Landlord and tenant — Lease for 21 years containing an option for the tenant to claim a further term of 21 years at a ‘full and fair market rent’ to be agreed before the expiration of the original term and, failing such agreement, to be determined by an arbitrator appointed by the president of the RICS — On failure of the parties to agree on the rent, the landlords applied by originating summons for a declaration that an arbitrator was entitled in determining the rent for the further term to introduce a provision whereby the rent would be periodically reviewed — Held, following the decision of the Court of Appeal in National Westminster Bank Ltd v BSC Footwear Ltd, and rejecting the submission that the arbitrator was entitled to incorporate a review provision, that the rent must be a single rent payable for the whole of the term of 21 years — Arguments based on the doctrine of frustration rejected — Declaration sought by landlords refused
This was a
summons for construction issued on the application of the plaintiff landlords,
Bracknell Development Corporation, to which the tenants, Greenlees Lennards
Ltd, were the defendants. The summons related to provisions in a lease dated
November 1960 of shop premises at 58 Broadway, Bracknell, Berkshire. The
defendants were the assignees of the original tenants.
J H G Sunnucks
(instructed by Sharpe, Pritchard & Co, agents for G Annesley, Bracknell
Development Corporation) appeared on behalf of the plaintiffs; Eian Caws
(instructed by Paisner & Co) represented the defendants.
Giving
judgment, FALCONER J said: This is a construction summons issued on the
application of the plaintiffs, Bracknell Development Corporation, on August 20
1980, concerning a lease of shop premises at 58 Broadway, Bracknell, in the
County of Berkshire, granted by Bracknell Development Corporation to Dorothy
Perkins Ltd on November 28 1960 for a term of 21 years from December 28 1959,
at a yearly rent of £900. The defendants, Greenlees Lennards Ltd, a company in
the Great Universal Stores group, became the tenants on July 27 1979 by
assignment. Pursuant to clause 4(5) of the lease, the defendants duly served
notice requiring a renewal of the lease for a further term of 21 years, on
December 7 1979, and I ought to read clause 4(5) or the relevant parts of it.
It reads:
At the
written request of the lessee made at least 12 months before the expiration of
the term hereby granted and if there shall not at the time of such request be
any existing breach or non-observance of any of the covenants on the part of
the lessee hereinbefore contained at the expense of the lessee grant to it a
lease (hereinafter called ‘the new lease’) of the premises for a further term
of 21 years from the expiration of the term hereby granted at a full and fair market
rent to be agreed before the expiration of the term hereby granted and failing
such agreement to be determined by an arbitrator appointed by the president for
the time being of the Royal Institution of Chartered Surveyors to commence from
and after the expiration of the term hereby granted and with and subject to the
same covenants and conditions as in this present lease reserved and contained
(this present covenant for renewal and clause 4(2)(c) hereof excepted).
and then I need
not read the rest of the clause. The rest of the clause is a substitution of a
fresh covenant relating to destruction or damage by fire for that which is
provided in the present lease, which is the clause 4(2)(c) to which I have just
referred.
The parties
have not been able to agree what rent should be payable for the further term
because the plaintiffs, the corporation, contend that under the terms of clause
4(5) an arbitrator acting thereunder to determine a full and fair market rent
would be entitled to determine a full and fair market rent for only a certain
number of years and provide that future rent payable thereafter should be
periodically reviewed. They appear to have in mind an initial period of five
years with reviews at five-yearly intervals. The defendants do not agree with
that contention and say that such a determination would not be permissible
without a variation of the terms of the lease and they are not willing to agree
any such variation.
The summons
asks first for the following declaration:
Whether upon
the true construction of the above-mentioned lease and the events which have
happened an arbitrator appointed under the provisions of clause 4(5) thereof is
entitled in determining a full and fair market rent of the demised premises for
a further term of 21 years from the expiration of the term thereby granted to
introduce a provision whereby such rent is to be periodically reviewed or
revised in the course of such further term in accordance with an agreement made
between the parties or, failing such an agreement, in accordance with a
determination by a further arbitration under the terms of the said sub-clause.
Three further
declarations are also asked for on the summons, but no submissions have been
addressed to me by counsel for the plaintiffs on any of these further
declarations and I am concerned only with the first declaration which I have
just read.
Counsel for
the plaintiffs referred me to the recent decision of October 30 1980 of the
Court of Appeal in the case of National Westminster Bank v BSC
Footwear Ltd reported in (1981) 257 ESTATES GAZETTE 277. I was also
provided with a transcript of the judgment. Counsel for the plaintiffs sought
to distinguish that case from the present one, but in my judgment he failed in
that task and the decision of the Court of Appeal in that case is decisive of
this summons in favour of the defendants and against the plaintiffs. In that
case the appellants, BSC Footwear Ltd, were lessees under a lease and the
defendants in a construction summons brought by the plaintiffs as lessors to
determine a question as to the true construction of an option to renew clause
in the lease. The judge at first instance decided, in favour of the lessors,
that an arbitrator, under the provisions of the clause, was entitled to
determine a rent which would be subject to periodical review during the term of
the new lease. The Court of Appeal allowed the defendants’ appeal. The option
to renew clause in that case (which was clause 4(2) in that lease) was as
follows:
If the lessee
shall be desirous of taking a further lease of the demised premises for a
further term of 21 years from the expiration of the term hereby created and
shall on or before March 25 1977 give to the lessor a notice in writing of such
its desire and shall pay the rents hereby reserved and subject to there being
no substantial breach of the covenants on the part of the lessee and conditions
herein contained which is incapable of remedy, then the lessor will subject to
the lessee having remedied any breach of covenant notice whereof shall have
been given to the lessee grant a new lease to the lessee for a further term of
21 years from March 25 1978 at the then prevailing market rent (to be
determined in default of agreement by a single arbitrator pursuant to the
Arbitration Act 1950 or any subsisting modification or re-enactment thereof)
and subject in all other respects to
subclause for renewal.
That renewal
clause is very similar to the one in question in the present case, clause 4(5)
which I have already read. The only difference of substance is that the rent to
be determined by the arbitrator in the absence of agreement between the parties
was in the cited case ‘the then prevailing market rent’ whereas in the present
case the arbitrator has to determine ‘a full and fair market rent’. Giving the
leading judgment in the National Westminster Bank case, with which
judgment the other Lords Justices agreed, Templeman LJ said:
The question
is whether power to determine a rent includes power to direct that the rent
shall be periodically reviewed. In my judgment that question only permits of a
negative answer.
After quoting
the renewal clause in issue he continued (at p 278):
The tenants
duly give notice. The landlords and tenants failed to reach agreement and they
are now in process of applying to the arbitrator to fix the rent. The salient
words are the requirements that the landlords, if the tenants wish, must grant
a 21-year lease from March 25 1978 ‘at the then prevailing market rent’
(namely, in 1978) to be determined by the arbitrator, and the lease must be
subject, in all other respects, to the same covenants provisos and conditions
as are contained in the original lease, excluding the proviso for renewal. In my
judgment, the arbitrator has no power to introduce any variations between the
original lease and the renewed lease. The arbitrator must determine the rent,
and only the rent, and for this purpose he must determine the prevailing market
rent.
The reasoning
in that passage applies with equal force to the renewal provisions in the
present clause 4(5). The new lease is to be granted ‘with and subject to the
covenants and conditions’ of the present lease (that is to say the initial
term) save for the exclusion of the provision for renewal and the substitution
of a fresh covenant relating to destruction or damage by fire for that provided
in the present lease in clause 4(2)(c). There is no provision in the renewal
clause for any rent review after that to be effected under the clause in
determining ‘a full and fair market rent’ for the new 21-year term. As
Templeman LJ held in the cited case, the arbitrator in the present case has no
power to introduce any variations between the original lease and the renewed
lease. The arbitrator must determine the rent, and only the rent, and for this
purpose in the present case he must determine ‘a full and fair market rent’.
Templeman LJ continued:
It was
argued, and the learned judge declared in his order, that upon the true
construction of the clause which I have read, the arbitrator is entitled, if he
thinks fit, having regard to the evidence adduced before him, to determine a
rent which is to be subject to periodic rent reviews during the term of the new
lease. The result of that declaration is to confer on the arbitrator a
discretion to decline to determine the rent payable under the renewed lease for
21 years, but only to determine the rent for a period of three or five years,
or some other period which he is free to choose, having heard indeterminate
evidence; and then he has power to direct that subsequent rent for subsequent
parts of the term of 21 years shall be determined by such persons, at such
intervals and by such machinery, as the arbitrator may think fit to draft and
award.
and a little
later in the judgment (p 278), dealing with that argument, he held:
I fail to
find in clause 4(2) anything which confers on the arbitrator the wide and
discretionary powers which are claimed by the landlords. Nor, in my judgment,
does the clause enable the arbitrator to decline to perform his duty, namely to
fix a rent for 21 years. He cannot say ‘I can see my way clear for five years
but I am going to throw up my hands in horror and say it is quite impossible
for me to fix the rent for the remaining 16 years’. No one has suggested that
in practice any arbitrator worth his salt would be inclined to throw up his
hands. What is said is that, if the arbitrator fixes the rent at the beginning
of 21 years for the whole period, then the landlord is in danger of not getting
the fruits of inflation which he might otherwise get if there were rent review
clauses. But what the landlords’ predecessors in title gave away these
landlords cannot now take back.
Similarly in
this case, it has been the burden of the plaintiffs’ argument and evidence that
it would be difficult, if not impossible, to fix now a rent which would remain
fair to both parties for the whole of the 21-year term; that any rent so
determined would probably be unfair to the tenant now and in the early years,
but would, in the event of inflation continuing, be likely to be increasingly
unfair to the landlords in the later years. But in construing clause 4(5) of
the lease I cannot see that I am concerned with those considerations. I have to
construe the clause as at the date of the lease, that is to say in November
1960. What, in effect, the parties to the lease then agreed was that there
should be one rent review, namely at the start of the renewal term, if such
renewal were asked for. It is also to be observed that the clause provides that
the full and fair market rent is to be agreed ‘before the expiration of the
term hereby granted’, that is to say before the commencement of the renewal
term, and in the absence of agreement it is to be determined by an arbitrator.
In my
judgment, therefore, what the parties have to agree — or what in default of
agreement has to be determined by the arbitrator — is a single rent payable for
the whole of the 21-year term starting on December 28 1980, namely a rent which
will be a full and fair market one for such a 21-year term commencing on that
date.
Counsel for
the plaintiffs sought to distinguish the National Westminster Bank case
on the difference in the nature of the rent to be determined. In that case the
rent which the arbitrator had to determine was specified in the renewal clause
as the then prevailing market rent, whereas in the present case the rent to be
agreed or determined by the arbitrator is a full and fair market rent. Counsel
submitted that determining the then prevailing market rent was an objective
test, as he put it, ‘tied down to a particular date, then’, whereas in this
case, as he argued, a full and fair market rent was a subjective test not tied
down to a particular date.
Whether or not
it be correct that in the present case a subjective test of assessment is
involved in determining the rent payable, it seems to me that all that the
difference really means is that the arbitrator in the present case, in making
the determination of the rent, may have to take into consideration matters
which it would not have been necessary to consider in determining the then
prevailing market rent in the National Westminster Bank case. That
difference does not, in my judgment, in any way affect the applicability of the
decision in that case to the present case.
Counsel for
the plaintiffs advanced another argument, based on the doctrine of frustration,
for construing the renewal clause, clause 4(5), of the lease in the way in
which the plaintiffs contend it should be construed, namely, that an arbitrator
appointed under the clause is entitled to determine the rent for an initial
short period of, say, five years and to introduce a provision whereby the rent
is periodically reviewed in the course of the 21-year renewal term. He relied
on two authorities on which to found this argument, namely (1) the Court of
Appeal decision in the case of Staffordshire Health Authority v Staffordshire
Water Works Co [1978] 1 WLR 1387, for the proposition that the effect of
inflation may cause frustration of a contract; and (2) the decision of the
House of Lords in the case of National Carriers Ltd v Panalpina
(Northern) Ltd [1981] 2 WLR 45, as establishing that the doctrine of
frustration applies to leases, and submitted that in the present case, in order
to preserve the lease from the effect of inflation, the court is driven to
construe clause 4(5) of the lease in the way the plaintiffs submit it should be
construed. Counsel put this frustration argument in two ways. First, he
submitted that the option in the lease could be frustrated because of
impossibility of performance, in that a full and fair market rent for the whole
21-year renewal term could not be determined by an arbitrator; and, second, the
lease itself could be frustrated if sufficiently harsh circumstances arose in
the renewal term, by which I understood him to mean that the rent, ex
hypothesi fixed at the outset of the whole term, could become so unfair due
to the effect of inflation that the doctrine of frustration would apply; and,
counsel submitted, if that could occur it would be right to construe the lease
so that the risk is eliminated.
There is, as
it seems to me, an underlying fallacy in this argument, in either of the two
ways in which it is put, namely that the lease, including in particular the
renewal clause thereof, has to be construed at the date of the lease, that is
to say November 28 1960, and the proper meaning of the clause when so construed
cannot be affected by subsequent events such as a high rate of inflation in
recent years. Moreover, the first way in which the argument was put must fail
on the evidence, as I think plaintiffs’ counsel in the end felt obliged to
concede. Apart from a formal affidavit putting the lease in question in
evidence and explaining the matter in issue, there were affidavits from four
deponents, two on each side, who were cross-examined. On the question of
whether an arbitrator would be able to determine a full and fair market rent
for the 21-year renewal term, I found most assistance from the evidence of Mr J
P Mabbott ARICS, an associate partner in a firm of surveyors and valuers with a
nationwide practice in advising multiple retailers, financial institutions and
development companies, and who gave evidence as an independent expert on behalf
of the defendants. He testified in his affidavit that he considered that, while
it might be more difficult to fix a full and fair market rent for the premises
in question for 21 years than it would be to fix such a rent for five years, an
arbitrator would be able to determine a single rent to be payable by the
defendants for a period of 21 years under a new lease to be granted in
pursuance of clause 4(5) of the lease, and that evidence was not displaced or
qualified in cross-examination. On that evidence, which I accept, and indeed
from the evidence as a whole, I conclude that an arbitrator appointed under the
provisions of clause 4(5) of the lease in issue could determine a full and fair
rent as a single rent to be payable by the defendants for the period of the
21-year renewal term, and I so hold.
It follows, as
I have already indicated, that the first way of putting the plaintiffs’
frustration argument must fail. As for the second way counsel for the
plaintiffs put the frustration argument, as I have already pointed out I have
to construe the lease, and in particular clause 4(5) thereof, as at November 28
1960. As counsel for the defendants pointed out, inflation did exist in 1960, a
fact which I think is tacitly accepted in the evidence but of which in any case
I think I can properly take judicial notice, and the parties indeed plainly had
in mind that inflation might continue and therefore provided in clause 4(5) for
a rent review for the renewal term. But the possibility of frustration of the
lease because of the effect of inflation during the renewal term cannot have
been in the contemplation of the parties in November 1960 when the lease was
executed, for until the very recent decision in the House of Lords in the National
Carriers case, to which I have referred, it seemed to be well settled that
the doctrine of frustration did not apply to leases: see, for example, Halsbury’s
Laws of England, 4th ed, vol 9, para 452.
It would be
quite wrong now to displace the proper meaning of the wording in question in
clause 4(5) construed as at the date of execution of the lease in November
1960, to take account of a possibility which has only now become a possibility,
however remote, by reason of that very recent decision in the National
Carriers case.
In the result,
I refuse the declaration sought by the plaintiffs and I dismiss the summons
with costs.
