Landlord and tenant — Rent review clause in lease — Construction — Effect of user covenant — Effect of restrictions in licence to assign to defendants — The hypothetical letting was to be a letting in the open market for a term equal to the residue of the lease with vacant possession without a premium and subject to provisions similar to those contained in the lease — The lease contained a user covenant restricting the use of the demised premises to offices in connection with the lessee’s business of mortgage finance and insurance consultants — The licence to assign to the present defendants restricted the user to offices occupied for the purposes of the assignee’s diplomatic mission — It was argued on behalf of the defendants that the user should be deemed to be restricted to use as offices for the purpose of the diplomatic mission of [blank] with the blank to be filled in when the name of the hypothetical diplomatic lessee was known — The judge rejected this submission, holding that the ‘provisions of the lease’ in the rent review clause meant the original provisions unaffected by the personal arrangements made in the licence respecting the current tenants — The Law Land Co Ltd v Consumers Association Ltd considered and in part distinguished — Held that, in applying the rent review clause, it should be assumed that there has been found a mortgage finance and insurance consultant intending to use the premises as offices; that the hypothetical tenant would be bound not to use the premises save in connection with his business as such a consultant; and that any assignee from the hypothetical tenant would be subject to the same user provision — The court refused to give directions to the arbitrator as to the kind of comparables that he might consider; this was a matter for his professional judgment
The following
cases are referred to in this report.
Law Land
Co Ltd v Consumers’ Association Ltd (1980)
255 EG 617, CA
This was an
originating notice of motion raising questions as to the construction of the
rent review clause in a lease for 21 years and one day from June 18 1973 of the
ground floor of 41 Lowndes Street, London SW1. The applicants were the
landlords, SI Pension Trustees Ltd, and the respondents were the tenants, the
Ministerio de Marina de la Republica Peruana.
Robert W Kirk
(instructed by J E Kennedy & Co) appeared on behalf of the applicants; John
R Cherryman QC (instructed by Amhurst Brown) represented the respondents.
Giving
judgment, MERVYN DAVIES J said: This is an originating notice of motion. The
applicant is SI Pension Trustees Ltd (the ‘landlord’). The respondent is the
Ministerio de Marina de la Republica Peruana (the ‘tenant’). The questions
arising involve construing some terms of a lease for the purpose of applying a
rent review clause. By a lease dated October 1 1973 the ground floor of 41 Lowndes
Street, London SW1, was demised for 21 years and one day from June 18 1973 at a
rent of £12,000. The demise was by M D Johnson and C A Fry to Johnson Fry &
Partners Ltd. Mr Johnson and Mr Fry are referred to in these terms:
(hereinafter
together called ‘the Lessor’ which expression shall wherever the context so
admits be deemed to include the person or persons for the time being deriving
title under the Lessor).
Johnson Fry
& Partners Ltd are described in these terms:
(hereinafter
called ‘the Lessee’ which expression shall whenever the context so admits be
deemed to include its successors in title and assigns).
The material
provisions of the lease are as follows:
USER COVENANT
2. The Lessee
hereby covenants with the Lessor as follows that is to say . . . . (12) Not to
use the demised premises otherwise than as offices in connection with the
Lessee’s business of Mortgage Finance and Insurance Consultants . . .
COVENANT
CONCERNING ASSIGNMENT
14. . . .
(B) Subject to sub-clause (D) hereof not to
assign the whole or charge underlet or part with possession of the whole (or
any part) of the demised premises without the previous written consent of the
Lessor which shall not be unreasonably withheld . . .
THE RENT
REVIEW CLAUSE
5. (1) The
Lessor may require the rent payable hereunder to be revised by serving upon the
Lessee notice in writing to that effect not more than 12 nor less than 6 months
before the expiration of the 5th 10th and 15th years of the said term
(hereinafter referred to as ‘the review date(s)’ and ‘the relevant review date’
shall be construed accordingly) and as and from the review date the revised
rent (calculated and determined in accordance with the following provisions of
this clause) shall become payable in all respects as if it were the rent hereby
reserved.
(2) The revised rent shall be the greater of
either
(i) the rent payable hereunder at the time of the
service of the notice requiring the rent to be revised or
(ii) the market rent of the demised premises at
the relevant review date.
(3) The expression ‘the market rent’ shall be
deemed in this clause to mean the yearly rental value of the demised premises
(having regard to rental values current at the relevant time for similar
property used for any purpose within the same use class under the Town and
Country Planning (Use Classes) Order 1963 as that which includes the use of the
demised premises permitted hereunder let with vacant possession without a
premium and subject to provisions similar to those contained in this lease)
taking no account of any goodwill attributable to the demised premises by
reason of any trade or business carried on therein.
(4) [A provision that failing agreement the
revised rent shall be determined by reference to the arbitration of an
arbitrator nominated by the president of the RICS.]
The original
parties to the lease are changed. The applicant is now the landlord. The tenant
is the respondent. There is a licence dated July 22 1976 and made between C A
Fry of the first part, Johnson Fry & Partners Ltd of the second part and
‘Ministerio de Marina de la Republica Peruana represented by the Peruvian Naval
Attache in Great Britain and having an office in the United Kingdom at 41
Lowndes Street in the City of Westminster (hereinafter together called the
assignee)’ of the third part. By the licence it was witnessed that the landlord
granted licence to Johnson Fry & Partners Ltd to assign. As to the assignee
— that is the minister — there was for him ‘after the lease has been assigned
to him consent for him to use the premises demised by the lease as offices in
one single occupation for the purpose of the assignee’s (here meaning the from
time to time accredited) lawful diplomatic mission in lieu of the user at
present carried on by the Lessee [ie Johnson Fry]’. Clause 2 of the licence was
a covenant by the assignee
for himself
and his successors in such office . . . (b) not to use or permit the premises
demised by the lease or any part thereof to be used otherwise than for offices
in one occupation for the purpose of the assignee’s lawful diplomatic mission.
Clause 3 of
the licence is as follows:
This licence
is restricted to the particular assignment and change of user
varied the covenants conditions provisions and agreements contained in the
lease (as varied by this licence aforesaid) shall remain in full force and
effect.
The rent
review machinery was invoked by a letter dated December 10 1982. There was no agreement
as to a revised rent. Pursuant to clause 5(4) of the lease Mr A G Salata
[FRICS] (‘the arbitrator’) was appointed. He agreed to act as arbitrator to
determine the revised rent. Negotiations ensuing between the parties then
disclosed that questions of law respecting the construction of the lease arose.
Arbitration was not regarded as suitable for the determination of those
questions and so the questions have with the consent of the parties and Mr
Salata been made the subject of the originating notice of motion.
The questions
now in issue appear in subparas (ii), (iii) and (iv) of para 3 of the notice of
motion. They are as follows:
(ii) Whether the ‘yearly rental value’ of the
demised premises has to be ascertained:
(a) on the basis of a hypothetical letting of the
premises with vacant possession without a premium; or
(b) on the basis that the premises are already
let to the tenant in occupation on all the terms of the lease as varied by the
terms of a licence dated the 22nd July 1976 or on some other and, if so, what
terms.
(iii) If the answer to question (ii)(a) is in the
affirmative, whether the ‘yearly rental value’ of the demised premises has to
be ascertained:
(a) on the basis that the premises can be let to
any lessee whatever his business but can only be used by that lessee as offices
and for the purposes of his business and further on the basis that the lease
would contain provisions similar to the present lease and in particular the
same provisions as to change of use and assignment; or
(b) on the basis that the premises can be let to
any lessee with diplomatic status but can only be used by that lessee as
offices in one occupation for the purposes of his or its lawful diplomatic
mission and further on the basis that the lease would (apart from the user
clause) contain the same provisions as are contained in the present lease.
(iv) Whether the comparable rental values to which
by subclause 5(3) of the lease the arbitrator is directed to have regard are:
(a) rental values current at the relevant time
for similar property used for office purposes generally; or
(b) rental values current at the relevant time
for similar property used for office purposes let with vacant possession
without a premium subject to provisions similar to those contained in the lease
as varied by the 1976 licence and in particular with the office use restricted
to a named lessee.
Mr Kirk
appeared for the landlord. Mr Cherryman appeared for the tenant. I turn to
question 3(ii). The phrase ‘yearly rental value’ is, of course, in clause 5(3)
of the lease. Mr Cherryman submitted that 3(ii) should be answered as in
3(ii)(b). Despite the inclusion of the phrase ‘market rent’ in clause 5(2)(ii)
and (3) of the lease, it was said that the arbitrator was not required to act on
the assumption that the rent was to be fixed by reference to any ‘market’. It
was said that nowhere in 5(3) is there necessity to assume any new letting, or
any letting with vacant possession, or the existence of an open market. The
reference to ‘vacant possession’ in 5(3) was acknowledged but was said to
enable the arbitrator to take account of letting values of similar properties
then being let with vacant possession with the arbitrator then discounting
those values in relation to the demised premises by reason of the fact that the
present tenant is in situ in the demised premises. It was said further
that it was significant that 5(3) does not expressly require tenants’
occupation to be disregarded although there is to be an express disregard of
goodwill. The position was contrasted with section 34 of the Landlord and
Tenant Act 1954. I do not accept Mr Cherryman’s submission. Clause 5 refers to
a ‘market rent’ which suggests that the revised rent is to be at a figure
derived from the market; not fixed by reference to a single individual already
in occupation. One goes further and reads 5(3). One sees that ‘the market rent’
means the yearly rental value of the demised premises ‘having regard to rental
values current . . . for [similar office property] let with vacant possession
without a premium and subject to provisions similar to those contained in this
lease . . .’ To my mind that means that
(1) the arbitrator is to ascertain the current rental values for similar office
properties which have been let with vacant possession without premiums in terms
akin to those in the lease; (2) the arbitrator is then to assess the revised
rent with those rental values in mind; (3) it seems to me that if assessments
are directed as in (2) it must be for the purpose of assessing a rent for the
demised premises on a vacant possession basis: a fortiori in that 5(3)
does not suggest any discounting of a vacant possession rent of the demised
premises by reference to the fact that the tenant is in occupation. I answer
3(2) in the sense of (a) — that is to say the yearly rental value is to be
ascertained on the basis of a hypothetical letting of the premises with vacant
possession without a premium.
I go now to
question 3(iii). This involves considering the difficulties that arise when
applying the rent revision clause in the light of the existence of the user
clause. Before me neither side, in the end, contended for the exact wording of
either (a) or (b) in 3(iii). Mr Cherryman (on the assumption that he was
unsuccessful on question 3(ii)) referred to the user covenant and to the
licence dated July 22 1976. He said the arbitrator was to assume an
hypothetical lease which restricted the use ‘to use as offices in one
occupation for the purpose of the diplomatic mission of [blank] with the blank
to be filled in when the name of the hypothetical diplomatic lessee is known’.
As will be evident from that formulation, Mr Cherryman regards 5(3) as now to
be read as if ‘the provisions contained in the lease’ were the provisions of
the lease as varied by the licence. I do not think that is right. In the first
place 5(3) refers to the provisions of the lease, not to the provisions of the
lease as they may be varied from time to time. Second, when one reads the
licence one sees that the variations there made are personal to the persons
there contracting. If and when the minister ceases to be a tenant the terms of
the original lease revive. See licence, clause 3. In these circumstances ‘the
provisions of the lease’ referred to in 5(3) seem to me to be the original
provisions of the lease’ referred to in 5(3) seem to me to be the original
provisions of the lease unaffected by the personal arrangements made respecting
the current tenant.
It follows
that one has to consider the impact of the user covenant 2(12) as originally
expressed in the lease on the operation of the rent review covenant. It was
common ground that the express provisions of a user clause are not impliedly
revoked by reference to the provisions of any assignment clause. It was also common
ground that where there is a user clause the arbitrator is not to have regard
to the fact that the landlord may relax the user clause. Those common grounds
are derived from The Law Land Co Ltd v Consumers Association Ltd
(1980) 255 EG 617 at p 621, foot of the left column, and p 621 right column
with its references to the words of Brandon LJ. Where, as here, one is faced
with the task of assessing, on the basis of a hypothetical letting with vacant
possession, a revised rent for premises subject to a user covenant, guidance is
afforded by the Law Land case. As I understand, in the circumstances of
that case, one supposes a lease about to be granted with vacant possession for
a term equal to the residue of the term of the actual lease. In other respects
the hypothetical lease reads as does the original lease save that the name of
the lessee is blank and the user provision, if and in so far as it refers to a
personal user by the original lessee, is to be regarded as modified so as to
allow a similar personal user by the hypothetical lessee but not to allow such
user by any assign of the hypothetical lessee. It is on that basis that the
valuer proceeds in a Law Land situation. See, in connection with my
reference to an assign, the words of Templeman LJ in the Law Land case
in the paragraph beginning ‘The second declaration’, right-hand column, p 621.
I must follow
the Law Land guidance unless the circumstances of the situation before
me differ significantly from the Law Land circumstances. There is, I
think, a significant difference. In Law Land — see p 617 — the user
covenant was that the lessee:
. . . would
not, without the prior written consent of the landlord use or permit the
demised premises or any part thereof to be used other than as offices of the Consumers
Association and its associated organisations.
In the present
case the user covenant — 2(12) — is as set out above.
One sees that
the Law Land covenant permits office user only by an individual, ie the
Consumers Association, but 2(12) names no individual. The reference is to ‘the
lessee’s business’. It was contended that the phrasing of 2(12) was apt to be
read as confining user to the original lessee — Johnson Fry: the context of
2(12) requiring the lease to be construed individually rather than in accordance
with the definition in the lease of ‘lessee’ which says that ‘lessee’ means the
lessee and its successors in title. I do not accept that view. To my mind, one
reads 2(12) giving ‘lessee’ its defined meaning; so that a successor in title
of the original lessee may use the demised premises as offices in connection
with his business if his business happens to be that of a mortgage finance and
insurance (‘MFI’) consultant. It follows that in this case the hypothetical
lessee is to be regarded as being granted a lease with 2(12) therein verbatim
but on a basis that 2(12) is to be construed as meaning that the demised
premises may be used as MFI offices not only by the original hypothetical
lessee but also as MFI offices by assigns of the original hypothetical lessee.
I should say
that Mr Kirk desired to construe 2(12) more liberally than I have done. As well
as pointing to the definition of ‘lessee’ in the lease, it was said that the
words ‘of [MFI Consultants]’ in 2(12) were surplusage or, at any rate, merely
descriptive of or informative as to the original lessee. At first I was
inclined towards that view, but when one sees from the Law Land case
that the hypothetical lease is to reproduce the original lease save as to
necessary blanks, I do not see myself at liberty to visualise the hypothetical
lease without therein including 2(12) verbatim.
In the light
of what I say above, it will be appreciated that I do not answer question (iii)
either as (a) or (b) therein. But I cover the ground of the question by setting
out guidelines for the arbitrator. In my view, clause 5(3) is to be applied as
follows:
(a) there is to be assumed an hypothetical
letting in the open market for a term equal to the residue of the lease ‘with
vacant possession without a premium and subject to provisions similar to those
contained in this lease taking no account of any goodwill attributable to the
demised premises by reason of any trade or business carried on therein’ — see
5(3).
(b) there is to be assumed there has been found a
willing lessee who is an MFI consultant intending to use the premises as
offices.
(c) the hypothetical lease will of course include
2(12). 2(12) is to be regarded as obliging the hypothetical tenant not to use
the premises save in connection with his business as an MFI consultant.
(d) if the hypothetical tenant is allowed to
assign pursuant to 2(14) the new tenant will be subject to the same user
provision as the hypothetical lessee — that is to say the new tenant will not
be able to use the premises save as offices in connection with his business as
an MFI consultant.
(e) regard must be had — see 5(3) — to rental
values of similar property used for office purposes.
As to (a)
above, neither counsel contended for any other term than the residue of the
lease.
Question (iv)
in the notice of motion is answered by item (e) above. I do not think that any
experienced arbitrator should be directed as to the kind of comparables he may
consider. He will, I imagine, consider the level of office rents in the
locality of Lowndes Square. Against that background he will fit in items
(a)-(d) above, making such adjustments by reference to (a)-(d) as he in his
professional judgment thinks appropriate.
