Landlord and tenant — Rent review clause in lease — Construction — Application made by landlords for leave to appeal under section 2(3) of the Arbitration Act 1979 and for the necessary qualifying certificate
sought a declaration as to the true construction of rent review provisions in a
lease for a term of 98 years from September 1975 of premises at 99 Bishopsgate,
London EC2 — The lease provided for 14 successive rent periods, the initial
rent reserved being £1,531,250, which then represented about 50% of the initial
yearly rental value of the demised premises — The lease was an ‘equity sharing
lease’ — The rent review provisions provided that the rent during each of the
subsequent rent periods should be whichever was the greater of the rent payable
during the last relevant year or 50.6% of the yearly rental value of the
demised premises as at the appropriate date — The yearly rental value of the
demised premises was the amount agreed or determined as representing a fair
yearly rent, having regard to rental values current for property let without a
premium with vacant possession and to the provisions of the actual lease
‘(other than the rent hereby reserved)’ — The issue was whether these words in
brackets were intended to exclude all the provisions as to rent reserved in the
actual lease, or none of these provisions or only the rent review provisions,
and, if only the rent review provisions, what part if not all of them
brackets were intended to exclude from the hypothetical lease only the quantum
of rent payable from time to time by the actual tenant under the actual lease
was preferred — The effect of this construction was to exclude the reference to
the fixed percentage of 50.6% from the hypothetical rent, since it was merely a
term as to the quantum of rent — The practice of trying to find answers by
looking at decisions on other rent review clauses was to be criticised, but the
Vice-Chancellor’s guidelines in British Gas Corporation v Universities
Superannuation Scheme was followed — The accepted construction was in
accordance both with the natural and ordinary meaning of the words and with the
underlying commercial purpose of rent review clauses — The exclusion from the
hypothetical lease of the reference to the fixed 50.6% of the yearly rental
value was analogous to the exclusion of the £7,500 premium in the case of Guys
‘n’ Dolls Ltd v Sade Brothers Catering Ltd — A declaration in favour
of the tenants’ construction and an order for payment of costs by the landlords
landlords’ application under section 2(3) of the Arbitration Act 1979 for leave
to appeal to the Court of Appeal and for the necessary certificate which was a
condition of appeal — The question was not one of general public importance and
therefore the landlords had to rely on the existence of a special reason
justifying the grant of a certificate — They relied on the large sums involved
but this did not constitute a special reason for the grant of a certificate and
it was refused; consequently leave to appeal was refused
The following
cases are referred to in this report.
Amax
International Ltd v Custodian Holdings Ltd
[1986] 2 EGLR 111; (1986) 279 EG 762
Antaios
Compania Naviera SA v Salen Rederierna AB
[1985] AC 191; [1984] 3 WLR 592; [1984] 3 All ER 229; [1984] 2 Lloyd’s Rep 235,
HL
Babanaft
International Co SA v Avant Petroleum Inc
[1982] 1 WLR 871; [1982] 3 All ER 244; [1982] 2 Lloyd’s Rep 99
Basingstoke
and Deane Borough Council v Host Group Ltd [1988]
1 WLR 348; [1988] 1 All ER 824; (1987) 56 P&CR 31; [1987] 2 EGLR 147; 284
EG 1587, CA
British
Gas Corporation v Universities Superannuation
Scheme Ltd [1986] 1 WLR 398; [1986] 1 All ER 978; (1986) 52 P&CR 111;
[1986] 1 EGLR 120; 277 EG 980
Equity
& Law Life Assurance Society plc v Bodfield
Ltd [1987] 1 EGLR 124; (1987) 281 EG 1448, CA
Guys
‘n’ Dolls Ltd v Sade Brothers Catering Ltd
(1983) 269 EG 129, [1984] 1 EGLR 103, CA
This was an
originating notice of motion by the landlords, Prudential Assurance Co Ltd,
under section 2 of the Arbitration Act 1979, to determine questions of law
arising in the course of an arbitration on the rent review provisions of a
lease of 99 Bishopsgate, London EC2. The defendants were the tenants, 99
Bishopsgate Ltd.
Christopher
Priday QC and Paul Morgan (instructed by Mr M C Gilbey, solicitor to Prudential
Assurance Co Ltd) appeared on behalf of the plaintiffs; Terence Cullen QC and
Miss Carolyn Walton (instructed by Stephenson Harwood) represented the
defendants.
Giving judgment,
MUMMERY J said: This is an application by originating notice of motion
under section 2 of the Arbitration Act 1979 to determine various questions of
law arising in the course of a reference to a chartered surveyor as arbitrator
pursuant to the provisions of a rent review clause in a lease. The application
is made with the consent of the parties to current arbitration proceedings as
to the rental value, as at March 25 1989, of premises at 99 Bishopsgate, London
EC2, demised by lease dated September 29 1975. The Prudential Assurance Co Ltd
are the landlords. The original lessee was Bishopsgate Developments Ltd. The
residue of the term of 98 years from September 29 1975 was assigned to 99
Bishopsgate Ltd on June 24 1976.
The lease
provides for 14 successive rent periods. The first rent period ran from the
date of the lease until September 29 1982. During that first rent period the
reserved rent was the ‘initial rent’ of £1,531,250, that is just over 50% of
the ‘initial yearly rental value’ as defined in clause 1(f) of the lease: see
also clauses 1(c) and 2(a)(1). There then follow 12 successive periods of seven
years each, the first commencing on September 29 1982, and then the balance of
the term. It is provided in clause 2(a)(2) that the rent reserved during each
of the subsequent rent periods should be a yearly rent of whichever should be
the greater of:
(i) The yearly rent payable during the last year
of the last preceding rent period, or
(ii) 50.6 per cent . . . of the amount of the
yearly rental value of the demised premises as at the last quarter day but one
before the end of the last preceding rent period . . .
It is common
ground that the lease is a ‘speculative development’ or ‘equity sharing’ lease
which, in effect, provides for the yearly rental value of the premises to be
shared between the parties.
The expression
‘the yearly rental value of the demised premises’ is defined in clause 1(d) of
the lease. The construction of that definition has given rise to a disputed
question of law which this court is asked to decide. Omitting immaterial parts,
the definition reads:
(d) ‘The yearly rental value of the demised
premises’ as at the last quarter day but one before the end of a rent period shall
mean the amount agreed at any time between the landlords and the Lessee as the
yearly rental value of the demised premises as at such day on the bases
specified by this sub-clause or failing agreement before such day the amount
determined as the yearly rental value of the demised premises as at such day on
the said bases by an arbitrator such arbitrator to be a Fellow of the Royal
Institution of Chartered Surveyors and failing agreement between the parties as
to the person to be appointed such arbitrator to be nominated by the President
for the time being of that Institution on the application of the Landlords or
the Lessee not earlier than the quarter day but one before or at any time after
such day and so that in the case of such arbitration the amount to be
determined by the arbitrator shall be the amount which shall in his opinion
represent a fair yearly rent for the demised premises as at such day having
regard to rental values current as at such day for property let without a
premium with vacant possession and to the provisions of this Lease (other
than the rent hereby reserved) . . .
(Emphasis
added.)
The question
of law which has arisen concerns the meaning of the words ‘(other than the rent
hereby reserved)’. For the purposes of the valuation exercise to be conducted
by the arbitrator, a hypothetical letting of the premises is assumed to take
place and to be subject to the provisions of the actual lease ‘(other than the
rent hereby reserved)’. The issue is whether these words exclude all the provisions
as to rent reserved in the actual lease, or none of those provisions, or only
the rent review provisions, and what part, if not all, of the rent review
provisions.
The landlords’
primary contention is that the clear effect of the words in brackets is to
exclude from the hypothetical letting the reservation of rent and the
provisions as to the reservation of rent contained in the lease, ie clause
2(a)(1), which refers to the initial rent reserved during the first rent
period, and clause 2(a)(2)(i) and the first six lines of clause 2(a)(2)(ii), as
quoted above, referring to the rent reserved during each of the subsequent rent
periods.
The landlords’
alternative contention is that if the words in brackets do not exclude all
those provisions relating to the reservation of rent in clause 2(a)(1) and (2)
then all of those rent reservation provisions should have full effect in the
hypothetical lease, including the provision in clause 2(a)(2)(ii) which refers
to the 50.6% of the amount of the yearly rental value of the premises.
The lessee’s
construction falls somewhere between the two constructions proposed by the
landlords. The lessee contends that the words in brackets do not exclude from
the hypothetical lease all the rent reservation provisions contained in clause
2(a), nor do they have the effect of including all those provisions in the
hypothetical lease. The construction advanced by the lessee is that the words
in brackets have the effect of excluding from the hypothetical lease only the
quantum of rent payable from time to time by the actual tenant under the actual
lease. The effect of this construction is to exclude the reference to the fixed
percentage of 50.6% at the beginning of clause 2(a)(2)(ii) from the
hypothetical lease, since it is a term as to the quantum of rent.
The lessee has
an alternative argument that the landlords are estopped per rem judicatam
from asserting that the hypothetical lease does not contain the rent review
provisions of the actual lease and from asserting that the hypothetical lease
provides for the initial rent payable thereafter to be reviewed every seven
years to a rent which is 50.6% of the yearly rental value of the premises.
Those arguments are based on the conduct of the landlords in relation to an
earlier arbitration which led to an award on June 21 1983 in respect of the
rent payable for the second rent period from September 29 1982. A point taken
by the landlords on the construction of the rent review provisions was
unsuccessfully appealed by the landlords to the Court of Appeal in January
1985*.
*Editor’s
note: Reported at [1985] 1 EGLR 72.
It was
unnecessary for me to hear arguments on the estoppel point at this stage, since
it was agreed between leading counsel for the parties that, in the interests of
saving costs and time, the construction point should be argued and decided
first, and that it would be necessary for the estoppel point to be argued only
if the landlords were successful on their primary or alternative contentions.
In my
judgment, the lessee’s construction of the words ‘(other than the rent hereby
reserved)’ is to be preferred. I have reached this conclusion in the following
way:
1 I approach the question of construction on
the basis that the function of the court is to construe these particular rent
review provisions in this particular lease and that, in construing the words
‘(other than the rent hereby reserved)’, it is both wrong and likely to lead to
confusion and error for this court to rely on decisions of other courts on
other documents as an aid to the construction of this lease: see Equity
& Law Life Assurance Society plc v Bodfield Ltd [1987] 1 EGLR
124, at p 125C-D. As was observed in Basingstoke and Deane Borough Council
v Host Group Ltd [1988] 1 WLR 348*, at p 353D, the function of the court
is to ascertain the intention of the parties expressed in the language used,
having regard to the context provided by the whole document and the matrix of
the material surrounding circumstances, including the commercial purpose of the
provision in question.
*Editor’s
note: Also reported at [1987] 2 EGLR 147.
2 It is permissible to follow guidelines for
the correct approach to the construction of particular types of provision.
‘Rough guidelines’ for the construction of rent exclusion provisions in rent
review clauses were stated by the Vice-Chancellor in his judgment in British
Gas Corporation v Universities Superannuation Scheme Ltd [1986] 1
WLR 398† , at p 403, and were approved by the Court of Appeal in the Equity
& Law case (supra) at p 125D-F. The Vice-Chancellor stated:
In my
judgment the correct approach is as follows: (a) words in a rent exclusion
provision which require all provisions as to rent to be disregarded
produce a result so manifestly contrary to commercial common sense that they
cannot be given literal effect; (b) other clear words which require the rent
review provision (as opposed to all provisions as to rent) to be disregarded (such
as those in the Pugh case (1982) 264 EG 823, [1982] 2 EGLR 120) must be
given effect to, however wayward the result; (c) subject to (b), in the absence
of special circumstances, it is proper to give effect to the underlying
commercial purpose of a rent review clause and to construe the words so as to
give effect to that purpose by requiring future rent reviews to be taken into
account in fixing the open market rental under the hypothetical letting.
† Editor’s
note: Also reported at [1986] 1 EGLR 120.
The
Vice-Chancellor added that these are not intended to lay down mechanistic rules
of construction, as opposed to principles of construction, and as Dillon LJ
observed in the Equity & Law case (supra), at p 125G, those
guidelines do not entitle a court to construe and apply a clause which the
parties might have entered into but, on the true construction of the relevant
provisions, have not in fact entered into.
3 There is no dispute that the underlying
commercial purpose of a rent review clause, to which effect should be given if
the relevant words allow, is the protection of a landlord from a situation in
which, as a result of increases in property values or falls in the real value
of money in an inflationary period, a fixed rent has become outdated and unduly
favourable to the tenant. Consistently with this purpose, the lease which is
hypothesised in rent review provisions should be on the same terms (other than
as to quantum of rent) as those still subsisting between the parties under the
actual lease. As was observed in the Basingstoke case, at p 354D:
Of course
rent review clauses may, and often do, require a valuer to make his valuation
on a basis which departs in one or more respects from the subsisting terms of
the actual existing lease. But if and in so far as a rent review clause does
not so require, either expressly or by necessary implication, it seems to us
that in general, and subject to a special context indicating otherwise in a
particular case, the parties are to be taken as having intended that the
notional letting postulated by their rent review clause is to be a letting on
the same terms (other than as to quantum of rent) as those still subsisting
between the parties in the actual existing lease. The parties are to be taken
as having so intended, because that would accord with, and give effect to, the
general intention underlying the incorporation by them of a rent review clause
into their lease.
4 Bearing in mind that approach and the
guidelines laid down by the Vice-Chancellor, I turn to consider the natural and
ordinary meaning of the words ‘(other than the rent hereby reserved)’ in their
context. Like Hoffmann J, who had to consider the identical words in Amax
International Ltd v Custodian Holdings Ltd [1986] 2 EGLR 111, at p
112D-E, I am of the view that the natural meaning of the words in brackets is
to exclude from the hypothetical lease the amount of the rent which the tenant
actually has to pay under the existing lease. I see no difference between the
specific amount
actual amount arrived at for subsequent rent periods. The words in brackets do
not, as a matter of construction or of necessary implication, clearly exclude
all the provisions relating to the reservation of rent and the machinery for
reviewing the amount of rent reserved from time to time. I also agree with
Hoffmann J that, at their lowest, the words in brackets are capable of a
meaning which excludes from the hypothetical letting only the quantum of rent
payable under the actual lease. A construction should be favoured for those
words which promotes, rather than frustrates, the overall commercial purpose of
the rent review provisions, ie one which does not exclude future rent reviews
but only excludes the sums of rent payable under the actual lease.
5 On such a construction the reference in
clause 2(a)(2)(ii) to the fixed 50.6% should be excluded from the hypothetical
lease, and I can see no special context requiring or indicating otherwise. The
application of that fixed percentage to the yearly rental value is a mechanical
exercise in quantifying from time to time the actual amount of rent which the
lessee should pay from time to time under the existing lease. The fixed
percentage presupposes that the amount of the yearly rental value of the
premises has been arrived at. That percentage is then applied to that value in
order to produce a figure which, if greater than the figure specified in clause
2(a)(2)(ii), will be the amount of revised rent payable for the relevant
subsequent rent period. The fixed percentage has no more relevance to the
valuation exercise which involves a hypothetical lease than those provisions of
the actual lease which specify a fixed amount of rent in pounds and pence, or
than terms, such as those considered in Guys ‘n’ Dolls Ltd v Sade
Brothers Catering Ltd (1983) 269 EG 129, [1984] 1 EGLR 103, which provide
for the addition of a fixed amount of premium over the fair rate rental market
value agreed or ascertained on a rent review.
6 Mr Priday QC, for the landlords, placed
considerable reliance on the decision of the Court of Appeal in the Equity
& Law case, where the words ‘upon the terms of this lease other than as
to . . . rent’ in relation to a hypothetical lease were held to exclude the
complex rent review machinery which included a requirement that a sum equal to
the amount by which 85% of the net rental value exceeded the stated sum of
£28,500 be paid by way of additional rent or increased additional rent. The
overall effect was to require payment of a rent less than the net rental value,
the ascertainment of which was the whole object of the valuation exercise on
rent review. The Court of Appeal held that in view of those percentage discount
provisions the rent review provisions with which they were bound up could not
be imported into the hypothetical letting. What had to be determined on the
hypothetical letting was the best rent which the premises might reasonably be
expected to fetch on the open market and not 85% or some other percentage of
the best rent. The provisions of the lease in that case were so different from
the present that I am not tempted to disregard Dillon LJ’s warning in the Equity
& Law case about decisions on different documents in other cases.
I therefore
find in favour of the construction proposed by the lessee. I would add that the
same construction will also apply to the reference to 50.6% in clause 6(iii)(c),
which sets out the definition of the expression ‘the initial rent’ in any new
lease granted in consequence of the lessee’s exercise of an option to renew the
lease. I will now hear argument as to the terms in which I should make the
appropriate declaration, and other matters such as costs.
After a
discussion of the form of the judge’s order and costs, the judgment continued
as follows:
I have given
judgment on the question of law raised by the originating notice of motion. I
will make a declaration along the lines set out in para 5.4 of the points of
defence which have been filed in the arbitration, and I would ask that a minute
of order containing the form of declaration be agreed between junior counsel
and lodged with the court.
I will make an
order that the costs of this application be paid by the Prudential Assurance Co
Ltd to 99 Bishopsgate.
I will now
deal with the application which has been made by Mr Priday on behalf of the
Prudential Assurance Co. That is an application for leave to appeal to the
Court of Appeal and for a certificate. The need for leave and for a certificate
of the High Court arises from the provisions of section 2(3) of the Arbitration
Act 1979, which is in these terms:
A decision of
the High Court under
— subsection
(1) above —
shall be
deemed to be a judgment of the court within the meaning of section 27 of the
Supreme Court of Judicature (Consolidation) Act 1925 (appeals to the Court of
Appeal), but no appeal shall lie from such a decision unless —
(a) the High Court or the Court of Appeal gives
leave; and
(b) it is certified by the High Court that the
question of law to which its decision relates either is one of general public
importance or is one which for some other special reason should be considered
by the Court of Appeal.
I consider the
question of the certificate first. It is accepted by Mr Priday that he cannot
argue in this case that the question is one of general public importance. There
is no question of the rent review clause in this case being in a common form
found in precedent books so that it would be desirable in the public interest
to have the validity of a common form rent review clause considered by the
Court of Appeal. Nor does Mr Priday contend that there is any new question of
principle involved or any challenge to established principles of construction
of rent review clauses, such as the rough guidelines laid down by the
Vice-Chancellor and approved by the Court of Appeal in the Equity & Law
case.
So the
question whether I should grant a certificate comes down to whether I am
satisfied as to the existence of a special reason for this matter being
considered by the Court of Appeal. On that matter I have in mind the remarks
which have been made in the Court of Appeal in the case of Babanaft
International Co SA v Avant Petroleum Inc [1982] 1 WLR 871 and by
the House of Lords in Antaios Compania Naviera SA v Salen Rederierna
AB, a case in [1985] AC 191.
The submission
of Mr Priday on special reasons really came to this, that there was a special
reason for having the question of law in this case considered by the Court of
Appeal because of the large sums involved on the rent period, which is under
consideration and which will affect subsequent rent periods and which, in turn,
will have an effect on the value of the reversion and of the term.
In my
judgment, the fact that large sums are involved, as they undoubtedly are, does
not constitute in this case a special reason for my granting a certificate
under section 2(3) of the Arbitration Act 1979. I therefore refuse a
certificate and, consistently with that, I refuse leave to appeal.
