Neutral Citation no. NICh 5
Judgment: approved by the Court for handing down
(subject to editorial corrections)
1997 No 2880
The issue which arises in these proceedings relates to the proper interpretation of a rent review clause contained in a lease dated 1 July 1988 ("the 1988 lease") between the plaintiffs' predecessors in title Kiran Builders Limited as lessors and the defendant which at the time of the grant was called Ratners Group Plc as lessee. The lease related to premises described in a lease as 2a King Street, Bangor, County Down ("the premises") which is a corner site located at the corner of King Street and Main Street in Bangor. The demise was for a term of 27 years, 3 months, 18 days from 13 June 1988 subject to an initial rent of £15,500 subject to review as therein provided. The plaintiffs are the successors in title to the lessors' interest in the lease.
The premises demised by the lease were described therein in the following terms:
"ALL THAT AND THOSE the lock up shop and premises situate at and known as that portion of the ground floor of No 2a King Street, Bangor in the County of Down aforesaid which said premises are more particularly delineated and described on the map annexed hereto and thereon surrounded by a red line (hereinafter referred to as 'the demise premises')."
Attached to the lease is a map on which the demise premises are shown delineated with a red line. What the map reveals is relevant to the construction issue which arises in this case and it will be necessary to refer further to this later.
Clause 2 provides as far as material:
"The initial market rent payable by the lessee shall be subject to increase in manner following namely:-
(a) on the 1st day of October 1991 (hereinafter referred to as 'the first review date') there shall be a review of the market rent then payable under this lease and if upon any such review it shall be found that the then current market rent (as hereinafter defined) of the demised premises on the 1st day of October 1991 is greater than the initial market rent then as from the review date the initial market rent shall be increased to the then current market rent provided that in those circumstances shall the rent payable hereunder following any such review be less than the rent payable by the lessee prior to the review date.
(b) for the purposes of this clause the expression 'the then current market rent' shall mean the yearly rent at which the demised premises might reasonably be expected at the date of review to be let in the open market by a willing lessor to a willing lessee under a lease on the same terms and conditions in all other respects as this present lease there being disregarded firstly any effect on rent of the fact that the lessee has been in occupation of the premises and secondly any effect on rent of any improvements of the premises or any part thereof carried out by the lessee otherwise than in pursuance of any obligation imposed by this lease or any agreement thereto."
Under Clause 2(c) it is provided that the review in the first instance should be made by the lessor and lessee or their respective surveyors in collaboration but in default of agreement it is provided that that matter should go to arbitration. Clause 2(e) provides that the rent payable by the lessee shall be subject to review on 1 October 1995, 1 October 2000, 1 October 2005 and 1 October 2010.
A review was carried out with effect from 1 October 1991 when the rent was increased to £23,800. The defendant contends that the rent was agreed on an incorrect basis and on a mis-interpretation of the provisions of the lease. What happened in the rent review in 1 October 1991 cannot affect the proper construction of the lease and accordingly I must disregard those events.
The demised premises had been let to a Mr Michael Brannigan on foot of a twelve-year lease dated 1 October 1984 ("the 1984 lease"). This lease was subsequently assigned to the defendant on 13 June 1988. The defendant surrendered its interest under the 1984 lease in consideration of the grant by the lessor of a new lease dated 1 July 1988 which created a term beginning on 13 June 1988.
The layout of the premises as they then existed before 13 June 1998 was somewhat outdated and unsuitable for modern retailing. The shop was divided by an intrusive stud wall and the shop floor area was on a split level. There was an extensive storage area at the back of the shop. The defendant undertook a programme of works which involved the removal of the stud wall and the creation of a return frontage onto King Street. The main elements of the work appear to have involved a remodelling of the old shop front and demolition of a wall facing King Street, shop fitting work in the form of an internal lobby with the construction of a level floor in the retail area and the introduction of steps at the rear of the premises to give access to the WC and shared fire exit with a Chinese restaurant which occupies the first floor of the building. Reinforcement work of the floors and ceiling was carried out and a new structural frame inserted. The improvement work began on 13 June 1988 and the work was completed on 15 August 1988 with the shop being opened on 20 August 1988. The total cost of the works appears to have been in the order of £75,000.
The defendant relied (inter alia) on an affidavit of Roger Crompton, the defendant's general practice surveyor. At paragraph 6 of his affidavit he stated:
"Between the dates of the surrender of the lease (13 June 1998) and a grant of a new lease (1 July 1998) it appears from the evidence available to the defendant that a programme of renovation works was carried out by the defendant as a fundamental element of the surrender and lease back agreement."
The plaintiffs' case proceeded on essentially the same basis. Paragraph 5 of senior counsel's skeleton argument states:
"It was not a term of the lease that after commencement of the term these works were to be undertaken but the plaintiffs say that in a proper inference drawn from the material facts, the court should come to the conclusion that it was part of the arrangements for the surrender of the Brannigan term and the re-grant of the Signet term that these works should be carried out."
The question for determination is whether the improvement works carried out by the defendant, which admittedly resulted in the premises having a greater rental value than would have been the case if the premises had remained in their unimproved state immediately before 13 June 1988, fall to be disregarded or taken into account in the rent review. It is clear that reviews as at 1 October 1995 and 1 October 2000 now fall to be made.
Mr Thompson QC on behalf of the plaintiffs argued that under Clause 2(b) while one must disregard the effect of any improvement of the premises carried out by the lessee that disregard does not apply to improvements carried out pursuant to an obligation imposed by the lease or "any agreement thereto". The phrase "any agreement thereto" could refer to the improvement being carried out with the agreement of the lessors or could refer to works carried out pursuant to an "obligation imposed by an agreement" to enter into the lease. Either way the improvement work does not fall within the "disregard" provision and thus at the rent review the rent falls to be assessed by reference to the improved state of the premises.
He adopted as a further argument of a point raised by the court in the course of submissions. The direction to "disregard improvements to the demised premises" necessitated a consideration of what was meant by the "demised premises" for it is only improvement work thereto which falls to be disregarded. The premises are defined by the lease as delineated and described on the map annexed. The map clearly shows a layout in which the dividing stud wall and the change of levels and the extension of the retail area exist and the location of the toilets and lobby point to the layout envisaged by the improvement scheme as carried out by the lessee in 1988. It is only improvements to those premises as altered that would fall to be disregarded in the future.
Mr Good on behalf of the defendant contended that the lease map only delineated the demised premises. The relevant premises were works of improvement to the premises, the subject matter of the demise. The relevant works accordingly were works of improvement which fell to be disregarded under the rent review provision unless the landlord could establish that they fell outside the wide terms of the disregard directed by Clause 2(b). He contended that the works were not carried out on foot of any obligation imposed by the lease on foot of any agreement provided for in the lease.
The rent revision under Clause 2(b) is directed to an assessment of the rent of the "demised premises" being defined by Clause 1 as the premises both delineated and described in the map. That rent must be ascertained disregarding the effect on rent of the fact that there has been an occupation thereof by the lessee. In addition the rent must be assessed disregarding the effect of improvements to the premises or any part thereof carried out by the lessee. However, one does not disregard and thus must take into account improvements carried out by the lessee pursuant to an obligation imposed by the lease. The concluding words of Clause 2(b) are open to a number of interpretations. They may be read as meaning:
"Otherwise than in pursuance of any obligation imposed by … any agreement to such works of improvement"
"Otherwise than in pursuance of any agreement to the works of improvement."
"Otherwise than in pursuance of any obligation imposed by any agreement to the lease."
"Otherwise than in pursuance of any agreement to the lease."
While in a different factual situation it is possible that a different outcome might result depending on which of the interpretations prevailed, in the circumstances of this case the relevant works fall within each of those possible interpretations. They were carried out on foot of an obligation pursuant to an agreement to carry out the works, in pursuance of an obligation under an agreement to do the works and under an agreement to enter into lease and in pursuance of an agreement to do the works.
Furthermore the demised premises as described on the map envisaged that the demised premises had the extended retail area and a layout which in skeletal form reflects what is now in the premises. It would only be works of "improvement" to those premises which would then be the subject of the disregard in the future.
The court accordingly dismisses the defendant's counterclaim and declares that for the purposes of any review of rent under Clause 2 of the lease the improvement works carried out by the defendant on or before 15 August 1988 do not fall to be disregarded in assessing the relevant current market rent of the demised premises.
1997 No 2880