Second City Voids

The rent review clause of a Head Lease from Birmingham Council (BCC) required determination at the review date of “the rents at which the sum total of the various parts of the demised premises could at that time be reasonably expected to be let.”

This was the case of Martineau Galleries No1 Ltd & Anor v Birmingham City Council [2013] EWHC 3018 (Ch) (20 August 2013) and involved a fairly common developer’s lease under which a developer had sublet the car park and the retail unit but not the offices.

Clause 7(h) continued by providing that the expected lettings were to be assumed to be on the open market by a willing landlord to a willing tenant without taking a fine or premium for a term of twenty-one years having regard to the actual rents then receivable in respect of parts actually let with regard being had to the provisions of section 34 of the Landlord and Tenant Act 1954.

Another clause – 7(j) – dealt with vacant premises.

However, clause 7(h) presupposed that there may be vacant parts within the premises, but which were not to be treated as vacant falling within clause (j). This envisaged unlet parts being partially occupied and used by Martineau Galleries (MG) as intermediate landlord and so not vacant either. The Court ruled that any part of the premises which might, for example, be occupied and used by MG rather than by sub-tenants would be within clause (h) and not within clause (j).

Clause 7(j) provided that if any part of the premises were vacant the rental value was the rent at which such part would at that time be reasonably expected to be let on the open market by a willing landlord to a willing tenant without taking a fine or premium for a term of 14 years here.

The first issue was whether MG was correct to contend that a valuation under 7(h) required no assumption of vacant possession to be made in respect of sublet parts, so that the actual sub-tenancies are taken into account together with the costs or risks, if any, consequential upon owning sublet property. Thus, management costs over the period of a long lease may have a significant depressive effect on the rent. There may also be periods affected by a lack of lettings.

Opposing this BCC contended that an open market vacant possession valuation was required. Regard (but nothing more) was to be had to the actual rents receivable, as clause 7(h) expressly recognised. BCC said the actual rents receivable were merely evidence of open market value, which was still to be assessed on a vacant possession basis. Against that interpretation Clause 7(h) referred to the aggregate of the rents at which the sum total of the various parts of the premises could be let. That suggested looking at each part of the premises separately and not at an overriding lease of the whole.

Furthermore the fact that (h) and (j) dealt with vacant and occupied premises separately again militated against any suggestion that there might be a requirement to look at an overriding lease of the whole.

The Court decided that the valuer would not be required to assume vacant possession; on the contrary, he was required to have regard to the actual rents then receivable and, as there was no assumption of vacant possession he would be entitled also to consider the terms of the sub-leases in ascertaining the appropriate rent for the sublet parts, as far as he thought that exercise relevant. That was not expressly mentioned in clause 7, but it did not need to be, as the process of ascertaining a proper rent for sublet premises may require consideration of all the terms of the sublettings.

It was for the valuer to decide which part of the premises should be valued separately from others in the light of his experience of the market and market conditions at the review date in 2008.

The Court declared that the valuer was free to consider that the vacant parts were being offered for letting together or in such parts, for example, floor by floor, for a term or terms of 14 years, for occupational use, as would have secured the highest bid or bids on the open market.

However the Court would not accede to the Council’s suggestion that the valuer be directed to disregard the depressive effect, on the rent the notional tenant would have been prepared to pay, of unlet accommodation and costs of management.

The valuer was entitled to have regard to such matters but what weight he placed on that was a matter for him. It may be their impact will be more or less depending upon the circumstances.

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