Landlord and tenant — Rent review clause in lease — Construction point — Lease for 30 years of premises used for the operation of amusement machines at rent of £12,500 per annum, with upward-only rent review provisions at mainly four-year intervals — Rental value for purposes of review was defined as being the highest of four figures — These were full market value of the premises let with vacant possession, or the previous rent plus an addition related to either the retail price index or the cost of living index, or the previous rent plus an addition ‘calculated at 10% per annum on a compound basis from the date of the immediately preceding rent review’ — The machinery for determination was a trigger notice by the lessors specifying the rental value, with provision for the lessee’s counternotice and a reference to a valuer — The lessors at the initial review at first specified a rent of £18,300, based on the 10% compound addition, but this was resisted by the lessee on the ground that the 10% compound formula operated only if there had been a ‘preceding rent review’, whereas there had been no preceding review — Lessors replied that if the 10% formula was inappropriate they relied on the price or cost index basis, which produced a figure of £15,635 — On the plaintiff lessee’s summons for construction, the lessors argued that the 10% formula should be read as if, after the words ‘the immediately preceding rent review’, there were added ‘or the commencement of the term (as the case may be)’ — Held that, construing the lease as a commercial document, it would be an odd result if the parties intended that the 10% escalation should start from the commencement of the term — Declaration that the rent payable from the first review date was £15,635 per annum (based on the indices formula)
The following
cases are referred to in this report.
Batley
(CH) Ltd v Memorial Enterprises Ltd [1974] 1
WLR 728; [1974] 1 All ER 1003; (1973) 229 EG 613, CA
Wight v Dicksons (1813) 1 Dow 141
This was an
originating summons taken out by the plaintiff, Paul Anthony Bissett, seeking
the construction of the rent review provisions in a lease of premises in
Peckham, for a term of 30 years from September 29 1981, of which the lessors
were the defendants, Marwin Securities Ltd.
W Blackburn
(instructed by Nicholson, Graham & Jones) appeared on behalf of the
plaintiff; Norman Primost (instructed by Lithgow Pepper & Eldridge)
represented the defendants.
Giving
judgment, VINELOTT J said: This originating summons raises a short but by no
means easy question as to the construction and effect of a rent review clause
in a lease dated January 21 1982 and made between the defendant Marwin
Securities Ltd, the lessor of the first part, the plaintiff Paul Anthony
Bissett, the lessee of the second part, his wife Mrs Dorothea Elizabeth Bissett
of the third part, and Alfred Marks Bureau Ltd, the former lessee who entered
into a limited guarantee, of the fourth part.
By the lease,
the lessor demised premises in Peckham to the lessee for a term of 30 years,
from and including September 29 1981, at a rent of £12,500 per annum ‘subject
to upward review as hereinafter provided’ and payable by quarterly instalments
in advance.
The lease
contains in clause 2(14) a covenant by the lessee not to use the premises
otherwise than for amusement machines with prizes. Then by clause 4(6) the
lessor was given the right on the 15th, 20th or 25th anniversary of the term to
determine the lease without compensation if it wishes to demolish or
reconstruct the building or any adjoining, adjacent or neighbouring property.
The rent
review provisions are contained in clause 5. Subclause (1) defines the
expression ‘the review date’ as meaning: ‘the 29th September 1985, 29th
September 1989, 29th September 1992, 29th September 1997, 29th September 2001,
29th September 2005, 29th September 2009’. Subclause (2) defines the expression
‘rental value’ as meaning: ‘whichever is the highest of the following figures’.
There follow three paragraphs. Under para (a) the figure is the full market
value of the premises let with vacant possession on the same terms ‘except as
regards rent’ and disregarding any effect on rent of the lessee being in
occupation, the break provision and the restriction on user.
Para (b)
starts with the words ‘the rent payable for the period immediately preceding
the review date plus by way of additional rent’. There follow two subparas
joined by the disjunctive ‘or’. The first defines ‘a sum bearing the same
relation to the rent payable for the period immediately preceding the review
date as shall be borne by any increase in the index of retail prices to the
figures shown therein for the month of September 1981 or as at the review date
for the preceding three-year period’; the second is in the same terms except
for the substitution for the reference to the index of retail prices of a
reference to the cost of living index. Para (c) I must read in full: ‘a rent
equivalent to the rent payable for the period immediately preceding the review
date plus an additional rent calculated at 10% per annum on a compound basis
from the date of the immediately preceding rent review’.
The next
provision is numbered (d) and starts with the words ‘the rental value shall be
determined as follows’. The machinery provided is shortly the service of a
notice by the lessor ‘at any time’, specifying the rental value, the service at
the option of the lessee of a counternotice within 28 days from receipt of the
lessor’s notice and, if the parties are unable to agree, a reference to a
valuer. If no counternotice is served, the sum specified in the lessor’s notice
is to be the new rent. Para (d) should, I think, have been numbered subclause
(3) (it is not part of the definition of the rental value but relates to the
machinery for its ascertainment) and indeed the next provision is numbered
subclause (4). That provides for the signature and annexation to the lease of a
memorandum of any agreement or determination of the rental value.
Subclause (5)
provides that:
pending such
agreement or determination of the rent as aforesaid, the Lessee shall pay rent
at the rate of the rent payable in respect of the period immediately preceding
the review date on every date due for payment until the amount of the said rent
shall be agreed or determined (hereinafter called ‘rent at the revised rate’).
And forthwith upon such agreement or determination the Lessee shall pay in
addition to the Quarter’s rent at the revised rate such sum as with the rent
already paid in respect of the period to which such agreement or determination
relates down to such Quarter day shall be equal to rent at the revised rate for
such a period down to such a Quarter day.
What happened
was this. On April 25 1985 (the first review date being then six months ahead)
the lessor’s surveyors served a notice specifying the new rent as £18,300. That
figure was arrived at by adding to the rent payable immediately before the
forthcoming review date (the initial rent of £12,500) an additional rent
calculated at 10% per annum compound on that rent. On May 9 the lessee’s
surveyors wrote objecting to the revised rental. The lessor’s surveyors
responded on May 22 1985 to say that the figure of £18,300
accordingly no ground for disputing it.
On June 14
1985, the lessee’s surveyors wrote to say that they had inspected the premises
and that they were satisfied that the premises were let at full market rent and
that no increase was called for. That of course did not answer the point made
in the lessor’s surveyors’ letter of May 22. That point was answered by the
lessee’s solicitors on November 14, when they wrote to say that they had been
advised by leading counsel that the lessor could not rely on para (c) ‘since it
refers to a preceding rent review and there has been no such review to date’.
The lessor’s
surveyors riposted with a further notice claiming, in effect, that if para (c)
was inappropriate, the rental value ascertained in accordance with both
subparas (i) and (ii) of para (b) was £15,635. There is no dispute about the
accuracy of that figure. There was initially a dispute whether the lessor was
entitled to have a second bite. The lessee now accepts that it was.
The question
therefore is whether the rent during the first review period should be the
£18,300 arrived at in accordance with para (c) or the £15,635 arrived at in
accordance with para (b). That of course turns on whether para (c) applies to
the determination of the rent at the first review date, there being at that
date no ‘immediately preceding review date’.
As I have
said, I have not found this question an easy one. There can be no doubt that
literally construed the formula in para (c) produces a rent of £12,500, that
being the rent payable for the period immediately before September 29 1985. No
addition falls to be made because the additional rent is to be calculated at
10% per annum compound (sub silentio on that initial rent) ‘from the
date of the immediately preceding rent review’, and on September 25 1985 there
had been no preceding rent review.
The case for
the lessor is that the parties must have intended that para (c) (like paras (a)
and both subparas of para (b)) would produce a figure larger than £12,500 (or,
I think, more accurately in the case of paras (a) and (b) would be capable of
producing a figure larger than £12,500) so that on each review date the lessor
would be able to choose from four different ways of recalculating the rent that
one which produced the largest rent. To give effect to that intention requires
only the addition after the words ‘the immediately preceding rent review’ of
the words ‘or the commencement of the term (as the case may be)’. The question
is whether, on construction, these words can be supplied.
It is common
ground between the parties (as it was in C H Bailey Ltd v Memorial
Enterprises Ltd [1974] 1 All ER 1003) ‘that this is a commercial document
between commercial parties, which ought to be construed so far as possible to
give effect to commercial good sense’. (See per Megaw LJ at p 1007.) The clear commercial purpose of para (a) is
to give the lessor on each review date the right to require the rent to be
increased to the figure that the premises would have commanded if offered on
the market for the residue of the term on the same terms as those in the lease,
save in so far as expressly varied.
Para (a) thus
ensures that the lessor is not prejudiced by the grant of a 30-year term if
rental values of similar premises in the same area escalate. The clear
commercial purpose of para (b) is to give the lessor the right to require the
rent to be increased in line with changes in either of the two indices
mentioned. There is in fact a slip in drafting in both limbs of para (b), which
refers to ‘the review date for the preceding three-year period’; the review
dates are for the most part separated by four, though in one instance five,
years. However, the commercial purpose being once discerned, this error (and
also the inelegant definition of ‘the review date’ — my emphasis) can
readily be corrected on construction.
Together paras
(a) and (b) give the lessor both belt and elastic braces. If rental values
increase ahead of inflation, he can call for rent to be assessed by reference
to para (a); if rental values lag behind inflation (measured by either of the
two indices) he can rely on para (b), notwithstanding that in the real world he
has retained the premises and could not have let them at a rent which would
reflect depreciation in the real value of the rent.
It is less
easy to discover the commercial purpose of para (c). Under that para, the
lessor is entitled to demand an arbitrary increase, which may bear no
relationship either to the rent which the lessor might have been able to
obtain, if he had let the premises for a shorter period and relet them on each
review date on similar terms, or to the income he might have received if he had
sold the premises and invested the proceeds in a way which would yield an
income which would increase in step with increases in either of the two indices
(assuming that that magical result was capable of achievement) and which, even
on the lessee’s construction, would yield a massive rent by the year 2009.
It is odd to
find that (on a literal construction) this automatic escalation will not start
until the first review date, but it is not, it seems to me, so odd as to compel
the conclusion that the parties must have intended that the escalation would
start at the commencement of the lease. There is a striking contrast between
the language of subparas (i) and (ii) of para (b) (which refer in terms to the
relevant index figure in September 1981 or, as I read para (b), the last
preceding review date) and para (c), which omits any reference to September
1981 or to the commencement of the term. It may be that the lessee was willing
to accept the unusual provision in para (c) only on the footing that it would
not operate until September 29 1989 (the effect of compounding is that a
reduction of four years in the period over which the rent is automatically
increased makes a substantial difference towards the end of the term). This is
not a case where (as in Wight v Dicksons (1813) 1 Dow 141) words
have to be supplied in order to make sense of other provisions of the lease. It
is true that, a point stressed by Mr Primost, subclause (5) is drafted on the
assumption that at each review date an additional rent will be payable
and that in theory there might be no increase at the first review date if para
(c) does not then operate. But I think that the answer to this point is that the
parties assumed that rental values generally would continue to increase and
that the value of the pound sterling, measured by the indices, would continue
to decline.
In sum, in my
judgment, it cannot be said that it is clear from the terms of the lease, construed
as a commercial document and with a view to giving effect to the commercial
purpose to be discerned from the terms of the lease as a whole, that the
parties must have intended that the automatic escalation in para (c) would
start from the commencement of the term. If the existence of such a common
intention can be inferred from other material, the lessor’s remedy is an action
for rectification.
On this
summons, therefore, I propose only to declare that the rent payable from
September 29 1985 is £15,635 per annum.
