NCR Ltd v Riverland Portfolio Ltd (No 1)
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE PETER SMITH |
| Judgment Date | 02 April 2004 |
| Neutral Citation | [2004] EWHC 921 (Ch) |
| Court | Chancery Division |
| Docket Number | TLC54/04 |
| Date | 02 April 2004 |
[2004] EWHC 921 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand
London WC2
Mr Justice Peter Smith
TLC54/04
MR DEREK WOOD QC appeared on behalf of the CLAIMANT
MR NIKKI SINGLA appeared on behalf of the DEFENDANT
The dispute in this case is about Solar House 907–925 High Road, Finchley, held by the claimant under the terms of a head lease dated 12 December 1984. In the claim form the claimants claim various heads of relief. The relief that is before me is declaration 1 that the proposed underlease of the premises, the terms of which were submitted by the claimant to the defendant under the terms of the head lease is an underletting authorised by clause 3.11 of the head lease.
On 2 March 2004 Patten J made an order, amongst other things, that the issue raised by paragraph 1 of the claim form, namely, whether clause 3.11 of the head lease prohibits the payment of premium made in consideration of reservation of rent payable at the rate required by clause 3.11, be heard as a preliminary issue. In deciding that issue the major matter to be considered is the effect of the decision of the Court of Appeal in Allied Dunbar Assurance Plc v Homebase Limited [2002] 2EGLR 23.
The head lease
The head lease of Solar House is dated 12 December 1984. The original landlord was Mark Heath Investments Limited. Their interest is now owned by the defendant. The claimant was the original tenant. The term of the lease is 25 years from 25 December 1984, expiring on 25 December 2009. An annual rent of £338,000 was initially reserved to be reviewed at five yearly intervals on an upward only basis. The annual rent since December 1999 has been £710,000. The next and last rent review date is due to take place in December of this year.
It is common ground that the passing rent represents £19.30 per square foot. The key clause in the head lease is, as I have said, clause 3.11, which contains a covenant as follows:
"(a) Not to underlet the whole of the demised premises or permit any underlease of the whole of the demised premises to be derived directly or indirectly however remotely out of this lease unless (i) the underlease is granted at the best rent obtainable in the open market without the grantor taking any premium or other capital consideration or, if greater, the rent then payable thereunder, and (ii) the underlease is in possession and on terms whereby all the covenants on the tenant's part contained in the lease and any deed or instrument then supplemental hereto or entered into by the underlessee with a tenant or as the case may be with the immediate reversioner and on the conditions and subject to the provisions binding on the underlessee the same in all respects as those herein contained including but not limited to provisions for reviewing rent thereunder at the same date and on the same terms as the rent hereunder is to be reviewed, if so the rent payable thereunder shall never be less than that from time to time payable hereunder." [quotation unchecked]
And other provisions in subclause (ii) that are not relevant.
It is to be noted that in clause 3.11(a): first the lease expressly distinguishes between payment of rent and payment of premium in respect of a grant where the tenant receives a premium. It is also to be noted that the clause does not make any reference to the granting of a reverse premium and it is not expressly excluded. Second it is to be noted that the lease contemplates the possibility that the market rent might fall below the passing rent under the lease from time to time and thus there is a requirement that the passing rent or the market rent, whichever is the higher, shall be the starting place for any rent under any created underlease.
It is common ground that the current open market letting value of Solar House is approximately £16 per square foot, which is significantly less than the current rent. By my calculations the difference is about £130,000 per annum, as appears from the witness statement of Mr Kite dated 17 September 2003 (paragraph 2).
The difficulty facing the claimant is that Solar House is surplus to the claimant's requirements and it has been attempting to find an underlessee for the premises since November 2002. Given the wide difference between what is perceived to be the current open market rent and the minimum rent required of any underlease, that is to say £710,000 as opposed to approximately £585,000, the claimant has had some little difficulty in finding an underlessee willing to take on those terms. It has, therefore, reluctantly reached the conclusion that in order to find an underlessee who would be willing to accept an underlease which would comply with clause 3.11, ie an underlease which would preserve the best rent without taking a premium into consideration, it would have to pay a financial inducement.
By 30 June last year the claimant had agreed terms in principle with Telco Global Limited for an underlease of Solar House. Telco was willing in compliance with the requirements of 3(a)(i) to pay an annual rent of £710,000 subject to review in December 2004 but required payment of a reverse premium to it of £3 million as consideration for entering into such underlease.
The agreement with regard to that premium is set out in paragraph 11 of the heads of terms as follows:
"The subtenant will be paid the sum of £3 million as a premium on the date of completion of the sublease. The sum of £2,290,000 will be placed into an escrow account by the subtenant held at the landlord's solicitors and released to the subtenant in five equal instalments of £458,000. The first payment will be made 12 months after the commencement of the sublease." [quotation unchecked]
By a letter dated 30 June 2003 the claimant's solicitors applied to the defendant for consent to the proposed underletting enclosing, amongst other documents, the draft heads of terms, thereby revealing the proposal to pay a reverse premium of £3 million. Objections were made to the proposed underletting by Mr Kite, as repeated in his witness statement, that the premium reflected a true passing rent under the underlease of between £210,000 and £252,000 per annum, depending on what is the current open market rental, and in view of the Allied Dunbar decision the proposed arrangement, he contended, breached clause 3.11 of the head lease.
It was also suggested that the premium might have financial consequences to the defendant as regards its bank borrowing. That for my part I find a little difficult to accept. The primary worth of the defendant's interest in the premises is surely the covenant given by the claimant, which, of course, will be unaffected by any underlease, and the claimant is currently paying £710,000 per annum, which by all accounts, as I have said, is a sum significantly in excess of the market rental.
Further, as the rent review is upwards only it is almost inevitable that the rent review in December this year will produce a figure of £710,000 for the remaining five years. If that is in excess of the market rental of some £130,000 per annum, by my calculations, the premises over the next five years, assuming no significant change in rental values in that five-year period, is over-rented by a sum of approximately £650,000. It seems to me that that is the true value to the defendant of these premises.
There were other objections by reference to the personality of the proposed underlessee but they are not before me.
I will set out now the competing submissions of the parties. Mr Derek Wood QC, who appeared for the claimant, provided me with his helpful submissions and I set them out as follows: the primary submission is relatively straightforward, that the underlease which the claimant wished to grant to Telco and will wish to grant to any future prospective underlessee (I pause to observe that Telco have now departed as a prospective underlessee) will reserve an annual rent which will comply with clause 11. The fact, Mr Wood QC submits, that in the current market a premium must be paid to the underlessee in order to induce the underlessee to pay the rent does not detract from the amount which is actually reserved by way of rent.
Second, he submits, the reddendum in the underlease will reserve £710,000 a year and no less. If the underlessee pays less than that amount reserved the underlessee will be subject to forfeiture and the assignee of the term of the underlease will be obliged to pay that amount and an assignee of the reversion will be entitled to recover that amount.
Hypothetically, he poses questions as to what would happen, for example, if the defendant were to forfeit the head lease for any reason and the underlessee were to apply for relief. He submits, and this is not disputed, that the underlessee could not claim relief on terms that it paid a rent of less than £710,000 a year, not because that was the rent payable under the forfeited head lease but because that was the rent which he was paying under the underlease.
Further, he points out that under section 6 of the Law of Distress Amendment Act 1908 the defendant would be entitled in the event that the claimant ceased to pay the head rent to serve a notice on the underlessee for payment at the rate of £710,000 and not some lesser amount. That latter example is a particularly stark and, to my mind, significant point because it shows that the obligation to pay rent can be divorced from the premiums which the prospective underlessee is entitled to receive.
Finally, he submits in more simple terms that if someone...
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...[33] In the course of submissions I was referred to the case of NCR Ltd. v Riverland Portfolio Ltd. No. 1, [2004] EWCR 921 (Ch); [2005] 1 P & CR 3; affirmed [2005] EWCA Civ 312; [2005] 22 EG 134, in which the earlier case of Allied Dunbar Assurance PLC v Homebase Ltd., [2002] EWHC Civ 666; ......