Rent review clause — Construction of various provisions — Length of hypothetical term — Whether profits basis may be used — Whether arbitrator can use turnover of a company if figures available in the open market — Whether goodwill must be disregarded — Whether relevance in “Tenant” or “tenant” for purposes of gaming licence — Whether hypothetical tenant assumed to have no gaming licence but could get one
This was an application under section 2 of the Arbitration Act 1979 for leave to appeal and concerned the construction of a rent review clause. The lease, granted originally to “Mecca” for a term of 21 years from July 1977, is now held by Ritz Casino Ltd; the applicant company, The Ritz (Hotel) Ltd, is the landlord. The lease, which contains 5-year rent reviews, is of premises used as an hotel. There is also a casino licensed under the Gaming Acts.
The upwards-only rent review clause provides that the rent is to be “the market rent of the demised premises taking no account [of] (i) any effect on the rent of the fact that the Tenant or any company within the same Group … or its or their predecessors in title has been in occupation of the demised premises … (iii) any goodwill attached to the demised premises by reason of the business carried on thereat at the review date and it is expressly agreed that in assessing the market rent no account shall be taken of the turnover or profits of the business carried on by the Tenant in the demised premises and that the Arbitrator…shall not be entitled to call for or inspect the accounts of the business carried on by the Tenant in the demised premises … But having regard insofar as possible to the rental values then current for similar properties let on similar terms with vacant possession for a term equivalent to the term hereby granted … on the basis that at the time when the market rent falls to be agreed or determined the Tenant does not hold but will immediately be able to obtain a licence under the Gaming Act 1968 … “.
The following questions as to the proper construction of this clause arose for determination: (1) whether the hypothetical term commenced at the date of the actual lease or at each rent review date; (2) whether profits can be used in the valuation as well as rental values of comparable properties; (3) whether turnover figures of related companies can be used where the information is available in the open market; (4) whether goodwill is to be disregarded on the basis that the hypothetical tenant is taking a new lease and no previous goodwill has been created; (5) whether the reference to “Tenant” in relation to the Gaming Acts is to the real tenant or the hypothetical tenant; and (6) whether it is to be assumed that the hypothetical tenant has no gaming licence but could get one.
Held 1. It must be assumed that the hypothetical lease is for a term of 21 years commencing in 1977 at the same time as the actual lease: Norwich Union Life Insurance Society v Trustee Savings Banks Central Board [1986] 1 EGLR 136. 2. The use of profits is permissible only in the absence of comparable rental values: Segama NV v Penny Le Roy Ltd (1983) 269 EG 322. 3. When considering the information available in the open market about the turnover of holding and other companies in the same group as the tenant, the arbitrator must have in mind the prohibition in the lease and must not take notice of anything revealed about the tenant. 4. As no account is to be taken of goodwill, this has a consequence to values that an arbitrator must consider. 5. There was little significance in the use of upper-case “T” in “Tenant” in relation to a gaming licence as the words “will immediately be able to obtain” a licence were present to avoid the risk and delay which were to be assumed in Daejan Investments Ltd v Cornwall Coast Country Club [1985] 1 EGLR 77. 6. It must be assumed that a tenant under the hypothetical lease would have no gaming licence but could get one.
The tenant was granted leave to appeal under the Arbitration Act 1979 as the case concerned points of law of general public.
Paul Morgan (instructed by Berwin Leighton) appeared for the applicant landlords; and David Neuberger QC (instructed by M J Kusel & Co) appeared for the defendant tenants.
