Landlord and tenant — Rent review clause in lease — Construction — Whether words ‘(other than the rent hereby reserved)’ in review clause required the assumption that the hypothetical term should contain no rent review provision — Actual lease, for 30 years from 1969, contained a rent review clause with four rent periods — Judge recalled principles of construction discussed in MFI Properties Ltd v BICC Group Pension Trust Ltd and British Gas Corporation v Universities Superannuation Scheme Ltd — The prima facie inference in the present case, in accordance with these principles, would be that the hypothetical lease would contain provisions for rent review — Judge considered and rejected submissions, in favour of the contrary construction, to the effect that the words ‘(other than the rent hereby reserved)’ required the total excission of the reddendum; that in a lease granted in 1970 (before the period of runaway inflation) the hypothesis of a long period at a fixed rent was not strange or absurd; and that the tenants’ covenant in regard to rent should be construed contra proferentem — In the result a declaration was made in favour of the tenants’ construction that the hypothetical term should contain provision for future rent reviews
The following cases are referred to in this report.
British Gas Corporation v Universities Superannuation Scheme Ltd [1986] 1 WLR 398; [1986] 1 All ER 978; [1986] 1 EGLR 120; (1986) 277 EG 980
MFI Properties Ltd v BICC Group Pension Trust Ltd [1986] 1 EGLR 115; (1986) 277 EG 862
This was an originating summons in which the plaintiff tenants, Amax International Ltd, sought answers to questions of construction relating to the rent review provisions of an underlease of premises at 1 Noble Street and 19/29 Gresham Street in the City of London, of which the lessors were the defendants, Custodian Holdings Ltd and Stanhope Pension Trust Ltd.
Nicholas J Patten (instructed by Slaughter & May) appeared on behalf of the plaintiffs; G O A Sebestyen (instructed by Jaques & Lewis) represented the defendants.
Giving judgment, HOFFMANN J said: This summons raises two points of construction of a rent review clause in an underlease of premises in the City of London. The underlease was granted on July 7 1970 for a term of 30 years from September 29 1969 until September 28 1999. The term was divided into four rent periods, the first being from the date of the grant until September 29 1978, the second and third being for successive periods of seven years thereafter, and the fourth being for the residue of the term. The rent reserved was £193,000 a year during the first rent period, and during each successive rent periods the higher of the rent payable during the previous rent period and ‘the yearly rental value of the demised premises as at the last quarter day but one before the end of the rent period’. The yearly rental value was, in default of agreement, to be determined by an expert valuer and was defined as:
the amount which shall in his opinion represent a fair yearly rent for the demised premises on the relevant date, having regard to rental values then current for property let without a premium with vacant possession and on the provisions of this lease (other than the rent hereby reserved)
and there then follows a proviso which is not presently material and similar to that found in section 34(1) of the Landlord and Tenant Act 1954 by which various matters are to be disregarded.
The summons presents a single omnibus question of construction with five possible answers, but I think logically there are two questions raised. The first concerns the term of the hypothetical|page:112| letting. The second is whether the words in parenthesis ‘other than the rent hereby reserved’ require an assumption that the hypothetical term will contain no provision for review of the rent.
The parties are now agreed that the appropriate term is the unexpired residue, as at the relevant date, of the term originally granted by the underlease. I am, therefore, concerned with only the second of these two questions.
Two weeks ago, in the case of MFI Properties Ltd v BICC Group Pension Trust Ltd*, I discussed the general principles of construction as they apply to rent review clauses and I do not propose to repeat what I then said. Since then the Vice-Chancellor has expressed himself in similar terms in British Gas Corporation v Universities Superannuation Scheme Ltd† . In this case the interest actually held by the tenant at the relevant date would be a lease containing provisions for rent review. In accordance with the principles to which I have referred, I would, therefore, prima facie expect that the parties intended the hypothetical grant to contain similar provisions. Mr Sebestyen, for the landlord, has, however, submitted that the language of this particular underlease prevents one from coming to such a conclusion. He draws attention to the fact that in the judgment of the Vice-Chancellor to which I have referred it is said, first, that a lease may be expressed in words so clear that there is no room for giving effect to the underlying purpose and, second, that there may be special surrounding circumstances which indicate that the parties did intend to reach what on the face of it would appear to have been an unusual bargain. In this case Mr Sebestyen relies upon both these counter-indications. In the first place he says that the words ‘other than the rent hereby reserved’ are not capable of being given a meaning which does not require the total excission of the reddendum in the lease. He points out that in this particular underlease the provision for rent review is not contained in a separate clause but, by means of a definition applicable only to the language of the reddendum, can be treated as incorporated by reference into the reddendum itself. In that respect it differs from some — although, of course, I am unable to say whether it differs from all — of the leases which have been considered in the reported cases.
*Editor’s note: Reported at [1986] 1 EGLR 115; (1986) 277 EG 862.
† Editor’s note: Reported at [1986] 1 EGLR 120; (1986) 277 EG 980.
I do not think that this distinction as to the arrangement of the rent review provisions within the lease can be regarded as so significant an indication of the intention of the parties as to displace the prima facie inference from which I begin. Nor do I think that the words ‘other than the rent hereby reserved’ are incapable of meaning anything less than the whole reddendum. On the contrary, it would seem to me that the natural meaning of the words ‘the rent hereby reserved’ is the amount of money which the tenant actually has to pay. The reddendum contains not only a specific amount payable during the first rent review period but machinery for the determination of the rent during the remaining rent review periods. I do not see why the words ‘the rent hereby reserved’ should have to mean not merely the figure which the application of the formula would produce but the whole of the formula itself. In my judgment, therefore, the words in the parenthesis are at the lowest capable of bearing the meaning contended for by the tenant and I am not, therefore, precluded from giving them that meaning if I consider that the overall purpose of the transaction and the context of the words requires such a construction.
Mr Sebestyen also submitted that if the words are confined to meaning the amount which the tenant has to pay, there would, in effect, be no wording in the lease which needed to be excised in order to give effect to the parenthesis. I think that this may be a fair point to make, since the valuer, looking at the lease for the purposes of arriving at a rent on a hypothetical letting, would not actually need to disregard any part of it. It may be that, as in the case of section 34 of the Landlord and Tenant Act 1954, the words are, upon a strict construction, superfluous. It is, however, understandable that the parties may have wanted to insert them in order to avoid any argument that the lease produced a circularity of reasoning. I do not find this a sufficient ground for displacing an inference which I would base upon the commercial purpose of the transaction.
Turning to the question of whether there are special circumstances which point in the opposite direction, Mr Sebestyen relied upon the fact that this lease was granted in 1970. That was before the property market crisis of 1973-74 and before the runaway inflation of the mid-1970s. Mr Sebestyen therefore says that at the time when this lease was granted it cannot be assumed that the parties would have thought that the hypothesis of a lengthy term at a fixed rent was quite so absurd as it would seem today. Equally, the court could not take judicial notice of the fact that in 1970 no such long leases at fixed rent would be available as comparables. This also seems to me a fair point. In the case of a lease granted in 1970 the inference to be drawn from the state of the property market at the time is much weaker than it would be today, and may even be said to be non-existent. That, however, does not fully meet the basis upon which the prima facie assumption of a grant upon the terms of the existing lease rests, both in the judgment of the Vice-Chancellor and in my own. The principal reason for such a prima facie construction is that the parties may ordinarily be supposed to have intended a valuation of the interest which on the relevant date the tenant actually has. This is not so much a question of the state of the property market at the time, but simply an assumption that the parties would not have intended to depart from reality unless there appeared to be some reason for doing so.
Mr Sebestyen submitted that in 1970 the parties might not necessarily have thought that the insertion of a rent review clause would make much difference to the valuation of the rent. Accordingly, the assumption of a grant without one would not necessarily have seemed particularly strange. I think that that argument is inconsistent with the fact that the parties to this underlease did in fact insert a rent review clause. One can only suppose that they did so because they thought that it would affect the value of the landlord’s and the tenant’s interests. The hypothesis of a letting without a rent review clause would, therefore, be to require the tenant to pay a rent for a different interest from that which he actually holds. In the absence of language or circumstances which suggested that that must be what the parties intended, I do not think that that is a construction which I would prefer.
Finally, Mr Sebestyen argued that this was a covenant by the tenant which in case of ambiguity ought to be construed contra proferentem, that is, against the covenantor. The contra proferentem has its uses, perhaps as a canon of construction of last resort, but I do not think it can carry much weight in the case of a lease. Its effect would in most cases be entirely arbitrary. At any rate, the fact that the tenant is the covenantor and therefore technically the proferens is not, in my judgment, sufficient to displace the inferences which I have already drawn from the language of the clause and its overall commercial purpose.
In those circumstances, I propose to declare that the true construction of this underlease is in accordance with para 1(a), (b) and (c) of the summons.
[By the summons the plaintiffs claimed:
‘(1) A Declaration that upon the true construction of the Underlease mentioned above in the Schedule hereto and in the events which have happened the reviewed rent which falls to be determined in respect of each successive rent period after the first rent period is to be determined: (a) upon the basis that the reviewed rent as so determined on any one such occasion will itself be liable to be subsequently reviewed in respect of each successive rent period thereafter during the residue of the term; and accordingly
(b) having regard to all the provisions of the Underlease (including those providing for such subsequent reviews throughout the residue of the term) and disregarding only the actual amount or quantum of the rent as provided for by the Underlease itself or pursuant to a subsequent review thereafter;
(c) upon the basis of a hypothetical term of years equivalent in length to the then unexpired residue of the term’]
Declaration accordingly.
