Landlord and tenant — Rent review provisions — Construction of clause in underlease relating to reviews at seven-year intervals — The reviewed rent was to be the aggregate of certain items including ‘(a) the excess of the rental value on the relevant date above two hundred and fifty thousand pounds of those areas being parts of the ground floor and the basement of the demised premises as shown edged red on the plans annexed hereto . . . (on the basis that those areas are actually let for or are available for letting for shopping and retail purposes)’ — There were other somewhat complex aggregation provisions immaterial for the present construction proceedings — There were four areas edged red the greater part of which was used as part of the Strand Palace Hotel and was physically adapted for that purpose and the remainder for shopping and banking — On these provisions and facts several questions of construction arose
referred to the decision of Fox J (as he then was) in Trust House Forte Albany
Hotels Ltd v Daejan Investments Ltd (1980) 256 EG 915, [1980] 2 EGLR 123, which
was helpful in regard to the correct approach to particular questions in the
present case, and to Basingstoke and Deane Borough Council v The Host Group
Ltd [1987] 2 EGLR 147, in which the Court of Appeal made some general
observations on the construction of review clauses — In general, and subject to
any special context indicating otherwise, parties are to be taken to have
intended that the hypothetical letting is to be on the same terms (other than
as to the quantum of rent) as those of the actual lease — As regards the
particular questions of construction raised by the present summons, the judge
decided as follows: (1) the rental value to be determined was the aggregate
rental values of the individual areas edged red, not the rental value under an
assumed single lease; (2) where an area was sublet it was to be valued subject
to and with the benefit of the existing sublease; (3) the words ‘on the basis
that those areas are actually let for or are available for letting for shopping
and retail purposes’ meant that they were to be taken to be available for
letting for those purposes only; (4) questions as to terms of the hypothetical
letting and frequency of rent reviews were to be determined by reference to the
actual letting rather than to provisions which might be negotiated in the open
market
The following
cases are referred to in this report.
Basingstoke
and Deane Borough Council v The Host Group Ltd [1988]
1 WLR 348; (1988) 56 P&CR 31; [1987] 2 EGLR 147; (1987) 284 EG 1587, CA
British
Gas Corporation v Universities Superannuation
Scheme Ltd [1986] 1 WLR 398; [1986] 1 All ER 978; [1986] 1 EGLR 120; (1986)
277 EG 980
Forte
& Co Ltd v General Accident Life Assurance
Ltd [1986] EGLR 115; (1986) 279 EG 1227
This was an
originating summons taken out by the plaintiff underlessees, Trusthouse Forte
Albany Hotels Ltd, seeking the determination of a number of questions of
construction relating to rent review provisions in an underlease of premises
known as 366-375 Strand, London WC2, and the Strand Palace Hotel. The reversion
on the underlease was vested in the defendants, Daejan Investments Ltd.
Derek Wood QC
and Kirk Reynolds (instructed by Paisner & Co) appeared on behalf of the
plaintiffs; Michael Barnes QC and David Neuberger QC (instructed by Herbert
Smith) represented the defendants.
Giving
judgment, MR MICHAEL WHEELER QC said: This is an originating summons seeking a
declaration as to the true construction of the rent review provisions in an
underlease dated June 16 1972 and made between the defendant, Daejan
Investments Ltd (‘Daejan’) as landlord and J Lyons & Co Ltd (‘Lyons’) as
tenant, whereby Daejan demised to Lyons land and buildings between the Strand,
Exeter Street and Burleigh Street, London, known as 366-375 Strand and the
Strand Palace Hotel. This property was originally demised to Lyons for a term
of 75 years from July 5 1963 and became vested for the residue of the term in
the plaintiff, Trust House Forte Albany Hotels Ltd (‘Forte’) in 1977. The
reversion to this underlease is vested in Daejan.
The initial
rent reserved by the underlease was £550,000 per annum, and clause 1(i)
contained provisions for the review of the rent as from July 6 1979 and at the
end of seven-year periods thereafter. The material provisions of clause 1(i)
are as follows:
(i) that as from the Fifth day of July 1979 and
at the expiration of each successive period of seven years calculated from such
date (such date and the date of each such expiration being herein after
referred to as ‘the relevant date’) the rent shall be the aggregate of
(a) the excess of the rental value on the
relevant date above Two hundred and Fifty thousand pounds of those areas being
parts of the ground floor and the basement of the demised premises as shown
edged red on the plans annexed hereto and marked C and D (on the basis that
those areas are actually let for or are available for letting for shopping and
retail purposes) such excess to be multiplied by 1.8125
(b) the initial rent of Five hundred and Fifty
thousand pounds herein provided and
(c) a sum equal to any increase of rent
currently payable in accordance with the provisions of Clause 1 of the Head
Lease;
Of these three
components, the aggregate of which is to constitute the rent as calculated at
the relevant review date, I am concerned only with component (a) and more
particularly with the meaning of the words ‘the rental value on the relevant
date . . . of those areas . . . on the basis that those areas are actually
let for or are available for letting for shopping and retail purposes‘ (my
emphasis). Examination of plans C and D seems to show that there are four areas
edged red on those plans; that the greater part of these areas is — and at all
material times has been — used as part of the Strand Palace Hotel and is
physically adapted for that purpose; and that the remainder is — and at all
material times has been — used for shopping and bank purposes and is physically
adapted for those purposes. It is also clear that if the part used for the
purposes of the hotel is to be used for shopping and retail purposes, it would
have to be subjected to substantial building and other works of conversion and
adaptation which would be costly and would take a substantial time to carry
out.
I here
interpose to say that no one has been able to tell me the significance or
origin of the multiplier of 1.8125 in clause 1(i), but it
arm’s-length bargaining.
The present
summons is not the first occasion upon which this unhappy rent review provision
has come before the court. In 1980, in proceedings reported in (1980) 256 EG
915, [1980] 2 EGLR 123, Fox J (as he then was) was asked to consider various
questions relating to the basis on which the areas edged red on plans C and D
ought to be valued on the first rent review. Two of the three questions which
he decided are, I think, irrelevant for present purposes, namely (a) the
question whether the rent review provision was void for uncertainty (a
contention which Fox J held was misconceived) and (b) a question as to
interest. The third question, however, has some bearing on the questions which
I have to decide and was to the following effect: for the purpose of deciding
the state of the property which was to be available for letting for
shopping and retail purposes (ie that part of the property which was not actually
let for those purposes at the relevant date), ought that property to be
valued in its existing physical state and condition as at the relevant date (as
Forte contended) or ought it to be valued (as Daejan contended) on the basis
that it was at that date in a state reasonably appropriate for use for shopping
or retail purposes? Fox J, in holding in
favour of Forte’s contention, made a number of points which are useful
indicators as to the basis upon which I should approach the questions which I
have to decide in the present case, namely (i) that there was no requirement or
supposition to be found in the rent review formula as to the state of the
premises and that it would be improper to insert words to that effect in the
formula unless compelled to do so; (ii) that the formula did require certain
suppositions to be made if feasible effect was to be given to it, for example
that any necessary planning permission to enable use for shopping or retail
purposes had been given and that any provision in the underlease which might
prevent that use or alterations of the premises for such uses had been suitably
varied or waived or appropriate consents given; and (iii) that ‘available’ and
‘availability’ mean no more than that the premises were to be treated as being
on offer with vacant possession and could be used for shopping and retail
purposes without illegality or breach of contract but that this requirement
could be fulfilled irrespective of the physical condition of the premises.
Before setting
out the precise questions which I am asked to decide, there is one very recent
Court of Appeal decision which is of great assistance to me in deciding the
proper approach to those questions. This is Basingstoke and Deane Borough
Council v The Host Group Ltd, the judgment in which (of which I have
been provided with a transcript), given by Nicholls LJ, was handed down on
November 3 1987*. This, too, was a dispute as to the true construction of a
rent review provision. I do not propose to review the facts in detail.
Inevitably, they differed from the facts of the case before me in a number of
respects. Suffice it, for present purposes, to set out what Nicholls LJ
referred to as ‘the crucial provision’ (namely para (B)(vii) in the first
proviso to clause 1 of the lease), which provided as follows:
The reasonable
then current ground rental value shall be the rental value of the demised
premises computed on the following basis:
(a) that the demised premises are available at
the date of assessment for letting for a term equal to the unexpired portion of
the term hereby granted or a term of twenty years (whichever shall be the
greater) with rent reviews at five yearly intervals as herein contained
(b) that the demised premises are a bare site
only clear of all buildings but not so as to permit consideration of a claim
for a reduced rent or rent free period during the development of the demised
premises as might otherwise be reasonably claimed if the premises were in fact
clear of all buildings
(c) that there shall be disregarded:
(i) any effect on rent of the fact that the
Lessee has been in occupation of the demised premises
(ii) any goodwill attached to the demised premises
by reason of the carrying on thereat of the business of the Lessee
(iii) any addition to the value of the demised
premises attributable to any Justices’ On-Licence
*Editor’s
note: Reported at [1987] 2 EGLR 147; (1987) 284 EG 1587.
On a summons
issued by the plaintiff landlord two questions were raised. First, as to
whether the valuer, in assessing the ‘reasonable then current ground rental
value of the demised premises’, was to do so on the basis that the premises
were available at the date of assessment for letting on the terms and
conditions of a hypothetical lease containing (a) such terms and conditions as
the valuer regarded as reasonable for a lease of a bare site for development at
the relevant date or (b) the same terms and conditions as the original lease.
(In the court below the judge had found for alternative (a), that is, in favour
of the landlord.) The second question
was whether the assessment was to be made on the footing that the bare site was
available for development (a) only as a public house or (b) for any lawful use.
(On this question, too, the judge had decided in favour of the landlord, ie on
the basis of alternative (b).) There are
a number of passages in the judgment of Nicholls LJ which I find useful as
guidelines (page references are to the pages of the transcript). The first is
at p 7, as follows:
The question
raised on this appeal is one of construction of a rent review clause in a
lease. In answering that question it is axiomatic that what the court is
seeking to identify and declare is the intention of the parties to the lease
expressed in that clause. Thus, like all points of construction, the meaning of
this rent review clause depends upon the particular language used interpreted
having regard to the context provided by the whole document and the matrix of
the material surrounding circumstances. Whilst recognising, therefore, that the
particular language used will always be of paramount importance, it is proper
and only sensible, when construing a rent review clause, to have in mind what
normally is the commercial purpose of such a clause.
As to
commercial purpose, Nicholls LJ referred with approval to what Sir Nicolas
Browne-Wilkinson V-C had said in British Gas Corporation v Universities
Superannuation Scheme Ltd [1986] 1 WLR 398 at p 401 as follows:
There is
really no dispute that the general purpose of a provision for rent review is to
enable the landlord to obtain from time to time the market rental which the
premises would command if let on the same terms on the open market at the
review dates. The purpose is to reflect the changes in the value of money and
real increases in the value of the property during a long term.
Nicholls LJ
pointed out (at pp 8 and 9) that the means by which rent review clauses
afforded landlords relief in respect of increases in property values or falls
in the value of money was normally by providing for a valuer (in default of
agreement between the parties) to assess the up-to-date rent for the demised
premises at successive review dates. Nicholls LJ said:
In making that
assessment the valuer will be achieving the intended purpose of keeping the
rent in line with current property values having regard to the current value of
money if, but only if, he assesses the up-to-date rent on the same terms (other
than as to quantum of rent) as the terms still subsisting between the parties
under the actual, existing lease. If he departs from those terms, and assesses
the up-to-date rent on the footing of terms materially less onerous to the
tenant than those in the actual, existing lease, the rental at which he arrives
will reflect, in addition to the rental increases attributable to a rise in
property values or a fall in the value of money, an additional element, namely,
the increased rental attributable to the fact that he is calculating the rent
of a lease on terms more favourable to the tenant than the terms in the actual,
existing lease. Conversely, if he assesses the up-to-date rent on the basis of
terms materially more onerous to the tenant than those in the actual existing
lease, the rental figure at which the valuer arrives will not fully reflect the
rise in property values or the fall in the value of money since the lease was
granted or the rent was last fixed.
Of course
rent review clauses may, and often do, require a valuer to make his valuation
on a basis which departs in one or more respects from the subsisting terms of
the actual existing lease. But if and in so far as a rent review clause does
not so require, either expressly or by necessary implication, it seems to us
that in general, and subject to a special context indicating otherwise in a
particular case, the parties are to be taken as having intended that the notional
letting postulated by their rent review clause is to be a letting on the same
terms (other than as to quantum of rent) as those still subsisting between the
parties in the actual existing lease. The parties are to be taken as having so
intended, because that would accord with, and give effect to, the general
intention underlying the incorporation by them of a rent review clause into
their lease.
At p 12,
Nicholls LJ said:
We approach
the construction of paragraph (vii), therefore, on the footing that, unless the
paragraph otherwise requires, expressly or by necessary implication, or there
is some context indicating otherwise, the parties are to be taken to have
intended that the notional letting assumed for the purposes of the rent review
assessment was to be on the same terms (other than as to quantum of rent) as
those still subsisting under the actual, existing lease.
There is one
further passage in the judgment which is relevant to the present case in the
light of some of the submissions which have been made to me. This is at pp 15
and 16:
We should
mention one further point. The declaration sought by the landlord and made by
the judge was that the valuer should assess the up-to-date rental value on the
basis that the demised premises were available for letting on the terms and
conditions of a hypothetical lease containing ‘such terms and conditions as the
valuer regards as reasonable for a lease of a bare site for development current
at the relevant date’ and that the site is available for any lawful use. This
construction of paragraph (vii) would mean that the valuer’s
of a property with stated characteristics. His role would extend to choosing
some of the characteristics of the property that he was about to value, namely,
‘such terms and conditions as the valuer regards as reasonable for a lease of a
bare site at the relevant date’. Paragraph (vii) contains no express direction
giving such a power to the valuer. So that this power must be found, if at all,
in paragraph (vii) as a matter of implication. We can see no justification for
reading any such implication into paragraph (vii). Such an implication would
require the valuer to step outside the lease actually granted and still
subsisting, with its user restrictions and obligations to pay rates and insure
and repair, and require him to direct his attention at whatever may, at the
relevant review date, be reasonable for a development lease of a bare site. As
time passes, the terms of such a lease may become very far removed from the
terms of this lease. In our view, if there has to be any implication, and we
think there has, the natural (and, indeed, necessary) implication from the
terms of paragraph (vii) read as a whole in its context in this lease is that
the rental value to be assessed by the valuer is of a notional letting on the
same terms (other than as to quantum of rent) as those subsisting between the
actual parties to the lease but modified to the extent expressly provided in
paragraph (vii) (a), (b) and (c).
Before setting
out the actual questions which the parties desire me to answer, I should refer
to the user covenants in the underlease. These are set out in clause 2(8),
which provides, inter alia:
(8) (a) That there shall not at any time during the
said term be exercised or carried on in or upon the demised premises or any
part thereof any trade or business manufacture or occupation whatsoever of an
offensive noisome noxious noisy or dangerous nature and that no clothing or
other articles shall be put out on the demised premises for the purposes of
drying or bleaching and that no part of the demised premises shall be used as
or for an asylum for persons of unsound mind or as a hospital nursing home or
charitable institution or school club or society or place of public amusement.
Provided nevertheless that part of the ground floor of the demised premises
abutting on to the Strand may be used as shops or a Bank and the business of a
good class Hotel and/or Restaurant may be carried on upon the remainder of the
demised premises subject to such business being conducted at all time in a
quiet and orderly manner and so as not to cause the forfeiture of any licences
which may be held for selling wine beer and spirits upon the demised premises
in connection with such business but so that any such breach of the provision
occasioned through any act neglect default or omission of the Tenants employees
servants or workmen in contravention of his her or their duties shall not
occasion a forfeiture of this Lease and at the end or sooner determination of
the said term the Tenant shall transfer such Licences (if any there be then in
force) or cause the same to be transferred to such person as the Landlord may
nominate on which being done the Tenant shall be paid the aliquot proportion of
the annual licence duty paid in respect of the same according to the unexpired
term thereof . . .
(c) That no part of the demised premises shall be
used as a betting shop . . .
It will be
seen that the first part of para (a) of subclause (8) and para (c) contain
specific restrictions on user, albeit something of a hotch-potch. But I agree
with Mr Barnes, who appeared for Daejan, that the proviso as to using part of
the ground floor for shops or a bank and the remainder of the demised premises
for a good-class hotel and/or restaurant is purely permissive. (See a very
similar provision so construed by Peter Gibson J in Forte & Co Ltd v
General Accident Life Assurance Ltd [1986] 2 EGLR 115 at pp 118D,
119B/C.) Thus, as I construe subclause
(8), the tenant is contractually at liberty to carry on any trade
or business on the demised premises other than those which are expressly
prohibited so long as the business did not require any planning or similar
consent. I confess that I was for a time puzzled as to why, if this were so, it
had been thought necessary, in framing the rent review provision, to make
express reference to the areas being let or available for letting ‘for shopping
and retail purposes’. But I think that Mr Barnes is right when he says that
this express reference was included so as to make it clear to the valuer that
he was to value on the basis that all necessary statutory or contractual
permissions and consents had been obtained to enable shopping and retail
businesses to be carried on in the areas not clearly so used: and it may be
that it was also included as recognition of the shops which were already in
existence at the date of the underlease. But having said this, it does seem to me
that in giving the surveyor this sort of instruction the parties were impliedly
recognising that shopping and retail purposes were the only purposes
which they were contemplating. The areas could not, for example, be used for
office purposes, because planning consent would be required and, so far as I
know, no such consent existed or had even been sought. True it is that under
subclause (8) the hypothetical lessee could have used the areas for carrying on
the business of ‘a good class Hotel and/or Restaurant’, but when one looks at
the location and shape of the four areas I cannot believe that the parties were
ever contemplating any of them being used for those purposes.
With the
unhappy experience of the 1980 litigation no doubt very much in mind, the parties
have, I am satisfied, made real efforts to reach agreement as to the principles
which should govern the valuer in operating the rent review provisions in the
underlease and they have agreed on the following propositions:
AGREED PROPOSITIONS
1 It is to be assumed that any tenant or
other occupier of the remainder of the demised premises, including the
plaintiff, could be a potential bidder in the open market for a lease or leases
of any of the areas edged red.
2 It is to be assumed that the areas edged red
have been on the market for a reasonable period prior to the relevant date so
as to effect [sic] the hypothetical letting or letting at that date.
3 The areas edged red are to be valued in
their physical condition at the relevant date.
4 The lessee or lessees under any such
hypothetical letting would be a person or persons actively seeking premises to
fulfil needs which the areas edged red could fulfil.
5 As to the remainder of the plaintiff’s
demised premises (ie those parts not comprised in the areas edged red) it is to
be taken at the relevant date to be occupied by the persons in actual
occupation and used for the purposes for which it is in fact used, and that it
is in its actual physical condition.
For the
purposes of propositions 3 and 5, in so far as Forte have not complied with
their repairing obligations under the underlease, it is to be assumed that the
areas (under proposition 3) or the remainder of the demised premises (under
proposition 5) are (or is) in the condition which they (or it) would have been
in if those obligations had been complied with.
Against this
general background I now turn to the questions, as formulated by the parties,
which I have to determine. These questions are, I understand, intended to
elaborate, and supersede, the questions formulated in the originating summons.
QUESTIONS FOR DETERMINATION
1 For the purpose of assessing the rental
value of the areas edged red on Plans C and D should it be assumed that
(a)
each area is being separately let, so that the rental value is the
aggregate of the values of individual areas
OR
(b)
all the areas edged red are being let under a single lease
OR
(c)
the areas are let by whichever method produced the higher rent?
2 Insofar as any of those areas is actually
sublet for shopping and retail purposes to any existing subtenant at the
relevant date, should any such area, for the purposes of either 1(a) or (b) be
valued
(a)
subject to and with the benefit of the existing sublease
OR
(b)
as if it were available for letting with vacant possession
OR
(c)
on whichever of the two bases produces the higher rent?
3 Do the words ‘on the basis that those
areas are . . . available for letting for shopping and retail purposes’ mean
(a)
that they are to be taken to be available for letting for those purposes
only
OR
(b)
that they may also be taken to be available for letting for any other
purpose permitted by the plaintiffs’ Lease?
4 Insofar as any area must be valued on the
basis of a hypothetical letting in the open market, is it to be assumed that
the term of the letting is
(a)
a term equal to the unexpired residue of the term of the plaintiff’s
Lease
OR
(b)
such term of years as might reasonably be expected to be negotiated in
the open market between willing parties?
5 Would any such hypothetical lease contain
provisions for rent review which (a) were, with regard to frequency and in all
other respects, such as might reasonably be expected to be negotiated in the
open market between willing parties
OR
(b)
were, with regard to frequency the same as those contained in the
plaintiffs’ Lease, but in all other respects such as might reasonably be
expected to be negotiated in the open market between willing parties?
6 Would the other terms of any such
hypothetical letting be
(a)
those which might reasonably be expected to be negotiated in the open
market between willing parties
OR
(b)
those which are contained in the plaintiffs’ Lease, adapted so far as
necessary for the purposes of a letting or letting of the particular area or
areas in question?
It is common
ground that the crucial question is question 3. As to this, the parties have
elaborated their respective arguments in the following terms:
For Forte:
The areas are
to be valued on the basis that they may be used without illegality or breach of
contract for shopping and retail purposes.
For Daejan, as
above, but with addition of the following:
and for such
other purposes for which the areas may at the review date be used without
illegality or breach of contract.
I suspect that
in actual fact there is little to choose between these two approaches. For the
reasons which I outlined when considering the user clause 2(8) it seems to me
that the normal construction of the rent review provision is to treat the
reference to ‘shopping and retail purposes’ as impliedly meaning those purposes
only. But even if I ought to construe that provision on the basis that
the hypothetical lease would include a user clause similar to clause 2(8) so as
to permit the premises to be used for any purpose not prohibited by clause
2(8), I am not satisfied that there is any such purpose (I took ‘offices’ as an
example) except possibly hotel or restaurant business which, as I have
indicated, I cannot treat as having been within the contemplation of the
parties.
For my part,
therefore, on question 3 I prefer alternative (a).
I now turn to
the remaining questions.
As to question
1, there are some minor indications in the wording of the rent review provision
which could be said to favour assumption (a) (for which Forte contend) or
assumption (b) which arouses little enthusiasm on either side (Daejan contend
for assumption (c)). Finding the answer is something of a coin-tossing exercise
but, looking at plans C and D, there are four separate areas edged red, a
factor which seems to me to be against the concept of all four being let under
a single lease or (for that matter) under one or more leases of two areas each,
still less for subdivided areas. Admittedly, the rent review provision refers
in the singular to ‘the rental value‘ of the areas edged red and not to
‘the aggregate rental value’ of the areas. But it seems to me that assumption
(a) is correct, namely the aggregate of the rental values of the four
individual areas.
As to question
2, after some discussion both sides opted for the treatment of any existing
subleases in accordance with alternative (a), namely that in so far as at the
relevant date any area was actually sublet for shopping and retail purposes
(and I include in this the sublease to the bank), the area should be valued to
and with the benefit of the existing sublease.
As to
questions 4, 5 and 6, namely (i) the terms of the hypothetical letting, (ii)
the frequency of any rent review in the hypothetical lease and (iii) whether
the other terms of the hypothetical lease would be those which might reasonably
be expected to be negotiated in the open market or would be those contained in
the underlease adapted so far as necessary for the purpose of a letting or
letting of the particular area or areas in question, in all three questions,
Forte contended, put shortly, for provisions which might be negotiated in the
open market. Daejan stuck much more closely to a parallel with the existing
underlease and contended in question 4 for alternative (a), in question 5 for
alternative (b) and in question 6 for alternative (b). In my judgment, Daejan’s
approach in all three questions is to be preferred. It is much closer to
actuality and does not require the valuer to go outside his normal province in
this sort of situation. As such it is, in my view, in accordance with the
principles approved by Nicholls LJ in the Host Group case (transcript at
pp 15 and 16).
Accordingly,
on the six specific questions which the parties have put to me, I answer
question 1 in the sense contended for by Forte; question 2 is now agreed by
both sides to be correctly answered in accordance with alternative (a); I
answer question 3 in the sense for which Forte contends; and I answer questions
4, 5 and 6 in the sense for which Daejan contends.
I very much
hope that these answers will enable the 1986 rent review to be completed
relatively quickly and that the ingenuity of the parties will not think up
further questions which will not have been answered either by Fox J or in these
proceedings.
Nevertheless,
I cannot help feeling that once the 1986 rent review is out of the way, it
would be in the interests of both sides to get together to produce a simpler
and more comprehensible rent review formula for the remainder of the term of
the underlease.
On the present
proceedings as a whole, I consider that the fairest solution would be to make
no order as to costs.
