Landlord granting underleases to tenants – Rent to be reviewed at open market value if not agreed – Whether hypothetical leases were for same term as underleases – Whether hypothetical leases included rent review clauses and break clauses from underleases – Whether rent under hypothetical leases was headline rent – Landlord’s application for declarations dismissed
The plaintiff landlord leased Cottons and 47/49 Tooley Street, London Bridge City, London SE1, to the defendant tenants by two underleases (the leases) dated March 31 1989 for a term of 35 years commencing June 24 1986. Under the leases rent reviews were to take place at the 10th anniversary of the starting date, and every fifth anniversary thereafter, and in default of agreement the higher of the current rent or the open market rent to prevail. A dispute arose between the parties in relation to the review on June 24 1996. The landlord sought declarations in respect the true construction of the leases and rent chargeable. The landlord contended that since the leases had provided that the hypothetical leases were to be “for a term equal in duration to the original term hereby granted . . . ” the hypothetical leases were to be for 35 years, not a term equal to the residue of the original leases. It was contended that , since the leases had provided that the hypothetical leases were “otherwise upon the terms and conditions of the [leases] “, the hypothetical leases were to include the provisions in the leases in relation to the review dates and break clauses, and, in order to enable the clauses to operate, the dates of review were to be the 10th year after the date of commencement of the hypothetical lease, and every fifth anniversary thereafter, and the name of the hypothetical tenant was to be substituted in the break clause. It was further submitted that since the leases had provided that the rent was to be determined on the assumption that the hypothetical tenant would not seek a rent-free period, or an equivalent of a rent-free period, the rent was to be headline rent.
Held The plaintiff’s application was dismissed.
1. The words “original term” meant 35 years from June 24 1986 not simply 35 years and therefore the hypothetical leases were to be for a term equal to the 25-year residue of the leases. In any event, even if the words had not been clear and unambiguous, that construction gave effect to the commercial purpose of the term.
2. Since the term of the hypothetical leases commenced on June 24 1986, there was no need for the review dates in the leases to be altered in order for them to be included in the hypothetical leases.
3. The court would only alter the terms of a lease if an open market valuation could not otherwise be made. Since an open market valuation could be made without including the rent review clauses in the hypothetical leases, the court was not entitled to alter the break clauses by replacing the names of the tenants with the names of hypothetical tenants and the hypothetical leases could not include the break clauses.
4. The rent in the hypothetical leases was not the headline rent because the leases had clearly required that the element of reduction which was attributable to inducement was to be disregarded.
Hazel Williamson QC (instructed by Stephenson Harwood) appeared for the plaintiff; Kim Lewison QC (instructed by Freshfields) appeared for the defendants.
