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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> East Renfrewshire Council v. J H Lygate And Partners [2005] ScotCS CSIH_27 (16 March 2005)
URL: http://www.bailii.org/scot/cases/ScotCS/2005/CSIH_27.html
Cite as: [2005] ScotCS CSIH_27, [2005] CSIH 27

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East Renfrewshire Council v. J H Lygate And Partners [2005] ScotCS CSIH_27 (16 March 2005)

SECOND DIVISION, INNER HOUSE, COURT OF SESSION

Lord Justice Clerk

Lord Clarke

Sir David Edward QC

 

 

 

 

 

[2005CSIH27]

XA50/54

OPINION OF THE LORD JUSTICE CLERK

in

STATED CASE

under section 3 of the Administration of Justice (Scotland) Act 1972

in the arbitration between

EAST RENFREWSHIRE COUNCIL

Tenants;

and

J H LYGATE AND PARTNERS

Landlords:

_______

For the tenants: Olson; Shepherd & Wedderburn, W.S.

For the landlords: A Cowan, solicitor advocate; Simpson and Marwick WS

16 March 2005

 [1]      This is a case stated by the arbiter in a rent arbitration under a lease of the ground floor of an office building at 224/226 Ayr Road, Newton Mearns, Glasgow. The landlords let the premises to the tenants with effect from 1 June 1996. This is the first rent review, the valuation date being 1 June 2001.

[2]      The rent review clause, so far as material, is as follows:

"6(1) With effect from the expiration of the fifth year of the Period of this

Lease ... the Current Annual Rental shall be such amount as shall be the greater of (i) the sum of Twenty eight thousand five hundred pounds (£28,500) and (ii) an amount (hereinafter called 'the revised rent') which shall represent the fair open market rent (as hereinafter defined in Clause 6(2) hereof) of the Premises at the date of review assessed in accordance with the following provisions of this Clause 6"

The relevant part of the user clause is as follows:

" ... not without the consent in writing of the Landlord (such consent not to be unreasonably withheld or delayed) to use or permit the Premises to be used otherwise than as an office ... " (cl 3(19)(a)).

 [3]      The parties agree that the existing use of the premises is within Class 2 (financial, professional and other services) in the Schedule to the Town and Country Planning (Use Classes) (Scotland) Order 1997 (SI No 3061) and that a change of use from class 2 to class 1 (shops) would constitute permitted development in terms of the Town and Country Planning (General Permitted Development) (Scotland) Order 1992 (SI No 223, as amended) (art 3; Sch 1, Class 10).

[4]      The tenants have contended from the outset that the arbiter should fix the rent solely by reference to rents of comparable premises in office use. The landlords have contended that he should base his award on rental evidence of comparable premises in retail use having regard to the likelihood that the landlords would consent to such a use. The arbiter proposes to find in favour of the landlords. If he is right, he proposes to fix the new rent at £32,800 per annum. If not, he proposes to fix it at £30,500 per annum.

[5]      The arbiter has submitted the following questions for the opinion of the Court:

"1. Did I err in law in interpreting the effect of the user clause specified in the lease of the ground floor?

2. Did I err in law in deciding that the reviewed rent payable under the lease of the ground floor should be calculated on the basis of a hypothetical letting of these premises not only for the current permitted use as offices, but also on the basis of any other alternative potential use for which the Landlord's consent could not be unreasonably withheld?"

 [6]      Counsel for the tenants submitted that the arbiter erred in law in calculating the rent by reference to retail use only. On the basis of Homebase Ltd v Scottish Provident Institution (2004 SLT 296), he submitted that the arbiter should have taken as his starting point the permitted use, assessed a rental value for the premises in that use and adjusted it for the "hope value" arising from the possibility that the landlords' consent to a retail use could not reasonably be withheld. Instead, the arbiter had assessed the revised rent as though that consent was a certainty and without having considered evidence as to the adverse effect of the user clause on open market offers made by prospective retail tenants.

[7]      The solicitor advocate for the landlords submitted that the arbiter was entitled not to deal with this last point because the tenants had not raised it. The tenants' consistent position had been that the arbiter should have no regard to the possibility of retail use. The arbiter had impliedly made the vital finding that class 1 use would be consented to by the landlords.

[8]      In my opinion, the arbiter correctly interpreted the user clause and was entitled to base his valuation on retail use on the view that the landlords' consent to that use could not reasonably be withheld.

[9]      The tenants' position, in my view, has been unsound from the outset. If the user clause had permitted office use and no other, theirs would have been the correct approach (Plinth Property Investments Ltd v Mott, Hay and Anderson, (1978) 38 P & CR 361). But in this case the provision that the landlords' consent to another use might not be unreasonably withheld opened up the possibility that rental evidence derived from other potential uses would be relevant (Tea Trade Properties Ltd v CIN Properties Ltd, [1990] 1 EGLR 155; Reynolds and Fetherstonhaugh, Handbook of Rent Review, para 5.3.4).

[10]      The arbiter's task was to assess the rent that would be obtained if the premises were offered for let on the open market subject to the conditions of the lease. In an open market letting, the hypothetical offeror would take into account the possibility of his obtaining the landlords' consent to another use. In this case a change of use to retail would not require planning consent and, as the draft award shows, a letting for retail use would enhance the value of the landlords' interest. In those circumstances, in my opinion, the arbiter was entitled to hold, in the absence of any evidence or argument from the tenants to the contrary, that the landlords' consent to retail use could not reasonably be refused. He was therefore entitled to assess the revised rent by reference to comparable retail subjects.

[11]      The primary submission of counsel for the tenants is, in my opinion, misdirected. The valuation issue in this case was not to determine by what amount, if any, rental value based on office use should be increased to reflect hope value. The concept of hope value is properly associated with the assessment of the capital value of heritable subjects. It is that element in the valuation that arises from the possibility that planning consent may be obtained for some more valuable use (eg Aberdeen DC v Skean Dhu plc, 1991 SLT (Lands Tr) 22; Northern Metco Estates Ltd v Perth and Kinross DC, 1993 SLT (Lands Tr) 28; cf Johnson, Davies and Shapiro, Modern Methods of Valuation, 9th ed, pp 279-280).

[12]      In Homebase Ltd v Scottish Provident Institution (supra), on which counsel for the tenants relied, hope value was discussed in the context of a rent review of retail premises; but in that case the use of the premises was restricted both by a user clause and by a planning agreement which the planning authority could enforce regardless of the landlords' attitude. It is clear that the court considered the question of hope value in relation to the possibility that the planning authority might be persuaded to consent to a wider use within class 1 than it had already consented to (at para [34]). In my view, that decision is irrelevant to the present issue.

[13]      In this case the arbiter had to start from the uses permitted under the lease. These were office use and any other use to which the landlords might consent, their power to withhold consent being restricted. Having concluded that the landlords could not reasonably withhold consent to a change from class 2 to class 1, an almost inevitable conclusion in my view, the arbiter therefore had to assess the rent by reference to evidence of comparable transactions for retail as well as office subjects. On that evidence he was entitled to conclude that the evidence of retail rents was decisive.

[14]      Counsel for the tenants criticised the arbiter for his failure in assessing the hypothetical open market rent to allow for the contingency, however slight, that the landlords' consent might not be obtained or might be obtained only after litigation. I agree that that contingency might have been a material factor in the assessment. At one stage the tenants' representative told the arbiter that he hoped to be in a position to provide further information on this point, but in the event he did not do so. In my opinion, the arbiter was under no obligation to allow for such a contingency in the absence of evidence on the point.

[15]      I propose to your Lordships that we answer both questions in the negative and return the case to the arbiter to proceed as accords.

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