Landlord and tenant — Rent review provisions in lease — Construction — Lease with ‘a number of glaring inconsistencies’ — Rent reviewable, after an initial period, at five-year intervals — Following a somewhat complex statement of the review machinery it was provided that if a review was not completed within 12 months of the commencement of a relevant period the rent payable during that period would be the current rent increased by 25% — The main issue was as to the true construction of this provision — The tenants argued that, as the review in question in the present case had not in fact been completed in time, an automatic increase of 25% in the current rent took effect — The landlords contended that the 25% provision was merely an interim arrangement and that, if a review were subsequently completed, the reviewed rent would take effect if it produced a figure of more than 125% of the rent for the previous relevant period — It was pointed out that it was stated in the review provisions that time was not to be deemed of the essence — Held (rejecting the tenants’ construction) that the 25% increase did not come into operation automatically if the review was not completed within 12 months of the completion of the relevant period — Time was not of the essence in that respect — It was open to the tenants to give notice making time of the essence, but unless that were done the rent remained payable at the current rate until the surveyor appointed under the lease should determine a new rent
The following
cases are referred to in this report.
Lewis v Barnett (1981) 264 EG 1079
Smith’s
(Henry) Charity Trustees v AWADA Trading &
Promotion Services Ltd (1983) 47 P&CR 607; [1984] EGD 103; 269 EG 729,
CA
United
Scientific Holdings Ltd v Burnley Borough
Council [1978] AC 904; [1977] 2 WLR 806; [1977] 2 All ER 62; (1977) 33
P&CR 220; [1977] EGD 195; (1977) 243 EG 43 & 127, HL
This was an
originating summons by which the plaintiff tenants, Panavia Air Cargo Ltd,
sought a determination of the true construction of rent review provisions in a
lease by the defendant landlords, Southend-on-Sea Borough Council, of about 2
3/4 acres of land forming part of Southend-on-Sea Municipal Airport, with a hangar
and buildings thereon.
Jonathan Gaunt
(instructed by Cameron Markby) appeared on behalf of the plaintiffs; David
Neuberger QC (instructed by Rowe & Maw) represented the defendants.
Giving
judgment, MR EDWARD NUGEE QC said: This summons raises a question on the
construction of the rent review provisions contained in a lease granted by the
defendant council, Southend-on-Sea Borough Council, to the plaintiff company,
Panavia Air Cargo Ltd, formerly known as British Air Ferries Ltd. The lease is
dated October 11 1978 and comprises about 2¾ acres of land forming part of
Southend-on-Sea Municipal Airport, together with an aircraft hangar and certain
other buildings erected thereon.
By clause 1 of
the lease the council demised the property to the company
to hold the
same unto the company from the 1st day of January 1978 to the February 13 2035,
yielding and paying therefor during the said term for the period January 1 1978
to February 13 1985 the annual rent of £2,700 plus any additional rent payable
under the provisions for review contained in the schedule hereto without any
deduction whatsoever by equal quarterly payments in arrear to be made on the
usual Quarter Days.
The schedule
contains provisions for reviewing the rent, of which the following are the most
material:
(1) During the seventh, twelfth, seventeenth,
twenty second, twenty seventh, thirty second, thirty seventh, forty second,
forty seventh and fifty second years of the said term for each successive
five-year period of the said term and during the fifty second year of the said
term for the remaining period of the said term, each of such periods being
hereafter referred to as a relevant period, the Council and the company shall
agree, or failing agreement shall determine by arbitration the sum total of the
then current rack rent . . . and one quarter of the sum total so ascertained,
or £2,700, whichever is the greater, shall be the rate of rent reserved by this
lease in respect of the then next succeeding period . . . (3) If such agreement
has not been made six months before the commencement of the relevant period the
Council may require an independent surveyor (hereinafter called the surveyor)
to be appointed to determine the new rent. The surveyor may be nominated by
agreement between the Council and the company or appointed by the President for
the time being of the Royal Institution of Chartered Surveyors on the
application of the Council . . . (5) Notice in writing of his appointment by
the said President shall be given by the surveyor to the Council and company,
inviting each to submit within a specified period which shall not exceed four
weeks a valuation accompanied if desired by a statement of reasons. (6) The
surveyor shall act as an expert and not as an arbitrator. (7) The surveyor
shall give notice in writing of his decision to the landlord and the tenant
within two months of his appointment, or within such extended period as the
Council may agree. (8) If the surveyor comes to the conclusion that the current
market value of the demised premises is less than the rent operative for the
period preceding the relevant period (hereinafter called the current rent) the
new rent shall nevertheless be the same as the current rent, and the decision
of the surveyor shall so state. (9) If the surveyor shall fail to determine the
new rent and give notice thereof within the time and in the manner hereinbefore
provided, or if he shall relinquish his appointment, or die, or if it shall
become apparent for any reason he will be unable to complete his duties hereunder,
the Council may apply to the said President for a substitute to be appointed in
his place, which procedure may be repeated as many times as necessary . . .
(11) Rent shall not be due at the rate of the new rent until after the tenant
has been given such notice thereof as is hereby provided, and in the event of
the relevant period starting before such notice has been given to him, the rent
shall continue to be due at the rate of the current rent on each day appointed
by this agreement for payment of rent until the said notice is given to him. On
the first day after the notice is given to him, which is a day appointed by
this agreement for payment of rent, there shall fall due for payment the
appropriate instalment at the new rate together by way of additional rent a sum
equal to the difference between the new rent and the rent actually paid for any
part of the relevant period in respect of which a rent less than the new rent
has been paid . . . (13) As respects the periods of time referred to in this schedule,
time shall not be deemed to be of the essence of the contract. (14) If for any
reason whatsoever no review of rent takes place in respect of any relevant
period, or a review is not completed within twelve months of the commencement
of any relevant period, then the rent payable during the relevant period under
the provisions of this lease shall be increased by 25% of the rent then
currently payable.
As can be seen,
there are a number of glaring inconsistencies in the lease. Thus the reddendum
in clause 1 states that the initial rent is to
(1) of the schedule clearly indicates that each relevant period is to begin on
the anniversary of the commencement of the term, that is to say, on January 1.
Para (1) states that the rent shall be determined in default of agreement by
arbitration, but para (6) clearly provides that the surveyor is to act as an
expert and not as an arbitrator. Para (1) states that the rent during each
relevant period shall be one quarter of the sum total ascertained or £2,700,
whichever is the greater, and para (8) compares the current market value of the
demised premises and the rent operative immediately preceding the relevant
period, while para (14) provides that in certain circumstances the rent payable
during the relevant period shall be the current rent increased by 25%.
The question
before me turns on the effect of para (14) construed in the context of the
lease as a whole and particularly in the light of para (13).
The facts
giving rise to the present dispute are as follows. The seventh year of the term
was the calendar year 1984. On September 13 1984 the council’s borough valuer
and surveyor wrote to the company drawing attention to the fact that the first
rent review under the lease was to operate from January 1 1985 and asking
whether the company would be appointing a professional adviser to agree terms
on its behalf. A rather desultory correspondence followed, until on January 17
1986 the borough valuer and surveyor wrote to the company’s surveyors saying:
This rental
review is now considerably overdue and if the negotiations do not progress in
the very near future I shall have to report accordingly to the Council with a
view to proceeding towards the appointment of an independent valuer in
accordance with the schedule to the lease.
On February 17
1986, four days after the expiration of 12 months from the date mentioned in
the reddendum, the company’s surveyors wrote back saying:
We have now
taken our client’s solicitor’s advice, which is as follows. Under clause 14 of
the schedule to the lease, which contains the relevant provisions, there will
be an automatic 25% increase in the rent if, inter alia, a review has
not been completed within twelve months of the commencement date. The automatic
increase seems to happen whether or not a disputed increase has been decided by
a surveyor at the time. It is arguable as a result of clause 1 of the lease the
relevant rent review date is February 13 1985 rather than December 31 1984, and
we confirm that if the rent review has not been completed by twelve months from
the relevant date the rent should merely be increased by 25%
and they ask
the council to confirm the rent payable from the review date was to be
increased to £3,375 pa, which is a 25% increase on the initial rent of £2,700.
Since that letter the council has applied to the president of the Royal
Institution of Chartered Surveyors for the appointment of a surveyor, but he
has declined to appoint one in view of the dispute between the parties.
Rather more
than a year after the last letter to which I have referred, this summons was
issued by the company. It seeks a declaration that the rent payable by the
plaintiff to the defendant under the above-mentioned lease with effect from
February 13 1985 is, in the events which have happened, to be assessed in
accordance with para (14) of the schedule to the said lease.
Mr Gaunt,
counsel for the company, points to the fact that all the initiatives under the
schedule lie in the council’s hands. Only the council can apply for the
appointment of a surveyor under para (3); only the council can extend the
time-limit for the surveyor’s valuation under para (7); only the council can
apply under para (9) for the appointment of a substitute surveyor. Para (14),
he submits, was intended to give the company some measure of certainty. The
schedule gives the council machinery which it can operate comparatively quickly
and which should result in a new rent being determined some time before the
commencement of the relevant period. The council is allowed to operate it more
slowly, but it says if for any reason the rent is not determined by the
surveyor within 12 months after the commencement of the relevant period, then
the automatic increase of 25% takes effect. If para (14) does not mean what it
says, he submits it does not mean anything at all.
Mr Neuberger,
counsel for the borough council, submits first of all that para (14) is an
interim provision which takes effect if no review has taken place or been
completed within 12 months from the commencement of the relevant period, and
that if a review is subsequently completed, the reviewed rent takes effect if
it results in a rent greater than 125% of the rent payable for the previous
relevant period, and the excess is payable on the next quarter day under para
(11) for the whole of that part of the relevant period up to that quarter day.
If it results in a rent less than 125% of the rent payable for the previous
relevant period, his preferred solution is that the council is entitled to a
25% increase throughout the relevant period. Alternatively, he says that a term
must be implied under which the council repays the excess that the company has
paid under para (14). As a second alternative, he submits that the provision in
para (14) that the 25% increase is to be payable if the review of the rent is
not completed within 12 months of the commencement of any relevant period is a provision
in respect of which time is not of the essence, and that in order that the 25%
increase shall take effect the company can serve a notice on the council making
time of the essence and only if the council fails to get the review completed
within the period specified in the notice does the 25% increase take effect.
The locus
classicus on the question whether time is of the essence in relation to
rent review provisions is the speech of Lord Diplock in United Scientific
Holdings Ltd v Burnley Borough Council [1978] AC 904. At p 930 Lord
Diplock said:
So upon the
question of principle which these two appeals are brought to settle I would
hold that in the absence of any contra indications in the express words of the
lease or in the interrelation of the rent review clause itself and other
clauses or in the surrounding circumstances the presumption is that the
time-table specified in the rent review clause for completion of various steps
for determining the rent payable in respect of the period following a review
date is not of the essence of the contract.
The approach
which is adopted to the construction of rent review provisions was well set out
by Griffiths LJ in Trustees of Henry Smith’s Charity v AWADA Trading
& Promotion Services Ltd (1983) 47 P&CR 607 at p 616:*
When they
enter into a lease such as this the expectation of both landlords and tenants
is that a fair market rent will be paid throughout the lease and unless driven
to do so by the wording of the lease I am loathe to construe the machinery
provided for arriving at a fair market rent as forcing either the tenant to pay
an exorbitantly high rent, or the landlord to receive a ridiculously low rent,
neither of which bears any relation to the fair market rent, because one or
other of them was one day late in observing the timetable set out in the rent
review provisions of the lease.
In the present
case there is evidence to suggest that a 25% increase on the rent payable for
the first seven years of the lease will result in the landlord’s receiving what
might be termed a ridiculously low rent.
*Editor’s
note: also reported at (1983) 269 EG 729.
The lease is,
as I have said, not well drafted, and Mr Neuberger’s first submission that para
(14) is intended to provide for an interim rent is one that is difficult to
extract from the wording of para (14) itself. Moreover, the suggestion that if
the period of 12 months referred to in para (14) expires without a review being
completed the rent is automatically increased by 25% of the rent then currently
payable, and the landlord is entitled to maintain that increase even if the
review is subsequently completed and results in the surveyor’s valuation at a
figure lower than a 25% increase on the previous relevant period, is one that I
would not readily accept. The alternative suggestion that it is a provision for
interim payment which will be adjusted when the surveyor has completed his
review, with some repayment possibly being due from the landlord if the surveyor
determines a rent smaller than 125% of the rent payable for the previous
relevant period, is one which requires a good number of words to be written
into the schedule which are simply not there. In my judgment, it is not
possible to construe para (14) as providing for an interim increase of 25% with
or without any adjustment if a review is subsequently completed. On the other
hand, if Mr Gaunt’s submissions are correct, one does find that the express
words of para (13) which provide that ‘as respects the periods of time referred
to in this schedule, time shall not be deemed to be of the essence of the
contract’ have to be qualified in some way so as not to apply to the 12-month
period referred to in para (14). If the language is strong enough, that is perhaps
not impossible, and Mr Gaunt referred me to a decision of the Court of Appeal
in Lewis v Barnett (1981) 264 EG 1079. In that case there was in
fact no provision that time should not be of the essence. I need not state the
full facts of the case, but there was a para 6 which provided that, if the
landlord and the tenant should not have carried out steps set out in earlier
paragraphs of the schedule to the lease there under consideration, the notice
already given by the landlord to the tenant under those provisions should be
void and of no effect. In that case the Court of Appeal held that the effect of
para 6 could only be to make time of the essence in relation to the steps to
which it referred. The earlier paragraphs in the schedule in that case had required
the landlord to take certain steps within
the specified periods the landlord’s notice should be void, and there was no
proper way of construing that, except by holding that it meant what it said,
and therefore the consequence of not complying with the time-limits in the
earlier paragraphs was to deprive the landlord of the benefit of the rent
review clause. Mr Gaunt submitted that that case was, if not directly applicable,
of relevance here, in that the machinery set out in paras (1) to (10) provided
certain time-limits, to which I have already referred, and para (14) then
provided what was to happen if those time-limits were not complied with. The
distinction from Lewis v Barnett, in my judgment, is that the
time referred to in para (14) of the present case is not linked with the
time-limits in the earlier paragraphs of the schedule. It is a general
provision that if a review is not completed within 12 months of the commencement
of the relevant period, then a different method of ascertaining the rent shall
apply. In my judgment, that provision is one which is readily distinguishable
from the one considered by the Court of Appeal in Lewis v Barnett.
Mr Gaunt
submits that the purpose of para (14) is to give the tenant certainty, and that
he should not be left without knowing what the rent is to be for the relevant
period for longer than 12 months after the commencement of the period. That is
already, as he points out, a considerable time after the landlord could have
operated the machinery. But in the present case the machinery is not solely
under the control of the landlord. The surveyor is required by the schedule to
take certain steps within specified times, but the landlord is not in a
position to ensure that he does so, and, indeed, the schedule recognises in
para (9) that unforeseen circumstances may arise which would prevent the
surveyor completing his task.
In my
judgment, the effect of para (14) is not to deprive the landlord of the benefit
of the rent which para (1) prima facie entitles him to. I accept, and
adopt gratefully, what Griffiths LJ says in the passage to which I have
referred. To give para (14) a meaning which resulted in an automatic
application of a 25% increase on the completion of 12 months from the
commencement of the relevant period would be unlikely to result in the
landlord’s receiving or the tenant’s paying one quarter of the fair market rent
as provided in para (1), which is the principal direction in the schedule for a
rent review. Although the position of para (13) is perhaps a little strange,
and it might more naturally have been found at the end of the schedule, to hold
that in para (14) the period of time was of the essence of the contract would be
to contradict para (13), which refers to periods of time referred to in the
schedule and not to periods of time referred to in the preceding provisions of
the schedule. Both because of the wording of para (13) and because of the
general principles laid down by the House of Lords in United Scientific
Holdings Ltd v Burnley Borough Council, I hold that the period of 12
months in para (14) is not one in respect of which time is of the essence. The
consequence is that if a rent review does not take place, or is not completed
within 12 months of the commencement of the relevant period, the provision that
the rent shall be increased by 25% of the rent then currently payable does not
automatically come into effect. It is open to the tenant, as Lord Diplock pointed
out in United Scientific Holdings Ltd v Burnley Borough Council,
to give a notice making time of the essence, with the result that if before the
expiration of the notice the review had not been completed, para (14) would
operate and the tenant’s liability would be limited to an increase of 25% of
the rent. But until such a notice has been given — and I appreciate, as both
counsel recognise, that there may be difficulties in determining precisely what
form any such notice should take — until such a notice has been given, in my
judgment the rent remains payable at the rate currently payable, that is to
say, the rent payable during the immediately preceding relevant period, until
the surveyor has determined a new rent. When the surveyor has determined the new
rent, that becomes the rent for the whole of the relevant period, and the
tenant on the next quarter day will be obliged under para (11) to make good the
difference between the rent he has paid up until then and the rent due at the
rate fixed by the surveyor. He does in this lease have no obligation to pay
interest on the balance of the rent which he is obliged to pay on that quarter
day, and until that quarter day arrives he can continue paying at the old rate.
The result, in
my judgment, accords with the justice of the case. It accords also with the
express provision in para (13) that time is not to be of the essence of the
contract, and so far as the other provisions in the schedule are concerned, it
does not, in my judgment, conflict in any decisive way with any of those
provisions.
There remains
the question of the date at which the new rent is to commence when it has been
determined by the surveyor. Mr Neuberger submitted that the reddendum was
capable of being construed so as to oblige the tenant to pay the additional
rent from January 1 1985. Mr Gaunt submitted that the relevant period defined
in para (1) of the schedule, in the light of clause 1 of the lease, should be
taken as commencing on February 13 in each of the years there mentioned. This is
not a case in which the draftsman has earned any accolades. More care, I think,
has been put into the provisions of the schedule, although not sufficient to
make it clear beyond argument. Para (1) of the schedule, in my judgment, does
provide that each successive five-year period of the term should begin on
January 1, on the anniversary of the commencement of the term, and in my
judgment that just prevails over the inferences one might otherwise draw from
the reddendum. The reddendum itself is capable of meaning that from January 1
1985 to February 13 1985 the tenant should pay the annual rent of £2,700 plus
any increase payable under the first schedule, and although I am certain that
the draftsman had not directed his mind to the point, I think that that is more
in accord with the scheme of the lease as a whole than to hold that the rent
remains at £2,700 a year until February 13 1985. So I will declare that, in
answer to the question in the summons, the rent payable by the plaintiff to the
defendant under the lease with effect from January 1 1985 will, if and when the
surveyor has determined the rent, be assessed in accordance with paras (1) to
(10) of the schedule to the lease. That will be without prejudice to the right
of the tenant to serve a notice making time of the essence under para (14) if
the council delays unreasonably in proceeding with the rent review. Until the
new rent has been assessed, as I have said, the rent will remain payable as
each quarter day arrives at the existing rate, with the difference, if any,
between that rent and rent at the rate determined by the surveyor being payable
as provided in para (11) of the schedule.