Landlord and tenant — Construction of rent-review clause in commercial lease — The rent-review clause, after providing for the reviewed rent to be determined by agreement or arbitration, went on to provide that if the parties had not, within a stated time-limit of 15 months, agreed on an arbitrator or made an application for the appointment of an arbitrator, the new rent should be a sum equal to the old rent — The parties did not agree on a rent for the first review date and neither party applied within the time-limit for the appointment of an arbitrator — Landlords made an application out of time for such an appointment and submitted that the late application was valid, relying on the general presumption, as established in United Scientific Holdings Ltd v Burnley Borough Council, that time was not of the essence — Tenants argued that the provision in the rent-review clause, that if no application were made within the specified time the new rent should be the same as the old rent, was a sufficient ‘contra-indication’ within the meaning of the United Scientific Holdings rule — After considering the United Scientific Holdings case, Lewis v Barnett, Henry Smith’s Charity Trustees v AWADA Trading & Promotion Services Ltd and Mecca Leisure Ltd v Renown Investments (Holdings) Ltd, the judge decided in favour of the tenant’s contention — This view was supported by Lewis v Barnett and by the Henry Smith’s Charity Trustees case — In the Mecca Leisure case the wording in question was held not to be a sufficient contra-indication, but the wording in the present case was far stronger — Whether a ‘deeming’ or default provision constitutes a sufficient contra-indication, displacing the United Scientific Holdings presumption, always depends on the proper construction of the whole of the particular clause concerned — In the present case it was sufficient to displace the presumption and to make time of the essence — Landlords’ summons dismissed
This was an
originating summons by which the plaintiff landlord, Greenhaven Securities Ltd,
sought a declaration against the defendants, Mr and Mrs Compton, as to the true
construction of the rent-review clause of a lease of a shop property at 65 East
Street Centre, Southampton.
Kirk Reynolds
(instructed by Debenham & Co) appeared on behalf of the plaintiff; J M
Fulthorpe (instructed by Richard Curtis & Co, of Southampton) represented
the defendants.
Giving
judgment, GOULDING J said: This is an originating summons by which the
plaintiff, Greenhaven Securities Ltd, seeks against two defendants, Mr and Mrs
Compton, a declaration as to the construction of a rent-review clause in a
lease. It will be my intention in this judgment to refer to the plaintiff as
‘the landlord’ and the defendants as ‘the tenants’.
The lease is
dated September 27 1978 and it describes itself as an underlease. It is
convenient to begin with some of the definitions contained in clause 3 of the
lease read in conjunction with certain preliminary particulars contained in
clause 1. The landlord is defined as Greenhaven Securities Ltd and the tenant
as The Readicut Woolshops Co Ltd, being the predecessor in title of the
defendants, the present tenants. The property is defined — I need not take time
to read the particulars — it is commercial property in Southampton. The rent is
defined in this way:
The rent
means the sum specified as the rent in item 6 of the Particulars, or such other
sum as shall for the time being be the rent under the provisions of the first
schedule . . .
and looking
back at item 6 of the particulars we there find:
Rent £3,000
per annum, rising to £4,000 per annum on a certain date [which is specified].
The first payment for the period from 2nd December 1978 to 24th December 1978
to be made on 2nd December 1978.
Then,
returning to clause 3, we find the review dates defined as:
Each date
specified in item 6 of the Particulars is the date on which the rent is subject
to review.
and the
provision in item 6 is:
Review dates:
The rent is subject to review in accordance with the provisions of the first
schedule on the following dates: 25th March 1983, 25th March 1988, 25th March
1993, 25th March 1998.
Then, although
it does not seem to be referred to in clause 3, there is in the particulars a
definition of the term as 25 years from March 25 1978.
With those
preliminaries I can read clause 2 of the lease which contains the demise and I
shall omit certain words relating to easements, reservations and the like. It
says:
The Landlord
lets the property to the Tenant for the term specified in item 5 of the
Particulars, the Tenant paying yearly and proportionately for any fraction of a
year the rent at the times and in the manner specified in item 6 of the
Particulars and by way of further rents certain of basic service charge and
insurance premiums as are described in detail.
That I think
enables me to go at once to the first schedule, which is the part of the lease
in dispute. It consists of four paragraphs, of which the most important for
present purposes is para 1. I will read it in full. It is headed — and also
marked in the margin — ‘Review of rent’ and it reads:
1. The rent
as from each review date until the next review date, or in the case of the last
or only review date from that review date until the end of the term, shall be.
. .
and then there
are three subparas numbered (1), (2) and (3).
(1) The sum agreed in writing between the
Landlord and the Tenant at any time before the new rent shall have been
ascertained under subparagraphs (2) or (3); or
(2) If no such agreement shall have been reached
then a sum equal to the greater of (a) the rent payable immediately before the
review date and (b) the rack rental value of the property (as defined in
paragraph 2) determined by a single arbitrator, appointed in default of
agreement by the President of the Royal Institution of Chartered Surveyors in
accordance with the Arbitration Act 1950 or any Act amending or replacing it,
on the application of the landlord or the tenant made during a period
commencing three months before and expiring twelve months after the review
date; or
(3) If within the said period the Landlord and
the Tenant shall not have agreed in writing who shall be the arbitrator for the
purpose of subparagraph (2) and neither the Landlord nor the Tenant shall have
applied to the President of the Royal Institution of Chartered Surveyors for
the appointment of an arbitrator for the purpose of that subparagraph, then a
sum equal to the rent payable immediately before the review date.
Para 2 of the
schedule contains an elaborate definition of the rack rental value of the
property, which is to be determined if necessary by arbitration. Para 3 is in
these words:
3. As soon as
may be after a new rent has been agreed or determined under subparagraphs (1)
or (2) of paragraph 1 the Landlord and Tenant shall sign in duplicate a
memorandum in writing (the cost of which shall be borne by the Tenant),
recording the amount of the new rent so agreed or determined.
Para 4
consists of two sentences; the first sentence says:
4. If a new
rent is not ascertained under paragraph 1 until after a review date, then the
rent which was payable immediately before the review date shall continue to be
payable until the new rent has been so ascertained, after which the new rent
shall be payable.
The second sentence
provides for the payment of any excess due from the tenant with the first
instalment of rent falling due after the new rent has been ascertained.
The material
facts are very short and simple. The first of the review dates was March 25
1983, so that no new rent having been agreed either party was at liberty to
apply for the appointment of an arbitrator not later than 12 months after that
date. However, neither party did apply. The landlord made a belated application
on June 20 1984 and the landlord maintains that the late application is none
the less effective because time is not of the essence of the provision
contained in para 1 (2) of the first schedule to the lease which I read. The
landlord says correctly that as one starts off with a general rule that time is
not of the essence in the machinery provisions of rent-review clauses, the
whole of the provisions of the first schedule are to be regarded as machinery
before achieving the object of a reasonable rent from time to time that will be
fair as between the parties, and that the expiry of the period commencing three
months before the expiring 12 months after a review date does not extinguish
the right of either party to apply for the appointment of an arbitrator; it
merely marks the end of the period contemplated by the parties as the proper
time in which to apply and it gives either party the ability to serve on the
other a notice fixing a further reasonable time as to which time will be of the
essence, so that if such further time notified is reasonable and has expired,
then it will indeed be too late for the dilatory party to apply. In practice,
of course, it is only the landlord that is ever likely to apply for an
arbitrator because the provisions of the schedule show that review can never
result in an actual reduction of rent.
That is the
attitude of the landlord. The tenants say, on the other hand, that the language
of the first schedule is perfectly clear; the parties have agreed that if no
application has been made within the specified time, then the new rent is to be
the same as the former rent payable immediately before the review date. And the
tenants maintain that there is no reason for departing from what, according to
them, is the clear contractual provision in the lease. They say that the court
would, in effect, be making a new bargain for the parties and setting aside the
bargain they had made if it were to apply the equitable doctrine that relaxes
time-limits in the way that the landlord here desires.
Now, I can
best approach the decision of the matter by examining the three propositions on
which the landlord’s contention was founded. They are, first, that there is a
presumption that time is not of the essence in the provisions of a rent-review
clause in a lease. Second, that that presumption can be displaced only by a
clear indication to the contrary and, third, that in the clause now under
scrutiny there is no such indication.
The first two
propositions, in my judgment, are correct, the difficult one being the third.
The first two propositions are established, I think, by what is now the leading
authority in this field, the decision of the House of Lords in United
Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904.
Lord Diplock there said at p 930 of the report:
So upon the
question of principle which these two appeals were brought to settle, I would
hold that in the absence of any contra-indications in the express words of the
lease or in the interrelation of the rent-review clause itself and other
clauses or in the surrounding circumstances the presumption is that the
timetable specified in a rent-review clause for completion of the various steps
for determining the rent payable in respect of the period following the review
date is not of the essence of the contract.
And the same
noble and learned lord said, at p 932:
So far from
finding any contra-indications to displace the presumption that strict
adherence to the timetable specified in this rent-review clause is not of the
essence of the contract, the considerations that I have mentioned appear to me
to reinforce the presumption.
I read that
later citation to show that Mr Reynolds, for the landlord, was justified in
using the word ‘presumption’, which he did.
I also think
that the same case of United Scientific Holdings makes good Mr Reynolds’
second proposition that the presumption can be displaced only by a clear
indication to the contrary. The language of Lord Diplock in the first of the
passages I cited was that time would not be of the essence in the absence of
any contra-indication in the expressed words of the lease or the interrelation
of the rent-review clause and other clauses or surrounding circumstances. I may
say that in the present case there is no evidence to send the court anywhere
but to the expressed words of the lease itself to look for a contra-indication.
That the contra-indication must be clear I have no doubt.
Lord Simon, in
the same case of United Scientific, at p 944 approved as correctly
summarising the modern law in the case of contracts of all types a sentence
from the 4th ed of Halsbury’s Laws of England, which says:
Time will not
be considered to be of the essence unless: (1) the parties expressly stipulate
that conditions as to time must be strictly complied with; or (2) the nature of
the subject matter of the contract or the surrounding circumstances show that
time should be considered to be of the essence. . .
In giving that
approval, I do not think Lord Simon could have meant to interpret the passage
as requiring an expressed stipulation that time should not be of the essence,
for that would be contrary to the general current of authority, both in United
Scientific itself and elsewhere. The stipulation of the parties that time
is not to be of the essence can, of course, be put in those very words, or it
can be put in any provisions that are inconsistent with time not being of the
essence. I think the requirement of an indication to make time of the essence
is well explained, if I may say so with respect, by Slade LJ in a case I shall
be referring to in a moment, Henry Smith’s Charity Trustees v AWADA
Trading and Promotion Services Ltd reported (1983) 269 EG 729, [1984] 1
EGLR 116. Slade LJ observed at p 735:
Though the
best way of rebutting the presumption is to state expressly that stipulations as
to the time by which steps provided for by the rent-review clause are to be
taken is to be treated as being of the essence . . . this is not the only way.
Any form of expression which clearly evinces the concept of finality attached
to the end of the period or periods prescribed will suffice to rebut the
presumption. The parties are quite free to contract on the basis that time is
to be of the essence if they so wish.
And the lord
justice referred to certain authorities.
Those being
the two general propositions asserted by the landlord and derived from the United
Scientific case, I propose first of all to express my own first impression
of the matter, applying those rules to the case before me, and then to see how
far that first impression ought to be modified having regard to reported
authorities decided in the Court of Appeal since the House of Lords’ judgment
in the United Scientific case.
Para 1 of the
first schedule says that:
The rent as
from each review date until the next review date . . . shall be (1) or (2) or
(3)
that is one or
other of three alternatives which are clearly intended to be between them
clearly separate from one another and together exhaustive. The first is the sum
agreed in writing between the landlord and the tenant. No time-limit is
prescribed for such agreement except that it must be before either of the two
other alternatives has fixed a new rate.
The second
alternative is the former rent or, if it be greater, the rent determined by
arbitration. There is a time-limit expressed for that — a period of 15 months
expiring 12 months after the review date in which either party can apply for
the appointment of an arbitrator unless, of course, although unable to agree on
a new rent the parties have agreed on the individual to determine it. In which
case no application is necessary.
Then comes the
third alternative, which is introduced by a protasis, an ‘if’ clause. It
begins:
If within the
said period. . .
and I
interpolate that the said period quite clearly means the period of 15 months
during which application can be made for the appointment of an arbitrator
. . . the
Landlord and the Tenant shall not have agreed in writing who shall be the
arbitrator for the purpose of subparagraph (2) and neither the Landlord nor the
Tenant shall have applied to the President of the Royal Institution of
Chartered Surveyors for the appointment of an arbitrator for the purpose of
that subparagraph, then a sum equal to the rent payable immediately before the
review date.
Grammatically
there is no doubt about that whatever. The said period is a period that expires
on a fixed date — that is 12 months after the review date. At that point it is
perfectly clear whether or not there has been any agreement as to the rent or
the personality of the arbitrator and whether there has been any application in
default of agreement to the president. If not, then unambiguously, the third
alternative comes into play and a sum equal to the old rent is to be the new
rent.
It seems to
me, going straight from the United Scientific case to the lease,
abundantly clear that the tenants’ contentions are justified. If subpara (3)
were not in para 1 of the first schedule then, indeed, it would be strongly
arguable that time was not of the essence. The clause would have said that
either party could apply during a certain period expiring 12 months after the review
date but would not have said in terms what was to happen if application was not
made. It would then be arguable ‘Ah well, that is a machinery provision
limiting the time and the parties have not said what is to happen if it is not
strictly made; therefore on United Scientific principles it will be
taken to give a reasonable further time to either party to apply.’ But subpara (3) is there; the parties have
said in expressed terms what is to happen if the time-limit is not observed. To
my mind they have therefore clearly indicated that time is to be of the essence
in respect of that period and the court would indeed be making a bargain for
the parties they never made for themselves — and writing into subpara (3)
qualifying words that are not there if the court were to accede to the
landlord’s application.
Now, that is
my personal view founded simply on an attempt to apply the principles of United
Scientific to the document before me. I have to consider now three cases
that have been decided in the Court of Appeal since the House of Lords’
decision. The first of them was Lewis v Barnett reported at
(1981) 264 EG 1079, [1982] 2 EGLR 127. Now, that was a case in which there was
a division — I do not want to go through the facts at unnecessary length. There
was a vital provision that:
If the
landlord and the tenant shall not have agreed the open market rent at least six
months before the rent-review date and the landlord shall neglect to make the
application referred to in paragraph 3. . .
and that was
an application for the appointment of an arbitrator.
. . . then
the provision
went on
(unless the
parties hereto shall in writing agree otherwise) any notice already given by
the landlord to the tenant under the provisions of paragraph 2 hereof. . .
and that was a
notice triggering the rent-review clause
. . . shall
be void and of no effect.
Now, the
landlord had not made his application for the appointment of a surveyor to
arbitrate until six months after the latest date provided by the clause, and
the judgment of Stephenson LJ, with which the other two members of the court
agreed, held that the tenants had achieved indirectly the result that expressed
words would have achieved by, in Lord Diplock’s words in the United
Scientific case, contra-indications in the expressed words of the lease.
Stephenson LJ
also said (at p 1080):
I have not
the smallest hesitation in saying that no principle of construction and no
authority of any court compels or even justifies a judge in finding one
paragraph in a written document (in this case a sealed lease) to have no
effect. Effect must be given to the paragraph if it possibly can be.
So the case of
Lewis v Barnett I find a powerful encouragement to my view of
first impression that I cannot accede to a construction of the rent-review
clause which would make subpara (3) of para 1 without effect.
The second
case in the Court of Appeal is that, to which I have already given the
reference, of Henry Smith’s Charity Trustees v AWADA Trading and
Promotion Services Ltd. Then there was provision for the service of an
initial notice by the landlord and a counternotice by the tenant and then, in
default of agreement, the landlord was to apply to the president of the Royal
Institution of Chartered Surveyors for the appointment of a surveyor to determine
the new rent, and then there was this time provision:
If on the
expiration of two months from the date of service of such counternotice, the
Landlords and the Tenant shall not have agreed in writing an amount to be
treated as the market rent and the Landlords shall not have applied for the
appointment of a surveyor in accordance with paragraph 6 of this Schedule the
amount stated in such counternotice shall be deemed to be the market rent.
Now, the
question before the court was whether time was of the essence of that
stipulation or whether, the landlords’ application for appointment of an
independent surveyor being four months late, the rent demanded by the tenants’
counternotice which was, in effect, the previously existing rent, was
inevitably fixed until the next review date should come.
The first
judgment was given by Sir John Donaldson MR and he took a view very similar to
that taken by the court in Lewis v Barnett, to which case he
referred. He said that he was quite unable to accept the landlords’
construction under which time was not of the essence and he continued at p 731
of the report:
The parties
have not only set out a timetable but have in terms provided what is to happen
in the absence of strict compliance with that timetable. The presumption of
elasticity would undoubtedly be acceptable if clauses 3 and 6 stood alone with
minor alterations in language to make that possible. But clauses 4 and 7 make
it clear that something quite different is intended.
It is highly
undesirable that decisions of this type of dispute shall turn upon fine
distinctions and I reject the suggestion that there is a difference between a
rent-review scheme which, in the event of default in adhering to the timetable,
avoids the whole process (Lewis v Barnett) and one which
automatically resolves the dispute, albeit in a somewhat draconian way (the
instant appeal). Both make precise and, in the case of the instant appeal,
elaborate provision for exactly what shall happen if one of the parties shall
fail to exercise his rights within the specified period of time. In neither
case would it be possible seriously to write into the clause after each
specified period of time words such as ‘or such longer period as shall elapse
before the expiration of reasonable notice making time of the essence of the
contract’. Accordingly, in my judgment, the parties must be deemed to have
intended that in the case of their lease the general rule should not apply and
that time should be of the essence of the contract.
Griffiths LJ
did not take the same view. He, I think because of the hardship to the landlord
in the particular case, only reluctantly held that time was of the essence and
he said in terms that he did not accept that the mere presence of such a
provision as that relied on by the Master of the Rolls would in all cases be
sufficient to make time of the essence. But, on examining a number of other
detailed provisions of the clause, in which it differs from the one that I have
to examine, Griffiths LJ reluctantly agreed that time was of the essence.
Slade LJ
mainly relied, I think, on Lewis v Barnett and the view taken by
the Master of the Rolls. He said (at p 735) that the paragraphs referred to by
the Master of the Rolls:
(apparently
unlike the two forms of lease under consideration in the United Scientific
case, so far as one can gather from the report of that decision) set out in
addition, specifically and clearly, what is to happen in default of the
exercise of the rights given to the respective parties within the permitted
periods of time.
And he said
that he thought the provisions of the two paragraphs particularly in question
were quite inconsistent with the survival of any right to take the necessary
steps after the expiration of the periods specified. He also said that while in
other contexts such provisions might not necessarily connote finality (so far
agreeing with Griffiths LJ) he said they clearly did so — well, he said they
did so — he obviously thought it clear in the context of the lease before him.
Thus the
decision in the Henry Smith’s Charity case and the reasons given by two
of the three members of the court are entirely on all fours with Lewis v
Barnett and, as I think, confirm the view which I should have arrived at
without any authority except that of United Scientific. However, the
latest interpretation of the United Scientific decision by the Court of
Appeal creates some difficulty. It was the case of Mecca Leisure Ltd v Renown
Investments (Holdings) Ltd (1984) 271 EG 989, [1984] 2 EGLR 137. The clause
provided for the service of what was called a rent notice by the landlord
setting out the figure that he thought the future rent should be and then for
the service of a counternotice by the tenant within 28 days and on that
followed an express provision as to what should happen if time were not
observed, for the clause said:
If the lessee
shall fail to serve a counternotice within the period aforesaid it shall be
deemed to have agreed to pay the increased rent specified in the rent notice as
from the review date.
There was then
provision for arbitration if a counternotice should have been served, and no
time-limit (I think I am right in saying) was set for the application for
appointment of an arbitrator, except that a period of 28 days was to elapse for
attempts for the landlord and tenant to reach agreement. But after that 28
days, failing agreement on an arbitrator, both or either of the parties might
apply and no limit was set as to the time of application. And what had happened
was that the tenant had been late in serving the counternotice and the
landlords contended that the time specified for the counternotice (28
days) was of the essence and that on the expiration of that period accordingly
the figure stated in the landlords’ notice became absolute. The landlords, of
course, relied on the cases that I have already cited and primarily, as appears
from the first of the judgments in the Mecca Leisure case — that of
Eveleigh LJ — the landlords relied on the Henry Smith’s Charity case.
Eveleigh LJ
dismissed that in very general terms. He said (at p 990):
I find no
help at all from the facts of other cases where there is a deeming provision,
as in the present case, but other terms in the review clause and the lease are
different.
So he went
back to United Scientific and he read the words requiring the
counternotice within 28 days and the 28 days after service of the counternotice
for agreement. Then he said:
No time is
laid down for the appointment of the arbitrator and no time is laid down for
the announcement of his decision. . .
and he said:
. . . It is
only from the words of the deeming clause itself
that was the
clause that said if the lessee failed to serve a counternotice within the
period the lessee was deemed to have agreed to pay the increased rent specified
in the rent notice
that any
argument can be raised in support of the contention that time was intended to
be of the essence.
And he
concluded:
I cannot
regard the mere presence of the ‘deeming’ clause as a firm indication that time
is of the essence. I read the clause as a whole and bear in mind that there is
a presumption to be displaced and the parties are clearly intending to arrive
at a fair rent to be determined amicably if possible. It seems to me that to
hold otherwise would make the clause a trap and the chosen machinery dangerous.
In my opinion time is not of the essence in this case.
May LJ agreed
with Eveleigh LJ. He gave somewhat more consideration to the Henry Smith’s
Charity case and agreed with the Master of the Rolls in that case that
decisions on this type of dispute should not turn upon fine distinctions. But
he came to the conclusion that the Master of the Rolls had been wrong in giving
such very strong weight to what had come to be referred to as deeming
provisions and preferred the less weight put upon such clauses by Griffiths LJ
and, to some extent, by Slade LJ. So, May LJ said (at p 992):
The effect
therefore of the Henry Smith’s Charity case is in my opinion that,
although the fact that a rent-review clause does contain a ‘deeming’ provision
is a contra-indication which may be sufficient to rebut the general principle,
whether it does so or not remains in the end a matter of the proper
construction of the particular clause concerned.
And he said
that in the case before him he did not think that one did any real violence to
the machinery to enable the parties to arrive at the fair market rent if one
construed the subclause as entitling the lessee to serve a counternotice even
after the stipulated 28 days had expired. He felt also that there would be far
greater hardship to the tenant if time was held to be of the essence than to
the landlord from any tardiness on the tenant’s part. So, on balance, he agreed
with Eveleigh LJ that the indication that time was intended to be of the
essence was not strong enough to outweigh the general presumption laid down by
the United Scientific case.
From those
opinions Browne-Wilkinson LJ dissented. He thought it impossible to distinguish
the case from the Henry Smith’s Charity case without introducing the
fine distinctions which the Master of the Rolls had deplored in that case and
he thought that the ratio decidendi of the majority decision in Henry
Smith’s Charity was that the provision for a default rent was a decisive,
or virtually decisive, contra-indication displacing the presumption that time
was not of the essence.
So I have to
reconsider in the end my own view based simply on United Scientific but
fortified by two subsequent decisions in the Court of Appeal — I have to
reconsider it in the light of the Mecca Leisure case. Now, it seems to
me that the indication that time is of the essence is far stronger in the
present case than it was in the Mecca Leisure case; in the present case
the three alternatives of para 1 of the first schedule clearly define the
future rent by strict time-limits, embracing every point, whereas in the Mecca
Leisure case, although there was a strict time-limit with a deeming
provision as regards the lessees’ counternotice, there was nothing as regards
the appointment of an arbitrator or the time of decision by the arbitrator. It
seems to me that accepting, as I must, that there was an insufficient
contra-indication in the Mecca Leisure case I am still at liberty on the
language of the case before me to hold that there is a sufficient
contra-indication. I think, applying the United Scientific principles
and bearing in mind all the observations of the Court of Appeal in all three of
the cases, that I am still bound to hold that the language of the lease in the
present case is inconsistent with the presumption that time is [not*] of the
essence. I am not prepared, in effect, to jettison a whole subparagraph or
alter its effect by inserting words that are not there in order to apply a
presumption which is, by the authority of the House of Lords, rebuttable if a
sufficient contra-indication is shown. Accordingly, the tenants succeed and I
must dismiss the originating summons. Landlord’s originating summons
dismissed.
*Editor’s
note: It would appear that, having regard to the context, the word ‘not’ is
missing from this sentence in the transcript.
