The Howgate Shopping Centre And Others V. Catercraft Services Limited
| Jurisdiction | Scotland |
| Judge | Lord Macfadyen |
| Date | 07 January 2004 |
| Court | Court of Session |
| Published date | 07 January 2004 |
| OUTER HOUSE, COURT OF SESSION | |
| CA 175/01 CA 192/01
| OPINION OF LORD MACFADYEN in the causes THE HOWGATE SHOPPING CENTRE LIMITED and OTHERS Pursuers; against CATERCRAFT SERVICES LIMITED Defenders: ________________ |
Pursuers: Dewar; Maclay Murray & Spens
Defenders: Sandison; Morton Fraser
7 January 2004
Introduction
[1]The first pursuers, The Howgate Shopping Centre Ltd (hereinafter referred to, unless the context otherwise requires, as "the pursuers"), are (or at least were at the dates on which the aftermentioned actions were raised) the landlords and the defenders are the tenants under a sub-lease of the premises which form Unit 22A of the Howgate Shopping Centre in Falkirk. A dispute has arisen between them as to the effect of the rent review provisions incorporated into the sub-lease. Two actions have been raised. In one ("the declaratory action") the pursuers conclude for declarator that the rent review provisions have the effect that the reviewed rent is to be the open market rent. In that action the defenders counterclaim for declarator that the reviewed rent is to be 23.15% of the open market rent. The pursuers also have an alternative conclusion for rectification, in the event that the sub-lease is to be construed as the defenders contend. Since the defenders ceased paying the pursuers rent and service charges under the sub-lease at about the time when the dispute about the rent review clause emerged, there is also a separate action ("the payment action") in which the pursuers conclude for arrears of rent and arrears of service charges. This Opinion is concerned with both actions.
The Sub-Lease
[2]The sub-lease which regulates the relationship between the parties as landlord and tenant of Unit 22A was entered into between R. Mathieson & Sons Ltd ("Mathiesons") and the defenders on 15 and 19 May 1995 and registered in the Books of Council and Session on 15 September 1995. An extract of the sub-lease is No. 6/2 of process. In it, the expression "the Lease" is defined as meaning the Lease between Meritclass Investments Limited ("Meritclass") and Mathiesons registered in the Books of Council and Session on 22 June 1993; "the Tenant" is defined as meaning Mathiesons; the defenders are referred to as "the Sub-Tenant"; and Meritclass are referred to as "the Landlord". The sub-lease is for a period of twenty-five years from 13 April 1995 to 12 April 2020.
[3]In terms of Clause SECOND of the sub-lease it was provided that the initial rent would be £55,000 per annum, payable quarterly in advance. The clause continues:
"Notwithstanding anything to the contrary contained in the Sub-Lease, it is specified for the avoidance of doubt that the rent payable in terms of this Sub-Lease shall be subject to review on the 13th April 1995 and at Five yearly intervals thereafter and that in every case in accordance with the whole conditions, provisions and stipulations imposed upon and undertaken by the Tenant in favour of the Landlord and contained in Schedule Part IV of the Lease."
The oddity that the first review date (13 April 1995) was the same as the date of entry, rather than a specified anniversary thereof, is perhaps explained by the fact that the initial rent of £55,000 had been agreed upon some time before the date of entry.
The Lease
[4]The lease between Meritclass and Mathiesons was entered into on 1 and 14 August 1991 and, as mentioned above, was registered on 22 June 1993. An extract of it is No. 6/1 of process. The date of entry was 13 April 1990, and the duration is for ninety-nine years, with an option to the tenant to extend it for a further twenty six years. In terms of Clause 4.1(a) the tenant was obliged to pay rent until the first review date at the rate of £10,001 per annum. By Clause 4.1(b) it is provided that "for each subsequent period of five years" the rent should be "fixed in accordance with or in pursuance of the provisions of Part IV of the Schedule". The expression "Review Date" is defined in Clause 1.2.27 as meaning the fifth anniversary of the Date of Entry and the date of expiry of each period of five years thereafter.
[5]Part IV of the Schedule to the lease contains inter alia the following provision:
| "1. | Date of Review The rent shall be reviewed and revised at each Review Date so as to equal to (sic) Twenty three and fifteen one hundred points of a cent per centum (23.15%) of the rent at which the Premises ... might then be expected to be let as a whole with vacant possession in the open market | |
| by a willing landlord to a willing tenant without payment of grassum or premium for a period equal to the unexpired period of the Duration or fifteen years, whichever is the greater". |
The paragraph continues with a statement of the hypotheses on which the valuation is to proceed and certain factors which are to be disregarded. Paragraph 2 contains machinery for determination of the open market rental value by a surveyor if the parties are unable to agree.
[6]Paragraph 3 of Part IV of the Schedule is in the following terms:
| "3. | Upwards only Notwithstanding any determination by such Surveyor the rent payable by the Tenant from each Review Date shall not be less than the rent payable immediately prior to that Review Date." |
Background circumstances and the evolution of the bargain
[7]The provision in Part IV of the Schedule to the lease which provides that the reviewed rent thereunder is to be 23.15% of the open market rental value is clearly an unusual one. In approaching the construction of the sub-lease in order to see whether the reviewed rent under the sub-lease is to be discounted in the same way, it may be important to understand the circumstances in which and reason for which the discount provision entered the lease. These matters were explained in evidence by George Stevenson, the managing director of Mathiesons. Mathiesons carried on business as bakers and restaurateurs in Falkirk. At the time when the development of the Howgate Shopping Centre was first projected, Mathiesons were approached by Falkirk District Council and Central Regional Council (hereinafter together referred to
as "the Councils") who were working with the developer to procure the development of the shopping centre, which was to be constructed behind High Street, Falkirk. Mathiesons owned premises part of which extended over part of the area of ground required for the development of the shopping centre. The developer thus required to acquire a portion of Mathieson's land in order to assemble the site for the development. A bargain was entered into between Mathiesons and the Councils in terms of which Mathiesons were to sell the land required to complete the development site, and in return, in addition to a cash price of £1000, Mathiesons were to be granted a lease of a unit (in the event Unit 22A) in the centre, once developed, extending to 2200 square feet, at a rent of £10,001 per annum.
[8]By the time the lease was finalised (in 1991) the rental value of Unit 22A was £43,200 per annum. That value was a matter of agreement between the landlords, Meritclass, and Mathiesons. As I have already noted, however, under the bargain which Mathiesons had made with the Councils the rent which they were to pay for Unit 22A was only £10,001. The difference was, in effect, part of the price which the developers had agreed to pay to Mathieson's for the land which they had surrendered in order to permit assembly of the development site. In order that the benefit of that discounted rent would not be eroded as soon as the rent was reviewed, the rent review provision in paragraph 1 of Part IV of the Schedule provided that the reviewed rent would continue to reflect a discount to 23.15% of the open market rental value of the unit.
[9]It was originally Mathieson's intention to trade from Unit 22A, operating a restaurant in it. There was, however, a change in the identity of the developer, which caused some delay in the development. Ultimately it emerged that the centre was to have an area specifically devoted to catering outlets. Unit 22A was remote from the catering area. Mathiesons decided to tender for, and succeeded in securing, a larger space in the catering area. That was achieved in early 1989. The centre opened in 1990. By that stage Mathiesons no longer intended to operate Unit 22A as a restaurant. They considered using it as a baker's shop, but decided against doing so, since they had such a shop nearby in High Street. They therefore decided to seek to sub-let Unit 22A.
[10]At that time, according to Mr Stevenson, the property market was in decline. The units in the centre were slow to fill up. Conditions were therefore not favourable for subletting Unit 22A. Time passed without a sub-tenant being found. An offer to take a sub-lease of the unit was eventually made by a soft furnishings company, but that proposal did not attract the landlords' consent. An approach was made by Wimpy International Ltd ("Wimpy"), with a view to the use of the unit as a fast food outlet. Such use was favoured by the landlords. Negotiations took place, in which Mathiesons were represented by Mr Henderson of Ryden. The other party to the negotiations came to be the defenders, who were a franchisee of Wimpy. Informal agreement was reached in October 1994.
[11]The defenders' surveyor, Mr Crawford of DTZ Debenham Thorpe, conveyed to Mr Henderson the agreement of Mr Fitzsimmons, the principal of the defenders, to the terms which had been negotiated. He did so by letter dated 6 October 1994 (No. 6/13 of process). These terms included the following:
| "1. | A new 25 year sub lease is granted, running co-terminous (sic) with the head lease, on a full repairing and insuring basis. | |
| 2. | Initial rental to be £55,000 per annum exclusive. | |
| 3. | A six month rent free period will be granted from the date upon which missives are concluded or indeed the building warrant is obtained, whichever is the... |
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