Landlord and tenant — Rent review — Rent to be higher of current market rental value or initial rent — Current market rent below initial rent — Landlord only entitled to serve trigger notice — Whether rent must be reviewed — Whether landlord must serve trigger notice
By a lease
dated September 8 1975 the defendant held a 42-year term of commercial premises
at an initial rent of £148,500 subject to seven-year rent reviews; the
plaintiff owns the reversion. The rent was reviewed in 1988 to £440,000. The reddendum
provided that for each rent review period the rent ‘shall be the higher of the
sum of £148,500 … or such sum as shall be assessed as the current open market
rent … such assessment being made in the following manner … Either (a) such
assessment as shall be specified in … a notice by the lessors … ‘. There were
further provisions concerning the assessment where the parties could not agree.
In respect of the 1995 rent review, the landlords contended that these
provisions gave the landlords an option to serve a trigger notice, and to have
a review; in the absence of a review the tenant was required to continue paying
the rent of £440,000 (which was above the rental value). (Editor’s note:
it is understood that the landlord served a trigger notice without prejudice to
any contractual obligation to do so.)
to pay from a review date the higher of the sum of £148,500 and the current
market rent. The remaining provisions of the rent review clause, including that
providing for a trigger notice, were essentially machinery. The language of the
reddendum contained a ‘shall’ in providing that the rent for each
succeeding rent review period shall be the higher of the two figures. The
landlord is to serve a trigger notice and initiate the dispute procedure. The
rent paid in the previous rent review period continues to be payable but, if
the review is triggered, as it was, it then reverts to the formula in the reddendum.
The following
cases are referred to in this report.
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
Harben
Style Ltd v Rhodes Trust [1995] 1 EGLR 118;
[1995] 17 EG 125
Royal
Bank of Scotland plc v Jennings (1995) 70
P&CR 459; [1995] 2 EGLR 87; [1995] 35 EG 140
Sudbrook
Trading Estate Ltd v Eggleton [1983] 1 AC
444; [1982] 3 WLR 315; [1982] 3 All ER 1; (1982) 44 P&CR 153; [1983] 1 EGLR
47; [1983] EGD 392; 265 EG 215, HL
This was a
hearing of an originating summons in which the plaintiffs, Addin Investments
Ltd, sought declarations as to the meaning of a lease against the defendant,
the Secretary of State for the Environment.
Simon Berry QC
(instructed by Denton Hall) appeared for the plaintiff; Nicholas Dowding (instructed
by Berwin Leighton) represented the defendant.
Giving
judgment, Jacob J
said:This is yet another dispute over the construction of the rent review
provisions of a lease. The plaintiff landlord holds the reversion in a lease
granted on September 8 1975. The lessee is a minister of the Crown. The term of
the lease is 42 years. So it still has more than 20 years to go. The lease
contains a provision about rent reviews taking place every seven years. The
review in 1988 fixed the open market rate at £440,000 with effect from July 18
1988. It is common ground that commercial rents have fallen since that date.
The landlord says that, even though another review is possible under the terms
of the lease, upon its true construction the lease gives him and him alone an
option to initiate such a review and that, if there is no review, the tenant
must continue to pay the rent fixed last time. That is agreed by both sides to
be substantially more than the current open market rent.
I am not
concerned with the details of what the current market rent ought to be. The
parties apparently differ on this considerably. Even on the landlord’s
contention as to the current market rent the sums at stake are considerable,
both in terms of the annual rent involved and the knock-on effect on the
capital value of the property.
The tenant
contends that the lease contains a provision requiring rent review and, if that
be wrong, that the only rent it has to pay in the absence of rent review is the
minimum rent set in the lease.
I begin by reading
the reddendum concerned:
Paying therefor until the end of the
seventh year of the said term the exclusive yearly rent of £148,500 such rent
to be paid by equal quarterly instalments on the twenty-fifth day of March the
twenty-fourth day of June the twenty-ninth day of September and the
twenty-fifth day of December in every year to run from the eighteenth day of
July 1974 the first payment (being a proportionate sum) to be made having
become due on the eighteenth day of July 1974 provided
always and it is hereby agreed that the yearly rent payable by the
Minister during the next and each succeeding period of seven years of the said
term shall be the higher of the sum of £148,500 aforesaid or such sum as shall
be assessed as the current open market rent of the demised premises for the
appropriate period such assessment being made in the following manner, that is
to say
Either
(a) such
assessment as shall be specified in writing and in a notice by the lessors to
the Minister given not more than twelve and not less than six months before the
review date (which expression means the expiration of the seventh fourteenth
twenty-first twenty-eighth or thirty-fifth years of the said terms as the
context requires)
(b) as shall
be agreed between the parties hereto in writing within three months after such
notice or
(c) in the
event of the parties hereto failing to reach agreement as aforesaid on or
before the date appointed (in respect of which time is to be deemed to be of
the essence) then the current open market rent of the demised premises ready
for use as office premises for the next seven years of the said terms shall be
fixed or assessed by an independent surveyor appointed for that purpose by the
parties hereto or failing agreement as to such appointment three months
before the review date (time in this respect also to be deemed to be of the
essence) then by an independent surveyor appointed for that purpose by the
President for the time being of the Royal Institution of Chartered Surveyors …
— I can leave
out some immaterial words which follow —
The assessment
fixed by the independent surveyor shall be communicated to the parties hereto
in writing and immediately upon such communication the rent so assessed as the
current open market rent for the next seven years of the said term or £148,000
whichever shall be the higher shall be the rent payable during that period
under the terms hereof and the fees payable to the independent surveyor
hereinbefore mentioned in respect of the assessment to be made herein shall be
borne by the parties hereto in equal shares
(d) until the
revised rent has been agreed or determined as aforesaid the Minister shall
continue to pay the rent payable during the previous rent period provided that when such rent has been
agreed or determined for such new rent period it shall become payable on the
first quarter day after such agreement or determination and on such quarter day
the Minister shall pay in addition to the quarter’s rent then due a sum equal
to the difference between the sum or sums in fact paid from the beginning of
such period and the sum or sums which would in fact have been paid had the new
rent been fixed before the beginning of the new rent period.
The issues
before me turn on the true construction of the language which I have just read.
Before turning to it I make some initial observations. The (a), (b), (c) and
(d) of the language are a little odd. Normally the word ‘either’ is followed by
just two alternatives. Here there appear to be four. It is common ground,
however, that (a) and (b) are to be read as one; (c) is the other; and (d) is
something else altogether. In the end I do not think it matters very much.
It is also
common ground that (d), which provides for payments being made by the minister
in the event that a rent is raised above that which was being paid during an
interim period, has a corresponding implied term that money would be paid back
if the assessed rent came to be less than was being paid during that interim
period.
Again before
turning to consider the language in detail, I remind myself that I am concerned
with a lease. In the well known case of Basingstoke and Deane Borough Council
v Host Group Ltd [1988] 1 WLR 348*, at p353 Nicholls LJ said:
*Editor’s
note: Also reported at [1987] 2 EGLR 147
We recognise,
therefore, that the particular language used will always be of paramount
importance. Nonetheless it is proper and only sensible, when construing a rent
review clause, to have in mind what normally is the commercial purpose of such
a clause.
That purpose
has been referred to in several recent cases, and is not in doubt. Sir Nicolas
Browne-Wilkinson V-C expressed it in these terms in British Gas Corporation
v Universities Superannuation Scheme Ltd [1986] 1 WLR 398, p401:
‘There is
really no dispute that the general purpose of a provision for rent review is to
enable the landlord to obtain from time to time the market rental which the
premises would command if let on the same terms on the open market at the
review dates. The purpose is to reflect the changes in the value of money and
real increases in the value of the property during a long term.’
To the same
effect Dillon LJ said in Equity & Law Life Assurance Society plc v Bodfield
Ltd [1987] 1 EGLR 124, 125:
‘There is no
doubt that the general object of a rent review clause, which provides that the
rent cannot be reduced on a review, is to provide the landlord with some
measure of relief where, by increases in property values or falls in the real
value of money in an inflationary period, a fixed rent has become out of date
and unduly favourable to the tenant. The exact measure of relief depends on the
true construction of the particular rent review clause.’
I mention this
because Mr Simon Berry QC, for the landlord suggested that these passages were
confined only to the cases of protecting the landlord against the effects of inflation
and the upward movement of market rents. I do not agree. The general background
is that landlords and tenants expect to receive and pay respectively the market
rents. One can normally expect that that is what either side would want and
expect from the other party, and I bear that in mind in construing this
document, although of course the question of paramount importance is the
language used here.
Mr Berry says
that (a) of the reddendum gives the landlord an option to serve a
trigger notice. If he does then either the parties agree or they do not. If
they do not then the machinery of (c), going to president, may be invoked by
either party. The reference in (c), he says, to a date appointed, albeit
slightly clumsy, means the date three months after the date of the notice under
(a) because (b) gives a three-month period for negotiation. He accepts it is a
slightly odd way to describe that date as a ‘date appointed’, but he says that
is the only thing that can make sense.
He then says
that if no trigger notice is given none of the machinery in (a) to (c) applies
and then, he says, it follows as night follows day that (d) applies and that
the tenant must accordingly pay the rent payable during the previous rental
period — in this case the £440,000.
In support of
his arguments he referred me to Harben Style Ltd v Rhodes Trust
[1995] 1 EGLR 118*. In that case the lease contained a provision expressly
dealing with what happened if there was no rent review — the actual language
was:
*Editor’s
note: Also reported at [1995] 17 EG 125
In the event
that the yearly rent hereinbefore reserved and payable in respect of the review
period is not ascertained at all … the tenants shall during the same review
period … pay rent at the rate of the rent payable hereunder for the year
immediately preceding the beginning of the same review period …
In that case
it was possible for the landlords not to initiate a rent review and the lease
itself had expressly contemplated what would happen if that option was, in
effect, exercised. I do not think it assists Mr Berry.
Mr Berry also
took me to the recent case of the Royal Bank of Scotland plc v Jennings
in the Court of Appeal [1996] EGCS 168. It was held that the reddendum concerned
did provide for a rent review. In the words of Sir Richard Scott, V-C that
‘there will be a rent review for each of the review periods’. The express
machinery for such review could only be initiated by the landlord, but refusing
to initiate a review the landlord was frustrating the provisions of the
contract that there should be a rent review. Accordingly, the Court of Appeal
held that the court could substitute its own machinery following the decision
of the House of Lords in Sudbrook Trading Estate Ltd v Eggleton
[1983] 1 AC 444*.
*Editor’s
note: Also reported at [1983] 1 EGLR 47
Mr Berry said
that the present case was distinguishable because on the true construction of
the present reddendum there is no provision that there will be a rent
review. The true construction here is that there is a rent review only if the
landlord decides he wants one. If he decides he does not want one the agreement
is perfectly complete in itself because it provides that the old rent shall
continue to be payable pursuant to the provisions of para (d).
I do not
agree. I think the correct way to approach the present case is to recognise
that the key commercial provision is contained in the opening words. I think
provisions (a) to (d) are essentially machinery. In the neat phrase used by
Evans-Lombe J in Royal Bank of Scotland plc v Jennings at first
instance [1995] 2 EGLR 87*, at p89, they are ‘administrative and accounting
provisions’.
*Editor’s
note: Also reported at [1995] 35 EG 140
I think the
way to read the agreement is that the parties, assumed to be men of commercial
substance and alive to the ways of landlords and tenants, contracted that the
rent was to be the higher of £148,500
and the current market rent. It is true that they use the expression ‘assessed
current market rent’ and the agreement goes on to deal with how there should be
assessment, but the substance of the agreement is that the higher of the
current market rent and the £148,500 is to be paid. I think that is the most
likely construction. It accords with my view of how commercial men behave and
it accords with the principles which I have stated from the Basingstoke
case and others.
It is unlikely
that a tenant would agree to pay more than a current market rent. Why should
he? It is unlikely that a landlord could get a tenant to pay that.
I am
reinforced in view by the language of the opening part of the agreement. It
says that the yearly rent payable shall be — and I emphasise the word ‘shall’ —
the higher of the two sums, and such sum as shall be assessed as the current
open market rent. I think Mr Berry’s argument amounts to this: that the second
‘shall’ means ‘may be assessed if the landlord chooses’. I do not think the
agreement contemplates that there will be no assessment. I think one finds
exactly the same conclusion to be derived from (a):
such
assessment as shall be specified in writing and in notice by the lessors …
Mr Berry says
that means that the ‘shall’ there was referring to what assessment actually
happens to be in the written notice if the landlord decides to serve such a
notice. I think a fairer reading is that he shall specify his opening shot as
to what he wants.
Finally, the
language of (d) clearly contemplates that there will be a revised rent agreed
or determined. It says:
until the
revised rent has been agreed or determined as aforesaid the Minister shall
continue to pay the rent payable during rent period …
It does not say
‘unless and until’. It contemplates that ‘the rent is going to be agreed or
determined as aforesaid’.
Mr Berry
rather accepted that his construction meant ‘unless and until’, and he said in
the context I should read the ‘until’ as being only if the ‘aforesaid’ referred
to the machinery of (a), (b) and (c) and that it, therefore, contemplated that
only the landlord could trigger the review machinery — that being his
construction of (a), (b) (c). But that is circular and ignores the key ‘shalls’
in the main operative portion of the reddendum. Very much the similar
approach was adopted in the Royal Bank of Scotland case in relation to a
clause very similar to clause (d).
I think,
therefore, overall the agreement contemplates that the landlord is to serve a
notice and initiate the procedure.
Suppose that
is wrong, however. Then, says the tenant, the rent is to be £148,500 and that
is all. The argument goes like this: the rent shall be the higher of the sum of
£148,500 or the assessed current open market rent. Well, if no current open
market rent is assessed then it is the higher of the £148,500 and nothing, to
wit, £148,500. The tenant then says that (d) only applies when a rent revision
is under way in accordance with (a) or (b) and, while there is no such procedure
in being, the only rent that is payable under the agreement is this minimum
£148,500. If the procedure is initiated the tenant says, ‘Well, then you pay
the last passing rent’. Mr Berry says that is all very odd, two rents, first of
all £148,500, then the last passing rent and finally the actual rent with
adjustment between them all.
Mr Nicholas
Dowding for the tenant accepted it was somewhat odd, but he says he wins on,
using the happy phrase, ‘the balance of oddities’. He says it would be even
odder that the tenant should have agreed to have paid above the market rent,
and I agree. I think the oddity referred to by Mr Berry is more abstract than
real. In reality, if no notice is served and the tenant starts paying £148,500
when, in fact, the landlord can get more, the immediate response will be for
the landlord to initiate procedure by a specification in writing, or agreement,
or going to the president.
I believe that
disposes of the case, but I should deal with the final argument of the tenant.
Mr Dowding suggested that, on its true construction, clause (c) enabled the
tenant to go to the president of the RICS after expiry of the date appointed —
as clause (c) calls it. That depends on what is meant by ‘date appointed’. He
suggested that the date appointed meant as follows: if the landlord serves a
notice then it is three months after the date of notice; if he does not then it
is three months after the six months referred in (a).
I have to say
that I find the argument perhaps too strained to work, but I do not think that
that matters. Overall, I think the agreement does provide for an assessment
which both parties expected to take place and ought to take place.
I will hear
counsel as to the appropriate form of order.
