Landlord and tenant — Unusual rent review clause in lease of industrial premises — Construction — Review rent determined by applying a mathematical formula to ‘standard accommodation’ — Appeal from decision of Peter Gibson J — The clause provided for the ascertainment of a ‘review standard rent’ in respect of the notional ‘standard accommodation’, the multiplication of that rent per sq ft by a factor of 95/65 and then the application of the resulting rent per sq ft to the square footage of the demised premises — The reason for this unusual method appears to have been the difficulty of finding satisfactory comparables — The main dispute giving rise to the summonses before Peter Gibson J and the appeal was the meaning of ‘standard accommodation’ in the formula — The clause referred to ‘a standard single industrial building in the same locality as the demised premises and of like age’, but made no mention of size — At the date of the lease there were, in addition to the subject premises, several other units in existence on the industrial estate — All were single-storey industrial buildings of about the same age as the subject premises, but, whereas most of the recently erected units were of about 10,000 or 11,000 sq ft, the size of the subject premises was about 100,000 sq ft — The average proportion of space devoted to office use was less than 20%, but in the case of the subject premises it was 49% — Gibson J accepted the landlords’ submission that as a matter of construction ‘standard accommodation’ meant a standard single-storey industrial building situated on the Kingsland Industrial Estate at Basingstoke, having a floor area of 10,000 sq ft or thereabouts and of which 20% or less was designed or adapted for use as offices — He rejected the tenants’ argument that it would be an unfair distortion of reality to apply such a standard to premises 10 times the size (in view of the variations of rent per sq ft in accordance with size) and that if necessary a wider locality than the industrial estate should be regarded — Held on appeal that Gibson J had construed the expression ‘standard accommodation’ too narrowly — The ambit of inquiry should not be confined to this industrial estate; it should be left to the good sense of the surveyor who would have to determine the rent — The judge was wrong to restrict the size of the standard accommodation to 10,000 sq ft; he did so in part because he identified ‘locality’ with the industrial estate — The matter came down in the end to the identification of appropriate properties in the vicinity, which would be a matter for the surveyor in the event of dispute — The court accepted as suitable a form of declaration proposed by the tenants — Appeal allowed accordingly
No cases are
referred to in this report.
These were
appeals by the tenants, Oxoid Ltd, from the decision of Peter Gibson J on two
originating summonses for construction, one issued by the landlords, Standard
Life Assurance Co, and one issued by the tenants, but in effect raising the
same questions (Gibson J’s decision is reported at [1986] 1 EGLR 123, (1986)
277 EG 1248). The dispute concerned Unit 11 on the Kingsland Industrial Estate
at Basingstoke, Hants.
Andrew Morritt
QC and R Wakefield (instructed by Alsop Stevens) appeared on behalf of the
appellants; Edward Nugee QC and Kim Lewison (instructed by Herbert Smith &
Co) represented the respondents.
Giving
judgment, FOX LJ said: This is an appeal from a decision of Peter Gibson J upon
the construction of a rent review clause in a lease. There were before the
judge two originating summonses, one issued by the landlord and the other by
the tenant which, in effect, raise the same question.
The lease is
dated November 4 1974 and was made between Stan-Bilt Ltd of the first part,
Oxoid Ltd of the second part, and Brooke Bond Liebig Ltd (as guarantor) of the
third part, and was a lease by Stan-Bilt to Oxoid of: ‘All that piece or parcel
of land containing 19,234 square metres or thereabouts situate . . . on the
Landlord’s Kingsland Industrial Estate at Basingstoke in the County of Hants .
. .’
Stan-Bilt
itself was a lessee from Standard Life Assurance Co (‘the landlord’), but it
surrendered its interest to the landlord in 1984. The premises are now known as
Unit 11 on that estate.
The term of
the lease was 35 years from September 29 1974. The initial rent was £95,300 per
annum. The lease provided for rent reviews every five years.
In consequence
of the first rent review, the rent was increased to £263,000. The second rent
review gave rise to the question of construction which is in dispute in these
proceedings. As to that question, one starts with clause 4(1) of the lease,
which is in the following terms:
(i) for the purposes of this clause the following
expressions shall have the following meanings: ‘initial standard rent’ means
the fair annual rack rent calculated on a per square foot basis at which a
standard single storey industrial building in the same locality as the demised
premises and of like age (hereinafter called ‘standard accommodation’) if
vacant could now be let in the open market by a willing lessor to a willing
lessee on the same terms and conditions including period of demise as are
contained in this Lease which the parties hereby agree is at the rate of £0.65
per square foot; ‘review standard rent’ means the fair annual rack rent
calculated on a per square foot basis at which standard accommodation if vacant
at the rent review referred to in paragraph (ii) of this clause could be let at
that time in the open market by a willing lessor to a willing lessee on the
same terms and conditions including period of demise as are contained in this
lease; ‘Lease rent’ means the rent reserved by this Lease in respect of the
demised premises and ‘initial Lease rent’ means the Lease rent at the date
hereof which the parties hereby agree at the rate of £0.95 per square foot and
‘review Lease rent’ means the Lease rent which shall be payable following each
relevant review of the Lease rent hereinafter provided.
The mechanism
of the rent review is dealt with in clause 4(ii) and (iii), which are as
follows:
(ii) at any time after six months prior to the
expiration of the fifth and every subsequent fifth year of the term hereby
granted the Landlord may by notice in writing served on the Tenant require a
review of the Lease rent and if upon any such review the review standard rent
shall be found to exceed the initial standard rent the Lease rent shall be
increased so that the review Lease rent bears the same proportion to the review
standard rent as the initial Lease rent bears to the initial standard rent and
such increased rent shall be paid on and after the expiration of the fifth and
every subsequent fifth year in lieu of the rent previously applicable until the
Lease rent is further increased in accordance with the terms of this clause.
(iii) the review standard rent shall be such figure
as is agreed upon in writing between the Landlord and Tenant during the period of
six months from the date of service of the notice referred to in paragraph (ii)
of this clause or in default of agreement during the aforementioned period as
shall be determined by a Surveyor mutually appointed and in the event of the
parties being unable to agree upon one to be appointed on the application of
either party by the President of the Royal Institution of Chartered Surveyors
whom failing the President of the Law Society.
The upshot is
that, having determined the rent for standard accommodation at the relevant
time, one multiplies that by 95 and divides by 65 in order to ascertain the new
rent.
The issue in
the case is the meaning of ‘standard accommodation’ as defined in the lease.
The landlord’s contention is that it means a standard single-storey industrial
building situated on the Kingsland Industrial Estate, having a floor area of
10,000 sq ft, or thereabouts, of which 20% or less was designed or adapted for
use as offices.
The tenant’s
case is that the meaning is a building of the same floor unit as Unit 11.
The judge held
that the landlord’s construction was correct. The tenant appeals. On the
hearing before the judge both sides filed affidavits. There was no
cross-examination of the deponents. The material evidence in those affidavits
is as follows:
Affidavit
by Mr Mehta (property investment lawyer for the landlord)
(1) The Kingsland Industrial Estate was developed
between about 1969 and 1977 by Stan-Bilt. At the date of the lease, the estate
was still in course of development.
(2) At the date of the lease, 10 of the eventual
21 units on the estate were in existence. The floor areas of those units (in
square feet) were as follows:
|
Unit |
1 |
101,134 |
|
Unit |
2 |
12,704 |
|
Unit |
3 |
113,407 |
|
Unit |
4 |
14,819 |
|
Unit |
5 |
10,009 |
|
Unit |
6 |
10,028 |
|
Unit |
7 |
11,024 |
|
Unit |
9 |
10,028 |
|
Unit |
11 |
99,983 |
|
Unit |
12 |
10,225 |
Nos 1, 2 and 3 were old buildings already erected in 1968. Of the
remaining seven units, six had areas of about 10,000 sq ft, and one (no 11) had
an area of about 100,000 sq ft.
(3) The rents of the smaller units were as
follows:
|
Unit |
4 |
£0.57 |
per sq ft |
|
Unit |
5 |
£0.60 |
per sq ft |
|
Unit |
6 |
£0.62.5 |
per sq ft |
|
Unit |
7 |
£0.70 |
per sq ft |
|
Unit |
9 |
£0.77 |
per sq ft |
Unit 12 was originally agreed to be let at a rate of £0.80, but was,
in fact, let to another company at £1.08.
Each of the
seven more modern units included in area were for use as offices. With the
exception of Unit 9, the proportion of space devoted to office use was less
than 20%. In the case of Unit 9, the proportion of office use is 2,008 sq ft,
out of a total of 8,020 sq ft.
(4) Units 1, 2 and 3 were all let before the end
of 1969. Units 5, 6, 7 and 9 were all let between September 1971 and September
1974. The landlord accordingly submits that the figure of £0.65 was derived
from those units.
(5) The two features present in Unit 11 but
lacking in the others are:
(i) the size of Unit 11;
(ii) the unusually large amount of office
accommodation.
The proportion
in Unit 11 is 49%.
Affidavit
by Mr Yates (chartered surveyor for the tenant)
(A) Mr Colin Yates produced a map of the
Basingstoke area showing Unit 11 and a number of other industrial buildings
erected between 1969 and 1978. The buildings are 19 in number. Three of them
are on the Kingsland Industrial Estate. The rest are not.
(B) The 19 buildings were constructed at the
following times:
|
Before |
1 |
|
1965……………………………………………………………………………………. |
2 |
|
1967……………………………………………………………………………………. |
2 |
|
1968……………………………………………………………………………………. |
1 |
|
1969…………………………………………………………………………………….. |
2 |
|
Between 1969 and |
4 |
|
Between 1971 and |
2 |
|
Between 1972 and |
4 |
|
1978……………………………………………………………………………………… |
1 |
The size of these buildings varies from 19,000 to 113,000 sq ft.
(C) All the buildings are within three-quarters
of a mile of Unit 11. Communication between all the other buildings and Unit 11
can be achieved in a few minutes. In Mr Yates’ opinion (he is a chartered
surveyor) all the buildings on the plan would, from a surveyor’s point of view,
be regarded as within the same locality as Unit 11 for the purpose of finding
comparable buildings on a review of rent.
(D) Looking at the whole area on the plan, there
was no standard industrial building in terms of size.
(E) Having (with one exception) inspected the
leases in respect of Units 4, 5, 6, 7, 9 and 12 on the Kingsland Industrial
Estate, they are as follows:
|
Unit No |
Date of letting |
Annual rental |
Floor area |
Rent |
|
|
(sq ft) |
|||
|
4 |
24.06.71 |
£8,520 |
14,819 |
0.57p |
|
5 |
24.09.71 |
£6,019 |
10,033 |
0.60p |
|
6 |
29.09.72 |
£6,270 |
10,028 |
0.63p |
|
7 |
25.12.72 |
£7,570 |
11,024 |
0.69p |
|
9 |
Sept 74 |
not |
10,028 |
0.77p |
|
12 |
25.12.74 |
£11,000 |
10,225 |
1.08p |
(F) The only two units on the
Kingsland Industrial Estate which are truly comparable for the purpose of
finding the level of rentals for industrial property at the time of the letting
of Unit 11 are Units 9 and 12, which had rentals of £0.77 and £1.08
respectively. The letting of Units 4, 5, 6 and 7 all fall within one year and
nine months and three years and three months before the letting of Unit 11. The
time gap makes those lettings largely irrelevant for the purpose of finding the
general level of rentals of industrial premises, since the level of rentals was
rising over the whole period from 1971 to 1974.
(G) By contrast, the letting of Units 9 and 12
(each being only a few weeks from the letting of Unit 11) are relevant to the
determination of industrial rentals in November 1974.
The initial
standard rent of £0.65 for Unit 11 falls well below the rent for the much
smaller Units 9 and 12.
(H) An industrial building generally has no more
than 20% office content. Unit 11 has an office content of 49%. It would,
therefore, appear that the reference to a ‘standard industrial building’ in the
lease is intended to refer to the type of accommodation, but not the size of
accommodation. In Mr Yates’ view ‘initial standard rent’ should be fixed by reference
to a building having the size of Unit 11.
The lease
provides that the reviewed rent shall be 95/65 of the ‘review standard rent’ on
a sq ft basis. That is ascertained by reference to ‘standard accommodation’,
which is defined as a ‘standard single storey industrial building in the same
locality as the demised premises and of like age’.
The order made
by Peter Gibson J was as follows:
THE COURT
DECLARES that upon the true construction of the above mentioned Lease and in
the events which have happened the expression ‘standard accommodation’ means a
standard single storey industrial building situated on the Kingsland Industrial
Estate Basingstoke having a floor area of 10,000 square feet or thereabouts of
which 20 per cent or less was designed or adapted for use as offices.
Thus, the
declaration contains three elements:
(i) The relevant accommodation is situate on the
Kingsland Industrial Estate.
(ii) It has a floor area of 10,000 sq ft or
thereabouts, and
(iii) 20% or less of the floor area was designed or
adapted for use as offices.
There is no
dispute regarding element (iii). The dispute relates to (i) and (ii).
In approaching
the construction of the lease, the following matters appear to me to be
established by the evidence (which, as I have indicated, was not cross-examined
to):
(1) In the five years or so prior to the date of
the lease, the construction of industrial buildings in the Basingstoke area was
not confined to the Kingsland Industrial Estate.
(2) At the date of the lease, there were at least
10 industrial buildings on the Kingsland Industrial Estate. Three of these were
erected before the lease to Stan-Bilt in 1969. The remaining seven were
constructed by Stan-Bilt between 1967 and 1974. Five were of approximately
10,000 sq ft in floor area, one of 15,000 sq ft and one (which was Unit 11) was
about 100,000 sq ft.
(3) In the seven buildings erected by Stan-Bilt,
the proportion of office space was about 20%, except for Unit 11 (which was
about 49%).
(4) Generally, in industrial buildings, office
space is about 20% of the floorspace.
(5) There is no such thing as a standard
industrial building in terms of size.
(6) In November 1974 the open market rental of
the smaller buildings on the Kingsland Industrial Estate was well in excess of
£0.65 per sq ft (having regard to the rise in rentals between 1971 and 1974).
I come then to
the construction of the lease. The judge stated the landlord’s case as follows:
The approach
of the landlord is quite simple. If one looks at the facts in order to find
standard accommodation as defined, there in the immediate area of Unit 11 on
the estate itself are to be found five single-storey industrial buildings,
which have the common features of being approximately the same size, that is to
say, about 10,000 or 11,000 sq ft, and having not more than about 20 per cent
office accommodation in the available space, and which are all of about the
same age as Unit 11. The rents per sq ft obtained for those units prior to the
date of the lease were 57p on September 8 1971 for Unit 5,62.5p on November 20
1972 for Unit 6, 70p on February 8 1973 for Unit 7, and 77p in September 1974
for Unit 9. Unit 12 was let after the lease of Unit 11 on December 20 1974 for
£1.08. The rent of 65p, agreed to be the rent of standard accommodation at the
date of the lease, must, the landlord says, have been derived from the rents of
Units 5, 6, 7 and 9.
I do not feel
able to agree that the proper ambit of inquiry is the area around Unit 11. That
seems to me to be too narrow. The word used in the lease is ‘locality’. As a
matter of ordinary English usage that seems to me to be wider than the area
around Unit 11, and I do not think that a draftsman who intended so to confine
it would use a word of such width as ‘locality’. The word seems to me to be
more nearly akin to ‘district’ than to any meaning which confines it to the
Kingsland Industrial Estate.
Further, in
the First Schedule to the lease, the draftsman refers to ‘the landlord’s
Kingsland Industrial Estate at Basingstoke’. And in clause 2 of the lease the
word ‘estate’ is used (‘. . . for the eventual development of the estate. . .
.’). In clause 9(2), the expression ‘the adjoining or neighbouring property of
the landlord’ is used. Having regard to the use of these various expressions, I
would suppose that the draftsman was treating ‘locality’ as wider than either
the estate or ‘adjoining or neighbouring’.
Further, the
purpose which underlies the introduction of properties in ‘the locality’ must
be to find comparables which are of value for the rent review. The
consideration of an area wider than the Kingsland Industrial Estate has obvious
value for that purpose. The precise ambit of locality is something which, it
seems to me, can be left to the good sense of the surveyor who, in default of
agreement between the parties, will have to determine the rent (clause 4
(iii)). Without tying his hands, I would not have thought that the
three-quarters of a mile area considered by Mr Yates was likely to be unreasonable.
I come then to
the question of size as a guide to the identity of ‘standard accommodation’.
The judge’s declaration ties the expression to accommodation having a floor
area of 10,000 sq ft or thereabouts. The judge reached that conclusion in consequence,
in part, of his opinion that ‘locality’ was confined to the Kingsland
Industrial Estate. But his conclusion was affected also by a consideration of
the rents.
The initial
standard rent was taken, in the lease, to be 65p per sq ft. So that, on the terms
of the lease, 65p per sq ft was agreed by the parties to be the rent at which
‘standard accommodation’ if vacant, would, at the time of the lease, be let in
the open market by a willing lessor to a willing lessee on the same terms and
conditions, including the duration, as are contained in the lease.
The judge was
not persuaded that 65p per sq ft was not the actual market rent, as the parties
perceived it to be in November 1974, for a building of about 10,000 sq ft. It
seems to me, however, that if the parties had intended ‘standard accommodation’
to refer, in effect, to Units 5, 6, 7 and 9 (which were of the areas of 10,033,
10,028, 11,024 and 10,028 sq ft respectively) they would have said so in the
lease. And, moreover, they would not in the lease have referred to the
locality.
Moreover, the
rental values of Units 5, 6, 7 and 9 were, or at any rate may have been in
November 1974, substantially in excess of 65p per sq ft. The dates of letting
and the rentals were:
|
Unit 5 1971 |
60 pence |
|
Unit 6 1972 |
63 pence |
|
Unit 7 1972 |
69 pence |
|
Unit 9 September 1974 |
77pence |
Mr Yates’ evidence is that the level of rentals was rising steadily
from 1971 to 1974, so that these figures may well be too low for November 1974,
even allowing for the fact that the property market was by then disturbed.
Accordingly,
it seems to me that, on the evidence before us, it would be altogether unsafe
to assume that in November 1974 the rent of Units 5, 6, 7 and 9 was in the
neighbourhood of 65p. Units 9 and 12, which were let only a few weeks from the
letting of Unit 11, were at rates per sq ft well in excess of 65p (ie 77p and
£1.08 respectively).
In the
circumstances it seems to me that the judge’s declaration defines the
expression ‘standard accommodation’ too narrowly.
The tenant asserts
that ‘standard industrial building’ refers to a building having the same floor
area as Unit 11. If that is so, it is
As to that,
our attention is drawn to the following proviso to clause 4(iii) of the lease:
PROVIDED ALWAYS
that there shall be disregarded in assessing the review standard rent
(a) any effect on rent of the fact that the
Tenant has been in occupation of the demised premises or any part thereof
(b) any goodwill attaching to the demised
premises by reason of the carrying on thereat of the business of the Tenant and
(c) any effect on rent of any permitted
improvement carried out by and at the expense of the Tenant (other than in
pursuance of Tenant’s obligations hereunder) and so carried out since the date
of service of the Review Notice last preceding the date of service of the
relevant Review Notice or (if the relevant Review Notice is the first Review
Notice to have been served) since the commencement of the term hereby created.
It is said
that these provisions indicate that the parties, in referring to standard
accommodation, had in mind Unit 11 because of the reference to ‘the tenant’. I
do not feel able to accept that. These provisions are the standard
‘disregarding’ provisions of section 34 of the Landlord and Tenant Act 1954. I
am not satisfied that the parties intended them to concentrate attention on
Unit 11 and so to have the restricting effect which is suggested.
The result, in
my opinion, is that ‘standard accommodation’
(a) was not restricted to the Kingsland Industrial
Estate,
(b) was not restricted to Units 5, 6, 7 and 9,
(c) was not restricted to Unit 11.
It seems to me
that the matter comes down in the end to the identification of appropriate
properties in the vicinity, which will be a matter for the surveyor in the
event of dispute.
I think that
the parties had in mind a fairly flexible approach which would be necessary to
achieve their basic purpose, ie to adjust the rent to market values for the
time being within the framework of the language which they have used. I think
that would be best achieved by the form of declaration ultimately proposed by
the tenant, which is as follows:
A declaration
that upon the true construction of the lease the expression ‘standard
accommodation’ means a single-storey industrial building situate in the same
locality and of like age as the demised premises (a) of which 20 per cent or
less is designed or adapted for use as offices and (b) for which the fair
annual rack rent calculated on a per square foot basis at which it could have
been let in November 1974 on the open market between a willing lessor and a
willing lessee and on the same terms including period of demise as are
contained in the Lease was 65 pence per square foot
I would so
declare and allow the appeal accordingly.
NOURSE LJ
agreed and did not add anything.
Also agreeing,
SIR DENYS BUCKLEY said: When the draftsman of the lease in question in this
case referred in clause 4(i) to ‘standard single storey industrial building in
the same locality as the demised premises and of like age’ he was, in my
judgment, referring to an abstract hypothetical building; he was not
cryptically identifying some existing building or any group of existing
buildings on the Kingsland Industrial Estate. I think he used the word
‘standard’ to indicate that the hypothetical industrial building should be one
which had no exceptional characteristic which could, in any way, distort its
rental value. It was to be assumed to be a single-storey industrial building
which could be regarded as normal in the market for that type of building in
the locality in which the demised premises were, and of like age to that of the
demised premises.
The mechanism
of the rent review provisions contained in clause 4 of the lease operates by
reference to rental per sq ft. Of course, the rent of property A calculated on
a certain rate per sq ft will be higher than the rent of property B calculated
on the same basis, if property A contains a larger number of sq ft than
property B.
By clause 4(i)
of the lease, the parties agreed that the ‘initial standard rent’ or ‘standard
accommodation’ should be taken to be at the rate of 65p per sq ft. This affords
a valuable guide to what was to be regarded as ‘standard accommodation’; it was
to be a single-storey industrial building in the same locality as the demised
premises and of a like age, of which the fair annual rack rent at the date of
the lease would have been 65p per sq ft if let by a willing lessor to a willing
lessee on the same terms as those of the lease.
The ‘initial
lease rent’ of the demised premises means the rent of the demised premises
reserved by the lease, agreed at 95p per sq ft, a figure arrived at merely by
arithmetic from the actual square footage of the demised premises and the rent
actually reserved.
The lease
consequently recognised that the demised premises commanded a higher rent per
sq ft than ‘standard accommodation’ would then have commanded. This, it is
suggested, is to be attributed to two circumstances:
(1) that the demised premises were very
substantially larger than other industrial premises in the neighbourhood, and
(2) that the demised premises comprised a much
larger proportion of office space than other industrial premises in the
neighbourhood.
The rent
review provisions in clause 4 were evidently designed to ensure that the
differential between the rent payable for the demised premises and the rent
which would be payable for ‘standard accommodation’ should remain
proportionately constant. This is achieved by the construction of the lease
favoured by Fox LJ and by the form of declaration which he has formulated.
I have to
confess that I do not understand the ‘double increment’ point propounded in
para 9 of Mr Yates’ affidavit*. In my view, 65p per sq ft was not put forward
as the ‘initial standard rent’ for the demised premises (Unit 11) either in the
lease or by the plaintiffs, as Mr Yates appears to suggest. ‘Initial standard
rent’ in clause 4(i) of the lease relates to ‘standard accommodation’ and, as I
have indicated, ‘standard accommodation’ means something other than the demised
premises. As certaining upon a rent review a ‘review standard rent’ in respect
of the notional ‘standard accommodation’, and multiplying that rent per sq ft
by the factor of 95/65 and then applying the resulting rent per sq ft to the
square footage of the demised premises does not appear to me to produce any ‘double
increment’.
*Editor’s
note: The relevant part of para 9 of the affidavit reads as follows: ‘The
‘initial standard rent’ of 65p for Unit 11 falls well below the rent for the
much smaller Units 9 and 12. In my submission, the Plaintiffs are now seeking
to build into the lease of Unit 11 a double increment, by having the ‘review
standard rent’ first fixed by reference to the rent per square foot for a
smaller building of 10,000 square feet and then increased to the ‘review lease
rent’ by the percentage permitted under the lease to reflect the unusually
large amount of office accommodation. An industrial building generally has no
more than 20% office content. Unit 11 has an office content of 49%. It would
therefore appear that the reference to a ‘standard industrial building’ in the
lease is intended to refer to the type of accommodation but not the size of the
accommodation.’
Upon the
interpretation of the word ‘locality’ used in the lease, I am in complete
agreement with Fox LJ.
I would allow
this appeal and make the declaration proposed by Fox LJ.
The appeal
was allowed, with costs in the Court of Appeal, no order being made for costs
below. Declaration as proposed by Fox LJ.
