England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE WILLESDEN COUNTY COURT
HIS HONOUR JUDGE COPLEY
5W104140

		Royal Courts of Justice Strand, London, WC2A 2LL
		22/05/2007

Lord Justice Mummery :

1. This is an appeal from the order of HHJ Copley dated 18 July 2006 fixing the open market rent payable on the grant of a new business tenancy of lock-up shop premises at 104 Walm Lane London NW2 (the Property) by Trans-world Investments Limited (the Landlord) to Ms Anita Dadarwalla (the Tenant). The parties were agreed on all the terms of a new lease to run from 15 November 2005, save for the annual rent, which the judge determined should be £3,937.50 for the first five years of the new lease.
2. Under section 34(1) of the Landlord and Tenant Act 1954

"The rent payable under a tenancy granted by order of the court under this Part of the Act … 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 …"

3. The subsection directs that certain matters are to be disregarded. They do not include the rent payable under the previous lease.
4. In its claim form the Landlord proposed a new annual rent of £8500 for a term of five years. In her Answer the Tenant proposed an annual rent of £6000 for a term of twenty years with a rent review every five years.

Outline facts

5. The Property is in a small single parade of three ground floor lock-up shops at Nos 104-108 Walm Lane approximately opposite Willesden Green Underground Station. All three shops are owned and let by the Landlord.
6. The Property was originally subject to a lease dated 15 November 1985 for a term of ten years at an annual rent of £2250 for the first five years, subject to review for the last five years of the term. The lease was renewed by a lease dated 6 April 1995 for a term of ten years from 15 November 1995 at a rent of £5250 for the first five years, subject to review for the last five years.
7. The Tenant took an assignment of the lease of the Property on 15 August 2000. On review the rent was increased to £6250 with effect from 15 November 2000 (i.e £83.33 per sq ft) in terms of Zone A.
8. The adjoining premises at No 106 is used for shoe repairs and key cutting. It is 127 sq ft in area (83 sq ft for Zone A). With effect from December 2001 the annual rent was negotiated at £7500. No 108 is used as an estate agent's office.
9. The use of the Property is restricted to tailoring repairs and as a drop off and pick up point for dry cleaning. It is 84 sq ft in area, of which 75 sq ft are in terms of Zone A ie, located at the front of the shop.
10. As the judge was asked to decide the market rent on the renewal of the business tenancy, he heard evidence from two expert valuers. They agreed that there had been an increase in rents in the area, but they did not agree on the amount of the new rent for No. 104.
11. Mr Malcolm Bailey, giving evidence for the Landlord, said that the annual market rent was £7,850. His report concentrated on the rents of the two adjoining properties in the parade, Nos 106 and 108 Walm Lane. The annual rent of the shoe repairer at No 106 was negotiated at £7500 (i.e. £90.36 per sq ft in terms of Zone A) in December 2001.The rent of the estate agent at 108 Walm Lane was increased by 21.2% over a five year period. Mr Bailey was involved in the negotiation, which he described as "tough", for the new rent of No 108 in August 2004 from £8250 in August 1999 to £10,000 with effect from August 2000 (i.e. £41.49 per sq ft). .
12. Mr David Cooper, giving evidence for the Tenant, said that the annual market rent for the property was £3,150. His report of 6 February 2006 considered six comparable premises within the immediate vicinity of the Property and in the same shopping district. Four of the premises were larger than the Property. He regarded the rental figure of No 106 as completely out of line with other rents in the area, which were in the region of £40-£50 per sq ft. He attached little weight to the passing rent in assessing the market rental value of the Property in 2006.

Grounds of appeal

13. The judge gave an ex tempore judgment at the end of the second day of the trial. We are told that this case was fixed for 1 day to start at 10.30 am on 8 May 2006. The case was not in fact reached until the middle of the afternoon. Mr Bailey gave evidence. The second day of the hearing did not take place until 5 July 2006 when Mr Cooper gave evidence. The gap is unfortunate as it resulted in a disrupted hearing of the crucial expert evidence, which was given over two half days separated by a period of two months.
14. It appears from the transcript of evidence that on the first day there were significant exchanges between the judge and counsel on the factors relevant to determining the new rent. In the course of them the judge expressed some surprise at the suggestion of Mr Blaker, counsel appearing for the Tenant, that the new rent should be lower than the rent payable under the expired lease. He questioned Mr Blaker's submission on behalf of the Tenant that the passing rent (i.e. the rent payable under the lease which had expired) was not a factor to be taken into account in the fixing of the new rent, that it was of no relevance in this case as a starting point for fixing the new rent and that it should be ignored. Mr Hypolite, who appeared for the Landlord in the court below, disagreed. He submitted that the passing rent was a relevant consideration. In argument, the judge accepted this, saying that he had never heard the proposition that he had to ignore the passing rent and he agreed with Mr Hypolite that it must be wrong and that he could not ignore it.
15. When he gave judgment on the second day of the hearing two months later the judge took the view that there were two particular difficulties in the case:

"06……. One is that not having heard any evidence at all either from Mrs Dadarwalla or anybody else in relation to what occurred in November 2000 when there was a rent review, nor on the assignment to her, the court has no information as to the circumstances either of the original rent, the assignment, or the rent review. The second difficulty is that Mr Bailey himself negotiated the rent of £41.49 for the premises two doors away less than two years ago."

16. The judge described No 106 as a "further difficulty", even though Mr Bailey had not been involved in the negotiations for the rent of that property. He commented that there was no evidence before the court as to the circumstances in which the rent for No 106 was agreed, adding that the rent was "completely out of line with all of the other rents that have been achieved in the locality." He accepted Mr Blaker's description of it as "the rogue figure."
17. The judge developed these points in paragraph 9 of his judgment:

" … and I also accept that, as Mr Blaker describes it, 106 is something of a rogue figure in its rent. It seems to me, therefore, that since I have to look at the rent for which the premises could be let on the open market, whilst it is always difficult to ignore the passing rent, and indeed Mr Hypolite on behalf of the landlord submits to me it would be wrong to ignore it-under normal circumstances of course he would be right- but in the absence of any evidence as to how the passing rent was negotiated in the past. And in the light of the evidence of the rent negotiated by Mr Bailey for 108 and that which has been achieved in the reasonably close vicinity, that the proper starting point is somewhere in the region of £50 per square foot. It seems to me that there should be some premium as Mr Cooper called it, for the fact that it is smaller and it seems to me that if one were to add 10% for that that would be the appropriate figure."

18. The judge then reduced that to 5% to take account of the effect of the restrictive user and came up with a figure of £52.50 per sq ft making a total annual figure of £3,937.50 for the rent of the Property.

The appeal

19. The amended grounds of appeal assert that the judge was unintentionally misled about how the passing rent of £6250 was reached and that the experts made the same mistaken assumption. The mistake was in thinking that the Tenant took an assignment of the old lease in August 2000 at a rent of £5250 and that there was a separate review of the rent in November 2000 under which the annual market rent increased by £1,000. In fact there was one transaction agreed on 15 August 2000, there being an assignment and a rent review effective from November 2000 and the passing rent of £6250 was the market rent as at November 2000. This, it is submitted, should be the starting point for assessing the market rent in 2006, alternatively a highly relevant factor in assessing the market rent.
20. It was submitted by the Landlord's counsel, Mr Lederman, who did not appear in the court below, that the judge failed to give adequate reasons for his conclusion that the passing rent should be left out of account. He was in error in fixing the new rent at £2312.50 less than the passing rent. The market rent was fixed by the judge at 25% less than the rent fixed in an identical lease 10 years earlier and contrary to the evidence of both experts that there had been an increase in rental values in the area since 2001.
21. As a result of his misunderstanding the judge took as his starting point a rent of £50 per square foot instead of £83.33 per square foot under the previous rent. Further, the judge had not taken into account the rent payable in respect of a comparable property at No 106 Walm Lane let at £90.09 per square foot in terms of Zone A in December 2001.

Tenant's submissions

22. Mr Blaker, who appeared for the Tenant in the court below and in this Court, sought to uphold the decision of the judge.
23. As for section 34(1) of the 1954 Act, he contended that it envisages a hypothetical willing lessee and a hypothetical willing lessor in a hypothetical open market. This means that the rent must be determined in an objective manner taking into account all relevant factors. What the actual lessee agreed in respect of the passing rent with an actual lessor was only one of the factors. It was some evidence, but not conclusive evidence, of the rent required to be determined under section 34: CE and KM Bowra (T/a Albion Properties) v. Dwight Barker (Lawtel 20 May 1998, Mance J at p7). It is open to either side to show by other evidence that the agreed rent does not reflect the true open market rent.
24. He submitted that the judge had the passing rent very much in mind. He did not ignore it. It was a matter of debate between him and counsel as to the extent to which weight could be given to it. The judge did not consider that he had to use it as a starting point for determining the open market rent. He took it into account as one of a number of factors. This was the correct approach. Nor was he wrong in holding that the Tenant was not bound by the figure of £6000 suggested in her Answer in July 2005.
25. The judge, he submitted, weighed up the figures proposed by the two experts. The judge was entitled to come to the figure he did on the evidence before him and he gave sufficient and cogent reasons for his decision that the new rent should be a sum, which was lower than the previous rent.
26. There was evidence that other rents in the area of Walm Lane (Nos 11, 12A,and 35) were in the region of £40-£50 per sq ft, including No 108 at £41.49 per sq ft. He applied the correct objective test, took all the relevant factors into account and based his decision of £52.50 per sq ft on the expert evidence, preferring, as he was entitled to do, the evidence give by Mr Cooper to that given by Mr Bailey.

Conclusion

27. In my judgment, the judge was clearly wrong on two points.
28. First, as is clear from paragraph 9 of his judgment, he left the passing rent of the Property out of account, as invited to do by counsel for the Tenant, on the basis that there was no evidence of the circumstances in which the passing rent had been negotiated in the past.
29. Secondly, and for a similar reason, he wrongly left out of account the rent of a comparable adjoining property, No 106, describing it as a "rogue figure" of little or not relevance. He said that there was no evidence as to the circumstances in which the rent was determined.
30. In my judgment, the judge was wrong to disregard the passing rent and the rent of No 106 on the basis stated by him. The rents under the current lease and of the adjoining property at No 106 are relevant valuation evidence of market rent of the Property without the need for the court to require the party relying on those rents to produce positive evidence of the circumstances in which they were determined. Rather it is for the party who challenges the relevance of the passing rent and/or the rent of the adjoining property to adduce evidence of circumstances relied on to show that the rents are not relevant factors in the valuation exercise of determining the open market rent.
31. The Tenant did not adduce evidence of circumstances showing that the passing rent of the Property and the rent of No 106 should be disregarded in the valuation exercise relating to the Property.

Result

32. I would allow the appeal and remit the matter of the market rent of the Property to be tried in the Central London Civil Justice Centre (Chancery List).
33. After the oral hearing the court stated that it would allow the appeal and that the judgments would be put in writing. It invited arguments on costs. The Tenant did not resist the order that she should pay the Landlord's costs of the appeal, which were assessed, after consideration of submissions on quantum, at £15,224.03 inclusive of VAT. The court accepted the Tenant's contention that the costs of the hearing below should be reserved to the judge who conducts the remitted hearing. It would not be right to regard all the costs of the earlier hearing below as having been wasted.

Lord Justice Keene:

34. I agree.

Lord Justice Jacob:

35. I also agree.