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SECOND DIVISION, INNER HOUSE, COURT OF SESSION |
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Lord Justice ClerkLord ClarkeSir David Edward QC |
[2005CSIH27]XA50/54 OPINION OF THE LORD
JUSTICE CLERK in STATED CASE under section 3 of the Administration
of Justice ( in the arbitration between Tenants; and J H LYGATE AND PARTNERS Landlords: _______ |
For the tenants: Olson; Shepherd & Wedderburn, W.S.
For the landlords: A Cowan,
solicitor advocate; Simpson and Marwick
WS
[1] This
is a case stated by the arbiter in a rent arbitration under a lease of the
ground floor of an office building at
[2] The
rent review clause, so far as material, is as follows:
"6(1) With
effect from the expiration of the fifth year of the Period of this
Lease ... the Current Annual Rental shall be such
amount as shall be the greater of (i) the sum of Twenty eight thousand five
hundred pounds (£28,500) and (ii) an amount (hereinafter called 'the revised
rent') which shall represent the fair open market rent (as hereinafter defined
in Clause 6(2) hereof) of the Premises at the date of review assessed in
accordance with the following provisions of this Clause 6"
The relevant part of the user clause is as follows:
" ... not without the consent in writing of the Landlord (such consent not to be unreasonably withheld or delayed) to use or permit the Premises to be used otherwise than as an office ... " (cl 3(19)(a)).
[3] The parties agree that the existing use of the premises is within Class 2 (financial, professional and other services) in the Schedule to the Town and Country Planning (Use Classes) (Scotland) Order 1997 (SI No 3061) and that a change of use from class 2 to class 1 (shops) would constitute permitted development in terms of the Town and Country Planning (General Permitted Development) (Scotland) Order 1992 (SI No 223, as amended) (art 3; Sch 1, Class 10).
[4] The tenants have contended from the outset that the arbiter should fix the rent solely by reference to rents of comparable premises in office use. The landlords have contended that he should base his award on rental evidence of comparable premises in retail use having regard to the likelihood that the landlords would consent to such a use. The arbiter proposes to find in favour of the landlords. If he is right, he proposes to fix the new rent at £32,800 per annum. If not, he proposes to fix it at £30,500 per annum.
[5] The arbiter has submitted the following
questions for the opinion of the Court:
"1. Did I err in law in interpreting the effect of the user
clause specified in the lease of the ground floor?
2. Did I err in law in deciding that the reviewed rent payable
under the lease of the ground floor should be calculated on the basis of a
hypothetical letting of these premises not only for the current permitted use
as offices, but also on the basis of any other alternative potential use for
which the Landlord's consent could not be unreasonably withheld?"
[6] Counsel
for the tenants submitted that the arbiter erred in law in calculating the rent
by reference to retail use only. On the
basis of Homebase Ltd v Scottish
Provident Institution (2004 SLT 296), he submitted that the arbiter should
have taken as his starting point the permitted use, assessed a rental value for
the premises in that use and adjusted it for the "hope value" arising from the
possibility that the landlords' consent to a retail use could not reasonably be
withheld. Instead, the arbiter had
assessed the revised rent as though that consent was a certainty and without
having considered evidence as to the adverse effect of the user clause on open
market offers made by prospective retail tenants.
[7] The
solicitor advocate for the landlords submitted that the arbiter was entitled
not to deal with this last point because the tenants had not raised it. The tenants' consistent position had been
that the arbiter should have no regard to the possibility of retail use. The arbiter had impliedly made the vital finding
that class 1 use would be consented to by the landlords.
[8] In
my opinion, the arbiter correctly interpreted the user clause and was entitled
to base his valuation on retail use on the view that the landlords' consent to
that use could not reasonably be withheld.
[9] The
tenants' position, in my view, has been unsound from the outset. If the user clause had permitted office use
and no other, theirs would have been the correct approach (Plinth Property Investments Ltd v Mott, Hay and Anderson, (1978) 38
P & CR 361). But in this case the
provision that the landlords' consent to another use might not be unreasonably
withheld opened up the possibility that rental evidence derived from other
potential uses would be relevant (Tea
Trade Properties Ltd v CIN Properties Ltd, [1990] 1 EGLR 155; Reynolds and Fetherstonhaugh, Handbook of Rent Review, para 5.3.4).
[10] The arbiter's task was to assess the rent that would be
obtained if the premises were offered for let on the open market subject to the
conditions of the lease. In an open
market letting, the hypothetical offeror would take into account the
possibility of his obtaining the landlords' consent to another use. In this case a change of use to retail would
not require planning consent and, as the draft award shows, a letting for
retail use would enhance the value of the landlords' interest. In those circumstances, in my opinion, the
arbiter was entitled to hold, in the absence of any evidence or argument from
the tenants to the contrary, that the landlords' consent to retail use could not
reasonably be refused. He was therefore
entitled to assess the revised rent by reference to comparable retail subjects.
[11] The primary submission of counsel for the tenants is, in my
opinion, misdirected. The valuation
issue in this case was not to determine by what amount, if any, rental value
based on office use should be increased to reflect hope value. The concept of hope value is properly
associated with the assessment of the capital value of heritable subjects. It is that element in the valuation that
arises from the possibility that planning consent may be obtained for some more
valuable use (eg Aberdeen DC v Skean Dhu
plc, 1991 SLT (Lands Tr) 22; Northern Metco Estates Ltd v Perth and Kinross
DC, 1993 SLT (Lands Tr) 28; cf Johnson, Davies and Shapiro, Modern Methods of Valuation, 9th ed, pp
279-280).
[12] In Homebase Ltd v
Scottish Provident Institution (supra),
on which counsel for the tenants relied, hope value was discussed in the
context of a rent review of retail premises; but in that case the use of the
premises was restricted both by a user clause and by a planning agreement which
the planning authority could enforce regardless of the landlords'
attitude. It is clear that the court
considered the question of hope value in relation to the possibility that the
planning authority might be persuaded to consent to a wider use within class 1
than it had already consented to (at para [34]). In my view, that decision is irrelevant to
the present issue.
[13] In this case the arbiter had to start from the uses permitted
under the lease. These were office use
and any other use to which the landlords might consent, their power to withhold
consent being restricted. Having
concluded that the landlords could not reasonably withhold consent to a change
from class 2 to class 1, an almost inevitable conclusion in my view, the
arbiter therefore had to assess the rent by reference to evidence of comparable
transactions for retail as well as office subjects. On that evidence he was entitled to conclude
that the evidence of retail rents was decisive.
[14] Counsel for the tenants criticised the arbiter for his failure in assessing the hypothetical open market rent to allow for the contingency, however slight, that the landlords' consent might not be obtained or might be obtained only after litigation. I agree that that contingency might have been a material factor in the assessment. At one stage the tenants' representative told the arbiter that he hoped to be in a position to provide further information on this point, but in the event he did not do so. In my opinion, the arbiter was under no obligation to allow for such a contingency in the absence of evidence on the point.
[15] I propose to your Lordships that we answer both questions in
the negative and return the case to the arbiter to proceed as accords.
|
SECOND DIVISION, INNER HOUSE, COURT OF SESSION |
|
Lord Justice ClerkLord ClarkeSir David Edward QC |
[2005CSIH27]XA50/54 OPINION OF LORD CLARKE in STATED CASE under section 3 of the
Administration of Justice ( in the arbitration between Tenants; and J H LYGATE AND PARTNERS Landlords: _______ |
For the tenants: Olson;
For the landlords: A Cowan,
solicitor advocate; Simpson and Marwick
WS
[16] For the reasons given by your Lordship in the chair, to which
there is nothing I can usefully add, I agree that the two questions should be
answered in the negative and the case returned to the arbiter to proceed as
accords.
|
SECOND DIVISION, INNER HOUSE, COURT OF SESSION |
|
Lord Justice ClerkLord ClarkeSir David Edward QC |
[2005CSIH27]XA50/54 OPINION OF SIR DAVID
EDWARD in STATED CASE under section 3 of the Administration
of Justice ( in the arbitration between Tenants; and J H LYGATE AND PARTNERS Landlords: _______ |
For the tenants: Olson;
For the landlords: A Cowan,
solicitor advocate; Simpson and Marwick WS
[17] I agree with the Opinion of your Lordship in the chair and have
nothing useful to add.