- Where a landlord is opposing the grant of a new lease to a tenant on the ground that the landlord intends to occupy the premises itself, the court has to decide whether the landlord's intention is made out on the assumption that the landlord (and not the tenant) is in possession of the premises at the end of the tenancy
- In calculating the rent payable while the tenant is holding over (under the Landlord and Tenant Act 1954), the court's main objective will be to determine the rent that it is reasonable for the tenant to pay
Facts of Humber Oil Terminals Trustee Ltd v Associated British Ports
The premises at the centre of this case were somewhat unusual. The landlord owned and ran a port on the river Humber. The tenant leased an oil terminal at the port, which served oil refineries which were run by the tenant.
The landlord and tenant have been to court a number of times in connection with the ending of the lease. The landlord opposed the grant of a new lease to the tenant on the ground that it intended to occupy the premises itself for the purposes of a business (known as "ground (g)" for the purposes of the Landlord and Tenant Act 1954). In the most recent instalment, the tenant appealed the High Court's finding that the landlord was entitled to recover possession of the premises under the 1954 Act on that ground.
Was the landlord entitled to recover possession?
The landlord stated that it intended to occupy the premises for the purposes of a business providing port facilities and services, with a view to ensuring the continuity of supply to the tenant's oil refineries but also exploring the use of the terminal by third parties.
In order to establish ground (g), the landlord had to show that it:
- had a fixed and settled intention to occupy the premises for the purpose of a business; and
- had a reasonable prospect of being able to do so.
The tenant challenged the High Court's conclusion that the landlord had a reasonable prospect of being able to run the terminal itself. The tenant argued that the landlord could not implement its intention without the complete assistance of the tenant.
The tenant was entitled to remove the infrastructure at the terminal on the termination of the lease, but to provide a continued service the landlord would need to acquire this infrastructure. Similarly, the landlord would need the expertise of the tenant's personnel, as well as software and systems manuals.
The High Court had ruled that the most likely outcome, if the landlord was successful and the lease were to terminate, was that the landlord and tenant would come to a commercial arrangement to enable the tenant to continue using the terminal to service the refineries. This was because the tenant was a commercial organisation which at the end of the day would be guided by economics, and not by any desire to "spite" the landlord.
The tenant submitted that this finding was circular. It allowed the landlord to rely on what would happen if the landlord was successful, in order to decide whether the landlord should be successful in the first place.
The Court of Appeal disagreed. It ruled that a landlord opposing the grant of a renewal lease under ground (g) had to establish what it intended to do "on the termination of the current tenancy". This involved making an assumption that it was the landlord, and not the tenant, that was in possession of the premises. The court could therefore take into account the landlord's notional dealings with the tenant in those circumstances. The appeal was dismissed.
Interim rent - principles
It can take a while for proceedings regarding a new lease to be determined one way or the other under the 1954 Act. During this time, the tenant will remain in occupation, paying the rent which was payable at the end of the contractual term. This will often be a rent which was set some years previously and market conditions may have changed in the interim. The Act therefore contains a mechanism for either party to apply for an "interim rent" to be paid, pending the grant (or refusal) of a new lease.
The landlord applied to the High Court for a determination of the amount of interim rent which should be paid by the tenant. The following principles govern the determination of the level of interim rent under the Act:
- The rent should be "the rent which it is reasonable for the tenant to pay
- The court should have regard to the rent payable under the terms of the current tenancy
- The court should apply the principles which regulate the level of rent under a new tenancy granted pursuant to section 34 of the Act, save that the court should assume a tenancy from year to year, rather than a fixed term tenancy. Broadly, section 34 requires an open market valuation, subject to certain prescribed disregards.
Interim rent - determination
The court ruled that the governing obligation on it was to set the interim rent at a level which was reasonable for the tenant to pay, and the other two guiding principles should be viewed in the light of that obligation.
One of the difficulties for the court was the unique nature of the premises which had to be valued and the fact that there were few, if any, comparables available.
The original lease was for a term of 40 years. The rent had been set by reference to the historic cost of construction of the oil terminal and there was no provision for rent review during the term. The lease exempted the tenant from any obligation to pay ships or goods dues. The rent payable under the existing lease was approximately £4 million per annum. The landlord proposed an interim rent of just under £25 million per annum.
The jetty at the oil terminal had been constructed by the landlord, but all the equipment fixed to it (which was necessary for it to function) had been installed by the tenant. Under section 34, tenant's improvements should be disregarded in setting the rent. The tenant argued that this meant that what had to be valued was a bare jetty, without any of the operating equipment. The rent for such a structure would be low, since it would not be capable of use until fitted out - which would take a couple of years and cost many millions of pounds. In addition, a prospective tenant would be unwilling to spend the necessary sums if all they were being offered was a lease from year to year (as required to be assumed by the 1954 Act), as opposed to a longer fixed term lease.
The court noted that there was a "strong air of unreality" about this argument, since the tenant had in fact been operating at the oil jetty throughout the whole of the period in respect of which interim rent was to be paid.
The court ruled that the correct way in which to calculate the interim rent was to use a Depreciated Replacement Cost (DRC) approach to valuation. This method of valuation is used where there is no active market for the asset being valued, so that there are no relevant comparables. In essence the DRC approach is to assume that the potential buyer of an asset would not pay more to acquire it than the cost of acquiring an equivalent new one. The costs of replacement are calculated and then a depreciation allowance applied to take account of the age of the asset, in order to arrive at a figure representing its current capital value. A decapitalisation rate would then be applied to that notional capital value to produce a return on that investment, which would be the annual rental figure.
In this case the DRC method of valuation was applied to the jetty alone, without the tenant's equipment, and in that way the equipment could be disregarded as required by the Act.
An additional element was then added to this amount to reflect the benefit to the tenant of the exemption from paying ships and goods dues. The court ruled that the net savings on this ground should be shared equally between the landlord and tenant.
This approach to the calculation of the interim rent paid due regard to the method of calculation of the rent under the existing tenancy, and was also in the court's view the measure which would be adopted on the open market.
Finally, the figure arrived at would be reduced by 10%, to reflect the fact that the court had to assume a yearly, as opposed to a fixed term, tenancy.
The application of this calculation produced an interim rent figure of approximately £14.8 million per annum. The court thought that this figure also had the right "feel" for an interim rent which it would be reasonable for the tenant to pay.
Things to consider
The oil refineries in this case account for about 25% of the oil refining capacity of the UK. The Department for Energy and Climate Change obtained an assurance from the landlord prior to the proceedings that, whatever happens, the terminal will continue to provide an effective level of service to the refineries - such is their operational importance.