Landlord and tenant–Rent review provisions–Construction–Purpose for which hypothetical tenant must be supposed to use the premises–Effect of planning permission for office use–Effects of parcels descriptions, user covenant and other clauses–Question as to length of hypothetical lease–Questions also as to date from which rent at the reviewed rate is to start to accrue and as to date when it is actually payable–Declaration on the whole in favour of landlords
proceedings related to the last rent review period, running from June 25 1989
to the expiry of the lease, which was for a term of 24 years from June 24
1970–There were three questions of construction–The first was as to the use of
the premises attributable to the hypothetical tenant–There had been, since
1988, planning permission for general office use–The tenants, however, relied
on the parcels, a qualified user covenant and an odd clause prohibiting
development as restricting user by the hypothetical tenant —
office use
question concerned the length of the term for which the hypothetical letting
was assumed to be granted–The relevant clause provided that the premises were
to be deemed to be let ‘for a term of years and on conditions and terms similar
to the terms hereof’–Did this mean a term equal to the residue of the actual
lease at the review date, namely five years, or a term equal to the 24 years
originally granted?–The judge held that it meant a term of five years only–He
found the decision of Warner J in Lynnthorpe Enterprises Ltd v Sydney Smith
(Chelsea) Ltd indistinguishable on this point
question, which the judge thought was probably the most difficult one, was as
to the date from which rent at the reviewed date was to start to accrue–Prima
facie the language of the reddendum pointed to a single rent operating
throughout the reviewed period–The tenants, however, submitted that this was
displaced by a clause providing for notification by the landlords of the ‘rent
payable’–This clause provided that ‘the rent shall become payable at the new
rate either at the appropriate rent review date or on receipt of the notice by
the lessees of the new rate of rent, whichever shall be the later’–The solution
was found by the judge in the ambiguity of ‘payable’, which could mean either
‘accruing from time to time’ or ‘falling due for payment’–The answer was that
the rent when eventually determined began to accrue at the new rate from the
commencement of the rent review period but fell due for actual payment on the
receipt by the tenants of the landlords’ notice in writing of the new rate–Thus
the clause merely made a slight alteration in the presumption mentioned by Lord
Diplock in United Scientific Holdings Ltd v Burnley Borough Council to
the effect that the rent when eventually determined commences to accrue at the
new rate from the beginning of the rent review period but falls due for payment
at the next rent day after the determination–Declaration accordingly
The following
cases are referred to in this report.
C & A
Pensions Trustees Ltd v British Vita Investments
(1984) 272 EG 63, [1984] 2 EGLR 36
Lynnthorpe
Enterprises Ltd v Sydney Smith (Chelsea) Ltd
[1990] 1 EGLR 148: [1990] 08 EG 93
United
Scientific Holdings Ltd v Burnley Borough
Council [1978] AC 904; [1977] 2 WLR 806; [1977] 2 All ER 62; (1977) 33
P&CR 220; [1977] EGD 195; (1977) 243 EG 43 & 127, HL, [1977] 2 EGLR 61
These
proceedings related to rent review provisions in a 24-year lease of Sir John
Lyon House, 5 High Timber Street, London EC4. The plaintiff tenants, Tea Trade
Properties Ltd, were a company formed by a number of firms and companies in the
tea trade for the specific purpose of taking a lease of the building. The
defendants, CIN Properties Ltd, were the lessors. The tea traders, who were the
shareholders of the plaintiff company, occupied most of the building as
subtenants.
Terence Cullen
QC and Christopher Pymont (instructed by Stephenson Harwood) appeared on behalf
of the plaintiffs; David Neuberger QC and Jonathan Gaunt (instructed by the
solicitor to the British Coal Corporation) represented the defendants.
Giving
judgment, HOFFMANN J said: This action raises three questions on the
construction of a rent review clause. The premises are a building in the City
called Sir John Lyon House. The tenant is a company called Tea Trade Properties
Ltd. It was formed by a number of firms and companies engaged in the tea trade
for the specific purpose of taking a lease of the building. The tea traders,
who constitute the shareholders of the company, occupy most of the building as
subtenants.
The lease,
dated July 20 1970, is for a term of 24 years from June 24 1970 and provided
for fixed rents until June 24 1977, followed by three rent review periods: the
first of seven years and the other two each of five years. These proceedings
concern the determination of the rent for the last rent review period, which
runs from June 25 1989 to the expiry of the lease. The relevant part of the
reddendum in clause 1 of the lease provides that the rent for this period is to
be (and I quote with appropriate adaptation):
Either the
rent payable immediately prior to
June 25 1989
or such rent
as shall be agreed by the parties hereto or determined under the provisions of
clause 5 hereof being a sum equal to the current market value of the demised
premises at
June 25 1989
such current
market value to be assessed in accordance with the provisions of clause 5
hereof whichever shall be the higher.
Clause 5
provides that, for the purposes of determining the reviewed rent, the current
market value of the premises at the rent review date is to be assessed as:
The rent at
which the demised premises might reasonably be expected to be let in the open
market by a willing landlord to a willing tenant with vacant possession for a
term of years and on conditions and terms similar to the terms hereof but
disregarding those considerations referred to in s.34(a)(b) and (c)
of the Landlord and Tenant Act 1954 as amended by s.1(1) of the Law of Property
Act 1969.
The first
question of construction, which is raised both by the tenant’s originating
summons and by the landlord’s counterclaim, is the purpose for which it must be
supposed that the tenant under a hypothetical letting in the open market will
use the premises. The tenant seeks a declaration that it must be assumed that
the tenant will use the premises as ‘commercial premises (with ancillary
offices and showrooms)’. The landlord says that this assumption is too
restrictive and that it cannot be assumed that the hypothetical tenant will use
the premises solely in the manner in which they are currently used and, in
particular, that it must be assumed that he will not use the entire building as
offices. The landlord therefore seeks a declaration to substantiate this effect
and a consequential declaration that the possibility that the premises could be
used entirely as offices should be taken into account in fixing its current
market value.
Until November
3 1988 there was no planning permission for general office use. The building
had been created, partly by the refurbishment of an old building and partly by
the construction of a new one, in 1963, pursuant to a planning permission
allowing use as ‘showrooms, warehouses and ancillary offices’. There was
apparently no office development permit then in existence, and the law as it
then stood was that such a permit was required for the use of more than 3,000
sq ft of the building as offices. The City Corporation, as planning authority,
took the view that the ancillary office user was therefore limited to 3,000 sq
ft. This was inadequate for the purposes of the tea traders and so, before
taking the present lease, they obtained a new planning consent dated July 9
1970. This was ‘use for commercial purposes (Tea Trade Centre) containing
auction and salerooms and stores, and with offices incidental to the main use
having a gross floor-space of 32,181 sq ft’. I should have mentioned that an
office development permit for that square footage of office floorspace had
previously been obtained.
The lease was,
as I have said, granted on July 20 1970. Immediately after the grant of the
lease the shareholder undertenants entered into possession and began to use the
premises in accordance with the planning permission. The permission was
expressed to be personal to the tea traders, and in 1975 the planning
authority, in response to an inquiry from the tenant’s surveyors, said that
‘the use of all of the premises as independent offices was unlikely to be
favourably considered’.
In 1986,
however, there was a change of planning policy. The City of London rezoned the
riverside area which included Sir John Lyon House as suitable for general
office use. Planning permission for use as such was granted on the landlord’s
application in November 1988. It follows that on the rent review date, namely
June 25 1989, there was no planning objection to the use of the entire building
as offices. Such use would no doubt have required alterations and improvements
and the parties differ over what these would have cost and how long they would
have taken. The tenant says that they would have been so time-consuming and
expensive as to make the building in practice unattractive to a potential
office tenant. If this is right, the theoretical potential of office use may
add little to its existing use value. But this is a question for a valuer and
does not, in my view, raise a question of construction on which the court can
make a declaration.
The tenant
submits, however, that on the true construction of the lease the premises must
be valued on the assumption that, despite the current planning permission, the
hypothetical tenant would be
showrooms)’. For this purpose it relies upon three provisions of the lease
which it says must be construed against the factual background known to the
parties at the time of the grant. The relevant factual background is that the
tea traders had been forced out of their former premises in Mincing Lane by a
rise in the level of rent in that part of the City and wanted to find a cheaper
home which was still within the City limits. Warehouse, showroom and such like
commercial premises were available at about a third of the rents commanded by
office premises, and it was for this reason that the tenant was attracted to
Sir John Lyon House.
The parcels in
the lease — and this is the first of the provisions upon which the tenant
relies — describe the building as ‘consisting of commercial premises with
ancillary offices’. The tenant submits that to value the premises on the
assumption that the whole can be used as offices would be to destroy the
purpose for which it entered into the lease. It argues that it would be wrong
for the landlord by unilaterally applying for planning permission to improve
its position upon the rent review.
I was referred
to the decision of His Honour Judge Thomas, sitting as a judge of the High
Court, in C & A Pensions Trustees Ltd v British Vita Investments
(1984) 272 EG 63, [1984] 2 EGLR 36, for what was said to be an example of the
principle supporting the tenant’s proposition. It seems to me to have been a
rather curious case. It concerned an impending rent review of premises held
under a lease in which the user clause was a covenant by the lessee ‘not to
exercise or carry on or permit to be used, exercised or carried on in any part
of the demised premises any trade or business whatsoever other than such as may
be authorised in writing by the lessor and the head lessor’. In fact, the
tenant, with the authority of the landlord and superior landlord, had been
using the premises for certain light industrial uses. Shortly before the rent
review date the landlords, who had also acquired the interest of the superior
landlords, purported to grant an authority in writing to the tenant to use the
premises for any trade or business whatsoever falling within classes 3, 4 or 10
of the Town and Country Planning (Use Classes) Order 1972.
The learned
judge held that this unilateral grant of consent was not an ‘authority’
contemplated by the user covenant in the lease. He construed that covenant as
if it had said: ‘Other than such user as may be requested by the lessee and
authorised in writing by the lessor and head lessor.’ That conclusion, if I may respectfully say
so, appears to me to be unexceptionable. The difficulty I have is in seeing
what relevance it had to the rent review. The question on the rent review is
not the use to which the actual tenant might wish to put the premises but the
purpose for which the hypothetical tenant in the open market might wish to use
it. The hypothetical tenant would no doubt have made a request to the landlord
for authorisation for whatever use he had in mind. The landlord’s unilateral
declaration, while obviously not constituting an actual authority in terms of
the lease, must, as it seems to me, have been evidence, which the valuer was
entitled to take into account, of the kinds of user to which the landlord was
likely to consent.
None of these
questions appears to have been discussed before the learned judge or considered
in his judgment, and I find it difficult to see how the actual declaration
which he made can have been of any assistance to the valuer when he came to
decide what the reviewed rent should be. It certainly does not, in my view,
support the general proposition for which the tenant here contends. In my
judgment, the general background and the circumstances in which the lease was
granted cannot displace the clear language of the rent review clause which
postulates on the rent review date a hypothetical letting in the open market.
The open market, prima facie, means that no potential tenant is excluded
from consideration. The valuer should not, therefore, exclude any potential
tenant who might wish to take a lease of the building for any purpose for which
it could physically and legally be used. The fact that the parcels describe the
building as it stood in 1970 as ‘commercial premises with ancillary offices’
does not in itself mean that they could not in 1989 be used for other purposes.
The purpose of
a rent review clause, as has been stated in a number of cases, is to allow the
rent to be adjusted to reflect changes (usually only upward changes) in the
monetary value of the building. These changes may be the result of inflation
but can be for other reasons. Changes in value may occur on account of
alterations in fashion, changes in the nature of the area in which the building
is situated, changes in communications, other developments in the neighbourhood
of the building and also on account of changes in the planning policy of the
local authority. There seems to me to be no reason why alterations in value for
any of these reasons should be excluded from consideration.
The tenant
does not, as I have said, suggest that there is any physical impossibility in
the use of the building for offices, but says that there are two clauses in the
lease which either make such use legally impossible or at least require the
valuer to proceed on the assumption that it is legally impossible. The first is
the user covenant, clause 2(12), of which the material part reads:
To use the
demised premises as commercial premises with ancillary offices and showrooms
and for no other purpose whatsoever save with the previous written consent of
the lessors which shall not be unreasonably withheld.
The tenant says
that the opening words ‘To use the demised premises as commercial premises with
ancillary offices and showrooms’ are a positive and, more important, an
absolute covenant which the landlord cannot be required to waive. The proviso
‘save with the previous written consent of the lessors which shall not be
unreasonably withheld’ is said to apply only to the words ‘and for no other
purpose whatsoever’.
I do not think
that I need to decide whether the opening words of the clause impose a positive
obligation, in the sense that the covenant will be broken if the tenant does
not use the premises at all. They may be simply an emphatic statement of the
prohibition on uses other than that specified. But in either case I do not
accept that the proviso for the landlord’s consent not to be unreasonably
withheld does not qualify the whole covenant. It seems to me that the tenant’s
construction produces a hopeless contradiction between the alleged positive
obligation to use the entire premises as ‘commercial premises with ancillary
offices and showrooms’, that obligation continuing throughout the lease, and
the negative obligation not to use for other purposes which the landlord may be
required to waive. On the tenant’s construction, the lease contemplates that
the tenant will be under a positive obligation to use the premises for one
purpose and yet may have the landlord’s consent to use it for some other
purpose.
In my view,
the landlord would not be entitled unreasonably to refuse the hypothetical
tenant’s consent to use the entire building as offices. The uncontradicted
evidence is that the landlord would have no reasonable grounds for such refusal
and this is something which, in my judgment, the valuer would be entitled to
take into account. Clause 12 is therefore, in my view, no legal bar to office
user.
The other
clause on which the tenant relies is clause 2(20), which reads as follows (and
I have for this purpose to read the whole of it):
Not to do or
omit or suffer to be done any act or matter of any kind whatsoever in on or
respecting the demised premises which may contravene the provisions of the Town
and Country Planning Acts 1962 to 1968 or any other Act or Acts for the time
being in force or any order or regulation or direction issued under or by
virtue thereof nor to carry out or permit to be carried out any development
within the meaning of the said Acts and instruments or any of them in or over
or under the demised premises or any part thereof and as soon as practical
after the lessees shall become aware of any notice or proposals or order under
any of the said Acts or instruments to give full particulars thereof to the
lessors and to join with the lessors if necessary or expedient in any objection
or representation in regard thereto and immediately to comply with any such
notice or proposal or order or any subsequent one given made or issued to the
lessees or lessors or the owner or occupier of the demised premises.
The clause, as
will be seen, prohibits the tenant from carrying out any development within the
meaning of the Town and Country Planning Act 1962 in the demised premises.
Section 12(1)
of that Act defines development as:
The carrying
out of building, engineering, mining or other operations in, on, over or under
land, or the making of any material change in the use of any buildings or other
land.
Section 13(1)
provides that:
Subject to
the provisions of this section, planning permission is required for the
carrying out of any development of land.
The tenant
submits that the prohibition on carrying out development means that the tenant
is not allowed to make any material change in the use of the building, whether
or not such change would be in accordance with a subsisting planning
permission. The clause prohibits development as such, not merely development in
breach of planning control, which would already be covered by the earlier words
prohibiting any acts which contravene the provisions of the Town and Country
Planning Act 1962.
I see the
force of that argument, but I have never found the presumption against
superfluous language particularly useful in the construction of leases. The
draftsmen traditionally employ linguistic overkill and try to obliterate the
conceptual target by using a number of words or phrases expressing more or less
the same idea. I cannot, therefore, rely upon the language alone but must, as
it seems to me, construe the words also by reference to the commercial effect
which would be produced by one construction or the other.
To construe
the clause as a prohibition on any material change of use, even for which planning
permission had been granted, would in my view produce results so irrational
that they cannot be supposed to have been intended. It would mean that a
material change of use to which no objection could reasonably be made under the
user clause (clause 2(12)) and for which planning permission had been granted
would nevertheless be a breach of clause 2(20).
The tenant
accepted this consequence and says that clause 2(20), on his construction, can
still be harmonised with clause 2(12) if the changes of use which that clause
contemplates as falling within the proviso against unreasonably withholding
consent are confined to changes which are not material within the meaning of
the Town and Country Planning Act.
Such a narrow
construction of clause 12 would, in my view, be surprising to the ordinary
reader and would deprive the clause of much of its effect. Furthermore (and
even more dramatically), the parties must have contemplated that upon entering
into possession after the grant of a lease, the tea trader subtenants would
immediately make a material change in the use of the building. That was the
very reason why they had thought it necessary to obtain planning permission
shortly before the lease was granted. If the tenant’s construction is right,
that change of use would have constituted an immediate breach of covenant,
preventing the use of the premises for which they had been intended.
I find this
impossible to accept. In my judgment, clause 2(20) does not prohibit a
development for which planning permission exists. It is therefore also no legal
objection to the use of the premises as offices.
Finally on
this question, the tenant submits that planning permission for office use
should be ignored because in seeking such permission the landlord was in breach
of an implied obligation under the lease not to apply. All I need say is that I
can find no material in the lease or the surrounding circumstances upon which
to base such an implied obligation. Clause 2(20) does not seem to me to prevent
either the landlord or the tenant from applying for whatever planning
permissions they please. It might just be possible to construe the last part of
the clause, which requires the tenant to join with the landlord, if necessary
or expedient, in objecting to proposals made under the Town and Country
Planning Acts, as implying an obligation upon the part of the tenant not
himself to make proposals or applications to which the landlord objects. But I
cannot see how, even assuming that implication to be possible, it can give rise
to a further implication that the landlord shall not himself apply for a
planning permission.
Accordingly I
have come to the conclusion that the declaration sought by the tenant must be
refused and that the counter-declaration sought by the landlord should be
granted in substantially the form set out in the order of June 8 1989.
The second and
third questions are a good deal shorter. The second question, which is raised
by the counterclaim, concerns the term for which the hypothetical letting is to
be granted. Clause 5(i) says that the premises are to be supposed to be let
‘for a term of years and on conditions and terms similar to the terms hereof’.
The tenant
says that what the landlord had to offer at the time and therefore what must be
assumed to have been on offer for the purposes of the rent review was a lease
for that period. The landlord says that the term as originally granted was for
24 years and therefore a lease for that term must be assumed to be on offer in
1989.
There are a
number of cases in which the courts have decided that, unless the language of
the lease shows clearly that some artificial assumption was to be made, it
should be presumed that the hypothetical letting should, as closely as
possible, reflect what the landlord at that date actually has to offer. There
is, in my view, nothing in the language of this clause which compels one to the
artificiality of the assumption which has to be made if the landlord’s
contentions were correct. In this respect I need refer only to the recent
decision of Warner J in Lynnthorpe Enterprises Ltd v Sydney Smith
(Chelsea) Ltd (a judgment delivered on April 28 1989)*, which is, in my
view, indistinguishable from this case. Accordingly, I will answer the second
question by refusing the declaration sought in the counterclaim.
*Editor’s
note: see p 148 ante.
The third, and
possibly the most difficult, question of construction is also raised by the
counterclaim. That concerns the date from which rent at the reviewed rate is to
start to accrue. The reddendum in clause 1 provides, as I have said, for fixed
rents up till June 24 1977 and then provides that for the three rent review
periods the rent is to be either the rent payable immediately prior to the appropriate
rent review date or the reviewed rent, whichever shall be the higher. Prima
facie, therefore, that language suggests that there is to be a single rent
throughout the reviewed period. That rent is to be ascertained by looking at
the rent payable immediately prior to the rent review date, looking at the rent
agreed or determined under the rent review provision and deciding which of them
is higher. It does not, on the face of it, appear to contemplate that the rent
shall be at one figure for part of the review period and at another figure for
the rest. That, however, is only a prima facie indication and may be
displaced by language elsewhere in the lease.
Clause 5
provides for the method by which the market value of the premises is to be
fixed, that is to say, either by agreement between the parties or by
determination by an independent surveyor. Clause 5(v) says:
The surveyor
— if that is
the route which is being taken —
shall give
notice in writing of his valuation of the current market value to the lessors
and lessees within two months of his appointment or such extended period as the
lessors may agree.
Clause
5(viii), upon which the tenant relies, says:
The lessors
shall by notice in writing inform the lessees of the rent payable under clause
1 hereof at the current market value as decided by the surveyor and the rent
shall become payable at the new rate either at the appropriate rent review date
or on receipt of the notice by the lessees of the new rate of rent whichever
shall be the later.
The tenant says
that the effect of that clause is that the rent at the new rate does not start
to accrue until notice has been given in accordance with clause 5(viii).
The word
‘payable’ as used in this lease has two distinct meanings and sometimes it is
used in one sense and sometimes in the other. It can mean either ‘accruing from
time to time’ or ‘falling due for payment’. So, for example, when the reddendum
speaks of ‘the rent payable immediately prior to the appropriate rent review
date’, it means the rent which was accruing due from time to time immediately
prior to the appropriate rent review date. It had fallen due not immediately
prior to the rent review date but a quarter earlier. On the other hand, when
the same clause goes on to say ‘such rent always to be payable by equal
quarterly instalments’, it is using ‘payable’ in the sense of falling due for
payment.
Similarly, in
the proviso for re-entry, the lease speaks of rent being unpaid for 21 days
after becoming payable. That clearly does not mean accruing from time to time.
It means falling due for payment.
The question,
as it seems to me, is to decide which of those two senses is meant by the word
‘payable’ where it is used for the second time in clause 5(viii). It is
important to note that the word is used twice in that clause. First, the
lessors have to give notice in writing informing the lessees of ‘the rent
payable under clause 1’ as decided by the surveyor. The effect of that is that
the rent shall become ‘payable’ at the new rate either at the appropriate rent
review date or on receipt of the notice by the lessee.
I find it
difficult to construe that clause in such a way as to give ‘payable’ the same
meaning on each of the occasions in which it is used. The notice is to inform
the lessee of the rent not which will become payable but which is
payable. That is to say, it is assumed to have become payable by virtue of
determination by the surveyor. But the effect of that notice is that the rent
is to become payable either upon that date or upon some future date. If
‘payable’ has to have the same meaning, that would seem to me to be a
contradiction. But the contradiction can easily be reconciled if on the
occasion of its first use ‘payable’ means accruing due but on the occasion of
its second use it means falling due for payment.
That
construction would, in my view, be supported by the way in which both the
reddendum and clause 5 deal with the effect of determination by the surveyor.
The reddendum speaks of the rent accruing due being that which has been agreed
by the parties or determined under the provisions of clause 5. Clause 5 clearly
shows
notice in writing of his valuation. It is that determination which the lessor
is obliged to notify to the tenant under clause 5(viii). It would therefore
harmonise clause 1 with clause 5 if clause 5(viii) were read to mean that the
rent which accrues due is that which has been determined by the surveyor, but
that it does not actually fall due for payment until the dates specified in
clause 5(viii).
Once one has
decided that clause 5(viii) is dealing only with the date upon which the rent
actually has to be paid and not the date upon which it starts to accrue, the
construction of the question of accruing is, in my judgment, governed by the
decision of the House of Lords in United Scientific Holdings Ltd v Burnley
Borough Council [1978] AC 904. The effect of the judgment of Lord Diplock
at pp 934-935, with which the rest of their lordships agreed, is that, prima
facie, in the case of a reddendum such as we have here, the rent when
eventually determined is held to have commenced to accrue at the new rate from
the commencement of the rent review period but falls due for payment at the
next rent day, after that determination has taken place.
The effect of
clause 5(viii) is, therefore, simply to alter the presumption that it falls due
for payment at the next rent date to a provision whereby it falls due on the
giving of the notice.
The tenant
submitted that the effect of that construction would be to render unnecessary
the two alternatives in clause 5(viii), namely that the rent is to fall due
either at the giving of the notice or if the notice is given before the
appropriate rent review date then on the latter date. The tenant says, and in
my judgment rightly, that even without such a provision, the rent at the new
rate could not possibly have fallen due until the appropriate rent review date.
Again for the
reasons that I stated earlier, I do not find that a sufficiently compelling
argument to make me reject the construction which I have arrived at on other
grounds. It may well be that the draftsmen thought it necessary to exclude any
suggestion that the giving of a notice before the rent review date would
somehow accelerate the date at which rent at the new rate should be paid.
Furthermore, the same point could be made even on the tenant’s construction,
since the reddendum makes it clear that the new rent could not start to accrue
before the rent review date.
For those
reasons I would make a declaration on this question in the terms sought by the
landlord in the counterclaim.
The plaintiff
tenants were ordered to pay 90% of the defendants’ costs.
