Rent review clause–Arbitrator to be nominated on application by the lessors, application to be made before a
This was a
claim by Mount Charlotte Investments Ltd, of City Road, London EC, against
Leek, Westbourne & Eastern Counties Building Society, of Leek,
Staffordshire, for a declaration that the plaintiffs had validly applied, under
a rent review clause in a lease of April 8 1968, to the President of the Royal
Institution of Chartered Surveyors for appointment of an arbitrator to
determine a revised rent of office premises at 89 Queen Street, Cardiff, for a
period of six years beginning with March 25 1975.
Mr J S Colyer
(instructed by Baileys, Shaw & Gillett) appeared for the plaintiffs, and Mr
C J Slade QC and Mr J A Moncaster (instructed by Gouldens, agents for Knight
& Sons, of Newcastle-under-Lyme) represented the defendants.
Giving
judgment, TEMPLEMAN J said: This is the latest (but I fear not the last)
dispute over a rent review clause in a lease. The landlords failed to refer the
rent to arbitration within the time provided by the lease, and the tenants
claim that the landlords have lost their chances to increase the rent. The
lease is dated April 8 1968. It was made between the landlords’ predecessors in
title and the tenants. It was a lease of a shop and premises, 89 Queen Street,
Cardiff, for a term of twenty-one years from March 25 1967, and for use as
offices of a building society or any other trade or business which the
landlords might permit. The lease provided that the tenants should hold the
premises ‘yielding and paying therefor during the said term and so in
proportion for any less time than a year the respective rents following: (a)
during the first eight years of the term’ £2,750 per annum, which was defined
as ‘the basic rent’; then ‘(b) during the next six years of the said term,’
from March 25 1975 to March 25 1981, ‘whichever of the two following yearly
rents is the greater that is to say (i) the basic rent or (ii) such amount as
may be agreed between the lessors and the lessees before the expiration of six
calendar months before the end of the eighth year of the said term or (in the
absence of such agreement by such last mentioned date) such amount as may be
determined by an arbitrator to be nominated by the President for the time being
of the Royal Institution of Chartered Surveyors on the application of the
lessors to be made within fourteen days after the date six calendar months
before the end of the eighth year of the said term and so that in case of such
arbitration the amount to be determined by the arbitrator shall be such as in
his opinion shall represent the fair yearly rent for the demised premises at
the end of the eighth year of the said term having regard to rental values of property
then current’; and then ‘(c) during the last seven years of the said term . . .
whichever of the two following rents is the greater that is to say: (i) the
rent reserved for the previous six years or (ii) the rent equivalent to a fair
yearly rent as at the end of the fourteenth year of the said term to be agreed
or calculated on the same basis mutatis mutandis as set out above in
respect of the eighth year.’ There
followed a provision that the rent should be paid on the usual quarter days, in
arrears. The lease thus provided for negotiations between the landlords and the
tenants before September 25 1974, and if those negotiations failed to reach an
agreement, then a reference to arbitration by the landlords before October 9
1974, with the obvious objective of seeing that the new rent should be
determined before June 24 1975 if possible, before the new rent became payable
for the first time. The landlords opened negotiations with the tenants by a
letter dated September 20 1974 and negotiations proceeded through surveyors.
The date for an application to the President of the Royal Institution of
Chartered Surveyors passed; negotiations still continued, until on February 27
1975 the tenants took the point that the landlords were out of time, and
therefore that the rent could not be increased. The landlords, in a letter
dated March 5 1975, applied to the President of the Royal Institution of
Chartered Surveyors to appoint an arbitrator, and the question is whether that
application is valid or whether, as the tenants say, the landlords have lost
their opportunity.
The
authorities disclose that there are at least two kinds of rent revision
clauses. The first kind has been analysed as ‘an option to the landlord to
obtain a higher rent,’ and in that case, if the landlord does not comply with
any time limits provided for the exercise of the option then he wholly fails.
The time limits are said to be mandatory. The second kind of clause has been
analysed as ‘creating an obligation on the landlords’–or sometimes the tenants
as well–‘to take the steps necessary to determine what the rent is going to
be.’ If in the obligation cases the
time-limits prescribed by the document are not complied with, then the court
construes those time-limits as being purely directory, and provided that the
tenant has not been prejudiced by any delay, then the rent is fixed after the
time-limits have expired. The analysis of the option rent review clause is a
triumph for theory over realism. In practice landlords insist on a rent review clause.
They are only prepared to grant a 21-year lease if the rent is increased to
keep pace with inflation every 7 years or so. The concept of the tenant
granting the landlord an option and conferring benefits on the landlord does
not accord with reality. The courts could have come to the conclusion that all
time-limits imposed by rent revision clauses were directory and not mandatory,
because an increase in rent is a condition imposed by the landlord for the
favour of a long term. Certainly in the obligation clause cases the courts have
had no difficulty in ignoring the express words of the clause and treating the
time-limits as directory; but they have refused to do the same in the case of
clauses which they have designated option clauses. The authorities begin in
1972. When the landlord before 1972 went to his draftsman to draft a rent
revision clause the draftsman might, in all innocence, produce an option type
of clause, or an obligation type of clause, or something which was neatly
halfway between the two. Since 1972 the drafting cannot be done wholly in
innocence, but can quite often be done in ignorance. The draftsman may lay a
trap, and the landlord may fall into the trap by forgetting the time-limit. But
that is the effect of the authorities.
In C Richards
& Son Ltd v Karenita Ltd (1971) 221 EG 25, the rent revision
clause provided that ‘if the landlords shall by giving notice in writing to the
tenants at any time during the first three months of the seventh year of the
term hereby created require a review of the rent payable hereunder such rent
shall be revised with effect from the expiration of the seventh year.’ Goulding J rejected the argument that time
was not of the essence, an argument adopted from the relationship of vendor and
purchaser. In Samuel Properties Developments Ltd v Hayek [1972] 1
WLR 1064, if the landlords desired to have the rent reviewed by reference to
the open market rental value, and served a notice in writing to that effect not
later than two quarters before the expiry of the seventh and fourteenth years,
then by agreement or arbitration the rent was to be increased. Whitford J at p
1070 said:
Clauses of
the character which I am considering run very closely with the type of option
clauses . . . I think it right that a review to bring about an increase in rent
at the end of seven and 14 years can reasonably be described as a benefit to
one party alone. It might not be unreasonable for it to be described as a
privilege, but I do not think that the particular words used are of much
importance one way or the other. I do think that in a case of this character it
is important that the party seeking to secure the benefit should comply
strictly with the provisions
options for the repurchase of shares.
After
referring to Hare v Nicoll [1966] 2 QB 130, the classic case
which reiterated that in the exercise of an option the terms must be strictly
complied with if the option is properly to be exercised, the learned judge held
that in the Samuel Properties case the rent revision clause was an
option type of clause, and the terms not being complied with, the landlord had
lost his opportunity. That decision was affirmed by the Court of Appeal in the
same volume at p 1296, and at p 1302 Russell LJ referred to the arguments that
a rent review clause should come within a general approach that time provisions
should not be construed as inflexible and mandatory unless there be special
reason for so doing, and that there were no special reasons for importing
inflexibility into provisions that were basically mere machinery for achieving
what the parties must have regarded as an equitable alteration in rent to
safeguard the lessor against the consequences of possible or indeed probable
continuing depreciation of the value of money in relation to housing
accommodation. Russell LJ said:
I am not
myself impressed by these arguments. The right or privilege of exacting an
additional rent was conferred by the bargain between the parties as an express
option which would be effective if a condition precedent was complied with. It
could be equated with an offer by the lessee to pay an increased rent only in
certain circumstances which it lay in the power of the lessor unilaterally to
bring about, which offer was not accepted in those terms. It was argued that
there was a distinction (as to time-limits) between options to determine, or to
renew, or to acquire the reversion, and a right such as the present. I do not
see why this should be so. Accordingly in my judgment the time requirement . .
. is to be treated as inflexible and mandatory.
That is
binding on me. In C H Bailey v Memorial Enterprises Ltd [1974] 1
WLR 728 a rent review clause provided that ‘if on September 21 1969 the market
rental value shall be found to exceed the rent of £2,375 hereby reserved there
shall be substituted from such date for the yearly rent hereby reserved an
increased yearly rent equal to the market rental value so ascertained.’ There were provisions for the market rental
value to be agreed or to be determined by arbitration. That rent review clause
was to operate at the end of the first five years of the term, and unless it
did so operate there would be no rent at all fixed by the lease or capable of
being fixed. Eveleigh J held that the market rental value on September 21 1969
could be ascertained after that date, but that the increased rent only became
payable on the quarter day following its ascertainment. The Court of Appeal
held that since the rent review clause provided for the increased rent when
ascertained to be substituted from September 21 1969, it was payable
retrospectively from that date. In coming to that decision, the Court of Appeal
rejected the tenants’ argument that the landlords had lost their right to
increase the rent at all because it was not in fact ascertained on September 21
1969. This was not an option which the landlord had power to exercise but an
obligation on both parties to determine what the rent should be as from
September 21 1969.
In Kenilworth
Industrial Sites Ltd v E C Little & Co Ltd [1974] 1 WLR 1069,
before Megarry J, in a 21-year lease the annual rent for the first five years
was £2,900. A rent revision clause provided that ‘not more than twelve months
nor less than six months before the expiration of the fifth, tenth and
fifteenth years of the term the landlord shall serve upon the tenant a notice
to agree the rent for the ensuing five years and thereupon the parties hereto
shall agree a new rent.’ There was an
express proviso that ‘any failure to give or receive such notice shall not
render void the right of the landlord hereunder to require the agreement or
determination of a new rent.’ Megarry J
decided that the failure of the landlord to give the notice did not render void
his right to an increased rent, and the Court of Appeal [1975] 1 WLR 143,
agreed. Between the judgment of Megarry J in the Kenilworth case at
first instance and the decision of the Court of Appeal there occurred United
Scientific Holdings Ltd v Burnley Corporation (1974) 231 EG 1543. A
99-year lease provided that during the year immediately preceding the first
10-year period of the term ‘the landlord and the tenant shall agree, or failing
agreement shall determine by arbitration, the rack rent, and one-quarter of the
sum total so ascertained, or £2,000, whichever is the greater, shall be the
rate of rent reserved by this lease in respect of the next period.’ And then it provided for a reference to
arbitration to be agreed by the parties or to be nominated by the President of
the Royal Institution of Chartered Surveyors. That was a rent review clause
where at first blush the language appears to be language of obligation and not
of option. In the event the parties failed to reach agreement during the year
immediately preceding the end of the period and failed to go to arbitration.
Pennycuick V-C assumed in favour of the landlords that the requirement that the
arbitration should be during the relevant year was satisfied if a reference to
arbitration were made during the specified period. It had been argued for the
landlords that time was not of the essence, that ‘all that one was concerned to
do was to quantify the amount of rent under the existing obligation to pay
rent,’ and that there was no reason why that should not be done outside the
year. Pennycuick V-C continued, ‘Although the rent review provision was
expressed merely as a provision for the quantification of additional rent, it
was in substance a unilateral right or privilege vested in [the landlords]
alone, the nature of the right being to increase the rent payable by the
tenants. The tenants were entitled under the lease to possession of the
property for the whole 99 years at [the original rent] unless the corporation
elected to require a rent review.’
Similarly, says Mr Slade for the tenants in the present case, although
there may be some indications in the instant lease which appear at first blush
to be language of obligation, on analysis it will be found that the lease
created an option for the landlords to increase the rent above the original
rent if they took the proper steps to do so.
The last
authority is a decision of the Court of Appeal, as yet unreported decided on
October 14 1974, the name of which is Stylo Shoes Ltd v Wetherall
Bond Street W1 Ltd. A review clause provided that ‘the landlords shall be
entitled to require the rent to be revised from the commencement of the eighth
year, and if the landlords shall so require then the yearly rent payable during
the residue of the said term shall be either the said sum of £2,750 or such
amount as may be agreed in writing between the landlords and the tenants before
the commencement of the eighth year of the said term which represents the full
rack rental value, or in the absence of agreement as aforesaid as shall be
determined by arbitration, whichever amount shall be greater. The arbitrator
shall in default of agreement between the parties be nominated by the President
for the time being of the Royal Institution of Chartered Surveyors on the application
of the landlords made not more than twelve months nor less than three months
before September 29 1972 and the decision of the arbitrator shall be final and
binding upon the parties.’ In the event
there was no reference to arbitration before the time-limit required by the
clause expired. The approach of the Court of Appeal was that the lease was in a
form put forward by the landlords; it plainly provided that the landlords could
not apply for the appointment of an arbitrator less than three months before
September 29 1972. It showed, said Lord Salmon, that ‘if the landlord wants to
ensure he will obtain a revised rent otherwise than by written agreement he has
to initiate an arbitration not less than three months before the beginning of
the eighth year.’ Mr Slade submits that
the similarities between that case and the present are too plain to be ignored;
in both
period; if there was no agreement the landlord had the right to set in motion
arbitration machinery by applying to the President of the Royal Institution of
Chartered Surveyors. This right was exercisable by the landlord; it was for the
benefit of the landlord alone because the rent could not be decreased, it could
only be increased, and the right to apply to the President was given a
time-limit, and mutatis mutandis Mr Slade says that in the same way as
the landlord was caught by his own defective drafting in Stylo Shoes, so
in the present instance.
I come back to
the present lease to determine whether it is in truth an option rent review
clause or an obligation rent review clause. The first indication supports Mr
Colyer, who appears for the landlords: there is not one rent of £2,750 for the
whole term, there are the respective rents for three separate periods. During
the first period there is the basic rent, and then the rent for the second
period must be determined. I agree with him that this is some indication of an
obligation. It is necesary to determine the rent for the second six years of
the term. The rent is to be ‘whichever of the two following rents is the
greater, that is to say,’ the basic rent, £2,750, or the amount which is agreed
or determined by arbitration. Mr Colyer submits that in order to determine
which of the rents is the greater there must be two rents which can be
compared; that would seem the language of obligation. A rent must be calculated
in order to make a comparison. But then the clause which deals with the
ascertainment of the rack rent, the amount to be compared with the basic rent,
provides that the rack rent is to be such an amount as may be agreed–and
that is permissive–between the landlord and the tenant before September 25
1974, and if there is no agreement such amount as may be determined, not
shall be determined. If there is a determination by an arbitrator he is
to be nominated. The application of the landlords for his nomination is to be
made within a certain time-limit, and in case of such arbitration the
amount to be determined by the arbitrator shall be the rack rent as assessed by
him at the ending of the eighth year. In my judgment, in the same way as in
Stylo and in the United Scientific case, the indications of an
obligation are overruled by contra-indications of option. The clause merely
empowers the landlord, and the landlord alone, to go to arbitration if there is
no agreement, and imposes on him the right to go to arbitration only if he
applies to the President of the Royal Institution of Chartered Surveyors within
the fourteen days, that is to say before October 9 1974. Dealing with the last
period, the rent is said to be the rent ‘agreed or calculated on the same basis
mutatis mutandis as set out above in respect of the eighth year.’ That reads in the whole of the language of
the rent revision clause attributable to the second period, and the argument
for the landlords is not advanced. Mr Colyer submitted that this was a case
where, if there is no arbitration because the time-limit is exceeded, then
there can be no rent for the second period, but I do not take that view. There
is a basic rent and a provision whereby the landlord can, if he likes, obtain
an arbitration with regard to a higher rent. If he fails to exercise his right
then the basic rent remains; that basic rent compares with such amount as may
be agreed or may be determined. In the events which have happened, nothing has
been agreed, nothing has been determined, and therefore the basic rent is
greater.
This is a
clause in which there are some indications that could have led to the view that
this was a rent revision clause of obligation rather than option, but
construing the clause, and paying attention as I must to the decisions to which
I have referred, it seems to me that I am bound to come to the conclusion that
this is an option-type clause, and that it would only make the law more
confused than it is if I were able on the wording of this clause to find some
subtle distinction between it and the earlier authorities. In my judgment, in
substance this is an option-type form of rent review clause, and the time-limit
was mandatory. It is common ground that the landlords failed to comply with the
time-limit, and it follows that the application for the appointment of an
arbitrator was out of time, and out of order.
His Lordship
made a declaration that on the true construction of the above-mentioned lease,
and in the events which have happened, the plaintiffs were not entitled to
apply and had not validly applied to the President of the Royal Institution of
Chartered Surveyors for the appointment of an arbitrator. The defendants were
awarded their costs.
