Landlord and tenant — Rent review — Trigger notice — Interrelationship with break clause — Whether time of the essence for service of trigger notice — Whether landlord entitled to rent review
By a lease
dated December 7 1971 office premises were let to the defendant tenant for a
term of 42 years at a rent of £21,750 pa subject to review. The lease contained
a break clause permitting either the landlord or the tenant to determine the
lease by six-months notice at the expiration of the first 21 years of the term,
namely September 28 1992. In respect of the relevant review period either
landlord or tenant could require a review by serving a notice on the other
party not less than 12 calendar months before the commencement of the rent
review period on September 29 1992. If the rent was not agreed then within six
months of the service of the rent review trigger notice, the determination of
the rent was to be referred to an independent surveyor. On April 14 1992 the
landlord wrote a letter to the tenant requiring the rent to be reviewed. The
tenant contended that time was of the essence, that the notice was too late and
did not accept that the rent could be reviewed. The landlord’s application for
a declaration that time was not of the essence for having the rent review, and
the letter was valid and effective, was granted by judge in the court below.
The tenant appealed.
interrelationship between the rent review clause and a break clause was that
time was of the essence for the rent review timetable. The terms of the lease
did not give rise to meaningful distinctions from those cases. There was an
interrelationship between the break clause and the relevant review period. Both
the rent review, which could be upwards or downwards, and the break clause
could be activated by either the landlord or the tenant. Following the
triggering of a review for the relevant rent review period, either party could
then operate the break clause. This mutuality required that time should be of the
essence of the service of the rent review notice.
The following
cases are referred to in this report.
Al Saloom v Shirley James Travel Service Ltd (1981) 42 P&CR 181;
[1981] 2 EGLR 96; [1981] EGD 404; 259 EG 420, CA
Coventry
City Council v J Hepworth & Son Ltd
(1982) 46 P&CR 170; [1983] 1 EGLR 119; 265 EG 608, CA
Legal
& General Assurance (Pension Management) Ltd v Cheshire
County Council [1984] 1 EGLR 102; (1983) 269 EG 40, CA
Metrolands
Investments Ltd v JH Dewhurst Ltd [1986] 3
All ER 659; [1986] 1 EGLR 125; (1986) 52 P&CR 232; 277 EG 1343, CA
Richards
(C) & Son Ltd v Karenita Ltd [1972] EGD
9; (1971) 221 EG 25
Samuel
Properties (Developments) Ltd v Hayek [1972]
1 WLR 1296; [1972] 3 All ER 473; (1972) 24 P&CR 223; [1973] EGD 266; 225 EG
1749, CA
Stephenson
& Son v Orca Properties Ltd [1989] 2
EGLR 129; [1989] 44 EG 81
United
Scientific Holdings Ltd v Burnley Borough
Council [1978] AC 904; [1977] 2 WLR 806; [1977] 2 All ER 62; (1977) 33
P&CR 220; [1977] 2 EGLR 61; [1977] EGD 195; 243 EG 43 & 127, HL
This was an
appeal by the tenant, the Secretary of State for the Environment, from the
decision of Judge Baker QC, sitting as a judge of the Chancery Division, in an
application by the landlord, Central Estates Ltd, seeking the determination of
the validity of a rent review notice.
Michael Barnes
QC and Mark Cunningham (instructed by the Treasury Solicitor) appeared for the
appellant; David Neuberger QC and Erica Foggin (instructed by Harkavays)
represented the respondent.
Giving the
first judgment at the invitation of Glidewell LJ, Morritt LJ said: This appeal from the judgment of Judge
Baker QC, sitting as a judge of the Chancery Division, given on February 4 1994
concerns the question whether a notice to review the rent payable under a lease
dated December 7 1971 given by Central Estates Ltd, as the landlord, to the
Secretary of State, as the tenant, after the time expressly allowed for that
purpose, is nevertheless valid as time was not of the essence of the provision
of the lease. The judge decided that time was not of the essence for service of
the notice so that it was valid. The Secretary of State appeals on the ground
that the judge was wrong in law.
The lease was
made on December 7 1971 between the predecessor in title of the landlord,
Overly Properties Ltd, and the Secretary of State for the Environment and
demised certain office premises in Gravesend to the Secretary of State for a
term of 42 years from September 29 1971 at an annual rent of £21,750, subject
to review in accordance with the provisions contained in the Schedule thereto.
The relevant
provisions of the lease are as follows, clause 4(3):
If the Lessee
shall desire to determine this Lease at the end of the first twenty-one years
of the said term and of such his desire shall give not less than six calendar
months previous notice in writing to the Lessors and shall pay all rents and
substantially perform and observe all the covenants and conditions hereinbefore
contained and on the part of the Lessee to be performed and observed up to such
determination or if the Lessors shall desire to determine this Lease at the end
of the first Twenty-one years of the said term and of such their desire shall
give not less than six calendar months previous notice in writing to the Lessee
then in either case immediately after the expiration of the said period of
Twenty-one years this present Lease and everything herein contained shall cease
and determine but without prejudice to any claim by either party against the
other in respect of any antecedent breach of any covenant or condition herein
contained.
The schedule,
so far as relevant, provides:
The Lessors
or the Lessee may require a review of the yearly rent to be paid by the Lessee
to the Lessors during the period from the expiration of the fourteenth year of
the said term to the expiration of the Twenty-first year of the said term
(hereinafter after called ‘the second period’) during the period from the
commencement of the twenty-second year of the said term to the expiration of
the twenty-eighth year of the said term (hereinafter called ‘the third period’)
during the period from the commencement of the twenty-ninth year of the said
term to the expiration of the thirty-fifth year of the said term (hereinafter
called ‘the fourth period’) and during the period from the commencement of the
thirty-sixth year of the said term to the expiration of the said term by
effluxion of time (hereinafter called ‘the fifth period’) respectively by
serving notice in writing upon the other of them requiring such review not less
than twelve calendar months before the commencement of the second period and/or
the third period and/or the fourth period and/or the fifth period respectively provided that in case of failure to
agree upon the yearly rents to be paid during each of such periods respectively
within six calendar months after the service of any such notice then the said
yearly rents shall be referred to the decision of an independent Chartered
Surveyor.
There then
follow provisions directing that the rent should be assessed on the basis of an
open-market rent as between a willing landlord and a willing tenant and it
continues:
… and upon the
agreement or determination of such yearly rents then the yearly rent payable
during such respective periods shall be the sum of twenty-one thousand seven hundred and fifty pounds (£21,750)
or the yearly rent so agreed or determined for the appropriate period whichever
is the greater.
Upon the
agreement or determination of the matters to be decided hereunder the parties
shall endorse and produce to the other party true Memoranda of such agreement
or determination on the original and counterpart of this Lease and such
Memoranda shall at all times thereafter be conclusive evidence of the matters
contained therein.
The rent
payable for the second period as so defined was increased to £65,000 as appears
from the memorandum dated November 11 1985 indorsed on the lease. That period
would expire on September 28 1992, which was also the date on which the term
would determine if either party operated the provisions of clause 4(3). The
interrelation of the break clause and the rent review procedure in respect of
that date is shown by the following timetable:
September 29
1991 latest date for the service of a notice requiring a rent review.
March 29 1992
latest date for the service of a notice to determine the term and the date on
which, if a notice activating the rent review had been duly given, the period
for agreeing an increased rent expires and thus the date on which a reference
to the surveyor to determine the amount of rent for the third period occurs.
September 29
1992 the date on which the term determines or the third period commences.
On April 14
1992 the landlord wrote to the Secretary of State stating:
As you are
aware, the rent payable under the lease falls to be reviewed with effect from
29 September 1992 for the ensuing seven year period. We shall be obliged if you
will accept this letter as notice requiring such review to take place.
The Secretary
of State was not prepared to accept the letter on that basis on the ground that
it was too late. Although a surveyor was appointed by the President of the
Royal Institute of Chartered Surveyors on the application of the landlord he
has taken no steps to ascertain the rent payable in respect of the third period
in view of the contention of the Secretary of State.
The
originating summons was issued on January 19 1993 and seeks declarations that
time is not of the essence for service of a notice by the landlord requiring a
review of the rent payable from the commencement of the 22nd year of the term
and that the letter of April 14 1992 was valid and effective for that purpose.
Before the judge and this court counsel for the tenant accepted that the two go
together in the sense that if time was not of the essence the notice was good
even though given after the time by which a notice to determine the lease had
to be served.
The judge
referred to the principles considered and established in what he described as
the classic decision of the House of Lords in United Scientific Holdings
v Burnley Borough Council [1978] AC 904* and three subsequent reported
cases, namely Legal & General Assurance (Pension Management) Ltd v Cheshire
County Council (1983) 269 EG 40† Metrolands Investment Ltd v JH
Dewhurst Ltd [1986] 3 All ER 659‡ and Stephenson & Son v Orca
Properties Ltd [1989] 2 EGLR 129. The reasons for his decision are
succinctly set out at p15 of the transcript of his judgment in the following
terms:
*Editor’s
note: Also reported at [1977] 2 EGLR 61
†Editor’s
note: Also reported at [1984] 1 EGLR 102
‡Editor’s
note: Also reported at [1986] 1 EGLR 125
The real
question, as I see it, is whether, as a matter of substance, and not of form,
the break clause is correlated or interrelated with the review clause, or
associated with it, as a relief for the tenant against the consequences of the
review. It is not enough that the result of the review may have some impact on
the tenant’s decision to operate the break clause if the clause is there for
some other purpose.
Here we have
a long lease of 42 years with one mid-term break. It is significant that that
break can be operated by either the landlords or the tenant. That sets it off
from the normal type of break clause associated with rent reviews. From that
fact, one deduces that the purpose of that break clause is to allow either
party to determine the lease for reasons which have no necessary connection
with the rent review. One could easily visualise, in the context of a 42-year
lease, that the tenant may no longer need the property or the landlord may wish
to get it back because it would make it more profitable by some sort of
refurbishment or redevelopment which the passage of time shows to be desirable.
It can really
be conceded that at the time when the tenant come to exercise the break, the
prospect of the amount of the rent for the next seven years may be a factor in
influencing his decision. By no means will it be the sole or even most
important factor in influencing his decision in this context. And if it is,
here, exceptionally the tenant could trigger the review to find out the likely
new rent.
Although I
have not overlooked the fact that the landlords are in default and served their
notice after the time that the tenant could have broken the lease,
nevertheless, as it seems to me, time is not of the essence and I shall make
the appropriate declaration.
The Secretary
of State contends that the judge was wrong because his conclusion is contrary
to the general principle established by the House of Lords in the United
Scientific Holdings case and the specific example of its application given
by Lord Diplock in his reference to Samuel Properties (Developments) Ltd
v Hayek [1972] 1 WLR 1296 and in a number of other authorities. The
landlord contends that all those cases are distinguishable and that the judge
correctly concluded that time was not of the essence in relation to the service
of a rent review notice under this lease.
It is common
ground that time is of the essence for the service of a notice to determine the
lease under clause 4(3). With regard to the notice triggering a rent review the
basic principles are not in dispute. The starting point is the formulation of
the principle in the speech of Lord Diplock in United Scientific Holdings
Ltd v Burnley Borough Council [1978] AC 904 at p930G where he said:
So upon the
question of principle which these two appeals were brought to settle, I would
hold that in the absence of any contra-indications in the express words of the
lease or in the interrelation of the rent review cause itself and other clauses
or in the surrounding circumstances the presumption is that the time-table
specified in a rent review clause for completion of the various steps for
determining the rent payable in respect of the period following the review date
is not of the essence of the contract.
The Secretary
of State contends that the presumption is displaced in this case because of the
interrelation of the rent review clause in respect of the third period as
defined by the lease and the break clause. Likewise it is not disputed that
whether the interrelation is sufficient is a question of construction. As Slade
LJ giving the judgment of the court said in Metrolands Investments Ltd v
JH Dewhurst Ltd [1986] 3 All ER 659 at p668G:
Throughout
this debate, we think it must be borne in mind that the ultimate object of the
court in construing a rent review clause, like any other contractual provision,
must be to ascertain the parties’ intention from the particular words which
they have used to express those intentions, read, of course, in the light of
any admissible evidence as to surrounding circumstances; albeit with the
assistance of the guidelines as to construction afforded by earlier
authorities. In
any) can result only in an increase, and thus is only for the landlord’s
benefit.
Essentially,
therefore, the question to which the court has to direct its mind is this: is
the proper intention to impute to the parties, from the words which they have
used, the intention that the landlord shall lose his right to a review if the
stipulated timetable is not strictly adhered to in the relevant respects?
The Secretary
of State submits that the decided cases show that time is of the essence where
the lease lays down a timetable which gives to the tenant a period after the
service of the rent review notice, whether or not the new rent is determined in
that period, before he has to decide whether to serve a notice to determine the
tenancy. That, it is submitted, constitutes a sufficient interrelationship and
is present in this case.
For present
purposes the cases to which we have been referred fall into three categories.
In the first are those in which the rent review clause is triggered by a notice
from the landlord only, is upward only and is followed by a period in which the
tenant, to whom alone the right is given, may consider whether or not to serve
a notice to determine the term. In this category fall C Richards & Son
Ltd v Karenita Ltd (1971) 221 EG 25; Samuel Properties
(Developments) Ltd v Hayek [1972] 1 WLR 1296; and Coventry City
Council v J Hepworth & Son Ltd (1982) 46 P&CR 170*. In the
second of those cases there was also a clause which extended the time for the giving
of a notice to determine the lease until a period after the increased rent had
been determined. Of the first two of these cases in United Scientific
Holdings v Burnley Lord Diplock at p935H said:
*Editor’s
note: Also reported at [1983] 1 EGLR 119
Samuel
Properties (Developments) Ltd v Hayek [1972]
1 WLR 1296 may be regarded as the origin of the dichotomy between ‘option’ on
the one hand and ‘obligation’ or ‘machinery’ on the other: the word option
having been used in the lease itself to describe the landlord’s right to
require the rent to be reviewed. It should be treated as overruled. There was a
complication in that the rent review clause was associated with a break clause
which gave to the tenant the right to surrender the residue of the term on any
rent review day by giving prior notice. The time-table in the rent review
clause for the determination of the new rent was obviously correlated with the
time by which the tenant had to give notice of his intention to surrender, so
as to enable him to make his decision whether or not to exercise that right in
the knowledge of what the new rent would be if he continued in possession after
the review date. Had that been all, as it had been in the previous and rightly
decided case of C Richards & Son Ltd v Karenita Ltd (1971)
221 EG 25, it would, I think have been sufficient by necessary implication to
make time of the essence of the rent review clause because of its
inter-relation with the time by which notice was to be given under the break
clause — a time which, for reasons I have given earlier, I consider to be of
the essence of the contract.
In Samuel
Properties (Developments) Ltd v Hayek, however, the break clause
itself contained a provision under which the period during which the tenant
could exercise his right to surrender would be extended in the event of the
reviewed rent not having been ascertained within the time stipulated in the
rent review clause. So the implication that would otherwise have arisen from
the association of the rent review clause with a break clause was negatived.
In the light
of that observation in the third case, namely Coventry City Council v Hepworth,
Lawton LJ said of United Scientific Holdings Ltd v Burnley at
p176:
It comes to
this, that their Lordships (though the matter was not immediately in point and
was technically obiter dicta) were all of the opinion that, where you
have a triggering off of a rent review provision started by the landlord
followed by an option given to the tenant to break the lease if he so wishes,
then time is to be presumed to be of the essence of the agreement unless there
are contra-indications.
The second
category of case is that in which the timetable laid down in the lease requires
the review notice to be served not later than the last date on which a break
clause might be served. In these cases the former might only be served by the
landlord in respect of an upwards-only rent review and the latter might only be
served by the tenant. The cases to which I refer are Al Saloom v Shirley
James Travel Service Ltd (1981) 42 P&CR 181* and Legal & General
Assurance (Pension Management) Ltd v Cheshire County Council (1983)
269 EG 40. In the former Waller LJ said at p185:
*Editor’s
note: Also reported at [1981] 2 EGLR 96
As I have
already said, both provisions about break and rent review in this case were in
the same clause and closely allied to each other. The words ‘not less than six
months’ notice in writing prior to the expiration of the said third year of the
term’ were used for both break and rent review. Whether the word
‘interrelated’, ‘correlated’ or ‘associated’ is used, the implication of the
use of the same phrase in the same clause is overwhelming. The phrase must mean
the same in each case, either that in both time was of the essence, or in
neither. In my view the phrase could not change its meaning in the course of 10
lines unless there were some qualifying phrases to make such a change clear. I
have no doubt that in both cases here time was of the essence;
In the latter
Dillon LJ said at p41:
But I would
add this. It is pointed out, and stressed, by Mr Colyer that where the dates of
a break clause and a rent review clause are coincidental, there is always a
possibility that the landlord’s service of a rent review notice may come too
late — even if in time — for the tenant to be able to take into account and act
on it in serving a break notice. That is theoretically possible if the astute landlord
wants to take the chance of serving his rent review notice at the last possible
permitted moment, or if by some accident a notice properly served in accordance
with the notice provisions of section 196 of the Law of Property Act 1925 does
not come into the tenant’s hands in due time. But most landlords who wish to
invoke rent review procedures are apt to serve in comfortable time before the
expiration of the permitted period. Therefore the learned judge in the present
case was fully entitled, in my view, to say, as he did in his judgment: ‘I
think the tenant could reasonably expect that the notice would be given in
sufficient time for him to decide whether he wanted to break or not.’
The reason
for having coincident dates is obviously that the tenant should have in mind,
when he decides whether he is going to break or not, whether or not the
landlord is going to invoke rent review procedure, and the reasoning which has
led the courts to hold that time is of the essence of a rent review clause
where the tenant’s break clause in the same lease is geared to a date later
than the date prescribed for the service of the landlord’s rent review notice
leads equally, I think, to the conclusion which this court reached in the Al
Saloom case and I would reach in this case, that time was of the essence of
the rent review clause in this lease.
The third
category comprises Stephenson & Son v Orca Properties Ltd
[1989] 2 EGLR 129 in which either party might trigger the rent review in which
the rent might be increased or reduced but only the tenant might serve a notice
to determine the lease. The date by which the two notices had to be served was
the same so that this case was in that respect similar to those in the second
category. The landlord served a review notice late and sought to distinguish
the cases in the second category in the manner described by Scott J at p132J in
the following terms:
First, the
rent review machinery in the lease with which I am concerned can be triggered
off either by the landlord or by the tenant. In the other two leases only the
landlord could do so. Second, the rent review under the lease in the present
case may lead to a reduction as well as to an increase in the rent. In the
other two leases a reduction in the rent was not a possible consequence of the
rent review. Third, the juxtaposition of the rent review provision and the
break option is different in the present case from the corresponding
juxtaposition in the other two leases.
In my
judgment, however, none of these points is a basis of legitimate distinction of
the two Court of Appeal authorities.
The third
point is, I think, of no weight whatever. The first two points do not, in my
view, incline against the conclusion reached by the Court of Appeal in the two
cases I have mentioned that time should be of the essence of the rent review
provision. The decisions in the two Court of Appeal cases require me, in my
view, to hold that time is of the essence of the rent review provision in the
present case. The construction and effect of leases, and in particular leases
of commercial premises, ought not, in my view, to be subjected to variation
caused by minor and apparently unimportant differences in language. Certainty
is highly important. It would be a disservice to the law if I were, in reliance
on such points of distinction as have been relied on in the present case, to
give to
the rent review clauses in the two Court of Appeal cases in question.
Metrolands
Investments Ltd v JH Dewhurst Ltd [1986] 3
All ER 659 did not concern a rent review notice. In that case the right to
determine the lease was given to the tenant during the period of three months
commencing on the date by which the lease stipulated that the increased rent
for the ensuing period should have been determined by an arbitrator. It was
held that time was not of the essence of the determination of the rent for the
interrelation between that determination and the break clause was not
sufficient to displace the presumption. The essential ground for distinction
was that the date of the determination of the rent by the arbitrator was not
within the full control of the landlord. In giving the judgment of the court
Slade LJ at p671C said:
Though there
is the clearest possible interrelation between the timetable embodied in the
rent review clause and that embodied in the break clause, such interrelation in
the context of this particular lease is not, in our judgment, a
‘contraindication’ sufficient to rebut the initial presumption of construction
(from which we think it right to start) that the timetable specified in the
rent review clause for the obtaining of the arbitrator’s decision is not of the
essence of the contract. The principal reasons why it does not suffice for this
purpose are two, which must be considered in conjunction with one another, and
have not been applicable in conjunction with any previous case which has been
cited to us.
First, the
date of the relevant event, namely the actual obtaining of such decision, is
one which is to a substantial degree outside the lessor’s control. Second, any
potential hardship to the tenant which might otherwise arise through tardy
action by the landlord in initiating the rent review procedure can be
eliminated or, at least, substantially mitigated, by the tenant initiating such
action itself. The ultimate object of the court in construing clauses such as
this, as we have already indicated, must be to ascertain the parties’
intentions from the words which they have used. Weighing in the balance all the
competing considerations that have been urged on us, we have come to the clear
conclusion that the intention properly to be attributed to the parties to this
particular lease is the intention that time should not be of the essence as
regards the obtaining of the arbitrator’s decision.
In my view,
the clear trend of all these cases supports the proposition for which the
Secretary of State contends, namely that the presumption is displaced and time
is of the essence if the timetable laid down by the lease allows a period after
the service of the review notice in which to consider whether or not to serve a
break notice for if time is not of the essence the period allowed for the
service of the break notice as to which time is of the essence is eliminated or
eroded.
The essential
question is whether the terms of this lease give rise to any meaningful
distinction. A number of points were relied on which I will seek to deal with
in turn.
First it was
emphasised that this lease provides for four rent reviews, but only one break.
This certainly distinguishes this case from all the others to which I have
referred. Counsel for the landlord relied on the observations of Waller LJ in Al
Saloom v Shirley James Travel Service Ltd, which I have already
quoted. If the question is one of construction how can the words change their
meaning depending which review they are applied to. Counsel for the Secretary
of State did not shrink from one consequence of this approach and accepted that
if it were necessary to do so he would contend that time was of the essence on
all reviews notwithstanding that there was only a link with the break clause on
one of them.
I do not
accept that this point of distinction justifies the conclusion that time was
not of the essence for service of the notice to trigger a review of the rent
payable during the third period. The principle described in the speech of Lord
Diplock is whether the interrelation between the rent review clause and the
other provisions of the lease displaces the presumption that time is not of the
essence. The relevant interrelation only exists in respect of the third period.
I see no reason why in relation to that period for which the context is
different the same words should not bear a different meaning to that which they
bear in respect of the other periods. The question is therefore whether in
respect of the third period the interrelation is sufficient.
This raises
the second point of distinction. In this case unlike the others to which I have
referred both the rent review, which may be upwards or downwards, and the break
clause may be activated by either the landlord or the tenant. It is submitted
that as either party considering whether to determine the lease could require a
rent review if knowledge of the future rent was required there was no reason
why he should not initiate the review. In this connection reliance was placed
on the second reason referred to by Slade LJ in Metrolands Investments Ltd
v JH Dewhurst in the passage I have quoted. Thus, it was submitted, that
party did not need the period for which the lease provided in order to
ascertain whether the rent was to be reviewed or not.
I do not
accept this as a distinction which points to a different result either. A
tenant will seek a rent review if he thinks that the rent should be reduced;
likewise the lessor will seek a review if he thinks it should be increased.
Neither will seek a review just for the sake of it. In each case the other
party is entitled to give notice to determine the lease. Thus as the rent
review may be both up and down and either party may trigger its operation and
give notice to determine the term the effect of the timetable contained in the lease
is to confer on both parties that which in the first category of case to which
I have referred was conferred on one of them only, namely the tenant. In my
judgment, this mutuality requires that time should be of the essence for the
service of the rent review notice by whichever party it is served, in the same
way and for the same reasons as in the cases in the first category, time is of
the essence of the landlord’s notice triggering the rent review because of its
relation to the tenant’s right to determine the term.
The remaining
point is the same as that which failed to impress Scott J in Stephenson
& Son v Orca Properties Ltd, namely juxtaposition. In my view,
to conclude that this was a valid distinction would be to put form before
substance. The point was not pressed and it is unnecessary to say any more
about it.
Counsel for
the landlord also sought to address arguments as to what the rent would be if
time is of the essence so that there is no valid rent review for the third
period. This point does not arise on this originating summons, but for the sake
of the argument I will assume that the rent will revert to the initial rent of
£21,750. In this event the landlord submits that the detriment to him and the
incentive to the tenant to do nothing in the hope that the landlord will not
serve notice in time is in each case that much the greater so that the
intention to achieve that result by making time of the essence cannot be
attributed to either party. I do not find this argument compelling for it is
one of degree and is only valid if the market is rising; if the market is
falling then the converse operates and produces a detriment to the tenant and
an incentive to the landlord.
For these
reasons I accept the arguments for the Secretary of State. In my judgment, the
judge reached the wrong conclusion. In my view, the reason he did so is that
the principle he sought to apply, namely:
… whether, as
a matter of substance, and not of form, the break clause is correlated or
interrelated with the review clause, or associated with it, as a relief for the
tenant against the consequences of the review. It is not enough that the result
of the review may have some impact on the tenant’s decision to operate the
break clause if the clause is there for some other purpose
is a much more
stringent test than any of the authorities justifies. In particular, in all the
cases in which time has been held to have been of the essence, the result of
the review would do no more than have some impact on the tenant’s decision whether
to operate the break clause, and in most of them the tenant would know little
more than that the landlord was seeking a review; but he would at least have
the opportunity to obtain advice before deciding whether to serve a notice to
determine the term. For the reasons I have tried to explain I would allow this
appeal.
Agreeing, Sir John
May said: I gratefully adopt
Morritt LJ’s summary of the terms of the relevant lease in this appeal and of
the material facts and relief sought. As he has said, the question for us, as
with the learned judge below, is whether time was of the essence for
the service of the notice by the landlord requiring a review of the rent
payable from the beginning of the 22nd year of the term granted by that lease.
Morritt LJ has also referred to the material decided cases to which our
attention was drawn but to which I need not now refer further.
Were it
possible to consider the question which arises in this appeal in isolation,
then there was clearly a sufficient interrelation between the rent review
procedures and the provisions of the lease entitling either party to give
notice to lead to the determination of the term granted at the end of the first
21 years thereof, to require us to hold on the authorities that time was of the
essence for the service of the landlord’s notice requiring a rent review at
that time.
However if
this would have been the correct answer in law to the limited question I have
posed, then on equally well established principles time should also be held to
have been of the essence in relation to the initiation of any other rent
reviews under the terms of the lease. As a matter of pure construction, if time
was of the essence with respect to one rent review notice under the lease, then
prima facie at any rate, time should also be of the essence with respect
to any other rent review notices under the same provisions of the same lease.
But it is
equally clear, on the authority of the United Scientific Holdings
decision in the House of Lords, that in the absence of any contradictions in
the express words of the lease, or in the interrelation of the rent review
clause and other clauses, for instance the clause enabling either party to
determine the lease after 21 years, or in the surrounding circumstances, then
the presumption is that time is not of the essence in construing the timetable
specified by the rent review clause.
In the present
case, while there is without doubt a sufficient interrelation or association
between the clause enabling the service of a notice to determine the lease and
the rent review clause providing for a review on the same date, as I have said
that interrelation or association does not exist in any real sense if one is
considering the mechanics leading to a rent review at any other date.
At the hearing
of this appeal, counsel on each side clearly appreciated the logical difficulty
to which the law and the arguments which I have outlined gives rise. Mr David
Neuberger QC, for the respondent landlord, relied upon it as substantial
support for his arguments. He asked rhetorically how time could be held to be
of the essence of one particular rent review procedure but not of any other.
For the
appellant tenant, Mr Michael Barnes QC, was understandably reluctant to commit
himself about how this potential illogicality should be resolved. If pressed,
however, I think that he was ready to accept any resolution of the illogicality
provided that we held that time continued to be of the essence of the material
procedure taking effect at the end of the 21st year of the term.
Viewed as a
question of construction there can only be three possible answers. One could
conclude that the parties intended time to be of the essence of the contract in
so far as the rent review procedures at the end of the 21st year of the term
were concerned, but not so in so far as the other rent review procedures were
concerned. For my part, I find it difficult to impute such a split intention to
the parties.
One is
therefore left with the two remaining possibilities. Either the parties’
imputed intention was that time was of the essence on each occasion that the
rent review procedures were operated, or it was that it should never be of the
essence in any such procedures.
In my
experience, these cases involving questions of construction frequently give
rise to artificiality, particularly when, as the law requires, one seeks to
impute an intention to the parties when in truth they never applied their minds
to the question at all. In reality it will be apparent that at least for the
purposes of this and similar cases the courts have effectively developed
certain rules of thumb to help them reach a decision about issues of
construction. For my part, I think that this is a preferable approach, but for
the time being I must continue the artificiality of seeking the parties’
intention. Doing so I respectfully do not think that one is helped by a
meticulous comparison of the facts, circumstances and contract terms with those
of the many similar cases to which we have been referred.
Faced however
with the stark choice between time being of the essence on all or alternatively
on none of the occasions when the rent review procedures were operated, I think
that I am forced to the conclusion that had the parties been asked some 24
years ago what they really intended, they would have answered that time should
be of the essence on all such occasions.
For these
reasons I would, like Morritt LJ, allow this appeal with the results that he
has suggested.
Also agreeing,
Glidewell LJ said: At the
conclusion of his speech in United Scientific Holdings Ltd v Burnley
Borough Council [1978] AC 904 Lord Diplock said at p936G:
I would
express the hope that your Lordships’ decision in these appeals will reduce the
number of occasions on which it will be necessary to have recourse to the
courts in order to ascertain whether delay has deprived the landlord of his
right to have the rent reviewed under particular rent review clauses.
This appeal
and the decisions of this court and of courts below to which we have been
referred during the course of argument show that that hope was over-optimistic.
Nevertheless, there is no doubt that the principles to be applied in our
decision are those to be derived from the speeches in that case. My lord,
Morritt LJ, has already set out, and I do not need to repeat in extenso,
the quotations upon which I would rely from the speech of Lord Diplock at
pp930G and 935 over to p936. I add, however, some passages from the speeches,
first, of Lord Simon of Glaisdale at p946 where he said:
However,
where a rent review clause is associated with a true option (a ‘break’ clause,
for example), it is a strong indication that time is intended to be of the
essence of the rent review clause — if not absolutely, at least to the extent
that the tenant will reasonably expect to know what new rent he will have to
pay before the time comes for him to elect whether to terminate or renew the
tenancy (cf Samuel Properties (Developments) Ltd v Hayek
[1972] 1 WLR 1296). That situation stands in significant contrast with those in
the instant appeals.
I refer also
to Lord Fraser of Tullybelton who said at p962F:
For these
reasons I am of the opinion that the equitable rule against treating time as of
the essence of a contract is applicable to rent review clauses unless there is
some special reason for excluding its application to a particular clause. The
rule would of course be excluded if the review clause expressly stated that
time was to be of the essence. It would also be excluded if the context clearly
indicated that that was the intention of the parties — as for instance where
the tenant had a right to break the lease by notice given by a specified date
which was later than the last date for serving the landlord’s trigger notice.
The tenant’s notice to terminate the contract would be one where the time limit
was mandatory, and the necessary implication is that the time limit for giving
the landlord’s notice of review must also be mandatory. An example of such
interlocked provisions is to be found in C Richards & Son Ltd v Karenita
Ltd (1971) 221 EG 25.
Whether the
application of those principles leads to the conclusion that the time specified
in the lease by which a notice to review a rent must be served is or is not of
the essence must of course depend on the terms of the lease in question.
Nevertheless, in the light of the express approval by their lordships in United
Scientific Holdings of the terms of the lease the subject of Goulding J’s
decision in C Richards & Son Ltd v Karenita Ltd (1971) 221 EG
25 as a paradigm of a rent review clause in which time is of the essence, the
more nearly the terms of a rent review clause in another lease approach to the
lease in that case, the more likely it will be that the time for service of the
notice will be held to be of the essence.
There are the
following differences between the terms of the lease in the present case and
those in Richards v Karenita.
First, the
present lease provides for four rent reviews but only one break half-way
through the term. Whether this leads to the conclusion that, if time is of the
essence, it is of the essence only in relation to the review at the same time
as the break clause, the review with which this appeal is concerned, (which, in
my view, is a possible though unusual construction) or whether the conclusion
must be as my lord, Sir John
not find it necessary to decide. The fact is that the late service of the
notice claiming the rent review has deprived the tenant in this case of any
opportunity to consider the review before deciding whether to put an end to his
lease. This is the very point referred to in the various speeches in United
Scientific to which I have made reference.
The second
point of distinction is that this lease provides for both review or a claim for
a review of the rent and the opportunity to break the lease to be available
both to the landlord and to the tenant. But like my lord, Morritt LJ, I regard
that as a distinction which makes no difference. Either party in that case has
the opportunity to serve a notice claiming a rent review if it is thought it
would be of its benefit to do so. If one party serves such a notice late then
the other is inevitably disadvantaged by having either less time or on the
facts of this case no time at all to consider whether to exercise the right to
terminate the lease at the half-way stage.
The point
which appears to have been the main basis of Judge Baker’s decision is that to
which Morritt LJ has referred where the judge said at p15 of the transcript of
his judgment:
The real
question, as I see it, is whether, as a matter of substance, and not of form,
the break clause is correlated or interrelated with the review clause, or
associated with it, as a relief for the tenant against the consequences of the
review. It is not enough that the result of the review may have some impact on
the tenant’s decision to operate the break clause if the clause is there for
some other purpose.
And then at the
end of that page:
It can readily
be conceded that at the time when the tenant comes to exercise the break, the
prospect of the amount of the rent for the next seven years may be a factor in
influencing his decision. By no means will it be the sole or even most
important factor in influencing his decision in this context. And if it is,
here, exceptionally the tenant could trigger the review to find out the likely
new rent.
As Mr Barnes
points out in his argument that situation must be common to all cases involving
leases which include both a rent review clause and a break clause. For my part,
therefore, I do not find it a proper basis for the conclusion to which the
learned judge came.
In my
judgment, unless I am bound by authority to the contrary, the pattern of the
lease in this case is such that the clause governing the review of the rent for
the third period from September 29 1992 is one in which the time specified for
the service of the notice is of the essence.
Is there
anything in the decisions of this Court subsequent to United Scientific
Holdings which require me to reach a different conclusion? The only such
decision in which this court concluded that time was not of the essence in
somewhat similar circumstances was the decision in Metrolands Investments
Ltd v Dewhurst Ltd [1986] 3 All ER 659. However the provisions of
the rent review clause in that case are so far from those in the present case
that Mr Neuberger disclaims any reliance upon the decision based on its facts.
The principles of that decision are to be deduced from passages to which, most
helpfully, emphasis has been given in the report itself. Slade LJ giving the
judgment of the court said at p669C:
… in a case
where a lease contains a break clause as well as a rent review clause and the
timetables of the two clauses are closely interlocked, the interrelation of the
two clauses is likely to suffice as a contra-indication sufficient to
rebut the ordinary presumption; though everything must depend on the wording of
the particular lease.
Then at p670A:
There is a
basic difference in the provisions of the lease in the presence case from those
under consideration in C Richards & Son Ltd v Karenita Ltd
and in the Coventry City Council case. In those two cases, the leases
had one most important feature in common, that is to say’ (emphasis given in
the judgment) the event as to which time was held to be of the essence was
one in the landlord’s full control (namely service of his trigger notice).
In a case where an event included as part of the timetable in a rent review
clause is one within the landlord’s full control, it is by no means
inconceivable that he should have been willing and should have intended to
commit himself to a rigid adherence to that part of the timetable, even though
the consequences of a failure to do so would be that of losing the entire
benefit of the relevant rent review and even though the lease does not
expressly state that time is to be of the essence.
In contrast,
the lease under consideration in the present case has this special and, we
would think, unusual feature: the event as to which time is said to be of the
essence is the (emphasis again) actual obtaining of the arbitrator’s
decision.
Here, the
service of a rent review notice was in the landlord’s full control (albeit that
the tenant was also entitled to and thus had control over the question of
whether he should serve the notice) but unlike the Metrolands case and
distinguishing it from the reasoning to which I have just referred this case is
one where the landlord was entirely able to activate the rent review.
I therefore
find nothing in that decision which binds us to adopt a conclusion different
from that which, seeking to apply the principles of United Scientific
Holdings, I have already indicated I arrive.
For those
reasons which do no more than add to those contained in the judgment of Morritt
LJ, with which I agree, I would therefore allow this appeal.
Mr Neuberger
has urged us to express a view about the proper interpretation of the lease in
relation to the rent for the current period in the light of our judgment. As is
apparent, I have not found it necessary to decide this question in order to
reach my decision on the issue in the appeal, and I must therefore disappoint
him by declining the request. The appeal is therefore allowed.
Appeal
allowed.
cases on this subject see p99