Clarise Properties Ltd v Rees & Anor

A rent review clause requiring rent to represent the open-market letting value of land requires the rent that would be agreed in a hypothetical open-market letting. The valuation must apply the stated assumptions, including that the property is a vacant site available for residential development and that the letting occurs between willing parties. The absence of comparable real-world transactions does not prevent the valuation. A conventional modern ground rent methodology under section 15(2) of the Leasehold Reform Act 1967 does not govern the contractual review unless the lease incorporates it. The hypothetical open-market rent cannot exceed market value.

The respondents claimed the freehold of a leasehold house under Part I of the Leasehold Reform Act 1967. The parties disputed the construction of clause 1(b) of the 1991 lease, which provided for periodic review of the rent by reference to the open-market letting value of the land as a vacant site available for residential development.

The Leasehold Valuation Tribunal for Wales adopted a marketable-ground-rent approach. The Upper Tribunal dismissed the landlord’s appeal in [2014] UKUT 0394 (LC). The Court of Appeal considered whether the clause required a conventional section 15 rent, a nominal rent, or the rent obtainable in the hypothesised open market.

Appeal dismissed. Lord Justice Henderson gave the leading judgment, with which Lord Justice Sales and Lady Justice Black agreed.

1. Clause 1(b) required the reviewed annual rent to represent the hypothetical open-market letting value of the land, assessed as a vacant site available for residential development. The word “representing” did not make the rent a proxy for open-market value. It meant that the sum ascertained on the stated assumptions was the annual rent payable [35].

2. The valuation necessarily assumed that a letting would take place in an open market between a willing landlord and a willing tenant. The absence of comparable transactions in the real world was irrelevant. The market itself was not hypothetical, even though the transaction was; the valuer had to apply real-world market behaviour subject to the contractual hypotheses. This was consistent with Inland Revenue Commissioners v Gray [1994] STC 360, Hoare v National Trust (1998) 77 P. & C. R. 366, and, in particular, Dennis & Robinson v Kiossos Establishment [1987] 1 EGLR 133 [11]–[13], [25], [36].

3. The conventional method for calculating a modern ground rent under section 15(2) of the Leasehold Reform Act 1967 did not govern the contractual review. Section 15(2) contained no open-market requirement and related to the notional extended lease used for statutory enfranchisement. The lease, by contrast, repeatedly made open-market value central to the review clause [26], [37].

4. The favourable terms on which the lease was originally granted were irrelevant to its construction. A notional open-market rent could not exceed market value. The Upper Tribunal had therefore reached the correct conclusion, and the appeal was dismissed [38]–[39].

• Court of Appeal (Civil Division) In [2017] EWCA Civ 1135, the appeal from the Upper Tribunal was dismissed. Permission had previously been granted in [2015] EWCA Civ 1118.
• Upper Tribunal (Lands Chamber) In [2014] UKUT 0394 (LC), the landlord’s appeal from the Leasehold Valuation Tribunal was dismissed and the marketable-ground-rent approach was endorsed.
• Leasehold Valuation Tribunal for Wales On 19 September 2013, the tribunal determined the rent-review construction as a preliminary issue and directed the parties to prepare valuations.