Burgerking Ltd V. Rachel Charitable Trust
| Jurisdiction | Scotland |
| Judge | Lord Drummond Young |
| Neutral Citation | [2006] CSOH 13 |
| Date | 24 January 2006 |
| Docket Number | CA60/05 |
| Court | Court of Session |
| Published date | 24 January 2006 |
| OUTER HOUSE, COURT OF SESSION [2006] CSOH 13 | |
| CA60/05 | OPINION OF LORD DRUMMOND YOUNG in the cause BURGERKING LTD Pursuer; against RACHEL CHARITABLE TRUST Defender: ________________ |
Act: Mackenzie, Solicitor; Pinsent Masons
Alt: Ross; Maclay Murray & Spens
24 January 2006
The parties' lease
[1] The defender is the owner of commercial premises situated at 3 and 5 High Street, Paisley. The pursuer is the tenant of those premises under a Lease dated 20 December 1984 and 7 January 1985. It carries on the business of a fast food restaurant from part of those premises. The Lease was granted by a company known as Caltrust Developments Limited, and the defender acquired the property in December 2003. It was for a term of nearly 25 years, expiring on 29 September 2009. The subjects leased in fact comprise three distinct areas, namely the area on the ground floor occupied by the pursuer as a fast food restaurant, adjacent shop premises, also on the ground floor, and an area on the first floor referred to in the Lease as the "Club Premises". The ground floor shop and the Club Premises were sublet by the pursuer to a firm of opticians. The present action is not concerned with those parts of the premises.
[2] The original rent payable under the lease was £88,500 per annum, in respect of the whole of the premises. This was subject to rent reviews on 29 September 1989 and every five years thereafter. At the first rent review in 1989 the rent for the whole premises was increased to £150,000 per annum. Of that sum, £112,000 was attributable to the subjects occupied by the pursuer. Paisley High Street has, however, suffered a significant economic downturn in recent years, and it was accepted by all of the witnesses that that rent was well in excess of the current market rent of the premises. In the rent reviews in 1994 and 1999 the rent was not increased. At proof Mr. Kevin Frost, who was a UK property asset manager with the pursuer at the time of the events that are in issue in this action, gave evidence that the market rent in the autumn of 2004 would have been approximately £75,000 per annum. Mr. John Vincent, who at the material time was a portfolio manager with Reit Asset Management, the defender's investment managers, gave evidence that when the defender acquired the property in December 2003 advice was received from DTZ that the market rent was £90,000 per annum. Subsequently, further advice was received in about June or July 2004 that the market rent was then £75,000 per annum. By late 2004, therefore, it appears that the market rent was in the region of £75,000 per annum.
[3] The lease was in relatively standard terms, involving full insuring and repairing obligations on the part of the tenant. Assignation and subletting were dealt with by clause FIFTH, which, so far as material, provided as follows:
"(One) ...
(a) ...
(b) The Tenants shall not in respect of any part of the premises consisting of other than the following specified parts there of namely (i) the Club Premises or (ii) the Ground Floor Shop or (iii) the premises (under exception of the Club Premises and the Ground Floor Shop) grant sub-tenancies.
(Two) The Tenants shall not in respect of the whole of the premises either assign or grant fixed [securities over this Lease nor in respect of the whole of the premises or any of three specified parts thereof enumerated in paragraph (One)(b) of this Clause, grant sub-tenancies except with the prior written consent of the Landlords such consent not to be unreasonably withheld or delayed in the case of a substantial and respectable assignee, security holder or sub-tenant as the case may be who is of sound financial standing and is in the reasonable opinion of the Landlords demonstrably capable of performing the Tenants' obligations under this Lease or the tenants' obligations under the proposed sub-lease as the case may be.
(Three) Every permitted sub-lease granted in pursuance of this Clause shall be granted subject to the whole conditions contained in this Lease (other than as to the amount of rent payable hereunder) and such other reasonable conditions as the Landlords shall have previously approved in writing, in consideration of a full market rent (calculated without taking any fine, premium, grassum or other lump sum payment which the Tenants may have obtained into account)...".
The pursuer's decision to dispose of its restaurant
[4] In 2004 the pursuer decided that it should if possible dispose of the premises occupied by it at 3 and 5 High Street, Paisley. This decision was explained at proof by Mr. Kevin Frost, who at the time was, as I have mentioned above, a UK property asset manager with the pursuer; he subsequently became the pursuer's head of UK property. I found him to be an impressive witness, who spoke clearly as to the pursuer's decision and the reasons that underlay it. His evidence, which I accept, was as follows. During 2003 the pursuer instructed Ernst & Young to carry out a review of poorly performing restaurants according to certain set criteria. The Paisley restaurant found its way on to a short list of 20 such restaurants. It made consistent losses; during 2003 the loss forecast for the current year was £80,000, and similar losses had existed for at least three years. It was located in a declining High Street, and turnover had fallen consistently year on year. There were no operational or management deficiencies in the restaurant, which consistently passed the inspections and audits imposed by the pursuer on its restaurants. Against that background the pursuer decided to attempt to cease trading in the premises and to dispose of the lease, by a surrender, an assignation or a sublet. Ernst & Young had indicated that, on a rough estimate based on surveying advice, the likely cost of leaving the Paisley premises was £379,800. I should add that the decision to cease trading was also influenced by a decision by the pursuer's parent company to float its shares publicly in the near future. That made it important to reduce losses, because the share price was likely to be influenced by the level of profit. Consequently the parent company's global board stipulated that any payments that were made in order to leave the property were to be capital in nature.
[5] Thereafter the pursuer contacted four property agencies and asked them to tender for the work involved in disposing of the restaurants on the short list, which had meantime been reduced from 20 restaurants to 12; the 12 included Paisley High Street. The property agency whose tender was successful was Eric Young & Co, acting with another firm in respect of the English properties on the list. All four property agencies gave advice that a significant premium would be required to leave the Paisley premises; the average of the estimates was approximately £410,000. Mr. Frost explained that premiums are often payable when an occupying tenant wishes to escape from a lease. In typical High Street locations there is generally a lack of tenant demand, and it is common to find a reverse premium. This involves a payment by the occupying tenant, either to the landlord to surrender the lease or to an assignee or subtenant to grant an assignation or sublease. Conversely, if there is high tenant demand for a location, and the market rent is in excess of the passing contractual rent, the tenant might expect to receive a premium. Twenty years ago that applied to High Street premises, but the reverse premium is the norm today.
[6] Eric Young & Co gave advice that the likely cost of disposing of the premises in Paisley High Street was in the region of £550,000. That figure was an estimate that took into account the rent due in respect of the remaining term of the lease (£532,000), the service charge to the end of the term (£15,000) and a very approximate estimate of the cost of stripping out the property (£100,000). Similar advice was given in respect of the other 11 properties on the short list of poorly performing properties.
[7] Eric Young & Co were then instructed to attempt to dispose of the lease. In the course of the proof evidence relating to their involvement was given by Mr. Derek Gordon, one of their directors, who was responsible for the attempts to dispose of the Scottish properties on the short list. I found Mr. Gordon to be an impressive witness. It was clear that he had great experience of the commercial property market in Scotland, acting for both landlords and tenants, and I accept his evidence on the proposed disposal of the Paisley property and the commercial rationale for the structure of the transaction. Mr. Gordon gave evidence that in July 2004 Eric Young & Co offered on behalf of the pursuer to surrender the lease to the defender in return for a payment of £500,000. That offer was not accepted, and thereafter, acting on the pursuer's instructions, Mr. Gordon attempted to arrange either an assignation or a sublease of the premises. He was aware of the problems facing Paisley High Street. He stated that it had suffered from a surplus of supply and shortage of demand for approximately 10 to 15 years. This had been caused first by the development of a new shopping centre, the Paisley Centre, at one end of the High Street, and subsequently by the development of a very large out-of-town shopping centre at Braehead. The latter development had completely undermined the High Street as a shopping centre. The result was that numerous shops were available in the High Street; 13 such shops were available when the marketing exercise was started. Mr. Gordon attempted to market the premises occupied by the pursuer, using the standard methods used by commercial property agents. Particulars of the property were circulated to potentially interested parties and other agents, and placed on a website. The only interest that emerged, however, came from a company known as Quids In (Scotland) Limited. The pursuer entered into...
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