Landlord and tenant — Rent review clause in lease of industrial estate — Construction — Appeal from decision of Gibson J — Confirmation of strict approach to construction of individual lease without any presumption in favour of commercial realism or otherwise — Guidance of Vice-Chancellor in British Gas Corporation v Universities Superannuation Scheme Ltd not to be understood as entitling the court to apply, not the actual clause which the parties have entered into, but the different clause which they probably would have entered into if fully advised as to the practical consequences of their scheme — In the present case there was a 70-year term with rent reviews at the end of the 14th, 28th, 42nd and 56th years — The rent review provisions included a somewhat complicated formula with the unusual feature that a discount on the ‘net rental value’ was allowed to the tenants — The ‘net rental value’ was defined as the best open market rent on the assumption (inter alia) that the hypothetical lease should be on the terms of the actual lease ‘other than as to duration and rent’ — Landlords had sought a declaration that the true construction was that the hypothetical lease should contain no rent review provisions and Gibson J had so decided — Tenants appealed, but Court of Appeal have affirmed Gibson J’s decision — It was common ground that the words ‘other than as to . . . rent’ did not exclude the covenant to pay rent or the power of re-entry for non-payment — It was also clear that they did exclude the yearly rents of fixed amounts payable before the first review — The difficulties arose as to other provisions — The somewhat complicated provisions as to a discount from the net rent could not, however, be imported into the hypothetical letting; that became clear on construction — It followed, in the court’s opinion, that the current rent review provision must be covered by the words of exclusion, not as a matter of implication, but of the meaning of the express words — It was a necessary consequence that future reviews should also be excluded from the hypothetical letting — Comments by court on the unhelpfulness of decisions on the construction of other leases as an aid to the construction of the particular lease which has to be considered — Appeal dismissed
The following
cases are referred to in this report.
Aspden v Seddon (1875) 10 Ch App 394
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
Guys
‘n’ Dolls Ltd v Sade Brothers Catering Ltd
(1983) 269 EG 129, [1984] 1 EGLR 103, CA
This was an
appeal by the tenants, Bodfield Ltd, from the decision of Gibson J (reported at
[1985] 2 EGLR 144, (1985) 276 EG 1157) in favour of the submission of the
landlords, Equity & Law Life Assurance Society plc, on the construction of
the rent review provisions of the lease of premises on an industrial estate
known as Commerce Estate, Raven Road, South Woodford, Essex.
Michael Barnes
QC and Christopher Priday QC (instructed by Baker & McKenzie) appeared on
behalf of the appellants; Kim Lewison (instructed by A C McIntosh, Legal
Department, Equity & Law Life Assurance Society plc) represented the
respondents.
Giving the
first judgment at the invitation of FOX LJ, DILLON LJ said: This is an appeal
from a decision of Peter Gibson J regarding the construction of a rent review
clause in a lease. Briefly, the problem is this. The lease provides that each
rent review shall be on the basis of a hypothetical lease on the same terms as
those of the lease other than as to duration and rent. What is meant by
rent? Does the reference to rent require
that the terms as to future rent reviews contained in the existing lease should
be included in the hypothetical lease or excluded?
The lease is
dated April 28 1968 and was made between the plaintiff, Equity & Law Life
Assurance Society (as lessors), of the one part and Town & Commercial
Properties Ltd (as lessees) of the other part. The term has since become vested
in the defendants. The demised property was an industrial estate in Essex. The
term granted was 70 years from the date of the lease at rents of:
£22,500 for
the first 3 years
£27,000 for
the next 7 years
£28,500
thereafter.
The lease
further provides for payment of ‘such increased rent as may be agreed or
determined in manner hereinafter provided’.
Clause 4(1) of
the lease conferred on the lessors the right to have the rent reviewed as from
the end of all or any of the 14th, 28th, 42nd and 56th years of the term. The
present question has arisen on the first rent review.
How the
reviews are to work is set out at considerable length in clause 4(2) of the
lease. That in turn depends on the definition of ‘Net Rental Value’ in clause
4(4). Rather than attempting a paraphrase, I set out the relevant provisions of
clause 4(2) as follows:
If a sum
equal to eighty-five per cent of the net rental value so agreed or determined
on a review under sub-clause (1) hereof as from the end of the Fourteenth year
of the term hereby granted exceeds the sum of Twenty-eight thousand five
hundred pounds there shall become payable by way of additional rent hereunder
an annual sum equal to the amount of such excess. If at the time of a review as
from the end of any one or all of the Twenty-eight Forty-second or Fifty-sixth
years of the term hereby granted no additional rent is payable under the
provisions of this Clause then if on any such review a sum equal to eighty-five
per cent of the net rental value is found to exceed Twenty-eight thousand five
hundred pounds there shall become payable by way of additional rent hereunder
an annual sum equal to the amount of such excess. If at the time of a review as
from the end of any one or all of the Twenty-eight Forty-second or Fifty-sixth
years of the term hereby granted an additional rent is payable under the
provisions of this Clause then if on any such review a sum equal to eighty-five
per cent of the net rental value is found to exceed the sum of Twenty-eight
thousand five hundred pounds plus the additional rent already payable the
additional rent then payable shall be increased by the amount of such excess.
There are then
provisions as to how the additional rent or increased additional rent is to be
paid. Clause 4(4) of the lease is, so far as material, as follows:
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.
The lessors on
March 14 1983 took out an originating summons asking for a declaration that:
upon the true
construction of the above-mentioned Lease and in the events which have
happened, any valuer appointed to determine the net rental value of the . . .
property (under Clause 4(4) of the said Lease) ought to determine the same upon
the assumption that the said property is let upon a hypothetical lease which
contains no provision for revising the rent payable thereunder.
The judge
accepted the plaintiffs’ case and made an order as asked in the originating
summons. From that decision the lessees appeal.
The dispute
turns on the meaning of the words in clause 4(4) ‘. . . upon the terms of this
Lease other than as to . . . rent’.
There is no
doubt that the general object of a rent review clause, which provides that the
rent cannot be reduced on a review, is to provide the landlord with some
measure of relief where, by increases in property values or falls in the real
value of money in an inflationary period, a fixed rent has become out of date
and unduly favourable to the tenant. The exact measure of relief depends on the
true construction of the particular rent review clause. It is, however, in my
view, a very unsatisfactory procedure for arriving at a decision on the true
construction of the particular clause that counsel should, as counsel for the
appellants did in the present case, feel constrained to read aloud in open
court the judgments from start to finish in 10 or more other cases decided on
differently worded clauses. These other cases serve in truth to illustrate the
great variety of different forms of words which draftsmen may use in preparing
rent review clauses. For my part I would accept the point made by Mr Lewison
(by reference to the judgment of Sir George Jessel MR in Aspden v Seddon
(1875) 10 Ch App 394 at p 397) that to refer to authorities on other documents
merely for the purpose of ascertaining the construction of a particular
document is to be deplored as a wrong approach and likely to lead to confusion
and error.
However, I
welcome and approve the rough guidelines stated by the Vice-Chancellor in British
Gas Corporation v Universities Superannuation Scheme Ltd [1986] 1
WLR 398 at p 403* where he said:
In these
circumstances, there are in my judgment conflicting decisions as to the correct
approach to the construction of these clauses. I am accordingly free to adopt
the approach I prefer. In my judgment the correct approach is as follows: (a)
words in a rent exclusion provision which require all provisions as to rent to
be disregarded produce a result so manifestly contrary to commercial common
sense that they cannot be given literal effect; (b) other clear words which
require the rent review provisions (as opposed to all provisions as to rent) to
be disregarded (such as those in the Pugh case, (1982) 264 EG 823,
[1982] 2 EGLR 120) must be given effect to however wayward the result; (c)
subject to (b), in the absence of special circumstances it is proper to give
effect to the underlying commercial purpose of a rent review clause and to
construe the words so as to give effect to that purpose by requiring future
rent reviews to be taken into account in fixing the open market rental under
the hypothetical letting.
*Editor’s
note: Also reported at [1986] 1 EGLR 120 at p 121.
I am
conscious that such an approach is perilously close to seeking to lay down
mechanistic rules of construction as opposed to principles of construction. But
there is an urgent need to produce certainty in this field. Every year
thousands of rents are coming up for review on the basis of clauses such as the
one before me: witness the growing tide of litigation raising the point.
Landlords, tenants and their valuers need to know what is the right basis of
valuation without recourse to lawyers, let alone the courts. The question
cannot be left to turn on the terms of each lease without the basic approach
being certain. 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.
These were of
course no mechanistic rules of construction, to be applied rigidly in every
case. They were only guidelines, and, however valuable guidelines are, the
function of the court in each particular case is to construe the particular
rent review clause which is in issue in that case.
Where lawyers
have prepared a particularly complicated rent review it is likely to be
difficult if not impossible for the parties to discover the right basis of
valuation without recourse to lawyers. Indeed, one of the most fruitful sources
of difficulty in the construction of such clauses is that parties leave it to
their lawyers to devise appropriate wording to, in the Vice-Chancellor’s words,
‘give effect to the underlying commercial purpose of a rent review clause’ and
the lawyers, in devising complicated review provisions, fail to appreciate the
less immediately apparent commercial implications of what they have drafted. Guidelines
such as the Vice-Chancellor’s cannot entitle the court to construe and apply
not the clause which the parties have entered into but the different clause
which they might have, or probably would have, entered into if their lawyers
had thought rather more deeply about how the intricate scheme they were setting
up would work in practice.
In the present
case, the rent review clause in its definition of ‘net rental value’ requires
the assumption of a hypothetical letting of the premises as a whole for the
residue unexpired of the term granted by the actual lease ‘upon the terms of
this lease other than as to duration and rent’. It is common ground that the
words ‘other than as to . . . rent’ do not exclude the covenant in the actual
lease to pay rent and the power of re-entry in the actual lease for non-payment
of rent; any other conclusion would, in the Vice-Chancellor’s words, be
manifestly contrary to commercial common sense. The words ‘other than as to
rent’ do, however, exclude the yearly rents of fixed amount reserved by clause
1 of the lease so as to be payable at various times before the first rent
review. So much is easy. The difficulty arises over clause 4(2) of the lease
set out above.
Clause 4(2) is
a complicated clause, with its provisions for additional rents and increased
additional rents to become payable on successive reviews. What is clear to me,
however, is that the provisions of clause 4(2) for calculating 85% of the net
rental value on a review, and calculating the additional rent, if any, payable
from that review date on the basis of that 85%, cannot be imported into the
hypothetical letting which is postulated for that particular review date by
clause 4(4), because what has to be determined for that hypothetical letting,
as the ‘net rental value’ as defined in clause 4(4), is the best rent which the
premises might fetch on the open market on the prescribed assumptions, and not
85% of the best rent.
It follows, in
my judgment, that the provisions of clause 4(2) as to the current review which
cannot be included in the hypothetical letting must be covered by the words of
exclusion in the phrase ‘upon the terms of this lease other than as to . . .
rent’ in the formula for determining the ‘net rental value’ — ie these
provisions of clause 4 (2) are excluded because they are terms of the actual
lease as to rent. This is emphasised by the fact that the whole cumbrous
edifice of clause 4(2) is based on the specified rent of £28,500, which is
itself excluded from the hypothetical letting by the words of exclusion just
quoted.
I do not for
my part regard the exclusion, from the hypothetical letting on a review, of the
provisions of clause 4(2) in relation to that current review as being merely a
matter of necessary implication, because to include them would be absurd.
Exclusion by necessary implication does not arise where there is an express
exclusion provision, as there is in the words ‘upon the terms of this Lease
other than as to rent’. Those words exclude the yearly rents of fixed amount
reserved by clause I of the lease, payable before the first rent review, which
it would be equally absurd or impracticable to include in the hypothetical
letting. In my judgment (as indicated), those words also exclude the parts of
clause 4(2) applicable to the current review. But clause 4(2) is a long and
detailed clause providing for what is to happen in relation to each successive
rent review. If any of its terms are ‘terms of this lease as to rent’, then all
of them are.
Peter Gibson J
dealt with this in a passage which is fundamental to his judgment. Referring to
Mr Barnes, counsel for the present appellants, he said:
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 initally 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
*Editor’s
note: See [1985] 2 EGLR 144 at p 145.
I agree and I
would therefore dismiss this appeal.
In addition,
if, by whatever process of construction, only the provisions of clause 4(2) as
to the current review are excluded from the terms of the hypothetical letting,
but the provisions of clause 4(2) as to future reviews are not excluded, those
provisions as to future reviews would have to be redrafted — probably
drastically, since clause 4(2) is such an involved clause — to base them on a
datum rent other than the rent of £28,500. I do not for my part believe that
such redrafting is permissible, given the terms of the definition of ‘net
rental value’ in clause 4(4).
FOX and
RUSSELL LJJ agreed and did not add anything.
The appeal
was dismissed with costs; leave to appeal to the House of Lords was refused.
