Landlord and tenant — Construction of rent review clause in lease — Whether a provision that the terms of the hypothetical letting should be the same as those of the lease ‘other than as to duration and rent’ meant that the terms as to future rent
reviews should be excluded — It was agreed by both parties that this could not mean that all the terms of the lease which in any way related to duration or rent should be excluded, but the dispute was as to what narrower meaning was intended — Landlord submitted that the exclusion was intended to apply to terms which quantified duration and rent, with the result that the rent review provisions should be excluded — Tenant suggested a still narrower meaning referring only to the duration of the lease and the quantified amounts of the rents initially reserved — It was clear from National Westminster Bank plc v Arthur Young McClelland Moores & Co that there was no presumption one way or the other as to the exclusion of the rent review clause from the hypothetical lease and that the answer must in every case depend on the precise terms of the lease — Rejecting an argument based on section 34 of the Landlord and Tenant Act 1954, the judge held that, on the true construction of the words ‘other than as to duration and rent’ in the present lease, the hypothetical terms excluded the rent review clause — Declaration accordingly
This was an
originating summons by which the plaintiff, Equity & Law Life Assurance
Society plc, the landlord, sought a declaration as to the true construction of
the rent review clause in a lease of premises on an industrial estate, known as
Commerce Estate, Raven Road, South Woodford, Essex. The tenant was the
defendant, Bodfield Ltd.
Kim Lewison
(instructed by A J Corby, Legal Department, Equity & Law Life Assurance
Society plc) appeared on behalf of the plaintiffs; Michael Barnes QC and
Christopher Priday (instructed by Baker & McKenzie) represented the
defendants.
Giving
judgment, PETER GIBSON J said: This originating summons raises a short question
of construction of a rent review clause in a lease, that question having arisen
between the landlord and the tenant on the first rent review. In summary, the
question is whether a provision that the terms of the hypothetical letting
envisaged on such review should be the same as those of the lease other than as
to rent requires the terms as to future rent reviews in the lease to be
excluded or included. If excluded, the likelihood is that the rental value
thereby ascertained will be significantly higher than if such terms were
included.
The plaintiff,
Equity & Law Life Assurance Society plc, on April 23 1968 granted a lease
on an industrial estate known as Commerce Estate, Raven Road, South Woodford,
Essex, for a term of 70 years. The estate consisted of 10 units, which had
already been let, and the lease was subject to and with the benefit of those
lettings.
The defendant,
Bodfield Ltd, has been the tenant under the lease since 1981. The reddendum in
clause 1 of the lease provides for the payment of a yearly rent of £22,500 for
the first three years, £27,000 for the next seven years and £28,500 thereafter
or such increased rent as might be agreed or determined in manner thereinafter
provided. Clause 4 contains provisions for rent reviews every 14 years of the
term. The reviews are triggered by a notice to be served by the landlord,
whereupon the landlord and the tenant are to endeavour to agree what is termed
the net rental value of the demised premises and, if they fail to agree, the
net rental value is to be determined by a valuer.
Clause 4 (2)
is an elaborate clause, the effect of which is to limit the rent payable
following such review to the greater of £28,500 and 85% of the net rental value
so ascertained. The method provided by the clause is to require a sum equal to
the amount by which 85% of the net rental value exceeds £28,500 to be paid by
way of additional rent or, if at the time of a later review an additional rent
is already being paid, then by way of an increased additional rent.
Clause 4 (4)
is the critical clause defining, as it does, the net rental value in this way:
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 (i) 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 (ii) that the premises have been kept in good repair and condition in all
respects in accordance with the Lessees’ obligations hereunder. There shall be
disregarded (a) any goodwill attached to the premises by reason of the carrying
on thereat of the business of the Lessees (b) any effect on the rent of any
improvement carried out by the Lessees hereunder otherwise than in pursuance of
an obligation to the Lessors.
The scheme of
the rent review as provided by that clause is therefore that, to ascertain the
net rental value, a hypothetical letting of the premises is postulated and for
that various assumptions there specified contrary to reality are made. They
include the assumption that instead of the 70-year lease continuing for the
remainder of the term a new lease for the unexpired residue of the term is to
be granted, and that instead of the actual rents payable under the lease the
best rent obtainable on a letting on the specified assumptions will be payable.
But the rents that will in fact be paid by the actual tenant in the real world
are governed by clause 4 (2).
Save for the
meaning of the words ‘other than as to duration and rent’ there is no
difficulty in construing the rent review clause, which has plainly been drafted
with care, professional skill and precision. One conceivable meaning of the
words if taken in isolation is that they refer to all the terms of the lease
which in any way relate to duration or rent. But Mr Lewison for the landlord
and Mr Barnes for the tenant are at one in rejecting that meaning and I think
they are right to do so. The basic terms which can be said to relate to
duration, for example the forfeiture clause, or to relate to rent, for example
the tenant’s obligation to pay rent quarterly in advance on the usual quarter
days, must be taken to have been intended to be terms of the lease in the
hypothetical letting. A narrower meaning must therefore be found for the words.
Mr Lewison
submits that the natural meaning to be given to the words is that they refer to
terms which quantify duration and rent. On that construction, therefore, the
rent review clause is excluded from the terms of the hypothetical letting.
Mr Barnes
gives an even narrower meaning to the words. He says that they refer to the
terms of the lease which give the duration of the lease and the quantified
amounts of the rents initially reserved or, as he puts it, £X. Thus the terms
he says that are excluded are the terms that the lease is for 70 years and that
the rents of £22,500, £27,000 and £28,500 are the operative rents.
I shall deal
with Mr Barnes’ submission first. On his construction, as it seems to me,
rather more of the lease would in fact have to be excluded from the terms of
the hypothetical lease than in his submission which I have just described. In
effect the whole of the for which they are payable would fall to be excluded.
Far more significantly, however, Mr Barnes accepts that clause 4 (2) could not
sensibly be treated as a term of the hypothetical lease providing, as it does,
for payment of a rent less than the net rental value, the ascertainment of
which is the whole object of the hypothetical exercise.
He submitted
on the authority of the decision of the Court of Appeal in Guys ‘n’ Dolls
Ltd v Sade Brothers Catering Ltd (1983) 269 EG 129, [1984] 1 EGLR
103 that where a lease provides for a rent review on the basis of a
hypothetical lease on the terms of an actual lease and the actual terms provide
for the payment of rent at a discount to or a premium over the market value
ascertained on the rent review, the court will as a matter of necessary
implication exclude that term from the terms of the hypothetical lease. I of
course accept that is so where the terms of the lease are explicit in requiring
the hypothetical letting to be on the terms of the actual lease. But in the
case of a lease such as this which does not contain such explicit terms, to my
mind it is a very odd process of construction to construe the words ‘other than
as to rent’ as in the first place limited only to the rents initially reserved,
but then to exclude clause 4 (2) by a process of necessary implication. The
more natural way to approach the matter is, in my view, to seek a meaning for
‘other than as to rent’ which comprehends all the terms to be taken as excluded
from the hypothetical letting.
Mr Barnes,
however, advanced several contentions in support of his submission. First he
submitted that only if rent reviews were included in the hypothetical letting
could references to increased rents in other parts of the lease which are
incorporated in the hypothetical letting be given any meaning. But even on his
own construction in the hypothetical letting at the final rent review there
would be otiose references to increased rents. In any event, the point is, in
my judgment, answered in the way that Goulding J dealt with a similar argument
advanced in Pugh v Smiths Industries Ltd (1982) 264 EG 823 at p
826, [1982] 2 EGLR 120: ‘If the valuer is to exclude the provisions of the rent
review clause, naturally he disregards references to it in the other parts of
the lease.’
Second, he
submitted that a rent review clause such as this which contains words of
ambiguity should be construed by the court in such
purpose of such a clause. By reference to Ponsford v HMS Aerosols Ltd
[1979] AC 63, and the remarks of Viscount Dilhorne at p 76 and Lord Fraser at p
83, he described this as to up-date rent at regular intervals so that the
landlord obtains the increased rent the demised premises would command if let on
the terms of the lease for the residue of the term. I do not doubt that that is
generally the commercial purpose of a rent review clause even in a lease
granted in 1968 before the days of high inflation. I accept that it is
surprising to have a valuation on the footing that the lease will run for 56
years without a rent review clause, as is the case when one is considering the
first rent review. But I do not understand the Ponsford case to lay down
any presumption or rule of construction to govern the interpretation of a rent
review clause.
Walton J in National
Westminster Bank plc v Arthur Young McClelland Moores & Co
(1984) 273 EG 402 made this observation on the question of whether a rent
review clause is to be treated as included in the terms of a hypothetical
letting:
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.
So in my
judgment here.
In the present
case there is the particular difficulty that unusually a discount from the net
market value is given to the tenant, for what reason it is not known. It may or
may not have been intended to compensate the tenant for not including rent
review clauses in the terms of the hypothetical letting. 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.
The same
comments can be made in respect of Mr Barnes’ next submission that the court
should construe the rent review clause so as to achieve the position that the
rent should be fair to both parties. This submission was made on the basis of
the recognition by Goulding J in the Pugh case that a rent review which
excluded a rent review clause from the terms of the hypothetical letting
involves a one-sided assumption in favour of the landlord. But Goulding J in Pugh’s
case, in rejecting a similar submission to that advanced by Mr Barnes,
commented (264 EG 823 at p 826, [1982] 2 EGLR 120):
It may be,
looking at nothing outside the terms of the document and admissible evidence,
that this bias of the clause in favour of the landlord was stipulated for in
negotiation against other advantages allowed to the tenants. One just does not
know from the document. Or, again, it may well be that neither side gave any
thought to this point.
Mr Barnes then
submitted that support for his construction could be derived from the words of
section 34, Landlord and Tenant Act 1954 (as amended) and certain judicial
comments thereon. By that section the court in granting a new business tenancy
both determines the rent (section 34 (1)) and has the power to include a rent
review clause in the new lease (section 34 (3)). The rent is to be that at
which, having regard to the terms of the tenancy ‘(other than those relating to
rent)’ the holding might reasonably be expected to be let on the assumptions
specified in the section. Both Stamp J in Regis Property Co Ltd v Lewis
& Peat Ltd [1970] Ch 695 at p 699 and Megarry J in English Exporters
(London) Ltd v Eldonwall Ltd [1973] Ch 415 expressed the view that
the words in parentheses in section 34 (1) were intended to prevent the
nonsense that would arise if the terms relating to rent were not ignored.
It is common
ground between Mr Barnes and Mr Lewison that the court must take into account
for the purposes of section 34 any rent review clause that it decides to
include when determining the rent, and therefore the words in parentheses in
the subsection must be construed as not referring to the rent review clause.
I accept that
section 34 provides an illustration of the use of words similar to those which
I have to construe as not referring to a rent review clause. But I do not think
it provides a compelling argument that in the present lease the words ‘other
than as to rent’ do not refer to a rent review clause. The context and the
circumstances of the application of section 34 are entirely different from the
present. Under the Landlord and Tenant Act the court at the same time as it
fixes the rent determines whether or not there is to be a rent review clause,
and it would be a nonsense if it were to ignore the review clause it decides to
include when it fixes the rent. In the present case the valuer is not deciding
whether or not to include a rent review clause. The only question is what did
the parties agree? Did they agree that
the rent review clause was to be included in the terms of the hypothetical
letting or not?
I turn to Mr
Lewison’s submission. He says that if one poses 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 when 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 the purposes of a rent review was to be ‘subject to
the provisions of this 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 feature 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
conclusion that I have stated.
For these
reasons, therefore, notwithstanding Mr Barnes’ skilful advocacy, I prefer the
submissions made by Mr Lewison as to the meaning of the rent review clause.
Accordingly, I shall make the declaration sought in the originating summons,
that is to say a declaration that upon the true construction of the lease and
in the events which have happened any valuer appointed to determine the net
rental value of the property, as defined by clause 4 (4) of the lease, ought to
determine the same upon the assumption that the property is let upon a
hypothetical lease which contains no provision for revising the rent payable
thereunder.
The plaintiff
society was awarded the costs of the application.
