Landlord and tenant — Construction of rent review clause in lease of office block — The issue was whether the hypothetical lease assumed for the purpose of determining the market
This was an
originating summons by which the plaintiff lessee, Datastream International
Ltd, sought a declaration as to the correct construction of the rent review
clause in the lease of an office block called Monmouth House, in City Road,
Islington, London EC1, of which the defendant, Oakeep Ltd, was the present lessor.
Michael Barnes
QC and Kim Lewison (instructed by Herbert Smith & Co) appeared on behalf of
the plaintiff; Roger Ellis (instructed by Julian Holy) represented the
defendant.
Giving
judgment, WARNER J said: This is an originating summons raising a question of
construction of a rent review clause in a lease. The lease is dated September
12 1980. It is a lease of a building — an office block I understand — called
Monmouth House, in City Road, Islington, for a term of 25 1/4 years from March
25 1980. The plaintiff is the lessee. The defendant is the successor in title
to the lessors.
The provisions
of the lease as to rent are these. In clause 2 one finds the words:
Yielding and
paying therefore unto the Lessors during the said term the rents reserved and
payable as set out in the Second Schedule hereto payment thereof to be made by
equal quarterly payments in advance on the usual quarter days in every year.
The second
schedule is headed ‘Rents’. Para 1 of it, which has the side heading
‘Reddendum’, provides:
The rents
reserved and payable are as follows: (1) From the 25th day of March 1980 until
the 3rd day of December 1980 a peppercorn (2) From the 4th day of December 1980
until the 23rd day of June 1985 the clear yearly rent of £360,000 (3) During
the next five-year period of the term either the said clear yearly rent of
£360,000 or a yearly sum equal to the market rental value of the said property
at the expiration of the immediately preceding period whichever is the greater
(4) During each of the several subsequent consecutive five-year periods of the
said term (and during the remainder thereof) either the clear yearly rent
payable during the immediately preceding five-year period or a yearly sum equal
to the market rental value of the said property at the expiration of the said
preceding five-year period whichever in each case is the greater.
Para 2
provides:
For the
purpose of the provisions of this Schedule the expression ‘market rental value’
shall mean the rent at which the said property is worth to be let in the open
market as a whole at the best rent reasonably obtainable without taking any
fine or premium and on the following bases: (1) Subject to the provisions of
this Lease (other than the amount of rent hereby reserved) for a term equal to
the residue then unexpired of the term granted by this Lease but having regard
to the Lessee’s rights under the Landlord and Tenant Act 1954.
There follow
subparas (2), (3) and (4) which prescribe further assumptions that are to be
made, such as that at the commencement of the relevant period the property is
fit for immediate occupation and business use, that the covenants contained in
the lease have been fully performed and observed and that the property is used
for purposes specified in the lease. Then there is a provision for three
matters to be disregarded. They are (1) any effect on rent of the fact that the
lessee has been in occupation of the property, (2) any goodwill attached to the
property by reason of the carrying on there of the business of the lessee or its
predecessors in title in that business and (3) any increase in the market
rental value of the property attributable to improvements carried out at the
lessee’s expense. Para 3 confers a special option on the lessors which is not
relevant for present purposes. Para 4 provides the machinery for the fixing of
the revised rent. It is machinery of the sort that one normally finds in rent
review clauses: here, in the absence of agreement between lessors and lessee
the revised rent is to be determined at the option of the lessors either by an
arbitrator or by an independent chartered surveyor acting as an expert and not
as an arbitrator. Finally para 5 lays down what payments the lessors are to
make if the revised rent is not ascertained at or prior to the relevant review
date.
So the first
rent review date was June 23 of this year and it is in relation to that that
these proceedings have been taken. The parties have not yet gone to arbitration
or to the independent surveyor. Before they do they want the court to decide
the question of construction that arises.
That question
is whether the hypothetical lease by reference to the terms of which ‘the
market rental value’ of the property at the review date is to be fixed is or is
not to include the provisions for rent reviews themselves that are contained in
the actual lease. The answer to that question turns on the meaning of the words
in brackets in para 2(1) of the Second Schedule, that is to say the words
‘other than the amount of rent hereby reserved’. The defendant contends that
the effect of those words is to exclude the provisions for rent reviews from
the hypothetical lease, with the result that the lessee must pay a rent
enhanced by the fact that, upon this hypothesis, he will be enjoying the
privilege of occupying the property for 20 years at that rent. The plaintiff on
the other hand contends that the words in brackets are not apt to exclude from
the hypothetical lease the provisions for rent review in the actual lease and
that therefore it gets the benefit of a lower rent because account must be
taken of the fact that in five years’ time there will be another rent review
and so on.
I have no
doubt that if the question were free from authority I would decide it in favour
of the plaintiff. The crux is really this. Does the word ‘amount’ in the
parenthesis mean only a fixed amount or does it include also any amount to be
ascertained by means of a formula?
Obviously if it includes only a fixed amount it includes for the purposes
of the present review only the peppercorn (if one can call that an amount at
all) and the £360,000. If it can include an amount to be ascertained by the
application of a formula then it will also include so far as para 1(3) is
concerned the ‘yearly sum equal to the market rental value of the said property
at the expiration of the immediately preceding period’ and so far as para 1(4)
is concerned the ‘yearly sum equal to the market rental value of the said
property at the expiration of the said preceding five-year period’. Of course,
on the narrow construction, according to which ‘amount’ means only a fixed
amount, at the next rent review the amount fixed at the present rent review
would fall to be treated as an ‘amount’. Faced with that choice as to the
meaning of the word ‘amount’, I prefer the meaning that does not produce an
unreasonable and unfair result, that is to say does not require the lessee to
pay over the next five years for a benefit it will not be enjoying, namely the
benefit of a lease with no rent review clause in it.
But the matter
is not free from authority. In Bernstein and Reynolds’ Handbook of Rent
Review at p S11 of the August 1984 service, there is a paragraph headed
‘Whether there are reviews during the hypothetical term’ in these terms:
Most modern
rent review clauses require the valuer to assume that there is to be a
hypothetical letting on the review date, on the same terms and conditions as
those contained in the actual lease. However, the actual amount of the rent
payable immediately prior to the review date is virtually always expressly
excluded from the terms of the hypothetical lease. Even if there is no express
provision, it would almost certainly be implied since otherwise the review
would be unworkable. It is also usual to provide, in cases where the hypothetical
term is longer than the relevant review period, that the hypothetical lease is
to contain a provision for review according to the same pattern as the actual
lease. This is probably the effect of the usual stipulation that the terms of
the hypothetical letting should be the same as the actual lease ‘other than as
to rent’ or the other common variant ‘other than as to the amount of rent’. It
is, of course, open to the parties expressly to provide that there are to be
assumed to be no reviews in the hypothetical lease. This was held to be the
effect of the clear words of the leases considered by the court in Pugh
v Smiths Industries Ltd (1982), and French Kier Property Investments
v Marconi Co Ltd (1982).
So I start
with this, that the provision which I find in the present lease is of a fairly
common kind and that, according to the learned authors of that work, it
probably has the effect of leaving the rent review clause to be included in the
provisions of the hypothetical lease.
Of the decided
cases to which I must refer, the first chronologically is Pugh v Smiths
Industries Ltd. It is reported at (1982) 264 Estates Gazette 823 and
it is a decision of Goulding J. In that case the relevant words were in a subclause
of the rent review clause defining what was there called ‘the full yearly open
market rent’. That subclause was in these terms:
The full
yearly open market rent of the property for the purposes of this clause is that
rent (exclusive of rates and other payments (if any) to be made by the lessee
by virtue of this subunderlease) which would be obtainable upon the day three
months before the relevant material date if this subunderlease was not then
subsisting upon a letting with vacant possession of the property for the
residue of the term hereby granted and on the basis that the lessee would be
obliged to perform and observe the covenants and conditions on the part of the
lessee contained herein but excluding therefrom the provisions of this clause
and disregarding those matters referred to in section 34 of the Landlord and
Tenant Act 1954 as amended by section 1 of the Law of Property Act 1969.
The relevant
words there ‘excluding therefrom the provisions of this clause’ unambiguously
excluded all the provisions of the rent review clause from the hypothetical
lease. Goulding J found it easy to see that the lessees felt that to be unfair,
but he held the meaning of the words to be quite plain. I do not see how he
could have come to any other conclusion, but those words were very different
from the relevant words in the present case.
The next case
chronologically is Lister Locks Ltd v T E I Pension Trust Ltd,
which is reported in Estates Gazette immediately after Pugh’s
case.* It is there stated to have been a
decision of ‘His Honour Judge Wheeler’, but that is a mistake. It was a
decision of Mr Michael Wheeler QC, sitting as a deputy High Court judge. In the
Lister Locks case the lease provided for a ‘basic initial rent’ of
£14,982 per annum and an ‘extra initial rent’ of £1,680 per annum. Those rents
were payable for the first five years of the term. For every subsequent
five-year period the ‘basic initial rent’ was to be replaced by the ‘fair rack
rental market value’ and the ‘extra initial rent’ was to be replaced by the
‘extra reviewed rent’. The definition of the ‘fair rack rental market value’
was, so far as material, as follows:
The fair rack
rental market value of the demised premises shall subject as hereinafter
provided be the amount which shall be agreed between the landlord and the
tenant (or in default of agreement the amount which shall be determined by
assessment as hereinafter provided) to be the best rent at which the premises
might reasonably be expected to be let for a term of years equivalent to the
then unexpired residue of the term hereby granted in the open market by a
willing landlord to a willing tenant and subject to similar covenants and
conditions (other than the amount of the rent) to those contained in this
lease, there being disregarded any of the matters which the court is required
to disregard under the provisions of section 34 of the Landlord and Tenant Act
1954 as amended by section 1 of the Law of Property Act 1969.
*Editor’s
note: The reference is (1981) 264 EG 827, [1982] 2 EGLR 124.
The provision
defining the ‘extra review rent’ was in these terms:
Upon such
fair rack rental market value being agreed or certified as aforesaid the extra
reviewed rent for every subsequent period of five years shall be ascertained in
the manner following, that is to say by multiplying the extra initial rent by
the said fair rack rental market value and dividing the result by the basic
initial rent.
In other words,
the extra initial rent was to increase in the same proportion as the basic
initial rent.
There was no
suggestion on the part of the landlord that the words ‘other than the amount of
the rent’ in the parentheses in the definition of ‘the fair rack rental market
value’ had the effect of excluding the entire rent review clause itself from
the hypothetical lease. The contention of the landlord with which Mr Wheeler
had to deal was that those words excluded from the hypothetical lease the
obligation to pay the ‘extra review rent’. As to that he said:
I cannot
accept this proposition. In my view, the words quoted are merely conveyancing
overcaution. ‘Amount’, in my judgment, means what it says, ie initially £14,892
(the ‘basic initial rent’) and £1,680 (the ‘extra initial rent’).
So Mr Wheeler
took the word ‘amount’ in that case to mean the fixed amounts, the amounts as
to which figures were available. That authority, so far as it goes, is in the
plaintiff’s favour in the present case.
The next
authority is also in the plaintiff’s favour. That is the judgment of Vinelott J
in Pearl Assurance plc v Shaw (1984) 274 EG 490*. That was again
a case about a rent review clause, but the ambiguity there arose in relation to
a provision concerning user. The passage in Vinelott J’s judgment that is relevant
to this case is as follows:
The purpose
of a rent review clause in general is to enable a landlord to bring the rent
originally negotiated up to date and to substitute for it the rent that the
parties might have been expected to agree if the rent had been negotiated on
the same basis as before, but in the light of market conditions prevailing at
the time of the review and, of course, for the shorter term then unexpired.
Looked at in that light I think the court should lean against a construction
which requires the rent fixed on a revision to be ascertained without regard to
the use which, under the lease, the tenant is to be entitled to make of the
demised premises, unless, of course, that intention is spelt out in reasonably
clear terms. Otherwise, the effect of the review might be to impose on a tenant
an obligation to pay a rent appropriate to a very profitable use, but one very
obnoxious to the landlord, and one which he had been careful to forbid in the
strongest possible terms — the effect, that is, of making the tenant pay for
something which he not only has not got, but which he cannot require the
landlord to give him.
*Editor’s
note: Also reported at [1985] 1 EGLR 92.
Transferring
that reasoning from a provision about user to the rent review clause itself, it
suggests that I should lean against a construction which requires the tenant to
pay for something which he has not got, that is a lease which is free from any
rent review clause.
The next
authority is the decision of Walton J in National Westminster Bank plc v
Arthur Young McClelland Moores & Co (1984) 273 EG 402† , the
judgment in which was delivered exactly one month after the judgment of
Vinelott J in the Pearl Assurance case. That, unlike the last two
authorities I have referred to, is in favour of the defendant, firstly because
Walton J adopted an approach which was different from that of Vinelott J.
Instead of leaning against a construction that would require a tenant to pay
for something he was not to get, Walton J said this:
The first and
I think probably the main question which arises is whether, when the arbitrator
is deciding what is to be the market rent for the next rent period, he is to do
that upon the basis that the lease contains (as, of course, we know it does in
fact contain) a rent review clause or whether, on the other hand, he is to fix
the fair market rent on the basis that there is no such clause in the lease. I
do not think that there is a presumption one way or the other. I think that in
every case that must depend upon the precise terms of the lease, because it
must be very much borne in mind that there is no such thing as a fair market
rent of any premises in the abstract. There is only a fair market rent upon a set
of abstractions which may be actual, may be hypothetical and in most cases
under rent reviews are a mixture of the one and the other. For example, here we
have that the premises are expected to be let with vacant possession, which is,
of course, something which you know as a fact just is not the case because the
tenants are actually in possession and are certainly not just going to move out
for the purpose of a rent review. So the attempt by Mr Morritt to poison my
mind in advance to achieve the lower of the two values by defining the fair
market rent as something which favours the tenant, as in fact he was attempting
to do, I do not think impresses me very much.
† Editor’s
note: Also reported at [1985] 1 EGLR 61.
The words of
the provision that Walton J had to construe were:
‘Fair Market
Rent’ means such amount as shall represent a yearly rent at which the demised
premises might reasonably be expected to be let at the Relevant Review Date in
the open market by a landlord to a tenant without a premium with vacant
possession and subject to the provisions of this Subunderlease other than the
rent hereby reserved there being disregarded any effect on rent of any of the
matters set out in paragraphs (a), (b) or (c) of section 34 of the Landlord and
Tenant Act 1954 (as amended).
Of that
provision Walton J said:
The words
here are unusual and seem to me to be very odd, because, repeating the relevant
ones, they are ‘to a tenant without a premium with vacant possession and
subject to the provisions of this Subunderlease other than the rent hereby
reserved . . .’. Quite clearly, something is missing from that phrase and why I
say something is missing is because it starts off ‘subject to the provisions of
this Subunderlease other than the rent . . .’. Quite clearly, ‘the rent’ is not
a provision. The rent is something which is payable under, or reservable by, or
covenanted to be paid as a result of, a provision in the lease and, therefore,
something has got to be put in. The simplest (and it may in fact be the most
correct) is to put in the words ‘other than the provisions relating to the rent
hereby reserved’ and if that were put in, as Mr Morritt quite correctly and
forcefully pointed out, one would have some rather odd suppositions. One might
have the supposition that there is no direct covenant to pay the rent. One
might have the supposition that there was no power of reentry for non-payment
of the rent. Be it so, if those have any effect on the
simpler to think that the missing words are something along the lines of
‘provisions relating to the amount of rent payable’. But, whatever it is, it
seems to me quite clear that, however unfortunate it may be and whether it was
intended or not, in this particular lease the fair market rent is to be
ascertained upon the somewhat curious assumption that there is no rent revision
clause contained in the hypothetical terms which the arbitrator is considering.
In the present case, that is stated by the arbitrator, who told us what the
effect of that would be. It would be very considerable because it would put up
a not inconsiderable rent by no less than 20.5%; but it is a simple point and
it seems to me an inescapable one in view of the way the definition of ‘fair
market rent’ is drawn. Mr Morritt did try to draw a distinction between ‘rent’
and ‘rents’ throughout the lease, but it does not seem to me that such a
distinction in fact exists and I do not think that even if it did exist, it
would really assist me in construing what is a very simple clause defining what
is to be taken for this purpose as the fair market rent.
Mr Ellis, on
behalf of the defendant, invites me to do two things. The first is to adopt the
approach of Walton J rather than that of Vinelott J. However, as I have already
indicated, my own preference is for the approach of Vinelott J. Second, Mr
Ellis invites me to follow Walton J’s example in inserting words into the
relevant clause in the lease. He submits that the words in the present lease
‘subject to the provisions of this lease (other than the amount of rent hereby
reserved)’ are grammatically as unsatisfactory as were the words in the lease
considered by Walton J and that I should therefore insert into the parenthesis
the words ‘provisions relating to’, so that it would read ‘other than
provisions relating to the amount of rent hereby reserved’. That would clearly,
says Mr Ellis, exclude the provisions of the rent review clause itself. I do
not think it would, because the crux would still be the meaning of the word
‘amount’. At all events, I do not feel the need to insert words into this
clause in the same way that Walton J felt a need to insert words in the clause
that he was considering. It seems to me that ‘subject to the provisions of this
lease (other than the amount of rent hereby reserved)’ is perfectly
intelligible English and that it would be too pernickety to say that the amount
of rent is not a provision of the lease. It is obviously something provided for
by the lease. From there to say that it may be referred to as a provision of
the lease is not a difficult step, and I decline to alter, or possibly to
alter, the meaning of this clause by inserting words in it that there is no
compelling reason for inserting.
I come to the
last of the authorities in this series, which is the judgment of Peter Gibson J
delivered on October 18 1985 in the case of Equity & Law Life Assurance
Society plc v Bodfield Ltd, of which I have been supplied with a
transcript.* That was a rather special
case because, in the rent review clause in the lease there in question, there
was an elaborate provision, clause 4(2), the effect of which was to limit the
rent payable following any rent review to the greater of £28,500 and 85% of the
‘net rental value’ as ascertained on the rent review. There was no indication
at all as to the reason why that provision had been inserted. The reason was
unknown.
*Editor’s
note: Reported at [1985] 2 EGLR 144; (1985) 276 EG 1157.
The presence
of clause 4(2) had two consequences as regards the construction of clause 4(4),
which was the critical provision. Clause 4(4) was, so far as material, in these
terms:
The ‘net
rental value’ means the best rent which the premises hereby demised might
reasonably be expected to fetch on the open market upon the following
assumptions, that is to say . . . that they are vacant and to let as a whole
without a premium or other capital payment for the residue unexpired of the
term hereby granted upon the terms of this lease other than as to duration and
rent.
So the crucial
phrase was ‘the terms of this lease other than as to . . . rent’.
The first
consequence of the existence of clause 4(2) was that that phrase had to be
given a meaning such that it excluded clause 4(2) itself from the hypothetical
lease. The phrase could not therefore be construed as excluding from that lease
only those terms of the actual lease that set out in figures the amounts of
rents payable. The second consequence was to render inapplicable any general
rule that the court should lean against a construction that would require a
tenant to pay for something he was not to have. Peter Gibson J, after pointing
out that the discount given to the tenant by clause 4(2) might or might not
have been intended to compensate the tenant for not including the rent review
clause in the terms of the hypothetical letting, went on to say: ‘In the
circumstances the only safe course is to construe the actual words used without
regard to such general considerations as those advanced by Mr Barnes.’ (I infer that the considerations advanced by
Mr Barnes in that case were similar to those that he advanced on behalf of the
plaintiff in the present case.)
Earlier in his
judgment Peter Gibson J had referred, with evident approval, to the passage in
the judgment of Walton J in the National Westminster Bank case where he
had said: ‘I do not think that there is a presumption one way or the other. I
think that in every case that must depend upon the precise terms of the
lease.’ I do not know whether Peter
Gibson J had had cited to him the judgment of Vinelott J in the Pearl
Assurance case. At all events Peter Gibson J expressed his reasons for
reaching the conclusion that he did in these terms:
I turn to Mr
Lewison’s submission. He says that if one faces the question: ‘What are the
terms of the lease as to rent?’, the answer that would naturally be given would
not be limited to the terms reserving the fixed quantified rents but would be
bound to include a reference to the terms as to the revised rent payable on a
rent review. I agree. There are no difficulties or inconsistencies with other
parts of the lease where the words are so construed. Further, support for this
construction to my mind can be found in the decision of Walton J in the National
Westminster Bank case, to which I have already referred. In that case the
hypothetical letting for purposes of rent review was to be ‘subject to the
provisions of the subunderlease other than the rent hereby reserved’. Those
words of exclusion might perhaps more readily than in the present case be taken
to refer simply to the quantum of rent. Walton J had no difficulty in
construing them as meaning something along the lines of provisions relating to
the amount of rent payable, and he reached the clear conclusion that the rent
review clause was thereby excluded. Mr Barnes has rightly pointed out that each
lease turns on its own wording. I accept that, but my attention has not been
drawn to any features of the lease before me that differentiates it very significantly
from the lease in the National Westminster Bank case other than clause
4(2), which as I have indicated tends to be a pointer against the construction
advanced by the tenant. In these circumstances, therefore, I am assisted by
Walton J’s decision in reaching the conclusions that I have stated.
So Peter
Gibson J regarded the case before him as stronger in favour of the landlord
than Walton J’s case, and each of them regarded his decision as turning on the
precise terms of the lease before him. I do not therefore feel constrained in
any way by their decisions, and that all the more so because I am told that in
the National Westminster Bank case Walton J refused to certify under
section 1 of the Arbitration Act 1979 that there was in that case a question of
law of general public importance. So, obviously, he did not think that his
decision would be applicable to other cases. In the result the authorities do
not bring me to depart from the view that I would have formed myself
independently of them.
The originating
summons seeks a declaration that:
Upon the true
construction of paragraph 2 of the Second Schedule to the above-mentioned lease
and in the events which have happened the rent to be paid by the Plaintiff with
effect from the 24th June 1985 is the greater of (a) the clear yearly rent of
£360,000 or (b) a yearly sum equal to the rent at which the property comprised
in the above-mentioned lease is worth to be let in the open market as a whole
at the best rent reasonably obtainable without taking any fine or premium
subject to the provisions of the above-mentioned lease (other than the amounts
of rent specified in paragraphs 1(1) and 1(2) of the said Second Schedule) but
including the provisions for the revising of rent contained in the said Second
Schedule for a term equal to the residue then unexpired of the term granted by
the above-mentioned lease but having regard to the Plaintiff’s rights under the
Landlord and Tenant Act 1954, and otherwise upon the bases set out in paragraph
2 of the said Second Schedule.
I propose to
make that declaration.
The plaintiff
was awarded costs.
