Mr Justice Sales :
Introduction
- This case concerns claims made by tenants of stalls, shops and offices at Smithfield Market in London ("the Market") for new business tenancies to be granted at rents and on terms to be determined by the Court under Part II of the Landlord and Tenant Act 1954 ("the 1954 Act"). The landlord is the Mayor and Commonalty and Citizens of the City of London, which is the formal designation of the local authority for the City of London. I will refer to the tenants collectively as "the tenants" and to the landlord as "the City".
- The Market is the well-known and historic principal meat and poultry market in London. For present purposes, three parts of the Market are in issue: the East Market, the West Market and the Poultry Market. The East Market and the West Market are buildings erected in the 1860s and subject to substantial renovation and redevelopment in the 1990s. In particular, new commercial office accommodation was built above the parts of the East Market and the West Market occupied by the tenants, which the City lets out to commercial tenants to generate rental income. The Poultry Market is a building dating from the early 1960s. It was not included in the redevelopment of the Market in the 1990s.
- There is also an extensive car park under the Market known as the Rotunda car park, because its entrance is by the rotunda just outside the Market, in front of St Bartholomew's Hospital ("the car park"). The car park was constructed by adaptation of what had previously been an underground railway station at the Market. That station ceased to be used in 1966, and in the early 1970s use of the car park commenced. It has space for 525 cars and vans. It is used by the tenants and the City, but is also open to the public to use in return for a charge.
- The tenants and the City are agreed that new business tenancies do fall to be granted to the tenants under the 1954 Act. They are also agreed that such new tenancies should be for a period of fifteen years (the maximum which can possibly be awarded under the 1954 Act). They are agreed in principle that the new tenancies should include a rent review clause, though they disagree about when rent reviews should occur (the City proposes a review after every five years, the tenants propose one after seven and a half years). They disagree about a range of other matters relevant to setting the rent and terms of the new tenancies to be awarded by the Court. In particular, the City proposes that there should be a basic rent set together with a service charge varying from year to year to reflect the actual running costs of the Market, divided up in an appropriate way between the tenants. The tenants propose instead that there should be a simple rent with no service charge.
- This is the judgment in the trial of two preliminary issues which have been ordered by Chief Master Winegarten to be determined in advance of the main hearing, which I set out in the order in which they were debated before me:
i) Issue 1: Whether the tenants are entitled to have their rents reduced on account of income received by the City from any parts of the East and West Market buildings and the Poultry Market building of the London Central Markets in the City of London used for non-Market purposes (including income from the car park and offices let for non-Market purposes i.e. from the commercial offices let to commercial tenants); and
ii) Issue 2: Whether the rents to be fixed by the Court should be an all-inclusive rent (consisting of the maximum recoverable rent, service charge and uniform business rates for each unit) as under the existing leases or exclusive with the tenant's contribution to services covered by a separate service charge. (In fact, there is some variation in the position under the existing leases which I explain in greater detail below).
- Issue 1 involved consideration of the legal regime under which the City holds and operates the Market, in particular as set out in the Metropolitan Meat and Poultry Markets Act 1860 ("the 1860 Act") pursuant to which the Market in its modern form, with the East Market and the West Market, was constructed. Put shortly, the argument of the tenants is that the City is obliged to bring the relevant part of the income it receives from the commercial offices and the car park into account against the running costs of the Market, and so reduce the income which the City ought to be entitled to receive in the form of rent from the tenants when the Court sets the rent for the new tenancies to be awarded under the 1954 Act.
- Issue 2 concerns the way in which the payment obligations of the tenants under the new tenancies should be structured by way of a simple fixed rent, as the tenants propose, or as a rent plus a variable service charge, as the City proposes. It became clear at the hearing that there is a comparatively narrow division between the parties on this issue. As a matter of basic principle to govern the setting of the rent and terms of the new tenancies, the tenants accept that the monetary payments to go to the City under the new tenancies ought to be set at a rate which should cover the overall cost to the City of running the Market, including the cost of maintaining the extensive services supplied by the City to enable the tenants to operate their businesses in conformity with demanding health and safety regulations and the cost of maintaining the fabric of the Market buildings. The City seeks by the service charge to cover the same costs.
- The main difference between the parties as regards Issue 2, then, is how the risks of future changes from any estimate regarding those costs of maintaining and operating the Market to be made now, at the start of the new tenancies, should be distributed between the parties under the terms of those tenancies. The tenants' position is that the best estimate should be made now of the future running and maintenance costs in relation to the Market for the relevant period to the next rent review (be it five years or seven and a half years) and an overall rental figure set by reference to those costs, as divided up in an appropriate way between the premises occupied by the tenants, and increasing year on year by reference to the general rate of inflation.
- The effect of this would be that the excess of any actual costs in that period over the estimated costs would have to be borne by the City as landlord, while any reduction in the actual costs in that period below the estimated costs would be for the credit of the City. The tenants say that payment obligations structured in this way would be fair and reasonable between the parties, because it is important that they as small businesses should have the benefit of certainty about how much they have to pay for their premises and because they are concerned that it may emerge in future that there is major expenditure required to restore and repair the old buildings which comprise the Market, in relation to possible concealed structural defects which go beyond anything known or expected at present. The tenants say that the risk of upward costs in future in relation to this, beyond estimates of such costs made now, should be borne by the City, as would occur if a simple rent is set by the Court. The tenants say that an arrangement on these lines is reasonable as between the parties because there has been a history of the City not maintaining the Market buildings in the past as it should have done, and the tenants should not have to bear the risks associated with undetected underlying structural problems which may have developed as a result. The tenants further say that most of the existing leases under which they hold their business premises from the City provide for there to be a simple rent and that the City has not made out a good case for changing from payment obligations structured in that way. The tenants also say that the City has run the Market in an inefficient way, without keeping costs under control as it should, and that to have a simple rent arrangement under the new tenancies is a reasonable way to ensure that the City bears the costs of its own inefficiencies.
- The City's position is that there should be a lower rent element under the new tenancies, but a high variable service charge element which is adjusted each year to cover the actual costs incurred by the City in maintaining and operating the Market, including supplying services to the tenants. That way, the City says, the tenants would bear the true operating costs properly attributable to running their businesses, and would bear the risks properly so attributable. The City says that there are many aspects of the costs of maintaining and operating the Market which could be kept under better control if the tenants had an economic incentive under the terms of the new tenancies to run their businesses in more efficient ways and to co-operate with the City to keep down operating costs. An example given by the City is the cost of cleaning services which are provided by the City under the terms of the existing leases and would be provided under the terms of the new tenancies. The City says that the staff employed by the tenants in their businesses do not have an incentive to take much care to take steps themselves to keep rubbish and mess to a minimum, relying on the cleaning service provided by the City at its cost to clean up after them. If the tenants had to pay the actual cost for this service, they would have an incentive to ensure that their staff were more careful in the way they carried on their businesses and this would reduce the overall cleaning costs to be met by the City and the tenants.
- The difference between the parties on Issue 2 is still narrower when one has regard to the context in which it falls to be determined, namely as one step on the path to determining the terms of the new tenancies and the rent to be paid under those tenancies. Where, under a lease negotiated between a willing landlord and willing tenant, the tenant is required to bear a higher degree of business risk, one may expect the reasonable rent to be adjusted downwards to some degree as a result (much in the way that a premium is paid to an insurance company for agreeing to bear the risk of possible but uncertain future events). Conversely, if under such a lease the risk is to be left with the landlord, one may expect the reasonable rent to be adjusted upwards to some degree as a premium to the landlord for assuming that risk. The expert evidence I heard confirmed this general point. The expert witness for the City said that if a simple rent were set, based on an estimate now of the future maintenance and running costs of the Market, it would in his view have to be adjusted upwards to reflect the risks being assumed by the City as landlord. The expert witness for the tenants arrived at the same conclusion, in effect, by saying that he would expect any current estimate of future maintenance and running costs which would be taken into account when assessing a simple rent figure to be set at the top end of the possible range of estimates so as to build in an allowance for the risk of future variance from the estimate to be borne by the landlord.
- A further variable should also be mentioned. The services provided by the City under the leases to the tenants have various components, and it is conceptually possible to divide them up as between coverage by a simple rent payment and coverage within a service charge element in different ways. I consider below whether a division of different elements might represent an appropriate approach to determining the terms of the new tenancies to be ordered under the 1954 Act.
- These considerations did cause me to question the value of taking Issue 2 as a preliminary issue separate from and in advance of final trial. However, the tenants had pressed for Issues 1 and 2 to be determined as preliminary issues and secured an order to that effect from the Court, against the objections of the City. The City did not seek to appeal against that order. I therefore took the view that I should seek to arrive at definite conclusions on the preliminary issues if I reasonably could. In the end, after reflecting on the arguments and evidence I heard, I consider I can make useful determinations and will do so.
- The proposals which the City put forward for determination of Issue 2 and the setting of the rent in due course included a proposal that there should be an inspection of the Market buildings by a neutral building surveyor to identify any issues relating to the soundness and repair of the fabric of the Market buildings (for example, the tenants pointed to an area around the entrance arch to one of the Market buildings where they said part of the cladding of the building appeared to be coming loose) and an acceptance that any structural repairs identified by that surveyor as necessary to put the fabric of the building in good repair should be for the City's account and not brought into the setting of the new rents. In that way, a large part of the risk of structural repairs would be borne by the City under its proposals. Not all the risk would be so borne, since the building surveyor might miss problems with the buildings which were latent and not apparent on his inspection or problems with the buildings might develop during the course of the new tenancies requiring work to be undertaken. However, the City submitted that this feature of its proposals supported its case that it would be appropriate to set a rent with a variable service charge, rather than a simple rent as the tenants contended.
- I heard evidence from the officials of the City most closely involved in the running of the Market and dealing with the tenants, Mr Tom Simmons (the former Solicitor and Town Clerk of the City, now retired) and Mr David Smith (the Director of Markets and Consumer Protection for the City). I heard evidence from various of the tenants, who tended to be prominent in the tenants' association which was responsible for handling negotiations with the City (the Smithfield Market Tenants' Association "the SMTA"). At the request of the tenants, which was not opposed by the City, I conducted a site visit of the Market.
- I also heard evidence in relation to Issue 2 from two expert surveyors, Mr Malcolm Hull for the City and Mr James Marland for the tenants. The order for the hearing of the preliminary issues limited the expert evidence which could be adduced in these terms:
"Each party shall be at liberty to adduce (for the purpose of [Issue 2]) the report of one expert valuation witness on the parties' respective contentions (in broad terms) concerning the effect upon the rent of there being an inclusive or exclusive figure. The intention of such evidence being to provide the Court with an indication of the range of views of the experts, but not for the Court finally to determine rental values."
- The parties were in agreement that the expert witnesses should be called to give evidence and be cross-examined, and I gave permission for this.
- There was no order permitting expert evidence to be called in relation to Issue 1. Despite this, the tenants adduced a witness statement from Mr Marland which gave his opinions about certain matters said to arise under Issue 1. I did not regard this as admissible expert evidence and Mr Rodger QC for the City properly did not take up time descending into a debate with Mr Marland in cross-examination of the views expressed in this statement.
The legal framework under the 1954 Act
- Section 24 of the 1954 Act makes provision that where a business tenancy is due to expire the landlord or tenant can apply to the court for an order for the grant of a new tenancy. In this case, the tenants have made requests under section 26 of the Act for new tenancies and have applied to court under section 24 for orders for the grant of new tenancies. The City agrees that the court should order the grant of new tenancies.
- Section 33 of the 1954 Act provides that a new tenancy ordered under the Act "shall be such a tenancy as may be determined by the court to be reasonable in all the circumstances, being, if it is a tenancy for a term of years certain, a tenancy for a term not exceeding fifteen years". The City and the tenants are agreed that the term of the new tenancies should be fifteen years.
- Section 34(1) of the 1954 Act provides that the rent payable under such a new tenancy, if not agreed by the parties, "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", after disregarding certain matters set out in the subsection. In my judgment section 34(1) presupposes that the terms of the tenancy have to be determined and known before the court can determine the rent which is to be set, because the amount of the rent will critically depend upon the package of rights and obligations contained in the terms of the tenancy which is to be granted pursuant to the order of the court. This view is supported by authority: see O'May v City of London Real Property Co. Ltd [1983] 2 AC 726 ("O'May") at 740E per Lord Hailsham of St Marylebone LC; the O'May case in the Court of Appeal at [1981] 1 Ch 216, esp. at 226F-227D per Brightman LJ; and Cardshops Ltd v Davies [1971] 1 WLR 591, esp. 596C-D per Lord Widgery LJ.
- Section 35(1) of the 1954 Act is the provision which is directly relevant for the purposes of Issue 2. It provides:
"The terms of a tenancy granted by order of the court under this Part of this Act (other than terms as to the duration thereof and as to the rent payable thereunder)
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; and in determining those terms the court shall have regard to the terms of the current tenancy and to all relevant circumstances."
The history of the Market and its legal basis
- The Market has a long and intricate legal history dating back to Medieval times. In 1444 the Crown granted a charter for a meat market for London at Smithfield. Over time, disputes arose between the City of London and the Crown and further charters were granted, which themselves led to disputes about the ultimate ownership of the land on which the Market now stands. Such disputes have been the subject of litigation between the City and the Crown in recent times: see The Crown Estate Commissioners v The Mayor and Commonality and Citizens of the City of London, Hoffmann J, unrep., 6 May 1992, and Court of Appeal, unrep., 19 May 1994. I do not need to dwell on this background, because the City and the tenants were agreed that the principal legal foundation for the operation of the Market as it exists today is the 1860 Act.
- The 1860 Act is a Victorian statute enacted before the creation of the Office of the Parliamentary Counsel in 1869 (the office of dedicated statutory drafters now available to the Government), which is not drafted with the precision and clarity which has come to be expected of statutory drafting since then. Part of the object of the Act was to make provision for the construction and operation of new buildings for the Market (in particular, the West Market and the East Market) despite the continuing dispute between the Crown and the City about the ownership of the land on which the new buildings were to stand.
- There was a long Preamble to the Act, as follows:
"Whereas the present existing Markets for the Sale of Meat and Poultry and other Provisions in the City of London are small and confined, and inadequate to supply the Wants of the rapidly increasing Population of the Metropolis: And whereas it is expedient that larger and more convenient Markets should be provided, and that proper Approaches should be made thereto: And whereas Part of the Site of Smithfield, formerly used as a Cattle and Sheep Market, is conveniently situated and adapted for such new Markets: And whereas the Mayor, Aldermen, and Commons of the City of London, in Common Council assembled, are willing to provide such Markets, and to cause proper Approaches to be made thereto: And whereas Her Majesty in right of Her Crown and the Mayor and Commonalty and Citizens of the City of London respectively claim to be entitled to or interested in the ancient Site of Smithfield Market, and Her Majesty is willing, and the Mayor and Commonalty and Citizens have agreed, that such Provisions as are herein-after contained should be made for keeping open the Part of the ancient Site of Smithfield Market which is not otherwise expressly appropriated for the Purposes of this Act, and for appropriating the Residue of the said ancient Site in manner herein-after provided; but the same cannot be effected without the Aid and Authority of Parliament: May it therefore please Your Majesty that it may be enacted [etc]."
- As indicated in the Preamble, the 1860 Act was intended to provide a basis for the operation of the Market which left the resolution of the on-going dispute about the ownership of the site between the Crown and the City to one side. To that end, sections 8 and 9 of the Act provide as follows:
"8. And whereas a Plan of Smithfield Market Place, showing the Alterations and Improvements authorized by this Act, has been deposited at the Office of Land Revenue Records and Inrolments, and has been signed by the Keeper of such Records and Inrolments: Be it enacted, That the Part of Smithfield Market Place which is coloured Red on the same Plan shall be for ever reserved and appropriated as an open public Place, subject to the Use of the same as a Market for the Sale of Hay and Straw in Carts or Waggons, and no Building or Erection shall at any Time be erected or made thereon (other than a Fountain and Dwarf Walls with Iron Rails, not exceeding in the whole Four Feet Six Inches in Height, at the Sides of the proposed Entrance to a Goods Stations, as shown on the same Plan, which proposed Entrance shall not be used for Railway Passengers); and the Parts of the said Market Place which are respectively coloured Green and Blue on such Plan shall be appropriated as or as an Addition to and shall be thrown into the adjoining public Streets; and the Land coloured Brown, Purple and Yellow on the said Plan shall be appropriated and used for the Purposes mentioned in the Ninth and Tenth Sections of this Act, and for no other Use or Purpose, and a Copy of such Plan shall be deposited at the Office of the Clerk of the Peace for the City of London with the other Documents referred to in this Act: Provided always, that nothing contained in this Act or appearing on the said Plan shall, subject to the Provisions of this Act, affect or prejudice any Estate, Right, or Interest of the Queen's Majesty, or of the said Mayor, Commonalty, and Citizens, to the whole or any Part of the Land coloured respectively Purple, Yellow and Blue on such Plan, it being alleged by the said Mayor, Commonalty and Citizens that such Land does not form Part of the ancient Site of Smithfield.
9. It shall be lawful for the Mayor, Aldermen, and Commons and they are hereby authorized to appropriate for the Purposes of this Act that Part of the ancient Site of Smithfield Market which is situate on the North Side of Long Lane, or any Part of such Site, and to erect, build, construct, and maintain on the Site so appropriated, or on any Part thereof, and on the Land by this Act authorized to be taken, a Market House and Market Place, or Market Houses or Market Places, for the Exposure and Sale of Meat and Poultry and other Provisions, in the Situation delineated on the Maps and Plans so deposited as aforesaid, together with such Houses, Shops, Stalls, Standings, Sheds, Buildings, Works, and Conveniences for the Purposes of the said Markets, and for the Accommodation of Persons resorting thereto, as they the Mayor, Aldermen and Commons may think necessary, all which said Market Houses and Market Places shall be deemed to be Public Markets."
The parties agree that these provisions provide the legal basis for the City to operate the Market and to carry out works of construction and modification, and that section 8 has the effect of restricting the permissible user of the parts of the site coloured brown, purple and yellow on the plan to Market purposes. This is relevant to the resolution of Issue 1, because parts of the site coloured brown, purple and yellow on the plan fall within the land occupied by the West Market building, which has the car park below it and which was developed in the 1990s to include commercial offices above the market areas.
- Other provisions in the 1860 Act conferred powers of compulsory purchase on the City, enabling it to acquire land in the vicinity of the historic market to provide the area required for construction of the Market buildings and streets around it. Section 10 made provision for the creation of an underground railway station at the Market. When the Market buildings were constructed in the nineteenth century an underground station was constructed pursuant to this provision. In the 1960s and 1970s this ceased to operate as a station and was converted into the car park. Section 10 provides:
"It shall be lawful for the Mayor, Aldermen, and Commons and they are hereby authorized and empowered to appropriate the whole or any Part of the underground Surface beneath the intended Market or Market Places, and the Buildings belonging thereto, and beneath so much of the Roads or Streets surrounding the said Market and Market Places as are to be purchased or taken under the Powers of this Act, for the Purpose of a Railway Station or Railway Terminus, with Lifts and Hoists communicating with the said Market and Market Places, to be used by any Railway Company, or any Persons desirous of constructing a Railway or Railways to such Market or Market Places, and to enter into any Contract or Agreement with any Railway Company or Persons for the Excavation, Building, and Erection of such Railway Station or Terminus, and of the Approaches thereto, and for the Lease of the same, at such Rent and upon such Terms and Conditions as shall be mutually agreed upon: Provided always, that the Station or Terminus shall not be used as a Passenger Station, except in connexion with the Market and for Market Purposes."
- Sections 14 and 15 provide:
"14. The Ground and Soil of the Roads or Streets immediately surrounding or intersecting the said Market, and formed or made under the Powers of this Act, other than the Ground and Soil of such Roads and Streets as are coloured on the said Plan deposited at the Office of Land Revenue Records and Enrolments, and the Fee Simple and Inheritance thereof, shall be and are hereby vested in the Mayor, Commonalty and Citizens of the City of London; and the whole of the said Roads or Streets shall be under the Care, Management, Control, and Jurisdiction of and shall be paved, repaired, cleansed, lighted, and watched by and at the Expense of the Mayor, Aldermen, and Commons.
15. In case any Lands which shall be purchased and cleared by virtue of this Act shall not be wanted for the Site of the said Market, and shall not be laid into the Streets to be made, widened, or improved under the Authority of this Act, it shall be lawful for the Mayor, Aldermen, and Commons to appropriate the same to any other Purpose which they may think proper or expedient: Provided that it shall not be lawful for the Mayor, Aldermen, and Commons to appropriate any Part of the said Market House, except the underground Surface thereof, to any other than Market Purposes."
- Section 26 confers on the City a power to grant leases of shops and stalls in the Market. It is under this power that the existing leases have been granted to the tenants. Section 26 provides:
"26. It shall be lawful for the Mayor, Aldermen, and Commons from Time to Time to demise and lease all or any of the Houses, Shops, Stalls, Standings, Sheds, Buildings, and Conveniences which may be provided under the Authority of this Act, and which in their Opinion may properly be exclusively occupied, for any Term or Number of Years not exceeding Twenty-one Years, and to demise and lease any House or Building which may be erected on any Land acquired under the Authority of this Act, and which may not be wanted for the Purpose of constructing the said Market, and also all or any Part of such Land, for any Term or Number of Years not exceeding Eighty Years, every Lease which may be granted under the Authority of this Act to take effect in possession, or within Three Months from the Time of granting the same."
- Section 34 provided for the City to fix a table of rents, not exceeding those set out in Schedule C to the Act. This regime was relaxed in 1963. Section 31 of the City of London Act 1963 ("the 1963 Act") provided that, notwithstanding anything in the 1860 Act, the City "may demand and recover in respect of the use of [the Market], or of any services provided by the Corporation in [the Market]s, such tolls, stallages, rents, dues or other payments as they may from time to time prescribe." It is under this provision that rents and service charges payable by the tenants have been set.
- Sections 32 and 33 of the 1860 Act gave powers for the City to charge tolls to traders, as set out in Schedules A and B to the Act. These are no longer levied. It is, however, relevant to set out sections 37 and 40 of the 1860 Act. Section 37 provides:
"37. The Tolls which may be received by the Mayor, Aldermen, and Commons under Schedule (A.), by virtue of this Act, together with the Rent which shall be received by them from any Railway Company for the Use of the underground Station, or Terminus thereto, shall be applied in the first place in defraying the Cost and Expenses of collecting and receiving the said Tolls and Rent, and in the next place in Payment of the Interest and Principal of the Monies expended in the Purchase or Acquisition of Land for the Site of the said intended Market and Market Places, and of the Roads or Streets surrounding or intersecting or approaching the same, and in making the several Improvements in this Act authorized or required to be made; and when all such Principal Monies shall have been repaid, with all Interest which shall from Time to Time or at any Time have accrued in respect thereof, the Tolls in Schedule (A.) by this Act authorized to be taken shall cease and determine, unless Parliament shall in the meantime otherwise direct, and the Rents and other Monies which shall be received for the Use of the said Railway Station or Terminus shall be applied towards the Maintenance and Improvement of the said Market and Market Places; and in case the Tolls which may be received by the Mayor, Aldermen, and Commons under Schedule (A.), by virtue of this Act, together with the Rent which shall be received by them from any Railway Company for the Use of the underground Station or Terminus, shall at any Time be insufficient to defray the Costs and Expense of collecting and receiving the said Tolls and Rent, and the Interest of the Monies which may be borrowed on the Credit thereof, the Deficiency shall be made good by the Mayor, Commonalty and Citizens out of their own Monies, and such Sums of Money as may be paid and advanced by them for the Purposes aforesaid shall be repaid to them, with Interest after the Rate of Four per Centum per Annum from the Time of advancing the same out of any future Tolls or Rent which may be received by them."
The effect of this section was modified by section 11 of the City of London (Various Powers) Act 1956, which provided that the tolls should continue after repayment of the principal and interest referred to in section 37 of the 1860 Act, and should be applied by the City "after defraying the cost and expenses of collecting and receiving the same towards the maintenance of the meat and poultry market and subject thereto shall be credited to the city's cash."
- Section 40 of the 1860 Act provides:
"40. The Mayor, Aldermen, and Commons shall cause Books to be provided and kept, and full and correct Accounts to be entered therein of all Monies which may be raised or borrowed upon the Credit of the Tolls by the Mayor, Aldermen, and Commons, under the Authority of this Act, for the Purchase of Land, and for effecting the said Improvements, and of all Rent received from any Railway Company or other Persons for the Use of the underground Station or Terminus, and of all Tolls and other Monies received under Schedule (A.) to reasonable Charges of such Distress and Sale: Provided always, that nothing herein contained shall extend to prevent the Mayor, Aldermen, and Commons from suing for and recovering in any Court of Record any Sum of Money which shall become payable to them for or in respect of any such Toll or Payment as aforesaid, if Default be made in Payment thereof."
Factual background
- The East Market and the West Market were built in the mid-nineteenth century under the authority given by the 1860 Act. The Poultry Market was built somewhat later in that century.
- The Poultry Market burned down in the 1950s and was reconstructed to a modern design in the early 1960s. The design involved installing a very large dome constructed in concrete. This was a novel design feature which has caused the Poultry Market to become a listed building. Although the East Market and West Market were substantially refurbished and redeveloped in the 1990s, at a cost to the City of about £70 million, the Poultry Market was not. The premises in the Poultry Market are more run-down than those in the East Market and West Market, and the roof of the Poultry Market requires extensive and expensive repair work. Under the City's proposals in these proceedings, the City will bear the cost of this.
- The refurbishment of the East Market and the West Market included the installation of elaborate refrigeration equipment, loading and handling bays and an overhead meat rail conveyor system for transporting animal carcasses to traders' shops, in order, inter alia, to comply with stringent new hygiene requirements introduced by the European Community.
- In or about 1981 (somewhat later in some cases) leases of stalls, shops and offices in the East and West Markets were entered into by the City and the tenants ("the early 1980s leases"). The leases were terminable on any quarter-day upon the giving of three months' notice. They provided for the tenants to pay a yearly rent plus a further sum by way of a service charge by reference to "all charges of whatsoever nature in respect of [the Market]
shown in the accounts in the books of [the City]", to be apportioned between tenants "to the intent that all the approved expenses of [the City] howsoever incurred that reasonably relate to the operation maintenance and functioning of [the Market] shall be reimbursed together with a charge for the administration
", and further sums for electricity consumed by the tenant and for use of the services of a cooling tower. It is this form of payment structure to which the City wishes to return under the tenancies to be ordered by the Court in these proceedings.
- Also in about 1981, various leases of stalls, shops and offices in the Poultry Market were entered into. I am concerned with those for units 205, 208, 219 and 222/223 ("the 1981 Poultry Market leases"). These were on terms closely similar to those in the early 1980s leases, and included provision for payment of rent and a variable service charge. The leases included provision for the City to give advance notice to the SMTA of the costs proposed to be included in the service charge, and provided that if the SMTA objected to any item of the costs there should be consultation and, in the absence of agreement, a reference to a body called the Estimates Committee for a binding decision.
- In the late 1980s the City had drawn up proposals for the refurbishment and redevelopment of the East and West Market buildings. The works were to be extensive and intrusive, and would require tenants to be moved around within the Market buildings as different parts of the buildings were subject to construction work and refurbishment. In these circumstances, the operation of the payment structure in the early 1980s leases, involving a rent payment and service charge payments, was felt to be inappropriate while the disruptive works continued. In 1987, therefore, the City and the tenants entered into supplementary agreements which modified the payment obligations under the early 1980s leases ("the 1987 endorsements"). In lieu of the rent and service charge payments in those leases, it was agreed that for the period 1 April 1988 to 31 March 1989 each tenant would pay "the total of the combined rent and estimated service charge" for the year to 31 March 1988, plus 9%; and that that overall composite figure increased at the rate of 9% each year would be paid thereafter. I accept the evidence for the City that these changes were intended to be temporary, to cover the period of the refurbishment. It seems that in relation to the 1981 Poultry Market leases, unit 205 was also made the subject of a similar 1987 endorsement.
- There was a longer period before commencement of the refurbishment works than had been anticipated. There were therefore further negotiations between the City and the SMTA with a view to replacing the 1987 endorsements, which as noted above had been intended as a temporary measure. In 1994 the City and the tenants entered into new agreements for leases in relation to the East Market and the West Market ("the 1994 agreements"). These agreements were again drafted in contemplation of significant disruption and decanting of tenants' businesses from time to time to different locations around the Market while the refurbishment works proceeded. They looked forward to the grant of new leases once the refurbishment works were finished, on terms from 1 October 2000 providing for payment of a rent plus a service charge; but in the meantime a simple all-inclusive rent was to be paid.
- Notwithstanding the making of the 1994 agreements, at meetings between the City and the SMTA in October 1994 disputes broke out whether they properly reflected what had previously been agreed between the City and the SMTA in relation to payment structure. The SMTA wanted there to be a simple rent, rather than an obligation to pay rent and a service charge. The SMTA wanted this arrangement to be in place under a ten year lease for each tenant. The City wanted to have a rent and service charge. The City's representatives maintained that there had been an understanding that there should be a compromise, with a simple rent arrangement for the first five years only and then a rent review on the assumption that a service charge would be payable (to cover repairs to common parts, heating, lighting, cleaning, ventilation and air conditioning of common parts, refuse collection, security and so forth). The result of this dispute was that the 1994 agreements were not given effect.
- The differences between the City and the tenants on this issue were not fully resolved. Eventually, from 2001 new leases were entered into in relation to premises in the East Market and the West Market (I refer to these as "the 2001 leases", though some were entered into later than this). These are the leases in relation to those buildings which are terminating and in relation to which the tenants seek new tenancies under the 1954 Act in these proceedings. The 2001 leases covered the period commencing on 1 January 2000 and expiring on 31 December 2009.
- The drafting of the 2001 leases with respect to rent and service charge payments reflected the fact that the parties remained in dispute about the payment structure to be adopted. Each lease incorporated a schedule which set out in paragraph 5(A) (entitled "Rent") a formula for an annual rent (a simple specified amount in the first year, subject to indexation in subsequent years) and in paragraph 5(B) (entitled "The Service Charge") a statement that the Service Charge "shall be outlay on" a range of matters and services, including "all repairs, decoration and maintenance appertaining to [the Market] together with the cost of the staff employed for this purpose"; heating, lighting and refrigeration of the common parts; refuse collection and cleaning of the common parts; security costs; that "all such other costs charges and expenses of whatsoever nature in respect of any service provided for the operation, maintenance and function of the [Market]
to the intent that all the approved expenses of [the City] incurred under the provisions [of the lease] that reasonably relate to the operation maintenance and functioning of [the Market] shall be reimbursed" and so forth. This reflected the payment structure proposed by the City. Clause 6(2) of the lease contained an obligation on the City to provide the services set out in paragraph 5(B) of the Schedule.
- However, in the body of the 2001 leases, clause 2 provided that the tenant was required to pay from the start date of the lease, "to the intent that this sum shall consist of the maximum recoverable rent, service charge and uniform business rates for the Premises", "the rent as set out in paragraph 5(A) of the Schedule". The effect of this was that, despite the elaborate specification of the service charge in the Schedule, the tenants were only obliged to pay a simple all-inclusive rent as specified in paragraph 5(A) of the Schedule. This reflected the payment structure preferred by the tenants.
- In each of the 2001 leases, clause 13 provided:
"Upon service by the Landlords of notice to terminate this Lease under Section 25 Landlord and Tenant Act 1954 or upon service by the Tenant of a request for a new lease under Section 26 Landlord and Tenant Act 1954 then the parties shall enter into negotiations to determine whether this Lease shall be renewed on an all inclusive rent or on a separate rent and service charge and in the event that agreement is not reached then the parties shall apply to Court in accordance with the Landlord and Tenant Act 1954 in respect thereof."
This provision was included as a way of recognising that the dispute between the parties regarding the appropriate payment structure to govern the tenancies under which stalls and shops in the East Market and West Market were to be held continued, notwithstanding the grant of the 2001 leases, and was to be treated as "parked" for the duration of those leases but with each side being at liberty to revive the argument when the time came to consider renewal of the tenancies under those leases.
- For good measure, in some of the 2001 leases an additional clause 14 was added in manuscript, to say:
"The parties hereto certify that there is no Agreement for Lease to which this Lease gives effect."
I infer that the tenants wished to include this provision in order to emphasise that the 2001 leases should not be regarded as the product of the 1994 agreements, which had contemplated that the payment structure would take the form of a rent and service charge from 2000 onward.
- In about 2001 the 1981 Poultry Market leases were also subject to variation by agreement. Under these variations ("the 2001 variations") the Poultry Market leases continued to have effect subject to variations to introduce payment terms similar to those contained in the 2001 leases. A definition of the service charge was introduced which corresponded to that in the 2001 leases: see para. [42] above. A figure and indexed calculation for rent corresponding to the model of the 2001 leases was also introduced (see para. [43] above), including the statement: "with the intention that for the period from and including 1 January 2000 to 31 December 2009 only the yearly rent shall include all contributions to the services charge referred to in [the Poultry Market leases as varied by the 2001 variations]" (my emphasis). Clause 2 of the 2001 variations provided that the relevant Poultry Market lease "shall continue in full force and effect in all other respects."
- The position in relation to the 1981 Poultry Market leases, therefore, is that they originally provided for payment of rent and a variable service charge, and by virtue of the 2001 variations provided for a simple all-inclusive rent for the period 1 January 2000 to 31 December 2009, but reverted to the same rent and variable service charge structure as from 1 January 2010. That appears to be true even in relation to unit 205, which had been the subject of the 1987 endorsement, because the 2001 variation referred back to the original lease of 1981 to vary its terms (without reference to the 1987 endorsement) and in clause 2 stated that it was that original lease which subject to the 2001 variations would have effect. Thus, as at the time of the applications to court in relation to units 205, 208, 219 and 222/223 in the Poultry Market, the leases applicable to them provided for a rent and variable service charge payment structure, unlike the leases then applicable in relation to the East Market and the West Market.
- I am also called on to consider the position in relation to units 217/218, 220, 207 and 221 in the Poultry Market. The leases for these units were granted between 2000 and 2002. Like the Poultry Market leases discussed above, they are terminable upon the giving of three months' notice to expire on a quarter-day.
- The leases for units 217/218 and 220 provide for a rent and separate variable service charge, but subject to the proviso in each case that for a defined period ("for the period from and including 06.03.2000 to 31.12.2009 only" for unit 217/218 and "for the period from and including 01.01.2002 to 31.12.2009 only" for unit 220 [my emphasis]) the rent payable should "include all contributions to the services charge". Thus, these units are in a position similar to that in relation to units 205, 208, 219 and 222/223, in that at the time of the applications to court a limited period for a simple all-inclusive rent to apply had come to an end and the payment structure provided for in the existing leases was of a rent and variable service charge.
- The leases for units 207 and 221 were both granted in 2000. In contrast to the leases for the other units in the Poultry Market discussed above, these leases did not provide for a general variable service charge, but only for rent plus a payment for electricity used in charging forklift trucks. These leases were also the subject of the 2001 variations, which defined the services which the City was to provide, introduced an indexation formula in relation to rent and stated that for a defined period ("for the period from and including 20.10.2000 to 31.12.2009 only" for unit 207 and "for the period from and including 01.01.2000 to 31.12.2009 only" for unit 221 [my emphasis]) "the yearly rent shall include the cost of all services" referred to in the leases as varied. The effect of the 2001 variations in relation to these units appears to be that the structure of the payment terms have now reverted to those in the leases granted in 2000, namely a simple rent without a general variable service charge.
- As appears from the figures in evidence, much the greater part of the services provided by the City relates to the day to day costs of running the Market, as opposed to the repair of the Market buildings. The City employs 13 full time maintenance staff, 16 cleaners and 22 security staff (whose duties include marshalling the unloading of vehicles making deliveries to the Market and monitoring compliance by traders with hygiene standards). It provides the energy required to refrigerate the delivery areas and the chilled water which assists with refrigeration of the tenants' cold stores. It maintains specialist equipment including a chilled water system and the meat rail in the East Market and the West Market on which carcasses are carried to the tenants' units. The City pays a proportion of the uniform business rates for the Market and meets the costs of meat inspection, cleaning and refuse collection. These all involve expense to the City for the purpose of enabling the tenants to trade from the Market.
- The cost of repairing and maintaining the Market buildings can, I think, fairly be described as being for the joint benefit of the City as freeholder and the tenants as long term occupiers of the Market. It was clear on the evidence that the tenants tend to hold tenancies in the Market for very long periods. This is something recognised in and reinforced by the proposals from both sides that the tenancies to be ordered by the Court in these proceedings should be for the maximum possible period, fifteen years. This is not a case where there is a high turnover of tenants, where the interest of the landlord in the fabric of the building which is let can more readily be regarded as entirely distinct from that of its tenants.
- The City accepts in its proposals that current dilapidations and disrepair in the Market buildings should be made good at its expense. One area of dispute between the parties, however, is how the cost of future repair of the buildings should be borne, as future dilapidations have to be made good or if further structural problems, unforeseen at the present time, emerge in the future and have to be put right. As mentioned above, under Issue 2 the tenants accept the principle that these costs like the operating costs of the Market in relation to the carrying on of their businesses as referred to above should be recovered from them under the tenancies to be ordered by the Court. The question is whether an allowance in relation to such costs should be made now and incorporated within a simple all-inclusive rent, or whether a lower rent with a variable service charge in relation to all these costs should be set.
- I accept the City's evidence that the Market has been run by the City for many years at a considerable loss of the order of between about £1 million and £1.5 million p.a., arrived at by comparing the cost to the City of providing the services referred to in the 2001 leases with the rental income received from the tenants. The City has been subsidising the running of the Market for the benefit of the tenants. If the agreed principle of recovery of costs is to be respected under the new tenancies to be ordered, the payments due from tenants will have to go up, whether as part of a simple rent or as part of the rent and variable service charge combination proposed by the City. The actual costs incurred by the City in maintaining and operating the Market have been running at more than £4 million p.a. for several years.
- Mr Marland, in giving evidence for the tenants, sought to suggest that the City had run the Market in an inefficient way, so increasing the costs which it has had to bear. He said that the buildings had been allowed over many years to deteriorate without planned preventive maintenance and that the City "has become incompetent and complacent in its management" of the Market, failing to contain costs and being inefficient in respect of the provision of services at the Market.
- In my assessment on the evidence, however, these suggestions are not sustainable. I consider that the City has operated the Market in terms of provision of services in a reasonably efficient way and as one would expect. The City has maintained a rolling programme of periodic maintenance and repairs, contrary to the suggestion by Mr Marland that they failed to undertake planned preventive maintenance. I reject his contention that the minor signs of dilapidation around the Market highlighted by him indicate a failure by the City to operate such a programme and to maintain the Market properly. They were consistent with the City maintaining a rolling programme of maintenance and repairs in a sensible and reasonable way to take account of ordinary wear and tear in a building which provides a very busy and physically demanding working environment. I was unpersuaded on the evidence before me that the City had been complacent, indifferent to costs and inefficient. Not least because the City has been subsidising the operation of the Market for many years, I consider that it has been properly alert to issues of costs and has taken reasonable steps to keep them under review and within proper bounds. Mr Marland's allegations to the contrary were not substantiated.
- It is convenient at this point to comment further on the expert evidence in this case on Issue 2. I found the expert evidence of only limited assistance. Neither Mr Hull nor Mr Marland were fully independent of the parties. Both of them had been involved in the on-going negotiations between the City and the tenants, and with both of them there was at times a flavour of advocacy for their side in their evidence. Having said this, I found Mr Hull on the whole to be a better witness on the points the experts could speak to than Mr Marland. Careful cross-examination by Mr Rodger exposed Mr Marland's evidence and report as containing careless factual inaccuracies and inconsistencies. I came to the conclusion that the proper resolution of the preliminary question set out in Issue 2 turned more substantially on legal submissions and consideration of principles of fairness and reasonableness rather than assessment of conflicting expert evidence.
- It is not necessary in this judgment to provide a full commentary on Mr Marland's evidence to highlight every point at which I found it implausible or unsustainable. I should, however, mention three particular points made by him in order to explain that I reject them. First, Mr Marland proposed a comparison between service costs at the Market and those at certain retail shopping centres in order to suggest that "It is frankly irrational to expect a wholesaler to pay service costs that are so much larger than those for a retailer". I do not consider that this was an appropriate comparative exercise. The two situations are very different, and the comparison ignores the extensive and specialist nature of the services which have to be provided at the Market in order for it to operate in compliance with legal hygiene standards. In my view, a more appropriate comparison was that proposed by the City with other similar markets operated by it, in particular the specialist fish market at Billingsgate where service charges are higher than at the Market. Whilst again there are significant differences between the markets, the comparison indicated that the cost of services at the Market is not exaggerated or out of line with what a reasonable landlord and tenant might expect. I consider that Mr Marland's evidence to the contrary was wildly overstated.
- Secondly, Mr Marland said that with a management record on the part of the City of the nature he sought to assert, "there is no prospect whatsoever that in the open market a tenant would be prepared to contemplate an exclusive rent with fully recoverable service charge." I do not accept this evidence. I am unpersuaded that the management record of the City was poor, so the predicate on which Mr Marland's opinion was based falls away. Further, I consider that even if there were a background of poor management, a tenant might well be prepared to accept such a payment structure if there were sufficiently robust mechanisms in place allowing him to review and participate in the setting of service standards and the costs associated with them which is what the City proposes in this case and if any additional risk were reflected in a reduction in the rental element to be paid.
- Thirdly, Mr Marland said that the tenants are small private businesses whose cashflow and resources inherently require a steady and predictable costs base and that tenants "will be able to bid on the basis of inclusive rents only". Again, I consider that his evidence was overstated and unsustainable. A degree of certainty and predictability is important for any business undertaking, including the City in its role as landlord of the Market as well as the tenants in running their businesses. The question is how risks in relation to future variations in the costs of operating and maintaining the Market ought reasonably to be distributed as between the City and the tenants. In that regard I observe that at various times, as set out above, tenants at the Market have been willing to carry on their businesses under terms providing for payment of a rent and a variable service charge and do not appear to have found it impossible or unduly burdensome to do so. The evidence was that traders at other markets, particularly Billingsgate (where the service charge element could be very high), accept such a payment structure. Businesses large and small whether in the Market or outside - have to cope with some level of uncertainty about operating costs, and to that end prepare annual budgets, make provisions and have contingency plans and so forth. In my view, the City's proposals for a rent and variable service charge would provide a reasonable level of predictability for tenants, because there would be mechanisms for them to be involved in setting estimates and budgets of costs in advance.
- Some of the witnesses for the tenants referred to transactions they had entered into in the past few years to acquire the businesses operating in some of the units in the Market, in order to emphasise the need for business certainty and predictability of their costs over time so as to satisfy the banks which had provided them with loan finance. This evidence was not persuasive to tip the balance in favour of the tenants on Issue 2. Those who entered into these transactions did so knowing that the issue of the payment structure to be applied under new tenancies to be ordered by the Court was a matter for debate and legal argument, and hence knowingly accepted the risk that the conclusion on the appropriate payment structure might be adverse to them. In any event, there is no reason to think that their banks would be unfamiliar with or particularly uncomfortable with the usual budgeting process in relation to uncertain future costs which almost any business has to engage in and which the tenants would have to adopt if they are unsuccessful on Issue 2.
Issue 1: analysis
- Mr Dingemans QC, who presented the argument for the tenants on this part of the case, submits that by virtue of the 1860 Act the City is obliged to apply the rental income derived from the commercial offices built during the refurbishment in the 1990s above the main market areas in the brown, purple and yellow parts of the site as marked on the plan referred to in the 1860 Act to Market purposes. The share of the commercial office rental income derived from that part of the site is about £300,000 p.a.. He also submits that the City is obliged to allocate the whole of the income derived from the car park (about £65,000 p.a.) to Market purposes; alternatively that it is obliged so to allocate the share of the car park income derived from the part of the site under the land coloured brown, purple and yellow on the plan. Mr Dingemans submits that all this is the effect of sections 8, 9 and 10 of the 1860 Act. The consequence, he says, is that the City is obliged to spend these sums on maintaining and operating the Market, with the result that the reasonable rent to be fixed under section 34 of the 1954 Act should be reduced to take account of these other sources of income for the City dedicated to Market purposes.
- In relation to the car park, in support of his primary contention that the whole income from it had to be allocated to Market purposes, Mr Dingemans made the submission that section 10 of the 1860 Act created a special regime for the underground surface of the Market site, and that section 37 has the effect that since the income from the car park is not "rent received
from any railway company for the use of the underground station", but is "other monies
received for the use of the
underground station or terminus", then the City is caught by the obligation in that provision that it "shall be applied towards the maintenance and improvement of the
Market and Market Places". He submits that this interpretation of section 37 is reinforced by consideration of section 40, which refers to "rent received from any railway company or other persons for the use of the underground station or terminus" (my emphasis), and hence contemplates that income might be received in relation to use of the area below ground level constituted by the underground railway station from persons other than a railway company referred to in the opening part of section 37. The underground station is now the car park, and Mr Dingemans says that money received by the City as car parking charges from people so using it has to be used for Market purposes as specified in the relevant part of section 37.
- If the submission based on section 37 is not accepted, Mr Dingemans submits in the alternative that such part of the car park income as is attributable to the area of the car park which lies under the parts of the site of the Market coloured yellow, brown and purple in the plan has like the relevant portion of the rent from the commercial offices - to be applied for market purposes, by virtue of sections 8 and 9 of the 1860 Act.
- In my judgment, the basic contention of the tenants that the operation of these provisions of the 1860 Act has the effect that the rents to be set in relation to new tenancies under the 1954 Act should be lower is flawed and should be rejected. The answer to the question in Issue 2 is "No".
- Having said this, I should make it clear that Mr Rodger made certain submissions in support of such a conclusion which I do not accept. He submitted that the 1860 Act was not enacted for the benefit of traders in the Market and is not enforceable by them. I do not think that the latter part of this is right. The 1860 Act creates a set of public law obligations binding on the City, and anyone with a sufficient interest could seek to take legal proceedings by way of judicial review to ensure that the City properly abides by those obligations. Traders in the Market would have standing to bring such a claim, especially if it was designed to ensure that the City spent sums on the Market which could benefit them.
- Mr Rodger also submitted at one point rather to my surprise - that the City had acted wholly unlawfully and ultra vires in relation to its powers under the 1860 Act when in the 1990s it built the commercial offices in the Market above the traders' premises and let them out. Therefore, he said, the rental income from those offices fell outwith the restrictions in the 1860 Act altogether.
- I do not accept this submission either. There was no evidence that the City deliberately set out to act unlawfully in the 1990s. In fact, it is clear that the proposal to refurbish the Market and to include commercial offices which could be rented out was intended to help make the Market financially viable for the future. I think that the natural presumption is that the City sought to act lawfully when it embarked on this major project. In my opinion, the better view is that the construction and letting of the offices to generate an income stream to help make the Market financially viable, where the offices would be something incidental to the overall operation of the Market and would not replace or overwhelm such operation (with the effect that the Market became a mere incidental part of an office block) was lawful under sections 8 and 9 of the 1860 Act. It was an activity and for a purpose falling within section 9, which authorises the City "to erect, build, construct and maintain on the site" the Market buildings "together with such
buildings
for the purposes of the [Market]
as [the City] may think necessary
".
- However, I consider that a consequence of this analysis is that the City is obliged by section 9 to use its income from the letting of the relevant part of the commercial premises, after deducting expenses, for the purposes of supporting the maintenance and operations of the Market. Unlike in relation to the letting of the Market units, which involves use of the Market land directly for Market purposes (and where the City is free, as a result of the 1963 Act, to charge whatever rents the market will bear and is not bound to use the proceeds for any particular purpose), the only way the incidental use of the Market land for commercial offices could be justified is if the proceeds of such use are used for Market purposes to help maintain the viability of the Market. If the City ceased to do that, and used the rental income from the relevant part of the commercial offices for other purposes, it would no longer be using the land for the purposes set out in section 9, as required by section 8. In other words, the continuing compliance by the City with its obligations under section 8 depends upon it continuing to put the relevant property and income derived from it to use for the Market purposes specified in section 9.
- I also found unpersuasive the further contention of Mr Rodger to the effect that once it had let the commercial offices to tenants, the City was no longer itself using those offices and could do what it liked with the income from them. Whatever might be the position as a matter of analysis of the technical position under the law of landlord and tenant as to who uses land which is demised to a tenant, I consider that the proper meaning and effect of sections 8 and 9 of the 1860 Act in a situation where the City builds commercial offices within the brown, purple or yellow parts of the plan for the purpose of creating a source of income to support the operation of the Market, and then leases them for a rent to achieve that end, is that the City remains bound to appropriate and use its remaining interest in the land (as the body which is authorised by the Act to exercise powers as the landlord of that land, and hence entitled to receive rent in relation to it) for Market purposes. That it can only do by using the rental income stream so created for Market purposes. Otherwise, the very purpose which makes the construction and letting of the commercial offices lawful in the first place would be capable of being undone at the whim of the City, contrary to the plain intention of the Act.
- The submission of the tenants breaks down, in my view, at a different point. There is no provision in any of the tenants' leases that the rent or service charge money which they pay to the City must itself be treated by the City as funds to be spent directly on Market purposes. Obviously the City is obliged to provide the services stipulated in the leases, and will have to spend money to do so. But the leases do not specify where that money is to come from. Nor is there any statutory limitation in the 1860 Act, as modified by the 1963 Act (see para. [30] above), on the amount which the City can charge its tenants, e.g. to restrict it to charging whatever might be the sum required to maintain and operate the Market after taking into account what it receives from letting the commercial premises or from the car park. In previous litigation concerning the Market, the Court held that "[The City], as the market authority, is entitled to seek to make a profit or to recover its costs or to minimise its losses": R v City of London Corporation, ex p. Brewster, Hidden J, unrep., 21 December 1993, transcript p. 25B-C. That proposition was not challenged by the tenants at the hearing before me. It is therefore open to the City to use money from the letting of the commercial premises and from the car park to meet (part of) its expenditure on the costs of maintaining and operating the Market i.e. "for the purposes of the Market" as required by section 9 of the 1860 Act and to pay the equivalent sums received as rent or service charges from the tenants into the City's general funds to use in other ways.
- The funds which the City does or is likely to receive from the letting of the relevant part of the commercial offices and from the car park estimated by Mr Marland for the tenants at something less than £400,000 p.a. is very much less than the £4 million p.a. or more which the City in fact expends or is likely to expend on maintaining and operating the Market. Accordingly, there is in fact no obstacle to the City proceeding to spend the full amount of the relevant commercial office and car park income on Market purposes, so freeing up a corresponding amount of money received as rent and service charges from the tenants to be spent on other purposes, as part of the general funds of the City.
- In addition, there is no limitation in the 1860 Act as to which Market purposes the income from the commercial offices and the car park should be spent on. It is open to the City to choose to spend that income on Market purposes (such as repair of the roof of the Poultry Market at a cost of about £5 million) which are unrelated to the direct provision of services to tenants under the new tenancies.
- Since the City is entitled to proceed in either of these ways, and is not under any legal obligation to use the relevant commercial office and car park income for the benefit of the tenants, in order to lower their rents, there is no reason why the existence of the obligations under the 1860 Act would be taken to be a matter causing a lower rent to be agreed by a notional willing landlord and a notional willing tenant for the purposes of setting rent under section 34 of the 1954 Act.
- I consider that this reasoning undermines the tenants' case on Issue 1 both in relation to the effect of sections 8 and 9 with respect to the share of income from the relevant part of the commercial offices and the share of income from the relevant part of the car park and in relation to their case in respect of the whole of the car park income under section 37. For completeness, however, I should mention that in any event I was unpersuaded by their argument based on section 37. The car park income is not money "received for the use of the
railway station or terminus", to which section 37 would apply. The railway station is no longer in use. The car park was constructed in its place. In my view, this was lawfully done by the City in exercise of its powers under section 9 of the 1860 Act. The construction and operation of the car park fell within the authorisation provided by section 9 for the construction and maintenance of "buildings, works and conveniences for the purposes of the [Market]". Section 9 is not restricted to construction work above ground, since it obviously covers the construction of foundations and basements under the surface of the land and section 15 of the 1860 Act contemplates that the land under the Market House constructed pursuant to section 9 is itself part of the Market House ("it shall not be lawful for [the City] to appropriate any part of the said Market House, except the underground surface thereof, to any other than Market purposes"). It is unnecessary and inappropriate to refer to section 37 of the 1860 Act for the legal foundation for the creation and operation of the car park.
Issue 2: analysis
- In this section I will first address the tenancies in relation to the East Market and West Market as one group, then the tenancies in relation to all the Poultry Market leases apart from units 207 and 221 as a second group, and finally I will turn to units 207 and 221.
The East Market and the West Market
- The leading authority in relation to the proper approach to determining the terms of a new tenancy under section 35 of the 1954 Act is O'May. The leading speeches in the House of Lords were delivered by Lord Hailsham of St Marylebone LC and Lord Wilberforce, with both of whom the other members of the Appellate Committee agreed. The case concerned, in the context of consideration of the terms of a new tenancy to be ordered by the court under the 1954 Act, an attempt by a landlord to change the basic parameters of the commercial deal reflected in the terms of the existing tenancy, according to which the landlord was responsible for repairs, maintenance and decoration of the exterior and common parts of the building and for providing and maintaining lifts and other plant (such as boilers). Instead, in return for a reduction in rent, the landlords proposed that the tenants should bear, by way of service charges, a proportion, attributable to their holding, of the costs of those items: see [1983] 2 AC at p. 748A-D. The House of Lords unanimously rejected the landlord's proposal.
- I set out substantial passages from the speech of Lord Hailsham and from the speech of Lord Wilberforce, since they provide authoritative guidance as to the approach which the court should adopt when applying section 35 of the 1954 Act. After citing sections 34 and 35 of the 1954 Act, Lord Hailsham said this at [1983] 2 AC 740D-741D:
"From these sections I deduce three general propositions. (1) It is clear from section 34 that, in contrast to the enactments relating to residential property, Parliament did not intend, apart from certain limitations to protect the tenant from the operation of market forces in the determination of rent. (2) In contrast to the determination of rent, it is the court and not the market forces which, with one vital qualification, has an almost complete discretion as to the other terms of the tenancy (which, of course in turn must exercise a decisive influence on the market rent to be ascertained under section 34). And (3) in deciding the terms of the new tenancy, as to which its discretion is otherwise not expressly fettered, the court must start by "having regard to" the terms of the current tenancy, which ex hypothesi must either have been originally the subject of agreement between the parties, or themselves the result of a previous determination by the court in earlier proceedings for renewal.
A certain amount of discussion took place in argument as to the meaning of "having regard to" in section 35. Despite the fact that the phrase has only just been used by the draftsman of section 34 in an almost mandatory sense, I do not in any way suggest that the court is intended, or should in any way attempt to bind the parties to the terms of the current tenancy in any permanent form. But I do believe that the court must begin by considering the terms of the current tenancy, that the burden of persuading the court to impose a change in those terms against the will of either party must rest on the party proposing the change, and that the change proposed must, in the circumstances of the case, be fair and reasonable, and should take into account, amongst other things, the comparatively weak negotiating position of a sitting tenant requiring renewal, particularly in conditions of scarcity, and the general purpose of the Act which is to protect the business interests of the tenant so far as they are affected by the approaching termination of the current lease, in particular as regards his security of tenure. I derive this view from the structure, purpose, and words of the Act itself. But, if I required confirmation of it, I would find it in the passages cited to us in argument from the judgment of Denning L.J. in Gold v. Brighton Corporation [1956] 1 W.L.R. 1291 , 1294 and of Widgery L.J. in Cardshops Ltd. v. Davies [1971] 1 W.L.R. 591, 596 (also cited with approval by Shaw L.J. in the instant case). The point is also emphasised by the decision in Charles Clements (London) Ltd. v. Rank City Wall Ltd. (1978) 246 E.G. 739, where the court rejected an attempt by the landlord as a means of raising the rent to force on a tenant a relaxation of a covenant limiting user which would have been of no value to the particular tenant, and Aldwych Club Ltd. v. Copthall Property Co. Ltd. (1962) 185 E.G. 219 where the court rejected an attempt by the tenant to narrow the permitted user with a view to reducing the rent.
A further point which was canvassed in argument, and with which I agree, is that the discretion of the court to accept or reject terms not in the current lease is not limited to the security of tenure of the tenant even in the extended sense referred to by Denning L.J. in Gold v. Brighton Corporation [1956] 1 W.L.R. 1291 . There must, in my view, be a good reason based in the absence of agreement on essential fairness for the court to impose a new term not in the current lease by either party on the other against his will. Any other conclusion would in my view be inconsistent with the terms of the section. But, subject to this, the discretion of the court is of the widest possible kind, having regard to the almost infinitely varying circumstances of individual leases, properties, businesses and parties involved in business tenancies all over the country."
- Lord Wilberforce added the following at pp. 747D-H and 748E-749H:
"The Act, in the portion (Part II) of it which deals with business tenancies, is in the main a discretionary Act, giving wide powers to the judge to grant and settle the terms on which the business tenant is to have a new lease. This applies particularly to sections 33 and 34, which relate to the duration of the tenancy and the rent. The crucial section, for present purposes, is section 35 which relates to the terms of the tenancy, other than terms as to duration and rent. This section contains a mandatory guideline or direction to "have regard to" the terms of the current tenancy and to all relevant circumstances. The words "have regard to" are elastic: they compel something between an obligation to reproduce existing terms and an unfettered right to substitute others. They impose an onus upon a party seeking to introduce new, or substituted, or modified terms, to justify the change, with reasons appearing sufficient to the court (see Gold v. Brighton Corporation [1956] 1 W.L.R. 1291, 1294 - on "strong and cogent evidence" per Denning L.J., Cardshops Ltd. v. Davies [1971] 1 W.L.R. 591, 596 per Widgery L.J.).
If such reasons are shown, then the court, applying the words "all relevant circumstances," may consider giving effect to them: there is certainly no intention shown to freeze, or in the metaphor used by learned counsel, to "petrify" the terms of the lease. In some cases, especially where the lease is an old one, many of its terms may be out of date, or unsuitable in relation to the new term to be granted. If so or for other good reasons shown, the court has power to order a modification by changing an existing term or introducing a new one (e.g. a break clause, cf. Adams v. Green (1978) 247 E.G. 49). Before doing so it will consider any objections by the tenant, and where there is an insoluble conflict, will decide according to fairness and justice.
The landlord's case for a shift of the burdens as I have indicated rests upon two broad foundations. The first is that such a shift is, for quite genuine and respectable reasons, in the interest of the landlord. I accept this; I think that it is shown by evidence that in the present and foreseeable state of the property market, a freehold interest in commercial property, at least in London, commands a higher price if let on "clear leases" - i.e. leases in which the tenants bear all the costs and risks of repairing, maintaining and running the building of which their demised premises form part, so that the rent payable reaches the landlord clear of all expenses and overheads. Thus the landlord demonstrates a genuine interest in departing from the existing terms of the lease. Secondly, the landlord asserts that new leases of property, such as that with which we are concerned, are now granted and accepted by tenants as "clear leases." This too is supported by the evidence. But, in my opinion, though a relevant circumstance it is not decisive. There is no obligation, under section 35 of the Act, to make the new terms conform with market practice, if to do so would be unfair to the tenant. and there is no inherent necessity why the terms on which existing leases are to be renewed should be dictated by those of fresh bargains which tenants may feel themselves obliged to accept. The court has to compare the advantage desired by the landlord with the detriment to be suffered by the tenants and to consider whether any monetary compensation offered against that detriment ought fairly to be imposed upon the tenants in exchange for the acceptance of that detriment. That money is not necessarily fair compensation for a change in existing rights is obvious in itself and is well recognised by the law in relation, for example, to compulsory acquisition and to the granting of damages instead of an injunction.
There can be no doubt in my opinion that this detriment is real and serious. Considering only the obligation to bear a proportion of the cost of maintaining and repairing the exterior and common parts of the building, to impose this upon the tenants is something which they may most reasonably resist. They risk incurring a liability which is unpredictable and which may, in the event of a structural defect, be very great. They have no power of precautionary inspection or survey, since they only have access to part of the building. They have no means of verifying that work for which they are charged was necessary at the time, or was truly repair and not improvement, the cost of which ought not to be put on the tenants, nor of controlling what work has been done or how it has been done. As tenants, carrying on a solicitor's business, they have no staff capable of performing these tasks, whereas the landlord, as a large property company with an interest in over 200 buildings in the City of London, has. If work can be ordered and effected by persons, other than those who have to bear the cost, risks of extravagance and misdirection of effort may be created. The same separation of responsibility necessitates a system of charging by certificate and of preventing challenges, except in rare cases, which is of its nature onerous and prejudicial.
The character of the two parties' interests in the land - the landlord's an indefinite one by freehold, the tenants' a limited one over a comparatively short period, even though capable of renewal if the tenant so wishes, is such as to call for the assumption of long term risks by the former: his benefit too is long term and will not, according to the evidence, emerge till the 1990's. Transference of these rights to the leaseholders, accompanied, as is inevitable, by separation of control, creates a risk disproportionate to their interest. If it is reasonable for the landlord to wish to get rid of these risks in exchange for a fixed payment (reduction in rent) it must be equally, or indeed more, reasonable for the tenants to wish, against receipt of that reduction, to avoid assuming it. The tenants are being asked to bear all the risks of property management, a business which they have not chosen, being management by others in the interest of those others. The present distribution of burdens is that freely and contractually agreed upon so recently as in 1972. To recast it involves a serious departure from the terms of the current lease. In my opinion, a court which has to have regard to the terms of the current lease ought not to sanction such a departure, and such other circumstances as should fairly be taken into account - the landlord's wishes and the increasing acceptance by others, in different situations, of clear leases - are insufficient to give grounds for so doing."
- As O'May makes clear, the Court should not generally exercise its discretion under section 35 to change the basic parameters of the commercial arrangement between the landlord and the tenant: see pp. 744A-E and 745G-746D (Lord Hailsham) and 750A-B (Lord Wilberforce). At p. 746C Lord Hailsham said: "If I am correct that the inference from the authorities is that the language of section 35 requires that the party (whether landlord or tenant) requiring a change must justify as reasonable a departure from the current lease in case of dispute about its terms, the answer [to the question where, in the new lease, the risk of fluctuation in the costs of maintenance etc should lie] must be that prima facie it must lie where the current lease provides".
- In the present case, for the East and West Market leases, the tenants point to the existing terms of the 2001 leases, which provide for a simple all-inclusive rent, and seek to rely on O'May for the conclusion that that should be the payment structure to be incorporated in the new tenancies to be ordered by the Court. The City makes proposals to depart from this position. Accordingly, in line with the guidance in O'May, the onus is on the City to show that it is appropriate to order the grant of tenancies which depart from that payment structure.
- In my judgment, there are significant differences between this case and the position in O'May. Applying the guidance in O'May as a whole, I consider that the City has shown that there are good and sufficient reasons to justify a change in the payment structure under the new tenancies back to the original structure of a rent and variable service charge which formed part of the early 1980s leases between the parties.
- The first important point of distinction from O'May is that it is common ground in this case that the basic principle applicable between the parties is that the City should be entitled to recover all its costs of maintaining and operating the Market on an ongoing basis from the tenants. So, for example, the tenants accept that the simple rent they propose should be based upon estimates to be made now about the future running costs of the Market. The City, in its proposals for a rent plus a variable service charge, is not seeking to change that basic principle, but says that its proposals will in fact better and more fairly reflect that principle. The choice between the different payment structures contended for by the two sides does not involve the same substantial shift in the basic parameters of the commercial arrangement between the parties as was in issue in O'May.
- Secondly, in my view the weight to be attached to the payment structure in the 2001 leases is considerably diminished because of the background to the agreement of the parties on those terms and the terms of the leases themselves. As set out above, the original position under the early 1980s leases was that the tenants should pay a rent and a variable service charge. The parties moved to a simple all-inclusive rent in 1987 in contemplation of the disruption associated with the refurbishment of the East and West Markets. The intention was that this should be a temporary solution until the refurbishment was completed. The refurbishment lasted longer than had been expected. In 1994 the City and the tenants addressed the question once more, and the 1994 agreements were entered into. Those agreements provided for a continuation of the simple rent regime until 2000, at which time the parties agreed that they would revert to a rent and variable service charge regime. It is a significant feature of the history of the relationship between the parties that the tenants were willing to enter into binding agreements which would have that effect.
- In late 1994 the tenants had second thoughts and prevailed upon the City not to enforce the 1994 agreements, and hence to allow the simple rent arrangements then operating to continue. But this was simply to allow time and space for further debate between the parties about the choice between a simple rent or a rent and service charge payment structure. That debate resulted in the 2001 leases, which have the striking features I have set out in paras. [42]-[45] above. In my view, in those leases the parties essentially agreed to a further temporary resolution of the underlying dispute between them, recognising that it had not been resolved and would have to be addressed afresh between them in the future. This is reflected in the curious drafting of those leases, which included (i) provisions in the schedule to them for both a rent and a service charge, but a stipulation in the body of each lease that during its life the rent would include the sums due in respect of the service charge and (ii) clause 13, which gave a clear indication that both parties reserved their position as regards the resolution of the continuing underlying dispute between them for further debate at such time as the grant of new tenancies under the 1954 Act would be in issue.
- It is clear that this is an unusual case for the purposes of application of section 35. In light of this background, I do not consider that the same weight can be attached to the existing terms of the leases as would be appropriate in a more typical case. Since the 1980s there has been a continuing dispute between the parties about the structure of the payment terms to govern their relationship which both sides recognise has never been resolved and has only been "parked" by them in various ways as time has gone by. Further, the parties have indicated by the terms of the 2001 leases, in particular by clause 13, their agreement that each should have a fair opportunity to present argument about the appropriate payment structure for new tenancies going forward without being prejudiced in that debate by the drafting or form of the payment structure in the 2001 leases. That interpretation of events is reinforced by the insertion of clause 14 in some of the 2001 leases, which was intended to emphasise from the tenants' point of view that they should not be prejudiced in that debate by the fact that they had previously entered into the 1994 agreements. I therefore think that for the purposes of application of section 35 relatively little weight attaches to the simple rent provision in the 2001 leases, as compared with other factors relevant to the assessment of what terms should apply.
- It is common ground that the principle governing the new tenancies is that the City should be able to recover in full from the tenants the ongoing operational and maintenance costs of running the Market, and I agree with the submission of the City that that principle will most fairly and accurately be reflected by the City's proposals that the payment terms should include a variable service charge. The tenants' proposal for a simple rent, to be adjusted annually by a crude general inflation measure such as the Retail Prices Index, would create an unwarranted and avoidable risk that the underlying principle to be applied is departed from year on year (whether for the benefit of the City or for the benefit of the tenants would be a matter of arbitrary chance). In my view, this means that there is "a good reason based
on essential fairness" (O'May at p. 741D per Lord Hailsham) for the payment terms to be structured as the City proposes, and such terms would best accord with "fairness and justice" between the parties (O'May at p. 747H per Lord Wilberforce).
- This reasoning is supported by Hyams v Titan Properties Ltd (1972) 24 P & CR 359. In that case the Court of Appeal had to deal with a similar choice between a simple fixed payment arrangement and a rent plus variable service charge arrangement. The Court allowed an appeal from the order of the county court judge providing for a tenancy with a simple fixed payment arrangement and substituted provision for a variable service charge. Buckley LJ referred to evidence of expert witnesses about modern practice and added his own observations as follows:
"The witnesses called in the county court included two technical witnesses called on behalf of Mr. Hyams and one called on behalf of Titan Properties Ltd., and in cross-examination each of the witnesses called on behalf of Mr. Hyams agreed that the modern practice in relation to service charges was to make the tenant liable for a proportion of the total costs incurred by the landlord in respect of the provision of services proportional to that part of the building occupied by the tenant; it was established in evidence that the proportion of the building which Mr. Hyams occupied was in fact one-ninth of the building. It was also established that the cost of providing the services for the year 196970 was £1,443, one-ninth of which would be approximately £150 a year. It is, I think, evident that the reason for this new practice which was recognised by the witnesses is that in an age of rapidly fluctuating and increasing prices it is a fairer arrangement between landlord and tenant that the tenant should pay a proportion of the cost year by year than that an arbitrary figure should be fixed at the inception of the lease to continue in force throughout, the term as the amount payable in respect of services."
- Sachs LJ agreed with the judgment of Buckley LJ and added this:
"It is quite clear that in the conditions which have been over recent years prevailing as regards increases required on expenditure on services the charges for those services should, when questions arise under the Landlord and Tenant Act 1954, normally be separated from the rent itself. It is equally clear that it is necessary that when a new lease is granted, at any rate where the service charge is not merely minimal, there should be inserted in the lease a formula of the type referred to by Buckley L.J.; the simple reason for this is that in no other way can one obtain an appropriate measure of fairness as between landlord and tenant. To try and fix for these somewhat unpredictable increasesand I mean, of course, "unpredictable" as regards percentageover a period of some five years a fixed mean sum is an exercise which is bound to result in unfairness to one side or the other."
- Current market practice supports the inference that adoption of a variable service charge to cover the provision of services by a landlord to a tenant in multi-occupied commercial premises is generally regarded as fair by both landlords and tenants. I accept the evidence of Mr Hull for the City that such an arrangement is standard market practice. A Code of Practice issued by the Royal Institution of Chartered Surveyors entitled, Service Charges in Commercial Property (2nd ed., 2011), drawn up to reflect a fair balance between the interests of commercial landlords and commercial tenants, provides detailed guidance for those drafting and operating commercial leases as to how a variable service charge payment structure should operate. The City's proposals are in line with this guidance.
- By far the larger element of the running costs incurred by the City in operating the Market is directly referable to the businesses carried on by the tenants. If their businesses were not located in the Market, the tenants would have to arrange for and directly bear the costs of provision of refrigeration, electricity, cleaning, security and the like. Provision of these services via the City allows for economies of scale and overall efficiency, but does not change the nature of such costs as in essence running costs of the tenants' businesses. Accordingly, it is in my view just and fair as between the City and the tenants that the tenants should directly bear the risks of fluctuations in such costs, and that the City should not have to bear the risk of subsidising such costs for the tenants if they fluctuate to an unexpected degree upwards.
- Furthermore, I accept the evidence for the City that the tenants are better placed than the City to manage and control such costs, by being able to adapt their behaviour (and that of their employees) to some degree so as to minimise such costs in a way that the City cannot readily do. The extent to which there may be scope for the tenants to do this will vary depending on the particular service in issue, but I consider that it is likely that the tenants will generally be more sensitive to the costs of provision of these services (such as cleaning) if they can see clearly year by year how such costs are affected by their actions. I also agree with the assessment of Mr Hull and Mr Smith for the City that adoption of a variable service charge is more likely to promote productive discussion between the City and the tenants about the level and standards of service which the tenants wish to pay for. Experience at other markets operated by the City tends to support that. Conversely, on the alternative proposed by the tenants of a simple fixed annual rent to cover all these matters, there is a greater risk that if faced with unpredicted rises in operating costs the City would attempt to trim back on the services provided, so potentially leading to acrimonious contractual disputes about whether the City was properly meeting its obligations.
- The adoption of a rent and variable service charge payment structure would also be likely to be fairer as between the various tenants who use the Market. The City's proposals in this regard are more finely attuned to the actual use which different tenants make of the Market and the different degrees to which they make use of the services provided by the City. So, for example, tenants in the Poultry Market do not make use of the meat rail which operates in the East Market and West Market. Likewise, so-called "box traders", who trade in meat delivered in boxes rather than in carcasses, do not use the meat rail. The City's proposals would more readily allow for such differences between tenants to be reflected in what they actually pay.
- I consider that there is a stronger argument for the tenants that the City should bear the risks of unforeseen upward fluctuation in the costs of maintaining the fabric of the Market buildings. However, there are certain features of the case which tend also to diminish the force of this argument. As noted above, the tenants are long-term occupants of the premises and will remain so under the new tenancies. There is therefore less reason than in some landlord and tenant contexts (where there may be a greater turnover in tenants) to distinguish strongly the respective interests of the landlord and the tenants in maintaining the fabric of the building. The East Market and West Market were refurbished to a good standard relatively recently in the 1990s, and there is no strong reason to expect that serious structural problems will arise in the near to medium future. The City's proposals provide for there to be inspection of the premises by a neutral expert, and the City undertakes that any structural problems identified in that inspection will be put right by it without cost to the tenants. The cost of maintaining the buildings has proved to be reasonably constant over a long period. Accordingly, the risk of significant unexpected structural costs appears to be within reasonable bounds. The City also makes other reasonable proposals for managing such risk, by creation of a sinking fund. And even in relation to maintenance costs, a service charge would be likely to have a beneficial effect in encouraging tenants to take greater care to minimise wear and tear caused to the fabric of the Market buildings as a result of the operation of the tenants' businesses, which make intensive use of the common parts.
- Since I think there is a difference in the force of the arguments applicable, I have given careful consideration to whether a distinction should be drawn in setting the payment terms under the new tenancies between the operating costs of the Market and the ongoing maintenance costs in relation to the fabric of the Market buildings, such that building maintenance costs might be accommodated within the rent element to be set while the operating costs should be the subject of a variable service charge. However, I have come to the conclusion that it would not be appropriate to split the treatment of the operating and maintenance costs in this way.
- Neither side argued with any force or enthusiasm for there to be such different treatment. Under the terms of the current tenancies (i.e. the 2001 leases), to which section 35 requires me to have regard, the services to be provided by the City and which (according to the schedule to the leases) are covered by the service charge group together both operating and maintenance costs without suggesting that any distinction should be drawn between them. Moreover, in relation to the underlying debate between the parties, the choice has always been framed in terms of either there being a simple rent to cover all costs or a rent plus a service charge covering all operating and maintenance costs as a whole. Under the early 1980s leases there was a variable service charge covering both operating and maintenance costs; under the 1994 agreements provision was made for reversion to a similar variable service charge covering all costs; and the essential question between the parties now, reflected in the way in which Issue 2 has been formulated, is whether there should be a reversion to such a service charge. Against this background of the way in which the parties have structured their agreements in the past and have framed the debate between themselves now, I do not think that the Court should intervene so as to impose a different solution of its own devising.
- Moreover, proceeding to choose between one or other of the two proposals put forward will promote simplicity and clarity of treatment of costs, and will reduce the scope for potentially acrimonious and costly boundary disputes over how particular items of costs borne by the City should be distributed between rent and service charge. Experience shows that landlords and tenants can operate a payment regime structured in this way in a satisfactory way without undue difficulty or argument, as the City and the tenants did under the early 1980s leases, have done and still do under leases in relation to the Poultry Market and as the City and other business tenants do at other markets such as Billingsgate. The parties did not point me to evidence of any practical experience of parties operating a sub-division in relation to services provided, as between partial coverage in the rent and partial coverage in a variable service charge, to show that such a structure could be operated equally successfully.
- Addressing the question in Issue 2, then, as a straightforward choice between a simple rent to cover all operating and maintenance costs (the tenants' proposal) or a rent plus a variable service charge to cover all operating and maintenance costs (the City's proposal), I conclude that the balance of justice and fairness is clearly in favour of adoption of the City's proposal for a variable service charge. By a substantial margin the greater part of the overall costs are operating costs directly referable to the carrying on of the businesses of the tenants, in relation to which I consider that the arguments of essential fairness in favour of a variable service charge are very strong. On the other hand, the maintenance costs are a significantly smaller proportion of the overall costs and the arguments in relation to them for including them within a simple rent are of lesser force (see para. [94] above).
The main group of Poultry Market tenancies
- For these tenancies, the position under the terms of the current tenancies for the purposes of section 35 and application of the guidance in O'May is that they provide for payment of a rent with a variable service charge. There has been some background of variation of that position to provide for coverage of the services provided in a simple rent, but that variation was clearly time-limited and by agreement the parties have reverted to the original position: see paras. [46]-[49] above. These leases do not include any equivalent of clauses 13 and 14 in the 2001 leases in relation to the East Market and the West Market.
- According to O'May, in relation to these tenancies the onus is on the tenants to show why there should be a change from the existing position. In the circumstances of these tenancies, I consider that the grounds for reducing the weight to be given to the existing position are not as strong as in relation to the leases in respect of the East Market and the West Market. In line with the guidance in O'May, and by contrast with the position set out above in relation to the East Market and the West Market leases, I think that significant weight should be accorded to the existing terms of these Poultry Market tenancies. In addition, albeit the Poultry Market was not refurbished in the 1990s, similar general reasons as set out above in relation to those leases for considering that justice and fairness point to adoption of a rent and variable service charge payment structure (see paras. [82]ff) also apply in relation to these Poultry Market tenancies.
- Therefore, in my judgment, in applying section 35 the grounds for adopting that payment structure in relation to the main group of Poultry Market tenancies are still stronger than in relation to the East Market and West Market leases.
Units 207 and 221 in the Poultry Market
- The only history of the relationship between the tenants of these units and the City which is in evidence is of a tenancy with a simple all-inclusive rent (subject to the minor and peripheral provision of separate payment for electricity usage). There is not the same elaborate factual history as applies in relation to the other tenancies considered in this judgment. Therefore, following the guidance in O'May in relation to these two units, the presumption in favour of adopting a simple rent payment structure as in the existing leases for these units is comparatively strong.
- However, the other general factors discussed above in relation to the tenancies of the East and West Markets (see paras. [82]ff) also apply in the context of these units and point in favour of adoption of a rent and variable service charge payment structure on grounds of justice and essential fairness between the parties. Moreover, I consider that the "relevant circumstances" referred to in section 35, to which I must have regard, include the desirability of having a uniform approach to the calculation and bearing of costs in the Market, applicable so far as possible across all relevant tenancies in the Market generally. Having a uniform payment structure across tenancies would be likely to assist in making reasonable assessments of the fair division of costs between tenants and would be likely to reduce the operational costs for the City of having to produce detailed estimates for five or seven and a half years hence (in order to work out how a simple all-inclusive rent for these two units should be calculated) as well as year on year estimates for all the other tenancies in the Market referred to above (required for the operation of the variable service charge in relation to those tenancies).
- Taking all these matters into account, I have come to the conclusion that in relation to the tenancies of units 207 and 221 as well the City has established that there is "good reason
based on essential fairness" (in the words of Lord Hailsham) and that there are "good reasons shown" on "strong and cogent evidence", taking into account "all relevant circumstances" and "fairness and justice" between the parties (to use the language of Lord Wilberforce) for adopting a payment structure of rent and variable service charge in the new tenancies to be ordered by the court under the 1954 Act.
Conclusion
- For the reasons set out above, the answers I give in relation to the two preliminary issues are:
i) Issue 1: "No". The tenants are not entitled to have their rents under the new tenancies reduced on account of income received by the City from letting any of the commercial offices or from the car park;
ii) Issue 2: The rents to be set under the new tenancies to be ordered by the court under the 1954 Act in relation to all the properties reviewed in this judgment should be exclusive rents with the tenants' contribution to services covered by a separate service charge.
