Landlord and tenant — Rent review — Construction — Base date for calculation of increase — Whether direction to apply rise in values of comparable properties merely arbitrary trigger to rent review or provides index to increase ground rent
By a lease
dated September 19 1966 the plaintiff landlord demised a site to S for a term
of 42 years; S later assigned the term to the defendant tenant. The lease
contained covenants by the tenant to erect a petrol-filling station and to pay
certain specified stepped rents to the end of the 14th year of the term. From
September 19 1980 and for the rest of the term, subject to the provisions of
the rent review clause, the rent was to be £1,850 pa. Under the rent review
clause the arbitrator was to determine whether, as at the date of the notice
triggering the review, any rise had taken place since the commencement of the
term, or since any last increase in the rent, in the annual rack-rental value
of the property in the locality used for like purpose or purposes and, if so,
by calculating the increase in the rent payable which would reflect the said
rise. In the court below Judge Hague QC accepted the landlord’s contentions:
(1) that, because there has been no increase of rent under the rent review
clause, the base date for calculation was the commencement of the term; and (2)
the calculation of the rent increase should be made by assessing the rental
value of the premises, including the buildings, the existence of a rise in values
of other properties being only the arbitrary condition precedent for switching
from a ground rent to current rack-rent. The tenant appealed.
date from which the arbitrator must determine whether and to what extent the
rents of other petrol stations have risen was the last increase to £1,850 pa.
which the increase is to reflect is the proportion or percentage rise in rents
of other petrol stations since September 19 1980. Although the £1,850 pa was a
ground rent and the comparable to be used to determine the percentage increase
is the rack-rental value of other petrol stations including their buildings,
this comparable is merely to provide an index which can be applied to the
ground rent payable under the lease.
No cases were
referred to in this report.
This was an
appeal by the defendant, Mobil Oil Co Ltd, from the decision of Judge Hague QC,
sitting as a judge of the High Court, who had made a declaration in favour of
the plaintiff landlord, British Railways Board, on the interpretation of a
lease dated September 19 1966 held by the defendant.
David
Neuberger QC (instructed by the solicitor to Mobil Oil Co Ltd) appeared for the
tenant; Kirk Reynolds QC (instructed by the solicitor to British Railways Board)
represented the landlord.
Giving the
first judgment at the invitation of Sir Thomas Bingham MR, HOFFMANN LJ
said: This appeal concerns the construction of a rent review clause in a lease
of a petrol-filling station constructed on railway land just north of King’s
Cross. By a lease dated September 19 1966 the British Railways Board demised
the site to a Mr Harry Sibley for a term of 42 years. He subsequently assigned
to the present tenant, Mobil Oil Co Ltd. The lease contains covenants by the
tenant, first, to erect the filling station within one year and, second, to pay
the following yearly rents: for the first year £350. This was a concessionary
rent for the period during which the petrol station would be built and before
the tenant commenced business. For the next six years, £1,325. From the end of
the seventh to the end of the 14th years, that is, until September 19 1980,
£1,470. For the rest of the term, subject to the rent review clause, £1,850.
The rent review clause entitled the board to serve what is called a rent notice
invoking the rent review mechanism at any time during the period of six months
before the expiry of the 21st year, that is, before September 19 1987. It
described a rent notice as:
. . . a
notice in writing . . . providing for the increase of the yearly rent of one
thousand eight hundred and fifty pounds payable hereunder as from the
expiration of the year of the term then current.
The board duly
served such notice on Mobil seeking an increase from September 19 1987.
The rent
review clause provided machinery for the parties to agree a new rent or for the
appointment of an arbitrator to determine one if they could not. Para 4 states
how the arbitrator should determine the new rent:
The
Arbitrator shall determine the question so referred to him by determining
whether as at the date of the Rent Notice any rise has taken place since the
commencement of the term hereby granted or if the rent payable hereunder shall
previously have been increased since the date of the last increase in the annual
rack rental value of the property in the locality used for the like purpose or
purposes as the demised premises and the buildings thereon and if so by
calculating the increase in the rent payable hereunder which would reflect the
said rise and the amount so calculated shall be the increase in the rent
payable hereunder.
The
arbitrator, therefore, has to determine whether, since a given date in the
past, there has been a rise in the rents of other petrol stations in the
locality and then to calculate an increase in the rent payable under the lease
which would reflect that rise. This would seem a fairly simple and businesslike
procedure, but the parties have been unable to agree on how it should be put
into effect.
The first
dispute concerns the base date from which the arbitrator must determine whether
and to what extent the rents of other petrol stations have risen. The board
says that ‘since the date of the last increase’ means since the date of the
last increase agreed or determined under the rent review clause. As there has
been no such increase, the base date is the commencement of the term. But, in
my judgment, this makes no sense. The rent notice requested an increase in ‘the
yearly rent of one thousand eight hundred and fifty pounds payable hereunder’.
The object of the arbitrator’s determination is to calculate the increase in
‘the rent payable hereunder’, which is the rent payable at the time of the rent
notice. This was £1,850. The increase in that rent must reflect the rise in
other rents since the base date. It would be very odd to calculate an increase
in a rent of £1,850 by reference to a rise in the rents of other petrol
stations from a time when the rent under the lease was £350. One would not be
comparing like with like.
In any case,
the board’s construction involves writing words into the lease. It says ‘since
the date of the last increase’ and the last increase was when the rent went up
to £1,850. This makes good sense without having to imply words which disqualify
that increase from consideration. The only argument against Mobil’s
construction is that it gives no effect to the conditional ‘if’ which precedes
the words ‘the rent payable hereunder shall previously have been increased’.
This is because, given the stepped rents provided for in the reddendum,
it was certain that the rent would have increased before any rent notice could
be served. But this is easily accounted for. The rent review was a standard
clause whereas the reddendum is custom-made for this particular lease.
This is the kind of ruck in the texture of a document which frequently happens
when the draftsman inserts a one-off clause without checking through the rest
of the document to see what effect it is going to have on other standard
clauses. It certainly is not enough to justify implying words into the clause
which will produce a commercially absurd result.
The second
dispute concerns the kind of calculation which the arbitrator must perform.
What is the ‘rise in rents at other petrol stations’ which must be reflected in
the increase under the lease? Is it a
rise in absolute or percentage terms? In
my view, it cannot possibly mean a rise in absolute terms. Petrol stations come
in all shapes and sizes and it would be absurd to regard the absolute rise in
the rent of, say, a station that is three times as big as being relevant to
what should be the increase in the rent of this one. In any case, the clause
contemplates considering more than one comparable and this also rules out the
notion of any absolute figure. The rise which the increase reflects must
therefore be the proportion or percentage rise in rents of other petrol
stations since September 19 1980.
In my view,
this produces a simple calculation. It is true that the £1,850 is a ground rent
and the comparable being used to determine the percentage increase is the rack
rental value of other petrol stations including their buildings. But the rents
of these other petrol stations are not being used to value the leasehold
premises. They are being used only to provide an index which can be applied to
the ground rent payable under the lease. It is in principle no different from,
and in practice somewhat more appropriate than, using other indices such as
retail prices or equity shares.
Before the judge,
however, the board contended successfully for an altogether different approach,
which Mr Kirk Reynolds QC has again urged upon us today. This is simply to
calculate the current rental value of the demised premises, including the
building, and to increase the rent to that figure. The rack-rents of
neighbouring petrol stations are on this basis no more than evidence of the
market value of the demised premises and the extent of the rise in such rents
since the base date is irrelevant. All that matters is that there should have
been some rise, however small, since on this construction the existence of a
rise is the arbitrary condition precedent for switching from a ground rent to a
current rack-rent.
In my view,
the clause cannot support this construction. It says that the increase in the
rent under the lease must reflect the rise in the rents of neighbouring petrol
stations since the base date and I have explained why this can mean only a
percentage rise. The lease says nothing whatever about calculating the current
rack-rental value of the demised premises. This would not reflect the rise in
other rents, but merely what those rents currently were.
I would
therefore allow the appeal and for the declarations made by the judge
substitute the following answers to the questions raised in the notice of
motion. Under question 1, September 19 1980 and under question 2, that it
should be answered in sense (a).
STEYN LJ agreed and did not add anything.
Agreeing, SIR
THOMAS BINGHAM MR said: On the second of the two points argued concerning
the comparison on which any increase in the rent is to be founded I have, with
respect to the learned judge who thought otherwise, no doubt that the
construction favoured by Hoffmann LJ is correct. It accords with the natural
wording of the clause and not only gives better effect to the language of the
lease than the judge’s construction but also, as I think, gives a much more
sensible commercial result.
I have, for my
part, felt more doubt on the first point concerning the base date for the
purposes of the comparison. The landlord, not surprisingly, has drawn attention
to the words:
. . . any
rise has taken place since the commencement of the term hereby granted or if
the rent payable hereunder shall previously have been increased since the date
of the last increase . . .
They submit
that that language must apply to an increase taking place under rent review
provisions because there will always, irrespective of any general increase in
rents, have been a stepped increase in the rent payable under the lease before
the date of the first rent review in the 21st year. Thus, they say, the clause
must be read as applying only to rent review increases as opposed to stepped
increases because otherwise the word ‘if’ would be deprived of its conditionality
since there could never be a comparison with a rent at the date of commencement
of the term which the clause envisages as a possibility. That is an argument
not without attraction. On the other hand, even the landlord’s interpretation
involves, as I think, interpolation to some extent since the words ‘under the
rent review provisions’ need to be inserted after ‘increased’.
Moreover, it
seems to me that the landlord’s construction involves a somewhat anomalous
exercise of seeing whether there should be an increase in the rent of £1,850 by
reference to an increase since the time when a rent of £350 was in force on
September 19 1966. The overwhelming probability is, I think, that a mismatch
arose in the course of drafting between the terms of subclause 4 and the
provisions of the lease, which provide for payment of a stepped rent over the
first 21 years of the term.
I accordingly
agree with Hoffmann LJ on this point; also and furthermore agree that the
question submitted for answer by the court should be answered as he proposes.
Appeal
allowed. Declaration accordingly.
