Debenhams Retail Plc v Sun Alliance & London Assurance Company Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Judge,Lord Justice Mance |
| Judgment Date | 20 July 2005 |
| Neutral Citation | [2005] EWCA Civ 868 |
| Docket Number | Case No: C3/2004/2478 |
| Court | Court of Appeal (Civil Division) |
| Date | 20 July 2005 |
[2005] EWCA Civ 868
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
The Hon Mr Justice Etherton
HC 03 C04456
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Judge
Lord Justice Mance and
Lord Justice Jacob
Case No: C3/2004/2478
Mr Jonathan Brock QC (instructed by Messrs Walker Morris) for the Respondents/Claimants
Mr John Furber QC (instructed by Messrs Maples Teesdale) for the Appellant/Defendant
Jacob LJ (giving the first judgment at the request of Lord Justice Judge):
This appeal is about the amount of rent payable for Debenhams' department store in Swindon. It is made up of 2 elements, a fixed annual amount and an 'additional rent'. That rent is a proportion of turnover. But does the turnover for the purposes of the lease include VAT or not? Etherton J found that it did not. From that decision the landlords appeal.
The lease was granted for a term of 99 years less 10 days from 1 October 1965. For many years Debenhams paid a rent on the basis that the turnover did include VAT, though once or twice they queried whether they should be doing so. In 2003 they decided to ask the Court for:
"A declaration that for the purposes of calculating the additional rent payable under the terms of the lease the turnover to be calculated in accordance with paragraph 3(a) of the third schedule of the lease should not include Value Added Tax".
Originally they also sought return of the sum said to be overpaid. But that claim has been abandoned. Since the lease has 60 years to run there is still a lot of money involved.
The Relevant Terms of the Lease
The terms about the rent are set out in the Third Schedule of the lease, which, so far as relevant, is as follows:
"1 The rents hereinbefore reserved shall be:
(i) the yearly sum of FIFTY-FIVE THOUSAND POUNDS
(£55,000) (hereinafter referred to as "the basic rent") and
(ii) such sum (if any) in each year (hereinafter referred to as
"the additional rent") as shall be equal to a proportion of turnover (as in Clause 3 hereof defined) calculated by taking the aggregate of:—
(a) Four per centum (4%) of the excess of turnover above the sum of ONE MILLION THREE HUNDRED AND SEVENTY-FIVE THOUSAND POUNDS (£1,375,000) and up to the sum of ONE MILLION FIVE HUNDRED THOUSAND POUNDS (£1,500,000) and
(b) Two per centum (2%) of the excess of turnover above the sum of ONE MILLION FIVE HUNDRED THOUSAND POUNDS (£1,500,000) and up to the sum of THREE MILLION POUNDS (£3,000,000) and
(c) Three per centum (3%) of the excess of turnover above the sum of THREE MILLION POUNDS (£3,000,000) without limit
…
2. (a) The basic rent shall be payable by equal quarterly payments in advance on the usual quarter days in every year the first of such payments or a proportionate part thereof being in respect of the period from the date of this Underlease to the quarter day next following to be made on the signing hereof
(b) the additional rent (if any) shall be payable in each year within Twenty-one days after it shall have been calculated and determined in manner hereinafter appearing
…
3. (a) In this Schedule the expression "turnover" shall mean the gross amount of the total sales including services from trade in the Demised Premises or any part or parts thereof by the Tenant (meaning in this context the turnover of the Tenant and of any licensee of the Tenant trading in any part of the Demised Premises) during any trading period of the Tenant commencing on or about the First Day of February in each year (hereinafter called "the Trading Period" or "trading Periods") where the context so requires and in calculating turnover account shall be taken of goods and merchandise returned by customers and accepted by the Tenant and of cash and other discounts given in the normal and ordinary course of trade and in all cases in relation to periods of less than the Trading Period (if any) turnover shall be deemed to accrue from day to day and in relation to any licensee of the Tenant turnover shall be included only for any lesser period
(b) The Tenant shall procure a certificate (hereinafter referred to as "the turnover certificate") to be issued by its Auditors within the period of two months following the last day of the Trading Period in each year specifying the amount of turnover and in the event of default involving delay in issuing the turnover certificate the Tenant shall pay to the Landlord interest on such additional rent (if any) as shall become payable by virtue of the issue of such Turnover Certificate at the rate of seven per centum (7%) per annum less income tax for the period commencing the First day next following the said period of two months
(c) The Tenant shall keep and cause each of its licensees to keep full proper and accurate records of turnover and shall afford all necessary facilities to the Landlords and their duly authorised Accountants to inspect the same at all reasonable times
(d) If the Landlords shall not agree the turnover certificate they shall give notice in writing to that effect to the Tenant as soon as may be practicable and the parties shall thereupon use their best endeavours to agree the amount of turnover provided that in default of agreement the dispute shall be referred at the instance of either party to an Arbitrator appointed by the President for the time being of the Institute of Chartered Accountants in England and Wales and if by agreement between the parties or on the decision of such Arbitrator it shall be decided that the turnover certificate shall have been incorrect then the Tenant shall forthwith pay to the Landlords the amount (if any) so agreed or found by such decision to be due together with interest thereon at the rate and for the period mentioned in sub-clause (b) hereof unless on arbitration the said Arbitrator shall desire that no such interest should be paid."
The date point
The lease itself is dated 19 th April 1971. But it was granted pursuant to an agreement for a lease made in 1965 – the formality of the actual lease was delayed as a result of delays to the associated head lease and possibly other transactions concerning the overall development in Swindon of which the Debenhams' new store formed part. It was not disputed that the terms which we are to construe should be considered as negotiated in 1965. And it is common ground that the lease is to be construed as of 1965.
The Factual Matrix
There is very little to this. In 1965 VAT did not exist. It was, at best, no more than a gleam in the eyes of some economists and the Treasury. It can have formed no part of the thinking of either party. What did exist, however, was purchase tax. This was a tax imposed only on wholesalers of goods. As far as retailers were concerned the tax was simply part of the price of the goods they bought. So also for the ultimate consumers. When a retailer bought goods he was quoted a price. It was technically necessary for the invoice to set out the price ex tax together with the tax, but as far as the retailer was concerned the only thing that mattered was the overall figure – his cost. The purchase tax to be paid by his supplier was of no direct concern to him, any more than any other cost or tax borne by his supplier.
That is not to say that retailers or indeed consumers were ignorant of or unconcerned by purchase tax. Far from it. I am afraid that I am old enough to remember well budget announcements of the raising or lowering of purchase tax on different items. Retailers would have to respond by raising or lowering their prices – but those responses were their own commercial decisions.
At the time of the lease, therefore, the trading accounts of Debenhams or any other retailer would have simply shown the cost of goods purchased and the value of goods sold. As a matter of business, the cost of goods purchased would have had factored within them the relevant purchase tax at the rate for the kind of goods concerned. But the tax itself would have formed no part of the retailer's accounts. That is as one would expect, and is confirmed by a memorandum ("the Tucker memorandum") of 1975: "in those days we added our profit to the cost price plus Purchase Tax".
The next piece of background is the nature of the premises. They formed an important part of a 60's town centre development. So the success or failure of the tenant and the size of its turnover depended also on the success or failure of the overall development – a matter largely out of the hands of either side.
Next there is the question of the extent to which price inflation would have been in the minds of the parties. I think it would have been part of the background of the negotiations. By 1965 we were told that commercial leases had begun to incorporate rent review clauses (not a few of which gave rise to disputes in the 1970's when the first review points were reached or passed without a review being activated). Moreover the...
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