Landlord and tenant — Construction of rent review clause — Determination of preliminary point of law under section 2 of Arbitration Act 1979 — Matter referred to court with consent of arbitrator — Appeal from decision of Lloyd J — Division of opinion in Court of Appeal — Dispute as to construction of provision which defined the ‘current rack rental value’ as the rent at which, inter alia, ‘the demised premises might reasonably be expected to be let for office purposes’ — Issue as to whether arbitrator should assume in determining the rent that planning permission for the use of the premises for offices had been granted or whether the de facto position at the time of the rent review should be regarded, with or without planning permission for the whole or parts as the case might be — Majority of Court of Appeal (Eveleigh and Griffiths LJJ), agreeing with Lloyd J, held that it should be assumed that the premises could be used for offices lawfully, ie with planning permission as one necessary attribute — The intention was to provide a yardstick on review which would avoid uncertainty — Kerr LJ, dissenting, considered that this view involved writing an additional assumption into the review clause (additional to certain assumptions which were
This was an
appeal by tenants, G C Flooring & Furnishing Ltd, from a decision of Lloyd
J (reported at (1982) 266 EG 1005) in which he determined a preliminary point
of law on the construction of a rent review clause in favour of the landlords,
Bovis Group Pension Fund Ltd. The clause was contained in a subunderlease of
premises at 41-42 Berners Street, London W1.
Anthony
Thompson QC and Ian D Grainger (instructed by Zeffertt, Heard & Morley
Lawson) appeared on behalf of the appellants; Ronald Bernstein QC and David
Neuberger (instructed by Masons) represented the respondents.
Giving
judgment, EVELEIGH LJ said: This is an appeal on the decision of Lloyd J on an
application for the determination of a preliminary question of law, arising in
the course of a reference under section 2(1) of the Arbitration Act 1979. The
matter for his determination was drafted in this form:
A
determination under section 2 of the Arbitration Act 1979 that upon a true
construction of a lease made on May 8 1972 between Audley Properties Ltd (1)
The respondent (then known as G C Flooring Ltd) (2) and Lional David Mendoza
and Stanley Houghton (3) and in particular clause 6(b) thereof, the current
rack rental value of the premises the subject of the lease is to be assessed:
(1) on the basis that the said premises may lawfully be used for office
purposes under the Town and Country Planning Act 1971 as at May 8 1981 (2) on
the basis that the said premises may lawfully be used for such purposes as are
actually permitted under the Town and Country Planning Act 1971 as at May 8
1981 (3) On some other (and if so what) basis.
The learned
judge very clearly set out the necessary material for the determination of the
question. I shall adopt his very words in doing that. He said:
The question
turns on the construction of a rent review clause in a lease. It is said to
raise a point of some general importance. The lease, or more accurately, the
subunderlease, is dated May 8 1972. It relates to premises at 41-42 Berners
Street, London W1. The premises consist of a basement, ground floor and five
other floors. They are in multiple occupation.
The
claimants, Bovis Group Pension Fund Ltd, are the successors in title to the
landlords named in the lease. The respondents, G C Flooring & Furnishing
Ltd, are the tenants. The lease is for 25 years from May 8 1972. There is
provision for rent review every five years. I am concerned with the second rent
review for which the review date was May 8 1981.
The parties
were unable to agree on the revised rent. The matter came before Mr Jack Collis
JP, of De Groot Collis & Co, as arbitrator. He held a preliminary meeting
on March 17 1982. In the course of that meeting it became apparent that there
was a fundamental difference between the parties as to the correct construction
of the rent review clause. Very sensibly, if I may say so, it was agreed
between the parties that the question of construction should be referred, with
the consent of the arbitrator, to the court for a decision under section 2 of
the Arbitration Act 1979. Very sensibly also, the parties agreed alternative
figures for the revised rent according to which of the two possible meanings of
the rent review clause is held to be correct. Once the court has decided that
question of construction, the arbitrator will have nothing left to do but to
issue his award accordingly. If the claimants are right, the rent will be
£85,000 per annum. If the respondents are right, the rent will be £75,000 per
annum.
The lease
contains, in clause 2(14), a user clause which is worthy of a place in the law
reports even if nothing else in this judgment is. It provides that the tenants
should not permit or suffer the premises to be used for:
‘. . . any of
the trades hereinafter mentioned (that is to say) the trades of a brewer
distiller vintner victualler or retailer of beer coppersmiths cooper trunkmaker
coachmaker working brazier founder melter of iron working smith letter press
founder printer pipe burner tripe boiler baker sugar baker scavenger nightman
butcher slaughterman farrier dyer tanner fellmonger fishmonger cheesemonger soap
boiler melter of tallow maker of varnish maker of grease for carriages flayer
of horses dealer in old iron or second hand clothes or second hand boots or
shoes blacking maker or hat manufacturer nor use nor permit the demised
premises or any part thereof to be used as or for a brothel or for any purposes
of gambling or for beating of carpets or beds or for a coal shed or for any
other offensive or noxious trade or business’ — and then it ends — ‘and in
particular will only allow the said premises to be used as professional
offices.’
Clause 6(a)
provides the machinery for the rent review. I need not refer to it further
except to say that it provides that the revised rent is to be equal to the
current rack rental value. Clause 6(b) defines current rack rental value for
the purposes of the clause as being:
‘the rent at
which having regard to the terms hereof (other than as to rent and user) the
demised premises might reasonably be expected to be let for office purposes
without premium in the open market by a willing lessor to a willing lessee it
being assumed that the demised premises are to be let with vacant possession
and in good repair and condition and for the residue of the said term remaining
unexpired at the commencement of the relevant revision year or (in the case of
revision other than in a revision year) at the commencement of the last
preceding revision year as the case may be no account being taken of any
goodwill attributable to the demised premises by reason of the trade or
business carried on therein by the lessee or any subunderlessee.’
The dispute
between the parties turns on the meaning of the first few lines of that clause,
and in particular on the words ‘the rent at which . . . the demised premises
might reasonably be expected to be let for office purposes.’
The claimants
say that you assume, for the purpose of the notional lease, that there is
planning consent for the notional user, namely, office purposes. The
respondents say that you take the actual user at the time of the rent review.
According to
an affidavit of Mr Stuart Sandler, a partner in the firm of Messrs Smith,
Melzack & Co, who had the management of these premises for many years past,
the permitted user under the various subleases at May 8 1981 was as follows:
‘The basement,
the ground floor and the first three floors, showrooms and stock rooms with
ancillary offices. The fourth floor and the fifth floor offices’.
As I
understand it, no planning consent for the use of the building as a whole for
offices has ever been granted.
The issue
between the parties is crystallised in the memorandum prepared by the
arbitrator dated May 13 1982. Para 5 of that memorandum provides:
‘The parties
have further agreed that the rental of the demised premises as at the date of
review aforesaid shall be £85,000 per annum related to full office user or
£75,000 per annum if based upon the actual user, where same varied from office
user and which would be subject to consideration of the planning regulations as
may be applicable.’
Lloyd J
answered the question by saying that the value should be assessed on the first
basis, namely that the premises may lawfully be used for office purposes. The
appellants appeal to this court and say he is wrong.
When I am
faced with a construction problem I prefer, in seeking to determine it, to read
the clause in question and any relevant associated provisions in the document —
in this case the lease — and then ask myself what the clause in question means,
and I confess that when I approached the matter in that way in this case I came
to the same conclusion as the learned judge. However, there does appear to be
uncertainty in the clause. The arguments before us in this court have revealed
possible alternative constructions, and indeed the very fact that the question
is before the court for determination is an indication at least of that.
Therefore, I approached the problem by reminding myself of the words of Lord
Cottenham LC in the case of Lloyd v Lloyd (1837) 2 Myl & Cr
192 at p 202 to this effect.
If the provisions
are clearly expressed, and there is nothing to enable the court to put upon
them a construction different from that which the words import, no doubt the
words must prevail; but if the provisions and expressions be contradictory,
and I would
insert there, ‘unclear’
and if there
be grounds, appearing upon the face of the instrument, affording proof of the
real intention of the parties, then that intention will prevail against the
obvious and ordinary meaning of the words. If the parties have themselves
furnished a key to the meaning of the words used, it is not material by what
expression they convey their intention.
Bearing in
mind in this case that these premises at the date of the lease — and that is an
important date to consider — were let for a variety of purposes to tenants
holding subunderleases, it seems to me that the intention which emerges is to
provide some yardstick that will lead to certainty when the day arrives in the
future for the rent revision clause to be applied, and the parties chose as
that yardstick something for which the premises were not in fact being used at
the date of the lease, namely office premises. They were choosing in effect an
agreed use, namely office use, as the basis for rent which was to be assessed
in 10 years’ time, and they envisaged, as I see it, for that assessment
premises which would be in a state of being used as offices — and that must
mean lawfully used: in other words, premises which had the character of office
premises capable of being used as such — planning permission would be one
attribute of those premises. In that way it seems to me the parties strove to
achieve certainty. The clause indicates to me that the valuer has to assume
that there are these premises in use as offices. The clause uses the phrase
‘let for office purposes’. That, to my mind, is another way of describing the
premises as office premises. The object is to value the premises on the basis
that you are able to let them for office purposes. It seems to me that that is
saying that we are concerned to determine the value of these premises as office
premises. If estate agents were to advertise premises with an announcement,
‘These valuable premises are to be let for office purposes’ and stipulated a
rent, that would convey, to my mind, to any prospective purchaser the message
that he could lawfully use those premises for office purposes.
We are not
seeking here to value a lease with a user clause permitting office use when in
fact it may or may not have real office value, and the fact that a property can
be let with a permitted purpose that requires planning permission does not, to
my mind, show it is being let as such premises. It is a different case.
The appellants
here say that the clause literally read means that you must take the premises
as you find them, you must assume a lease which says ‘for use as offices’ inter
alia, and you must take a lessee who takes the lease with a chance of
obtaining planning permission, or maybe with the intention of obtaining
planning permission, for use as offices. To my mind that produces uncertainty,
which I cannot think that the parties to this lease ever intended. As was said
in argument, ‘They have chosen a yardstick, but it would be made of elastic’.
I have not set
out in detail the argument of Mr Thompson for the appellants — and I mean no
disrespect to him in not doing so — as it is set out in the judgment of the
learned judge; it was developed upon the lines indicated in that judgment
before us with great skill and, may I say from my point of view, evoking great
interest. One further point that he argued was that the solution arrived at by
the learned judge involved inserting words into the clause, namely the words,
‘with planning permission’. That was an argument that he advanced below and in
support of that argument he referred the court to the case of Trollope &
Colls Ltd v North West Metropolitan Regional Hospital Board [1973] 2
All ER 260, and in particular to the words of Lord Pearson at p 265 where he
repeated the well-known rule that the court will not insert a provision into an
agreement when it is not necessary to do so in order to give business efficacy
to it. With respect to Mr Thompson’s argument on that point, this is not a case
of inserting a provision for the purpose of giving business efficacy or for any
purpose at all, as I see it. It is not one in that line of cases. Once you have
determined the meaning of the words the effect of the document is clear, and so
the landlords are not, as I see it, asking the court to insert words to give
business efficacy. That is not the way in which they put their case. They say
the words properly construed have a perfectly effective business meaning.
I would
dismiss this appeal.
Agreeing,
GRIFFITHS LJ said: We are concerned here to construe a commercial lease for a
period of 25 years, entered into in 1972. The properties comprised in the lease
were two houses in Berners Street, in the West End of London, and as was to be
expected they commanded at that date a substantial rent of £30,000 a year. But
living in an inflationary age, as we do, no lessor in his right mind lets
commercial property for a substantial period of years without insisting on
having a rent revision clause in the lease. The purpose of the rent revision
clause is to provide that the rent can be revised upwards at various stages in
the course of the term of years so that it represents throughout the term a
fair rental for the property.
It seems to me
that it must have been the intention of both parties to the lease that it
should be possible, without too much difficulty, to anticipate the likely rent
that would have to be paid when the revision dates came round. That is in the
interest of both the landlord and the tenant. The tenant may have to take a
decision as to whether or not he is going to be able to afford to stay in the
premises at the revised rent or whether he has now got to lay his plans on the
basis of not being able to afford it and has to sell the remainder of his term.
With that in
mind I turn to the clause. I read the clause as indicating an intention to use
the going rate for office space in the Berners Street area at the time of the
rent review as the yardstick by which the rent is to be fixed. The assessment
of that figure should present no difficulty to an experienced surveyor and
indeed I would expect most commercial users to have a very good idea of what
office space was fetching per square foot in their area and thus be able to
anticipate their rent increase with a very fair degree of accuracy without the
need to have any professional assistance. But once one introduces the concept
of valuing the premises for office use for which planning consent is required
the calculation becomes infinitely more difficult; it requires the
consideration of a multiplicity of factors upon which there may be room for
very wide differences of opinion, and I cannot believe that it could have been
the intention of the parties to introduce such uncertainties as, for example,
the possibility of a change in the political complexion of the local authority
with the possible consequent change in their planning policies into the
calculation of the revised rent. But this, it seems to me, is a necessary
consequence of adopting the appellants’ construction. Furthermore, it might
lead to this very curious result; that it will entirely defeat the real object
of the rent revision clause, because it is not impossible to conceive a
situation in which a local authority set its face against any further office
letting at all, and in that case when the time for the rent revision came round
the market price that it would fetch from someone who was taking a chance on
being able to get office user, so far from reflecting any increase in rent,
might very well reflect a decrease in rent. I cannot believe, from looking at
the realities of the situation, that either party could have had that concept
in mind.
I find myself
in agreement with Lloyd J when he said ((1982) 266 EG at p 1006): ‘It seems to
me quite obvious, if I may say so, that in requiring the arbitrator to go
through that notional exercise they required him to assume that planning
permission for the notional user had been granted’. It seems to me that the
appellants’ construction involves reading words into this clause. On the
appellants’ construction the surveyor is not required to value the premises on
the basis of what they could reasonably be expected to be let for office
purposes but to value them on what the demised premises reasonably might be
expected to be let — and here I interpolate — ‘to a tenant who hopes to be able
to use the premises’ — end of interpolation — for office purposes, and that is
not what the clause says.
I am not
impressed by the argument that because certain assumptions are directed to be
made by the surveyor it must therefore follow that he is not to assume that
these premises can lawfully be let for office purposes. It seems to me that
there are obvious reasons why the assumptions had to be put in when one looks
to see what they are dealing with. They all deal with the physical condition of
the premises, and all assume a different condition to that which will almost
certainly exist at the time of the surveyor’s valuation. The premises will
probably not be vacant, and one can fairly readily assume that in the middle of
the term they will not be in the good repair and condition that the covenants
of the lease require. It is therefore necessary that these explicit assumptions
are spelled out in the wording of the clause. But that does not lead me to
conclude that because planning permission is not dealt with as an assumption
that is any ground for construing this clause in a way which would introduce an
uncertainty which it could never have been the intention of the parties to
introduce into this calculation, and accordingly I think this appeal should be
dismissed.
Dissenting,
KERR LJ said: Each of the parties in this case appointed a surveyor for the
purpose of determining the appropriate rent, and the two surveyors agreed that
on the respondent landlords’ construction of clause 6(b) the appropriate annual
rent was £85,000 and on the appellant tenants’ construction it was £75,000. The
issue as to the correct construction of clause 6(b) then came before the
arbitrator, and he submitted it to the court for determination under section 2
of the Arbitration Act 1979. The case provides an encouraging illustration of
the working of that Act. The task of the court is to decide between these two
interpretations of clause 6(b). Both Lloyd J and the majority of this court
favour the landlords’ interpretation. The only rift in the lute, which I
regret, is that on weighing the arguments I have been driven to the opposite
conclusion.
I agree that
the point of construction is a short one; it is a matter of impression and
largely of first impression. Unfortunately, my impression differs from that of
my lords and from that of Lloyd J. Clause 6(b) requires the determination of a
current rental value on a hypothetical basis. This basis is to be the rent at
which these premises ‘might reasonably be expected to be let for office
purposes’. That is the yardstick to be applied, supplemented by the words
‘without premium in the open market by a willing lessor to a willing lessee’.
However, this yardstick is to be applied on the basis of certain assumptions,
viz the matters listed in clause 6(b) after the words ‘it being assumed’. In
this connection it is common ground, as illustrated by the speech of Lord
Pearson in Trollope & Colls Ltd v North West Metropolitan
Regional Hospital Board [1973] 2 All ER 260, particularly in the passage at
the bottom of p 267 and the top of p 268, that no assumptions may be read into
the clause other than those which are stated in it.
The judge
dealt with what I see to be the issue as follows, in a very clear formulation
of his reasoning:
I agree with
Mr Thompson
counsel for
the appellant tenants
this far,
that my task is to construe the words as they stand without reading in anything
unless I must. But I do not agree that the claimants’ construction involves
reading in anything at all. The question, quite simply, is what the parties
intended when they required the arbitrator to assess the rent at which the
premises might be expected to be let for office purposes; having already
required the arbitrator to disregard the actual user permitted under the
existing lease. It seems to me quite obvious, if I may say so, that in
requiring the arbitrator to go through that notional exercise they required him
to assume that planning permission for the notional user had been granted. It
is true that there is no express reference to that assumption in clause 6(b),
but to my mind it is an assumption which is inherent in the exercise itself;
otherwise, as Mr Bernstein submitted, it is difficult to see what object the
parties can have had in mind in referring to office purposes at all.
The crucial
question to my mind is whether the learned judge is right in saying that this
‘is an assumption which is inherent in the exercise itself’ — the assumption
that planning permission for office purposes would have been granted. I do not
see that this is so, and in my view the facts demonstrate it. Both surveyors
agree that if planning permission is assumed to have been granted for using the
premises ‘for office purposes’ then the appropriate rent is £85,000, but if no
assumption of any kind is made about such planning permission then the
appropriate rent is £75,000. The figure of £85,000 is therefore, in my view,
arrived at on the basis of an assumption additional to those illustrated in the
clause, whereas the figure of £75,000 is arrived at on the basis of the
situation as it in fact is without making any assumption whatever in this
regard.
The latter
interpretation of the clause has not only been shown to be a possible way of
giving effect to this provision but also a way which appears to be in
accordance with commercial realities; at any rate no one has suggested the
contrary. Both surveyors agree on both figures without qualification. No one
has suggested that the valuation at £75,000 without prior planning permission
rests on anything unlawful, and there is nothing to show that there was any
difficulty or uncertainty about arriving at that figure, or indeed any figure,
on the tenants’ interpretation of the clause.
In these
circumstances I do not agree that the assumption that planning permission for
office purposes will have been granted is ‘inherent in the exercise itself’, to
use the judge’s words. The assessment of the rent at £85,000 in my view
involves writing this additional assumption into the clause which is not
inherent in it and for which there is no necessity. Accordingly, I would not
make this assumption in construing the clause, and for myself I would have
allowed this appeal.
The appeal
was dismissed with costs. Leave to appeal to the House of Lords was refused.
