Landlord and tenant — Rent review clause — Time stated to be of the essence of the contract — Clause providing for open market rental value to be a sum (a) specified in a notice in writing by the landlord, or (b) agreed between the parties before the expiry of three months after the service of such a notice, or (c) determined, at the election of the tenant made by a counternotice served not later than the expiry of the said three months, by an independent surveyor — Landlords specified a sum by a notice in writing in accordance with the clause — Tenants within the three months served a document, purporting to be a counternotice, which stated merely that the rent specified in the landlords’ notice was excessive and requested information as to the ‘comparables’ on which the figure was based — Tenants’ notice did not make it clear that the tenants elected to have the rent decided by an independent surveyor in accordance with the provisions of the lease — Held that the document was not an effective counternotice and that rent was payable in accordance with the amount specified in the landlords’ notice — Limited stay granted to allow application under section 27 of Arbitration Act 1950
In this action
the plaintiffs, Edlingham Ltd, landlords of premises at 55 and 57 St Benedict’s
Street, Norwich, claimed against the defendants, MFI Furniture Centres Ltd,
tenants of the premises, a sum in respect of arrears of rent which included an
increase which the plaintiffs alleged was due as a result of the operation of a
rent review clause in the lease. The defendants disputed the claim that the
increase was payable under the clause.
J S Brock
(instructed by Joelson, Wilson & Co) appeared on behalf of the plaintiffs;
N T Hague (instructed by Cripps & Shone) represented the defendants.
Giving
judgment, McNEILL J said: By a lease dated March 4 1975 the plaintiff company
let premises, numbered 55 and 57 St Benedict’s Street, Norwich, for a term of
20 years commencing on March 10 1972 to MFI Warehouses Ltd. The latter company,
in the years which have followed, has changed its name to MFI Furniture Centres
Ltd, the present defendant company. The lease provided for the payment of rent
and for review of the rent payable at five-yearly intervals. A rent review was
due, and is said to have become effective, on March 10 1980.
The relevant
provisions of the lease, for the purposes of this case, are as follows. After
setting out the rent first payable, clause 1(c) reads as follows, for the
second five years of the term:
(c) For the next five years of the said term the
yearly rent reserved in subclause (a) hereof or the open market rental value of
the demised premises at the review date whichever is the higher and in either
case the same shall remain constant during the whole period referred to in this
subclause.
It was further
provided for the purposes of that subclause (c) that, after a definition of
‘open market rental value’, ‘the expression ‘review date’ means the expiration
of the fifth year of the said term’ and the provisions then dealt with the 10th
and 15th years ‘for the purposes of the ascertainment of the open market rental
value under subclause (c)’.
Then, clause
1(3), providing by the sidenote for the mechanics of rent review, reads as
follows:
(3) The open market rental value shall be such
annual sum as shall be:
(a) specified in a notice in writing signed by or
on behalf of the Landlord and posted to the Tenant at the demised premises or
served on the Tenant as hereinbefore provided at any time (and if posted such
notice shall be conclusively deemed to have been received by the Tenant in due
course of post) or
(b) agreed between the parties before the
expiration of three months immediately after the date of posting or service (as
the case may be) of such notice as aforesaid in substitution for the said sum,
or
(c) determined (at the election of the Tenant
such election to be made by counternotice in writing served by the Tenant upon
the Landlord not later than the expiration of the said three months) by an independent
surveyor appointed for that purpose by the parties jointly in writing or upon
their failure to agree upon such appointment within one month immediately after
the date of service of the said counternotice then by an independent surveyor
appointed for that purpose on the application of either party alone by the
President for the time being of the Royal Institution of Chartered Surveyors
and in either case in accordance with the provisions of the Arbitration Act
1950.
There is only
one other clause of the lease which is material for my consideration and that
is 1(5), which reads:
(5) All stipulations as to time in the foregoing
subclauses
that includes
the clauses to which I have already referred
. . . shall
be of the essence of the contract and shall not be capable of enlargement save
as agreed in writing by the parties.
The
plaintiffs’ claim in this action is for arrears of rent amounting to £13,068.49
being the balance over the rent payable for the first five years adjusted
upwards in accordance with what the landlords claim is the amount specified in
a notice in writing under clause 1(3)(a). It is correct and not in dispute that
on February 7 1980, solicitors for the plaintiff company gave written notice
that, in pursuance of clause 1 of the lease identified, the annual rent payable
under the terms of the lease from March 10 1980 should be £50,000 and the
defendant company was asked to acknowledge receipt of the notice ‘by signing
and returning the duplicate notice enclosed herewith’. That document was
received by the defendant company and was acknowledged in writing by a receipt
endorsed on it, signed by the secretary of the defendant company and dated
February 11 1980. The broad effect of that notice, if operative, was to
increase the rent payable for the second five years from £24,000 to £50,000,
the sum of £13,068.49 representing the difference between those two sums for
three quarters ante-dating the service of the writ.
The defendant
company, by its amended defence, took more than one point. It is only necessary
now to say that there is no dispute as to the receipt of the plaintiff
company’s notice and the
plaintiff company was a counternotice for the purposes of clause 1(3)(c) of the
lease. If it was such a counternotice then the matter has not, it is common
ground, been referred to the determination of a surveyor either appointed by
agreement or by the president of the institution.
There was a
further plea in the amended defence directed to an allegedly implied term of
clause 1 of the lease, but that is no longer pursued, Mr Hague having intimated
that, as a result of a recent decision of the Court of Appeal, it is no longer
open to him to argue that point.
Therefore, the
short point for my consideration is simply this. Is the document, admittedly
served on the plaintiff company by the defendant company, a counternotice for
the purposes of clause 1(3)(c)? That
document is dated February 19 1980, although it says it was dictated on
February 11 (the very day of the receipt of the plaintiff company’s notice). It
is written by the defendant company’s company secretary, sent by recorded
delivery to the plaintiff company’s solicitors and it reads as follows (under
the title of the property):
I refer to
your letter dated February 7 and return herewith one copy of the notice duly
acknowledged.
Will you
please accept this letter as counternotice to the effect that we consider that
the rent of £50,000 is excessive and will appreciate it if you will kindly
forward to us comparables on which you have based this figure.
It is of
historical interest only that following that letter there was correspondence
between the parties through their surveyors, subject to contract and without
prejudice, indicating that there were negotiations of some sort, but no further
formal step was taken and I am concerned only with the construction of that
document dated February 19 1980.
The way in
which Mr Hague, for the defendant company, puts it is this. The mechanics of
rent reviews, to which I have referred, entitle the tenant when he has, and in
the ordinary way he will have, received a notice from the landlord indicating
the rent which the landlord demands for the next five-year period to two
alternative courses. He may enter into negotiations with a view to agreement
under clause 1(3)(b). He may institute by counternotice procedure towards
arbitration by a surveyor under clause 1(3)(c). He can take both of those
courses in whichever order he thinks fit. They are not mutually exclusive,
because negotiation may be commenced and if it breaks down there can be a
reference to arbitration. There may be a request for arbitration following
which the parties may negotiate and it may be, as Mr Hague pointed out, that on
occasions the fact that the arbitration procedure has been commenced may be a
spur to a landlord to be more amenable in negotiating an agreed rent. I drew
attention to clause 1(5) of the lease simply for the purpose of pointing out
that here time was of the essence of the contract both in relation to
negotiation and to the giving of a counternotice with a view to arbitration.
The three-month period was final and binding upon the parties and I am not
concerned if there was any further counternotice, or purported counternotice,
after the three-month period — that is to say, after May 11 1980. It is common
ground between the parties that the only relevant document for this purpose is
that to which I have referred (dated February 19 1980).
The
construction of the document has to be approached in this light. The existence
of a right to negotiate does not of itself deprive a document which is, in form
and substance, a counternotice under 1(3)(c) of its character as such. The
document itself has to be considered and in particular Mr Hague draws attention
to the fact that it is expressed to be a counternotice and this is the only
place in the lease, which is to say in clause 1(3)(c), where a counternotice so
described is material. So I start, said Mr Hague, with the proposition that the
document described itself as a counternotice and that although there are
following words (as I have read them out) they do not deprive it of that
character because negotiation is wholly consistent with the giving of an
arbitration counternotice. The formality of the matter is emphasised by the
fact that it was sent by recorded delivery, dictated on the day that the
landlords’ notice was received. And, said Mr Hague, no landlord receiving that
notice could have been in any doubt whatsoever that it was, and was intended to
be read by him as, a notice under the rent review mechanics clause in the
lease.
This matter is
not without authority. My attention has been drawn to three decisions: Bellinger
v South London Stationers Ltd (1979) 252 EG 699, [1979] 2 EGLR 88, Oldschool
v Johns (1980) 256 EG 381, and Amalgamated Estates Ltd v
Joystretch Manufacturing Ltd (1981) 257 EG 489. In each of those cases the
material words of the lease were the same as those in the instant lease. It is
right to say there may be some immaterial variations of wording but effectively
they are the same clauses. In each of those cases the court had to consider the
construction of a document alleged to be an effective counternotice leading to
arbitration.
In the first
of those cases, which was decided by Goulding J, the notice of the reviewed and
increased rent was sent to the tenant’s solicitor and a formal notice was
referred to in a covering letter looking forward to hearing from the solicitor
during the current month. An acknowledgement was signed by the solicitor, in
the name of the tenant, saying:
We formally
acknowledge receipt of your notice of rent review for the above property, and
we would hardly need to add that we do not accept your revised figure.
There was no
evidence of any communication thereafter until after the three-month period,
when surveyors wrote in the following terms:
We write to
inform you that we have accepted instructions to advise South London Stationers
Ltd on the rental value of these premises in respect of a rent review due on
September 29 1978, contained in the fourteen years’ lease dated August 3 1971.
We would, therefore, be obliged to hear your opinion as to the rental value
applicable so that we can advise our clients accordingly.
The point was
taken that the second letter was outwith the three-months’ period allowed in
the lease; as in this lease.
In the second
case, which was heard by Mr Michael Wheeler QC, sitting as a deputy judge of
the Chancery Division, the relevant letter read as follows:
As you know
our client is at present paying £2,340 per annum and he contends that the open
market rental value of the premises is at this time less than the present
rental value.
Then the
letter went on to invite attention to another lease with which the solicitors
were concerned inviting the landlord to:
. . . let us
have any evidence supporting your contention that a figure of £3,600 per annum
for the premises is the open market rental value.
Finally, in
the third case, in the Court of Appeal, the material letter from the defendant
was in these terms:
We are in
receipt of your letter of December 8 1978 and note contents of same.
We cannot
agree with your rent increase, for, as you know, they are building a new Centre
which is going to push Regent Street right out of position.
This was
Regent Street, Rugby.
There are
shops very close to our own that are being offered for around £4,000 per annum.
Perhaps, therefore, you could explain how you arrive at £10,000.
It would be
clear from reading those letters, first of all, that no one of them uses the
phrase ‘counternotice’ and each was described, not unfairly by Mr Hague, as
being more in the nature of a protest at the proposed rent than a formal
request to embark upon the procedure to arbitration. In that sense each of
those cases can be distinguished on its particular facts from the present case.
But, having said that, I have to consider what, in relation to each of those
ripostes, was said to be the law applicable to the construction of such a
document. Again, in each of those cases there was guidance given as to the way
in which the trial judge should approach construction.
I found
helpful the judgment of Templeman LJ in the Amalgamated Estates case
where, on p 493 of the report, beginning at the bottom of the left-hand column,
he said this:
Mr de la
Piquerie’s second point, namely that the tenant’s letter dated December 12 1978
constitutes a counternotice, also seems to me to be untenable. By that letter
the tenant refused to agree the landlord’s figure of £10,000 and asked for an
explanation. By the lease the tenant had three months from December 8 1978 in
which to serve a counternotice electing for the rent to be determined by
arbitration. I am unable to find in the tenant’s letter of December 12 any
words which enable me to construe it as a counternotice of the kind required by
the lease. It is true that no magic formula is required but, in my judgment,
the tenant must make it clear to the landlord that he proposes to have the rent
decided by arbitration in accordance with the provisions of the lease. The
landlord and tenant may reach a compromise before arbitration has been reached,
but, nevertheless, on the plain words of the lease it seems to me that the
tenant is directed to serve a counternotice making it clear to the landlord
that he proposes to go to arbitration if that is his intention. I cannot spell
that out of the tenant’s letter, which simply said he did not agree with the
landlord’s £10,000 and asked for an explanation.
Then, in the
same case, Lawton LJ, on the preceding page, referring to the same point, said
this:
The first step
is to construe the letter of December 12 1978. It was a letter expressing
disagreement with the figure put forward by the landlords. But it was a little
more than that because, in the final paragraph, there was a request for an
explanation as to how the landlords had reached the figure of £10,000. On
receipt of this letter the landlords would not have known with certainty what
attitude the tenants were taking up. They had made it clear that they
disagreed. On the other hand, by asking for particulars as to how the figure
was made up, they may have been inviting the landlord to convince them that the
figure of £10,000 or some figure near £10,000 was perhaps a reasonable figure
in all the circumstances.
There is
nothing, in my judgment, in the letter to indicate that, on December 12 1978,
the tenant’s wanted to go to arbitration. The landlords were left without any
clear indication as to what the tenants wanted to do.
Those
expressions of view are wholly consistent with what had been said by Goulding J
in the first case and where, at p 702, having put the matter in this way by way
of test, he said:
Supposing
that a day or two after March 31 Mr Levinson, or someone else on behalf of the
tenant, had written to Mr Bellinger and said that the tenant had taken advice
and, having regard to current rentals and to the possible costs of arbitration,
was prepared to accept after all the figure of £5,250. Suppose that had
happened, and suppose that Mr Bellinger, on behalf of the landlord, had then
turned round and said, ‘Oh, no; you have by your letter on March 31 required an
arbitration, and my figure of £5,250 was on my own advice a low one, and I
would now rather go on and see what I can get from an arbitrator,’ would the
landlord have been entitled to insist on that course? I cannot believe that the court in those
hypothetical circumstances would have construed the letter of March 31 as a
counternotice that opened the door irrevocably (in the absence of further agreement)
to an arbitration. I do not forget, indeed, that Templeman J as he was then, in
the case which I have cited
that was the
earlier case of The Dean and Chapter of the Cathedral Church of the Holy
Trinity in Chichester v Lennards Ltd (1977) 35 P & CR 309
said not only
that the court should not be perverse and should not be over-obstructive, but
also that the court should not invent imaginary difficulties which might have
arisen in other cases. Nonetheless, on a simple question of interpretation such
as this is, I know of no other method than to test the meaning of the language
in different hypothetical circumstances, and I am forced to the conclusion,
which was also my first impression when the matter was opened to me, that the
letter of March 31 contains nothing sufficiently specific to constitute a
counternotice under subparagraph (c) in clause 1(3) of the lease. To my mind,
it is no more than a refusal of the landlord’s proposal, and then it remained
open to the tenant, if he wished to do so, to try to persuade the landlord’s
surveyor, through his own surveyor maybe, that a lower figure was appropriate,
or, in the end, to accept the landlord’s figure without the risk of costs of an
arbitration; or, thirdly, if he thought fit, to serve a counternotice requiring
arbitration. The tenant seems to me to have retained entire freedom as between
those courses on a reasonable reading of the letter.
Thirdly, of
these citations Mr Wheeler in the Oldschool case at p 385, having
earlier said that there is no specific requirement as to the content of the counternotice
went on to say:
It seems to me
in principle, and apart from authority, that if some communication is coming
from the tenant to the landlord in response to a landlord’s notice under clause
5(2)(a), it is important that the landlord should know precisely what the
tenant has in mind. Is he on the one hand merely saying ‘I do not agree your
rent; let us see if we can agree’? In
other words it is an opening shot under clause 5(2)(b). Or is he saying,
‘Regardless of whether we negotiate or not, I wish to have the rent fixed by
arbitration’? And if he gives a valid
counternotice under clause 5(2)(c), then the landlords know perfectly well that
they can of course go on negotiating but if they do not get anywhere or if they
decide that it is not worth negotiating, then there will be, but it is purely
at the tenant’s option, an independent hearing to fix the rent.
Mr Geddes, I
think, was inclined to say that, because of the construction which he put on
clause 5(2)(c), all that the tenant had to do to give an effective
counternotice under clause 5(2)(c), since no contents were specified, was
simply to say ‘I do not agree your figure’ and that is enough. That does not
seem to me to be a fair way of looking at the machinery at all, because it must
be one of two things as I have already indicated. It might be a deliberate
attempt (although perhaps ineptly expressed) to trigger off clause 5(2)(c) or
it might be just the opening shot in negotiations under clause 5(2)(b). I think
that the notice must either be in a form which clearly says it is a
counternotice under clause 5(2)(c) or it must clearly indicate to the landlord
that the tenant is exercising his election to have the rent fixed
independently.
I do not think
it is necessary for the purposes of this judgment to express a view as to
whether or not a counternotice, to be effective, must expressly refer to the
relevant clause of the lease which is in point. My inclination would be to say
that that degree of formality is probably unnecessary. But the notice must
identify the form of relief which the tenant is seeking and must do so
unequivocally. If a notice may be read as an invitation to negotiate or as an
election to arbitrate it seems to me to be a defective notice. It must, to
adopt Goulding J’s words, contain that which is specific and make it clear to
the landlord that this is the tenant’s election to choose his, in this case,
1(3)(c) course and not his 1(3)(b) course. It is not a question, as Templeman
LJ put it, of a ‘magic formula’, but in his words ‘the tenant must make it
clear to the landlord that he proposes to have the rent decided by arbitration
in accordance with the provisions of the lease’. This document [the document
dated February 19 1980] does not do that and I do not think, on its proper construction,
that it is, or is effective as, a counternotice under that subclause. That
being so, the rent demanded is properly due, there being no other answer to the
claim, and the plaintiff is entitled to judgment for the sum of £13,068.49.
There is,
however, a remaining point which I have been asked to consider.
Under section
27 of the Arbitration Act 1950, which Act applies to this clause, so the
parties agree, it is open to a party to an arbitration agreement to apply to
the court for leave to proceed despite the lapse of time where the party can
persuade the court that in the circumstances of the case undue hardship would
be caused. I understand that in this case the tenant company has taken in these
proceedings some steps to have such an adjudication made in its favour. As I
understand it, no more has been done than issuing a master’s summons and at the
very least, having regard to the wording of the section, an affidavit
substantiating undue hardship would be necessary before there could be a
determination. I venture no view on this matter. It would be wrong to do so. I
have not the slightest idea what the merits of the tenant’s case on hardship
may be.
Mr Hague
suggested that the situation might be met by granting a declaration that the
counternotice was not effective instead of giving a money judgment. I cannot
accede to that. Not merely is it not claimed but Mr Brock would not wish to
amend to add a plea for a declaration and nor do I think in commercial terms,
and this was a commercial lease of shop property, that it would be right to do
so. I am, however, if those proceedings are to be prosecuted, prepared to grant
some stay, for a limited period, on terms that the matter is prosecuted
diligently and timeously under the section 27 proceedings. The way in which I
propose to do it is to grant a stay for a short period and then only on the
defendant company’s undertaking that in the event of failure in their
application interest would run on the judgment sum from today and not from the
date on which payable.
Judgment was given for the plaintiffs for £13,068.49
with costs of the action up to the date of judgment.
