Landlord and tenant — Construction of rent review clause — Declaration sought by tenants — Judge’s ‘realistic
The following
cases are referred to in this report.
British
Gas Corporation v Universities Superannuation
Scheme Ltd [1986] 1 WLR 398; [1986] 1 All ER 978; [1986] 1 EGLR 120; (1986)
277 EG 980
Daejan Investments
Ltd v Cornwall Coast Country Club (1984) 50
P&CR 157; [1985] 1 EGLR 77; 273 EG 1122
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
Norwich
Union Life Insurance Society v Trustee Savings
Banks Central Board [1986] 1 EGLR 136; (1986) 278 EG 162
Pearl
Assurance plc v Shaw [1985] 1 EGLR 92;
(1984) 274 EG 490
Ponsford v HMS Aerosols Ltd [1979] AC 63; [1978] 3 WLR 241; [1978] 2 All ER
837; (1978) 38 P&CR 270; [1978] EGD 137; 247 EG 1171, [1978] 2 EGLR 81, HL
This was an
originating summons by which the plaintiff underlessees, Dennis & Robinson
Ltd, sought a declaration as to the true construction of an underlease of land
and premises on an industrial estate at Lancing, Sussex, of which the
defendants, Kiossos Establishment, were the underlessors.
Michael Barnes
QC and J M Male (instructed by Speechly Bircham) appeared on behalf of the
plaintiffs; David Neuberger (instructed by Teacher Stern & Selby)
represented the defendants.
Giving
judgment, MR MICHAEL WHEELER QC said: I have before me an originating summons
in which the plaintiffs, Dennis & Robinson Ltd, seek a declaration as to
the true construction of a rent review clause in an underlease dated October 20
1982 and made between Smiths Industries plc of the one part and the plaintiffs
as tenants of the other part of land and premises on an industrial estate at
Lancing in Sussex. The underlease has since been assigned to the defendants,
Kiossos Establishment. I shall refer to the plaintiffs and the defendants
respectively as ‘the tenants’ and ‘the landlords’.
I need not
refer to the underlease in any detail. It was for a term of 25 years from
December 31 1981 at a yearly rent of £30,000.
Clause 2(12),
upon which Mr Barnes QC, who appeared for the tenants, placed some reliance in
opening the summons, contained a covenant by the tenants not to assign,
underlet or part with or share possession of the property unless they had first
made an offer to the landlords to surrender the underlease for a premium:
representing
. . . its fair market value as between willing buyer and willing seller at the
date of the offer.
Mr Barnes
contrasts the words which I have quoted with the language of the rent review
clause to which I am about to refer. That is contained in clause 5, and I must
read clause 5(1) in full, together with most of clause 5(2):
5(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 eighty-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 purpose of reviewing the
rent reserved by this Lease.
Clause 5(2)
(of which I shall omit part):
(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) . . .
PROVIDED
ALWAYS . . . 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.
It will be
seen that the landlords have a ‘safety net’ in that no rent review is to result
in the tenants becoming liable to pay less than the initial rent of £30,000 per
annum.
Before going
further, there is one point which I should mention at the outset. It will be
seen from the extract which I have quoted from clause 5(2) that it provides for
the hypothetical lease to be ‘for a term of twenty-five years’ and the question
might be thought to arise in the light of the provisions in the existing lease
for four 5-yearly rent reviews, ‘a term of twenty-five years from when?’; for
my part I would have 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. Otherwise (taking the last rent review date of
December 31 2000 as an example) that rent review would seemingly have to
proceed on the basis of a 25-year lease with no rent review provision at all: a
construction which, to use the words of the Vice-Chancellor in British Gas
Corporation v Universities Superannuation Scheme Ltd [1986] 1 WLR
398 at p 401)* would produce a result which is: ‘. . . so surprising as to
offend commonsense.’ I also bear in mind
what Hoffmann J said recently in Norwich Union Life Insurance Society v Trustee
Savings Banks Central Board [1986] 1 EGLR 136, (1986) 278 EG 162 that:
*Editor’s
note: Also reported at [1986] 1 EGLR 120; (1986) 277 EG 980.
There is, I
think, a presumption that the hypothesis upon which the rent should be fixed
upon a review should bear as close a resemblance to reality as possible.
The Norwich
Union case was one where the contest was whether the hypothetical lease
should be for the full 22 years for which the actual lease had been granted or
merely for a term equal to the unexpired portion of the actual lease, namely 10
years, and Hoffmann J had no hesitation in opting for the latter, adding:
In this case
the reality was that at the date of the rent review the tenant’s interest was
an unexpired period of 10 years. He had been paying in the earlier part of the
term a rent calculated, at any rate for the first five years, according to the
market rent for what was then being granted, namely a lease for a period of 22
years. The purpose of the rent review is to enable that rent to be adjusted at
a subsequent date in order to take into account the effects of inflation and
changes in the market since the original grant. But I think that the landlord
would be having it both ways if he was entitled not only to an adjustment for
changes in the market and changes in inflation but also to the assumption that
what was being granted on the rent review date was a brand new lease rather
than what was in fact the case, a lease which by then was 12 years expired.
That construction also seems to me to be in accordance with what Viscount
Dilhorne in Ponsford v HMS Aerosols Ltd [1979] AC 63 at p 76H and
Vinelott J in Pearl Assurance plc v Shaw (1984) 274 EG 490
regarded as being commonsense
In my
judgment, the decision in the Norwich Union case would be decisive of
the point which I have touched on in the present case. But I should emphasise
that before me (very sensibly in my view) neither side sought to argue the
point at all and there is, I gather, no suggestion that here the hypothetical
lease should be otherwise than on the basis of a term equal to the residue of
the existing underlease, and such of the rent review provisions as would apply
to it.
I have
nevertheless dealt with the point, not in the hope of producing the
deputy-judicial equivalent of a Law Quarterly Review article, but
because I wholeheartedly accept the desirability — unless compelled to do
otherwise by the clearest of language — of producing a hypothetical answer
which does not offend commonsense and which bears as close a resemblance to
reality as possible.
I now set out
the rival declarations which the parties invite me to make. Both commence in
the same way as follows:
A Declaration
that, upon a true construction of the underlease dated the 20th October 1982
made between Smiths Industries plc of the one part and the Plaintiffs of the
other part, of land and premises at Blenheim Road, Churchill Industrial Estate,
Lancing, Sussex, the independent valuer in determining the full yearly market
rent thereunder in accordance with clause 5(2) thereof . . .
Up to that
point, both declarations are the same and the remainder is what the independent
valuer is or is not to do. The tenants’ declaration then continues:
. . . is not
required or entitled to make an assumption that there 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
declaration for which the landlords contend is very helpfully set out in para 5
of an affidavit (mistitled, but not unintelligibly so) sworn on June 27 1986 by
a Mr S M Langley, who is a partner in a firm of surveyors and valuers and has
been advising the landlords in connection with the present rent review. The declaration
sought by the landlords would conclude as follows, and it will be remembered
that this is what the independent valuer is to do:
. . . 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 subclause.
The said
subclause of course is subclause (2) of clause 5.
I frankly
confess that when I was first presented with these rival contentions I was hard
put to it to see what differences of substance there were between them. Suffice
it to say, that by the end of the day I was in a wiser — if still somewhat
bemused — state of mind. It was clear on the evidence that the difference in
rent to which the rival contentions were said to give rise was a substantial
one. But I am still of the view that, even allowing for the fact that the
expert has to assess a hypothetical rent which would be arrived at in an open
market transaction between a hypothetical lessor and a hypothetical lessee, the
mere fact that the whole thing is a hypothetical exercise should not (in the
absence of the clearest indications to the contrary in the language of the
lease concerned) require commonsense to fly out of the window and be replaced by
unreality and a reliance on semantics.
I start
therefore by considering the point which Mr Barnes touched on in opening when
he drew my attention to the contrast between clause 2(12) with its reference
to: ‘fair market value as between willing buyer and willing seller’ and clause
5(2) which refers to: ‘the rent . . . at which the property might reasonably be
expected to be let in the open market.’
The difference in language is in my view mainly, if not exclusively,
attributable to the fact that the words quoted appear in entirely different
contexts and with quite different syntax. I would not therefore be disposed to
set any particular store on the difference (admittedly in the same document)
between the two expressions.
Quite apart
from that, however, I question whether there is in any event any material
difference between a transaction ‘in the open market’ and a transaction between
a willing buyer and a willing seller. There is nothing particularly special
about the expression ‘open market’ even if in common parlance it might at first
conjure up an open-air market like Berwick Market in London’s W1. In my
judgment, when used in contexts dealing with such topics as rating valuation,
compulsory purchase and stamp duty, where an ‘open market value’ has to be
ascertained, what is (hypothetically) required is that steps be taken to bring
the property in question before the widest selection of potential customers;
and the same applies, in my judgment, to the hypothetical letting of property
under a rent review clause. If this is done — and it has of course to be
assumed (as I do) that it will be done properly and thoroughly by the chosen
expert — it may have a variety of results, depending on the expert’s assessment
of who would constitute ‘the open market’. Thus there might be a wide range of
potential competing bidders; or there might be only one potential bidder
(though the fact, if it were the fact, that the one bidder was the existing
lessee would in itself be irrelevant): or it might be (though it would, I think,
be extremely unusual) that the best efforts to investigate the open market
might result in there being no willing lessee at all.
As to this
last point, it is true that in F R Evans (Leeds) Ltd v English
Electric Co Ltd (1977) 36 P & CR 185 at p 191* 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 that 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 (p 191):
That the rent
must be determined at an amount that the hypothetical tenant — the willing
lessee — would agree.
*Editor’s
note: Also reported at (1977) 245 EG 657, [1978] 1 EGLR 93.
and that:
The willing
lessee has to agree this rent with a hypothetical landlord — the willing
lessor.
And 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’.
If I have
understood his argument correctly, and I hope he will forgive me if I have not,
Mr Neuberger, for the landlords, lays the greatest stress on the statement of
Donaldson J in F R Evans (Leeds) Ltd v English Electric Co Ltd at
p 192 that ‘the parties will reach agreement’. It matters not, says Mr
Neuberger, that in reality there might be no hypothetical lessee who would
reach agreement with the hypothetical lessor because the rent review formula
requires that there will be such a lessee. He illustrates his argument by what
(as he readily accepts) is an extreme example. Suppose, he says, that by the
first review date the property in question, because of its age, environment, or
what you will, has become virtually unlettable for the remainder of the 25-year
term except with massive and expensive redevelopment (and, incidentally, a much
longer lease and at a much lower rent). Leave aside the question whether, in
such circumstances, the rental value of the property as a potential development
would justify a ‘willing lessor’ asking for (let alone obtaining) a rent of the
size (say, ultimately, £20,000 per annum) which might reflect some eventual
redevelopment; suppose, the argument runs, that the maximum rent for the
property which could be obtained in the open market (ie from a willing lessee)
would be, say, £100 per annum, which no lessor in his right mind would agree
to. In those circumstances, argues Mr Neuberger, the expert has to pick a
rental value somewhere between £20,000 per annum and £100 per annum. But he
offers, as it seems to me, no guidance as to the basis on which the expert is
to base his decision. It could, as I think, have no basis which even remotely
resembles reality. On the contrary, the expert’s assessment would be little
more than a figure plucked off the wall.
The commonest
form of rent review clause combines two expressions, that is to say, ‘in the
open market’ and ‘as between a willing buyer and a willing seller’. But as has
been seen, there is no reference to ‘a willing buyer’ or ‘a willing seller’ in
the instant case. But where in Daejan Investments Ltd v Cornwall
Coast Country Club (1984) 50 P & CR 157* the formula was:
The highest
rent at which . . . the premises might reasonably be expected to be let in the
open market by a willing lessor with vacant possession . . .
*Editor’s
note: See also [1985] 1 EGLR 77; (1985) 273 EG 1122.
Peter Gibson J
clearly felt no difficulty, in the absence in this formula of any reference to
‘a willing lessee’, in holding that the open market value was the highest that
anyone offered, and the open market was one which included all possible
lessees, each of whom had an equal opportunity of bidding to become the lessee
on the letting.
I conclude,
therefore, that the fact even if some such expression as ‘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 be either 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
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 I might
describe as ‘the realistic approach’ finds, I think, appellate support in the
judgment of Templeman LJ (as he then was) in The Law Land Co Ltd v Consumers’
Association (1980) 255 EG 617, [1980] 2 EGLR 109, where the lease contained
a covenant by the tenant not, without the landlord’s consent, to use the
demised premises other than as offices of the Consumers’ Association and its
associated organisations. On a rent review, the tenants submitted that these
identical words should be deemed to be written into the hypothetical lease.
Templeman LJ said at p 617:
In my
judgment the submission . . . produces results which are both incredible and
unworkable.
And later in
his judgment (at p 621) he said this:
The clause
[11(b)] works perfectly well if the provisions which have to be included in the
hypothetical lease are the provisions set forth in the original lease with the
necessary modification that the name of the lessee will be different and
therefore the name in clause 11(b) will be different. Once that is accepted then
it seems to me that the lease, including the rent review clause, makes good
sense and that there is no difficulty, either for the surveyor or for the
court.
Finally, I
bear in mind — and respectfully adopt — the purpose of a rent review provision
as explained by the Vice-Chancellor in the British Gas decision [1986] 1
WLR 398 at p 401:*
There is
really no dispute that the general purpose of a provision for rent review is to
enable the landlord to obtain from time to time the market rental which the
premises would command if let on the same terms on the open market at the
review dates. The purpose is to reflect the changes in the value of money and
real increases in the value of the property during a long term.
*Editor’s
note: [1986] 1 EGLR 120 at p 121.
At the
conclusion of the argument in the present case I asked Mr Barnes and Mr
Neuberger whether they wished me (i) to choose between their respective
suggested declarations: or (ii) prepare a modified declaration of my own: or
(iii) hopefully to give sufficient indications in my judgment of the factors
which I 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 (perhaps with some side-letter of explanation agreed
between them) the expert could then proceed to implement. They tactfully
indicated that they preferred course (iii) and I have done my best to comply.
I have found
this an extremely difficult case of a type which clearly has already given, and
is still capable of giving, rise to all manner of difficulties. But one thing
is certain, having listened to the admirable arguments and having studied the
authorities with some care, in so far as it is permissible I am an unrepentant
realist. Nevertheless, I respectfully echo what the Vice-Chancellor said in the
British Gas case at p 403:*
It is in my
judgment most desirable that this, or some other case, should at an early stage
be taken to the Court of Appeal so as to resolve the conflicting judicial
approaches that have emerged.
*Editor’s
note: [1986] 1 EGLR 120 at p 121.
I believe that
the Vice-Chancellor’s plea may not have been in vain.
True it is
that those ‘conflicting judicial approaches’ mainly depended on whether or not,
in the normal case, it was legitimate to proceed on the assumption that a rent
review clause should be construed on the basis that it is intended to give
effect to the normal commercial reason for providing for rent reviews at all.
But if put that way and if the appellate answer is ‘yes’, this in itself will
go a long way toward providing the answer — or at least a sufficient guideline
— for a case such as the present.
