Rent review clause modelled on Form 8, 1 of the Encyclopaedia of Forms and Precedents held to contain provisions of the nature of ‘machinery’ rather than an ‘option’–Landlords some 18 months late with their notice demanding a revised rent accordingly held entitled nevertheless to call the clause into operation–Court refers to C Richards & Son Ltd v Karenita Ltd (1971) 221 EG 25 and United Scientific Holdings Ltd v Burnley Corporation (1974) 231 EG 1543
This was a
summons by Accuba Ltd, who sought a declaration that a notice served on them by
the respondents, Allied Shoe Repairs Ltd, on September 24 1974 was invalid and
ineffective to determine the rent payable for the second seven-year period of a
14-year underlease granted by the respondents to the applicants on October 16
1967. By a cross-summons the respondents sought a declaration that the notice
in question was valid and effectual for that purpose, and that in any event the
President of the Royal Institution of Chartered Surveyors was empowered under clause
5 (2) (c) of the underlease concerned to appoint an independent surveyor to
determine the open market rental value of the demised premises.
Mr S J Sher
(instructed by Rayner & Co) appeared for the applicants, and Mr J L Knox
(instructed by Fitzhugh, Eggar & Port, of Brighton) represented the
respondents.
Giving
judgment, GOFF J said that the case concerned a rent review provision in an
underlease dated October 16 1967 granted by Allied Shoe Repairs to Accuba Ltd.
It was of importance to the parties because of the money involved, and also of
considerable general importance, because the underlease was clearly modelled on
Form 8, 1 in the Encyclopaedia of Forms and Precedents (1966) vol 12. The
underlease was for 14 years beginning on March 25 1967. Clause 1 read:
‘yielding and paying therefor during the first seven years . . . the clear net
yearly rent of £5,000 . . . and for the residue of the said term . . . a rent
to be determined in accordance with the provisions of clause 5 hereof.’ Clause 5 provided:
The reviewed
rent . . . shall be determined in manner following that is to say it shall be
whichever shall be the higher of the first reserved rent and the open market
rental value of the demised premises for the review period provided that and it
is hereby agreed as follows:
(1) The expression the open market rental value
as aforesaid means . . . the annual rental value of the demised premises in the
open market on a lease for a term of seven years certain . . . with vacant
possession at the commencement of the term. . . .
(2) The said open market rental value shall be
determined as follows:
(a) It shall be such sum as shall be specified in
a notice in writing by the landlord to the tenant at any time before the
expiration of the period of six years after the commencement of the term hereby
granted; or
(b) As shall within three months after such
notice be agreed between the parties in writing in substitution for the said
sum; or
(c) It shall be determined at the election of the
tenant by counternotice in writing to the landlord not later than three months
after the landlord’s said notice (time to be of the essence hereof) by an
independent surveyor appointed for that purpose by the parties jointly in
writing or upon their failure to agree upon such appointment within one month
after the date of the said counternotice then by an independent surveyor
appointed for that purpose by the President for the time being of the Royal
Institution of Chartered Surveyors. . . .
(3) In the event of the determination by such
independent surveyor not having been made and communicated to both parties
hereto prior to the commencement of the review period for any reason whatever
then in respect of the period of time (hereinafter called ‘the said interval’)
beginning with the said commencement and ending on the quarter day immediately
following the date on which such determination shall have been made and
communicated as aforesaid the rent payable hereunder shall continue to be paid
at the rate of the first reserved rent provided that at the expiration of the
said interval there shall be due as additional rent payable by the tenant to
the landlord on demand a sum of money equal to the amount whereby the reviewed
rent shall exceed the first reserved rent but duly apportioned in respect of
the said interval.
Clause 6 was a
suretyship clause which he (his Lordship) did not need to read in full, but it
contained a provision under which, in the event of the underlease being
disclaimed under any statutory or other power, the surety agreed to take from
the landlords (if required by them) a grant of another underlease. The period
of six years after the commencement of the term ended on March 24 1973, and the
landlords should therefore have given notice some time before then, but due to an
oversight for which they themselves were fully responsible, they failed to
serve any notice until September 25 1974, when they wrote claiming a figure of
£15,000 a year. The tenants said this was too late, though without prejudice to
this contention they had in fact served a counter-notice under clause 5 (2)
(c).
It was clear
that the issue before the court was one purely of construction of the
underlease: see the remarks of Lord Denning and Megaw LJ at p 732 in C H
Bailey Ltd v Memorial Enterprises Ltd [1974] 1 WLR 728, and the
passage at p 735 in which Sir Eric Sachs stated: ‘The objective of the courts
in a case relating to office leases is naturally to determine the intended
commercial effect of a particular agreement reached between the parties. In this
respect a lease is no less a contract relating to the use of the premises than
an agreement in relation to the supply of furniture for those premises is also
a contract. It follows to my mind that the courts should in this class of case
avoid resort, so far as practicable, to any of the highly technical points that
stem from the intricacies of the ancient law of landlord and tenant.’ Further, although the construction of the
underlease must depend on its own particular words, and he (his Lord-ship) was
bound by decisions even of superior courts only in so far as they laid down any
principle, still he did discern a dividing principle between the cases. If the
words used imported an option or privilege for the landlord to increase the
rent which would otherwise be payable, then any time conditions must be
absolutely strictly observed. Examples of this type of case were Samuel
Properties (Developments) Ltd v Hayek [1972] 1 WLR 1296; C
Richards & Son Ltd v Karenita Ltd (1971) 221 EG 25; and United
Scientific Holdings Ltd v Burnley Corporation (1974) 231 EG 1543. In
those three cases there was a fixed rent throughout the whole term with a
provision expressly granting an option or saying that the rent should be
subject to increase. On the other hand, where the provision was mere machinery
the time was not strict. Examples were Kenilworth Industrial Sites Ltd v
E C Little & Co Ltd [1974] 1 WLR 1069, [1975] 1 WLR 143, and In
re Essoldo (Bingo) Ltd’s Underlease (1972) 23 P & CR 1. In the latter
case the question of time being strict was not argued. The case turned on a
point to do with reference to surveyors. It was of some significance, however,
that the time question was not raised although the landlord’s claim was more
than a year out of time and more than 10 months into the new rent period. Also,
very importantly, both in that case and in Kenilworth the original rent
was reserved for an original period only, leaving the later rent to be agreed
or ascertained.
On which side
of the line did the language used in the present underlease fall? He (his Lordship) thought it was
mechanics only. In Kenilworth there was of course an express provision
that ‘any failure to give or receive such notice shall not render void the
right of the landlord to require the agreement of a new rent,’ and although the
provision in clause 5 (2) (c) of the present underlease afforded a supporting
argument for the landlords’ construction here, it was impossible to treat that
provision as equivalent to the words quoted from Kenilworth. Nevertheless
both Megarry J and the Court of Appeal in that case relied on those words
merely as an additional or supporting reason, and arrived at their conclusion
independently of it. Megaw LJ said at p 146: ‘The proviso, if it has any effect
at all, is saying that even though the time specified in the opening words of
the clause may not have been observed by the landlord, and the landlord is
thereby in breach of that provision of the contract, nevertheless the breach of
the contract by him shall not render void his right to have the new rent for
the succeeding five years agreed or, in the absence of agreement, determined by
arbitration.’ The significant words
there were, of course, ‘if it has any effect at all.’ Moreover there was in that case a gap if the
rent review clause did not operate, and Megaw LJ said: ‘If the lease failed to
make provision for any rent to be payable in the absence of notice being given
within the proper time then plainly there would not be the alternative which
would be necessary to constitute an option.’
It was argued that there was no gap in the present case, because the
agreement was to pay whichever should be the higher of the first reserved rent
and the open market rental value for the review period determined in manner
therein provided, so that if in the event there were no determination the first
reserved rent remained payable. He (his Lordship) did not think that was right.
It was not a covenant to pay that rent unless something else were determined,
but one to pay the higher of something specific and something ex hypothesi
unascertainable, and so there was a gap. In this connection it was to be
observed that in Kenilworth Megaw LJ refused at p 146 to imply a term to
fill the gap, not only because of clause 5 (it happened to be clause 5 in that
case also), but also because of clause 1, the reddendum, and he (Megaw LJ)
added, ‘whether read separately or together.’
So far as clause 1 was concerned, that lease and the present underlease
appeared to him (Goff J) wholly indistinguishable. Even however if there were
no gap, and if in default of determination of the open market rental the first
reserved rent continued, that would not be because of an accrued right to pay
only that sum because there was an express covenant in clause 5 to pay that or
something higher. It would be because of a breakdown in the machinery, and even
on that view of the matter it seemed to him (his Lordship) that he should
regard this as mechanics only: see the point stressed by Megarry J in Kenilworth
at p 1071, ‘In the Samuel case the Court of Appeal was concerned with an
underlease for 21 years in which the rent had been agreed for the entire term.
. . .’ That appeared to him (Goff J) to
be crucial.
In his
judgment, therefore, time was not of the essence in clause 5 (2) (a), and the
express stipulation to that effect in clause 5 (2) (c) was of course a
supporting context of some strength. Counsel for the tenants had relied on
clause 6, where, he said, time must be of the essence, though not so stated.
That might well be so, but it was not so strong as the express reference in
clause 5 (2) (c) compared with the absence of it in the same clause in
paragraph 2 (a). Counsel also relied on the provision in clause 5 (1) that the
open market rental value was to be determined at the time of such
determination, which, he said, was an impossible operation if one had to value ex
post facto. The parties did, however, contemplate that that might have to
be done, though only to cover a failure, likely to be short, to carry out all
the necessary operations in the time allowed, not a failure to start at all
which resulted in the determination having to be made much longer after the due
date. This was an important point which he (his Lordship) had carefully
weighed, but he did not think it outweighed the basic view he had formed that
clause 5 was machinery not in the nature of an option, and he accepted the
argument of counsel for the landlords that the difficulty was a valuation
problem, not an impossibility. Finally he had to consider whether even so the
notice was too late. As Lord Denning MR had stated in Bailey’s case,
delay might give rise to a defence by way of equitable estoppel. For that
purpose, however, the tenant had to establish that he had altered his position:
see the Essoldo case at p 6. The tenants here had filed no evidence on
that point, and it had been agreed by counsel that if he (Goff J) allowed the
landlords’ notice to take effect he should order that in applying it
retrospectively the rent freeze should apply as if the rent had been fixed from
the start, and subject thereto no case of equitable estoppel was put forward.
He (his Lordship) accepted that agreement, and passed to the next question,
which was how long a landlord might wait even when time was not of the essence.
He thought the law was correctly stated in Emmet on Title 16th ed p 214:
Even where
the date for completion was not originally of the essence (either by express
provision or in accordance with the above-mentioned rules), if delay has been
unreasonable, the other party can treat the contract as broken, without first
giving notice as mentioned below (Farrant v Olver [1922] WN 47).
Was the delay
here so long, then, as to be unreasonable?
In the light of the Bailey and Essoldo cases, he (his
Lordship) thought that though it was a borderline case the landlords were not
too late in the context of a seven-year term. Accordingly he dismissed the
tenants’ summons, and granted the landlords relief on their cross-summons,
subject to the agreed application of the rent freeze.
