Landlord and tenant — Construction of rent review clause in lease — Declarations sought by originating summons as to assumptions which arbitrator should make in determining the rent payable in accordance with the provisions of the lease — Three questions for court to decide — What assumption was arbitrator to make as to the terms of the notional letting other than as to rent? — Was arbitrator to assume that the notional letting was with vacant possession or subject to existing underlettings? — Was a wall dividing part of the ground floor occupied by the tenants from part occupied by underlessees an ‘improvement’ so that its effect on rent was to be disregarded in accordance with a direction in the review clause? — Plaintiffs’ tenancy was for a term of 42 years subject to one rent review providing for an increase of rent as from the expiration of the 21st year of the term — Held, after considering submissions on behalf of plaintiff tenants and defendant landlords, and examining a number of authorities, that the rulings to be given to the arbitrator on the questions raised were as follows — The rent for the residue of the term should be assessed on the same terms and conditions as in the existing lease other than as to the amount of the rent and with no provision for a further review — The notional lease should not be assumed to be with vacant possession but should be assumed to be subject to the existing underlettings — The wall in question was not an ‘improvement or additional building carried out by the tenant’, as it was in fact built in accordance with a design suggested by the tenants in the course of erection and was thus part of the original building leased — Some incidental discussion, although the question did not in the end arise, of the Re ‘Wonderland’, Cleethorpes point and the observations of Scott J in Hambros Bank Executor & Trustee Co Ltd v Superdrug Stores Ltd — Declarations made in accordance with these rulings
This was an
originating summons taken out by the plaintiff tenants, Scottish &
Newcastle Breweries plc, to determine questions of construction in a lease of
premises at 22-25 Sackville Street and 10-11 Vigo Street in London SW1, of
which the landlords were the defendants to the summons, Sir Richard Sutton’s
Settled Estates. The questions related to the rent review clause in the lease,
which was for 42 years from July 9 1962, and it had been agreed between the
parties that an arbitration should not be proceeded with until the court had
answered the questions raised in the summons.
Nigel Hague QC
and Paul de la Piquerie (instructed by Laytons) appeared on behalf of the
plaintiffs; Michael Barnes QC and John Male (instructed by Stoneham, Langton
& Passmore) represented the defendants.
Giving
judgment, JUDGE PAUL BAKER QC said: I have before me an originating
summons to determine certain questions of construction and law arising out of a
rent review clause in the underlease which is specified in the title to these
proceedings. The questions are directed to the assumptions which the arbitrator
who is to review the rent should make.
Under the
originating summons there are five questions, but they boil down to three. It
has been common ground in the argument that there are really three questions,
and I would phrase them in this way:
(1) What assumption is the arbitrator to make as
to the terms in the notional letting other than as to rent?
(2) Is the arbitrator to assume that the notional
letting is with vacant possession, or is he to assume that it is subject to the
existing underlettings? and
(3) Is he or is he not to assume that a wall
dividing part of the ground floor occupied by the lessees from part occupied by
sublessees is an improvement or additional building carried out by the tenant,
with the consequence that its effect on rent is to be disregarded?
Those, I think,
are the questions, or that is how they have been argued before me.
It comes
before the court in the following circumstances, which are described in the
first affidavit of Mr Hillyer [partner in the plaintiffs’ solicitors, Laytons]
when, after referring to the relevant lease and its rent review clause, in para
5 he goes on:
Pursuant to
the provisions of the said rent review, the defendants herein as landlords
served upon the plaintiff as tenant notice seeking a review of the said rent,
and the plaintiff herein, as tenant, has served counternotice upon the
landlord, and the parties being unable to agree an arbitrator has been
appointed to determine, in accordance with the provisions of the said lease,
whether or not there should be a review of the said rent.
A dispute has
arisen between the plaintiff and the defendant as to the true construction of
the lease and it has been agreed between the plaintiff and defendant that the
arbitration will not be proceeded with until the question posed in the
originating summons herein has been answered.
So arbitration
is under way and the purpose of these proceedings is to clarify and limit the
areas of dispute in the arbitration. In those circumstances, Mr Hague, very
rightly, called my attention to the provisions of the Arbitration Act 1979,
section 2(1), which is set out conveniently on p 1463 of the current Supreme
Court Practice. That specifically deals with the question of a
determination of a preliminary point of law by the court, and section 2(1)
says:
Subject to
subsection (2) and section 3 below, on an application to the High Court made by
any of the parties to a reference —
. . .
(b) with the consent of all the other parties,
the High Court shall have jurisdiction to determine any question of law arising
in the course of the reference.
Certainly that
is one means of determining a preliminary point which may arise in an
arbitration, but it does not exclude, in my judgment, the ordinary jurisdiction
of the court. That position is regulated by the Arbitration Act 1950, section
4, conveniently set out at p 1411 of this work. That is a well-known provision
in arbitration proceeding, to the effect that:
If any party
to an arbitration agreement, or any person claiming through or under him,
commences any legal proceedings in any court against any other party to the
agreement, or any person claiming through or under him, in respect of any
matter agreed to be referred, any party to those legal proceedings may at any
time after appearance, and before delivering any pleadings or taking any other
steps in the proceedings, apply to that court to stay the proceedings, and that
court or a judge thereof, if satisfied that there is no sufficient reason why
the matter should not be referred in accordance with the agreement, and that
the applicant was, at the time when the proceedings were commenced, and still
remains, ready and willing to do all things necessary to the proper conduct of
the arbitration, may make an order staying the proceedings.
It is clear
that the defendants do in fact consent and have obviously taken steps in these
proceedings, so there is no question of any stay being given and, of course, it
is not desired.
The effect of
that provision is, as I see it, that the ordinary jurisdiction of the court is
not ousted and can be appealed to at any stage, and so I have here, as I see
it, an originating summons under Order 7 under the general inherent
jurisdiction of the court to make declarations as to the construction of
documents, among other things. That is how I propose to proceed. I do not see myself
as proceeding under section 2 of the Arbitration Act 1979.
Turning to the
questions, leaving that procedural matter on one side and coming now to the
substance of the matter, I am required by cases of high authority not to
consider questions of construction in isolation, that is to say solely upon
internal linguistic considerations, but I have to consider the document in its
matrix or mould of fact or, as the old authorities have it, I have to look at
all the circumstances with reference to which the document in question was
made. Here, as I see it, it is particularly important to look at those facts,
and so I turn to deal with them before I come to the provision to be construed.
In the event
there is no dispute about the facts, although one of the deponents of
affidavits put in on behalf of the defendants was in fact cross-examined by
plaintiffs’ counsel, but at the end of the day there is not any dispute as to
the facts.
I am concerned
with a site at the corner of Vigo Street and Sackville Street in the West End
of London. It is plainly a very valuable site and, indeed, is near Piccadilly
and Regent Street. The freehold at all material times has been owned by the
defendants, Sir Richard Sutton’s Settled Estates, who are, as I understand it,
a corporation of some description. In the late 1950s this site was ripe for
development and consequently the defendants, on December 17 1959, entered into
a building agreement with a company then known as Eastern International
Investment Trust Ltd who were in the business of property development. By June
1962 that company — just to anticipate a little — had changed its name to
Trafalgar House Ltd, a well-known public company operating in this field.
The agreement
entered into between the defendants and Eastern International (as I call them
at the time) was in fact a building agreement for the grant of a lease for 99
years from June 24 1960 and, as is the way with these, the lease was to be
granted when the premises were developed and to run from that date. It would seem
that they were subject to a lot of underleases at the time. There is a schedule
of them. But, looking at clause (iii), it was contemplated that the developers
would be able to clear the tenants out and obtain possession as near as
possible to June 24 1960. I need not deal with this in great detail, but under
clause (v) the tenant was not to commence to pull down the existing buildings
until they had submitted the detailed plans, elevations and specifications of
the new building proposed to be erected and that should have been approved by
the landlords’ then surveyors. Perhaps I might notice in clause 13 that the
lease was to be granted, and the tenant should accept it, ‘when and as soon as
the new messuage and building shall have been erected and completed in
accordance with the plans elevations and specifications approved as aforesaid
and a certificate to that effect signed by the landlord’s surveyors shall have
been produced to the landlord’. I do not think I need refer to any more of that
document.
It would seem
that during the course of 1960 the developers did get possession of the
property, and in July 1960 we find Mr Favell, the partner in Cubitt Nichols,
the architects responsible for the supervision of this scheme, producing a plan
for the redevelopment of the site. It consisted of a basement which it was
envisaged should be a car park, and then a ground floor which would consist of
shops or showrooms, and then there were to be six upper floors which would
consist of offices or offices and flats. That was the general design of the
building as conceived by the developers and approved by the owners.
Now during
1960, if not before, Eastern International had entered into negotiations with
the plaintiffs to take a lease of the new building. The plaintiffs are brewers
and licensed victuallers, and it would seem that by April 1960 the plaintiffs’
architects had formulated plans which involved part of the ground floor and
part of the basement being separated from the remainder as a public house and
restaurant and accompanying cellar in the occupation of the plaintiffs for
their business. By the end of 1960, at some date in December 1960, those plans
on the part of the plaintiffs had been approved by the freeholders and that
work of division involved some modification of the main building works. Clearly
it was not going to be a shop or showroom in regard to that part of the ground
floor occupied by the plaintiffs. It would seem that by January 23 1961 — and
that is a date I take from a document to which I have yet to refer, in clause 7
there — Eastern International had agreed to do the modifications and adaptation
of the ground floor as part of their works, the substructure or superstructure
works, and the works got under way. On February 3 1961, as Mr Favell told me in
evidence, there was a site meeting in which the plaintiffs’ architects were
represented and he explained there would be some requirement of those
architects affecting the floor frame and substructure; there were to be some
changes in the services; and it required the lowering of the ground-floor slab.
But there was no reference at that point to any dividing wall dividing off the
part to be occupied by the restaurant and public house from the remainder of
the ground floor.
It had become
clear by this stage that the plaintiffs were to take a lease of the whole
property, not just the part that they required for their own occupation. It is
no question that I have to concern myself with whether that was the only term
on which they could get the premises that they were looking for, the public
house part, or whether they were looking for an investment over and above. That
is not a question I have to concern myself with but, be all that as it may,
they did agree to take a lease of the whole of the property. The first formal
document of their involvement then comes into being.
It was an
agreement made on March 13 1961 between Eastern International and the
plaintiffs, Scottish & Newcastle Breweries Ltd. It recites that Eastern are
in course of erecting the building and that
Scottish Breweries. Then it gets on to the main part of the agreement:
Eastern is to
proceed with the building work with all reasonable speed in accordance with the
existing plans subject to the right of Eastern’s architect to make reasonable
alterations and variations . . .
2. Subject to
the provisions of this agreement Eastern shall grant and Scottish Brewers shall
accept an underlease . . . of the whole of the building with the site thereof
as the same is shown in the existing plans.
The term of the
lease is to be 42 years ‘from the certified completion date as hereinafter
defined’.
Then there is
the clause which sets out the rent, which is of some importance:
4. The annual
rent reserved by the lease (hereinafter called ‘the annual rent’) shall be the
sum of TWENTY SIX THOUSAND TWO HUNDRED POUNDS plus a sum equal to One half of
the amount by which the aggregate of the rents receivable by the Scottish
Brewers for the occupation of the whole of the building at the expiration of
twelve months from the date of completion certified in the manner mentioned in
clause 6 hereof exceeds Twenty-seven thousand two hundred pounds. The aggregate
of the rents receivable by Scottish Brewers for this purpose (hereinafter
called ‘the original gross annual rent’) shall be calculated by reference to
the rent actually receivable by Scottish Brewers at the time aforesaid in
respect of any part of the building which is then let and by reference to the
estimated rent available in the open market as between a willing landlord and
willing tenant (if the tenant undertook to pay all usual tenants rates and
taxes and bear cost of all repairs insurances and other expenses necessary to
maintain the same in a state to command such rent) in respect of any part of
the building which is unlet at the time aforesaid or is in the occupation of
Scottish Brewers itself.
I miss out the
next part, which deals with the mode of fixing that estimated rent in the
absence of agreement, and I pick it up in the last few lines:
For the
purpose of the calculation aforesaid a sum of Three Thousand Five Hundred
pounds shall be treated as the annual rental value of that part of the ground
floor and cellarage in the basement now intended to be occupied by Scottish
Brewers itself and coloured red on the plans of such floors attached hereto.
I have to
return to that clause, but then clause 5 says ‘The lease shall contain a
provision for the revision of the said rent in the following terms’ and then
the rent review clause which found its way ultimately into the underlease is
set out in extenso, but I will come back to it, I will not read that at
this point.
Then in clause
6 Eastern’s architect is to ‘certify the date when the building is substantially
completed to the extent shown in the existing plans or would have been so
completed but for any alterations or additions to the existing plans required
by Scottish Brewers (hereinafter called ‘certified completion date’) and the
annual rent shall commence to be payable as from the certified completion
date’. I do not think I need read the remainder of that.
I now look at
clause 7, which I have already mentioned:
For the
avoidance of doubt it is hereby agreed that but for Scottish Brewers requiring
alterations and additions to the existing plans the superstructure contract for
the building would have commenced in accordance with the existing plans on the
first day of March One thousand nine hundred and sixty one for completion of
the building in the terms of that contract in fifty-two weeks and that if this
agreement had been entered into on the twenty-third day of January One thousand
nine hundred and sixty-one (being the date upon which Eastern agreed with
Scottish Brewers to incorporate certain alterations and additions required by
Scottish Brewers) any delays caused by reason of such alterations and additions
as aforesaid would have been taken into account by Eastern’s architect in
certifying the date when the building is substantially completed or would have
been so completed had it not been for any alterations or additions to the
existing plans required by Scottish Brewers.
I do not think
I need deal with the rest of that. Agreement was reached about the starting
date of the rent at a later period.
Clause 8:
Scottish
Brewers shall be let into possession of the building and of the rents and
profits thereof at the certified completion date.
Clause 9:
Eastern shall
permit and give effect to any alterations or additions during the course of the
erection of the building to the existing plans for the building which may be
desired by Scottish Brewers only upon the following terms
which are set
out there.
Clause 10 provides
that the lease is to be in the form and shall contain all such covenants as are
contained in the draft form of lease. And then there is provision, which did
not in fact happen, for the rent to be revised if there was delay, which could
be up to a year one remembers from clause 4, in the computation of the original
gross annual rent, but in the end it was able to be computed before the lease
was granted. I do not think I need read anything further out of this document.
That was the basis agreed between the parties.
Before leaving
it, one notices, going back to clause 4, that an immediate subletting was
contemplated. Scottish & Newcastle Breweries were going to sublet
immediately, and certainly within a year, portions of the building and that the
rent was to be calculated by reference to those sublettings. That is one of the
matters one gathers from that document.
It will be
recalled that Mr Favell told me (and I accept) that at the initial meeting in
February 1961 there was no reference to the dividing wall at that meeting
between architects, but that came along later and on November 14 1961 the
plaintiffs’ architects send to Cubitt Nichols, the supervising architects, a
letter and plan, the first paragraph of which I should refer to:
We enclose
three copies of our drawing . . . on which we have indicated the drainage
system and the 9′ brick enclosing walls which we should like Messrs Trollope
& Colls to execute before we take possession of that part of the ground
floor to be used as licensed premises.
That plan did
indeed show the appropriate directions for the builders in measurements, and so
forth, and did indeed show the wall which was to divide off the licensed
premises from the rest of the ground floor. I have that plan here as part of
the exhibits in the case. It was a plan which dealt with the dividing wall and
also with these special requirements as to drains which were required by the
plaintiffs for their business.
That was found
to be acceptable by Cubitt Nichols and accordingly they authorised a variation
to their contractors, and one sees on January 5 1962 an authority given to the
contractors which, among other things, is to execute the works required in the
plaintiffs’ architects’ letter dated November 14 1961, and it refers also to
their drawing of October 1961.
On June 19
1962 it would seem that those works had been completed, because we find the
quantity surveyors on June 19 advising Trafalgar House (as it had then become)
as to the effect of that variation and other variations of which I do not have
the details but which had evidently been called for while the work was
proceeding. It says this:
Further to
our letter of May 21 1962, we have now been instructed by Messrs Cubitt Nichols
regarding the allocation of cost of work executed for the benefit of your
tenants. We understand that further items have still to be recorded on
subsequent Orders, but up to and including Variation Order No 8 the position is
as follows —
And it is this
one in particular that I referred to as Variation Order No 6. Coming back to
the letter:
|
£ |
|
|
1. Scottish Brewers Ltd. |
6,821 |
|
Total |
4,623 |
|
NETT |
£2,198 |
Then Hobbs Savill were the people, as I shall mention shortly, who
were going to take an underlease from Scottish Brewers of the whole of the
upper part of these premises, and it would seem that they had had some works
done for their own requirements and their total additions were £1,294. It
caused a saving of £1,145, so the net additions in their case were £149. The
letter concluded:
These
approximate estimates of costs have not been finally agreed with the
contractor, and nothing has been included for architects or surveyors’ fees.
One deduces
from that that the works had been done by that time that Hobbs Savill were on
the scene and that, perhaps more important in this context, the works involved
some modification as they went along of the landlords’ initially proposed
works, because these works involved some saving, so that some part of the works
which had been initially planned did not in the event have to be executed
because they were in some way replaced by the requirement by the tenants’
works. That is what I draw from that letter.
Coming now to
July 10, on which date there was a letter of some importance. This is a letter
from Trafalgar House to the plaintiffs’ surveyors, Vigers & Co:
I am informed
by our architects that certified completion occurred yesterday — and it is
common ground that that is a true statement and, therefore, the completion of
this building was certified as of July 9. That has a bearing on the start of
the rent, it will be recalled in the 1961 agreement.
Then in
another paragraph they say:
I understand
your letting to the US Government is now secured and the lease to Hobbs Savill
& Bradford (Pensions) Ltd is, of course, finalised.
On these
assumptions there should be no difficulty in fixing the rent to be paid by your
clients, and if you would kindly confirm to me the rents you will be receiving
from the US Government and from Hobbs Savill, I would imagine our solicitors
can be instructed without delay to engross the lease and to get it exchanged.
And, indeed,
there did not turn out to be any difficulty over that matter.
Then it goes
on to deal with the rent to be paid in respect of the period before July 9,
because it seemed that the plaintiffs had been allowed to take possession of
part of the premises from the previous May for their own purposes.
So, as I say,
it would seem at that stage that the whole property, it was agreed, should be
let to the plaintiffs and that the plaintiffs had already negotiated
underleases with Hobbs Savill in respect of the upper parts, as we shall see
shortly, and also in respect of the remainder with the United States
Government. So there we are at July 9 1962. It would seem that the head lease
from the defendants to Trafalgar House was granted on August 16 1962. That date
I take from Mr Hillyer’s second affidavit, para 5. On September 12 1962 was
granted the underlease to the plaintiffs with which I am particularly concerned
in this case. It was between Trafalgar House Ltd and Scottish & Newcastle
Breweries, of course, the latter being defined as ‘the tenant’, which
expression shall include its successors in title and assigns where the context
so admits. The site is described, and I need not read that out, and the
parcels. Then coming to the term, it is:
To Hold the
premises hereby demised unto the tenant from the Ninth day of July One thousand
nine hundred and sixty-two for the term of forty-two years yielding and paying
therefor the yearly rent of TWENTY EIGHT THOUSAND FOUR HUNDRED AND FIFTY POUNDS
to be paid without any deductions
and so forth.
So that was in
exact conformity with regard to the term with the agreement, that is to say 42
years from July 9 which was the certified completion date. And there had been a
calculation according to the formula in the agreement and it had produced
£28,450 instead of the £26,200 which was the basic rent mentioned on p 31. So
the receivable rents are obviously more and were in fact £31,700. So that the
original gross annual rent would be something of that order and then reducible
because the first £1,000 was to be retained by Scottish & Newcastle
Breweries and the balance over that was to be divided 50/50 according to that
formula; and that produced for Trafalgar House £28,450. Coming now to the
tenants’ covenants, there is nothing beyond what one would normally expect in a
lease of property of this size and importance and for this sort of term. There
were, of course, full repairing covenants. The ones I need specially refer to I
think are first subclause (14) of clause 2 about the user. It is:
Not without
previous consent in writing of the landlord and the superior landlord to use or
suffer the said premises or any part thereof to be used other than as a car
park and cellars in the basement (such cellars being restricted to the area
edged red on Plan B . . .) office and/or flats in the upper parts and as
showrooms and shops or as to the part edged red on the said Plan B as a high
class restaurant with (ancillary to such restaurant) a snack counter and
separate Bar . . . on the ground floor, such showroom or shops to be used for
trades to be approved of in writing by the landlord and the superior landlord
such approval not to be unreasonably withheld in the case of trades suitable
for the said premises and for other approved uses permitted by the Town
Planning Authorities and the landlord and the superior landlord AND PROVIDED
ALWAYS that in no circumstances shall music singing or dancing be permitted on
any part of the said basement and ground floor.
Then I think I
can go to subclause (17):
Not at any
time during the said term to build any additional erection whatsoever upon the
demised premises and will not make any addition to or alteration in the outside
or cut or injure any of the timbers joists or walls of or in the said premises
or any part thereof without the previous consent in writing in that behalf of
the landlord and the superior landlord or its or their surveyors or agents such
consent not to be unreasonably withheld.
And then I need
not read the rest of it about the charges.
Then I think I
can go to subclause (23):
Not to assign
underlet or otherwise part with the possession of the demised premises or any
part thereof nor part with the lease hereby granted without the consent in
writing of the landlord which consent shall not be unreasonably withheld in the
case of a respectable and responsible tenant or assignee and not in any case to
underlet or part with possession of the demised premises or any part thereof
otherwise than at the best rent obtainable without premium such rent being an
exclusive rent and any such underlease for which consent is given as aforesaid
to provide for the determination thereof at the end of the twenty-first year of
this lease or to contain rent revision clauses similar to those contained in
this lease.
Then comes the
crucial rent revision clause which, broadly, provides for one review half-way
through on the 21st year, during the 20th year, providing for the increase of
rent payable as from the expiration of the 21st year of the term. That is
clause 4(2) starting on p 15 and going over the next two pages. I shall, of
course, come back to that when I have dealt with the conclusion of the review
of the facts.
On October 11
1962 the underlease, or strictly, I suppose, the subunderlease, between
Scottish & Newcastle Breweries and Hobbs Savill & Bradford Ltd, is to
be found. This comprised, as I think I have already mentioned, all the upper
floors of the building, of which there were six. They took a lease of that
‘from the 9th July 1962 for the term of forty-two years (less ten days)
yielding and paying therefor the yearly rent of TWENTY THREE THOUSAND FOUR
HUNDRED AND FIFTY POUNDS’. So they had taken the upper floors for the entire
term less a nominal reversion to Scottish Brewers. It contains many clauses
that were in the other lease. I do not propose to go through this in detail. I
think I can refer to clause 2(22), the assigning and underletting clause:
Not to assign
and so forth,
and ending up with these words:
and not in
any case to under-let or grant possession of the demised premises or any part
thereof otherwise than at the best rent obtainable without a premium such rent
being an exclusive rent and any such underlease for which consent is given as
aforesaid shall provide for the determination thereof at the end of the
twenty-first year of this lease or shall contain rent revision clauses similar
to those contained in this lease.
So there we see
going down the operation of the assignment clause which was in the other lease
and ensuring that any underlease from these underlessees shall come up for
review on that critical date, the end of the 21st year, if they last so long.
Then I think I
can just notice, without reading, the rent review provision in virtually
identical terms mutatis mutandis to be found on pp 79 and 80, put in
there as was required by the underlease held by Scottish & Newcastle
Breweries. So that was arranged in that way in regard to the upper floors.
As to the
remainder of the ground floor, we have seen some evidence that the United
States Government were interested in that part, but I have no documentary
evidence as to what lease, if any, they took. It seems they were going to take
some lease but they had ceased to be interested in these premises by 1969,
because on November 7 1969 we see an underlease of that part of the premises,
that part of the ground floor not occupied by the plaintiffs for their own
purposes, to an organisation which I am told is the Hungarian Airlines. This is
an underlease from November 7 1969 for 14 years, and, therefore, it expired on
November 7 1983, a few months after the end of the 21st year, which would have
ended, and did end, in July 1983. So to that extent it went a bit beyond the
covenant in relation to assignments and underletting provided in Scottish
Breweries’ lease, but no point seems to have been taken about that. The term of
that lease was, as I said, 14 years from November 7 1969 and it did not contain
any provision as to review. But as regards that lease, the undertenants, the
Hungarian Airlines, have made an application under the Landlord and Tenant Act
1954, as they are entitled to do, and that application is still pending. When
it is determined the court which adjudicated on that will be concerned to apply
the provisions of section 34 of the Landlord and Tenant Act in settling a new
lease if it cannot be agreed.
The only other
fact I think I need mention is that at some point between the grant of the
underlease to the plaintiffs and the present day the head lease was surrendered
to the defendants, but that, of course, necessarily was subject to the
underlease which had been granted by Trafalgar House to Scottish Breweries. So
they are now the direct landlords and not merely the superior landlords of the
premises and Trafalgar House have dropped out of the picture.
I can now
return to the rent review clause. I have already said that it provides that
during the 20th year the landlord can serve on the tenant a notice requiring an
increase in rent as from the expiration of the 21st year. Then there is
machinery for negotiation and arbitration and the appointment of an arbitrator.
All that, as I have already indicated, has happened and I am not concerned with
any point about that. But what I am concerned with is what the arbitrator is to
do in regard to the determination of the question to him, the question being
whether any, and if so what, increase ought to be made in the rent payable as
from the expiration of the 21st year of the term. He is directed by subclause
(d) to determine that question by:
(i) ascertaining the annual rack rent of the demised
premises including any buildings thereon at the date of the rent notice that is
to say the annual rent at which the demised premises and any such buildings
might reasonably be expected to be let as a whole without premium in the open
market as between a willing landlord and a willing tenant if the tenant
undertook to pay all usual tenant’s rates and taxes and to bear the cost of
repairs insurance and other expenses (if any) necessary to maintain the same in
a state to command such rent and assuming that the tenant has observed and
performed all the covenants and conditions by it to be observed and performed
hereunder but disregarding (a) any effect on rent of the fact that the tenant
or any persons deriving title under it had been in occupation of the demised
premises (b) any goodwill attached to the demised premises since the
commencement of the term hereby granted by reason of the carrying on thereat of
the business of the tenant or of any person deriving title under it and (c) any
effect on rent of any improvement or additional building carried out by the
tenant or any person deriving title under it.
One notices
that there is no reference to vacant possession there, as there is in some of
these clauses, and that question has come up here. Then one notices that ‘the
disregards’ obviously have been taken to some extent from the statutory
disregards in the Landlord and Tenant Act 1954, but there are very important
differences. They have certainly been tailored to the particular situation
here, but the three disregards are those which are to be found in the 1954 Act,
that is to say the effect of the occupation, goodwill and, important for
present purposes, the effect of any improvement or additional building. But
clause (c) goes beyond the disregard in the statutory provision in that it
refers to ‘additional building’ and ‘any persons deriving title under it’.
That is the
main provision, but I should just deal with the rest of the clause. Subclause
(ii) directs what the arbitrator is to do. He is to determine the question and
then having got that decision made, he is to go on:
(ii) calculating the amount which bears to the
annual rack rental value ascertained under paragraph (i) above the same ratio
that the rent payable hereunder at the date of the rent notice bears to the
original gross annual rent (hereinafter defined) And if the amount calculated
under paragraph (ii) above exceeds the rent payable hereunder at the date of
the rent notice the difference shall be the increase in the rent payable
hereunder.
Then there is
a covenant on behalf of the tenant to pay that increase from the 21st year, and
I need not read that out, but go on to (f):
For the
purpose of this clause the expression ‘Original Gross Annual Rent’ shall have
the same meaning as that assigned to it by an agreement dated the thirteenth
day of March One thousand nine hundred and sixty-one made between the same
parties as the parties hereto and in the same order.
That is a
provision which has the effect of reducing the rent which has been determined
by the arbitrator, because he has to calculate the amount which that bears to
the value that he has ascertained by the same ratio that the rent under the
lease bears to the original gross annual rent, and as the gross annual rent is
larger than the rent payable under the lease, as we noticed as I went along,
then, of course, that will necessarily mean a reduction, of not very large
proportions because it was not a very big reduction, but a reduction of the
rent so ascertained by the arbitrator under clause (d)(i).
Assumption
as to terms of natural letting
That is the
clause, and now I can deal with the first question: what are the terms of the
hypothetical lease which the arbitrator is to assume when he is making his
award or determining what increase in rent there should be?
The landlords’
position is this, that he should assess the rent payable for the residue of the
term, that is 21 years, on the same terms and conditions as are in the existing
lease other than as to the rent. There should be, among other things, no
further review; there is no provision for further review, this is the one and
only, and that will no doubt result in a higher rent being awarded than would
be if the arbitrator was to assume a notionally shorter lease, or perhaps a
lease for the rest of the term, the 21 years, with shortish reviews — which is
the common feature of leases of this type of property being granted today. So
that is the landlords’ view, that except for the amount of the rent it is on
exactly the same terms as in the current lease but without any review at all.
To some extent
there is support in the authorities for that view. In the case of Ponsford
v HMS Aerosols Ltd [1979] AC 63, there are some dicta of the House of
Lords which bear on this question. They were concerned with fixing the
reasonable rent for demised premises — that was the phrase in question, ‘What
was the reasonable rent for the demised premises?’, and that led to a judicial
opinion which happily I am not concerned with in this case. It is simply some
dicta which shows the approach of at least some of their lordships, certainly
two of those in the majority, on the matter. I was referred specifically to the
speech of Viscount Dilhorne on p 76 at G, where his lordship said:
In the
present case and in many others provision is made for the assessment to be made
by an independent surveyor. What is he to do?
Surely it is to assess what rent the demised premises would command if
let on the terms of the lease and for the period the assessed rent is to cover
at the time the assessment falls to be made.
Then he goes
on:
That rent may
depend to some extent on local factors such as deterioration of the
neighbourhood.
But the point
is what it would command if let on the terms of the lease and for the period
the assessment is to cover. That is how Viscount Dilhorne saw it.
Lord Fraser at
p 83 has a sentence in his speech which says this, dealing with the question of
what is meant by a reasonable rent:
Regard must,
of course, be had to the terms of the lease, because its provisions with regard
to duration, responsibility for repairs and other matters may affect the rent,
but their effect would be the same whoever the landlord or the tenant might be.
So his lordship
also directed his attention to the terms of the existing lease other than as to
rent.
In a more
recent case in 1984 Harman J in Sterling Land Office Developments Ltd v Lloyds
Bank plc, reported in (1984) 271 Estates Gazette 894, had some observations
about this. He was dealing with the effect of a user clause which had a very
restrictive effect in the lease his lordship was concerned with, but he had
some observations which are of assistance here. The arbitrator there was
directed simply to find ‘an amount equal to the market rental for the demised
premises with vacant possession’. There, of course, the vacant possession point
— which is the second point I have to deal with — was expressly dealt with, but
the point at the moment is that it is as to the market rental of the demised
premises. There is no indication there of what terms the arbitrator is to
assume in the hypothetical lease. Harman J says this:
Mr Gaunt, for
Lloyds Bank, submitted that no valuation could ever be made without knowing the
terms on which the property to be valued was to be disposed, that is to say,
freehold or leasehold, the length of term, user, and others. There were here,
he submitted, as Mr Poulton’s motion raised the question, three possible sets
of terms: first, on the terms of this lease; second, on ‘the usual covenants’;
third, the terms likely to be available at the time of the valuation in the
open market. He urged that the first was the correct implication, and that that
meant all the terms of this underlease, including the user covenant as
presently standing.
Then he goes a
little into that, and then he analyses that and dismisses the idea that it
should be on the usual covenants basis. He ends up by saying:
On this
point, I am wholly convinced by Mr Gaunt that any valuation should, if
possible, not be on the terms of the ‘usual covenants.’ I am also content to accept that a valuer
should not be asked to determine what covenants might be expected in the open
market at the date of valuation.
By a process of
elimination his lordship obviously accepted that the right approach was on the
terms of the lease.
So that is how
the matter stands on the landlords’ submissions and the supporting authority.
The tenants
say that whatever may be the position generally in regard to this, in this case
guidance is given in the review provision itself. Mr Hague called my attention
to the phrase ‘in the open market as between a willing landlord and a willing
tenant if the tenant undertook to pay all usual tenant’s rates and taxes and to
bear the cost of repairs insurance and other expenses necessary to maintain the
same in a state to command such rent . . .’. So there is an express direction
as to what covenants are to be included and that excludes the rest of the
covenants and provisions of the lease itself. He accepted that the length of
term was 21 years, that is to say the whole of the outstanding residue, and
that he did not feel able to put forward an argument that the arbitrator should
assume that it should be any other term than the outstanding unexpired portion
of the term. But he said this: ‘The terms of the lease should be the terms
specified in clause (d)(i) and those which the property is most likely to be
let at in the open market at the due date.’
So that is the third of the possible bases that Harman J considered.
‘One can leave the arbitrator to decide on what terms the property would be let
for on a 21-year lease, and such an arbitrator’, so the submission goes, ‘would
say that no one would let on review for 21 years without some
existing lease because of the express provisions of the rent review clause
which do not follow the words of the lease’. He said: ‘It was not in
contemplation that it would be those terms and it must be contemplated that the
arbitrator was to judge what the market would be at a review in regard to those
other terms including a review provision.’
He distinguished the authorities on the basis that in those cases, as we
have seen, ‘there was no guidance whatever in the submission to the arbitrator
as to what he was to do in regard to the terms of the lease’.
I am bound to
say I see some logical difficulty in that submission. It would be possible to
say that only the terms mentioned in the review clause should be regarded as
forming part and parcel of the hypothetical lease, but if that is so, then
there would be no rent review provision in it. I cannot myself see how the
expression of some terms in the review provision leaves the rest of the
provisions at large to be incorporated or not as the arbitrator might decide.
It seems to me the choices open are either no terms at all other than those indicated
in the review provision, or those in the existing lease in so far as they are
not inconsistent with the express terms in the review provision. In fact they
are not inconsistent with the terms in the lease, because under the lease the
tenant, as one might expect, does pay the tenant’s rates and taxes and bears
the cost of repairs and insurance.
So on that
ground it seems to me that the landlords’ submission should be accepted and
that the arbitrator should be directed to review this lease on the basis that
it is to be on the terms of the existing lease other than as to rent for the
period of 21 years.
There are
certain other considerations that have led me to that view. One depends on the
history of the phrase that is in the review provision, ‘. . . a willing tenant
if the tenant undertook to pay all usual tenant’s rates and taxes and to bear
the cost of repairs insurance and other expenses necessary to maintain the same
in a state to command such rent . . .’ because that has its origin, so far as
this case goes, in the agreement of March 1961, and particularly in clause 4,
where one finds that phraseology set out in relation to assessing the rents of
the parts that are unlet in order to assess the initial rent of the lease and
that does just seem to have been copied into the rent review provision which,
as I have said, was in fact formulated first in clause 5 of that agreement
without properly considering its due effect.
Then a point
which Mr Barnes made when he called my attention to the following words in the
clause ‘. . . and assuming that the tenant has observed and performed all the
covenants and conditions by it to be observed and performed hereunder . . .’.
It would be strange, though not impossible, if the arbitrator was to assume
that all the terms of the lease up to the review date had been observed and
performed, even if the fact was otherwise, in other words that the tenant was
fully abreast of his covenants, but, on the other hand, then going on to the
hypothetical lease, to assume that some of those covenants were not going to
find any part in it whatever. As I see it, having been directed to make that
assumption, one infers from that that he is to assume that those covenants and
conditions are to continue.
Accordingly on
that part of the matter I propose to answer the question I put to myself at the
outset, that the assumption he is to make as to the term is that he is to
assume that all the terms presently in it, other than the amount of the rent,
are to be offered for 21 years without any further review.
Assumption
as to letting with vacant possession or subject to existing underlettings
Now I come to
the question of vacant possession. What the arbitrator has to ascertain is the
annual rack rent of the premises including any buildings, that is to say the
annual rent at which the demised premises must reasonably be expected to let as
a whole without a premium in the open market. If it stood alone I think one
would assume that it meant with vacant possession. It is the normal assumption:
if premises are offered for letting one assumes what is being offered is the
possession of those premises and not a lease subject to an existing lease. One
is not being offered a lease of the reversion. But the question I have to
consider is a much more complex one, because here underleases are known to
exist or are going to be brought into existence. What is the position if
underleases are known to exist and a lease is granted subject to them? That was the position in a case before Judge
Mervyn Davies (as he then was) sitting in this court, Avon County Council
v Alliance Property Co Ltd (1981) 258 Estates Gazette 1181. The learned
judge in that case held that there, in the circumstances that he had, the ‘rack
rental market value’ (and I do not see any difference between that phrase and
the one I have got to consider, ‘the annual rack rent’) was to be determined on
the basis of a deemed vacant possession of the whole. That was despite the fact
that there were existing subleases of parts of the premises and the lease had
been granted subject to those subsisting subleases.
Now neither
counsel suggested that I can derive any general principle from this case,
indeed each of these cases turns on the particular provisions of the rent
review provision under consideration, but nevertheless I have had a meticulous
examination of the learned judge’s judgment by both counsel — and I make no
complaint about it, indeed I have been greatly assisted by both counsel in this
case generally. In the end I found that it is not really of great assistance to
me in resolving the problems that I have here. It helps to clarify one’s ideas,
but it is not of great assistance. The points that seem to me so remote from
this case are these. In that case the provision was for a 125-year lease but
with five-yearly reviews throughout the whole term. It was subject to a number
of underleases which ranged into the term, but nothing like half of it; I think
35 years was the longest one and some were 25 years and some shorter periods.
One can see that if there were to be five-yearly reviews with subleases of that
nature throughout a long term one would see that it would lead to very great
variations on each five-yearly review if it had to depend on the state of the
underleases which would vary from year to year. There was no provision that I
could see for linking those subleases with the review of the head lease at any
point. I can well understand the decision that the learned judge came to in
dealing with the facts of that case. Nevertheless, the conclusion I have come
to on this is that on this review the subleases are to be taken into account at
the review. There is only one review at mid-term and that, of course, at once
sets it apart from the Avon case, though that in itself is not
conclusive of the question. But it is a point.
Then, second,
the subletting of all the other floors and the part of the ground floor was
contemplated and agreed to from the outset, and, indeed, the original rent was
calculated by reference to the rents receivable from subletting, and the
formula then adopted finds its place for certain purposes in the current review
provision.
Third — and I
think this is what has really weighed with me — that the sublettings, if
continuing beyond the review date, are themselves subject to review at that
date. That was a requirement which was imposed by the landlords in the clause
that I have referred to, and consequently the tenant will then be in receipt of
the full rack rents following such reviews and hence his interest will be correspondingly
enhanced. The landlords could thus be considered to be offering a lease of the
whole, vacant possession of a part and leases at full rents of the remainder.
Having established that, why, I ask, should there be an assumption of vacant
possession of the whole, including the upper floors as well as the ground
floor, which all know is not going to occur?
It is for those reasons that I find, on this part of the case, in favour
of the tenants’ submissions.
Mr Hague
supported his submissions with a reference to the case of Oscroft v Benabo
[1967] 1 WLR 1087. This was a case where the court was concerned with an
application under the Landlord and Tenant Act 1954 for a new lease. In the
premises — which were mixed business and residential — there was a residential
flat. When the new lease came to be considered it would appear that the
landlord had required the tenants, or was requiring the tenants, to take a new
lease of the entirety of the premises which had been the subject of the
previous lease, that is to say both the part occupied by the tenant for
business purposes and also the upper floor which was sublet for residential
purposes. The tenant’s right to demand a new lease is confined to the holding,
which is the part he is himself occupying for his business or for his own
residence and, therefore, he cannot insist on other parts of the premises which
are not so occupied being included in the lease. But the landlord is entitled
to require that under section 32 of the Landlord and Tenant Act. The landlord
can require the new tenancy ordered to be granted to be a tenancy of the whole
of the property comprised in the former tenancy, and in that situation how is
the property to be valued? Is it to be
valued on the basis that the tenant is taking possession of the whole of the
property, or is account to be taken of the sublease? The court was of opinion that the latter was
the right decision. I put it in that way because the opinion of the court on
this matter was obiter, their having decided on another point and the
point could not be opened in the Court of Appeal, not having been taken in the
court below.
My attention
was called to the dictum of Willmer LJ on p 1094 of the report, where
his lordship said:
Assuming (if
I may anticipate the third point) that Thomas is the tenant of the upper floor,
he is the tenant of the partners, and not of the landlords. It seems to me that
if he is a tenant and if his tenancy is a protected one, that must be a
relevant circumstance to consider when deciding the rent at which the premises
as a whole might reasonably be expected to be let in the open market by a
willing lessor; which is what the judge has to decide in the pursuance of
section 34 . . . In fixing that rent, it seems to me that all the circumstances
of the particular case, including the fact of any existing subtenancy, must
necessarily be taken into consideration.
And Harman LJ
said, on p 1097:
The point is
whether, when finding the market value, the county court judge is to take into
account all the factors. If, for instance, there is a statutory tenant in
possession of part of the premises, is that a matter which he can take into
account in arriving at an open market value?
It seems to me that he clearly is entitled to look at the open market
value of the premises in the condition in which they are and with such
disadvantages as they possess as between a willing lessor and a willing lessee.
There is no rule, so far as I can see, to bar the judge from taking into
account the fact that there is a statutory tenancy.
Of course
those dicta do lend some support for the view which has been pressed on
me by Mr Hague and I have accepted that here in this case one does look at the
position as it stands, although I am bound to say that I do not find the case
in any way conclusive of this case and it is not on the ground of any sort of
authority that I am deciding it. Looking at the position in that case, it would
indeed be strange if the landlord could insist on the tenant taking a sublet
part under section 32 and at the same time make him pay for the vacant
possession value of it. So to that extent it seems to me that the case is not
conclusive of the matter.
In deference
to Mr Barnes’ submission on this important point I ought to say a few words on
his most careful argument in support of the proposition that the arbitrator is
to assume that it is with vacant possession. Mr Barnes said that vacant
possession valuation is likely to be the intention unless it is expressed to
the contrary, and in general I would accept that; as I said, I think one starts
with that. Were it otherwise the landlord would be in the position on a review
of rent of being in the hands of the tenant if the tenant decides what terms he
is to arrange with the subtenants.
I think to my
mind, with respect, there are two answers to that. The first is that it is in
the common interest of the landlord and tenant, as Mr Hague put it, to get the
best rent and, second, in this particular case the landlord has expressly
protected himself by the provisions of the assignment clause.
Then, still on
this point, it was pointed out that the arbitrator is put in a curious
situation, since he would have to value the subleases in existence and
therefore has to assess what they would get under the subleases. That does not
seem, with respect, to be a great drawback in the matter. Indeed, valuers are
continually having to assess interests subject to other interests, and in this
case he is assisted by the fact that all those subleases are themselves under
review by a similar formula.
Then it was
suggested to me that with regard to the first disregard, he has got to
disregard any effect on rent of the fact that the tenant or any person deriving
title under it has been in occupation of the demised premises, and if that
requires him to assume that it is with vacant possession it ignores any sort of
occupation that has been or is going on. That, in my judgment, is not a
legitimate use of that disregard, indeed not the purpose of it, which is
limited to negating the special effect of the tenant’s own occupation, because
that might either enhance the value in that he is likely to make a special bid
and thereby increase it, or his occupation might diminish the value of the
premises in that he had been in any way unsatisfactory in his occupation and
thereby the premises had deteriorated. It is really directed at those sort of
considerations and not to conclude the question as to whether it is with or
without vacant possession that the arbitrator is to review the rent.
The next point
was based on the Avon case but, as I say, I do not really get much
guidance from it or feel that that case is a very great help here.
Then, based on
the assumption that I was, as I have, to decide that the arbitrator was to
assume that it was on the other terms, then it was said, well those terms do
presume that the lease is granted with vacant possession. That was, I think,
the way it was put, on the hypothesis of everything I have decided, that those
are the terms on which the arbitrator is to proceed in valuing this
hypothetical lease as to rent. That, as it seems to me, does not really answer
the question at all, whether it is subject to underleases or not. Quite
frequently if there are subsisting underleases then the lease refers to them,
but it does not necessarily have to do so without thereby vitiating some parts
of the covenants of the lease and there is no need to state that it is subject
to underleases.
Then Mr Barnes
had a special point on clause 4 of the agreement in relation once again to the
formula we looked at in relation to other points, the formula of the tenants’
bearing costs of all repairs and insurances and other expenses, pointing out
that that occurs, indeed is the fact, in clause 4 of the agreement of 1961 in
relation to unlet premises and thereby by incorporating it into the rent review
it has the same consequence, and that was an indication that that, too, was to
say that one was to assume that the hypothetical lease was with vacant
possession.
I have already
dealt with this to some extent. In clause 4 it was necessarily with vacant
possession because that was the only occasion on which it could operate. It did
not in itself determine it because that was dealing with, and only with, those
parts of the premises that were unlet after the lapse of a period of one year
after the lease had been granted, and I think it is putting too much on that,
if I may say so, by copying that into the rent review clause itself that
thereby it is also to be assumed that the premises are unlet. The expression
‘part of the building which is unlet’ is expressly defined in clause 4 but, of
course, is not to be found in clause (d)(i).
I think the
next point that was taken was that one must ignore the actual lease with the
actual rent in the hypothetical lease. The natural corollary is to assume that
any interest which is under it also does not exist. That, as it seems to me, is
simply another way of putting the first major point about vacant possession and
is not an additional way, and I do not really see that as adding in any way to
the first submission.
Then another
point was that as the initial rent was calculated by reference to a formula
based on rent receivable, if they had intended to follow the same matter here,
that the valuation was to be by reference to rent receivable, they would have
said so. Again I find that unacceptable as a point, persuasively as it was put,
because initially what was being taken was the rent actually being received on
the open market; these were the first rents of the property and they were,
therefore, actual open market rents being received. Here it is a question of
valuation and it is quite a different situation on review where it must be
either notional vacant possession or, as here, where the subleases themselves
are under review.
Finally there
was a point based on the formula, the reduction exercise based on the formula.
This point to me has potency, I think because the formula itself is ambivalent.
It was initially an uplifting arrangement to give the landlord a share of the
profit rentals and it has been introduced in the review clause, not altogether
happily in my judgment, as a reducing formula to allow for the burdens and
risks in the management of a multi-occupied building. Then it is said: ‘Well,
if it is valued subject to subleases and then reduced the tenant then gets a
double reduction.’ But I think that is
an oversimplification of the situation. First of all, as I see it, on general
grounds, the introduction of the original gross annual rent and the rent
payable into the review clause, clause 2(d) and (f), to my mind underlines the
connection with the underlettings rather than the reverse. Second, as the
underlet rents were themselves subject to review, it may have been thought at
the time that there was no difference between the value with vacant possession
and the value of the head lease subject to leases which are themselves going to
command a full rent. Having dealt with those two considerations, although I was
impressed with this point of Mr Barnes, I do not find it sufficient to upset
the conclusion which I came to on general grounds at the outset of this
discussion, based mainly on the provisions of clause 2(22).
Assumption
as to dividing wall
So I propose
to answer that point by saying he is to assume that the notional lease is
subject to the existing underlettings.
I have,
lastly, to deal with the dividing wall. It was at one time thought that this
was going to be a point of real significance and, indeed, it was put in the
forefront of the originating summons, but it is agreed now not to have very
much bearing on value, because if the subtenancies are to be ignored — that is
to say the vacant possession point was right — then the hypothetical tenant
taking on the existing terms could remove the wall, the landlord not being able
reasonably to withhold his consent and thus possess himself of the entirety of
the ground floor which it seems commands a higher rental value as a whole than
when divided. As I have heard full argument and it may
with it.
The question
is: is it an improvement or additional building carried out by the tenant or
any person deriving title under it? I
can ignore the last words ‘person deriving title under it’; there is no question
of any such person here. It breaks down into three questions: (1) Was it an
improvement or additional building? (2)
Was it carried out by the plaintiffs?
and (3) Were they the tenants at the time?
I leave the
first one on one side for the moment and deal with the other two first. To
answer the second question: ‘Was it carried out by the plaintiffs?’ I am firmly of the view, in my judgment, that
they did carry it out. They ordered it and paid for it, even though it was
actually carried out by the landlords’ contractors with the landlords’
approval.
On the third
point: ‘Were they the tenants at the time?’, that is not quite so straight
forward and indeed there is a certain amount of authority about this. The point
is that when it was carried out, as I have explained in my review of the facts,
they had not then taken the lease, though they were under an agreement to take
the lease. It was done before the lease was granted. I have been referred to a
number of cases on this point, but I think I need only refer briefly to two of
them.
The first is
the decision of the House of Lords in Re ‘Wonderland’, Cleethorpes [1965]
AC 58. There there was an application for a new lease under the 1954 Act and
there had been an improvement by the tenant some years before the time had
started; he had done it when he had been holding under a previous lease and
then he had taken a new lease and that had expired, and then he sought to say
that the value of improvements that he had done under the former lease were to
be disregarded. The House of Lords held that it had to be effected during the
term of the current lease to qualify to be disregarded. The harshness of that
decision did in fact lead to some statutory amendment, but that has no bearing
on what I have to decide in this case.
The other case
is a very recent decision early this year of Scott J in Hambros Bank
Executor & Trustee Co Ltd v Superdrug Stores Ltd (1985) 274
Estates Gazette 590. There the position was that Superdrug were proposing to
take a lease of some premises that were in bad need of renovation and
adaptation and before they took the lease — they had not had any previous lease
of the premises, but before they took them they had done substantial
fitting-out work during the period immediately prior to the grant of a lease
and clearly in contemplation of that grant and in the expectation that it would
be granted to them, as in fact it was. Scott J held for the tenants on a number
of grounds. The first was that they were literally the tenants; as we have
here, Superdrug were defined as the tenants, and on the factual matrix that it
was in clear contemplation that the lease would be granted to them. Then, faced
with the Wonderland case which I have just mentioned, the learned judge
distinguished it in this way:
I am not
clear that the dicta and principles expressed by their lordships in that case
indicate what their view would have been had the improvements been carried out
shortly before the current tenancy by the person shortly becoming the current
tenant and with a view to the grant of the current tenancy. The example I am
contemplating is that of a tenant who negotiates a tenancy with a landlord and
is allowed into possession before the grant of a lease in order to carry out
various improvements to adapt the premises for his use as tenant. Let it be
supposed that the term originally granted expires, that there is no provision
in the lease for renewal or rent review and that the tenant, relying on his
statutory rights, applies for a new tenancy. I do not think the Wonderland
case is any authority for the proposition that in assessing the rent for the
new tenancy the improvements made by the tenant in those circumstances fall to
be taken into account on the ground that they were improvements carried out
before the grant of the lease. That was not the factual situation with which
the House of Lords in the Wonderland case was concerned. It is a factual
situation which raises, to my mind, quite different considerations from those
with which the House of Lords was concerned. I do not regard the dicta by
Viscount Simonds and Lord Morris to which Mr Reynolds referred me as having any
bearing on the facts in the present case.
For myself I
am perfectly happy to follow the approach of the learned judge in that case and
apply them to this case. The way I would put it is: are the improvements
referable to the grant of a tenancy under consideration, or are they referable
to some former interest of the tenant, as in the Wonderland case? Here they were done in anticipation of the
grant of a lease and the occupation by the plaintiffs for the first time of
these premises.
I return,
then, to the first of the questions on this part of the matter: ‘Was it an
improvement or additional building?’
Here I have not got any guidance from the authorities that have been
referred to me. I am sure they would have been pointed out had there been such guidance.
The work in question here was a modification of the landlords’ building in the
course of erection, and the modification concerned the wall and the drains, as
I have already called attention to. That and other variations not in evidence
resulted in certain savings of works in not doing other works and resulted in a
net charge to the plaintiffs. As I would see it, in the case of an improvement
or an additional building what is being looked at is the alteration of or
addition to a building that the landlord has provided. That is what is contemplated
here: the landlord provides a building and then the tenant adds something to it
or improves it in some way. But if a building is built according to the design
of a tenant, or to some extent according to the design of a tenant, and it is
never built by the landlord in some other way, then, in my judgment, it is not
an improvement or additional building. It is part of the original building, and
it is none the less so even though the tenant contributes to the building cost.
What he has improved in those circumstances, in my judgment, is the design of
the building; he has not improved the building itself. The building that went
up is all that ever went up, as Mr Hague put it to me. I recognise, of course,
that in some cases it may be difficult to sever out what is a genuine
improvement which is added in as a building is going up as originally designed,
on the one hand, which would be an improvement, and, on the other, what we have
here, which is a modification resulting in some parts of the building not being
built according to original plans but being built according to some other plan.
Having
formulated that test and applied it to this case, it seems to me that this wall
and a fortiori the drains which are mentioned in that variation are not
an improvement or additional building carried out by the tenant.
I think that
disposes of the questions I have been asked to answer.
The
defendants were ordered to pay half the plaintiffs’ taxed costs.
