In the latest in a series of judgments in the litigation between Humber Oil Terminals Trustee Limited ("HOTT") and Associated British Ports ("APB"), the High Court decided the interim rent payable under the lease of property described as an oil jetty, which stretches about 1 kilometre into the Humber Estuary and comprises 7 berths for ships ("the Oil Jetty Lease").

Background

To set the interim rent judgment in context, this litigation concerned leases of properties forming part of the Immingham Oil Terminal in the Humber Estuary, the busiest port in the UK (by volume). Each year, about 20 million tonnes of oil and related products pass though Immingham to and from two local refineries, the Lindsay Oil Refinery and the Humber Oil Refinery ("the Refineries"), each owned and operated by a large oil company. The owners of the refineries together operate HOTT, a joint venture company.

The Immingham Oil Terminal facility was constructed in the late 1960s and the four leases of property which relate to the Immingham Oil Terminal were entered into for periods of forty years, the contractual terms of which all came to an end in 2010. The particular features of the property demised to HOTT under the leases are unusual, but the approach of the court in determining the interim rent provides valuable assistance to parties who are faced with interim rent valuations under section 24D of the Landlord and Tenant Act 1954.

Opposed Lease Renewal Proceedings

ABP served section 25 notices terminating the leases and indicating an intention to oppose any application by HOTT for the grant of new tenancies on the basis of section 30(1)(g) of the 1954 Act, i.e. the landlord's intention to occupy the premises for the purpose of carrying on its own business there.

ABP contended that the Immingham Oil Terminal was the most advantageously located facility for deepwater access for oil tankers, that HOTT's exclusive use of the terminal was the only such arrangement within the Port of Immingham, and that it was not operating the terminal efficiently. ABP's case was that it wished to occupy and manage the Immingham Oil Terminal itself to maintain supply to the refineries and to open the oil jetty, demised to HOTT under one of the leases, to third party users.

HOTT applied to the court for the grant of new tenancies under the 1954 Act. HOTT argued that ABP could not prove its required intention under section 30(1)(g) and pointed out that on termination of the leases, HOTT would be entitled to remove its complex system of pipes, equipment and infrastructure from the oil jetty, which would cost around £10 million. It would then cost at least £60 million and about two years to replace what had been removed.

The court found on the facts that ABP's intention was to occupy the Immingham Oil Terminal for the purposes, or partly for the purposes, of a business to be carried on by it at the Immingham Oil Terminal at the termination of the leases. The court took the view that the parties would be guided only by economics and commercial reality and that it was not only possible, but quite probable, that the tenant would come to a commercial arrangement with the landlord to continue to use the Immingham Oil Terminal.

The court was convinced by ABP's evidence that it was motivated by the need to obtain value for its port facilities, to expand competition in the port and to attract third party customers. It felt that it was not for the court to decide whether ABP's approach was a prudent business decision, provided that it had a reasonable prospect of being fulfilled. HOTT's appeal against this decision was dismissed.

Issues over Interim Rent

Following this decision, in a separate hearing, the parties asked the court to rule on the question of the interim rent payable by HOTT pursuant to section 24D of the 1954 Act.

Interim rent fills the gap between the earliest possible termination date for the tenancy according to the landlord's section 25 notice/tenant's section 26 request and either the start date for the new rent under a renewal lease or the date when the premises revert to the landlord. Section 24D contains provisions for calculating interim rent in circumstances where section 24C does not apply. Section 24C applies where the renewal is unopposed, the tenant is in occupation of the whole of the property at the time when the section 25 notice or section 26 request is served, the landlord grants a new tenancy of the whole of the property to the tenant, and there have been no significant changes to the rental market or to the terms of the new lease so as to affect rental value.

For the Oil Jetty Lease, ABP's proposed interim rent under section 24D was £24,903,000 per annum and HOTT's proposed interim rent was £2,300,000 per annum.

The parties were divided over two major issues. Firstly, the Oil Jetty Lease permitted HOTT to remove "the Lessee's works" at the end of the term. These included the pipes and loading and unloading equipment which HOTT had installed. HOTT argued that the 1954 Act required the court to assess the rent that a willing landlord and a willing tenant would be prepared to agree a yearly tenancy in relation to the premises without any of the tenant's works present, i.e. the court should assume that the pipework and equipment had to be installed by an incoming tenant to get the oil jetty up and running again. This would, of course, have the effect of significantly depressing the interim rent payable because of the level of capital outlay required to equip the bare jetty structure.

Secondly, the Oil Jetty Lease contained an exemption from ship dues and goods dues for ships using the Oil Jetty and for crude oil and refined products passing across the Oil Jetty. ABP argued that a willing tenant would be prepared to pay a significant amount for a lease of the Oil Jetty with the benefit of the ship and goods dues as this was a very valuable exemption.

The court emphasised that the factual context was important and noted that the Refineries, being two of nine oil refineries in the United Kingdom, need to have supplies of crude oil and to be able to supply refined products to their customers in order to function productively. In their commercial operations, the Refineries are heavily dependent on being able to use the oil jetty to obtain supplies of crude oil and whoever owned the Refineries would have a strong incentive either to take a lease of the oil jetty or to enter into fee paying arrangements with whoever controlled the jetty to keep it operational. Essentially, there was a strong element of mutual dependency in the relations between the owner of the jetty, the operator of the oil jetty and the owners of the Refineries. The court also noted that both HOTT and ABP had had made equally vital contributions to the creation of a viable oil jetty. In order for the oil jetty to be of any good commercial use, there had to be the jetty structure with the pipelines and equipment installed.

Since there was no ready market for the letting of oil jetties, the court accepted both parties' experts' reliance on the Depreciated Replacement Cost method of valuation, which is a method for ascribing capital value to the asset in question based on the assumption that a willing buyer would not pay more to acquire the asset that the cost of acquiring an equivalent new one.

Section 24D

The court noted the requirement in section 24D(1) of the 1954 Act that interim rent is to be set at the level which is fair and reasonable for the tenant to pay. The court said that the requirements in section 24D(2), that

"in determining the interim rent under subsection (1) above the court shall have regard - (a) to the rent payable under the terms of the relevant tenancy; and (b) to the rent payable under any sub-tenancy of part of the property comprised in the relevant tenancy, but otherwise subsections (1) and (2) of section 34 of this Act shall apply to the determination as they would apply to the determination of a rent under that section if a new tenancy from year to year of the whole of the property comprised in the relevant tenancy were granted to the tenant by order of the court",

were subordinate to and should be read in light of section 24D(1). The court referred to the Court of Appeal decision in Neale v Witney Electric Theatre [2011] EWCA Civ 1032 in this regard, in which Laws LJ said that the "overriding" provision in section 24D is subsection (1).

The court also said that the current passing rent under section 24D(2)(a) was capable, depending on the circumstances, of having relevance beyond acting as a possible 'cushion' against an increase in rent by reference to market circumstances.

Decision on issues

In relation to the first major issue of disagreement between the parties, the court noted that the pipelines and equipment were firmly anchored to the oil jetty structure and for legal purposes had become part of ABP's property, subject to a right to removal by HOTT under the Oil Jetty Lease. In any event, the court found that the amount of interim rent did not depend on the question of whether the items installed by HOTT qualified as tenant's fixtures as it rejected the 'bare jetty' approach put forward by HOTT. The court said that it was difficult to see that anyone would wish to take a yearly tenancy of the bare jetty structure of the oil jetty for anything other than a nominal or very low rent. The court held that the property to be disregarded under section 34 of the 1954 Act was any property installed by HOTT and which HOTT was contractually entitled to detach and remove from the oil jetty at the end of the Lease. Therefore, HOTT had to pay an interim rent in respect of the property now owned by the landlord which HOTT had no right to remove.

In relation to the second major issue of disagreement between the parties, the court held that there was clearly significant value for HOTT and the oil companies in having been able to continue using the oil jetty to service the refineries over the interim rent period, whilst also having the benefit of the exemption from ship and goods dues. The court found that these were significant features which ought to inform the amount of rent which it was reasonable for the tenant to pay under section 24D.

The court held that there was no good commercial reason why the interim rent should be set at a level which would continue to afford HOTT and the oil companies the commercial benefit of being wholly exempt from goods and ship dues. The court recognised that the exemption from such charges was an unusual feature and that there appeared to have been no attempt in the Oil Jetty Lease to calculate the amount of these potential liabilities which could be expected to be saved. However, the court found that this exemption was a supplementary benefit for HOTT which effectively kept the rent low, akin to a rent free period as an incentive to a tenant to take a lease. The court said that the additional element of rent which a willing landlord and a willing tenant in open market conditions would agree should be paid in relation to the exemption would be that part of the net savings attributable to the elements of the jetty structure for which the landlord is responsible. The court felt that a deal between business entities as willing landlord and tenant was likely to conclude with equal division of benefits, i.e. half of the net savings in relation to goods and ship dues.

In general terms, the court said that this was not a case in which it was appropriate to allow for a cushioning effect to take account of an increase in market rents above the current passing rent due to inflation or to the impact of unexpected events, i.e. circumstances where it would be reasonable to protect a tenant against the impact of a much higher rent. However, the court accepted ABP's expert valuer's assertion that the notional rental figure should be reduced by 10% to take account of the yearly nature of the notional tenancy which has to be assumed under section 24D and assessed the interim rent under the Oil Jetty Lease at £14,800,306 per annum.

Landlords may be interested to note the court's comment that in appropriate circumstances it is possible for the court to "have regard" to the current passing rent in a particular contractual setting and to infer from it and from a change in the circumstances that the interim rent should be increased above the current passing rent.

Interim Rent Start Date

In order to assess the start date for interim rent, the court had to decide which of two notices served by ABP pursuant to section 25 of the 1954 Act in relation to the Oil Jetty Lease was valid.

The issue concerned the proper construction of the provision in the Oil Jetty Lease, which stated that HOTT was to hold the demised premises "on and from" 1 January 1970 for the term of forty years. ABP argued that this phrase meant that the contractual term expired on 31 December 2009. HOTT argued that it meant that the contractual term expired on 1 January 2010.

Where the term of a lease is expressed to be a period "from" a particular date, this usually means that the period commences immediately after that date. Where a term is said to commence "on" a particular date, that date will generally be construed to be the first day of the period. Here, the court held that the phase "on and from" had the effect that the term expired on 1 January 2010, which meant that the first section 25 notice (which purported to terminate the tenancy on 31 December 2009) was invalid and the court looked to the second section 25 notice for the interim rent start date.

The court rejected ABP's attempt to rely on Mannai Investment Co Limited v Eagle Star Life Assurance Co. Limited [1997] AC 749 in order to validate its notice. The court held that the section 25 notice in this case could have referred to any number of dates, so the identification of the specific termination date was central to the meaning of the notice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.