Landlord and tenant — Rent review clause in underlease — Construction — The clause in the underlease provided that the rent payable by the underlessee should, as from the material date, be 78/85ths of the rent payable by the underlessor in respect of the principal premises as fixed in the manner provided by the superior lease or the rent of £7,800 per annum (whichever shall be the greater) — The review clause in the underlease contained no reference to a fair market rent — The relevant clause in the original headlease, in addition to containing machinery for the appointment of valuers and an umpire, indicated that the object was to reach a fair market rack-rent of the premises — The problems giving rise to the present litigation arose from the fact that the predecessors in title of the plaintiff underlessors had surrendered the superior lease and taken a leaseback — This lease was expressly stated to be subject to and with the benefit of the underlease — The main question which arose was whether the plaintiffs were still entitled to a rent review in accordance with the clause in the underlease, as they contended, or whether, as the defendant underlessees contended, the review clause ceased to be operative
Wheeler QC, sitting as a deputy judge of the High Court, decided the point in
favour of the plaintiffs, applying the reasoning of Sudbrook Trading Estates v Eggleton — He
ordered an inquiry as to the rent that would have been payable under the
superior lease if it had not been surrendered — The Court of Appeal were
divided, Lloyd LJ and Sir George Waller agreeing in the result with the deputy
judge, Balcombe LJ dissenting
the Court of Appeal held that on the true construction of the clause in the
underlease the defendants were required to pay 78/85ths of the fair market
rack-rent of the whole premises as determined in accordance with the original
headlease — The words ‘as fixed in the manner provided by the said superior
lease’ showed that the parties had in mind not only the machinery provided but
also the ‘fair market rack-rent’ referred to in that lease as an objective
standard — The case was on all fours with the Sudbrook case — Balcombe LJ in
his dissenting judgment considered that the majority’s construction involved a
complete rewriting of the clause in the underlease in a manner which, on the
ordinary canons of construction, was unjustifiable — In accordance with the
majority view the appeal was dismissed
The following
cases are referred to in this report.
Candler v Crane, Christmas & Co [1951] 2 KB 164; [1951] 1 All ER
426, CA
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, [1983] 1 EGLR 47, HL
This was an
appeal by Leon Allan International Fashions Ltd, underlessees of part of
premises at 39 New Street, Birmingham, from the decision of Mr Michael Wheeler
QC, sitting as a deputy High Court judge, in favour of the underlessors, R
& A Millett (Shops) Ltd, on the construction of the rent review clause in
the underlease. Mr Michael Wheeler’s decision was reported at [1988] 1 EGLR 45.
E Evans-Lombe
QC and P R Griffiths (instructed by Gregory Rowcliffe & Co, agents for
Martyn W Amey & Co, of Birmingham) appeared on behalf of the appellants;
Robert Pryor QC and P Rees (instructed by Philip Hodges & Co) represented
the respondents.
Giving
judgment, LLOYD LJ said: In this case we are concerned with the true
construction of a rent review clause in an underlease dated March 10 1970 (‘the
underlease’) relating to part of premises at 39 New Street, Birmingham. The
clause provides:
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).
In December
1972 the plaintiffs’ predecessors in title surrendered the superior lease
referred to in clause 5, and obtained a leaseback. The question we have to
decide is whether the plaintiffs are still entitled to a rent review under
clause 5 or whether, as the defendants contend, clause 5 has ceased to be
operative. Mr Michael Wheeler QC, sitting as a deputy judge of the High Court,
has decided the point in favour of the plaintiffs, applying the reasoning of
the House of Lords in Sudbrook Trading Estates v Eggleton and Others
[1983] 1
been payable under the superior lease had it not been surrendered. The
defendants now appeal to this court.
Before coming
to the arguments, I shall first recite the facts, which I take gratefully from
the defendants’ skeleton argument.
By a lease
dated May 14 1969 the shop known as 38 New Street, Birmingham, comprising first
floor, ground floor and basement premises, was demised by Raventop Developments
Ltd to C & J Clark Retail Ltd for a term of 21 years from September 29 1968
at a yearly rent of £13,250 subject to one review at the end of the 14th year,
namely September 29 1982.
By a lease
(‘the original headlease’) dated June 23 1969, the shop known as 39 New Street,
Birmingham, comprising first floor, ground floor and basement, was demised by
Raventop Developments Ltd to Suede Circle Ltd for a term of 21 years from March
25 1969 at a yearly rent of £8,500 subject to one review at the end of the 14th
year, namely March 25 1983.
On March 10
1970 Suede Circle Ltd assigned its interest in the original headlease to C
& J Clark Retail Ltd. On the same day C & J Clark Retail Ltd underlet
the greater part of the premises demised by the original headlease. A small
part of the ground floor was partitioned off and retained by C & J Clark
Retail Ltd. The underlease was for a term of 20 1/4 years (less one day)
terminating one day before the original headlease, namely March 24 1990. The
rent reserved in the underlease was £7,800 per annum, or such other sum as
might become payable under clause 5.
On October 27
1971 C & J Clark Retail Ltd assigned its interest in both leases to
Wakefield Stores (Midland) Ltd.
On December 18
1972 Ravenseft Properties Ltd, who held the reversion to both leases, entered
into an agreement with Wakefield Stores (Midlands) Ltd for the surrender of the
leases (including the original headlease) and a leaseback of the premises
comprised in them, together with some other properties, after various
alterations had been carried out.
The agreement
dated December 18 1972 was completed on April 9 1973 when Ravenseft Properties
Ltd by way of a new headlease (‘the 1973 headlease’) let the premises to
Wakefield Stores (Midlands) Ltd for a term of 32 years from December 25 1972 at
a yearly rent of £27,000 subject to review on December 25 1982, 1989, 1994 and
1999.
The demise of
the new combined premises was expressly stated to be subject to and with the
benefit of the underlease. On August 15 1978 the benefit of the underlease
became vested in the defendants.
By a transfer
dated September 2 1985 between Wakefield Stores (Midlands) Ltd and Milletts
Leisure Shops plc the unexpired residue of the 1973 headlease was vested in the
plaintiffs, still subject to and with the benefit of the underlease.
Clause 5 of
the original headlease is as follows:
(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 qualified Valuer to negotiate and endeavour to
reach agreement with the Valuer 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).
Before the
judge, the plaintiffs put their case on two main grounds. First, it was argued
that clause 5 of the underlease provides a formula which incorporates by
reference the more detailed provisions of clause 5 of the original headlease,
and that the formula is not affected in any way by the surrender of the
original headlease. This way of putting the case depends simply on the proper
construction of clause 5.
Second, it was
argued that if the rent review ‘machinery’ has broken down, the court can
provide its own machinery, in order to ascertain a fair market rent. This way
of putting the case depends on the application of the principles stated in Sudbrook.
The judge, as
I have said, decided in favour of the plaintiffs on the second ground; but he
would also, it appears, have been prepared to decide in favour of the
plaintiffs on the first ground.
Before us,
things took a somewhat different course. The two arguments advanced by the
plaintiffs in the court below were substantially elided.
Mr
Evans-Lombe, for the defendants, argued that the Sudbrook case does not
help the plaintiffs, since in that case, once the lessees had exercised their
option to purchase the reversion in fee simple, the contract became a contract
to purchase the fee simple at a ‘fair and reasonable price’. The valuation
provisions were therefore nothing more than convenient machinery for
ascertaining, objectively, what that fair and reasonable price might be.
In the present
case, by contrast, there is nothing about a fair market rent in clause 5 of the
underlease, nor can anything be implied. The measure of the plaintiffs’
entitlement under clause 5 of the underlease is their liability under the
original headlease. Unlike Sudbrook, there is no other standard, express
or implied, against which the plaintiffs’ entitlement can be measured.
Mr Evans-Lombe
gave two examples to illustrate his argument. The plaintiffs could, he
submitted, have agreed a revised rent with the head lessors, which was less
than the fair market rack-rent contemplated by clause 5 of the original
headlease. If that had happened, then clause 5 of the underlease would only
have entitled the plaintiffs to recover 78/83ths of the rent actually being
paid by them, not 78/83ths of the full fair market rent.
Second, the
head lessors might have forgotten altogether to call for a rent review under
the original headlease or might, for one reason or another, have deliberately
decided to forgo an increased rent. It could not have been the intention, said
Mr Evans-Lombe, that the plaintiffs should nevertheless be entitled to call for
an increased rent under clause 5 of the underlease, from March 25 1983, thereby
in effect making a profit out of the transaction.
Mr Prior
conceded that he could not succeed on Sudbrook, unless he could show
that clause 5 of the underlease, on its true construction, requires the
defendants to pay 78/83ths of a fair market rent as determined in accordance
with the original headlease; but that, he submits, is exactly what the clause
does require.
In my
judgment, Mr Pryor’s argument is well founded. I accept, of course, that there
is no reference to ‘fair market rent’ in clause 5. But nor was there any
reference to ‘fair and reasonable price’ in Sudbrook. The question in the
present case, as in Sudbrook, is what the clause means. To my mind the
meaning is clear. If Mr Evans-Lombe’s argument were correct, I would have
expected the clause to end with the words ‘in respect of the principal
premises’. The addition of the words ‘as fixed in the manner provided by the
said superior lease’ shows that the parties had in mind not only the machinery
provided by clause 5 of the original headlease but also the ‘fair market
rack-rent’ referred to in that clause as an objective standard. When the full
force of the concluding words of clause 5 was underlined by Balcombe LJ in the
course of the hearing, Mr Evans-Lombe characteristically accepted that it
‘torpedoed’ the first of the two examples which he had taken. To my mind it
does more; it torpedoes his entire argument.
The purpose of
referring to 78/83ths of the rent payable by the lessor in clause 5 is not, as
Mr Evans-Lombe argued, to ensure that the plaintiffs do not recover more than
the designated fraction of what they actually pay. The purpose is different. It
is to enable the rent to be ascertained by reference to the premises as a
whole, and not by reference to part of the premises. What clause 5 of the
underlease requires is, therefore, a valuation of the fair market rent of the premises
as a whole, followed by the application of the designated fraction. This is a
sensible construction. It does not involve writing anything into clause 5. It
involves no more than giving the meaning which the existing words bear.
Once it is
accepted that the clause requires the defendants to pay 78/83ths of a fair
market rent for the premises as a whole, then the case is on all fours with Sudbrook.
The standard is capable of objective ascertainment. The machinery is
inessential. Indeed I did not
argument. It follows that clause 5 of the underlease remains operative as a
valid and effective rent review clause, despite the surrender of the original
underlease.
I confess that
I am glad to have reached that result, since, like the judge, I feel that it
reflects the broad justice of the case. To have held otherwise would have
risked shutting the windows ‘on the welcome breath of fresh air’ which, as the
judge so aptly said, has been introduced into this branch of the law by the
majority decision of the House of Lords in Sudbrook.
BALCOMBE LJ
said: I have had the advantage of reading in draft the judgments of Lloyd LJ
and Sir George Waller and I need not repeat the essential facts of this case
which are there set out.
As they say,
the issue with which we are faced has come down to a question of the
construction of clause 5 of the underlease, which for convenience I set out
again below:
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
greatest).
Does that mean
that the defendants are required to pay 78/83ths of a fair market rent for the
principal premises (those comprised in the original headlease) as determined in
accordance with the original headlease?
If so, then it is common ground that the court, applying the principle
of Sudbrook Trading Estates v Eggleton [1983] 1 AC 444 can
provide the machinery for fixing that rent. Or does it mean that the defendants
are liable to pay only 78/83ths of the rent properly payable in respect of the
principal premises, and if there is no such rent then the fixed rent of £7,800
per annum remains payable under the underlease?
In that event it is again common ground that there is no room for the
application of the Sudbrook principle.
I regret that
I find myself unable to agree with the views of Lloyd LJ and Sir George Waller
that the former construction is correct. It seems to me to involve a complete
rewriting of clause 5 in a manner which, on the ordinary canons of
construction, is wholly unjustifiable.
Lloyd LJ
refers to two examples given in argument by Mr Evans-Lombe. The first, which he
withdrew in the course of argument, was (as I recall it) that of the
plaintiffs’ having agreed a revised rent with the head lessors which was more
(not less) than the fair market rack-rent of the whole premises and then
seeking to charge the defendants 78/83ths of that inflated rent. He accepted
that the plaintiffs could not recover that amount, since it would not be
78/83ths of ‘the rent payable by the Lessor . . . as fixed in the manner
provided by the said Superior Lease’.
The second
example, for which Mr Evans-Lombe’s junior, Mr Griffiths, deserves credit, was
the case where the head lessors fail, either wholly or for a time, to actuate
the rent review procedure under the original headlease. In those circumstances
I find it impossible to say that the plaintiffs would be entitled to recover
from the defendants 78/83ths of the rent which would have been payable
under the original headlease had the rent review procedure under that lease
been actuated. If the proverbial officious bystander had been asked the
question: ‘Are the defendants liable to pay the plaintiffs 78/83ths of (say)
£25,000 pa while the plaintiffs themselves are only liable to pay £8,500 under
the original headlease?’, I suspect his answer would be one of incredulous
amazement that such a possibility could even be considered. I do not accept
that Mr Evans-Lombe’s acceptance of the fact that his first example was unsound
‘torpedoes’ his second example, which I find wholly persuasive.
If my
interpretation of this clause lays me open to the charge of ‘shutting the
windows on a welcome breath of fresh air’, then I can only adopt the words of
Asquith LJ in Candler v Crane, Christmas & Co [1951] 2 KB 164
at p 195 that ‘I must face that consequence with such fortitude as I can
command’.
I would allow
this appeal.
SIR GEORGE
WALLER said: I agree with the judgment of Lloyd LJ and will only add a few
words.
As a matter of
history, when the superior lease was executed Suede Circle was the tenant, but
a year later Suede Circle assigned its tenancy to Clark Retail and on the same
day Clark Retail sublet 78/83ths to Suede Circle. It is not surprising,
therefore, that the headlease being £8,500 the sublease was £7,800 and that
clause 5 of the sublease should specify 78/83ths of the rent of the superior
lease as the measure. It is important to note that the rent payable for the
whole of the property was governed by clause 5 of the superior lease and was to
be ‘the fair market rack-rent’ as agreed by valuers selected by each side with
an umpire failing agreement. Does the fact that the superior lease was
surrendered and replaced by a new lease (subject to the underlease) make a
difference to the operation of clause 5?
It is argued that since the superior lease referred to in clause 5 has
been surrendered there is no ‘superior lease’ and therefore there can be no
review because this clause required the rent to be fixed by what was being paid
under the superior lease and the superior lease is no longer in existence.
In Sudbrook
Trading Estate Ltd v Eggleton [1983] 1 AC 444 at p 483 Lord Fraser,
in considering whether the court could substitute its own machinery in such a
case, said:
The true
distinction is between those cases where the mode of ascertaining the price is
an essential term of the contract, and those cases where the mode of
ascertainment, though indicated in the contract, is subsidiary and
non-essential.
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 78/83ths of that sum.
In my opinion, clause 5 of the sublease falls into the second of Lord Fraser’s
categories. I would dismiss this appeal.
The appeal
was dismissed with costs. Application for leave to appeal to the House of Lords
was refused.
