Martineau Galleries No1 Ltd & Anor v Birmingham City Council

In construing a rent review clause, the valuer must apply the wording of the lease as a whole. Where the clause requires regard to be had to rents actually receivable from sublet premises, it does not necessarily require a vacant-possession valuation. Existing sublettings, their terms, management costs and rental voids may be considered, although the valuer decides what weight they deserve. Artificially depressed rents may be given little or no weight. For vacant premises, the valuer may assess whether the market would produce the highest rent by letting the premises together or in separate parts. The valuation may take account of voids and management costs where the clause does not exclude them.

The claimants held premises under a 99-year development lease granted by Birmingham City Council’s predecessor. The rent was subject to review by reference to the basic rental value and the aggregate rental value of the various parts of the premises. At the relevant review date, the car park and retail unit were let, while the offices were vacant.

The proceedings sought declarations to assist the expert valuer in construing clause 7(h), concerning occupied or sublet parts, and clause 7(j), concerning vacant parts. The central issues were whether the valuer had to assume vacant possession of sublet premises, how the vacant offices should be valued, and whether management costs and rental voids could be taken into account.

1. Occupied or sublet parts. Clause 7(h) required the valuer to assess the aggregate rents at which the various parts could reasonably be expected to be let on the open market, while having regard to the actual rents receivable. The wording indicated that the individual leases and existing sub-tenancies were to be considered, rather than treating the actual rents merely as comparables for a vacant-possession valuation.
2. The valuer was not required to assume vacant possession of sublet parts. The terms of the subleases could be considered where relevant to the proper rent. Management costs, rental voids and other consequences of ownership of sublet property could also be considered. The valuer would determine the weight to be given to those matters.
3. The risk of artificial manipulation did not require a different construction. If a rent had been artificially depressed, the valuer could place little or no weight on it. The reasoning in Ashworth Frazer Ltd v Gloucester City Council [1997] 1 EGLR 104 concerned a materially different clause, in which the relevant rents were the review standard itself.
4. Vacant parts. Under clause 7(j), the valuer was entitled to decide whether the vacant premises should be offered together or in separate parts, such as floor by floor, according to the highest bid or bids reasonably obtainable on the open market for the relevant term. The valuer could also consider management costs and voids and determine their weight.
5. The parties were invited to formulate declarations giving effect to those rulings.