England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CENTRAL LONDON COUNTY COURT
(His Honour Judge Ryland)

		Royal Courts of Justice Strand London WC2 Monday, 29th April 2002

Monday, 29th April 2002

1. LORD JUSTICE PETER GIBSON: In Gospel Oak in the London Borough of Camden the defendant, Railtrack Plc ("Railtrack"), owns the reversion to a tenancy granted by Railtrack to the claimant, Murphy & Sons Ltd ("Murphy"), as tenant. The demised premises ("the property"), comprising 5.065 acres, once formed part of a goods yard of the British Railway Board ("British Rail"). The property is an irregular shaped piece of land described by Mr Brock QC, appearing for Railtrack, as roughly in the form of an anvil; otherwise it might be described as being in the form of a somewhat irregular crescent. Some of the boundaries adjoin various railway lines running in different directions. Across the middle of the crescent, but under the ground, is an old railway tunnel from which an air-shaft protrudes. Murphy owns the freehold interest in a parcel of land adjoining the property to the west ("the western land") which it purchased from British Rail on 29th March 1985. Out of that was reserved a right in favour of Railtrack to pass over the western land from a highway, Gordon House Road, to the property. Murphy also bought from British Rail on the same day, 29th March 1985, a further parcel of land adjoining the property to the east ("the eastern land") which has road access via Sanderson Close. By a deed of grant, Murphy granted a right of way over the eastern land for the purposes of British Rail and other limited purposes. The tenancy granted by Railtrack to Murphy of the property was for a term of 10 years from 24th June 1987 at a peppercorn rent for the first five years, and thereafter at a rent of £23,000 per annum. The lease also provided that if it continued after the expiry of the term, there would be rent reviews every five years, the rent being ascertained by reference to an index of commercial rents. No right of way providing access to the property was granted by the lease to Murphy. Indeed Railtrack after selling the western land and the eastern land to Murphy had no ability to grant access to the property.
2. The term of years expired by effluxion of time on 23rd June 1997. Murphy held over as tenant pursuant to section 24 of the Landlord and Tenant Act 1954 ("the Act"). By a notice dated 13th January 1999 under section 25 of the Act, Railtrack, as the successor to British Rail, terminated the tenancy with effect from 20th July 1999. Murphy served a counter-notice that it was not willing to give up possession. On 10th May 1999 it applied for a new tenancy. Railtrack did not object to a new tenancy. The parties had agreed the grant of a new tenancy for a term of 10 years, with a rent review at the end of the fifth year, and that rent review provided for the rent to be ascertained by reference to the same indexation provision as was expressly agreed under the existing lease. The parties were not able to agree the initial rent to be payable under a grant of a new lease under the Act. Railtrack contended that an annual rent of £300,000 should be payable. Murphy contended that £75,000 was the proper annual rent. Railtrack's expert, Mr Lewis, and Murphy's expert, Mr Watson, agreed that the base rent for open storage land in this part of London was £14.25 per square yard. The two experts then applied discounts to reflect matters such as the size of the site and the denial of the full use of the property because of the tunnel running underneath the middle of the property. Having ascertained that discounted figure, Mr Watson applied a further discount to reflect the restricted access to the property. The initial stance of Mr Lewis was that there should be no discount for that feature.
3. The court has power under section 29 of the Act to grant a new tenancy. By section 32(3):

"Where the current tenancy includes rights enjoyed by the tenant in connection with the holding, those rights shall be included in a tenancy ordered to be granted under section twenty-nine of this Act except as otherwise agreed between the landlord and the tenant or, in default of such agreement, determined by the court."

4. Section 33 prescribes the duration of the tenancy. As the law now stands, the maximum tenancy is for 14 years, though we have been told that pursuant to a Law Commission recommendation it is to be changed to a maximum term of 15 years.
5. Section 34(1) is the provision to which most of the argument before us has been directed. This provides:

"The rent payable under a tenancy granted by order of the court under this Part of this Act shall be such as may be agreed between the landlord and the tenant or as, in default of such agreement, may be determined by the court to be that at which, having regard to the terms of the tenancy (other than those relating to rent), the holding might reasonably be expected to be let in the open market by a willing lessor, there being disregarded-

(a) any effect on rent of the fact that the tenant has or his predecessors in title have been in occupation of the holding,

(b)any goodwill attached to the holding by reason of the carrying on thereat of the business of the tenant (whether by him or by a predecessor of his in that business),

(c)any effect on rent of an improvement to which this paragraph applies,

(d) in the case of a holding comprising licensed premises, any addition to its value attributable to the licence, if it appears to the court that having regard to the terms of the current tenancy and any other relevant circumstances the benefit of the licence belongs to the tenant."

6. Section 35(1) provides that:

"The terms of a tenancy granted by order of the court under this Part of the Act (other than terms as to the duration thereof and as to the rent payable thereunder) shall be such as may be agreed between the landlord and the tenant or as, in default of such agreement, may be determined by the court; and in determining those terms the court shall have regard to the terms of the current tenancy and to all relevant circumstances."

7. The application for a new tenancy came before His Honour Judge Ryland in the Central London County Court. During the course of the argument the judge was invited to determine a preliminary issue, that is to say, for the purposes of fixing the rent, "whether or not the lack of access or the restricted access to [the property] should be regarded properly by the two experts as being capable of being a reason for a further deduction in the rent". We have been told that in fact the judge accepted that the property could be treated as land-locked for the purposes of the application before him.
8. The judge determined the preliminary issue by holding that it was not open to the court to disregard the position that arose from the land-locked nature of the land in coming to a conclusion on the valuation of the property. The judge then heard expert evidence and further submissions on valuation. Mr Lewis, who by then knew that the judge was not willing to accede to Railtrack's submission that there should be a disregard of the lack of access to the property, proposed that there be a one-third discount. Mr Watson maintained that the discount should be two-thirds to cater for the access difficulty. On 18th September 2001 the judge determined that the annual rent of the property under the new tenancy should be £157,000. That incorporated a discount of 40% to take account of the access difficulty.
9. Railtrack now appeals against the ruling on the preliminary issue alone. There is no Respondent's Notice. Accordingly the only issue for us to determine is whether the court in fixing the rent for the new tenancy should have treated the property as landlocked or whether a disregard of the lack of access should be implied into section 34(1). We have had the benefit of admirable argument from Mr Brock for Railtrack, and from Mr Furber QC for Murphy.
10. Mr Brock submits as his primary argument that the judge ought to have disregarded the lack of access to the property in calculating the rent in accordance with section 34. He points out that the section requires the assumption of an open market and a willing lessor, and he submits that that plainly leads to the implication that there should be a willing lessee. He says that the disregards in section 34(1) are disregards habitually included in standard form rent review clauses in commercial leases. Indeed, he has shown us that in some precedent books the disregards are referred to in some precedents by reference to section 34 itself. He argues from that that decisions in relation to the construction of rent review clauses may be apposite to the construction of the section. He then prays in aid two High Court decisions on rent review clauses in cases where what was being reviewed was the rent of land-locked premises. Those cases are Jefferies v O'Neill [1983] 46 P&CR 376 and British Airways Plc v Heathrow Airport Ltd [1992] 1 EGLR 141.
11. Before the judge Railtrack had contended that there would be no open market if the property were valued as if it was land-locked, as the only person interested who would bid in the market would be Murphy, possessing, as it did, rights of access through the ownership of the eastern land and the western land. The judge rejected that submission in the light of the judgment of the Privy Council in Raja Vyricherla Narayana Gajapatiraju v The Revenue Divisional Officer Vizagapatam [1939] AC 302 ("the Indian case"), and in accordance also with what the judge said was commonsense, because, even if there was only one person with a special interest in acquiring the property, nevertheless it seemed to him that that still amounted to an open market. Mr Brock contended that the judge was wrong on that in the light of Jefferies and British Airways. He argued that for the purpose of a standard form commercial rent review clause for land-locked premises, for which there would only be one bidder at a nominal or heavily discounted rent, there could not be an open market. The same, he said, must obtain in respect of a rent to be determined under section 34, and, as in Jefferies and British Airways, a disregard of the lack of access must be implied.
12. Mr Furber supports the reasoning and conclusion of the judge. He points to the fact that the lease of the property granted to Murphy contained no express or implied grant of any right of access, because Railtrack had no right of any value to grant and Murphy had no need of the grant of any such right because it had control over the land through which access might be obtained. He says that rights of access not actually available to Railtrack should not be assumed or required to be granted to Murphy on the grant of a new lease pursuant to Part II of the Act and paid for by Murphy by way of rent. He contends that decisions in rent review cases involve consideration of the intentions of the parties to an actual lease and are of no assistance in determining the meaning of the statutory provisions.
13. Section 34(1), as it seems to me, contains within itself all the essential guidance needed for the determination of the rent on the hypothesis of a letting of the holding in the open market by a willing lessor with the specific statutory disregards referred to in the subsection, and only those disregards. I of course accept that the counterpart of willing lessor in the open market is a willing lessee. The phrase "the holding" means the premises demised under the tenancy: see section 23(3). The holding cannot, in my view, be enlarged to include an easement, or indeed any other right, not previously enjoyed. When Parliament has specified what should be taken into account and what should be disregarded, it is a bold submission that it is permissible, nevertheless, for the court to imply a further disregard. That is particularly so where the suggested further disregard of the lack of access, requires the holding to be treated as having some right of access, such as an easement, over neighbouring land which is not conferred by the tenancy and which the landlord is not able to grant. It would, in my view, be necessary to specify precisely what assumed access is to be enjoyed by a piece of land which is land-locked. What is one to assume about the access? Are there to be more than one point of access? What sort of easement does one imply? How is the court to decide?
14. Unless there is some principle that the rental value of any premises is to be maximised for the benefit of the landlord - and I cannot see how there can be any such principle - it seems to me impossible for the court to depart from the reality of the situation as a matter of statutory interpretation in order to imply into the tenancy some right which it does not confer. It would be very surprising if Parliament intended that a tenant should be required to pay rent for a right which he already has by reason of his ownership of land adjoining the demised premises.
15. The argument in favour of there being an implied statutory disregard proceeds on the basis of the two decisions in Jefferies and British Airways.
16. In Jefferies a 10-year tenancy of upper parts of a high street shop was granted to a firm of solicitors who occupied the premises next door and who provided an access through the wall separating the two properties. The tenancy contained no express right of access. It provided for a rent review after five years, the rental value being defined as the yearly rent at which the demised premises might reasonably be expected to be let in the open market by a willing lessor to a willing lessee. On the rent review the tenant argued that there was no open market and that the only willing lessees were the solicitors or other persons occupying the premises next door. Nourse J in rejecting that submission referred to the fact (which he found) that when the lease was concluded the rent had been negotiated without regard to the lack of access. The judge accepted the submission that when the parties referred to an open market rent in the lease, they must have intended that it should be arrived at by a similar process of negotiation. He found that the rent review provision would have no practical effect and would not work without implying a disregard of any effect upon rental value caused by the absence of any access other than from the neighbouring premises.
17. In the British Airways case, British Airways was lessee of land-locked premises with no right of access under its tenancies, but it was the lessee and occupier of all the other neighbouring plots from which it could in fact obtain access. On the rent review the then current annual market rental value of the demised premises, if let, had to be ascertained. British Airways argued that the only possible bidder in the market was itself and that the rent should be nominal. Mummery J summarised the guidance from the authorities. At page 144 D he quoted the observations of this court in Basingstoke and Deane Borough Council v Host Group Ltd [1988] 1 WLR 348 at page 353 D-F, that what the court is seeking to identify and declare is the intention of the parties to the lease expressed in the rent review clause and that, like all points of construction, the meaning of the clause depended on the particular language used, interpreted having regard to the context provided by the document and by the matrix of surrounding circumstances. Also in that summary, at page 144 F:

"4. The court should also be alert to the danger of confusing reality and hypothesis. The only relevant hypotheses are those expressly or impliedly agreed by the parties in the rent review clause. Agreed assumptions and disregards must be adhered to but, subject to that, it is the real circumstances affecting the actual property which are relevant to valuation: see Cornwall Coast Country Club v Cardgrange Ltd [1987] 1 EGLR 146 at pp 149 G - 150 E."

18. Further, at page 144 K:

"6. In some cases it may be necessary, in order to give commercial efficacy to a rent review provision, to imply into that provision an assumption or a disregard about the actual state of the property In Jefferies v O'Neill ... Nourse J implied a disregard of any effect on rental value caused by the position of access to the property since, without such an implication of a disregard, no practical effect could be given to the clause requiring the rent to be assessed in the open market. In that case the lessee failed to persuade the court that the rental value should proceed on the basis that, having regard to the access arrangements, there was, in fact, no open market for the property. The rent review clause predicated the existence of an open market for the property. The lessee could not negative that hypothesis by asserting that he was in a very special position and that, in fact, there was no open market for that property."

19. Mummery J accepted the landlord's argument that the effect of the lack of access on valuation should be disregarded by an implied term, and he said at page 146 H:

"I agree that, without such an implied disregard of the lack of legal access, it is difficult to see here how there could be a market for a hypothetical lease of the property. There should, in my judgment, be an implied disregard of the kind suggested by the defendants as a matter of commercial efficacy."

20. Accordingly, he held that the disregard should be of the lack of access. Under the hypothetical letting of a plot access to it for the purpose, or any of the purposes, for which the plot was permitted to be used was to be assumed and the lack of access was to be disregarded when determining the current market rental value.
21. It is to be noted that the arguments in both the Jefferies case and the British Airways case were somewhat extreme in that it had been contended that there could be no open market for the land-locked premises and that, in consequence, the rent for the demised premises was to be treated as only nominal. In neither case was there any consideration, so far as one can tell from the judgment, of the Indian case, nor of other well-known cases about special purchasers. In all of them it has been held that the existence of a special purchaser is taken to be an appreciatory factor so that, even if there is only one special purchaser, nevertheless the property is to be valued on the footing that the special purchaser would be prepared to pay for the acquisition of the property an amount more than merely nominal to reflect his interest in acquiring the property. In the Indian case it is quite clear that Lord Romer accepted that there could indeed be an open market when there is only one purchaser: see in particular what he said at page 316 of the report. An open market is one from which no-one is excluded and if there is a purchaser interested there can be a sale in the open market.
22. On this appeal it is in my judgment not necessary to decide whether or not the Jefferies and British Airways cases were correctly decided. It is certainly true, as Mr Brock has pointed out, that they have been cited in the text books as being good law and they have stood for some time. But, as Mummery J indicated in the latter case by reference to the Basingstoke case, in a rent review case one is looking at the intention of the parties to the lease having regard to the particular language they have used and the surrounding circumstances.
23. In the case of a statutory renewal of a lease the position seems to me to be different. The statutory provisions must apply in the same way to all leases. The intention of the parties to a particular lease cannot be written into the statutory language. I can see no justification for abandoning reality and treating the tenancy as including rights which the landlord is unable to grant.
24. Mr Brock submitted that if the court were to uphold the judge's view, it would lead to an anomaly as between a rent review provided for as a matter of contract under a lease and a statutory renewal. He pointed out that under Part II of the Act a commercial tenant could go on holding the property under successive leases ordered by the court on the tenant's application and that the renewed lease could provide for rent reviews. He submitted that it would lead to the rent reviews being determined on the basis laid down in Jefferies and British Airways, but the rent on the statutory renewal being calculated on a quite different basis so that a much lower rent became payable.
25. In the present case that anomaly does not of course arise. The parties, as I have indicated, had already provided for a rent review under the new statutory lease, to be determined by reference to an indexation provision which they had had the foresight to agree in relation to the lease granted in 1995. We have no information as to the circumstances in which that was agreed. Nor, indeed, do we know whether in 1995 in fixing the rent of £24,000 per annum the parties took into account the restricted access. Whether Mr Brock is right in saying that in cases where rent rises are not index-linked this anomaly would continue, or whether Mr Furber is right in saying that, once the court has determined the rent on the basis which he submits to be correct, future rent reviews under the renewed lease ordered by the court would be carried out having regard to the basis declared by this court to be correct, it is unnecessary for us to determine in the present case.
26. For these reasons, despite Mr Brock's persuasive arguments, I have reached the clear conclusion that the judge was correct to hold that there was an open market for the property, even though the property is to be treated as land-locked, and that an open market rent for it as such could be ascertained. Indeed, this is not a case where the expert for the landlord has persisted in contending that no market rent could be fixed. As I have indicated, once the preliminary Mr Lewis suggested that there should be a discount for the lack of access, but only a much more modest one than that suggested by Mr Watson. No-one has ever suggested that the open market rent should be nominal or nil. The court has fixed a substantial rent of £157,000 on the basis that the property is land-locked.
27. Mr Brock submitted by way of a secondary argument that by reason of section 32(3) or section 35(1), it would be possible to reach the conclusion which he was arguing for, that is to say that access should be treated as provided under the tenancy. But as he himself very fairly conceded, there are great difficulties in his way. In my judgment those difficulties are insuperable. I cannot see how under section 32(3) one can treat the tenancy as including rights which simply are not conferred by that tenancy. As for section 35(1), reliance on that section would mean asking the court to confer new rights in relation to the tenancy which were not granted by the lease, and this court in Orlik v Hastings & Thanet Building Society [1974] 29 P&CR 126 was not prepared to accept that that was possible.
28. Accordingly, for these reasons I would dismiss this appeal.
29. LORD JUSTICE JUDGE: Section 34(1) of the Landlord and Tenant Act 1954 expressly defines the factors to be disregarded by the court when determining the rent payable on a new business tenancy. As originally enacted, three specific factors were identified. A fourth was added by the Law of Property Act 1969. For this appeal to succeed, we should, in effect, be introducing an additional disregard into the statute and perhaps also paving the way for the creation of yet more. Judicial legislation of that kind is impermissible.
30. In my view, it is unnecessary to decide the correctness of the decisions in Jefferies v O'Neill and British Airways v Heathrow Airport. On the basis of the facts and submissions before the court in those cases, neither decision should be treated as supporting the creation of an additional disregard to section 34.
31. I agree with the judgment of my Lord and the reasons that he has given for the dismissing this appeal.
32. LORD JUSTICE MAY: I agree that this appeal should be dismissed for the reasons given by my Lords, Peter Gibson and Judge LJJ. The highlight reasons which persuade me to that conclusion are that:

(1) I am not persuaded that section 34(1) of the Landlord and Tenant Act 1954 can properly be construed as including that in determining the rent under a new tenancy matters concerning access should additionally be disregarded in circumstances where the land the subject of the tenancy is landlocked or that there should be an implication into the statute to that effect; and

(2)I do not see why in justice Railtrack should have a rent under the new tenancy which assumes that they are providing a benefit under the lease which it is not within their power to provide and which the terms of the tenancy do not provide. The land has value to Murphy because they themselves can provide access, not because Railtrack are able to grant it to them.

33. I agree that you can have an open market although the land is only of interest to a special purchaser apart from speculators. This may often happen where something is put on the market which few, if any, people want to buy because it has attributes which make it intrinsically undesirable.
34. I do not consider that the conclusion for which Mr Brock contends is required by the decision of Nourse J, as he was, in Jefferies v O'Neill and Mummery J, as he was, in British Airways v Heathrow Airport in relation to the construction of the contractual rent review clauses in those cases. Here we are construing a statute which has to be construed as it stands without reference to the background known to the parties for an individual case.
Order: Appeal dismissed with costs subject to detailed assessment unless agreed within 14 days. (Order does not form part of approved judgment)