Landlord and tenant — Rent review clause in lease of commercial premises — Whether time of the essence of a stipulation setting a date for rent review notice — Review clause linked with clause giving lessee option to determine lease — Rent review notice not served before expiry of time-limit — Time assumed by lessors to be of the essence as these occurrences took place before decision of House of Lords in United Scientific Holdings Ltd v Burnley Borough
Council — Rent review notice served after House of Lords’ decision — Held that time was of the essence because of the interrelation between the rent review clause and the option to determine — Judgment for lessees
This was an
originating summons by which the plaintiffs, Coventry City Council, sought to
establish that a rent review notice served on the defendants, J Hepworth &
Sons Ltd, after the expiration of the time-limit laid down in the rent review
clause of a lease, was valid and effective, time not being of the essence of
the stipulation. The lease in question demised to the defendants parts of a
building in Coventry known as Broadgate House.
Anthony Cripps
QC and R Denman (instructed by the chief solicitor, Coventry City Council)
appeared on behalf of the plaintiffs; Terence Cullen QC and A Rimmer (instructed
by Biddle & Co) represented the defendants.
Giving
judgment, WARNER J said: This is an originating summons raising questions as to
the effect, in the events that have happened, of a rent review clause in a
lease, that clause being linked to a clause giving the lessee an option to
determine. The plaintiff is the Coventry City Council, which is, by virtue of
the Local Government Act 1972, the successor to the Lord Mayor, Aldermen and
Citizens of the City of Coventry. I shall call it ‘the corporation’. The
defendant is J Hepworth & Son Ltd, which I shall call ‘Hepworths’. It is
the parent company of a group of companies operating a substantial chain of
retail clothing shops throughout the country.
The lease was
granted on August 10 1953 by the Lord Mayor, Aldermen and Citizens of the City
of Coventry (therein called ‘the Corporation’) to Hepworths (therein called
‘the Tenants’). It is a lease of parts of a building in Coventry known as
Broadgate House, and it was granted for a term of a little over 421/2 years. By
clause 1 of the lease the term was expressed to begin on August 10 1953 and to
expire on March 31 1996 ‘unless previously determined as hereinafter provided’.
By the same clause the rent was expressed to be one shilling a year for an
initial period that does not now matter and, during the remainder of the term,
£8,500 a year ‘subject to any revision in accordance with clause 4(3) hereof’.
Clause 4(3) reads as follows:
(a) The Tenants may determine the term hereby
created on the Thirty-first day of March One thousand nine hundred and
seventy-five provided that they shall have given notice in writing to the
Corporation of their intention so to do on or before the Thirtieth day of
September One thousand nine hundred and seventy-four and shall at all times up
to the time of such determination pay the rent hereby reserved PROVIDED
that on such determination this lease and everything herein contained shall
cease and determine but without prejudice to the right of action of either
party against the other in respect of any antecedent claim or breach of
covenant
(b) On or before the Thirty-first day of December
One thousand nine hundred and seventy-three the Corporation may give to the
Tenants notice in writing of their desire to increase the rent hereby reserved
in respect of the period from the First day of April One thousand nine hundred
and seventy-five until the expiration of the term hereby created and if the
Tenants and the Corporation shall thereafter agree upon the amount of such
increased rent then the rent so agreed shall become payable hereunder in
respect of the said period in substitution for the rent hereby reserved (but
without prejudice to the provisions herein contained as to payment for services
or any of the other terms and conditions herein contained)
(c) If a notice having been served by the
Corporation pursuant to Clause 4(3)(b) aforesaid no agreement as therein
mentioned shall have been reached by the Twenty-eighth day of February One
thousand nine hundred and seventy-four then (without prejudice to the Tenants’
right or power of determination contained in the foregoing paragraph (a) of
this subclause) the question of the rent to be payable in respect of the period
from the First day of April One thousand nine hundred and seventy-five until
the expiration of the said term shall be determined by a single arbitrator in
case the parties can agree upon one within a period of one month next after the
said Twenty-eighth day of February One thousand nine hundred and seventy-four
otherwise to two arbitrators one to be appointed by each party on or before the
Thirtieth day of April One thousand nine hundred and seventy-four and in either
case in accordance with the Arbitration Act 1950 or any statutory enactment in
that behalf for the time being in force and (unless the term hereby created
shall be determined by the Tenants under the right or power contained in the
said foregoing paragraph (a) of this subclause) the rent determined by such
arbitration shall (subject as hereinafter mentioned) be substituted as
aforesaid in respect of the said period from the First day of April One
thousand nine hundred and seventy-five until the expiration of the said term
notwithstanding the fact that the result of such arbitration may not be known
until after the said First day of April One thousand nine hundred and
seventy-five PROVIDED THAT in the event of the rent so determined being less
than the rent hereby reserved then such rent shall not be substituted as
aforesaid and (unless the said term shall be determined by the Tenants as
aforesaid) the rent hereby reserved shall continue to be payable for the
remainder of the said term notwithstanding the result of such arbitration.
So that clause
laid down an elaborate and precise timetable. On or before December 31 1973 the
corporation might give to the tenants notice of its desire to increase the rent
in respect of the period from April 1 1975 until the expiration of the term
created by the lease, that is, roughly speaking, in respect of the second 21
years of it. I shall call that a ‘rent review notice’. If the corporation gave
such a notice and no agreement had been reached by February 28 1974 (that is,
within two months), there was to be a reference to arbitration. Clearly, what
was envisaged was that, in the two months between December 31 1973 and February
28 1974, there would be negotiations between the parties, which would either
produce agreement on a new rent or be abortive. Then, if the negotiations
proved to be abortive, the parties were given one month in which to agree upon
a single arbitrator. If they failed to do so, each must appoint an arbitrator.
The last day for doing that was April 30 1974. The provisions of sections 7 and
8 of the Arbitration Act 1950 would then apply. On or before September 30 1974
the tenants might give notice of their intention to determine the lease as from
March 31 1975, that is the day before any increase of rent might take effect.
At that time, that is on September 30 1974, assuming that the corporation had
served a rent review notice, the tenants might not know precisely what the new
rent was going to be. Clause 4(3)(c) expressly envisaged that the new rent to
be determined by arbitration might not be known before April 1 1975. None the
less, obviously, the tenants would, in the contemplation of clause 4(3), be in
a good position to know, by September 30 1974, at least roughly what the new
rent was likely to be. They would have been parties to the negotiations
envisaged by the clause and parties also to any subsequent arbitration. By
September 30 1974 any such arbitration would be well under way. So the tenants
would be aware of the upper and lower figures envisaged in the negotiations and
in the subsequent arbitration.
There is
before me a certain amount of evidence as to the circumstances in which the
lease was entered into, but I do not think that that evidence throws any light
on the construction of clause 4(3), though one aspect of it, which I shall
mention later, is relied upon by Mr Cripps, who appears for the corporation, in
that connection.
Owing to an
oversight by officers of the corporation, the date, December 31 1973, by which
a rent review notice should have been served was allowed to go by without such
a notice being served. That oversight appears to have been realised by March
1974. At that time, however, it was the generally accepted view of the law that
time was of the essence of rent review clauses. So the officers of the
corporation did not seek to do more than negotiate with Hepworths in an
endeavour to ‘claw back’ (as it was expressed to me) some of the loss
occasioned to the corporation by the oversight. That loss was substantial.
According to an affidavit of Mr Ingham, who is a Fellow of the Royal
Institution of Chartered Surveyors and Hepworths’ general manager for estates,
the open market rent of the demised property as at April 1 1975 would have been
of the order of £50,000 per annum. Mr Savage, who is also a Fellow of the Royal
Institution of Chartered Surveyors and is the deputy director of the
corporation’s ‘Homes & Property Services’, puts it at about £80,000 per
annum.
The
negotiations between the parties do not appear to have led to anything of
substance and in 1975 they fell into abeyance.
Then on March
23 1977 came the decisions of the House of Lords in United Scientific
Holdings Ltd v Burnley Borough Council and Cheapside Land
Development Co Ltd v Messels Service Co [1978] AC 904. These
decisions were first reported in The Times on March 24 1977 and
subsequently in the WLR and the All ER on April 9 and May 3 1977 respectively.
As a result of them the corporation’s officers reconsidered the possibility of
serving a late rent review notice.
Such a notice
was, in fact, contained in a letter written by the corporation to Hepworths on
August 4 1977. That letter is in these terms:
Dear Sirs,
Re: 44-46
Broadgate, Coventry
I hereby give
you notice of the Council’s desire to increase the rent of the above premises
in accordance with clause 4(3) of the lease dated August 10 1953, under which
you hold the same.
Hepworths
objected to that notice on the ground that it was out of time. Eventually, on
October 24 1979, the present originating summons was issued.
Two questions
were argued before me. The first was whether I should hold, on authority of the
two cases decided by the House of Lords on March 23 1977, that time was not of
the essence of the stipulation in clause 4(3)(b) of the lease that a rent
review notice should be given on or before December 31 1973. (I propose to
refer for short to those two cases as ‘the Cheapside case’, because the
second of them was, on its facts, more like the present case than the first).
The second question that was argued before me was whether, if time was not of
the essence in that stipulation, I should none the less decline to relieve the
corporation of the consequences of its having served the rent review notice
late, on the ground of unreasonable delay on its part or on the ground of such
delay combined with prejudice to Hepworths. That second question can arise
only, of course, if I decide the first question in favour of the corporation.
I will say at
once that I have come to the conclusion that Hepworths are entitled to succeed
on the first question, so the second question does not arise.
The general
principle laid down by the House of Lords in the Cheapside case was
stated by Lord Diplock in these terms (at p 930):
So upon the
question of principle which these two appeals were brought to settle, I would
hold that in the absence of any contra-indications in the express words of the
lease or in the interrelation of the rent review clause itself and other
clauses or in the surrounding circumstances the presumption is that the
time-table specified in a rent review clause for completion of the various
steps for determining the rent payable in respect of the period following the
review date is not of the essence of the contract.
The important
words there, for the purposes of this case, are:
in the
absence of any contra-indications . . . in the interrelation of the rent review
clause itself and other clauses.
That is
explained later in Lord Diplock’s speech when he comes to deal with two earlier
cases where rent review clauses were, as here, linked to clauses giving the
tenant the right to determine the lease. The relevant passage is at pp 935 and
936 and it reads as follows:
Samuel
Properties (Developments) Ltd v Hayek [1972]
1 WLR 1296 may be regarded as the origin of the dichotomy between ‘option’ on
the one hand and ‘obligation’ or ‘machinery’ on the other: the word option
having been used in the lease itself to describe the landlord’s right to
require the rent to be reviewed. It should be treated as overruled. There was a
complication in that the rent review clause was associated with a break clause
which gave to the tenant the right to surrender the residue of the term on any
rent review day by giving prior notice. The time-table in the rent review
clause for the determination of the new rent was obviously correlated with the
time by which the tenant had to give notice of his intention to surrender, so
as to enable him to make his decision whether or not to exercise that right in
the knowledge of what the new rent would be if he continued in possession after
the review date. Had that been all, as it had been in the previous and rightly
decided case of C Richards & Son Ltd v Karenita Ltd (1971)
221 EG 25, it would, I think, have been sufficient by necessary implication to
make time of the essence of the rent review clause because of its
inter-relation with the time by which notice was to be given under the break
clause — a time which, for reasons I have given earlier, I consider to be of
the essence of the contract.
In Samuel
Properties (Developments) Ltd v Hayek, however, the break clause
itself contained a provision under which the period during which the tenant
could exercise his right to surrender would be extended in the event of the
reviewed rent not having been ascertained within the time stipulated in the
rent review clause. So the implication that would otherwise have arisen from the
association of the rent review clause with a break clause was negatived.
Lord Dilhorne,
at p 940, expressed his agreement with what Lord Diplock had said about those
cases. Lord Simon of Glaisdale dealt with the matter at p 946. He said:
However,
where a rent review clause is associated with a true option (a ‘break’ clause,
for example), it is a strong indication that time is intended to be of the
essence of the rent review clause — if not absolutely, at least to the extent
that the tenant will reasonably expect to know what new rent he will have to
pay before the time comes for him to elect whether to terminate or renew the
tenancy (cf Samuel Properties (Developments) Ltd v Hayek [1972] 1
WLR 1296). That situation stands in significant contrast with those in the
instant appeals.
Lord Salmon
dealt with the Hayek case at pp 951 and 952. He said:
In Samuel
Properties (Developments) Ltd v Hayek the rent revision clause which
laid down the procedure for having the open market rent value ascertained at
the end of the seventh and fourteenth years of the term and the rent then being
raised to that level, was dressed up to look like an option. Indeed the word
‘option’ appeared in the clause. But, for the reasons I have already stated, I
do not think that it was a real option in the sense that any option to renew or
determine a lease is an option. The clause required the landlord to give notice
to the tenants six months prior to the expiry of the seventh year if he
required the rent to be raised to the open market rental value. If within one
month of the notice, the parties failed to agree the open market rental value
this figure was to be determined by a valuer appointed by the President of the
Royal Institution of Chartered Surveyors. But the date by which this determination
was to be made was not specified. The landlord gave his notice about one month
late. The Court of Appeal held that time was of the essence and that the
landlord was precluded fron, putting the rent revision clause into operation.
Clause 5 of the lease so far as relevant gave the tenant a true option to
determine the lease at the end of the seventh year of the term by giving the
landlords at least one quarter’s notice in writing. This break clause was
obviously inserted to protect the tenant should he not wish to pay the
increased rent during the next seven year period of the term.
The proviso
to the break clause strongly suggests however that the time provisions relating
to rent revision were not of the essence of the contract. It reads:
‘Provided
always that if one quarter before the expiration of the first seven . . . years
of the term . . . the reviewed rent . . . shall not have been reviewed then the
right of the lessee to terminate as herein provided shall be extended until the
expiration of one month from the date of the notification of the reviewed rent
to the lessee.’
There is
nothing in the proviso nor in any other part of the lease to suggest that the
new rent may not be determined by the valuer and notification of this rent may
not reach the lessee until after the expiration of the first seven year period.
In my view Samuel Properties (Developments) Ltd v Hayek [1972] 1
WLR 1296 was wrongly decided and should be overruled.
It appears to
me implicit in that passage that if the lease in the Hayek case had not
contained the proviso extending the lessee’s time for giving notice to
terminate the lease, Lord Salmon, like Lord Diplock, would have held that the
time provisions relating to rent revision in that case were of the essence of
the contract.
Lastly, Lord
Fraser dealt with the matter at pp 962 to 963. He said:
For these
reasons I am of the opinion that the equitable rule against treating time as of
the essence of a contract is applicable to rent review clauses unless there is
some special reason for excluding its application to a particular clause. The
rule would of course be excluded if the review clause expressly stated that
time was to be of the essence. It would also be excluded if the context clearly
indicated that that was the intention of the parties — as for instance where
the tenant had a right to break the lease by notice given by a specified date
which was later than the last date for serving the landlord’s trigger notice.
The tenant’s notice to terminate the contract would be one where the time limit
was mandatory, and the necessary implication is that the time limit for giving
the landlords notice of review must also be mandatory. An example of such
interlocked provisions is to be found in C Richards & Son Ltd v Karenita
Ltd (1971) 221 EG 25 where the decision that time was of the essence of the
landlord’s notice could be supported on this ground, although not, as I think,
on the ground on which it was actually rested. The case of Samuel Properties
(Developments) Ltd v Hayek [1972] 1 WLR 1296 is not in this class
because, although there was a tenant’s break clause, the time allowed to the
tenant for giving notice was automatically extended until one month after the
notification of the reviewed rent to the lessee.
My attention
was also drawn to a recent, unreported, decision of the Court of Appeal in
Abdul Jabbar Al Saloom v Shirley James Travel Service Ltd on May
14 1981* where, on the strength of what
by Lord Fraser, it was held that time was of the essence of a rent review
provision which was in the same clause as a tenant’s option to break. The
decision there was founded, however, on the wording of the relevant clause and
I do not think that, for present purposes, it carries the matter further than
the dicta in the House of Lords.
*Since
reported in full at (1981) 259 EG 420, [1981] 2 EGLR 96.
Mr Cripps
invited me to hold that those dicta were inapplicable in the present case. He
submitted that I must look at the circumstances of the case as a whole and that
there were a number of features of it from which the inference should be drawn
that the parties, when they negotiated the terms of the lease in 1953, cannot
have intended the stipulation as to time in clause 4(3)(b) to be of the essence
of the contract between them.
Mr Cripps
pointed in particular to the following features of the lease:
(1) It was a lease for over 42 years, with only
one break at the 21st year. This meant that the landlord’s omission to serve a
rent review notice in due time, if held to be fatal, could have catastrophic
results for the landlord and confer a substantial windfall on the tenant.
(2) The parties envisaged that Hepworths would,
from the start, underlet substantial parts of the demised property. That is
shown by a provision in the lease itself (clause 2(12)) and also by the
evidence. The case was not one, therefore, where the tenant was to occupy the
whole property for the purposes of his own business, but one where he could
cushion himself, to some extent, against the effect of a rise in his own rent
by raising the rents of his underlessees.
(3) Clause 4(3) of the lease envisaged the lapse
of a period of nine months between the date for service of the rent review
notice (December 31 1973) and the date of service of any notice by the tenant
determining the term (September 30 1974). That gave the tenant ample time, if
he wished to, to serve on the landlord a notice making time of the essence of
the contract.
(4) The provision in clause 4(3)(c) as to what
was to happen if the result of the arbitration was not known by April 1 1975
showed that the parties envisaged that the tenant might not know the amount of
the revised rent by September 30 1974.
Mr Cripps
submitted that it was not in every case where a rent review clause was
associated with a tenant’s option to break that time was of the essence of the
rent review clause. That is manifestly right, as the House of Lords’ treatment
of the Hayek case illustrates. I do not think, however, that the
features of the present case to which Mr Cripps pointed are sufficient to
negative the presumption that, where a rent review clause is linked to a
tenant’s option to break, time is of the essence of the rent review clause. The
length of the term and the fact that the lease provided for only one break at
21 years are, I think, sufficiently explained by the circimstance that it was granted
in 1953, at a time when inflation was at a much lower rate than now. The fact
that substantial subletting by Hepworths was envisaged seems to me neutral. The
period of nine months between December 31 1973 and September 30 1974 was, I
think, intended, not to give the tenant an opportunity to serve a notice making
time of the essence, but to enable any necessary arbitration to have been
completed by September 30 1974 or at least to be sufficiently advanced by that
date to give the tenant a good idea of what the revised rent was likely to be.
Lastly, I do not think that it matters that there could be no certainty that
the tenant would know the precise amount of the revised rent by that date. So
far as the report of C Richards & Son Ltd v Karenita Ltd shows,
there was no such certainty in that case either.
Mr Cullen, who
appeared for Hepworths, reminded me of the paragraph in Lord Bridge’s speech in
The Chikuma [1981] 1 WLR 321 at p 322, where he said:
It has often
been pointed out that shipowners and charterers bargain at arm’s length.
Neither class has such a preponderance of bargaining power as to be in a
position to oppress the other. They should be in a position to look after
themselves by contracting only on terms which are acceptable to them. Where, as
here, they embody in their contracts common form clauses, it is, to my mind, of
overriding importance that their meaning and legal effect should be certain and
well understood. The ideal at which the courts should aim, in construing such
clauses, is to produce a result, such that in any given situation both parties
seeking legal advice as to their rights and obligations can expect the same
clear and confident answer from their advisers and neither will be tempted to
embark on long and expensive litigation in the belief that victory depends on
winning the sympathy of the court. This ideal may never be fully attainable,
but we shall certainly never even approximate to it unless we strive to follow
clear and consistent principles and steadfastly refuse to be blown off course
by the supposed merits of individual cases.
That appears to
me, if I may say so, entirely apposite in the present type of case also.
I accordingly
hold that this summons must be dismissed.
