Landlord and tenant — Construction of rent review clause in relation to question whether works carried out by tenants should be disregarded in ascertaining the open market rent — Appeal by landlord from decision of Judge Finlay QC, sitting as a High Court judge, who held, in favour of tenants, that the works in question were to be disregarded — Tenants were a golf club company — During the course of their original lease, granted in 1973, they had built a clubhouse on the land leased and, in addition to laying out an 18-hole golf course on that land, had laid out a 9-hole course on nearby land not then included in their demise — Subsequently, in 1978, this lease was surrendered and a new lease granted to the tenants which included the 9-hole course — This new lease was rectified by consent during the trial to cure the unintentional omission of provision for further rent reviews after the first — The review clause in the 1978 lease provided for the disregard, in ascertaining the open market rent, of ‘those matters set out in paragraphs (a), (b) and (c) of section 34 of the Landlord and Tenant Act 1954’ — Judge Finlay decided that, as a matter of construction, the reference to section 34 in the lease was intended to be to that section before it was amended by section 1 of the Law of Property Act 1969, although the lease was granted after the amendment had taken effect — He held, however, that it did not follow from this that the principle of the House of Lords decision in East Coast Amusement Co Ltd v British Transport Board (the Re ‘Wonderland’, Cleethorpes, case) applied so as to require the clubhouse and the 9-hole course to be taken into account (ie not to be disregarded) in determining the relevant open market rent — He reached this conclusion by construing the reference to section 34 in the context of the review clause in the lease, which differed from the statutory context of the application for a new tenancy under the 1954 Act, and by considering the factual matrix against which the lease was executed — Held by the Court of Appeal, allowing the landlord’s appeal, that the judge was correct in construing the reference to section 34 as being to that section as originally enacted, but that he had not addressed himself to the two critical questions of construction — These were (a) whether the erection of the clubhouse and the creation of the 9-hole course were ‘improvements’ within the meaning of section 34 and incorporated in the 1978 lease, and (b) whether they were carried out by the ‘tenant’ within that meaning — The answer to the first question, which really disposed of the second also, was ‘no’ — The word ‘improvements’ in the context must mean improvements made to the premises demised by the 1978 lease and could not therefore include the clubhouse or the 9-hole course as these
This was an
appeal by the plaintiff landlord, John Dudley Brett, against the decision of
Judge Finlay QC, sitting as a High Court Judge in the Chancery Division, in
favour of the tenant company, Brett Essex Golf Club Ltd, on the construction of
the rent review provisions of a lease granted by the landlord to the tenant
company in 1978. The second defendant before Judge Finlay was National
Westminster Bank plc to whom the premises had been charged.
Robert Pryor
QC and Timothy RF Jennings (instructed by Bazley White & Co) appeared on
behalf of the appellant landlord; Alan Steinfeld (instructed by Leonard Kasler
& Co) represented the respondent tenants: the bank was not represented on
the appeal.
The
proceedings before Judge Finlay were reported at [1985] 1 EGLR 63.
Giving
judgment, SLADE LJ said: This is an appeal by Mr John Dudley Brett, the
plaintiff in an action, from a judgment of His Honour Judge Finlay, sitting as
a judge of the Chancery Division, which was delivered on October 19 1984. This
judgment concerned the construction of a rent review clause in a lease granted
in 1978, and in particular the construction and effect of a reference in that
clause to section 34 of the Landlord and Tenant Act 1954.
I think it
will be convenient to begin this judgment by explaining briefly the statutory
background to the two leases which will fall to be considered. Section 34 of
the Landlord and Tenant Act 1954 is comprised in Part II of that Act, which
gives security of tenure to business tenants. In its original form, so far as
material, it read as follows:
The rent
payable under a tenancy granted by order of the court under this Part of this
Act shall be such as may be agreed between the landlord and the tenant or as,
in default of such agreement, may be determined by the court to be that at
which, having regard to the terms of the tenancy (other than those relating to
rent), the holding might reasonably be expected to be let in the open market by
a willing lessor, there being disregarded —
(a) any effect on rent of the fact that the
tenant has or his predecessors in title have been in occupation of the holding,
(b) any goodwill attaching to the holding by
reason of the carrying on thereat of the business of the tenant (whether by him
or by a predecessor of his in that business),
(c) any effect on rent of any improvement carried
out by the tenant or a predecessor in title of his otherwise than in pursuance
of an obligation to his immediate landlord . . .
There is a para
(d), but I do not think I need read it.
Para (c) of
this section, in its original form, gave rise to certain problems of
interpretation, as was illustrated by the decision of the House of Lords in the
case of In re ‘Wonderland’, Cleethorpes, which is reported under the
name of East Coast Amusement Co Ltd v British Transport Board
[1965] AC 58. In that case the appellant company had carried out certain works
of improvement in 1926 under a lease granted in 1912 and subsequent leases. In
1938 the landlord granted to the company a new lease for 21 years from a date
in 1939. Shortly before this lease expired the company served on the landlord a
request for a new tenancy under section 26 of the 1954 Act. There was no
counternotice. The question arose whether, by virtue of section 34(c) of the
1954 Act, the work done in 1926 should be disregarded for the purpose of
determining the rent payable under a new tenancy. The House of Lords held that
it should not. It held that section 34(c) referred only to improvements carried
out by the tenant who was making the application for the tenancy, and effected
during the term of the tenancy current when the application was made, or by a
predecessor in title of his to the same tenancy.
A few years
later, presumably having regard to this decision, section 34 of the 1954 Act
was amended by the Law of Property Act 1969. Section 1(1) of that Act
substituted an entirely new paragraph for para (c) and added to section 34 an
entirely new subsection (2), by providing:
In section 34
of the Act of 1954 (rent under new tenancy) the following paragraph shall be
substituted for paragraph (c) (improvements to be disregarded):-
‘(c) Any effect on rent of an improvement to which
this paragraph applies’ and the following subsection shall be added (the
present section, as amended by the foregoing provisions, becoming subsection
(1)):-
‘(2) Paragraph (c) of the foregoing subsection
applies to any improvement carried out by a person who at the time it was
carried out was the tenant, but only if it was carried out otherwise than in
pursuance of an obligation of his immediate landlord and either it was carried
out during the current tenancy or the following conditions are satisfied, that
is to say, —
(a) that it was completed not more than
twenty-one years before the application for the new tenancy was made; and
(b) that the holding or any part of it affected
by the improvement has at all times since the completion of the improvement
been comprised in tenancies of the description specified in section 23(1) of
this Act; and
(c) that at the termination of each of those
tenancies the tenant did not quit.
Against this
statutory background, I now revert to the facts of the present case. By a lease
dated August 13 1973 the plaintiff let certain parcels of land forming part of
Clapgate Farm, Little Warley, Essex, which were defined in the lease as ‘the
demised premises’ to The Brett Essex Golf Club Ltd, the first defendant in
these proceedings (which I shall call ‘the company’), for a term of 50 years
from July 9 1973. It appears that at the time when the lease was granted the
plaintiff held 750 out of the 1,000 issued £1 shares in the company, while a Mr
Greene held the remaining 250 shares. The yearly rent payable under the lease
was expressed by clause 1 to be £2,000 for the first two years of the term,
£5,000 for the next five years, and for each successive five years, up to and
including the 46th year, a rent to be agreed by the parties, or in default of agreement
to be determined in accordance with the provisions of clause 2. The first
period during which a reviewed rent would be payable would thus begin in July
1980.
Clause 2, so
far as material, provided for such rent to be determined in accordance with the
following formula, that is to say:
. . . such
rent shall be the rent (but not less than the rent reserved in the period of
five years immediately expired) at which the demised premises might reasonably
be expected to be let in the open market by a willing Landlord by a lease for a
term equal to the residue of the term unexpired at the end of the period of
five years immediately before expired with vacant possession on the same terms
and subject to the same incidents in all other respects as this present demise
and upon the supposition (if not a fact) that the Tenant had complied with all
the repairing covenants herein imposed on the Tenant (but without prejudice to
the rights and remedies of the Landlord in respect thereto) and there being
disregarded (if applicable) those matters set out in paragraphs (a), (b) and
(c) of Section 34 of the Landlord and Tenant Act 1954.
Clause 3(4) of
the lease contained a covenant by the company
To lay out
the demised premises as a golf course and not to erect at any time thereon any
dwellinghouse or other building except such buildings as are authorised by
Clause 4(2) (hereinafter referred to as ‘the permitted buildings’) for the use
of the club and the members and servants thereof and to make no other
alteration in the character and general arrangement of the demised premises
save as may be necessary or desirable for laying out and maintaining the same
as a golf course and as may be approved for that purpose by the Landlord or his
surveyor.
Clause 4(2)
contained a covenant by the landlord with the tenant
that the
Tenant shall be at liberty to erect at its own expense on the demised premises
at the point marked ‘A’ on the said plan a clubhouse with all necessary offices
and outbuildings for the use of the members and servants of the club.
I think there
is nothing in the 1973 lease to suggest that there were any buildings on the
land at the date when it was granted.
After this
grant the company not only laid out an 18-hole golf course on the demised land
but built a clubhouse which was completed in about July of 1975. It also laid
out a 9-hole golf course on some adjoining land, not included in the 1973
demise. That was completed at about the end of 1977.
In January
1978 or thereabouts, negotiations took place between the parties with regard to
the proposed sale by the plaintiff of his 750 shares in the company to Mr
Greene. At about the same time there was also negotiated a project for the
prolongation of the term granted to the company and for the enlargement of the
premises comprised in its demise by the inclusion of the 9-hole golf course.
Eventually the sale of the shares was completed by a transfer of the
plaintiff’s shareholding to Mr Greene on February 17 1978. In the meantime, on
February 14 1978, the plaintiff duly granted to the company an entirely new
lease.
In that lease
the company was defined as ‘the Tenant’, which expression was stated to
include, where the context so admitted, its successors in title. Clause 1
defined the subject-matter of the lease as:
ALL THOSE
parcels of land (hereinafter called ‘the Demised Premises’) forming part of
Clapgate Farm aforesaid as the same are for the purpose of identification only
delineated on the plan annexed hereto and thereon edged red TOGETHER WITH the
buildings erected on parts thereof but excluding the lakes hatched blue.
The plan
referred to made it plain that the 9-hole golf course was included in the
property demised, as of course was the, by then
The lease was
granted for a term of 50 years from February 14 1978, at a rent of £12,000 for
the first three years, with provision for review at the end of the third year,
that is to say in February 1981. It also provided for the tenant from time to
time to pay to the landlord the amount which the landlord might expend in
effectuating or maintaining the insurance of the demised premises. Clause 2(8)
contained a covenant by the tenant
to use the
demised premises and such buildings as may be erected thereon as a private golf
course and/or a country and sporting club with the requisite ancillary
buildings for the convenience of members of the club and its staff only.
The earlier
clause 2(4), which was in somewhat different form from the corresponding
covenant contained in clause 3(4) of the 1973 lease, contained a covenant by
the tenant:
Not to erect
at any time thereon any other buildings and to make no other alteration in the
character and general arrangement of the demised premises save as may be
necessary or desirable for laying out and maintaining the same as a golf course
and/or a country and sporting club with associated buildings and as may be
approved for that purpose by the Landlord or his surveyor which approval shall
not be unreasonably withheld.
The lease also
contained, in clause 3, a covenant by the landlord to insure and keep insured
the demised premises. It further provided that, in the event of any part of the
demised premises at any time during the tenancy being damaged or destroyed by
fire so as to be unfit for habitation and use, then the rent thereby reserved,
or a fair proportion thereof, should be suspended until the premises should
again be rendered fit for habitation and use. It further provided that:
. . . any
dispute concerning this clause shall be determined by a single arbitrator in
accordance with the Arbitration Act 1950 or any statutory modification or
re-enactment thereof for the time being in force.
Clause 7
contained a general arbitration clause, which made a reference in similar terms
to ‘the Arbitration Act 1950 or any statutory modification or re-enactment
thereof for the time being in force’.
Clause 6
provided:
The
provisions of Section 196 of the Law of Property Act 1925 as amended by the
Recorded Delivery Service Act 1962 shall apply to any notice under this lease.
When the 1978
lease was executed, it was apparently the intention of both the company and the
plaintiff that it should provide for the rent to be reviewed, not only at the
end of the third year but at each successive seventh year thereafter. But the
1978 lease, on its face, provided for review only at the end of the third year.
By a writ
issued on June 3 1983 the plaintiff claimed rectification of the 1978 lease as
against the company so as to provide for a review of the rent at the end of the
third and each successive seventh year thereafter. The proceedings were
subsequently amended so as to join as second defendant the National Westminster
Bank plc, in as much as the company had charged the property to that bank by
way of mortgage. The bank has not been represented on this appeal.
By the amended
statement of claim, rectification of the rent review clause in the 1978 lease
was claimed against both defendants. The pleading also claimed a declaration as
against the company that the clubhouse and the laying out of the 9-hole golf
course were not to be disregarded in determining the relevant open market
rental value for the purposes of clause 4 of the 1978 lease.
At the trial
before the learned judge the rectification claim was disposed of by consent as
against both defendants. By consent the court declared that the 1978 lease
ought to be rectified in the manner specified in the schedule to the order and
ordered that the lease should be rectified accordingly. It further declared
that:
. . . the
said lease as so rectified as aforesaid ought to take effect in like manner as
if the said rectification had been made in the said lease at the time of the
execution thereof by the parties thereto.
Clause 1 of
the 1978 lease as rectified provided for the payment by the company for the
first three years of the term of the yearly rent of £12,000 and
for each next
successive seven years of the said term and for the last five years of the said
term (each of which successive periods is hereinafter respectively referred to
as ‘the Review Period’) a rent to be determined in accordance with the
provision in that behalf contained in clause 4 hereof (hereinafter when
specifically referred to, called ‘the reviewed rent’).
The first
period during which a reviewed rent was to be payable under the 1978 lease was
thus to begin in February 1981, a little later than the start of the first
review period provided for by the 1978 lease.
Clause 4 as
amended provided for the reviewed rent to be the higher of the first reserved
rent and the open market rental value of the demised premises for the relevant
review period and continued:
(1) The expression the open market rental value
as aforesaid means a sum in relation to the review period determined in manner
hereinafter provided as being at the time of such determination the annual
rental value of the demised premises in the open market on a lease for a term
of seven years certain save in the case of the last review period, in which
case the appropriate term shall be a term of five years certain with vacant
possession at the commencement of the term but upon the supposition (if not a
fact) that the tenant has complied with the obligations as to repair and
decoration herein imposed on the tenant such lease being on the same terms and
conditions other than as to the amount of rent and the length of the term as
are herein contained without the payment of any fine or premium and
disregarding (if applicable) those matters set out in paragraphs (a), (b) and
(c) of section 34 of the Landlord and Tenant Act 1954.
I pause to
comment that by the time the 1973 and 1978 leases were executed the 1954 Act
had of course been amended.
Clause 4(2) of
the 1978 lease as rectified contained provisions for the ascertainment of the
open market rental value, which I do not think I need read. Henceforth in this
judgment all references to the 1978 lease are intended as references to that
lease as rectified.
Despite the
compromise of the claim for rectification, the learned judge still had to
decide the question of construction raised by the statement of claim. This
turned on the construction and effect of the reference in clause 4(1) of the
1978 lease to paras (a), (b) and (c) of section 34 of the Landlord and Tenant
Act 1954.
The trial
proceeded, I understand, without oral evidence, though a number of the
background facts to which I have referred, or to which I shall refer hereafter,
appear to have been common ground on the basis of the documents and the
pleadings. The learned judge in his judgment in effect reached two main
conclusions. First, he accepted a submission made on behalf of the plaintiff
that clause 4(1) of the 1978 lease, in referring to the three paras (a), (b)
and (c), was referring to the unamended version of section 34 and not to the
version as amended by the 1969 Act. Second, however, he accepted a submission
made on behalf of the company that, when the references in clause 4(1) to paras
(a), (b) and (c) of the 1954 Act are properly construed in their context,
having regard to the factual matrix against which the 1978 lease was executed,
they require the clubhouse to be disregarded in determining the relevant open
market rental value for the purposes of the 1978 lease, even though the
clubhouse was erected before the 1978 lease was executed. Though I understand
that submissions had been made to him on behalf of the company to the effect
that the 9-hole golf course likewise fell to be disregarded for this purpose,
the learned judge did not specifically advert to this argument in his judgment;
indeed, I think he did not refer to the 9-hole golf course at all. However, we
have been told that when this point was drawn to his attention after he had
delivered his judgment, he indicated that he thought that the 9-hole golf
course fell to be treated in the same way as the clubhouse. He accordingly made
a formal declaration:
That upon the
true construction of the said lease (1) The clubhouse and (2) the laying out of
the nine-hole golf course in the said Writ of Summons [sic] are to be
disregarded in determining the relevant open market rental value for the
purposes of the said lease dated 14th February 1978 mentioned therein.
By his notice
of appeal the plaintiff in effect challenges the correctness of this
declaration. The company, by a respondents’ notice, disputes the learned
judge’s holding that the reference in clause 1 of the 1978 lease to section 34
of the Landlord and Tenant Act 1954 constituted a reference to that section in
its unamended form.
Logically, I
think the first point which falls to be considered is that raised by the
respondents’ notice, so I propose to consider it first. As the learned judge
said, there is no direct authority on the question whether a reference in a
lease, granted after the passing of the amending Act of 1969, to section 34 of
the Landlord and Tenant Act 1954 or to provisions contained in that section, is
to be construed as a reference to the provisions contained in the 1954 Act as
originally passed, or to that Act as amended in 1969. In one case, Euston
Centre Properties Ltd v H & J Wilson Ltd, reported in (1981) 262
EG 1079, [1982] 1 EGLR 57, Cantley J had to consider the effect of a rent
review clause which required to be disregarded ‘the matters referred to in
section 34(a), (b) and (c) of the Landlord and Tenant Act 1954’. He seems to
have assumed that this provision referred to the Act of 1954 as amended.
However, since the point does not appear to have been argued before him, and he
gave no reasons for his assumption, I agree with Judge Finlay that the decision
cannot be regarded as guiding authority for
court.
The reasons
why the learned judge himself concluded that the reference in clause 4(1) of
the 1978 lease is to the unamended Act of 1954 are to be found at p 9 of his
judgment:
It will be
noted that the paragraphs are referred to as paragraphs of section 34, not as
paragraphs of section 34(1), which is what they would be if it were the 1969
Act that was referred to. Subsection (2) of the amended Act also contains
paragraphs (a), (b) and (c), but it is the case the paragraphs so designated in
the second subsection of the amended section 34 are in the nature of conditions
rather than matters. But there is this further significant difficulty, that
paragraph (c) in section 34(1) of the amended Act is in these terms: ‘any
effect on rent of an improvement to which this paragraph applies, and when one
looks at subsection (2) to determine to what paragraph (c) is referring, one
finds the improvements to which the paragraph applies must be improvements in
relation to which the three conditions designated (a), (b) and (c) in
subsection (2) are satisfied, and the first of those conditions is ‘(a) that
it’ — that is the improvement — ‘was completed not more than 21 years before
the application for the new tenancy was made’. It appears to me to involve a
considerable degree of imaginative construction to ascertain how that first
condition can be made applicable to a provision in a lease which is not
concerned in any way with applications made under statute but is simply
concerned with a review of the rent. On that ground alone, fortified by the further
ground that there is no reference to subsection (1) in the wording of the
lease, I come to the conclusion that it is to the unamended Act that the lease
is referring, when it refers to paragraphs (a), (b) and (c) of section 34 of
the Landlord and Tenant Act 1954.
Mr Steinfeld,
in support of his respondents’ notice, submits that the more natural
construction of the reference to section 34 in clause 4(1) of the 1978 lease,
is a reference to that section as it stood at the date of the grant of that
lease, February 14 1978, and thus to the section as expressly substituted by
section 1 of the 1969 amending Act. In his submission the reference in clause
4(1) to paras (a), (b) and (c) of section 34 is, by necessary inference, a
reference to the corresponding paragraphs of subsection (1) of section 34 as
amended. In his submission, therefore, no significance need, or should, be
attached to the omission of any specific reference to subsection (1) in clause
4(1) of the 1978 lease. Condition (a) of the amended subsection (2), he
suggests, is not incapable of being applied to a rent review clause in a lease;
if the parties incorporate in such a clause paras (a), (b) and (c) of
subsection (1) of the amended section 34, as he says they did here, then they
must necessarily have intended them to be subject to such modification of the
statutory language as would enable them to be applied in the context of such a
clause. On this basis he suggests that the learned judge ought to have held
that para (c) of the amended subsection (1) was to be treated as incorporated
in clause 4(1) of the 1978 lease subject to the modification that the reference
in para (a) of subsection (2) to the date when the application for the new
tenancy was made must be treated as a reference to the date which, for the
purposes of the rent review provision in the lease, most nearly equates with
the date of application by a tenant for a new tenancy under the 1954 Act. In
his respondents’ notice he suggested two alternative candidates for this date,
that is to say, first, the date from which the reviewed rent was to take effect
or, second, the date of the tenant’s counternotice under clause 4 of the lease.
In argument, however, he submitted that the second date was the correct one.
For my part, I
agree with Mr Steinfeld that in many, perhaps the majority of, cases where
parties to a written contract have incorporated in it a reference to a statute
which has been amended, it may be reasonable to impute to them an intention to
refer to the statute in its amended form. However, no authority has been cited
to us which suggests that under the ordinary law there is any presumption of
construction to this effect.
Mr Pryor, on
behalf of the plaintiff, has drawn our attention to section 20(2) of the
Interpretation Act 1978, which expressly provides that:
Where an Act
refers to an enactment, the reference, unless the contrary intention appears,
is a reference to that enactment as amended . . .
However, as he
pointed out, the very fact that Parliament thought it necessary to enact this
new subsection seems to lend some support to the view that, under the ordinary
law, there is no presumption of construction that a bare reference in a
contract to an Act of Parliament which happens to have been amended is a
reference to the Act in its subsequently amended form. Whether it is to be read
in this sense, or as a reference to the Act in its original form, must, in my
judgment, depend entirely on the context. In the present case the following
points, most of which were referred to by the learned judge, seem to me to lend
compelling support to his conclusion that the intended reference is to the
unamended Act of 1954.
First, the
reference in clause 4(1) of the amended 1978 lease to ‘those matters set out in
paras (a), (b) and (c) of section 34 of the Landlord and Tenant Act 1954’ simpliciter
would be entirely accurate if intended as a reference to the matters set out in
paras (a), (b) and (c) of the unamended section. It would not, however, be
accurate if intended as a reference to the matters set out in those paragraphs
of the amended section, since the amended section contains two sets of
paras (a), (b) and (c), and furthermore the reference should have been an
express reference to subsection (1) of section 34. Second, the unamended three
paragraphs can be readily incorporated into a rent review clause; on the other
hand the wording of the amended subsections (1) and (2), as the learned judge
pointed out, could not be incorporated into the 1978 lease without ‘a
considerable degree of imaginative construction’. In the course of any attempt
at such incorporation, one particular difficulty would lie in determining the
date on which the 21-year period referred to in subsection (2)(a) was to begin.
In my view, Mr Steinfeld’s ingenuity has not been able to overcome this
difficulty.
Third — and
this point follows from the second — I think that, if the draftsman of the 1978
lease had known of the amendments to section 34 of the 1954 Act and had
intended to refer to the section as amended, he could reasonably have been
expected to specify in greater detail the manner in which the relevant
provisions of the amended section were to be applied in the operation of the
rent review clause. Finally, it is to be observed that in clause 6 of the 1978
lease the draftsman took care specifically to refer to the amended version of
section 196 of the Law of Property Act and, in clauses 3(3), 4(2) and 7, to any
statutory modification of the Arbitration Act 1950 for the time being in force.
I think that if he had had the knowledge and intention to which I have referred
he could, in relation to section 34, reasonably have been expected to take a
similar course by referring expressly to the amended version of that section.
Taken
together, these points lead me to agree with the learned judge that, on the
true construction of clause 4(1) of the 1978 lease, the determination of the
‘open market rental value’ of the premises has to be carried out ‘disregarding
if applicable those matters set out in paragraphs (a), (b) and (c)’ of section
34 of the 1954 Act as originally enacted. On this basis, what is the
true construction of the clause when applied to the facts of this case?
Mr Steinfeld,
who made it clear that the submissions made in his respondents’ notice were not
his principal submissions in resisting this appeal, has advanced an
attractively simple alternative argument in support of the learned judge’s
judgment. I hope and think that it can be fairly summarised as follows: the
relevant words in clause 4(1) constitute simply a shorthand method of
incorporating in the subclause, as matters to be disregarded, the matters set
out in paras (a), (b) and (c) of section 34. That subclause can and should
accordingly be read as though it contained an express provision directing
disregard of, inter alia, ‘any effect on rent of any improvement carried
out by the tenant or a predecessor in title of his otherwise than in pursuance
of an obligation to his immediate landlord’. It is these words as incorporated
in the subclause that fall to be construed and not the same words in the
context of the statutory scheme from which they have been lifted. In the ‘Wonderland’,
Cleethorpes case, he reminded us, the House of Lords was concerned with the
construction of para (c) of section 34 in the context of an application by a
tenant for a new tenancy under the 1954 Act, following the expiry of the
previous tenancy. In his submission it does not follow that the same words must
be given the same construction in the different context of the 1978 lease. As
will appear a little later, I think that the speeches in the ‘Wonderland’,
Cleethorpes case give us helpful guidance by analogy in deciding the
present issues. Subject to this qualification, I would accept in their entirety
these submissions of Mr Steinfeld up to this point, as indeed I think they were
accepted by the learned judge.
His argument
proceeded on the following lines. The company is ‘the tenant’, both in fact and
by definition in the 1978 lease. The improvements in question were carried out
by the company. It is common ground that the company did not erect the
clubhouse or the 9-hole golf course in pursuance of any obligation to its
landlord. In these circumstances, Mr Steinfeld submitted, there is no escape
from the conclusion that clause 4(1), on its literal wording, requires the two
improvements in question to be disregarded. He sought to derive some support
for this conclusion from the recent decision of Scott J
Stores Ltd, reported in [1985] 1 EGLR 99,* in which that learned judge, in
the course of construing a rent review clause in a lease, attached importance
to the fact that the lease in question defined the defendants as ‘the tenant’.
*Editor’s
note: first reported at (1985) 274 EG 590.
Mr Steinfeld
accepted that the construction of the word ‘improvements’ is also important in
the construction of clause 4(1) of the 1978 lease. In his submission, however,
there is no sufficient reason to confine the operation of this word to
improvements carried out by the company during the subsistence of the 1978
lease. They are likewise, in his submission, perfectly apt to include
improvements carried out during the subsistence of the 1973 lease. Support for
this conclusion is, in his submission, to be derived when one considers the
construction of the 1978 lease in the light of the factual matrix of the
transaction and of the principles expounded by Lord Wilberforce in Prenn
v Simmonds [1971] 1 WLR 1381. The 1978 lease was not being granted on
the expiry of an old lease; as the facts showed, in Mr Steinfeld’s submission,
it was being granted substantially as a replacement of the 1973 lease on
altered terms. This makes it all the more likely, he suggested, that
improvements carried out during the subsistence of the 1973 lease would fall to
be disregarded.
As I have
already indicated, I accept that the decision of the House of Lords in the ‘Wonderland’,
Cleethorpes case as to the true construction of section 34 of the original
1954 Act is not decisive of the question: what is meant by words taken from
section 34 and incorporated in the 1978 lease by reference? Nevertheless, I think it is clearly relevant
to consider the reasoning which led the House of Lords to their conclusion,
because so many arguments rather similar to those advanced on behalf of the
company in the present case were rejected by them on that occasion.
Lord Simonds,
with whose speech Lord Reid, Lord Hodson and Lord Pearce concurred, pointed out
([1965] AC 58 at p 70) that the immediately relevant clause of section 34 was
(c) and that the question was whether the relevant works were ‘improvements’
carried out by ‘the tenant’ or a ‘predecessor in title of his’ within the
meaning of that clause. He referred to an argument on behalf of the appellant
company in these words:
It is urged
on the one hand by the appellant company that they were at the date of their
application under section 24 the tenants of the premises and that it was they
who had in fact carried out the improvements in question: therefore, they say,
the language of the section is unambiguously apt to cover their case.
However, he
did not accept this argument. Later, at p 70, he said:
For me, the
critical question is what is meant by ‘the tenant’? and I reject the premise upon which the
appellants must rely that it includes the individual tenant in any other
capacity than that in which he makes his application to the court, ie as tenant
under the current tenancy which he seeks to have renewed. Part II of the Act
(within which section 34 falls) begins and ends with the tenancy then current
which is to be extended or renewed. When that tenancy was created, a new
relation was established between landlord and tenant. It is to be assumed that,
when it was established and the old chapter, if there was one, was closed, the
parties took into account what were then their respective rights and
liabilities and founded on them accordingly. A new chapter then began and it is
only with what thereafter happened that the court is concerned. This is perhaps
only another way of saying that in the context the words ‘carried out by the
tenant’ import carried out during the current tenancy, but I arrive at that
conclusion upon a consideration of the meaning which must be given to ‘the
tenant’.
Lord Simonds
further referred to an argument advanced on behalf of the respondent that the
same result could be reached by having regard to the meaning of the word
‘improvement’, which it was suggested could only refer to something done after
the start of the current tenancy. As to this, he said at p 71:
It may well
be that in the context of section 34 (c) this is a valid argument, but I prefer
not to rest on it, for it is easy to see what difficulties might arise if it
was sought to adopt such a meaning generally in an interpretation of the Act.
Lord Morris,
however, appears to have found the last mentioned argument compelling. He said
at p 74:
. . . the
tenancy that is now continuing is the current tenancy which was created by the
lease of November 4 1938, and which began on March 25 1939. The ‘holding’ (see
section 23) is the property comprised in that tenancy. That must be the
property as it existed at the beginning of the current tenancy together with
any physical improvements carried out during the tenancy. The ‘tenant’ who is
referred to in section 34(c) is the tenant of that property. If what is to be
regarded as the effect from the rent point of view of any improvements carried
out by the tenant, that, I consider, denotes any improvements carried out by
him in respect of the property comprised in the current tenancy. That involves
a consideration as to whether between the start and the end of the period of
the current tenancy improvements have been carried out by him. It seems to me,
therefore, that the reference in section 34, sub-section (c), is a reference
only to works carried out during the currency of the current lease.
As in the ‘Wonderland’,
Cleethorpes case, the critical questions of construction seem to me to be
(a) whether the relevant works — that is to say, the erection of the clubhouse
and the creation of the 9-hole golf course — were ‘improvements’ within the
meaning of the words taken from section 34 and incorporated by reference in
clause 4(1) and, if so, (b) whether they were carried out ‘by the tenant’
within that meaning.
In my judgment
the first of the two questions can only be answered in the negative for these
short reasons. In the context of the rectified clause 4(1) (including the
incorporated words), the word ‘improvements’ must mean improvements to the
demised premises. Yet, in the context of that subclause the reference to ‘the
demised premises’ clearly includes the clubhouse and the 9-hole golf course,
which were part of the subject-matter comprised in the original grant under the
1978 lease. To construe clause 4(1) as requiring the disregard of improvements
to the demised premises, consisting of the erection of the clubhouse and the
creation of the 9-hole golf course, when the original demised premises
themselves included the already erected clubhouse and the already created
9-hole golf course, would not seem to me to make sense. Even though the rest of
their lordships may not have found the reasoning of Lord Morris entirely
compelling in the construction of section 34, it seems to me that, mutatis
mutandis, it is compelling in the construction of clause 4(1) when the
wording of paras (a), (b) and (c) of section 34 are incorporated by reference
in that subclause. The word ‘holding’ in those paragraphs has to be treated as
a reference to the demised premises. The demised premises are the property
comprised in the 1978 lease. That must be the property comprised in the 1978
lease as it existed at the beginning of the term granted by that lease. The
‘tenant’ who is referred to is the tenant of that property, ie all the property
comprised in that lease, including the clubhouse and the 9-hole golf course. If
what is to be disregarded is the effect, from the rent point of view, of any
improvements carried out by ‘the tenant’, that must denote any improvements
carried out by him in respect of the property comprised in the current tenancy
(ie the demised premises including the clubhouse and the 9-hole golf course).
That involves a consideration as to whether, between the start of the term
granted by the 1978 lease and the time of the review, improvements have been
carried out by the tenant. It seems to me, therefore, that unless the matrix
compels a contrary conclusion, the reference to para (c) of section 34 when
incorporated in clause 4(1) is in its context apt to refer only to works
carried out during the currency of the 1978 lease and not before.
This makes it
unnecessary to say much more about the meaning of the word ‘tenant’ in the
context of clause 4(1) when the wording of para (c) is incorporated in it.
Suffice it to say that I do not regard the word ‘tenant’ as unambiguous in this
context any more than Lord Simonds regarded it as unambiguous in the context of
section 34. In my opinion, as in that case, the context imperatively demands
that some qualification be placed on the words, the obvious qualification in
the present context being that the reference to ‘the tenant’ means the tenant
in his capacity as tenant of the demised premises under the 1978 lease. The
decision of Scott J in the Hambros Bank case is, in my view, plainly
distinguishable on its facts.
Lord
Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381 reminded us, at
p 1383, that:
. . . the
time was long passed when agreements, even those under seal, were isolated from
the matrix of facts in which they were set and interpreted purely on internal
linguistic considerations.
In the light of
this reminder, I end by considering briefly whether the matrix of facts leads
to a conclusion as to the true construction of clause 4(1) different from that
which I would reach on the basis of the words used.
The learned
judge himself considered that the matrix of facts reinforced the conclusion
that the relevant works fell to be disregarded in the application of the rent
review clause. He commented:
Here the
improvement was carried out by the tenant holding the premises of
the time when the improvements were effected had some 48 years to run. That
term was within a few years surrendered by operation of law when the same
landlord granted to the same tenant a new lease at a different rent and with
some slight changes of the terms of the lease particularly as to rent review,
for another term of 50 years, thus extending the original term in effect for a
further five years. In that matrix of fact I find support for and nothing
repugnant to the adoption of the construction which I place upon paragraph (c)
as incorporated in the lease . . .
Mr Steinfeld,
as I have already indicated, in support of the reasoning of the learned judge,
stressed that the 1978 lease was executed in the special context of a surrender
of the 1973 lease. In my opinion, however, these points, which are said to
favour the company’s construction of the clause, are counterbalanced by a
number of factors pointing in the opposite direction. As Mr Pryor pointed out,
the 1978 lease conferred a number of benefits on the company which it had not
previously enjoyed under the 1973 lease, and which could be said to have made
it not unreasonable that the relevant improvements should be taken into account
when a reviewed rent came to be fixed.
The term
granted by the 1973 lease was extended by nearly five years. The 1978 lease
provided for longer review periods (seven years, as opposed to five years). The
hypothetical term to be valued on a review of rent under the 1978 lease was
shorter than that provided for by the 1973 lease (seven years, as opposed to the
residue of the term). The 1978 lease contained new provisions for the insurance
of the demised premises, and in the event of damage to them, suspension of the
rent until they should be rendered fit for habitation. Finally, the execution
of the 1978 lease was part and parcel of an arrangement under which the
plaintiff landlord agreed to give up his controlling interest in the tenant
company.
In all the
circumstances, I think that the matrix of fact, so far as known to us, is at
the very least equally consistent with the intention that the clubhouse and the
9-hole golf course should be taken into account in fixing the reviewed rent as
with the intention that they should be disregarded.
For my part, I
would go a little further. I think that with all respect to him, the learned
judge, when delivering his judgment, either overlooked or attached too little
weight to the particular fact that the 1978 lease included a substantial area
of property which had not been included in the earlier demise (the 9-hole golf
course). Mutatis mutandis, some of the observations of Lord Simonds,
which I have quoted, appear to me to apply in the present case. Looking at the
matter broadly, it seems to me that when the 1978 lease was granted, a new
relation was established between the plaintiff and the company. The intention
reasonably to be imputed to the parties is that when it was established the old
chapter, constituted by the 1973 lease, was closed, and the parties, in
entering into the 1978 lease, took into account what were then their respective
rights and liabilities, contractual and statutory, and proceeded accordingly. A
new chapter then began, and in my judgment the intention properly to be imputed
to them is that only improvements effected by the tenant to the demised premises
during the course of this new chapter would fall to be disregarded for the
purpose of a future rent review.
For all these
reasons, based primarily upon the linguistic interpretation of the 1978 lease,
but, in my view, supported by the matrix, I would allow this appeal. I would
set aside that part of the judgment of the learned judge which dealt with the
construction of the lease. In lieu thereof, I would order and declare that,
upon the true construction of the lease, the clubhouse and the laying out of
the 9-hole golf course mentioned in the pleadings are not to be disregarded in
determining the relevant open market rental value for the purposes of the 1978
lease.
CROOM-JOHNSON
LJ and SIR JOHN MEGAW agreed and did not add anything.
The appeal
was allowed with costs in the Court of Appeal and below. It was declared that
on the true construction of the lease the clubhouse and the laying out of the
9-hole golf course were not to be disregarded in determining the rental value
for the purpose of the review clause.
