Landlord and tenant — Rent review clause — Whether letter from tenants headed ‘subject to contract’ constituted a valid counternotice in accordance with provisions which, in the judge’s view, were unusual in the sense of not having been considered hitherto in any reported case — The machinery
The following
cases are referred to in this report.
Sheridan v Blaircourt Investments Ltd [1984] EGD 176; (1984) 270 EG
1290, [1984] 1 EGLR 139
Shirlcar
Properties Ltd v Heinitz (1983) 268 EG 362,
[1983] 2 EGLR 120, CA
These were
proceedings between the plaintiff landlords, British Rail Pension Trustee Co
Ltd, and the defendant tenants, Cardshops Ltd, to determine whether a letter
written by the tenants was a counternotice served in accordance with the rent
review provisions in an underlease of shop premises at 101 Queen Street,
Cardiff.
Terence Cullen
QC and Miss Hazel Williamson (instructed by the Solicitor, British Railways
Board) appeared on behalf of the plaintiffs; N J Patten (instructed by Stuart
Hunt & Co, of Croydon) represented the defendants.
Giving
judgment, VINELOTT J said: The short but by no means easy question in this case
is whether a letter written by a tenant constitutes a valid counternotice given
under the terms of a rent review clause.
The facts can
be shortly stated. On October 29 1982 the plaintiff, British Rail Pension
Trustee Co Ltd, the landlord, granted an underlease to the defendant, Cardshops
Ltd, of shop premises in Cardiff for a term of 20 years from March 25 1981, at
a rent of £15,000 per annum (subject to review). The provisions for review are
contained in a schedule. The schedule is not, in fact, referred to in the body
of the underlease, but nothing turns on that; it is common ground that the
relevant schedule, the third schedule, must be read into the lease, the words
‘subject to review’ being read as ‘subject to review as provided by Schedule
3’.
The rent
review provisions are unusual, at least to the extent that they are unlike any
form of rent review that has so far been considered in any reported case. They
may, for all I know, be in very common use. They are certainly well and clearly
drawn. Schedule 3 starts in para 1 with definitions of a number of phrases,
including ‘Review Notice’, a notice served by the landlord pursuant to para 2;
‘Review Notice Period’, each of the periods of five years immediately following
the commencement of each fifth year of the term; ‘Market Rent’, the rent at
which the demised premises might reasonably be expected to be let on certain
assumptions, and the ‘Review Date’, the commencement of the second year of any
Review Notice Period, or the date of service of a Review Notice within that
Review Notice Period, whichever is the later date.
Para 2
provides that the landlord may once only at any time during a Review Notice
Period serve on the tenant a notice in writing stating the amount which, in the
opinion of the landlord, is the market rent. Para 3 provides that within the
period of eight weeks from and exclusive of the date of service of the Review
Notice ‘(time to be of the essence hereof)’:
The tenant
may serve on the landlord a Counter Notice in writing stating the amount which
in the opinion of the tenant is the market rent, but if on the expiration of
eight weeks from and exclusive of the date of service of the relevant Review
Notice (time to be of the essence hereof), the tenant shall not have served on
the landlord such a Counter Notice in writing, the amount stated in the
relevant Review Notice shall be deemed to be the market rent.
Para 4 I also
read in full:
If the tenant
does serve such a Counter Notice, then the landlord and the tenant shall seek
to agree the market rent and record that agreement in writing within seven
weeks of the date that the tenant’s Counter Notice was received by the landlord.
Para 5 provides
that if the landlord and the tenant fail to reach agreement within that
seven-week period, the landlord will apply to the president of the RICS for the
appointment of an independent surveyor to determine the market rent, the
surveyor acting as an expert not as an arbitrator.
I can pass
over provisions governing the basis on which the market rent is to be
ascertained, the endorsement of a memorandum on the underlease, and the date on
which the new rent is to be paid.
Para 9
provides that the fees of the surveyor are to be borne in the following way: if
the market rent is equal to or greater than that stated in the landlord’s
review notice by the tenant, if it is equal to or less than that stated in the
tenant’s counternotice by the landlord, and in any other case equally.
What happened
was shortly this. On February 18 the landlord served a formal notice of his
intention to review the rent with effect from March 25 1986, and of the
landlord’s opinion that the market rent of the premises was £36,000 a year. On
the following day the tenant wrote to the landlord to say that they were not in
agreement with the rent proposed. The tenant commented: ‘Before commencing
further on this matter, I would be pleased if you would let me have details of
comparables which you are using to justify the rent we are being asked.’ That letter was answered on March 3, when the
landlord’s estate manager put forward a rent of £70 per sq ft as that at which
shops in the neighbourhood were currently let. He added: ‘I look forward to
hearing from you if you have any counter proposals as to the market rent’.
There was a formal reply on March 6 to the effect that the director of the
tenant company concerned was on holiday until the end of March. Then on April 9
the director in question on behalf of the tenant wrote the following letter:
Your letter
of March 3 has been put before me on my return and I am surprised at the
contents in view of the fact that you recently agreed rent reviews on numbers
99 and 97, which reflected rentals considerably below the £70 you appear to be
looking for. I can only assume from this the figure of £70 was referring to
premises in the peak section of the street. In view of the agreement reached
and the level of rentals in the area, we are prepared to agree a rental of
£24,000 per annum, which would appear to be in line with agreements on premises
in the block in better positions than our own.
That letter was
headed in large type ‘SUBJECT TO CONTRACT’. The question is whether that letter
was a counternotice within para 3 of Schedule 3.
It is trite
law that a lease must be construed in the same way as any other commercial
document; that is, it must be given the meaning in which ordinary businessmen
would understand it. The rent review provisions in turn are intended to be
operated by the parties and not always by their lawyers. There is no specific
requirement as to the form a counternotice should take. There is no magic
formula. The question whether a letter constitutes a counternotice is like any
other question of construction and must be answered in the light of the
particular provisions of the lease and of the surrounding circumstances,
including any other correspondence of which the letter forms part. The test is:
would a reasonably sensible businessman in the light of all the surrounding
circumstances have been left in no real doubt that the tenant wished to bring
paras 4 and
position of the landlord in this case have been reasonably mistaken as to what
was meant? Mr Cullen submitted that even
if the letter of April 9 had not been headed ‘subject to contract’, it would
not have been free from ambiguity and could sensibly have been read as a last offer
by the tenant, made in an endeavour to agree the rent and to avoid having to
specify what in his opinion was the market rent. He pointed out that it was
important to the landlord to know not merely the figure which the tenant would
agree to accept by way of negotiation but also the figure which, in the opinion
of the tenant, was the market rent. The latter figure would govern the
liability of the parties to the costs of the ascertainment of the market rent
if, during the period specified in para 4, the parties failed to agree the new
rent.
I have no
hesitation in rejecting this submission. In my judgment, looking at the
sequence of letters and the date when the letter of April 9 was written (it was
written six or seven days before the expiry of the period of eight weeks
specified in para 3), it would be only a most unreasonable landlord who would
read it as an offer to which the tenant required an answer before deciding
whether to specify what in his opinion was a market rent, thereby exposing
himself to a possible risk as to the costs if the market rent had to be
determined by an expert.
The only
question to my mind is whether the words ‘subject to contract’ in effect
converted what any sensible businessman would otherwise read as a counternotice
into something else — a step in a negotiation and intended to avoid the
necessity of serving a counternotice.
Mr Cullen
relied on the decision of the Court of Appeal in Shirlcar Properties Ltd
v Heinitz (1983) 268 EG 362, [1983] 2 EGLR 120 where a landlord’s notice
triggering a rent review clause was similarly headed ‘subject to contract’. In
that case the Court of Appeal took the view that, in the words of Dillon LJ:
these
time-hallowed words ‘subject to contract’ would leave the tenant in real doubt
as to whether the figure of £6,000 a year was being put forward as a firm
figure specified by the landlords under the rent review clause, or was merely
being put forward as a provisional figure, which, if not agreed by a binding
contract (that is, as envisaged by the words ‘subject to contract’), the
landlord might reserve the right to revise.
In Sheridan
v Blaircourt Investments Ltd (1984) 270 EG 1290, [1984] 1 EGLR 139, a
letter was relied on as a counternotice which, under the rent revision clause
there under consideration, was, in effect, an election by the tenant to have
the rent determined by an expert. It was headed ‘Without Prejudice and Subject
to Contract’. Nichols J (as he then was) held that that letter was wholly
insufficient to alert the landlord to the fact that the tenant wished to
exercise his right of election. He held that, apart from the heading, it would
have been quite inadequate for that purpose; that if it had been otherwise
adequate, it would have been made inadequate by the heading. He said:
I would, in
the context of the correspondence in this particular case, and having regard to
the heading of the letter, have come to the conclusion that for this reason
alone it would not be possible to construe the wording in this letter as an
unequivocal intimation to the landlord’s advisers that the tenant was requiring
the ascertainment of the substituted rent be referred to a referee.
However, there
is nothing in these cases which binds me to hold that the letter of April 9
cannot be a valid counternotice. I have to consider the effect of that letter
in the context of a rent review clause in which the document so headed does not
trigger a rent review clause, as it did in the Shirlcar case, and which
does not exercise a right to elect to have a rent determined by arbitration or
by an expert, as it did in the Sheridan case, but which starts a period
during which the parties are required to enter into negotiations in good faith
and which results in a reference to an expert if, and only if, they fail so to
agree. I think it is unreal in this context to regard the words ‘subject to
contract’ as stamping this letter as unequivocally an offer in a round of
negotiation antecedent to the commencement of, as it were, mandatory
negotiations, and necessarily antecedent to a step which might, in the event of
there being a reference to an expert, expose the tenant to a risk as to costs.
The words would be taken, I think, by a sensible businessman, as either a
mistake (by no means an unfamiliar mistake — the words ‘subject to contract’
are frequently used in quite inappropriate circumstances) or, a suggestion put
forward by Mr Patten, as designed to ensure that the letter was not taken by
the landlord as an offer capable of acceptance — a construction which is wholly
consistent with the operation of the letter as a counternotice; that is, as a
statement of the opinion of the tenant as to the market given on the footing
that the expression of that opinion is not to be taken as an offer. Under the
rent review clause it would be open to the expert to determine a rent at a
figure below that given in the counternotice, and the tenant might have had
this possibility in mind.
It would, in
my judgment, be unreasonable in all the circumstances for the landlord to have
read it as an offer to which the tenant expected a reply before determining
whether or not to serve a counternotice in the day or so that would remain
after receipt of the tenant’s letter and before the expiry of the eight-week
period. In these circumstances I shall make the declaration sought by the
tenant and, unless I hear argument to the contrary, I will say that the normal
consequences as to costs will follow.
Costs were
awarded to the defendants.
