Commercial property — Definition of site for purposes of valuation — Whether value of “site” determined at date of occupation or date of valuation — Whether tenant to pay for own improvements — Whether buildings in rent review provision included plant and machinery — Whether notional lease incorporated clause as to user — Whether absolute covenant against alteration prohibited tenant making alterations to convert premises to own use — Appeal by landlord allowed
The Medway Ports Authority was landlord of demised premises at Sheerness, Isle of Sheppey. The tenant was the Sheerness Steel Co plc. The premises included part of a defensive moat by which the north-west tip of the Isle of Sheppey had been almost cut off from the rest of the Isle. The premises were held under two leases, the first comprising the major part of about 51 acres, including 13 acres of moat and the two pieces of land beyond it. The term was granted for 125 years from September 1 1968. The tenant agreed to erect a steelmaking and rolling mill. It was out of the provisions of this main lease that the issue of construction arose; the second lease was supplemental to the main lease.
The rent reserved for the first 21 years of the term was £22,000. The rent reserved for the next 21 years (from September 1 1989) was the greater of £22,000 and the ascertained rent, being 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 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 …”. The tenant was obliged to erect a steelmaking and rolling mill of specified minimum capacity. It was not obliged to drain and fill in the moat although that was recognised as a possibility and in fact was carried out. The tenant at considerable cost drained and filled in all but approximately two of the 13 acres of moat, duly erected and completed a fully equipped steelmaking plant and rolling mill capable of producing not less than 50,000 tons of steel products per annum; and carried out additional works of improvement including the erection of further buildings. It became clear that the rent from September 1 1989 would have to be determined by an independent expert. There were also differences of opinion between the landlord and the tenant as to the true construction of provisions of the lease, and proceedings were commenced by summons issued by the tenant to resolve them beforehand because otherwise the expert would be presented with a very difficult task in making his valuation.
Browne-Wilkinson V-C answered two of the questions put to him in favour of the landlord and two in favour of the tenant. He declared, inter alia, that “the site” meant the site in its state and condition as at September 1968 and that it was taken to be an unbuilt plot and the moat unfilled. He stated that while the general purpose of a rent review provision was to give the landlord a rent which reflected at the review date change in the value of money and of property it was not to confer some additional windfall on the landlord. A tenant was not to be called upon to pay an additional rent for improvements made at his own expense: Basingstoke and Deane Borough Council v Host Group Ltd [1987] 2 EGLR 147.
The landlord and the tenant appealed and cross-appealed respectively.
Held The landlord’s appeal was allowed and the tenant’s cross-appeal dismissed.
1. It was clear from the words in the rent review clause, “to construct thereon such buildings as may at the time of such valuation be situate thereon”, that reference was made to the site as at the date of the valuation. Moreover, the double use of the “on” demonstrated that it could only be a reference to the site in its physical condition. If that were right, the words “a fair yearly rent for the site” appearing in the same provisions could only refer to the site in its physical condition at the date of the valuation. There were clear words which showed an intention to override the normal commercial expectation that a tenant would not be called upon to pay an additional rent for improvements made at his own expense.
2. The expression “such buildings” in the rent review provisions did not include plant and machinery affixed to the realty. There was a requirement that the premises should be let for industrial purposes and not merely for the purposes of steelmaking plant and rolling mill. It would be inconsistent with that 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 steelmaking plant and rolling mill. Thus 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 steelmaking and rolling purposes only.
3. The notional tenant was to be regarded as entitled to carry out all alterations necessary or appropriate to convert the premises for an industrial use of his choice. There was a repugnancy between the clause seeking to restrict alterations and the more ample rights of the notional tenant under the rent review provisions which justified modification of that clause.
Robert Reid QC and Nigel Thomas (instructed by Slaughter & May) appeared for Sheerness Steel Co plc; and David Neuberger QC and Timothy Fancourt (instructed by Norton Rose) appeared for Medway Ports Authority.
