Landlord and tenant — Rent review clause in lease — Question as to whether the hypothetical lease should be assumed to exclude the provision for rent reviews — Rent was to be determined on review ‘upon the terms of this lease except as regards rent’ — Plaintiff landlords sought a declaration that the effect of the words ‘except as regards rent’ was that a schedule to the lease which contained the rent review provisions should be treated as omitted from the hypothetical lease — In argument, however, the landlords submitted primarily that the effect of the words quoted was to excise every term which could be said to be a term ‘as regards rent’; if that argument failed, then at least the schedule containing the rent review provisions should be excised — Terms ‘except as regards rent’ were said to cover nine terms, including the covenant to pay rent, the reservation of insurance and service rents and the proviso for entry on non-payment of rent, as well as the rent review provisions — Tenants submitted that the words meant only that the rent actually passing at the review date should be disregarded — In considering the respective arguments, the judge referred to the restatement by Stephenson LJ in Bonalumi v Home Secretary of Lord Wensleydale’s ‘golden rule’ in Grey v Pearson as ‘giving the words their natural and ordinary significance unless there is some compelling reason to the contrary’ — The usual purpose of a rent review clause was to ensure that the rent at which a property was let did not fall in real terms at rent reviews while the tenant remained in occupation — That purpose required certain hypotheses to be made which were contrary to reality, eg the hypothesis of vacant possession, and the parties might make it clear that they intended the hypothetical lease to depart still further from reality — But if the wording was not clear, and a literal interpretation resulted in an alteration of rental values which went beyond a reflection of changes in the value of money or in the property market generally, that could be a compelling reason for not applying the ‘golden rule’ — The words in dispute in the present case could be given a literal meaning which would be inconsistent with the commercial purpose of rent review provisions, or which would be plainly futile or absurd, or they could be interpreted as only excluding the passing rent — The last might merely produce the result which would have been produced without these express words, but that was no reason to reject this interpretation, which the judge held to be the correct one — A number of authorities were considered, including the Vice-Chancellor’s judgment in British Gas Corporation v Universities Superannuation Scheme Ltd, which did not enunciate special principles of construction applicable to rent review provisions, but set out the result which flowed from the application of the general principles of construction to such provisions — Held that the tenants were right in submitting that the words referred only to the reservation of rent, which in this particular case resulted only in the exclusion of the passing rent — Landlords’ summons dismissed.
This was a
summons by the plaintiff, Electricity Supply Nominees, seeking a declaration
that, on the true construction of a lease of accommodation at 97-105 Victoria
Street, London SW1, the rental value on rent reviews was to be assessed on the
basis that the lease contained no provision for rent reviews. The defendant,
the tenant, was F M Insurance Co Ltd.
Paul Morgan
(instructed by Jaques & Lewis) appeared on behalf of the plaintiff; R J
Furber (instructed by Linklaters & Paines) represented the defendant.
Giving
judgment, MR TERENCE CULLEN QC said: This summons raises a point on the
construction of a lease dated June 13 1980 and made between the plaintiff as
landlord and the defendant as tenant, together with a guarantor. The demised
property was the fifth floor and part of the ground floor of 97-105 Victoria
Street, London SW1. The plaintiff seeks a declaration that on the true
construction of the lease the rental value on rent reviews under the lease is
to be assessed on the basis that the hypothetical lease contains no provisions
for rent reviews. The lease is for 25 years from March 25 1980.
The present
dispute arises on the occasion of the first rent review, which is operative as
at March 25 1985. The rent review provisions are contained in the fourth
schedule to the lease. By para 1 the expression ‘rental value’ is defined, so
far as material, as:
the best
yearly rent at which the demised premises are reasonably worth to be let as
offices
then I omit
provisions as to area
in the open
market with vacant possession and as a whole for a term of twenty-five years at
a relevant date hereunder (that is to say a date as at which rental value falls
to be agreed or determined in accordance with the following provisions of this
Schedule) without taking a fine or premium and upon the terms of this Lease except
as regards rent.
There then
follow certain immaterial assumptions and common form provisions for
disregarding certain matters.
The schedule
goes on to provide for five-yearly reviews with a reference to arbitration if
the rental value cannot be agreed. Para 5 provides for the attachment to the
lease of a memorandum of any agreement or determination of matters under the
schedule.
The
declaration sought by the plaintiff is that under para 1 of the fourth schedule
the hypothetical lease is on the same terms as the actual lease save that it is
for 25 years from the date of review (this is not disputed) and by reason of
the words ‘except as regards rent’ the hypothetical lease omits the fourth
schedule.
However, in
argument, while confining himself to that relief, Mr Morgan for the landlord
submitted primarily that the words ‘except as regards rent’ had the effect of
excising all terms which can be said to be a term ‘as regards rent’. It was
only if that argument failed that he submitted that, at the narrowest, the
words extended to the fourth schedule.
Mr Furber for
the tenant submitted that the words should be confined to meaning the rent
actually payable immediately prior to the relevant review date, which I shall
call ‘the passing rent’. I was told that the parties had agreed that if the
landlord were right, the rental value as at March 25 1985 was £18.50 per sq ft,
while if the tenant were right it was £17 per sq ft. In view of that agreement,
there was no factual dispute between the parties, so that by consent they came
before the court on this construction issue rather than having it resolved by
arbitration under the lease.
It is common
ground that the words ‘terms except as regards rent’ could include:
(i) the reservation of rent. This is in the
following terms:
YIELDING AND
PAYING therefor during the term hereby granted FIRST the yearly rent of FOUR
HUNDRED AND FOUR THOUSAND ONE HUNDRED AND NINETY-THREE POUNDS (£404,193) or
(after the end of the fifth year) such greater yearly rent as shall be agreed
or determined in accordance with the provisions of the Fourth Schedule hereto.
Thus at the
first review date the reservation of rent will reserve a rent of £404,193, and
at each subsequent review date it will reserve that sum or such other sum as is
shown on any memorandum as is attached to the lease under para 5 of the fourth
schedule. In other words, the reservation will, at each review date, simply set
out the passing rent. It is therefore the defendant’s contention that the material
words are limited to the reservation of rent, and it is only those words that
are omitted from the hypothetical lease.
(ii) the reservation of an additional yearly rent
in respect of service charges, as to which there are elaborate provisions for quantification
and administration in the fifth schedule.
(iii) the reservation of an additional yearly rent
in respect of a proportion of insurance premium payable by the landlord.
(iv) the covenant to pay rent in clause 2(1) of
the lease.
(v) the proviso for interest on arrears of rent
in clause 4(1).
(vi) the proviso for re-entry for non-payment of
rent in clause 4(2).
(vii) the proviso for rent suspension in clause
4(3).
(viii) the proviso that receipt of rent should not
be a waiver of the right of re-entry in clause 4(9), and
(ix), of course, the rent review provisions in the
fourth schedule.
Mr Morgan
submitted that the words ‘terms except as regards rent’, in their literal
sense, covered all nine of the terms or provisions I have mentioned. He then
directed me to Halsbury’s Laws of England, 4th ed, vol 12, para 1463,
and submitted that I must apply the literal meaning and excise all nine terms
unless to do so would be absurd. He further submitted that, even if I found
that there would be an absurdity in the case of the excision of some of the
terms, I was still bound to give the words the widest meaning short of
absurdity, and that meant that at least the rent review provisions must be
excised from the hypothetical lease, because it could not be said that to
exclude them would be an absurd result.
In view of
three authorities: French Kier Property Investment Ltd v Marconi Co
Ltd, an unreported decision of McNeill J delivered on March 16 1982; Pugh
v Smiths Industries Ltd (1982) 264 EG 823, [1982] 2 EGLR 120; and Safeway
Food Stores Ltd v Banderway Ltd (1983) 267 EG 850, in which tenants
entered into leases which plainly excluded rent review provisions from the
hypothetical lease, I agree with Mr Morgan that I could not conclude that the
excision of the rent review provisions could be said to be absurd.
However, the
canon of construction set out in para 1463 is not confined to the rejection of
the absurd. The golden rule, as it is called, which applies to wills, statutes,
and all written instruments, is usually taken from the speech of Lord
Wensleydale in Grey v Pearson (1857) 6 HL Cas 61 at p 106, and
covers not only absurdity but also an inconsistency with the rest of the
instrument, in which case the ordinary sense of the words can be modified so as
to avoid that inconsistency. In the case of a contractual transaction, in
concluding whether there is an inconsistency with the rest of the instrument,
the court takes into account the whole of the instrument, together with the
commercial purpose of the transaction, viewed objectively (see Reardon Smith
Line v Hansen-Tangen [1976] 1 WLR 989 at p 996).
The golden
rule itself has been restated in modern terms by the Court of Appeal in Bonalumi
v Secretary of State for the Home Department [1985] 1 QB 675, where
Stephenson LJ said at p 682F:
the court . .
. must start by apply Lord Wensleydale’s golden rule in Grey v Pearson
. . . (put bluntly) of giving the words their natural and ordinary significance
unless there is some compelling reason to the contrary.
So I turn to
this lease, looking at it as a whole, and in the context of the commercial
purpose of rent review provisions viewed objectively, as to which there was no
doubt in 1980, although such purpose was expressed in various ways. To take one
example, known to the parties at the date of the lease, I refer to Ponsford
v HMS Aerosols Ltd [1979] AC 63, where Viscount Dilhorne, at p 76G,
stated: ‘Their object is to secure that in real terms the rent payable does not
fall below that initially agreed on.’
That is a
limited purpose. The rent was initially agreed on the basis of the value of the
property when let on the terms of the actual lease. To achieve the purpose of
securing that that rent does not fall in real terms at rent reviews while the
tenant remains in occupation, so the premises cannot actually be let at the
then current rental, requires certain hypotheses to be made which are contrary
to reality; for example, the hypothesis of vacant possession to be found in
this and in most other rent review provisions. Of course, the parties may have
a particular commercial or other reason which causes them to agree to depart
still further from reality, but a hypothesis that would result in an alteration
in rental value other than one merely reflecting an alteration in the value of
money or in the property market generally is, in my judgment, inconsistent with
the limited commercial purpose of a rent review provision. If the wording of
the lease makes it clear that the parties intended to affect the rental value on
review by using a basis other than the terms of the actual lease, then I must
give effect to that intention. It is not for me to speculate what particular
commercial or other reasons prompted such alteration, nor to rewrite the lease
so as to make it conform to the usual limited commercial purpose. Thus in the
present case the term of the hypothetical lease is to be 25 years at each
review date, although the actual lease will have a shorter residue at each such
date.
However, if
the wording of the lease is not clear, and if the words, used literally, result
in altering rental values other than by merely reflecting an alteration in the
value of money or the property market generally, and if the words can be
applied in a more limited sense which is consistent with the commercial purpose
I have described, then in my judgment there is a compelling reason for not
applying the golden rule. In the lease before me the literal approach clearly
results in alterations in rental value which have nothing to do with inflation
or the property market. If the words ‘terms except as regards rent’ apply to
the service charge rent and the insurance rent so that these are to be excised
from the hypothetical lease, the rental value will obviously be different from
that which would result from a lease on the terms of the actual lease at the
rent review date. So with the rent review provisions of the fourth schedule.
It follows
that, if there is a narrower meaning that could be applied to the words, I
would restrict them to such narrower meaning.
Then there are
the terms relating to actual payment of rent and interest, to the securing of
such payment by the right of re-entry, and to the suspension of the payment of
rent. I do not know if these would
with the commercial purpose as in the case of the other terms I have dealt with
and would not be within the relevant words for the same reason. If they would
have no effect on rental value, then they have no discernible effect at all,
save to emasculate the lease, and it would be an exercise in futility for the
parties to have provided that the hypothetical lease should not include such
provisions.
In the latter
event, the question of exclusion or inclusion is only of academic interest.
However, I should deal with the point. In such event, the terms would not be
inconsistent with the commercial purpose, but futility or absurdity seem to me
to be a like compelling reason for not extending the words to include these terms.
I am therefore
left with the reservation of rent, which, as I have said, effectively merely
sets out the passing rent. To exclude the passing rent from the actual lease in
order to arrive at the hypothetical lease in which the new rent was to be inserted
is something which has to be done. Indeed, Mr Morgan points out that the words
would be impliedly excluded anyway. I agree.
To sum up, the
relevant words can be given a literal meaning that includes terms that are
inconsistent with the commercial purpose of the rent review provisions. They
can be given a narrower meaning which includes terms which it would be futile
or absurd to include, or they can be given a meaning narrowed down to the
passing rent, which meaning would be implicit and therefore, Mr Morgan says,
unnecessary. However, if the words so construed would be implied anyway, it
follows that they are neither inconsistent nor futile, and therefore in my
judgment I must give that narrowest meaning to them. I see no compelling reason
in the context of this lease to reject the possible meaning of the words simply
because the parties would be held to have intended that result even if the
lease had been silent on the point.
It follows
that I consider that the tenant is right in submitting that the words refer
only to the reservation of rent, which in this particular lease results only in
the exclusion of the passing rent.
I was referred
to a number of authorities. However, I am construing this particular lease, so
that, apart from one authority which I shall come to, other decisions on other
leases are not of great assistance. I merely mention those in the landlord’s
favour. In Safeway Food Stores Ltd v Banderway Ltd (1983) 267 EG
850, [1983] 2 EGLR 116 and the two earlier decisions to which I have already
referred, the terms of a lease were such that they could have no meaning other
than that the rent review provisions were to be excluded from the hypothetical
lease.
In National
Westminster Bank plc v Arthur Young, McClelland Moores & Co
(1984) 273 EG 402* the wording of the particular lease was such that the
relevant words could not be confined to the passing rent. Even with adjustments
for grammatical reasons, the words still included ‘rent payable from time to
time’, and that in turn, under the reddendum, included the rent review
provisions, which therefore had to be excluded from the hypothetical lease.
*Editor’s
note: Also reported at [1985] 1 EGLR 61.
In Equity
& Law Life Assurance Society plc v Bodfield Ltd (1985) 276 EG
1157†, the relevant words again could not be confined to the passing rent as
they can in this case.
† Editor’s
note: Also reported at [1985] 2 EGLR 144.
I was also
referred by Mr Furber to section 34 of the Landlord and Tenant Act 1954 and by
Mr Morgan to section 8 of the Agricultural Holdings Act 1948 and to the
reversal of approach occasioned by the amendment of that section by virtue of
section 1 of the Agricultural Holdings Act 1984. However, I get no assistance
from such statutory provisions.
As I have
said, there is one authority I should mention more fully. That is the recent
unreported decision of the Vice-Chancellor in British Gas Corporation v Universities
Superannuation Scheme Ltd.‡ The
judgment was delivered on February 6 1986, and I was provided with a
transcript. Mr Furber submitted that in that case the Vice-Chancellor laid down
new principles of construction that are applicable to rent review provisions in
leases, and he further submitted that I am bound by that decision under the
principles referred to by Nourse J in Colchester Estates (Cardiff) Ltd v
Carlton Industries plc [1984] 3 WLR 693. § However, I do not consider that the
Vice-Chancellor was enunciating special principles of construction which apply
only to rent review provisions in leases. It seems to me that the
Vice-Chancellor was merely setting out what would be the usual result that
would flow from the application of the general principles of construction to
rent review clauses in leases. As I have indicated, in my judgment, that result
flows in this case. I therefore dismiss the summons.
‡ Editor’s
note: Reported at p 120 ante and (1986) 277 EG 980.
§ Editor’s
note: Also reported at (1984) 271 EG 778, [1984] 2 EGLR 64.
The
plaintiff’s summons was dismissed with costs.
