Newman v Dorrington Developments Ltd

Protected tenancy–Option for further lease at ‘commercial yearly rack-rent at which demised premises might reasonably be expected to be let in the open market’ — Option not incapable of performance though rack-rent substantially more than the registered rent–Order for specific performance of contract constituted by exercise of option This was a claim by Mr Frederick Allen Newman, of 7 Dudley House, Westmoreland Street, Marylebone, London W1, against Dorrington Developments Ltd, for specific performance of a contract for a further lease of his flat constituted by exercise of an option contained in a lease of June 24 1970. Mr T R F Jennings (instructed by Nabarro, Nathanson) appeared for the plaintiff, and Mr E J Prince (instructed by Philip Ross, Elliston & Bieber) respresented the defendants. Giving judgment, BRIGHTMAN J said: This is an action by a tenant to compel landlords to grant a new lease in accordance with an option for renewal which the tenant claims to have exercised. The landlords submit that the option has become incapable of performance by reason of the fact that the rent is restricted by the Rent Act 1968. By a lease dated June 24 1970 the then landlord let a flat, 7 Dudley House, Marylebone, to the then tenant for a term expiring on June 24 1973 at the yearly rent of £550, plus a service charge which I can ignore. Clause 5 (iv), so far as relevant for present purposes, provided as follows: (a)  If the lessee shall be desirous of taking a lease of the demised premises for a further term of three years from the expiration of the term hereby granted at the rent and on the terms and conditions hereinafter mentioned and shall not more than 12 nor less than six months before the expiration of the term hereby granted (time being deemed to be of the essence) give to the lessors notice in writing of such his desire and if he shall have paid the rent hereby reserved (hereinafter called ‘the current rent’) and shall have performed and observed the covenants and stipulations herein contained and on his part to be performed and observed up to the termination of the tenancy hereby created then the lessors will let the demised premises to the lessee for the further term of three years from the twenty-fourth day of June One thousand nine hundred and Seventy-three at a rent to be determined as hereinafter provided and subject in all other respects to the same stipulations as are hereinbefore contained except this clause for renewal. . . . (b)  The rent for the said further term (hereinafter called ‘the new rent’) shall be such annual sum as shall be agreed in writing between the lessors and the lessee or their respective surveyors but if within two months after the date of the lessee’s notice (time being deemed to be of the essence) of his desire of taking the said lease for a further term of three years agreement shall not have been reached on the new rent then the new rent shall be determined in accordance with the Arbitration Act 1950 by a single arbitrator to be appointed by the President for the time being of the Royal Institution of Chartered Surveyors as being the commercial yearly rack-rent at which the demised premises might reasonably be expected to be let in the open market for an unbroken term commencing on the same day and of the same duration as the said further term by a willing lessor to a willing lessee on the same terms covenants and conditions (except as to rent) as are herein contained provided that notwithstanding a determination lower than the current rent the new rent shall in no circumstances be less than the current rent. In 1972 the term became vested in the plaintiff and the reversion became vested in the defendants. On June 24 1972 the option first became exercisable and would continue to be exercisable until December 24 1972. By notice dated June 30 1972 the plaintiff purported to exercise the option by requiring the defendant to let the demised premises to him for a further term of three years from June 24 1973 at a rent to be determined in accordance with clause 5 (iv) (b) of the lease. It is common ground that on the date when the tenancy was created, ie June 24 1970, it was (and still is) a protected tenancy within the meaning of section 1 of the Rent Act 1968, and a regulated tenancy within the meaning of section 7. As a result, the rent of the demised premises became subject under section 20 to a limit which is called by the Act ‘the contractual rent limit.’  If a rent has been registered under Part IV of the Act the contractual rent limit is basically the registered rent. Where no rent has been registered, then the contractual rent limit is basically to be determined as follows: (a) if not more than three years before the regulated tenancy began the dwelling-house was subject to another regulated tenancy, the contractual rent limit would be the rent payable under that other tenancy; (b) otherwise, the contractual rent limit is the rent payable under the terms of the lease creating the tenancy. Section 20 provides that where the rent payable for any contractual period of a regulated tenancy of a dwelling-house would exceed the contractual rent limit, the amount of the excess shall be irrecoverable. Section 46 provides, in effect, that in determining the fair rent, which is the rent to be registered, regard shall be had to all the circumstances and, in particular, to the age, character and locality of the dwelling-house and its condition, but it shall be assumed that the ‘number of persons seeking to become tenants of similar dwelling-houses in the locality’ is not substantially greater than the number of available houses. In other words, scarcity value is to be disregarded. The contractual period of this tenancy expired on June 24 1973, leaving aside for this purpose the option to renew. I understand that there was no registered rent on that day, but that an application for the registration of a rent was made to the rent officer on July 6. On November 29 the fair rent was determined to be £890 per annum. This accordingly became the registered rent and prima facie took effect from the date of the application. It follows that if the defendants had granted a new tenancy to anyone on June 24 1973 a yearly rent in excess of £550 would not have been recoverable. The landlords could, however, have granted a new tenancy to anyone after July 6 1973 at a recoverable rent not exceeding £890. It is common ground that the commercial yearly77 rack-rent in the open market (to use the phraseology in the lease) would have exceeded £890 if the Act had not existed. As I have already said, the lease provides that in default of agreement (and none exists in the present case) the rent shall be ‘the commercial yearly rack-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.’  That, say the defendants, is an impossibility in the present case, because an open market commercial rent presupposes an unrestricted market. In the present case the market is not unrestricted; section 46 prevents scarcity value from being taken into account. A ‘rack-rent’ was defined by William Blackstone as ‘a rent of the full value of the tenement or near it’; see Commentaries on the Laws of England, vol 2 p 43. In support of his proposition, counsel for the landlords referred me to Rees v Marquis of Bute [1916] 2 Ch 64. In that case, a freeholder of a number of cottage properties let at weekly rents wished to give his tenants the opportunity of buying long leases which would be almost equivalent to freeholds. An auction sale was held. One tenant of a cottage, let at a weekly rent of about 4s, bought for £55 a 99-year lease of his cottage at an annual rent of £1. A month before the sale the Rent Act of 1915 had been passed, but this was not appreciated by the vendor or purchaser. Both sides wished to honour the bargain, but the vendor was unwilling to do so until it had been ascertained that it could lawfully be carried into effect. The house in question was one to which the Act applied. The Act provided that the payment of a premium for a tenancy could not be required and if paid could be recovered. Consequently, the agreement to pay the premium in that case was an illegal agreement, and as it had not been performed, the defendant ought, it was decided, to be relieved from it. I do not think that this case supports the defendants’ proposition. In the Bute case the payment of the purchase price or premium was illegal, and if paid could be recovered. The contract was inevitably one of which the court would not order specific performance because one term of the contract was not a lawful term. I was next referred to Hollies’ Stores Ltd v Timmis [1921] 2 Ch 202. That was a case where there was an option for the renewal of a lease, but it was a term of the lease that the payment of the rent should be guaranteed by three named guarantors. One of the guarantors had died before the exercise of the option. The lessees, upon the purported exercise of the option, naturally could not produce all three guarantors, but they offered instead to pay, in advance, the entire rent under the renewed lease or to secure it by a deposit of government securities sufficient for that purpose. The judge held that the contract was impossible of performance, because one of the specified parties could not concur in the guarantee. The only purpose of the guarantee being to secure the payment of the rent, and the tenants being able and willing to secure the rent beyond a peradventure, I am not certain that I would myself have been willing to decide the case against the tenants. But however that may be, the decision seems to me a long way from that with which I am concerned, and it does not give me any assistance. In Brilliant v Michaels (1945) 114 LJ Ch 5 the defendant agreed to let a flat from a future date at a rent in excess of the standard rent payable under the Rent Restriction Acts. The plaintiff sought specific performance. It was held on the facts that there was no consensus ad idem and therefore no binding agreement. However, the learned judge added this on the enforceability of the agreement had there been any agreement to enforce (I read from p 8): There is one other matter to which I think perhaps I ought to make some reference, since the point is a novel one on which there has been some argument. As I have already indicated, the rent, which was eventually settled in the final of these receipts, was a rent which appears to have been substantially in excess of what is called the standard rent applicable to these premises by virtue of the current rent restriction legislation. It is quite clear that, if two parties agree that one is to pay and the other is to receive a rent in excess of the so-called standard rent, neither that part of the bargain nor the whole contract is thereby rendered illegal. The fact is that in so far as the rent inserted or agreed upon is in excess of the standard rent, the excess is not recoverable at law. Had the plaintiff succeeded, the question would have arisen whether, in circumstances such as appear here, the court would have made an order for specific performance of an agreement, a material term of which was not wholly enforceable at law. In the circumstances which have happened, it is unnecessary for me to reach a final conclusion, but for what it is worth, I will say that I am not yet satisfied that the court ought to grant specific performance, having regard to the form of decree common in these cases, of an agreement one term of which to the knowledge of the court is unenforceable in whole or in part, particularly where, as in this case, the subject-matter, the rent and the limitation of the amount of rent, which can be charged, is a matter of public policy. I therefore say, without expressing it any more affirmatively than that, that I am not satisfied that it would be right in such a case to grant a decree of specific performance with such a term as to rent in the agreement. Lastly, counsel for the landlords, referred me to Maurey v Durley Chine (Investments) Ltd [1953] 2 QB 433. In that case there was a furnished tenancy for a term expiring on June 24 1953 at a rent of £525. On March 30 1949 the tenant was granted for good consideration an option for the immediate grant of a new lease for the further term of seven years from June 24 1953 at the like rent of £525. The tenancy due to end in June 1953 unless the option were exercised was within the Furnished Houses (Rent Control) Act 1946. In 1950, the rent was fixed under the Act at the reduced rate of £425 per annum. In December 1951 the tenant purported to exercise the option. At that date the 1946 Act, originally due to expire in 1947, had been extended to March 1953. Later on, it was extended to March 1954. The position therefore was that at the date when the option was exercised (December 1951) and the new lease ought to have been forthwith executed, the new lease would not have been subject to any legislative rent restriction at the moment it commenced, although by the time the term of the new lease fell into possession such a restriction had come into existence. The option was held to have been validly exercised. However, Jenkins LJ, reading the judgment of the court, added this: If at the time when the new lease ought to have been granted (that is, forthwith after the exercise of the option) the duration of the Act of 1946 as then fixed had extended beyond the date of the commencement of the new term (namely June 24 1953), we would, as at present advised, have been disposed to hold the defendants relieved on the ground that the new lease could not lawfully have been granted at a recoverable rent of £525 per annum, and that the agreement under which it was to have been granted had accordingly become impossible of performance because it could not be legally performed. The cases which I have read seem to come to this, that if a contract is made, whether by ordinary offer and acceptance or by the grant and exercise of an option, for a sale or lease at a price or rent which is greater than that which can be lawfully recovered at the time when the contract is due to be performed, the court will not force the bargain upon the parties, because it is not a bargain which can lawfully be implemented according to its terms. These authorities are not, in my view, decisive of the present case. Here the option is not, in terms, an option for the grant of a lease at a rent which exceeds the permitted rent. It is an option for the grant of a lease at a rent which is determined to be ‘the commercial yearly rack-rent at which the demised premises might reasonably be expected to be let in the open market.’  A somewhat similar formula was considered in Rawlance v Croydon Corporation [1952] 2 QB 803. The case arose under section 9 of the Housing Act 1936. This section provided that where a local authority was satisfied that a house was unfit for human habitation they might serve a notice to repair upon78 the person having control of the house, and that was defined as the person who received the rack-rent of the house or would receive it if the house were let at a rack-rent. ‘Rack-rent’ was defined as rent which was not less than two-thirds of the full net annual value of the house. A notice was served on the respondent in respect of a house let by him at a yearly rent of £45. This was the permitted rent under the Rent Restriction Acts. It was admittedly less than two-thirds of the annual value of the house on the supposition that the house was outside the ambit of the Acts. Nevertheless it was held that the respondent was in receipt of a rack-rent, because he was receiving the full rent which he was capable of receiving by law. I quote this passage from the judgment of Romer LJ: When the legislation was first introduced into our economic and social system, and it may be for some considerable time thereafter, landlords still received a profit rental although they were in the main precluded from increasing it. The general trend of the legislation has long since resulted in landlords only receiving rentals which are usually a great deal less than those received by owners of equivalent but uncontrolled properties. Nevertheless this change cannot alter the fact that landlords who are affected by the legislation are undoubtedly receiving the full rent which their properties are capable of yielding, in the sense that they are receiving the maximum which is permitted by the law. In other words, they are receiving the ‘rack-rents’ of their premises. The argument to the contrary overlooks the fact that value is not an absolute but a relative conception. The value of any particular thing can only be ascertained in the light of circumstances which affect or control its disposability. For example, the apparent owner of property might have some defect in his title which would lessen its selling value below that of another similar property the title to which was flawless. Similarly in the present case the rack-rent or annual value of the property in question is conditioned by the fact that its owner cannot increase its annual yield beyond the permitted maximum. In my opinion the legislature, in section 9, was applying itself to a factual and not to a hypothetical position. If the standard rent is the greatest rent that is obtainable in respect of any particular premises then it is the full rent of those premises, the rack-rent, notwithstanding that (and indeed because) the owner is restricted from receiving the higher rent which the premises, if uncontrolled, would command. The Rawlance case was recently applied by the Court of Appeal in Gidlow-Jackson v Middlegate Properties Ltd [1974] 1 QB 361 when considering the meaning of ‘the letting value of the property’ in section 4 of the Leasehold Reform Act 1967. In the result, I do not think that there is any impossibility involved in an agreement by a landlord to grant a lease at ‘the commercial yearly rack-rent at which the demised premises might reasonably be expected to be let in the open market’ notwithstanding that the rent is controlled by statute. The case is not in essence different from any other case in which the quantum of rent is reduced by some form of legislative control. Take this example by way of illustration. A dwelling-house may be lettable at a low rent because it lies in a district zoned for residential occupation, but if it were available for office use it might be let at a much higher rent. Nevertheless the lower rent is truly a rack-rent. No doubt there are other cases in which the hand of the legislature precludes the realisation of the highest rent potential of a property. Value, as Romer LJ said, can only be ascertained in the light of factors which affect or control its disposability. In the result, I decide that the plaintiff, having exercised the option, is entitled to an order for specific performance. I will hear argument as to the form of order appropriate to the circumstances. Strictly speaking, the rent is a matter for arbitration, but proceedings for arbitration should have been commenced in September 1972. Perhaps the parties can agree the rent so as to avoid the formalities and the expense of an arbitration, if that is still the appropriate mode of determination in the absence of agreement.