Coors Holdings Ltd v Dow Properties Ltd

THE DEPUTY JUDGE: In this claim under CPR part 8, the issue which I have to decide is whether the rent review provisions in a 90-year lease dated 12 May 1980 between the London Borough of Islington and Bass Holdings Limited, required the open market rental value of the demised premises, namely The Whittington Stone Public House, Highgate Hill in London, to be determined by reference to the land and buildings or by reference to the land alone.

The facts relevant to this question of construction are agreed and are as follows. The lease was granted pursuant to an agreement for lease dated 15 August 1978 and made between the London Borough of Islington and Bass Limited. That agreement provided by clause 1 for the grant of the lease in the form of a draft annexed schedule. That lease was to be for 90 years from 1 November 1978 at an initial rent of £2,500 per annum, subject to upward only review every ten years, with the lessee responsible for repairs and insurance. It was to be granted only on the completion of the construction by the lessee of a public house on the land and in consideration of the cost to the lessee of carrying out that construction.

Clause 2 provided for the lessee to have a right of entry to the site for the construction of the public house back-dated to 3 January 1978. By clauses 3 to 5 of the agreement, the lessee agreed to build the public house for not less than £88,000 by 1 March 1979, or by such later date as the Council might permit, and the lessee was to be responsible for obtaining planning permission.

The lease itself was in due course granted; the lessee there being named as Bass Holdings Limited, it being the same as the Bass Limited party to the agreement after a name change. That occurred after the completion of the pub and the grant was on 12 May 1980. As I have said, the lease was granted in substantially the same form as the draft scheduled to the agreement.

The relevant provisions of the lease are as follows. I shall partly read them and partly summarise them. It was granted on 12 May 1980, made between the London Borough of Islington and Bass Holdings. The definition of the lessee was Bass Holdings and persons deriving title under the lessee. The only recital to the lease was that the Council was desirous of redeveloping the land, later described, for residential purposes, and that the parties had agreed that the demised premises would be used for the provision of a public house, ancillary to such residential development.

In clause 1 at the words, “The demised premises” are defined as meaning:

“All that piece of land between Salisbury Walk and Annesley Walk on the western side of Highgate Hill in the London Borough of Islington and containing an area of 0.15 of an acre or thereabouts as the same as delineated on the plan hereto annexed and thereon edged red together with the whole of the premises now known as the Whittington Stone Public House Highgate Hill in the London Borough of Islington.”

Thereafter the lease uses the phrase, “The demised premises” as a term of art, almost uniformly subject to one exception, which I will mention.

The habendum was for 90 years from 1 November 1978. As I have said, the rent was reserved at £2,500 per annum. There then follow a series of sub clauses (b) to (i) which provide in effect for upward only rent reviews every ten years, and the rent was by an identical format in each of those clauses for the following ten years to be:

“Either the yearly rent reserved in sub-clause (H) hereof or the open market rental value of the demised premises at the review date (whichever is the higher).”

Rent was payable quarterly, in advance, and there then follow in clause 1 a series of provisos, the first of which being the most important and it reads as follows:

“The expression ‘open market rental value’ 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 there being disregarded (if applicable) those matters set out in paragraphs (a) (b) and (c) of section 34 of the Landlord and Tenant Act 1954 and there being disregarded any effect on rental of the fact that the lessee has been in occupation of the demised premises or on any improvement carried out by the lessee otherwise than in pursuance of every obligation hereunder and on the assumption that the lessee has complied with all the obligations as to repair and decoration herein imposed on him by the Council (but without prejudice to any rights or remedies of the Council in regard thereto) notwithstanding the fact that in no circumstances whatsoever (by virtue of the operation of this clause or otherwise) shall the reviewed rent fall below the sum then last reserved in the lease.”

By proviso 2 the review date is defined as meaning the expiration of 10th, 20th, 30th, 40th, 50th, 60th, 70th and 80th years of the term as the context requires for the purpose of the ascertainment of the open market rental value referred to.

There are then provisions for the determination of the open market rental value as defined, which provide in summary, for a notice procedure, an attempt by the parties to agree the rent and then for determination, in the absence of an agreement, on a reference:

“To a duly qualified independent surveyor specialising in the valuation of premises used for purposes similar to those for which the demised premises shall then be used to act as an expert and not an arbitrator.”

And there are provisions for his nomination by the RICS.

I should read clause 2:

“It is hereby declared that the demise hereby made shall not be deemed to include and shall not operate to convey or demise (except as herein before provided) any ways water courses sewers drains lights liberties privileges easements rights or advantages whatsoever in through over or upon any land of the Council adjoining or near to the demised premises AND that the Council shall have the power at all times without obtaining any consent from or making any compensation to the lessee to deal as the Council may think fit with any land or buildings adjoining opposite or near to the demised premises and to erect or suffer to be erected on such adjoining opposite or neighbouring land any buildings whatsoever whether such buildings shall or shall not effect or diminish the light or air which may now or at any time or times during the said term be enjoyed by the lessee or other the tenants or occupiers of the demised premises or any part thereof.”

They then follow typical lessee’s covenants: firstly to pay the rent. At clause 3(c)(i) there is a lessee’s covenant:

“To put, keep and maintain the exterior of the demised premises excluding the main walls party walls boundary walls and fences but including the roof.”

And I leave a part out:

“And the front (which expressions shall be deemed to include any external showcases and any rollers shutters fences gates or other means of containing the demised premises) and the glass of the windows (including plate glass) and doors and locks and fastenings of the demised premises clean and in good order and condition and properly painted grained varnished and/or polished where necessary all to the reasonable satisfaction of the Council.”

Sub clauses 2 and 3 include lessee’s covenants to maintain the interior of the demised premises and to replace any lost, stolen, damaged or unfit landlord’s fixtures or fittings.

Clause 3(f) obliges the lessee to keep the premises insured. Clause 3(j) contains a qualified covenant against alterations. Clause 3(m) contains a number of user covenants, the first of which is not to use the demised premises for residential purposes, and clause 3(n)(ii) requires the lessee, so long as the requisite licences can be obtained:

“To use the demised premises or cause or permit the same to be used as a fully licensed public house only and to keep the same or cause the same to be kept open as such during most lawful hours and to conduct the business thereof or cause the same to be conducted in a lawful and orderly manner.”

Clause 6 contains an abatement of rent provision, which I should read:

“In case the demised premises or any part thereof shall at any time during the said term be destroyed or damaged by any of the insured risks so as to be unfit for occupation or use and any policy or policies effected by the Council shall not have been vitiated or payment of the policy monies refused in consequence of some act or default of the lessee the rent hereby reserved or a fair proportion thereof according to the nature and extent of the damage sustained shall be suspended until the demised premises shall be again rendered fit for occupation and use.”

And then there is a provision for arbitration of disputes arising under that clause.

It is acknowledged that the £2,500 per annum reserved as the initial rent was, as at 1978, well below a rack rent. On the first review in 1988 the rent was raised to £11,500. Bass Holdings Limited again changed its name to Coors Holdings Limited. It is the claimant in these proceedings. The reversion on the lease is now vested in Dow Properties Limited, the defendant in these proceedings.

On this issue as to the construction of a business lease, I bear in mind the following guidance from the authorities: (1) the lease is to be construed against the relevant factual background to the extent known to the parties when it was agreed (in this case in August 1978) and that is apparent from Ipswich Town Football Club Co Ltd v Ipswich Borough Council [1998] 2 EGLR 146; (2) prima facie a rental value for the purposes of a rent review is the value of the demised premises at the review date, see Ravenseft Properties Ltd v Park [1988) 2 EGLR 164. In this case proviso 2 in clause 1 of the lease makes that express; (3) prima facie the rental value of premises for the purposes of a rent review clause in a lease is the value of the whole of the demised premises, i.e. including any buildings on the land, see Braid v Walsall Metropolitan Borough Council [1999] at 78 P&CP 94; (4) But that is only a starting assumption from which the parties to a lease are at liberty to depart. Whether they have done so or not in any particular case will depend, like any other question of construction, on the language they have used set against the relevant factual background. The fact that the lessee has built the relevant buildings at its own expense, although highly relevant, is unlikely to be determinative on its own if there is nothing at all in the terms of the lease pointing away from the normal assumption, see: Goh Eng Wah v Yap Phooi Yin [1988] 2 EGLR 148, a decision of the Privy Council.

But the combination of that fact, together with language in the lease pointing away from the normal assumption, may be compelling even if the language on its own might have been insufficiently clear to justify such a departure. See again Ipswich Town Football Club v Ipswich Borough Council. There are dicta, for example, in Braid v Walsall Metropolitan Borough Council that there must be shown a clear or very clear contrary intention if the general rule is to be displaced.

Subject to elucidating those general principles, decided cases are of little further value in this or any other construction case. Sometimes, identically worded provisions in different leases may, because of the different matrix of fact lying behind each, mean quite different things. See for example the question whether identically worded improvement disregards apply to works done before the grant of the relevant lease in Hambros Bank Executor & Trustee Company Limited v Superdrug Stores Limited [1985] 1 EGLR 99, Scottish & Newcastle Breweries PLC v Sir Richard Sutton Settled Estates [1985] 2 EGLR 130, and Panther Shop Investments Limited v Keith Popel Limited [1987] 1 EGLR 131.

I therefore start with the general rule favourable to the defendant’s case that the whole of the demised premises is prima facie to be valued for rent review purposes and ask myself whether the provisions of this lease, set in its relevant factual context, clearly disclose a contrary intention. For this purpose, the key provisions in the lease are, in my judgment, the following:

(1) Rent is reserved as the quid pro quo for the letting of the whole of the demised premises which at all times after the grant of the lease included the new pub just constructed by the lessee, by way of express definition.

(2) The reviewed rent is also to be, if higher than the current rent, the open market rental value of the demised premises as defined.

(3) That expression namely, “open market rental value”, is itself a defined term by the first proviso and means the annual rental value at which the site comprised in the demised premises might reasonably be expected to be let for 90 years on the terms of the lease, other than the rent, and on the open market by a willing lessor, subject to the stated disregards and on the stated assumptions.

(4) The disregards include improvements carried out by the lessee, otherwise than pursuant to any obligation under the lease.

(5) It is to be assumed that the lessee is in compliance with all its repairing obligations, which consist almost exclusively of obligations to repair the buildings.

(6) The surveyor appointed to be to determine the open market rental value in the event of dispute is to be a specialist in the valuation of premises, similar to those for which the demised premises shall then be used, and therefore, probably public house premises.

Lastly, clause 6 provides, in certain circumstances, for abatement of rent if the buildings are damaged or otherwise unfit for use.

The key facts in the background matrix are as follows: (1) the agreement for lease provides for the lessee to build the new public house for not less than £88,000 and for the lease to be granted in consideration of the lessee’s expenditure; (2) the rent agreed for the first ten years was well below a rack rent.

In my judgment the terms of this lease, set in its relevant factual context, do disclose with sufficient clarity that for rent review purposes, only that part of the demised premises which consists of the site, i.e. excluding the buildings, should be valued for the purpose of agreeing, or in default, determining the open market rental value of the demised premises.

My reasons are as follows: (1) the natural meaning of the words, “The site comprised in the demised premises”, is apt to exclude the buildings; (2) if the building were to be included for rent review purposes there would have been no need for proviso 1 to have referred to anything other than the demised premises, which itself was already a defined term. The words, “The site comprised in”, would be mere surplusage and non-standard form surplusage at that.

(3) The fact that the lessee built the pub at its own expense which besides being a fact, was an essential part of the bargain which included the grant of the lease, is, as a matter of commercial common sense, strongly supportive of that interpretation.

(4) True it is that there may be other facts, for example, reasons why the lessee paid for the construction of the pub now lost in the mists of time, which might put a different complexion on the fact that it paid for that construction; but that possible obscurity cannot in my judgment make valueless an otherwise highly relevant fact forming a central express part of the parties bargain.

(5) The low initial rent reserved is not in my judgment a powerful factor, because there could be many different explanations for it.

(6) It is also true that both parts of the first proviso in clause 1 itself, and other provisions in the lease, may fairly be said to constitute contra-indications (that is contrary to the conclusion that I have reached) detracting at least potentially from the clarity of the conclusion to which the combination of the phrase, “site comprised in the demised premises” and the landlord’s payment for the public house, otherwise drive me.

Those contra-indications are as follows: (a) the requirement that the hypothetical term for valuation purposes is to be, “On the terms of this lease”, which assume a completed public house and include a licensed premises user clause; (b) the occupation and improvements disregards, both by reference to the Landlord and Tenant Act 1954 and the express disregards; (c) the assumption as to compliance with repair covenants; (d) the rent abatement provisions in clause 6.

As to (b) that is the occupation and improvements disregards; the most important of these is the improvements disregard and it is in my judgment a significant contra-indication, unless it is to be treated as a mere irrelevance inserted unthinkingly as a standard London Borough of Islington clause in their leases at that time; in my judgment that latter assumption is the more probable.

As to (c) that is the assumption of compliance by the lessee with repairing covenants; since the repairing covenants virtually only refer to repair of the buildings, this is again, a significant contra-indication, but the probable explanation for it, namely that it is included as the unthinking inclusion of a standard provision, in my judgment, is also to be treated as the likely explanation.

As to (d) that is the rent abatement provisions in clause 6; the rent abatement clause is itself curiously drafted because it assumes a lessor’s insurance, whereas clause 3(f) of the lease required the lessee to insure. Again, it seems to me that this clause has been included probably as an essentially standard term, without sufficient regard to the express terms of the lease, and although therefore it is a potential contra-indication in a lease which, in my judgment, is to be construed as providing for a review that does not include the value of the buildings, it is not a strong one.

Generally, none of the contra-indications are, in my judgment, by contrast with the phrase, “Site comprised in the demised premises”, in the first proviso in clause 1, are one-off provisions, and none of them afford any other explanation for the inclusion of that key phrase than an intended deliberate exclusion of the buildings from valuation for the purposes of the open market rental value.

In answer to his own rhetorical question: “Why did the draughtsman use the phrase, “Site comprised in” rather than as elsewhere, for example in clause 2, a distinction between land and buildings?” Mr Fetherstonhaugh was driven to only two possible explanations. First, he submitted that the use of that phrase created added specificity, the site being a reference to the land and the buildings; in my judgment that explanation is unlikely, because the demised premises is already a precisely defined term of art in the lease. Alternatively he submitted that the phrase, “Site comprised in” is just another example of mere surplusage in a lease full of surplusage of one kind or another. That is an attractive submission, but in my judgment, whereas the other surplusage can reasonably be put down to the unthinking adoption of standard forms, the key phrase cannot. Furthermore, it is not surplusage. The phrase, “Site comprised in the demised premises” naturally, as I have already concluded, excludes the buildings as a matter of language.

In the end Mr Fetherstonhaugh’s basic submission was that the contrary intent, which the claimant asserts as being found in the lease, is insufficiently clearly expressed to satisfy the legal test, which I have set out. In my judgment, although the intention that the buildings should be excluded for the purposes of rent review valuation could have been more clearly expressed, it was, nonetheless, sufficiently clearly expressed when set in the relevant context.

Mr McGhee advanced an alternative submission, based solely on the improvement disregard also found in proviso 1 in clause 1. He submitted that assuming against his main submission that site comprised in the demised premises meant the whole of the demised premises including the buildings, nonetheless, the construction of the public house was a qualifying improvement because it was carried out by the lessee with reference to the grant of the lease. He relied for that purpose on the Hambros and Superdrug case and the Scottish and Newcastle Breweries case by way of distinction from the Panther Shop Investments v Popel Case. In the latter case, as he has submitted, the relevant improvements had not been carried out with reference to the grant of the current lease but sometime previously under an earlier lease.

It is not necessary for me to decide that question, since in my judgment the phrase, “site comprised in the demised premises”, is sufficient to exclude the buildings. The question therefore does not arise.

I should add this as a postscript. I have been much assisted in reaching the conclusion as to the construction of this lease by the background fact that the lessee paid for the construction of the public house. That fact, although of course apparent from the agreement for lease, is not recited or referred to in any way in the lease itself.

The strict application of reference to the factual matrix classically set out, for example, by the House of Lords in the ICS case to long leases which or the reversion on which, may come into the hands of successors in title long after the event, in circumstances where those successors in title are wholly ignorant of key background facts affecting the value of their asset, is in my judgement a matter of some concern; but for as long as the process of construction of leases, as much as any other essentially contractual documents, consists of the objective ascertainment of the presumed intention of the original contracting parties, it is hard to see how the potential for serious injustice to successors in title can, entirely satisfactorily, be avoided. I should add that there has been no allegation in this case that Dow Properties Limited, a successor in title to the original lessor, was in fact, in ignorance of that material fact.

For those reasons I make the declaration sought by the claimant in these proceedings.

Mr McGhee, who has succeeded, asks for costs. Mr Fetherstonhaugh submits that the costs occasioned to the claimant by the commissioning of its expert’s report should be excluded from the assessment. The history appears to be that the claimant commissioned that report. There was then an agreement that the defendant should commission one too, but on a later application by the defendant for permission to put its report in, the Master directed that there should be no expert evidence submitted at trial. In the event, I did not read those reports and they have played no part in the process.

Application for permission to appeal is refused. Interim costs are awarded to the claimant in the sum of £10,000, stayed for a period of six weeks, pending any application the defendant may be advised to make to the Court of Appeal on its undertaking to prosecute any such application, if so advised, as soon as reasonably possible.