Landlord and tenant — Rent review clause in lease provided for increases of rent at seven-year intervals, not by the usual method of reference to open market rental levels but by reference to increases in the vacant possession capital value of the land which was the subject of the lease — Instead of a hypothetical lease the clause envisaged a hypothetical freehold with similar rights and obligations attaching thereto and with a similar planning permission to that which was enjoyed by the actual freehold — The land demised was some 127 acres out of a larger estate and was leased in order to allow it to be laid out and used as a golf club — The actual lessees were a brewery company whose interest was not unconnected with the possibility of a ‘tie’ being imposed on the club as to the brand of beer to be consumed at the 19th hole — The mechanism was that the owners of the estate let the land to the brewers, who would then sublet it to the golf club — Before the lease was executed planning permission had been obtained for a golf course, but the land at the date of the lease was still agricultural land — The lease was for 99 years from 1971, the rent being £1,800 pa during the first seven years and thereafter (subject to variation under the review clause) £3,500 pa — The lease provided for a number of easements and contained in a schedule extensive covenants on the part of the tenants — There were also some landlords’ covenants, such as for quiet enjoyment — The rights reserved to the landlords included mines and minerals and sporting rights
review clause required the rent to be increased (there was no provision for
reduction) by the same percentage as the increase in capital value resulting
from the hypothetical freehold formula — The problem which the court was asked
to solve in the present proceedings was what ‘rights and obligations’, in the
words of the review clause, should be treated as attached to the land in
question in determining the relevant capital value — The tenants argued that
all the tenants’ obligations under the lease, including the obligation to lay
out the golf course, should be taken into account — The landlords submitted
that the ‘rights and obligations’ were merely those easements and the mineral
and sporting rights granted and reserved to the landlord
Vice-Chancellor gave reasons why the tenants’ argument, while ‘semantically
strong’, produced insuperable difficulties — Also, it seemed an
‘extraordinarily wayward’ intention to impute to the parties that there should
be brought into the vacant possession value of the freehold rights which could
subsist only between landlord and tenant — The indications were that what the
parties had in mind was a valuation which determined the capital value of the
freehold together with the benefit of the rights and easements stated in the
relevant schedules to the lease, but disregarding covenants applicable only as
between landlord and tenant — Declaration accordingly
No cases are
referred to in this report.
This was a
summons to determine questions of construction of the rent review provisions in
a lease of which the plaintiffs, Robert and John Wallace, were the landlords
and the defendants, McMullen & Sons Ltd, were the tenants. The land
consisted of approximately 127 acres, part of which was the Hamels Park Estate
in Hertfordshire, and was leased with the object of enabling the East
Hertfordshire Golf Club to use it as a golf club.
Miss Hazel
Williamson (instructed by Longmores, of Hertford) appeared on behalf of the
plaintiff landlords; Jonathan Brock (instructed by Chalmers-Hunt & Gisby,
of Ware) represented the defendant tenants.
Giving
judgment, SIR NICOLAS BROWNE-WILKINSON V-C said: This is a summons which raises
a question on the construction of the rent review clause contained in a lease
dated November 16 1971 made between Mr Robert Wallace and Mr John Wallace, who
are defined as ‘the landlords’ of the one part, and the company, McMullen &
Sons Ltd, of the other part.
The rent
review clause is an unusual one and indeed I have not come across one in this
form before. It provides for an uplift in the rent at seven-yearly intervals
not by reference, as is usual, to the increase in the open market rental of the
premises demised but by reference to an increase in the capital value of the
freehold of the land which is the subject-matter of the demise.
The background
of the case is this. Prior to 1971 the land in question formed part of the
Hamels Park Estate and was agricultural land. The land demised is approximately
127 acres out of a much larger estate. The two lessors were the freeholders of
that estate. The lessees are brewers. The background was that the lessees were
acquiring the lease under an arrangement between them, the lessees, and the
East Hertfordshire Golf Club. The land was being leased in order to enable the
East Hertfordshire Golf Club to lay it out and use it as a golf club. I believe
the explanation for the actual lessees being the brewery was the desire to
impose a tie on the golf club as to the beer that could be consumed. However that
may be, the actual structure was that the owners of the estate let to the
brewers, the brewers then granted a sublease in exactly similar terms to the
golf club. The result is that effectively the occupiers of the land at all
times have been the golf club and the purpose of the lease in 1971 was to
enable the golf club to lay out the land and use it as a golf club.
The initial
rent was a figure of £3,500 pa. However, for the first seven years of the term
it was reduced to a figure of £1,800. It is common ground that that reduction
was designed to reflect the fact that the club had to lay out the land as a
golf course at considerable expense. It may well be, and I should think it
almost certainly is, the fact that the cost to the club of laying out the land
as a golf club was far in excess of the amount by which the rent was reduced in
the first seven years. However, that is speculation. All that is common ground
is that there was a reduction in the rent which reflected either wholly or in
part the cost to the club of laying out the golf course.
Since the
land, the subject-matter of the lease, was only part of an estate previously in
common ownership, the severance of the golf
estate, namely, there had to be reservations and grants of mutual rights and
easements over, and for the benefit of, the land the subject-matter of the
lease.
Finally,
before the lease was executed, planning permission had been obtained for the
construction of a golf course on the land, but the land at the date of the
lease was still agricultural land.
Against that
background I turn to the terms of the lease. By clause 1, it was provided that
the land in question (which was defined as ‘the demised premises’) ‘together
also with the rights and easements set out in the second schedule hereto but
save except and reserving unto the landlords the rights and liberties mentioned
in the third schedule hereto’ were demised for a term of 99 years from
September 29 1971 at a rent during the first seven years of £1,800 ‘and
thereafter (subject to variation as hereinafter provided for) yearly the rent
of £3,500’.
By clause 2,
‘the tenant covenants with the landlords to observe and perform the provisions
and stipulations contained in the fourth schedule’. The fourth schedule
covenants are in many ways the normal covenants as entered into by a tenant
with a landlord, though there are very special provisions in addition. The
fourth schedule is headed (and this is important) ‘Obligations of the tenant’.
Going through the paragraphs of the fourth schedule, para 1 is a covenant to
pay rent. Para 2 is to pay rates, taxes and outgoings. Para 3 is as follows:
Not to use
the demised premises other than as a private golf course together with clubhouse
members accommodation stewards and greenkeepers and other staff accommodation .
. . and generally in connection with the user hereby authorised to lay out and
construct facilities only in accordance with the overall development plans
which have first been approved in writing by the landlords (such approval not
to be unreasonably withheld).
Para 4 is a
covenant not to fell timber without the consent of the landlord. No 5 is to
erect fencing. No 6 is critical and I must quote it all:
To layout
repair and maintain and keep the said golf course and other permitted
facilities from time to time authorised and all buildings from time to time
standing placed or erected on the demised premises in good and tenantable
repair throughout the term hereby granted.
No 7 is a
covenant for painting. No 8 is a covenant against bringing any dogs or cats
other than those belonging to the landlords’ gamekeeper on to the demised
premises. No 9 is a covenant not to obstruct the landlords’ gamekeeper in the exercise
of his duties. No 10 is not to permit persons playing golf to trespass over the
boundaries in search of lost golf balls. No 11 is to take steps to prevent the
acquisition of public or private rights of way. No 12 is the right for the
landlords to enter the premises and examine the condition thereof. No 13 is a
provision that subject to para 3 the tenant is not to make any alterations
other than of a minor nature without the landlords’ consent, not to be
unreasonably withheld. No 14 is a covenant to comply with notices served by
public authorities. No 15 is to insure all buildings. No 16 is not to do
anything which would become a nuisance or annoyance to the landlord or his
tenants. No 17 is a covenant against subletting or parting with possession. No
18 is a covenant against assignment. No 19 is a covenant to pay the costs and
expenses of a section 146 notice and no 20 is a covenant to yield up. Those are
the tenant’s covenants.
Going back now
to the body of the lease, clause 3 contains the landlords’ covenants. Clause
3(a) is a covenant for quiet enjoyment in normal terms. Clause 3(b) is a
covenant by the landlords that they will permit ‘the tenant in the exercise of
the rights granted to it in the second schedule hereto (subject to compliance
by the tenant with the obligations set out in the fourth schedule hereto) to
cut down or root up any hedges . . .’. Covenant 3(c) is ‘not to permit any
vehicles other than rubber tyred ones not exceeding 3 tons gross weight to pass
over the entrance road . . .’. So there is the format of the tenant’s and
landlords’ covenants respectively.
The rights and
easements which were granted with the demised land and excepted and reserved in
favour of the landlords are contained in the second and third schedules. The
rights and easements granted to the tenant are in the second schedule and
conferred, by para 1, a right of way over the entrance road.
2 The right to construct upon the demised
premises in accordance with the tenants’ covenants hereinafter contained an 18
hole private golf course together with club house.
Right no 3 is a
right to construct and retain a sewage treatment works. No 4 is a right to make
connection to and take a supply of water from somewhere on the rest of the
landlords’ estate. No 5 is a right to lay wires, pipes, drains under the
adjoining land of the landlords. No 6 is the right to stop up the natural flow
of water in a stream, and no 7 a right to erect and maintain notice boards on
the demised lands. Those were the rights granted with the demised premises to
the tenant.
The rights
reserved to the landlords under the third schedule were, first, all mines and
minerals; second, all the sporting rights and specifically a right of entry for
the purpose of shooting and fishing; third, a right to maintain field gates at
certain specified points on the plan annexed to the lease and for the purpose
of managing and servicing the shooting rights; fourth, a right for the
landlords to issue to such persons as they shall reasonably select one-day
green vouchers up to a limit of 20.
I can now
finally turn to the rent review clause itself, which is the one on which the
case turns. Clause 4 reads as follows, so far as material:
Provided
always and it is hereby agreed and declared as follows:
(a) The rent payable hereunder during the eighth
to fourteenth years inclusive of the said term and each subsequent seven year
period thereafter may at the request in writing of the landlords made not less
than six months prior to the commencement of any such seven year period be
increased (if found appropriate) but not reduced in accordance with the
following formula:
(i) It shall be assumed that at the date hereof
the freehold value of the demised premises and the rights and obligations
hereby attached thereto with planning permission unlimited in duration for
development as authorised by this lease is £400 per acre (and the full market
rental thereof for such use £27.50 per acre).
(ii) There shall be determined as at the date of
commencement of any such seven year period the freehold value of an equivalent
and comparable area of land in Hertfordshire with similar rights and
obligations attaching thereto and with similar planning permission unlimited in
time save only in respect of any such period falling within the last 20 years
of the term hereby created when the planning permission shall be deemed to be
limited to that part of the term hereby created then remaining unexpired.
(iii) Any determination made in accordance with
(ii) above which shall show an increase in the capital value per acre above
that shown in (i) above shall be expressed as a percentage increase over the
said figure of £400 and the rent increased by a similar percentage.
There are then
provisions in the event of a dispute for the appointment of an independent
surveyor in order to fix the appropriate values.
The question
which arises between the plaintiffs, the landlords and the defendant, the
tenant, is this: in fixing under clause 4(ii) the present-day capital value of
the freehold, what rights and obligations should the valuer treat as attached
to the land in question? The defendant,
the tenant, says the obligations which under the terms of the lease attach to
that equivalent and comparable area of land include obligations contained in
the tenant’s covenants in the fourth schedule as being obligations of the
tenant. In particular, the tenant contends that para 6 of the fourth schedule
(the obligation to lay out the golf course) is an obligation attaching to the
land which the valuer must take into account. It is therefore said that in
valuing the land the valuer must not simply assume that the hypothetical
purchaser of the land can, if he wishes, lay it out as a golf course but is
bound so to do under the obligation in para 6 of the fourth schedule. I am told
(though at the moment I do not quite understand why) that if there is an
obligation to construct a golf course as opposed to the mere right to do so,
that could have a substantial impact on the value of such piece of land. That
is only the principal question which I am told arises. Generally the valuer
needs to know whether, in making his valuation, he must take account of
obligations which under the lease are imposed on the tenant under schedule 4 to
the lease.
The landlords
say that the tenant’s submission is illfounded; that when clause 4(a)(i) and
(ii) refers to the ‘rights and obligations hereby attached’ to the demised
premises, those rights and obligations are merely those which are referred to
in clause 1 of the lease as having been granted together with the demised
premises; that is to say, the rights and easements set out in the second and
third schedules. It was the landlords’ case that the tenant’s covenants in
schedule 4 and the covenants given by the landlords in clause 3 of the lease
are not rights and obligations attached to the land for the purposes of the
valuation under clause 4 of the lease.
Before turning
to the detailed arguments, there are two preliminary matters which I think one
should get clear. The first is
without a golf course on it. Under clause 4(a)(ii) what has to be valued is the
freehold value of an equivalent and comparable area of land. The land to which
it has to be equivalent and comparable is that described in clause 4(a)(i),
which is the demised premises ‘at the date hereof’, namely, November 1971, a
time prior to the construction of the golf course. So one is valuing the
freehold value of agricultural land together with the right to construct a golf
course.
The second
preliminary matter to which I refer is this. It seems clear that the
subject-matter of valuation is a freehold of the demised premises with vacant
possession. It does not in terms say so, but it is, I am satisfied, inherent in
the whole scheme that what is being valued is the capital value of the land on
an open market basis free of a lease. If the subject-matter of the valuation
were a reversion on a lease, such valuation would be incapable of being carried
out, since the valuation of the reversion is largely dependent on the rent
reserved by any lease, whereas the whole question here is to determine what is
the rent to be reserved by the lease. I therefore approach the matter on the
basis that the subject-matter of valuation is a freehold of an equivalent and
comparable area of land to the demised premises as they were in 1971 together
with planning permission for the creation of a golf course.
Mr Brock’s
submissions on behalf of the tenant are largely based on the use of the word
‘obligations’. The question is what is meant by the words ‘rights and
obligations hereby attached thereto’. Mr Brock concentrates on the fact that in
this lease the word ‘obligations’ is used, and only used, as a matter of
language to describe those obligations undertaken by the tenant under the
combined effect of clauses 2 and the fourth schedule. In particular, as I have
mentioned, the fourth schedule is headed ‘Obligations of the tenant’. He points
out that in clause 3(b) of the lease there is a specific reference to
permitting the tenant to fell timber in exercise of the rights granted to the
tenant in the second schedule, ‘subject to compliance by the tenant with the
obligations set out in the fourth schedule hereto’. So again one has a
reference to those being ‘obligations’. In clause 4(a)(i) and (ii) the word
‘obligations’ is of course used. Those are the only occasions on which the word
‘obligations’ appears in the lease. So, says Mr Brock, with substantial force,
in attempting to establish the intention of the parties one assumes that they
used the word ‘obligations’ throughout as meaning the same and that
accordingly, when under clause 4 one has to have regard to obligations, the
word ‘obligations’ must include what are described as ‘obligations’ in the
fourth schedule. That is a strong semantic argument.
The argument,
semantically strong though it may be, does not convince me that that is the
right construction of this lease. First of all, although the word ‘obligations’
as such is used only in reference to the fourth schedule tenant’s covenants, it
is inherent in the whole structure of the lease that there are obligations
attached to the land quite apart from the tenant’s and landlords’ covenants in
the lease. The rights and easements granted to the tenant by the second
schedule and reserved over the demised premises in the third schedule, though
expressed to be rights and easements, in fact carry with them the collateral
obligation to give effect to those rights and easements. So if one takes the third
schedule, the reservation to the landlords of the sporting rights on the
demised premises, together with a right of entry for the purpose of shooting
and fishing, though expressed as a reservation of a positive right, necessarily
carries with it an obligation on the tenant to permit entry for the purpose of
sporting. Similarly with the right to maintain field gates, there is an
obligation to permit the maintenance of field gates.
So as a matter
of construction, the words ‘rights and obligations attached to the demised
premises’ can be given a perfectly rational effect without importing into the
rent review provisions the covenants imposed on the tenant as tenant and on the
landlord as landlord.
Second, it
seems to me an extraordinarily wayward intention to impute to these parties
that they should be seeking to bring into the valuation of a freehold rights
which can only subsist as between landlord and tenant. As it seems to me, the
scheme of the valuation clause is to take the capital value as an agreed value
at the date of demise of the freehold, then to reassess the value of that
freehold at the time of the review and then to increase the amount of the rent
by the same proportion as the increase in the capital value of the freehold.
The essence of it is to concentrate on the value of the freehold of that parcel
of land, not on the position as between landlord and tenant under that lease
itself. I find it almost impossible sensibly to introduce into such a valuation
process, directed to the value of the freehold, obligations relating to the
same piece of land which can arise only as between landlord and tenant under a
lease, particularly as what is under consideration is the valuation of land
with vacant possession. If one were to introduce, as part of the obligations
attached to the demised premises, the tenant’s covenants, the same would be
true of the landlords’ covenants for quiet enjoyment. How could you attribute
to the freehold of land a value of a covenant for quiet enjoyment? What Mr Brock says is that obviously one
cannot include all obligations, one has to take only those covenants which do
affect the value of land, and so far as the landlords’ covenants and tenant’s
covenants are subsumed in the fact that it is a freehold with vacant possession,
then you can ignore them. That is theoretically possible, but what I am
attempting to find is the intention of the parties in entering into the
document.
Again if, on
the true construction of the lease, the ‘obligations hereby attached thereto’
include the obligations under the tenant’s covenants, it must follow that the
freehold also has the value of the benefit of the tenant’s covenants. You
cannot divide the ‘rights and obligations hereby attached’ and say: ‘We will
only look at the tenant’s covenants as obligations but not at the benefit of
those covenants as rights.’ Since you
are valuing a single piece of land in one ownership with vacant possession, the
value of the right to insist on performance — for example, the obligation to
lay out the land as a golf course — is a right attached to the land. So if
there is an obligation on the tenant so to lay out the land, the landlords have
the benefit of that. Therefore both the obligation to lay it out and the right
to have it laid out are both to be treated as included in the valuation. I am a
bit lost to know how that could be done at all — it would seem to me that the
two cancelled out in any event. But to my mind, it is a strong indication that
the covenants which exist only as between landlord and tenant cannot sensibly
be brought into account because the obligation on the tenant will be offset by
the benefit of the performance of that obligation to the landlords, and both
landlords’ and tenant’s rights and obligations are to be treated as attached to
the land. It seems to me a very wayward intention indeed.
Third, it is
not enough simply that there are rights and obligations. The only rights and
obligations in question are those which are ‘hereby attached to the demised
premises’. As I have indicated, many of the obligations are positive
obligations of a tenant enforceable as between landlord and tenant but
incapable, save in very devious ways, of being attached to a freehold. What
appears to be clear is that for the right to be included in the valuation, that
right has to be attached to the premises; it cannot be a mere personal right.
Moreover, it must be attached by that document. Given that it is a freehold,
those covenants that are positive could not be attached by this document to a
freehold, since they are incapable of touching and concerning the land so as to
run with the land. Mr Brock says, first, that you could achieve that result by
assuming in making the valuation that there is a hypothetical sale to an
outsider of the land, reserving a rentcharge out of the land sold and reserving
a right of entry in support of that rentcharge to enforce positive covenants. I
confess that that seems to me to be a wholly fanciful concept that these
parties were envisaging anything of that kind.
Second, he
says, one can concentrate on the negative covenants alone and you can say that
those are capable of being attached to freehold land and therefore are to be
treated as attached. But again I can find no rational reason why the parties in
approaching this valuation should want to have regard only to negative rights
as opposed to positive rights.
Finally, the
format of the clause seems to me to make the suggestion put forward by the
tenant most improbable. It seems to me clear that under clause 4(a)(i) and (ii)
one is comparing like with like. One is looking at a freehold value at the date
of demise and a rental value at the date of demises. One is then comparing that
with a freehold value and a rental value at the date of review. At the date of
the demise the rental was fixed under clause 4(a)(i) as being £27.50 per acre,
that being, as I understand it, the agreed full market rental for the land in
its undeveloped state with the benefit of planning permission. That gave rise,
if multiplied out, to an initial rent of £3,500. From that there was deducted,
in order to have regard to an obligation to construct, a sum of money. But the
£27.50 per acre (£3,500 for the whole land) is a figure under clause 4(a)(i)
which paid
compare with that figure, under clause 4(a)(ii), the freehold value of the
equivalent and comparable land, one would be looking to see land which was of
the same nature and having a rent fixed on the same basis, namely, a rent referable
to the land disregarding an obligation to construct. I do not say that that by
itself is an overwhelming factor, but taken with all the other matters it does
seem to me to indicate strongly that what these parties had in mind was a
valuation which fixed a capital value of the land at a given time together with
the benefits of the rights and easements and the obligations involved in the
rights and easements stated in schedules 2 and 3, but disregarding covenants
applicable only as between landlord and tenant in clause 3 and schedule 4.
In my
judgment, therefore, in fixing the new rent under clause 4 of the lease the
equivalent and comparable area of land in Hertfordshire should be taken to
enjoy the rights contained in the second schedule and be subject to the rights
of way and other rights reserved to the landlords over the demised premises in
the third schedule, but should not be taken as being subject to any of the
obligations contained in the fourth schedule or entitled to the benefit of the
landlords’ covenant in clause 3 of the lease.