Landlord and tenant — Rent review clause in lease of commercial premises — Construction of clause — Clause provided that after the first review date the rent of the premises should be £7,500 above such sum as was agreed or determined as representing a fair rack rental market value — There was a similar provision, including the same figure of £7,500, in respect of the second review date — The rent to be agreed or determined was to be ‘in all other respects on the terms and conditions of this lease’ — Walton J had decided that in ascertaining the fair rack rental market value at the first review date (a) no regard should be had to the obligation during the first review period to pay £7,500 above whatever that rental figure might be, but (b) account should be taken of the fact that at the second review date the tenant would again become subject to an obligation to pay an annual sum of £7,500 in excess of what the fair rack rental value would then be — Held by Court of Appeal, disagreeing with (b) above, that throughout both the first and second review periods the annual rent should be £7,500 above the market rental value of the premises, such market rental value to be assessed without regard in either period to the obligation to pay the £7,500 excess itself — Appeal allowed and decision varied to that extent
This was an
appeal from the decision of Walton J reported at (1982) 263 EG 979, [1982] 2
EGLR 119. The appellants, Guys ‘n’ Dolls Ltd, were the lessors and the
respondents, Sade Brothers Catering Ltd, the lessees of commercial premises
under a lease for a term from June 24 1977 to September 25 1990, containing an
unusual review clause.
A Steinfeld
(instructed by Reynolds Porter Chamberlain) appeared on behalf of the
appellants; Robert Pryor QC (instructed by Bennetts & Partners) represented
the respondents.
Giving the
first judgment at the invitation of Waller LJ, SLADE LJ said: This is an appeal
from a judgment of Walton J delivered on April 23 1982 on an originating
summons which concerned the construction of a rent review clause in a lease
dated January 23 1978 made between the appellants, Guys ‘n’ Dolls Ltd, as
landlords, and the respondents, Sade Brothers Catering Ltd, as tenants.
The lease was
in fact an underlease and almost all its detailed provisions are to be found
set out in schedules. By the 1st schedule its term is expressed to run from
June 24 1977 to September 25 1990. By the same schedule, the rent payable is
expressed as follows:
Rent. Firstly
the annual exclusive rent of £24,000 for the first 3 1/4 years from the 24th
day of June 1977 subject to increase as specified in the Fifth Schedule hereto
. . .
This provision
then goes on to specify the manner in which the rent is to be paid.
This
definition of ‘rent’ in the first schedule thus includes the increases
specified in the fifth schedule.
The fifth
schedule, so far as material, reads as follows:
(1) After the 28th day of September 1980 the
yearly rent payable in respect of the demised premises until the 28th day of
September 1985 shall be £7,500 above such sum as shall be agreed between the
Landlord and the Tenant as representing a fair rack market value of the demised
premises . . .
I interject
that it is common ground that the word ‘rental’ should be read into the middle
of the phrase ‘fair rack market value’ as a clerical omission
. . . for a
term of years equivalent to the then unexpired residue of the term hereby
granted as between a willing lessor and a willing lessee with vacant
possession and taking no account of any goodwill attributable to the premises
by reason of any trade or business carried on therein by the tenant and in all
other respects on the terms and conditions of this lease and if the Landlord
and the Tenant shall be unable to agree on the amount of such rent as aforesaid
the same shall be decided by some competent person to be agreed to by the
Landlord and the Tenant and in the event of failure so to agree by a person to
be appointed by the President for the time being of the Royal Institution of
Chartered Surveyors . . .
I need not read
the rest of paragraph (1), which states, inter alia, that this shall be
a submission to arbitration.
Para (2) of
the fifth schedule, so far as material, reads as follows:
After the
said 28th day of September 1985 the yearly rent payable in respect of the
demised premises until the 25th day of September 1990 shall be £7,500 above
such sum as shall be agreed between the Landlord and the Tenant as representing
a fair rack rental market value of the premises such rental to be agreed and
calculated upon the same basic terms and conditions as are contained in the
immediately preceding subclause . . .
There then
follows a proviso, which I need not read.
By the
originating summons the landlords sought a declaration against the tenants that
upon the true construction of the lease, the yearly rent payable in respect of
the demised premises from September 28 1980 until September 28 1985
is the
aggregate of (a) £7,500 and (b) such sum as is agreed between the plaintiff and
the defendant (or in default of such agreement as is decided by arbitration in
accordance with the terms of the lease) as representing a fair rack market
value of the demised premises without taking into account either (i) the
obligation of the defendant to pay rent at a rate of £7,500 per annum above
such fair rack market value; or (ii) the amount of rent payable under the said
lease from and after the said September 28 1985.
The question
asked by the originating summons was thus directed to the first rent review
that would take place with effect from September 28 1980. I should perhaps say
at this point that Mr Steinfeld, on behalf of the appellant landlords, has not
gone so far on this appeal as to submit that the valuer, in carrying out his
valuation exercise in 1980, has altogether to disregard the amount of rent
payable under the lease from and after September 28 1985, as the originating
summons would seem to claim. True it is that this valuer, according to the
provisions of paragraph (1) of the fifth schedule, has the duty of assessing a
hypothetical annual ‘fair rack rental market value’ of the premises for the
first five years of a term of years running from September 28 1980 to September
25 1990 being the then unexpired residue of the term. It seems clear, however,
and Mr Steinfeld has accepted before us, that in carrying out this exercise the
valuer has to take into account the existence of the rent review clause
in paragraph (2) of the fifth schedule, which will operate in 1985, and that he
also has to take into account the manner in which the amount of rent payable as
from September 28 1985 will fall to be assessed by virtue of that clause.
The
substantial question on this appeal is whether, in carrying out this exercise
on the first rent review, the valuer has also to take into account the £7,500
excess which will fall to be paid under paragraph (2) during the second rent
review period.
On behalf of
the tenants, Mr Pryor, before Walton J, as before us, in answer to the claim
made by the originating summons, particularly relied on the words appearing in
paragraph (1) of the fifth schedule ‘in all other respects on the terms and
conditions of this lease’. He submitted to the learned judge in effect that the
‘terms and conditions’ of the lease which the valuer has to take into account
in carrying out the first rent review include both the obligation of the
tenants to pay the £7,500 excess referred to in paragraph (2), and the
obligation to pay the excess of £7,500 referred to in paragraph (1).
Accordingly, he submitted that in assessing the ‘fair rack rental market value’
for the purposes of the first rent review, the obligation of the tenants to pay
the excess of £7,500 during both rent review periods should, inter alia,
be taken into account.
The practical
result of such a construction would have been that during the first rent review
period the tenants would merely have had to pay the ‘fair rack rental market
value’ without the addition of the £7,500 at all.
Walton J
accepted that strictly this was the result which would have been achieved if
the phrase ‘in all other respects on the terms and conditions of this lease’
were applied according to the strict literal meaning of those words. I pause to
say that I respectfully agree with that conclusion. If one looks at the words
of paragraph (1), which immediately precede this phrase, one sees they read as
follows:
. . . as
representing a fair rack (rental) market value of the demised premises for a
term of years equivalent to the then expired residue of the term hereby granted
as between a willing lessor and a willing lessee with vacant possession and
taking no account of any goodwill attributable to the premises by reason of any
trade or business carried on therein by the tenant . . .
It seems to me
that, on a literal, grammatical reading of the words used, the phrase ‘in all
other respects on the terms and conditions of this lease’ merely means ‘in all
other respects on the terms and conditions of this lease, in addition to the
provision relating to the duration of the term which has already been referred
to’. Literally read, the phrase is thus wide enough to include the obligation
to pay the £7,500 excess under paragraphs (1) or (2), which literally are other
terms and conditions of the lease.
Nevertheless,
though the learned judge appears to have accepted that this was the strict
literal meaning of the words used, he rejected the argument that the obligation
to pay the £7,500 excess under paragraph (1) should be taken into account on
the first rent review. He commented that it could not be supposed that the
parties went to all the bother of adding on £7,500 merely in order to have that
sum subtracted as representing an onerous obligation on the tenant before the
ascertainment of the fair market rental value. He thus decided that the
landlords and tenants, when trying to agree the rental payable under the first
rent review (or the arbitrator, when deciding it), must ignore the obligation
of the tenants to pay that excess for the period of the first review.
There is no
appeal against that part of the learned judge’s decision, and in my opinion he
was plainly right in rejecting the Alice in Wonderland construction then
suggested on behalf of the tenants. As a matter of strict literal meaning of
the words used, as I have said and he implicitly recognised, the phrase ‘in all
other respects on the terms and conditions of this lease’ appears to be wide
enough to include a reference to the obligation to pay the annual £7,500 excess
during the period of the first rent review. Nevertheless, in my opinion, it is
absolutely necessary to read an exclusion of such a reference into the phrase
as a matter of implication, if business efficacy is to be given to the transaction;
otherwise, paragraph (1) really does not make commercial sense. Though the
learned judge did not say so in terms, I think that he, too, can only have
reached his conclusion on this particular point by similarly restricting the
apparent literal meaning of the crucial phrase by a process of unnecessary
implication.
Having dealt
with this point, the learned judge then went on to consider whether, on a true
construction of the lease, the persons assessing the rent for the first rent
review period had to take into account the fact that as on September 28 1985
the tenant would come under a further obligation to pay an annual sum of £7,500
above whatever would, at that date, be the fair market rental of the premises.
He concluded that it would, and this is the point on which the landlords now
appeal.
The learned
judge, having referred to the provision for payment of rent during the second
rent review period, said this:
I see no
method of construction whatsoever which will as it were remove that from the ambit
of the arbitrator’s view when he comes to ascertain the fair rack market rental
value of the demised premises. True it is that he can ignore the £7,500 at that
point in ascertaining the rent, but he cannot ignore the fact that a similar
exercise will be gone through, or will have to be gone through, in another five
years’ time as to September 28 1985. That is a term or condition of the lease
and, that being so, he must give effect to it, and there is no prospective way
of writing out the £7,500. Of course, how one decides what effect that has upon
the current fair market rental value, beyond saying in general terms that it
has a depreciatory effect, I do not know. But that, of course, is a matter
which somebody nominated by the President of the Royal Institution of Chartered
Surveyors will be admirably in a position to cope with.
The learned
judge thus considered that the crucial phrase ‘in all other respects on the
terms and conditions of the lease’ on any construction had to be read as wide
enough to include the obligation to pay the annual £7,500 excess during the second
rent review period. With great respect to him, I have reached a different
conclusion, but before giving my reasons for such conclusion, I think I should
say a word about the evidence in this case.
Mr Steinfeld,
on behalf of the appellant landlords, sought to adduce in evidence an affidavit
sworn by Mr Nicholas, a director of the landlords, in which in effect, he
referred to certain negotiations leading up to the lease, and gave some explanation
in particular as to the manner in which the rent initially payable thereunder
was calculated by the parties. Mr Steinfeld referred us to the decision of the
House of Lords in Prenn v Simmonds [1971] 1 WLR 1381 and
submitted that this affidavit was admissible as deposing to facts
principles stated by Lord Wilberforce in his speech in that case (see pp
1383-1385). While no doubt this evidence might well have been admissible on an
application for rectification of the lease, we did not feel able to accept Mr
Steinfeld’s submission that it was admissible on this construction summons,
because we did not consider it fell within the principles related to the
admissibility of evidence stated in Prenn v Simmonds. Accordingly
we excluded it.
Thus the point
of construction falls to be determined by reference simply to the four corners
of the lease itself. Nevertheless, when the lease, in particular the fifth
schedule, is read as a whole, it seems to me that, as Mr Steinfeld has
submitted, the plain and obvious intention of the parties was that at all
times, throughout the periods of both the first rent review and the second rent
review, the annual rent payable should be maintained at a figure representing a
steady £7,500 above the market rental value of the premises — such market
rental value being assessed without regard to the obligation to pay the £7,500
excess itself. That is the clear and unmistakeable intention I derive from a
general reading of the fifth schedule to the lease, and, in so doing, I do not
disregard the point made by Mr Pryor that the intention of the parties has to
be gleaned without forgetting that the lease itself might be assigned, and that
the obligations thereunder might devolve on parties other than the original
tenants or landlords.
There is, in
my judgment, one way in which effect can be given to such an intention. In my
judgment the provisions of the lease can properly be construed on the basis
that, in determining the amount of the ‘fair rack market rental value’ on the
occasion of any review, no account whatsoever is to be taken of the fact that
the actual rent payable under the lease following the review — be it the first
review or the second review — is to be £7,500 above the sum determined to be
the ‘fair rack market rental value’. I respectfully disagree with the
conclusion of the learned judge that there is no method of reaching this result
on the basis of the words used in the lease. As I have already pointed out, I
think that he himself, by a process of construction, implicitly restricted the
strict literal meaning of the crucial phrase ‘and in all other respects on the
terms and conditions of this lease’, by excluding from its ambit any reference
to the obligation to pay the annual £7,500 excess during the period of the
first rent review. For my part, I am satisfied that by a similar process of
necessary implication, it is not only proper but necessary further to exclude
from the ambit of the phrase a reference to the obligation to pay the annual
£7,500 excess during the period of the second rent review. To do otherwise
would seem to me to lead to a result which would have the effect of frustrating
rather than giving effect to the commercial object of the parties. The speech
of Lord Wilberforce in Prenn v Simmonds well illustrates that the
court is justified in taking such considerations into account in any process of
construction (see [1971] 1 WLR 1381 at p 1385 A-B).
It may be that
one could reach the same result by saying, contrary to my view, that even on
its literal meaning, the crucial phrase on which the tenants’ argument has to
be based, is not wide enough to include a reference to the obligation to pay
the £7,500 excess at any time during the lease. However, whichever way one
reads this phrase, I think that on any footing it cannot be reasonably supposed
that the parties intended that, in carrying out his functions in 1980, the
valuer should reduce the ‘fair rack market rental value’ falling to be assessed
by him, on account of the annual excess of £7,500 which the tenants would have
to continue to pay during the second rent review period, any more than he
should reduce such figure on account of the annual excess of £7,500 which they
would have to pay during the first rent review period.
In this
context, my thinking is broadly on the same lines as that which is to be found
expressed in a passage from a judgment of Mr Michael Wheeler QC in Lister
Locks Ltd v TEI Pension Trust Ltd (1982) 264 ESTATES GAZETTE 827,
the passage being at p 832 — though the particular provisions of the lease in
that case were not, of course, the same as those in the present case.
In short, I
cannot see sufficient justification for construing the crucial words ‘and in
all other respects on the terms and conditions of this lease’ as being wide
enough to include the £7,500 excess payable during the second rent review
period, but (as is now common ground) not as including the £7,500 excess
payable during the first rent review period.
For my part,
therefore, I would allow this appeal and substitute for the declaration made by
the learned judge a declaration substantially in the terms of that sought by
the notice of appeal, namely that:
. . . upon a
true construction of the said lease in determining the yearly rent payable in
respect of the premises thereby demised from September 28 1980 until September
28 1985, account should be taken of the amount of rent payable under the said
lease from and after September 28 1985, only to the extent that after such date
such rental falls to be increased to the fair rack rental market value of the
said demised premises but no account should be taken of the obligation of the
tenants to pay rent from and after such date at a rate of £7,500 per annum
above such fair rack rental market value.
For the
reasons which I have given, that is the form of order which I think would meet
the case.
Agreeing,
ROBERT GOFF LJ said: This case is concerned with the construction of a rent
review provision, which is contained in the fifth schedule to the lease before
the court. It is concerned in particular with the construction of clause (1) of
that Schedule.
Clause (1), as
my lord has pointed out, provides that the rent payable from September 28 1980
until September 28 1985 shall be £7,500 above such sum
as shall be
agreed between the Landlord and Tenant as representing a fair rack market
(rental) value of the demised premises for a term of years equivalent to the
then unexpired residue of the term hereby granted as between a willing lessor
and a willing lessee with vacant possession and taking no account of any
goodwill attributable to the premises by reason of any trade or business
carried on therein by the Tenant and in all other respects on the terms and
conditions of this Lease . . .
So there are
two elements. There is first of all what I shall call the fair market rent, and
then there is the additional premium of £7,500 which is to be added to that
fair market rent.
In my
judgment, there can be no doubt that, for the purposes of assessing the fair
market rent under this clause, the fact that a premium of £7,500 falls to be
added to that fair market rent has to be ignored. It would be ridiculous to add
that premium on and then immediately to take it away again by reducing the fair
market value by the same sum. So far, I find myself in agreement with the
learned judge. For my part it does not matter for present purposes whether I
reach that conclusion as a matter of construction or by way of implication. In
my judgment, the same construction or implication must also apply in respect of
clause (2) of the fifth schedule, for the same reason, when the fair market
rent comes to be assessed in 1985.
But the
submission of Mr Pryor is as follows. He founds his argument on the words ‘and
in all other respects on the terms and conditions of this lease’. He submits
that those terms and conditions must include, when the assessment of a fair
market rent is made in 1980, clause (2) of the fifth schedule. He then turns to
clause (2) and he points out that it provides that after September 28 1985 the
rent shall be £7,500 above a new revised fair market rent. So, he submits, the
valuer on the occasion of the first rent review must take into account not
merely the fact there will be a review in 1985 but also the fact that the rent
payable after that review shall comprise (i) the new revised fair market rent,
plus (ii) a premium of £7,500.
Now I agree
with Mr Pryor that the words ‘and in all other respects on the terms and
conditions of this lease’ are apt to include clause (2) of the fifth schedule.
I agree with him thus far, because it seems to me that when the valuer is
making his valuation in 1980, he is not just making a valuation on the basis of
an unexpired term of 10 years; he is making a valuation on the basis of an
unexpired term of 10 years with a rent review clause after five of those years.
But I cannot
travel any further with Mr Pryor because on the second review, when it takes place,
the additional premium of £7,500 remains unchanged. The only thing that may
change is the fair market rent and so, although the valuer in 1980 must take
into account the fact that there is going to be another rent review in five
years’ time, the only matter of relevance which he may derive from that fact is
that there may be an increase in the fair market rent. The premium of £7,500,
being constant, is in my judgment wholly immaterial.
We can test
the point in a very simple way. Let us suppose that clause (2) provided not
merely that there should be, in 1985, a revised fair market rent but also that
the premium was going to be doubled to £15,000. If that had been the situation,
it would have been appropriate, in my judgment, for the valuer in 1980 to take
into account (i) the fact that the fair market rent would be revised, and (ii)
the fact that the premium would be doubled. In each case, however,
the only relevant matter for the valuer in 1980 would be the increase — ie the
probable increase in the fair market rent and the certain increase in the
premium.
On that
reasoning it seems to me that, although the words ‘the terms and conditions of
this lease’ are apt to include clause (2) of the fifth schedule, the valuer in
1980 can only take into account clause (2) of the fifth schedule in so far as
it is relevant to the exercise he is carrying out; and for the purposes of that
exercise the premium, being constant, is wholly irrelevant. Indeed, I am bound
to say that I have formed the impression that Mr Pryor’s argument really
produces the same kind of absurdity (though not to the same degree) as the
argument which the learned judge rightly rejected when he said that the valuer,
in 1980, was not to take into account the premium of £7,500 which was to be
added on to the fair rental value which his task then was to assess.
For these
reasons I, too, would allow the appeal. I also agree with the order which my
lord has proposed.
WALLER LJ also
agreed and did not add anything.
The appeal
was allowed with costs in Court of Appeal and below.
