Landlord and tenant — Rent review clause in commercial lease — Whether a letter written by landlords’ agents constituted an effective ‘trigger’ notice for the purpose of the clause — Letter from agents, after stating the amount of the revised rent required from the review date, said ‘We look forward to receiving your agreement’, and under the signature the words ‘subject to contract’ appeared — Held, upholding decision of Michael Davies J, that a tenant receiving such a letter would be left in doubt as to whether the figure specified was a firm figure intended to ‘trigger’ off the review machinery or a purely provisional amount put forward as a basis for negotiation — Hence letter did not constitute a notice effective to set review procedure in motion — Appeal dismissed
This was an
appeal by the landlords, Shirlcar Properties Ltd, from the decision of Michael
Davies J on July 28 1982, dismissing their claim as plaintiffs against the
tenants, the defendants Thomas Heinitz and Andrew Kirk, for increased rent
under a lease of premises at 35 Moscow Road, London W2. Michael Davies J’s
decision is reported at (1982) 266 EG 126, [1983] 1 EGLR 125.
Kirk Reynolds
(instructed by Arram, Fairfield & Co) appeared on behalf of the appellants;
R W Kirk (instructed by Julius Back & Co) represented the respondents.
Giving
judgment, LAWTON LJ said: This is an appeal by the plaintiffs, Shirlcar
Properties Ltd, as landlords against the judgment of Michael Davies J given on
July 28 1982 whereby he dismissed the plaintiffs’ claim for increased rent
which the plaintiffs had made against their tenants, the defendants, Mr Thomas
Heinitz and Mr Andrew Kirk. The case is yet another of the cases involving
problems about rent review. It has an unusual feature because it is concerned
not with the construction of the rent review clause in the lease but with the
construction and effect of a letter which was sent by the plaintiffs to the
defendants seeking to bring into operation the rent review clauses.
We have been
told that this appeal to some extent is a test case, because the rent review
provisions of the lease under consideration have been repeated in relation to
five other properties, and a similar notice seeking to operate the rent review clause
was sent to the other five tenants. The properties concerned are in Moscow Road
in the Bayswater area and the particular property with which this appeal is
concerned is 35 Moscow Road. By a lease made December 22 1977 the plaintiffs
let to the defendants as tenants 35 Moscow Road for a period of 15 years. The
rent provision was as follows. The tenants were to pay for the first five years
of the term the yearly rent of £3,000. For the next five years of the term they
were to pay either that rent or the open market rental value of the demised
premises at the review date, whichever was the higher, and in either case the
same was to remain constant during the whole period referred to in the clause.
Further, for the next five years of the term they were to pay either the yearly
rent of £3,000 a year or the rent decided upon for the second five years or the
open market rental value for the remaining five years.
Then there
followed provisions as to how the open market rent was to be ascertained and
what was to be the review date. That expression in the lease meant the
expiration of the fifth year and the expiration of the 10th year of the term.
Subclause
(iii) is the operative one for the purposes of this appeal. It was in these
terms:
The open
market rental value shall be determined in manner following that is to say it
shall be such annual sum as shall be (A) specified in a notice in writing
signed by or on behalf of the Lessors and posted by recorded delivery post in a
prepaid envelope addressed to the Tenant at the demised premises at any time
before the beginning of a clear period of two quarters of a year (commencing on
one of the usual quarter days hereinbefore mentioned) immediately preceding the
review date (and such notice shall be conclusively deemed to have been received
by the Tenant in due course of post).
The relevant
review date was March 25 1981.
or (B) agreed
between the parties before the expiration of three months immediately after the
posting by recorded delivery of such notice as aforesaid in substitution for
the said sum or (C) determined at the election of the Tenant (to be made by
counternotice in writing served by the Tenant upon the Lessors not later than
the expiration of the said three months) 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 immediately after the date of
service of the said counternotice then by an independent surveyor appointed for
that purpose on the application of either party alone by the president for the
time being of the Royal Institution of Chartered Surveyors and in either case
in accordance with the provisions of the Arbitration Act 1950 as amended.
Then came
subclause (iv) which covered the situation if there was delay in getting an
arbitration award. Subclause (v) was in these terms:
All
stipulations as to time in the foregoing sub-clauses numbered (i) (ii) (iii)
and (iv) shall be of the essence of the Contract and shall not be capable of
enlargement save as agreed in writing by the parties.
In my judgment
on the proper construction of subclause (iii) the position was as follows. The
plaintiffs had to serve a notice in writing which conformed with subclause
(iii) paragraph (A). Having served that notice the tenant then had three
options. He could enter into negotiations with the landlord, the plaintiffs, to
get a lower rent than that specified in the notice and if the negotiations were
successful the agreed new rent was the rent payable, but if they were not
successful or he did not want to enter into negotiations with the plaintiffs,
he could by counternotice served within the specified period ask for
arbitration or he could do nothing. It followed therefore that the first stage
in the rent review was the serving of the landlords’ notice. The tenant could
agree to pay the rent specified and, if he did so agree, there was no need for
him to do anything at all. He could remain silent and at the end of the period
of three months the rent specified in the notice would be the rent binding upon
him or he could take one of the other two courses to which I have already
referred.
What happened
in this case was this. Two months before the appropriate review date, namely,
on January 20 1981, the plaintiffs’ agent, a well-known firm of chartered
surveyors, wrote a letter to the defendants and to their other tenant in Moscow
Road in these terms:
‘Dear Sirs’,
and the letter in this particular case was headed ’35 Moscow Road, London W2′.
The body of the letter read as follows:
We act on
behalf of your Landlords, Shirlcar Properties Ltd, and have been instructed to
deal with the rent review on the above premises due as at the 29th September
1981. The rent required as from the review date is £6,000 pa exclusive, and we
look forward to receiving your agreement. Yours faithfully
and then the
agent signed the letter.
I stop there
and call attention to various matters which Mr Reynolds on behalf of the
plaintiffs relied upon. That letter was a notice in writing. It was signed on
behalf of the plaintiffs. It was sent by recorded delivery. It was addressed to
the defendants as tenants at the leased premises. It was sent before the
appropriate review date, which was March 25 1981. It expressly referred to a
new rent and it specified a figure. Mr Reynolds submitted that in those
circumstances that letter complied strictly with every one of the provisions of
subclause (iii) paragraph (A) of the lease. It does; but a difficulty has
arisen because the letter did not end with the signature of the estate agents:
under that signature in capital letters which were underlined came the words
‘subject to contract’. Immediately below that, also in capital letters, there
were the words ‘recorded delivery’.
The argument
which Mr Reynolds put before the court is that, as the body of the letter
complied strictly with the provisions of the lease, it purported to require the
payment of a new increased rent. The tenants, on receiving it, would, indeed
must, have appreciated that they were being asked to pay the rent in accordance
with the rent review provisions of the lease. He submitted, and Mr Kirk on
behalf of the tenants accepted, that the test of an effective notice for the
purposes of a rent review clause such as the one in this lease is whether, on
receipt of such a notice, a reasonable tenant would infer that what he was
receiving was a notice in accordance with the rent review terms of his lease.
Mr Kirk, on the other hand, says that, although it may well be that the body of
the letter accomplishes that particular object, the whole letter is vitiated as
an effective letter for the purposes of the rent review clause by the words
‘subject to contract’ which appear at the end of the letter.
Mr Reynolds’
argument in answer to that was put in two ways. He pointed out that the tenants
on receiving this letter, had they looked at their lease, would have
appreciated that there was a second stage to the rent review provision. That
second stage envisaged the possibility that the tenants might want to negotiate
with the landlords. The commonsense reading of the letter would have been that
the words ‘subject to contract’ tied up with the words ‘We look forward to
receiving your agreement’ and therefore could apply only to the second stage of
the rent review and in no way affected the first stage, which required the
landlords to send what is popularly known as a trigger notice. Secondly, it was
submitted that the words ‘subject to contract’ were wholly inappropriate to the
rent review provisions of this lease. The structure of the lease, submitted Mr
Reynolds, was such that the rent review started with the landlord doing
something, namely, sending a notice specifying a new rental figure. In those
circumstances the tenant could not reasonably infer that the words ‘subject to
contract’ had anything to do with the first stage.
Mr Kirk on
behalf of the defendants, however, submitted that it cannot be the right
construction of this letter to tie up the words ‘subject to contract’ with the
words ‘We look forward to receiving your agreement’, because the words ‘subject
to contract’ apply to the whole letter and not to a particular part of it. Had
the landlords intended the words to apply to the phrase ‘We look forward to
receiving your agreement’, they would have tacked on some such words as
‘subject to contract’ in that part of the letter — not at the end — so as to
apply to the whole of the letter.
Mr Kirk went
on to submit that the tenant could reasonably have inferred that the letter was
intended by the landlords to be the beginning of negotiations for a new rent;
it was sent two months before the rent review date and because it refers to the
whole letter Mr Kirk submitted that anyone reading this letter could have
reasonably understood it, not as being the beginnings of the rent review
machinery but as a preliminary step before the rent review machinery was put in
motion. It is only, said Mr Kirk, on that basis that the letter makes sense,
because it is otherwise inappropriate to the rent review machinery.
Since there is
an argument both ways about this matter and as, in my judgment, it is an
argument which is reasonable on both sides, it seems to me that it cannot be
said that the tenants, on receiving this letter, would necessarily and
reasonably have inferred that it was an effective trigger notice for the
purpose of the lease. There is doubt about its meaning and as there is doubt it
seems to me that the letter was ineffective for the purposes of the rent review
clause in the lease. I would dismiss the appeal.
Agreeing, KERR
LJ said: It is perfectly clear that this letter was written in the context of
the rent review clause, and to that extent, to use the words of Templeman J (as
he then was) to which I come in a moment, but only to that extent, the tenant
who received it would understand what the landlord was up to. The question,
however, is whether it is a sufficiently clear notice within the terms of
clause (iii) (A), the first stage of the rent review machinery. As to that I
have no doubt, in the same way as my lord, that the words ‘subject to
contract’, which are in capital letters and underlined after the signature,
must govern the whole of this letter.
In those
circumstances it seems to me that the passage from the judgment of Templeman J
in Keith Bailey Rogers & Co v Cubes Ltd (1975) 31 P&CR
412 is apposite, and the learned judge in fact cited it in his judgment.
Templeman J there said at p 415, and I leave out immaterial words:
If it is
clear . . . that each of the recipients could be in no doubt as to what the
landlord was up to and what the notice and the letter meant as far as he was
concerned, it does not seem to me that the court is entitled or bound to be
perverse and invent imaginary difficulties which might have arisen in other
cases.
I therefore
ask myself whether the recipient of this letter, governed as it is by the words
‘subject to contract’, could be in no doubt. To my mind the answer to that is
in the negative. I think any recipient might ask himself whether the words
‘subject to contract’ have the effect that the landlord is indeed bound by the
figure of £6,000 put forward in the letter. Similarly, if the tenant is minded
to accept that figure, and is therefore minded to write back and agree to it,
he would be left in doubt, and that doubt would remain if he consulted his
solicitor, as to whether any such agreement would be binding. In my view,
therefore, this is not a sufficiently clear specification of the required rent
under the rent review clause to fulfil the requirements of it, and I would
dismiss this appeal.
Also agreeing,
DILLON LJ said: The issue that arises on this appeal is a very short one, but I
have not found it a very easy one and my mind has fluctuated as the admirably
concise arguments have proceeded. There is no doubt about the law to be
applied. If the meaning of the landlords’ notice given by their surveyors on
January 20 1981 is so plain that the recipient cannot reasonably mistake what
is meant, then effect should be given to the notice. Apart from the words
‘subject to contract’, I would have no doubt that the notice was a valid notice
specifying a rent under the review clause in accordance with subhead (A) of
that clause. I read the words at the end of the notice — ‘And we look forward
to receiving your agreement’ — as inviting agreement to the rent figure of
£6,000 a year which was put forward in the notice and not as inviting general
negotiation. So reading those words, I regard them as possibly optimistic but
in no way inconsistent with the giving of a valid notice under subhead (A).
The question
is, then, as to the effect of the words ‘subject to contract’. They are wholly
inapposite to a trigger notice given by landlords under this particular rent
review clause. My initial inclination, therefore, was that they should be
disregarded and that a reasonable tenant would take the view that they were
merely meaningless. On consideration, however, I think that these time-hallowed
words ‘subject to contract’ would leave the tenant in doubt as to whether the
figure of £6,000 a year was being put forward as a firm figure specified by the
landlords under the rent review clause or was merely being put forward as a
provisional figure which, if not agreed by a binding contract such as is
envisaged by the words ‘subject to contract’, the landlord might reserve the
right to revise. If it is merely a provisional figure, then it is not enough to
trigger the rent review clause.
On the whole I
feel that a reasonable tenant might regard this as merely a provisional figure.
Therefore the meaning of the notice is not so plain that the notice can be
taken as a valid stipulation of a rent which sets the review provisions in
operation. I, too, would therefore dismiss this appeal.
The appeal
was dismissed with costs.
