Landlord and tenant — Construction of rent review clause — Appeal from decision of Mr Michael Wheeler QC, sitting as a deputy judge of the Chancery Division — Underlease for 25 years with four five-yearly reviews — A ‘full yearly market rent’ to be determined, meaning the yearly rent at which the property might reasonably be expected to be let in the open market — There was no express reference to ‘a willing lessor’ or to ‘a willing lessee’ — Tenants contended that there should be no assumption that there would in fact be a willing lessee to whom the property might reasonably be expected to be let, it being a matter for consideration whether, if the property were offered in the open market, anyone would wish to take a lease on the terms offered — Landlords submitted that the independent valuer was required to determine the rent which would be expected to be agreed between a willing lessee and a willing lessor — The deputy judge came to the conclusion that to say that it must be assumed that there will be a letting (whatever may be the reality of testing the appropriate open market) is to incorporate into this hypothetical exercise a situation which the language of the rent review clause does not warrant and which is completely unreal — Held by the Court of Appeal, allowing the landlords’ appeal, that the language of the review clause required the following assumptions: (1) there will be a letting of the property, (2) there is a market in which that letting is agreed, (3) the landlord is willing to let the premises, (4) equally, the supposed tenant is willing to take the premises — Although there was no express reference here to a willing lessor and a willing lessee, such an implication was necessary to achieve an open market letting — The fact that the above assumptions are artificial is irrelevant; that is the bargain which the parties have made — It is, however, a matter for the valuer, using his experience and judgment, to determine the strength of the market — Although it is assumed that there is a market there is no assumption as to how lively that market is — The court could give only limited guidance to the valuer — It was not appropriate to make any formal declaration — The judge’s order would be set aside but no order would be made on the originating summons — A subsidiary point, as to the date of commencement of the 25-year term, had been decided by the judge, but he had not been asked to decide it and it was not in issue; the order in so far as it purported to determine this point would have to be set aside for that reason also
The following cases are referred to in this report.
Evans (FR) (Leeds) Ltd v English Electric Co Ltd (1977) 36 P&CR 185; [1978] EGD 67; 245 EG 657, [1978] 1 EGLR 93
Law Land Co Ltd v Consumers’ Association (1980) 255 EG 617, [1980] 2 EGLR 109, CA
Wallersteiner v Moir [1974] 1 WLR 991; [1974] 3 All ER 217, CA
This was an appeal by the landlords, Kiossos Establishment, from an order of Mr Michael Wheeler QC, sitting as a deputy judge, on an originating summons by the tenants, Dennis & Robinson Ltd, underlessees of premises on an industrial estate at Lancing, Sussex, seeking a declaration as to the construction of the review clause in the underlease. The judgment of Mr Michael Wheeler is reported at [1986] 2 EGLR 120.
David Neuberger (instructed by Teacher Stern & Selby) appeared on behalf of the appellants; Michael Barnes QC and J M Male (instructed by Speechley Bircham) represented the respondents.
Giving judgment, FOX LJ said: This is an appeal by the landlord from an order of Mr Michael Wheeler QC, sitting as a deputy judge of the Chancery Division. The case is concerned with the construction of a rent review clause in a lease.
The lease is an underlease dated October 20 1982 and was made between Smiths Industries plc, as landlords of the one part, and the plaintiffs, Dennis & Robinson Ltd, as tenants of the other part. The reversion has since been assigned to the defendants, Kiossos Establishment, who are now the landlords.
The demised property consists of premises on an industrial estate at Lancing in Sussex. It comprises a large warehouse built in about 1906.
The lease was for a term of 25 years from December 31 1981. The rent payable was £30,000 per year but was subject to increase as provided by clause 5.
Clause 5 (1), (2) and (3) provide as follows:
IT IS HEREBY AGREED BY THE LANDLORD AND TENANT that the rent hereby reserved (or such increased sum as results from the application of this clause) shall be subject to review in the manner following namely:
(1) The Landlord may give notice in writing to the Tenant at any time not more than six months before nor more than twelve months after all or any of the following dates namely the thirty-first day of December in the years one thousand nine hundred and eight-five one thousand nine hundred and ninety one thousand nine hundred and ninety-five and two thousand (each of such dates being called a ‘Material Date’) calling upon the Tenant to negotiate with the Landlord as to what represents the full yearly market rent (as hereinafter defined) of the property at the date three months before the Material Date in question and after the giving of such notice the following provisions of this clause shall take effect for the purposes of reviewing the rent reserved by this Lease.
(2) For the purposes of this clause the expression ‘full yearly market rent’ shall mean the yearly rent (exclusive of rates and other payments (if any) to be made by the Tenant by virtue of this Lease) at which the property might reasonably be expected to be let in the open market three months before the Material Date for a term of twenty-five years with vacant possession and otherwise on the same terms and conditions as this Lease (including the provisions for rent review at the intervals herein specified) there being disregarded those matters referred to in paragraphs (a) (b) and (c) of subsection (1) of Section 34 of the Landlord and Tenant Act 1954 PROVIDED ALWAYS and It is hereby agreed and declared that Firstly the expression ‘Improvement’ in the said paragraph (b) of the said subsection 34(1) shall only be deemed to cover any improvement carried out to the property on or after the thirty-first day of July one thousand nine hundred and eighty-two and Secondly that if the full yearly market rent as aforesaid shall be less than the Existing Rent then and in such case the Existing rent shall continue to be payable as from the relevant Material Date.
(3) If the Landlord and the Tenant have not reached an agreement as to the full yearly market rent by a date three months after the service of a Notice pursuant to sub-clause (1) of this Clause 5 the review of rent may at any time thereafter be referred to an independent valuer to be appointed in default of agreement between the parties by the President for the time being of the Royal Institution of Chartered Surveyors upon the application of either party such valuer to determine (as an expert and not as an arbitrator) what sum in his opinion represents the full yearly market rent of the property at the date three months before the Material Date in question.
Under these provisions there is protection for the landlords in that no rent review is to result in the tenants’ paying a rent of less than the existing rent (ie at present £30,000 per year).
On August 14 1985 Smiths Industries plc, the then landlords, gave notice under clause 5 (1) of the lease calling upon the tenants to negotiate with the landlords as to what represents the full yearly market rent. The parties were unable to reach agreement by the expiration of the period of three months referred to in clause 5(3). On May 9 1986 the president of the Royal Institution of Chartered Surveyors appointed an independent valuer under the provisions of clause 5(3). A question has arisen as to the basis on which he should make his valuation.
I need not refer further to the terms of the lease, except to mention the tenants’ covenant not to assign, underlet or part with possession of the demised premises without first making an offer to the landlords to surrender the lease for a premium: ‘. . . representing . . . its fair market value between willing buyer and willing seller at the date of the offer’.
The originating summons was taken out by the tenants and asked for a declaration:
. . . that on the true construction of the Underlease . . . the independent valuer in determining the full yearly market rent thereunder in accordance with Clause 5 (2) is not required or entitled to make an assumption that there|page:134| would be a willing lessee to whom the property might reasonably be expected to be let but must consider and determine whether if the property were offered to be let in the open market anyone would wish to take a lease of the property on the terms offered and must determine the rent, if any, which would be agreed in the open market in respect of such a lease.
The judge, by the order appealed from, declared that upon the true construction of the lease ‘. . . the independent valuer therein referred to shall determine the reviewed rent thereunder in accordance with the attached judgment of Mr Michael Wheeler QC . . .’
The judgment appealed from is in two parts. The first part dealt with the meaning, in clause 5 (2), of the words ‘. . . for a term of 25 years’. The judge stated that he had ‘no hesitation in concluding that the reference to 25 years is a reference to a term of a lease which commenced (as did the existing underlease) on December 31 1981’. The tenants cross-appeal against that decision.
Mr Barnes for the tenants submitted that the construction adopted is wrong and that the clause requires the assumption of a lease for 25 years from three months before the relevant material date. He also contended that the judge was not entitled to decide the point, as it was not in issue before him.
Mr Neuberger for the landlords offered no argument in opposition to the tenants’ contention.
In my opinion the judge’s order, so far as it purports to determine this point, must be set aside. The judge was not asked to decide the point, which was never in issue in the proceedings, and he heard no argument upon it. I do not, however, think it would be appropriate for this court to make a declaration as to the interpretation of the material words. Since we heard no argument from the landlords we would, in effect, be making a declaration by consent. The court does not normally make declarations by consent or upon admissions (see the Annual Practice 1986, at p 218, and Wallersteiner v Moir [1974] 1 WLR 991 at pp 1029 and 1030).
Nor is there any reason to do so in the present case. Either the parties are agreed upon the meaning of the lease or they are not. If they are agreed, they do not need any declaration. They can give effect to their own agreement. If they are not agreed, the matter must be raised in proceedings and fully argued.
The second part of the judgment dealt with the issue raised in the originating summons. The declaration thereby sought by the tenants I have already set out. That sought by the landlords was as follows:
. . . is required to determine the rent which would be expected to be agreed between willing lessee and willing lessor three months before the material date and otherwise on the assumptions set out in the said sub-clause.
For present purposes, the material parts of the judgment appear to be the following: on p 6, after referring to the decision of Donaldson J in F R Evans (Leeds) Ltd v English Electric Co Ltd (1977) 36 P & CR 185, the deputy judge said:
. . . it appears to have been argued that the arbitrator’s concern was with the attitude of the hypothetical willing lessee and that the rent review clause therefore assumed that there was such a person so that it was nihil ad rem to prove that there was no such willing lessee. I am not sure how far Donaldson J (as he then was) accepted the last part of the statement. The learned judge accepted that it was to be assumed that there was at least one tenant bidding for the lease. So be it. But he also accepted: ‘That the rent must be determined at an amount that the hypothetical tenant — the willing lessee — would agree’ and that: ‘The willing lessee has to agree this rent with a hypothetical landlord — the willing lessor.’
On p 192, Donaldson J said: ‘The parties will reach agreement.’ With much of this I respectfully agree. But if examination of the appropriate open market were to reveal no willing lessee at any price, I do not see for myself why the formula should be construed as requiring one to be invented. It may well be, of course, that Donaldson J did not have in mind the admittedly remote possibility of the open market turning up no ‘willing lessee’ at all. In any event, there is no express reference in the present case to ‘a willing lessor’ or to ‘a willing lessee’; and for my part I would if necessary find no difficulty in implying after ‘willing lessee’ the words ‘if any’.
At p 8 of his judgment, the deputy judge said:
I conclude, therefore, that the fact that even if some such expression ‘as between a willing lessor and a willing lessee’ were found in clause 5 (2) in this present case it would add nothing to the requirement that the rent was to be that at which the property might reasonably be expected to be let ‘in the open market’. An open market transaction necessarily proceeds on the hypothesis of a willing seller/lessor and a willing buyer/lessee. But if examination of the open market were to reveal a total or almost total absence of hypothetical willing lessees, the result would, as it seems to me, necessarily be that the best rent that the hypothetical lessor could get in the open market would either be a very low rent or (in an extreme case) a peppercorn rent. Of course, in the present case, the landlord is protected against that sort of hardship by the £30,000 ‘safety net’ provided at the end of clause 5 (2). But to say that the formula must be applied on the hypothetical assumption that there will be a letting (whatever may be the reality as a result of testing the appropriate open market) is in my judgment to incorporate into this hypothetical exercise a situation which the language of the rent review clause does not warrant and which is completely unreal.
What the lease requires the valuer to determine is ‘the full yearly market rent’. That is defined as:
the yearly rent . . . at which the property might reasonably be expected to be let in the open market three months before the Material Date for a term of 25 years with vacant possession and otherwise on the same terms and conditions as the Lease.
The following assumptions in relation to that provision appear to me to be correct:
(1) There will be a letting of the property. The judge, as I read his judgment (p 8 of the transcript), was not prepared to accept that in general terms. But in my opinion it must be so. The language of clause 5 (2) expressly contemplates a letting on the open market.
(2) There is a market in which that letting is agreed.
(3) The landlord is willing to let the premises. Equally, the supposed tenant is willing to take the premises. The notion of a letting in the open market between an unwilling lessor and an unwilling lessee (or between a willing lessor and an unwilling lessee) for the purpose of determining a reasonable rent makes no sense.
These assumptions seem to me to follow from the language which the parties chose to use.
I refer to the judgment of Templeman LJ in Law Land Co Ltd v Consumers’ Association Ltd (1980) 255 EG 617 at p 617, [1980] 2 EGLR 109 (right-hand column) where he said:
Clause 3 (5) (a) (ii) defines the market rent. It means the yearly rent at which the demised premises, fully repaired in accordance with the provisions of the lease, might reasonably be expected to be let in the open market with vacant possession by a willing lessor . . . That clause envisages the existence of an open market, an offer with vacant possession, a willing lessor and, by implication, a willing lessee.
In the present case, although there is no express reference to a willing lessor, that has to be implied if an open market letting is to be achieved. A willing lessee must be implied in consequence.
Mr Barnes, for the tenants, says that the purpose of the rent review clause is to determine the amount that would actually be paid in the open market if the property were actually offered to be let on the relevant terms at the relevant time. The valuer, it is said, must therefore investigate whether there would in reality be any willing lessee or lessees in the market if the property were so offered.
The important fact is that clause 5 (2) requires assumptions to be made. The fact that those assumptions are artificial is irrelevant. That is the bargain which the parties have made. For the reasons which I have given, the clause requires the assumption of a willing lessor and a willing lessee. I do not think that the assumption of a willing lessee, any more than the assumption of a willing lessor, can be qualified by the addition of the words ‘(if any)’.
But the dispute which has arisen has, I think, some unreality about it. The assumptions are only a part of the process of computation of the full yearly market rent. It is assumed that there is a willing lessee. But the willing lessee is not going to pay more than the market requires him to pay. It is essentially a matter for the valuer to inquire into and determine the strength of the market. He is, for example, entitled, if such is his expert opinion on the facts, to say that, having regard to the state of the market and the condition of the property, a tenant, though a willing tenant, could not be expected to take the stipulated lease save at a low or nominal rent and that the full yearly market rent must be determined accordingly. Further, any determination below £30,000 will leave the existing rent unaltered anyway.
The judge obviously found difficulty in formulating any specific declarations to deal with the matter. So do I. I do not think that the tenants are entitled to a declaration that clause 5 does not contemplate a willing lessee. On the other hand, I think that the declaration sought by the landlords is unsatisfactory in that it might divert attention from the central fact that it is for the valuer to determine, in the light of his own expertise and judgment of the market, at what rent the property might reasonably be expected to be let at the time and in the circumstances specified in clause 5.
I would discharge the order made by the judge and make no further order.
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Agreeing, DILLON LJ said: In these proceedings, the parties ask the court to express a view on the finer nuances of the legal interpretation of the rent review clause in the lease for the guidance of the independent valuer appointed by the president of the Royal Institution of Chartered Surveyors, who is, by the lease, charged with determining, as an expert, the ‘full yearly market rent’ of the premises. I do not find this a very satisfactory or desirable procedure: first, because the determination of the full yearly market rent of the premises depends primarily on the practical experience and common sense of the independent valuer; second, because the nuances of legal interpretation which are thought by the parties to be in issue are very difficult to express in language which will be helpful and not confusing to the independent valuer when the court does not know how this particular problem of valuation strikes the valuer or what particular difficulties he perceives in it.
The learned deputy judge commented that when he was first presented with the rival contentions of the parties he was hard put to it to see what differences of substance there were between them. As I see it, the differences are essentially differences of emphasis. The learned deputy judge decided that the best he could do to help the parties was, hopefully — as he put it — to give sufficient indications in his judgment of the factors which he considered to come within the true construction of the rent review formula so as to enable them to prepare a revised form of declaration which they could agree and which the expert could then proceed to implement. He therefore made an order declaring that the independent valuer should determine the rent in accordance with his judgment. It is, however, somewhat difficult to discern precisely what he has meant in some parts of his judgment.
The most that I feel I could say to the independent valuer by way of guidance is as follows:
The lease uses the phrases ‘full yearly market rent’ and ‘rent . . . at which the property might reasonably be expected to be let in the open market’. These phrases assume that there is a market in which agreement will be reached for a hypothetical letting of the premises to a hypothetical tenant. That necessarily imports a hypothetical landlord who is willing to let the premises and a hypothetical tenant who is willing to take the premises on the terms prescribed by the rent review clause, ie a willing lessor and a willing lessee. But though it is assumed that there is a market, there is no assumption required as to how lively that market is. The strength of the market and the rental value of the premises in the market are matters for the valuer’s discretion based on his own knowledge and experience of the letting value of such premises.
The learned deputy judge dealt in his judgment with a further question on which there was no dispute between the parties and on which he had not heard argument. This was a question as to the duration of the hypothetical lease which the valuer had to consider. The judge considered this as part of the background to his consideration of the question he was asked to rule on; his conclusion was that the hypothetical lease, which was said by clause 5 (2) of the actual lease to be for a term of 25 years, was to be a lease for 25 years from the date of commencement in 1981 of the actual term of 25 years of the actual lease. By the form of the deputy judge’s order as drawn up — declaring that the valuer should determine the rent in accordance with the deputy judge’s judgment — that conclusion of the deputy judge as to the term has become binding on the parties.
The respondent tenants have given a notice of cross-appeal against the deputy judge’s conclusion as to the term of the hypothetical lease. The appellant landlords have declined to argue the point. Since there is no lis on it between the parties, this court should, in my judgment, decline to decide the point. It should simply set aside the deputy judge’s order, so that each party will have complete freedom to argue the point in other proceedings, if the point ever does become a live one.
For the rest, I have indicated the limited extent of the guidance which I feel able to offer to the independent valuer. I do not think, however, that it is appropriate for this court to make any formal declaration. It should set aside the deputy judge’s order and simply make no order on the originating summons.
RUSSELL LJ agreed with both judgments and did not add anything.
The appeal was allowed and the order of the judge below discharged. No order was made as to costs in Court of Appeal or below.
