Landlord and tenant — Rent review — Construction of rent review provision — Whether, inter alia, improvements carried out by tenants to be disregarded in giving effect to the expression ‘a fair yearly rent for the Site’ — Appeal allowed in part
landlord, Medway Ports Authority, is the owner of some 53 acres of land — The
land originally included part of a defensive moat extending to 13 acres — By
one of two leases the respondent tenant held the term of the major part of the
land, including the 13 acres of moat and two pieces of land beyond it, for a
term of 125 years from September 1 1968 — Under the lease the tenant covenanted
to erect a building consisting of a steel-making plant and rolling mill — The
tenant was at liberty to drain and fill the moat with suitable solid matter —
The evidence showed that the tenant at considerable cost did drain and fill 11
acres of the moat, leaving the balance as cooling ponds, and that it erected
the steel-making plant and rolling mill and further buildings — The lease made
provision for the rent to be reviewed every 21 years — The rent at review was
to represent a ‘fair yearly rent for the Site’ having regard to rental values
of property let for 125 years from the date of valuation ‘. . . for industrial
purposes with an obligation for the Tenant to construct thereon such buildings
as may at the time of such valuation be situate thereon . . .’ no account being
taken of the value of any buildings actually standing on the premises — Upon
the hearing of an originating summons issued by the tenant, Browne-Wilkinson
V-C granted declarations in answer to, inter alia, four questions arising out
of the rent review provision; two questions were decided in favour of the
landlord and two in favour of the tenant and the landlord and tenant appealed
and cross-appealed respectively
September 1 1989 (the review date) — (2) The site is to be taken to be an
unbuilt plot with the moat thereon wholly filled except for that part not
filled and used for cooling ponds — (3) In the passage in the rent review
clause worded ‘with an obligation for the Tenant to construct thereon such
buildings as may at the time of such valuation be situate thereon’, the
expression ‘such buildings’ did not include plant and machinery affixed to the
realty — (4) Clause 2(14) of the lease contains a covenant by the tenant not to
use or occupy the premises other than for the purposes of steel-making,
steel-rolling and operations ancillary thereto or for such other purposes as
may from time to time be approved by the lessors — The notional lease
incorporated this clause but with the user provision modified so as to permit
use for industrial purposes or for such other purposes as might from time to
time be approved by the landlord — The notional lessee is to be regarded as
being entitled to carry out all alterations necessary or appropriate to convert
the premises for an industrial use of his choice, notwithstanding the covenant
in the actual lease by the tenant not to carry out alterations or improvements
save in connection with the use of the premises for steel-making
The following
case is 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
This was an
appeal by the defendant landlord, the Medway Ports Authority, and a
cross-appeal by the plaintiff tenant, Sheerness Steel Co plc from an order of
Sir Nicolas Browne-Wilkinson V-C, who on October 24 1990 granted declarations
in answer to a number of questions arising out of the rent review provisions of
a lease dated February 1 1971 of a 51-acre site at Sheerness, Isle of Sheppey.
David
Neuberger QC and Timothy Fancourt (instructed by Norton Rose) appeared for the
appellant; Robert Reid QC and Nigel Thomas (instructed by Slaughter & May)
represented the respondent.
Giving the
first judgment at the invitation of Lord Donaldson of Lymington MR, NOURSE
LJ said: By an order made on October 24 1990 Sir Nicolas Browne-Wilkinson
V-C granted declarations in answer to a number of questions arising out of a
rent review provision in a lease of commercial premises. Of the four questions
which are still in dispute he decided two in favour of the landlord and two in
favour of the tenant, who now appeal and cross-appeal respectively.
The landlord
is the defendant, the Medway Ports Authority. The tenant is the plaintiff,
Sheerness Steel Co plc. The demised premises are at Sheerness on the Isle of
Sheppey. Their total area is between 52 and 53 acres. The great majority of
them were acquired by the landlord in 1963 from the War Department which, until
shortly before that date, had used them for military purposes. There were only
three buildings on the land at that time. The premises included part of a
defensive moat by which the entire north-western tip of the Isle of Sheppey had
been almost cut off from the rest of the isle. The area of the part of the moat
included in the demised premises was 13 acres. Two pieces of land of an
aggregate area of 7.62 acres were cut off from the main area by the moat.
The demised
premises are held under two leases dated February 1 1971 and October 14 1973,
each made between the landlord of the one part and the tenant of the other
part. The first of them comprised the major part of the premises, of an area of
about 51 acres, including the 13 acres of moat and the two pieces of land
beyond it. The term granted was 125 years from September 1 1968. The tenant
agreed to erect a steel-making and rolling mill. It is out of the provisions of
this main lease that the questions of construction have arisen. The second
lease, which added a small area to the west of the main area, was expressed to
be supplemental to the main lease and to be made upon the same terms. Hereafter
I will refer to the main lease simply as ‘the lease’.
The principal
provisions of the lease are these. The parcels were expressed as follows:
ALL THAT
piece or parcel of land situate at Sheerness in the County of Kent shown on the
plan annexed hereto and thereon edged red (hereinafter called ‘the Site’)
Together with the Buildings erected thereon or on some part or parts thereof
(hereinafter called ‘the said premises’).
The rent
reserved for the first 21 years of the term was £22,000. The rent reserved for
the next 21 years, that is to say from September 1 1989, was whichever should
be the greater of £22,000 and ‘the ascertained rent’, with similar provisions
during each period of 21 years thereafter. The ascertained rent was defined to
mean the rent agreed between the landlord and the tenant or in default
determined by an independent expert:
being the
amount which shall represent a fair yearly rent for the Site having regard to
the rental values then current for property let for one hundred and twenty five
years from the date of valuation without a premium with vacant possession for
industrial purposes with an obligation for the Tenant to construct thereon such
buildings as may at the time of such valuation be situate thereon and otherwise
on the terms and conditions of this Lease (other than the rent hereby reserved)
provided that in determining such rent no account shall be taken of
(i) any
effect on rent of the fact that the Tenant has been in occupation of the said
premises and
(ii) any
goodwill attached to the said premises by reason of the business then carried
on thereat by the Tenant.
(iii) the
value attributable to any buildings actually standing on the premises.
The tenant’s
covenants were contained in clauses 1 and 2 of the lease. By clause 1(1) it
covenanted that it would:
proceed
expeditiously to erect and complete by the 31st day of December 1973 a new
building consisting of a fully equipped steel making plant and rolling mill
capable of producing not less than Fifty thousand tons of steel products per
annum . . .
By clause
2(10) the tenant covenanted, among other things, not to discharge any solid
matter into the moat, with a proviso in these terms:
PROVIDED THAT
the Tenant shall after a water-tight wall shall have been constructed between
the points marked X and Y on the said plan be at liberty to drain and fill in
the moat with suitable solid matter up to the level of the remainder of the
said premises at the point or points respectively where the same are contiguous
and such filling in shall not constitute a breach of this Clause.
I shall refer
to others of the tenant’s covenants when dealing with the individual questions.
It will be
observed from these provisions that, although the tenant was obliged to erect a
steel-making and rolling mill of a specified minimum capacity, it was not
obliged to drain and fill in the moat. At the same time it was within the
contemplation of the parties that the moat might be drained and filled in, an
operation which, as has been pointed out by the tenant, would result in the
reclamation not only of the 13 acres of moat but of the 7.62 acres of dry land
beyond it. The evidence does not establish whether the specified minimum
capacity could or could not have been achieved without that reclamation and I
make no assumption either way. What the evidence does show is that the tenant,
at what it claims was a considerable cost, has drained and filled in all but
approximately two of the 13 acres of moat (now used as cooling ponds); that it
duly erected and completed a fully equipped steel-making plant and rolling mill
capable of producing not less than 50,000 tons of steel products pa; and that
it has carried out further works of improvement, including the erection of
further buildings, resulting in a current productive capacity of the order of
850,000 tons pa.
Early in 1989
discussions started between surveyors on both sides with a view to agreeing the
rent which should be payable from September 1 1989. The figure of £900,000 pa
proposed by the landlord having proved to be approximately four times the
figure acceptable to the tenant, it became clear that the rent would have to be
determined by an independent expert. A nomination was duly made by the
president of the Royal Institution of Chartered Surveyors on December 5 1989.
It also became apparent that there were a number of differences of opinion
between the landlord and the tenant as to the true construction of various of
the provisions of the lease which, if they were not resolved beforehand, would
or might present the expert with a very difficult task in making his valuation.
And so these proceedings were commenced by an originating summons issued by the
tenant in the Chancery Division on January 18 1990.
By the time
that the matter came before the Vice-Chancellor several of the questions had
been determined by consent and his order so records. Seven questions, of which
the first two were in substance one, were argued and decided. Two of them are
no longer in dispute; so five, in substance four, remain. Each of them is
short. But it seems that the outcome of two of them may have a considerable
influence on the rental value of the premises. I will deal with the questions
in turn, using the numbering and formulation set out in the list annexed to the
Vice-Chancellor’s order.
Questions 1
and 2:
1. Whether
‘the Site’ means the Site as defined by the earlier Lease in its state and
condition on 1st February 1971 or on 1st September 1989.
2. Whether
(a) the Site is to be taken to be an unbuilt plot and (b) the moat thereon to
be wholly unfilled.
The
Vice-Chancellor answered these questions by declaring that ‘the Site’ meant the
site in its state and condition as at September 1 1968 and that it was taken to
be an unbuilt plot and the moat thereon wholly unfilled. That decision was
favourable to the tenant because ‘a fair yearly rent for the Site’ will clearly
be less if it is taken to include an unfilled moat extending to about a quarter
of its area. This is one of the questions whose outcome may, so it seems, have
a considerable influence on the rental value of the premises.
The
Vice-Chancellor prefaced his consideration of the individual questions with
some observations on the general approach of the court to the construction of
rent review provisions. Those observations were primarily directed towards
questions 1 and 2. He said that in general the purpose of a rent review
provision was to give the landlord a rent which reflects, as at the review
date, changes in the value of money and in the value of property; it was not to
confer some additional windfall on the landlord. Having referred to the
decision of this court in Basingstoke and Deane Borough Council v Host
Group Ltd [1988] 1 WLR 348*, he continued:
Mr Neuberger
[for the landlord] further accepts what is merely a corollary to that
underlying approach, namely that one does not expect under a rent review
provision that the tenant will be called upon to pay an additional rent for
improvements made at his own expense. However, he emphasises — and I fully accept
— that it is difficult to call these ‘principles’: they are mere commercial
expectations with which one approaches the construction of a particular
document. Each lease has to be construed individually according to the words
used in that document. If there are clear words showing an intention which
conflicts with one’s normal expectation, those words must be given effect
according to their tenor. But if the words are not clear and if there is a
doubt as to the actual intention as expressed in the words used, it is
legitimate to construe the words containing such doubt or ambiguity so as to
give effect to the assumed intention of the parties which I have mentioned.
He expressed
the view that there was nothing in the rent review provision in the main lease
to suggest that in general the intention of the parties was any different from
that which it was assumed to be.
*Editor’s
note: Also reported at [1987] 2 EGLR 147.
So far as
material to questions 1 and 2, the rent is to be:
The amount
which shall represent a fair yearly rent for the Site . . . with an obligation
for the Tenant to construct thereon such buildings as may at the time of such
valuation be situate thereon . . .
It is clear
from the parcels that the expression ‘the Site’ means only the land demised and
does not include the buildings erected on it. It is clear from the words in the
rent review provision ‘to construct thereon such buildings as may at the time
of such valuation be situate thereon’ that reference is there made to the site
as at the date of the valuation. Moreover, the double use of the preposition
‘on’ demonstrates that it can be a reference only to the site in its physical
condition. And, if that be right, the words ‘a fair yearly rent for the Site’,
appearing, as they do, in the very same provision, can refer only to the site
in its physical condition at the date of the valuation. This view of the matter
is strongly confirmed by para (iii) of the proviso to the rent review provision,
which requires there to be left out of account the value attributable to any
buildings actually standing on the premises but which is silent as to the value
attributable to any improvements to the site.
The reasoning
of the Vice-Chancellor and the arguments of Mr Reid QC, for the tenant, having
failed to persuade me to the contrary, I would on these short grounds decide
questions 1 and 2 in favour of the landlord. To express it in terms of the
approach stated by the Vice-Chancellor, I would say that here there are clear
words showing an intention which overrides the normal commercial expectation
that a tenant will not be called upon to pay an additional rent for
improvements made at his own expense.
I do not
arrive at this conclusion with any enthusiasm, since the merits, as the
Vice-Chancellor so clearly recognised, are all in favour of the tenant. What I
suspect may have happened was that when the terms of the lease were being
negotiated there was no certainty that it would be necessary for the moat to be
filled in; that the lease as originally drafted by the landlord’s solicitors
made no mention of it; that the proviso to clause 2(10) was added by the
tenant’s solicitors because they thought that the site lease as it stood might
prevent it from filling in the moat, should it be necessary to do so; and that
in any event the impact on the rent review provision of its being filled in,
understandably enough at the time, was never considered by the parties.
Whether these
suspicions be accurate or not, I would, for the reasons stated, discharge the
declarations made by the Vice-Chancellor in answer to questions 1 and 2 and
declare instead that (1) ‘the Site’ means the site in its state and condition
on September 1 1989 and (2) the site is to be taken to be an unbuilt plot with
the moat thereon wholly filled except for the cooling ponds.
Question 4
(a):
Whether, in
the passage in the Review Provision worded ‘with an obligation for the Tenant
to construct thereon such buildings as may at the time of such valuation be
situate thereon’, the expression ‘such buildings’ includes plant
be drawn between trade and other fixtures.
The
Vice-Chancellor answered this question by declaring that the expression ‘such
buildings’ did not include plant and machinery affixed to the realty; thus the
second part of the question did not arise. That decision was favourable to the
landlord because it means that the allowance made to the tenant in making the
rental valuation is limited to a notional obligation to construct the buildings
alone. It does not extend to the installation of plant and machinery affixed to
the buildings. This is the other question whose outcome may, so it seems, have
a considerable influence on the rental value of the premises.
The argument
of Mr Reid on this question relied principally on the tenant’s obligation,
under clause 1(1) of the lease, to erect and complete a new building consisting
of a fully equipped steel-making plant and rolling mill capable of
producing not less than 50,000 tons of steel products pa. He submitted that the
tenant’s notional obligation under the rent review provision should be
construed as being in line with the particular obligation contained in clause
1(1). I do not think that Mr Reid’s submission is correct. Although, as a
matter of law, plant and machinery affixed to realty, not being tenant’s
fixtures, become part of the realty, as a matter of construction the word ‘buildings’
does not necessarily, or even ordinarily, include such plant and machinery.
Indeed, as Mr Neuberger pointed out, there are positive indications in other
parts of the lease which support an exclusive construction in this case. Thus
the tenant’s covenant to repair in clause 2(7) refers to ‘the said premises and
all other buildings erected on the said premises . . . the fixtures and
fittings and all additions thereto’. In like manner the covenant to yield up at
the end of the term in clause 2(11) refers to ‘the said premises so repaired
and maintained amended and kept as aforesaid together with all additions and
improvements made thereto in the meantime and all fixtures and fittings of
every kind . . . except tenants or trade fixtures’.
It is unnecessary
to decide whether this question could have been determined in favour of the
landlord on these indications alone. Perhaps more significant is the
requirement of the rent review provision that the premises should be notionally
let ‘for industrial purposes’ and not merely for the purposes of a steel-making
plant and rolling mill. I agree with the Vice-Chancellor that it would be
inconsistent with this requirement to hold that the notional obligation to
construct the buildings included an obligation to install plant and machinery
which could be used only for the purposes of a steel-making plant and rolling
mill. I would therefore affirm the declaration which he made in answer to
question 4(a).
Question 6:
Whether such
notional lease incorporates Clause 2(14) as to user or not and if not, whether
and if so what restrictions on user there are in the notional lease.
Clause 2(14)
of the lease contains a covenant by the tenant, the first part of which is in
these terms:
Not to use or
occupy the said premises other than for the purposes of steelmaking steel
rolling and operations ancillary thereto or for such other purposes as may from
time to time be approved by the Lessors (such approval not to be unreasonably
withheld) . . .
The
Vice-Chancellor answered this question by declaring that the notional lease
incorporated clause 2(14), but with the user provision therein modified so as
to permit use for industrial purposes or for such other purposes as might from
time to time be approved by the landlord (such approval not to be unreasonably
withheld). That decision was favourable to the landlord because the tenant
under the notional lease would be able, at any rate in theory, to use the
premises as of right for industrial purposes other than those of steel making,
steel rolling and operations ancillary thereto.
The
Vice-Chancellor thought that the requirement that the rent should be fixed on
the hypothesis that the premises could be used for industrial purposes
generally made it inappropriate to include in the notional lease a limitation
to use for steel-making and steel-rolling purposes only. He continued:
Nor, as a
matter of language, is that, to my mind, ridiculous result forced upon me,
since all that is incorporated from the terms and conditions of the actual
lease is introduced by the words ‘and otherwise on the terms and conditions of
this lease’.
I entirely
agree. I would therefore affirm the declaration made by the Vice-Chancellor in
answer to question 6.
Question
9:
Whether,
given the absolute covenant against alterations contained in Clause 2(6), the
notional lessee is to be regarded as being entitled (a) to carry out all
alterations necessary or appropriate to convert the said premises for an
[industrial] use of his choice (b) to make any alterations necessary or
appropriate to the demised premises in conjunction with a change of use
effected pursuant to Clause 2(14) or actually authorised by the landlord and
(c) to make improvements under Part I of the Landlord and Tenant Act 1927.
Clause 2(6)
contains a covenant by the tenant in these terms:
Not at any
time during the said term to erect make or maintain or suffer to be erected
made or maintained any building erection alterations or improvements nor to
make or suffer to be made any change or addition whatsoever in or to the said
premises save in connection with the use of the said premises for the purposes
of steelmaking steel rolling and operations ancillary thereto.
The
Vice-Chancellor answered this question by declaring that the notional lessee
was to be regarded as being entitled to make improvements only under Part I of
the Landlord and Tenant Act 1927. That decision was favourable to the tenant,
at any rate in theory, because the tenant under the notional lease would not be
able, as of right, to convert the premises for another industrial use of his
choice.
It might have
been thought that the reasoning which led the Vice-Chancellor to hold that
clause 2(14) should be modified so as to permit user for industrial purposes
generally would equally have led him to hold that clause 2(6) should be
modified so as to permit the notional tenant to carry out as of right all
alterations necessary or appropriate to convert the premises for an industrial
use of his choice. However, he held that, if the provisions of clause 2(6) were
to be modified, a repugnancy between those provisions and the obligations of
the notional tenant must be demonstrated. He held that there was no repugnancy
because, if the tenant were to be refused permission to carry out the
alterations, he could apply to the court under section 3 of the 1927 Act. While
I agree that a repugnancy must be demonstrated, I respectfully disagree that it
is avoided by the remedy available to the notional tenant under section 3.
This, like the other questions, is a question of construction arising out of
the terms of the lease. Looking only at those terms, I see the same repugnancy
in the case of clause 2(6) as has already been seen in the case of clause
2(14). Moreover, an application under section 3 might not succeed and, if it
did, it would be likely to cause the tenant delay and expense. The remedy under
that section cannot be regarded as a satisfactory substitute for the right to
make the alterations without troubling either the landlord or the court. Thus
there remains a repugnancy between clauses 2(6) and the more ample rights of
the notional tenant under the rent review provision.
For these
reasons I would discharge the declaration made by the Vice-Chancellor in answer
to question 9 and declare instead that the notional lessee is to be regarded as
being entitled to carry out all alterations necessary or appropriate to convert
the premises for an industrial use of his choice.
Having decided
all the outstanding questions in favour of the landlord, I would allow the landlord’s
appeal, dismiss the tenant’s cross-appeal and vary the order of the
Vice-Chancellor accordingly.
LORD
DONALDSON OF LYMINGTON MR and BUTLER-SLOSS LJ
agreed and did not add anything.
Appeal
allowed with costs; cross-appeal dismissed with costs; costs order below to
remain undisturbed; leave to appeal to the House of Lords refused.
