Hypothetical lease of obsolete building

Citation

Dowden, M. (2001), "Hypothetical lease of obsolete building", Journal of Property Investment & Finance, Vol. 19 No. 6. https://doi.org/10.1108/jpif.2001.11219fab.004

Hypothetical lease of obsolete building

Hypothetical lease of obsolete building

In construing rent review clauses the court will strive to stay as close to reality as possible – not an easy task in the world of assumptions, disregards and hypothetical leases. The decision in Bellow Properties Limited v. Trinity College Cambridge (2000) Lawtel provides a good illustration of the court's approach to such matters.

In 1970 a building lease was entered into for a period of 85 years. The tenant covenanted to erect a building on the plot in accordance with plans "to be approved" by the landlord. The rent review clause directed the valuer to assume a hypothetical lease containing a covenant on the part of the tenant "to erect a building in accordance with the plans that have heretofore been approved…"

The judge found as fact that such plans had existed before completion of the lease, and that the approved building had been duly erected.

The issue – which had considerable implications for the level of the reviewed rent – was whether the hypothetical tenant's obligation was to erect a building in accordance with the actual plans approved in 1970, or whether (as the landlord contended) it was to erect a building in accordance with plans "to be approved" at the relevant review date. The landlord's argument was that its interpretation would amount to a covenant to build a modern building, rather than an obsolete one.

Rattee J held that the wording of the rent review provision was perfectly clear. It was not an "inaccurate reference" to the actual covenant contained in the 1970 lease. Rather, it was an express reference to pre-lease plans and so the inescapable conclusion was that the provision meant that the hypothetical lease should include the actual 1970s building, and not a modern replacement. The judge's finding cleared the way for the tenant to argue that the rent should be substantially less than the rent otherwise obtainable because most, if not all, (hypothetical) tenants would refuse to accept an obligation to erect a building in 1998 in accordance with plans that had been approved in 1970.