed on each Review Date and the New Rent (subject
to the further review of rent on each succeeding Review Date and to the
provisions of the sub-clauses hereinafter appearing) shall be the greater of:
(a) the
Existing Rent to the intent that the Yearly Rent cannot decrease upon any rent
review
(b) such sum
as shall be agreed by the Lessor and by the Lessee or determined as
representing the best yearly open market rent (at the rate payable following
the expiry of any rent free period or periods at concessionary rents which
might be granted on a new letting of the Demised Premises or of comparable
premises in the open market on the relevant Review Date) at which the Demised
Premises might reasonably be expected to be let in the open market on the
relevant Review Date without a fine or premium or value in the nature of a fine
or premium:
(i) as a whole by a willing lessor to a willing
lessee or (if a sub-letting of any Sublet Unit has been completed) in the
Sublet Units by a willing lessor to a willing lessee of each Sublet Unit
(whichever shall produce the higher rent or aggregated rents as the case may
be)
(ii) with vacant possession for a term equal to
the original term of this Lease for the Permitted Use and otherwise subject to
the provisions of this Lease (other than the amount of the Yearly Rent reserved
but including provisions for rent review in accordance with this Clause 3 on
every fifth anniversary of the commencement of such term) and
(iii) on the assumption that at the relevant Review
Date the Demised Premises are fit for immediate occupation and use for the
purposes permitted by these Presents and that no work has been carried out
thereon which has diminished the rental value of the Demised Premises and in
case the Demised Premises or the Development have been destroyed or damaged on
the assumption that they have been fully restored before the relevant Review
Date
(iv) on the assumption that the Lessee’s covenants
herein contained have been fully performed and observed
(v) on the assumption that the benefit of any
planning or other consent or licence (whether or not granted hereunder) current
at the relevant Review Date is also available for such willing lessee or
lessees.
But
disregarding:
(a) any effect on rent of the fact that the
Lessee its sub-tenants or their respective predecessors in title have been in
occupation of the Demised Premises
(b) any goodwill attached to the Demised Premises
by reason of the carrying on thereat of the business of the Lessee its
sub-tenants or their respective predecessors in title in their respective
businesses and
(c) any effect on the rental value of the Demised
Premises attributable to the existence at the relevant Review Date of any
improvement to the Demised Premises or any part thereof carried out not more
than twenty-one years before the relevant Review Date with consent where
required (or if the Court has determined that consent was unreasonably
withheld) and otherwise than in pursuance of an obligation to the Lessor or its
predecessors in title (except obligations requiring compliance with statutes or
directions of local or public authorities) to the extent only that such
improvement as aforesaid shall have been carried out without any liability on
the part of the Lessor or its predecessors in title to reimburse or contribute
towards the cost thereof and provided that such improvement was completed by
the Lessee its sub-tenants or their respective predecessors in title during the
Term or during any period of occupation prior thereto arising out of an
agreement to grant the Term.
(d) any effect on rent of any initial rent free
period or periods at concessionary rents or other inducements which might be
offered in the open market to prospective underlessees of the Demised Premises
or any part thereof or of comparable premises.
The questions
for determination on this application may be stated as follows:
Question 1
— fitting-out question
In the
direction in clause 3.2(b) that the rent to be determined is to be:
the best yearly
open market rent (at the rate payable following the expiry of any rent free
period or periods at concessionary rents which might be granted on a new
letting of the Demised Premises or of comparable premises in the open market on
the relevant Review Date) at which the Demised Premises might reasonably be
expected to be let in the open market . . .
is the
reference to rent-free periods or concessionary rents to be interpreted as
limited to such rent-free periods or concessionary rents as a willing lessor would
give to reflect the fact that the willing lessee will not be able to make full
beneficial use of the demised premises until after completion of his
fitting-out works?
I will call
this kind of rent-free or concessionary rent period ‘a fitting-out period’, and
any other such period (see further below) an ‘inducement period’. I will call
the words in the passage which I have set out from clause 3.2(b) and which are
in brackets ‘the bracketed words’.
The lessees
contend that the periods referred to in the bracketed words are fitting-out
periods. The lessor contends that they are not so limited.
Question 2
— underlessee question
Is disregard
(d) of clause 3.2(b) concerned with the effect on rent of:
(a) rent-free periods, concessionary rents or
other inducements which might be offered in the open market to the hypothetical
willing lessee on the hypothetical letting contemplated by clause 3.2(b), or
(b) the need for a lessor of the premises, or of
comparable premises, to offer such rent-free periods, concessionary rents or
other inducements to prospective underlessees?
The lessees
contend for (a) and the lessor contends for (b).
Question 3
— disregard (d) — fitting-out question
Does disregard
(d) extend to fitting-out periods (and inducements for a like purpose) given to
a willing lessee or does it apply to all rent-free periods, concessionary rents
and inducements given to him?
This question
is really an alternative to question 1 so far as the lessees are concerned. It
arises if the lessees succeed on question 2. Consistently with its position on
question 1 the lessor says that no limitation can be read into disregard (d) in
this way and that it applies to fitting-out periods. The lessees contend the
contrary. If the lessor is right, the result may be that disregard (d) cancels
out the exclusion of rent-free periods in the bracketed words so that (contrary
to the norm) the lessees will obtain the benefit of fitting-out periods even on
mid-term rent reviews.
Question 4
— overall effect question
What is the
true meaning of clause 3.2(b) in relation to any rent-free periods or periods
at concessionary rents or other inducements which might be offered or granted
in the open market to the hypothetical lessee?
This is really a recapitulation on the earlier questions.
In setting out
the questions, I have used slightly different wording from that appearing in
the originating motion with the aim of simplification.
There is
little that I need from the underlease itself. On the front cover, it is
described as an underlease, as indeed it is. Although, internally, it is called
a ‘lease’ and the parties are called ‘the lessor’ and ‘the lessee’, it is clear
from, inter alia, the definition of ‘lease’, and the references ‘to any
superior lessor’ and the headlease, that the terms ‘lessor’ and ‘lessee’ in
this underlease mean the underlessor and underlessee respectively. The term of
the underlease is 25 years from March 25 1987. There are five-yearly rent
reviews. The lessees may not sublet less than an entire floor or, without the
lessor’s consent, the whole premises. The term ‘underlessee’ is not defined. It
is used only occasionally. It is used for instance in clause 1.6 and in clause
4.5 (which uses the term ‘prospective underlessee’). In these instances it
means subtenants from the lessees (including perhaps subtenants from them).
Question 1
— fitting-out question
Mr Jonathan
Gaunt QC, for the lessor, submitted that there is nothing to limit in the words
in brackets to fitting-out periods. Their object is to prevent a tenant
obtaining additional rent-free periods during the term of his lease. As I
understood it, it would be normal for a rent review clause of this nature to
prevent a sitting tenant from getting further fitting-out periods. It was
common ground that, once a lease was granted, it was inappropriate to claim
further fitting-out periods that might have been given to a tenant on first
occupation. Mr Gaunt pointed to the fact that the distinction between fitting
out and other rent-free periods had been rejected in City Offices plc v Bryanston
Insurance Co Ltd [1993] 1 EGLR 126, at p127L per Aldous J; and in Broadgate
Square plc v Lehman Brothers Ltd (November 29 1993, unreported*), per
Harman J albeit on different rent review clauses. The result was to give the
lessor a more favourable rent on review than would be obtained under some other
rent review clauses.
*Editor’s
note: Also reported at [1994] 1 EGLR 143 (ante).
Mr Paul Morgan
QC, for the lessees, submitted that the commercial object of the bracketed
words and/or of disregard (d) is to prevent the tenant from getting further
fitting-out periods. He submitted that the bracketed words should not apply to
other rent-free periods. Landlords from time to time give extended rent-free
periods to maximise the ‘headline’ rent (or rent actually specified in a lease
following a rent-free period). This practice I am told improves the valuation of
the reversion. If the distortion in the headline rent is not corrected, the
rent fixed on the rent review will be higher than it would otherwise have been.
The commercial purpose of the bracketed words on the lessees’ case is to
prevent the open market rent being fixed by reference to the distorted figures.
Moreover, in this case, the lessees are prevented from subletting the whole of
the premises at a rent which is less than the rent they are liable to pay. The
lessor’s construction will thus make it difficult for them to sublet.
Mr Morgan
further submits that the words ‘which might be granted on a new letting’ in the
brackets restrict the relevant rent-free periods to those attributable to the
new letting. He also submits that the lessor’s construction renders the words
in brackets after ‘at concessionary rents’ otiose. Furthermore, the reference
to concessionary rents suggests that the rent payable at the end of the
relevant periods will be true market value, but this value may be distorted if
periods other than the fitting-out period are taken into account as a result of
the words in brackets. Alternatively, the words ‘value in the nature of a fine
or premium’ require the exclusion of inducement periods. The words ‘any initial
rent free period or periods at concessionary rents or other inducements’ in
disregard (d) are wider than the equivalent in the bracketed words. This
indicates that a narrower meaning is to be given to the bracketed words.
My duty is to
find the intention of the parties as expressed in the bracketed words bearing
in mind the commercial purpose of the rent review clause. The leading authority
in this field is Basingstoke and Deane Borough Council v Host Group
Ltd [1988] 1 WLR 348† . This concerned the construction of a rent review
clause in a lease of property comprising land and buildings restricted to use
as a public house. The tenant had constructed the buildings at his own expense.
The rent review clause required the valuer to assume that the premises were
available for the greater of 20 years and the unexpired portion of the lease
and that the property was a bare site. One of the questions which arose was
whether in the absence of an express direction the valuer should assume that
the site was available for development for any lawful purpose. The Court of
Appeal held that the valuer should assume that the notional letting was on the
same terms, other than as to the amount of rent, as those subsisting under the
existing actual lease. The reasoning is to be found in the following passages
from the judgment of the court, which was given by Nicholls LJ [at p353D]:
The question
raised on this appeal is one of construction of a rent review clause in a
lease. In answering that question it is axiomatic that what the court is
seeking to identify and declare is the intention of the parties to the lease
expressed in that clause. Thus, like all points of construction, the meaning of
this rent review clause depends on the particular language used interpreted
having regard to the context provided by the whole document and the matrix of
the material surrounding circumstances. We recognise, therefore, that the
particular language used will always be of paramount importance. Nonetheless it
is proper and only sensible, when construing a rent review clause, to have in
mind what normally is the commercial purpose of such a clause.
† Editor’s
note: Also reported at [1987] 2 EGLR 147.
That purpose
has been referred to in several recent cases, and is not in doubt. Sir Nicolas
Browne-Wilkinson V-C expressed it in these terms in British Gas Corporation
v Universities Superannuation Scheme Ltd [1986] 1 WLR 398, 401:
‘There is
really no dispute that the general purpose of a provision for rent
review is to enable the landlord to obtain from time to time the market rental
which the premises would command if let on the same terms on the open market at
the review dates. The purpose is to reflect the changes in the value of money
and real increases in the value of the property during a long term.’
To the same
effect Dillon LJ said in Equity & Law Life Assurance Society plc v Bodfield
Ltd [1987] 1 EGLR 124, 125:
‘There is no
doubt that the general object of a rent review clause, which provides that the
rent cannot be reduced on a review, is to provide the landlord with some
measure of relief where, by increases in property values or falls in the real
value of money in an inflationary period, a fixed rent has become out of date
and unduly favourable to the tenant. The exact measure of relief depends on the
true construction of the particular rent review clause.’
The means by
which rent review clauses afford landlords relief in respect of increases in
property values or falls in the value of money is by providing, normally, for a
valuer, in default of agreement, to assess the up-to-date rent for the demised
premises at successive review dates. In making that assessment the valuer will
be achieving the intended purpose of keeping the rent in line with current
property values having regard to the current value of money if, but only if, he
assesses the up-to-date rent on the same terms (other than as to quantum of
rent) as the terms still subsisting between the parties under the actual,
existing lease. If he departs from those terms, and assesses the up-to-date
rent on the footing of terms materially less onerous to the tenant than those
in the actual, existing lease, the rental at which he arrives will reflect in
addition to the rental increases attributable to a rise in property values or a
fall on the value of money, an additional element, viz, the increased rental
attributable to the fact that he is calculating the rent of a lease on terms
more favourable to the tenant than the terms in the actual, existing lease.
Conversely, if he assesses the up-to-date rent on the basis of terms materially
more onerous to the tenant than those in the actual, existing lease, the rental
figure at which the valuer arrives will not fully reflect the rise in property
values or the fall in the value of money since the lease was granted or the
rent was last fixed.
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 a 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 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.
We are
fortified in this view by observations made in several cases . . .
Next there is
British Gas Corporation v Universities Superannuation Scheme Ltd
[1986] 1 WLR 398. There a rent review clause expressly provided for the
notional letting at each review date to be a letting ‘containing the same
provisions (other than as to the yearly rent) as are herein contained . .
.’ The question arose whether the
direction to leave out of account the provision in the actual lease ‘as to the
yearly rent’ was apt to exclude from the notional letting the fact that the
actual lease contained provisions for future rent review. Sir Nicolas
Browne-Wilkinson V-C held that the direction did not have that effect. Having
referred to the general purpose of a rent review provision, as quoted above, he
said, at pp401-402:
‘Such being
the purpose, in the absence of special circumstances it would in my judgment be
wayward to impute to the parties an intention that the landlord should get a
rent which was additionally inflated by a factor which has no reference either
to changes in the value of money or in the value of the property but is
referable to a factor which has no existence as between the actual landlord and
the actual tenant, ie, the additional rent which could be obtained if there
were no provisions for rent review. Of course, the lease may be expressed in
words so clear that there is no room for giving effect to such underlying
purpose. Again, there may be special surrounding circumstances which indicate
that the parties did intend to reach such an unusual bargain. But in the
absence of such clear words or surrounding circumstances, in my judgment the
lease should be construed so as to give effect to the basic purpose of the rent
review clause and not so as to confer on the landlord a windfall benefit which
he could never obtain on the market if he were actually letting the premises at
the review date, viz, a letting on terms which contain provisions for rent
review at a rent appropriate to a letting which did not contain such a
provision.’
The fact
that, unusually, the rent being reviewed is a ground rent, does not show or
even suggest that in this case, where the landlord is to obtain an up-to-date
rent for the site, unlike the ordinary case, where the landlord obtains an
up-to-date rent for the site plus the buildings, the parties intended that (to
adapt the words of Sir Nicolas Browne-Wilkinson V-C in the British Gas
case [1986] 1 WLR 398, 401) the landlord was to get a rent for the site
additionally inflated by a factor which has no reference either to changes in
the value of money or in the value of the site as demised but which is
referable to a factor having no existence as between the actual landlord and
the actual tenant: for instance, the additional rent which could be obtained
for the site if the actual, existing lease did not contain user restrictions.
To update the ground rent the valuer is to disregard the value of the buildings
on the site. But we can see no more reason why, in doing so, he should
disregard (or, more precisely, the parties can be supposed to have intended
that he should disregard) the other subsisting terms of the actual, existing
lease in this case than in any other case.
We approach
the construction of paragraph (vii), therefore, on the footing that, unless the
paragraph otherwise requires, expressly or by necessary implication, or there
is some context indicating otherwise, the parties are to be taken to have
intended that the notional letting assumed for the purposes of the rent review
assessment was to be on the same terms (other than as to quantum of rent) as those
still subsisting under the actual, existing lease.
. . . There is
no express direction that in thus assessing the reasonable current ground
rental value the valuer is not to have regard to the other terms of the actual
lease. Nor do we think that such a direction can fairly be spelled out as a
matter of necessary implication. Quite the contrary: in the case of this lease,
with its stringent user covenant, such a direction would be capable of working
so unfairly on the tenant, in the manner we have explained, that we find it
impossible to suppose that the original parties to the lease could have
intended this.
Nor are we
persuaded by the contention that none of the covenants in the actual lease can
be impliedly incorporated in the notional letting because many of the tenant’s
covenants are inappropriate to the notional site lease. The essential substance
of the direction in paragraph (vii)(b) is that, for the purpose of computing
the up-to-date ground rental value of the demised premises, the buildings actually
there are to be disregarded. They are to be disregarded for that purpose
because they were erected by the original tenant and at its own expense. No
ground rental value, in other words, is to be attributable to the presence of
the buildings. But although the tenant’s covenants relating to buildings, such
as covenants to repair and to insure, would be inappropriate to a simple lease
of a bare site, those covenants will or may have some materiality in assessing
the up-to-date rental value of the premises demised by this lease (which
includes buildings) even though no rental value is being attributed to the
buildings themselves. They will or may have materiality in assessing that
value, because those covenants impose obligations on the tenants. For this reason
it is not inappropriate to carry those covenants into the notional lease, even
though the buildings are being excluded therefrom. Paragraph (vii) is concerned
with a valuation exercise, and the concept of a notional or hypothetical lease
is a tool fashioned to that end. Where the subject of a lease is land and
buildings, and the subject matter of the valuation is the up-to-date rental
value of the leased property but excluding the buildings, it is not surprising
if the notional lease thus predicated is a somewhat odd-looking creature.
Mr Cullen
pointed out that in paragraph (vii) the parties have plucked out of the lease
two provisions only, those relating to the length of the term and to rent
reviews. They have left unmentioned all the other provisions. He submitted
that, in valuing the bare site, the only terms of fundamental importance to a
valuer would be the terms relating to period, rent reviews and user. The
parties have dealt expressly with two of these fundamental terms. If they had
intended that the site should be valued on the basis of restricted user surely
they would have said so. As arguments directed at the presumed intention of the
parties we find these arguments of little weight when put in the scales against
the contrary argument based on the manifestly unfair result to which the
landlord’s case leads.
The Court of
Appeal reached a similar result in Glofield Properties Ltd v Morley
(No2) [1989] 2 EGLR 118. Hoffmann J (as he then was) had also reached a
similar result in MFI Properties Ltd v BICC Group Pension Trust Ltd
[1986] 1 All ER 974*. However, the British Gas Corporation† case was not cited in the MFI Properties
case. Moreover, MFI Properties was decided before the Basingstoke
case, but was not cited in that case. In view of the unanimous and recent
decision of the Court of Appeal in the Basingstoke case, it is
sufficient for me to limit my citation of authority to that case. Mr Gaunt
urged the MFI Properties case on me, but, in so far as there is any
difference
case, I am of course bound to follow the latter.
*Editor’s
note: Also reported at [1986] 1 EGLR 115.
† Editor’s
note: Also reported at [1986] 1 EGLR 120.
The exclusion
of inducement periods results in a bonus to the lessor. If an inducement period
has any effect on rent, it will be to increase the market rent artificially in
the lessor’s favour. The lessor could not obtain the increased rent on a new
letting without suffering a rent-free period additional to a fitting-out
period. Moreover, the ascertainment of the open market rent at the rate payable
following expiry of an inducement period is not part of the process of
reflecting changes in the value of money or real increases in the value of the
property. In the case of this underlease it creates a difficulty for
subletting. With all these factors in mind, I have come to the conclusion that,
unless clause 3.2(b) otherwise requires, the bracketed words should be confined
to fitting-out periods. This conclusion follows from the Basingstoke
case which established that a rent review clause should be construed so as to
give effect to the basic purpose of the rent review clause and not so as to
confer a windfall on the landlord.
In my
judgment, the words ‘on a new letting’ are capable of more than one meaning.
They can mean ‘in the event of a new letting’, or ‘as a result of a new
letting’ and not as a result of (for example) the landlord’s desire (to which
the tenant has acceded) to maximise the headline rent. Applying the Basingstoke
case I prefer the latter construction. Effectively I adopt Mr Morgan’s
submission that the words ‘on a new letting’ mean ‘attributable to’ (and only
to) a new letting. I do not accept Mr Gaunt’s criticism of this construction
that an inducement period is also attributable to a new letting. It may be
contemporaneous with a new letting, but causally it is distinct from it. A
further reason for preferring Mr Morgan’s construction is that it gives content
to the words following the reference to ‘concessionary rents’. These words
otherwise for no apparent reason largely repeat directions given immediately
after the brackets in clause 3.2. Finally, there is nothing in the clause to
prevent this construction and it has not been suggested that it would be
unworkable. In the circumstances I hold that the periods referred to in the
bracketed words are fitting-out periods. It is unnecessary for me to deal with
Mr Morgan’s alternative or additional submissions.
Question 2
— underlessee question
Mr Gaunt
submits that the words ‘prospective underlessees’ are used in contradistinction
to the words ‘lessee’ and ‘the lessee’s subtenants’. Prospective lessees are
persons to whom the hypothetical lessee may sublet individual floors (as is
permitted by clause 4.5) and to whom the hypothetical lessee may envisage
having to give rent-free periods or inducements, the cost of which he will
reflect by reducing his own rental bid. The commercial purpose of disregard (d)
is thus to negative the discount awarded on this basis in 99 Bishopgate Ltd
v Prudential Assurance Co Ltd [1985] 1 EGLR 72 and this purpose was
acknowledged (obiter) as an aspiration of the draftsman of similar wording in London
& Leeds Estates Ltd v Paribas Ltd [1993] 30 EG 89, [1993] 2 EGLR
149*. Mr Gaunt accepts, however, that such a discount would be unlikely in
premises of this size.
*Editor’s
note: Also reported at [1993] 2 EGLR 149.
Mr Morgan
points out that the lease is in fact an underlease so that the hypothetical
lessee contemplated by the opening paragraph of clause 3.2(b) will in fact be
an underlessee. To disregard the hypothetical lessee makes no sense of the words
‘comparable premises’. Disregard (d) should be given the same effect as
disregard (iv) in City Offices plc v Bryanston Insurance Co Ltd
[1993] 1 EGLR 126. This would mean that, where, for example, the market rent
ascertained under clause 3.2(b) would in fact have been payable for the balance
of a term following the expiration of a rent-free period, then, notwithstanding
the bracketed words, it will be amortised over the whole of the term. This
results in a lower open market rent.
I prefer Mr
Gaunt’s construction. In the context of this particular underlease, the word
‘underlessee’ in my view more naturally refers to subtenants from the lessee
and not to the lessee himself. Where the latter is referred to, the word
‘willing lessee’ is used. The term ‘underlessee’ is used in the underlease in
the same sense as I have given it here. The reference to ‘comparable premises’
serves a purpose, viz the purpose of eliminating a discount for rent-free
periods to subtenants found in comparables. My preferred construction prevents
any question of any potential mismatch between the bracketed words and
disregard (d). The words ‘to prospective underlessees’ have no equivalent in
the bracketed words, which provides some additional support for my
construction. The result is not to confer a windfall on the landlord so the Basingstoke
point does not arise.
Question 3
— disregard (d) — fitting-out question
Having regard
to my answer to question 1, this question does not arise.
Question 4
— overall effect question
For the above
reasons, in my judgment:
(i) the effect of the bracketed words is that the
market rent is to be at the rate payable following the expiry of any rent-free
periods or periods at concessionary rents for fitting out;
(ii) disregard (d) requires the valuer to make any
adjustment necessary to eliminate any effect on rent attributable to the
tenant’s need to give any rent free or concessionary period or other inducement
to a subtenant.
I propose to
ask counsel to agree a minute of order.
