Lease of industrial premises shortly to expire – Tenant intending to vacate but nevertheless making statutory request for new tenancy – Landlord opposing on ground of intention to redevelop – Tenant claiming statutory compensation for disturbance – Whether tenant’s request invalid for want of genuine proposals for new tenancy – Landlord claiming damages for terminal dilapidations – Application of section 18 Landlord and Tenant Act 1925 where value of reversion arguably affected by prospects of letting for non-industrial use
The claimant (Sun Life) was the freehold owner of an industrial site in Raynes Park, London SW20. Four buildings on the site were occupied by the defendant companies (Racal), which belonged to the Racal group of companies, under two full-repairing leases, each expressed to expire on 24 December 1998. Towards the end of 1996 both Sun Life and Racal became interested, each for its own reasons, in acquiring an adjoining site. Sun Life’s objective was to combine the two sites in a major redevelopment, which it could not achieve without obtaining possession of the four buildings. Racal wished to vacate the four buildings and re-establish itself on the adjoining site. In formulating its plans Racal was aware that: (i) it would face a heavy claim for terminal dilapidations; (ii) its prospects of obtaining substantial (disturbance) compensation from Sun Life under section 37 of the Landlord and Tenant Act 1954 depended, inter alia, upon Sun Life opposing an application by Racal for a new tenancy of the buildings, and doing so on ground (f) of section 30(1) of the 1954 Act (intention to demolish or reconstruct).
On 13 November 1997 Racal exchanged contracts to buy the adjoining site on terms requiring confidentiality. The completion date was deferred to 1 April 1998. On 9 January 1998 Racal served, in respect of each tenancy, a request for a new tenancy pursuant to section 26 of the 1954 Act. On 4 March 1998 Sun Life served counter-notices stating that the applications would be opposed on ground (f). On 16 April 1998 Racal wrote to Sun Life announcing that it would not be applying for a new tenancy, and claiming compensation to be assessed in accordance with section 37(1) of the Act (as amended). On 8 December 1998 Sun Life served notices requiring Racal to remedy breaches of the repair covenants.
Racal quit the buildings on 23 December 1998, by which time Sun Life was in negotiation with two prospective lessees (Abbey and Acorn) who saw the buildings as well suited to the self-storage business. On 21 October 1999 Abbey took a 25-year lease at a rent of £290,000 pa with five-year reviews, the rent per sq ft (£5.68) being approximately £1.20 higher than the rent obtainable from industrial users.
In proceedings commenced by Sun Life, the court considered, inter alia: (i) whether Sun Life could resist the compensation claim on the ground that the section 26 notices were invalid, having been served with no genuine intention to remain in possession; (ii) the correct measure of damages recoverable by Sun Life for extensive terminal dilapidations. On the first issue the judge found as a fact that in the period January to March 1998 Sun Life was genuinely confused as to whether Racal had succeeded in securing the adjoining site, while Racal knew that Sun Life’s reason for opposing the renewal of the leases lay in its continuing hope to redevelop in conjunction with that site. On the second issue it was common ground that section 18 of the Landlord and Tenant Act 1927 applied so as to limit damages to the diminution in the value of the reversion, and that for valuation purposes the hypothetical purchaser would be an investor with plans to let. The parties’ experts differed however on the extent to which such a purchaser would, on 24 January 1998 (the valuation date), be driven by the prospect of letting to a company engaged in the self-storage business, Racal’s expert speaking in terms of a “safe bet”, as opposed to the mere “hope” allowed for in Sun Life’s valuation.
Held: Sun Life succeeded on the first issue. Racal succeeded on the second.
1. By section 26(3) of the 1954 Act the notice had to set out “the tenant’s proposals” as to the property and terms to be contained in the new tenancy. There was no express requirement that the proposals should be genuine, nor was there any judicial authority directly in point. There were however judicial observations made in other contexts which supported such a requirement: see per Stuart-Smith LJ in Cadogan v Morris [1999] 1 EGLR 59 at p61; per Glidewell LJ in Rous v Mitchell [1991] 1 WLR 469 at p487; per Harman and Pearson LJJ in Marks (Morris) v British Waterways Board [1963] 1 WLR 1008 at pp1018 and 1020. It was inherently unlikely that the Act was intended to allow outgoing tenants to obtain compensation by misrepresenting their intentions concerning their desire for a new tenancy.
2. On the second issue, it was plain that companies engaged in the storage business (as described, for example, in Estates Gazette, 23 October 1999, p51) would pay substantially more rent than an industrial user for premises which suited their purpose. The issue was how such interest should be translated into an element of “hope value” as defined at PS 4.2.5 of the RICS Appraisal and Valuation Manual (the Red Book). On the evidence before the court, in particular the fact that two leading operators were bidding against each other at the valuation date, the view of Racal’s expert was to be preferred. Evidence of events after that date was only admissible to the extent that it corroborated or clarified evidence of what had previously been a potentiality. Keats v Grahams [1959] 3 All ER 919; Crown Estate Commissioners v Town Investments Ltd [1992] 1 EGLR 61 considered.
Mark Wonnacot (instructed by Dibb Lupton Alsop) appeared for the claimant; Malcom Sheehan (instructed by the solicitor to Racal Group) appeared for the defendants.
Alan Cooklin, barrister
