Landlord and tenant — Rent review — Deeming provision — Whether provisions for service of counternotice to landlord’s rent trigger notice time of the essence
By a lease
dated January 14 1986 the appellant tenant held premises at a rent subject to
review in certain years upon notice given by the lessor. Clause 4(3) of the
lease provided for the service by the landlord of a notice specifying the
market rent payable from a rent review date; clause 4(4) provided that the
tenant may serve a counternotice specifying the market rent within five weeks
of the landlord’s notice; and clause 4(8) provided that the market rent
specified in the landlord’s notice was then payable from the appropriate rent
review date unless the tenant had served a counternotice. By a letter dated
January 18 1991 the landlord’s agent specified a rent of £25,000 stating that
it was payable from the review date of March 25 1991. The tenant failed to
serve any counternotice until May 16 1991 when it specified a market rent of
£12,000. The tenant appealed from the decision of Judge Oddie, who had allowed
the landlord’s claim for arrears of rent based on its rent review notice,
contending that time was not of the essence for the service of the
counternotice.
Held: The appeal was allowed. Unless rebutted by some contraindication
the presumption that time is not of the essence for the taking of the various
steps needed to effect a rent review applied; see United Scientific Holdings
Ltd v Burnley Borough Council (1977) 243 EG 43 and 127. The
provision in the rent review clause at clause 4(8), that the rent specified by
the landlord’s notice is deemed to be the rent from the rent review date, is
not a sufficient contra-indication; clause 4(8) did not itself contain any
specific mention of time within which a counternotice had to be served.
its proper construction it is not a deeming provision, but is referring to a
counternotice which complies with the description in clause 4(4), but not
necessarily one served within five weeks there stipulated.
The following
cases are referred to in this report.
Biggs v Hoddinott [1898] 2 Ch 307
Cheapside
Land Development Co Ltd v Messels Service Co [1978]
AC 904; [1977] 2 WLR 806; [1977] 2 All ER 62; (1977) 33 P&CR 220; [1977]
EGD 195; 243 EG 43 & 127, HL
Henry
Smith’s Charity Trustees v AWADA Trading &
Promotion Services Ltd (1983) 47 P&CR 607; [1984] EGD 103; 269 EG 729,
CA
Lewis v Barnett (1981) 264 EG 1079
Mecca
Leisure Ltd v Renown Investments (Holdings) Ltd (1984)
49 P&CR
12; [1984] EGD 200; 271 EG 989, CA
Raineri v Miles [1981] AC 1050; [1980] 2 WLR 847; [1980] 2 All ER 145, HL
Stickney v Keeble [1915] AC 386
United
Scientific Holdings Ltd v Burnley Borough
Council [1978] AC 904; [1977] 2 WLR 806; [1977] 2
All ER 62; (1977) 33 P&CR 220; [1977] EGD 195; 243 EG 43 & 127, HL
Visionhire
Ltd v Britel Fund Trustees Ltd [1992] 1 EGLR 128; [1992] 10 EG 95, CA
Young v Bristol Aeroplane Co Ltd [1944] 2 All ER 293; [1944] KB 718
This was an
appeal by the tenant, Grandmet Restaurants Ltd, from the decision of Judge
Oddie in Mayors and City of London Court, who had allowed a claim by the
landlord, Bickenhall Engineering Co Ltd, for arrears of rent.
David
Neuberger QC and Thomas Leech (instructed by Travers Smith Braithwaite)
appeared for the appellant; Paul Morgan QC and Basil Yoxall (instructed by
Stafford Young Jones) represented the respondent.
Giving the
first judgment, Neill LJ
said: This is an appeal by Grandmet Restaurants Ltd (the lessee) from the order
of Judge Oddie made on January 29 1993, whereby it was ordered that judgment be
entered for Bickenhall Engineering Co Ltd (the lessor) in the sum of £7,751.
The claim by the lessor was for £6,500 rent and £1,251 by way of interest.
The lessor is
the freehold owner of premises known as 8 Hill Rise, Richmond upon Thames. By a
lease dated January 14 1986 the lessor demised the premises to the lessee (at
that time named United Biscuits (UK) Ltd). The lease was for a term of about 17
years expiring on March 24 2003. The annual rent for the premises was £4,700.
Clause 4 of
the lease contained provisions for the review of the rent payable by the
lessee. So far as is material clause 4 was in these terms:
(1) If the
lessor shall by giving notice in writing (the lessors notice) to the lessee at
any time after the 25th March in each of the years 1986, 1990, 1994 and 1998
require a review of the rent payable hereunder the rent shall be revised with
effect on 25th March in each of the years 1987, 1991, 1995 and 1999 (each of
which is a ‘review date’) so as to equal (subject as provided by sub-clause
(11) [a mistake for (10)] of this clause) the then market rent of the demised
premises provided always that any
failure to give or receive such notice shall not render void the right of the
lessor to require the agreement or determination of a new rent or payment
thereof from the relevant review date as herein provided.
Clause 4(2)
defined ‘market rent’, but I need not read it because it has no relevance in
these proceedings.
Clause 4
continued:
(3) The
lessor’s notice shall specify the amount that the lessor considers should be
the market rent payable on and from the relevant review date.
(4) The
lessee may within five weeks of the service of the lessor’s notice serve on the
lessor a written counter-notice specifying the rent that the lessee considers
should be the market rent payable on and from the relevant review date.
(5) If such
counter-notice be served and agreement should be reached by the parties within
three months of the date of service of the counter-notice as to the market rent
then at the cost of the lessee a memorandum shall be prepared in duplicate by
the lessor recording the agreed market rent at the relevant review date and one
copy shall be signed by and on behalf of the lessor and one copy shall be
signed by the lessee and the signed copies exchanged by the parties but so that
delay or failure in the preparation signature or exchange of such memorandum
shall not prevent either party relying or setting up any agreement as to market
rent made between the parties.
(6) If such
counter-notice be served but no agreement shall be reached by the parties
within three months of the date of service of the counter-notice as to the
market rent then the dispute or question as to the market rent may at any time
thereafter be referred to an independent surveyor …
Clause 4(7)
contained provisions as to the costs of the independent surveyor. I need not
set it out. I should, however, set out the remaining subclauses of clause 4:
(8) If no
such counter-notice is served the market rent specified in the lessor’s notice
shall stand as the market rent payable at and from the relevant review date and
shall be paid accordingly.
(9) If the
revised market rent has not been fixed in any manner as hereinbefore provided
before the relevant review date then:–
(a) until
such revised market rent has been so fixed the lessee shall on the days herein
fixed for payment of rent continue to pay a sum equal to the rent payable
immediately before the expiration of the relevant review date generally on
account of the liability to pay the revised market rent.
(b) within
fourteen days of the revised market rent being so fixed the lessee shall pay a
sum (hereinafter called ‘the balance of rent’) equal to the difference between
the revised market rent and the sum paid on account thereof pursuant to
sub-clause (9)(a) hereof for the period from the relevant review date until the
next ensuing day on which rent is payable hereunder together with interest …
(10) The rent
payable by the lessee with effect on any relevant review date shall be:–
(a) the rent
fixed in any manner as hereinbefore provided or
(b) the rent
payable immediately before the expiration of the relevant review date
whichever
shall be the greater.
Though March
25 1987 was stated to be a review date in clause 4(1) it seems clear that the
parties treated March 25 1991 as the first effective review date.
On January 18
1991 John Broomfield & Co, acting as agents for the lessor, wrote to the lessee
as follows:
Please be
advised now that, having considered carefully again the size and location of
the premises, and the terms of the lease as entered into originally by the
parties on January 14 1986, that we assess the market rental value as at the
first review date to be in the sum of £25,000 … per annum exclusive and that
this is the rental we ask you to confirm for payment from March 25 1991. For
the avoidance of doubt, we confirm that this communication represents the
lessor’s notice …
It is clear
that at that stage the lessee took no steps to serve a counternotice as
provided in clause 4(4) of the lease.
On April 30
1991 the lessor’s agents wrote to the lessee’s solicitors to draw attention to
the fact that the bank reference which had been obtained for the lessee related
to the old rent level. The letter continued:
The rent
payable by the lessee as from March 25 of this year will be £25,000 per annum
and we should be glad if a fresh bank reference can be obtained at this level.
On May 3 1991
the lessee’s solicitors, in a letter which also dealt with other matters, wrote
as follows with reference to the rent review:
Our clients
confirm that indeed there is a rent review as at 25 March 1991. However, they
inform us that the new rental figure has not been agreed and the figure of
£25,000 quoted has not been accepted by them. Accordingly, for the moment,
please would you accept the bank reference previously supplied which is in
respect of the current rent payable [to] your clients
On May 6 1991
the lessor’s agents replied:
A rent review
notice was served upon your client and they did not issue a counter-notice
within the time limit set out within the lease. Accordingly, the rental
determination of £25,000 per annum does stand and we would wish there to be a
reference application at this market level of rent.
This letter
prompted the service of a counternotice. The lessee’s solicitors wrote on May
16 1991:
We now
enclose a copy of the counternotice which we have today served upon the landlord
in accordance with clause 4(4) of the lease dated 14 January 1986. We
acknowledge that this clause states that the tenant may serve the
counter-notice within a five week period and this limit has now expired. The
lease does not however specifically state that time is of the essence in
respect of service of the counter-notice and it is therefore a question of
construction of the rent review clause as to whether the clause contains
sufficient contraindications to make time of the essence …
In the counternotice
dated May 16 1991 the lessee gave notice that it considered that the market
rent payable should be £12,000. The parties were unable to agree, however, as
to the proper construction of the lease and as to the consequences of the
counternotice having been served outside the five-week period specified in
clause 4(4).
On September
23 1991 the lessor issued a writ claiming arrears of rent for the March and
June quarters of 1991 based on the difference between the rent claimed by the
lessor (at the rate of £25,000 pa) and the rent paid by the lessee (at the rate
of £12,000 pa). Though the sum involved is not large the case raises a question
of general importance and some difficulty.
Both before
the judge and in this court the case for the lessor was put in two ways. The
primary argument (certainly before us) was that, in the absence of a
counternotice served within the time specified in clause 4(4), the rent payable
in accordance with clause 4(8) was the rent stated in the lessor’s notice.
Clause 4(8) conferred on the lessor an accrued contractual right. The
alternative argument was that the lessor had successfully rebutted the
presumption that the time for the service of the counternotice was not of the
essence of the contract.
Judge Oddie,
in an admirable judgment in which he reviewed the relevant authorities,
concluded that he could not accept the primary argument, but decided that the
presumption that time was not of the essence had been rebutted.
He said:
Construing
the documents as best I can, giving every effect to the provision in the lease,
it seems to me that he has successfully rebutted the presumption that time is
not of the essence so that the clause must be given the meaning that it would
otherwise have.
Accordingly,
he gave judgment for the lessor for the rent claimed and interest.
In this court
counsel for the lessor developed his argument on the following lines.
(1) The
references in clause 4(5), (6) and (8) to ‘such counternotice’ are references
to a counternotice served in accordance with clause 4(4), that is, within five
weeks.
(2) Clause
4(8) provides that if no such counternotice is served the rent stated in the
lessor’s notice stands as the market rent and is payable accordingly.
(3) Clause
4(8) confers on the lessor in the events which have happened an accrued
contractual right.
(4) There is
no principle of law or equity which can be invoked to deprive the lessor of
this accrued contractual right.
(5) The
presumption that time is not of the essence is not material because the
presumption applies only where the contract contains a time stipulation, but
does not provide for the consequences of non-compliance with that stipulation.
In the present case, though the contract contains a time stipulation, there is
a provision for the consequences of non-compliance.
(6) If,
however, contrary to the lessor’s primary submission, the presumption is
material, then it is clear that the parties had rebutted the presumption by the
express provisions in the lease.
I must turn,
therefore, to the law.
The law
I propose to
start by considering the matter without reference to the guidance given by the
House of Lords in the decision which is usually referred to as United
Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904,
though it is to the facts in the conjoined appeal in Cheapside Land
Development Co Ltd v Messels Service Co that I shall have to look
later.
One starts
with the general principle, as enunciated by Romer J in Biggs v Hoddinott
[1898] 2 Ch 307 at p313, ‘that a man shall abide by his contracts, and that
a man’s contracts should be enforced as against him’. This principle is of
particular importance in construing agreements between commercial organisations
of comparable bargaining power who are likely to have had access to skilled
legal advice.
At common law
a stipulation as to time in a contract was a condition of the contract and this
rule applied to contracts for the sale of land. Equity, however, would
intervene in certain circumstances to prevent the other party to the contract
from relying on a breach of a stipulation as to time as a repudiatory breach.
It was in this context that the doctrine of time being of the essence was
developed. But it is important to notice that equity intervened to mitigate the
effects of a breach of condition.
The matter was
explained by Lord Edmund-Davies in Raineri v Miles [1981] AC 1050
at p1083A in these terms:
The true
position before 1873, as I see it, in contracts for the sale of land was this:
On a vendor’s failure to complete on the specified date (a) the
purchaser could recover damages for the vendor’s breach both in the common law
and the Chancery courts; (b) notwithstanding (a), the vendor
could petition in the Chancery court for a decree of specific performance. There
would be no discordance between the purchaser being awarded damages and the
vendor getting his decree … Equity would, however, interfere to stay common law
proceedings in which the purchaser sought to rely on the vendor’s breach of
strict compliance with the completion date not simply as entitling him to
recover damages but also enabling him to treat the contract as thereby
repudiated, for that would be in direct conflict with the vendor’s suit in
equity for specific performance if he had completed within a reasonable time
after the stipulated date.
It is also
helpful to refer to a passage in the speech of Lord Parker of Waddington in Stickney
v Keeble [1915] AC 386 where he said at p415:
Where it could
do so without injustice to the contracting parties it [equity] decreed specific
performance notwithstanding failure to observe the time fixed by the contract
for completion, and as an incident of specific performance relieved the party
in default by restraining proceedings at law based on such failure.
This is
really all that is meant by and involved in the maxim that in equity the time
fixed for completion is not of the essence … it was only for the purposes of
granting specific performance that equity in this class of case interfered with
the remedy at law.
The rights
conferred on the landlord by clause 4(1) and on the tenant by clause 4(4) do
not give rise to a claim for breach if the rights are not exercised. They could
be regarded as options rather than obligations. Accordingly, in the absence of
authority it would have been possible to argue that the stipulations as to time
in clauses 4(1) and 4(4) should be treated as akin to stipulations as to time
in clauses which contain an option to break or renew a lease, and that
therefore there was no room for the intervention of equity. Equity intervenes,
it could be said, to relieve from the consequences of a breach of contract; it
does not intervene to rewrite the terms on which an option may be exercised.
After this
introduction, however, I must turn to the decision of the House of Lords in the
United Scientific case and to the facts in Cheapside Land. It is
convenient to refer to the facts in Cheapside Land because the lease in
the United Scientific case did not contain any specific provision for
the service of a lessor’s notice.
In the Cheapside
Land case by a lease dated March 13 1968 the lessor demised to the lessee
parts of a building known as Winchester House in the City for a term of 21
years from April 8 1968. The term of 21 years was divided into three periods of
seven years. The second schedule to the lease contained the rent provisions.
The review date for the second period of the term was defined as April 8 1975.
Clauses (2) and (3) of the second schedule were in these terms [at p932F]:
2. In respect
of (i) the second period of the said term the yearly rent shall be the sum of
one hundred and seventeen thousand three hundred and forty pounds (£117,340) or
a sum equal to the market rent (if duly determined in the manner hereinafter
set out) whichever shall be the higher.
3. The market
rent may be determined and notified to the lessees in the manner following: (a)
the proposed rent shall be specified in a notice in writing (‘the lessors’
notice’) served by the lessors … on the lessees not more than 12 months nor
less than six months prior to the review date; (b) the lessees may
within one month after service of the lessors’ notice of the proposed rent
serve on the lessors a counter-notice (‘the lessees’ notice’) either agreeing
the proposed rent or specifying the amount of rent which the lessees consider
to be the market rent for the period in question; (c) in default of
service of the lessees’ notice or in default of agreement as to the market rent
… the rent shall be valued by a Fellow of the Royal Institution of Chartered
Surveyors agreed between the lessors and the lessees or in default of agreement
to be appointed not earlier than two months after service of the lessors’
notice on the application of the lessors by the President … of the said
Institution whose valuation shall be … final and binding upon the lessors and
the lessees and shall be given in writing to the lessors and the lessees not
less than 14 days before the review date.
On September 5
1974 the lessors served their notice under clause 3(a) of the second
schedule containing their proposal for the rent for the second period, but the
lessees did not serve any counternotice under clause 3(b). Negotiations
then took place between the parties, but they were protracted and in the result
the lessors failed to make an application to the president of the Institution
in time for a valuation to be made and given to the parties ‘not less than 14
days before April 8 1975’.
In the
subsequent proceedings it was contended on behalf of the lessees that the
lessors were not entitled to a review of the rent because time for applying for
the appointment of a valuer was of the essence. The trial judge held that
though time for the service of a lessors’ notice was of the essence of the
contract the time for applying for the appointment of a valuer was not. The
Court of Appeal reversed the judge on the second point. It was in that context
that the House of Lords considered the nature of stipulations as to time in
rent review clauses.
In the course
of his speech Lord Diplock expressed the view at p929C that there was, ‘A more
practical business explanation why stipulation as to the time by which an
option to acquire an interest in property should be exercised by the grantee
must be punctually observed’. It was that ‘the grantor, so long as the option
remains open, thereby submits to being disabled from disposing of his
proprietary interest to anyone other than the grantee, and this without any
guarantee that it will be disposed of to the grantee’. A little later Lord
Diplock added that there was also a practical business reason for treating time
as of the essence where a lessee is granted an option to determine his interest
in the property under a break clause.
Lord Diplock
then turned to consider the position in relation to rent review clauses. At
p930B he said:
It was this
concentration of initiative and benefit in the landlord that led the Court of
Appeal in the [Cheapside Land] second appeal to regard the rent review
clause as conferring upon the landlord a unilateral right to bring into
existence a new contractual relationship between the parties. This they regarded
as sufficiently analogous to an option, to make time of the essence of the
occurrence of each one of the events in the time-table laid down in a review
clause for the determination of the new rent. For my part, I consider the
analogy to be misleading. The determination of the new rent under the procedure
stipulated in the rent review clause neither brings into existence a
fresh contract between the landlord and the tenant nor does it put an end to
one that had existed previously.
I see no
relevant difference between the obligation undertaken by a tenant under a rent
review clause in a lease and any other obligation in a synallagmatic contract
that is expressed to arise upon the occurrence of a described event, where a
postponement of that event beyond the time stipulated in the contract is not so
prolonged as to deprive the obligor of substantially the whole benefit that it
was intended he should obtain by accepting the obligation.
So upon the
question of principle which these two appeals were brought to settle, I would
hold that in the absence of any contra-indications in the express words of the
lease or in the interrelation of the rent review clause itself and other
clauses or in the surrounding circumstances the presumption is that the
time-table 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.
Lord Diplock
then turned to consider the relevant provisions set out in the leases in the
two appeals. In relation to the Cheapside Land lease he said at p934C
that he could find nothing in the lease to displace the presumption that strict
adherence to the time-table specified in the rent review clause was not of the
essence of the contract. Accordingly, he held that neither the time for service
of the lessors’ notice nor the time for applying to the president of the
institution were of the essence of the contract. It is clear that Lord Diplock
was impressed by the fact that, in his view, the landlord’s failure to initiate
the procedure or to apply for the appointment of a valuer within the stipulated
times did not have any significant detrimental consequences for the lessee. He
pointed out that it was open to the lessee at any time to serve a notice on the
lessor making time of the essence.
Lord Simon of
Glaisdale agreed with Lord Diplock and with the propositions that (see p940F):
in general,
in modern English law time is prima facie not of the essence of a
contract, and that there is nothing in the two leases the subject of the
instant appeals which rebuts that presumption so as to make the stipulations as
to time essential to the operation of their rent review clauses
The other
members of the House also agreed. I propose, however, to refer to a short
passage in the speech of Lord Salmon where he explained what he regarded as
being the difference between options to determine or to renew on the one hand
and the rights contained in a rent review clause. At p951A he said:
Options to
determine or to renew are not agreements to determine or renew. They are no
more than irrevocable offers (kept open for good consideration) to do so
providing the tenant complies with certain conditions usually before a certain
date. If the tenant complies with the conditions in time he thereby accepts the
offer. … The same is true, mutatis mutandis, of an option to acquire the
reversion. Neither equity nor the common law would ever intervene to make a
contract for the parties. Anything which falls short of a complete acceptance
of the offer is of no effect except sometimes as a counter-offer.
I do not
regard the leases in either of the present appeals … as vesting any option in
the landlord to have the rent revised. In my opinion each lease constitutes,
among other things, an agreement between the parties that, at stated intervals,
the rents shall be revised so as to bring them into line with the then open
market rent. The rent revision clauses specify the machinery or guidelines for
ascertaining the open market rent. These provisions as to time are not, in my
opinion, mandatory or inflexible; they are only directory. Nevertheless any
unreasonable delay caused by the landlords and which is to the tenant’s
prejudice would prevent the rent being revised after the review date.
Later at p955E
Lord Salmon said in relation to the provisions in the Cheapside Land lease:
I do not
consider that an agreement between the parties or a determination by a Fellow
of the … Institution … as to the amount of the market rent adds any new
contractual term. It merely quantifies the rent which the lessees are bound by
the lease to pay during the period in question. The words ‘if duly determined
in the manner hereinafter set out’ in my view do no more than indicate the
procedure to be followed in determining the market rent.
From the
speeches in the United Scientific case it is possible to extract the
following guidance:
(1) Where a
rent review clause in a lease provides for periodic variations in the rent so
as to reflect changes in ‘the market rent’ the provisions in the clause will be
treated as mere machinery for ascertaining the market rent.
(2) There is a
rebuttable presumption that the time-table specified in the clause for
completion of the various steps for determining the rent payable is not of the
essence of the contract.
(3) This
presumption may be rebutted by:
(a) any
contra-indications in the express words of the lease;
(b) any
contra-indications in the inter-relation of the rent review clause and other
clauses in the lease; or
(c) the
surrounding circumstances.
In these
circumstances I do not think that it is open for this court to approach the
matter on the lines suggested by counsel for the lessor in his primary
argument. The House of Lords have held that there is a presumption that
stipulations as to time for the taking of the various steps needed to effect a
revision of the rent are not of the essence of the contract. As Lord Diplock
explained, this presumption may be rebutted, but it seems to me to be clear that
the House of Lords rejected the argument that the rights conferred on the
parties in a rent review clause to give notices could be regarded as analogous
to options. It will therefore be necessary to consider the terms of the clause
in the instant case to see whether the presumption has been rebutted. For this
purpose I must take account of the three authorities in the Court of Appeal
which have been cited and which are subsequent to the decision in the United
Scientific case.
I should start
with the decision in Lewis v Barnett (1981) 264 EG 1079. In that
case the lease contained a provision enabling the landlord to give a notice in
writing of his desire to vary the rent as from the specified rent review dates.
There was also provision for the appointment of a surveyor to determine the
open market rent if the landlord and the tenant could not agree. Para 6 of the
rent review clause, however, was in these terms:
If the
landlord and the tenant shall not have agreed the open market rent at least six
months before the rent review date and the landlord shall neglect to make the
application referred to in para 3 hereof [an application to the president of
the RICS to nominate a surveyor] then (unless the parties hereto shall in
writing agree otherwise) any notice already given by the landlord to the tenant
under the provisions of para 2 hereof shall be void and of no effect.
The judge in
Birmingham County Court decided that in the light of Lord Diplock’s speech in
the United Scientific case the times specified in paras 2 and 3 of the
clause were not of the essence of the contract and that accordingly para 6 was
ineffective. The Court of Appeal disagreed. At p1080 Stephenson LJ said:
In my
judgment para 6 means what it says and what it says is that, if the landlord
neglects to comply with para 3 in respect of the application there referred to
in a case where he and the tenant have not been able to agree the open market
rent in the time required, or at all, then any notice already given by the
landlord to the tenant under the provisions of para 2 … shall be void and of no
effect.
I turn next to
Henry Smith’s Charity Trustees v AWADA Trading & Promotion
Services Ltd (1983) 47 P&CR 607* (the AWADA case). In that case
the lease contained a timetable for completing various steps in determining the
rent payable on the specified rent review dates. Para 3 of the clause provided
that within the period of one month from the date of service of a review notice
by the landlord the tenant might serve on the landlords a counternotice in writing
‘stating the amount which in the opinion of the tenant is the market rent’.
There were then provisions for the appointment of a surveyor to determine the
market rent. Para 7 of the clause, however, was in these terms:
*Editor’s
note: Also reported at (1983) 269 EG 729.
If on the
expiration of two months from the date of service of such counternotice the
landlords and the tenant shall not have agreed in writing an amount to be
treated as the market rent and the landlords shall not have applied for the
appointment of a surveyor in accordance with para 6 of this
market rent.
I should also
take note of para 4 of the clause which provided that if the tenant did not
serve a counternotice within the period of a month the amount stated in the
landlords’ review notice should be deemed to be the market rent.
Vinelott J
held that the provisions in the clause were merely machinery and that although
the landlords had not applied for the appointment of the surveyor within the
time stipulated the landlords were still entitled to take further steps to have
the rent reviewed. He therefore rejected the tenant’s argument that the rent of
£8,000 per year specified in the counternotice should be deemed to be the
market rent in accordance with para 7. The judge’s decision, however, was
reversed.
It is
necessary to refer to passages in the three judgments in the Court of Appeal.
Sir John
Donaldson MR, in his judgment, rejected the argument for the landlords that all
time-limits specified in rent review clauses could be treated as being elastic
unless and until a notice was served making time of the essence. He continued
[at p614]:
The parties
have not only set out a timetable, but have in terms provided what is to happen
in the absence of strict compliance with that timetable. The presumption of
elasticity would undoubtedly be acceptable if clauses 3 and 6 stood alone with
minor alterations in language to make that possible. But clauses 4 and 7 make
it clear that something quite different is intended.
Griffiths LJ
agreed with the Master of the Rolls’ conclusion, but with some reluctance. At
p616 he said:
I cannot
accept the submission that the decision in the Court of Appeal in Lewis
v Barnett (supra) provides a foundation for any general rule that
whenever in a rent revision clause provision is made for what is to happen in
default of a time limit this will of itself be sufficient to make time of the essence
of the contract. I do not read Lewis v Bamett as laying down any
such general rule, I regard it as no more than a decision on the construction
of a particular rent review clause …
Later he added
at p617:
I do not
accept that the mere presence of a ‘deeming’ provision in a rent review clause
will in all cases be sufficient to make time of the essence of the contract.
But when I
consider the rent review provisions of this lease as a whole I have been
driven, albeit reluctantly, to conclude that in this case they carry the
necessary implication that the parties to this lease intended that time should
be of the essence of the rent review provisions.
Slade LJ at
p619 set out a valuable summary of the effect of the decision in the United
Scientific case. At p621 he continued:
If paras 3 to
8 had done nothing but set out steps which were required to be taken only if
one or other of the parties so elected, I would have unhesitatingly agreed with
the judge’s conclusion and his reasoning. However, these paragraphs … set out
in definition, specifically and clearly, what is to happen in default of the
exercise of the rights given to the respective parties within the permitted
periods of time.
Slade LJ then
referred to paras 4 and 7 of the rent review clause and added:
In my opinion
the only meaning which can be attached to the phrase ‘shall be deemed to be the
market rent’ in the context of those two paragraphs is ‘shall be conclusively
presumed to be the market rent’. And the phrase in each of these two paragraphs
is of critical importance in the construction of the lease.
Later at p623
Slade LJ added:
I think that
the ‘deeming’ provisions of paragraph 4 of this particular rent review clause
are quite inconsistent with the survival of any right of the tenant to serve a
counternotice after the expiration of the one-month period designated in that
paragraph. Likewise, I think that the deeming provisions of paragraph 7 are
quite inconsistent with the survival of any right in the landlords to apply for
the appointment of a surveyor after the expiration of the two-month period
therein specified. While in other contexts ‘deeming’ provisions may not
necessarily connote finality, they do so in the context of this lease.
At p624 Slade
LJ summarised the position:
The structure
of the third schedule is … one under which the respective parties are given
carefully defined rights exercisable within carefully defined time-limits and
in which the consequences of any failure to exercise such rights within those
limits are no less carefully defined. The inter-relation of the various
paragraphs of the rent review clause is, in my opinion, quite inconsistent with
any necessity for the tenants to serve on the landlords a ‘time of the essence’
notice of the nature suggested, before he can rely on the provisions of
paragraph 7 according to their terms. This paragraph, when read with the other
paragraphs to the schedule, is, in my opinion, too explicit a
‘contraindication’ within the relevant principles to allow the ordinary presumption
against time being of the essence to operate in the landlords’ favour; it
serves clearly to rebut the presumption.
The third case
to which I must refer is Mecca Leisure Ltd v Renown Investments
(Holdings) Ltd (1984) 49 P&CR 12*. In that case the lease, which was
for a term of 21 years, contained a rent review clause which provided for the
service of a lessor’s notice at specified intervals and for the service of a
counternotice whereby the lessee could call on the lessor to negotiate the
amount of the rent to be paid as from the review date. Para (8)(ii) of the
clause was in these terms:
*Editor’s
note: Also reported at (1984) 271 EG 989.
If the lessee
shall fail to serve a counternotice within the period aforesaid [28 days after
the receipt of the lessor’s notice] it shall be deemed to have agreed to pay
the increased rent specified in the rent notice as from the review date.
The tenants
failed to serve a counternotice within 28 days and the landlords claimed that
they were deemed by virtue of para (8)(ii) to have agreed the rent specified in
the landlords’ notice. Bristow J rejected the landlords’ contention and the
Court of Appeal, by a majority, upheld his decision. Browne-Wilkinson LJ, who dissented,
did so on the basis that he was not prepared to distinguish the case from the AWADA
case.
Eveleigh LJ
approached the matter on the basis that the court had to start with the
presumption that time was not of the essence and then determine whether the
parties had shown an intention to make time of the essence. He said that he did
not think that the facts of other cases were of assistance. He expressed his
conclusion at p17 as follows:
I read the
clause as a whole and bear in mind that there is a presumption to be displaced
and that the parties are clearly intending to arrive at a fair rent to be
determined amicably if possible. It seems to me that to hold otherwise would
make the clause a trap and the chosen machinery dangerous. In my opinion, time
is not of the essence in this case.
My conclusion
does not mean that a ‘deeming’ provision is of no effect. It entitles the
landlords to make time of the essence by giving notice to that effect once the
twenty-eighth day has expired. It is a useful part of the machinery in the
hands of the landlords. … It is not to be seen as an independent clause
creating a binding obligation on the happening of a particular event.
May LJ was
clearly troubled by the argument that a deeming provision of the kind set out
in para (8)(ii) was sufficient to rebut the presumption that time was not of
the essence. As I read his judgment, however, he felt able to distinguish the AWADA
case and was impressed by the potential detriment to the tenant if time was
held to be of the essence in circumstances where he served his notice a few
days late. He might thus be fixed with a wholly unreasonable rent specified in
the landlords’ trigger notice.
Before I leave
these three cases in the Court of Appeal I should refer to some further
passages in the judgments.
First, I would
draw attention to the judgment of Griffiths LJ in the AWADA case at
p616, where (in a passage which May LJ in the Mecca Leisure case at p22
said he would adopt as his approach to the construction of a rent review
clause) he said:
When they
enter into a lease such as this the expectation of both landlords and tenants
is that a fair market rent will be paid throughout the lease and unless driven
to do so by the wording of the lease I am loath to construe the
tenant to pay an exorbitantly high rent or the landlord to receive a
ridiculously low rent, neither of which bears any relation to a fair market
rent, because one or other of them was one day late in observing the timetable
set out in the rent review provisions of the lease.
I would also
draw attention to the dissenting judgment of Browne-Wilkinson LJ in the Mecca
Leisure case, where he considered how time provisions in a rent review
clause should be treated if the clause itself fixes the rent to be paid in the
event that a notice or counternotice is not served within the periods
specified. He suggested that there were three solutions:
(a) That the
existence of a provision for a default rent is not, by itself, a
contra-indication sufficient to displace the presumption that time is not of
the essence.
(b) That an
express provision for a default rent in the event of a failure to serve a
notice within a specified time necessarily shows that time is of the essence of
the service of the notice.
(c) That the
whole doctrine of time not being of the essence cannot apply to such a case.
It seems to me
that the problem is one which the House of Lords may wish to re-examine at some
stage in the future. I am satisfied, however, that the third solution is not
open in this court because of the decision of the House of Lords in the United
Scientific case. Accordingly, the court has to construe the relevant clause
to determine whether or not Lord Diplock’s presumption is rebutted.
The
present case
I referred
earlier to the arguments advanced on behalf of the lessor. Counsel placed
particular reliance on clause 4(8) which, he said, was similar to the deeming
provisions in the lease in the AWADA case. This was a default provision
which provided in terms that if the counternotice referred to in para 4(4) was
not served the market rent specified in the lessor’s notice should ‘stand as
the market rent’.
I see the
force of the lessor’s arguments, but I have come to the conclusion that para
4(8) of the rent review clause is not a sufficient contra-indication to rebut
the presumption. I have found the approach of Griffiths LJ (with which May LJ
agreed) to be helpful. It seems to me that, in the light of the guidance given
by the House of Lords to the effect that prima facie provisions as to
time in a rent review clause are not of the essence, the contra-indications
must be clear and explicit. Moreover, it is to be remembered that in the Cheapside
Land case itself clause (2) of the second schedule to the lease was in
these terms:
In respect of
(i) the second period of the said term the yearly rent shall be the sum of one
hundred and seventeen thousand three hundred and forty pounds (£117,340) or a
sum equal to the market rent (if duly determined in the manner hereinafter set
out) whichever shall be the higher.
£117,340 was
the rent for the first period of seven years. Accordingly, clause (2) was in a
sense a default provision.
I can well
understand the reluctance of Browne-Wilkinson LJ to attempt to draw a
distinction between the relevant clause in the Mecca Leisure case and
the clause in the AWADA case. If, however, one assumes, as one must,
that the doctrine of time not being of the essence applies to rent review
clauses, the principle that provisions for the serving of notices and
counternotices within specified times constitute mere machinery for the
ascertainment of the open market rent from time to time requires one to apply
the presumption unless the contra-indications are clear. I do not consider that
clause 4(8) is a sufficient contra-indication to rebut the presumption. In
particular it is to be noted that clause 4(8) contained no specific mention of
the time within which a counternotice had to be served.
I would allow
the appeal. It may be necessary to invite the assistance of counsel as to the
appropriate form of order.
Agreeing, Brown LJ said: I have had the
advantage of reading in draft the judgment of Neill LJ. I need not repeat the
facts and gratefully adopt all that he says as to the background of the appeal
and his rehearsal of the competing arguments. I agree with his conclusions and
add a short judgment of my own only because of the obvious importance of this
appeal and the fact that we have heard it (whether or not appropriately) as a
court of two.
The sole issue
raised in the case is whether time was of the essence for the service of the
lessee’s counternotice. That issue in turn raises two central questions:
(1) Does
clause 4(8) on its proper construction constitute ‘an express provision for a
default rent in the event of a failure to serve a notice within a specified
time’? (Those are the words of Browne-Wilkinson LJ in Mecca Leisure Ltd
v Renown Investments (Holdings) Ltd (1984) 49 P&CR 12; Slade LJ in Henry
Smith’s Charity Trustees v AWADA Trading Promotion Services Ltd (1983)
47 P&CR 607 called such a clause a ‘deeming provision’ and for the sake of
convenience so shall I.)
(2) If so,
which of two conflicting principles emerging from the trilogy of Court of
Appeal decisions — the two I have mentioned and the earlier case of Lewis
v Barnett (1981) 246 EG 1079 — do we — a court now free and indeed bound
in accordance with the principles established in Young v Bristol
Aeroplane Co. Ltd [1944] KB 718 to choose between them — think it right to
follow? The conflict of principle concerns whether or not deeming provisions
are (again to quote the judgment of Browne-Wilkinson LJ in Mecca) ‘a
decisive, or virtually decisive, contraindication displacing the presumption
that time was not of the essence’.
If we were to
decide (a) that clause 4(8) is a deeming provision and yet (b) that is
not ‘decisive or virtually decisive’ in the landlord’s favour, a third question
would arise: looking at the express words of the review clause as a whole, are
there nevertheless contra-indications displacing the presumption otherwise
arising in the lessee’s favour, ie the presumption that time was not of the
essence?
Question
one
The respondent
landlord contends that the meaning of clause 4(8) is clear and unambiguous;
that the reference to ‘no such counternotice be(ing) served’ must be read as
referring not only to ‘a written counter-notice specifying the rent that the
Lessee considers should be the market rent payable on and from the relevant
review date’ but also to a counternotice served ‘within five weeks’ (both
requirements being specified by clause 4(4)).
If the
language of clause 4(8) is unambiguously to that effect, then certainly the
clause amounts to a deeming provision.
But if the
natural and ordinary meaning of the crucial opening words is not entirely clear
and unambiguous, if instead the phrase ‘no such counter-notice be served’ is
capable of bearing another meaning, then in deciding which meaning it bears the
court is entitled to apply established rules of construction.
Although I
confess to having at first blush thought clause 4(8) clear as to its natural
and ordinary meaning — to have the plain effect contended for by Mr Morgan QC —
I have come to regard it as capable of bearing instead the alternative meaning
for which Mr Neuberger QC argued — as referring, that is, to a counternotice
complying with the description in clause 4(4), but not necessarily one served
within the five weeks there stipulated. In short, I do not now regard the word
‘such’ as necessarily determinative of the question. Clause 4(8) could, but
does not, expressly incorporate reference to the five-week period within which
the lessor’s counternotice must be served. It could begin ‘if no such
counter-notice be served within the aforesaid period …’, or ‘if no such
counter-notice be served within the aforesaid period of five weeks …’, or ‘if
no such counter-notice be served within five weeks of the service of the
lessor’s notice …’. Such explicit drafting is very often to be found in these
clauses and in such cases, of course, they unarguably amount to deeming
provisions and one would proceed therefore to question 2. That was the position
in both AWADA and Mecca. Nor could it be said that the word
‘such’ would then be otiose: it would still be apt so as to require the notice
to be in writing and to specify what the lessee considers to be the appropriate
rent.
Clause 4(8)
being, therefore, as I conclude, open to two meanings, the court can look to
any relevant rules of construction and, as it seems to me, there are here two.
First is the contra
proferentum rule: the rule that of two possible readings of a contractual
term one should adopt that least favourable to the party putting it forward —
here the landlord. That rule, of course, would not be available to a tenant
were there equivalent clauses capable of operating against the landlord’s
interests — as, for example, para 6 of the review clause in Lewis v Barnett
(to which I shall return). But it is a conspicuous feature of our case that the
only clause capable of being construed as a default provision is clause 4(8);
the review provisions in this lease place no arguable time constraints upon the
landlord.
Second of the
rules of construction here in play is what Slade LJ in his summary in AWADA
of the principles established by the House of Lords in United Scientific
Holdings Ltd v Burnley Borough Council [1978] AC 904 called the
‘rebuttable presumption of construction that time is not intended to be of the
essence’ in relation to the provisions of a rent review clause.
That
presumption, as it seems to me, should apply not least to the construction of a
clause which may or may not constitute a deeming provision (such as would on
any view be a vital, if not decisive, consideration in the case). And this
indeed seems wholly consistent with the Scots’ approach: as the Lord President
said in the Inner House in Visionhire Ltd v Britel Fund Trustees Ltd [1992]
1 EGLR 128 at p131:
The function
of the rule [in United Scientific Holdings] is to fill the gap where
there is an absence of provision or a lack of clarity on the point, not to
override express provisions in the contract which show either expressly or by
necessary implication that the parties intended that the time-limit was to be
strictly applied.
Applying both
those rules of construction to the present case, I come to the clear conclusion
that Mr Neuberger’s argument is to be preferred; that, in short, clause 4(8) is
not a deeming provision; it begs rather than answers the critical question
arising under clause 4(4) as to whether the counternotice must be served within
five weeks.
I recognise,
of course, that having thus construed clause 4(8), it is still necessary to
apply the presumption against time being of the essence in order that the words
‘within five weeks’ in clause 4(4) do not preclude the lessee from serving a
counternotice out of time — in effect, therefore, as if the words read ‘at any
time prior to the expiry of a lessor’s notice served (after five weeks of the
service of the lessor’s notice) making time of the essence for service of a
counter-notice’. But that, of course, is the inevitable consequence of applying
the United Scientific presumption whenever it does apply.
Before passing
to question two I should return briefly to Lewis v Barnett to
deal with an argument raised by Mr Morgan based upon a suggested similarity
between para 6 of that lease and our own clause 4(8). The relevant provisions
there were these:
6. If the
landlord and the tenant shall not have agreed the open market rent at least six
months before the rent review date and the landlord shall neglect to make the application
referred to in para 3 hereof then … [the landlord’s notice suggesting an
increased rent] shall be void and of no effect.
3. If the
landlord and the tenant shall not have agreed the open market rent not less
than six months before the rent review dates the open market rent shall be
determined by a surveyor … to be agreed upon in writing by the landlord and the
tenant not less than four months before the rent review dates and in default of
such agreement to be nominated by the President for time being of the Royal
Institution of Chartered Surveyors upon the application of the landlord to be
made not less than three months before the rent review dates.
The landlord
neglected to seek a nomination from the president of the RICS within the
three-month period stipulated under para 3 and the Court of Appeal decided in
those circumstance that he fell foul of para 6 so that his notice of proposed
increase was of no effect.
Mr Morgan
points to the similarity between a provision ‘if … the landlord shall neglect
to make the application referred to in para 3 hereof’ and our own ‘if no such
counter-notice be served’. Mr Neuberger, however, points out that ‘the
application referred to in para 3 hereof’ is specifically ‘the application of
the landlord to be made not less than three months before the rent review
dates’ — the time stipulation thus being, he submits, expressly incorporated
within the description of the application.
While
recognising that to be a somewhat narrow distinction between the two cases, I
think it just about sufficient to justify a different result when one takes
account also of the contra proferentum rule which, as I have already
explained, is available to the lessee in the present circumstances, but was
plainly not available to the lessor in Lewis v Barnett.
I would
accordingly conclude on question one that clause 4(8) on its proper
construction is not a deeming provision and, that being so, would
unhesitatingly allow the lessee’s appeal: to my mind there are certainly no
other contra-indications capable of displacing the United Scientific presumption.
Question
two
Having regard
to my conclusion upon question one, question two strictly does not arise. I
would nevertheless wish to express my own brief views upon it.
There are, as
it seems to me, three ends to which it may be argued that the United
Scientific presumption can be put:
1. In the
absence of any express terms specifying what is to happen in default of the
exercise of the rights given to the respective parties within the permitted
periods of time (ie in the absence of a deeming provision), the presumption
applies: time is not of the essence unless and until it is made so, and in the
result a time stipulation cannot be strictly enforced against whoever fails to
observe it. (I decline to use the language of default; there is no obligation
to observe such a time limit, merely a prospective loss of the benefits of
compliance.)
2. In the
event of dispute whether or not there is such an express deeming provision, the
presumption applies as a rule of construction to assist the resolution of that
dispute.
3. Even if
there is such an express deeming provision the presumption can
nevertheless still apply to defeat both it and the strict enforcement of the
separate time stipulation.
In my
judgment, the presumption applies in situations 1 and 2, but not in 3.
Situation 1 was that arising in United Scientific itself. Situation 2 I
believe to be the present case and, as indicated, I would apply the presumption
first to construe clause 4(8) as not amounting to a deeming provision,
and then of course to clause 4(4) as in situation 1. If, however, contrary to
my view on question 1, clause 4(8) is to be construed as a deeming
provision, then I would not think it permissible to over-ride it (as well as
the prima facie effect of clause 4(4) itself) by application of the
presumption. That indeed would involve, as Browne-Wilkinson LJ pointed out in Mecca,
‘not simply extending the time-limits within which the parties bargain could be
performed but an alteration of the parties’ bargain itself’. And that — the
effect of applying the presumption in situation 3 — seems to me to go beyond
what United Scientific permits: so far from the court being
entitled to rewrite the parties’ contract, it is bound to find the presumption
displaced by express words of the lease which are inconsistent with it and thus
‘contra-indications’ to it.
Accordingly,
I, for my part, would hold that a deeming provision is indeed ‘a decisive, or
virtually decisive, contra-indication displacing the presumption that time was
not of the essence’. I find myself, in short, with the majority (although not,
I think, with Griffiths LJ) in AWADA and with the minority in Mecca.
The third
question arises only if I am wrong about both questions one and two. In those
circumstances I cannot think my opinion upon it would carry much weight and
accordingly I shall leave it unanswered.
