Landlord and tenant — Rent review clause — Construction — Reviewed rent to be the equivalent of the annual rental value ‘at the time of’ its determination — Meaning of ‘at the time of’ — Appeal by tenants from judge’s ‘reluctant’ decision that the words meant at the time when the independent surveyor appointed under the review clause actually made his determination — Appeal succeeds
clause in the lease, which was for 15 years from December 8 1977, was in a
familiar form, with provisions (1) for a trigger notice by the landlords
specifying the amount of the review rent, (2) for agreement between the parties
within three months of such notice, substituting a different sum, or (3) at the
election of the tenants not later than three months after the landlords’
notice, for determination by an independent surveyor — An independent surveyor
had in fact been appointed, in the absence of agreement on the rent, for both
the first and second rent reviews — Action on the first review had been held up
because of a dispute as to the validity of the tenants’ counternotice electing
for an independent surveyor — Its validity was established by Hutchison J in
Glofield Properties Ltd v Morley (no 1) [1988] 1 EGLR 113 — In the meantime the machinery for
the second rent review had begun to operate, the tenants having duly given a
counternotice — The independent surveyor had not, however, been able to
determine either of the review rents because of the construction dispute which
was now the subject of the present proceedings
landlords’ contention was that the rent payable during each review period was
to be determined by reference to the open market rental value at the date on
which the surveyor actually made his determination — The tenants contended that
it was to be ascertained by reference to the open market rental value at the
date of the commencement of the relevant rental period — Mr Michael Wheeler QC,
sitting as a deputy judge of the Chancery Division, made a declaration in
favour of the landlords’ construction and the tenants appealed — The result of
the judge’s decision, which he arrived at with reluctance, was that the rents
payable during the second and third five years of the term would be determined
by values prevailing in the first case about seven years and in the second case
about two years after the commencement of the relevant rental periods
Appeal accepted that the obvious natural meaning of the disputed words ‘at the
time of such determination’ was ‘at the time at which such determination was
made’ — The question was, however, whether the lease showed that the parties
had clearly and unequivocally expressed their intention in accordance with that
construction — If not, it would be open to the court to construe the language
in such a way as to produce a more sensible and realistic commercial result —
It was contrary to the whole purpose of a rent review provision that the
reviewed rent should be fixed by reference to values prevailing at a date significantly
later than the start of the period in respect of which the rent was payable —
The court found material in the lease to support the more sensible and
realistic construction — The review clause referred to ‘the open market rental
value’ as a sum ‘in relation to the review period or the second review period
as the case may be’ — These words, which otherwise would have no obvious
purpose, supported the view that ‘at the time of such determination’ was
capable of meaning ‘at the time for such determination’ or ‘at the time to
which such determination relates’ — The time for the determination of a
reviewed rent was the start of the review period to which it related — The
court were unanimous in adopting the construction proposed — They distinguished
the decision in London & Manchester Assurance Co Ltd v G A Dunn &
Co, which had influenced the deputy judge in deciding in favour of the
landlords; there was nothing in that case which prevented the court from
reaching the proposed construction — Tenants’ appeal allowed
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
Glofield Properties Ltd v Morley [1988] 1 EGLR
113; [1988] 02 EG 62
London & Manchester Assurance Co Ltd v G A Dunn & Co
[1983] EGD 86; (1982) 265 EG 39 & 131, CA, [1983] 1 EGLR 111
This was an
appeal by the defendants, David Morley and Brian Stewart, tenants of the
premises at 532 Kingsbury Road, London NW9, consisting of a ground-floor
lock-up shop, from the decision of Mr Michael Wheeler QC [1988] 2 EGLR 149,
sitting as a deputy judge of the Chancery Division, in favour of the plaintiffs
and present respondents, Glofield Properties Ltd, the landlords of the
premises. The case concerned the true construction of the rent review clause in
the lease of the premises.
Kirk Reynolds
(instructed by Fayers & Co) appeared on behalf of the appellants; Paul
Dickens (instructed by Druces & Attlee) represented the respondents.
Giving
judgment, NOURSE LJ said: ‘The questions to which rent review provisions can
give rise appear to be endless. In this case the lease provides that the
reviewed rent shall be the equivalent of the annual rental value of the
premises ‘at the time of’ its determination. The reviewed rents payable during
periods commencing in December 1982 and December 1987 have not yet been
determined. Are they to be determined in accordance with 1982 and 1987 values,
or is it the 1989 value which is to apply?
The judge in the court below, recognising that the first of these
answers would produce a far more sensible and realistic commercial result, with
obvious reluctance decided in favour of the second. Now we have to decide
whether the language of the lease and the influence of such authority as there
is on the point are so strong as to compel us to uphold a decision which does
not produce such a result.
The lease is
of a ground-floor lock-up shop at 532 Kingsbury Road, London NW9. It is dated
December 8 1977 and was made between the plaintiff, Glofield Properties Ltd, as
lessor of the one part and the defendants, Mr David Morley and Mr Brian
Stewart, and another as lessees of the other part. The term is one of 15 years
from December 8 1977. The first part of the reddendum, which is contained in
clause 2, is in these terms:
YIELDING AND PAYING therefor during the
term yearly and proportionately for any fraction of a year the rents hereunder
set out:
(a) During the first five years of the term the
rent of THREE THOUSAND FOUR HUNDRED POUNDS (£3,400.00) (hereinafter when
specifically referred to called ‘the first reserved rent’).
(b) During the second five years of the term
(hereinafter called ‘the review period’) the rent payable by the lessee shall
be whichever shall be the higher of the first reserved rent and the open market
rental value of the Demised Premises for the review period (hereinafter when
specifically referred to called ‘the reviewed rent’).
(c) During the third five years of the term
(hereinafter called ‘the second review period’) the rent payable by the lessee
shall be whichever shall be the higher of the reviewed rent and the open market
rental value of the Demised Premises for the second review period (hereinafter
when specifically referred to called ‘the second reviewed rent’).
Such reviewed rents to be determined in
accordance with the provisions in that behalf contained in Clause 5 hereof . .
.
Clause 5, so far as material, is in these
terms:
PROVIDED THAT AND IT IS HEREBY AGREED as
follows:
(1) The expression ‘the open market rental value’
as aforesaid means a sum in relation to the review period or the second review
period as the case may be determined in manner hereinafter provided as being at
the time of such determination the annual rental value of the Demised Premises
in the open market on a lease for a term of years certain equivalent to the
number of years then unexpired of the term granted by this Lease with vacant
possession at the commencement of such term . . .
(2) The said open market rental value shall be
determined as follows:–
(a) It shall be such sum as shall be specified in
a notice in writing by the Lessor to the Lessee at any time not earlier than
twelve months prior to the commencement of the review period or the second
review period as the case may be; or
(b) As shall within three months after such
notice be agreed between the parties in writing in substitution for the said
sum; or
(c) It shall be determined at the election of the
Lessee by counter-notice in writing to the Lessor not later than three months
after the Lessor’s said notice (time to be of the essence hereof) by an
independent surveyor . . .
(3) In the event of the determination by such
independent surveyor not having been made and communicated to both parties
hereto prior to the commencement of the review period or the second review
period as the case may be for any reason whatever then in respect of the period
of time (hereinafter called ‘the said interval’) beginning with the said
commencement and ending on the quarter day immediately following the date on
which such determination shall have been made and communicated as aforesaid the
rent payable hereunder shall continue to be paid at the rate payable
immediately prior thereto PROVIDED that at the expiration of the said interval
there shall be due as additional rent payable by the Lessee to the Lessor on
demand a sum of money equal to the amount whereby the reviewed rent or the
second reviewed rent shall exceed the rent payable immediately prior thereto
but duly apportioned in respect of the said interval.
No other
provisions of the lease are material to the question which is now in issue. On
August 20 1982 the plaintiff duly gave a notice to the defendants initiating
the first rent review. On September 23 1982 the defendants duly gave a
counternotice, but the plaintiff contended that it was not valid for the
purposes of clause 5(2)(c) of the lease. That objection was not disposed of
until July 10 1987, when it was overruled by Hutchison J in Glofield
Properties Ltd v Morley [1988] 1 EGLR 113. We have not been told why
it took nearly five years for that point to be dealt with. Meanwhile, on June
12 1987, the plaintiff duly gave another notice initiating the second rent
review. On July 21 1987 the defendants duly gave a counternotice. There having
been no agreement between the parties as to either of the reviewed rents, an
independent surveyor has been appointed to determine them. A dispute between
the parties as to the true construction of clause 5(1) of the lease has
prevented him from doing so.
The plaintiff
contends that the rent payable during each review period is to be determined by
reference to the open market rental value as at the date on which the surveyor
actually makes his determination. The defendants contend that it is to be
ascertained by reference to the open market rental value as at the date of the
commencement of the review period. On March 29 1988 Mr Michael Wheeler QC,
sitting as a deputy judge of the Chancery Division, made a declaration in the
former sense. The defendants now appeal to this court.
The question
depends on what is meant by the words ‘at the time of such determination’ in
clause 5(1) of the lease. At first sight it might appear that the plaintiff is
correct in saying that those words can refer only to the time at which the
determination is actually made, it being natural to assume that it will be made
at or soon after the start of the review period to which it relates. But it was
held by the majority of this court in London & Manchester Assurance Co
Ltd v G A Dunn & Co (1982) 265 EG 39, [1983] 1 EGLR 111, on the
wording of a rent review provision taken from the same book of precedents, that
the words ‘at any time not earlier than 12 months prior to the commencement of
the review period’ in clause 5(2)(a) enable the lessor to give an initiating
notice at any time before the end of the review period to which it relates.
That holding, having been made in relation to a rent review provision which is
in all material respects identical to that which is now before us, is binding
on this court. If the plaintiff’s argument on the further question which is now
before us is correct, it will, on the facts of the present case, have produced
a result whereby the rents payable during the second and third five years of
the term will be determined by reference to the open market rental values of
the premises prevailing in the first case about seven years and in the second
about two years after the commencement of those periods.
It was that
result which the learned judge, with every justification, strove to avoid. But
he found himself unable to do so. At p 4F-G of the transcript* he said:
I frankly admit that, looking at rent
review procedures in general, I find a construction which could give rise to
such curious results as unlikely to be what the average parties to a lease
could reasonably be expected to have in mind; and left to myself my initial
inclination would have been to favour the tenants’ construction. I have to
accept, however, that if the intention of the parties is clearly and
unequivocally expressed, the court is bound by it, however capricious it may
be, unless it is plainly controlled by other parts of the lease (see Chitty
on Contracts, 25th ed at para 779). At the end of the day, therefore,
notwithstanding considerable initial misgivings I have reluctantly come to the
conclusion that in the instant case, the landlord’s contention is correct and
that the open market rental value is the value as determined by the independent
surveyor at the date of his valuation.
*Editor’s note: Also reported at [1986] 1
EGLR 120. The passage quoted is at p 121B.
He then said that, in reaching that
conclusion, he had been very much influenced by four recent decisions on rent
review provisions, including London & Manchester Assurance Co Ltd v G
A Dunn & Co, to which I will return in due course.
It being clear
that the learned judge applied the correct test, the question is whether he was
also correct in deciding that the parties have clearly and unequivocally
expressed an intention in the sense for which the plaintiff contends. If they
have not, it is open to the court to construe their language in such a way as
to produce the more sensible and realistic commercial result. In that
connection I would emphasise that the objection to the plaintiff’s construction
is not so much that it gives one or other party, in times of inflation the
lessor and in times of deflation the lessee, an opportunity of working the
review machinery so as to produce a result which is more favourable to him. It
is simply that it is contrary to the whole purpose of a rent review provision
that the reviewed rent should be fixed by reference to values prevailing at a
date significantly later than the start of the period in respect of which it is
payable. That purpose has not been better stated than it was by the
Vice-Chancellor in British Gas Corporation v Universities Superannuation
Scheme Ltd [1986] 1 WLR 398 at p 401:†
. . . 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: See [1988] 2 EGLR 149 at
p 150M.
Mr Dickens has
sought to overcome this fundamental objection to the plaintiff’s construction
by pointing out that on the wording of clause 5(1) (sc ‘on a lease for a term
of years certain equivalent to the number of years then unexpired’) a
late determination will reduce the notional length of the term, thus favouring
the lessee at the expense of the lessor. He also points to the lessor’s
inability under clause 5(3) to obtain interest on increases in rent between the
start of a review period and the determination of the rent. In my view, neither
of these points is of sufficient weight to overcome the fundamental objection.
Indeed, the first of them confirms the unreality of the plaintiff’s
construction. It makes much better commercial sense for the reviewed rent to be
fixed by reference to the number of years unexpired at the start of the review
period. There is no difficulty in reading the word ‘then’ as referring to that
date. Mr Dickens also submitted that the greater difficulty of making the
retrospective valuation which would be necessary if the plaintiff’s
construction were incorrect supports the correctness of that construction.
Again I do not think that that is a consideration of any great weight.
Is the
intention of the parties clearly and unequivocally expressed? This question can be answered only by looking
at the material provisions of the lease with some care.
Para (b) of
the reddendum provides that during the second five years of the term the rent
payable by the lessee shall be whichever shall be the higher of the original
rent and ‘the open market rental value of the Demised Premises for the review
period’, which is then defined as ‘the reviewed rent’. Para (c) is of similar
effect in regard to the third five years of the term. At that stage it is clear
that what has to be looked for is the open market rental value for the
particular review period. If the matter had rested there, there could have been
no doubt that the plaintiff’s construction was incorrect. However, the
reddendum then goes on to provide that the reviewed rents shall be determined
in accordance with the provisions in clause 5.
It cannot be
said that clause 5 is perfectly drawn. To begin with, the wording of subclause
(1) leads you to expect that the open market rental value of the premises,
however it is determined, will be the equivalent of the annual rental value of
the premises in the open market. But when you get to subclause (2) you find
that under (a) it is such sum as shall be specified by the lessor and under (b)
it is such sum as shall be agreed between the parties. Neither of those sums
need bear any relation to the annual rental value of the premises. It is only
in relation to a determination under subclause (2)(c) that the provisions of
subclause (1) have any application.
Turning more
closely to the wording of clause 5(1), I observe that it starts by stating that
the expression ‘the open market rental value’ means a sum ‘in relation to the
review period or the second review period as the case may be’. Those words
suggest that the sum to be determined is to have some relation to the
particular review period. They confirm the effect of the reddendum, which is
that what is to be looked for is the open market rental value for the
particular review period. I do not think that the presence and effect of those
words can be disregarded. But if the plaintiff’s construction is correct, they
are entirely superfluous. The reddendum and clause 5(1) (with those words
omitted) would together have been enough to support that construction.
I come, then,
to the crucial words ‘determined . . . as being at the time of such
determination the annual rental value’ etc. Mr Reynolds, for the defendants,
has pointed to the contrast between the word ‘time’ and the word ‘date’ where
the latter appears in clause 5(3). He has argued that the words ‘at the time
of’, when contrasted with ‘at the date of’, mean ‘on the occasion of’. I would
not put it quite in that way. The words used are ‘at the time of such
determination’. I would accept that those words are fully capable of meaning
‘at the time at which such determination is made’. Indeed, I would go further
and say that that is their natural meaning. But they are also capable of
meaning ‘at the time for such determination’ or, if you prefer, ‘at the
time to which such determination relates’. The time for the determination of a
reviewed rent is the start of the review period to which it relates. And I do
not think that there is any offence in that construction if, as has been shown,
some purpose and effect can thereby be given to the words ‘in relation to the
review period or the second review period as the case may be’. Moreover, the
presence of those latter words, being wholly unnecessary if the plaintiff’s
construction is correct, leads me to conclude that the intention of the parties
is not clearly and unequivocally expressed. I therefore do not hesitate to
favour a construction which produces what the judge rightly thought was a far
more sensible and realistic commercial result.
I now revert
to London & Manchester Assurance Co Ltd v G A Dunn & Co,
in which it was assumed throughout, and I think decided by Peter Gibson J at
first instance (1982) 262 EG 143, [1982] 1 EGLR 117, that the question which
has now arisen ought to be decided in favour of the lessor. But it is to be
observed that before Peter Gibson J the primary argument of counsel for the
lessees on that question was that the open market rental value ought to be
determined as at the date on which the determination was actually made. In
other words, he adopted the plaintiff’s construction in this case. He raised
that argument in order to buttress his contention that the lessor must give his
initiating notice before the commencement of the review period to which it
relates. In the circumstances, I do not think that the views which were
expressed either by Peter Gibson J or by the members of this court can be
decisive of the question which we must now decide. It never comes amiss to
remind ourselves that views, even of the most eminent judges, which are formed
without argument on questions which do not have to be directly decided can
never be as valid as those which are formed where the particular point is both
argued and decided. The learned judge was impressed by the views which were
expressed in this court in that case. No doubt it is easier for us, albeit with
the greatest respect, to evaluate them rather differently. I think that nothing
which was said in that case inhibits us from adopting the construction which I
have proposed.
The decision
of the majority of this court in London & Manchester Assurance Co Ltd
v G A Dunn & Co has the beneficial result, conformable with the
now-established general rule that time is not of the essence of rent review
provisions, that under this widely used provision a landlord does not have to
get his initiating notice in before the commencement of the review period to
which it relates. Equally the construction which I have proposed in this case
will have the beneficial result that in times of inflation the tenant will not
suffer a disadvantage if, for whatever reason, the determination is not made
until a much later date.
Like the
learned judge, we were referred to a number of other cases, which do not in my
view materially assist us.
I would allow
this appeal and make a declaration in the terms sought by the defendants.
STOCKER and
TAYLOR LJJ agreed and did not add anything.
The appeal was allowed and a declaration
in the form of the notice of appeal substituted for that made by the judge
below. Appellants to have their costs here and below, excluding the costs of an
affidavit. Leave to appeal to the House of Lords was refused.
