Determination of market rent – Long lease – Length of notional term – Whether hypothetical tenant impliedly subject to subletting restrictions
The defendant council were at all times the freehold owners of a site in Bolton located close to an important shopping area. The claimant (Westside) was the assignee of a 125-year lease of the site (the headlease) that had commenced in November 1969 and had originally been granted to Royal Exchange Assurance (Royal) after it constructed a four-storey building on the site for mixed retail and office use.
Royal had granted back to the council a sublease of the building for a term three days shorter than that of the headlease. The sublease reserved an initial rent of £29,000 pa, with provision for upwards-only rent review at intervals of 14 years. By a formula contained in the rent review clause, the council were required to pay a percentage (subsequently agreed to be 68.59%) of the “fair rack rental” at the relevant review date, such rental to be determined by an arbitrator in default of agreement by the parties. The fair rack rental was declared to be the open market rent obtainable on a letting of the building as a whole or in parts, whichever was the greater, on conditions (other than those relating to rent) similar to those contained in the sublease. These conditions included an absolute covenant by the council against alterations and a qualified covenant against subletting as a whole or in part. Clause 3 of the sublease declared that the consent of Royal had already been given to the subletting of certain parts of the building.
In negotiations with Westside directed to the second review in November 1997, the council argued that, by operation of the rent review provisions, a hypothetical tenant would: (i) as regards underletting, be restricted to the parts of the building expressly mentioned in clause 3; and (ii) have to take a lease for a term no shorter than the unexpired 97-year residue of the sublease. Recognising that each point, if established, would severely depress the notional market rent, Westside sought a court ruling on the relevant provisions.
Held: The council’s arguments were rejected.
1. As regards the first issue, the court accepted Westside’s submission that, notwithstanding the absolute covenant against alterations, a flexible regime for the underletting of parts was contemplated. Had the parties intended otherwise, it would have been only too easy and natural to make express provision accordingly. Although the question was essentially one of construction, that conclusion derived some support from Buccleuch (Duke of) v Inland Revenue Commissioners [1967] 1 AC 506 and Iceland Frozen Foods plc v Starlight Investments Ltd [1992] 1 EGLR 126.
2. As regards duration, there was a general rule that the intended term was for the residue of the lease, in the absence of a contrary indication: see Norwich Union Life Insurance Society v Trustee Savings Banks Central Board [1986] 1 EGLR 136 and British Gas plc v Dollar Land Holdings plc [1992] 1 EGLR 135. However, given the general reluctance of business tenants to take terms in excess of 25 years, it was judicially recognised that in the case of a very long lease (usually a building lease) the intended duration was for a term that a landlord might reasonably be expected to grant and a tenant might reasonably be expected to take: see Brown v Gloucester City Council [1998] 1 EGLR 95 and Prudential Assurance Co Ltd v Salisburys Handbags Ltd [1992] 1 EGLR 153. In the present case, the council had failed to point to anything in the sublease capable of displacing the interpretation accepted in Brown, it being immaterial that the demised land, unlike that considered in Brown, had been developed before the date of the grant.
Kim Lewison QC (instructed by Fladgate Fielder) appeared for the claimant; Kirk Reynolds QC (instructed by the solicitor to the council) appeared for the defendants.
Alan Cooklin, barrister
