Landlord and tenant — Rent review provisions — Construction — The rent review clauses provided for the rent of a 15-year lease to be reviewed, after a fixed rent for the first five years, in respect of the second and third five years — There were usual provisions for a landlord’s ‘trigger’ notice, for agreement between the parties and for determination at the election of the lessee by an independent surveyor — The ‘open market rental value’ for the purpose of determination by any of these methods was the sum which was ‘at the time of such determination the annual rental value of the demised premises in the open market’ on a lease for a term equivalent to the residue of the actual lease at that date
elected for determination by an independent surveyor, the question for
construction by the court was whether the independent surveyor was required to
determine the rental value as at the date when he actually made his
determination (as the landlords contended) or as at the commencement of the
relevant review period (as the tenants contended) — The landlords relied on the
wording of the review clauses, particularly the provision that the ‘open market
rental value’ meant a sum determined as being ‘at the time of such
determination’ the annual rental value of the demised premises — The tenants
pointed to the uncertainty
event of a long delay between the initiation of the review procedure by the
tenants’ election and the independent surveyor’s determination
considered in some detail four recent decisions, of which the most helpful was
London & Manchester Assurance Co Ltd v G A Dunn & Co, before
Peter Gibson J and the Court of Appeal — With some reluctance, the judge
concluded that the landlords’ contention was correct and that, in consequence,
the rental value must be the value at the date of the independent surveyor’s
determination — Although this did not produce the most sensible result, it
accorded with the language of the review provisions and with the reasoning of
the majority of the Court of Appeal in the London & Manchester case —
Declaration accordingly
The following
cases are referred to in this report.
London
& Manchester Assurance Co Ltd v G A Dunn
& Co [1982] EGD 228; (1981) 262 EG 143, [1982] 1 EGLR 117; [1983] EGD
86; (1982) 265 EG 39 & 131, CA
Touche
Ross & Co v Secretary of State for the
Environment (1982) 46 P&CR 187; 265 EG 982, [1983] 1 EGLR 123, CA
Webber
v Halifax Building Society [1985] 1 EGLR 58;
(1984) 273 EG 297
This was an
originating summons for construction of the rent review provisions of a 15-year
lease of commercial premises at 532 Kingsbury Road, London NW9. The plaintiffs
were the landlords, Glofield Properties Ltd, and the tenants were David Morley
and Brian Stewart.
Paul Dickens
(instructed by Druces & Attlee) appeared on behalf of the plaintiffs; Kirk
Reynolds (instructed by Fayers & Co) represented the defendants.
Giving
judgment, MR MICHAEL WHEELER QC said: This originating summons raises a short
question of construction as to the true meaning of rent review provisions in a
15-year lease of premises in north London dated December 8 1977 and made
between the plaintiff company as landlord of the one part and the defendants as
tenants of the other part.
I need refer
to only two passages in the lease. In clause 2 the term of the lease, and the
rent payable, was stated as follows:
. . . the term
of FIFTEEN years calculated from the eigth day of December one thousand nine
hundred and seventy-seven and expiring at midnight on the seventh day of
December one thousand nine hundred and ninety-two (hereinafter called ‘the
term’) YIELDING AND PAYING therefor during the term yearly and proportionately for
any fraction of a year the rents hereunder set out:
(a) During the first five years of the term the
rent of THREE THOUSAND FOUR HUNDRED POUNDS (£3,400.00) (hereinafter when
specifically referred to called ‘the first reserved rent’).
(b) During the second five years of the term
(hereinafter called ‘the review period’) the rent payable by the Lessee shall
be whichever shall be the higher of the first reserved rent and the open market
rental value of the Demised Premises for the review period (hereinafter when
specifically referred to called ‘the second reviewed rent’).
(c) During the third five years of the term
(hereinafter called ‘the second review period’) the rent payable by the Lessee
shall be whichever shall be the higher of the reviewed rent and the open market
rental value of the Demised Premises for the second review period (hereinafter
when specifically referred to called ‘the second reviewed rent’).
Such reviewed
rents to be determined in accordance with the provisions in that behalf
contained in Clause 5 hereof.
Such rents to
be paid . . . by equal quarterly payments in advance on the four usual quarter
days in each year the first payment to be made on the signing hereof and to be
for the period from the Commencement Date to the quarter day next following the
date hereof . . .
The
commencement date had earlier been defined as the date of the lease, ie
December 8 1977.
The meaning of
the expression ‘the open market rental value’ and the method of ascertaining it
is set out in clause 5 of the lease.
Clause 5(1)
provides as follows:
the
expression ‘the open market rental value’ as aforesaid means a sum in relation
to the review period or the second review period as the case may be determined
in manner hereinafter provided as being at the time of such determination the
annual rental value of the Demised Premises in the open market on a lease for a
term of years certain equivalent to the number of years then unexpired of the
term granted by this Lease with vacant possession at the commencement of such
term . . .
Clause 5(2)
provides for the open market rental value to be determined as follows:
(2) . . .
(a) It shall be such sum as shall be specified
in a notice in writing by the Lessor to the Lessee at any time not earlier than
twelve months prior to the commencement of the review period or the second
review period as the case may be; or
(b) As shall within three months after such
notice be agreed between the parties in writing in substitution for the said
sum; or
(c) It shall be determined at the election of
the Lessee by counter-notice in writing to the Lessor not later than three
months after the Lessor’s said notice (time to be of the essence hereof) by an independent
surveyor appointed for that purpose by the parties jointly in writing or upon
their failure to agree upon such appointment within one month after the date of
the said counter-notice then by an independent surveyor appointed for that
purpose by the President for the time being of the Royal Institute (sic) of
Chartered Surveyors and every such determination shall be made in accordance
(so far as not inconsistent herewith) with the provisions of the Arbitration
Act, 1950, or any statutory modification or re-enactment thereof for the time
being in force and shall be subject to the further provisions of the next
succeeding sub-clause hereof.
Subclause (3)
provides as follows:
(3) In the event of the determination by such
independent surveyor not having been made and communicated to both parties
hereto prior to the commencement of the review period or the second review
period as the case may be for any reason whatever then in respect of the period
of time (hereinafter called ‘the said interval’) beginning with the said
commencement and ending on the quarter day immediately following the date on
which such determination shall have been made and communicated as aforesaid the
rent payable hereunder shall continue to be paid at the rate payable immediately
prior thereto PROVIDED that at the expiration of the said interval there shall
be due as additional rent payable by the Lessee to the Lessor on demand a sum
of money equal to the amount whereby the reviewed rent or the second reviewed
rent shall exceed the rent payable immediately prior thereto but duly
apportioned in respect of the said interval.
The question
of construction which I have to decide is whether, the tenants having elected
to have the open market rental value in relation to both the review period (ie
the second five years from December 8 1982) and the second review period (the
final five years from December 8 1987) determined by an independent surveyor
pursuant to clause 5(2)(c) of the lease, the independent surveyor is required
to determine the open market rental value as at the date on which he actually
makes his award (as the landlord contends) or as at the commencement of the
review period or the second review period as the case may be (as the tenants
contend).
I should
mention in passing that, strictly, the tenants’ election involves two separate
determinations, but no point is taken on this, since the question of law which
I have to decide as a prelude to any determination will apply equally to the
review period and to the second review period.
For the
landlord, Mr Dickens relies quite simply on the language of clause 5(1) of the
lease and in particular the provisions that ‘the open market rental value’
means a sum determined as being ‘at the time of such determination’ the annual
rental value of the demised premises.
For the
tenants, Mr Reynolds points to the uncertainty which this construction of the
lease creates. The expression ‘at the time of such determination’ does not
point to the ‘date’ of determination but, as he put it, to the ‘occasion’ of
the determination: and he further contends that the word ‘then’ a few lines
later in clause 5(1) can perfectly reasonably be construed as referring to the
commencement of the relevant review period: and he points out with considerable
force not only to the curious (he would say ‘ludicrous’) results to which the
landlord’s construction would give rise in the event of a long delay between
the tenants’ initiation of the rent review procedure by virtue of a
counternotice given under clause 5(2)(c) and the independent surveyor’s
determination.
I frankly
admit that, looking at rent review procedures in general, I find a construction
which could give rise to such curious results as unlikely to be what the
average parties to a lease could reasonably be expected to have in mind: and
left to myself my initial inclination would have been to favour the tenants’
construction. I have to accept, however, that if the intention of the parties
is clearly and unequivocally expressed, the court is bound by it, however capricious
it may be, unless it is plainly controlled by other parts of the lease (see Chitty
on Contracts, 25th ed at para 779). At the end of the day, therefore,
notwithstanding considerable initial misgivings, I have
contention is correct and that the open market rental value is the value as
determined by the independent surveyor at the date of his valuation.
In reaching
this conclusion, I have been very much influenced by four recent decisions on
rent review clauses to which I have been referred. These are, in order of date:
(i) and (ii) London
& Manchester Assurance Co Ltd v G A Dunn & Co, reported at
first instance before Peter Gibson J in (1981) 262 EG 143, [1982] 1 EGLR 117 and
in the Court of Appeal before Lawton, Oliver and Slade LJ) at pp 39 and 131 of
(1982) 265 EG;
(iii) Touche Ross & Co v Secretary of
State for the Environment (1982) 265 EG 982, [1983] 1 EGLR 123 (Lawton,
Griffiths and Dillon LJJ); and
(iv) Webber v Halifax Building Society [1985]
1 EGLR 58 (Judge Baker QC).
I must stress
at the outset that none of these decisions specifically decides the point of
law which I have to decide, but that point has, to put it at its lowest, been
assumed to be correctly decided in the sense for which the landlord contends in
the instant case, namely that the value for rent review purposes falls to be
determined as at the date of the surveyor’s determination and not at the
commencement of the review period in question.
Of these
decided cases, for my purposes the two reports of London & Manchester
are far and away the most helpful, not least because the rent review provisions
there were, so far as I can see, for all practical purposes the same as those
in the case before me. Indeed, it appears from the judgment of Peter Gibson J
that they have a common ancestor in the 1966 edition of the Encyclopaedia of
Forms and Precedents. If that be so, I can only hope that the defects
brought to light in London & Manchester and in the instant case will
result in urgent reconsideration of the normal rent review provisions to ensure
that they are unambiguous and comprehensive and hold a fair balance between
landlord and tenant. At present, in my view, they fail on all these points.
In London
& Manchester, the question of construction with which I am faced was
fairly and squarely raised in the originating summons which the plaintiff
landlord took out. Of three declarations sought, the third was that the
arbitrator, who had been appointed in accordance with what in the instant case
is clause 5(2)(c) of the lease:
should
determine the amount of the reviewed rent by reference to the rental values
current at the time of his award.
A further
declaration which was sought by the landlord was put shortly, that he was
entitled to invoke the rent review procedure notwithstanding that his notice
under clause 5(2)(a) had not been given until some considerable time after the
commencement of the first review period. As matters turned out, this was to
become the key issue in London & Manchester: and, as Peter Gibson J
pointed out, a remarkable feature of the rent review provisions was that,
strictly construed, there was no fixed date (such as the start of the review
period) for the date at which the open market rental value was to be
determined. That would be so in the instant case, but happily the point, on the
facts, does not arise.
Unfortunately
for me, counsel in London & Manchester had agreed at the outset that
the rental value fell to be determined at the time of that determination. That,
of course, in itself would not be sufficient to require Peter Gibson J to grant
the third declaration for which the landlord asked and he was quick to point
out that a determination by an arbitrator had to be made in accordance with the
Arbitration Act and that there could be considerable delays in working out this
procedure, particularly if (as has happened in the instant case) recourse was
had to the High Court. As to this, Peter Gibson J, after pointing out that
these provisions were applicable in respect of all the review periods,
including the third (which comprised the last four years of the term), said:
it is readily
apparent that the result of having the rental determined at the date of
determination could be very strange indeed.
I can only
wish that the learned judge had pursued his initial doubts as they have been
pursued before me. Be that as it may, the relevance of this passage from Peter
Gibson J’s judgment is that his doubts must clearly have been present in the
minds of the Court of Appeal when the lords justices had to consider his
decision. In the result, however, Peter Gibson J’s conclusion was that he could
see no escape from giving literal effect to the words of the lease ‘however
curious a result they could produce’.
In the Court
of Appeal, Peter Gibson J’s decision was upheld by a majority (Lawton LJ
dissenting), although the views of the majority (Oliver and Slade LJJ) can
scarcely be regarded as identical. Before the Court of Appeal the real question
in issue was whether the landlord’s notice, which had admittedly been given
well after the commencement of the relevant review period, was properly given.
As has been pointed out earlier, no terminal date for the giving of such notice
was expressly stated in the lease. But inevitably this led the court, in
varying degrees, to consider the timing of the rent review provisions as a
whole and the question (which I have to decide) which had in effect gone by
default (or agreement) before Peter Gibson J.
The
conclusions which the members of the Court of Appeal reached can be summarised
as follows.
Lawton LJ
(dissenting) concluded that the landlord had to serve any rent review notice
before the commencement of the first review period because the increased rent
was to be paid (during) that period. He further pointed out that the new rent
was to be a sum ‘in relation to the review period . . . determined . . . as
being at the time of such determination the annual rental value of the
demised premises in the open market . . .’ and he emphasised that if the
landlord could serve a rent review notice at any time before the end of the
first review period, the odd result would follow in a period of inflation that
the longer the landlord delayed setting the rent review procedure in motion the
higher the rent was likely to be for the whole of the rent review period.
‘This,’ he said, ‘cannot have been what the parties intended.’ He therefore concluded that the parties must
have intended that the rent review procedure should be set in motion before the
end of the first seven years and that the new rent would be determined either
before the rent review period stated or soon thereafter under the provisions of
clause 5(3): and he held that it was the landlord’s duty to keep strictly to
the rent review timetable.
I have
already ventured to suggest that the word ‘soon’ in the above paragraph might
be thought to be unduly optimistic, giving the opportunities for postponing any
effective and binding decision under clause 5(3).)
For the
majority, Oliver LJ accepted that on the views put forward by either side,
clause 5 fixed the expiration of the period of seven years (ie the start of the
first review period) as the latest date at which the landlord could invoke the
rent review procedure by means of a notice under clause 5(a). (I should here
add that before me there was some suggestion that the words ‘at any time’ in
clause 5(2)(a) mean what they say and that the giving of such notice by the
landlord was not restricted to the first review period: but that is not a point
which, on the facts of this case, I need pause to consider.) Oliver LJ also stated that he would be the
first to acknowledge that so to read clause 5 made very much better commercial
sense than the construction which Peter Gibson J had accepted, not least
because there was an obvious advantage to the tenant in knowing what he was
going to have to pay for the review period before it started, particularly when
the rent was payable in advance. Moreover, as Oliver LJ went on to say, the
construction which Peter Gibson J had upheld meant that when the rent for the
review period was eventually fixed (which might well be towards the end of the
review period and, I might add, possibly even after that period had expired) it
would be retrospective and might not bear any relation to what would have been
the appropriate market rent at the opening of the period. Finally, Oliver LJ
pointed out that it was not easy to find a sensible application for clause 5(3)
— what I might call the ‘catch-up’ provision — unless the contemplation was
that the rent review machinery would have been put into operation by the time
that the review period in question opened. He emphasised, however, that it was
not the landlord’s notice which brought clause 5(3) into operation but the
tenant’s election: and he concluded:
it seems to
me that it can be said only that the construction for which the defendants now
contend is one which produces a more sensible commercial result and is less
likely to lead to anomaly than the construction applied by the learned judge.
The latter construction is, in my judgment, that which accords with the natural
and ordinary meaning of the words used . . . In my judgment, . . . the words
appear to me to be quite clear and unambiguous . . . Anxious as I am to adopt a
view of this document which makes sound commercial sense, I do not feel able to
depart from what seems to me to be the clear meaning of the words. That that
clear meaning produces, as a result of the way in which clause 5 is framed,
some not very sensible commercial results does not, in my judgment, produce an
ambiguity or justify doing violence to the language which the parties . . .
have chosen to use.
Slade LJ, not
unnaturally, concentrated on the question as to the validity of the landlord’s
notice, given, as it was, well out of time: and
designating a latest date for the giving of such notice, namely, in relation to
the first review period the expiration of the first seven years of the lease,
none the less he held that this did not make time the essence of the contract:
and he accordingly concurred with Oliver LJ in dismissing the appeal. But on
the question with which I am concerned, Slade LJ said:
It has, I
think, been common ground throughout the argument in both courts that, in view
of the wording of clause 5(1), there is no question of the surveyor . . . being
required to make an ex post facto determination of the rent as at the
commencement of the relevant review period. He is required to determine it in
accordance with the clause 5(1) formula, but otherwise in the light of
market conditions prevailing when he makes his determination.
So much for London
& Manchester. As to Touche Ross, where a similar question arose
as to whether time was of the essence for the giving of a notice to trigger-off
the rent review provisions, the relevant clause in the lease defined the ‘fair
market rack rental’ as meaning the amount which would be the annual amount
obtainable ‘at the date of agreement or determination as aforesaid’.
Thus, so far as concerns the point which I have to decide, the language of the
definition was, if anything, even stronger than the language of the lease in London
& Manchester: and the Court of Appeal in fact decided that time was not
of the essence for the giving of a valid landlord’s notice notwithstanding that
it was out of time.
Finally, I was
referred to the decision of Judge Paul Baker QC in Webber where, on a
lease which had certain similarities with the case before me (including a
provision in the definition of open market rental as meaning ‘the sum in
relation to the review period determined in manner hereinafter provided as
being at the time of such determination the annual rental value of the demised
premises in the open market’), the learned judge nevertheless felt able, on the
basis of some verbal differences in the rent review provisions, to distinguish London
& Manchester and Touche Ross and to hold that the lease required
the new rent to be determined (as the tenant seeks to do before me) as at the
commencement of the relevant review period. I confess that I have not found the
judgment in Webber entirely easy to follow, but if I have understood it
correctly, there is nothing in it which would justify my reaching a similar
conclusion in the case before me.
I frankly
confess that I would have preferred to uphold the tenants’ construction of the
rent review machinery in the instant case, because it seems to me (as it did to
Oliver LJ in London & Manchester) to produce a far more sensible and
realistic commercial result. But although in London & Manchester the
question which I have to decide was not expressly decided and was merely — as
it were — taken as read, it would be almost an impertinence on my part to reach
a conclusion which would be so manifestly at variance with the thinking and
reasoning of distinguished lords justices.
Accordingly, I
make the declaration sought in the originating summons in accordance with para
1(i) thereof.
