Landlord and tenant — Rent review clause — Rent geared to rack-rents ‘receivable’ on rent review date — Whether rack-rents receivable means whatever would be the market rack-rents — Where no rack-rents whether court should devise valuation machinery
The plaintiff
tenant holds the severed term of a lease dated April 28 1969 of premises at an
apportioned yearly rent between April 28 1970 and December 25 1989 of £9,425.
In respect of each 21-year period of the term from December 25 1989 the rent
was to be a fair market rent to be determined in accordance with clause 4 of
the lease. Clause 4 provided that the yearly rent was to be either: (a) the
rent of £9,425; or (b) the rent payable during the previous rent period; or (c)
8% of the rack-rents receivable by the lessee, there being provision for the
tenant’s accountants to certify the rack-rents receivable. The defendant
landlords contended that, as the premises were not sublet but occupied by the
tenant, the rent at review should be 8% of what would be a market rack-rent at
the review date. But that if the tenant’s alternative construction was correct,
namely that if there are no rack-rents, that part of the rent review clause
cannot operate, the court should imply terms or devise valuation machinery to
determine a fair market rent.
tenant. As the tenant was in occupation and no such rents were receivable on
the rent review date, there would be a period in which no rent can be
calculated by reference to the rack-rent of a tenant in actual occupation. The
particular machinery for determining the rent had therefore broken down.
However the court could not imply a term or machinery for determining a rent
because the original parties to the lease had agreed an ad hoc means
of arriving at a ground rent and it was not clear what rental basis any implied
term or machinery could be directed to.
The following
cases are referred to in this report.
Henniker-Major v Daniel Smith (a firm) (1990) 62 P&CR 24; [1991] 1 EGLR
128; [1991] 12 EG 58, CA
Philpots
(Woking) Ltd v Surrey Conveyancers Ltd [1986]
1 EGLR 97; (1985) 277 EG 61
R&A
Millett (Shops) Ltd v Leon Allan International
Fashions Ltd [1989] 1 EGLR 138; [1989] 18 EG 107, 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] 2 EGLR 61; [1977] EGD 195; 243 EG 43 & 127, HL
This was an
application by the tenant, Fraser Pipestock Ltd, by originating summons to have
determined the true meaning of a rent review clause in a lease dated April 28
1969 held from the landlords, Gloucester City Council.
Philip Rainey
(instructed by Rowe & Maw) appeared for the tenant; Stephen Bate (instructed
by the solicitor to Gloucester City Council) represented the landlords.
Giving
judgment, JUDGE COOKE QC said: I have before me a construction summons
to determine the true meaning and effect of what may, without too much violence
to language, be described as a rent review clause, though one of an unusual
kind.
The facts are
these. In 1969 the mayor and aldermen and citizens of Gloucester (the
defendants to the present proceedings), were minded to dispose of their old
cattle market on a building or development
substantial area, something like 14 acres, and it is clear from the lease, if
nothing else is, that the intention was that the developers should develop the
land and then in due course dispose of it to traders by (in the most obvious,
but not necessarily the only way) subletting it. On April 28 1969 the lease was
duly executed. I will come back to its provisions in a moment.
In the events
which have happened, the headlease (this lease) is no longer one and entire
because it was disposed of by a series of severances so that comparatively
small areas came into the hands of purchasers, but those areas owe their title
entirely to the headlease with the rent being apportioned. The particular
disposal which gives rise to the present problem was one dated September 7 1973
by way of registered transfer in favour of an organisation called Kentron
Plastics Ltd, who subsequently changed their name, and the rent was apportioned
to this severed part of the term as £702, the rent for the whole of the term
being a figure of £9,425 (by 1989). So it is now, instead of the original
regime being followed that there is one headlease and a whole series of
sublettings which, no doubt in the main if not entirely, attracts rents to
individual tenants on conventional business tenancies.
The particular
part of the premises with which the present plaintiffs are concerned is held by
them as successors in title to Kentron Plastics Ltd as original lessee but of
part only and at an apportioned rent. It is that situation which gives rise to
the problem in this case. I will say at once, so I need not refer to it again,
that the 1973 transfer contained nothing that directly affected the rights of
the parties so the rights of the parties have to be considered entirely under
the original lease but so as to take effect in the events which have happened.
I turn now to the lease itself.
The rent is
dealt with towards the end of clause 1. It started as a peppercorn from April
28 1969 to April 27 1970 and then rose to the figure I have already mentioned,
£9,425, from April 28 1970 to December 25 1989, just under 20 years. Thereafter
(and I emphasise these words) ‘such sum as may be agreed or determined as the
fair market rent in accordance with the provisions of clause 4 hereof by equal
quarterly payments in arrear’, and so on. One would perhaps have expected to
see in clause 4, following that general and rather conventional statement of an
intention to review, something more like a conventional rent review clause but
one does not. Clause 4 says:
It is
mutually agreed that as at the Twenty Fifth day of December One Thousand Nine
Hundred and Eighty Nine thereafter at the end of every 21 year period
hereinafter called the relevant renewal date the yearly rent payable by the
Lessee shall be reviewed in manner following:
(a) the yearly rent payable by the Lessee in
respect of the said periods of Twenty One years [It must, I think, mean each]
and last Nine years of the said term shall be either the sum of Nine Thousand
Four Hundred and Twenty Five Pounds aforesaid or the rent payable during the
previous rent period or such sum [this I emphasise] as shall be equivalent to
Eight percent of the rack rents receivable by the Lessee in respect of the
demised premises or (sic) the relevant renewal date such figure of Eight
percent be certified by the Lessee’s Accountants whichever figure shall be the
higher.
The word ‘or’
between ‘premises’ and ‘the relevant renewal date’ is quite obviously a typing
error and the word that must have been intended must either have been ‘on’ or
‘at’ or some word of very similar meaning to give the appropriate intention to
the clause. Nobody really disputes that some such word must have appeared in
place of ‘or’.
It will
readily be seen that as a means of arriving at a fair market rent this is a
somewhat curious provision because the provision, of course, that two of the
three possible controls are effectively the original rent for the period
immediately after the peppercorn, or the rent in the previous rent period, does
no more than say that this is an upwards-only review. It is no more help than
that. The actual machinery for arriving at what clause 1 calls a fair market
rent is 8% of the rack-rents receivable by the lessee at, I construe, the
relevant renewal date, such figure of 8% to be certified by the accountants.
It needs to be
said straight away that there is nothing whatever in the lease, or in any of
the evidence that I have seen, to give the smallest indication of why 8%. Why
is it that 8% of, let us say for the moment, a market rack-rent of the
premises, or a series of market rack-rents, should represent as between freeholder
and headlessor a fair market rent for a headlease? It may or it may not, but
there is no factual indication of how that particular gap was to be bridged. I
am bound to say for my part that it has all the indications of a figure
bargained ad hoc. It may, for all I know, be a very sensible figure
based upon experience and experienced values, but I do not know and there is
nothing to show. In all events there is nothing to tell me how that and no
other percentage equates to a fair market rent.
I fall to deal
with one or two small matters of construction before I proceed to the main
issue. What Mr Stephen Bate, on behalf of the landlords, suggested to me was
that rack-rents receivable by the lessee ‘at’, or, if one liked, ‘on’ the
relevant renewal date, if strictly construed, could only mean rent receivable
actually on that day so if that day did not happen to be a quarter day there
would not be any rents. And so that led to the inference that there must be
some wider meaning. I think not. To my mind what it plainly means is that
whatever ‘receivable’ may or may not mean, it is what it stands at, as distinct
to being actually payable on the relevant date. I do not think there is more to
it than that.
Mr Bate also
questioned two other matters, one whether the expression the ‘demised premises’
in clause 4 must have some different meaning to the ‘demised land’, which is
what is used throughout the rest of the lease. It would suggest that it might,
but there is absolutely nothing in the lease to give me the smallest guidance
that it is intended to have any particular and peculiar meaning and I, for my
part, am inclined to think that the ‘demised land’ and ‘demised premises’
actually, in the end, mean the same thing. Of course, by the time one is
looking at a clause 4 situation inevitably the land will have been built on in
accordance with the covenants and, like it or not, clause 4 must be
contemplated as looking at that.
Finally, on
these minor matters, Mr Bate suggested that there might be some significant difference
between ‘payable’ and ‘receivable’. I do not think so. I think the way in which
this clause is drawn is centring matters on the lessee so that there is rent
payable by the lessee in one direction and receivable from another. I do not
think there is more magic to it than that.
There are
essentially two points in this case. One is whether clause 4, when it refers to
8% of rack-rents receivable, means the actual rack-rents in place at the
relevant date so if there are none that part of the formula simply cannot
operate; or alternatively, whether it should be given a wider construction, as
meaning 8% of what would be a market rack-rent at that date. The landlords
favour the wider construction, the tenant the narrower. The second point is
this: assuming the tenant to be right and the landlords wrong, is this
nevertheless a case where in the events which have happened the machinery which
is established, (it follows from the landlords’ argument) as likely to arrive
at a fair market rent has broken down and that gap should be filled either by
implied terms or, alternatively, by the court devising some valuation machinery
in effect, I apprehend, by way of an inquiry? I take those points in turn.
On the first
issue I can perhaps start by referring very briefly to one point made on behalf
of the tenants, which was this — that a court ought not to start approaching a
clause of this kind by assuming that the parties invariably intended that the
rent from time to time should not fall below a market rate. The authority for
that is Philpots (Woking) Ltd v Surrey Conveyancers Ltd [1986] 1
EGLR 97. To my mind, that point is clear and no such argument can avail the
landlords.
The critical
point, as it seems to me, is this: that although the words used in clause 1, if
they were taken on their own, would indicate a conventional rent review
situation, that is what everybody is doing is seeking to arrive at a fair
market rent — essentially a question of valuation. When one comes to clause
4(a) that is quite patently what is not being done. The reason one has to say
that is the actual machinery provided in that clause, because critical to my
mind is the figure being
directed to is a regime whereby the lessee’s accountants go through the rent
roll (bear in mind that this lease is essentially directed to one lease and a
whole lot of subtenants) work out what the total rent roll is, apply 8% to it
and certify the balance, so that far from this being a valuation exercise on
which to arrive at the notional fair market rent, it is a fact finding
exercise, as Mr Bate put it a ‘number crunching exercise’ and that is all it
is. If that is the regime that is being operated, then that, to my mind, must
control the meaning of the word ‘receivable’.
‘Receivable’
is defined in the Oxford Dictionary, among other places, as capable of
being received. That is, of course, in itself a question begging definition.
Capable of being received can mean the sort of figure a landlord would expect
to receive if only anybody was paying it, or capable of being received because
there is somebody paying it who can, as a matter of contract, be expected to
pay up. To my mind, once one has the audit regime in place, as 8% of what I describe
as the audited figure, then the meaning of ‘receivable’ must become clear. That
is a narrow meaning and that is the rent actually paid by a tenant in place, or
payable by a tenant in place, if he keeps his obligations so that the head
tenant takes the risk of his tenant not paying up. I pause to say that it is
hard to see how a draftsman could have both incorporated the closing words of
clause 1 and the words of clause 4 in the same document. It appears to me,
although I speculate only, it has the look of a travelling draft where a clause
was added at some late stage without consideration of its effect on the rest of
the lease. It is such a tight regime, as it seems to me, depending on
certification, that I really can see no other way of construing clause 4(a).
In the events
that have happened the result is disastrous because the present tenant, the
plaintiff, is in occupation for its own benefit, as I understand the evidence,
but in all events without having let to anybody else, and it has not in fact the
smallest intention of doing so (as I read what it says) not at least at or
about the present time nor had it in 1989. There is therefore no rack-rent and,
at least until the next review date arrives, there would be a period in which
no rent can be calculated by reference to the rack-rent of a tenant in actual
occupation of the premises. So what is to be done?
Mr Philip
Rainey, for the plaintiff, says that it all works perfectly because 8% of nil
is nil and the formula can simply be applied. I am not myself convinced thus
far that Mr Rainey is right because it seems to me that the reality is not
taking 8% of nil, but that there is nothing of which one can take 8%, and that
is not the same thing. So that of the three controlling factors, there is one
that is not there. So, says Mr Bate, what one ought to do is either imply a
term or import machinery. In Henniker-Major v Daniel Smith (a firm)
[1991] 1 EGLR 128 at p130 of Nicholls J’s judgment (as he then was), dealing
with a situation where there had been non-service of a notice in circumstances
where (following the United Scientific* decision) time was not of the
essence, held that the court should imply a term, as it were, to fill the gap
caused by the breakdown in the machinery. I gratefully accept that proposition
which to my mind is clear enough. The alternative route is to do what has been
done in a number of cases, not only in this particular jurisdiction, but (among
other things) specific performance and options, to provide machinery again to
fill the gap. For instance, in R&A Millett (Shops) Ltd v Leon
Allan International Fashions Ltd [1989] 1 EGLR 138 at p140H to J Sir George
Waller talking of the instant lease in that case said:
*Editor’s
note: United Scientif Holdings Ltd v Burnley Borough Council
[1977] 2 EGLR 61.
In my
opinion, the whole object of clause 5 of the underlease, taken in conjunction
with clause 5 of the superior lease, was to arrange that the subtenant paid a
fair market rack-rent, no more and no less. This did not depend on what the
sublessor was paying for the whole of the property; it depended on what was the
market rent payable for the whole property and was to be 78/85
of the sublease falls into the second of Lord Fraser’s categories [which is a
reference to Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC
444]. I would dismiss this appeal.
In short where
it is clear that what the lease is seeking to do is to get at a fair market
rent and the particular machinery to get it is broken down in one instance or
because of some supervening act, then the court ought by one means or the other
to fill the gap and provide a valuation.
At first sight
that is an attractive argument and I was much attracted by it, but, to my mind,
there is, as Mr Rainey pointed out in his closing submission, a powerful
objection and that is this: when one looks at clause 4, clause 4 is not,
despite the label put upon it in clause 1, seeking to arrive at a fair market rent
as generally understood at all. What it is seeking to arrive at is 8% of
something else. Whether 8% of something else is a fair market rent, there is no
machinery to tell me. It seems to me that, as Mr Rainey put it, no matter what
he comes out with, he will not come out with a fair market rent but with 8% of,
in effect, somebody else’s fair market rent. To my mind, this goes to show that
despite the protestations in clause 1 that what the parties are after is a fair
market rent, they have so arranged their affairs in clause 4(a) as to provide
what is really an ad hoc bargaining regime that is not directed to
getting a fair market rent at all, but simply an arbitrary (no doubt perfectly
sensibly) bargained figure.
I do not think
in those circumstances that one is able to say for implied term purposes if the
parties have been asked ‘Now you haven’t got a rack-rent, what would you like?’
they would have been at all ad idem with what they said. There is
nothing that would come to mind as being the obvious solution although Mr
Bate’s preferred solution, which is that the ultimate figure from which 8% was
taken is the market rack-rent, has its obvious attractions. Nor does it seem to
me that it can be said that the machinery that has broken down is in reality machinery
that is achieving a fair market rent as between ultimate reversioner and head
tenant, which is what this case is about. I am inclined to think that Mr Rainey
is right when he describes this as a method of arriving somewhat ad hoc
at a ground rent, and that is all it is. I feel therefore unable to accept Mr
Bate’s tempting invitation to imply a term or impose machinery, although in
many ways that would do substantive justice between the parties. I am inclined
to think that what he is really asking me to do is to remake the parties
bargain and that I do not think I can do. It therefore follows that I should
give judgment to the plaintiff.
