Edwards & Walkden (Norfolk) Ltd and Others v The Mayor and Commonalty and Citizens of the City of London
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE SALES,Mr Justice Sales |
| Judgment Date | 12 September 2012 |
| Neutral Citation | [2012] EWHC 2527 (Ch) |
| Date | 12 September 2012 |
| Court | Chancery Division |
| Docket Number | Case No: HC11C02527 |
[2012] EWHC 2527 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Sales
Case No: HC11C02527
James Dingemans QC & Paul Letman (instructed by Kidd Rapinet) for the Claimants
Martin Rodger QC & Joseph Ollech (instructed by Field Fisher Waterhouse LLP) for the Defendants
Hearing dates: 14/6/12 – 21/6/12
Introduction
This case concerns claims made by tenants of stalls, shops and offices at Smithfield Market in London ("the Market") for new business tenancies to be granted at rents and on terms to be determined by the Court under Part II of the Landlord and Tenant Act 1954 ("the 1954 Act"). The landlord is the Mayor and Commonalty and Citizens of the City of London, which is the formal designation of the local authority for the City of London. I will refer to the tenants collectively as "the tenants" and to the landlord as "the City".
The Market is the well-known and historic principal meat and poultry market in London. For present purposes, three parts of the Market are in issue: the East Market, the West Market and the Poultry Market. The East Market and the West Market are buildings erected in the 1860s and subject to substantial renovation and redevelopment in the 1990s. In particular, new commercial office accommodation was built above the parts of the East Market and the West Market occupied by the tenants, which the City lets out to commercial tenants to generate rental income. The Poultry Market is a building dating from the early 1960s. It was not included in the redevelopment of the Market in the 1990s.
There is also an extensive car park under the Market known as the Rotunda car park, because its entrance is by the rotunda just outside the Market, in front of St Bartholomew's Hospital ("the car park"). The car park was constructed by adaptation of what had previously been an underground railway station at the Market. That station ceased to be used in 1966, and in the early 1970s use of the car park commenced. It has space for 525 cars and vans. It is used by the tenants and the City, but is also open to the public to use in return for a charge.
The tenants and the City are agreed that new business tenancies do fall to be granted to the tenants under the 1954 Act. They are also agreed that such new tenancies should be for a period of fifteen years (the maximum which can possibly be awarded under the 1954 Act). They are agreed in principle that the new tenancies should include a rent review clause, though they disagree about when rent reviews should occur (the City proposes a review after every five years, the tenants propose one after seven and a half years). They disagree about a range of other matters relevant to setting the rent and terms of the new tenancies to be awarded by the Court. In particular, the City proposes that there should be a basic rent set together with a service charge varying from year to year to reflect the actual running costs of the Market, divided up in an appropriate way between the tenants. The tenants propose instead that there should be a simple rent with no service charge.
This is the judgment in the trial of two preliminary issues which have been ordered by Chief Master Winegarten to be determined in advance of the main hearing, which I set out in the order in which they were debated before me:
i) Issue 1: Whether the tenants are entitled to have their rents reduced on account of income received by the City from any parts of the East and West Market buildings and the Poultry Market building of the London Central Markets in the City of London used for non-Market purposes (including income from the car park and offices let for non-Market purposes — i.e. from the commercial offices let to commercial tenants); and
ii) Issue 2: Whether the rents to be fixed by the Court should be an all-inclusive rent (consisting of the maximum recoverable rent, service charge and uniform business rates for each unit) as under the existing leases or exclusive with the tenant's contribution to services covered by a separate service charge. (In fact, there is some variation in the position under the existing leases which I explain in greater detail below).
Issue 1 involved consideration of the legal regime under which the City holds and operates the Market, in particular as set out in the Metropolitan Meat and Poultry Markets Act 1860 ("the 1860 Act") pursuant to which the Market in its modern form, with the East Market and the West Market, was constructed. Put shortly, the argument of the tenants is that the City is obliged to bring the relevant part of the income it receives from the commercial offices and the car park into account against the running costs of the Market, and so reduce the income which the City ought to be entitled to receive in the form of rent from the tenants when the Court sets the rent for the new tenancies to be awarded under the 1954 Act.
Issue 2 concerns the way in which the payment obligations of the tenants under the new tenancies should be structured — by way of a simple fixed rent, as the tenants propose, or as a rent plus a variable service charge, as the City proposes. It became clear at the hearing that there is a comparatively narrow division between the parties on this issue. As a matter of basic principle to govern the setting of the rent and terms of the new tenancies, the tenants accept that the monetary payments to go to the City under the new tenancies ought to be set at a rate which should cover the overall cost to the City of running the Market, including the cost of maintaining the extensive services supplied by the City to enable the tenants to operate their businesses in conformity with demanding health and safety regulations and the cost of maintaining the fabric of the Market buildings. The City seeks by the service charge to cover the same costs.
The main difference between the parties as regards Issue 2, then, is how the risks of future changes from any estimate regarding those costs of maintaining and operating the Market to be made now, at the start of the new tenancies, should be distributed between the parties under the terms of those tenancies. The tenants' position is that the best estimate should be made now of the future running and maintenance costs in relation to the Market for the relevant period to the next rent review (be it five years or seven and a half years) and an overall rental figure set by reference to those costs, as divided up in an appropriate way between the premises occupied by the tenants, and increasing year on year by reference to the general rate of inflation.
The effect of this would be that the excess of any actual costs in that period over the estimated costs would have to be borne by the City as landlord, while any reduction in the actual costs in that period below the estimated costs would be for the credit of the City. The tenants say that payment obligations structured in this way would be fair and reasonable between the parties, because it is important that they as small businesses should have the benefit of certainty about how much they have to pay for their premises and because they are concerned that it may emerge in future that there is major expenditure required to restore and repair the old buildings which comprise the Market, in relation to possible concealed structural defects which go beyond anything known or expected at present. The tenants say that the risk of upward costs in future in relation to this, beyond estimates of such costs made now, should be borne by the City, as would occur if a simple rent is set by the Court. The tenants say that an arrangement on these lines is reasonable as between the parties because there has been a history of the City not maintaining the Market buildings in the past as it should have done, and the tenants should not have to bear the risks associated with undetected underlying structural problems which may have developed as a result. The tenants further say that most of the existing leases under which they hold their business premises from the City provide for there to be a simple rent and that the City has not made out a good case for changing from payment obligations structured in that way. The tenants also say that the City has run the Market in an inefficient way, without keeping costs under control as it should, and that to have a simple rent arrangement under the new tenancies is a reasonable way to ensure that the City bears the costs of its own inefficiencies.
The City's position is that there should be a lower rent element under the new tenancies, but a high variable service charge element which is adjusted each year to cover the actual costs incurred by the City in maintaining and operating the Market, including supplying services to the tenants. That way, the City says, the tenants would bear the true operating costs properly attributable to running their businesses, and would bear the risks properly so attributable. The City says that there are many aspects of the costs of maintaining and operating the Market which could be kept under better control if the tenants had an economic incentive under the terms of the new tenancies to run their businesses in more efficient ways and to co-operate with the City to keep down operating costs. An example given by the City is the cost of cleaning services which are provided by the City under the terms of the existing leases and would be provided under the terms of the new tenancies. The City says that the staff employed by the tenants in their businesses do not have an incentive to take much care to take steps themselves to keep rubbish...
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