Rent review clause–Another case on the effect of a stipulation as to time–Whether case came within the ‘interrelation’ exception to the prima facie rule that time is not of the essence in a rent review provision–United Scientific Holdings decision analysed–Karenita decision also considered–Held that in the present case there was a perfectly clear interrelation between the ‘break’ provision and the rent review provision–Indeed these provisions were in one continuous clause in lease–This was an a fortiori case of interlocking provisions–Thus one of the exceptions recognised by the House of Lords applied and the time-table in the rent review provision was of the essence–Landlord’s notice thus out of time–Landlord’s summons for declaration that rent review machinery could be operated dismissed
In this case
the plaintiff landlord, A J Al Saloom, issued an originating summons for a
declaration that the landlord was entitled to require a rent review under the
terms of an underlease dated September 11 1969 notwithstanding that the time
prescribed in the underlease for the initiation of a review had passed before
the requisite notice on his behalf had been given. The defendants were the
original lessees, Shirley James Travel Services Ltd.
Gregory Hill
(instructed by Moreton Phillips & Son) appeared on behalf of the plaintiff;
A C Geddes (instructed by Boyce, Evans & Sheppard) represented the
defendants.
Giving
judgment, JOHN MILLS QC said: This case concerns the ground-floor shop and
basement rooms at 4 Halkin Street, Belgrave Square in the City of Westminster,
in respect of which the plaintiff is the landlord and the defendant is the
tenant by virtue of an underlease dated August 19 1976 for seven years from
midsummer 1976, that is to say to midsummer 1983.
The fuller
facts of the case are these. There was first of all an underlease of the
premises dated September 11 1969 and the provisions of that are in some
respects important. This was for seven years from midsummer of 1969 at a rent
of £2,500 but, as we shall see, there was a rent review at the end of six
years. The underlease itself was made between the former landlord, Callandie
Investment Company Ltd, who have assigned their interest since to the
plaintiff, but the defendants were the original tenants. The premises are
suitably described and the habendum is for seven years determinable as
thereinafter mentioned, and the reddendum is £2,500 or such higher rent as
shall become payable under the provisions of clause 5 thereinafter contained by
four equal quarterly payments in advance on the usual quarter days, one of
which is, of course, Christmas Day. There are lessees’ covenants which I need
not particularly bother with, except clause 2 which shows the trade to be carried
on at the business premises and provides that the tenant was not to carry on or
suffer to be carried on from the demised premises or any part thereof any trade
or business other than the business of a travel agency or other office or shop
use not objected to by the lessor and the superior lessor provided that any
objection on the part of the lessor should not be made unreasonably. It is
simply to be observed that the defendants were travel agents and therefore
nothing turns on the user of the premises at all.
The remainder
of the tenants’ covenants do not matter. There were then provisos for re-entry
and abatement of rent in case of fire, and it is just, in passing, appropriate
to notice clause 4(4), which is a clause of a somewhat usual kind providing for
the methods by which notices are to be served by the landlord on the tenant or
vice versa:
Any notice
under this lease shall be in writing and if addressed to the lessee should be
sufficiently served if left addressed to the lessee at the demised premises or
if sent to the lessee by registered post at their registered office and in the
case of a notice to the lessor shall be sufficiently served if delivered or
sent by registered post to the lessor at their registered office.
Then there
comes clause 5, which is the central clause, as it turns out, for consideration
in this case, and I therefore propose to read it in full. This is clause 5 of
the original underlease of September 11 1969.
Provided
always and it is hereby agreed that at the expiration of the third year of the
term hereby granted the lessee shall have the right on giving to the lessor not
less than six months notice in writing prior to the expiration of the said
third year of the term to determine this lease and if such notice shall be
given and the lessee shall up to the time of such determination pay the rent
and perform and observe the covenants on its part hereinbefore performed and
contained then immediately on the expiration of the said third year the present
demise and everything herein contained shall cease and be void but without
prejudice to the rights and remedies of either party against the other in
respect of any antecedent claim or breach of covenant and subject to the
lessee’s right of determination as aforesaid the lessor shall have the right on
giving to the lessee not more than 12 nor less than six months notice in
writing prior to the expiration of the said third year of the term to review
the yearly rent for the time being payable hereunder and if the lessor shall
give to the lessee such notice as aforesaid then from the commencement of the
fourth year of the said term the yearly rent payable in respect of the demised
premises shall be such a sum as shall be agreed between the lessor and lessee
as representing the fair rack-rental market value of the demised premises for a
term of four years as between a willing lessor and a willing lessee with vacant
possession and taking no account of any good-will attributable to the demised
premises by reason of any trade or business carried on therein by the lessee or
any improvements to the demised premises carried out by the lessee and in all
other respects on the terms and conditions of this lease and if the lessor and
the lessee shall be unable to agree on the amount of such rent as aforesaid the
same shall be decided by some competent person to be agreed to by the lessor
and the lessee or in the event of failure so to agree by a person to be named
by the President for the time being of the Royal Institution of Chartered
Surveyors and this shall be deemed to be a submission to arbitration within the
meaning of the Arbitration Act 1950 or any statutory modification or
re-enactment thereof for the time being in force and the decision of such
person shall be binding on both the lessor and the lessee provided further that
in no event shall the rent payable by the lessee to the lessor after such
review be less than the rent payable by the lessee to the lessor immediately
prior thereto.
The third year
of the term duly ended on midsummer 1972 and there is a 1972 endorsement on the
underlease whereby it was evidently agreed on that occasion that the rent
payable should become £3,250 for the remaining four years. So that is how the
review operated as from midsummer of 1972.
Then the seven
years also in due time expired at midsummer of 1976 and an additional
underlease was thereupon granted, and that is a short referential type of
document which is also to be seen bound up in the underlease. It was dated
August 19 1976. It demised the premises for seven years from midsummer 1976,
that is the expiry of the original term, again for seven years at an initial
rent of £4,250. I need not read it in full. It contains expressions referring
to all the provisions of the 1969 underlease and specifically mentions the rent
review provision, and there has been no point before me of any kind taken to
suggest that any provision of the 1969 underlease is inapplicable to that term
granted by the new document in August 1976. So that produces a situation in
which clause 5, which I have read at length, clearly applies to the seven-year
term which started in midsummer 1976. So under the second of these leasing
documents midsummer 1979 was the date on which a first review could become
effective, and December 24 1978, Christmas Eve 1978, was the last day on which
the landlord could initiate the review, that is to say it was within 12 months
but not after six months before the appropriate review date, and it was also
the last date upon which under the earlier words of clause 5 the tenant could
break the letting.
What happened
was that in November 1978 the plaintiff bought the landlord’s interest from the
original landlord. December 24 1978 came and went without anything passing or
being said by one side about the review or by the other about the break,
nothing being written either. But 10 or so days later a letter of January 5
1979 was sent off by the landlord’s solicitors. It was addressed to the
secretary of the tenant company at the address of the premises and it was
apparently sent by post. It said, ‘We act on behalf of the landlord from whom
you hold the premises by an underlease dated September 11 1969 extended by
supplemental lease,’ which I have read, and giving particulars of it.
On behalf of
our client your landlord, we hereby give you formal notice that a review is
required of the rent reserved by the underlease and supplemental lease to take
effect from and including midsummer 1979. Please acknowledge receipt of this
notice by signing and returning the enclosed duplicate in the enclosed stamped
addressed envelope. In the meantime and entirely subject to contract we are
approaching our client’s agents to ascertain from them the rent at which our
client would be willing to review the annual rental payable as from June 24
next and as soon as we receive an indication of that rental we will be in
contact with you further.
Twenty five
days later there came back from the tenant’s solicitors a letter of that date
suitably addressed to the landlord’s solicitors, which is both brief and to the
point.
Our
above-named client has handed to us your letter to it of 5th instant. The
notice given by you is in our opinion bad as it does not comply with the
provisions of the lease. We have taken counsel’s opinion on the interpretation
of the rent review clause and he advises that as time is of the essence no
review can be applied at this stage. No doubt you will let us have your
comments in due course.
There then is
the simple confrontation and I am not concerned with any of the things which
might have happened at any stage; it was a simple confrontation, one letter
sent in one direction and one sent in the other. The only other fact which is
peripherally relevant is that evidently the new rent might, or would be if
there was to be a new rent, be in the neighbourhood of £9,750 or so it is said,
but I of course have not heard any evidence about that and I do not say whether
that is right or not. But it is sufficient to observe that a substantial
increase would probably have resulted if the review procedures had operated.
The next event
was under six months later, when on July 10 1979 the plaintiff issued the
originating summons in these proceedings for a declaration apt to sustain a
review pursuant to the landlord’s solicitor’s letter of January 5 1979.
For the law
that applies to this matter it is appropriate to look at what must be called
either three or four cases, because two of them are, for the purposes of the
Law Reports, capable of being treated as one. That is the two cases that came
before the House of Lords together in 1977 and which are to be found in [1978]
AC 904. They are United Scientific Holdings Ltd v Burnley Borough
Council and Cheapside Land Development Co Ltd v Messels Service Co,
which can conveniently be referred to as the United Scientific Holdings and
Cheapside cases. There are two relevant cases also of subordinate courts.
There is the decision of Goulding J in C Richards & Sons Ltd v
Karenita Ltd (1971) 221 EG 25, and there is the case of Samuel Properties
(Developments) Ltd v Hayek [1972] 1 WLR 1296.
Taking the
House of Lords cases I find that those cases establish the following
propositions: (1) that prima facie time is not of the essence of a rent review
provision, (2) but that it may be of the essence of a rent review provision in
at least three sets of circumstances. One is that if it is expressly so agreed.
That is not this case by any standards. The second is if there are relevant
surrounding circumstances, and that is not this case. The third is that if
there is an interrelation between the rent review provision and other
provisions of the document in which it is contained which produced that result.
That can most succinctly be followed at p 930 of the report at F and G, where
Lord Diplock said:
So upon the
question of principle which these two appeals were brought to settle, I would
hold that in the absence of any contraindications in the express words of the
lease
that is the
first one
or
[the second
one]
in the
interrelation of the rent review clause itself and other clauses or
[the third
one]
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.
So those first
two propositions can be derived from that passage.
The third
proposition is (3) that the interrelation element may be an interrelation
between the provision for review and a break clause. That can be seen in
several parts of the judgment and I do not propose to read all of them at
length, but I will give the references to them. Lord Diplock on p 929 E, F and
G, where he says opposite F:
Although your
Lordships have not been referred to any direct authority upon the converse case
of a ‘break clause’ granting to the tenant an option to determine his interest
in the property and his contractual relationship with the landlord prematurely
at the end of a stated period of the full term of years granted by the lease,
there is a practical business reason for treating time as of the essence of
such a clause, which is similar to that applicable to an option to acquire
property.
Then he goes
on to enlarge upon that. Then to the same effect at p 946 C, Lord Simon of
Glaisdale where he says:
Rent review
clauses cannot be considered as severable terms of unilateral obligation.
However, where a rent review clause is associated with a true option (a ‘break
clause’ for example), it is a strong indication that time is intended to be of
the essence of the rent review clause–if not absolutely, at least to the
extent.
and so on, and
I may have to come back to that in connection with the Samuel Properties
(Development) Ltd v Hayek case. Then thirdly Lord Fraser at p 962 at
F-G:
The rule
[that is the
prima facie rule]
would of
course be excluded if the review clause expressly stated that time was to be of
the essence. It would also be excluded if the context clearly indicated that
that was the intention of the parties–as for instance where the tenant had a
right to break the lease by notice given by a specified date which was later
than the last date for serving the landlord’s trigger notice.
That is the
third proposition that interrelation may, but not necessarily, be with a break
clause.
The fourth
proposition is (4) that there is no material distinction in these respects
between what has been called a ‘trigger’ notice, that is to say a landlord’s
notice initiating a review process, and the timing of stages of the review
process itself. That can most shortly be seen by looking at p 939 between D and
G where it is made clear by Viscount Dilhorne that he was in a minority of one
on that particular point. At G he says:
While, as I
have said, the question whether time was of the essence in relation to the
lessors’ notice does not have to be decided in this appeal, I differ from my
colleagues in that I think that where a rent review has to be initiated by a
lessor and is not automatic, then time is of the essence when it is provided
that that notice initiating the review has to be given by a certain date.
But it is clear
that the remaining four took the opposite view, and although in the particular
circumstances of those cases those were all dicta I nevertheless would be
disposed, if it were relevant at all, to accept that case as one which I should
follow and that there is no material distinction between trigger and process of
review.
The fifth
proposition which I get from this case is (5) that time is normally of the
essence of a break clause. This was analysed at greater length by Lord Diplock
and that can also be seen on p 929 F-G:
. . . there
is a practical business reason for treating time as of the essence of such a
clause, which is similar to that applicable to an option to acquire property.
The exercise of this option by the tenant will have the effect of depriving the
landlord of the existing source of income from his property and the evident
purpose of the stipulation as to notice is to leave him free thereafter to
enter into a contract with a new tenant for a tenancy commencing at the date of
surrender provided for in the break clause.
The sixth
proposition, which is a somewhat less general one and which I get from the United
Scientific Holdings case, is (6) that the Karenita case was rightly
decided at the end of the day, not for the reasons which were given by the
judge who decided it, Goulding J, but because it was a clear case of an
interrelated break clause, and it is important to note that that emerges very
clearly on p 936 at A, B and C, where Lord Diplock says:
The timetable
in the rent review clause for the determination of the new rent was obviously
correlated with the time by which the tenant had to give notice of his
intention to surrender, so as to enable him to make his decision whether or not
to exercise that right in the knowledge of what the new rent would be if he
continued in possession after the review date. Had that been all, as it had
been in the previous and rightly decided case of C Richards & Son
Ltd v Karenita Ltd (1971) 221 EG 25, it would, I think, have been sufficient
by necessary implication to make time of the essence of the
contract, and
he was actually talking at the time about the Samuel Properties v Hayek
case, but it is clear that the Karenita case was considered to have been
rightly decided. But the ground of the correctness of it was that there was a
clear interrelation between the break clause and the review processes. Lord
Simon to the same effect at p 947 A, and Lord Fraser at p 962 G-H, where he
actually says:
The tenant’s
notice to terminate the contract would be one where the time limit was
mandatory and the necessary implication is that the time limit for giving the
landlords notice of review must also be mandatory. An example of such
interlocked provisions is to be found in C Richards & Son Ltd v Karenita
Ltd (Supra) where the decision that time was of the essence of the
landlords’ notice could be supported on this ground, although not, as I think,
on the ground on which it was actually rested.
So it is clear
that the House of Lords, or at any rate three of their Lordships, upheld the
result of Karenita.
Finally, the
seventh proposition is (7) that Samuel Properties Ltd v Hayek was
held by the House of Lords to be wrongly decided, but although that was a case
in which there was a break clause it was a case in which the effect of the
break clause was expressly negatived as regards the notice of review, and one
sees that at p 935H going over to 936D. Lord Diplock said:
Samuel
Properties v Hayek [1972] 1 WLR 1296 may be
regarded as the origin of the dichotomy between ‘option’ on the one hand and
‘obligation’ or ‘machinery’ on the other: the word option having been used in
the lease itself to describe the landlord’s right to require the rent to be
reviewed. It should be treated as overruled. There was a complication in that
the rent review clause was associated with a break clause which gave to the
tenant the right to surrender the residue of the term on any rent review day by
giving prior notice. The timetable in the rent review clause for the determination
of the new rent was obviously correlated with the time by which the tenant had
to give notice of his intention to surrender, so as to enable him to make his
decision whether or not to exercise that right in the knowledge of what the new
rent would be if he continued in possession after the review date. Had that
been all, as it had been in the previous and rightly decided case of C
Richards & Son Ltd v Karenita (Supra), it would, I think have
been sufficient by necessary implication to make time of the essence of the
rent review clause because of its interrelation with the time by which notice
was to be given under the break clause–a time which, for reasons I have given
earlier, I consider to be of the essence of the contract.
In Samuel
Properties (Developments) Ltd v Hayek, however, the break clause
itself contained a provision under which the period during which the tenant
could exercise his right to surrender would be extended in the event of the
reviewed rent not having been ascertained within the time stipulated in the
rent review clause. So the implication that would otherwise have arisen from
the association of the rent review clause with a break clause was negatived.
It is only to
be observed that there was nothing like that in clause 5 in this present case.
Now applying
these propositions to the present case, in my judgment, first, there is a
perfectly clear interrelation between the break and the review provisions in
this case–indeed there is more than interrelation, there is one continuous
integrated clause with neither breaks nor punctuation in it of any kind at all,
and I do not in this case even have to consider what would have happened if the
review provisions had been perhaps at the end of the reddendum and the break
provision, as it sometimes is, right at the end of the lease. So this case I
find is a fortiori from interrelation and there is no question that it
could be otherwise. It follows therefore, secondly, that this case is within
the interrelation exception to the prima facie rule that time is not of the
essence of a rent review provision. It therefore, thirdly, follows that time is
of the essence of the rent review provision itself, including the notice to
initiate. A number of considerations which might lead one to suppose that this
was unjust or unfortunate were urged upon me, but I find it accords very well
with good sense in this particular matter; and in particular I find nothing in
the various rather extreme possibilities of what might have happened late on
the night of Christmas Eve of 1978. The answer to that was, as I find,
precisely given on the part of the tenant by saying, that at all times when the
landlord could seek a review, the tenant was entitled to break; and secondly,
that it was on January 5 that the tenant’s right to determine had gone.
Hardship on
the landlord was mentioned, but I can see no hardship on the landlord which
will not always be present as hardship on any party who is given time to serve
a notice when time is of the essence of it; and the hardship in this
case, as was pointed out, is certainly quantitively considerably less than it
was in the Karenita case of which the House of Lords has expressly
approved.
I was also
asked to contrast fault on the side of the landlord with fault on the side of
the tenant, but I need only say this, that no serious suggestion that there was
any fault whatsoever on the side of the tenant was even put forward before me.
For these reasons, therefore, I propose to dismiss the originating summons.
The
originating summons was dismissed with costs.
