Landlord and tenant — Property subject to building lease and underlet as a whole subject to rent reviews — Construction of rent review clause in head lease — ‘Delphic’ definition of rent — After fixing as a ‘floor’ the rent payable for the preceding period, the relevant clause provided that the rent should be ’17 1/2% of the sum of the rack rent or the current open market rack rental value of the demised premises at the relevant rent review date (as agreed or certified) whichever shall be the greater’ — It then went on to say that ‘the current open market rack rental value referred to above shall be the aggregate total of rentals payable in respect of lettings current at the relevant rent review date . . . and agreed rentals in respect of any parts then vacant’ — Landlords contended that this formula required a comparison to be made between the sum of the rack rent and the current open market rack rental value, the revised rent to be the higher of these two figures — Tenants contended that no such comparison was contemplated, the only figure needed for the present review being the amount of the rack rent actually payable, since no part of the premises was then vacant and so there was no requirement for an agreement or valuation of rental value — The judge upheld the tenants’ contention but made a declaration covering the possibility that in a future review the premises might be partially vacant — The declarations provided that if the premises were wholly let the rent at the review date would be the rent, or the aggregate of the rents, actually payable — In so far as the premises were not wholly let, the rent would be a sum agreed between landlords and tenants or, in default of agreement, as determined by an expert in accordance with the lease — Held that the judge had arrived at the correct conclusion — The construction put forward by the landlords involved the infliction of too ‘drastic surgery’ on the language used — Appeal dismissed
This was an
appeal by the landlords, Freehold & Leasehold Shop Properties Ltd, from a
decision of Judge Paul Baker QC, sitting as a judge of the High Court, in
favour of the tenants, Friends Provident Life Office, on the construction of a
rent review clause in the lease of an office block known as D H Lawrence House,
Wollaton Street, Nottingham.
Ronald
Bernstein QC and Victor Joffe (instructed by D J Freeman & Co) appeared on
behalf of the appellants; Michael Rich QC and Stephen Bickford-Smith
(instructed by Brian W Sweetland, of Dorking) represented the respondents. (Mr
Rich was not called on.)
Giving
judgment, OLIVER LJ said: This is a plaintiffs’ appeal from an order made on
May 23 1983 by his Honour, Judge Paul Baker QC, sitting as a judge of the
Chancery Division whereby he declared the basis upon which the rent payable
under a review clause contained in a lease between the plaintiffs and the
defendants’ predecessors in title is to be ascertained.
The lease, which
is dated February 23 1971, was made between the plaintiffs and a company called
Morley Developments Ltd. It relates to an office block known as D H Lawrence
House, Wollaton Street, Nottingham. It may, I think, be questioned whether the
distinguished author after whom the premises were named would have approved of
the obscurity of language with which the parties have chosen to veil their
intentions.
The lease, of
which the defendants are the assignees, is a building lease under which the
original lessees undertook to erect (as they, indeed, subsequently did) a
building on the demised land, and to pay a relatively low rent, ultimately
agreed at £7,900, during the first 10 years of the term after the date of
practical completion, the term being 125 years from the date of the lease.
The building
having been duly completed on January 15 1973 it was, on October 9 1973,
underlet as a whole for 21 years subject to 7-year reviews. The rent currently
payable under the underlease is £118,500, it having been reviewed I think on
October 1 1980. Apart from the fact that there is no covenant against
subletting in the lease on any terms which may commend themselves to the tenant
— for instance, by letting the term for a premium at a nominal rent — I need
not, I think, detail any of the provisions of the lease other than the rent
review clause, which is the clause which has given rise to the dispute in this
case. Indeed, it is not necessary, I think, to refer to the whole of that rent
review clause. It is clause 3, and it is divided into a number of subclauses.
For present purposes it will be sufficient to summarise its principal
provisions until we come to the nub of the dispute.
The clause
provides that the rent for the first 10 years shall be as provided in a
schedule, and shall be reviewed thereafter on the 10th year and the 10 years
thereafter. Those 10-year periods are referred to as ‘the rent review date’.
Even that subclause is not particularly happily expressed, for it might, on one
construction, appear to authorise only two reviews, although I doubt if it can
be seriously contended that that is its meaning. That, however, does not matter
for present purposes because we are concerned only with the first review in any
event.
Subclause (b)
provides a timetable for giving notice, called a ‘rent increase notice’, and
for reviewing the rent as from what is described as ‘the relevant rent review
date’. It contains, at the end, a precautionary proviso which protects the
landlord from a revision which results, or might result, in the rent payable
being less than the rent payable for the period immediately preceding the
relevant rent review date. In other words, it fixes, as it were, a floor from
which the rent is to be reviewed.
Subclause (c)
then provides a limited period during which the landlord and the tenant are to
attempt to agree on the amount of an increase, and if they fail to agree within
the relevant period, as has happened in this case, then the calculation of the
increase is to be referred to an expert who is to be appointed by agreement
and, in default, shall be nominated by the president of the Royal Institution
of Chartered Surveyors. The expert, who is to be a person who, in the parties’
opinion, possesses special knowledge of land and building value and a competent
person ‘to give a reliable opinion on the question to be referred to him
hereunder’ need not state his reasons, but he is to certify his opinion that
‘the current open market rent’ at the relevant rent review date is whatever is
the appropriate figure. The clause goes on to direct that the rent is to be
valued at the latest convenient date selected by the expert during the period
of six months immediately preceding the relevant review date. The expert’s fee
is to be paid by the tenant, and that, I think, is the only point in this
remarkable clause about the meaning of which there seems to be no substantial
room for argument.
The portion of
the rent review clause which has given rise to the argument between the
landlord and the tenant is subclause (c)(6), which reads as follows:
The yearly
rent payable hereunder shall as from the commencement of the Relevant Rent
Review Date —
then I think
one has to interpose the word ‘be’, although it is not in the text —
(i) the rate payable for the year ending with
the Relevant Rent Review Date or
(ii) seventeen and a half per centum of the sum of
the rack rent or the current open market rack rental value of the demised
premises at the Relevant Rent Review Date (as agreed or as certified) whichever
shall be the greater.
(iii) the current open market rack rental value
referred to above shall be the aggregate total of rentals payable in respect of
lettings current at the Relevant Rent Review Date or at the completion of works
as the case may be and agreed rentals in respect of any parts then vacant. Any
dispute as to vacant parts shall be referred to the expert above mentioned.
There are a
number of things that have obviously gone wrong with that on any analysis. As
observed already, the word ‘be’ has been omitted at the beginning of the
clause; and the reference to the date of completion of works is obviously
misconceived because that is not a review date. But these are, I think, minor
matters and do not affect the real bone of contention.
The two rival
interpretations which have been accorded by the parties to this somewhat
Delphic pronouncement may be summarised as follows. First, the plaintiff
landlords say that it is pointing to whichever is the highest of three possible
figures, videlicit, (a) the rent payable for the year immediately prior
to the review date (that is, the basic rent below which, under the proviso
already referred to, the reviewed rent cannot fall) or (b) 17 1/2% of the sum
of the rack rent, by which they mean the rack rent as ascertained by the expert
under the preceding machinery to which I have already referred, or (c) 17 1/2%
of the current open market rack rental value as defined in subclause (6)(iii),
whichever is the highest of those three. So they contend that the view cannot
be operated until one has first ascertained, through the machinery of the
expert, what the rack rent is. That figure can then be compared with the
current open market rack rental value as defined, and the revised rent will be
whichever is the highest of those three possibilities. The tenants’ contention,
on the other hand, is that there are indeed only two alternatives, that is to
say, the rent currently payable at the review date or the sum of the rack rent
which they equate with the amount of the rack rent actually payable and
referred to in the first part of subclause (6)(ii), that is, 17 1/2% of
£118,500. I think that works out at £20,735.50. They thus decline to concur in
appointing an expert whose function can be no more than an arithmetical one capable
of being performed with a pocket calculator, since no part of the premises is
vacant in fact, and thus there is no requirement for a valuation or agreement
of rental value. The reference, they say, to ‘the sum of the rack rent’ is a
reference to the case, which in fact has occurred in this case, of the premises
being let as a whole, when one simply takes the rent which is payable under the
existing underletting of the whole premises.
The learned
judge upheld the tenants’ contention and made a declaration which was designed
to cover not only this review but future reviews, inasmuch as it dealt with
both the existing situation of the whole premises being let to one tenant and
the alternative possibility of the premises being let to a number of tenants or
being partially vacant.
The
appellants’ argument has been, as always, attractively put by Mr Bernstein, and
it may be summarised thus. First, he argued, the object of the rent review
clause — and this is really indisputable — is to ensure that the rent payable
under a lease keeps pace with the general level of rent currently payable for
comparable premises in the open market. If, therefore, he says, there are two
possible constructions, one of which does and one of which does not produce
that result, the court called upon to construe the clause should elect for that
construction that does fulfil the ordinary purpose, provided it is open. And
here, he says, on the tenants’ construction the clause makes commercial
nonsense because the landlord has no control, as I have already pointed out,
over the tenants’ sublettings, so that it is open to the tenant, for instance,
to sublet the whole or part of the premises at a low rent or even at a nominal
rent in consideration of a premium, and if you apply subclause (6)(iii) to that
situation you end up with a result that is really wholly uncommercial and
cannot possibly, says Mr Bernstein, have been intended. Again if you take the
case of the actual underlease which has been granted, where the rent is
reviewed at 7-year intervals, the result of the tenants’ construction, Mr
Bernstein points out, is that the market rent which is intended to be achieved
by the review is being calculated by reference to a rent fixed at a time
separated from the review date by periods which vary as the lease progresses;
and even stranger results, he says, ensue if one postulates an underlease with
10-year reviews but granted on a date falling between the two review dates
under this lease.
On the face of
it the expression ‘the sum of the rack rent’ is, as Mr Bernstein accepts, a
phrase which, assuming the building to be let at a rack rent or rack rents, is
appropriate to describe the rent actually receivable. It might, of course, not
be the same as the market rent, and therefore, he submits, one needs a
provision for ascertainment of the market rent which, apart from the provisions
of subclause (6)(iii), one would find in the expression ‘current open market
rack rental value’. That is an expression which would tie in perfectly well
with the certificate which the expert is to give, because that is a certificate
which certifies the valuer’s opinion of ‘the current open market rent’.
So that if the
clause simply stopped there, there would be, as he suggests, no problem at all.
All you have to do is to take 17 1/2% of the actual rent from the underletting
— that is, the sum of the rack rent — and 17 1/2% of the open market value as
agreed or ascertained by the expert, and whichever is the higher governs the
amount of the increase. His difficulty, it seems to me, is this, that when you
read in para (iii) this turns the clause on its head, for para (iii) clearly
defines the current open market rack rental value by reference to the rents
which are actually being received, and the only provision for agreement or
valuation is that in relation to those parts, if any, of the premises which are
vacant and unlet.
So that Mr
Bernstein is really driven to submit that the clause has to be read as if the
two expressions — that is, ‘the sum of the rack rent’ and ‘the current open
market rack rental value’ — were transposed, and the definition in subclause
(iii) is taken as applying not, as it says, to ‘the current open market rack
rental value’ but to ‘the sum of the rack rent’.
It is
difficult, I feel bound to say, to resist the conclusion that this is not
simply a matter of construction: it is demolition and reconstruction. No doubt
there are occasions when the language in which the parties to a contract have
chosen to express themselves has to be offered up, as it were, upon the altar
of the commercial purpose which clearly appears from the document in which the
words appear, but it is, I think, a sacrificial exercise which requires a
degree of compulsion, and it was the tenants’ contention before the learned judge
that, even granted that the way has been left open for some perhaps rather
uncontemplated results to be achieved, not only is there no compelling context
for departing from what the document appears to say in express terms but there
is, in fact, a perfectly clear and acceptable meaning which is deducible from
the language of the clause without inflicting upon it the rather drastic
surgery which Mr Bernstein is driven to suggest.
The two
expressions, ‘the sum of the rack rent’ and ‘the current open market rack
rental value’ are, the learned judge accepted, alternatives, but they are
mutually exclusive alternatives. The reviewed rent is whichever is the higher
of the existing rent at the review date or 17 1/2% of whichever is appropriate
to the actual circumstances of the two alternatives in paragraph (ii). Thus the
learned judge arrived at the conclusion that the words ‘of the demised
premises’ (that is, the whole of the demised premises) in paragraph (ii)
qualifies both ‘the sum of the rack rent’ and ‘the current open market rack
rental value’; and if one reads the paragraph, substituting for ‘the current
open market rack rental value’ the definition in paragraph (iii), you end up
with this result that what you have to ascertain is 17 1/2% of (a) the sum of the
rack rent of the demised premises — that is, on the supposition that they are
let as a whole — or, alternatively, if they are not let as a whole, but are let
in parts or if part is vacant, the aggregate of the total rent which is payable
in respect of the lettings of the demised premises
vacant.
The singular
‘sum’ which is used in relation to the rack rent is, on this analysis, to be
contrasted with the ‘aggregate total’ of rentals in relation to ‘lettings’, and
what the learned judge concluded in his judgment was this, that what, on the
face of it, this provision is looking at is simply one of two alternative
factual situations subsisting at the review date. If the building is let as a
whole you take the sum — that is to say, the amount of the (singular) rent; if
it is only partially let, or is let in separate parts, you take the aggregate
of the (plural) rentals, actual or agreed.
Of course, the
construction which suggested itself to the learned judge, and which he adopted,
is one which does leave certain potential situations uncovered, and as the
learned judge pointed out there are indeed difficulties both ways. It leaves
possibly uncovered the case where the tenant chooses to occupy the building
itself, although speaking for myself I am not convinced that in a case where
the building has so obviously been developed for subletting, the word ‘vacant’
may not fall to be construed simply as ‘unlet’, and it also produces, or is
capable of producing, very unsatisfactory results from the landlord’s point of
view if the tenant chooses to adopt a letting policy of granting terms at low
rents in consideration of premiums. But as it seems to me the mere fact that a
clause is capable of being operated in a way which the parties may not, at the
time, have contemplated as serving their commercial purpose is not itself a
ground for redrawing the clause so as to make it say, at the instance of one
party, what the parties did not choose to say at the time for themselves.
The learned
judge, albeit he was, I think, impressed to some extent by the obvious
deficiencies of the clause — and I am not surprised — felt himself, in the end,
unpersuaded that he was either driven to or, indeed, permissibly could go
through the process of amputation and reconstitution upon which the plaintiffs
were, I think, then inviting him to engage, and accordingly declared that the
sum of the rack rent or the current open market value of the demised premises
fell to be ascertained as follows. I take, from p 11 of the bundle, the
declarations there set out:
(a) insofar as the premises are let as a whole
at the review date by reference to the rent payable to the defendants in
respect thereof at the review date.
(b) insofar as the premises are wholly let in
parts by reference to the aggregate of the rentals of the premises.
(c) insofar as the premises or any part thereof
are not so let as a whole by reference to a sum agreed between the landlord and
the tenant or in default of agreement the rent shall be referred to and
determined by the expert referred to in clause 3(c)(5) of the lease.
Speaking for
myself, I feel equal difficulty in acceding to Mr Bernstein’s arguments,
persuasive as they have been. The clause, it seems to me, does make perfectly
good sense in the way in which it was construed by the learned judge without
doing any violence to the language used; and although there may be, as I have
said, some unforeseen consequences which now make the bargain less attractive
to the plaintiffs than it may have seemed at the time the lease was negotiated,
I can see no grounds, at any rate in the absence of a plea for rectification —
and there is none here — for saying that the words which the parties used do
not mean what they appear to mean and that they ought to be taken otherwise
than as representing what the parties intended. It seems to me that not the
least of Mr Bernstein’s difficulties is that if the clause was, as he
suggested, merely designed to fulfil the normal purpose of keeping the rents
under the lease abreast of current market rentals there is no readily
intelligible reason why it should have been thought necessary to invoke the
rent actually receivable for the purpose of calculation at all. The open market
rent is, by definition, the rent which may be expected to be paid for the
premises in the open market, and that is a matter which is perfectly capable of
easy ascertainment by a process of valuation. It is not easy to conceive, I
think, of a position where the rents actually payable are likely to exceed the
market rent ascertained by valuation. It is therefore, as it seems to me,
difficult to see any purpose which could be served by a reference to the actual
rents payable if all that the parties were really concerned with was an
ascertainment of the proper market rent which might be commanded by these
premises.
But be that as
it may, I have felt, for my part, compelled to reject Mr Bernstein’s
submissions. I do not think it necessarily follows that if the tenant did seek
to avoid the rent reviews by taking premiums and letting out the premises at
peppercorn rents the clause would necessarily be ineffective. What is being
sought, as it seems to me, is, by definition, a standard which is referable to
a rack rent, and I can envisage at least the possibility that if the premises
are not let at a rack rent the court might find itself compelled, as a matter
of construction, to give an enlarged meaning to the word ‘vacant’, in the
context of this clause, as meaning ‘unlet at a rack rent’. I express no firm
opinion about that. It can, I think, be left to be decided if and when the case
arises; but for the reasons I have endeavoured to express I think that the
learned judge arrived at the right conclusion and I would dismiss the appeal.
Agreeing,
GRIFFITHS LJ said: For the reasons given by Oliver LJ, I do not think that the
wording of clause 3(c)(6), can bear the construction for which Mr Bernstein has
contended.
Furthermore,
it seems to me that, reading the language of this clause, it is easy to
ascertain the intention of the parties at the time it was drafted, bearing in
mind the genesis of this lease. This lease clearly arose out of a joint venture
between the landlord, who was supplying the land, and the developer, who was
providing the money to put up a large office block. They agreed on the rent for
the first part of the lease, and thereafter the agreement was that they would
share the cake between them. The landlord was to have 17 1/2% of the rent that
was coming in from the building and the tenants were to have the remainder, the
larger slice of the cake. It seems to me that this clause is effective to give
effect to an understandable commercial intention at the time that they entered
into this joint venture. I am sure that, at that time, it never crossed their
minds that the tenant might seek to cheat the landlord by charging peppercorn
rents and taking premiums; and I, like my lord, believe that if he did resort
to that sort of a tactic it might well be possible to construe this lease to
defeat his intention.
I would only
add that, for my part, there are two other features of the wording that drive
me to the conclusion that the learned judge’s construction was right, and they
are these. In subclause (6)(ii), there appear the words, under the passage
dealing with the current open market rack rental, in brackets, ‘(as agreed or
as certified)’, and that is clearly a reference to the certificate of the
expert. It is to be observed that those words do not appear after ‘the sum of the
rack rent’ where one might have expected to see them on Mr Bernstein’s
construction. Furthermore, in paragraph (iii) it concludes with the words ‘Any
dispute as to vacant parts shall be referred to the expert above mentioned’.
There is an express reference to the activities which the expert is expected to
perform under this clause, namely, he is to be brought in if the parties cannot
agree on the valuation of the vacant parts. He is not required at all if all
that has to be done is to calculate 17 1/2% of the rent for which the whole
building has been let. Accordingly one finds no reference to him in that
connection.
These two
further matters convince me that the learned judge’s construction was right.
I should say I
also agree with all the reasons given by Oliver LJ.
FOX LJ also
agreed that the appeal should be dismissed for the reasons given.
The appeal
was dismissed with costs. Leave to appeal to the House of Lords was refused.
