The Only Way Is Up?

Scottish Widows Fund and Life Assurance Society v BGC International (Formerly Cantor Fitzgerald International) [2012] EWCA Civ 607

Summary

The Court of Appeal considered the construction of a complex rent review clause where the parties had not foreseen a fall in open market rental value.

Facts

Scottish Widows took a sub-underlease of premises at One America Square in the City of London for 20 years with an upwards only rent review at five yearly intervals commencing in 1996. Scottish Widows proceeded to grant a sub-sub-underlease to BGC International. At the time of granting the sub-sub-underlease, the rent payable by Scottish Widows under the sub-underlease was well above market value (passing rent was £1,283,424, market rent was £752,765). BGC refused to pay the equivalent of the rent which was passing under Scottish Widows' own lease.

Scottish Widows originally offered a reverse premium of £10 million, to incentivise BGC to take the premises at the passing rent. However, it was agreed that BGC would pay rent which was less than that paid by Scottish Widows, based on the £10 milllion incentive. The rent payable by BGC International was as follows:

During the period until 18 December 2010, BGC was to pay:

£752,765 per annum plus

i. with effect from the Review Date on 29 September 2001, the excess (if any) of the Open Market Rent on that Review Date over the sum of £1,285,424, or

ii. with effect from the Review Date on 29 September 2006, the excess (if any) of the Open Market Rent on that Review Date over £1,285,424.

From 18 December 2010 until the end of the term, the tenant was to pay whichever was the greater of £1,285,424 or such other sum as shall be agreed or determined to be the Open Market Rent on the immediately preceding Review Date (i.e. 29 September 2006).

As at the 2001 rent review date the market value of the premises had increased quite substantially from £752,765 to £1,426,353 per annum. The rent was therefore reviewed under Scottish Widows' own lease to £1,426,353. Since this was higher than £1,285,424, BGC had to pay the difference (£140,929) to Scottish Widows, on top of its basic rent of £752,765. By the time of the 2006 review however, the market had dipped again. The market value of the premises was now only £1,001,930. Scottish Widows' lease had normal upwards-only rent review provisions, so it continued to pay rent at the higher level of £1,426,353 to its landlord.

The dispute in the case arose in relation to the...