Landlord and tenant — Rent review clause in lease of commercial premises — Whether time of the essence in respect of a provision triggering-off the procedure for rent review — Clause containing review provisions contained also a provision giving lessees an option to determine lease provided that they gave notice to do so by a certain date — Lessors failed to serve ‘trigger’ notice by prescribed date — Appeal from decision of Warner J, who held that time was of the essence because of the interrelation between the rent review provisions and the option to determine — Lessors had assumed, before publication of decision in United Scientific Holdings Ltd v Burnley Borough Council that time must be of the essence, but after consideration of that decision they served a ‘trigger’ notice, to which the lessees objected — In their appeal against the decision of Warner J the lessors submitted that there were a number of surrounding circumstances, such as the length of the lease (42 years) and the absence of a strict timetable in the review machinery, which suggested that time was not of the essence, despite the interrelation with the option to determine — Held, upholding Warner J’s decision and rejecting the submission that these circumstances made any difference, that time was of the essence in this case — Appeal by lessors dismissed
This was an
appeal by Coventry City Council from a decision of Warner J on an originating
summons by which the council, as plaintiffs, sought to establish against J
Hepworth & Son Ltd, defendants and present respondents, that a rent review
notice served by the council was valid and effective although served after the
expiry of a time-limit. The appellants were the lessors, and the respondents the
lessees, of part of a building in Coventry known as Broadgate House. The
decision of Warner J was reported at (1982) 261 EG 566, [1982] 1 EGLR 114.
Anthony Cripps
QC and R Denman (instructed by Sharpe, Pritchard & Co, agents for A H
Pitts, chief solicitor, Coventry City Council) appeared on behalf of the
appellants; T L G Cullen QC and C P F Rimer (instructed by Hepworth &
Chadwick, of Leeds) represented the respondents.
Giving
judgment, LAWTON LJ said: This is an appeal by the Coventry City Council, as successor,
pursuant to the Local Government Act 1972, of the Lord Mayor, Alderman and
Citizens of the City of Coventry, against an order made by Warner J on July 23
1981, whereby he refused the appellants the declaration for which they had
asked in their originating summons dated October 24 1979. The appellants had
asked for a declaration ‘that on the true construction of a lease dated August
10 1953 made between The Lord Mayor Alderman and Citizens of the City of
Coventry and J Hepworth & Son Ltd’ — the respondents in this appeal — ‘and
in the events which have happened particularly the service of a notice dated
August 4 1977 by the plaintiffs on the defendants of the plaintiffs’ desire to
increase the rent payable under the said lease the rent currently payable under
the said lease is an increased rent to be agreed as provided by clause 4(3)(b)
thereof alternatively to be determined by arbitration as provided by clause
4(3) thereof’.
The background
of the case, which is relied upon by the plaintiffs, is as follows: Coventry
was badly damaged during the 1939-45 war. A considerable part of the shopping
centre was either destroyed or damaged. Between 1945 and 1953 the City Fathers
arranged for the repair and reconstruction of the damaged parts. By 1953 a considerable
portion of the centre of Coventry had been reconstructed and repaired. Included
in the buildings which had been repaired was a block of property known as
Broadgate House, Broadgate. This was in the shopping area. The City Fathers
were keen to see that that part of the shopping area was occupied by a
reputable trading company which would be willing to take a lease for a fairly
substantial time. The time element was likely to be important to a prospective
tenant, because in the summer of 1953 a certain amount of internal work still
had to be done on Broadgate House.
The defendants
were willing to contemplate taking a longish lease of part of Broadgate House
and to establish there one of their well-known shops. They have branches in
many parts of the country. Under the contemplated arrangements they would have
to do a certain amount of shopfitting and the like and to rearrange the
interior of the premises. In the summer of 1953 the City Fathers and the
defendants agreed the terms of a lease for 42 years. The defendants were to
take part of Broadgate House. It was more than they wanted for their own
trading purposes. The lease contemplated in clause 2(12) that part of the
property let to them would be sublet by the defendants to other retail trading
companies. It is also clear from that subclause that it was contemplated that
other parts of the premises would be sublet. There was no restriction on the
length of time for which the defendants could sublet. All this was happening in
1953. That was a time when the Defence (General) Regulations, which had
controlled the lives of so many of us for many years and had also controlled
the activities of trading companies, were being relaxed. Nobody at that time,
so it seems to me, contemplated the kind of inflation which has beset us in
recent years, particularly in the last decade. But both the City Fathers and
the defendants seem to have appreciated that, as time went by, there might be
changes in both inflation and trading conditions which would require both
parties to the lease to consider whether it was advisable for the defendants to
continue as tenants for as long as 42 years at the original rent. This was, as
Mr Cripps on behalf of the City Fathers has pointed out, a long lease for a
retail trading company to be given. At that time leases of shop premises tended
to be for about 21 years. As a result of the parties contemplating the
possibility of changes in the future, clause 4(3) of the lease was inserted.
It is
necessary now for me to read the subclause as a whole. It provides as follows:
(a) The tenants may determine the term hereby
created on the 31st day of March 1975 provided that they shall have given
notice in writing to the Corporation of their intention so to do on or before
the 30th day of September 1974 and shall at all times up to the time of such
determination pay the rent hereby reserved Provided that on such determination
this lease and everything herein contained shall cease and determine but
without prejudice to the right of action of either party against the other in
respect of any antecedent claim or breach of covenant.
(b) On or before the 31st day of December 1973
the Corporation may give to the tenants notice in writing of their desire to
increase the rent hereby reserved in respect of the period from the 1st day of
April 1975 until the expiration of the term hereby created and if the tenants
and the Corporation shall thereafter agree upon the amount of such increased
rent then the rent so agreed shall become payable hereunder in respect of the
said period in
provisions herein contained as to payment for services or any of the other
terms and conditions herein contained).
(c) If a notice having been served by the
Corporation pursuant to clause 4(3)(b) aforesaid no agreement as therein
mentioned shall have been reached by the 28th day of February 1974 then
(without prejudice to the tenants’ right or power of determination contained in
the foregoing paragraph (a) of this subclause) the question of the rent to be
payable in respect of the period from the 1st day of April 1975 until the
expiration of the said term shall be determined by a single arbitrator in case
the parties can agree upon one within a period of one month next after the said
28th day of February 1974 otherwise to two arbitrators one to be appointed by
each party on or before the 30th day of April 1974 and in either case in
accordance with the Arbitration Act 1950 or any statutory enactment in that
behalf for the time being in force and (unless the term hereby created shall be
determined by the tenants under the right or power contained in the said
foregoing paragraph (a) of this subclause) the rent determined by such
arbitration shall (subject as hereinafter mentioned) be substituted as
aforesaid in respect of the said period from the 1st day of April 1975 until
the expiration of the said term notwithstanding the fact that the result of
such arbitration may not be known until after the said 1st day of April 1975 Provided
that in the event of the rent so determined being less than the rent hereby
reserved then such rent shall not be substituted as aforesaid and (unless the
said term shall be determined by the tenants as aforesaid) the rent hereby
reserved shall continue to be payable for the remainder of the said term
notwithstanding the result of such arbitration.
That subclause
contained what in the case of United Scientific Holdings Ltd v Burnley
Borough Council and Cheapside Land Development Co Ltd v Messels
Service Co [1978] AC 904 was described by Lord Fraser as a provision
‘triggering-off’ a procedure for rent review coupled with a break clause if the
tenant decided that he did not want to pay an increased rent.
Mr Cripps, on
behalf of the plaintiffs, has submitted that there are a series of surrounding
circumstances which should be taken into account when construing the lease and
which were not taken into account by Warner J when he came to construe it. He
says these circumstances are as follows. First, the fact that the lease was
granted for the purpose of getting tenants into a shopping area who would be
likely to stay there and want to stay there for a longish period. Secondly,
that the period of the lease was unusually long for the letting of shop
premises. Thirdly, that it was clear from the terms of the lease that the
tenants would not only trade from the leased premises but would regard part of
them as an investment, that part being those sections of the property which
they were entitled to, and clearly intended to, and did, sublet. Fourthly, it
was said that the various steps which were to be taken, namely, the giving of
the triggering notice, the dates when the break was to come about if it was to
come about at all and the provisions for arbitration, were over an extended
period and the lease did not contain, as so many leases which have been
reviewed by the court in recent years did contain, a strict timetable. He said
all those factors make a difference when the court comes to construe the lease.
In my opinion,
they make no difference at all. They were the ordinary circumstances which
surround many leases of shops and other commercial premises. The problem for
this court is to decide what the parties intended to happen under this lease at
the time when it was executed, namely, August 10 1953. The court looks at the
words of the lease to determine what they intended. As the House of Lords
pointed out in the case of United Scientific Holdings Ltd, no
presumption arises that time is to be of the essence of the lease unless there
are indications that the parties did intend that time should be so. As it
happens, starting some time in the late 1960s, the view became common in the
legal profession that, when there was a lease of commercial premises with a
rent review clause which contained requirements that notices should be given at
stated dates, there was a presumption that time was of the essence of the
contract. It was that assumption which led the plaintiffs in this appeal into
the difficulties in which they now find themselves. Somebody in their office
overlooked the fact that, under clause 4(3)(b), the notice of an intention to
seek a rent review had to be given on or before December 31 1973. Nothing was
done to take steps to bring about a possible increase of rent. That was of very
considerable importance to the plaintiffs at that time, because the rent
reserved by the lease was £8,500 per year, no doubt the rack rent in 1953, but
very far from the rack rent for premises of this kind in 1974. The parties were
unable to agree as to what was the rack rent in 1974 but the evidence shows
that the defendants’ advisers thought the rack rent would be in the region of
£50,000 per annum, whereas those of the plaintiffs thought it would be about
£85,000 per annum. The oversight having taken place, the legal advisers of the
plaintiffs at that time, following the presumption which had been generally
held by the legal profession, felt they could do nothing about serving any rent
review notice as they were out of time.
This problem
of time in relation to rent review clauses, against a background of rampant
inflation during the 1970s, was one which was causing difficulty to tenants and
landlords in all parts of the realm. As a result, the House of Lords, in the
cases to which I have already referred, decided not only to consider the proper
construction of the leases which were under consideration in the two appeals
which they were hearing, but to examine generally the law relating to rent
review clauses in relation to time and to give general guidance with regard to
the construction of leases containing rent review clauses. They delivered their
judgment on March 23 1977 and the general effect of that judgment was that
where in leases there is a rent review clause and there are no express words
making time of the essence of the contract, there is no presumption that time
is of the essence of the contract, but time may be so because of surrounding
circumstances and other factors to which I shall soon be referring.
That judgment
was reported in The Times on March 24 1977. Almost at once the
plaintiffs started negotiations with the defendants to see whether they could
agree a new lease. They were unsuccessful in persuading the defendants to make
such an agreement. As a result, on August 4 1977 they served upon the
defendants a notice in these terms: ‘Dear Sirs, re: 44-46 Broadgate, Coventry.
I hereby give you Notice of the Council’s desire to increase the rent of the
above premises in accordance with clause 4(3) of the Lease dated the 10th
August 1953 under which you hold the same.’
The defendants were advised that such a notice was out of time under the
terms of the lease and in any event, having regard to what was said by the
House of Lords in the United Scientific Holdings Ltd case, time was of
the essence of the contract in the circumstances of this case. So, as a result,
an originating summons was issued asking the Chancery Division of the High
Court to make the declaration to which I have already referred.
Warner J
delivered a longish and careful judgment on the construction of this lease. As
I have already indicated, he (like I) did not think that the surrounding
circumstances relied upon by the plaintiffs made any difference to the
construction of the lease. His starting point in construing it was the summary
of the factors to be taken into account in construing rent review clauses which
is found in the speech of Lord Diplock in the United Scientific Holdings Ltd
case at p 930. That passage is in these terms:
So upon the
question of principle which these two appeals were 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
timetable specified in a rent review clause for completion of the various steps
for determining the rent payable in respect of the period following the review
date is not of the essence of the contract.
When this case
was before Warner J the defendants relied upon the following passage in that
extract from Lord Diplock’s speech: ‘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’. The submission was that, where you have what
Lord Fraser called a ‘triggering-off’ of a rent review procedure followed by a
provision which entitles the tenant to break the lease if he does not like the
prospect of paying more rent, the inference is that the parties did intend that
time should be of the essence of the agreement.
Warner J went
through every passage in the speeches in the United Scientific Holdings Ltd
case with care. He called attention to the speeches of no less than four of
their Lordships. He also commented that Lord Dilhorne had agreed with the
review of the cases which Lord Diplock had made in the course of his speech. He
could perhaps have called attention to the fact that Lord Dilhorne in his
speech, although differing from the reasoning of his brethren with regard to
the Cheapside appeal, had himself taken the view that, where you have a
triggering action on the part of the landlord, followed by a break clause, time
is clearly of the essence of the agreement. That is to be found in Lord
Dilhorne’s speech at p 939. It comes to this, that their Lordships (though the
matter was not immediately in point and was technically obiter dicta)
were all of the opinion that, where you have a triggering off of a rent review
provision started by the landlord followed by an option given to the tenant to
break the lease
unless there are contra-indications.
It seems to
me, therefore, that there is no point in this case in analysing the United
Scientific Holdings Ltd case again. I rely upon the passages to which
Warner J referred. The only additional point which it is necessary for me to
mention is this. Mr Cripps submitted that, where you have a lease which
provides for triggering action followed by a break clause and there is an
interval of time provided for between the triggering action and the date when a
decision has to be made about breaking the lease, the tenant can always serve
upon the landlord a notice making time of the essence of the agreement. He says
that makes a difference and it was a difference to which their Lordships did
not put their minds when making the observations which they did about the
interrelation of the triggering-off provision and the break provision. The fact
is they all did: in the course of their speeches they all considered the
possibility in these rent review cases of the tenant making time of the essence
of the contract if he wished to do so. Indeed in Lord Fraser’s case he
mentioned that aspect of the matter immediately before he made his observations
about the inter-relation of the triggering-off procedure and the break clause.
In any event, in my judgment, it is unrealistic to talk about tenants in this
sort of situation serving this kind of notice. No landlord and no tenant, in my
judgment, when making a lease of this kind, would have contemplated such a
possibility.
For the
reasons which Warner J gave and for the additional reasons which I have given
for disregarding what Mr Cripps called the surrounding circumstances, I would
dismiss this appeal.
Agreeing,
GRIFFITHS LJ said that he found the reasoning of Warner J so compelling that he
did not wish to give any separate reasons of his own.
FOX LJ also
agreed and did not add any observations.
The appeal
was dismissed with costs.
