Airways Aero Associations Ltd v Wycombe District Council

This claim arises from a dispute over the operation of a rent review clause in the claimant’s lease from the defendant of the Wycombe Air Park, a small civil airport (to use a term which is neutral in the context of the issues before me) near High Wycombe. The present lease runs for 42 years from 1 September 1972 at a rent which was initially £8,288 (plus a 10% share of any increased rent paid by certain subtenants) and reviewable every 7 years. Over the years the rent was negotiated between the parties and rose at each review, reaching £42,800 at the penultimate review date, in 2000. The parties were unable to agree a rent at the final review in 2007, and activated the procedure in the lease for reference to an expert valuer. The claimant proposed a modest increase to £44,500. The defendant’s valuer put forward a figure of £670,000.

In these proceedings the claimant asserts that this proposal was based on an incorrect interpretation of the review provision, which the claimant contends requires the valuer to determine a rent for an area less than the whole site, excluding the hangars and other buildings. Further, it contends that in any event the defendant is estopped from seeking any increase in rent attributable to the rebuilding of the hangars by the claimant at its own expense, having expressly agreed in writing not to do so before the rebuilding took place.

After a contested hearing on 27 October 2009 Lewison J held that the question of construction was one for the court and not the valuer to determine. At that hearing it appeared that this was the only matter in dispute, the defendant having conceded the estoppel claimed. It has however since emerged that the parties are not fully agreed as to the extent of the estoppel, which therefore falls to me to determine.

At the opening of the trial, I allowed the claimant (on terms) to amend its claim to include a contention for a wider estoppel, to the effect that the rent would only ever be increased by a percentage based on increases in market rates generally, it being the claimant’s contention (strongly disputed) that the lease was entered into with a view to securing a local amenity and to exclude a fully commercial operator, that the rents since had reflected that common assumption and it would be unjust for the defendant now to seek a hugely increased rent based upon the amount that such a commercial operator might pay to lease the site. It was clear that this new issue will require further evidence and so it was agreed that the trial should continue to deal with those issues that were ready for trial as preliminary issues, with a further hearing in due course on the new matters.

In opening, Mr Male QC for the defendant also confirmed that its concession would be extended so that the defendant would not seek any increase in rent by reason of the construction of a modern control tower (built at the claimant’s expense) or for improvements made by subtenants, including four private hangars built on areas sublet on ground leases. This was of concern to the claimant, which has no entitlement to any rent receivable from the subtenants based on these improvements. Mr Male emphasised that this was a generous concession, going beyond anything agreed before the improvements in question had been made.

The facts relevant to the present issues are not significantly disputed. Witness statements from Captain Orchard, the claimant’s Managing Director, and Mr Brocklehurst, the Head of Property Services at the defendant were each taken as read. By way of background, the evidence shows that there has been flying from the site since just before the second World War. It was taken over by government and used as a military airport from 1941. In 1965 the then airport site was sold to a predecessor of the defendant Council, and in turn let by it to the claimant under a lease for 21 years from 1 September 1965. There have been some variations along the way to the extent of the land included in the airport site, which are not material to the present case. The claimant is a company formed to operate a flying club for employees originally of BEA and latterly its successor British Airways. Until recently it was a subsidiary of BA. Its facilities are available to members of the public and it was a term of the 1965 lease that the claimant must ‘foster and encourage civilian flying and gliding’ and make its facilities ‘readily available’ to responsible persons for that purpose. In the early 1970s the claimant wished to build a clubhouse. It was unwilling to incur the capital cost without a longer term, and after negotiation the present 42 year lease, at an increased rent, was entered into in 1972. The case turns on the construction of the 1972 lease, but both parties have referred me to the 1965 lease as part of the relevant factual matrix.

The property demised is described in the parcels clause of the 1972 lease as follows:

“ALL THAT piece of land containing 205.4 acres or thereabouts situated in the parish of Great Marlow in the County of Buckingham which said piece of land is delineated on plan (sic) annexed hereto and thereon edged pink, together with the stores offices hangars and other aerodrome buildings erected on the said land…. together also with the bungalow known as Hazlewood Bungalow…”

The rent was described in the Second Schedule, Part I of which dealt with the first seven year period. Part II then provided as follows:

“The yearly rent… during the second and subsequent seven year periods of the term hereby created shall be such sum not being less than £8288 at which the Airfield as a single demise might reasonably be expected to be let for the residue of the term on the same terms and conditions with the exception of the passing rent…” (my emphasis)

There follow provisions for the rent to be agreed and in default determined by a valuer. It is common ground that ‘the same terms and conditions’ means the terms of the lease itself, so that the valuer must assume a letting for (in the case of the present review) seven years from 2007 to a tenant bound by the particular covenants of the lease, including for instance the obligation to foster civilian flying and gliding referred to above.

‘The Airfield’, although capitalised, is not a defined term. The claimant’s case is that having regard to the way this and other similar terms are used in the lease it is to be construed as referring not to the whole of the demised premises, but to the area excluding the ‘stores offices hangars and other aerodrome buildings’ and Hazlewood Bungalow. The claimant was asked in a Part 18 request to delineate the area it contended was ‘the Airfield’ and produced a plan, which was said to be indicative only, that excluded not only the buildings I have referred to, but a large concrete hardstanding in front of them, and the single concrete runway. The claimant’s contention is that the excluded areas (other than the Bungalow) are referred to in the lease as the ‘aerodrome’ in distinction from the ‘Airfield’. In submissions, Mr Terry said that the question whether the runway was or was not ‘Airfield’ was a difficult one, but maintained that the hardstanding was excluded. The claimant’s difficulty in defining the precise extent of the area it contends for is indicative in my view of the problems raised by its preferred construction.

The defendant’s position is that the various terms used in the lease are merely poor drafting and do not indicate any intention to refer to separate areas. It is conceded (Mr Male says, again, generously) that the term ‘Airfield’ does not include the bungalow, but that apart the court should follow what was referred to as the presumption of reality and conclude that the intention was that the rent be fixed by reference to the rental value of the whole of the premises actually demised.

Mr Terry pointed to the following provisions as supporting his contention. In all the extracts quoted, the emphasis supplied is mine:

I am grateful to both counsel for their submissions on the relevant law, on which they were substantially agreed, and their reference to authority, although they differed on the application of that authority to the present case. There is no doubt that as a matter of contract the parties to a lease may agree that the rent is to be determined, whether originally or on review, in any way they choose, and the task of the court is to interpret the words used in the lease that sets out that agreement to determine, objectively, what they mean. In construing those words the court may have regard to the relevant factual context, also referred to as the factual matrix, which includes all the facts known to the parties at the time the lease was entered into. The court may not however have regard to subjective evidence of intention at the relevant time, or of the course of negotiation between the parties.

The starting point in considering a rent review clause in a commercial lease is an assumption that the rental value is to be that of the whole of the demised premises as they exist at the review date. That is what Mr Male referred to as the ‘presumption of reality’, derived from the decision of the House of Lords in Ponsford & others v HMS Aerosols Ltd [1979] AC 63, the term itself being used by Hoffmann LJ in Co-Operative Wholesale Society Ltd v National Westminster Bank Plc [1995] EGLR 97. In Ponsford the relevant clause required the assessment of ‘a reasonable rent for the demised premises’, which were a factory. The factory had been rebuilt after a fire, incorporating substantial improvements made at the tenant’s expense, and the question was whether the rent should be, in effect, the open market rental value of the premises in their actual improved state, or whether a ‘reasonable rent’ meant that which it would be reasonable for the tenant to pay, bearing in mind that he had made the improvements at his own expense.

The majority held that the first interpretation was to be preferred. This conclusion was expressed in various ways; Lord Dilhorne expressed the task of the surveyor determining the rent to be “to assess what rent the demised premises would command if let on the terms of the lease and for the period the assessed rent is to cover at the time the assessment falls to be made… the surveyor will be assessing the reasonable rent that others, not just the sitting tenant, would be prepared to pay for the use and occupation of the premises. He will not consider the tenant’s position separately… the rent payable by the lessees will of course be rent for the demised premises but as I see it the task of the surveyor is not to assess what would be a reasonable rent for the lessees to pay, but what is a reasonable rent for the premises.” (beginning at p 77H). Lord Fraser of Tullybelton agreed with Lord Dilhorne. Lord Keith of Kinkel delivered a concurring judgment.

Although that case was one of construction of a particular lease, it is common ground that it sets a general approach which has been applied in subsequent cases. Equally, it is an assumption that may be displaced by wording in the lease itself, which in the factual context gives a sufficiently clear indication of a contrary intention. How clear must this indication be? I was referred to a number of cases in which the question had been whether the terms of the lease displaced the general rule.

In Ipswich Town Football Club v Ipswich Borough Council [1988] 2 EGLR 146 the issue was whether the rent to be assessed for ‘the sports ground’ should include the value of the football stadium and other buildings erected on it by the tenant over a period of many years before and after the commencement of the lease. Sir Nicholas Browne- Wilkinson V-C found that the language of the lease, which he held to be carefully drafted, clearly and consistently distinguished between ‘the sports ground’ and the buildings on it and that in consequence the reference to rent of ‘the sports ground’ was not mere chance but careful drafting. Such careful drafting, and the factual background compelled the conclusion that the rent was to be assessed for the land only.

In Ravenseft Properties Ltd v Park and another [1988] 2 EGLR 164 HHJ Paul Baker QC referred to a prima facie position that “the subject matter which the arbitrator has to review is the demised premises as they now stand” including buildings erected or altered. He held that there was “nothing in the lease or the circumstances to depart from the usual position”. The judge did not seek, it seems to me, to lay down any general principle as to the strength of the indications required to depart from the prima-facie position, but he rejected the mere fact that the tenant had constructed a building as being sufficient in itself.

In the Co-Operative Wholesale Society case Hoffmann LJ (as he then was) said this, having reviewed earlier authority: “This approach has produced what is sometimes called a ‘presumption of reality’ in the construction of rent review clauses. In the absence of clear contrary words or necessary implication, it is assumed that the hypothetical letting required by the clause is of the premises as they actually were, on the terms of the actual lease and in the circumstances as they actually existed. But there is no doubt that most clauses require some assumptions which are or may be contrary to reality. In most cases however there is no conflict between such fictions and business sense… in some cases it will be easy, even for an outsider who was not privy to the negotiations between the parties, to see why such an assumption should have been made. For example, fairness to the landlord might explain an assumption that the tenant has complied with his repairing covenants even if he has not done so. Similarly fairness to the tenant will explain an assumption which excludes from consideration any improvements which the tenant has made at his own expense or his acquisition of goodwill which he would pay a higher rent to protect.”

In Braid v Walsall Metropolitan Borough Council (1999) P & CR 94 the land in question was let in an undeveloped state, and subsequently built on by tenants. The demised premises were described as being the land and any buildings erected thereon, but the rent review clause required an assessment of ‘ a reasonable rent for the land’. The Court of Appeal, overturning the decision at first instance, held that this was to be construed as referring to the land without buildings. Sir Christopher Slade approved a proposition 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 with any buildings situated thereon at that date” saying (at p 101) “On the authorities I have no difficulty in accepting [that proposition] as correctly summarising what should be the court’s general approach…nevertheless all the authorities which establish that proposition recognise that it is open to the parties to agree that the valuer shall assess the rent on the basis that, notwithstanding the reality, the land is still undeveloped. And though Lord Templeman in Goh v Yap [1988] 2 EGLR 148 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 [state] 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.” He went on to hold that the lease was carefully and consistently drafted to distinguish between the land and the buildings and in the circumstances “the only legitimate inference is that on a review the rent was to be assessed by reference to the land alone”. Peter Gibson LJ expressed himself to be in complete agreement with this judgment, although it must be said he seemed less supportive of the utility of any general approach to construction, referring instead to “prima facie assumptions” which might be helpful or determinative in cases where the lease was unclear but “seem to be less helpful in the case of a well drawn lease such as the present”. Evans LJ agreed with both judgments.

In Coors Holdings Ltd v Dow Properties Ltd [2007] EWCA Civ 55 the lease in question was again one of land on which the tenant had built a building at its own expense, having been required to do so by an earlier agreement for lease. Lloyd LJ with whom both other LJJ agreed cited the passage from the judgment of Sir Christopher Slade in Braid quoted above, and upheld the decision that a rent review clause referring to rent of ‘the site comprised in the demised premises’ referred to the land without buildings. In the circumstances of the case this conclusion was reached notwithstanding a number of apparently inconsistent provisions of the lease- such as an assumption of compliance with repairing covenants that could only relate to buildings- on the basis that these were likely to be standard provisions insufficiently adapted to the particular lease. These were regarded as showing a conflict within the drafting that the judge was right to resolve in favour of the tenant given the clear and non standard language of the particular wording of the review clause.

In the end, it seems to me that these cases show that although there have been dicta suggesting that any departure from the prima facie assumption of reality must be ‘clear’, ‘express’ or require a ‘necessary implication’ this does not indicate an inflexible approach or a high hurdle to be overcome. Leases may be, and frequently are, drafted in a manner which is unclear or contradictory. What is required as in all exercises in construction is that the court looks at the terms of the lease as a whole, in its relevant factual and business context, and determines whether the best construction is the prima facie one or that the parties have intended something different.

Against that background I turn to consider the lease in this case. In his earlier judgment in this case Lewison J referred to its “rather confused drafting”. I respectfully agree with that assessment. The conclusion I have reached is that it does not show with sufficient clarity any intention that the rent on review should be fixed on an artificial basis of assessing only part of the demised area described as ‘Airfield’, as the claimant contends (except of course to the extent of the concession excluding the bungalow). There are a number of reasons for this.

The textual analysis urged by Mr Terry does not in my view point strongly or clearly to such a construction, or to the suggested distinction between ‘airfield’ and ‘aerodrome’.

There is nothing in the relevant factual context which in my judgment suggests that the parties would have wished to draw the distinction contended for by the claimant.

In summary therefore I conclude that the terminology of ‘airfield’ and ‘aerodrome’ used in the lease does not denote an intention to refer to different parts of the site, but is to be regarded as largely indiscriminate. In particular, ‘Airfield’ in the rent review clause refers to the whole of the demised premises, except the bungalow.

For these reasons I decline to make the declaration as to construction sought by the claimant.

It remains to consider the issue as to the extent of the estoppel that the defendant has, in principle, conceded. It arises from correspondence between the parties at a time when the claimant was considering expenditure of the order of £1m to demolish and rebuild certain of the wartime hangars. In a letter dated 9 December 1998 to Ann Richards, an Assistant Valuer in the Council’s Property and Housing Department, Capt Orchard asked for assistance from the defendant in a number of respects, including this: “AAA [the claimant] request WDC [the defendant] to ignore the value of improvements made to these hangars at the next and subsequent rent reviews. The extra quality of WDC’s hangars should either be paid for in capital or in rent by AAA but not both”.

Ms Richards replied on 4 February 1999 declining to provide any of the other forms of assistance requested but saying this: “With regard to the value of improvements at rent review, effectively the rebuilding of the hangars would be regarded as a tenant’s improvement… and therefore any enhanced value due to these buildings cannot, under statute, be taken into account when looking at a revised rent”. There are in fact no such statutory restrictions applying on a rent review, but it is likely, as Mr Male suggested, that Ms Richards was confusing the position with that which would apply on a renewal of the lease under the Landlord and Tenant Act 1954, when there would be a requirement to disregard the effects of tenant’s improvements in the 21 years preceding expiry.

The claimant’s position is that the rent at review should be assessed on the footing that the old hangars have been removed and not replaced. The defendant’s is that the assumption should be that the former buildings remain, in the condition they were in prior to demolition, subject to a further assumption that up to that date the tenant had complied with its repairing covenant.

Mr Terry submits that the defendant’s assumption would be artificial, and points to the provisions of clause 2(5) which permit the tenant to demolish (with consent) buildings deemed beyond economic repair, or allow them to remain in disrepair. The defendant’s letter in 1999 amounts expressly or by implication to permission to demolish the old hangars. Mr Male submits that the assumption is no more than that which would apply on a statutory disregard under the 1954 Act, or in any well drafted commercial lease expressly providing for such a disregard on rent review.

Mr Terry’s submission, it seems to me, misses the point. The estoppel alleged, and conceded, is one which prevents the defendant going back on the assurance it in fact gave in the 1999 letter. The court has no power to impose terms on the parties which it considers fair or reasonable by reference to circumstances which might have, but did not, occur, but only to determine whether an assurance has been given which it would be inequitable for the defendant to renege on once the claimant has relied on it to its detriment, and if so what were its terms. Reliance and detriment have been conceded. In determining the scope of the assurance, I have regard primarily to the words used, and not comparison with provisions of other leases. I can draw some analogy however with the position that would obtain on a renewal under the 1954 Act, as it seems clear that is what Ms Richards was agreeing to reproduce.

It is clear in my view that the assurance sought and given related to the value of improvements, ie the difference between the position as it obtained prior to the assurance being given and that which came about in reliance on it. Capt Orchard’s own letter refers to ‘the value of improvements’ and ‘extra quality’ of hangars, language which suggests a comparison with the hangars as they existed at the time of his letter. The letter in reply refers also to ‘improvements’ and to ‘enhanced value due to these buildings’. This does not suggest that the whole value of the new buildings is to be disregarded, only the amount by which it exceeded the value of the old buildings. Given the implication to be drawn from the mistaken reference to the statutory provision, I am satisfied that the value of the old buildings is to be assessed on the footing that the tenant had complied, and continued to comply, with its repairing covenants under the lease in relation to them- but no more.

It may be, of course, that the value of the old buildings was limited by their condition at the time and the limitations on the claimant’s repairing obligations under clause 2(5). Capt Orchard’s letter in 1998 certainly asserted that the claimant would have had the option to leave them unrepaired if it chose. Whether that is right or not is not, however, it seems to me, an issue capable of resolution on the material presently before me. I would be doubtful however of any suggestion that a consent to demolition given by the defendant in the planning process necessarily amounts to a consent to demolition on the grounds that the hangars were incapable of economic repair, or that any such consent could be implied from the 1999 letter. I am conscious that this may lead to further dispute and cost between the parties as to the facts or interpretation of clause 2(5) or both, which is to be regretted, and will hear further from the parties if it arises.

I will list a short hearing at which this judgment will be handed down. No attendance will be required. If the parties are agreed as to the order resulting, I invite them to submit a draft. If a further hearing is required to settle the order or deal with matters arising, the parties should contact my clerk with an agreed time estimate so that it can be listed, probably in Birmingham.