Landlord and tenant — Construction of unusual rent review clause in lease of industrial premises — Instead of usual rent review provisions based on a hypothetical letting of the actual premises on the open market, the review rent was to be determined by applying a mathematical formula to ‘standard accommodation’ — The reason for this unusual method appears to have been the difficulty of finding satisfactory comparables — The main dispute giving rise to the present summons was as to the meaning of ‘standard accommodation’ in the formula — The characteristics mentioned were that it must be a single-storey industrial building, in the same locality as the subject premises and of a like age, but there was no mention of size, although both parties agreed that size must be a necessary element in the conception of the standard — At the date of the lease there were, in addition to the subject premises, six 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 their sizes varied from 10,000 to 15,000 sq ft, with most of them about 10,000 or 11,000 sq ft, the size of the subject premises was 100,000 sq ft — Landlord argued that for the purpose of the standard accommodation in the review formula the size should be taken as 10,000 or 11,000 sq ft — Tenant submitted that it would be an unfair distortion of reality to apply such a standard size to premises in fact ten times larger (in view of the variations of rent per sq ft in accordance with the size of the premises) and that, if necessary, a wider locality than the industrial estate should be regarded — Held that as a matter of construction the landlord’s view was correct — The tenant’s construction would involve writing into the formula a requirement which was not there, namely, that the size must be the same as that of the subject premises — Declaration accordingly
In these
proceedings there were two originating summonses, one taken out by the
landlord, the Standard Life Assurance Co, and the other by the tenant, Oxoid
Ltd, but both summonses raised the same question as to the construction of the
rent review provisions in a lease of a unit on the Kingsland Industrial Estate
in Basingstoke.
Edward Nugee
QC and Kim Lewison (instructed by Herbert Smith & Co) appeared on behalf of
the Standard Life Assurance Co; Peter Langan QC and R Wakefield (instructed by
Alsop Stevens) represented Oxoid Ltd.
Giving
judgment, PETER GIBSON J said: I have before me two originating summonses, each
raising what is in effect the same question. That question is the construction
of a particular term in the rent review clause under a lease. The lease is one
dated November 4 1974 whereby Stan-Bilt Ltd (‘Stan-Bilt’) demised to Oxoid Ltd
(‘the tenant’) certain premises part of the Kingsland Industrial Estate in
Basingstoke in Hampshire. Those premises are now known as Unit 11 on that
estate. The term of the lease was 35 years from September 29 1974 and the initial
rent was £95,300 per annum, but the lease provided for five-year rent reviews.
Stan-Bilt was itself the lessee of the estate under a lease from the Standard
Life Assurance Co (‘the landlord’) but it surrendered its interest to the
landlord in 1984.
The estate
prior to 1969 consisted of only three completed units. Between 1969 and 1977
Stan-Bilt built a number of other units. At the date of the lease the estate
was still in the course of development, but seven units built by Stan-Bilt were
in existence at that date. All were single-storey industrial buildings
containing warehouse or factory space and some office accommodation. One, Unit
11, differed from the other six in size and the amount of office accommodation.
Of the other six, five were about 10,000 or 11,000 sq ft and the sixth, Unit 4,
was nearly 15,000 sq ft. But Unit 11 was 100,000 sq ft. In all the other six
not more than about 20% of the available space was office accommodation. In
Unit 11, however, 49% of the available space was office accommodation.
The first rent
review of Unit 11 resulted in an increase in the rent to £263,000, but the
premises were at that time let to a company other than the tenant. On the
second rent review the question of construction that is the subject of these
proceedings has emerged between the landlord and the tenant. To understand the
question I must read clause 4(i) of the lease. This provides:
(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.
Clause 4(ii)
then provides for the rent review. If the landlord sets the review in motion,
and if on such review the review standard rent is found to exceed the initial
standard rent, the lease rent is to 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. In other words, having ascertained the rent
for the standard accommodation at the relevant date, one then increases that
rent by multiplying by 95 and dividing by 65. If the parties fail to agree,
then the matter is to be determined by a surveyor.
The dispute
between the parties turns on the meaning of standard accommodation as defined.
The landlord attributes to it a meaning which it asks, by its originating
summons dated July 9 1985, the court to declare, that is to say, that it means
a standard single-storey industrial building situated on the Kingsland
Industrial Estate, Basingstoke, 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 attributes to ‘standard accommodation’ a different meaning; the
meaning it asks the court, by its originating summons dated July 10 1985, to
declare is that it means ‘a building having the same floor area as the building
on the demised premises’. Each of the parties has put in an affidavit on which
it relies, but there has been no cross-examination or other oral evidence and
there is no dispute of fact.
Nor is there
any dispute on the principles to be applied in construing the lease. Mr Nugee,
appearing for the landlord, has reminded me of the much cited passage from the
speech of Lord Wilberforce in Reardon Smith Line Ltd v Yngvar
Hansen-Tangen [1976] 1 WLR 989 at pp 996-997. From that it is clear that
the proper test is an objective one, to ascertain the intention which
reasonable persons would have had in agreeing the rent review clause if placed
in the position of the parties to the lease at the relevant date. Mr Nugee
submitted that that date was the date when the parties agreed the terms and
that was likely to be a date preceding that of the lease. He submitted that
there was a real possibility that an unusual building like Unit 11 might well
have been the subject of a prior agreement between Stan-Bilt and the tenant and
the terms of the lease might therefore have been agreed much earlier than the
date of the lease. But that seems to me to be much too speculative. All that I
have to go on is the fact that the lease was dated November 4 1974, and that I
must take to be the relevant date when the parties committed themselves to the
terms of the lease.
The rent
review clause is in a very unusual form. Instead of the usual rent review
provision whereby the updated rent of the demised premises is ascertained on
the basis of a hypothetical letting of the actual premises on the open market,
the rent to be paid, in the present case, is to be determined by applying a
mathematical formula to the rent of premises other than Unit 11, that is to
say, standard accommodation as defined. The parties to the lease must be taken
to have anticipated some difficulty in ascertaining the market rent of
Unit 11 in the conventional way, and I would infer that difficulty to have been
that of finding comparables to Unit 11. That of course would be the ordinary
way of ascertaining the market rent. The parties must, I think, also be taken
to have adopted the definition of standard accommodation on the footing that
the building therein defined avoided that difficulty. One would therefore
expect that there would be sufficient comparables known to the parties to exist
at the date of the lease which would ensure that that description to be found
in the lease made the task of ascertaining the review standard rent a
relatively easy one. One would also expect that all the information necessary to
enable the rent review to be carried out would be provided in the definition.
The
identifying characteristics of standard accommodation as defined are (1) that
it is a single-storey industrial building which answers the description
‘standard’, (2) in the same locality as Unit 11, and (3) of like age. There is
little difficulty over the third characteristic. It is common ground that a
building built within a few years of the date of the building of Unit 11 would
answer that description. However, in determining whether the parties must be
taken to have had in mind particular buildings, one should I think look only at
buildings existing at the date of the lease, unless there is some evidence,
which there is not, of other buildings which were in the course of being built
or about to be built and which were known to the parties. The difficulties of
construction relate to the word ‘standard’ and ‘in the same locality’.
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% 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.
The tenant’s
approach is different. Mr Colin Yates, a chartered surveyor, has sworn an
affidavit on which the tenant relies. He looked at an area wider than the
estate on the footing that ‘locality’ would naturally be understood as having a
wider connotation. He has looked at an area up to three-quarters of a mile from
Unit 11. His purpose, as he deposes in his affidavit, was to determine the
situation, size and rentals of other industrial buildings, which might be
relevant to the issue in the proceedings. He listed 19 buildings built between
1965 and 1978, but it appears that he excluded those buildings on the estate
which are of between 10-15,000 sq ft and any others that there may be outside
the estate of that size. The buildings he lists vary from 19,000 to 113,000 sq
ft. Mr Yates concludes that in what he has taken to be the locality there
appears to be no standard industrial building in terms of size. He then
proceeds to look at the rents of units on the estate, but takes only the rents
of units 9 and 12 because they were determined close to the date of the lease
of Unit 11, and regards those units as the only two relevant units on the
estate which are truly comparable for the purpose of finding the level of
rentals for industrial buildings. Because 65p is well below those rentals, Mr
Yates rejects the landlord’s view that the standard accommodation is a building
of about 10,000 sq ft. He asserts that the initial standard rent should be
fixed by reference to a building having the size of Unit 11. The result is that
on his own evidence there was no example in the locality of standard
accommodation except possibly one building of approximately 113,000 sq ft built
in two stages between 1969 and 1971, a half mile away from Unit 11, and another
of 90,000 sq ft which Mr Langan, appearing for the tenant, accepts should be
excluded as it was built in 1965. That is a remarkable result given the obvious
business purpose of the unusual rent review clause, to provide an easily
ascertainable rent by reference, one must assume, to comparables. With all due
respect to Mr Yates, to my mind he has approached the matter from the wrong
end. Instead of surveying the area round Unit 11, to look at all industrial
buildings to see whether there were some which had the defined characteristics
of standard accommodation, he has assumed what he intended to prove, namely,
that those buildings on the estate which do have common characteristics should
be excluded because they are too small. Yet he accepts that two of the units of
the estate are relevant for the purposes of comparability of rents for standard
accommodation. I cannot accept that Mr Yates’ approach is what the parties to
the lease can be taken to have intended.
Mr Nugee and
Mr Langan agree that standard accommodation has this characteristic, that it is
of a building of which up to about 20% of the available space is given to
office accommodation. Mr Langan says that it is therefore not necessary to look
further for the meaning of ‘standard’ in that a sensible meaning can be given
to it. But it is common ground between Mr Nugee and Mr Langan that there must
be a reference to size in the definition of standard accommodation. That must
be right, given the fact that the rent per sq ft of premises will vary
according to the size of the premises. Mr Langan cannot point to any words in
the definition that procure for him the attribute of standard accommodation
which he asserts, that is to say, that it should be the same size as Unit 11.
In effect he asks the court to write in those words. That is a very bold
submission, the more so having regard to the actual language of the definition.
There one finds the parties have expressly agreed two matters which standard
accommodation has to have in common with Unit 11, namely locality and age. It
would be remarkable if the parties should be taken to have intended a third
characteristic, size (and a particular size), but had not expressed it. Moreover,
it is so obviously important a characteristic to be mentioned for the guidance
of those who have to ascertain the rent on a rent review. In contrast Mr Nugee,
on his construction, can point to the word ‘standard’ as including a reference
to size. To my mind ‘standard’ connotes a norm, the first, the most obvious and
natural characteristic of which is size.
Mr Langan,
however, urges on me two arguments against size being comprehended in the word
‘standard’ in this lease. The first is that, if standard accommodation relates
to premises of only 10,000 sq ft, that is to say, one-tenth of the size of Unit
11, that would be a great distortion of reality and, he submits, it is to be
assumed that the parties intended to stick as close as possible to the actual facts.
With respect, this seems to me to be an impossible argument. Standard
accommodation is accommodation other than Unit 11. Save for the two
characteristics to which I have already referred, locality and age, it cannot
be assumed that the parties intended Unit 11 to be in any other way like
standard accommodation. The second and more attractive argument of Mr Langan is
one to which Mr Yates adverted, namely, that in the light of the rents obtained
for Units 9 and 12 the agreed figure of 65p for standard accommodation does not
relate to a building of 10,000 sq ft. Mr Langan argues that otherwise the
landlord would obtain a discount on the true rental value plus the application
of the 95/65 multiplier. The basis of that submission is that the 65p rental was
intended by the parties to be a genuine estimate of the market rental for
standard accommodation and that a rental of not less than 77p, and as much as
£1.08, was the actual market rental known to the parties for standard
industrial buildings of about 10,000 sq ft.
As for the
actual market rent in November 1974, I do not think it permissible to take
account of the £1.08 figure which appeared in the subsequent lease dated
December 20 1974, that is to say, after the date of the lease of Unit 11. I do
accept that the rents agreed for other units on the estate are likely to have
been known to the parties given the practice of surveyors to obtain
comparables, and it is a fact that 77p, the rent obtained in September, is
higher than 65p. But I am not thereby persuaded that 65p was necessarily not
the actual market rent, as the parties perceived it to be in November 1974, for
a building of about 10,000 sq ft. I can take judicial note of the fact that in
November 1974 the financial and property markets were in considerable disarray.
The true market rental must have been a matter of some uncertainty at that time
and it is possible that the parties would have regarded 65p as the true market
rent, looking at the rents which had been obtained in the previous three years
for other units on the estate. But in any event the primary purpose of the
reference in the lease to 65p appears to be to provide the denominator in the
95/63 multiplier. The parties had agreed 95p per sq ft as the actual rental for
Unit 11. Whether the 65p figure played any part in the negotiations for that
initial rent is not known. The landlord, of course, would have wanted the
denominator in the multiplier fraction to be as low as possible. In all the circumstances
I cannot give the reference to 65p the significance that Mr Langan has urged
upon me. In my judgment Mr Langan’s argument is not sufficient to overcome what
to my mind is the clear indication from the language of the definition and in
particular the use of the word ‘standard’.
Mr Langan also
submitted that the landlord was wrong to treat the
parties have not used the words ‘the estate’ although that term is to be found
in another clause of the lease. He submits that a wider meaning must have been
intended by the parties. I see great force in that argument. But ‘locality’ is
a word of some imprecision; there is no particular logic in going as little or
as far as three-quarters of a mile away from Unit 11, and in this case to go
that far crosses local authority boundary lines. On the facts, it has not been
shown that there are industrial buildings of the like size and otherwise
possessing the characteristics required by the definition in an area wider than
the estate. The words ‘the locality’ are capable of being limited to the estate
on which Unit 11 stands, and in the circumstances I am prepared to hold that
that is its meaning.
In the result
I reach the clear conclusion that the landlord’s construction is to be
preferred as according better with what I take to be the intentions of the
parties, viewed objectively. Accordingly I shall make the declaration asked for
by the landlord by its originating summons and I shall dismiss the tenant’s
originating summons.
