Landlord and tenant — Option to renew lease — Rent of new lease to be agreed but not to exceed £1,150 pa (the rent under the expiring lease) — Whether the provision for rent ‘to be then agreed’ made the option void for uncertainty — Appeal by landlords from decision of judge in the Chancery Division that the option was valid and effectively exercised
were trustees of a golf club and the landlords were a local authority whose
predecessors in title had granted two leases to the club — The first was a
lease of 99 years of land on which the club constructed the clubhouse — The
second, which was the source of the present dispute, was for a term of 21 years
from January 1 1965 and comprised the land now laid out as a golf course — The
rent of this lease was £1,150 pa with no rent review clause — It contained an
option in favour of the tenants to take a new lease of the demised premises
from the expiry of the existing term for a further 21 years at a rent to be
then agreed, such rent not in any event to exceed the £1,150 pa payable under
the existing lease — The tenants claimed to exercise the option and stated that
they were willing to pay an annual rent of £1,150 under the terms of the new
lease — The landlords wished to negotiate a higher rent and later asserted that
the option was invalid — The judge below (the late Judge Fitzhugh, sitting as a
High Court judge) decided that it was right to imply a term as to a fair rent
and that the option clause, on its true construction, required the parties to
agree a fair rent, with an upper limit of £1,150 — The landlords appealed
landlords argued in favour of their contention that the option was invalid —
They submitted that the implication of a term was only legitimate to enable a
continuing transaction to proceed, not to attempt to establish a contract of
which the initial validity depended on the essential terms having already been
agreed — Putting this somewhat abstruse argument more simply, they asserted
that there must be an existing contract apart from the implied term into which
the term in question could be inserted; and that such an existing contract was
absent in the present case — The authorities cited in support of the view were
Brown v Gould and Beer v Bowden — The Court of Appeal declined to accept this restrictive
analysis — In their opinion the task of the court was to construe the option
clause in the context of the whole transaction in accordance with the approach
of the House of Lords in Hillas & Co v Arcos and the Court of
Appeal in Foley v Classique Coaches Ltd — The option clause in the present case was
expressed in terms of a contractual right and obligation, not of a mere
expression of willingness to negotiate for a new lease — It was proper to apply
the principle of Lord Tomlin in Hillas & Co v Arcos that the court
should, if it could, ‘so balance matters that without violation of essential
principle the dealings of men may as far as possible be treated as effective’ —
It was thus just and necessary to imply a provision in the present case for the
rent to be a fair rent — The decision in King’s Motors (Oxford) Ltd v Lax, which
appeared to take a different view, was distinguishable from the present case as
containing no reference to a maximum rent and in any event may well have been
wrongly decided — Foley’s case established that the presence of the words ‘to
be agreed by the parties’ was not fatal to the existence of an enforceable
contract if it is otherwise clear that there was a contractual intention by the
parties to be bound by the clause
noted that Staughton LJ considered that the
bystander — Appeal dismissed
The following
cases are referred to in this report.
Beer v Bowden [1981] 1 WLR 522; [1981] 1 All ER 1071; (1976) 41
P&CR 317, CA
Brown v Gould [1972] Ch 53; [1971] 3 WLR 334; [1971] 2 All ER
1505; (1971) 22 P&CR 871
Courtney
& Fairbairn Ltd v Tolaini Brothers (Hotels)
Ltd [1975] 1 WLR 297; [1975] 1 All ER 716, CA
Foley v Classique Coaches Ltd [1934] 2 KB1
Hillas
& Co v Arcos (1932) 147 LT 503
King’s
Motors (Oxford) Ltd v Lax [1970] 1 WLR 426;
[1969] 3 All ER 665
Kleinwort
Benson Ltd v Malaysia Mining Corporation Berhad
[1988] 1 WLR 799; [1988] 1 All ER 714; [1988] 1 Lloyd’s Rep 556
May &
Butcher v King [1934] 2 KB 17
Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206
United
Dominions Trust (Commercial) Ltd v Eagle
Aircraft Services Ltd [1968] 1 WLR 74; [1968] 1 All ER 104, CA
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] EGD 195; 243 EG 43 & 127, HL, [1977] 2 EGLR 61
This was an
appeal by the landlords, Rhuddlan Borough Council, from a decision by the late
Judge Fitzhugh, sitting as a judge of the High Court, whereby he held, in
favour of the tenants, trustees of the Prestatyn Golf Club, that an option to
renew a 21-year lease on land on which the club’s golf course was constructed
was a valid option and had been effectively exercised. The trustee tenants,
plaintiffs below and respondents to the appeal, were James Salmon Corson, Henry
Samuel Griffiths, Lynton Morgan Price and John Lawrence Nicholas.
N G Orr
(instructed by Sharpe Pritchard, agents for the borough solicitor, Rhuddlan
Borough Council) appeared on behalf of the appellants; William George
(instructed by Clement Jones & Co, of Holywell, Clwyd) represented the
respondents.
Giving the
first judgment at the invitation of Balcombe LJ, RALPH GIBSON LJ said:
This is an appeal by the defendants, the council of the borough of Rhuddlan,
from the order made on March 31 1988 by His Honour the late Judge Fitzhugh,
sitting as a High Court judge of the Chancery Division in Liverpool. The
question in the case is whether an option to renew a 21-year lease of the land
on which Prestatyn Golf Club constructed its golf course is a valid option
effectively exercised by the golf club, as Judge Fitzhugh held it to be, or, as
the council contends, is void for uncertainty.
The plaintiffs
are the trustees of Prestatyn Golf Club, which is an unincorporated
association. I shall refer to them as ‘the club’. On October 27 1967 two leases
were granted by the Urban District Council of Prestatyn, the predecessors in
title of the defendant council. The first was a lease for 99 years, at the
yearly rent throughout the term of £10, of the land upon which the club was to
construct, and has since constructed, the clubhouse. There has been a change in
trustees. Nothing turns on that. No issue arises in the case with reference to
the lease of the clubhouse. There is no rent review clause in that lease.
The terms of
the second lease have given rise to this dispute. The parties were the same,
and the general structure of the document was similar to that of the first
lease. The land demised was shown on a plan. The term was 21 years from January
1 1965 and the rent was to be £1,150 throughout the term. The covenants etc to
be ‘observed and performed by the trustees and by all the members for the time
being of the club’ were set out in the second schedule and included the usual
covenants such as for payment of rent and rates, for insurance and for repair.
Para 6 of the second schedule imposed upon the club the obligation:
to make such
alterations as soon as practicable in the character and general arrangement of
the demised property as may be necessary or desirable in laying out the same as
a golf course of 18 holes with proper greens, fairways, tees and other
requisites of a first class golf course having obtained the approval in writing
of the landlord Council before making such alterations.
The lease thus
contemplated that the club would have to make a substantial investment in
improving the land.
The second
lease contained in clause 3 the covenants by the landlord council. Para 1 of
that clause is an express covenant for quiet enjoyment in common form. Para 2
contained the disputed option:
If the
Trustees shall be desirous of taking a new lease of the demised property after
the expiration of the term hereby granted and of such their desire shall
deliver to the Landlord or leave for it or send by registered post to it notice
in writing not less than six months before the expiration of the said term then
the Landlord will at or before the expiration of the said term hereby granted
if there shall then be no subsisting breach of any of the Trustees obligations
under this present lease at the cost of the Trustees grant to the Trustees a
new Lease of the demised premises for a further term of twenty one years to
commence from and after the expiration of the term hereby granted at a rental
to be then agreed (but such rental shall not in any event exceed the rental
hereby reserved) and with and subject to the same covenants and conditions as
in this present Lease reserved and contained (this present covenant for renewal
excepted).
Clause 6 of
the second lease contained an arbitration clause applicable.
If any
dispute shall arise between the parties in relation to any rights or
liabilities hereunder . . .
The two leases
were granted pursuant to an agreement in writing, also dated October 27 1967,
between the club trustees and the council. It is sufficient to mention the
following terms of it. The council were described as freehold owners of all the
land. It was recited that club members had for some years past been permitted
to use parts of the land demised as a golf course. The club was to surrender
certain parts of the land previously used by it; and was to make such changes
in its rules as would enable two elected members of the council to be members
of the club’s ‘Amenity and Course Development Subcommittee’ and these
representatives of the council would continue to be members of the subcommittee
‘during the term of the lease before referred to and any extension thereof’.
By clause 8 of
the agreement it was agreed and declared
that the
Council as local authority wish to ensure that the said golf course shall be
kept open maintained and operated for the benefit not only of the members of
the club but also for their guests and visitors to Prestatyn authorised to play
on the golf course under the rules of and for the time being of the club and
further that the council is only agreeable to granting the leases herein before
mentioned on the understanding that such golf course being a valuable amenity
to the town of Prestatyn will be so kept open maintained and operated so as to
be an asset not only to the ratepayers of Prestatyn and the members of the club
but also an attraction to persons visiting or intending to visit Prestatyn
during the term of the said lease and it is further required and understood
that for the reasons aforesaid the Council require the said two persons to be
nominated by them to be members of the Amenity Committee and it is only on this
express understanding that they are prepared to grant the said lease . . .
In 1985 the
club claimed to exercise the option. The council took the view that,
irrespective of legal rights, the club should negotiate a rent increase above
the current rent of £1,150. There was, of course, no evidence at the trial
about the value because it was not an issue in the proceedings, but the basis
of the council’s view of the merits of their position may perhaps be indicated
by the fact that the extent of inflation between the date of the lease in 1967
and the termination of it on January 1 1986 is shown in the tables in Kemp
and Kemp* by a multiplier of not less than 6.74. The fact is of no
significance in the case and does no more than to suggest an explanation for
the attitude of the council.
*Editor’s
note: Quantum of damages in personal injury and fatal accident claims.
The club
claimed to exercise the option by a letter of June 21 1985. The letter also
referred to a surrender and lease of August 1 1974, but nothing turns on that
and it is not necessary to explain it further. The council eventually asserted
the invalidity of the option. The club, by its statement of claim, alleged that
‘the club is willing to pay rent at a yearly rate of £1,150 under the terms of
the new lease’ and claimed a declaration that the option was valid and had been
validly exercised and an order for the grant of a lease for a term of 21 years.
The council by its defence disputed that the option clause ‘constituted a valid
or enforceable covenant or option to renew the lease by reason of it providing
for the rental thereunder to be agreed’. The council by a notice in the action
admitted that if the option to renew contained in the lease was valid it had
been duly exercised by letter of June 21 1985.
Judge Fitzhugh
reached his conclusion thus. The words ‘such rental shall not in any event
exceed the rental hereby reserved’ merely indicated an upper limit to the
amount to be agreed by the parties and did not provide what was to happen in
the event of the parties failing to agree; or of one party repudiating the
obligation, as Judge Fitzhugh referred to it, to negotiate the amount of the
new rent. He referred to two cases, namely Brown v Gould (Megarry
J) [1972] Ch 53 and Beer v Bowden (Note) [1981] 1 WLR 522 (CA).
Those cases required the court, in Judge Fitzhugh’s opinion, to imply a term in
order to give business efficacy to the option granted to the
original parties was that a fair rent should be agreed but subject to the
stipulation that the rent must not exceed £1,150.
According to
the order as drawn up, after declaring that the option was valid and had been
validly exercised, he ordered that a fair rent be agreed subject to the proviso
that the rent does not exceed £1,150 and gave liberty to apply. It was, I
think, common ground between the parties that Judge Fitzhugh did not intend the
order to be in precisely that form.
By their
notice of appeal the council put forward the grounds that the learned judge,
having rightly found that the lease contained an option to renew at a rent to
be agreed between the parties, and that there was no provision as to what was
to happen if the parties failed to agree such rent, went wrong in law in then
holding that a term should be implied into the option, and in holding that
implication of such a term, was required by authority without having found any
facts to support that holding.
Mr Orr for the
appellant council submitted that the provision of a maximum rent did not, as
the judge held, remove the requirement of agreement. The law provides, he
submitted, that a transaction in which the rent or consideration is ‘to be
agreed’ will be void for uncertainty save in two instances, the first being
where the parties have stated a sufficiently clear formula for the
determination of the consideration of rent. An example of such a case was, he
said, Brown v Gould, where a lease of business premises contained
an option to renew the lease, providing for:
such new
lease to be for a further term of 21 years at a rent to be fixed having regard
to the market value of the premises at the time of exercising this option
taking into account to the advantage of the tenant any increased value of such
premises attributable to structural improvements made by the tenant . . .
The second
instance in which such a transaction may be saved is, said Mr Orr, where it is
appropriate and lawful to imply a term so as to give business efficacy to the
transaction: an example of that is Beer v Bowden, where a lease
of 1968 provided for rent until 1973 of £1,250 pa and
. . . from
March 25 1973, such rent as shall thereupon be agreed between the landlords and
the tenant but no account shall be taken of any improvements carried out by the
tenant in computing the amount of increase, if any, and in any case not less
than the yearly rental payable hereunder.
In this case,
Mr Orr contended, there is no formula for fixing the rent, and implication of a
term is not appropriate because there is no continuing transaction as there was
in Foley v Classique Coaches Ltd [1934] 2 KB 1 and in Beer
v Bowden.
Mr Orr
referred the court to May & Butcher Ltd v The King, reported
as a note to Foley v Classique Coaches Ltd [1934] 2 KB1, at p 17,
and the passage in the speech of Lord Buckmaster at p 20 where he said that it
is not open to parties ‘to agree that they will in the future agree upon a
matter which is vital to the arrangement between them and has not yet been
determined’. Next, Mr Orr referred to the decision of Burgess V-C in King’s
Motors (Oxford) Ltd v Lax [1970] 1 WLR 426, where the form of option
provided for a further term of seven years ‘at such a rental as may be agreed
upon between the parties’. It was held by the Vice-Chancellor that the option
was ineffective because uncertain and because no term could be implied. Lax’s
case was referred to in Beer v Bowden [1981] 1 WLR 522 by Goff LJ
at p 525H where he said:
That case, in
my judgment, is wholly distinguishable and does not really assist at all. That
was a case of an option to renew, and the exercise of the option could operate,
if at all, only to create a contract. Valid contract it could not be, because
an essential term — namely, the rent — was neither agreed nor ascertainable.
That, in my judgment, poses an entirely different problem from that which
arises where one starts with the premise that there is a subsisting lease which
creates an estate in the land and with the premise that the court must imply
some term, because it is conceded that rent is payable.
Mr Orr pointed
out that the learned judge had not referred to these matters nor to the
distinction between the clause in Beer v Bowden, which was a case of a rent
clause in a subsisting lease, and the option clause in this lease. The court
could not, said Mr Orr, imply a term so as to make an agreement between the
parties when the parties themselves had expressly provided that the option was
to be exercised only upon agreement between them as to the rent.
In the course
of argument a suggestion came from the court that whatever might be the correct
view as to the propriety of implying a term that the rent, if less than the
maximum, was to be a fair rent, the club had apparently exercised the option on
the basis that the rent payable should be the maximum of £1,150 and that there
might therefore have been an acceptance of the irrevocable offer contained in
the option clause in a way which left nothing to be determined or agreed. Mr
Orr replied that such was not a proper view of the clause, since it amounted to
permitting the club to waive for its own advantage the requirement of the
agreement of the council, and that such agreement was necessary notwithstanding
the fact that the council had by the option clause agreed that they could not
require more than £1,150. The club had served no respondent’s notice to uphold
the judgment on such a ground although it is clear that reliance was placed
upon the maximum rent provision both before the judge and in Mr George’s
skeleton argument. Mr George prudently took the view that there should be
before the court such respondent’s notice as would enable the court to consider
the point so raised. Mr Orr acknowledged that the notice raised no more than a
new point of construction of the option and, after consideration over the
adjournment, did not resist the giving of the notice in the present form. It
must be made clear that Mr George, with firm courtesy, explained why he viewed
the point with small enthusiasm and adhered primarily to the club’s main
submission that the judge’s decision was right for the reasons which he had
given. Mr George referred to the difficulty of determining the validity of the
option clause by reference to events occurring after the date of the agreement.
The notice in its final form contends that:
on its true
construction the option clause provides in effect either that in default of any
agreement the rent to be reserved under the lease should be £1,150 per annum;
or that the rent reserved should be £1,150 or such lower rent as might be
agreed.
Subject to the
point raised in the respondent’s notice, it seems to me that, without
implication of the term for the rent to be a fair rent, the parties had not
provided any formula for the determination of the rent to be agreed. Without
some standard or formula, the court could not regard the option as valid
because determination of the rent would
involve an
adjustment between the conflicting interests of the parties, which the parties
have left unsettled and on which the court is not entitled to adjudicate:
see per
Lord Thankerton in Hillas & Co Ltd v Arcos Ltd [1932] 147 LT
503 at p 513.
It is
necessary first, therefore, to decide whether Mr Orr is correct in his
submission that the implication of a term for the purpose of enabling the
consideration under a contract or the rent under a tenancy to be determined is
appropriate only where it enables a continuing transaction to proceed, and is
not in law appropriate where a party asserts a contract, such as that arising
upon the exercise of an option, of which the initial validity depends upon all
essential terms having been agreed. This point was put succinctly in argument thus:
there must be an existing contract, without the implied term, into which the
term can be implied. The authority for these propositions was said to be found
in Brown v Gould and Beer v Bowden. For my part, I
do not accept the submission.
In May
& Butcher’s case, the House of Lords held that the letter sent by the
Disposals Commission, confirming the sale of ‘the whole of the old tentage’
which might become available up to a certain date, and which provided that ‘the
price or prices to be paid, and the date or dates on which payment is to be
made . . . shall be agreed upon from time to time’ was not an enforceable
contract. That decision was considered by the House of Lords in Hillas &
Co v Arcos. In that case an agreement entered into for the sale and
purchase of Russian softwood in 1930 provided that the buyers should have the
option of entering into a contract with the sellers for the purchase of further
timber for delivery during 1931. The option clause did not specify what kinds
or sizes or what quantities were to be supplied nor did it define the dates or
ports of shipment and discharge. At trial there was held to be an enforceable
agreement. The Court of Appeal (Scrutton, Greer and Romer LJJ) regarded itself
as bound by the decision in May & Butcher Ltd to hold that there was
no concluded contract. On appeal to the House of Lords the decision of
MacKinnon J at trial was restored. Lord Tomlin, with whose speech Lord
Warrington, Lord Macmillan and Lord Thankerton agreed, first observed (p 511)
that:
Commercial
documents prepared by businessmen in connection with dealing in a trade with
the workings of which the framers are familiar often by reason of their
inartificial forms confront the lawyer with delicate problems
but he added
that the
governing
principles of construction recognised by the law are applicable to every
document
and
the effect of
that application is to some extent governed by the nature of the document.
He then
contrasted, on the one hand, the conveyance of real estate, embodying terms of
art whose meanings and effect have long since been determined by the courts,
with, on the other hand, the product of the minds of men seeking to record a
complex trade bargain intended to be carried out, and continued:
both fall to
be construed by the same legal principles, and the problem for a court of
construction must always be so to balance matters, that without violation of
essential principle the dealings of men may as far as possible be treated as
effective, and that the law may not incur the reproach of being the destroyer
of bargains.
Turning to the
documents in that case, Lord Tomlin proceeded, as I understand his speech, by
the following steps: (i) although the claim turned upon the option clause, the
validity of that clause depended, at least in part, upon an issue which
governed the validity of the contractual document as a whole, and there was no
doubt that the parties intended that document to be a complete concluded
bargain; (ii) the 1930 purchase was for 22,000 standards of softwood goods of
fair specification; (iii) in the option clause, which dealt with 1931
deliveries, and which were said to be no more than a contemplated future
bargain the terms of which remained to be settled, it was plainly necessary to
imply the words ‘soft wood goods of fair specification’ after the words
‘100,000 standards’ to which the option referred; (iv) if the words ‘of fair
specification’ had no meaning capable of being made certain, then there would
be no contract under the option clause but also there would have been no
contract under the provision for the 1930 purchase; (v) that might be the
proper conclusion but, before it was reached, it was necessary to exclude as
impossible all reasonable meanings which would give certainty to the words;
(vi) the words to be implied were shown to have a meaning which, if the parties
failed to agree, could be applied to the facts by the court ‘just as much as
the fair value of a property’.
Lord Wright,
who also agreed in the result, stated the problem as being the true construction
of the option clause itself. The document was inartistic, but he said (p 514):
It is clear
that the parties both intended to make a contract and thought that they had
done so.
He continued:
Businessmen
often record the most important agreements in crude and summary fashion; modes
of expression . . . clear to them in the course of their business may appear to
those unfamiliar with the business far from complete or precise. It is
accordingly the duty of the court to construe such documents fairly and
broadly, without being too astute or subtle in finding defects . . . That . . .
does not mean that the court is to make a contract for the parties, or to go
outside the words they have used, except in so far as there are appropriate
implications of law, as for instance, the implication of what is just and
reasonable to be ascertained by the court as a matter of machinery where the
contractual intention is clear but the contract is silent on some detail.
Lastly, it is
necessary to mention a passage in which Lord Wright referred to the case of May
& Butcher Ltd, by which Scrutton LJ had felt compelled to decide as he
did (p 517):
The Court of
Appeal were not justified in thinking that this House intended (in that
decision) to lay down universal principles of construction . . .
and
the cases
cited by the Court of Appeal do not, in my judgment, apply here, because this
contract contains no such terms as were considered in those cases; it is not
stipulated in the contract now in question that such matters as prices or times
or quantities were to be agreed.
I have set out
in some detail the reasoning of their lordships in Hillas & Co v Arcos
because, despite references to the fact that the principles of construction are
the same in all cases, it is clear that, in reaching their decision, all their
lordships placed emphasis upon the commercial nature of the agreement and the
fact that businessmen may be imprecise in their language. Next, Lord Wright
stressed the absence of express reference in the contract in that case to the
need of any matter ‘to be agreed’. Further, Lord Tomlin, with whose speech Lord
Warrington, Lord Macmillan and Lord Thankerton agreed, considered that the
implication of words into the 1931 option clause was justified or assisted by
the presence of those words in the preceding 1930 sale clause.
In Foley
v Classique Coaches Ltd, already cited above, this court was required to
consider an agreement which was, in my judgment, no more ‘commercial’, in the
sense of being drawn up in the language of commercial men, than are the
documents before the court in the present case. The agreement in Foley’s
case was supplemental to an agreement for the sale of land. It stood by itself,
as part of the larger transaction, and if the point as to uncertainty was a good
point the whole of the supplemental agreement was void for uncertainty. In
particular, the agreement expressly provided for the prices ‘to be agreed’.
In Foley’s
case the plaintiff had sold to the defendants a piece of land which the
defendants intended to use for their business as motor coach proprietors. The
sale was made subject to the defendants’ entering into a second agreement to
purchase from the plaintiff all the petrol required for their business. The
second agreement provided that the defendants would purchase from the plaintiff
all the petrol required by them ‘at a price to be agreed by the parties in
writing and from time to time’. This court (Scrutton, Greer and Maugham LJJ),
after consideration of the cases of May & Butcher Ltd and Hillas
& Co v Arcos, held that a term must be implied in the agreement
that the petrol supplied should be of reasonable quantity and be sold at a
reasonable price, and that, if any dispute arose as to what was a reasonable
price, it was to be determined by arbitration under the arbitration clause.
There was therefore ‘an effective and enforceable contract although as to the
future no definite price had been agreed with regard to the petrol’: per
Scrutton LJ at p 10. There is no trace in the reasoning of this court in Foley’s
case of the limitations which Mr Orr’s submission would place upon the court in
the construction of this option clause. In particular, the court implied the
term in the process of determining the intention of the parties, as shown by
the document, in the circumstances in which it was executed. It did not hold
that the supplemental agreement for the purchase and sale of petrol must first
be shown to be a valid and enforceable contract without the implied term
contended for.
I would
therefore hold that the matters relied upon by Mr Orr as excluding the
possibility of implication of the fair rent term do not have the effect in law
for which he contended. The task of the court, therefore, is to construe the
option clause in the second lease in accordance with the approach of their
lordships in Hillas & Co v Arcos. It must be construed in the
context of the entire transaction of which the second lease formed part. It is
expressed in terms suitable and relevant to contractual right and obligation
and not to the mere expression of a willingness at the end of the first term to
negotiate, free of any legal obligation, for the grant of a new term. If it was
intended to be no more than a statement that the landlords would negotiate, it
was grossly misleading to anyone unfamiliar with the argument capable of being
mounted upon the decision in the case of King’s Motors (Oxford) Ltd v Lax,
and it served no purpose whatever in a contractual document. If there was to be
no obligation, there was no need for or point in the definition of the time for
service of notice for the exercise of the option. There was equally no need for
or point in the expression of the condition that there must be no subsisting
breach of any of the obligations of the club. Finally, there was no point in
the provision that the rent under the new lease should not exceed the current
rent of £1,150. It seems plain to me, therefore, that, in the absence of
authority requiring us to take a different course, it is proper to apply to
this clause the principle applied by Lord Tomlin to the document in Hillas
& Co v Arcos, namely that the court should, if it can,
so balance
matters that without violation of essential principle the dealings of men may
as far as possible be treated as effective.
In Brown
v Gould, Megarry J at p 56G referred to the reluctance of the court to
hold an instrument void for uncertainty as a basic principle. If we are free to
do so, I would hold that in this case the contractual intention of the parties
is clear that, upon proper notice being given, the council should be under an
obligation to grant a new lease at a fair rent to be agreed between the
parties, that fair rent not to be in excess of £1,150. It is just and necessary
to imply the provision for the rent to be a fair rent.
There is said
to be authority in the way of taking that course. In King’s Motors (Oxford)
Ltd v Lax [1970] 1 WLR 426 the option clause was contained in a
seven-year lease of a petrol station and provided for a further term of seven
years. As in this case, there was a requirement as to the giving of notice six
months before the end of the term and of due performance of the covenants in
the lease, but the rent was to be ‘as may be agreed between the parties’. There
was no statement as to the maximum rent. Mr Orr submitted that that case had
been approved in Beer v Bowden by this court and that the
reference in the option clause in this case to a maximum rent did not
serve to distinguish this case from the grounds of decision in Lax’s case. As
was pointed out in the course of argument by Balcombe LJ, the correctness of
the decision in Lax’s case was not treated as a matter of decision for
this court in Beer v Bowden. The Lax case was concerned with an
option clause, as contrasted with the rent revision clause before the court in Beer
v Bowden and was thus regarded as distinguishable. It is, again, I
think, not necessary for this court to decide whether the decision in the Lax
case was correct because the provision for a maximum rent is, in my judgment, a
material distinction. For my part, however, I incline to the view that it was,
as Mr George submitted, wrongly decided, and I would respectfully differ from
the view of Goff LJ that the option clause was in that case precluded from
being a valid contract because the rent was not ascertainable. I see no reason
why different principles should be applicable to the construction, so far as
concerns voidness for uncertainty, of a rent revision clause in an existing
lease as contrasted with an option for a new lease or further lease in an
existing lease. Foley v Classique Coaches Ltd established that
the presence of the words ‘to be agreed by the parties’ is not fatal to the
existence of an enforceable contract if it is otherwise plain, upon the
construction of the whole of the document in its context, including of course
those words, that there was a clear contractual intention of the parties to be
bound by the clause. A provision that the rent should be a fair rent could, I
think, have been implied in the Lax case. I can see no risk of
difficulty arising from such a conclusion. If parties intend an option clause
to be no more than an indication that the landlord will be willing to consider
a request for a new lease without obligation and on terms to be agreed, there is
no difficulty in making that intention clear if there is thought to be any
utility in including such a statement in the document.
There is,
therefore, no need for this court to pursue further the point which appears in
the respondent’s notice. Mr George’s submission that it was not necessary to
raise the point was, if I am right so far, correct. The question is whether
this option clause can properly be held to have such meaning that, upon the
giving of the notice by the club in 1985, the council became bound to grant a
new lease at the maximum rent, or at a lower rent if agreed. If, when the club
gave notice under the option, it is clear, as it was, that the club is not
seeking to agree a lower rent than the current rent, then, if the option clause
was intended to be contractual, the rent can only be £1,150. Such is plainly
the true consequence of the club’s notice in the circumstances of this case.
But it is said that, when the clause was agreed in 1967, it is clear from the
terms of it that the parties had provided for the possibility of an agreement
of the rent at less than the maximum rent. To hold that the rent was to be
£1,150, if not agreed at a lower figure, and without any enforceable standard
for fixing that lower figure, would thus be to deny full effect to all the
words used and to deprive the club of the opportunity to negotiate a lower rent
and in effect to force the club to take a lease at £1,150 upon giving notice. I
see force in these points. Nevertheless, if I had been persuaded that it was not
possible to imply a term that the rent to be agreed should be a fair rent,
capable of being fixed by arbitration or by the court in default of an
agreement, it seems to me that it would have been open to the court to hold
that the option could be effectively exercised by a notice calling for a new
lease at the maximum rent of £1,150. An option clause is
. . . an
irrevocable offer . . . in order to be turned into a binding contract the offer
must be accepted in exact compliance with its terms. The acceptance must
correspond with the offer
See per
Lord Denning in UDT (Commercial) Ltd v Eagle Aircraft Services Ltd
[1968] 1 WLR 74 at p 81, cited by Lord Diplock in United Scientific Holdings
Ltd v Burnley Borough Council [1978] AC 904 at p 929A. If a notice
given by the club was, in the circumstances, given and known by the council to
be given, on the basis that the rent to be payable under the new lease was to
be £1,150 per annum, as I understand is common ground, then it was, in my
judgment, an acceptance by the club of the offer by the council to grant the
new lease at a rent to be agreed but not exceeding the current rent. Upon such
acceptance by the club there was nothing left to be determined as to the terms
of the new lease, because the council had agreed that its irrevocable offer
should be on the basis that the rent was not in any event to exceed that
figure. I see no reason why an acceptance in those terms should not be
effective in law even if a notice, calling for a new lease at a rent to be
agreed, must be regarded as ineffective for want of any standard by reference
to which the rent at a figure less than the current rent could be determined by
the court. The option clause should not be held to be void because the club, in
theory and in other circumstances, might have given a notice purporting to
exercise the option in terms which the club did not and could not rationally
have put forward in the events which happened. This is not to vary the meaning
of the clause from what it had in 1967. It is to hold that, then and now, a
notice calling for the new lease at the maximum rent is a valid and effective
exercise of a valid option clause.
I would
therefore uphold the decision of Judge Fitzhugh and dismiss the council’s
appeal. I would wish to hear counsel on the form of the order. It should,
subject to any further submissions, direct the grant of a new lease at a rent
of £1,150 and on the terms required by the option clause. The result, as Judge
Fitzhugh pointed out after judgment, would be to include within the new lease
the original provisions for construction of the new course. It is clear, I
think, that nothing turns upon that and no difficulty arises from it. It is the
same covenant as was contained in the second lease and, as is common ground, it
has been performed.
Agreeing, STAUGHTON
LJ said: It is by no means uncommon for parties to a contract to provide
that, on the happening of some future event, further terms will be agreed
between them. It may be uncertain whether the event will occur and if so when;
it may indeed be unlikely that it will ever occur. I do not suppose that very
often either party is aware of the potential effect of such a term on their
bargain. No doubt occasionally one party has that knowledge and deliberately
signs the contract when he knows that all or part of it is void. But generally
I imagine that both believe the bargain to be effective; the future event may
never happen; if it does happen, the parties may then reach agreement; and if they
do not, it will be for the courts or arbitrators to find a solution. Meanwhile
the desired objective of concluding a contract must not be held up by further
negotiations with a view to resolving what is not yet agreed. If one party is a
company with an in-house legal adviser, he may whisper words of caution; but
the managing director will tell him that it is the task of lawyers to solve
problems not to create them. Similar considerations may explain the use of
letters of comfort, recently considered by Hirst J in Kleinwort Benson Ltd
v Malaysia Mining Corporation [1988] 1 Lloyd’s Rep 556 and on appeal by
this court.
Ralph Gibson
LJ in his judgment has provided a review of the authorities upon which I could
not and do not seek to improve. So I can summarise quite briefly the reasons
which lead me also to the conclusion that the option here is not void for
uncertainty.
The solution
which the law provides for the problem was in part codified by section 8 of the
Sale of Goods Act 1893, now the Sale of Goods Act 1979, as follows:
8 Ascertainment
of price. (1) The price in a
contract of sale may be fixed by the contract, or may be left to be fixed in a
manner agreed by the contract, or may be determined by the course of dealing
between the parties.
(2) Where the price is not determined as
mentioned in subsection (1) above the buyer must pay a reasonable price . . .
That section
was said by Lord Buckmaster in May & Butcher Ltd v The King
[1934] 2 KB 17 at p 20 to reproduce the common law. In the same case (at p 21)
Viscount Dunedin explained its effect as follows:
No doubt as
to goods, the Sale of Goods Act 1893 says that if the price is not mentioned
and settled in the contract it is to be a reasonable price. The simple answer
in this case is that the Sale of Goods Act provides for silence on the point
and here there is no silence, because there is a provision that the two parties
are to agree.
It might have
been inferred from that decision that, whenever there is an express term that
the price is to be agreed, there can be no implied term for a reasonable price
in the absence of agreement. Such a conclusion would, in my view, illustrate
the undesirable rigidity which can ensue when the common law is codified by the
words of a statute. That danger was avoided, as appears from Foley v Classique
Coaches Ltd [1934] 2 KB 1. There the contract provided for the supply of
petrol at a price to be agreed. Scrutton LJ said (at p 10):
In Hillas
& Co v Arcos the House of Lords said that they had not laid down
universal principles of construction in May & Butcher v The King,
and that each case must be decided on the construction of the particular
document, while in Hillas & Co v Arcos they found that the
parties believed they had a contract. In the present case the parties obviously
believed they had a contract and they acted for three years as if they had;
they had an arbitration clause which relates to the subject-matter of the
agreement as to the supply of petrol, and it seems to me that this arbitration
clause applies to any failure to agree as to the price. By analogy to the case
of a tied house there is to be implied in this contract a term that the petrol
shall be supplied at a reasonable price and shall be of reasonable quality. For
these reasons I think the Lord Chief Justice was
as to the future no definite price had been agreed with regard to the petrol.
So, too, Greer
LJ said (at p 12):
It is a
common observation that a decision upon the construction of one contract is not
an authority upon the construction of another contract in different words and
entered into in different circumstances. The facts of this case and the nature
of the contract take it out of the authority of May & Butcher v The
King, and leave us free to construe this contract as containing the implied
term mentioned.
That approach
is not confined to contracts for the sale of goods and to contracts where it is
only the price of goods which remains to be agreed. It can apply to a lease: Brown
v Gould [1972] Ch 53. Mr Orr for the borough council argues that, if the
express terms of a contract leave some important term unascertained, the
contract is invalid, and one does not reach the stage of asking whether a term
should be implied. He seeks support for that in dicta of Goff and Geoffrey Lane
LJJ in Beer v Bowden [1981] 1 WLR 522. I do not regard that case
as laying down any such proposition, even obiter; if it had done so, the
proposition would have been contrary to the law as stated in Foley’s
case, by which the court was bound as we are, and which the court followed. In
my opinion, one must first consider both the express and any implied terms of a
contract before deciding whether it is void for uncertainty.
If the
officious bystander envisaged by MacKinnon LJ in Shirlaw v Southern
Foundries (1926) Ltd [1939] 2 KB 206 at p 227 had asked the parties to this
contract what would happen if the option were exercised and a rent could not be
agreed, their answer would have been: of course the court will decide, or
rather the arbitrators will, as we have an arbitration clause. Upon a
supplementary question, as to what solution the arbitrators would impose, the
answer would be: a fair rent, again of course. I reach that conclusion from the
terms of the contract and the surrounding circumstances. The parties obviously
intended the option clause to be of legal effect; they went to the trouble of
specifying, among other things, an upper limit for the new rent; by a separate
lease which was part of the same bargain the trustees had taken the clubhouse
for a period of 99 years; they had undertaken an obligation, which may well
have been onerous, to carry out improvements. I do not believe that either
party would have contended that, if there were no agreement, the option was to
be ineffective.
It is
regrettable that the law does not provide any easy and clear solution for this
type of case, since it occurs with some frequency. The dispute has no doubt
been expensive both for the trustees and the borough council. If parties wish
to avoid such expense, they should either not provide in their contracts for
something to be agreed in the future or they should state expressly what is to
happen if agreement is not reached. If that course is not adopted, the court or
arbitrators must determine whether any, and if so what, term is to be implied.
Here I would uphold the decision of the judge and imply a term that a fair rent
was to be payable if agreement could not be reached.
It may be that
the same conclusion could have been reached on another ground. There is, as it
seems to me, at least an obligation on the parties to negotiate, with a view to
agreeing a new rent. In the ordinary way a contract to negotiate is
ineffective: see Courtney & Fairbairn Ltd v Tolaini Brothers
(Hotels) Ltd [1975] 1 WLR 297. But here there were very special
circumstances. The upper limit for the new rent was £1,150 a year; but that was
also the lower limit, since the trustees say in their pleading that they are
willing to pay at that rate. So if the borough council are under an obligation
to negotiate, they must be obliged to agree that figure. However, this approach
to the problem was not pleaded, or advanced in argument. So I do not rest my
decision upon it.
Also agreeing,
BALCOMBE LJ said: I have had the advantage of reading in draft the
judgments of Ralph Gibson and Staughton LJJ. I, too, was at one time attracted
by the point, taken at the instance of the court and now formulated in the
respondent’s notice, that the option clause could be construed as meaning that
the rent to be reserved by the new lease was £1,150 pa or such lesser sum as
might be agreed. As the club never sought to suggest a rent lower than £1,150
pa, the effect of their exercise of the option, on this construction of the
clause, was to create a contract for the grant of a new lease at a rent of
£1,150 pa. However, I see the force of the argument that such a construction
depends in part on hindsight, that in 1967 it could not be predicated that a
fair rent would necessarily be more than £1,150 pa, and that such a
construction might have deprived the club, had circumstances proved otherwise,
of the opportunity to secure a new lease at a rent lower than £1,150 pa.
Having further
considered the matter I am satisfied that the judge was right in holding that
the option clause, on its true construction, required the parties to agree a
fair rent, with an upper limit of £1,150. I agree with the reasons of Ralph
Gibson and Staughton LJJ for reaching that conclusion.
For the
reasons given by Ralph Gibson LJ, and notwithstanding the dictum by Goff LJ in Beer
v Bowden [1981] 1 WLR 522 at p 525, I doubt whether King’s Motors
(Oxford) Ltd v Lax [1970] 1 WLR 426 was correctly decided.
I agree that
this appeal should be dismissed.
The appeal
was dismissed with costs; the order in the court below was varied in terms of
agreed draft handed in by counsel.