Coors Holdings Ltd. v Dow Properties Ltd.

This appeal from an order of Mr Michael Briggs QC, as he then was, sitting as a Deputy Judge in the Chancery Division on 4 May 2006, concerns the basis on which a rent review is to be calculated. The lease, which was made between the London Borough of Islington, as landlord, and a company then called Bass Holdings Limited, as tenant, is of what, by the time it was executed, was called The Whittington Stone Public House at Highgate Hill. It is for a term of 90 years from 1 November 1978, although the date of the lease itself is 12 May 1980. The starting rent was £2,500 per annum and that applied for the first ten years. Thereafter each ten years the rent was to be either that payable in the previous period or, if higher, “the open market rental value of the demised premises at the review date”. We were told that at the first review in 1988 the increase in rent was agreed, or ended up at any rate, at £11,500. The issue that is now live is as to the second review as at 1998. We were told some matters which account for the seemingly rather long period that it has taken to come on which do not matter for present purposes. But the issue affects therefore the rent review as at 1998 and also the rent review as at next year and successively through until the last rent review in 2058.

The phrase “the open market rental value” is defined in a proviso (1) in the rent provision as follows:

“[It] shall mean the annual rental value at which the site comprised in the demised premises might reasonably be expected to be let for a term of 90 years upon the terms of this Lease (other than the amount of rental hereby reserved) in the open market by a willing Lessor.”

Then it goes on to require a number of matters to be disregarded and to require an assumption to be made that the lessee has complied with all the obligations as to repair and decoration imposed on it in the lease by the council. The disregards include the statutory disregards, to some extent duplicated by express disregards, including of improvements carried out by the lessee otherwise than in pursuance of any obligation under the lease. The issue is whether the words “the site comprised in the demised premises” have the effect that the rental value is to be assessed by reference only to the land or rather to the land and the building as erected on it. If the answer is the former, there is a separate point of much less significance as to precisely how it should be formulated. But for the four words “the site comprised in”, the rent review would clearly be by reference to the entire demised premises which are defined as including both the land and the building. The use of those words creates conflicts within the lease. The question is how those conflicts should be resolved. Either the four words mean “disregard the building,” for short, or they mean nothing.

The judge decided that they meant the former. Subject to one point, which is in fact not a point on his judgment but on his order, I agree with him. Subject to that point I am tempted to say that he was right for the reasons he gave. But having had the careful and well-focused argument that we have received from Mr Fetherstonhaugh for the appellant today, and in the light of Jonathan Parker LJ’s observations when giving permission to appeal on the papers, I will not content myself with that. The judge’s judgment, I should say, has a neutral citation number of [2006] EWHC 1862 (Ch).

The lease was granted pursuant to an agreement for lease dated 15 August 1978. Under that, the consideration for the grant of a lease was the expense which Bass was to incur in the erection of the public house. Clause 3 of the Agreement provided the obligation to build and clause 5 specified a minimum expenditure of £88,000 for the building of the public house. The tenant’s point arising from that is that since the tenant paid for the building upfront, it is at the least perfectly understandable that it should not have to pay for it again by way of rent.

Dow Properties, the appellant, which acquired the reversion from the London Borough of Islington, may or may not have known of the Agreement for Lease. The judge made no finding on that, recording that it was not alleged that it did not know of it. It is asserted in the skeleton argument that it did not know of it at the time that it bought the reversion but nothing turns on that. I should say that the claimant/respondent, Coors Holdings Limited, is in fact the original tenant after a change of name.

The judge pointed out correctly that, on conventional principles of construction, the matrix of fact relevant to the interpretation of the lease comprises the facts known to the parties to the lease at the time at which it was executed. Clearly on that basis the agreement for lease is part of the matrix. As the judge said at paragraph 46 of his judgment, there is scope for potential unfairness here in relation to a long lease where either the term or the reversion, or both, may come into the hands of others, by way of assignment, who do not have access to the same facts as the original parties to the transaction.

The appellant complained that the judge relied in the terms of the lease entirely on the phrase “the site comprised in the demised premises” and did not have proper regard to other parts of the lease which showed that the reviewed rent had to be of the building not just of the site -- not just of the land -- is perhaps how I should put it in the light of Mr Fetherstonhaugh’s contentions. He also submits that no reliable conclusion could be drawn from what little is known of the matrix material from the evidence. In addition he submitted that the judge’s decision produced commercial consequences which the parties cannot be assumed to have intended.

It seems to me that last point primarily goes in the end to a point which affects the rightness of the judge’s order and its formulation of the consequence of his judgment rather than as to the judgment. However, it is of course against the order rather than the judgment that the appeal lies. The judge set out in his judgment a number of propositions of law derived from some of the many cases on the interpretation of rent review clauses and in particular on some where the issue has been of the same kind as arises here, namely whether the market rent on the review is to be the market rent of land, or of land plus buildings especially where the buildings have been erected at the expense of the tenant.

I do not need to cite any of those except for a short passage from one of them: Braid v Walsall Metropolitan Borough Council (1999) 78 P&CR 94. That is a decision of this court in which the principal judgment was given by Sir Christopher Slade, and Evans LJ and Peter Gibson LJ agreed. In particular Sir Christopher Slade reviewed the authorities then in being on this sort of issue and then applied what he drew from that to the facts of the case before the court. I can content myself with citing one paragraph at page 102 on which Mr Fetherstonhaugh, as regards the last sentence of it, placed some reliance. But in order to understand that paragraph I need to refer back to a proposition which he enunciated at page 101, which is that in construing a rent review provision there is a prima facie assumption that the parties intended that the premises should be valued as at the rent review date that is to say together with any buildings situated thereon at that date. Sir Christopher at page 102 then went on to say this:

“Nevertheless, all the authorities which established that proposition [that is the one that I have just cited] recognise that it is open to the parties to a lease to agree that the valuer shall assess the rent on the basis that, notwithstanding reality, the land is still undeveloped. And though Lord Templeman in Goh v Yap and some other similar dicta have referred to the need for ‘express’ instructions to negative the general rule, I do not think it could be or has been argued that this means that the lease has to include words which specifically and in terms [provide] that buildings shall not be taken into account in the valuation. All it means is that the lease must give a very clear indication of a contrary intention, if it is to negative the general rule.”

Mr Fetherstonhaugh, as I say, takes up that last sentence and submits that whatever else there is in the present lease, it is not a very clear indication of a contrary intention. Conversely, as it seems to me, for the tenant Mr McGhee would say that the words “the site comprised in” are words which specifically and in terms have the effect and provide that the buildings are not to be taken into account in the valuation. Essentially the question is: what is the effect of those words in the context of this lease and in the context, so far as relevant, of the admissible surrounding circumstances? So far as the matrix of fact is concerned, the one item of evidence that there is is the Agreement for Lease and the essential point there is that it shows that the building was erected at the expense of the tenant as a matter of obligation. The completion of the building was a condition of having the lease and there were a number of provisions which as Mr Fetherstonhaugh submits were not entirely tenant -- or perhaps one should say at that stage proposing tenant -- friendly. The agreement imposed a shortish timescale for the construction of the building. Paragraph 3 of the Agreement provided for the building to be completed by 1 March 1979 or “such later date as the Council may … allow”. Since it was almost another a year and a half before the lease was executed, one can assume that the council was content to wait.

What we also can tell from the Agreement, and to some extent from the lease, is that the construction of the new public house arose in the context of the council wishing to redevelop certain land for residential purposes and that the public house was going to be ancillary to that residential development. The lease which refers to that in its one recital shows perhaps for the first time in the text of the lease a degree of ineptitude because it says that the land to be redeveloped is “the land hereinafter described” but we are told, and I confess I have not checked, that there is no land hereinafter described that can correspond with that. Nevertheless the plan annexed to the Agreement, which I dare say may have been the same as the plan annexed to the lease, which I do not have, shows the site of the public house on Highgate Hill and shows extending to the west and somewhat to the south from Highgate Hill the site laid out in a recognisable format of a housing estate. So that is part of the matrix although probably a part that does not throw a great deal of light on the issue before us. What Mr Fetherstonhaugh submitted in particular as regards the matrix arguments is that it is striking how little is known to the court about the matrix, despite the fact that the claimant was a party to the agreement. Of course it may be that after all this time records may not be available nor relevant witnesses.

But that being so, he submits that at any rate a substantial degree of caution is needed in drawing inferences from the terms of the Agreement by themselves. One has no possibility of insight as to what other commercial circumstances there may have been in terms of, for example, the presence of some potential goodwill attaching to any previous Whittington Stone Public House that there may have been on the site -- there is certainly an indication that there had been such premises -- or the value to Bass of having a lease which is a very long lease and has a number of provisions which are to some extent favourable to the tenant of this public house site immediately adjacent to a large catchment area of potential customers.

Those points that Mr Fetherstonhaugh makes are, as it seems to me, fair points and it may be that the only thing one can sensibly derive from the context is the fact that the tenant did pay for the construction of the building. The correct starting point is undoubtedly the terms of the lease and the assumption as set out in the normal general rule that Sir Christopher Slade enunciated in Braid, namely that one would expect the rent on the review to be for the whole premises. The judge started from that point as he said at paragraph 17 of his judgment.

The mere fact of the tenant having paid for the construction of the premises is not enough. The question is: what is the impact of that in the light of the terms of the lease? It seems to me that Mr Fetherstonhaugh is correct in saying -- to use a metaphor that he did not use -- that in the blue corner, so to speak, is just the words, “the site comprised in”. Those words are plainly important. They are in the definition which is central to the issue. They could not be described as a standard form of wording. They must have been put in for a reason. Mr Fetherstonhaugh says that if the draftsman had intended to achieve the result that the rent was a ground rent, that is to say a rent for the site without the building or a rent for the demised premises but disregarding the effect of there being a building, there are better and clearer ways of achieving that result. He submits that the word “site” is an uncertain and unsatisfactory word in itself. In what condition, he says, would the site have to be assumed to be? His primary submission, I think, in order to seek to give the words “the site comprised in” a meaning which is not in conflict with the other provisions of the lease on which he relies, is to say that it means the location of the demised premises. But it seems to me that it cannot mean that because one could not sensibly speak of the location as being comprised in the demised premises. In my judgment, the words “the site comprised in” must mean the land without the buildings. If that is so, Mr Fetherstonhaugh goes on to say that nevertheless it is conflict with other powerful indications and ought not to prevail.

He arrays in -- so to speak -- the red corner, seven points. His first point is that the demised premises is defined as the land and the building and the rent review clause speaks of the “open market rental value of the demised premises” and, somewhat oddly, the definition which brings in the words “the site” is not all the “open market rental value of the demised premises” but simply of the “open market rental value” which, therefore, strictly speaking as a matter of language, has to be fitted back into the phrase in the rent review clause so as to have “of the demised premises” tacked on at the end, which does not seem altogether sensible or likely to have been intended.

These points are fairly taken but it seems to me that, apart from the slight oddity of taking the definition of only part of the phrase, it would be normal to speak in a rent review clause of the “open market rental value of the demised premises” and it is precisely that normal approach which gives rise on the tenant’s reading to the need for, and the explanation for, the addition of the non-standard words “the site comprised in”.

Secondly, Mr Fetherstonhaugh points out that the effect for which Mr McGhee contends could have been achieved in different words, and in particular he points to the use elsewhere in the lease, in several places, of the juxtaposition of land and buildings, or land or buildings, and he says that it would have been more sensible, more satisfactory and clearer to have used that dichotomy rather than the words “the site”. So be it. Other words could always have been used but the question is the meaning of what was used. It does not seem to me that in this context the use elsewhere of the antithesis land and buildings casts any light on the meaning of the words “the site comprised in the demised premises”, other than that which one can get from the phrase itself. The only thing that can sensibly be meant by “the site comprised in the demised premises” is the land to the exclusion of the building.

Mr Fetherstonhaugh’s third point is that the rent review clause assumes a 90-year hypothetical lease upon the terms of this lease and that those presuppose a letting of land with buildings and make little or no sense if applied to land alone. This is a point which the judge dealt with at paragraph 36 of his judgment and I see no need to add to what he says there. It is related to a slightly different point to which I will come back.

Mr Fetherstonhaugh’s best points arise from two other provisions forming part of the rent review. The first is the disregards which he says assume that there is a building, and the second is the assumption as to performance of the repairing covenants which assumes that there is a building to repair. As to those two points, the judge said the likely reason for them is that they were standard provisions in the London Borough of Islington’s rent review clauses or in whatever precedent was used for their rent reviews of leases of public houses and were included without thought as to their appropriateness or relevance to this particular transaction.

He said much the same in relation to Mr Fetherstonhaugh’s seventh point, which is the point about clause 6, which provides for suspension of rent if the demised premises should at any time be rendered unfit for occupation or use. As to that Mr Fetherstonhaugh says, fairly, that if the rent payable is only referable to the site in the sense of the land it is odd that the tenant should be let off having to pay that if it is the buildings that are damaged. But it seems to me that that is first of all quite likely, as the judge said, to have been a standard clause and secondly, to be much less cogent than the two earlier points which derive directly from the rent review provision.

Mr Fetherstonhaugh’s sixth point also derives from the rent review clause and relates to the provision for the determination of a reviewed rent if the parties do not agree as to it. It requires the issue to be referred to a duly qualified independent surveyor specialising in the valuation of premises used for the purposes similar to those for which the demised premises shall then be used. Mr Fetherstonhaugh submits that that is a careful stipulation which makes no sense at all if the judge’s decision is right that the parties contemplated a demise of a vacant site.

It seems to me again that is a point much less cogent than his points based on the disregards and the assumption as to compliance with the repairing covenant, and is to an extent bound up with the new point as to the form of the declaration to which I shall come later.

Basing himself on what Sir Christopher Slade said in Braid, Mr Fetherstonhaugh argues that a clear, or indeed a very clear, indication is needed to displace the normal assumption that the rent on a review is for the whole demised premises and he submits that, given the number and substance of his seven points ranged against the four words relied on by the tenant and the judge, it cannot be said to be sufficiently clear.

When considering the application for permission to appeal on paper Jonathan Parker LJ queried the evidential basis for the judge’s reference to “the unthinking adoption of standard forms”. Mr Fetherstonhaugh submitted that it could not be assumed that a local authority and a large brewery group would have used words unthinkingly. He showed us, on a point not for the most part directly relevant to the issue, that the repairing obligations in the lease are in non-standard form. Clause 3(c)(i) requires the tenant to repair the exterior excluding the main walls party walls boundary walls and fences but including the roof, to a water-tight standard, and the front the glass of the windows and the doors, locks and fastenings. Correspondingly clause 3(d) requires the tenant to allow the landlord access to effect repairs to the external parts or structure except as aforesaid -- and the words “except as aforesaid” must refer to those parts of the external parts of the structure which are the subject of the tenant’s obligation in 3(c)(i). It would be wrong to conclude that thought was not given to the terms of the lease. Clearly thought was given to the inclusion of the words “the site comprised in”. It certainly appears that thought was given to the allocation of responsibility for external and structural repair. But equally it cannot be said that on any reasoning all of it fits neatly together. There has been some failure either to think through the implications of the transaction or to give an appropriate effect to it, despite whatever thought was given to it.

The judge recognised that some of the points relied on by Mr Fetherstonhaugh, especially the disregard of improvements and the assumption as to compliance with the repairing covenant, were telling if they were really intended, and that they were in conflict with the conclusion resulting from the words “the site comprised in”. I see the force of that so far as it goes, but it seems to me that the judge was right to resolve the conflict in favour of the tenant and to do so for the reasons that he sets out in particular at paragraphs 37 and 38, dealing with the disregards and compliance with the repairing covenant, and more generally in paragraphs 39 to 41.

Mr Fetherstonhaugh also focused on a divergence between, as he said, the tenant’s contentions and the judge’s conclusion as regards the assumptions relevant to the rent review. The user obligations appear in two places in the lease. At the end of clause 3(h) there is a negative covenant under which the tenant may not use the premises other than as a public house, and in clause 3(n)(ii) there is a positive covenant to use the premises as a public house if the necessary licence is in force, and that includes also a keep open clause. If one were concerned only with a bare site, the effect of that would be that the land could not be used for any purpose at all because there would be no licence to use the public house nor, hypothetically, would there be a public house and there is an obligation not to use it for any other purpose. The judge said that the assumption which had to be made for the purposes of the rent review was that there was a vacant site but that the tenant would have to build a public house in order to be able to get any value from it.

As it seems to me that since in practice, at any rate for the moment, there is a public house and a licence, the point has not arisen and the sole question was as to the rental value of the site, assuming that the building is being used for the permitted purpose. It could produce oddities from the application of the user clause but as it seems to me the resolution of this particular point is that what the lease requires is a market rental valuation not of a bare site, not of a vacant site unbuilt on but of -- in the words used in the rent review provision -- the site, ie the land, comprised in the demised premises ie the land plus buildings. Therefore what the provision is getting at is a notional rental value for a ground rent but not on the basis that the premises to be the subject of the notional lease is a vacant piece of land, but rather that it is the demised premises as they stand but with the effect on the rental value of the existence of the building being disregarded.

In that respect, to the extent that that is not carried through in the judgment, I would respectfully differ from the judge and I would accept Mr Fetherstonhaugh’s proposition that in the declaration, which was that the open market value to be determined on the rent review was the piece of land in question assuming that it was vacant and that the present building had not been erected upon it, goes too far. Whether it makes a substantial difference I know not and I shall come in a moment to the effect of concluding the judge was wrong in that one respect. But apart from that it seems to me that this point and those of Mr Fetherstonhaugh’s other points that have weight are examples of the internal inconsistency of the lease, which go to show that no construction is available that can make the whole thing fit together neatly without contradiction.

It seemed to the judge, and so it seems to me, that the greater weight in this situation must be given to the specific non-standard and clear words at the heart of the definition in the rent review clause as against other provisions in the lease, even including other provisions in the rent review clause itself. The assumption as to the terms of the lease, the disregards, the assumption as to the performance of the repairing covenants, the experience of the valuer, and the rent suspension provision: all of these seem to me quite likely to be standard provisions derived from precedents in rent review clauses included without the realisation that they might need to be modified because of the special nature of the review negotiated, as we must assume it was negotiated, in the present case.

For the reasons that I have attempted to set out, which are for the most part those given by the judge, it seems to me that the claimant was right and the defendant was wrong in this case. In those circumstances it is not necessary to consider the point on the respondent’s notice. It would however, as it seems to me, be right on appeal to vary the declaration made by the judge. I do not at this stage propose to set out the precise terms in which it shall be done, and if necessary we can hear submissions from counsel. The judge’s declaration simply followed the terms of the claim form and the judge cannot in any sense be criticised for this since there was no argument as to an alternative formulation. Nevertheless it is not quite right. What he should have declared was that the open market rental value to be determined on the rent review is the rental value of the demised premises but disregarding the effect on the rent of there being a building on it that there is, The Whittingston Stone Public House. That may in fact come to the same thing as Mr McGhee would have been arguing for if we had been against him on the basic point but in favour of him on his respondent’s notice, which is that the effect of the statutory disregard, or indeed the express disregard, is to require the whole of the value of the building and its effect on rental value to be disregarded, which would come back, in effect to assessing the open market ground rent on the assumption specified for the lease of these demised premises.

Subject therefore to varying the judge’s declaration in that one respect, and in terms to be discussed, I would dismiss this appeal.

I entirely agree.

I also agree. Much of the force of the contentions advanced on behalf of the landlord is lost, as it seems to me, once it is appreciated that the valuer’s task is not to value the site on the assumptions that it is vacant land and that the building in fact erected thereon had not been erected; but to value the site as it exists in fact there but (having done so) to disregard such part of the rental value as is attributed to the building that has been erected on the site.