Co-operative Wholesale Society Ltd v National Westminster Bank Plc; Scottish Amicable Life Assurance Society v Middleton Potts & Co; Broadgate Square Plc v Lehman Brothers Ltd; Prudential Nominees Ltd v Greenham Trading Ltd
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE HOFFMANN,LORD JUSTICE SIMON BROWN,LORD JUSTICE LEGGATT |
| Judgment Date | 17 November 1994 |
| Judgment citation (vLex) | [1994] EWCA Civ J1117-5 |
| Docket Number | CHANF 94/0932/B 94/0792/B |
| Court | Court of Appeal (Civil Division) |
| Date | 17 November 1994 |
[1994] EWCA Civ J1117-5
Before: Lord Justice Leggatt Lord Justice Simon Brown Lord Justice Hoffmann
CHANF 94/0932/B
94/0314/5B
94/0792/B
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION
LIST OF COUNSEL
MR. D NEUBERGER QC (Instructed by Messrs. Denton Hall) appeared on behalf of the Appellant, National Westminster Bank Plc
MR. K LEWISON QC (Instructed by Messrs. Linklaters & Paines) appeared on behalf of the Respondent, Co-operative Wholesale Society
MR. J GAUNT QC (Instructed by Cameron Markby Hewitt) appeared on behalf of the Appellant, Scottish Amicable Life Assurance Society
MR. P MORGAN QC (Instructed by Middleton Potts) appeared on behalf of the Respondent, Middleton Potts & Co
MR. D NEUBERGER QC (Instructed by Messrs. Freshfields) appeared on behalf of the Appellant, Lehmann Brothers Limited
MR. K LEWISON QC (Instructed by Messrs. Herbert Smith) appeared on behalf of the Respondent, Broadgate Square Plc
MR. P MORGAN QC (Instructed by Messrs. Taylor Woodrow) appeared on behalf of the Appellant, Greenham Trading Ltd
MR. S BERRY QC (Instructed by Messrs. Lovell White Durrant) appeared on behalf of the Respondent, Prudential Nominees Ltd
JUDGEMENT
Thursday 17 November 1994
These four appeals have been heard together because they involve the construction of provisions in leases which are intended to deal with a similar problem, namely, the effect of the common practice of allowing a rent free period to a new tenant upon the determination of a current market rent at a rent review. A rent review clause ordinarily requires that in default of agreement an arbitrator or expert shall determine the rent for which, upon various assumptions, the premises could on the review date be let in the open market with vacant possession. The assumption of a letting with vacant possession is primarily intended to reinforce the hypothesis of a letting in the open market. This requires one to assume that anyone is able to bid for the lease and move in. But the decision of Lloyd J and the Court of Appeal in 99 Bishopsgate Ltd v Prudential Assurance Ltd (1984) 270 EG 950 and [1985] 1 EGLR 72 drew the attention of draughtsmen to a consequence of the vacant possession assumption which some might have overlooked. On a review of the rent of a 30-storey office building in the City, the arbitrator found that the most likely tenant would have wanted only part of the building for his own use and would have sub-let the rest. He would have bargained for a rent-free period to cover the time needed to find sub-tenants and the rent-free period he would have had to allow them to fit out their premises. Having regard to the size of the building in relation to the general supply of similar office space in the City, he would have been able to secure a 16 month rent free period on a 14 year letting. The arbitrator therefore found that if one had to assume that the building was empty one would have to discount the rent which would have been paid by a tenant whoseactivities were already up and running. Lloyd J and the Court of Appeal held that this necessarily followed from the assumption of a letting with vacant possession.
Some landlords regarded this decision as demonstrating an unintended side-effect of the assumption of vacant possession. In actual fact the tenant was in possession. Why should the rent be depressed at rent reviews by an assumption that each time he had to move in again? The matter was taken up in the literature and by professional bodies. In December 1985 a Joint Working Party of the Law Society and the Royal Institution of Chartered Surveyors produced a model from of rent review clause which required the arbitrator to assume that -
"no reduction is to be made to take account of any rental concession which on a new letting with vacant possession might be granted to the incoming tenant for a period within which its fitting out works would take place."
In 1986 a new Landlord and Tenant (Business Tenancies) volume of the Encyclopedia of Forms and Precedents was published under the editorship of Sir Raymond Walton. This contained in para. 82.3 the following prescient comment on the drafting of such clauses:
"Any attempt to draft a provision that aims to ensure that the vacant possession assumption would not bring about a reduction in the revised rent needs to recognise that rent-free periods are granted essentially for two distinct reasons.
Often the length of the rent-free period at the commencement of a new letting reflects a genuine attempt by the parties to estimate the time that it will take for the tenant to fit out the premises for its proposed use, or, where the tenant will not be taking possession of the property or all of it, to market the premises. No such time is needed at the commencement of the rent review period and the tenant cannot reasonably expect any reduction in rent. The premises should therefore be assumed to be ready for immediate occupation and use at the commencement of the hypothetical tenancy…
There are cases, however, where market conditions are such that an incoming tenant would be able to obtain a very much longer rent-free period than would be required to fit out the premises, or some other benefit as an inducement to enter into the lease…Such inducements are not uncommon because landlords, when operating in a tenant's market, frequently prefer quite generous 'one-off' incentives at the commencement of the term (such as rent-free or concessional rent periods, a payment to the tenant for fitting out or otherwise etc.) to a reduction in the rent they were seeking for the premises. Previously, rents were generally negotiated to represent the value of the premises and to become payable either immediately or after a fairly short period for fitting out: any inducement was a straightforward reduction in the asking rent… Where this state of affairs exists at the time of the review date in relation to premises of the type in question, it is submitted that this ought not to be disregarded in determining the revised rent and that any drafting that sought to provide otherwise would be an attempt to remove from comparables with such inducements a vital aspect of those comparables. Such tinkering with the evidence would be likely to cause numerous legal and valuation difficulties, quite apart from being unfair to the tenant. And yet, some landlords would argue that providing 'one-off' inducements on the grant of leases on a type of premises in a certain area is no reason for depressing the rent of comparable premises, let some time previously, that fall to be reviewed while such inducements are being offered."
This discussion encapsulates the dispute between the landlords and the tenants in the four cases before us. The landlords, espousing the view attributed to them by the author, say that the rent review clause means that the reviewed rent must be the "headline rent" currently obtainable in the market, irrespective of the length of the rent free period or other inducement which the tenant has to be given to secure it. The tenants say that, for the reasons given by the author, this would be unfair and irrational. They argue that on their true construction, the clauses require one to ignore only the inducement a tenant would need to compensate for the fact that before he could have the full beneficial use of the building, he would have to move in or find sub-tenants. Put another way, they modify the assumption of vacant possession by assuming that the hypothetical tenant is able, instantly and costlessly, to enter into beneficial occupation of the premises. But they do not require one to ignore the inducements of which the purpose is simply to inflate the rent above that which he would otherwise have been willing to pay.
The financial consequences of choosing one interpretation rather than the other in the current market for office accommodation in the City appear starkly from the figures in the Broadgate Square appeal. The arbitrator found that on 25th December 1991, the rent review date, the premises would have been let with a 2 1/2 year rent free period, after which the 'headline' rent would be £7,033,300 a year. Six months of the rent free period would have been attributable to fitting out and the rest simply in exchange for the tenant agreeing to pay a higher rent than he would otherwise have done. On the landlord's construction, the review rent would be £7,033,300. On the tenant's construction, adjusting the headline rent to take into account 2 years of the rent free period, it would be £5,281,365 a year.
There are no special rules for the construction of rent review clauses. As in any other contractual document -
"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 on the particular language used interpreted having regard to the context provided by the whole document and the matrix of the material surrounding circumstances. We recognise therefore that the particular language used will always be of paramount importance. Nonetheless, it is proper and...
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