Metropolitan Property Realizations v Atmore Investments
| Jurisdiction | England & Wales |
| Judge | Mr Justice Sales,THE HONOURABLE MR JUSTICE SALES |
| Judgment Date | 28 November 2008 |
| Neutral Citation | [2008] EWHC 2925 (Ch) |
| Date | 28 November 2008 |
| Court | Chancery Division |
| Docket Number | Case No: HC08C00773 |
[2008] EWHC 2925 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Sales
Case No: HC08C00773
Mr Guy Fetherstonhaugh QC (instructed by McGrigors) for the Claimant
Mr Wayne Clark (instructed by Mace & Jones) for the Defendant
Approved Judgment
Hearing date: 6/11/08
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
This is an application made under section 68 of the Arbitration Act 1996 for an order remitting an award dated 20 February 2008 made by Mr D.C. Stanger (“the Arbitrator”) in respect of a rent review clause in a lease. The Claimant, Metropolitan Property Realizations Limited (“Metropolitan”) is the tenant under that lease. The Defendant, Atmore Investments Limited (“Atmore”), is the landlord.
The relevant lease is an under-lease dated 29 September 1964 granted for a period of about 99 years. The property to which it relates comprises a small parade of shop units with residential flats on the floor above them, located in Partington Street, Failsworth. The lease is a full repairing and insuring lease. Clause 1(b) provides for rent reviews to take place every 21 years.
The second rent review fell due in September 2006. Clause 1(d) of the lease sets out the formula to be applied on each review in the following terms:-
“(d) “the yearly rent value of the demised premises” as at the last quarter day but one before the end of a rent period shall mean the amount agreed between the Landlord and the Tenant as the yearly rent value of the demised premises as at such day or failing agreement the amount determined as the yearly rent value of the demised premises at such day by an arbitrator to be nominated by the President for the time being of the Royal Institution of Chartered Surveyors on the application of the Landlord made before but not more than one quarter before the beginning of the next succeeding rent period and so that in the case of any such arbitration the amount to be determined by the arbitrator shall be the amount which shall in his opinion represent a fair yearly rent for the demised premises at the relevant date having regard to rent values then current for property let without a premium with vacant possession and to the provisions of this Lease (other than the rent hereby reserved)”
The relevant date referred to in relation to the present case was 24 June 2006. The parties were unable to agree the amount of the yearly rent value, so the question of the amount of a fair yearly rent was referred to arbitration.
The lease provides in clause 2 that the rent payable should be the greater of:-
“(i) a rent equal to the rent payable during the last preceding rent period: and
(ii) a rent equal to six elevenths of the yearly rent value of the demised premises as at the last quarter day but one before the end of the last preceding rent period.”
It is common ground that the assessment under (ii) was to involve the calculation of the fair yearly rent of the demised premises as at 24 June 2006, with the application of the six elevenths formula to take place in relation to the figure so determined. In other words, it was common ground that in assessing the fair yearly rent of the demised premises one should ignore the six elevenths calculation.
The arbitration was conducted by reference to written materials alone. For Metropolitan, the written submissions were prepared by Mr Simon Burbidge, a chartered surveyor. Atmore's written submissions were prepared by Mr Peter Owen, who also is a chartered surveyor.
The submissions put in by Mr Burbidge for Metropolitan followed advice provided by leading counsel as to the proper approach which should be adopted to valuation of a lease of this kind. Metropolitan was represented at the hearing before me by different leading counsel, Mr Fetherstonhaugh QC. He made it clear in his submissions that Metropolitan did not now seek to contend that the method of valuation proposed in the previous counsel's opinion and adopted by Mr Burbidge is correct. That method involved discounting the relevance to the calculation of a fair yearly rent of the rental income which could be achieved upon sub-letting the units in the demised premises. In his written submissions at paragraphs 6.2 to 6.4 Mr Burbidge submitted:-
“6.2 The simplistic way to look at this matter is to apply a market rental figure to each of the component parts of the property to get a total rent and then take 6/11 of that figure as being the rent applicable however the Leading Counsel's Opinion clearly states that that is not the correct approach. We are to assume that the whole development is available to let on the open market with vacant possession for a term of 57 years with the remaining terms being as per the subject lease. The rent payable will then be 6/11 of that figure.
6.3 The question this raises is having regard to the nature of the development, the income likely to be received from sub-tenants, the costs liabilities under the lease, shopping patterns at the time of the review and general demand for units in such a location would there be a market for such a lease at a rental in excess of that already paid?
6.4 My view is that there would not. The evidence of the cost/income spreadsheet shows minimal benefit for a great deal of effort. With the opening of the 24 hour Tesco close by it is only going to become harder to attract sub-tenants for the commercial parts in the future and harder for them to stay in business. …”
He concluded at paragraph 6.10:-
“6.10 A 57 lease term on a property of this nature in such a location is inconceivable in the current market. In my opinion the only way a theoretical Tenant would be persuaded to take a 57 year lease of a property of this nature in such a location would be on a peppercorn basis.”
Mr Burbidge put forward no alternative argument as to what the proper position should be if the Arbitrator did not accept the fundamental point of principle he was putting forward as to the approach to valuation to be adopted, and preferred instead the approach put forward by Atmore.
Mr Owen, for Atmore, presented a case which started from analysis of the rental income which on the evidence available he thought could be identified as obtainable for each of the units within the parade of shops and for each of the residential flats. Taking account of rents which had in fact been achieved for such units, he concluded that the yearly rental value of the shops would be £5,000 per annum for each standard unit and that the rental value for the residential flats would be £3,600 per annum each, with some associated garages. He then aggregated these figures to give an overall rental income figure for the whole of the demised premises.
Mr Owen made three adjustments to the figure given on this basis of calculation. First, he considered that a deduction should be made for a management charge. At paragraph 5.3.6 of his submissions he said:-
“5.3.6 Management Charge
5.3.6.1 … In a building with multiple occupancy, it is normal to make a discount for management. It is also quite usual to make a discount from sub-let income when an occupier sub-lets part of a larger demise.
5.3.6.2 Neither of these instances is entirely similar to the subject circumstances but I see there a principle which applies to whomsoever collects the rent.
5.3.6.3 With regard to the amount of that management charge, I refer you to the attached memo from my colleague, Mark Hopley, who is the Associate Director in charge of the Management Department at Legat Owen. You will see that in his view a typical charge would be 5% of the rents collected, although he does point out that some residential agents are charging 10%. He also refers to the RICS's preference and Code in this regard and gives his opinion that the likely management fees, involved with a parade of this nature, would be in the order of £10,000 per annum.
5.3.6.4 I am therefore adopting that in my calculation. I see it as good first hand evidence and it shows, in percentage terms, a charge of some 9% which fits in with Mr Hopley's general observations.”
Second, Mr Owen allowed for a deduction in respect of an estimate of the extent to which the shop units and residential units might be unlet, and so empty or void, during the 21-year period for which the new rent would apply. He concluded that the void rate for the shop units would be of the order of 10% over the relevant period. For the residential units, he concluded that the void rate would be 15%.
Third, Mr Owen made an adjustment in favour of taking account of the fact that the new rent would, once established, last for the extended period of 21 years. His view was that it was necessary to make an adjustment for the increasing imbalance from the original bargain as the term progresses. Accordingly, he adopted an approach (which he described as being common among practitioners) of making an addition of 1% for every year over five, giving a total adjustment of 16%.
He set out his calculation in section 6 of his report, headed “The Yearly Rent Value”, as follows:-
“Total yearly rent value for shops £ 78,450
Flats and maisonettes £ 42,720
Garages £ 1,400
£122,570
Add 16 % for 21 year rent review pattern £ 19,611
Deduct management cost (£10,000)
Deduct shop voids @ 10% (£ 7,845)
Deduct residential & garage voids @ 15% (£ 6,618)
£117,718
Say £118,000 per annum”
His calculation therefore proceeded on the...
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