Construction of rent review clause — Hypothetical lease on same terms as actual lease — Whether hypothetical term is of the same term as the actual lease commencing on the rent
tenant holds the term of a lease dated December 17 1969 of premises at Sydney
Road and Essex Road, Enfield, Middlesex, for 35 years from the date of the
lease — The defendant owns the reversion — The lease provides for the rent to
be reviewed to the full market yearly rent defined as ‘the yearly rent at which
the demised premises might reasonably be expected then to be let in the open
market with vacant possession by a willing Lessor by a Lease in the same terms
in all other respects as this present Lease (other than the original rents
hereby reserved but including the provisions for review of rent herein contained)’
— In respect of the rent review date on December 17 1990, the tenant submitted
to the arbitrator that the hypothetical term was of 35 years from the review
date, thus throwing up a lower rent — The landlord had contended for a
hypothetical term of 14 years from the review date, being the residue of a term
of 35 years from the original commencement date — The arbitrator rejected the
tenant’s argument and made alternative awards in relation to the parties’
respective contentions, namely a rent of £1,392,200 on the basis of a
hypothetical term of 14 years commencing on December 17 1990 and £1,252,980 on
the basis of a hypothetical term of 35 years commencing at the review date —
The tenant applied to vary or set aside the arbitrator’s principal award
hypothetical term was for a period equal to the residue of the term of the
actual lease — Adopting an absolutely literal importation of the hypothetical
terms of the lease granted by the actual lease one gets a habendum by
which a lease is held from the commencement of the actual lease for a term of
35 years — The provisions regarding stepped rents in the early years of the
lease are excluded in any event in the phrase ‘in the same terms in all other
respects as this present Lease’ — A statement specifically excluding provisions
as to quantum of rent is frequently found in the decided authorities on
rent reviews — To consider that the hypothetical term is for a term equal to
the actual lease commencing on the rent review date is far from reality and
involves treating the tenant as enjoying something other than what he actually
has — The amount of rent in issue was a factor in granting a certificate under
section 1(7) of the Arbitration Act 1979 — Leave to appeal was refused
The following
cases are referred to in this report.
Basingstoke
and Deane Borough Council v Host Group Ltd
[1988] 1 WLR 348; [1988] 1 All ER 824; (1987) 56 P&CR 31; [1987] 2 EGLR
147; 284 EG 1587, CA
Lynnthorpe
Enterprises Ltd v Sidney Smith (Chelsea) Ltd
[1990] 2 EGLR 131; [1990] 40 EG 130
Norwich
Union Life Insurance Society v Trustee Savings
Banks Central Board [1986] 1 EGLR 136; (1986) 278 EG 162
Ponsford v HMS Aerosols Ltd [1979] AC 63; [1978] 3 WLR 241; [1978] 2
All ER 837; (1978) 38 P&CR 270; [1978] EGD 137; 247 EG 1171, [1978] 2 EGLR
81, HL
Ritz
Hotel (London) Ltd v Ritz Casino Ltd [1989]
2 EGLR 135; [1989] 46 EG 95
Tea
Trade Properties Ltd v CIN Properties Ltd
[1990] 1 EGLR 155; [1990] 22 EG 67
This was an
application by an originating motion by the tenant, British Gas plc, under a
lease dated December 17 1969 for the award of an arbitrator, dated January 2
1991, to be varied or set aside. The defendant landlord was Dollar Land
Holdings plc. Both parties consented to the appeal to the court.
Peter Birts QC
(instructed by the Regional Solicitor for British Gas plc, of Potters Bar,
Hertfordshire) appeared for the plaintiff; David Neuberger QC (instructed by
Saunders Sobell Leigh & Dobin) represented the defendant.
Giving
judgment, KNOX J said: I have before me an amended originating motion by
the tenant under a lease dated December 17 1969 for the award of an arbitrator,
dated January 2 1991, to be varied or set aside in certain limited respects.
Both parties consent to the appeal so there is no issue as to leave by the
court.
The tenant is
British Gas plc, the respondent in the arbitration and the applicant before the
court. The landlord is Dollar Land Holdings plc, the claimant in the
arbitration and the respondent in this court. (I propose to call them the
‘tenant’ and the ‘landlord’ respectively.) The points in issue are what length
of hypothetical term and what commencement date should the arbitrator use in
determining full market yearly rent for the purposes of a rent review clause in
the lease.
The lease was
over land and an office building built in 1966, at Sydney Road and Essex Road,
Enfield, Middlesex. The term was for 35 years, from December 17 1969 (the date
of the lease). The arbitrator found that the tenant held the premises on
conventional full repairing and insuring terms and that, apart from the review
provisions, none of the terms of the lease was remarkable in the context of
value.
The rents
reserved by the lease were as follows:
(a) for the period from the date hereof until the
10th day of March 1970 the rent of one peppercorn if demanded
(b) for the period of one year from the 11th day
of March 1970 the rent of One hundred and forty five thousand pounds
(c) for the period of one year from the 11th day
of March 1971 the rent of One hundred and forty seven thousand and five hundred
pounds
(d) for the residue of the term hereby created
subject nevertheless to revision as hereinafter provided the rent of One
hundred and fifty thousand pounds . . .
The review
provisions are contained in clause 5 of the lease. Clause 5(1) provides:
That the
Lessor shall be entitled by notice in writing given to the Lessee during the
first six months of every seventh year of the said term call for a review of
the yearly rent payable under this Lease and if upon any such review it shall
be found that the initial rent payable hereunder or by virtue of this clause
shall be less than the full market yearly rent of the premises at the date of
such review then as from the end of every such seventh year the yearly rent
payable under this Lease shall be increased to such full market yearly rent.
It is common
ground that the relevant review date is December 17 1990, that is to say, 21
years after the commencement of the term. Clause 5(2) starts as follows:
For the
purposes of this clause the full market yearly rent means the yearly rent at
which the demised premises might reasonably be expected then to be let in the
open market with vacant possession by a willing Lessor by a Lease in the same
terms in all other respects as this present Lease (other than the original
rents hereby reserved but including the provisions for review of rent herein
contained) . . .
and then there
follow certain things that are to be disregarded, which can be summarised as
follows. First, the fact of occupation by the lessees; second, goodwill through
the carrying on of their business; third, sublettings below full market rent
and, fourth, improvements by the lessee. The further machinery in the clause
for the conduct of the arbitration can be disregarded, since no issue has
arisen with regard to its operation.
The dispute
before the court is limited to the questions:
(a) What length of term is contemplated by clause
5(2)? and
(b) What is the commencement of that term?
The evidence
regarding the market, which the arbitrator accepted, included the following
from his award:
It is I think
generally accepted that the current market is very difficult and I accept Mr
Dorkings’ view that a letting of a building of this size in this location and
of this specification might border on the impossible.
Mr D J
Dorkings [FRICS] appeared for the tenant before the arbitrator. It is no doubt
this circumstance that contributes to the feature, unusual in comparison with
reported cases over the past 10 to 15 years, that it is the tenant who is
contending for a long hypothetical term of 35 years from the review date, since
that throws up a lower rent, and the landlord who contends for a hypothetical
term of 14 years from the review date or, which seems to me much the same
thing, a term of 35 years from the original commencement date, December 17
1969, since that throws up a higher rent. The arbitrator made alternative
awards in relation to the parties’ contentions on these disputed issues. His
main or substantive award was that the rent payable on review, with effect from
December 17 1990, should be £1,392,200 pa. In reaching that conclusion, he
rejected the
be 35 years and should commence on the review date. It is not entirely clear to
me whether his award was on the basis of a term of 35 years, commencing on
December 17 1969, or a term of 14 years, commencing on the review date.
In his
alternative award, he said:
In my award,
I have found in favour of the landlord’s claim that the hypothetical lease is
for a term of 14 years.
In his
principal award he said:
The new
hypothetical tenancy will start in December 1990 as rightly pointed out by Mr
Hughes even though the term is backdated . . . .
Mr H G Hughes
[ARICS] was the landlord’s surveyor. What matters more is that the figure in
his alternative award, in respect of a hypothetical term of 35 years commencing
at the review date, December 17 1990, was £1,252,980, which is exactly 10% less
than the principal award of £1,392,200, and is therefore, not surprisingly, the
figure which the tenant seeks to support.
Both sides
accept, as binding in this court, the general principle stated by Nicholls LJ
in Basingstoke and Deane Borough Council v Host Group Ltd [1988]
1 WLR 348*, where he said, at p 353, letter D:
The question
raised on this appeal is one of construction of a rent review clause in a
lease. In answering that question it is axiomatic that what the court is
seeking to identify and declare is the intention of the parties to the lease
expressed in that clause. Thus, like all points of construction, the meaning of
this rent review clause depends on the particular language used interpreted having
regard to the context provided by the whole document and the matrix of the
material surrounding circumstances. We recognise, therefore, that the
particular language used will always be of paramount importance. Nonetheless it
is proper and only sensible, when construing a rent review clause, to have in
mind what normally is the commercial purpose of such a clause.
That purpose
has been referred to in several recent cases, and is not in doubt. Sir Nicolas
Browne-Wilkinson V-C expressed it in these terms in British Gas Corporation
v Universities Superannuation Scheme Ltd [1986] 1 WLR 398, 401:
‘There is
really no dispute that the general purpose of a provision for rent review is to
enable the landlord to obtain from time to time the market rental which the
premises would command if let on the same terms on the open market at the
review dates. The purpose is to reflect the changes in the value of money and
real increases in the value of the property during a long term.’
At p 354,
letter D, Nicholls LJ said:
Of course
rent review clauses may, and often do, require a valuer to make his valuation
on a basis which departs in one or more respects from the subsisting terms of
the actual existing lease. But if and in so far as a rent review clause does
not so require, either expressly or by necessary implication, it seems to us
that in general, and subject to a special context indicating otherwise in a
particular case, the parties are to be taken as having intended that the
notional letting postulated by their rent review clause is to be a letting on
the same terms (other than as to quantum of rent) as those still subsisting
between the parties in the actual existing lease. The parties are to be taken
as having so intended, because that would accord with, and give effect to, the
general intention underlying the incorporation by them of a rent review clause
into their lease.
We are
fortified in this view by observations made in several cases. First, this view
accords with comments made in passing in Ponsford v HMS Aerosols Ltd
[1979] AC 63. The point now in question was not in issue there, but in the
context of a rent review clause that made no express direction for the terms of
the existing lease to be taken into account on the review, Viscount Dilhorne
described the task of the valuer in these terms, at p 76:
‘Surely it is
to assess what rent the demised premises would command if let on the terms
of the lease and for the period the assessed rent is to cover at the time
the assessment falls to be made.’
*Editor’s
note: Also reported at [1987] 2 EGLR 147.
The Basingstoke
and Deane case was not a case in which the length of the hypothetical term
was in issue, but the principle laid down extends to that type of issue.
Moreover, there can, in my view, be no doubt that the residue of the term at
the review date constitutes the term still subsisting between the parties in
the actual existing lease. Lord Dilhorne says so in terms in Ponsford v HMS
Aerosols Ltd† . And that is the natural inference from Nicholls LJ’s
reference to the subsisting terms of the actual existing lease. The question
is, therefore, does this lease, either expressly, or by necessary implication,
or through some special context, require a different term to be used as a
valuation yardstick?
† Editor’s
note: Reported at (1978) 247 EG 1171, [1978] 2 EGLR 81.
For the
tenant, Mr Birts QC submits that it does so require. He submits that in clause 5(2)
the word ‘then’ in the phrase ‘might reasonably be expected then to be
let in the open market’ refers to the review date. That was not disputed. Next,
he submitted that the requirement that the lease should be ‘in the same terms
in all other respects as this present Lease’ showed that each and every term or
provision of the existing lease, including its term or duration, should be
included in the hypothetical lease, which is therefore one of 35 years. Third
and critically, he pointed to the exclusion of ‘the original rents’ (in the
plural) ‘hereby reserved’ and identified these rents as the original stepped
rents in the reddendum of the existing lease. From this he deduced that
the whole of the 35-year term was intended to go into the hypothetical lease,
rendering it necessary to exclude the provision for stepped rents in respect of
the initial part of the term originally granted. A hypothetical lease of the
residue of the term on this review date, 14 years, would not require such an
exclusion, because the stepped-rent period lay in the past and was not
imported, so such an exclusion would be unnecessary.
I am
unconvinced that this argument is one which amounts to a necessary implication
that the hypothetical lease should be one of 35 years from the review date.
First, if one
gives maximum weight to the use of the words ‘same terms’, and adopts an
absolutely literal importation of the hypothetical terms of the lease granted
by the actual lease, one gets a habendum ‘to hold unto the Lessee from
the 17th December 1969 for the term of 35 years’. That is what it actually
says.
Second, the
provisions regarding the stepped rents are excluded already by the word ‘other’
in the phrase ‘in the same terms in all other respects as this present
Lease’. ‘Other than what?’ can only be
answered ‘Other than the yearly rents reserved’ and that would exclude the
stepped rental provision. So the subsequent exclusion of ‘the original rents
hereby reserved’ is tautological and that is destructive of the underlying
assumption that a separate meaning and purpose needs to be found for each
provision.
Third, such a
statement of the obvious, in specifically excluding provisions as to quantum
of rent, is in fact frequently indulged in both in statute law — see the
Landlord and Tenant Act 1954, section 34(1) ‘Having regard to the terms of the
tenancy (other than those relating to rent)’ — and in judgments — see the
passages quoted above from Nicholls LJ in the Basingstoke and Deane
case, where he expressly excludes terms as to quantum of rent on more
than one occasion. Many other examples of this could be found.
In my
judgment, the expression ‘other than the original rents hereby reserved’ was
both tautologous and unnecessary in excluding the rents reserved by the
original lease. But that is not an unprecedented feature in a commercial lease.
The plural ‘rents’ is accounted for by the fact that four different rents were
indeed originally reserved. I was referred to a number of authorities with
different clauses, Lynnthorpe Enterprises Ltd v Sidney Smith
(Chelsea) Ltd [1990] 2 EGLR 131; Ritz Hotel (London) Ltd v Ritz
Casino Ltd [1989] 2 EGLR 135; Tea Trade Properties Ltd v CIN
Properties Ltd [1990] 1 EGLR 155, and Norwich Union Life Insurance
Society v Trustee Savings Banks Central Board [1986] 1 EGLR 136. In
none of those cases did an argument in favour of a hypothetical lease of the
same length as the original term, but commencing at the review date, succeed. I
accept, however, Mr Birts’ submission that they are all distinguishable on the basis
that the words used were different, with the possible exception of the Norwich
Union Life Insurance v Trustee Savings Banks Central Board case,
where the report does not in terms contain a verbatim quotation of the relevant
clause, but Hoffmann J is reported as saying that ‘the rent review clause
provided that the new rent was to be assessed on the review date on the
assumption that the premises were being let in the open market by a willing
lessor to a willing lessee, taking a lease otherwise on the terms and
conditions of the lease’. If that is a verbatim quotation, which it may well
be, it is quite close to the present clause, and although Hoffmann J was only
concerned to refuse leave to appeal, he did so on the basis that he had no
doubt that the arbitrator was right to take as the term of the hypothetical
lease the unexpired period of the existing lease. However, although I derive
comfort from that decision, in view of the uncertainty as to the exact content
of the clause, I base my decision, in dismissing this appeal, upon the general
principle laid down in the Basingstoke and Deane decision and what seems
to me to amount to the absence of an express or necessary implication in favour
of the tenant’s construction.
I should add
that although this is exceptionally, so far as reports go, not a case where it
is the landlord who is arguing for the longer hypothetical term, it can, in my
view, make no difference whether it is
other than what the parties are actually enjoying at the relevant date. Putting
it in another way, reality, so far as length of term is concerned, consists in
the term which the tenant enjoys at the review date. It is true that Staughton
LJ, in Lynnthorpe Enterprises v Sidney Smith (Chelsea) Ltd (supra),
at p 135, said that while there was clearly a presumption in favour of reality
so far as length of term was concerned, reality pointed in two directions, one
in favour of the unexpired residue of the term, because that was what the
tenant had, the other in favour of a 15-year term, which was what the original
term in that case was. He went on as follows, at p 135:
. . . I would
have given greater weight to the second aspect of reality rather than to the
first, because that is more directly concerned with the monetary calculation
that has to be done. So I would have wished to reach a solution whereby the
valuer had to go into the market-place and find a 15-year rent rather than a
6-year rent.
Of the three
possible solutions that have been put forward, the first is that the valuer
should consider a hypothetical lease for 15 years from the date of the review.
The second is that he should consider a hypothetical lease for 15 years from
the date of the original lease; the third is that he should consider a
hypothetical lease for the unexpired period of the original term. That, so far
as concerns August 1987, is six years.
He rejected
the first for two reasons: first, it seemed to have been uniformly rejected by
a number of Chancery judges at first instance. The other reason was the
existence of specific stepped rents at the outset of the actual term granted,
which was irreconcilable with the requirements of the hypothetical lease. They
are specifically excluded here, so that reason is not available to the
landlord. The first is, but I would add, for my part, that the first of the
three possibilities mentioned by Staughton LJ is much the furthest from reality
of the three, because unlike the other two it involves treating the tenant as
enjoying something other than what he actually has. For these reasons this
appeal will be dismissed.
Following an
application by Peter Birts QC, on behalf of the plaintiff, for leave to appeal
to the Court of Appeal and for a certificate under section 1(7) of the
Arbitration Act 1979, KNOX J continued: The decision that I have made
was intended to be founded on the general principle which both parties before
me adopted and which was laid down in the Basingstoke case (as I can
call it for the sake of brevity). It is submitted that there is a question of
general public importance in the application of that principle to the terms of
this lease.
The arguments
that were addressed to me were, very rightly, detailed arguments in connection
with the construction of this particular clause. It is not possible to assert
conclusively that this particular clause is one which is unique or very widely
adopted in leases that were granted some little whileago. The indications are
that it is not a form that is currently very widely adopted, but, of course,
commercial leases have a way of being for quite a lengthy period of time, more
especially if they have rent review clauses in them, and therefore one has to
have regard to what has happened in the past as well as to what is being done
today.
Essentially,
in my view, this decision was concerned with the consideration whether there
were particular circumstances in the construction of this particular lease
which took it out of the general run of cases, which is quite strongly, as
Staughton LJ noted in the Lynnthorpe decision, one where there has been
a fairly consistent trend among judges at first instance in the Chancery
Division, a trend which has been recognised and given effect to, perhaps with
something less than unqualified enthusiasm in the case of Staughton LJ, by the
Court of Appeal.
In those
circumstances, it does seem to me difficult to say, and I am not able to find
that there is a question of general public importance in this particular case,
because the arguments have really been concerned with the particular rather
than the general. By that I mean the particular considerations that impinge on
the true construction of this clause and the emphasis that was very properly
placed by Mr Birts on the singular (in a numerical sense) framework of this
clause in excluding the original rents. That was a very particular argument,
quite rightly addressed as of some significance, but nevertheless particular
rather than general. Accordingly, I am not persuaded that there is a question
of general public importance in correlating this type of clause with what is, I
think now, a very well-established general principle, which has been laid down
by the Court of Appeal and is binding.
The other
possibility is one that there should be some other special reason requiring the
question of law to be considered by the Court of Appeal. Questions of
construction are, of course, questions of law, so there is no problem on that
score. What this comes down to is whether the amount of money involved —
because that is the importance — is sufficient to warrant the case being
considered by the Court of Appeal. It is not easy to see whether the section
contemplated the size of the amount at stake as being a special reason, not one
of general public importance. On balance, it does seem to me that it must be
possible for the amount at stake to fulfil the criterion that Parliament has
adopted. The amount here has not been very precisely calculated, but it is
clear that if one takes 10% of the actual award that was made by the arbitrator
and multiplies it by seven, one reaches a figure of the order of a million
pounds, and there is a possibility of further reviews, where this question
could come up again.
On balance, I
have reached the conclusion that this is just, because of the very large size
of the amount involved, capable of being a special reason which should be
considered by the Court of Appeal. I do not regard, as an ingredient in what
the subsection requires, any view to be formed as to the intrinsic merits of
the appeal. That would be a difficult process for a judge, whose decision is
sought to be upset, in which to indulge.
I propose to
give a certificate that there is a special reason why the question of law to
which my decision related should be considered by the Court of Appeal — if
anyone wants to know what it is, it is the amount at stake — but I do not
propose to give leave to appeal.
Appeal
dismissed with costs. Certificate that there is a special reason why a question
of law should be considered by the Court of Appeal granted. Leave to appeal
refused.