Sale and leaseback — 25-year lease — Upwards-only rent review — Landlords entitled to choose notional premises within 35-mile radius — High Court finding in plaintiff’s favour on construction issue but refusing rectification
By an underlease dated April 28 1989 the plaintiff landlord underlet a retail distribution warehouse at Overross Industrial Estate, Ross-on-Wye, of 250,000 sq ft to the defendant for a term of 25 years from March 25 1989 at a rent (subject to five yearly reviews) of £855,000 pa, equal to a rent of £3.59 per sq ft. The capital sum paid was £9,025,000. The transaction involved a headlease of 999 years and a leaseback transaction promoted by the defendant, the freehold owner. An upwards-only rent review was provided for. It allowed the landlord to choose not to review to the open market value of the actual premises but to elect instead for a rent geared to the rent of a notional unit within a defined area. The notional premises were defined as meaning “…a warehouse unit within a thirty-five mile radius of Ross-on-Wye having the following characteristics: (a) a total gross internal area of 50,000 square ft”. A dispute arose from the failure of the rent review provisions to specify where, within the stated radius, the notional premises were to be assumed to be located.
Held The rent review clause was constructed in plaintiff’s favour but rectification was refused.
1. In construing rent review clauses regard had to be had to the language used in the context of the material surrounding circumstances, and bearing in mind the normal commercial purpose of such a clause: see Co-operative Wholesale Society Ltd v National Westminster Bank plc [1995] 1 EGLR 97.
2. The normal commercial purpose of a rent review was to reflect the changes in the value of money and real increases in property value long term, giving rise to the “presumption of reality”: see British Gas Corporation v Universities Superannuation Scheme Ltd [1986] 1 EGLR 120.
3. The present lease was intended to govern the parties’ relationship for 25 years, and its provisions might fall to be construed at any time during that term. That seemed to reinforce the primary rule of construction, which was to focus on the actual language used in the context of the document as a whole, and to lessen the weight to be given to circumstances — in particular market circumstances — which happened to obtain at the inception of the lease and evidence of which might only be obtainable with difficulty at the time the lease fell to be construed.
4. Further, by deliberately adopting a “gearing” to changes in the value of “notional” property the “presumption of reality” was significantly weakened, although not displaced in principle.
5. It was clear in this case that the parties intended that the rent, on review, might be fixed by an artificial process which did not reflect the premises’ open market rental value. The radius included areas of widely differing rental values for the premises described.
6. The language required, if the landlord so elected, that the rent be reviewed of a notional building of the required specification “within” the defined area. Since the clause did not say where within the defined area the notional building was to be located, the clause had to be read as if it stated “anywhere within” the defined area.
7. However, on the evidence, the court did not accept that the transaction had been entered into on the basis of common or unilateral mistake so that rectification would be refused.
Roger Ellis (instructed by Allen & Overy) appeared for the plaintiff; Simon Berry QC and Andrew Walker (instructed by Linklaters & Paines) appeared for the defendant.
