Landlord and tenant — Rent review clause — Construction — Preliminary question — Trigger notice not served by landlords within time-limit laid down in clause — Time not of the essence but question as to date from which increase of rent specified in the belated notice became payable — Whether payable from the date from which it would have been payable if the landlords’ notice had been served in time or whether payable from a year later — Position of surveyors who served the late notice and solicitors who served a second notice — Plaintiff landlords, who considered that they had lost a year’s increase, commenced an action against surveyors claiming damages for alleged negligence — Surveyors contended that on the true construction of the lease there had, in fact, been no loss of a year’s increase and plaintiffs complained that, if this construction were correct, the solicitors had been at fault in
trustees owned a shop in Kilburn, London NW2, which had been let for a term of
35 years from March 25 1975 at an original rent of £7,500 a year — The rent was
reviewable at five-year intervals — The review clause provided for a trigger
notice by the landlords at any time before the expiration of the fifth, 10th,
15th, 20th, 25th and 30th years of the term — There were provisions for the
tenant to serve notice of acceptance of the rent specified in the landlords’
notice, for the parties to try to reach agreement if the tenant did not accept
the specified increase, and for arbitration failing agreement — What happened
was that the surveyors instructed by the plaintiffs failed to serve a notice by
March 25 1980 and when they did serve one later it was defective because it
failed to specify the amount of the increased rent — The plaintiffs then
instructed solicitors, who served a proper notice in December 1980 — The
surveyors, however, contended, in an action brought against them for
negligence, that there had been no loss of a year’s increase of rent because
the notice served by the solicitors gave rise to an increase retrospectively
payable from March 25 1980 — This prompted the plaintiffs to add the solicitors
as defendants, complaining that they had too readily accepted the tenant’s
contention that a year’s increase of rent had been lost — Clearly, there was a
need for a preliminary determination of the true construction of the lease —
This was carried out by Potts J, who held that the surveyors’ construction was
incorrect — The surveyors appealed by leave on this preliminary point
the lease on the face of it provided for the lessors to serve a rent notice
during the last six months of each succeeding year of the term and made no
provision for a late notice — However, as a matter of law, in accordance with
the principles established by United Scientific Holdings Ltd v Burnley Borough
Council, time was not of the essence in regard to the service of a rent notice
by the landlords in the present case — The result was that the belated notice
served by the solicitors was effective to trigger an increase of rent — The
question then arose as to the date from which the specified increase began to
operate — Was it from March 25 1980 or March 25 1981? — The solution, as Slade LJ explained, was to
read clause 3 and the lease as a whole and then consider what the parties might
reasonably be taken to have intended to happen in the circumstances which
actually occurred — The gap had to be filled by necessary implication — The
underlying purpose of the rent review clause was to update rent every five
years — As the time-table set out in clause 3 was not of the essence, it could
not have been intended that the landlords would lose their right to have the
rent increased merely because they had served their notice after, rather than
before, March 25 1980 — The intention of the parties must have been that they
would obtain, although belatedly, the clause 3 increase — It was true that they
would be to some extent out of pocket by being paid later than they otherwise
would have been, but after all they had been tardy in serving the notice
more point — As at what date should the amount of the rent be assessed? — It would not be right for the landlords to
enjoy the bonus of a larger increase, in a period of rising rents, by having
served their notice out of time — The rent should therefore be calculated as at
the latest date on which the landlords could have served a notice in strict
accordance with clause 3, namely, March 24 1980 (or, per Nicholls LJ, March 24
or 25)
the surveyors on the preliminary issue was therefore allowed and a declaration
made that any increase of rent payable in accordance with a rent notice served
between March 25 1980 and March 25 1981 was payable from the earlier date
The following
cases are referred to in this report.
Glofield
Properties Ltd v Morley (No 2) [1989] 2 EGLR
118; [1989] 32 EG 49
Liverpool
City Council v Irwin [1977] AC 239; [1976] 2
WLR 562; [1976] 2 All ER 39, 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; 243 EG 43 & 127, HL, [1977] 2 EGLR 61
Weller v Akehurst [1981] 3 All ER 411; (1980) 42 P&CR 320; 257
EG 1259, [1981] 1 EGLR 105
This was an
appeal by surveyors, Daniel Smith (a firm), from the decision of Potts J
(reported at [1990] 1 EGLR 180; [1990] 20 EG 74) on the preliminary question of
the true construction of a lease of shop premises at 108 High Road, Kilburn,
London NW2. The action in which this preliminary issue was ordered to be tried
was between the plaintiff trustees who were the freehold owners of the shop and
the defendant surveyors, Daniel Smith, and the defendant solicitors, the
partners in the firm of AF & RW Tweedie in 1980. Potts J decided against
the surveyors on the construction of the lease and they brought the present
appeal by leave of the judge.
Paul Collins
(instructed by Brice Droogleever & Co) appeared on behalf of the
appellants; Kenneth Farrow (instructed by Sharpe Pritchard) represented the
respondent trustees; James Thom (instructed by Reynolds Porter Chamberlain)
represented the respondent solicitors.
Giving the
first judgment at the invitation of Slade LJ, NICHOLLS LJ said: This
appeal concerns a rent review clause. It raises the question of how the
provisions of such a clause are to be interpreted and applied when, in respect
of dates specified in the clause, time is not of the essence and a rent review
notice was served late and the clause made no express provisions for that
eventuality.
The three
plaintiffs are trustees. They own the freehold of shop premises at 108 High
Road, Kilburn, London NW2. On March 19 1975 they granted a lease of the
premises to Swears & Wells Ltd for 35 years from March 25 1975. The rent
was reviewable at five-yearly intervals at the instigation of the lessors. The
first defendants (‘the surveyors’) are a firm of chartered surveyors, known in
1980 as Daniel Smith, Briant & Done. In 1978 the plaintiffs instructed the
surveyors to attend to the forthcoming rent review. Unfortunately, the
surveyors failed to serve a rent notice under the rent review provisions by
Lady Day 1980. They did give a notice on June 5 1980, but that was defective
because it failed to specify the amount of the increased rent. The plaintiffs
turned to their solicitors for assistance. They instructed the second to ninth
defendants (‘the solicitors’) who, in 1980, practised in partnership under the
name of AF & RW Tweedie. On December 15 1980 the solicitors served on
behalf of the plaintiffs a second, and effectual, rent review notice stating
that as from March 25 1980 the annual rent payable under the lease would be
£30,000. In due course the increased rent was fixed at £22,500 pa. However, the
tenants took the point that, having regard to the wording of the lease, the
revised rent payable pursuant to that belated notice was payable only from the
end of the then current year of the term, namely Lady Day 1981, which was the
sixth anniversary of the commencement of the term. The plaintiffs, no doubt
reluctantly, accepted that contention.
That meant
that, by reason of the late service of the notice, the plaintiffs lost the
amount of one year’s rent increase, plus interest. So they commenced this
action against the surveyors, claiming damages for professional negligence. The
writ was not issued until February 7 1986, when the six-year limitation period
had nearly run its course. Thus, events are now somewhat stale.
In the action
the surveyors denied negligence. They took the point that even though the
effective rent notice was not served until December 1980 nevertheless, on a
proper interpretation of the lease, the rent increase to which it gave rise was
payable retrospectively from the end of the fifth year. Therefore, so the
surveyors contended, the plaintiffs had not lost one year’s increased rent at
all; the plaintiffs should not have accepted the tenant’s contention on this
point.
This prompted
the plaintiffs to add the solicitors as additional defendants, claiming that if
the surveyors were correct in their interpretation of the lease, then the
solicitors were professionally
plaintiffs put it in their pleading. For their part also, the solicitors have
denied any negligence.
On July 26
1989 Master Creightmore directed the trial of a preliminary question on the
true construction of the lease. The question was whether any increase in rent
payable in consequence of a rent notice served in the sixth year of the term —
that is to say, between March 25 1980 and March 25 1981 — was payable as from
the end of the fifth year, namely March 25 1980, or as from the end of the sixth
year, namely March 25 1981. On October 17 1989, Potts J held in favour of the
latter date. The surveyors have now appealed to this court by leave of the
judge.
I turn to the
lease. The reddendum provides for the payment of an annual rent of £7,500 for
the first five years of the term and that
for the
remainder of the said term such rent as shall be ascertained pursuant to the
provisions of clause 3 hereof.
The rent was
payable quarterly in advance on the usual quarter days.
Omitting
immaterial words, clause 3 reads:
At any time
during the six months before the expiration of the fifth, tenth, fifteenth,
twentieth, twenty-fifth and thirtieth year of the term hereby created the
lessors may serve on the lessee a notice in writing (hereinafter called ‘the rent
notice’) providing for the increase of the rent payable hereunder as from the
expiration of the year of the term then current to an amount specified in the
rent notice and thereupon the following provisions shall have effect:
(1) the lessee within one month after receipt of
the rent notice may serve on the lessors a written acceptance of the amount
specified in the rent notice
(2) If the lessee shall not serve such written
acceptance as aforesaid, then the parties hereto shall forthwith consult
together and use their best endeavours to reach agreement as to the amount of
the increased rent to be paid hereunder as from the expiration of the said year
but failing agreement within two months after service of the rent notice (or
within such extended period as the parties hereto shall mutually agree) the
question of whether any, and if so what, increase ought to be made in the rent
payable hereunder as from the expiration of the said year shall be referred to
the arbitration of a single arbitrator . . .
(3) The arbitrator shall determine the question
so referred to him by ascertaining the rent at which the demised premises might
reasonably be expected to be let in the open market as between a willing lessor
and willing lessee as at the date of the rent notice . . .
(4) The lessee hereby covenants with the lessors
that if the rent shall be increased by agreement or arbitration in pursuance of
this clause, the lessee will, as from the expiration of the relevant year pay
the increased rent at the times and in the manner aforesaid and the rent as so
increased shall remain payable until the expiration of the term hereby granted
or until further increased under the terms of this lease, as the case may be.
Read on its
own terms, clause 3 gives rise to no difficulty. The lessors may serve a rent
notice during the last six months of each succeeding fifth year of the term. No
other notice is contemplated. That notice must specify the amount of the rent
payable ‘as from the expiration of the year of the term then current’. If such
a notice is served, the lessee can accept the amount specified within a month.
If he does not do so, the parties are to consult and seek to agree on, once
more, and as one would expect, ‘the amount of the increased rent to be paid
hereunder as from the expiration of the said year’. If the parties have not
reached agreement within two months after service of the notice, the question
of what increase in rent shall be payable ‘as from the expiration of the said
year’ is to be referred to arbitration. When the rent increase has been fixed
by agreement or by arbitration, the lessee is to pay the increased rent ‘as
from the expiration of the relevant year’. In each of those four instances the
phrase beginning with the words ‘as from’ is referred to the same point in
time, namely the end of the year of the term within the last six months of
which, as envisaged by the opening words of clause 3, the rent notice is to be
given. For his part, the arbitrator is to determine the open market rental ‘as
at the date of the rent notice’. This also fits in reasonably neatly, because
clause 3 envisages that the notice will be served not more than six months
before the date from which the rent increase will take effect.
Thus far there
is no problem. As already noted, the lease envisages a rent notice being given
only within the prescribed six-month period. On that footing the pieces fit
together comfortably. But it is important to note, first, that the premise on
which clause 3, spelling out the consequences of a rent notice, is drafted is
service of the notice within the six months preceding the end of successive
fifth years of the term and, second, that the end consequence of such a notice
is a rent increase from the successive fifth anniversaries of the start of the
term.
The difficulty
in the present case is that, as a matter of law, and conformably with the
principles enunciated in United Scientific Holdings Ltd v Burnley
Borough Council [1978] AC 904, time is not of the essence of the provisions
in clause 3 regarding service of a rent notice. That is common ground between
the parties. A rent notice served late, by which I mean a rent notice served
after the expiry of the six-month period specified in clause 3, is still
effectual to trigger a rent increase pursuant to clause 3. But, and this is of
crucial importance in this case, clause 3 does not cater at all for what is to
happen in that event. The draftsman has made no express provision for that
occurrence. As a matter of language, the lease provides for a rent notice being
given only on such a date as will mean that it is given in the latter half of
one of the successive fifth years of the term, and it provides for the
increased rent to run from the end of those years, namely the successive fifth
anniversaries of the beginning of the term. It is to be noted that the rent
increase will run from those anniversary dates even though the agreement or
arbitration process, in respect of a notice served before the anniversary, may
not yield finality on the amount of the increased rent until after that
anniversary date has passed.
How, then, is
the clause to operate when a notice is served late? Since the lease does not cater for what is to
happen when a notice is served late, it cannot be right to attempt to find the
answer to that question solely by a literal application to a notice served late
of provisions which were geared to a notice served in time. That would be to
apply provisions which were intended to operate only in one circumstance to
another, materially different, circumstance, to which they were not directed at
all. That would be to misuse the language in clause 3.
In this
situation, the only sensible way in which to proceed is to read clause 3 and
the lease as a whole and consider what the parties must reasonably be taken to
have intended to happen if the event to which their review machinery is geared
did not happen, namely a notice served in time, but instead the machinery is
triggered by another event with which they did not expressly deal, namely a
notice served late. In this case that necessitates some adaptation of the
express language of clause 3. This is not to propound a novel or heterodox
approach. It is simply the necessary consequence of having to apply the clause
3 provisions in a circumstance which the parties did not have in mind and with
which those provisions do not deal expressly. Clause 3 applies to a notice
served late only by reason of giving to the clause an effect different from
that which a literal construction of the language would produce. That being so,
consequential adaptation of the strict language of the clause must follow, so
far as necessary, to enable such a notice still to achieve the substance of the
underlying purpose of the clause.
As I see it,
therefore, the exercise is not simply one of construing the express language of
clause 3. Rather, the exercise is one of implication, for the court is having
to apply the clause 3 code in a circumstance for which it made no provision.
There is a gap which it is necessary to fill. In filling that gap, the court is
concerned to seek to apply the provisions in clause 3 as nearly as can
reasonably and fairly be done in the circumstances. The court is searching for
what must be implied, the parties not having stated what was to happen if the
notice was served late: see in this regard the familiar observations of Lord
Wilberforce in Liverpool City Council v Irwin [1977] AC 239 at p
254. In parenthesis, I observe that the existence of such a gap in the
contractual provisions, in the event of a notice being served late, may afford
ground for supposing or contending that time was intended to be of the essence.
If that were right, and time were of the essence, there would be no gap to
fill. But once it is held that on the proper construction of the lease time is
not of the essence, then the court has no alternative but to fill the drafting
gap which is thus revealed.
If one applies
this approach in the instant case, there is no room for doubt. Had the rent
notice been served in accordance with the clause 3 timetable, the rent increase
would have been payable from Lady Day 1980. The underlying purpose of the
clause was to update the rent every five years. Admittedly the timetable
specified in clause 3 was not of the essence. Writ large, that means that
admittedly the parties did not intend, or are not to be taken to have intended,
that the lessors would lose their right to have the rent increased under clause
3 from Lady Day 1980 merely because they served their rent notice after, rather
than before, that date. The parties must be taken to have intended that if the
lessors were late with their notice, they would still get, albeit belatedly,
the clause 3 increase. They would be out of pocket to the extent that, through
their own fault, or through the
been. That would be a loss which they would suffer through being late with
their notice.
In my view,
the arguments for the solicitors and the plaintiffs addressed to us fail to
carry through and give full effect to their acceptance that time was not of the
essence of clause 3. The arguments accept that the notice served in December
1980 triggered a rent increase under clause 3, but the arguments stop short of
giving to that rent increase substantially the same consequences as those which
clause 3 alone contemplates, namely that the increase will take effect from the
relevant fifth anniversary date. In my view, the parties are reasonably to be
taken to have intended that in the case of a notice served after the relevant
Lady Day, namely outside the clause 3 timetable, the ensuing rent increase
under clause 3 would take effect from that Lady Day just as much as would a
rent increase following upon a notice served in the six months leading up to the
relevant Lady Day.
That is not
quite the end of the matter. Clause 3(3) provides that failing agreement an
arbitrator is to determine:
the rent at
which the demised premises might reasonably be expected to be let in the open
market as between a willing lessor and a willing lessee as at the date of the
rent notice . . .
Those words,
‘as at the date of the rent notice’, are clear and unambiguous. It is no part
of the function of the court to distort their plain meaning. The function of
the court in this case, as I have already sought to explain, is to apply the
provisions of clause 3, which were geared to a notice served in time, to a
different circumstance at which the clause was not directed. The parties cannot
sensibly be presumed to have intended that, with market rents for the most part
rising rapidly, a tenant should have to pay a higher rent for the ensuing
five-year period if the lessors served their notice months out of time than it
would pay if the rent notice had been served in time. The lessors are not to be
better off than they would be if they had served their notice in accordance
with the clause 3 timetable. In my view, the answer here lies in the
arbitrator’s determining the rent as at the latest date on which the lessors
could have served a notice in accordance with the clause 3 timetable; that is
to say, on March 24 or 25 1980. Such an implication is not inconsistent with
the express provisions of subclause (3), because the provision in the subclause
is concerned only with the assessment of market rent as at the date of a rent
notice which has been served in time.
Furthermore,
this application of that assessment provision in this case accords with the
general observations of Nourse LJ in Glofield Properties Ltd v Morley
(No 2) [1989] 32 EG 49 at p 50*, [1989] 2 EGLR 118:
It is
contrary to the whole purpose of a rent review provision that the reviewed rent
should be fixed by reference to values prevailing at a date significantly later
than the start of the period in which it is payable.
*Editor’s
note: Also reported at [1989] 2 EGLR 118 at p 119M.
For my part,
therefore, for these reasons I would allow this appeal and declare that any
increase in rent payable in consequence of a rent notice served between March
25 1980 and March 25 1981 was payable from the former date.
I mention one
last point. It has not been suggested that this is a case in which the tenant
was prejudiced by late service of the notice. That was a point which was
touched upon in the House of Lords in the United Scientific case,
especially in the speech of Lord Salmon. The matter might have stood very
differently had that been the case, but, as I have said, that is not so here.
FARQUHARSON
LJ agreed and did not add anything.
Also agreeing,
SLADE LJ said: I will add something of my own since we are differing
from the learned judge.
The House of
Lords decision in United Scientific Holdings Ltd v Burnley Borough
Council [1978] AC 904 has given rise to a presumption that strict adherence
to the timetable specified in rent review clauses is not of the essence of the
contract between landlord and tenant. It was common ground in the court below,
as in this court, that the lease now under consideration contains nothing
sufficient to rebut this presumption.
Nevertheless,
this case does well illustrate the frequent difficulties of applying the
presumption in a case in which the draftsman of a lease plainly contemplated
that the parties would in practice adhere to the timetable provided for by him
as part of the machinery for ascertaining the reviewed rent and did not
stipulate what was to happen if they did not. It is, of course, the intentions
of the parties to the lease rather than the intentions of the draftsman which
matter. Nevertheless, the intentions of the parties can be ascertained only
from the words that they use through him.
The draftsman
of this lease, in drafting clause 3, plainly did not direct his mind to what
was to happen if the lessors for any reason failed to serve a rent notice on
the lessees during the six months before the expiration of the fifth year of
the term. We have none the less to presume that the parties did not intend that
strict adherence to the timetable set out in clause 3 would be obligatory.
Applying this presumption, we have to do our best to collect from the words
used in the lease what they intended, or would have intended, to happen in the
event of the lessors’ serving the rent notice after the expiration of that
six-month period — that is to say, during the course of the next five years.
Conducting
this somewhat artificial exercise and, I hope, approaching the matter not too
simplistically, I am reasonably confident of three points, which seem to me to
highlight the correctness of the construction placed on the lease by Nicholls
LJ.
First, I think
that the parties clearly intended that the original rent of £7,500 reserved by
clause 1 should be payable only for the first five years of the term. Second,
they intended that thereafter — that is to say as from the expiration of the
fifth year of the term — there should be payable a rent ascertained according
to the formula provided for by clause 3. As to these two points I refer to the wording
of clause 1 of the lease, which clearly and specifically provides that there shall
be paid ‘for the first five years the clear rent of £7,500 per annum and for
the remainder of the said term such rent as shall be ascertained pursuant to
the provisions of clause 3 hereof’ (the emphasis is mine). There is, I think,
no such gap as there was in the case of Weller v Akehurst [1981]
3 All ER 411, which compels a construction that the old rent should continue to
be payable after the expiration of the first five years of the term, in the
event of a rent notice not being served during that period. Nor is there in
principle any reason why, in a situation such as this, the new rent when
ascertained should not be payable retrospectively: see the United Scientific
case at p 935, per Lord Diplock.
On behalf of
the respondents much emphasis was placed on the phrase at the beginning of
clause 3 which states that a rent notice should provide for the increase of the
rent payable thereunder ‘as from the expiration of the year of the term then
current’. It was suggested that this phrase could only mean ‘as from the
expiration of the year of the term in which the notice was served’. I think
that this point is not well founded. In its context, in my judgment, the phrase
merely bears the sense ‘as from the expiration of the fifth, tenth, fifteenth,
twentieth, twenty-fifth or thirtieth year of the term as the case may be’. It
was merely a convenient means of expressing this concept with brevity. As I
have already said, the draftsman was not contemplating the situation which
would arise if a notice was served out of time.
The third
point which seems to me to be clear on a reading of this lease as a whole is
that the parties intended, or would have intended, that in the event of the
late service of a rent notice after the first five years of the term, any
increased rent, ascertained accordingly to the formula provided for by clause
3, would be ascertained as at the last date on which the notice could properly
have been served; that is to say, as at March 24 1980. True it is that
subclause (3) specified that the increased rent should be ascertained as at the
date of the rent notice. However, the clause as a whole contemplated that the
lessors should serve the notice before, rather than after, the expiration of
the fifth year of the term. In this sense, therefore, the clause, as Nicholls
LJ has pointed out, leaves a drafting gap. In my judgment, the proper inference
must be that in the events which actually happened the parties would have
intended that the rent should be ascertained as if the lessors had complied
with the timetable provided for by the clause and served the notice before
March 25 1980. The intervention of equitable principles by virtue of the
presumption to which I have referred means that the lessors do not altogether
lose their right to obtain an increased rent for the second five years of the
term merely because they have been late in serving their notice. It cannot,
however, mean that they are entitled in any way to benefit from their
tardiness.
In concluding
that the construction of the lease which is placed upon it by Nicholls LJ is
the right one, I am supported by the consideration that it does no violence to
the language of the lease. It does no more than fill some gaps which have to be
filled and it
lessees. The lessors, despite their tardiness in initiating the rent review
procedure, will have largely preserved their rights under clause 3. However,
the delay in the determination of the new rent will have worked to the economic
benefit of the lessees, since until the higher rent has been determined they
will have had the use of the money which they would have to pay by way of rent
if the lessors had acted more promptly: see and compare the United
Scientific case at p 935 E-F per Lord Diplock.
For these
reasons, and for the other reasons given by Nicholls LJ, I too would allow this
appeal and concur in the form of order which he has proposed.
The appeal
was allowed; plaintiffs and second to ninth defendants to pay costs of first
defendants in Court of Appeal and below; counsel to prepare and agree draft
order to be handed in. An application for leave to appeal to House of Lords was
refused.
