Landlord and tenant — Construction of underlease — Rent formula in underlease fixed the rent payable as the fraction of 78/85 of the rent of the superior lease, which provided for rent reviews — The explanation of the fraction was that the underlease did not demise the whole of the property comprised in the superior lease — The event which gave rise to the present problem of construction was the surrender of the superior lease in pursuance of a leaseback arrangement by which the property comprised in the superior lease together with certain other properties were included in a new lease — This new superior lease was expressly stated to be subject to and with the benefit of the underlease — It was argued by the underlessees that the effect of the surrender was to put an end to the operation of the rent formula; as the original superior lease had ceased to exist the formula could no longer be invoked to quantify the rent of the underlease — The superior lessees argued that the formula could still apply as a matter of construction notwithstanding the disappearance of the original superior lease — Alternatively they submitted that the rent formula was merely machinery and if for some reason it broke down the court could substitute its own machinery — Held, accepting this submission and applying the principles of Sudbrook Trading Estate Ltd v Eggleton, that the court would substitute its own machinery to supply the gap — The court would therefore order an inquiry with appropriate machinery to arrive at the proportion of 78/85 which would have been payable as the rent of the underlease if the original superior lease had not been surrendered
The following
cases are referred to in this report.
Lorien
Textiles (UK) Ltd v S I Pension Trustees Ltd
(1981) 259 EG 771
Sudbrook
Trading Estate Ltd v Eggleton [1983] 1 AC
444; [1982] 3 WLR 315; [1982] 3 All ER 1; (1982) 44 P&CR 153; [1982] EGD
392; 265 EG 215, HL
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; (1977) 243 EG 43 & 127, HL
This was an
originating summons by which the plaintiffs, R & A Millett (Shops) Ltd,
lessees of premises at 39 New Street, Birmingham 2, sought a determination of
the true construction of rent provisions in an underlease held by the
defendants, Leon Allan International Fashions Ltd.
Robert Pryor
QC and Paul Rees (instructed by Philip Hodges & Co) appeared on behalf of
the plaintiffs; D McEvoy QC and Peter Griffiths (instructed by Martyn W Amey
& Co) represented the defendants.
Giving
judgment, MR MICHAEL WHEELER QC said: This case turns on the true construction
of clause 5 of an underlease dated March 10 1970 (‘the underlease’) of part of
premises at 39 New Street, Birmingham 2. It will be convenient if I first
outline the steps by which the parties acquired their interests in the
underlease.
1 By a lease dated June 23 1969 (‘the original
headlease’) 39 New Street was demised by Raventop Developments Ltd to Suede
Circle Ltd (‘Suede Circle’) for a term of 21 years from March 25 1969 to March
25 1990 at an initial rent of £8,500 pa, subject to one review at the end of
the 14th year, namely on March 25 1983.
2 On March 10 1970 Suede Circle assigned its
interest under the original headlease to C & J Clark Retail Ltd (‘Clark
Retail’) and on the same day Clark Retail underlet to Suede Circle most (but
not all) of the premises demised by the original headlease, retaining part
of the ground floor for itself. This is the underlease as above defined. It was
for a term of 20 years and one quarter, less one day, from December 25 1969. It
would thus terminate on March 24 1990, ie one day before the original
headlease.
3 On October 27 1971, Clark Retail assigned, inter
alia, its interest in the original headlease to Wakefields Stores
(Midlands) Ltd (‘Wakefields’).
4 On December 18 1972, by which time the
reversion to the headlease was vested in Ravenseft Properties Ltd (‘Ravenseft’)
and the underlessee under the underlease was still Suede Circle, Ravenseft
entered into an agreement with Wakefields for the surrender, inter alia,
of the original headlease and a leaseback to Wakefields of the property comprised
in the original headlease, together with certain other properties, after
various alterations had been carried out. This agreement was completed on April
9 1973, when Ravenseft let the new combined premises to Wakefields for a term
of 32 years from December 25 1972. This lease (‘the 1973 headlease’) was
expressly stated to be subject to and with the benefit of the underlease. There
is no evidence before me as to whether or not Suede Circle was aware of this
surrender and leaseback.
5 On August 15 1978, by an assignment of that
date, Suede Circle assigned the underlease to the defendant in this action.
6 By a transfer dated September 2 1985, the
unexpired residue of (inter alia) the 1973 headlease was transferred by
Wakefields to the plaintiff in this action.
So much for
the parties’ chain of title. The rent payable under the underlease was £7,800
per annum ‘or such other amount as shall become payable under the provisions of
Clause 5 hereof’; that clause provided as follows:
5. The rent
payable by the Lessee as from the 25th day of March 1983 shall be seventy-eight
eighty-fifth parts of the rent payable by the Lessor as from such date in
respect of the principal premises as fixed in the manner provided by the said
Superior Lease or the rent of £7,800 per annum (whichever shall be the
greater).
It is common
ground that in the underlease ‘the lessor’ means the person for the time being
entitled in reversion immediately expectant upon the term thereby granted; ‘the
principal premises’ means that part of 39 New Street which had been demised by
Raventop Developments Ltd to Suede Circle Ltd by the headlease; and that the
‘superior lease’ means the original headlease.
Basically, the
question which I have to decide is as to the rent payable as from March 25 1983
under clause 5 of the underlease, having regard to the fact that in December
1972 the plaintiff’s predecessor in title, Wakefields, had surrendered the
original headlease and in April 1973 had obtained a leaseback in the form of
the 1973 headlease.
Before leaving
the underlease, I should also mention clause 8, which provides as follows:
8. It is
hereby agreed and declared without prejudice but in addition to Lessee’s rights
under the Landlord and Tenant Act 1954 (as amended) in the event of the Lessor
being granted a new Lease of the premises comprised in the said Superior Lease
on or before the expiration of the term hereby granted the Lessor will within
14 days of being granted such new Lease give to the Lessee written notice
thereof and the Lessee shall have the option to be exercised within one
calendar month from the date of the receipt of the aforesaid notice to renew
this Underlease for the same term (less one day) as shall be granted to the
Lessor by such new Lease at a rent equal to seventy-eight eighty-fifth parts of
such rent as shall be payable by the Lessor under such new Lease and containing
such covenants provisions and conditions as may be appropriate in the light of
those contained in such new Lease and the relationship of the covenants
provisions and conditions herein contained to those contained in the said
Superior Lease.
It is common
ground that if, which the plaintiff denies, clause 8 had any application to a
case where the original headlease was surrendered and the underlessor was
granted a new headlease, no such notice as the clause contemplates was in fact
given or sought.
In view of the
provisions in clause 5 of the underlease regarding the rent payable thereunder
as from March 25 1983, I must refer to the provisions in the original headlease
regarding the manner of fixing the rent thereunder. As I have already
mentioned, the basic rent as from May 13 1969 was £8,500 ‘(or such other amount
as shall become payable under the provisions of clause 5 hereof)’. To avoid
confusion, I must stress that this reference was to clause 5 of the original
headlease, which provided as follows:
5(a) Upon the request of the Lessors made not
earlier than twelve months nor later than six months immediately preceding the
expiration of the fourteenth year of the said term each party shall within
fourteen days appoint a duly
of the other party as to the fair market rack rent of the premises at that time
for a Lease for the residue of the said term without taking a premium and
disregarding the effect on rent of any alterations carried out by the Lessees
(other than in pursuance of any obligation to the Lessor) or any change of use
consequent thereon or any goodwill attached to the premises by reason of the
lessee’s occupation thereof on the same terms and conditions (save for this
proviso) as are herein contained. And in the event of such Valuers not having
reached such agreement by the expiry of the period of six weeks they shall
agree upon an umpire to settle the question whose decision shall be final and
binding upon both parties;
(b) If within the aforementioned period of
fourteen days either party shall not have appointed a Valuer as aforesaid or if
within the period of two weeks next following the said period of six weeks the
said two Valuers shall not have agreed upon such umpire or such an umpire shall
not have been appointed then in the first contingency the other party and in
the second contingency either party may request the President for the time
being of the Royal Institution of Chartered Surveyors to appoint a member of
that body (but not the Valuer appointed as aforesaid by either party) to settle
the question and the parties hereto shall be bound as aforesaid by the decision
of the person so appointed and;
(c) The rent payable under the Lease from the
expiration of the fourteenth year of the said term shall be the rent fixed in
manner aforesaid or the rent of £8,500 per annum (whichever shall be the
greater).
I should here
add, although only for completeness, that the 1973 headlease also contained
(once again in a clause 5) elaborate machinery for a series of rent reviews;
the first rent review date was December 25 1982, when the initial rent of
£27,000 per annum was increased to £70,000. But I must stress that the 1973
headlease demised considerably more property than had been comprised in the
original headlease. It is no part of the plaintiff’s case that the rent review
provisions in the 1973 headlease play any part in the computation of the rent
payable under the underlease.
Looking at the
original headlease and the underlease together, certain points seem to me to be
reasonably clear:
(i) the references to 78/85ths of the rent
payable under the original headlease reflect the fact that at the time when
Clark Retail entered into the underlease it retained for itself part of the
property comprised in the original headlease, and the remaining seven
eighty-fifths of the rent which it would have to pay under the original
headlease and which it could not recover under the headlease reflected this
retention.
(ii) Clause 5 of the original headlease clearly
contemplates a review of the rent payable thereunder within the period thus
specified by qualified valuers, with a view to their agreeing the then current
‘fair market rack rent’, with provisions for an umpire or, if necessary, a
reference to the president of the Royal Institution of Chartered Surveyors in
default of agreement. This clause 5, which the lessor under the original
headlease was entitled to invoke, bears all the hall-marks of a formula which
could quite readily be used, if it became necessary, to quantify the rent which
would become payable under the underlease as from March 25 1983.
(iii) Clause 5 of the underlease was clearly
intended to protect the underlessor in the event of the rent payable by the
underlessor as lessee under the original headlease being increased by reason of
the machinery provided for in clause 5 of the original headlease.
(iv) The operation of this rent review machinery
did not result in any new contract between the parties to the underlease. They
remained underlessor and underlessee respectively (see per Lord Diplock
in United Scientific Holdings Ltd v Burnley Borough Council
[1978] AC 904 at p930).
For the
defendant, Mr McEvoy contends that with the surrender of the original
headlease, clause 5 of the underlease in effect ceased to operate so as to be
capable of quantifying an increased rent: and in support of this argument he
points to, and relies on, the language of clause 5 itself. His main points, I
think, are that there was no longer any ‘rent payable by the Lessor . . . in
respect of the principal premises as fixed in the manner provided by the said
Superior Lease’ because the ‘superior lease’ had disappeared as a result of the
surrender. He also relies on clause 8 of the underlease as showing that the
parties had contemplated — and provided for — the possibility of the underlease
expiring early; that this must have been intended to include the possibility of
the surrender of the original headlease and its replacement by a new headlease;
and that clause 8 contained a complete statement of the underlessee’s rights in
those circumstances, rights which it is admitted the underlessee never sought
to exercise. Mr McEvoy also relies on the fact that the surrender of the
original headlease was brought about by the action of the plaintiff’s
predecessor in title, so that it does not lie in the plaintiff’s mouth to
complain now of possible adverse consequences of that surrender.
For the
plaintiff, Mr Pryor has two main points. First, that clause 5 of the underlease
is merely a formula which operates by reference to the more detailed formula
set out in clause 5 of the original headlease and remains capable of being
operated purely as a matter of construction and is therefore totally unaffected
either by the surrender of the original headlease or by such questions as the
rent under the original headlease not being duly paid: payment of that rent, says
Mr Pryor, is in no sense a condition precedent to the operation of clause 5 of
the underlease. Second, and as an alternative to his first point, Mr Pryor
relies on clause 5 as mere machinery and claims that if a term, properly
construed, is mere machinery and is not an essential term of the contract, and
if that machinery for some reason breaks down, the court will substitute its
own machinery. For this, Mr Pryor relies heavily on the recent decision in Sudbrook
Trading Estate Ltd v Eggleton [1983] 1 AC 444 at pp 464 et seq:
in that case the House of Lords held, in relation to leases each of which
contained an option to purchase the freehold reversion, that (and I quote from
the headnote at p 445):
as the price
was to be ascertained by machinery which, on the true construction of the
agreement was a subsidiary and non-essential part of the contract, the court
would, if the machinery broke down for any reason, substitute its own
machinery, to ascertain a fair and reasonable price.
In the present
case, as I have already indicated, I regard clause 5 of the underlease as
merely providing machinery for the rent increase by reference to the machinery
set out in greater detail in clause 5 of the original headlease. That being so,
I respectfully adopt and apply what Lord Fraser said in Sudbrook at p
484, which seems to me to be directly in point of the present case:
Where, as
here, the machinery consists of valuers and an umpire, none of whom is named or
identified, it is in my opinion unrealistic to regard it as an essential term.
If it breaks down there is no reason why the court should not substitute other
machinery to carry out the main purpose of ascertaining the price in order that
the agreement may be carried out.
As to Mr
McEvoy’s point that the difficulty in the present case stems from the seemingly
voluntary act of one of the plaintiff’s predecessors in title agreeing to the
surrender of the original headlease, I would only say this. In Sudbrook
the machinery had broken down because the lessors refused to appoint their
valuer. On this aspect, Lord Fraser, again at p 484, said:
In that sense
the breakdown has been caused by [the lessors’] fault, in failing to implement
an implied obligation to co-operate in making the machinery work. The case
might be distinguishable in that respect from cases where the breakdown has
occurred for some cause outside the control of either party, such as the death
of an umpire, or his failure to complete the valuation by a stipulated date.
But I do not rely on any such distinction. I prefer to rest my decision on the
general principle that, where the machinery is not essential, if it breaks down
for any reason the court will substitute its own machinery.
In the present
case, I know virtually nothing of the circumstances in which the original
headlease came to be surrendered and I must also assume, I think, that the
defendant’s predecessor in title, Suede Circle, was not asked to agree to the
surrender. But in my judgment, Wakefields’ apparent failure to consider the
possible legal effect of the surrender on clause 5 of the underlease cannot
fairly be regarded as anything more than an oversight and is certainly not
sufficient to preclude the court from substituting its own machinery, as Lord
Fraser had contemplated.
I should also
add that there is in my judgment nothing in the point which Mr McEvoy sought to
raise on clause 8 of the underlease.
In an amended
statement of claim the primary relief for which the plaintiff asks is
formulated as follows:
(i) A declaration that on a true construction of
clause 5 of [the underlease] the Plaintiff is entitled to have the rent payable
by the Lessor as from the 25th March 1983 assessed as between the Plaintiff and
the Defendant in the manner provided by [the original headlease];
(ii) Alternatively, an enquiry as to what is
78/85ths of the rent payable by the Lessor as from the 25th March 1983 in
respect of the principal premises.
In para 3a of
the body of the amended statement of claim, the plaintiff contended that the
effect of clause 5 of the underlease was ‘to incorporate into the underlease
the terms of [the original headlease] so far as might be necessary to ascertain
the amount of rent payable in respect of the principal premises’. In response
to a
junior, Mr Rees, in effect incorporated virtually the whole of clause 5 of the
original headlease with one or two relatively minor and fairly obvious changes
or adaptations.
As to this, Mr
Griffiths, who appeared with Mr McEvoy, raised three points:
(1) that it would be necessary to exclude
alterations carried out by the underlessor even if in pursuance of an
obligation to the headlessor;
(2) that this incorporation would require the
underlessee to incur the costs of appointing a valuer, something which the
underlessee had never previously agreed to;
(3) that looking at the scheme of the underlease
and the original headlease as a whole the underlessor was not to make any
profit by reason of any rent increase under the underlease, and this situation
must be preserved.
Mr Pryor
accepts point (1). As to point (2), he said that this was something which could
be covered as a matter of machinery, but it was not in any way fatal to the
substitution by the court of its own machinery. He contended that point (3) was
not a good point and that the existence of a profit element was irrelevant,
since the machinery was merely designed to ascertain 78/85ths of the fair
market rent of the premises in question.
I think there
is possibly sufficient in points (1) and (2) (I agree with Mr Pryor on point
(3)) not to incorporate specific provisions of clause 5 of the original headlease,
even with further relatively minor changes or additions, although I would have
been prepared to treat those changes or additions as de minimis if the
only solution open to me in order to preserve clause 5 as an effective
provision had been to proceed on the proper construction of clause 5 itself.
But since, on the case as a whole, I have no doubt that justice requires that
clause 5 of the underlease should not be emasculated in the manner for which
the defendant contends, and that machinery for implementing what was clearly
the original intention of the parties to the underlease should be provided by
the court, I propose to proceed on the alternative basis for which the
plaintiff contends and to order an inquiry with appropriate machinery so as to
establish the 78/85ths proportion of the rent which should have been paid under
the underlease as from March 25 1983 in respect of ‘the principal premises’.
I will hear
further argument as to the precise terms of this order at the conclusion of
this judgment.
It may have
come as something of a surprise to those who argued this case so ably to
discover that I have reached my decision without apparent reference to the
judgment of Mr Julian Jeffs QC, sitting (as I do) as a deputy judge in the
Chancery Division in 1981 in a case called Lorien Textiles (UK) Ltd v S
I Pension Trustees Ltd reported in (1981) 259 EG 771. But in actual fact I
have obtained very considerable assistance and encouragement from that
decision. It was a case of an underlease and a subunderlease and the effect of
the surrender of the former on the rent review provisions in the latter where,
in certain events, the new rent to be paid under the subunderlease was to be
fixed in accordance with the covenant and conditions contained in the underlease
in question. In broad outline, therefore, Lorien reflected many of the
elements in the case before me. There were of course — inevitably — a number of
differences between the two cases, but none which, in my judgment, go to the
heart of the matter. Lorien was, of course, decided some six years
before the House of Lords had (if I may be excused the expression) changed the
rules of the game in Sudbrook. It comes as no surprise, therefore, to
find Mr Jeffs upholding the proposition that ‘if the contract provides
machinery for determining the rent and the machinery breaks down or becomes
inoperable, the court cannot interface or substitute fresh machinery’. That was
clearly right as matters then stood and it was thus not open to Mr Jeffs to
decide the case before him on the basis on which I prefer to proceed in the
present case. He decided Lorien on the construction of what was then
also clause 5 of the subunderlease. I do not propose to examine in detail the
differences between Lorien and the present case. Suffice to say that Mr
Jeffs found, on the facts before him, (i) that the revised rent in the
subunderlease fell to be determined ‘on the basis set out’ in the underlease;
(ii) that it mattered not that no rent was payable under the underlease; and
(iii) that notwithstanding the determination by surrender of the estate granted
by the underlease, it was still possible and proper to fix a yearly rent under
it within the meaning of clause 5 of the subunderlease.
While I yield
to no one in my admiration and respect for the late Lord Russell of Killowen, I
cannot help feeling that the majority decision of his fellow law lords in Sudbrook
blew a welcome breath of fresh air into a part of the law which over a century
and a half had tended to become somewhat inappropriate and, on occasion,
unfair. In the words of Lord Scarman (at p 488):
I challenge
the relevance of ancient authority when construing the terms of the formula
used in these leases. I agree with the comments of my noble and learned friends
on the injustice which can arise by applying old cases when what has to be
considered is a modern contract.
Mr Jeffs, of
course, reached his conclusion without the aid of Sudbrook. While I do
not for one moment suggest that anything I have decided in the present case is
new law, I like to think that the result which I have arrived at is at least
consistent with the reasoning which underlay the approach of the majority in Sudbrook.
