B e f o r e :
THE HONOURABLE MR JUSTICE SALES
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Between:
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Humber Oil Terminals Trustee Limited ("HOTT")
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Claimant
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- and -
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Associated British Ports ("ABP")
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Defendant
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Mr Nicholas Dowding QC, Mr Mark Sefton (instructed by DLA Piper UK LLP) for the Claimant
Mr Christopher Nugee QC, Mr David Holland QC (instructed by Eversheds LLP) for the Defendant
Hearing dates: 30/1/12-10/2/12
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HTML VERSION OF JUDGMENT
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Crown Copyright ©
Mr Justice Sales :
Introduction
- This is the latest in a number of judgments in relation to legal proceedings between the Claimant ("HOTT") and the Defendant ("ABP") concerning the Immingham Oil Terminal on the Humber Estuary. The Terminal was built to accommodate oil tankers to supply crude oil to and take refined products from two refineries about 5 km inland (the Lindsey Oil Refinery, "LOR", and the Humber Oil Refinery, "HOR"). The legal proceedings are in respect of four leases of property which relate to the Terminal. The most important for the purposes of this judgment is the lease which relates to the oil jetty which protrudes about one kilometre into the Humber Estuary, and comprises seven berths for ships ("the Oil Jetty").
- In this judgment, unless indicated otherwise, I use the same terms as are set out and defined in the judgment of Mr Justice Vos in these proceedings, dated 29 July 2011 ([2011] EWHC 2043 (Ch) - "the New Leases Judgment"). Like him, I will use the abbreviation "IOT" to refer to the entirety of the premises demised by the four leases ("the Leases").
- The IOT facility was built in the late 1960s and the Leases were then entered into for periods of 40 years. ABP is the landlord under the Leases and HOTT the tenant. HOTT is jointly owned by the oil companies which own LOR and HOR, Total UK Limited ("Total") and ConocoPhillips UK Limited ("CoP") respectively. Although sharing an interest in HOTT, Total and CoP compete with each other in the oil market.
- The terms in the Leases came to an end in 2010. In advance of that, ABP served notices under the business tenancy provisions in Part II of the Landlord and Tenant Act 1954 ("the 1954 Act") to pre-empt claims by HOTT under the 1954 Act that ABP should grant it new leases. In its notices, ABP relied on section 30(1)(g) of the 1954 Act, claiming that it wished to take back possession of the property demised under the Leases in order to carry on a business of its own on it, namely to take on its own shoulders the operation of the Oil Jetty and IOT in order to allow the supply of crude oil to and the export of refined products from the Refineries over the Oil Jetty in return for payment by their owners. In turn, HOTT applied to court under section 24(1)(a) of the 1954 Act for the grant of new tenancies to it.
- On 28 June 2011 Morgan J ordered that the question whether ABP genuinely intends to occupy the demised property to carry on its own business there, so as to be entitled to take advantage of section 30(1)(g) of the 1954 Act, should be tried as a preliminary issue. Before that, HOTT had amended its pleadings to raise questions as to the lawfulness of any such intention of ABP as a matter of competition law, but by a judgment in February 2011 the Chancellor had struck out the amendments based on competition law ([2011] EWHC 352 (Ch)). By the time of the hearing before Morgan J, HOTT had issued a notice of appeal in respect of the Chancellor's decision. Therefore, in defining the preliminary issue to be tried and in order to avoid delay in fixing a hearing date for that trial while HOTT's appeal took place, Morgan J ordered that the preliminary issue should not include any question as to the lawfulness of ABP's intention as a matter of competition law.
- The preliminary issue, as defined by Morgan J, was tried by Vos J and is the subject of the New Leases Judgment. In the New Leases Judgment, Vos J found that ABP had established that it had the requisite intention in accordance with section 30(1)(g) of the 1954 Act to occupy the property demised under the Leases for the purpose of carrying on its own business there. Accordingly, subject to any appeal and subject to any issue of competition law, Vos J found that ABP has successfully given notice under the 1954 Act so as to defeat any right of HOTT to have new leases of the demised property granted to it.
- Since Vos J delivered the New Leases Judgment in July 2011, there have been two hearings in the Court of Appeal. The first was HOTT's appeal against the decision of the Chancellor striking out its competition law pleading in relation to the section 30(1)(g) case. That appeal was dismissed on 27 January 2012 ([2012] EWCA Civ 36). The second hearing was in respect of HOTT's appeal against the New Leases Judgment. It took place in March 2012, part way through the hearing before me. In a recent decision handed down on 10 May 2012 ([2012] EWCA Civ 596), the Court of Appeal has dismissed this appeal by HOTT as well.
- Whether or not HOTT is entitled to have new leases granted to it, a question arises regarding the level of interim rent to be paid by HOTT for its continued occupation and use of the demised property until such time as the question whether new leases should be granted or not is resolved. ABP has applied to the court under section 24A of the 1954 Act to determine the level of interim rent and the period for which it is to be paid. The date from which interim rent is payable is governed by section 24B and, in relation to the Oil Jetty Lease, is in dispute. The amount of interim rent payable is to be set in accordance with section 24D of the 1954 Act. These are the matters which I have to determine.
- At the start of the hearing before me, HOTT indicated that it wished to reserve its position in relation to possible arguments based on competition law which might affect the level of interim rent to be set by the court. I made an order by consent designed to afford HOTT an opportunity after having sight of this judgment to apply (if so advised) to amend its pleadings in relation to the issue of the level of interim rent to raise competition law issues for further consideration at a future hearing. The parties were agreed that they should proceed with the hearing before me to obtain at least a provisional ruling (subject to any future point of competition law to be raised hereafter) on issues regarding interim rent.
- By far the most significant of the issues which I have to determine is the level of interim rent in respect of the Oil Jetty Lease. In addition, I have to determine (i) the level of interim rent payable in respect of the Oil Depot Lease in relation to the grant of an easement for pipelines owned by HOTT which run across ABP's land (which complete part of the run of pipelines between the Refineries and the Oil Jetty) and (ii) the date from which the interim rent payable in respect of the Oil Jetty Lease should run (ABP says it should run from 1 January 2010; HOTT says it should run from 8 April 2010: the difference between them turns on a point of construction of the terms of the Oil Jetty Lease).
- The amount of the interim rent payable under the other leases relevant to the IOT has been agreed between the parties at £145,778 p.a. in relation to the land demised under the Oil Depot Lease; £142,500 p.a. in respect of what was termed the 10 Acre Lease; and £28,072.50 p.a. in respect of what was termed the 1.97 Acre Lease. The times at which the interim rent begins to become payable in relation to those other leases are not in dispute. The time at which the interim rent under all the Leases ceases to be due will be when the claims and cross-claims in respect of the grant of new leases under the 1954 Act are finally determined. That date is not yet known.
Factual Background
- The basic factual background to the IOT, the Leases and the dispute between HOTT and ABP is helpfully set out by Vos J in the New Leases Judgment. It is convenient to set out some paragraphs of that judgment here, for ease of reference:
"1. This case concerns 4 leases of properties (the "Leases") comprising important parts of the Immingham Oil Terminal in the Humber Estuary. I shall use the abbreviation "IOT" to refer to the entirety of the premises demised by the Leases. Each year, about 20 million tonnes of oil and related products passes through the IOT to and from the Lindsey Oil Refinery ("LOR") and the Humber Oil Refinery ("HOR") (together the "Refineries"), some 5 kilometres away from the IOT. Total UK Limited ("Total") owns and operates the LOR, and ConocoPhillips UK Limited ("CoP") owns and operates the HOR.
2. The tenant under each of the Leases is Humber Oil Terminals Trustee Limited ("HOTT"), which is a joint venture company operated by Total and CoP. Total and CoP also own a joint venture operating company, Associated Petroleum Terminals (Immingham) Limited ("APT"), established to operate the IOT, other jetties, and the Common Pumping Station (the "CPS") for the Refineries.
3. The most important of the 4 leases relates to the Immingham Oil Jetty itself (the "Oil Jetty") which protrudes about one kilometre into the Humber Estuary, and comprises a total of 7 berths. There are three seaward deep water berths, two of which are suitable for VLCCs, allowing partly loaded vessels of up to 290,000 deadweight tonnes to dock. The 4 remaining berths are suitable for barges and coasters and are located to the West of the Oil Jetty on a finger pier. Total uses the Oil Jetty for all its imports of crude oil, but CoP does not, using another facility, the Tetney Monobuoy, further down the Estuary instead. CoP does however utilise about 30% of the Oil Jetty's capacity for import and export of finished product. Total uses the remaining 70% of the Oil Jetty capacity. It is common ground that, as things stand, the Oil Jetty is now operating at or very slightly below its full capacity.
The history of the operation of the IOT
9. The British Transport Docks Board ("BTDB"), a publicly owned corporation, was reconstituted and renamed as ABP by section 5(1) of the Transport Act 1981. Section 5(2) made provision for ABP to become a subsidiary of a holding company. That holding company, Associated British Ports Holdings plc ("ABPH"), was incorporated on 31st December 1982. Section 7(1) provided for ABP to continue as a statutory corporation. ABP is now in private ownership. Section 9(1) imposed a statutory duty on ABP to: "provide port facilities at its harbours to such extent as it may think expedient".
10. ABP owns and operates 21 UK ports and is the UK's largest ports group, holding about 23% of the market share. Immingham is the busiest port in the UK (by volume) and handled over 55 million tonnes of goods in 2008.
11. BTDB constructed the Oil Jetty at IOT between 1967 and 1969 pursuant to the Immingham Dock Revision Order 1966. Thereafter, HOTT installed a complex system of pipes and loading and unloading equipment pursuant to an agreement of 27th January 1967. The first pipeline was installed in 1967, and the Oil Jetty became partially operational in April 1969. As contemplated by the original terms of the lease of the Oil Jetty, in 1993-1994, ABP constructed, at HOTT's request, a third deep water berth.
12. Apart from the IOT, the Port of Immingham (the "Port") covers an area of some 1,100 acres, and is made up of numerous facilities including the Immingham Gas Jetty (the "IGT"), which is a specialist liquid bulks terminal handling vessels up to 50,000 deadweight tonnes for a variety of customers, and the Eastern and Western jetties (respectively the "Eastern Jetty" and the "Western Jetty"), which are also specialist liquid bulk terminals handling vessels up to 30,000 deadweight tonnes, also serving a variety of customers. The other terminals generally handle dry bulk cargoes.
13. The statutory background is that section 33 of the Harbours, Docks and Piers Clauses Act 1847 encompasses what is known as the "open ports" obligation, providing: that "[u]pon payment of the rates made payable by this
Act
the harbour, dock and pier shall be open to all persons for the shipping and unshipping of goods
". Section 26(2) of the Harbours Act 1964 allows a harbour authority such as ABP power to "demand, take and recover such ship, passenger and goods dues as they think fit". Section 27A of the same Act allows ABP to levy ship and goods dues or equivalent dues, to make other charges, and to make a combined charge including both, except where the payer objects. Section 31 of the Harbours Act 1964 allows those paying dues and charges imposed by a harbour authority to appeal to the Secretary of State. The definition of "ship, passenger and goods dues" in section 57 provides that such dues include those for any ship entering using or leaving the harbour, and in respect of services rendered or facilities provided in respect of goods brought into or taken out of the harbour.
The Leases
14. I have set out the details of the Leases in a schedule to this judgment. In short the 4 Leases are of 4 different properties as follows.
15. The lease of the Oil Jetty (the "Oil Jetty Lease") is the most important one. Clause 3(7) of the Oil Jetty Lease permits HOTT to remove "the Lessee's works" at the end of the term. The Lessee's works include the pipes and the loading and unloading equipment which HOTT installed. Clause 6(a) of the Oil Jetty Lease exempts HOTT from payment of ships and cargo dues. There was only one rent review after about 25 years.
16. The lease of 10 acres of land (the "Oil Depot") which comprises APT's offices and a tank farm (the "Oil Depot Lease") was granted on different terms to the Oil Jetty Lease. It contained three rent reviews, and a provision in clause 3(9) requiring HOTT to remove all buildings and erections on the Oil Depot if ABP requires it to do so at termination.
17. The lease of a further 10 acres of land (the "10 Acres") to the East of the Oil Depot (the "10 Acre Lease") was broadly on the same terms as the Oil Depot Lease.
18. The lease of a further 1.97 acres (the "1.97 Acres") to the North of the Oil Depot was also granted broadly on the same terms as the Oil Depot Lease."
- ABP is the harbour authority under the Harbours Act 1964 for the Port of Immingham. This means that it has statutory powers under section 26 of that Act to charge persons using the harbour with ship and goods dues. The Oil Jetty Lease contains an exemption in clause 6(a) from ship dues and goods dues for ships using the Oil Jetty and for crude oil and refined products passing across the Oil Jetty. This is potentially a valuable exemption for a person operating the Oil Jetty. Issues arise between the parties as to the significance of this provision when setting the interim rent.
- ABP is also the designated harbour authority under the Harbours Act 1964 for the Humber Estuary. In that capacity, it again has statutory powers to charge ship dues. The ship dues it charges in that capacity are designated as "conservancy charges" and are primarily levied to raise funds to facilitate navigation of the Estuary, including by dredging the channel for deepwater ships using it. There is no exemption in the Oil Jetty Lease in respect of these dues, so ships approaching the Oil Jetty up the Estuary are charged conservancy charges.
The relevant agreements and the Oil Jetty Lease
- A draft agreement between BTDB, HOTT and the oil companies which were to build and operate the Refineries (which were planned to be operational by 1 January 1970) was drawn up in 1967. This came to be known as "the Principal Agreement" and was implemented by the parties to it. Under the Principal Agreement BTDB agreed to construct the Oil Jetty as a bare jetty structure and let it to HOTT and HOTT agreed to carry out certain Lessee's Works on the jetty. The bare jetty was to include two large deepwater berths facing seaward (Berths 1 and 2) and four smaller berths on a branch jetty ("the finger pier") (Berths 6, 7, 8 and 9), and the agreement contemplated that HOTT would have the option to call for construction of other seaward facing berths at later times. The Lessee's Works were to include the installation of jetty equipment including loading booms for each of Berths 1 and 2, smaller loading arms for Berths 6, 7, 8 and 9 and a pipeline system on the jetty between the berths and the shore and then on to the Refineries to allow for crude oil to be off-loaded from vessels and pumped to the Refineries and refined products to be pumped from the Refineries in the opposite direction and loaded onto vessels moored at the berths.
- By further Heads of Agreement between the same parties dated 7 August 1969 ("the 1969 Heads of Agreement") they agreed certain modifications of the Principal Agreement and agreed that the Principal Agreement, as so modified, should be treated as having binding effect as from 27 January 1967. The 1969 Heads of Agreement and the Principal Agreement, read together, contemplated that leases would be granted by BTDB to HOTT of the Oil Jetty and land associated with the project (for a storage depot and tank farm adjacent to the Oil Jetty), with provision for payment of sums to BTDB in the interim prior to grant of the leases. By clauses 16 and 19 of the 1969 Heads of Agreement, leases in relation to the land associated with the project were to be for terms which would "determine on the 1st January 2010" or "expiring on 1st day of January 2010". By clause 22 of the 1969 Heads of Agreement, the lease to be granted in respect of the Oil Jetty (referred to as "the Second Lease") was to "commence on the 1st January 1970 and expire on the 1st January 2010".
- Certain terms were defined in the Principal Agreement which have significance in relation to the Oil Jetty Lease. "The Capital Sum" was defined in clause 1(i) of the Principal Agreement as the total of the costs, charges and expenses incurred by BTBD in carrying out its works to construct the Oil Jetty plus the capital value of the land which it contributed to the project. "The Annual interest sum" was defined to mean:
"the total amount of money which [BTDB] would have been required to pay annually as interest in respect of the Capital Sum if they had borrowed from the Minister of Transport each part of the Capital Sum on the day when such part was expended or in the case of the capital value of [BTBD]'s land and other parts of the Capital Sum not actually expended by [BTDB] had borrowed the amount thereof on the date of these presents. To The Intent that the annual interest sum shall represent interest on the whole of the Capital Sum from time to time expended or incurred computing each separate part thereof at the relevant interest rate hereby made applicable thereto."
- Clauses 23 and 24 of the 1969 Heads of Agreement provided:
"23. The initial rent payable under the Second Lease shall (subject to the next following Clause hereof) commence to accrue due from the 1st January 1970 and be the total of the following sums:
(i) 2% of the Capital Sum (subject to Clause 26(a) hereof)
(ii) 2½% of the Capital Sum
(iii) a sum equal to the Annual Interest Sum
(iv) the amount of the annual sums referred to in paragraph (iii) of Clause 4(a) of the Principal Agreement ("Headrent Payments") for the period specified in the Principal Agreement
24. The final amount of the Capital Sum and the Annual Interest Sum will not be known until after the 1st January 1970 therefore the rent reserved by the Second Lease shall not be expressed therein as a figure but as a formula whereby until the Ascertained Initial Rent is known rent is payable quarterly in arrear and each quarter's rent shall be:-
[formula set out]"
- The Oil Jetty Lease is dated 29 August 1970. It was entered into pursuant to the arrangements set out in the Principal Agreement and the 1969 Heads of Agreement. The Oil Jetty Lease provided for the grant by BTDB to HOTT of a lease in respect of the jetty and finger pier as already constructed by BTDB (Berths 1, 2, 6, 7, 8 and 9) and also provided HOTT with certain options to call for the construction of further seaward facing berths adjacent to Berths 1 and 2 and the inclusion of those further berths in the lease. In due course, HOTT did require BTDB to construct a further seaward facing berth (Berth 3), which was completed in 1993 and was then incorporated in the Oil Jetty Lease by a Deed of Variation dated 26 May 1993 ("the 1993 Deed of Variation").
- Under the terms of clause 1 of the Oil Jetty Lease, "the demised premises" are defined to be the jetties "now or hereafter constructed" (identified by reference to plans), "all dock and other equipment constructed thereon or attached thereto
and the Lessees' works and all additions or improvements to such land jetties equipment and works." "The Lessees' works" are defined to mean:
"
the several works and equipment constructed and installed by the Lessees upon the demised premises and any pipelines booms cargo handling equipment and similar works and equipment hereafter constructed or installed by the Lessees upon the demised premises
"
- Clause 2 of the Oil Jetty Lease provides in relevant part as follows:
"2. In consideration of the rents and Lessees' covenants hereinafter reserved and contained the Board hereby demise unto the Lessees ALL THAT the exclusive right to occupy use and maintain the demised premises and all dock and other works from time to time constructed thereon and the dock equipment constructed or intended for use in connection therewith Together with the following rights
(1) The right (subject to the terms of the exceptions and reservations hereinafter contained) to have the exclusive use of the Berths for the purpose of berthing Lessees' vessels
(2) The right to maintain and use equipment approved by the Board over the Berths such approval not to be unreasonably withheld
(3) A right of way for all purposes necessary for the enjoyment of the demised premises over the roadway between the demised premises and Queens Road
TO HOLD the demised premises unto the Lessees on and from the First day of January One thousand nine hundred and seventy for the term of Forty years YIELDING AND PAYING therefor
(a) Until the Determined Rent Quarter Day a quarterly rent payable on the First day of October One thousand nine hundred and seventy and thereafter on the First day of January the First day of April the First day of July and the First day of October in every year each of such quarterly rents being an amount equal to the Appropriate Quarterly Rent except the rent to be paid on the said First day of October one thousand nine hundred and seventy which shall be the total of the Appropriate Quarterly Rents in respect of the quarter years ending the First day of April One thousand nine hundred and seventy the First day of July One thousand nine hundred and seventy and the First day of October One thousand nine hundred and seventy
(b) On and after the Determined Rent Quarter Day an annual rent of the amount of the Ascertained Initial Rent such rent to be payable by equal quarterly payments in arrear on the said First day of January the First day of April the First day of July and the First day of October in every year
Such rents to be paid without any deduction (except deductions which the Lessees may by law be entitled notwithstanding any agreement to the contrary to deduct) the last quarterly payment to be made in advance if required by the Board Provided That the said rent shall be subject to variation in accordance with the provisions of Clauses 8 and 9 hereof so that such rent shall be increased upon the Extension Date of each Works Addition and shall be varied on the First day of January One thousand nine hundred and ninety five and (where appropriate) on the Twenty-fifth Anniversary of the Extension Date of each Works Addition."
- Clause 3(7) provides:
"3. The Lessees for themselves and their assigns hereby covenant with the Board in manner following that is to say:-
Yielding up
(7) At the expiration or sooner determination of the said term quietly and peaceably to deliver up the demised premises leaving the same other than the Lessees' works in good and substantial repair and condition having first (if requested by the Board so to do or if the Company shall so elect) removed all or (according to such request or election) some of the Lessees' works and having made good to the reasonable satisfaction of the Board all damage occasioned to the remainder of the demised premises by or in such removal."
- Clause 6(a) contains the exemption from ship and goods dues at the Port of Immingham referred to above. It provides:
"6. IT IS HEREBY AGREED AND DECLARED as follows:-
(a) The Board shall not without the previous written consent of the Lessees levy or raise any dues in respect of Lessees' Vessels for calling at or loading or unloading any Lessees' Oil and Products or goods at the demised premises or using the Berths or any dues in respect of goods handled at the demised premises or passengers using the demised premises or in respect of any vessel for calling at the demised premises for bunkering PROVIDED THAT this sub-clause shall not relate to or affect any dues or payments which were formerly leviable by or payable to the Humber Conservancy Board or are payable or leviable by the Board as successors to the Humber Conservancy Board or in respect of any of the functions or duties of the Board as Conservancy Authority
"
- Clause 7 set out the options for HOTT to call for extensions of the Oil Jetty to be constructed. Clauses 8 and 9 provide in relevant part as follows:
"8. IF and so often as the Lessees shall have given a notice under the terms of the last preceding Clause hereof then the following sub-clauses shall take effect in relation to the Works Addition effected under the terms of such notice
(a) The Lessees shall pay to the Board on each First day of January and First day of July before the Extension Date and on such Extension Date interest at the Appropriate Rate on all parts of the Further Capital Sum expended by the Board up to the date of such interest payment falling due computed from the date when such sums were expended or the date when interest on such part was last paid (whichever shall be the later) up to the date of such payment of interest falling due
(b) As from the Extension Date the rent payable hereunder shall be increased by the total of the following sums
(i) The Further Annual Interest Sum
(ii) A sum ascertained by dividing the Further Capital Sum by the number of complete years of the term hereby granted that shall remain unexpired at the Extension Date
(iii) Two per cent of the Further Capital Sum (which sum of Two per cent is hereinafter referred to as "The Additional Management Sum")
9. On the First day of January One thousand nine hundred and ninety-five the rent hereby reserved shall be increased or decreased (as the case may be) for the residue of the said term by a sum which represents the difference between the purchasing power of the Original Management Sum on the said First day of January One thousand nine hundred and ninety-five and the purchasing power of the Original Management Sum on the First day of April One thousand nine hundred and sixty-nine such difference to be computed by reference to the Index Figure published for the month in which each such date respectively falls To the intent that the said rent shall be increased if the said purchasing power shall have decreased in the said period and decreased if the said purchasing power shall have increased in such period."
- The "Original Management Sum" referred to in clause 9 is defined in clause 1 to mean "a sum equal to Two per cent of the Capital Sum referred to and defined in [the Principal Agreement and the 1969 Heads of Agreement]".
- Berth 3 was added by extension of the Oil Jetty built by ABP (as BTDB had become hereafter in this judgment I shall use the name ABP) and equipped by HOTT, completed in 1993. The 1993 Deed of Variation changed certain definitions in the Oil Jetty Lease (of "the Appropriate Rate" and "Further Annual Interest Sum" in relation to interest payments), but provided that save as so modified the Oil Jetty Lease "shall continue in full force and effect in all respects".
- The result of the Principal Agreement, the 1969 Heads of Agreement, the Oil Jetty Lease and the 1993 Deed of Variation was that ABP constructed the bare jetty structure in place at the IOT now, consisting of the three seaward facing deep berths (Berths 1, 2 and 3) and the four smaller berths on the finger pier (Berths 6, 7, 8 and 9). The berths are connected to shore by a road which is part of the bare jetty structure constructed by ABP. HOTT, on the other hand, constructed the pipework on the jetty which connects the berths to the shore, to the tank farm at the base of the Oil Jetty and to the Refineries. It also installed the loading equipment on each berth and the fire equipment which health and safety legislation requires to be maintained on the Oil Jetty.
- The pipework, loading equipment and fire equipment is all firmly fixed to the bare jetty structure and in the eyes of the law has become part of the real property constituted by the Oil Jetty.
- The bare jetty structure includes an arch close to the finger pier ("the access arch") to facilitate the passage of barges and smaller transportation vessels to and from the berths on the finger pier, which are suitable for use by such vessels. By contrast, Berths 1, 2 and 3 are suitable for use by Very Large Crude Carriers ("VLCCs", i.e. large ocean-going oil tankers), albeit (for the largest kind) only if they are partially empty. The Humber Estuary to Immingham and Berths 1, 2 and 3 are not deep enough to accommodate the largest VLCCs if fully loaded.
- The Oil Depot Lease is also dated 29 August 1970. It was granted for a term expressly expiring on 1 January 2010.
The 1954 Act and the Notices served by the parties
- Part II of the 1954 Act (as amended in 1969 and 2003) applies to business tenancies. Section 24(1) provides:
"Continuation of tenancies to which Part II applies and grant of new tenancies
24(1) A tenancy to which this Part of this Act applies shall not come to an end unless terminated in accordance with the provisions of this Part of this Act; and, subject to the following provisions of this Act either the tenant or the landlord under such a tenancy may apply to the court for an order for the grant of a new tenancy
(a) if the landlord has given notice under [section 25 of this Act] to terminate the tenancy, or
(b) if the tenant has made a request for a new tenancy in accordance with section 26 of this Act.
"
- Section 24A(1) provides:
"Applications for determination of interim rent while tenancy continues
24A(1) Subject to subsection (2) below, if
(a) the landlord of a tenancy to which this Part of this Act applies has given notice under section 25 of this Act to terminate the tenancy; or
(b) the tenant of such a tenancy has made a request for a new tenancy in accordance with section 26 of this Act,
either of them may make an application to the court to determine a rent (an "interim rent") which the tenant is to pay while the tenancy ("the relevant tenancy") continues by virtue of section 24 of this Act and the court may order payment of an interim rent in accordance with section 24C or 24D of this Act."
- Section 24B(1) and (2) provides:
"Date from which interim rent is payable
24B(1) The interim rent determined on an application under section 24A(1) of this Act shall be payable from the appropriate date.
(2) If an application under section 24A(1) of this Act is made in a case where the landlord has given a notice under section 25 of this Act, the appropriate date is the earliest date of termination that could have been specified in the landlord's notice."
- Section 25C provides for the amount of interim rent where a new tenancy is granted pursuant to the 1954 Act and the landlord does not oppose the grant of such tenancy. Section 24D provides for the amount of interim rent in any other case. It is the main applicable provision in the present proceedings. It provides, in relevant part, as follows:
"Amount of interim rent in any other case
24D(1) The interim rent in a case where section 24C of this Act does not apply is the rent which it is reasonable for the tenant to pay while the relevant tenancy continues by virtue of section 24 of this Act.
(2) In determining the interim rent under subsection (1) above the court shall have regard
(a) to the rent payable under the terms of the relevant tenancy; and
(b) to the rent payable under any sub-tenancy of part of the property comprised in the relevant tenancy,
but otherwise subsections (1) and (2) of section 34 of this Act shall apply to the determination as they would apply to the determination of a rent under that section if a new tenancy from year to year of the whole of the property comprised in the relevant tenancy were granted to the tenant by order of the court.
"
- Section 25, headed "Termination of tenancy by the landlord", provides:
"25(1) The landlord may terminate a tenancy to which this Part of this Act applies by a notice given to the tenant in the prescribed form specifying the date at which the tenancy is to come to an end (hereinafter referred to as "the date of termination"): Provided that this subsection has effect subject to the provisions of section 29B(4) of this Act and the provisions of Part IV of this Act as to the interim continuation of tenancies pending the disposal of applications to the court.
(2) Subject to the provisions of the next following subsection, a notice under this section shall not have effect unless it is given not more than twelve nor less than six months before the date of termination specified therein.
(3) In the case of a tenancy which apart from this Act could have been brought to an end by notice to quit given by the landlord [and provision is made for such cases]
(4) In the case of any other tenancy, a notice under this section shall not specify a date of termination earlier than the date on which apart from this Part of this Act the tenancy would have come to an end by effluxion of time.
(6) A notice under this section shall not have effect unless it states whether the landlord is opposed to the grant of a new tenancy to the tenant.
(7) A notice under this section which states that the landlord is opposed to the grant of a new tenancy to the tenant shall not have effect unless it also specifies one or more of the grounds specified in section 30(1) of this Act as the ground or grounds for his opposition.
(8) A notice under this section which states that the landlord is not opposed to the grant of a new tenancy to the tenant shall not have effect unless it sets out the landlord's proposals as to
(a) the property to be comprised in the new tenancy (being either the whole or part of the property comprised in the current tenancy);
(b) the rent to be payable under the new tenancy; and
(c) the other terms of the new tenancy."
- Section 26 provides for a tenant to request the grant of a new tenancy. Sections 29 and 29A govern the making of applications to court by landlord or tenant.
- Section 30(1) sets out the grounds on which a landlord may oppose an application by a tenant under section 24(1) requesting the grant of a new tenancy or may make an application himself under section 29 for an order for the termination of the tenancy where he has given notice under section 25 that he is opposed to the grant of a new tenancy to the tenant. In the present case, ABP has sought to rely on the ground set out in section 30(1)(g), saying that it intends to occupy the relevant property for the purpose of a business to be carried on by it. Vos J held in the New Leases Judgment that it had successfully made out that ground. Section 31(1) provides that if the landlord is successful in his opposition to a tenant's application under section 24(1), "the court shall not make an order for the grant of a new tenancy".
- Section 34 governs the rent to be payable if a new tenancy is granted by order of the court. It is relevant in this case because of the cross-reference to it in section 24D. Section 34 provides in relevant part as follows:
"Rent under new tenancy
34(1) The rent payable under a tenancy granted by order of the court under this Part of this Act shall be such as may be agreed between the landlord and the tenant or as, in default of such agreement, may be determined by the court to be that at which, having regard to the terms of the tenancy (other than those relating to rent), the holding might reasonably be expected to be let in the open market by a willing lessor, there being disregarded
(a) any effect on rent of the fact that the tenant has or his predecessors in title have been in occupation of the holding,
(b) any goodwill attached to the holding by reason of the carrying on thereat of the business of the tenant (whether by him or by a predecessor of his in that business),
(c) any effect on rent of an improvement to which this paragraph applies,
(d) in the case of a holding comprising licensed premises, any addition to its value attributable to the licence, if it appears to the court that having regard to the terms of the current tenancy and any other relevant circumstances the benefit of the licence belongs to the tenant.
(2) Paragraph (c) of the foregoing subsection applies to any improvement carried out by a person who at the time it was carried out was the tenant, but only if it was carried out otherwise than in pursuance of an obligation to his immediate landlord and
it was carried out during the current tenancy
".
- It was common ground that although section 34 does not refer in terms to a willing lessee (though it refers to "a willing lessor"), on its proper construction it is implied from the concept of a letting "in the open market" that both a willing lessor and a willing lessee are to be assumed for the purposes of assessing the rent to be set under this provision.
- Section 64 provides for the interim continuation of tenancies pending determination by a court. The statutory tenancy in respect of which the interim rent is payable extends to a date three months after the relevant application under section 24(1) or section 29(2) "is finally disposed of". In the circumstances of this case, that date is not yet known.
- Towards the end of the four leases in issue in these proceedings, ABP decided to issue notices under section 25 to set out its opposition on the grounds stipulated in section 30(1)(g) to the grant of new tenancies to HOTT. On 2 January 2009 ABP served a section 25 notice in respect of the Oil Jetty Lease to expire on 31 December 2009. In the event, there is a dispute whether that notice expired before the term stipulated in the Oil Jetty Lease (which HOTT contends only came to an end on 1 January 2010, not 31 December 2009), and hence whether this section 25 notice was valid. This dispute turns on a point of construction of the Oil Jetty Lease which I have to resolve. Against the possibility that this notice was not valid, ABP served a second section 25 notice in respect of the Oil Jetty Lease on 8 October 2009. Apart from issues arising under section 30(1), HOTT does not dispute the validity of this notice. The second notice was expressed to expire on 11 April 2010, but it is common ground that it could have been expressed to expire on 8 April 2010 and would still have been valid, so that - if it is necessary for ABP to rely upon the second notice by reason of the invalidity of the first - the "appropriate date" for the purposes of section 24B from which the interim rent would be payable (i.e. "the earliest date of termination that could have been specified in the landlord's notice") is 8 April 2010.
- On 24 June 2009, ABP served section 25 notices in respect of each of the Oil Depot Lease, the 10 Acre Lease and the 1.97 Acre Lease, each expressed to expire on 31 December 2009. It is common ground that the 1.97 Acre Lease expired on 31 December 2009 and hence that (subject to issues arising under section 30(1)) the section 25 notice in respect of it was valid. It is common ground that the Oil Depot Lease and the 10 Acre Lease each expired on 1 January 2010 and hence that the section 25 notices served in respect of them were invalid. On 21 July 2009 ABP served further section 25 notices in respect of each of those leases to expire on 24 January 2010, and it is common ground that (subject to issues arising under section 30(1)(g)) those notices were valid.
- On 21 December 2009 HOTT issued a claim for a new tenancy in respect of each of the four Leases under section 24 in the Great Grimsby County Court. On 15 January 2010 ABP served its defences opposing the grant of new leases on section 30(1)(g) grounds and applying for the determination of an interim rent. In March 2010 the proceedings were transferred to the Chancery Division of the High Court.
- The current passing rent payable under the Oil Jetty Lease is £1,511,910 p.a. (according to the formula in respect of the original construction works) plus £2,533,334 p.a. (according to the formula in respect of the additional construction works for Berth 3 from 1993), making a total of £4,045,244 p.a.. ABP's proposed interim rent under section 24D is £24,903,000 p.a.. HOTT's proposed interim rent under section 24D is £2,300,000 p.a..
- Although there are many points of difference in the respective analyses proposed by the parties, they are divided on two major issues in particular:
i) A large part of the increase in the interim rent proposed by ABP relates to what ABP submits a willing tenant would be prepared to pay for a lease of the Oil Jetty with the benefit of the ship and goods dues exemption in clause 6(a) (i.e. for a tenancy on the same terms as the Oil Jetty Lease other than those relating to rent: see section 24D(2) read with the opening words of section 34(1)). ABP maintains that this exemption is very valuable indeed. For various reasons, HOTT disputes that clause 6(a) should be treated as having the value which ABP maintains it does and indeed disputes that it has any bearing on the amount of the interim rent to be set;
ii) In setting the interim rent, HOTT submits that the 1954 Act requires the court to assess the rent that a willing landlord and a willing tenant would be prepared to agree for a yearly tenancy in relation to the bare jetty structure that is to say, it should be assumed that none of the Lessee's works are present on the structure and that pipework and equipment would have to be added to that bare structure by a notional incoming tenant in order to get the Oil Jetty up and running again. ABP's primary submission is to dispute that this is the proper approach to setting the interim rent under section 24D.
- HOTT's proposed analysis under section 24D by reference to a hypothetical bare jetty structure led to each party adducing evidence from various expert witnesses directed to assessing the way in which, if there really were a bare jetty in place, it could be equipped from scratch so as to be made operational (and hence able to supply services to the Refineries) and the costs involved in doing so. HOTT also relies on this analysis as one reason for denying that there would be any value to be attached to the dues exemption in clause 6(a) of the Oil Jetty Lease, since (it argues) the time which would be required to install equipment on the bare jetty would be greater than the two and a bit years over which the interim rent will be payable. Thus, according to HOTT, in the hypothetical scenario which section 24D requires the court to address, there would be no question of ships coming to moor at the Oil Jetty nor of any goods moving across it in the form of crude oil being delivered or refined products being loaded onto vessels, and so no tenant would consider the exemption from ships and goods dues to have any significant value.
- There was a strong air of unreality about all of this. In fact, during the interim rent period from early 2010 the Oil Jetty has been in constant use by ships, with approximately 20 million tonnes of goods passing across it each year.
- The sense of unreality also stemmed from the fact that section 24D requires the court to assume that there is a letting of the premises on a yearly basis (i.e. so that any tenancy could be brought to an end after a year upon the giving of proper notice, and subject to questions regarding the operation of the protective regime for tenants under Part II of the 1954 Act). As Mr Dowding QC for HOTT was at pains to emphasise, this would mean that the notional tenant would be in a precarious position if it invested heavily in fitting out the Oil Jetty with pipework and dock equipment, since it would be at risk of losing the great bulk of the value of its investment after a year or so if, for example, the landlord served a notice to terminate the tenancy on the ground that it now wished to carry on a business itself on the Oil Jetty (as has in fact happened in this case). Mr Dowding made this point in support of submissions for HOTT that the interim rent should be fixed at a low level. On any view, the capital investment required to equip a bare jetty to render it operational would be very great, and I find it doubtful that - if one really were starting from scratch with a bare jetty - anyone would spend the money required for that without having a far longer period of assurance that the tenancy could not be terminated, in order to have a reasonable period over which to earn an income from the equipped jetty to justify the initial substantial investment required to equip it. By comparison, HOTT was granted a lease for 40 years when it undertook an equivalent exercise in the late 1960s.
- Mr Dowding submitted that, notwithstanding the unreality in the exercise, an analysis proceeding from the assumption of a bare jetty is what section 24D, on its proper construction, requires.
The regime of charges under the Harbours Act 1964
- In light of the issues surrounding the value of the contractual exemption from ship and goods dues in clause 6(a) of the Oil Jetty Lease, it is necessary to say something about the regime of charges under the Harbours Act 1964. This Act was introduced after a major review of legislation in relation to ports carried out in 1962, contained in the Report of the Committee of the Inquiry into the Major Ports of Great Brtiain (Cmnd 1824, known as the Rochdale Report).
- By virtue of section 9(1) of the Transport Act 1981, ABP is under a duty to "provide port facilities at its harbours to such extent as it may think expedient". It is the harbour authority for the Port of Immingham and is also, distinctly, the harbour authority for the Humber Estuary. Section 57(1) of the Harbours Act defines "harbour authority" to mean:
"any person in whom are vested under this Act, by another Act or by an order or other instrument (except a provisional order) made under another Act or by a provisional order powers or duties of improving, maintaining or managing a harbour."
- Section 26(1) and (2) of the Harbours Act provides:
"26. Repeal of provisions limiting discretion of certain harbour authorities as to ship, passenger and goods dues charged by them.
(1) Subject to the following provisions of this Act, any statutory provision made with respect to a particular harbour authority shall cease to have effect in so far as (otherwise than by way of expressly providing for freedom from dues or in any other manner prohibiting the levying of a due) it limits the discretion of the authority as to the ship, passenger and goods dues chargeable by them at a harbour which, in the exercise and performance of statutory powers and duties, they are engaged in improving, maintaining or managing (whether by specifying, or providing for specifying, the dues to be levied, or fixing or providing for fixing, dues, or otherwise).
(2) Subject to the following provisions of this Act and to any such statutory provision made with respect to them in particular as expressly provides for freedom from dues or in any other manner prohibits the levying of a due, a harbour authority shall have power to demand, take and recover such ship, passenger and goods dues as they think fit at such a harbour as aforesaid.
"
- The meaning of "ship, passenger and goods dues" is defined in section 57(1) of the Act as follows:
"ship, passenger and goods dues" means, in relation to a harbour, charges (other than any exigible by virtue of section 29 of this Act) of any of the following kinds, namely,
(a) charges in respect of any ship for entering, using or leaving the harbour, including charges made on the ship in respect of marking or lighting the harbour;
(b) charges for any passengers embarking or disembarking at the harbour (but not including charges in respect of any services rendered or facilities provided for them); and
(c) charges in respect of goods brought into, taken out of, or carried through the harbour by ship (but not including charges in respect of work performed, services rendered or facilities provided in respect of goods so brought, taken or carried)."
- Section 27 of the Harbours Act provides in relevant part as follows:
"27. Certain charges of certain harbour authorities to be reasonable.
(1) In place of any limitation imposed, by a statutory provision made with respect to them in particular, on the discretion of a harbour authority as to charges (of any kind other than excepted charges) that may be made by them at the harbour which, in the exercise and performance of statutory powers and duties, they are engaged in improving, maintaining or managing (not being a limitation by way of expressly providing for freedom from charges or in any other manner prohibiting the making of a charge or by way of providing, by what form of words soever, that the charges shall be such as may be reasonable), there shall, by virtue of this subsection, be imposed the limitation that the charges shall be such as may be reasonable.
(2) For the purposes of the foregoing subsection the following shall be excepted charges, namely,
(a) ship, passenger and goods dues;
"
- Section 31 of the Harbours Act provides for a right of objection against ship and goods dues and other charges set by a harbour authority to the Secretary of State, as follows:
"31. Right of objection to ship, passenger and goods dues.
(1) Subject to the following provisions of this Act, charges to which this section applies are ship, passenger and goods dues other than combined charges within the meaning of section 27A of this Act; and references in this section to the rate at which any such charge is imposed are to the amount where no composition agreement applies and no specially agreed rebate is allowed
(2) Subject to subsections (10) to (12) below the provisions of subsections (3) to (6) below shall have effect where written objection to a charge to which this section applies imposed by a harbour authority at a harbour which, in the exercise and performance of statutory powers and duties, they are engaged in improving, maintaining or managing, is lodged with the Secretary of State by
(a) a person appearing to him to have a substantial interest; or
(b) a body representative of persons so appearing;
and the objection is expressed to be made on all or any of the following grounds, namely,
(i) that the charge ought not to be imposed at all;
(ii) that the charge ought to be imposed at a rate lower than that at which it is imposed;
(iii) that, according to the circumstances of the case, ships, passengers or goods of a class specified in the objection ought to be excluded from the scope of the charge either generally or in circumstances so specified;
(iv) that, according to the circumstances of the case, the charge ought to be imposed, either generally or in circumstances specified in the objection, on ships, passengers or goods of a class so specified at a rate lower than that at which it is imposed on others.
(4) Where the proper notice concerning the objection has been duly published, then so soon as practicable after the expiration of the time therein specified (but subject to the next following subsection), the Secretary of State shall, unless the objection has been withdrawn before the expiration of that time and no written representations in the matter have been made to him by any such person or body as is mentioned in subsection (3)(b) above before the expiration of that time, proceed to consideration of the charge and any representations made and, unless he is satisfied that he can properly proceed to a decision in the matter without causing an inquiry to be held with respect to it, shall cause an inquiry to be so held.
(6) The Secretary of State, after effect has been given to subsection (4) above, shall either
(a) approve the charge but set a limit (not being later than the expiration of twelve months from the date on which he approves it) to the period during which the approval is to be of effect, and give to the authority written notice that he has approved it, stating the limit set; or
(b) give to the authority such direction with respect to the charge as would meet objection thereto made on any of the grounds specified in subsection (2) above (whether that is or is not the ground, or is or is not included amongst the grounds, on which the objection whose lodging gives rise to the proceedings is expressed to be made).
"
- The effect of these provisions is that ABP is entitled under the Harbours Act to require payment of such ship and goods dues at the Port of Immingham "as they think fit" (section 26(2)); such dues are "excepted charges" and hence are not required to be set at a "reasonable" level under section 27; and there is a right of objection (in effect, an appeal) to the Secretary of State in relation to such ship and goods dues as ABP may set (section 31). On such an appeal, the Secretary of State may decide for herself on the merits of the case what ship and goods dues should be imposed she is not confined by law to simple review of a harbour authority's decision on ordinary public law grounds (such as by reference to a test of irrationality or Wednesbury unreasonableness).
- On an appeal under section 31, therefore, the Secretary of State is entitled to apply her own policy regarding the setting of ship and goods dues. She may, if she thinks it appropriate, adopt a policy of not interfering with the decision of the harbour authority provided that decision appears to be lawful.
- In the present case, ABP has made it clear that, absent any constraint in clause 6(a) of the Oil Jetty Lease or an equivalent term to be assumed as applicable in the notional tenancy in relation to which the interim rent is payable, it would wish to set ship and goods dues at a rate the market for use of the Oil Jetty would bear. Mr Nugee QC for ABP submits that the only material constraint upon ABP's freedom of action in setting such dues would be commercial competitive pressures in the market. He submits that the rent which a willing lessee would pay for tenancy of the Oil Jetty (as assessed under section 24D read with section 34) would be high, to take account of the benefit it would receive from being granted exemption from having to pay such dues.
- Mr Dowding disputed this. He submitted, inter alia, that there would be significant constraints upon the ship and goods dues which ABP could (absent clause 6(a) or equivalent) charge in respect of use of the Port and Oil Jetty deriving from the likely policy the Secretary of State would apply when determining an appeal pursuant to section 31 of the Harbours Act or from the general law. Legal constraints could arise under general domestic public law, as applicable to both ABP in setting dues under section 26 of the Harbours Act and to the Secretary of State in determining an appeal under section 31 of that Act, and under EU competition law (and equivalent domestic competition law). In that regard, I was referred to the decision of the European Commission dated 23 July 2004 in Case COMP/A.36.568/D3 Scandlines Sverige AB v Port of Helsingborg [2006] 4 CMLR 23 ("Scandlines"). That decision concerned a challenge to the setting by the Port of Helsingborg in Sweden of charges for ferry companies wishing to operate from the port.
- Both parties adduced expert evidence on the subject of the ship and goods dues which could be charged by ABP in respect of use of the Oil Jetty, absent clause 6(a) of the Oil Jetty Lease, having regard in particular to commercial and policy constraints.
- By virtue of section 30 of the Harbours Act, a harbour authority is required to publish its lists of charges. In relevant part, it provides:
"30. Duty of harbour and local lighthouse authorities to make available for inspection, and to keep for sale, copies of lists of certain charges.
(1) A list showing the ship, passenger and goods dues for the time being exigible
(a) by virtue of section 26 of this Act by a harbour authority at a harbour which, in the exercise and performance of statutory powers and duties, they are engaged in improving, maintaining or managing;
shall be kept at the harbour office and shall be open there during reasonable hours for inspection by any person without charge
(3) No ship, passenger or goods due exigible as mentioned in paragraph (a) or (b) of subsection (1) above shall be levied by, as the case may be the harbour authority or Board concerned if, at the time at which it is exigible, the authority or Board are in default in compliance with the requirement of subsection (1) of this section with respect to the keeping of a list of dues at the harbour office or the due is not shown in the list kept there at that time in compliance with that requirement;
"
The relevant market circumstances at the Port of Immingham
- In setting the interim rent, it is relevant to have particularly in mind the following prominent features of the factual context:
i) The Refineries are two of the nine oil refineries in the United Kingdom. In order to function productively, the Refineries need to receive supplies of crude oil and need to be able to transport refined products (such as petroleum) to their customers;
ii) The Refineries are linked by a spur to the national rail network and have facilities for filling up tankers on both trains and lorries to transport refined products. However, transportation of crude oil and refined products in bulk for any distance is likely to be most efficient and cost-effective by oil tanker by sea that is why the Oil Jetty was built in the first place and it is clear that the Refineries make extensive use of it;
iii) HOR has a pipeline connection to the Tetney Monobuoy farther out in the Humber Estuary (outside the jurisdiction of the harbour authority for the Port of Immingham and therefore not subject to ship and goods dues set by that authority), at which it is possible for oil cargo vessels to discharge crude oil for supply to HOR. In theory, the Tetney Monobuoy could also be used for the supply of crude oil to LOR as well; but HOR competes with LOR, and any grant of access by HOR to the Tetney Monobuoy for LOR would be a matter of negotiation, and if granted would be likely to be at a high price. In any event, it does not appear that the Tetney Monobuoy could handle the volume of crude oil currently being supplied to the Refineries via the Oil Jetty;
iv) In their commercial operations, the Refineries are heavily dependent on being able to use the Oil Jetty to obtain supplies of crude oil for refining and to transport out the refined products produced by them. Whoever owns the Refineries would thus have a strong incentive either to take a lease of the Oil Jetty (if one was on offer) to keep it operational or to enter into arrangements with whoever does control the Oil Jetty to pay them fees to keep it operational. This has been the assessment of ABP in deciding to seek the termination of HOTT's tenancy of the Oil Jetty and the property comprising the IOT, relying on the ground in section 30(1)(g) of the 1954 Act so as to interpose itself as the person to control and operate the Oil Jetty. In the New Leases Judgment Vos J found that ABP's reliance on that ground was made out, not least because the economics made it likely that Total and CoP would be prepared to deal with ABP to ensure that it worked to keep the Oil Jetty operational so as to service the Refineries: see in particular paras. [118]-[123] of the judgment. On the basis of the evidence available to me, I agree with Vos J in that basic assessment;
v) From the very little evidence before me regarding the current financial position of the Refineries, it seems that the LOR at least is currently operating at a loss, with its revenue depleted because of the poor state of the general economy. However, there was no significant suggestion that the Refineries would be likely to close down, even if their owners have to fund HOTT to pay a considerably increased rent in respect of the Oil Jetty (or if their owners had to pay ABP or some third party lessee of the Oil Jetty increased fees to secure the continued operation of the Oil Jetty for the benefit of the Refineries). The Refineries represent a major capital investment for their owners, with considerable fixed and variable running costs, and it is likely that their owners would wish to keep them in operation and would be willing (at least, for a period, while the general economy remains at a low ebb) to pay higher rent or fees to keep the Oil Jetty operational, so as to avoid still greater losses which would flow from having to shut the Refineries down or reduce their production. On the other hand, a background of unprofitable or only marginally profitable Refineries would tend to operate to temper the demands for increased rent or fees by ABP or any notional willing lessor of the Oil Jetty since, if the Refineries did eventually limit or stop their operations, that would deprive the Oil Jetty of most of its value to ABP or a lessee of it;
vi) The points made in sub-paragraph (v) above reflect the fact that there is a strong element of mutual dependency in the relations between ABP, as owner of the Oil Jetty, the operator of the Oil Jetty and the owners of the Refineries. There was no significant evidence that the Port of Immingham generally is suffering from an excess of demand as against the facilities other than the IOT which it has available for other users of the Port, such that the Oil Jetty could usefully be used to meet such excess demand. There are no other oil refineries which it could serve. It is the presence of the Refineries and their need to use the Oil Jetty that makes it a valuable asset. In turn, the Refineries would lose a significant part of their value (and might well be prevented altogether from operating in a profitable way) if they were unable to make use of the Oil Jetty;
vii) When the Oil Jetty was first built and equipped, and again when Berth 3 was added, it required very major capital outlay by each of ABP (to construct the jetty and its extension to Berth 3) and HOTT (to lay the pipelines and install loading arms, fire-fighting equipment and so on). In broad terms, they made equally vital contributions to the creation of a viable Oil Jetty. The Oil Jetty would not be a viable and valuable asset without the contribution made by either of them. In order for the Oil Jetty to be able to provide a valuable service to the Refineries there has to be the jetty structure (obviously) and (equally obviously) there has to be the pipelines and equipment installed on top of it. Neither element could be replaced without massive capital expenditure (in that respect, amongst others, the situation is rather different from the case of an office building or shop, where the costs of fitting it out may be relatively low, especially by comparison with the capital value of the whole).
- There are other facilities, apart from the Oil Jetty, for loading and unloading cargoes at the Port of Immingham, including two jetties ("the East Jetty" and "the West Jetty") which are also connected by pipelines via the tank farm by the Oil Jetty to the Refineries and are capable of handling transportation of refined products into smaller cargo vessels (not VLCCs); the Immingham Gas Jetty (handling liquid gas); and the Humber International Terminal ("the HIT", handling bulk dry goods, in particular coal).
The main rival submissions in outline
- ABP contends that the governing feature of section 24D of the 1954 Act is that the interim rent should be that "which it is reasonable for the tenant to pay" (section 24D(1)), and that this should be taken to inform the application of the more detailed guidance in section 24(2). ABP disputes HOTT's contention that the interim rent should be set by reference to a hypothetical assumption that one starts, at the beginning of the interim rent period, with a bare jetty and then tries to work out how quickly and at what cost the bare jetty could be equipped with pipelines, loading arms, fire-fighting equipment and so forth. Mr Nugee submits that that is an artificial exercise, not required by the statute and, indeed, inconsistent with the requirement in section 24D(1) to set a rent which is "reasonable for the tenant to pay".
- On ABP's primary case, Mr Nugee accepts that although the interim rent is set by reference to the hypothetical assumption that it is paid in respect of "a new tenancy from year to year of the whole of the property comprised in the relevant tenancy" (section 24D(2)), and that "the whole of the property comprised in the relevant tenancy" includes all the Lessee's Works (i.e. the pipelines, loading equipment, fire-fighting equipment and so forth, which by being fixed to the land and jetty have all become part of the property which is demised to HOTT under the Oil Jetty Lease), nonetheless HOTT should not be required to pay a rent which is inflated by reference to the value of the Lessee's Works, in so far as they are improvements falling within the disregard set out at section 34(1)(c) read with section 34(2). This disregard does not apply to the Lessee's Works which were installed before HOTT became the tenant in relation to the property: see the opening part of section 34(2). Since HOTT only became a tenant in relation to the Oil Jetty on 1 January 1970, that means that most of the Lessee's Works in laying pipelines to and equipping Berths 1, 2, 6, 7, 8 and 9 do not fall to be disregarded in setting the rent. The parties have agreed a statement of the pipelines and equipment which were installed on the Oil Jetty before that date (by contrast, the improvements in relation to equipping Berth 3 all occurred during the current tenancy). Nor does the statutory disregard apply in relation to any of the fire-fighting equipment, since it is common ground that that equipment was installed pursuant to an obligation owed by HOTT to ABP (i.e. it was not installed "otherwise than in pursuance of an obligation to [HOTT's] immediate landlord", as required by section 34(2)) to ensure that all relevant health and safety legislation was complied with in relation to the operation of the Oil Jetty.
- Where the statutory disregard for improvements does apply, or in relation to any other basis for applying a disregard in relation to the Lessee's Works for which HOTT contends, Mr Nugee submits that it is given proper effect not by making an assumption that such pipelines or equipment as are covered by such disregard are assumed not to be present at all on the jetty (and so would have to be installed), but rather by reducing the overall value of the Oil Jetty (as furnished with such pipelines and equipment) by an amount in proportion to the cost of installing them, and reducing the rent to be paid by an appropriate amount accordingly. Mr Nugee says that this is all that is required in order to achieve the disregard of "any effect on rent" of a relevant improvement, as required by section 34(1)(c), and moreover that this application of the legislation is supported by the governing requirement in section 24D(1) to identify a "reasonable" rent.
- In assessing an appropriate open market rent in respect of the Oil Jetty for the purposes of section 24D(2) and section 34, Mr Nugee submitted that the primary basis for such an assessment should be a comparison with a recent transaction in 2009 involving the letting of another oil jetty, at Tranmere on the River Mersey ("the Tranmere jetty"), by its owners, Peel Ports, to Shell UK Limited ("Shell") for use in conjunction with Shell's oil refinery nearby at Stanlow. He also relied, in particular, on a rental figure to be derived from a valuation of the Oil Jetty based on the Depreciated Replacement Cost ("DRC") of the asset with an additional element to reflect the value of the clause 6(a) exemption from ship and goods dues.
- On the latter approach, according to Mr Nugee, the benefit of the equivalent in the notional yearly tenancy of the exemption from ship and goods dues in clause 6(a) in the Oil Jetty Lease - as, under sections 24D(2) and 34(1), the court is required to assume - is a distinct item, for which a willing tenant would be expected to pay a considerable amount by way of increased rent, reflecting a large proportion of the value of the ship and goods dues which it would but for the exemption otherwise have to pay. On Mr Nugee's proposed approach, the Oil Jetty is taken to be fully operational in the usual way (as in fact has been the case) throughout the period when the interim rent is payable, so what is in issue here are the ship and goods dues which would have been payable in relation to about 20 million tonnes of crude oil and refined products passing across the Oil Jetty each year. On the basis of the expert evidence in relation to ship and goods dues adduced by ABP, Mr Nugee says that the amount of the ship and goods dues foregone is about £1.42 per tonne. With the support of an expert valuer, he contends that the interim rent should be increased by a sum equivalent to about 75% of the net savings in respect of ship and goods dues which the assumed contractual exemption would achieve.
- Mr Nugee was wary about the court placing significant weight on the factor identified in section 24D(2)(a) ("the rent payable under the terms of the relevant tenancy", i.e. under the Oil Jetty Lease). However, he disputed Mr Dowding's suggestion that the rent payable under the Oil Jetty Lease was fully adjusted for inflation over time. Mr Nugee submitted that, on the contrary, only a small part of it was so adjusted and that I should have regard to the fact that if one did fully adjust for inflation according to the Retail Prices Index since 1970 that would imply a rent greater than the current passing rent under the Oil Jetty Lease and well above the £2.3 million that HOTT submits should be set as the interim rent.
- The primary case for HOTT, presented by Mr Dowding, is that section 24D(1) does not have the governing effect argued for by Mr Nugee; rather, section 24D(2) (read with section 34) sets out how the interim rent is to be assessed. He submits that as HOTT paid for the installation of the Lessee's Works and has a contractual right to remove all of them at the end of any relevant tenancy (by virtue of clause 3(7) of the Oil Jetty Lease or equivalent term in the notional yearly tenancy under section 24D), and hence in a certain sense is to be regarded as the owner of them (even though he accepts that they are affixed to and have, in the eyes of the law, become part of the jetty owned by ABP), in setting the interim rent it must be assumed that none of the Lessee's Works are present on the jetty. In the alternative, relying primarily on certain comments in New Zealand Government Property Corporation v H.M. & S. Ltd [1982] 1 QB 1145 (CA) ("the New Zealand case"), he submits that all the Lessee's Works qualify as "tenant's fixtures" for the purposes of the law of landlord and tenant, and that on that basis also they must be disregarded in setting the interim rent again, by making the assumption that none of the Lessee's Works which qualify as "tenant's fixtures" are present on the jetty.
- If he fails on those submissions, Mr Dowding relies finally on the statutory disregard in respect of improvements (section 34(1)(c) and (2)). There is agreement regarding which of the Lessee's Works qualify as relevant improvements for these purposes. However, there is sharp disagreement as to the way in which the disregard should operate. Mr Dowding submits, in line with his other submissions, that it is necessary to assume that none of the Lessee's Works which qualify as relevant improvements for the purposes of section 34(1)(c) are present on the jetty. This assumption is required by the words of section 34(1)(c), Mr Dowding says, since otherwise one does not disregard "any effect" on rent which the improvement has, because the Oil Jetty is only a valuable asset to the extent that it is equipped by way of the Lessee's Works (cf para. [62] above).
- Mr Dowding did not accept that the Tranmere jetty transaction provided a suitable comparable transaction for use in assessing the interim rent payable in relation to the Oil Jetty. He proposed that the court should focus rather on the DRC-based method to arrive at a rental figure for the relevant property (his primary submission being that this was just the bare jetty structure), and denied that any significant value should be given in relation to clause 6(a). In that regard he made a number of submissions, including that clause 6(a) is not a distinct element of the tenancy but simply part of the overall deal or package agreed between ABP and HOTT for which the rent payable under the Oil Jetty Lease and now to be derived from the DRC in respect of the jetty is the full consideration. He further submits that, having regard to HOTT's contention that the court is required to assume that there is only a bare jetty and that the Lessee's Works or parts of them are not currently present on the jetty structure and to the expert evidence regarding the steps which would be required to make the Oil Jetty operational again, the Oil Jetty could not have been made operational at any time during the period when interim rent is due or in the near future (so far as relevant to assessment of rent in relation to a yearly tenancy). Accordingly, he submitted that on this basis also the interim rent should not be increased to take account of this element in the Oil Jetty Lease.
- Like Mr Nugee, Mr Dowding was wary regarding what weight, if any, should be attached to the factor referred to in section 24D(2)(a). On the whole, he took a firmer line than Mr Nugee in submitting that it was not a factor which ought to carry weight in the context of the present case.
- It is relevant to observe at this stage that a significant part of the underlying tension in the submissions between the parties stems from the nature of the Oil Jetty as the product of contributions by both sides it would have no significant value if there were no jetty structure, nor if there were a jetty structure but no pipelines and other equipment installed on it (para. [62] above); but it is a very valuable composite asset. At points in its submissions, particularly in claiming substantial benefit from the effect of clause 6(a) of the Oil Jetty Lease, ABP sought to take the benefit of the valuable composite asset without equal allowance for the contribution made by HOTT in installing the Lessee's Works. Conversely, at points in its submissions, particularly in inviting the court to assume that there is only a bare jetty, HOTT sought to take advantage of the fact that without the Lessee's Works being in place the Oil Jetty would in large part be stripped of value. However, in setting the reasonable rent payable under section 24D the court should be careful to avoid unfair "ransom" effects which may arise from one party or the other seeking to attribute excessive significance to its own contribution to the production of overall economic benefits to be shared between them.
The evidence
- Most of the oral evidence which I heard was expert evidence of one sort or another. Expert evidence was adduced by each party in a number of different fields.
- The only witness of fact who gave oral evidence was the same Mr Robson from the LOR who gave oral evidence in the hearing before Vos J. His oral evidence before me was confined to explaining instructions that had been given on behalf of the owners of the Refineries to Foster Wheeler Energy Ltd ("Foster Wheeler"), marine and oil engineering consultants, for Foster Wheeler to prepare reports in 2006 and 2009 regarding the feasibility and cost of constructing a new jetty and oil terminal adjacent to the IOT ("the Foster Wheeler reports"). This work was commissioned because the oil companies wished to consider their options about how to proceed once the Oil Jetty Lease came to an end. I refer to Foster Wheeler's design for a new jetty and terminal as "IOT2". I was also referred to parts of Mr Robson's evidence in the transcript of the hearing before Vos J.
- In addition, there is unchallenged evidence of fact from Mr Andrew Martin in relation to the terms on which the Tranmere jetty was leased to Shell in 2009 for use in conjunction with Shell's refinery at Stanlow. This is relevant to arguments about the significance or otherwise of the Tranmere jetty transaction as a possible comparable by reference to which inferences might be drawn about the likely terms which would be agreed in the open market between a willing landlord and a willing tenant of the Oil Jetty.
The valuation experts
- The lead experts on each side were Members of the Royal Institution of Chartered Surveyors ("RICS") with expertise in valuation Mr Watson for ABP and Mr Norman for HOTT.
- In a run-of-the-mill interim rent case under Part II of the 1954 Act, say in relation to an office building or a shop, expert evidence will usually be very helpful to the court in working out the rent which a willing lessor and a willing tenant in the open market would be likely to agree in relation to the grant of a yearly tenancy of the property in question. Valuation experts will be able to refer to lettings of comparable properties and their own experience in the relevant market to provide the court with a sound objective basis for deciding the rent to set.
- In the present case, however, it is clear that there is no ready market for the letting of oil jetties and the notional transaction which I have to address under section 24D is, unsurprisingly, of a type of which neither of the expert valuers put forward by the parties had any experience. I therefore found the expert valuation evidence less helpful in this situation than would usually be the case. Also, as I am told is standard practice, neither of the expert valuers sought to have regard to the rent payable under the terms of the relevant tenancy (section 24D(2)(a)) in giving their view, leaving that as a distinct factor for the assessment of the court.
- Mr Watson has provided advice to ABP in relation to the IOT for financial reporting purposes and has experience in assessing the value of industrial and commercial property, including unusual properties for which there is often limited market evidence available. Mr Norman has experience of advising major oil companies in respect of business rates assessments for refineries and chemical works and of preparing capital valuations of such assets for company accounts, business acquisition and taxation purposes. I do not consider that there is any significant difference in their experience and expertise which particularly assists in deciding whose evidence to accept or reject. Both of them were helpful in explaining the methodology which valuers typically adopt where there is no or inadequate evidence of comparable transactions in a market. In that regard, both of them referred to the Depreciated Replacement Cost - DRC - method of valuing an asset and to guidance on that approach published by the RICS and effective from 1 July 2007: "Valuation Information Paper No. 10: The DRC Method of Valuation for Financial Reporting" ("the RICS Guidance").
- As explained in the RICS Guidance, the DRC method is used where there is no active market for the asset being valued, so that there is no useful or relevant evidence of recent sales transactions due to the specialised nature of the asset (para. 3.1). It is a method for ascribing a capital value to the asset in question. The method is based on the economic theory of substitution, whereby it is assumed that the potential willing buyer of the asset would not pay more to acquire the asset being valued than the cost of acquiring an equivalent new one: "The technique involves assessing all the costs of providing a modern equivalent asset using pricing at the date of valuation" (para. 2.3). Both the expert valuers used the DRC method to assess the present capital value of the Oil Jetty, by relying on evidence from other experts regarding the current costs of providing a replacement (there being argument as to what, if any, equipment installed on the jetty should be treated as being included in the calculation and in relation to differences between those other experts) and then applying a depreciation allowance of 40% - a figure which they agree on - to take account of the age of the Oil Jetty in order to arrive at a figure representing its current capital value. Having gone through this process, they agreed that a further step was required (which was not the subject of the RICS Guidance), to apply some suitable decapitalisation rate to that notional capital value to arrive at an appropriate annual rental figure. They disagreed about the decapitalisation rate.
- According to the RICS Guidance and the evidence of Mr Watson and Mr Norman, the general principle underlying the DRC method is that the costs to be taken into account should "reflect those of a modern equivalent asset", which is to be "defined by its comparative performance and output, not its physical characteristics" (paras. 6.1 and 6.2 of the RICS Guidance). By way of illustration, para. 6.2 of the RICS Guidance says: "If technological advances mean that the same output can now be achieved with a smaller and more efficient machine, the actual machine would not be replaced."
- This part of the Guidance gave rise to an area of dispute between the parties. ABP argued that the DRC method should be applied in relation to a notional oil jetty broadly physically equivalent to the Oil Jetty itself (including three seaward facing berths and four smaller protected berths as on the finger pier, and an arch in the jetty structure equivalent to the access arch to allow for ease of approach to those protected berths), constructed using efficient modern means, whereas HOTT argued that the DRC method should be applied in relation to a notional oil jetty with certain significant physical differences from the Oil Jetty (in particular, that it should have no access arch, rather smaller seaward facing berths and only three, rather than four, smaller protected berths). The basis for HOTT's argument was that when HOTT and the oil companies instructed Foster Wheeler to prepare designs for IOT2 they asked them to produce a design with these differences from the Oil Jetty on the footing that this smaller jetty would adequately meet their needs. Mr Robson, in his evidence, said that the four smaller berths on the finger pier were only being utilised at 60% capacity, so it was felt that the Refineries could cope with having fewer such berths. On this basis Mr Dowding submitted that the smaller IOT2 as designed in outline by Foster Wheeler was the relevant "modern equivalent" of the Oil Jetty for the purposes of application of the DRC method.
- On this issue, I reject HOTT's submission. The performance and output of the Oil Jetty include the ease with which it can handle traffic arriving to load or unload, with a minimum of delay and disruption for the Refineries and the ships servicing them (all of which, ultimately, results in additional cost for HOTT or the Refineries). They also include the ability to handle a full range of oil-carrying vessels. There is no doubt that having four protected berths rather than three, and an access arch to facilitate access to them, provides the operator of the jetty with greater flexibility and ease of use, allowing the Oil Jetty to handle traffic more efficiently during periods of congestion. There is also no doubt that having a jetty with larger seaward-facing berths provides more options in terms of the vessels which can be used to service the Refineries, and hence enables more efficient access to the shipping market. Indeed, HOTT's submission on this point seemed to me to confuse the possible absence of commercial need for a large jetty complex of the size of the existing Oil Jetty with the productive capacity of the Jetty itself.
- Without intending to limit the force of the last observation, my decision to reject HOTT's submission is supported by two further matters. First, when the Oil Jetty was designed and constructed and then expanded with Berth 3 (with the very substantial capital cost involved at each stage) the oil companies operating the Refineries clearly assessed that it would be useful to have it built with such ship-handling capacity. There was no evidence to suggest that there had been some radical change in circumstances to change that basic picture. The instructions to Foster Wheeler to build a more limited IOT2 probably reflected a decision that HOTT and the Refineries could "make do" with a smaller, less flexible jetty arrangement (with the likely inefficiencies in its use that would result from time to time) in order to save money, rather than because it would not be useful in fact to have the bigger, more flexible arrangement which currently exists. Secondly, in relation to the four berths on the finger pier, the evidence of Mr Robson, as I understood him, suggested that they are all in fact used by HOTT to service the Refineries as things currently stand, albeit at an overall annual average usage rate of 60%. None of the berths has been de-commissioned or moth-balled. Since all are used from time to time, the inference is that HOTT and the Refineries find it useful to have the additional performance which that additional capacity allows for.
- Accordingly, I accept ABP's submission that the "modern equivalent" of the Oil Jetty is a jetty with broadly similar physical characteristics.
- Mr Watson considered that the lease of the Tranmere jetty to Shell provided a valid recent comparable transaction to which it is relevant to have regard in assessing an appropriate annual rent for the Oil Jetty. Mr Garratt, ABP's expert on ship and goods dues, also relied on comparison with the charges in relation to the use of the Tranmere jetty to derive a figure for the likely level of ship and goods dues which ABP would be able to charge in relation to use of the Oil Jetty, in order to assist Mr Watson in valuing the additional rental element payable in relation to the exemption from dues in clause 6(a). As explained in more detail below, I consider that there are sufficient similarities between the situation in relation to the Oil Jetty and the situation in relation to the Tranmere jetty, as set out in their evidence, to provide support for the assessment performed by Mr Garratt in relation to ship and goods dues. However, I do not accept that the similarities are so extensive as to provide direct support for an interim rent figure for the Oil Jetty, as Mr Watson sought to suggest in part of his evidence. There are differences between the situations of the Oil Jetty and the Tranmere jetty which mean that the Tranmere jetty transaction cannot bear the great weight which Mr Watson sought to place on it in this part of his evidence. But they do have significant similarities sufficient to support Mr Garratt's assessment. Shell's refinery at Stanlow is positioned to service the United Kingdom and other markets for refined products as the Refineries are. They are capable of competing with each other, and can be seen as being subject to some degree to similar market forces.
- In selecting a suitable decapitalisation rate to arrive at an annual rental value for the Oil Jetty from its current capital value given by the DRC method, Mr Watson used a rate taken from the Weighted Average Cost of Capital ("WACC") of oil companies. The WACC rate for any particular entity reflects the cost to it of capital (weighted to allow for its relative use of equity or debt in raising capital), and for present purposes represents the point at which a rate of return would be considered to be sufficient to justify the making of a capital investment. By contrast, Mr Norman's view was that the relevant decapitalisation rate should be given by reference to general property investment yields.
- On this issue, I consider that the WACC-based approach adopted by Mr Watson provides a better guide. I accept the submission of Mr Nugee that it follows through more coherently, in the present context, the basic concept underlying the DRC method used to arrive at the current capital value of the Oil Jetty, which both valuation experts consider to be relevant as an approach because of the paucity of comparable market transactions. As set out in the RICS Guidance, the theory underlying the DRC method is that the potential buyer would not pay any more to acquire the asset being valued than the cost of acquiring an equivalent one (para. 2.3) given, here, by the cost of investing to build a new equivalent jetty. Following through the reasoning which underlies the DRC method, when working out the annual return on his capital outlay which the potential buyer (who is taken to be equivalent to a person investing to acquire - here, by building - an equivalent asset) would think worthwhile before making the investment, he would refer to the appropriate WACC rate. In extrapolating from the notional exercise involved in the DRC method to arrive at the relevant annual income level, reference to the WACC rate is appropriate, as best reflecting the notional foundations of the whole exercise (which, to repeat, is predicated on there not being a set of ready market comparable data to give a capital value or rental value derived therefrom). By contrast, the use of general property investment yields, as favoured by Mr Norman, reverts inappropriately, in my view to a general market comparable type approach at this final stage of the notional DRC-based analysis.
- Since, on the DRC-based analysis, one is looking to what a notional builder of an equivalent Oil Jetty would spend and the rate of return he would expect on his investment (in order to work out an annual income which can be taken as a fair return on that investment), and since major oil companies are the main entities who would usually be expected to make the investment to build such an asset, I consider that it is fair and appropriate to treat such oil companies as a representative body from which to draw the suitable WACC-based decapitalisation rate to be used. There is a fairly wide variation in the WACC rates for leading oil companies, depending on the way in which they are capitalised, between 8.49% and 15.04% post tax. But, in line with Mr Watson's evidence and Mr Nugee's submissions, I consider that use of a WACC rate of about 11% in relation to the notional investment in building an equivalent of the Oil Jetty is fairly representative and suitable in the circumstances of this case (with a rate of 13% being appropriate in relation to the liquid handling equipment having regard to a faster rate of depreciation and higher levels of maintenance required for it).
- As part of his DRC-based approach, Mr Watson treated the value to be attributed to the equivalent of clause 6(a) of the Oil Jetty Lease as an additional item which would increase the market rent by a substantial amount. For reasons explained below, I consider that this is a proper assessment; but I do not agree with the value given to it by Mr Watson.
- Mr Watson assessed the appropriate market rent based on the average of the comparative figure given by reference to the Tranmere jetty transaction as a direct comparator and the figure given by the DRC method (with a decapitalisation rate taken by reference to WACC rates) plus an addition in relation to the value of clause 6(a), with an adjustment to reduce that average figure by 10% to allow for the fact that the tenancy to be assumed for the purposes of the 1954 Act is only a yearly tenancy. Mr Norman did not consider that the Tranmere jetty transaction provided helpful guidance for setting the interim rent for the Oil Jetty. I accept parts of Mr Watson's analysis but reject other aspects of it. My reasoning is set out in detail below.
- The other main area of difference between Mr Watson and Mr Norman related to the appropriate rental rate for the pipeline easement contained in the Oil Depot Lease. On this, I found the evidence of Mr Watson more persuasive. He identified market transactions which I consider are properly comparable, whereby Network Rail charges oil companies amounts ranging from £7.50 per metre p.a. to £10-£20 for smaller bore pipes carrying high value product to £20 for 36" pipes carrying crude oil. Based on these figures, Mr Watson proposed a figure of £15 per metre p.a. as a reasonable annual rental figure for the pipeline easement giving an overall annual rent of about £500,000.
- Mr Norman suggested that the Network Rail rates did not provide a suitable comparison, because Network Rail might be able to charge higher rates than other landowners if the only alternative was to take a pipeline a very long way around an extended strip of land with a railway on it. I do not accept this. Whether the owner of a pipeline had, as an alternative to paying Network Rail its usual rates, to take a pipeline a long way or a short way to avoid going over Network Rail's land would be a fortuitous matter, depending on the particular geographical context (the same would be true of any situation where a pipeline owner had to think of crossing another landowner's land the alternative might be a short diversion or a long diversion). On the evidence, Network Rail would charge the same rates in each case. They simply were standard rates, without any particular reason to think they were inflated because of some special or unique position of Network Rail.
- I agree with Mr Watson that the Network Rail rates provide a suitable market comparator for present purposes. I agree with him that an annual rental charge of £500,000 for the pipeline easement is the appropriate fair market rent.
The experts on ship and goods dues
- Mr Garratt was the expert on this topic for ABP; Professor Gilman the expert for HOTT.
- The expert evidence on ship and goods dues is particularly relevant to the question what value, if any, should be included in the reasonable rent to be fixed under section 24D to take account of clause 6(a) in the Oil Jetty Lease, which is presumed also to be a term in the new tenancy postulated in the second part of section 24D(2) and in section 34 of the 1954 Act. According to ABP, the reasonable rent should be increased by a substantial sum in relation to this, because it is a term which would exempt the notional willing tenant from having to bear (directly or indirectly) very substantial ship and goods dues, and the tenant would be willing to pay a large proportion of that saving as an increase in the rent. Mr Garratt gave evidence that the ship and goods dues which ABP, as harbour authority for the Port of Immingham, could charge in respect of use of the Oil Jetty at the level required by the Refineries (where about 20 million tonnes of crude oil and petroleum products pass across it each year) would be significant. His evidence was that Government policy is understood in the industry to be to allow each port in the United Kingdom to set ship and goods dues rates at whatever level the market will bear in relation to that port, and that their freedom of action in that regard was in effect constrained only by commercial competitive pressures.
- HOTT disputes the relevance of clause 6(a) on various grounds, but if the court determines that it is relevant it seeks to argue, relying on Professor Gilman's evidence, that the potential ship and goods dues would not be as high as indicated by Mr Garratt, and as a matter of Government policy or competition law would be required to be tied in some way to the level of ABP's costs in operating the Port of Immingham, as to which there was no evidence.
- I consider that Mr Garratt had the more detailed and up-to-date experience of market usage in relation to the setting of ship and goods dues, I also found his evidence better reflected Government policy than that of Professor Gilman and was generally more persuasive. Accordingly, where their evidence conflicted, I prefer the evidence of Mr Garratt. I found the evidence of Mr Garratt to be thorough, balanced and carefully reasoned, and I accept it in substance in its entirety.
- The notional situation I am required to bear in mind is what rent a willing tenant and a willing landlord would agree for a yearly lease of the Oil Jetty, including a term equivalent to clause 6(a). If a tenant of the Oil Jetty were not exempt from ship and goods dues, the harbour authority would have a commercial interest to set them as high as it reasonably could under section 26 of the Harbours Act. If the tenant had the right to an exemption from such dues, it would either benefit directly in relation to the savings it would make in respect of any dues it would otherwise have to pay itself or indirectly in relation to savings which it could offer to provide to third parties (e.g. owners of ships using the jetty) and for which benefit it could charge. In deciding how much a willing tenant would be prepared to pay by way of an increase in rent to take a lease of the Oil Jetty with the benefit of such a term, one looks to see how participants in the market would reasonably be expected to assess matters in calculating the benefit attaching to the exemption in such a term.
- In making such an assessment, market participants would have in mind that there might be (i) commercial constraints operating on a port affecting the level at which ship and goods dues could be charged; (ii) legal constraints under domestic public law (obligations on the harbour authority, as an authority exercising public functions, to act in conformity with ordinary rules of public law, including the obligation to act rationally and without making arbitrary distinctions between different classes of case compare, e.g., R (Association of British Civilian Internees - Far Eastern Region) v Secretary of State for Defence [2003] QB 1397 reinforced by the obligation on the authority under section 30 of the Harbours Act to publish the rates it charges, so that they are transparent to all users of the port); (iii) legal constraints under competition law, particularly EU competition rules against abuse of dominant position in a market (the subject of the Scandlines decision); and (iv) constraints which the Secretary of State might impose as a matter of policy, in deciding any appeal to her under section 31 of the Harbours Act by a dissatisfied user of the port.
- As to (iv), I agree with Mr Garratt that the best reading of indications as to current Government policy in policy documents and the most recent decision on a section 31 appeal (in relation to Langstone Harbour, as set out in an inspector's report - "the Langstone report" - and a decision letter dated 30 June 2010 - "the Langstone decision letter") is that ports are to be left free to set ship and goods dues at such rates as harbour authorities think that the market will bear.
- In the Langstone case, the owners of two privately owned and operated wharfs in the harbour, engaged in the importation of marine dredged aggregates, objected to ship and goods dues imposed in relation to their operations and appealed to the Secretary of State under section 31. Langstone Harbour is a trust port, rather than a fully commercial harbour like the Port of Immingham. The wharf operators objected in particular that the harbour board contributed very little by way of services to their operations, with the result that by paying the dues imposed on them they were bearing a disproportionate part of the harbour's costs. They proposed, therefore, that the Secretary of State should substitute a cost allocation approach to the setting of dues, so that the harbour dues imposed on them bore a proportionate relationship to the cost of providing harbour services in relation to their activities. This was an argument similar to that maintained by HOTT in these proceedings in relation to the rate at which dues would be expected to be set.
- The wharf operators' arguments were rejected by the inspector, who recommended that their appeal under section 31 should be dismissed. In the Langstone decision letter, the Secretary of State adopted the inspectors' recommendation and the substance of his reasoning.
- In the Langstone report the inspector helpfully and accurately summarised the key principles on the setting of harbour dues to be derived from the relevant Government policy documents in the context of trust harbours as follows:
i) "Dues must be set at a level that allows for proper maintenance of the trust's harbour duties";
ii) "Port developments and port operation should not in general need public subsidy";
iii) "Dues should be set at commercial and competitive rates neither exploiting trust port status to undercut the market, nor abusing a dominant position in that market";
iv) "Dues must be seen to be fair and equitable";
v) "There should be no presumption that dues levied on a specific group or type of user should be exclusively reinvested in improving services and facilities on offer to that user".
- Allowing for the somewhat different context at Langstone Harbour, as a trust port, the reasoning in the Langstone report and decision letter supports the inference that Government policy is to allow ports to charge dues at levels that the market will bear (subject to competition rules), and without any necessity to tie them to the cost of services being provided to particular users. That policy could be expected to apply with still greater force in relation to commercially operated ports, such as the Port of Immingham, which are intended to operate on the basis that they can raise capital from the loan and equity markets (in return for paying interest rates and dividends in respect of profits) to fund their operations and development of their facilities.
- That impression is reinforced by consideration of the terms of relevant policy documents issued by the Government and the Office of Fair Trading. In Modern Ports: A UK Policy issued by the relevant Government Department in November 2000 (and still the current principal statement of Government policy) it is emphasised that UK ports should be able to meet the immediate demands of their customers and invest in new facilities without recourse to public subsidy, but on the basis of charging users of the ports, and ports are to be allowed to compete against each other (see in particular paras. 1.1.2, 1.1.6 and 1.1.7). At para. 1.1.8, the report states:
"It is a strength of the ports industry that each undertaking has statutory powers suited to its needs. Commercial decisions, as well as responsibility for port operations, lie with those who have these powers and the duties that go with them. This continues to be fundamental. It is not Government's job to run the ports industry."
- At para. 2.1.9 the report states that "Those operating port facilities must be allowed to compete on level terms", and refers to the Competition Act 1998 as the measure which provides protection for customers against any abuse by ports of a dominant market position. This again suggests that Government policy is to leave ports to set their own dues according to commercial constraints, subject only to controls in the form of competition law.
- In a section headed "Paying for ports", the report says this:
"2.1.11. Government does not run the shipping industry or the ports industry. Government does not decide the ports industry's commercial strategy, or direct or fund its investment; nor does it manage port operations. These are matters which Parliament has entrusted to local statutory authorities, who fund their investment and operations from levies on users. In general, port infrastructure can and should be commercially financed. Commercial funding for development is unlikely to be a problem where a port's business is growing.
2.1.12. The Government and the devolved administrations retain powers to set dues when port users appeal against them. This is because the public right to use a harbour depends upon payment of dues. If they are not paid, the use is not by right. On the other hand, the right could be practically extinguished if dues were unfair or unreasonable. We believe that dues must be fair and equitable. It is wrong for some users to have special treatment, and even to be exempt from dues altogether, when their competitors are paying the going rate. Harbour facilities cannot be maintained unless the users contribute properly. Harbour authorities are obliged to publish the dues tariff. These are important safeguards.
2.1.13. We believe that port developments and port operations should not in general need public subsidy. Public money is not well spent distorting competition between ports for example, where a port is seeking to win business to replace lost traffic and use surplus capacity. Subsidy tends to spread the problems caused by excess capacity. It can be damaging to otherwise healthy neighbouring ports."
The thrust of this is, once more, that the Government will leave ports to set dues according to their own commercial strategy, to ensure that their infrastructure is commercially financed (i.e. by setting dues which can generate profits in the market in which the ports operate). The reference to dues being required to be "fair and equitable" is best understood, in the context of para. 2.1.12, to be a reference to fairness in the sense of avoidance of arbitrarily differential dues rates being charged to port users. That is of significance in the present case, since Mr Garratt's evidence about the likely saving in relation to ship and goods dues associated with clause 6(a) is based on the dues which ABP could charge in respect of use of the Oil Jetty if the same or similar rates are charged as in relation to the use of other jetties in the Port of Immingham.
- In a section entitled "Company-owned Ports" (i.e. the class of port which includes the Port of Immingham, which is owned by ABP as a commercial operator), the report states:
"Most commercial ports are now in the private sector. Companies now operate all but six of the largest 20 ports by tonnage. Not all company ports are successful, but most successful ports are in this sector.
These ports are subject to the full freedoms and disciplines of the commercial marketplace. They are free to seek commercial funding for investment, on commercial terms, borrowing on their assets. They are obliged to account to shareholders for their failures as well as their successes, and they can be called to account for their performance. They are expected to generate dividends and to increase shareholder value over time. To the extent that they generate retained profits, they have wide discretion over how to invest them."
The particular need for the Humber ports, including the Port of Immingham, to invest in development was also emphasised:
"
The volume of ship traffic in the Humber is predicted to grow in response to the extension of the European Union, increasing trade with the North Sea and Baltic countries and greater competitiveness within the UK's port industry. Continued port development will be needed in the Humber to accommodate projected increases in trade and changes in trading patterns."
These sections of the report again indicate that Government policy, as applicable to the Port of Immingham, would be to allow it to operate in a fully commercial manner.
- In 2007, the Department for Transport issued the Ports Policy Review Interim Report. This confirms that policy remains to allow for "a market-oriented approach" for the operation and development of ports. Again, reliance was placed on competition law and transparency in relation to the setting of dues as sufficient controls against abuse or unfairness. The report refers to the experience of the Office of Fair Trading ("OFT") in carrying out investigations and of the Secretary of State in relation to section 31 appeals in support of the view that "there is at present no large-scale abuse of local monopoly power" and that "existing arrangements, including the OFT's general role in guarding against anti-competitive practices, are sufficient to sustain competition" (sc. without the need for the Government to intervene in appeals under section 31 to disturb ship and goods dues charged by harbour authorities).
- In December 2010, the OFT issued a report on a case study it had carried out in relation to competition in the ports sector. Generally, it was satisfied with the position, concluding that on the evidence it had gathered "[it] did not see a case for general changes in the structure of port services so [it does] not propose to carry out further general analysis of the ports market." It noted a relative lack of appeals under section 31, "which might reflect that competition is working well in the ports sector", or could reflect risks inherent in the process itself. Either way, the OFT's report would not suggest to market participants that there would be a good prospect under section 31 of challenging ship and goods dues set by ABP at commercial rates at the Port of Immingham, which would therefore tend to make the type of exemption from such dues under clause 6(a) all the more valuable.
- As to points (ii) and (iii) in para. [102] above (general legal constraints), I agree with the submission of ABP that market participants would not consider that there would be any significant prospect of challenging dues set by ABP at commercial rates relying on the general law, in particular EU law or the Competition Act 1998. Although in principle the setting of charges at exorbitant rates can constitute abuse of a dominant position and so be subject to legal challenge, in practice it would be difficult to mount such a challenge if (as Mr Garratt posits in his evidence) ABP set ship and goods dues in relation to use of the Oil Jetty at levels similar to or lower than those which have to be paid by users of other comparable jetties at the Port of Immingham and elsewhere. The complaint would have to be that the dues charged to users of the Oil Jetty were set at levels which were so excessive as to be abusive; and that would be very difficult to establish. The difficulties of mounting such a challenge would, again, tend to make the type of exemption from such dues under clause 6(a) all the more valuable.
- HOTT sought to suggest that competition law controls in relation to abuse of dominant position meant that ABP would have to limit the dues it imposed by reference, in some way, to its costs of providing services to those using the Oil Jetty. HOTT submitted that those costs were likely to be low, so any dues imposed by ABP would have to be low (or, at any rate, ABP had not adduced evidence about its costs, so could not show that they could be high). I do not accept this.
- A similar submission in relation to dues charged by the Port of Helsingborg (which were high, by reason of the port's ability to exploit its market advantage deriving from its good geographical location next to a short crossing between Sweden and Denmark) was rejected by the European Commission in Scandlines. The ferry operator Scandlines submitted that the port charges were excessive because they did not reflect the actual costs borne by the port for the provision of services to ferry-operators (Scandlines, para. [16]) and that Scandlines "should only have to pay individually for the infrastructure and facility that it actually uses plus, in principle, its fair share of costs relating to common infrastructure and facilities" (para. [18]). The Commission found that there was a mismatch between the port charges to ferry operators and the costs actually incurred by the port to provide services to those operators (see in particular paras. [139] and [160]). However, the Commission rejected Scandlines' complaint. The port was entitled to set charges reflecting "the economic value" of the service it provided. Although the profit margin was relevant to the issue, it could not in itself "be conclusive as regards the existence of an abuse" (para. [214]), since "The determination of the economic value of the product/service should also take account of other non-cost related factors, especially as regards the demand-side aspects of the product/service concerned" (para. [226]; that is to say, the value it has for the customer for that product or service). In the circumstances of the case, the use of the ferry route from the Port of Helsingborg had a high value for the ferry operators, because of its convenience and attractiveness for persons who chose to use their services (para. [234]). Therefore, Scandlines could not show that the port had set prices at a level which constituted an abuse of a dominant position (paras. [241]-[248]).
- Accordingly, review of the Scandlines decision would tend to persuade market participants that it was unlikely that a successful challenge could be made in reliance on competition law against imposition of substantial ship and goods dues by ABP - which would increase the value to be attached to clause 6(a).
- Reference to leading commentaries on competition law would tend to reinforce that assessment. They emphasise (including by citing Scandlines) the difficulties in establishing abuse of a dominant position in legal terms by reference simply to allegations of excessive pricing: see Roth and Rose (eds), Bellamy and Child, European Community Law of Competition (6th ed.), paras. 10.104-10.107; O'Donoghue and Padilla, The Law and Economics of Article 82 (EC) (2006), pp. 621-628; and Niels, Jenkins and Kavanagh, Economics for Competition Lawyers (2011), pp. 268-270, 276, 282.
- I turn, then, to point (iv) in para. [102] above (market/commercial constraints). As explained by Mr Garratt, in his experience and for various reasons (such as the opportunity to develop monobuoy terminals in very deep water to which VLCCs can have access to discharge their loads, the high volumes of crude oil that a single berth can handle and direct pipeline access from the North Sea for some refineries) tariffs for the use of jetties to discharge crude oil are generally lower than the tariffs for the use of jetties to handle refined petroleum products. The goods dues chargeable per tonne of crude oil are about half those generally chargeable per tonne of refined product. The IOT handles some 20 million tonnes of cargo each year, of which 45% is normally crude oil and 55% is refined products.
- The oil terminal which provides the closest comparator for the IOT is the Tranmere jetty on the Mersey, which is linked by pipes to Shell's oil refinery at Stanlow, some 15 miles away. The jetty at Tranmere is owned by Peel Ports and leased to Shell. The lease terms were subject to renewal on agreed terms in 2009. Mr Garratt assessed that, for the purposes of his economic analysis of ship and goods dues, the Tranmere/Stanlow complex could sensibly be regarded as an integrated whole, similar to the complex of the Refineries and the Oil Jetty at Immingham. They are also in competition with each other, since Shell's refinery and the Refineries are all located in the north of England and are all linked to the national oil pipeline grid, so analysis of the ship and goods dues at Tranmere is capable of providing a reasonable indicator of what tariffs might be set at Immingham by way of market rates.
- Mr Garratt also referred in particular to the HIT at the Port of Immingham, which is a large coal terminal, and to the East and West Jetties, which handle a range of goods, including refined petroleum products from the Refineries transported on smaller sized ships. The East and West Jetties are operated by Simon Storage, not ABP. CoP moves certain refined products over those jetties, and pays ABP ship and goods dues in respect of such movements, in addition to the charges levied by Simon Storage for use of its facilities (including pipelines on the jetties and tank storage). The mean rate at which ship and cargo dues combined are paid in respect of use of the East and West Jetties is £2.56 per cargo tonne; in respect of the HIT it is £2.05 per cargo tonne. According to Mr Garratt, HIT is the key comparator with the IOT because it is recently built, the rates reflect deals freely entered into between the port and users and it handles ships of a similar size to those using the IOT (it differs mainly in that the jetty is equipped with dry cargo craneage and conveyors rather than pumps and pipes for bulk liquids).
- The oil companies also use the Immingham Gas Jetty for movements of some refined products, and pay ship and goods dues to ABP in respect of such movements at an average rate of about £3.43 per tonne.
- The current published rates for goods dues at the Port of Immingham are £1.60 per tonne for heavy oils (crude, fuel oils, marine diesel etc); £2.18 per tonne for light oils (kerosene, petroleum spirit etc); and £4.65 per tonne for LPG and chemicals. These are often varied by agreements with individual customers, ranging between £0.48 to around £3.20 per tonne for LPG (by way of comparison, if one took the whole current rent for the Oil Jetty to stand in place of ship and cargo dues, the rate given would only be about £0.20 per tonne). The current published rates for ship dues vary according to vessel tonnage and origin/destination, at £0.98 per NT for coastwise vessels; £3.00 per NT for EU states, Norway and Ireland; and £8.46 per NT for the rest of the world.
- In addition, ship dues (known as "conservancy dues") are charged by ABP as harbour authority for the Humber Estuary as charges to maintain the navigability of the Estuary, which have the effect of adding about £3 million to the total annual charge to the owners of the IOT of using the Port of Immingham (assessed at 20 million tonnes p.a., at £0.1426 per tonne payable by ships of greater than 12,000 NT). These conservancy dues are not exempted under clause 6(a) of the Oil Jetty Lease. They have to be taken into account when comparing the market rates of ship and goods dues which could be charged in relation to use of the Oil Jetty as compared with the Tranmere/Stanlow complex.
- In Mr Garratt's assessment, which I accept, the overall cost of operating ships and distributing output that the Refineries would face per tonne of cargo is no higher (and is potentially lower) than for Tranmere/Stanlow. The Humber and the IOT can handle bigger vessels than the Mersey and Tranmere (and much bigger vessels than Stanlow itself, located on the Manchester Ship Canal, for movements of refined products), which cuts sea freight rates for use of the IOT; and the conservancy charges levied in respect of use of the Humber are significantly lower. Also, the location of the IOT on the east coast of England gives it some competitive advantage in relation to overall shipping rates, by reason of its closer proximity to large entrepot ports in Northern Europe such as Rotterdam and Antwerp, which means there is greater scope for VLCCs of the very largest size (and hence the most efficient carriers) to travel full from around the world and part discharge at those ports, so enabling them to continue their journey with a load that would be at a level which would enable them to have access to the Oil Jetty.
- Mr Garratt calculates that the mean charge for ship and goods dues in respect of use of the Tranmere jetty is £1.08 per tonne, representing £0.89 per tonne for crude oil and £1.78 per tonne for refined products, excluding conservancy charges. Typically, shipowners would pay some £0.14 less per cargo tonne in respect of conservancy dues on the Humber as compared with the Mersey. Allowing for the relative balance of crude oil movements (45%) and refined product movements (55%) at the IOT, as compared with the higher proportion of crude oil movements at Tranmere, and for the competitive scope for ABP to charge higher ship and goods dues at the IOT because of the lower conservancy charges on the Humber, Mr Garratt assesses the equivalent overall charge for ship and goods dues which ABP could reasonably charge for use of the IOT, subject to competitive market constraints, to be £1.50 per cargo tonne. In due course, after making certain adjustments, Mr Watson derives a figure of £1.42 per cargo tonne for use in his valuation calculations.
- I accept that this is the appropriate figure to be used for present purposes. This is the rate at which market participants would expect ship and goods dues to be charged by ABP, without realistic prospect of successful challenge under section 31 of the Harbours Act, competition law or public law. The robustness of this figure and its validity and reasonableness are underlined by the fact that Mr Garratt, in his calculations, has not built in a distinct additional amount to reflect the geographical advantages of the IOT in terms of location and the size of ships which can be handled there and by comparison with the rate of £2.05 per cargo tonne at the HIT (which has sufficient similarities as to make it another helpful comparator for the IOT) and £2.56 per cargo tonne at the East and West Jetties (which also have sufficient similarities as to make them a helpful comparator for the IOT).
Expert evidence on removability of the pipelines and other equipment on the Oil Jetty
- Evidence regarding the removability of the pipelines and other equipment installed on the Oil Jetty by HOTT was relevant to the question whether they should be regarded as tenant's fixtures and also to the question of the time and cost required to achieve a bare jetty structure (if that proved to be a relevant issue). Mr Mackie was the expert witness for HOTT on this issue; Mr Cross the expert for ABP.
- All the pipelines and equipment are firmly anchored to the Oil Jetty structure. For legal purposes, they have become part of the Oil Jetty structure and hence are property owned by ABP, subject to a right of removal by HOTT under the terms of the Oil Jetty Lease.
- Since, on the legal analysis below, I reject the bare jetty approach put forward by HOTT and I find that the amount of the interim rent does not depend upon the question whether the pipelines and the equipment installed by HOTT would qualify as tenant's fixtures or not, it is not necessary to resolve the various points of disagreement in the evidence of Mr Mackie and Mr Cross.
Expert evidence on replacing the pipelines and equipment on the Oil Jetty
- Arising from the way in which HOTT put its case on the law, both parties adduced expert evidence relating to the cost and the time it would take, if one were dealing with a bare jetty structure, to equip the Oil Jetty to get it operational. As noted above, there was a distinct air of unreality about all this, which meant that the experts were at points driven to speculate about various matters in ways that seemed to stray beyond the bounds of genuine matters of expertise.
- In particular, Mr Daly (for HOTT) and Mr Cross and Mr Korsgaard (for ABP), all with expertise in the oil industry, joined issue in their evidence on the question whether oil companies having operating refineries in the position of LOR and HOR and confronted with a bare jetty rather than an operational Oil Jetty would spend money to get the jetty operational again as quickly as possible, but with a lesser overall capacity, and then spend time and more money later on to expand its capacity (the line taken by Mr Cross and Mr Korsgaard), or would take longer to install pipelines and equipment to bring the jetty up to a full operational standard in one go, which would leave the jetty out of commission for a longer period but would involve lesser overall expenditure (the line taken by Mr Daly). The point was said to be important to issues such as whether, starting from the assumption of a bare jetty, the Oil Jetty would have been made operational at all during the period of two-and-a-bit years during which the interim rent is payable, and hence whether there would in fact have been any saving at all in respect of ship and goods dues by reason of the presumed exemption equivalent to clause 6(a) in the Oil Jetty Lease.
- It seems to me that in relation to a question like this, if such a situation ever actually arose in practice, the approach of oil companies owning such refineries to how they would re-equip the jetty would depend on a range of commercial factors and calculations about which I could only speculate. A reasonable case could be made out, in the abstract terms in which Mr Daly and Mr Cross and Mr Korsgaard debated the issue, for either approach to be adopted. On the material before me, a choice between them would be essentially arbitrary.
- Furthermore, in reality, in my view, anyone investing in equipping the Oil Jetty from a bare jetty structure would require the security of an extended lease to ensure that they could recover their investment over time (much as happened when the Oil Jetty Lease was originally negotiated and agreed). They would not invest the large sums required to equip a bare jetty if they were only granted a yearly tenancy of the type which the 1954 Act requires me to assume, since (even allowing for the measure of protection provided by Part II of that Act) they would be at risk of losing their investment after a year or so. This is because the clear temptation would be for ABP to give early notice to terminate the yearly lease as it has in fact done in this case so as (as a likely practical result, following the reasoning already spelled out by Vos J in the New Leases Judgment, esp. at paras. [122]-[123]) to obtain for itself the benefit of the equipment newly installed on the jetty to operate the jetty for itself. Indeed, the temptation for ABP to do that in this imaginary scenario would appear to be all the greater, since the pipelines and equipment re-installed on the bare jetty structure would all be new and, for the most part, could not be economically removed for re-use (and even for those items which could be removed, ABP would be in a strong negotiating position to acquire them at a knock-down price). So I was left with the strong impression that the issues argued over by the experts on this part of the case were essentially meaningless in real commercial terms.
- If one were truly required to engage with a scenario in which there was only a bare jetty structure and the non-negotiable offer of a yearly tenancy, I consider that the very likely outcome would be that no-one would agree to take such a lease and then invest to equip the jetty as a functioning oil jetty. The economics of operating the Refineries are not such as would drive the oil companies to invest in re-equipping the Oil Jetty in the hope of keeping them operational at the likely cost of making a large uncovenanted gift to ABP of the value of that investment. If anything, it seems that the Refineries are loss-making in current market circumstances and there appears to be commercial pressure on the refining industry in the United Kingdom generally. The oil companies would be likely to look to expand other ways of supplying crude oil to and taking refined products from the Refineries. They have pipeline connections to the United Kingdom's oil grid, good road and rail lines of communication, some alternative access to ships via other jetties and the HOR in particular has significant insulation against over-reliance on the Oil Jetty for deliveries of crude oil because of its access to the Tetney Monobuoy (and might well be prepared to negotiate with Total to give the LOR similar access to it at a cost more attractive than the alternative of making a precarious investment in equipping the Oil Jetty under a yearly tenancy). If pushed to it, I think that the oil companies would even be prepared to contemplate closure or a significant scaling back of the activities of the Refineries for the period in which the notional scenario has (on HOTT's case) to be assumed to prevail.
- Therefore, following through the logic of HOTT's case, it is difficult to see that anyone would wish to take a yearly tenancy of the bare jetty structure of the Oil Jetty for anything other than a nominal or very low rent. It would not be equipped under such an arrangement and would have no good commercial use.
- Having listened with care to the expert evidence on both sides on this part of the case, the main conclusion that I draw from it is that the whole unreality of the exercise reinforces my legal analysis and conclusion below, to the effect that HOTT's legal submissions as to the operation of section 24D are fundamentally flawed. In setting a reasonable interim rent under that provision, the court is not required to imagine a bare jetty scenario so utterly divorced from reality and arriving at a result (an interim rent set at a purely nominal amount) so unfair and unreasonable between the parties.
- I therefore do not think that it is appropriate to lengthen this judgment with detailed consideration of this expert evidence. If the matter goes further and it transpires that I have erred in my legal analysis, I am satisfied that the Court of Appeal will have available to it the same evidential material as has been available to me and will be as well placed as me to assess that material and any arguments which might be sought to be based on it. I should record that there was nothing in the demeanour of any of the expert witnesses or their conduct in court that could have any bearing on any choice as to which of their opinions to prefer. They all gave their evidence in a straightforward and reasonable way. There is a full transcript of their evidence.
Expert evidence on the cost of building a replacement for the Oil Jetty
- The evidence on this topic is of particular relevance to the DRC-based method of assessment of an open market rent for the Oil Jetty.
- Mr Ferguson was the expert witness for ABP on this issue. He is a chartered quantity surveyor with over 30 years experience, including extensive experience in marine construction projects. I consider he has impressive and appropriate expertise to give evidence regarding the cost of building a notional replacement for the Oil Jetty. His evidence was primarily directed to consideration of construction of a replacement for the Oil Jetty in its current form and extent, which is the relevant question according to the RICS Guidance (see paras. [83]-[87] above).
- In giving his opinion, Mr Ferguson had regard to modern construction methods to arrive at an estimate for construction of an equivalent jetty structure in the most economical way in a manner which I considered was appropriate and reinforced the robustness and moderate nature of his estimate of the costs involved. In particular, after due consideration, he proposed that a modern equivalent of the Oil Jetty would be constructed using trestle supports on piles driven into the sea-bed placed approximately 15 metres apart to carry the oil pipelines, rather than using fewer piles placed about 50 metres apart with the oil pipelines being supported in pre-assembled units (a sort of pipe-bridge constructed from steel girders), which is the method of construction used in the existing Oil Jetty for Berth 3. In terms of structural viability, the difference is that with piles and trestles placed only 15 metres apart, the oil pipes would have sufficient strength to support themselves across the span without the need for pre-assembled units; if piles are placed further apart, an additional structure has to be constructed (the pre-assembled units) to provide strength and support for the pipes in crossing the span between piles. In terms of cost, the choice between these construction methods involves comparing the expense associated with having to install more piles (spaced 15 metres, rather than 51 metres, apart) with the expense of having to use pre-assembled units, if piles spaced 51 metres apart were used.
- In my view, Mr Ferguson's evidence in working through this and other issues was careful, fair and compelling. Mr Ferguson produced a fully worked up project costing, drawing on his own knowledge and expertise. His evidence was vigorously tested in cross-examination, in which a number of the assumptions and figures he had used were challenged. I consider that he was unshaken in cross-examination, and was able to provide appropriate and persuasive explanations for all the stages in his reasoning and costings.
- HOTT's expert on this issue was Mr Bartlett. Mr Bartlett is not a quantity surveyor, but an associate in an oil industry consulting company. He has 15 years' experience in the oil and gas industry, across a range of commercial and technical areas. It is no criticism of him to observe that he has less, and less specialist, marine construction expertise than Mr Ferguson.
- Unlike Mr Ferguson, Mr Bartlett's report consisted of a "review" of the estimates provided by Foster Wheeler (in the Foster Wheeler reports for the IOT2 project) and by Mr Ferguson. In substance, Mr Bartlett relied on a very summary indication of costs for the IOT2 project which had been provided to Foster Wheeler by a marine construction company called Nuttalls and relied on by them for their project reports on IOT2. Mr Bartlett did not have significant expertise of his own relevant to assessing the likely cost of construction of a replacement Oil Jetty.
- There are a number of weaknesses in Mr Bartlett's evidence on this issue, quite apart from his own comparative lack of personal expertise regarding likely costs in relation to a marine construction project of this character. First, the Nuttalls costs indication relied on was very summary indeed. It is a rough preliminary indication for a possible project, and could not be regarded as a fully worked up estimate of costs for a project with full plans. Second, the Nuttalls costs indication and the Foster Wheeler report to which it was appended were directed to a project (the IOT2 project) materially different from the project which I have to consider for the purposes of the DRC-based approach to calculation of market rent (the construction of a full replacement for the Oil Jetty). Third, the individuals who actually produced the Nuttalls costs indication and the Foster Wheeler reports were not identified and no information about their expertise and experience was provided to the court. Fourth, the persons who produced the indication and the reports had clearly not done so for the purposes of assisting the court in these proceedings and had not accepted any responsibility to comply with the usual duties of impartiality and so forth which experts giving evidence for use in legal proceedings are ordinarily required to accept and acknowledge. Fifth, no-one from Nuttalls or Foster Wheeler appeared to give evidence and have their assessments and underlying assumptions explored and tested in cross-examination.
- In the circumstances of this case, I have reached the view that Mr Ferguson's evidence regarding the current cost of building a suitable replacement for the Oil Jetty should be accepted in full.
- In the final, closing submissions stage of the hearing, after the oral evidence had finished, a dispute arose between the parties regarding the evidential status of the Foster Wheeler reports and the Nuttalls indication of the cost of works which they had obtained. For the first time, Mr Dowding submitted that this material constituted hearsay expert opinion evidence on which HOTT was entitled to rely, despite the matters set out in para. [145] above and even though HOTT had not given notice that it proposed to do so under CPR Part 35, with the result that Mr Nugee had been deprived of any opportunity to argue that either the authors of such reports or estimate should be called to give evidence and be cross-examined on that material or that it should be excluded. Mr Dowding relied upon the commentary in Phipson on Evidence 17th ed, para. 33-24 at pp. 1090-1091, which refers to the effect of the Civil Evidence Act 1995 that no evidence is to be excluded on the ground that it is hearsay, and to the existence of a class of case in which hearsay evidence of the opinion of a person with relevant expertise could properly be admitted pursuant to that Act (including, for example, official reports into shipping casualties or factory accidents). After the conclusion of the hearing, HOTT drew the court's attention to the recent decision of the Court of Appeal in Charnock v Rowan [2012] EWCA Civ 2 and sought to rely on it in support of its submission that the Foster Wheeler reports and the Nuttalls costs indication should be treated as admissible expert evidence on which HOTT was entitled to rely.
- Mr Nugee submitted that although it is possible for expert opinion evidence to be adduced in hearsay form, by virtue of the operation of CPR Part 35 HOTT is not entitled to rely on the Nuttalls and Foster Wheeler material as expert evidence in the context of this trial. CPR Part 35.4(1) provides that "No party may call an expert or put in evidence an expert's report without the court's permission". CPR Part 35.5(1) provides that "Expert evidence is to be given in a written report unless the court directs otherwise". Mr Nugee submitted that HOTT had not obtained the permission of the court as required by CPR Part 35.4(1) to put in evidence the Nuttalls and Foster Wheeler material as an expert report, and therefore is not entitled to rely upon it as expert evidence.
- I accept Mr Nugee's submission. It involves a straightforward reading of CPR Part 35. As the commentary in Phipson makes clear, "the court has power to restrict the calling of an expert or the tendering of an expert's report" falling within the scope of CPR Part 35. HOTT's argument is that it is entitled to rely on the Nuttalls and Foster Wheeler material as (hearsay) evidence of opinion of persons to be considered as experts for the purposes of these proceedings in relation to the issues to be determined by the court. I therefore consider that, in substance, HOTT is seeking to make use of this material in the same way as a party would seek to adduce and use an expert report in the ordinary way, so that HOTT is subject to the CPR Part 35 regime when it invites me to accept and rely on the material in this way (rather than just as factual background to which others, such as Mr Bartlett, could refer). The position is different from the kind of official reports referred to in Phipson, which (as there observed) "are not the reports of 'experts' within CPR Part 35".
- Compliance with the detailed regime in CPR Part 35 in relation to the introduction of expert evidence into a trial is an important matter, since parties need to know in advance and in the course of a hearing the proper status of any evidential material to be debated at trial, in order to consider whether to adduce evidence to rebut it and to decide what attitude to adopt in relation to it and what submissions might ultimately need to be made about it. Since HOTT has not complied with that regime in relation to this material, there has been no concession by ABP that HOTT may employ it as expert evidence and no waiver of the usual rules by the court, I consider that HOTT is not entitled to rely on it as expert evidence in the way it seeks to do.
- I can see nothing in Charnock v Rowan which is inconsistent with this analysis or conclusion. It was concerned with the ability of counsel to cross-examine a witness on the basis of prior inconsistent statements made to doctors (see paras. [15] and [16]), which is a matter far removed from the issue of the application of CPR Part 35 in this case.
- I would add that, even if I had treated the Nuttalls and Foster Wheeler material as admissible expert evidence, I would have treated it as substantially devalued for all the reasons set out in para. [145] above and would without hesitation have preferred the expert evidence of Mr Ferguson. My conclusions on the issue of the cost of constructing a replacement jetty and regarding the outcome of the case would have been the same.
Legal Analysis
(a) The test in section 24D
- There are three principal elements governing the operation of section 24D of the 1954 Act, and the precise relationship between them is in question in these proceedings. The elements are (i) the requirement in section 24D(1) that interim rent be set at the level "which it is reasonable for the tenant to pay"; (ii) the requirement in section 24D(2) that in determining the interim rent "the court shall have regard (a) to the rent payable under the terms of the relevant tenancy [i.e. the current passing rent]
" (I leave to one side here the distinct element set out in sub-paragraph (b), which is not a relevant factor in the present case); and (iii) the stipulation that "otherwise" section 34(1) and (2) "shall apply to the determination as they would apply to the determination of a rent under that section if a new tenancy from year to year of the whole of the property comprised in the relevant tenancy were granted to the tenant by order of the court". In summary terms, section 34(1) and (2) provides for a rent set in the open market between willing landlord and willing tenant, subject to certain adjustments.
- In my judgment, the governing obligation on the court in this context is that set out in section 24D(1), to set the interim rent at the level which it is reasonable for the tenant to pay (element (i)), and the other elements ((ii) and (iii)) fall to be read and applied in the light of that obligation. On this important question I accept the submission of Mr Nugee, for the following reasons:
i) Section 24D(1) clearly sets out the task for the court and the main obligation upon it. It introduces the interim rent regime and states the task to be performed, and elements (ii) and (iii) in the assessment are introduced by the opening words in section 24D(2) "In determining the interim rent under subsection (1) above
" which indicate that they are subordinate to and should be read in light of the obligation in sub-section (1). The words in section 24D(1), "the rent which it is reasonable for the tenant to pay", have a meaning and force of their own which cannot be reduced simply to what is said in section 24D(2), as if they did not appear at all;
ii) The exact relationship between elements (ii) and (iii), and also the relationship between the distinct factors in sub-paragraphs (a) and (b) in section 24D(2), is not specified on the face of section 24D(2). Therefore, in order to give a proper structure to the court's determination of interim rent and avoid simple capriciousness, it is necessary to read those elements in light of the fundamental task and statement of objective set out in section 24D(1);
iii) This view is supported by the decision of the Court of Appeal in Neale v Witney Electric Theatre [2011] EWCA Civ 1032, at [20] and [31]-[32] per Laws LJ (with whom the Longmore and Etherton LJJ agreed). At para. [20] Laws LJ said that "the overriding provision" in section 24D is sub-section (1). See also English Exporters (London) Ltd v Eldonwall Ltd [1973] 1 Ch 415, 429B-C per Megarry J: it is the words of section 24D(1) "that constitute the basic requirement." Section 24D(1) is not to be read as allowing the court to undertake a "roving commission to consider every fact that might bear on reasonableness" (Eldonwall at p. 429G-H), but construing it in the way set out here avoids that by giving it its proper place in the conceptual structure of section 24D as a whole;
iv) Wider consideration of the nature of the task to be performed in setting interim rent supports the same conclusion. The court is required to set a rent governing a relationship between the parties in circumstances where they have not made a consensual agreement between themselves (this aspect of the application of section 24D is reinforced by section 24C of the 1954 Act, which provides, in effect, that where a new tenancy is agreed between landlord and tenant after relevant notices are served there is a rebuttable presumption that the rent payable under the new tenancy shall also be the interim rent). In general terms, the court clearly has to do so in a way which is fair and reasonable between the parties (since it is inherent in the nature of the situation that the justice of the case cannot be determined by their own agreement), which implies an obvious analogy with the approach generally adopted by the common law in similar contexts where parties find themselves in a relationship involving provision of benefits by one to the other in circumstances requiring a payment to be made, but where they have not made a binding agreement between themselves governing the amount to be paid, such as when assessing the amount payable on a quantum meruit basis for services rendered. In fact, section 24D(1) uses language which confirms that a similar exercise is required.
- Indeed, in my view section 24D(1) and (2) was intended to establish application of an approach broadly equivalent to that used in setting the amount of a quantum meruit and other common law remedies requiring reasonable payment to be made for some benefit conferred. Not only does section 24D(1) use language which is apt to indicate this, the other elements in section 24D(2) involving comparison with what is to be taken to be the market rate and with what the parties have themselves agreed at other times or under different circumstances as payment terms in respect of the same benefit also have a strong correlation with the common law approach. So, for example, in particular contexts the terms of an arrangement between the parties may be taken to provide the best indication of what should be the fair and reasonable amount of a payment found to be due: see e.g. Way v Latilla [1937] 3 All E.R. 759 (HL). Depending on the circumstances, that might be found to provide better evidence in that regard than the general market, perhaps because there is no very clear market rate in relation to the benefit in question or because the rate agreed between the parties indicates that particular value is attributed by the recipient to the service or benefit provided which it would be fair to reflect in the rate to be set (e.g. if there were no clear alternative provider of an equivalent service or benefit who could otherwise have been employed).
- In this respect, I do not think that the purpose of section 24D(2)(a) is as limited as perhaps suggested in a dictum by Nourse LJ in Charles Follett Ltd v Cabtell Investments Ltd (1987) 2 EGLR 88 at 90F-H, where he said that "[t]he legislative purpose" of the requirement that regard should be had to the old rent was, where appropriate, to cushion the tenant against the shock of being exposed to a new market rent greatly increased by the effects of inflation. That is undoubtedly a purpose of the provision, but I do not think it is the exclusive purpose of it. The inclusion of sub-paragraph (b) in the same part of section 24D(2) (requiring regard to be had to "the rent payable under any sub-tenancy") cannot be explained on this basis. That may be relevant as a possible indication, derived from agreement between relevant persons, of the reasonable value of the property - if the tenant has sub-let the same property at a particular rent, that may be a useful basis for working out a reasonable interim rent which he should himself pay. The inclusion of sub-paragraph (a) alongside this factor, and the general points made above, lead me to conclude that the current passing rent under section 24D(2)(a) is capable, depending on the circumstances, of having a wider relevance than just acting as a possible cushion against an increase in rent by reference to market circumstances.
- Under section 24D the relative weight to be given to general market indications of value and indications of value to be derived from dealings between the parties will vary according to context, and will moreover ultimately be subject to the assessment of the court as to what is reasonable as a rate of payment to be set between the parties in respect of the particular benefit conferred in the particular context in which it is conferred. So, for example, in simple contexts concerning provision of benefits which are standardised in nature and for which there is a clear stock of readily available substitutes in the market, ordinarily the reasonable rate to be paid will simply be the standardised market rate for that benefit. Why should the recipient have to pay more than that? By contrast, in the present case, there is no ready market in the type of asset in issue (which is why the expert valuers resort to use of the DRC valuation method, as a substitute) and there is clearly significant particular value for HOTT and the oil companies in having been able to continue using the Oil Jetty to service the Refineries over the interim rent period, whilst also having the benefit of the exemption from ship and goods dues. In my judgment, these are significant features of the present context which ought to inform the amount of rent "which it is reasonable for the tenant to pay" to be set under section 24D.
- Similarly, the weight to be given to the current passing rent under section 24D(2)(a) in assessing the reasonable interim rent and the extent to which it may provide helpful guidance in setting that rent will vary depending on the circumstances of the particular case.
- Mr Dowding submitted that the open market rental rate and the current passing rent constituted alternative upper limits on the amount that could be set as the interim rent. I do not agree with this. Section 24D(2) provides only that the court should "have regard" to the current passing rent; it does not stipulate that it and the open market rent constitute alternative upper limits on the amount of interim rent to be set. In my judgment, in appropriate circumstances it is possible for the court to "have regard" to the current passing rent in its particular contractual setting and to infer from it and from a change in the relevant circumstances that "the rent which it is reasonable for the tenant to pay" for the interim period should be increased above the current passing rent.
(b) Having regard "to the rent payable under the terms of the relevant tenancy"
- The calculation of the current passing rent under the Oil Jetty Lease is rooted in circumstances from long ago and so does not provide helpful direct guidance on the rent it would be reasonable for HOTT to pay in current circumstances. The calculation involved percentage increases over time in relation to only some of the elements of rent, and even those increases were calculated by reference to old public sector borrowing rates.
- However, I consider that it is a fair inference that the exemption from ship and goods dues in clause 6(a) of the Oil Jetty Lease operated to decrease the sums payable overall to ABP during the life of that lease and that it was included as an incentive to HOTT and the oil companies to invest the considerable sums required to establish the Refineries and to equip the Oil Jetty. Such exemption from dues is not a normal and general feature of arm's length arrangements made in relation to similar jetty lease arrangements in the open market, as the experience of Shell in relation to the Tranmere jetty shows and as Mr Watson's and Mr Garratt's analysis of the market indicates. There appears to have been no attempt in the Oil Jetty Lease to calculate the amount of the ship and goods dues which could be expected to be saved under the exemption and to match that with any part of the rent. The amount of the rent was primarily defined by reference to the capital sums invested to build the Oil Jetty and interest thereon, which reinforces the impression that it is fair to regard the exemption in clause 6(a) as a supplementary benefit for HOTT. The explanation for clause 6(a) of the Oil Jetty Lease, and the length of time for which that lease was agreed to last, is in my view the desire to provide HOTT and the oil companies with a lengthy period of special protection in respect of dues and with assurance that they could generate income over the same period from their activities without significant risk of losing the benefit of the Oil Jetty facility by exercise of rights of notice by ABP.
- Thus the rent payable under the terms of the relevant tenancy (i.e. in the setting of a tenancy including the exemption in clause 6(a)) was, in effect, kept low by means of the exemption (and the absence of an element of rent or other obligation attributable to paying for that exemption) to allow for such an incentive, much as a tenant in other circumstances might be granted a rent free period of occupation as an incentive to take a lease and to equip the premises in question for use. The agreed dues exemption incentive period has now expired and I can see no good commercial reason why the interim rent should be set at a level which continues to afford HOTT and the oil companies the commercial benefit of being wholly exempt from ship and goods dues. They have had the benefit of what they bargained for in relation to that particular incentive. The justification for a rental sum calculated so as to provide exemption from ship and cargo dues has now expired. Accordingly, I cannot accept HOTT's submission that clause 6(a) "is not 'a very valuable exemption' to the tenant
[i]t is simply the quid pro quo for the tenant's covenants in the lease."
- Accordingly, having regard to the current rent leads to the conclusion that it would be reasonable for the interim rent to reflect the expiry of the justification for the special exemption from ship and goods dues, such that the overall rent payable for the benefit of an interim holding of the Oil Jetty with the continued benefit of such a contractual exemption term should be increased to allow for the commercial value of such a term. I regard this as a factor which is less helpful and less weighty than the analysis of the open market rent set out below; but it does have some force and it underlines the validity of the conclusion arrived at below pursuant to the open market rental test under the second part of section 24D(2) and section 34.
- This is not a case in which it is appropriate to allow for a distinct cushioning effect to take account of the increase in market rents above the current passing rent due to inflation or the impact of unexpected events which might lead to the conclusion that it is reasonable to protect a tenant against "an inordinate shock" of suddenly being required to pay a much higher rent: contrast Charles Follett Ltd v Cabtell Investments Ltd (1987) 2 EGLR 88 at 90F-H.
(c) Open market letting between willing landlord and willing tenant
- The rent at which the holding might reasonably be expected to be let in the open market between a willing lessor and a willing lessee is to be calculated by reference to "the whole of the property comprised in the relevant tenancy" (section 24D(2)), under a tenancy from year to year (section 24D(2)) and otherwise assuming the same terms of the tenancy as are included in the Oil Jetty Lease (section 34(1) in particular, this means that it is to be assumed that the yearly tenancy continues to include the exemption from ship and goods dues in clause 6(a)). The statutory regime allows for there to be certain disregards of parts of the property subject to the notional yearly tenancy. The parties disagreed about what parts of the equipment on the Oil Jetty are to be disregarded for the purposes of the interim rent calculation and also regarding how the disregard mechanism should be taken to operate. Is it to be assumed that the jetty is bare to the extent that equipment is to be disregarded, or do the disregards produce a reduction in the interim rent payable in some other way?
- So far as concerns the property to be disregarded, HOTT made three alternative submissions: (i) any property installed by HOTT and which HOTT is contractually entitled to detach and remove from the Oil Jetty at the end of the lease (i.e. all of the equipment installed by it under the Oil Jetty Lease) should be regarded as its property and hence disregarded; or (ii) any property which constitutes a tenant's fixture for the purposes of the law of landlord and tenant should be disregarded (the parties disagreed about the extent to which equipment installed by HOTT constitutes tenant's fixtures, in light of guidance given in the New Zealand case); or (iii) any improvement to the Oil Jetty falling within section 34(1)(c) and (2) of the 1954 Act should be disregarded.
- In my judgment, the correct scope of the disregard is as in (i), for the reasons which follow.
- The issue is one of the proper interpretation of section 24D(2). Section 24D(2) says that the yearly tenancy which is to be assumed is "of the whole of the property comprised in the relevant tenancy". On one view, it could be said that this phrase includes all the equipment installed by HOTT on the jetty, both because of the terms of the Oil Jetty Lease itself (which in clause 1(i) provides that the Lessee's Works form part of the demised premises) and because of the operation of the general law of property (which has the effect that property affixed to land becomes part of the land). However, I consider that the better construction of this phrase is that it means the whole of the property owned by the landlord which the tenant has no right to detach and remove. It is the property which is in this sense the landlord's own property which is to be treated as subject to the notional tenancy. The notional tenancy is not to be treated as a demise also of property which the tenant has installed and has a right to detach and remove, which is for these purposes to be regarded as the lessee's own property.
- This is, in my view, the better interpretation of section 24D(2) when read in light of the general requirement in section 24D(1) that what is to be determined is "the rent which it is reasonable for the tenant to pay". It is not reasonable to expect the tenant to pay rent in respect of his own property, in the sense described above.
- It should be noted here that the disregard in section 34(1)(c) and (2) for "improvements" made by the tenant does not provide full protection for the reasonable interests of the tenant, since it does not cover certain improvements made by the tenant to the property (e.g. those made more than 21 years ago, by installation of plant or equipment which the tenant has a right to detach and remove). It is not plausible to infer that Parliament intended to produce the unfairness or unreasonable result of requiring the tenant in such cases to pay rent in respect of his own property, which he installed at his own expense and is entitled to detach and remove. Indeed, the fact that Parliament has, in section 34(1)(c), provided that a disregard applies for improvements made by the tenant even when he has no right to detach and remove them (such as what are known as "landlord's fixtures") supports the inference that Parliament did not intend that a tenant should have to pay rent in relation to property installed by himself and which he remains entitled to remove. The better reading of section 34 is that it provides for an additional disregard for the protection of a tenant, in relation to improvements made to the demised property which the tenant has no right to detach and remove and which have thus become, in the relevant sense, the property of the landlord.
- Further, section 24D(2) is to be read in light of the usual presumption that Parliament does not intend to interfere with property rights without compensation: see e.g. Westminster Bank Ltd v Beverley Borough Council [1971] AC 508, 529 (per Lord Reid); Maxwell on the Interpretation of Statutes, 12th ed., pp. 251-262 (esp. p. 253: "A
restrictive construction is placed on statutes which interfere with rights of property"). If the relevant phrase in section 24D(1) were not interpreted with the restrictive sense which I prefer, I consider it would infringe this presumption, since it would deprive the tenant of the fruits or incidents of his rights in relation to his own property by requiring him to pay rent for what is properly to be regarded as his own. Since there is an alternative, sensible construction of the phrase which avoids this result, that construction is to be preferred.
- This conclusion on the proper construction of section 24D(2) is also supported by considered obiter dicta in the judgments given in the Court of Appeal in the New Zealand case. I am not bound by those dicta, but they are of substantial persuasive authority.
- The New Zealand case was not directly concerned with the operation of sections 24D and 34. Rather, it related to the rent payable under the terms of a lease, which was to be the open market rental appropriate for the demised premises, a theatre, to be set by arbitration in absence of agreement. The theatre was originally held under a business tenancy to which Part II of the 1954 Act applied. Before the expiry of the term of that tenancy on 30 September 1970 the lessee applied for the grant of a new lease under the 1954 Act. The landlord conceded that the lessee was entitled to a new lease, and there was a period of negotiation regarding its terms, until a new lease was executed on 8 February 1973. Meanwhile, the old lease continued in existence automatically until it was surrendered in 1973 and the new lease took effect.
- The question the Court had to determine arose under the new lease. That lease was for 21 years from 1 October 1970, at a set rent for the first seven years and for the next seven years at the "open market rental of the demised premises". The parties could not agree the amount, so the matter went to arbitration. As set out at [1982] 1 QB at p. 1156B-E, a matter dividing the parties was whether fixtures installed in the theatre over many years by the tenant, such as seats in the auditorium installed by screwing or bolting them to the floor, were to be included as part of the "demised premises" in relation to which the tenant was to pay rent (on the basis that they belonged to the landlord) or not (because they belonged to the tenant). The answer to the question was found to depend on whether the tenant had lost the usual right to remove "tenant's fixtures", which subject to contrary stipulation is assumed by law to be part of every lease. That the issue came to be posed in this way turned on the proper construction of the new lease (a point borne out by the reference by Lord Denning MR to the detailed terms of the new lease at [1982] 1 QB 1160E-F). The landlord contended that the tenant lost its right to remove tenant's fixtures when the old lease was surrendered in 1973 so that they became part of the "demised premises" to be included in the calculation of open market rent under the new lease, while the tenant argued that the surrender did not have that effect and that so long as it continued in possession of the premises (as it had done) it retained its right to remove the tenant's fixtures: see [1982] 1 QB at 1156G-H. The Court of Appeal upheld the tenant's argument on this point: [1982] 1 QB at 1157G (Lord Denning MR), 1161E-1162A (Dunn LJ) and 1164F-1166A (Fox LJ). Thus, the operation of the relevant term in the new lease regarding fixing a market rent for the second seven year period was found to depend upon the question whether the tenant had retained its right to remove tenant's fixtures, and in the circumstances of the case it was held that it had.
- In the course of reaching this conclusion, Lord Denning MR referred to a counter-argument by the landlord, who contended that section 34 of the 1954 Act, as amended in 1969, "shows that Parliament proceeded on a different course", in that the section says that in fixing the rent payable under a new tenancy there is to be taken into account any "improvements" carried out within the last 21 years, but not those carried out before that. Lord Denning said that the answer to this point was that this only "applies to improvements made by the tenant which are 'landlord's fixtures' which the tenant is never able to remove. It does not apply to 'tenant's fixtures'": p. 1160B-C. Dunn LJ and Fox LJ specifically agreed with this analysis: pp. 1161G and 1165H, respectively. The analysis presupposes that tenant's fixtures, i.e. additions affixed by the tenant to the landlord's property which the tenant has the right to detach and remove, do not form part of "the holding" the notional open market rent for which is to be set under section 34(1) since it would be bizarre if rent did have to be paid for all tenant's fixtures while an exemption was provided in relation to most landlord's fixtures. A similar approach is required when considering the notional open market rent for the property referred to in section 24D(2). The words, "the property", in the second part of section 24D(2) and the words, "the holding", in section 34(1) fall to be construed as referring the property of the landlord which is being let and as excluding the property of the tenant in the relevant sense I have identified (property installed by the tenant and which he has a right to detach and remove).
- Although Lord Denning (and Dunn LJ and Fox LJ in agreeing with him) did not spell out the exact process of statutory construction of section 34 which led him to make his observation, and to read the word "improvement" as having this limited sense, I think that there is a sound basis of reasoning which supports this construction, along the lines set out above. I consider that it is right and that I should follow the guidance given by the Court of Appeal.
- The Court in the New Zealand case considered the position in relation to tenant's fixtures, as that concept had developed in the old common law of landlord and tenant. However, in my judgment, the reasoning of the Court is not confined to items which qualify as tenant's fixtures in that particular sense. The reasoning in the New Zealand case was framed by reference to the law of tenant's fixtures because, in the context of the new lease in that case, it was only in relation to tenant's fixtures that the tenant had a right to remove the property added to the demised premises, and hence it was only those items of property which qualified as tenant's fixtures which could properly be regarded as the property of the tenant rather than the landlord. However, it will often be sensible for landlord and tenant to stipulate expressly which items of property added to demised premises by the tenant the tenant is entitled to detach and remove, thereby avoiding what may be difficult arguments as to exactly how to classify particular additions (cf the general guidance given by Lord Denning regarding the dividing line between landlord's fixtures and tenant's fixtures at [1982] 1 QB 1157A-E). The general principle of freedom of contract applies, enabling the parties to a lease to specify their rights and obligations in this way. There is no policy reason why the law should refuse to respect the agreement they make as to what property added to the demised premises by the tenant he has the right to detach and remove. In relation to all such property, the tenant is to be regarded as the owner of it just as the tenant in the New Zealand case was to be regarded as the owner of the property added by way of tenant's fixtures. As I think is clear from the judgments in that case, it is the right of removal by the tenant which shows that the property is to be regarded as his own for the purposes of working out the open market rent to be paid in respect of the demised premises, not whether the fixtures happen to be regarded as "tenant's fixtures" as such.
- Since HOTT has the right under the Oil Jetty Lease to detach and remove all the equipment installed by it on the Oil Jetty (including pipelines, loading arms, fire equipment and so on), it is to be regarded as the owner of those items for the purposes of the interim rent calculation and they all fall to be disregarded when working out the notional open market rent payable for the Oil Jetty in the interim period.
- Having adopted this analysis, there is no relevant property in relation to which section 34(1)(c) applies. Nor are any further disregards or adjustments appropriate under the other sub-paragraphs of section 34(1). In particular, although at certain points in the hearing Mr Dowding referred to section 34(1)(a), I agree with Mr Nugee that that provision is directed to removing the effect of what is sometimes called "the sitting tenant overbid", the idea that a sitting tenant might be prepared to pay a premium to avoid the disturbance of having to move out. That is not a factor which affects the analysis of the open market rent which I have adopted.
- I turn, then, to consider the next main issue dividing the parties under this part of the analysis, namely how the disregard in relation to the items installed by HOTT on the Oil Jetty is to be given effect. HOTT submits that the court should assume that there is in place at the start of the interim rent period a bare jetty structure, with the result that a low interim rent should be set and (in particular) that it should be assumed that the continued availability of the exemption in clause 6(a) of the Oil Jetty Lease would have no practical value, since it would be unlikely that a bare jetty could be re-equipped and made operational in time to allow any shipments of crude oil or refined products across the Oil Jetty. I do not accept these submissions.
- As set out above, the main guiding principle in setting the interim rent is that it should be set as "the rent which it is reasonable for the tenant to pay while the relevant tenancy continues by virtue of section 24 of [the 1954 Act]": section 24D(1). This informs the assessment required under the second part of section 24D(2) and section 34. Where a tenant holds over in possession of premises by virtue of continuation of the relevant tenancy under the 1954 Act, the rent which it is reasonable for him to pay should be assessed in a practical and fair way, having regard to the actual circumstances which it is contemplated at the start of the interim rent period will apply during the period for which the rent is to be paid. In my judgment, since it was always contemplated that HOTT would be operating the Oil Jetty in the usual way in the interim period, shipping about 20 million tonnes of crude oil and refined products across it each year, it is obvious that it is reasonable for it to pay rent which reflects such actual usage of the Oil Jetty, which was foreseeable when the interim period commenced. The court should not assume that, contrary to the facts, there was only a bare jetty structure in place.
- The main consequence of this is that proper value has to be given, when looking for the purposes of the second part of section 24D(2) and section 34(1) at the open market rental to be expected in relation to the property demised on the same terms (other than those relating to rent) as are contained in the Oil Jetty Lease, to the commercial benefit a tenant of the Oil Jetty would expect to receive by virtue of the exemption from ship and goods dues in clause 6(a) of that Lease. This is a commercial benefit additional to the physical possession of the Oil Jetty, which needs to be added to the value of the jetty given by the DRC approach.
- It is relatively easy to work out how to allow a fair disregard in relation to the equipment installed by HOTT for the purposes of the rental calculation based on the DRC valuation method. One simply ignores the cost of installation of replacements for that equipment when carrying out the DRC calculation, and uses only the cost of construction of a replacement for the jetty structure itself. On that, I find the evidence of Mr Ferguson compelling. The relevant replacement construction cost for the jetty for use in the DRC-based assessment is therefore £142,474,000. This is the figure explained and justified in his report, which Mr Watson thought should be used in his calculations (this figure omits a small speculative additional amount of cost in relation to environmental mitigation which Mr Ferguson said "could be in the region of £1-2m", which Mr Watson did not think it appropriate to include in the relevant calculations, and I agree with him). The reduction for depreciation is agreed to be 40%.
- Mr Watson and Mr Norman disagreed about the de-capitalisation rate. Part of the basis for the difference between them was the period which was to be assumed for re-equipping a bare jetty. Since I reject HOTT's bare jetty theory as a basis for analysis, this is not a basis for reducing the relevant de-capitalisation rate. For reasons given above, I consider that the appropriate de-capitalisation rate for the purposes of the DRC-based rental calculation is that given by Mr Watson, i.e. 11%: see para. [91] above.
- Therefore, the DRC-based rental calculation gives an annual rental figure in respect of the jetty structure of £142,474,000 x 60% x 11% = £9,403,284.
- I consider that a willing landlord and a willing tenant would also treat the exemption from ship and goods dues in clause 6(a) as having substantial value, and could be expected to negotiate an additional element in the annual rent to reflect that, dividing up the commercial benefit between themselves. I accept Mr Garratt's evidence regarding the likely assessment of a willing landlord and willing tenant of the savings in respect of ship and goods dues. By reference to 2009 data the figure would be £1.50 per tonne of goods transported across the Oil Jetty. With adjustment to produce a 10 year average, the relevant figure would be £1.42 per tonne. The 10 year average throughput of goods is 20,228,600 tonnes p.a.. The likely assessment of the overall saving associated with clause 6(a) at that rate of usage of the Oil Jetty, therefore, would be about £28,725,000.
- I do not find Mr Norman's evidence of great assistance in valuing the addition to the open market rent to take account of clause 6(a). He accepted that there could in principle be some addition, but his analysis focused on the bare jetty theory which I reject.
- Mr Watson's evidence is of assistance, but in my view his approach requires modification. His approach was to identify the DRC-based rental figure for the Oil Jetty covering both the jetty structure and the pipes and equipment (an analysis I have rejected above) to give a combined DRC-based annual rent of £14,642,000 (compared to the figure I have arrived at, based on the jetty structure alone, of £9,403,284); then to take what he termed the "net saving" of expenditure deriving from clause 6(a), calculated as the full annual saving of ship and goods dues less the DRC-based annual rent (£28,725,000 - £14,642,000 = £14,083,000: an amount slightly adjusted from that given in his original report to take account of an increase he allowed for in the DRC in respect of equipping the Oil Jetty); then to allow as the additional element of rent attributable to clause 6(a) a figure equal to 75% of the net saving (£10,562,250, again slightly adjusted from his original report), based on his assumption as to how a willing landlord and willing tenant would negotiate to divide up the net saving figure between them there is little reasoning to support the particular figure of 75% which he uses. On this calculation, Mr Watson arrived at a total notional annual rent figure - working from the DRC-based approach with an addition in relation to clause 6(a) - of £14,642,000 + £10,562,250 = £25,204,250 (which provides a basis for further calculations by him, considered below). If converted into an overall rate of payment per cargo tonne transported across the Oil Jetty, this would equate to a rate of about £1.24, just over that agreed by Shell in relation to the Tranmere jetty.
- I accept from Mr Watson's analysis that his concept of the net savings is appropriate as the basis for the notional willing landlord and notional willing tenant to address between themselves the additional element of rent to be paid to take account of having a lease including the equivalent of clause 6(a). Mr Watson posits a business negotiation which would take place in which the parties would haggle over how the net savings figure would be divided up. In my judgment, a reasonable and appropriate way of looking at how such a negotiation would be framed and resolved is to proceed on the basis of Mr Watson's approach, modifying it as follows.
- The parties would proceed using Mr Watson's proposed figure of £14,083,000 as the "net savings" figure. They would already have taken the DRC-based rent figure for the jetty structure to be that used by Mr Watson based on the cost of constructing an alternative set at £142,474,000 (a figure I have found to be correct) and would have agreed that it should be paid by the tenant. They would have agreed that any separate DRC-based rent figure in respect of the pipelines and equipment as proposed by Mr Watson should not be paid by the tenant, but that it should be an element fairly attributable to the tenant in the negotiation - it represents a contribution by the tenant, using his property, to the overall commercial situation in which the Oil Jetty can be treated as a valuable asset. It is appropriate to use Mr Watson's figure for this element of the calculation to arrive at the "net savings" figure, since as used in this context it is at the end of the range of possible figures which is generous to HOTT; it is not unfair to ABP to use it, since on its submissions it is the appropriate figure to use (and I observe that in relation to the cost of equipping the Oil Jetty in modern circumstances the variation between the rival figures was fairly narrow); and to reduce it would have the effect of increasing the relevant "net savings" figure beyond the amount which Mr Watson thought it appropriate to use.
- It should be noted here that it would not be appropriate to use a net savings figure based simply on the difference between the savings in respect of ship and goods dues and the DRC-based rent calculation I have used for the Oil Jetty, which is limited to the jetty structure alone (in recognition of the tenant's effective ownership of the pipelines and equipment). If one did that, the implication from Mr Watson's analysis would be that the additional element of rent payable in respect of the clause 6(a) savings would go up, because the figure given by the concept of the net savings would increase. That would be a very odd conclusion to draw in circumstances in which the tenant was found to be making more of a contribution to the overall economic value of the Oil Jetty than Mr Watson assumed to be the case. In such circumstances, judged objectively and assuming a notional willing landlord and willing tenant, one would expect a lower additional element of rent in relation to clause 6(a) to be negotiated. This would reflect the greater contribution which the tenant makes (who is recognised to be contributing the pipelines and equipment, which he is taken to own) and the smaller contribution which the landlord makes (who is now taken only to be contributing the jetty structure, not the totality of the jetty structure, pipelines and equipment) to creating the conditions which allow for the realisation of traffic across the Oil Jetty of about 20 million cargo tonnes a year, which is the foundation for the commercial benefit of having the savings associated with clause 6(a).
- Analytically, if one is looking at a notional landlord (rather than ABP itself), the fact that he can confer the benefit of exemption from ship and goods dues as against the harbour authority is a power which allows him to confer savings on the tenant in the form of avoiding having to pay sums to a third party (the harbour authority). The amount of the savings to the tenant will reflect the extent to which he can induce the Refineries to go on using the Oil Jetty for shipping in crude oil and shipping out refined products (in relation to that, it should be noted that a significant increase in the price ultimately payable by the Refineries to the tenant for use of the Oil Jetty would increase the attractiveness to the Refineries of using other routes the Tetney mono-buoy, the inland national pipeline distribution network, other jetties at the Port of Immingham, road and rail and being prepared to pay somewhat more to gain access to those routes than they do now, thereby creating downward pressure on the extent to which they would continue using the Oil Jetty). Those savings are an economic benefit which can then be divided up between landlord and tenant in the form of an additional element of rent.
- The commercial benefit associated with a clause 6(a) type exemption from ship and goods dues would be the product of having a fully operational Oil Jetty comprising a combination of the jetty structure and the pipelines and equipment on it, functioning in the context of demand for use of the Jetty to service the Refineries. The amount of the savings associated with clause 6(a) (and hence the amount of the economic benefit to be shared between landlord and tenant) is a function of the level of activity passing across the Oil Jetty, which is a function of contributions made by both of them to the overall level of that activity and of the pressure of demand for use of the Oil Jetty by the Refineries (which, since the Refineries do have other transportation routes available to them, would be vulnerable to some degree to price increases passed on to them). I think that in negotiating an additional element of rent to reflect clause 6(a), reasonable business people (the notional willing landlord and the notional willing tenant) would seek to agree a figure which recognised in a fair way this underlying economic reality.
- In my judgment, the additional element of rent which a willing tenant and willing landlord in open market conditions would agree should be paid in relation to the clause 6(a) exemption would be that part of the "net savings" which is fairly attributable to that element of the overall circumstances for which the landlord is responsible and in relation to which it is entitled to demand rent for the purposes of section 24D, namely the provision of the jetty structure. There is no clear or scientific way in which that could be assessed. I do not think, for example, that reasonable business people would try to enlist experts to try to work out the modern installation costs of pipelines and equipment and then try to hold a little trial of that issue, as I was invited to do, in order to compare them with the modern construction costs for the jetty and divide up the value of the savings from ship and goods dues proportionately the process would be too onerous, the different elements in it too speculative, the scope for argument too great, and the results would have only a spurious "scientific" appearance unlikely to provide much guidance in any real commercial negotiation. It would also be a calculation which left out assessment of the possible impact, in the form of downward pressure on the amount of the "net savings" to be haggled over, of a significant price increase on the demand from the Refineries to use the Oil Jetty. Rather, an overall evaluative judgment is required to be made by the Court, in light of all the circumstances of this unusual case.
- In my view, following Mr Watson's analysis but with adjustments to take account of the points made above, the additional element of rent which would be agreed between a willing landlord and willing tenant in these circumstances would be equivalent to half the "net savings" in respect of ship and goods dues that he identifies (£14,083,000), namely £7,041,500. Where there is no clear criterion available to support a different approach, equal division of a benefit may be regarded as likely to be treated as fair by business eople wanting to do a deal (as has to be assumed here, since I am required to posit a willing landlord and a willing tenant), where both can be regarded as making a major contribution to the realisation of that benefit. In the circumstances of this case, such a division would also allow for a degree of contingency and uncertainty, in relation to which the tenant could argue with considerable force that a substantial increase in the rent it has to pay (a cost it has to pass on to the Refineries) would tend to jeopardise realisation of the full "net savings" amount. Accordingly, I consider that a 50/50 division of the "net savings" between the notional willing landlord and the notional willing tenant would be regarded as fair and reasonable in the circumstances of this case.
- Therefore, in conclusion on the analysis based on the DRC-based valuation method combined with sharing of the "net savings" in relation to clause 6(a), I find that the annual rental figure given by that analysis would be £9,403,284 + £7,041,500 = £16,444,784.
- Mr Watson says that it is conventional in valuation exercises to reduce a notional rental figure by 10% to take account of the yearly nature of the notional tenancy which has to be assumed. A yearly tenancy is comparatively short for letting property and introduces an element of precariousness for the tenant. That is matter on which I consider that his expertise is valuable and relevant and I accept that such an adjustment should be made. Accordingly, one arrives by this analysis at an appropriate figure for interim rent of £16,444,784 less 10% = £14,800,306.
- Standing back as best I can to assess matters in the round in light of the objective set by section 24D(1), a figure of that order for interim rent also has the right "feel" for an interim rent which it would be reasonable to expect HOTT to pay.
- I do not consider that any of the other matters referred to by Mr Watson and Mr Norman is persuasive or of such force as to justify any modification of this figure up or down. The principal matter in this respect is comparison with the transaction concerning the Tranmere jetty in 2009, which Mr Watson treats as a relevant comparator in trying to assess the open market rental value for the Oil Jetty but which Mr Norman discounts. By treating the Tranmere jetty transaction as a close comparator, Mr Watson derives a figure of £25,890,000 p.a. as a rental figure for the jetty structure alone at the Oil Jetty. As noted above, Mr Watson and Mr Garratt also refer to the position at Tranmere as a reference point for figures relevant to the calculation of the "net savings" in relation to clause 6(a).
- I consider that the position in relation to the Tranmere jetty provides a useful reference point (alongside others) for the exercise undertaken by Mr Garratt, to assess the potential level at which ship and goods dues could be imposed in relation to the Oil Jetty. However, I am unpersuaded that the 2009 lease of the Tranmere jetty provides more direct guidance along the lines proposed by Mr Watson regarding the setting of an appropriate interim rent under section 24D(1). I consider that the detailed analysis set out above is the best way to do that.
- The interim rent figure given by that analysis will equate to a lesser charge per cargo tonne than applies in relation to use of the Tranmere jetty, but in my view that simply reflects the different circumstances which obtain at Immingham and the relevant balance of interests between landlord and tenant which is applicable in these particular circumstances. The Refineries have been operating for some 40 years using the Oil Jetty with the benefit of clause 6(a) and at a much lower combined rate for rent and dues than Shell's refinery at Stanlow using the Tranmere jetty, and have presumably reached a degree of competitive equilibrium over that time with Shell's refinery, allowing for differences in their relative positions. If the Refineries and the Oil Jetty were in a directly comparable business position with Shell's refinery and the Tranmere jetty, but having a huge comparative advantage against Shell in relation to this element of their transportation costs, one might have expected that they would have driven Shell's refinery out of business over that period (or at any rate would have curtailed its operations) or that the Refineries would be earning surplus profits on their activities yet there is no evidence that any of this has happened.
- I was not provided with a full economic analysis of the business position of the Refineries and Shell's Stanlow refinery, and have to make the best assessment I can on the information available. In my view, the implication is that Shell's refinery enjoys certain competitive advantages (e.g. its closer position to major conurbations) that mean it can more readily absorb such higher shipment costs than the Refineries could. That lends weight to Mr Norman's caution in treating the position at Stanlow/Tranmere as a direct comparator for the purposes of assessing the interim rent. Therefore I do not agree with Mr Watson that the Tranmere jetty transaction should be taken as a direct guide for the appropriate open market rent in relation to the Oil Jetty. In my opinion, his attempt to derive the interim rent from that transaction yields too high a figure for the purposes of section 24D.
- In my view, appropriate weight is given to the position in relation to the Tranmere jetty transaction for present purposes by using it to provide part of the foundation for Mr Garratt's ship and goods dues analysis, and then using that analysis in the assessment of the value of the "net savings" to be shared between the notional willing landlord and the notional willing tenant as set out above. I consider that both expert valuers were right to have recourse to the DRC method as a basis for valuation, precisely because of the weaknesses and dangers associated with using the Tranmere jetty transaction as a direct comparator (weaknesses and dangers which Mr Watson himself acknowledges, though not in my view giving them sufficient weight).
(d) "The rent which it is reasonable for the tenant to pay" for the Oil Jetty: section 24D(1)
- Finally, I refer to the different components to which reference is required under section 24D(2) to arrive at a conclusion regarding the interim rent which it is reasonable to expect HOTT to pay under section 24D(1).
- In my view, reference to the current passing rent (in the context of a lease containing clause 6(a)) as required by the first limb of section 24D(2) reinforces the approach to valuation of the DRC-based rent for the jetty structure with an additional element in relation to clause 6(a) as set out above: see paras. [160]-[164] above.
- As regards the second part of section 24D(2), the open market rent one would expect to be agreed between a willing landlord and a willing tenant of the Oil Jetty is best assessed, in my judgment, by reference to the DRC-based rent figure for the jetty structure plus an additional element in respect of the "net savings" shared between HOTT and ABP, as set out above, and not by a figure drawn from a direct comparison with what Shell pays in relation to using the Tranmere jetty.
- Finally, having regard to these assessments and also looking at the matter generally for the purposes of making the assessment required by section 24D(1), I consider that an interim rent figure fixed by reference to the DRC-based rent calculation for the jetty structure plus an element for the shared "net savings" in relation to ship and goods dues as set out above is the rent which it is reasonable to expect HOTT to pay in the interim period.
- For these reasons, I assess the interim rent in relation to the Oil Jetty as £14,800,306 p.a..
The interim rent in relation to the pipeline easements in the Oil Depot Lease
- For reasons set out above (paras. [94]-[96]), I accept the evidence of Mr Watson regarding the reasonable annual rent to be paid for these pipeline easements. I assess the annual rent for these at £500,000 p.a..
The validity of the first notices given in relation to the Oil Jetty Lease
- This issue turns on the proper construction of the provision as to the term of the Oil Jetty Lease contained in clause 2 and on the proper construction of the section 25 notice served by ABP on 2 January 2009. Clause 2 of the Oil Jetty Lease states that HOTT is to hold the demised premises "on and from" 1 January 1970 "for the term of Forty years". The section 25 notice served by ABP stated, "I am giving you notice under section 25 of [the 1954 Act] to end your tenancy on 31 December 2009." HOTT submits that clause 2 has the effect that the Oil Jetty Lease expires at the end of 1 January 2010; ABP submits that it has the effect that the Lease expires at the end of 31 December 2009. If ABP is wrong about this, it submits in the alternative that its notice should be interpreted as a notice to end the tenancy on 1 January 2010.
- In my judgment, HOTT is correct on the issue regarding the proper interpretation of clause 2 of the Oil Jetty Lease.
- Where in a demise of property the term is expressed as a period "from" a particular date, it is established that it is usually and naturally construed as meaning the period which commences immediately after that date: see Ladyman v Wirrall Estates [1968] 2 All E.R. 197, 199C. By contrast, where a term is said to commence "on" a particular date, that date will usually and naturally be construed to be the first day of the period.
- In my view, in light of these different meanings, the use of the phrase "on and from" 1 January 1970 in clause 2 of the Oil Jetty Lease most naturally falls to be construed to mean that the period of the demise is the period "on" 1 January 1970 and for forty years "from" 1 January 1970. That period expired on 1 January 2010.
- The alternative proposed by ABP, namely that the phrase means a period of forty years commencing on 1 January 1970 (and hence expiring on 31 December 2009), is not in my opinion a natural reading of the phrase. In the context in which the phrase is used it involves a non-natural reading of both the words "on" and "from" and tends to deprive one or other of them of meaning and force, whereas the drafter appears to have used this unusual combined phrase deliberately and intending to give meaning and force to both words.
- The reading of the provision which I prefer is reinforced by other features of the Oil Jetty Lease. On the front title page of the Lease as executed, its effect is summarised thus: "Lease of [the Oil Jetty] for the term of 40 years, Commencing: 1st January 1970, Expiring: 1st January 2010". This summary is itself part of the Lease and, in my view, an important textual indicator as to the meaning and effect which the parties intended it to have.
- By clause 2 of the Oil Jetty Lease, the rent is payable "by equal quarterly payments in arrear on the said First day of January the First day of April the First day of July and the First day of October in every year". As Mr Dowding submitted with considerable force, if the term of the lease ends on 31 December 2009, then the rent for the last quarter would apparently not become payable because the rent day would fall after the end of the term. This is another powerful indication in favour of the interpretation put forward by HOTT.
- Clause 22 of the 1969 Heads of Agreement supports the same conclusion, since the Oil Jetty Lease was issued pursuant to it and it provided that the Lease should expire on 1 January 2010: see para. [16] above.
- Finally, I accept Mr Dowding's submission that it is legitimate also to have regard to the Oil Depot Lease as an aid to interpretation of the Oil Jetty Lease, since it was granted at the same time as the Oil Jetty Lease, as part of the same transaction and pursuant to the same pre-existing instruments (the Principal Agreement and the 1969 Heads of Agreement). The Oil Depot Lease was granted for a term expiring on 1 January 2010, as contemplated by the 1969 Heads of Agreement, and its front sheet refers (like the front sheet of the Oil Jetty Lease) to the term as expiring on 1 January 2010.
- For ABP's alternative submission, Mr Nugee referred to Mannai Investment Co. Ltd v Eagle Star Life Assurance Co. Ltd [1997] AC 749 and argued that the first notice served by ABP under the 1954 Act on 2 January 2009 should be interpreted to be a notice expiring on 1 January 2010 rather than on 31 December 2009. I do not accept this.
- The construction of the notice must be approached objectively. The issue is how a reasonable recipient would have understood it: see Mannai Investment at p. 767G per Lord Steyn. In that case, the tenant had a contractual right to terminate its leases on particular anniversary dates, pursuant to break clauses in the leases. It served notices to do so which wrongly named the anniversary date as 12 January rather than 13 January. There was no doubt about what date the break clause operated by reference to (the anniversary date), and in those circumstances the majority in the House of Lords held that on an objective approach the recipient of the notice must have appreciated that it was a notice served to expire on the relevant anniversary date, which had simply been wrongly set out by the tenant in the notices. The notices were therefore construed to be valid notices to determine the leases on the anniversary date, 13 January. Even on the facts of that case, that conclusion was arrived at by a bare majority in the House of Lords.
- In my view, the facts of the present case and the context in which ABP's first notice was served are materially different from Mannai Investments. In Mannai Investments there was only ever one possible date which might have been stated in order to comply with the terms of the break clauses, so it was comparatively easy to interpret the notices as notices to terminate on that specific date and to treat the reference to the wrong day of the month as an error obvious (on an objective approach) to both parties and therefore to be disregarded. In the present case, however, the section 25 notice could have referred to any number of dates, so the identification of the particular day of a particular month was central to the meaning of the notice, and not a detail which could be ignored. Moreover, there was a background of uncertainty about the true meaning and effect of clause 2 of the Oil Jetty Lease, so judged objectively ABP's notice of 2 January 2009 would appear to the recipient as a deliberate assertion by ABP of its own right to terminate the Oil Jetty Lease on 31 December 2009 rather than 1 January 2010. It cannot be construed as a notice to terminate the Lease on 31 December 2009 "or whatever other earliest date the court might find to be correct", nor (if it were construed in that way) would it be a valid notice. ABP adopted its own view of its rights under the Oil Jetty Lease and sought to rely on that view to the uttermost degree in giving its notice, and must now take the consequences of doing so.
- In light of my conclusion in HOTT's favour as to the proper interpretation of clause 2 of the Oil Jetty Lease and the proper interpretation of ABP's first statutory notice, it follows that the first statutory notice given by ABP to terminate that Lease was invalid. It is agreed that the second statutory notice was valid, and that therefore the period for payment of interim rent under section 24D commenced on 8 April 2010.
Conclusions
- My conclusions are as follows:
i) The interim rent payable by HOTT in relation to the Oil Jetty is £14,800,306 p.a.;
ii) The interim rent payable by HOTT in relation to the pipeline easement in the Oil Depot Lease is £500,000 p.a.;
iii) The first notice in respect of the Oil Jetty Lease served by ABP under the 1954 Act on 2 January 2009 was invalid, since it purported to take effect before the expiry of the Oil Jetty Lease, according to the proper construction of that Lease. The second notice served on 8 October 2009 was effective. The commencement date for the interim rent is 8 April 2010.
