Clarise Properties Ltd v Rees  EWCA Civ 1135
11th September 2017
The Court of Appeal gave guidance as to the proper construction of a rent review clause. It was held that that the “open market letting value” should be taken to mean the highest ground rent a purchaser in the hypothetical open market would be willing to pay to acquire a lease of the land.
A landlord appealed against a decision of the Upper Tribunal on a preliminary issue arising out of a claim by the respondent tenants to acquire the freehold of a house under the 1967 Act.
The tenants had acquired a 99-year lease, (‘the Lease’) from 24 June 1990. The previous tenants had negotiated a modest premium of £600 and nominal ground rent of £45 per year. The Lease required that the ground rent be reviewed at 25-year intervals, the first of which fell in 2015. The relevant clause required that the increased rent should be ‘a sum representing the open market letting value of the land…as if it were a vacant site without any buildings to be assessed in accordance with current market values…as if it were…available for residential development’. Therefore, although the letting value of the land was expressed as an annual rent, it was required to be calculated by reference to the capital value of the vacant site. This created a conceptual difficulty in that there is no real market for long leases of vacant plots of land which are subject to a ground rent.
The tenants sought to acquire the freehold. The parties agreed that the price should be determined under s.9(1) of the Act, taking into account the capitalised value of the rent that would have become payable after the 2015 review. However, the parties were unable to agree on the construction of the rent review clause and so the matter was put to the LVT (as it then was).
In the LVT, Landlord submitted that the reviewed rent should be determined by adopting the approach usually employed in determining rents under s.15 of the Act, which yielded a much higher sum. The tenants submitted that the rent should continue to be a nominal ground rent. The LVT rejected both arguments, holding that the open market letting value was a marketable ground rent, being defined as the highest ground rent at which a purchaser in a hypothetical open market would be willing to acquire a lease of the land. The LVT then gave directions for the parties’ surveyors to exchange written valuations in an attempt to agree the price to be paid with liberty to restore. The Landlord appealed this decision. The Upper Tribunal upheld the decision of the LVT. The Landlord appealed to the Court of Appeal.
In a sense, the sole issue on appeal was the proper construction of this particular Lease. However, the Court of Appeal offered valuable guidance on the following:
- The concept of an “open market”;
- Whether the absence of comparable transactions means that the familiar mechanism provided by s.15 of the Act ought to be employed;
- The relevance, if any, of a lease having originally been granted on favourable terms.
Decision on appeal
The Court recapitulated and reiterated the matters to be assumed when applying the “open market value” test, set out in, amongst others, Dennis & Robinson v Kiossos Establishment , namely that the property must be assumed to be capable of sale in the open market, that there is a market in which the sale is agreed and that the landlord and tenant are willing to do business with each other in a reasonable manner.
To this end, it was held at Paragraph 36 of Henderson LJ’s judgment that, ‘the absence of comparable transactions in the real world is irrelevant. The parties agreed on the hypothesis which has to be made’. He observed that such hypothetical exercises are familiar to surveyors. The fact that the parties’ respective surveyors had been able to reach agreement (albeit based on a single property in Cardiff) on the basis of the LVT’s formulation demonstrated this.
The Appellant submitted that the reference to “current market value” required the identification of a true market value, i.e. for vacant development sites with planning permission, and that s.15 of the Act furnishes a way of achieving this which the draftsman must have had in mind. However, this submission was rejected on the basis that, if this were right, the Lease would have contained a reference to s.15 and that the Lease was clear in its terms that the open market be the metric to determine both the annual letting value and the capital value of the vacant plot.
It was also submitted by the Appellant that the word “representing” in the lease was not itself the open market letting value but was rather a proxy for the open market. In essence, it was an argument that the Lease itself conceded that there was no market for long-lease vacant plots of land and that the UT was wrong in holding that the rental value should be one which would be “agreed in the open market”. This submission was rejected and it was held that the term “representing” was merely a concession that the land did in fact have a property standing upon it and that the clause required the open market value to be ascertained nevertheless.
Finally, the Appellant invited the Court to infer that, as the Lease had initially been granted on favourable terms, the parties intended that the rent review figure would exceed that achievable in the open market. It was however held that the Lease could not bear this inference in light of the repeated references to open market value.