Landlord and tenant — Construction of rent review clause in lease — Lease provided that the open market rental value should be arrived at, first, as specified in a notice by the landlords; secondly, if the tenants did not accept the figure specified, by agreement between the parties; thirdly, as determined by an independent surveyor appointed as arbitrator by agreement or, failing agreement, by the president of the RICS — Two questions arose for decision — The first was whether the figure specified in the landlords’ notice had to be a bona fide and genuine pre-estimate of the open market rental value — The second was whether a letter from the tenants refusing the figure specified by the landlords, and asking for an explanation of how it had been arrived at, could be construed as a notice requiring arbitration — Held that the answer was ‘no’ to both questions — Appeal from an order of Smith J dismissed.
This was an
appeal by tenants, Joystretch Manufacturing Ltd, from a decision of Smith J
dismissing the tenants’ appeals from
liable to the present respondents, Amalgamated Estates Ltd, in the sum of
£8,392.12 for arrears of rent. The lease under which the dispute arose related
to property in Rugby at 14 Regent Street and 3 Bank Street. The relevant
clauses in the lease are set out in the judgment of Lawton LJ.
Paul de la
Piquerie (instructed by Ward Bowie, agents for H E Wynschenk, John Basset &
Co, of Birmingham) appeared on behalf of the appellants; N T Hague (instructed
by Frimonds) represented the respondents.
Giving
judgment, LAWTON LJ said: This is yet another appeal raising the question of
the construction of a rent review clause in a lease. In this case it arises by
way of appeal from the order of Smith J made on July 25 1980 whereby he
dismissed the defendants’ appeal against the refusal of Master Ritchie to give
them unconditional leave to defend, and the judgment given by the Master on
July 7 1980 against the defendants in the sum of £8,392.12 for arrears of rent.
There was also an order for costs.
The
defendants, who were tenants, had to apply for leave to appeal out of time.
That we granted; there was only a technical infringement of the rules. They
asked for the judgment to be set aside on the ground that, on the true
construction of the lease, the landlords were not entitled to be paid the rent
which they had demanded.
The lease
under consideration was made on December 7 1973. It related to some property in
Rugby known as 14 Regent Street and land at 3 Bank Street, Rugby. The premises
were, in fact, shop premises with a yard. The term was for 25 years at a
starting rent of £3,500 per annum. For the first five years of the lease the
rent was to be £3,500 per annum. Clause 1(b) of the lease provided:
(b) For the next FIVE years of the said term
either the yearly rent reserved in subclause (a) hereof or the open market
rental value of the demised premises to be determined in the event of
disagreement between the parties by a Chartered Surveyor to be nominated by the
President for the time being of the Royal Institution of Chartered Surveyors at
the review date whichever is the higher and in either case the same shall remain
constant during the whole period referred to in this subclause.
Clause 1(c)
was in these terms so far as it is relevant:
(c) For each subsequent successive term of FIVE
years of the said term either the yearly rent in subclause (a) hereof or that
in subclause (b) hereof or the open market rental value of the demised premises
at the review date to be determined as hereinbefore provided whichever is the
higher and in either case the same shall remain constant during the whole
period referred to in this subclause . . .
I leave out
some words which are irrelevant, and the clause ended with a proviso which was
as follows:
PROVIDED THAT
for the purpose of subclause (b) and (c) hereof it is hereby agreed that the
following definitions and provisions shall apply . . .
Then was set
out a definition of open market rental value as follows:
The annual
rental value of the demised premises in the open market which might reasonably
be demanded by a willing landlord on a Lease for the term of years certain
equivalent in length to the residue unexpired on the review date of the term of
years hereby granted with vacant possession at the commencement of the term . .
.
The second
paragraph of the proviso defined what was meant by ‘review date’. Nothing in
this appeal turns on that paragraph. The third paragraph must be read in full
and is as follows:
(3) The open market rental value shall be
determined in manner following that is to say (a) specified in notice in
writing signed by or on behalf of the Landlord and posted by recorded delivery
post in a pre-paid envelope addressed to the Tenant at the demised premises at
any time provided that if a notice is posted after the review date the open
market rental shall not be payable until the second quarter day following the
posting the said notice and such quarter day shall be known for all purposes as
the review date and such notice shall be conclusively deemed to have been
received by the Tenant in due course of post or (b) agreed between the parties
before the expiration of three months immediately after the date of posting of
such notice as aforesaid in substitution for the said sum of
That was left
blank. Then comes:
(c) determined at the election of the Tenant (to
be made by counter-notice in writing served by the Tenant upon the Landlord not
later than the expiration of the said three months) by an independent surveyor
appointed for the purpose by the parties jointly in writing or upon their
failure to agree upon such appointment within one month immediately after the
date of service of the said counter-notice then by an independent surveyor
appointed for that purpose on the application of either party alone by the
President for the time being of the Royal Institution of Chartered Surveyors
and in either case in accordance with the provisions of the Arbitration Act
1950.
(4) is irrelevant for present purposes, and (5)
is in these terms:
(5) All stipulations as to time in the foregoing
subclauses numbers (1)(2)(3) and (4) shall be of the essence of the contract
and shall not be capable of enlargement save as agreed in writing by the
parties.
There is
reason to believe that most of the proviso was taken from a precedent in the Encyclopaedia
of Forms and Precedents 4th ed vol 12 at p 841. What was not in that
precedent was the part providing that the notice shall be conclusively deemed
to have been received by the tenant in due course of post. Another provision of
the lease which was not, as far as I can see, in the precedent in the Encyclopaedia
of Forms and Precedents was clause 1(b) of this lease, which provides that,
if there is a dispute as to the open market rental value of the demised
premises, it is to be determined by a chartered surveyor to be nominated by the
president for the time being of the Royal Institution of Chartered Surveyors.
The history of
the case is as follows. Two or three days before the review date as defined in
the lease the landlords wrote to the tenants by letter dated December 8 1978 in
these terms:
Dear Sirs, Re:
14 Regent Street and 3 Bank Street, Rugby. Pursuant to the terms of your Lease
of the above premises dated December 7 1973, we hereby give you notice that we
require a review of the yearly rent payable thereunder as from December 10
1978. We specify that the new rent payable as from December 10 1978 will be
£10,000 per annum exclusive. This rent is proportionately in line with our
recent lettings and reviews of other premises in the area with similar
accommodation.
Please will
you kindly acknowledge safe receipt of this notice by signing the enclosed copy
notice and returning it in the stamped addressed envelope provided.
The tenants
replied to that letter on December 12 1978 in these terms:
We are in
receipt of your letter of December 8 1978 and note contents of same.
We cannot
agree with your rent increase, for, as you know, they are building a new Centre
which is going to push Regent Street right out of position. There are shops
very close to our own that are being offered for around £4,000 per annum.
Perhaps, therefore, you could explain how you arrive at £10,000.
The landlords
did not reply to that letter.
On April 19
1979, that is after the expiration of the three months in which a counternotice
could have been served by the tenants under clause 3(c) of the proviso, the
landlords demanded the payment of rent at the rate of £10,000 per annum. The
rent at that rate was not paid. On February 26 1980 the landlords issued a
specially indorsed writ claiming a rent at the increased rate. The defendants
put in a defence to the effect that it was an implied term of the lease that
any new rents specified by the landlords in a notice given under clause 3(a) of
the proviso to clause 1 of the lease should be a bona fide and genuine pre-estimate
of the open market rental value. Further, they said that there had in fact been
a counternotice pursuant to clause 3(c) of the proviso by reason of the letter
of December 12 1979. The landlords took out a summons for judgment under Order
14 and the points which had been foreshadowed in the defence were argued before
Smith J. He adjudged that there was nothing in them and that, accordingly, the
plaintiffs were entitled to judgment. He had before him an affidavit put in by
the tenants. It was that of a surveyor deposing that, in his opinion, the
maximum rent was £6,000 per annum.
There are two
questions, therefore, for decision in this case: (1) should there be implied
into clause 3(a) of the proviso words to the effect set out in the defence,
namely, that the sum specified by
rental value?; (2) was the tenants’ letter of December 12 1978 a counternotice
under clause 3(c) of the proviso?
As to the
first point, I have no doubt at all that the words which, it was submitted,
should be read into clause 3(a) cannot be so read. The proviso deals with
definitions and procedure. Clause (1) of the proviso provides that the open
market rental must be a rent which might reasonably be demanded by a willing
landlord, etc. Clause (3) sets out how that reasonable rent is to be fixed and
it is to be done in three stages. First, the landlord is to specify his figure;
then there are to be negotiations for an agreement if his figure is not at once
accepted. That is clear from clause 3(b). If there is no agreement then there
is to be arbitration. It is after all those steps have been taken that a
reasonable rent is to be ascertained; and I can see no room at all in this
lease for implying that the figure specified by the landlord must start with a
bona fide and genuine pre-estimate of the rent. The whole purpose of the lease
is to decide what that rent should be and, as Templeman LJ pointed out in the
course of argument, if there was such an implied term to be written into clause
3(a), disputes would inevitably follow as to what was a bona fide and genuine
pre-estimate of the rent. There would be no certainty at all and the lease must
have intended the procedure in the proviso to deal with such uncertainties as
there were.
My judgment in
that respect is supported by the decision of Goulding J in the case of Davstone
(Holdings) Ltd v Al-Rifai [1976] 32 P&CR 18. The lease in that
case was differently worded from the one in this case, but the issue in that
case was the same as in this case; and Goulding J held that there was no room
for the kind of implied term which Mr de la Piquerie on behalf of the tenants
submitted should be read into this lease.
The second of
the two points which were taken on behalf of the tenants I have found more
difficult. The first step is to construe the letter of December 12 1978. It was
a letter expressing disagreement with the figure put forward by the landlords.
But it was a little more than that because, in the final paragraph, there was a
request for an explanation as to how the landlords had reached the figure of
£10,000. On receipt of this letter the landlords would not have known with
certainty what attitude the tenants were taking up. They had made it clear that
they disagreed. On the other hand, by asking for particulars as to how the
figure was made up, they may have been inviting the landlord to convince them
that the figure of £10,000 or some figure near £10,000 was perhaps a reasonable
figure in all the circumstances.
There is
nothing, in my judgment, in the letter to indicate that, on December 12 1978,
the tenants wanted to go to arbitration. The landlords were left without any
clear indication as to what the tenants wanted to do. They might, perhaps, have
got some further information about the tenants’ intentions had they answered
the letter and given their reasons for fixing the figure at £10,000 per annum;
but they did not. They were under no obligation to give any explanation. They
were, in my judgment, entitled to sit back and wait to see what action the
tenants took under clause 3(c) of the proviso and, when the tenants did not
take any steps to call in aid the provisions of that clause, they were entitled
to assume that they did not want to take advantage of it. It is worthy of note
that, after the demand for rent at the new rate which was made on April 19
1979, the tenants did not seek the relief which, in my judgment, would have
been available to them under section 27 of the Arbitration Act 1950. That section
reads as follows:
Where the
terms of an agreement to refer future disputes to arbitration provide that any
claims to which the agreement applies shall be barred unless notice to appoint
an arbitrator is given or an arbitrator is appointed or some other step to
commence arbitration proceedings is taken within a time fixed by the agreement,
and a dispute arises to which the agreement applies, the High Court, if it is
of opinion that in the circumstances of the case undue hardship would otherwise
be caused, and notwithstanding that the time so fixed has expired, may, on such
terms, if any, as the justice of the case may require, but without prejudice to
the provisions of any enactment limiting the time for the commencement of
arbitration proceedings, extend the time for such period as it thinks proper.
That section is
of considerable importance, not only in relation to the construction and effect
of the letter of December 12 but to one of Mr de la Piquerie’s arguments about
the need to imply a term. He laid great stress on the fact that the lease in
subclause 3(a) fixes the tenant with notice, even though he has not in fact
received the notice of the rent which the landlord wishes to charge him. But,
as was pointed out by Mr Hague, when the tenant was asked to pay the increased
rent after the expiration of the three months, he could have come to the court
under section 27 and have applied for an extension of time. The tenants in this
case accept that they did receive notice. They could have come to the court, even
if they had not appreciated at first what their rights were under clause 3(c);
but they did not and, in those circumstances, they cannot now complain about
the operation of clause 3(c).
A more
fundamental problem is the seeming difference between clause 1(b) and clause
3(c) of the proviso. Clause 1(b), to go back to it, provides that the open
market rental value of the demised premises is to be determined in the event of
disagreement between the parties by a chartered surveyor to be nominated by the
president for the time being of the Royal Institution of Chartered Surveyors.
Mr Hague submitted that that provision in the lease is ambiguous, because it is
not clear whether, by that subclause, the rent is to be determined by an
expert, in which case the Arbitration Act would not apply, or whether it is to
be determined in accordance with the Arbitration Act and the provisions of
clause 3(c) of the proviso.
One argument
which has been canvassed is that the lease envisages two ways of finding out
what the new rent should be. One is under clause 1(b), that is to say, by an
expert, or under clause 3(c) of the proviso by arbitration. As there has been
no request for arbitration by the tenants in this case it follows, it was
submitted, that it is still open to the tenants to ask for a determination by
an expert under clause 1(b). The difficulty about that argument seems to me to
be this. The proviso starts by saying: ‘. . . for the purpose of subclause (b)
and (c) hereof it is hereby agreed that the following definitions and
provisions shall apply namely . . .’ In
other words, clause 1(b) has got to be construed in the light of what comes in
the proviso, because the proviso is in the lease for the purposes of clause
1(b).
Mr Hague put
his argument in what I found an attractive manner. He submitted that the
structure of this lease sets out in clause 1(b) a general proposition about the
rent reviews: that, when there is a dispute, it is to be determined by an
independent surveyor, and the proviso says how it is to be done. The first two
clauses of the proviso deal with definitions, and clause (3) deals with the
specific way the rent is to be calculated in the event of the parties not being
able to agree. In other words, the determination by an independent surveyor which
is envisaged in clause 1(b) is to be dealt with by the machinery provided by
clause 3(c). I found that a compelling argument. An attempt to construe the
lease in any other way produces this result. The parties would have provided in
the lease for two entirely different ways of determining the new rent, one by
arbitration and one by an expert. Determination by arbitration would entitle
the parties to certain rights under the Arbitration Act. Determination by an
expert would leave the parties bound by whatever figure the expert decides
upon. It is difficult to envisage that, in this lease where the parties have
specifically mentioned arbitration in clause 3(c), they, at the same time,
could have envisaged that there should be a determination which had nothing
whatsoever to do with arbitration.
Again, as was
pointed out by Templeman LJ in the course of argument, the final words of
clause 1(b)
. . . to be
determined in the event of disagreement between the parties by a Chartered
Surveyor to be nominated by the President for the time being of the Royal
Institution of Chartered Surveyors at the review date whichever is the higher
and in either case the same shall remain constant during the whole period
referred to in this subclause
are really
surplusage. The only sense that can be made of them is to transpose them from
1(b) to a new subclause in clause (3) of the proviso. If that is done, back one
comes to the situation whereby in one and the same lease there are to be two
different ways with different legal consequences of determining the rent. I
find that an impossible situation and, for those reasons, I would come to the
same conclusion as Smith J, namely, that there was no defence to the landlords’
claim.
Agreeing,
TEMPLEMAN LJ said: I only add a few words of my own out of sympathy for the
tenant, who has fallen into one of the many traps which leases lay for tenants.
The first
point made by Mr de la Piquerie for the tenant is that there must be an implied
term that the landlord will only specify a bona fide and genuine pre-estimate
of the open market rental value. That appears to me to be an unnecessary and
unworkable proposition. If a landlord puts forward a preposterous figure for
rent, the tenant can always serve a counternotice. It would be ludicrous if the
court were obliged to decide whether the landlord’s figure was a bona fide and
genuine pre-estimate in order to decide whether the landlord’s request for an
increased rent was valid or wholly void. The court does not exist to punish a
landlord for being greedy, especially as the definition of ‘greed’ varies from
Shylock to Portia and from landlord to tenant.
Mr de la
Piquerie submitted that the tenant could not serve a counternotice if he did
not in fact receive the landlord’s notice, although the tenant is conclusively
deemed to have received a notice despatched by recorded delivery post. The
tenant might, therefore, be bound by a proposed rent of which he had no
knowledge. Therefore, so the argument runs, there must be some implied term
which will enable the tenant to escape from a preposterous rent in those
circumstances.
Apart
altogether from the provisions of section 27 of the Arbitration Act 1950, which
appear to give the tenant a remedy in appropriate circumstances, it seems to me
that this tenant has accepted a lease under which he runs the risk of
non-delivery of a landlord’s notice just as under the Law of Property Act 1925
a tenant runs the risk that a notice may be delivered to the demised premises
and yet never come to the attention of the tenant. At the same time, on general
principles, I fail to see why a landlord cannot be content with the provisions
of the Law of Property Act 1925, and I deprecate the inclusion in any lease of
an express provision, such as we have in the present lease, whereby the tenant
is conclusively deemed to have received a notice which he never had an
opportunity to receive: for example, a notice which has been accidentally lost
or destroyed by the Post Office authorities. That seems to me to be an unfair
burden to put upon any tenant.
The tenant’s
present dilemma is also due to the fact that he has accepted a lease under
which time is expressly made of the essence. Although that provision is applied
to several subparagraphs, on analysis it can only do very real harm to the
tenant who, because of that provision — if, as has happened in the present
case, he accidentally disobeys the time limits — may find that he is saddled
with a very onerous rent. The House of Lords has broken the implied tyranny of
time as regards rent renewal clauses, but tenants are still harassed by express
clauses making time of the essence. I think it is a great pity that any
landlord should require, or any tenant should accept, a provision making time
of the essence when the consequences are so onerous. In the present case, for
example, if the landlord is correct as to the legal position but if the
tenant’s advisers are correct as regards the prevailing rent, the landlord will
receive a grossly excessive rent for a period of five years simply because the
tenant had either forgotten or was not sufficiently knowledgeable to understand
what he had to do under the lease and made a mistake in the time factor. The
result does not seem to me to be just.
Mr de la
Piquerie’s second point, namely that the tenant’s letter dated December 12 1978
constitutes a counternotice, also seems to me to be untenable. By that letter
the tenant refused to agree the landlord’s figure of £10,000 and asked for an
explanation. By the lease the tenant had three months from December 8 1978 in
which to serve a counternotice electing for the rent to be determined by
arbitration. I am unable to find in the tenant’s letter of December 12 any
words which enable me to construe it as a counternotice of the kind required by
the lease. It is true that no magic formula is required but, in my judgment,
the tenant must make it clear to the landlord that he proposes to have the rent
decided by arbitration in accordance with the provisions of the lease. The
landlord and tenant may reach a compromise before arbitration has been reached,
but, nevertheless, on the plain words of the lease it seems to me that the
tenant is directed to serve a counternotice making it clear to the landlord
that he proposes to go to arbitration if that is his intention. I cannot spell
that out of the tenant’s letter, which simply said he did not agree with the
landlord’s £10,000 and asked for an explanation.
Similar views
were expressed by Goulding J in Bellinger v South London Stationers
Ltd (1979) 252 EG 699, [1979] 2 EGLR 88 and by Michael Wheeler QC, sitting
as a deputy judge of the Chancery Division, in Oldschool v Johns
(1980) 256 EG 381.
I was at first
attracted by Mr de la Piquerie’s third point that the landlord had fouled his
own nest by providing in clause 1(b) for a determination by a chartered
surveyor to be nominated by the president for the time being of the Royal
Institution of Chartered Surveyors, and that this was a separate and extant
provision which still bound the landlord and the tenant. Mr Hague, in a lucid
exposition, has, however, persuaded me that the procedure mentioned in clause
1(b) is only a short method of referring to the machinery specified in the five
provisos which are set out, those provisos expressely declared by the lease to
be for the purpose inter alia of subclause 1(b). It would not make
sense, in my judgment, to have the elaborate provisions of the provisos and to
leave as some kind of long stop the similar provisions of clause 1(b).
Reading the
provisions as a whole I accept Mr Hague’s argument that those provisions show
how open market rental value is to be arrived at. First of all, the landlord
specifies it; secondly, if the tenant does not agree with that specification,
there is the second method, namely of agreeing the rental value and, for that
purpose, three months are allowed. Thirdly, if the landlord’s specification is
not accepted and if the landlord and the tenant cannot reach agreement, then
there is the third method: determination by an independent surveyor appointed
as an arbitrator in accordance with the provisions of proviso (c). Those three
methods being marked out as being the methods of determining the open market
value for the purposes of subclause (b), it does not, in my judgment, leave room
for any fourth method of adjudication by an expert. I, too, would dismiss the
appeal.
Also agreeing,
O’CONNOR LJ said: I agree with my Lords that there is no room for implying any
such term as that for which the tenant contends in arriving at the figure which
the landlord puts in his notice under proviso 3(a) of the lease.
I also agree
that the letter of December 12 sent by the tenant to the landlord does not
qualify as a counternotice under clause 3(c) of the proviso.
I have had
more difficulty in coming to a conclusion on the third submission, namely that
the lease provides for two different methods of determining the open market
rental value at the review stage. Clause 1(b) is, in my judgment, not a
submission to arbitration. I think it clear that it is an agreement to have the
open market rental value determined by a chartered surveyor in the event of
disagreement between the parties; and, if it stood alone, there would be no
room, in my judgment, for submitting that it was a submission or an agreement
to arbitration.
What, then, is
the effect of the proviso? My Lords have
come to the conclusion that, even if there be any ambiguity in 1(b) (which I do
not think there is), the effect of the proviso is that proviso 3(c), so to speak,
provides an overriding construction of 1(b). I have difficulty with that
concept, but there is another reason which has persuaded me in the end that it
would not be right to dissent on that ground. The difficulty is this. There is
clear machinery in clause 3 of the proviso for determining the open market
rental value. As has already been stated, there is, first of all, a figure put
upon it by the landlord; alternatively, an agreed figure (that is (b)) come to
between landlord and tenant; or, alternatively, arbitration as set out in
subclause (c). It will be seen that there are time-limits on that; and, however
disadvantageous they may be to the tenant and however hard some of these
clauses may appear, there must be some determination of the open market rental
value. If all the time-limits which are dealt with in the proviso have gone by
and nothing has been done other than the naming of a figure by the landlord, is
it to be open to a tenant to come back, long after the event if need be,
under clause 1(b) and ask for a determination of the rent? The answer, to my mind, comes back: ‘No, that
will not do’. Therefore, I also agree that the appeal should be dismissed.
The appeal
was dismissed with costs.
