Landlord and tenant — Rent review clauses in lease — Construction — Complications caused by reservation of ‘additional rent’ — Whether the hypothetical letting should take into account the existence of this additional obligation — Question similar to that which arose in Guys ‘n’ Dolls Ltd v Sade Brothers Catering Ltd — Tenant’s proposed construction would result in eliminating the additional rent at the first review, a paradoxical situation — Solution was that the additional rent should be disregarded in the reviews of the basic rent
question in this case was of a factory in Wales and was granted for a term of
25 years from August 29 1978 — The lease reserved a basic rent of £43,400 pa
for the first five years subject thereafter to review and also reserved an
‘additional rent’ — The additional rent was 15% of a capital sum of £60,000
which had been spent on the demised premises — A clause in the lease provided
that this 15%, ie £9,000 pa, was to be increased pro rata with the increase in
the basic yearly rent — Thus the basic rental value of the premises as
determined on each rent review date was to serve as an inflation index for the
£9,000 fixed as the additional rent — The review formula for the basic rent
provided for an assessment of ‘the fair yearly market rental of the premises as
it shall then be let on the terms and conditions (except as to yearly rent)
herein stipulated for the residue of the said term of years’ — The issue in the
present case turned on the effect of the words ‘let on the terms and conditions
(except as to yearly rent) herein stipulated’
contended on behalf of the tenant that the hypothetical letting should be
assumed to include the obligation to pay additional rent as it stood at the
commencement of the lease — Hoffmann J pointed out that this construction would
mean that at the first review date the additional rent would in practice
disappear, just as in Guys ‘n’ Dolls Ltd v Sade Brothers Catering Ltd
a similar construction would have resulted in the ‘fair rack rental market
value’ in that case being determined without the addition of the fixed figure
of £7,500 — This is hardly likely to have been what the parties intended — The
proper and sensible construction, which did justice to the wording, was to
disregard the additional rent altogether for the purpose of reviewing the basic
rent — Declarations to that effect were accordingly made
The following
case is referred to in this report.
Guys
‘n’ Dolls Ltd v Sade Brothers Catering Ltd (1983)
EG 129, CA
In this
originating summons, in which the landlord, Buffalo Enterprises Inc, was the
plaintiff, and the tenant, Golden Wonder Ltd, was the defendant, the question
raised was as to the true construction of the rent review clauses of the lease
of a factory in Wales.
Kim Lewison
(instructed by Rayner De Wolfe) appeared on behalf of the plaintiffs; John
Furber (instructed by Farrer & Co) represented the defendant.
Giving
judgment, HOFFMANN J said: This is an originating summons which raises a
question of construction on a rent review clause. The lease was granted on
January 12 1979. The demised premises were a factory in Wales, and the term was
for 25 years from August 29 1978. The lease reserved first what was described
as a basic yearly rent of £43,400 for the first five years, subject thereafter
to review in accordance with the provisions of clause 5(ii). Second, it
reserved what was called an additional rent.
Before
explaining how the additional rent was calculated I must refer to some other
provisions of the lease. By clause 4(2) the tenant covenanted to use its best
endeavours within nine months to carry out at its own cost to the reasonable
satisfaction of the lessor certain works specified in a schedule. Those works
were all for the improvement of the premises and its adaptation for the needs
of the tenant. The obligation to pay for those improvements was, therefore, prima
facie imposed upon the tenant, but by clause 4(i) the lessor covenanted to
contribute £60,000 to the tenant’s expenditure. By clause 2(c) the tenant covenanted
to contribute £13,500 to the landlord’s expenditure under clause 4(i). One
might well ask why the lease did not simply provide that the landlord was to
make a contribution of £46,500 to the improvements. It may be that the form of
the covenants had something to do with the provisions for obtaining industrial
grants.
Those
provisions are the background to the reservation of an additional rent which is
said to be a sum equal to 15% on the capital defined by clause 4(i), that is to
say the sum of £60,000 expended on the demised premises. Another way of saying
the same thing would have been to say £9,000, and to make that assurance doubly
sure the lease goes on to say that for the avoidance of doubt the maximum
additional rent during the first period of the lease is to be £9,000. As from
the rent review date, that additional rent was to be increased in accordance
with clause 5(iii). So one has a rent in two parts, a basic rent subject to
review under clause 5(ii) and an additional rent subject to review under clause
5(iii).
Clause 5(ii)
provides that the basic rent on review is to become:
the fair
yearly market rental of the premises as it shall then be let on the terms and
conditions (except as to yearly rent) herein stipulated for the residue of the
said term of years but assuming the premises to be fairly maintained and
repaired in accordance with the lessee’s covenants in this lease contained,
there being disregarded any goodwill attached to the premises and any effect on
the rent of any improvement carried out by any tenant with the landlord’s
permission.
It is accepted
on behalf of the landlord that the effect of the concluding words is to require
the valuer to disregard the value of the improvements made under clause 4(ii).
That makes perfectly good sense because the landlord’s return for his
expenditure on those improvements is already covered by the additional rent.
Clause 5(iii),
dealing with the additional rent, says that it shall be increased at the rent
review dates pro rata with the increase in the basic yearly rent. Thus the
rental value of the premises as determined on each rent review date under
clause 5(ii) is to serve, so to speak, as an inflation index for the sum of
£9,000 fixed as the additional rent.
The issue in
this case turns on the effect of the words ‘let on the terms and conditions
(except as to yearly rent) herein stipulated’,
that the lease contains the obligations in clause 4 to make and to pay for the
improvements, the obligation in clauses 2(c) for the tenant to repay to the
landlord part of its contribution to those improvements and the obligation to
pay additional rent.
It has been
established by a number of cases in recent years that the guiding principle of
construction in the case of rent review clauses is to achieve, unless the words
positively drive one to a different result, a meaning which gives effect to the
underlying commercial purpose of such a clause. That principle ordinarily
requires one to assume that the hypothetical letting at the rent review date is
of the premises as they exist in the circumstances which then exist and that it
is a letting of what the landlord then actually has to offer, namely the
residue of the term.
As at the date
of this rent review clause the obligations under clauses 2(c) and 4 had been
performed. They were not obligations which had any relevance to a letting of
the residue of the term as it then stood. The principle of reality therefore
suggests that those past obligations should be disregarded as being incapable
of having any effect upon the hypothetical letting. Mr Furber, in a most
attractively presented argument, said that they ought nevertheless to be taken
into account because they expressly played a part in the calculation of the
additional rent. While it is perfectly true that this is what the lease says,
the reality was that once the obligations had been performed and the lease was
running they no longer had any relevance to the rental obligation. They might
as a matter of history explain why there was an additional rent, but all that
would matter from the point of view of the hypothetical tenant was that he
would have to pay a premium or addition of £9,000 a year, adjusted in
accordance with clause 5(iii).
That brings
one to the central point in the case which is whether the valuer in performing
the valuation under clause 5(ii) should take into account the existence of the
additional obligation under clause 5(iii). There is an obvious difficulty at
once about taking into account that obligation as it would actually exist at
the moment of the hypothetical letting. The tenant taking a letting of the
residue at the rent review date would have to pay by way of additional rent not
the original £9,000 but £9,000 increased in accordance with clause 5(iii). The
extent of that increase, however, depends upon the valuer’s answer to the
question posed by clause 5(ii). One therefore has a circularity which the
parties are highly unlikely to have intended. Mr Furber therefore contended
that the hypothetical letting should be assumed to include the obligation to
pay additional rent as it stood at the commencement of the lease, and he
frankly acknowledged that this was the only escape from the circularity to which
I have referred. The difficulty is, however, as he equally acknowledged, that
it runs up against the presumption of reality. I would be willing to give the
words that effect only if the language clearly required it or if the other
alternative construction was so wayward that the parties could not be supposed
to have intended it.
Mr Furber’s
submission was that the alternative construction did lead to a wayward result.
It meant that the landlord would be getting an ever-increasing sum by way of
additional rent, a sum which the effect of inflation could well carry to an
amount exceeding his original capital contribution and that this amount could
hardly be described, as it was in the lease, as a return for the landlord on
his capital expenditure. For my part, I do not find that result so surprising
that the parties must be taken not to have intended it. The evidence does not
go into the background as to grants and so forth which may have led to this
provision, but there is nothing improbable in a landlord’s stipulating not only
for a premium over the market rent but for that premium being linked to some
index, which in this case was provided by the value of the premises themselves.
There is the
additional difficulty that the construction for which Mr Furber contends,
certainly if shorn of the provisions of clause 4 and clause 2(c), would mean
that at the first rent review date the additional rent in practice disappeared.
It was the improbability that the parties could have intended such a result
which led the court in Guys ‘n’ Dolls Ltd v Sade Brothers Catering
Ltd (1983) 269 EG 129, [1984] 1 EGLR 103 to hold that the parties must by
necessary implication have intended a provision for additional rent to be
disregarded when the market value was being determined. Mr Furber distinguishes
that case on the grounds that the premium, the additional rent there reserved,
was to be a constant amount throughout the period of the lease. In this case
there is the provision in clause 5(iii) for its increase.
Mr Furber is able
to rely upon the remarks of Robert Goff LJ where he expressly says that if the
premium was going to be doubled at the next rent review date it would have been
appropriate for the valuer to take that fact into account. I am bound to say,
with all respect to Robert Goff LJ, that I find it difficult on the facts of
that case to see why that should be so. But be that as it may. I am concerned
only with the construction of this document, and given in particular the fact
that the measure of the future increase of the additional rent is dependent
upon the increase in the market rent under clause 5(ii), I am really left in no
doubt that the proper construction is to disregard the additional rent
altogether for the purposes of reviewing the basic rent.
Accordingly I
will make declarations in terms of para 1 of the summons, as to which there is
no issue before me, and also in terms of para 2*.
*Editor’s
note: Paras (1) and (2) of the summons read:
(1) A declaration that upon the true construction
of a Lease made the 12th January 1979 between Hensher (Furniture Trades) Ltd
(1), the Defendant (2), and Imperial Food Ltd (3) the obligations contained in
clauses 2(c) and 4(i) and (ii) of the said Lease have been discharged by
performance.
(2) A declaration that upon the true construction
of Clause 5(ii) of the said Lease and in the events which have happened it is
to be assumed, for the purposes of the rent review, that the premises comprised
in the said Lease are to be assumed to be let upon the terms and conditions
contained in the said Lease with the exception of
(i) the obligations contained in clause 2(c)
(ii) the obligations contained in clause 4(i) and
(ii)
(iii) the liability to pay the additional rent
referred to in clause 1 and clause 5(iii) of the said Lease.
The
plaintiffs were awarded the costs of the summons.
