Rent review clause in lease–Impact of the Counter-Inflation (Business Rents) Order 1973–"Fair rack rent . . . which would be payable"–Whether a rent representing the full annual value or the restricted rent payable under the temporary statutory provisions–Former construction held to be correct–Any possibility of future use of premises in breach of planning control to be excluded–Not function of court to attempt to direct surveyors how to value
This was an appeal
by the defendants, The Estates Gazette Ltd, from an order by Goulding J, who
had held on April 13 1976 that, on the true construction of a rent-review
clause in a lease of part of certain premises in Wardour Street, London W1,
under which the plaintiffs, Compton Group Ltd, were the lessees, and in the
light of the Counter-Inflation (Business Rents) Order 1973, the "fair rack
rent" which was to be payable under the rent-review clause was a figure
not exceeding the existing "frozen" rent stated in the lease. There
was a cross-appeal by the plaintiffs which raised inter alia the
question whether in determining the fair rack rent there should be excluded
from consideration the possibility of any future use being made of the premises
in breach of planning control.
John Colyer QC
and K Lewison (instructed by Lovell, White & King) appeared on behalf of
the appellants; Jeremiah Harman QC and Mark Potter (instructed by Courts &
Co) represented the respondents.
Giving the
first judgment at the invitation of Stephenson LJ, SIR JOHN PENNYCUICK said:
This is an appeal from an order made by Goulding J on April 13 1976. The
parties to the action are Compton Group Ltd, as plaintiff, and The Estates
Gazette Ltd, as defendant. The learned judge decided the case in favour of
Compton Group; the appeal is brought by Estates Gazette.
Summarily
Estates Gazette is the reversioner under an underlease of part of certain
premises, 147 to 149 Wardour Street, Westminster, dated October 26 1967.
Compton Group is the tenant under that underlease. The issue is as to the
amount of rent payable under a review provision taking effect in 1974 at a date
when the Counter-Inflation (Business Rents) Order 1973 was still in force.
At October 26
1967 Regalis Holdings Ltd was the leasehold owner of these premises. By the
underlease of that date, Regalis granted a 21-year lease of the premises to
Compton Group. I will set out the material provisions of that underlease. It is
made between Regalis Holdings Ltd, called the lessors, and Compton Group Ltd,
called the lessees. Then clause I reads: "In consideration of the rents
and covenants on the part of the lessees hereinafter reserved and contained . .
. the lessors hereby demise unto the lessees all those the premises"–and
it describes them–"together with" certain rights, and subject to a
certain exception and reservation:
to hold the
same unto the lessees from the 29th day of September 1967 for a term of 21
years next ensuing (determinable as hereinafter provided) yielding and paying
therefor unto the Lessors (a) during the first seven years of the said term the
yearly rent of five thousand five hundred pounds (£5,500) (b) during the next
seven years thereof the yearly rent of five thousand five hundred pounds
(£5,500) or if the Lessors shall serve written notice on the Lessee at least
four months prior to the expiration of the first seven years requiring the rent
payable for the demised premises to be reviewed such yearly rent as the
respective surveyors of the Lessors and the Lessees shall within two months
prior to the expiration of the first seven years agree in writing as being a
fair rack rent as between a willing Landlord and a willing Tenant which would
be payable for the demised premises if the same were then to be let as a whole
for a term of seven years with vacant possession upon the terms of this Lease mutatis
mutandis (save as regards rent). . . .
Then two
matters are to be disregarded and there follows a corresponding provision to
take effect at the expiration of the second seven-year period.
Then come the
words:
And in
default of agreement as aforesaid as to the yearly rent payable for the demised
premises at the times such rental reviews shall be made or required the said
rent shall be valued on the basis aforesaid by a surveyor to be appointed on
the application of the Lessors by the President for the time being of the Royal
Institution of Chartered Surveyors whose valuation shall be made as an expert
and not as an arbitrator and whose decision both as to rent and costs of such
valuation shall be final and binding upon the Lessors and the Lessees.
Then there is
a provision for further rent by reference to insurance premiums. Clause 2
reads:
The Lessees
for themselves and its assigns to the intent that the obligations may continue
throughout the term hereby granted hereby covenant with the Lessors as follows:
(1) To pay the said reserved rents . . . (9) Not to use or suffer or permit the
demised premises or any part thereof to be used otherwise than for the purpose
of the trade or business of the Lessees namely as offices and workrooms
appertaining to the production sale and distribution of cinema and television
films and for no other purpose or for any other trade or business of a kind or
kinds to be from time to time approved in writing by the Lessors and the
Superior Lessors such approval not to be unreasonably withheld which latter
consent the Lessors will at the request and cost of the Lessees use their best
endeavours to obtain.
Subclause
(19):
At all times
during the term hereby demised to comply in all respects with any licence
consent permission and conditions relating to the Town and Country Planning Act
1962 or any statutory modification or re-enactment thereof for the time being
in force and any Regulations or Orders made thereunder in respect of the
demised premises.
I say at this
stage that the live issue in this case turns wholly on the rent review
provision in clause 1 of the underlease. We were taken through the underlease,
very properly, in some detail, but I do not think any significant light is
thrown on the construction of clause 1 by any of the other terms in the
underlease.
Estates
Gazette is the assignee of the leasehold reversion under the underlease. I
shall henceforward refer to Estates Gazette as the lessor and Compton Group Ltd
as the lessee.
It will be
observed that the first review date under the underlease was September 29 1974.
At that date the Counter-Inflation (Business Rents) Order 1973 was in force.
That order had superseded a previous order made in 1972. I should read certain
clauses from the 1973 order:
(1) This order may be cited as the
Counter-Inflation (Business Rents) Order 1973 and shall come into operation on
April 29 1973.
(2) In this Order, unless the context otherwise
requires . . . "Business tenancy" means any tenancy where the
property comprised in the tenancy is or includes premises which are occupied by
the tenant and are so occupied for the purpose of a business carried on by him
or for those and other purposes but does not include a tenancy of or a right to
occupy land used for agriculture or a building lease.
. . .
"Standard rate" has the meaning assigned to that expression in
Article 4.
Then:
4(1) Subject to paragraph (2) of this article and
to articles 6, 7 and 8, the standard rate in relation to any premises means–(a)
where a business tenancy was subsisting on November 5 1972, the rate at which
rent was payable (whether or not then determined as to amount) under that
tenancy at that date.
Paragraph
10(1):
Subject to
paragraph (3) of this article, where a tenant has paid on account of rent any
amount which by virtue of this order he is not liable to pay, he shall be
entitled to recover that amount from the landlord who received it.
Finally,
paragraph 14:
Nothing in
this order shall render unlawful or invalid, any agreement, determination or
notice relating to a rent to which this order applies but, subject to the
provisions of this order, where any such agreement, determination or notice
provides for an increase of rent in respect of any part of the time during
which this order is in force, the amount of that increase shall not be payable
in respect of that period.
It is not in
dispute that the underlease created a business tenancy for the purpose of that
order.
On July 25
1974–that is, before the review date–the Business Rents (Transitional) Order
1974 was made, that order being due to come into force on November 1 and
providing for a limited relaxation of the freeze under the 1973 Order. I
mention in parenthesis that in the event the freeze was removed altogether by
an order made shortly afterwards.
The lessor
duly gave a review notice pursuant to the rent review provision in the
underlease. The lessee contends that on the proper construction of the review
provision, the "fair rack rent" mentioned in the review provision
must be treated as meaning the existing frozen rent of £5,500. The lessor
contends that at the same date the expression "fair rack rent" means
the market rental value at that date, disregarding the freeze. The surveyors of
the respective parties were unable to come to terms; indeed, the difference
between them was evidently a very wide one and the difference in money was very
considerable indeed.
On March 25
1975 the lessees issued the summons which commenced this action. The summons as
amended and reamended asks four questions. The main, and almost the only live,
question for the present purpose is no 3, which reads as follows: "Whether
a surveyor determining the fair rack rent of the premises . . . 3. ought to
take into account and apply the provisions of the Counter-Inflation (Business
Rents) Order 1973 (‘the freeze’) and in particular article 5 thereof so that
the yearly rent assessed as payable under the said rent review provision should
not exceed £5,500." I shall refer
later on shortly to the other questions raised by the summons.
The summons
came on for hearing before Goulding J in April 1976 and he gave his judgment on
April 13. Goulding J in his judgment made the procedural objection that the
summons was wholly concerned with giving directions to the surveyors, whose
function was to value the rent as experts, and that it was not appropriate for
the court to give any direction at all. He considered that the jurisdiction of
the court was being somewhat strained when the court was asked to make any
declaration as asked by the summons. I am to a considerable extent in agreement
with what Goulding J said there, but I think the construction of the review
provision is a question of law which must be determined by the court in order
that the surveyors may know what is the subject matter which they are required
to value. Goulding J, most properly, did hear and decide that question. I
should mention at this stage that I wholly agree with Goulding J that it is not
the function of the court to give the surveyors directions as to how they shall
make their valuation; that is to say, what factors to take into account and
what weight to give them.
After setting
out the history of the matter, referring to the arguments of counsel and citing
certain cases, Goulding J said this:
In
adjudicating on that submission [that was Mr Colyer’s submission, who
appeared for the lessor] I do not attach much importance to the word
"payable." I agree with Mr
Colyer that it is a word of flexible meaning and not one of cardinal
significance in the context of the rent review clause. But I cannot disregard
the much more important and technical term "fair rack rent." It is true that the exposition of the words
"rack rent" in Rawlance v Croydon Corporation [1952] 2
QB 803 is that of Romer LJ alone. The other Lord Justices, however, did not
disagree with it, nor does Mr Colyer suggest it is out of line with other
authorities. A figure estimated according to Mr Colyer’s formulation could not,
in my judgment, be described as a "fair rack rent" while the
"freeze" continued, for the tenant could not be required to pay it.
Then, lower
down, he says:
As I view the
case, the "freeze" legislation in truth made it impossible to apply
the rent review clause at the valuation date because no single figure could
then be specified as a fair rack rent for a term of seven years. Accordingly,
£5,500 falls to be compared with an unascertainable sum and £5,500 must
prevail. I reach this conclusion with regret, because the legislation seems to
have worked capriciously against the defendant.
The lessor
appeals from that decision; I need not read the grounds of appeal; nor need I
read the cross-appeal on the part of the lessee. I hope the contentions of both
parties will sufficiently appear in the course of this judgment. The main
question outstanding upon the summons turns upon the proper construction of the
review provision in the underlease, and in particular the two closely linked
expressions, "fair rack rent" and "payable" in that
provision. The review provision must be construed in the light of the
circumstances existing at its date, namely October 26 1967, although the review
under the provision falls, of course, to be carried out in the light of the
circumstances existing at the review date, September 29 1974. It is important
to bear in mind that in October 1967 there was no statutory restriction upon
business rents; nor is there any reason to suppose that the parties had a
possible restriction of that nature in mind.
Clause 1 of
the underlease contains the common form words of reddendum namely
"yielding and paying therefor"; that is, for the premises demised.
The rent expressed to be reserved by the reddendum is "(a) During the
first seven years . . . the yearly rent of £5,500; (b) during the next seven
years . . . the yearly rent of £5,500 or if the lessors shall serve written
notice" within the specified time, "requiring the rent payable for
the demised premises to be reviewed"
lessees shall . . . agree in writing as being a fair rack rent as between a
willing landlord and a willing tenant which would be payable for the demised
premises if the same were then to be let as a whole for a term of seven years
with vacant possession upon the terms of this lease mutatis mutandis." There follows certain qualifications which I
need not refer to again and there are similar provisions for a rent review
applicable for the remaining seven years; then there is the provision which I
have already read as to valuation by surveyors.
The effect of
the review provision is that, if the lessor requires a review, the surveyors
must make an estimate of the fair rack rent which would be payable upon a
hypothetical seven-year lease negotiated between a willing landlord and a
willing tenant at the review date, upon the same terms, mutatis mutandis,
as those contained in the lease itself and the rent so estimated will be
substituted for the initial rent of £5,500. In this provision the two critical
expressions for the present purpose are "fair rack rent" and
"payable for the demised premises."
These expressions are closely interconnected and of course both must be
construed in relation to each other and in the context of the provision as a
whole, and indeed of the lease as a whole. Taken together, the expressions
must, I think, denote either market value reserved or restricted rent
recoverable; together they have no other sensible meaning. I mention at this
stage that it is quite clear that the rack rent to be determined by the
surveyors as at the review date must be a rent which will continue to be
payable throughout the whole of the seven-year term; there is no question of
the rent going up or down after the first year during the remaining years of
the term. It is most unlikely that in the unrestricted market of 1966 the
parties would have had the second alternative, that is to say restricted rent
recoverable, in mind, but one must of course construe the provision as it is
drawn. It seems to me that the general tenor of the provision indicates the
first alternative; that is to say market rent reserved.
Then one turns
to examine more meticulously the precise words used in the provision. In my
judgment each of the two expressions is, according to its context, capable of
two meanings. So far as now relevant, the words "rack rent" may mean
either (a) a rent which represents the full annual value of the holding; or (b)
the maximum rent which is permitted by law. I think the former is the primary
meaning of the word in legal language–see Re Sawyer and Withall [1919] 2
Ch 333, in which Sargant J said at p 336: "Rack rent has been defined in 2
Blackstone’s Commentaries, page 43, as ‘only a rent of the full value of
the tenement or near it’; and in a judgment of Holmes LJ in Re Connolly to
Sheridan & Russell [1900] 1 IR1 at p 6, it is defined thus: ‘a rack
rent in legal language means a rent that represents the full annual value of the
holding.’" At p 338 Sargant J in
terms approved of Holmes LJ’s definition. However, the latter meaning has been
adopted by the courts, including the Court of Appeal, in certain recent cases
where the premises were subject to statutory control; see in particular the
case of Rawlance v Croydon Corporation [1952] 2 QB 803–I shall
turn to that case a little later.
So far as now
relevant, the word "payable" may mean either (a) "reserved"
or (b) "recoverable"; that needs no elaboration. In my judgment the
clue to the construction of the provision is to be found in the expression
"payable for the demised premises": that expression occurs twice in
the provision. It first occurs in the passage authorising the lessor to require
a review of the rent payable for the demised premises. Those words indicate a
review of the rent reserved by the formula "yielding and paying," the
purpose being to substitute a revised rent for £4,500 as the subject matter of
the reservation; one has not yet reached the hypothetical lease. It seems to me
that on that first occasion where the expression "payable for the demised
premises" occurs, it plainly means "reserved." Then the expression occurs again in the
passage describing the hypothetical lease. It is accepted by Mr Harman, who appeared
for the lessee, that the expression "payable for the demised
premises" must bear the same meaning in each of the two passages in which
it is found, and so it seems to me that the word "payable" must mean
"reserved" in the second passage, as it clearly does in the first.
Once it is accepted that "payable" in the description of the
hypothetical lease means "reserved" it is I think clear that the
expression "fair rack rent" in that description must mean rent
representing full annual value. Indeed, almost by definition a willing landlord
and a willing tenant could hardly be supposed to agree upon the reservation of
a rack rent in an unrestricted market in any other sense. This conclusion is
supported by the insertion of the word "fair," which itself suggests
the upshot of free negotiation rather than an amount statutorily imposed.
Mr Harman
contended that the clue to the construction of the provision is to be found in
the words "rack rent." He
contended that that word has now an established meaning as denoting the maximum
rent which is permitted by law. This contention he based entirely on the
decision of this court in the case of Rawlance v Croydon Corporation;
I will refer to that case in a little more detail. The headnote runs as
follows:
By section
9(1) of the Housing Act 1936 local authorities are empowered to serve upon the
person having control of a house which is officially reported to be in any
respect unfit for human habitation, a notice requiring him to execute such
works specified in the notice, as will render the house fit for human
habitation. By subsection (4) the person who receives the rack-rent of the
house or who would receive it if the house were let at a rack rent, shall be
deemed to be the person having control of the house, and the expression
"rack rent" means rent not less than two-thirds of the full net
annual value of the house. In ascertaining the full net annual value the fact
that the rent of the house is controlled by the Rent Restriction Acts is to be
taken into consideration, for they restrict the value of the house to the
landlord, and since the standard rent for such a house, plus statutory
increases, is the full amount which the landlord can receive from the tenant,
that rent is the full net annual value of the house within the meaning of
subsection (4). Thus, where a house was let at a controlled rent of £45 it was
held that the landlord was receiving a rack rent though that rent was less than
two-thirds of the net annual value of the house on the hypothesis that there
were no statutory restrictions on the rent and therefore the notice to repair
was properly served on him. Poplar Assessment Committee v Roberts
[1922] 2 AC 93 distinguished.
and the
reasoning of Atkin LJ in the Court of Appeal in the same case, applied.
It will be
observed that the decision was concerned with the meaning of the expression
"full net annual value" in the Housing Act; the term "rack
rent" being defined as a proportion of annual value. Romer LJ, however,
addressed himself in terms to rack rent in a passage on p 816, in these words:
When the
legislation was first introduced into our economic and social system, and it
may be for some considerable time thereafter, landlords still received a profit
rental although they were in the main precluded from increasing it. The general
trend of the legislation has long since resulted in landlords only receiving
rentals which are usually a great deal less than those received by owners of
equivalent but uncontrolled properties. Nevertheless this change cannot alter the
fact that landlords who are affected by the legislation are undoubtedly
receiving the full rent which their properties are capable of yielding, in the
sense that they are receiving the maximum which is permitted by the law. In
other words, they are receiving the "rack rents" of their premises.
The argument to the contrary overlooks the fact that value is not an absolute
but relative conception. The value of any particular thing can only be
ascertained in the light of circumstances which affect or control its
disposability.
Then he gives
an example, and goes on:
In my opinion
the legislature, in section 9, was applying itself to a factual and not to a
hypothetical position. If the standard rent is the greatest rent that is
obtainable in respect of any particular premises then it is the full rent of
those premises, the rack rent, notwithstanding that (and indeed because) the
owner is restricted from receiving the higher rent which the premises, if
uncontrolled, would command.
The judgment
of Romer LJ may strictly be obiter, or at least the reasoning of a
single member of the court, though I think it may well be–indeed, upon reading
their judgments, I feel pretty sure it is so–that the other two members of the
court would have agreed with what he said. I am not at all concerned to
criticise Romer LJ’s statement as made in the context of the case; it is
sufficient to say that the case appears to be wholly distinguishable from the
present case. There the court was concerned with a statutory provision
contained in the Housing Act; here the court is concerned with the construction
of an instrument inter partes. I am not persuaded that Romer LJ’s statement
should be regarded as containing a judicial definition of the expression
"rack-rent" wherever that expression occurs in an instrument inter
partes. In such an instrument one must determine its meaning according to
the proper construction of the instrument read in the light of its surrounding
circumstances.
Mr Harman
disclaimed reliance on any other case, but I think I ought for completeness to
mention the case of Newman v Dorrington Developments Ltd [1975] 1
WLR 1642. That case was cited at length by Mr Colyer. The position there was
that a three-year lease dated 1970, when the rent control over dwelling-houses
was in force, and had been in force for a long time and was likely to continue
to be in force for a long time, contained an option for renewal for a further
three years at a rent to be agreed or determined by an arbitrator as being the
yearly commercial rack rent at which the premises might reasonably be expected
to be let in the open market. Brightman J held that that expression denoted the
full rent which the law permitted to be recoverable, and he relied on the Rawlance
v Croydon Corporation case. That case is distinguishable on the very
important ground that the lease which contained the renewal provision was made
when the control under the Rent Act was in force. If the learned judge had
intended to go beyond that particular case and lay down a general rule as to
the construction of the expression rack rent, then I would not agree with him.
But I see no reason to suppose that he had such an intention.
The point of
construction is a relatively short one, and I have endeavoured to analyse the
construction of the provision to the best of my ability. I would add, upon this
main point, that the conclusion which I have reached produces a fair result. It
would be manifestly unfair that the lessor should be held to the 1974 rent for
seven years by reason of a transient and unforeseeable wage freeze. Indeed, I
think Mr Harman, very properly, did not suggest that the substantial merits of
the case were on his side.
In the course
of argument Mr Colyer developed a second contention of an extremely artificial
nature; that second contention is stated by Goulding J in his judgment in the
following terms and Mr Colyer accepted that that is an accurate statement of the
argument. The contention as stated by Goulding J runs as follows:
The
hypothetical letting on the valuation date is one with vacant possession, and
rent (under the hypothetical, as under the actual, lease) is to be paid in
advance. The Order of 1973 only limits rent under a business tenancy, and there
is no business tenancy (according to the definition in Article 2 of the Order)
unless the demised premises, or part of them, are occupied by the tenant for
business purposes.
Now, Mr
Colyer argues, there is at least a scintilla of time, and there may be a
substantial time, between the execution of the lease and the tenant’s entry
into occupation. In that interval the rent is not controlled because the
tenancy is not yet a business tenancy. Thus, the first instalment of rent in
advance is payable–even in Mr Harman’s sense of the word–though the tenant can
recover the whole or part of any excess that he has paid (over and above the
standard rate) as soon as he goes into occupation for business purposes.
I may say at
once that I regard this latter argument as an unsafe guide to the solution of
the problem. No doubt the interval postulated by Mr Colyer is in real life a
possible and even a probable one, but for the purpose of interpreting the
provisions of a purely hypothetical letting, I think the tenant’s occupation
for the purposes contemplated by those provisions should be treated as
co-extensive with the term granted by the landlord.
Having decided
the case in favour of the lessor on what I have called the main issue, I think
it unnecessary to devote time to considering this second contention. I shall
confine myself to saying that Goulding J, when he says that he regards the
argument as an "unsafe guide to the solution of the problem," is
making a very charitable assessment of the contention; Mr Harman gave what
appeared to me a conclusive answer to it and I will simply say that the
contention appears to me to be wholly without foundation.
It only
remains to refer to the other questions raised by the summons as amended and
re-amended. I think, for completeness, I should read these questions. They are
prefaced by the words, whether "a surveyor determining a fair rack rent of
the premises" and so on:
1 Ought inter alia to have regard to and
make allowance for the following considerations: (a) the restrictions upon use
of the premises contained in the lease generally and in particular that
contained in clause 2(9) of the said lease, that is to say, "as offices
and workrooms appertaining to the production sale and distribution of cinema
and television films"; (b) the current user of the premises in accordance
with the said clause 2(9); (c) the demise of the third and fourth floors of the
premises together as one unit to be used as workrooms and offices. 2 (a) Ought
to exclude from consideration the possibility of a change in the planning user
being permitted in respect of the third floor of the premises. (b) Ought to
exclude from consideration the possibility of any future use of the premises in
breach of planning control. (3 Is the main question.) 4 Further or
alternatively to 3 above, should exclude from consideration any increase as at
September 29 1974 in the level of market rents for leases of new buildings, or
of premises otherwise outside the restrictions on rent imposed by the freeze,
caused or attributable to the effects of the freeze.
All those
questions, it seems to me, concern, with the exception of 2(b), the manner in
which the surveyors ought to conduct their valuation; that is to say, what
particular circumstances and factors they should take into account in making
their valuation, and what weight, or absence of weight, they should give to
them. I think it is clear that the court is not concerned to give directions to
the surveyors upon those points, and I would accordingly not give any answer
upon questions 1, 2(a) and 4.
Clause 2(b),
which I think was raised at the hearing by reamendment, is in rather a
different position, and I will read it again: "Ought to exclude from
consideration the possibility of any future use of the premises in breach of
planning control." It is a
surprising question, and I find it difficult to suppose that a surveyor would
really take into consideration the possibility of use of the premises in breach
of planning control. However, Mr Colyer persisted until almost the end of the
hearing before us in seeking a decision to that effect. At the last moment he
withdrew that contention and agreed that a declaration should be made. I would
on that question, and only on that question, make the appropriate declaration,
namely that the surveyor determining the fair rack rent of the premises
"ought to exclude from consideration the possibility of any future use of
the premises in breach of planning control."
I would add,
in order to avoid any possible misunderstanding, that the surveyor, in making
his valuation of rack
of the freeze might have on the determination of that rent. It is for him to
say what weight he would attach to it.
I would allow
the appeal, set aside the order of Goulding J and make a declaration as
indicated upon question 2(b).
The only
remaining matter is that of costs, which I shall leave to be dealt with by my
Lord.
Agreeing,
BROWNE LJ said: I agree that the appeal should be allowed and that the
cross-appeal should also be allowed to the extent stated by Sir John
Pennycuick, only by making the declaration in the terms of question 2(b) as
asked in the originating summons. I agree entirely with the reasons given by
Sir John; I only add anything out of respect to Mr Harman’s argument, though I
shall merely be repeating in less happy language what Sir John has already
said.
I agree that
the decision of this appeal depends in the end on a fairly short point of
construction of this lease. In my view the word "rack rent" is not a
word which has a precise meaning which it always bears. My Lord has already
referred to what Sargant J, as he then was, said in the case of Re Sawyer
and Withall in [1919] 2 Ch 333. I shall not read again the passage which my
Lord had already read, on p 336, but I think it is also helpful to read a few
words from p 338, in which Sargant J said: ". . . I do not think that the
phrase ‘rack rent’ has any such absolutely definite and inflexible legal
meaning as has been contended for. In my judgment the definition of rack rent
by Holmes LJ in the case above referred to [Re Connolly], or indeed the
looser definition of Blackstone, is sufficiently definite for the
purposes of the order. . . ."
The meaning of
"rack rent" may I think vary according to the context in which it
appears, in this case in the rent review clause in the lease. The authorities
cited as to the meaning of "rack rent" in various statutory
provisions, to some of which my Lord has already referred, in which it is often
the subject of a special statutory definition, seem to me irrelevant for the
purposes of this appeal. Nor can I agree that it necessarily or always has the
meaning which Mr Harman suggests; that is, the maximum amount of rent which a
landlord could lawfully receive and which the tenant could be legally compelled
to pay. I think that the word "payable" is also a word of which the
meaning may vary according to its context.
The words
"paying" and "payable" are used three times in clause 1 of
this lease, the rental clause: (1) "Yielding and paying
therefor"–that is, for the demised premises–"unto the lessors (a)
during the first seven years of the said term the yearly rent of £5,500";
(2) " . . . if the lessors shall serve written notice on the lessees . . .
requiring the rent payable for the demised premises to be reviewed"; and
(3) " . . . such yearly rent as the respective surveyors . . . shall . . .
agree in writing as being the fair rack rent as between a willing landlord and
a willing tenant which would be payable for the demised premises" on the
assumptions specified.
Mr Harman
agreed that (1) is what he called the "traditional reservation
phrase," but he says that this throws no light on the meaning of "payable"
in (2) and (3). The question is whether "rent payable" in (2) and
"rent . . . payable" in (3) mean the rent reserved–that is, the rent
contracted to be paid–or the restricted rent which the landlord could in fact
lawfully receive and the tenant could be compelled to pay at September 29 1974,
having regard to the freeze. It seems to me plain that in (2) "the rent
payable" means the rent reserved; what is to be "reviewed" is
the yearly rent of £5,500 for the first seven years, which is the rent reserved
by the "yielding and paying" formula.
I find it
impossible to say that "rent . . . payable" in (3) has a different
meaning from "rent payable" in (2), and indeed Mr Harman conceded
that "payable" had the same meaning in both places. Further, if the
clause is read as a whole, it provides, leaving out the words which are
immaterial for this purpose: "Yielding and paying . . . (a) during the
first seven years . . . the yearly rent of £5,500 . . . (b) during the next
seven years . . . the yearly rent of £5,500 or if the lessors" (serve
notice requiring review) "such yearly rent as the respective surveyors . .
. shall . . . agree . . . whichever shall be the greater." The phrase "yielding and paying"
governs the rent to be determined on the review as well as the £5,500 for the
first seven years, and the rent determined on the review, like the original
£5,500, is in my view clearly the rent reserved. In this context "rack
rent" means in my view the full annual value which the parties contract
shall be paid–the rent reserved–even though temporarily the landlord cannot
lawfully receive, or the tenant be compelled to pay, that amount in full. It is
clear from article 14 of the 1973 order that there is nothing unlawful or
invalid about an agreement or determination fixing a rent above the limit laid
down by the order.
As to the
cross-appeal, Mr Colyer accepts that the court should decide the point raised
by question 3 of the originating summons, because that is telling the valuer
what to value, but not how to value it, and I agree with Sir John that this is
right. I have no doubt that it would be quite wrong for the court to answer
questions 1, 2(a) or 4 of the originating summons, which are essentially
questions within the province of the surveyor as an expert. To answer them
would be for the court to tell the expert valuer how to value. It should never
have been necessary to ask question 2(b), but as the defendants had raised it
in their contentions, the plaintiffs were entitled to ask it, and I agree that
we should make the declaration asked for under this subparagraph.
Agreeing with
both judgments, STEPHENSON LJ said: What is "a fair rack rent as between a
willing landlord and a willing tenant which would be payable for the demised
premises" on the hypothesis stated in clause 1(b) of this lease? That is the yearly rent which the surveyor,
valuing as an expert, will have to value, since the respective surveyors of the
lessors and the lessees have not agreed it. This valuation is a review during
the second seven years of the term of the yearly rent payable for the demised
premises during the first seven years of the term. The yearly rent which the
lessees yield and pay unto the lessors during the first seven years is £5,500.
In a period of inflation it can be stated with confidence that the rent review
clause was incorporated to enable the lessors to increase that yearly rent
during the second, and third, seven years. In my judgment, it has achieved its
purpose, notwithstanding that subsequent legislation has temporarily prevented
the lessors from recovering any excess over £5,500.
It is
submitted by Mr Harman for the lessees that "the rent payable for the
demised premises" is not the rent payable under the lease for which the
lessees are contractually liable to the lessors, but the rent lawfully payable
which the lessors are permitted by law to recover. There was no divergence
between the rent contractually payable and the rent lawfully payable during the
first seven years, even after the Counter-Inflation legislation came into
being. But (it is said) when the second seven years begin to run the
contractual review cannot increase the rent because that legislation prevents
the increase for the whole period of the second seven years, though it is
repealed before the end of them. This surprising result is said to follow from
giving the words "the rent payable" their natural meaning and to be
reinforced by describing the rent payable as "a fair rack rent," a
term of art which means the rent received or obtained by a landlord. Alternatively
that natural meaning of "rack rent" is said to be reinforced by that
natural meaning of "payable."
Like my Lords,
I entertain no doubt that "payable rent" may mean recoverable rent,
and that a legislative limit on rents, which exists at the time when a lease
providing for a revaluation of the rent is executed, may give such words in
that lease that meaning: see Newman v Dorrington Develop-
ments, which has already been cited. So also a rack rent may in a statutory
context mean the full rent which the landlord is permitted by the legislature
to receive: Rawlance v Croydon Corporation, also already cited.
But I have no doubt that the primary meaning of the words "the rent
payable" in a lease is the rent required by the terms of the lease to be
paid, and the primary meaning of the words "rack rent" is a rent
which represents approximately the full annual value of the demised premises: Re
Sawyer and Withall, which also has been cited.
Which of these
two meanings do these two sets of words bear in this lease? I have no doubt that in their context
"the rent payable for the demised premises" means the rent payable
for them under the lease and "a fair rack rent which would be payable for
the demised premises "means the full annual value of them. The latter
words, so far from reinforcing Mr Harman’s construction of the former, seem to
me to weaken it. At least it would be ironical if a term of art which meant
originally an excessive or extortionate rent should, when tempered by the
qualification "fair," be construed as preventing the parties even
from agreeing through their surveyors on an increase of rent which both might
consider to be fair. I do not believe that the introduction of these words has
this effect. "Payable" retains its first meaning wherever it occurs
in clause 1. It is not suggested that any other references in the lease to the
rent or rents help the true construction of clause 1.
I agree
accordingly that the appeal succeeds; that we should set the judgment aside and
that the surveyor who will have to value the rent will not be prevented by the
Counter-Inflation legislation from increasing the rent, although he should take
the legislation into account.
I also agree
that the cross-appeal succeeds to the extent proposed, and that we should grant
the declaration prayed in clause 2(b) of the respondents’ summons.
We are all
agreed that the appellants should have three-quarters of their costs, both here
and below.
Appeal allowed and order of Goulding J set aside;
respondents’ cross-appeal allowed to the extent of granting a declaration that
the surveyor determining the fair rack rent of the premises ought to exclude
from consideration the possibility of any future use of the premises in breach
of planning control; the respondents ordered to pay three-quarters of the
appellants’ costs in the Court of Appeal and below; leave to appeal to the
House of Lords refused.
