McDonalds Real Estate Ltd Liability Partnership v Arundel Corporation

In construing a rent review clause, the court must identify the physical entity which the valuation formula requires to be valued and interpret the contractual language in its commercial and historical context. The presumption of reality requires the counter-factual valuation to depart from reality only so far as the clause expressly or necessarily requires. A reference to a warehouse may identify a building type without permanently limiting its permitted use. Where the clause requires restrictions on permitted use to be disregarded, the valuation may take account of the prospect of obtaining planning permission for retail use, even though the assumed building is constructed with planning permission for storage and distribution use.

The claimant held a long lease of a site occupied by a drive-through restaurant. The lease contained a rent review clause providing two alternative valuation bases. The second required the assumption of a modern single-storey warehouse of 20,000 square feet, including office space, constructed to a high standard with statutory consents and adequate parking and loading facilities.

The dispute concerned whether “warehouse” described only a physical building or also confined the use of the assumed building to storage and distribution. The central issue was whether the valuation could take account of the potential for planning permission permitting retail use.

1. The court construed the rent review clause by reference primarily to its text, read in the factual and commercial context existing when the lease was made. The second valuation basis altered the physical entity to be valued but did not otherwise alter the terms of letting.

2. The reference to a modern single-storey warehouse described a building type, namely a second-generation standard warehouse unit. The reference did not impose a permanent restriction requiring the assumed building to be used only for storage or distribution.

3. The presumption of reality required the counter-factual assumption to adhere as closely as possible to reality and depart from it only where the clause expressly or necessarily required departure. Applying that approach, the assumed building was to be constructed with planning permission for Class B8 use. The clause did not expressly or necessarily require an assumption that planning permission for retail use already existed.

4. The physical characteristics of the assumed warehouse nevertheless made it capable of retail use. The clause expressly required restrictions on permitted use to be disregarded, and the lease permitted retail use with consent that could not be unreasonably withheld. It would therefore contradict the clause to imply a continuing restriction to storage and distribution. The prospect of obtaining planning permission for Class A1 retail use could be taken into account in the valuation.

5. The court accepted that the ordinary meaning of “warehouse”, as discussed in Monomart Warehouses Ltd v Secretary of State for the Environment [1977] 34 P & CR 305, assisted in identifying the building type, but did not determine the full scope of potential use under the rent review clause.

6. The first declaration sought by the claimant was to be made. The second declaration was refused. The precise form of relief was to be determined after hearing counsel.