Edwards & Walkden (Norfolk) Ltd & Ors v City of London

Under section 35 of the Landlord and Tenant Act 1954, the court must start with the current tenancy terms. The party seeking change bears the burden of showing good reason based on essential fairness and all relevant circumstances. A variable service charge may be ordered where it fairly allocates fluctuating operating and maintenance costs, even though the current tenancy provides for an all-inclusive rent. Statutory obligations requiring income from ancillary commercial uses to support market purposes do not necessarily require rents paid by market tenants to be reduced, particularly where the landlord may apply equivalent expenditure to other market purposes.

Tenants of stalls, shops and offices at Smithfield Market sought new business tenancies under Part II of the Landlord and Tenant Act 1954. The parties agreed that new tenancies should be granted for fifteen years, but disputed two preliminary issues.

1. Whether income from commercial offices above market areas and from the Rotunda car park had to be taken into account so as to reduce the new rents.
2. Whether the new tenancies should provide for an all-inclusive rent or a rent plus a variable service charge.

The judgment determined those preliminary issues before the main rent-setting hearing.

1. Issue 1. The tenants were not entitled to rent reductions based on income from the commercial offices or car park. Sections 8 and 9 of the Metropolitan Meat and Poultry Markets Act 1860 permitted ancillary commercial offices where their income supported the Market. The City remained obliged to use the relevant net income for Market purposes, but could apply it to expenditure such as repair of the Poultry Market. It was not required to use that income specifically for the benefit of the tenants or to reduce their rents. The City could correspondingly use tenant rents and service charges for other general purposes.
2. The car park was not the railway station or terminus contemplated by section 37 of the 1860 Act. It had replaced the former station and was lawfully constructed under section 9 as a building, work or convenience for Market purposes. Section 37 therefore did not require the car park income to be applied in the manner alleged.
3. Issue 2. Applying O’May v City of London Real Property Co Ltd [1983] 2 AC 726, the court had to have regard to the current tenancy, while recognising that section 35 did not freeze its terms. The party proposing change had to justify it by good and sufficient reasons based on fairness and justice.
4. For the East and West Markets, the all-inclusive rent in the 2001 leases carried reduced weight because it was a temporary arrangement adopted against a background of continuing dispute. The City established that a variable service charge would more accurately recover fluctuating operating and maintenance costs, allocate risks fairly and encourage cost control.
5. The same conclusion applied to the Poultry Market tenancies. Although the existing terms carried greater weight, the case for a variable service charge was stronger. It also applied to units 207 and 221, despite their stronger history of all-inclusive rent, because uniformity across the Market was a relevant circumstance.
6. The court declined to split operating costs from building-maintenance costs. The parties’ arrangements and arguments had consistently treated them together, and division would create avoidable boundary disputes.

The answers were: Issue 1, no; Issue 2, the new tenancies should contain exclusive rents with tenants’ contributions to services covered by a separate service charge.