Summary

The court construed rent review provisions contained in a commercial lease granted pursuant to a development agreement between a local authority and a property developer.

Facts

In proceedings brought by the claimant tenants (M), the court was required to construe rent review provisions contained in a lease of commercial premises between the defendant local authority and a property developer (F).

The local authority owned the freehold and had granted a 99-year lease to F in 1975 pursuant to a development agreement. The rent was fixed for the first 12 years and subject to review every 21 years thereafter. The rent review provisions were contained in cl.7 of the lease. Clause 7(h) required determination at the review date of "the rents at which the sum total of the various parts of the demised premises could at that time be reasonably expected to be let". It also provided that the expected lettings were to be on the open market, having regard to the actual rents then receivable in respect of parts actually let and to the Landlord and Tenant Act 1954 s.34. Clause 7(j) provided that the rental value for any vacant part of the premises was the rent that such part could reasonably be expected to be let for on the open market. There was provision for the appointment of an expert valuer if required.

M contended that a valuation for the purposes of cl.7(h) required no assumption of vacant possession in respect of sub-let parts, so that the costs and risks of owning sub-let property, including management costs and rental void periods, could have a significant effect. The local authority argued that an open market vacant possession valuation was required, and that no more than regard was to be had to the actual rents receivable, as expressly recognised by cl.7(h). The local authority further argued that the valuer was free to consider that the vacant parts were being offered for letting together, or in such parts as would secure the highest bid on the open market.

Held

(1) The express provision in cl.7(h) that regard was to be had to s.34 was some indication that, in respect of sub-let parts, the valuer was not undertaking a hypothetical vacant possession valuation, Oscroft v Benabo [1967] 1 W.L.R. 1087 considered. However, the point was far from conclusive. Clause 7(h) referred expressly to the aggregate of the rents at which the sum total of the various parts of the premises could be let. That suggested looking at each part of the premises separately and not at an overriding lease of the whole. The fact that cl.7(h) and cl.7(j) dealt with vacant and occupied premises separately also rebutted any suggestion that there might be a requirement to look at an overriding lease of the whole. However, that did not answer the question of whether the valuations of the sub-let parts were to be vacant possession valuations. Rather, the requirement for regard to be had to the actual rents then receivable by the lessee was a strong indication that one was valuing the individual leases subject to the existing tenancies, and not merely treating the existing rents as comparables, for which it would not be necessary to make special provision. The strongest argument against the construction advanced by M was that that might enable M, as tenant, to artificially reduce the rent by, for example, granting a sub-tenancy at a premium or to an associated company at a reduced rent. However, a valuer would be entitled to place little or no weight on artificial rents. That was the main mischief to be avoided. The instant lease could then be seen as a fairly common developer's lease under which F had, through its own efforts, acquired a number of sub-tenancies. It would be wrong to deprive F of the benefit of the work it had done and to attribute a higher rent than should be attributed to those sub-let parts. The weight a valuer would put on the existing sub-tenancies and their particular terms, when looking at a rent review that was to last 21 years, was a matter for the valuer, but he would not be required to assume vacant possession. On the contrary, he would be required to have regard to the actual rents then receivable and would be entitled to also consider the terms of the sub-leases in ascertaining the appropriate rent for the sub-let parts, Leigh v Certibilt Investments [1988] 04 E.G. 127 and Ashworth Frazer Ltd v Gloucester City Council (Rent Review) [1997] 1 E.G.L.R. 104 considered (see paras 12-20 of judgment). (2) With regard to the incidental question of whether the relevant parts of the demised premises could be defined, it was for the valuer to decide which part should be valued separately from others in the light of his experience of the market and market conditions as at the review date. The valuer was free to consider that the vacant parts were being offered for letting such as to secure the highest bid on the open market. A declaration would be made to that effect. However, no declaration would be made precluding the valuer from having regard to voids and management costs. The valuer was entitled to have regard to such matters, and to give them whatever weight he considered appropriate in the circumstances (paras 21-22).

Judgment accordingly