Rent review clause — Whether hypothetical lease contains rent reviews — Earlier action deciding against rent reviews — Whether issue estoppel prevents lessees reopening question — Whether exceptions to issue estoppel — Later change in law — Relevant circumstances justifying exception to issue estoppel
The plaintiffs are the lessees of a building in Fetter Lane, London EC4, holding a sub-underlease for a term of 32 years from October 1976; the defendants are the landlords. The underlease contains a rent review clause with provisions for a review of the rent in 1983, 1988, 1993, 1998 and 2004. At each review the rent payable from the rent review date is to be the greater of £800,000, the initial rent, or the “fair market rent”. Fair market rent is defined as: “Such amount as shall represent a yearly rent at which the demised premises might reasonably be expected to be let … subject to the provisions of this Sub-Underlease other than the rent hereby reserved …”.
At the first rent review the arbitrator’s decision, that the hypothetical lease must be regarded as containing five-year rent reviews, was held to be wrong in law by Walton J (National Westminster Bank plc v Arthur Young McClelland Moores & Co [1985] 1 EGLR 61); leave to appeal from that decision was refused and the Court of Appeal found it had no jurisdiction to grant leave. The arbitrator’s alternative award, that the rent be uplifted by some 20% to £1.209m, therefore bound the parties. In the present action the lessees sought to reopen the same question as to the proper construction of the rent review clause. They sought rectification of the sub-underlease or, in the alternative, a determination that on its true construction the hypothetical lease must be regarded as containing five-year rent reviews; there having been a change in the law following the Court of Appeal’s approval in Equity & Law Life Assurance Society plc v Bodfield Ltd [1987] 1 EGLR 124 of the approach to the interpretation of rent review clauses advanced in British Gas Corporation v Universities Superannuation Scheme Ltd [1986] 1 EGLR 120. The landlords applied to strike out the action, contending that by virtue of the earlier proceedings as to the construction of the lease, there is an issue estoppel binding the lessees.
Application in chambers: judgment given in open court
Held The landlords failed in their application; the lessees are not estopped from raising the matter of construction. Although the doctrine of issue estoppel is normally an absolute one, there are exceptions in special cases: Henderson v Henderson (1843) 3 Hare 100; R v Humphreys [1977] AC 1 approving Mills v Cooper [1967] 2 QB 459. A change in the law can constitute further material which is relevant to the correctness or incorrectness of the earlier decision. The question is whether, given a subsequent change in the law indicating that the earlier decision was wrong, the injustice of holding the plaintiff in the second action bound by the erroneous decision in law in the first action outweighs the hardship to the other party in having to relitigate the matter and the public interest in the finality of legal proceedings.
Whether a later change in the law brings the case within the exception depends on the exact circumstances of each case. In the present case the following factors were held to be relevant: (1) the earlier decision and the continuing relationship of landlord and tenant affected rent reviews to the end of the term; (2) because of the pecularities of the appeal procedure from arbitrators, the lessees never had an opportunity to test the issue in the higher courts; (3) there had been no right of appeal against the decision of Walton J in the earlier action; and (4) subsequent decisions make it, at the lowest, strongly arguable that the earlier decision was wrong.
Donald Rattee QC and Jonathan Gaunt (instructed by Freshfields) appeared for the plaintiffs; and Terence Cullen QC and Hazel Williamson QC (instructed by Stephenson Harwood) appeared for the defendants.
