Landlord and tenant–Rent review clause in lease–Problems of construction in lease and in deeds of variation–Effect of section 79 of the Law of Property Act 1925–‘Presumption in favour of reality’ established by a line of authority–Content and length of term of hypothetical lease–Originating summons taken out by plaintiff tenants
question was in fact an underlease and the plaintiffs were assignees of the
term, which was of 15 years from August 22 1978, the premises demised being a
ground floor and basement at 52 King’s Road, Chelsea–The term was divided into
seven periods, but only the last two, of three years each, commencing on August
22 1987 and August 22 1990, were material–The rent review clause provided for a
fair annual market rent ‘for a term of years equivalent to the said term’ (ie
the term of the actual underlease) and subject to similar covenants and
conditions–By clause 2(11) of the underlease the use of the premises was to be
restricted to that of a wine and snack bar, but a variation could be permitted
with the landlord’s previous consent in writing
underlease was subject to two deeds of variation, in 1981 and 1986, and the
impact of these was to cause some of the difficulties in this litigation–The
1981 deed increased the rent and added to the user covenant a prohibition of
use as a licensed betting office or amusement arcade and as a place for the
display and sale of pornographic material–In 1986, at the time when the present
plaintiffs were agreeing to take an assignment of the underlease, a second deed
of variation, to which the plaintiffs were a party, was entered into–The 1986
deed included the agreement of the lessors to the assignment of the underlease
and permitted the premises to be used broadly as a restaurant as distinct from
a wine and snack bar–However, no mention was made in the 1986 deed of the
previous obligation on the landlord not unreasonably to withhold consent to the
use of the premises for purposes other than those specified
question was as to the effect, if any, of the 1986 deed on the user clause in
the underlease–Here Warner J accepted the tenant’s contention that the effect
of the 1986 deed was to substitute for the provisions of the underlease as
varied by the 1981 deed an absolute covenant against using the demised premises
otherwise than in the manner specifically permitted by the 1986 deed–In
particular, its effect was to delete the obligation on the landlord not
unreasonably to withhold consent to the use of the premises for other
purposes–The judge rejected, with the assistance of section 79 of the Law of
Property Act 1925, an argument that a clause in the 1986 deed contained a
covenant which was purely personal to the plaintiffs, not binding on their
successors in title, and, therefore, to be excluded from the hypothetical lease
question was as to the duration of the hypothetical lease in the light of the
wording in the review clause ‘for a term of years equivalent to the said
term’–The landlords argued that the hypothetical term was 15 years from
the review date, while the tenants submitted that it was the unexpired residue
of a term of 15 years from August 22 1978–The judge preferred the tenants’
contention but was concerned about the problems which this interpretation would
cause a valuer–The difficulty was, however, overcome by imparting into it what
had become known during the argument as ‘the Datastream formula’–This was the
wording of the rent review clause in Datastream International Ltd v Oakeep Ltd,
namely, ‘a term equal to the residue then unexpired of the term granted by this
lease but having regard to the lessee’s rights under the Landlord and Tenant
Act 1954′–Here again Warner J decided in favour of the tenants’ submission with
the addition of the Datastream gloss–Declarations accordingly
The following
cases are referred to in this report.
Abbey v Gulteres (1911) 55 SJ 364
Basingstoke
and Deane Borough Council v The Host Group Ltd
[1988] 1 WLR 348; (1987) 56 P&CR 31; [1987] 2 EGLR 147; 284 EG 1587, CA
Bradshaw v Pawley [1980] 1 WLR 10; [1979] 3 All ER 273; (1979) 40
P&CR 496; [1980] EGD 100; 253 EG 693, [1980] 1 EGLR 49
British
Gas Corporation v Universities Superannuation
Scheme Ltd [1986] 1 WLR 398; [1986] 1 All ER 978; [1986] 1 EGLR 120; (1986)
277 EG 980
British
Home Stores plc v Ranbrook Properties Ltd
[1988] 1 EGLR 121; [1988] 16 EG 80
Datastream
International Ltd v Oakeep Ltd [1986] 1 WLR
404; [1986] 1 All ER 966; (1985) 51 P&CR 218; [1986] 1 EGLR 98; 277 EG 66
Gisborne v Burton [1988] 2 EGLR 9; [1988] 38 EG 129, CA
Gregg v Richards [1926] Ch 521
Law Land
Co Ltd v Consumers’ Association Ltd (1980)
255 EG 617, [1980] 2 EGLR 109, CA
London
County Council v Allen [1914] 3 KB 642
Milbourn v Lyons [1914] 1 Ch 34
Norwich
Union Life Insurance Society v Trustee Savings
Banks Central Board [1986] 1 EGLR 136; (1986) 278 EG 162
Pearl
Assurance plc v Shaw [1985] 1 EGLR 92;
(1984) 274 EG 490
Royal
Victoria Pavilion, Ramsgate, Re [1961] Ch 581;
[1961] 3 WLR 491; [1961] 3 All ER 83; (1961) 12 P&CR 349
SI
Pension Trustees Ltd v Ministerio de Marina de
la Republica Peruana [1988] 1 EGLR 119; [1988] 13 EG 48
Sefton v Tophams Ltd [1967] 1 AC 50; [1966] 2 WLR 814; [1966] 1 All
ER 1039; [1966] EGD 242; (1966) 189, HL
White v Taylor (No 2) [1969] 1 Ch 160; [1968] 2 WLR 1459; [1968] 1
All ER 349
This was an
originating summons by which the plaintiffs, Lynnthorpe Enterprises Ltd, raised
questions as to the correct interpretation of the rent review clause in an
underlease of the ground floor and basement of premises at 52 King’s Road,
Chelsea. A surveyor had been appointed as an expert under the rent review
provisions, but answers were required to two questions as to the basis on which
he should make his determination. The defendants were Sidney Smith (Chelsea)
Ltd, the underlessors.
John Dagnall
(instructed by Fuller Buckley of Cobham, Surrey) appeared on behalf of the
plaintiffs; Justin Fenwick (instructed by Oswald Hickson Collier & Co)
represented the defendants.
Giving
judgment, WARNER J said: This is an originating summons raising
questions as to the effect of a rent review clause in a lease. The lease, which
was in fact an underlease, was dated August 22 1978. The parties to it were
Sidney Smith (Chelsea) Ltd and Nose Wine Bar Ltd. Sidney Smith (Chelsea) Ltd
was therein called ‘the Landlord’. It is still the landlord of the premises
demised by the lease and it is the defendant in these proceedings. I will call
it ‘the landlord’. Nose Wine Bar Ltd was in the lease called ‘the Tenant’ and
that expression was thereby defined as including, where the context should so
admit, ‘its successors in title and permitted assigns’.
By the lease
the landlord demised the ground floor and basement of 52 King’s Road, Chelsea,
to Nose Wine Bar Ltd for the term of 15 years from August 22 1978. For a reason
that will appear, I quote the actual words of the habendum:
To hold the
same unto the Tenant for the term of fifteen years from the date hereof
(hereinafter called ‘the said term’).
The reddendum
divided that term into seven periods. For the first two of those periods, which
were of nine months each, the rent was fixed at £10,000 and £20,000 per annum
respectively. For each of the subsequent five periods, the first of which was
of a year and a half and the other four were of three years each, the reddendum
provided that the rent should be either the rent payable under the lease
immediately prior to the commencement of that period or ‘the fair market rent
of the demised premises at the commencement of’ that period. These proceedings
relate only to the last two of those seven periods, namely that commencing on
August 22 1987 and that commencing on August 22 1990.
Clause 1(2) of
the lease provided:
The said fair
market rent shall be the amount which shall be agreed between the Landlord and
the Tenant to be the fair annual market rent for the time being obtainable as
between a willing landlord and a willing tenant in respect of the demised
premises on a letting thereof as a whole with vacant possession but upon the
supposition (if not a fact) that the Tenant has complied with all the
obligations as to repair and decoration and for compliance with statutory
requirements herein imposed on the Tenant (but without prejudice to any rights
or remedies of the Landlord in regard thereto) for a term of years equivalent
to the said term And Subject to similar covenants and conditions to those
contained in this Lease but there being disregarded any effect on the rent of,
and then a
number of the usual sort of factors were listed.
Clause 1(3)
provided for the determination of ‘The said fair market rent’, in default of
agreement between the landlord and the tenant, by a surveyor who was to act as
an expert and not as an arbitrator.
Clause 2 of
the lease contained the tenant’s covenants. By clause 2(8) the tenant covenanted,
so far as now material, not to underlet or part with or share the possession of
any part of the demised premises and not to assign the demised premises as a
whole without the previous written consent of the landlord (such consent not to
be unreasonably withheld).
By clause
2(11) the tenant covenanted as follows:
(a) Not to use or permit the demised premises or
any part thereof to be used for any illegal or immoral purpose or for betting
gaming wagering or for any noxious noisy or offensive trade or business and not
without the Landlord’s previous consent in writing such consent not to be
unreasonably withheld to use the demised premises otherwise than for the
business of a wine bar and the sale of snacks. Provided always that in any
event the demised premises nor any part thereof shall not at any time be used
for any purpose which shall in the reasonable opinion of the Landlord compete
or conflict with any of the Landlord’s businesses or interests from time to
time within 200 yards of the demised premises or which shall be prohibited by
any superior landlords or which shall in the reasonable opinion of the Landlord
not be in keeping with a high class shopping parade.
(b) To ensure at all times during the said term
that the demised premises shall be open for trading at all times during normal
business hours for the locality (public and bank holidays excepted) and that
the display in the windows of the demised premises of any goods or articles
shall be arranged in a neat and attractive manner.
By clause
2(12)(a) the tenant covenanted:
Not to do or
permit or suffer anything in or upon the demised premises or any part thereof
which may be or become a nuisance annoyance or cause damage or inconvenience to
the Landlord or the Superior Landlord or the tenants of the Landlord or of the
Superior Landlord or the tenants or occupiers of other property in the
neighbourhood or which may render the Landlord or the Tenant liable to any
notice under any Public Health Act for the time being in force or for any purpose
or in any way which would constitute a breach of any of the provisions of any
private or public Act or Acts of Parliament for the time being in force or any
regulations or bye-laws made thereunder or by any competent public or local
authority whether affecting the Landlord or any of its present or future
property (including the demised premises).
Those are, I
think, all the provisions of the lease which I need mention.
At some time
after the grant of the lease Nose Wine Bar Ltd changed its name to Blushes Ltd.
On November 6
1981 a deed of variation was entered into. The parties to it were the landlord
of the first part, Blushes Ltd of the second part, and two gentlemen, Mr Barry
and Mr Garrett, of the third part. That deed (which I will call ‘the deed of 1981’)
had three main effects. First, it increased the rent payable for the third
period specified in the reddendum (namely the period from February 22 1980 to
August 21 1981) to £40,000 per annum. That has no relevance to the present
questions. Second, it introduced Mr Barry and Mr Garrett as guarantors of the
obligations of the tenant under the lease. There were in the deed of 1981
provisions ancillary to that which, in my view, have no relevance to the
present questions either. Third, the deed of 1981 varied clause 2(11)(a) of the
lease. Clause (4) of the deed provided:
Clause
2(11)(a) of the Underlease shall be renumbered 2(11)(a)(i) and the following
sub-clauses shall be added:
(ii) Not to use or permit the demised premises or
any part thereof to be used
pornographic indecent or obscene books video tapes or films.
(iii) To notify the Landlord in writing of all
renewals of licences and of any applications for justices’ on-licences not less
than 21 days prior to renewal or application date.
Clause (5) of
the deed of 1981 provided:
Save as
hereby modified the provisions of the Lease shall remain in full force and
effect in all respects.
(The draftsmen
of the deed seem to have been a little uncertain about whether they should
refer to the lease as ‘the Underlease’ or ‘the Lease’.)
In 1982, with
the requisite consent of the landlord, Blushes Ltd assigned the lease to a
company called Essexpark Ltd. Mr Barry and Mr Garrett were not thereby released
from their obligations under the deed of 1981.
On August 20
1986 Essexpark Ltd entered into a formal agreement for the sale of the goodwill
and assets of the business that it carried on at the demised premises to
Lynnthorpe Enterprises Ltd, which is the plaintiff in the present proceedings.
I will call it ‘Lynnthorpe’. The lease was included in the property agreed to
be sold and the agreement was expressed to be conditional on the grant by the
landlord of the consent required for the assignment of the lease. There is no
evidence that the landlord was ever told of the existence, much less of the
terms, of that agreement.
On August 22
1986, a deed (which I shall call ‘the deed of 1986’) was entered into between
five parties, namely the landlord (therein called ‘the Lessor’) of the first
part, Essexpark Ltd (therein called ‘the Assignor’) of the second part,
Lynnthorpe (therein called ‘the Assignee’) of the third part, Mr Garrett and Mr
Barry (therein called ‘the Original Sureties’) of the fourth part, and Mr Lynn
and Mr Thorpe (therein called ‘the New Sureties’) of the fifth part.
The recitals
in the deed of 1986 referred to a number of matters, not in strict chronological
order. Among those matters were the lease (which was in the deed of 1986 called
‘the Underlease’); the provisions of the deed of 1981 (which was therein called
‘the Deed of Variation’) about the increase of rent and about the obligations
of ‘the Original Sureties’, but, conspicuously, not those varying the terms of
clause 2(11)(a) of the lease; and the fact that a deed of variation of the
lease that Essexpark Ltd had covenanted to enter into in 1982 had not been
completed. The deed of 1986 also contained a recital (recital 7) that ‘The
Assignor desires to assign the Underlease to the Assignee’ and a final recital
(recital 9) in these terms:
The Lessor
has agreed to grant the Assignor licence for such assignment subject to the
parties hereto entering into the further covenants hereinafter contained and
the further variations to the Underlease being effected accordingly.
It seems clear
from those recitals and from the wording of the operative part of the deed of
1986 that its authors overlooked the provisions of the deed of 1981 varying
clause 2(11)(a) of the lease.
The operative
part of the deed of 1986 was, so far as material, in these terms:
In
consideration of the licence hereinafter granted and of the covenants by the
parties hereinafter contained
1 The Underlease is hereby varied as follows:–
(a) Clause 2(11)(a) of the Underlease shall be
varied so as to permit the demised premises to be used as a wine bar for the
sale and consumption of wine spirits beer cider any fermented distilled or
spiritous liquor soft drinks coffee tea and food (including meals and snacks)
subject to substantial food being available at all times on both floors of the
demised premises and subject also to no intoxicating liquor being sold in the
demised premises for consumption off the premises
(b) The Assignee covenants with the Lessor as
follows:–
(i) Not to use or permit the demised premises to
be used otherwise than in the manner permitted by the preceding clause 1(a)
(ii) That substantial food will at all times be
available on both floors of the demised premises when the demised premises are
open for the sale of intoxicating liquor and that no intoxicating liquor shall
be sold therein for consumption off the premises
(iii) Not to sell or permit the sale of intoxicating
liquor outside the hours permitted by any Justices Licence Certificate or order
in force at any time relating to the demised premises and to close the demised
premises not later than half an hour after midnight on weekdays and not later
than 11.30 p.m. on Sundays
(iv) To obtain any necessary licence consent or
authority of any person body council corporation or Government Department for
the use permitted by clause 1(a) hereof.
I need not read
clause 1(c). It is common ground that it would need rectification to make
sense.
Clause 1(d)
provided:
Save as
hereby modified the provisions of the Underlease as varied by the Deed of
Variation shall remain in full force and effect.
Clauses 2, 3
and 4 were as follows:
2 The Lessor hereby grants to the Assignor
licence to assign the Underlease to the Assignee.
3 The Assignee hereby covenants with the Lessor
that as from the date when the Assignor’s estate and interest in the Underlease
shall be assigned to it pursuant to the Licence hereinbefore contained and
thenceforth during the residue of the term granted by the Underlease the
Assignee will pay the rent thereby reserved and perform and observe the
covenants and conditions on the part of the tenant therein contained as varied
by the Deed of Variation and this Deed.
4 The New Sureties hereby jointly and severally
covenant with the Lessor that from the date referred to in Clause 3 above the
Assignee will pay the rent on the days and in the manner provided by the
Underlease as varied by the Deed of Variation and this deed and that the
Assignee will observe all the tenant’s covenants and conditions contained in
the Underlease and the Deed of Variation and this Deed and that in the case of
default in such payment of rent or in the performance or observance of such
covenants the New Sureties will pay and make good to the Lessor on demand all
losses damages costs expenses thereby arising or incurred by the Lessor subject
always to the same provisions (a) and (b) in Clause 2 of the Deed of Variation
as if the same were set out herein in full and formed part thereof.
I have not, of
course, thought it necessary to read provisos (a) and (b) in clause 2 of the
deed of 1981. Nor do I need to read clause 5 of the deed of 1986. Clause 6
declared that ‘the Original Sureties’ were not to be released from their
obligations under the deed of 1981.
On the same
day (August 22 1986), the assignment of the lease by Essexpark Ltd to
Lynnthorpe was completed.
A surveyor has
been appointed under clause 1(3) of the lease to act as an expert for the
purposes of the rent review that was due on August 22 1987. Two questions have,
however, arisen between the parties as to the basis on which he should make his
determination. This originating summons was issued on March 29 1988 for the
determination of those questions by the court. Both questions relate to the
terms of the ‘letting’ postulated by clause 1(2) of the lease, that is of what
is commonly called, in cases about rent review clauses, ‘the hypothetical
lease’.
The first
question is as to the terms of the user covenant in the hypothetical lease.
More precisely it is as to the effect (if any) of the deed of 1986 on clause
2(11)(a) of the lease.
The second
question is as to the duration of the hypothetical lease. Is it to be for the
unexpired residue of a term of 15 years from August 22 1978, or for a term of
15 years from the review date, or from some other and, if so, what term?
On the first
question, the main issues between the parties are as to the proper construction
of the deed of 1986. However, at the end of his argument on that question, Mr
Fenwick, on behalf of the landlord, put forward, albeit with commendable
restraint, the submission that the provisions of the deed of 1986 were
irrelevant because, on the proper construction of clause 1(2) of the lease, the
hypothetical lease was to contain only covenants and conditions similar to
those contained in the lease itself regardless of any subsequent variation.
That submission was based on two sentences in the judgment of Mervyn Davies J
in SI Pension Trustees Ltd v Ministerio de Marina de la Republica
Peruana [1988] 1 EGLR 119. Although that submission was made, as I have
said, at the end of Mr Fenwick’s argument on the first question, it comes
logically at the beginning of it, because, if it is right, one need not
consider the construction of the deed of 1986. I will therefore deal with it
first.
In the SI
Pension Trustees case, the facts were, briefly, these. The lease had
originally been granted in 1973 to a company which carried on the business of
mortgage, finance and insurance consultants. The user covenant in the lease
was: ‘Not to use the demised premises otherwise than as offices in connection
with the lessee’s business of mortgage finance and insurance consultants’. In
1976 the lease was, pursuant to a licence to assign granted by the lessor,
assigned to the defendant, who wished to use the premises as offices for the
Peruvian Naval Attache. By the licence the lessor gave his consent for the
defendant to use the demised premises as offices for his ‘lawful diplomatic
mission in lieu of the user at present carried on by the lessee’. By clause 2
of the licence the defendant covenanted not to use or permit the premises to be
used otherwise than for the purpose of his lawful diplomatic mission. Clause 3
of the licence was as follows:
This licence
is restricted to the particular assignment and change of user hereby authorised
and save to the extent that the same are hereby expressly varied the covenants
conditions provisions and agreements contained in the
effect.
On a rent
review the question arose what user covenant the hypothetical lease was to be
assumed to contain. Clause 5(3) of the lease, which defined the market rent for
the purposes of that clause, provided in effect that the hypothetical lease
should be ‘subject to provisions similar to those contained in this lease’. It
was argued by Mr Cherryman, on behalf of the defendant, that the hypothetical
lease was to be assumed to restrict the use of the premises to use as offices
for the purpose of the hypothetical tenant’s lawful diplomatic mission. Mervyn
Davies J said at p 120 H:
As will be
evident from that formulation, Mr Cherryman regards 5(3) as now to be read as
if ‘the provisions contained in the lease’ were the provisions of the lease as
varied by the licence. I do not think that is right. In the first place 5(3)
refers to the provisions of the lease, not to the provisions of the lease as
they may be varied from time to time. Second, when one reads the licence one
sees that the variations there made are personal to the persons there
contracting. If and when the minister ceases to be a tenant the terms of the
original lease revive. See licence, clause 3. In these circumstances ‘the
provisions of the lease’ referred to in 5(3) seem to me to be the original
provisions of the lease unaffected by the personal arrangements made respecting
the current tenant.
Following the
guidance afforded by the decision of the Court of Appeal in The Law Land Co
Ltd v Consumers’ Association Ltd (1980) 255 EG 617, [1980] 2 EGLR
109, Mervyn Davies J went on to hold that the hypothetical lease must be
assumed to contain a covenant restricting the use of the premises to use as
offices in connection with a business of mortgage, finance and insurance
consultants carried on by the hypothetical tenant or any assignee of his.
I do not think
that in the passage that I have read Mervyn Davies J was giving two independent
reasons for the conclusion he reached. I think that he was giving expression to
a process of reasoning founded on two factors, the first being that clause 5(3)
referred to the provisions of the lease, not to those of the lease as varied
from time to time, and the second being that the variation made by the licence
was personal to the defendant.
In other
words, I do not think that Mervyn Davies J rested his decision in any way on a
general proposition that a provision in a rent review clause requiring it to be
assumed that the hypothetical lease contains covenants similar to those
contained in the actual lease is to be construed as requiring any subsequent
variations of those covenants to be ignored. Such a proposition would be
contrary to the principle laid down in what is now a copious line of authority
in this court and in the Court of Appeal that the construction of a rent review
clause should be approached on the footing that, in the absence of clear words
compelling a different conclusion, the terms of the hypothetical lease should not
be held to be such as to cause the tenant to have to pay, by way of reviewed
rent, either for more or for less than what he enjoys under the actual lease. I
was referred to a number of the cases in that line of authority. I refrain from
listing them all. They start with the judgment of Vinelott J in Pearl
Assurance plc v Shaw (1984) 274 EG 490*. They include the judgment
of the Vice-Chancellor in British Gas Corporation v Universities
Superannuation Scheme Ltd [1986] 1 EGLR 120, the judgment of Hoffmann J in Norwich
Union Life Insurance Society v Trustee Savings Banks Central Board, ibid
p 136, and the judgment of the Court of Appeal in Basingstoke and Deane
Borough Council v The Host Group Ltd [1987] 2 EGLR 147. The last in
date that was cited to me was my own judgment in British Home Stores plc
v Ranbrook Properties Ltd [1988] 1 EGLR 121. I will call that principle,
to which I shall have to return later in this judgment, ‘the presumption in favour
of reality’. It clearly requires the terms of the hypothetical lease to reflect
any variations (other than perhaps variations personal to a particular tenant)
in the terms of the actual lease.
*Editor’s
note: Also reported at [1985] 1 EGLR 92.
So I turn to
the question of construction of the deed of 1986. On behalf of Lynnthorpe, Mr
Dagnall contends that the effect of clause 1 of the deed of 1986 was to
substitute for paras (i) and (ii) of clause 2(11)(a) of the lease as varied by
clause (4) of the deed of 1981 an absolute covenant against using the demised
premises otherwise than in the manner specifically permitted by clause 1(a) of
the deed of 1986. In particular, its effect was to delete from clause 2(11)(a)
the obligation of the landlord not unreasonably to withhold its consent to the
use of the premises for other purposes.
On behalf of
the landlord, Mr Fenwick contends that the deed of 1986 left that obligation
unaffected. He points out that clause 2(11)(a) in its original form was
divisible into four parts. There was, first, the absolute prohibition against
using the premises or permitting them to be used for any illegal or immoral
purpose or for betting, gaming or wagering, or for any noxious, noisy or
offensive trade or business. Second, there was the restriction of the use of
the premises to use for the business of a wine bar and the sale of snacks.
Third, there was the obligation of the landlord not unreasonably to withhold
its consent to a variation of that restriction. Lastly, there was the proviso
to that obligation entitling the landlord to withhold its consent to a proposed
use competing or conflicting with businesses or interests of the landlord, or
prohibited by a superior landlord or not in keeping with a high-class shopping
parade. Mr Fenwick’s contention is that clause 1 of the deed of 1986 left the
first, third and fourth parts of clause 2(11)(a) unaffected. Its only material
effect was to vary the second part so as to permit the premises to be used for
a wider purpose than the business of a wine bar and the sale of snacks–broadly
speaking to allow them to be used as a restaurant.
Mr Dagnall
concedes that if clause 1(a) of the deed of 1986 had stood alone it would have
been ambiguous and that that ambiguity would probably have been resolved in
favour of Mr Fenwick’s contention. But, he says, clause 1(b)(i) resolves the
ambiguity in favour of his own contention. Clauses 1(a) and 1(b)(i) must be
looked at together, particularly as they are both introduced by the words ‘The
Underlease is hereby varied as follows’.
I have come to
the conclusion that, on this point, Mr Dagnall’s contention is correct. It is
not an easy point, and it is made all the less easy by the fact that the deed
of 1986 is carelessly drafted. However, as Mr Dagnall pointed out, and as I
think Mr Fenwick accepted, Mr Fenwick’s construction involves reading clause
1(b)(i) as if it contained the words ‘in the manner permitted by clause
2(11)(a) of the lease as varied by the preceding clause 1(a)’, instead of the
words ‘in the manner permitted by the preceding clause 1(a)’. It may be
observed that clause 1(b)(iv) uses the expression ‘the use permitted by clause
1(a) hereof’ in a context where it must almost certainly mean only the use
specified in clause 1(a). Moreover, as Mr Dagnall also pointed out, on Mr
Fenwick’s contention clause 1(b)(i) would be otiose. Mr Fenwick suggested that,
having regard to the prohibitions in the lease itself (particularly clause
2(12)(a)) and to the terms of clause 1(a) of the deed, some at least of the
provisions of clauses 1(b)(ii), (iii) and (iv) were also otiose. Certainly some
of those provisions are otiose, for instance the repetition of the condition
that no intoxicating liquor be sold in the demised premises for consumption off
the premises, but not all of them are.
In case I
should reach that conclusion, Mr Fenwick put forward the alternative contention
that clause 1(b)(i) contained a covenant which was personal to Lynnthorpe, in
the sense that it would not bind any successor in title of Lynnthorpe, and that
it should therefore be excluded from the hypothetical lease. Mr Dagnall argued
that, even if the covenant were personal to Lynnthorpe, its exclusion from the
hypothetical lease would not follow, but his main answer to the contention was
that the covenant did extend to successors in title of Lynnthorpe.
Mr Fenwick
relied of course on the contrast between the form of clause 1(a) and that of
clause 1(b) and in particular on the fact that the covenants in clause 1(b) are
expressed to be made by ‘the Assignee’, an expression which is defined by the
deed as meaning Lynnthorpe without any reference to its successors in title. He
contrasted that with the expression ‘the Tenant’, which is defined in the lease
as including the original tenant’s successors in title and is used also in
clauses 3 and 4 of the deed of 1986 to mean, clearly, the tenant for the time
being. Mr Fenwick relied in support of his argument on a passage in the
judgment of Templeman LJ in the Law Land case (1980) 255 EG 617 at p
621, [1980] 2 EGLR 109, where he draws attention to the contrast, in the lease
in that case, between the meaning of the expression ‘the Consumers Association
and its associated organisations’ and that of the expression ‘the Lessee’,
which was defined as including the Consumers’ Association and persons deriving
title under it. Not surprisingly, the Court of Appeal held that those
expressions meant different things.
Mr Dagnall met
that argument in two ways. First, he pointed to indicia in the deed of 1986,
which, he submitted, were enough to show that the covenant in clause 1(b)(i)
was intended to extend to successors in title of Lynnthorpe. Second, he
submitted that, if those indicia did not quite go that far, they showed at
least that the express terms of the deed were equivocal as to what was
intended, in case the matter was clinched in his favour by section 79 of the
Law of Property Act 1925.
Among the
indicia in the deed to which Mr Dagnall pointed were these, which I found
telling. First, the words ‘The Assignee covenants with the Lessor as follows’
at the beginning of clause 1(b) introduced not only clause 1(b)(i) but also
clauses 1(b)(ii), (iii) and (iv). Having regard to the content of the latter clauses,
it is unlikely that they were intended to apply only so long as Lynnthorpe
itself was the tenant. Second, unless the expression ‘all the tenant’s
covenants and conditions contained in the Underlease and the Deed of Variation
and this Deed’ in clause 4 includes the covenants in clause 1(b), the New
Sureties did not guarantee the performance of the latter covenants, which is
unlikely to have been the intention. Third, if that expression does include the
covenants in clause 1(b), the corresponding reference to ‘the covenants and
conditions on the part of the tenant’ in clause 3 must include them too, and
that clause is expressly to have effect ‘during the residue of the term granted
by the Underlease’.
Having regard
to those indicia, I think that Mr Dagnall made good his point that the deed was
at least equivocal as to whether the covenant in clause 1(b)(i) was intended to
bind successors in title of Lynnthorpe. That makes it relevant to consider
section 79 of the Law of Property Act 1925.
That section
provides, so far as material:
A covenant
relating to any land of a covenantor or capable of being bound by him shall,
unless a contrary intention is expressed, be deemed to be made by the
covenantor on behalf of himself, his successors in title and the persons
deriving title under him or them, and, subject as aforesaid, shall have effect
as if such successors and other persons were expressed.
In the light
of what was said in Earl of Sefton v Tophams Ltd [1967] 1 AC 50
by Lord Upjohn at pp 72-73 and by Lord Wilberforce at pp 80-82, it was common
ground that section 79 could not of itself render a covenant binding on a
successor of title of Lynnthorpe. Only the doctrine of privity of estate could
do that. Mr Fenwick conceded, however, that, if the section applied, the
covenant in clause 1(b)(i) could not be regarded as personal to Lynnthorpe and
that it was of such a kind that privity of estate would then make it binding on
a successor in title of Lynnthorpe. In my view, that concession was rightly
made.
In arguing
that I should hold section 79 not to apply here, Mr Fenwick relied on the
decision of Pennycuick J in Re Royal Victoria Pavilion, Ramsgate [1961]
Ch 581 as showing that the contrary intention referred to in the section need
not be expressed in so many words but may be gathered from the wording and
context of the instrument. That is undoubtedly so. However, in that case, the
covenant in question was, as Pennycuick J said, ‘manifestly intended to be
personal only’. That is not so in this case, where, as I have already
indicated, the express terms of the deed are, in my view, at least equivocal.
As is shown by Gregg v Richards [1926] Ch 521, to which Mr
Dagnall referred me, where that is so, the court must give effect to a section
such as this.
Mr Fenwick’s
main submission on this part of the case was that section 79 did not apply
because at the time when the deed of 1986 was entered into the assignment to
Lynnthorpe had not taken place, and indeed might never take place, so that
Lynnthorpe had no land and was capable of binding no land to which the covenant
related. That submission led to a complex and most interesting argument,
because Mr Dagnall sought to meet it by referring to analogous situations in
which the court would treat a series of transactions as a single transaction or
would treat a person as capable of binding land before he acquired title to it.
I have not in
the end found any of those analogies helpful, and I hope that I shall be
acquitted of discourtesy to counsel if I deal with their arguments upon them
fairly shortly.
Mr Dagnall’s
first analogy was White v Taylor (No 2) [1969] 1 Ch 160.
The decision in that case turned, however, on the fact that the sales were
contemporaneous.
His second
analogy was Gisborne v Burton [1988] 3 All ER 775*. But there was in the
present case no element of artificiality in the transactions such as was there.
*Editor’s
note: Also reported at [1988] 2 EGLR 9.
Mr Dagnall’s
third analogy was the doctrine of ‘feeding the estoppel’. But there was in the
present case no misrepresentation of fact.
Mr Dagnall’s
fourth analogy was Abbey v Gutteres (1911) 55 SJ 364, which
showed, he said, that a person with an equitable interest in land as the
purchaser under a contract could burden the land with a restrictive covenant if
he subsequently acquired the legal title to the land. That gave rise to an
argument in which I was referred also to Milbourn v Lyons [1914]
1 Ch 34 and [1914] 2 Ch 231 and to London County Council v Allen
[1914] 3 KB 642, and in which Mr Fenwick submitted, among other things, that
the effect of the deed of 1986 could not depend on the existence of a contract
of which, for aught we knew, the landlord was unaware.
It seems to me
that, in truth, I am faced here with a simple question of construction of
section 79 itself. It is plain from the terms of the deed of 1986 that, at the
time it was executed, the parties to it contemplated that the lease would be
assigned to Lynnthorpe, though it might not be. Lynnthorpe thereby entered into
a covenant that was to take effect if and when the lease was assigned to it. Is
it to be held that the land comprised in the lease was not ‘capable of being
bound’ by Lynnthorpe in that event? To
answer that question in the affirmative would, to my mind, be to place an
unwarrantable restriction on the meaning of those words in the section.
Parliament, by referring in the section to ‘any land of a covenantor or capable
of being bound by him’ has evinced an intention that the land need not belong
to the covenantor at the time of the covenant. Otherwise, the words ‘or capable
of being bound by him’ add nothing. I therefore hold that section 79 does apply
here.
In the result,
Lynnthorpe succeeds on the questions of construction of the deed of 1986.
I turn to the
question about the duration of the hypothetical lease.
In their
arguments, counsel canvassed three possible answers to that question:
(i) a term of 15 years from
the review date,
(ii) the unexpired residue of
a term of 15 years from August 22 1978, and
(iii) a term of years equal to
that unexpired residue, that is six years in the case of the present rent
review and three years in the case of the review that is to take place at
August 22 1990.
I will call
those answers (i), (ii) and (iii) respectively.
Mr Fenwick, on
behalf of the landlord, argued for answer (i), Mr Dagnall, on behalf of
Lynnthorpe, for answer (ii). Subject to an argument by Mr Fenwick that answer
(ii) created an insoluble problem for the valuer, it was common ground between
them that the only practical difference between answer (ii) and answer (iii)
lay in the hypothetical tenant’s (or his assignee’s) prospects of renewal under
Part II of the Landlord and Tenant Act 1954 at the end of the lease. His
chances of being awarded a long lease under those provisions would be better
with answer (ii) than with answer (iii), so that answer (iii) would make the
hypothetical lease less valuable. Mr Dagnall’s reason for not contending for
answer (iii) was, of course, that it would conflict with what I have called the
presumption in favour of reality.
Both counsel,
rightly in my opinion, took as the starting point of their arguments the words
‘for a term of years equivalent to the said term’ in clause 1(2) of the lease
and the definition of ‘the said term’ in the habendum as meaning ‘the term of
fifteen years from the date hereof’. Both agreed that ‘equivalent’ meant ‘of
equal value’, but they differed as to the interpretation of the phrase ‘the
term of 15 years from the date hereof’. Mr Dagnall contended that it meant 15
years from August 22 1978. Mr Fenwick contended that, in relation to the
hypothetical lease, it meant 15 years from the date of that lease.
Here again I
am of opinion that Mr Dagnall’s contention is to be preferred, for the
following reasons.
First, a lease
for 15 years from the review date would not be equivalent to or ‘of equal value
with’ the actual lease at the review date.
Second, I do
not think that the way in which Mr Fenwick reads the words ‘the term of 15
years from the date hereof’ into clause 1(2) of the lease will do. If one
substitutes those words for the words ‘the said term’ in that clause, they mean
literally 15 years from the date of the lease, not 15 years from the date of
the letting mentioned earlier in the clause.
Third, as Mr
Dagnall pointed out and as Mr Fenwick accepted, if answer (i) had been
intended, it would have been unnecessary to use in clause 1(2) such a phrase as
‘for a term of years equivalent to the said term’. The apt phrase would have
been ‘for a term of 15 years’.
Fourth, if
there is any ambiguity in clause 1(2), read with the definition in the
habendum, that ambiguity must be resolved in accordance with the presumption in
favour of reality: see the Norwich Union case, to which I referred
earlier. Mr Fenwick sought to distinguish that case on the ground that there
the rent review
but it does not, in my opinion, make the case irrelevant. Hoffmann J rested his
decision on (and I quote) ‘a presumption that the hypothesis upon which the
rent should be fixed upon a review should bear as close a resemblance to
reality as possible’.
Mr Fenwick
referred me to Ross on Drafting and Negotiating Commercial Leases (2nd
ed, pp 87-88, 370-372 and 375-377, where there are extracts from model forms
prepared by a joint committee set up by the Law Society and the Royal
Institution of Chartered Surveyors, and from a background note by that
committee, and a discussion of the subject by Mr Ross. I have not found
anything there helpful. I was told that the model forms were first published on
June 6 1979 and that a revised version was published on March 26 1980, and I
was told that the first edition of Mr Ross’ work was published in 1980 and the
second in 1984. Thus, none of that material can have been considered by the
draftsmen of the lease of August 22 1978. On the other hand, all that material
was published before any of the cases in this court or in the Court of Appeal
establishing the presumption in favour of reality were decided, so that its
authors cannot have considered their effect.
I was much
impressed by an argument put forward by Mr Fenwick, to which I have already
alluded, that answer (ii) would create an insoluble problem for the valuer.
That problem was this. Answer (ii), having regard to the terms of clause 1(2)
of the lease, requires one to envisage a fresh letting on the review date (in
this instance August 22 1987) for a term of 15 years commencing on August 22
1978. While leases are commonly granted for terms commencing before the date of
their execution, a lease for a term commencing as much as nine years before the
date of its execution would be, to say the least, unusual. It is not something
for which there is in the real world a market. There is, therefore, no basis in
that world on which the valuer could determine, as required by clause 1(2),
‘the fair annual market rent’ for it.
Mr Fenwick
coupled with that argument a theoretical argument which I found less
impressive. This was that, if one were to envisage a fresh letting on August 22
1987 neither for 15 years nor for six years but on the terms of the existing
lease, one would find that the only provision in the hypothetical lease as to
the rent payable from that date was the rent review clause itself.
At one time it
seemed to me that those arguments, or at all events the first one, must lead to
the conclusion that answer (iii) was the correct one, because that bore a
closer resemblance to reality than answer (i).
In my opinion,
however, Mr Fenwick himself supplied the answer to the problem when he argued
that, in order to produce the result contended for by Mr Dagnall without giving
rise to that problem, the draftsmen of clause 1(2) would have had to use some
such formula as ‘for a term equal to the residue then unexpired of the term
granted by this lease but having regard to the lessee’s rights under the
Landlord and Tenant Act 1954’, which was actually the formula used in the lease
that was in question in Datastream International Ltd v Oakeep Ltd
[1986] 1 EGLR 98–not that anything in that case turned on the use of it.
Mr Dagnall
accepted that that formula expressed the practical result of answer (ii),
assuming of course that the expression ‘the lessee’ there meant the lessee or
his successors in title.
The question,
therefore, is whether, in the light of that degree of consensus between
counsel, I can construe the words ‘for a term of years equivalent to the said
term’ in clause 1(2) as importing what came to be called during the argument
before me ‘the Datastream formula’. It seems to me that I can, since the
formula spells out what constitutes a term ‘equivalent’ to the term granted by
the lease. I do not overlook that the formula goes further than simply to
define a term of years. But one has to bear in mind that a lease for a term
expressed to commence before the date of the lease cannot create an estate in
the land commencing before that date. In respect of the period before that date
there can only be attributed to it some other effect, if any–see Bradshaw
v Pawley [1980] 1 WLR 10.
Of course, if
the Datastream formula is to be used in any declaration I make, its
wording should be adapted to accord with the wording of the present lease, in
particular by referring to ‘the tenant’ rather than ‘the lessee’. However, I
will hear counsel as to the terms of the declarations I should make in answer
to both questions in the originating summons.
The
defendants were ordered to pay the plaintiffs’ costs.
