Landlord and tenant — Construction and effect of rent review clause in lease — Tenant’s appeal from decision of
This was an
appeal by the tenants, AWADA Trading & Promotion Services Ltd, from a
decision of Vinelott J holding that, notwithstanding a late application, the landlords,
Trustees of Henry Smith’s Charity, were entitled to secure the appointment of a
surveyor as an independent expert to determine the rent under a review clause
in a 15-year lease of premises at 215 Brompton Road, London SW2.
Leslie Joseph
QC and Ian Lee (instructed by Gasquet Metcalf & Walton) appeared on behalf
of the appellants; Paul de la Piquerie (instructed by Warrens) represented the
respondents.
Giving
judgment, SIR JOHN DONALDSON MR said: This is a tenant’s appeal from a judgment
of Vinelott J on the construction and effect of certain rent review clauses. In
United Scientific Holdings Ltd v Burnley Borough Council [1978]
AC 904 the House of Lords held, in the words of Lord Diplock at p 930, 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 time-table 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.
In the course
of his speech, Lord Diplock, at p 933, also said that where the presumption is
not displaced, the landlord does not have an unfettered right to delay taking
the appropriate steps to obtain a determination of the new rent, since so soon
as the stipulated time has elapsed, the tenant can serve reasonable notice
making time of the essence of the contract. Mr Leslie Joseph QC, appearing for
the tenants, submitted to us that this latter passage in Lord Diplock’s speech
was unnecessary for the decision in the United Scientific appeal and
could not be supported in principle. He then examined repudiation, the
implication of a contractual term, waiver and estoppel as providing a basis for
Lord Diplock’s view and submitted that there were objections to all of them. He
then went on to submit that if it were accepted that no notice having such an
effect could be served, the courts would be much more ready to infer a common
intention by the parties that time should be of the essence.
If Mr Joseph’s
premise were correct, it might well be that the courts would be reluctant to
hold that time was not of the essence, but for my part I think that Lord Diplock’s
view binds us as being part of the ratio decidendi of the decision of
the House of Lords in United Scientific. Furthermore, it is a view of
the law which was accepted by Oliver LJ, with the agreement of Lawton LJ, in Amherst
v James Walker Goldsmith & Silversmith Ltd [1983] 3 WLR 334 at p
344A and p 248B.
Mr Joseph also
submitted that, as the terms of the lease were agreed before the decision of
the House of Lords in United Scientific, the lease had to be construed
and the intention of the parties deduced on the basis of the law as it was
thought to be at that time. While this argument is not without its attractions,
I think that it must be rejected as involving an undesirable extension of the
doctrine of stare decisis. A somewhat similar argument was rejected by
the House of Lords in Shell International Petroleum Co Ltd v Gibbs
[1983] 2 WLR 371.
Accordingly I
approach the instant appeal on the basis of the law as declared in United
Scientific, including the proposition that it is open to a tenant to make
time of the essence by a suitable notice addressed to the landlord.
Having cleared
the decks, I turn to the facts. The premises were at 215 Brompton Road, London
SW2. The lease was for a term of 15 years from June 24 1976 at an initial
rental of £8,000 per annum, subject to review in accordance with the provisions
of the Third Schedule. Those provisions, so far as is material, were as
follows:
Review of
Rent
1. In this
Schedule the following expressions have the meaning respectively assigned to
them:
(a) ‘review notice’ means a notice served by the
Landlords pursuant to paragraph 2 of this Schedule.
(b) ‘relevant review notice’ means at any given
time the review notice most recently served.
(c) ‘review period’ means each of the periods of
five years immediately following the commencement of the fourth and ninth years
of the term hereby created respectively.
(d) ‘relevant review period’ means the review
period within which the relevant review notice is served.
(i) ‘variation date’ means whichever is the
later of
(i) the third quarter day next following the
date of service of the relevant review notice or
(ii) the date of commencement of the second year
of the relevant review period.
2. The
Landlords may once at any time during a review period serve on the Tenant a
Notice in writing stating the amount which in the opinion of the Landlords is
the market rent PROVIDED that if at any time during a review period (and before
the Landlords shall have served such a notice as aforesaid) the Tenant by a
notice in writing request the Landlords to serve such notice as aforesaid
within the period of Six months from the date of such request then the
Landlords shall not be entitled to serve such a notice as aforesaid during that
review period after the expiration of the said period of six months.
3. Within the
period of one month from the date of service of the relevant review notice the
Tenant may serve on the Landlords a counter-notice in writing stating the
amount which in the opinion of the Tenant is the market rent.
4. If on the
expiration of one month from the date of service of the relevant review notice
the Tenant shall not have served on the Landlords a counternotice in writing in
accordance with paragraph 3 of this schedule the amount stated in the relevant
review notice shall be deemed to be the market rent.
5. If within
one month from the date of service of such counter-notice the Landlords and the
Tenant shall have agreed in writing an amount which shall be treated as the
market rent the same shall be deemed to be the market rent.
6. If within
one month from the date of service of such counter-notice the Landlords and the
Tenant shall not have agreed in writing an amount which shall be treated as the
market rent the Landlords may apply to the President (or if there is no person
so described then to the official occupying a similar office howsoever
described) for the time being of the Royal Institution of Chartered Surveyors
(or the successors to that body) for the appointment of a surveyor to determine
the market rent the determination of the market rent by the Surveyor appointed
pursuant to such application shall be made by him as an expert and not as an
arbitrator and his determination shall be final and binding on the Landlords
and the Tenant.
7. If on the
expiration of two months from the date of service of such counter-notice 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 counter-notice shall be deemed to be the market rent.
8. Subject to
the provisions of paragraph 9 of this Schedule on and from the variation date
the revised rent shall be substituted for the current rent and the provisions
of this Lease as to payment of rent shall apply to the revised rent.
9. If the
Landlords shall have applied for the appointment of a Surveyor in accordance
with paragraph 6 of this Schedule but the Surveyor shall not have determined
the market rent before the variation date the following provisions shall have
effect:
(i) On and from the variation date and
until the quarter day next following the date on which the market rent shall
have been determined by the Surveyor a provisional rent at a rate equal to the
amount stated in the relevant review notice shall be substituted for the
current rent and the provisions of this Lease as to payment of rent shall apply
to such provisional rent.
(ii) On the quarter day next following
the date on which the market rent shall have been determined by the Surveyor
the difference (if any)
the total amount which would have been paid by the Tenant had the Surveyor
determined the market rent before the variation date shall be paid by the
Tenant to the Landlords or (as the case may be) repaid by the Landlords to the
Tenant but in either case free from any interest thereon.
(iii) On and from the quarter day next
following the date on which the market rent shall have been determined by the
Surveyor the revised rent shall be substituted for such provisional rent as
aforesaid and the provisions of this Lease as to payment of rent shall apply to
the revised rent.
11. As soon
as the revised rent has been agreed or determined as aforesaid a memorandum of
the same recording such agreement or determination shall be endorsed on the
Lease and the counterpart thereof and that on the Lease signed by or on behalf
of the Landlords and that on the Counterpart thereof signed by or on behalf of
the Tenant the Landlords’ costs of and in connection with the preparation and
execution of the said memoranda shall be borne by the Tenant.
The landlords
initiated the rent review procedure by a notice dated November 4 1980 which, inter
alia, stated that in their opinion the market rent of the premises from
June 24 1981 should be £29,000 per annum. The tenants served a counternotice
dated December 3 1980 expressing the opinion that the market rent was £8,000
per annum, ie the current rent. This was within the period of one month
specified in clause 3 of the Third Schedule. Thereafter the parties entered
into negotiations but failed to reach agreement. On June 4 1981 the landlords
applied to the arbitration office of the Royal Institution of Chartered
Surveyors for the appointment of an independent surveyor to determine the new
rent for the premises. The tenants thereupon claimed that the application was
out of time and that, by virtue of clause 7 of the Third Schedule, the market
rent was deemed to be £8,000 per annum.
The issue is
whether, as Vinelott J held, the landlords are entitled to have the market rent
for the period from June 24 1981 determined by an independent surveyor, notwithstanding
that they made the relevant application four months after the expiry of the two
months’ period specified in clause 7.
It is, I
think, unfortunate that the learned judge was not referred to a decision of
this court on not dissimilar rent review provisions in Lewis v Barnett
now reported in (1982) 264 EG 1079, [1982] 2 EGLR 127 but then unreported.
There the provisions were as follows:
2. If at any
time not more than twelve and not less than nine months before the rent review
dates the landlord shall give notice in writing to the tenant of his desire to
vary the yearly rent payable hereunder as from the rent review dates such
yearly rent shall from and after the rent review dates be whichever is the
higher of:
(a) the yearly rent reserved hereunder immediately
before the rent review dates and —
(b) the open market rent.
3. If the
landlord and the tenant shall not have agreed the open market rent not less
than six months before the rent review dates the open market rent shall be
determined by a surveyor (hereinafter called ‘the appointed surveyor’) to be
agreed upon in writing by the landlord and the tenant not less than four months
before the rent review dates and in default of such agreement to be nominated
by the President for the time being of the Royal Institution of Chartered
Surveyors upon the application of the landlord to be made not less than three
months before the rent review dates.
Para 4 is
immaterial. Paras 5 and 6 provide:
5. If on the
rent review dates the open market rent shall not have been agreed or determined
as aforesaid the yearly rent reserved hereunder immediately before the rent
review date shall continue to be payable until the determination of the open
market rent by the appointed surveyor but so that immediately on demand after
such determination the excess difference (if any) over the amount actually so
reserved and the amount which would have been payable had the determination
been made before the rent review dates shall be paid by the tenant to the
landlord and if not so paid shall be recoverable as rent in arrear.
6. 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 para 3 hereof then (unless the parties hereto shall
in writing agree otherwise) any notice already given by the landlord to the
tenant under the provisions of para 2 hereof shall be void and of no effect.
The application
to the president for the appointment of a surveyor was made six months after
the latest date calculated in accordance with clause 3.
A division of
this court, consisting of Stephenson LJ, Brandon LJ and Sir Stanley Rees, held
that (per Stephenson LJ at p 1080):
These leases
were, of course, drawn up and executed before the decision of the House of
Lords in that case, but nevertheless the tenants may have achieved indirectly
the result that express words would have achieved by, in Lord Diplock’s words,
‘contra-indications in the express words of the lease’.
In my
judgment, in spite of Mr Davidson’s submissions, that is exactly what they have
done. I cannot regard the omission of the reference to time from the reference
to the landlord’s application as having the effect for which Mr Davidson
contends. It seems to me that when the draftsman of this paragraph referred to
the landlord’s neglect to make the application referred to in para 3, he was
referring, without setting out all the words, to his application to make it not
less than three months before the rent review dates, because that is the
application which the landlord has to make in para 3. He might have omitted the
words ‘at least six months before the rent review date’ in the second line of
the para if he had wished to be equally concise. In my judgment para 6 means
what it says and what it says is that, if the landlord neglects to comply with
para 3 in respect of the application there referred to in a case where he and
the tenant have not been able to agree the open market rent in the time
required, or at all, then any notice already given by the landlord to the
tenant under the provisions of para 2, including the all-important opening
notice, shall be void and of no effect.
Mr de la
Piquerie, for the landlords, submits that the principles laid down in the United
Scientific case require us to treat the time-limits specified in the rent
review clauses with which we are concerned as being elastic, unless and until a
notice is served making time of the essence. On this view, clause 3 allows the
tenant an unlimited time in which to serve a counternotice, unless and until
reasonable notice is given making time of the essence. If and when such a
notice makes time of the essence and there is non-compliance, clause 4 deems
the landlord’s view to be correct and to determine the market rent. Clauses 6
and 7 operate similarly. The landlord has an unlimited time in which to apply
for the appointment of a surveyor, unless and until time is made of the
essence. If the failure continues, clause 7 comes into operation.
I am quite
unable to accept this construction. 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.
It may well be
thought unwise to have a strict timetable review clause which, in the event of
default, may have the effect that an unreal rent put forward for negotiating
purposes becomes the contractual rent. This I would accept, but it is for the
parties to make their own contract. One modification which may commend itself
is to borrow from the procedure in what is sometimes known as a ‘flip-flop’
arbitration. Each party is free to put forward a figure (in this context a
figure for the market rent) which they say is the ‘right’ figure. In default of
agreement, an arbitrator or expert decides what is the ‘right’ figure, but, and
this is the significant feature, his award or determination takes the form of
confirming whichever of the parties’ suggested figures is nearest to the
‘right’ figure. The practical result is, of course, that each party is forced
to put forward a highly realistic figure, since any exaggeration in either
direction is likely to lead to the other party’s figure being accepted. This
approach has, I understand, been used in wage bargaining and will be equally
appropriate — indeed perhaps even more appropriate — in rent review.
For the
reasons which I have given, I would allow the appeal and declare that in the
events which have happened the contractual rent is £8,000 per annum.
Agreeing that
the appeal should be allowed, GRIFFITHS LJ said: I have found this a difficult
and troublesome case. The inexorable inflation of property values since the end
of the second world war has led to the invariable practice of making provision
for rent increases during the term of any long lease. When the time comes to
review the rent, usually every five or seven years, machinery is provided in
the lease to enable the landlord and tenant to arrive at a fair market rent for
the next rental period. The machinery will, almost invariably, set a timetable
in which negotiations are to take place, and make provision for some form of
arbitration if the landlord and tenant cannot agree upon a fair market rent.
When the
negotiations are opened one would expect each side to take up a negotiating
position. The landlord will put forward a higher figure for rent than he
expects to settle at and the tenant a lower figure. Neither has any real
expectation that his figure will eventually be accepted as the true market
rent; such is the way men have conducted their bargains since time immemorial.
I doubt if
this case is any exception to the general rule. When this property was let in
January 1977 the rent was £8,000 per annum. On November 4 1980, less than four years
later, the landlords were putting forward a figure of no less than £29,000 as
the fair market rent. The tenant riposted that a fair market rent was still
£8,000. I suspect that the true figure probably lies somewhere between these
two extremes.
When they
enter into a lease such as this the expectation of both landlord and tenant is
that a fair market rent will be paid throughout the lease, and unless driven to
do so by the wording of the lease I am loath to construe the machinery provided
for arriving at a fair market rent as forcing either the tenant to pay an
exorbitantly high rent or the landlord to receive a ridiculously low rent,
neither of which bears any relation to a fair market rent because one or other
of them was one day late in observing the timetable set out in the rent review
provisions of the lease.
But such may
be the result if it is held that time is to be regarded as of the essence in
the performance of the obligations of the landlord and the tenant in the Third
Schedule to this lease.
The general
rule established by the House of Lords in United Scientific Holdings Ltd
v Burnley Borough Council [1978] AC 904 is that time is not of the
essence in a rent review clause. This general rule is however displaced if the
lease expressly provides that time is to be of the essence, or if it is a
necessary implication to be derived from the language of the rent review
clauses.
In the opening
paragraph of his speech Lord Fraser said:
My Lord,
these appeals raise the question of what is the legal significance to be
attached to stipulations as to time in a rent review clause in a lease. The
appeals were heard together and the primary argument on both sides treated the
question as one that was susceptible of a general answer, but it is proper to
recall that the application of any general rule may always be excluded if the
intention to do so is express or clearly implied. Rent review clauses take many
forms, and it is not possible, even if it were desirable, to state any rule as
to the effect of stipulations as to time that will apply to all such clauses.
I cannot
accept the submission that the decision of the Court of Appeal in Lewis
v Barnett (1982) 264 EG 1079, [1982] 2 EGLR 127 provides a foundation
for any general rule that whenever in a rent revision clause provision is made
for what is to happen in default of a time-limit this will of itself be
sufficient to make time of the essence of the contract. I do not read Lewis
v Barnett as laying down any such general rule. I regard it as no more
than a decision on the construction of a particular rent review clause, the
language of which was wholly different from that with which we are concerned.
Suppose in the
present case clauses 3 and 4 had been elided to provide that ‘If the tenant
objects to the new rent proposed by the landlord he must serve a notice of
objection within 1 month’. Such a clause carries the implication that if the
tenant does not serve the counternotice he accepts the landlord’s new rent and
it would add nothing to the meaning of the clause to add at the end of it ‘and
if he does not do so he is deemed to accept the new rent’. If such a clause
including the deeming provision stood alone, I would not, I think, be prepared
to hold that it was sufficient to displace the general rule that time was not
of the essence of the contract. In Davstone (Holdings) Ltd v Al-Rifai
(1976) 32 P & CR 18 Goulding J held that such a clause did not make time of
the essence. The clause in that case provided: ‘if the lessee shall raise no
objection to the increased rental proposed by the lessor within 28 days of
receiving such notice, the lessee shall be deemed to have accepted and agreed
the same’. That case was cited by distinguished counsel for the appellants and
the respondents in their arguments in United Scientific. Neither of them
submitted that it was wrongly decided and no doubt was cast upon it by any of
their Lordships’ speeches, but it is right to recount that none of their
Lordships referred to it.
I do not
accept that the mere presence of a ‘deeming’ provision in a rent review clause
will in all cases be sufficient to make time of the essence of the contract.
But when I
consider the rent review provisions of this lease as a whole I have been
driven, albeit reluctantly, to conclude that in this case they carry the
necessary implication that the parties to this lease intended that time should
be of the essence of the rent review provisions.
By clause 1,
para (f), market rent is to be assessed as at the date of the landlord’s rent
review notice. Clause 2 allows the landlord to serve a rent review notice at
any time during a five-year review period; so if rents are rising fast the
landlord may think it to his advantage to delay serving his notice. However,
the tenant is given the chance of protecting himself against this tactic by
serving a notice on the landlord requiring him to serve a notice within six
months, and if the landlord does not do so, clause 2 expressly prohibits the
landlord from serving another notice during that review period. This clause must
be read with time being of the essence otherwise the protection of the tenant
is either destroyed or greatly reduced. So we start with a provision where time
is of the essence.
Now I look
towards a remarkable provision towards the end of the schedule. Clause 9
provides that if a surveyor has not determined the market rent before the
variation date, the tenant will pay the rent put forward by the landlord until
such time as the surveyor determines the rent. So the tenant may be saddled
with paying a very high rent put forward as an opening shot in the negotiations
by the landlord. True, there are provisions for reimbursement, but no interest
is repayable. It is a very unsatisfactory position but it will be minimised if
the parties are held to the timetable in the lease. If the tenant has served a
counternotice putting forward a market rent and the landlord does not apply for
the appointment of a surveyor within two months, it cannot arise because the
market rent will be deemed to be that in the counternotice; if the landlord
does apply within two months, then the risk of the rent not being determined by
the variation date is small and in any event unlikely to last for more than the
payment of one quarter’s rent.
This, then,
appears to me to be another powerful pointer towards the intention of the
parties that this timetable should be strictly adhered to.
There is also
some room for the view that it was the intention of the parties to put forward
realistic figures at the commencement of a rent review because clause 10
requires the wholly unsuccessful party to pay the surveyor’s fees. If this is
the case, they may not have thought that so much hardship would result from
being forced to accept the other’s figure in the event of their failure to
observe a time-limit. However, I am bound to say I do not place much reliance
on this consideration when I reflect on the respective figures put forward in
this case; on one side a virtual quadrupling of the rent and on the other no
increase at all.
Clause 11 also
fits more easily with the view that time is of the essence, as it requires the
revised rent to be endorsed on the lease and the counterpart signed by the
parties ‘as soon as the rent has been determined as aforesaid’, which phrase
must include, I think, determining the rent by virtue of the ‘deeming’
provisions in clauses 4 and 7 of the Schedule.
And, finally,
although, as I have been at pains to point out, not necessarily conclusively,
the express inclusion of the deeming provisions does add some weight to the
view that this schedule should be read as though time is of the essence,
particularly as the deeming provisions apply to both landlord and tenant.
I do not
myself attach the same weight to the apparently absurd consequences that if a
landlord allowed extra time to a tenant to negotiate the lease before he
applied for the appointment of a surveyor, he might lose his right to have the
rent determined, as did the learned judge. Even if the landlord does allow more
time for negotiation, this does not prevent him from at least applying for the
appointment while negotiations are going on. And I suspect that in a case of
protracted negotiations the facts might well show that the tenant had waived
the landlord’s duty to comply strictly with the timetable.
For these
reasons I agree that the appeal should be allowed.
Also agreeing,
SLADE LJ said: The facts of this case have already been set out in the judgment
of the Master of the Rolls. The legal principles which fall to be applied in
the construction of rent review clauses since the decision of the House of
Lords in United Scientific Holdings Ltd v Burnley Borough Council
[1978] AC 904 may in my opinion be summarised sufficiently accurately for
present purposes as follows:
(1) Where a rent review clause confers
on a landlord or tenant a right for his benefit or protection, as part of the
procedure for ascertaining the new rent, and that right is expressed to be
exercisable within a specified time, there is a rebuttable presumption of
construction that time is not intended to be of the essence in relation to any
exercise of that right.
(2) In a case where the presumption
applies, the other party concerned may, if he wishes to bring matters to a head
after the stipulated time for the exercise of the right has expired, give to
the owner of the right a notice specifying a period within which he requires
the right to be exercised, if at all; the period thus specified will, if it is
reasonable, then become of the essence of the contract (see the United
Scientific case [1978] AC 904 at pp 933H-934A per Lord Diplock and Amherst
v James Walker Goldsmith & Silversmith Ltd [1983] 3 WLR 334 at p
344A per Oliver LJ and p 348B per Lawton LJ).
(3) The presumption is rebuttable by
sufficient ‘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’ (see the United Scientific case at p 930 per
Lord Diplock).
(4) 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 (see ibid at p 936G-H per Lord Diplock and at p 947E-F
per Lord Salmon), 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. (See, for example, Drebbond Ltd v Horsham District Council
(1978) 264 EG 1013 and Lewis v Barnett (1982) 264 EG 1079, [1982]
2 EGLR 127).
On the present
appeal I think that, with the exception of the second, all these points were
more or less common ground. Mr Joseph, in his interesting argument on behalf of
the landlords, suggested that there are a number of conceptual difficulties
involved in the second proposition and challenged its correctness. If that challenge
were well founded, the whole basis upon which the learned judge reached his
decision would be undermined for this reason, if no other. However, for the
reasons given by the Master of the Rolls, I do not think it can be regarded as
well founded.
The relevant
right under consideration in the instant case is the right of the landlords
under para 6 to apply to the president of the Royal Institution of Chartered
Surveyors for the appointment of a surveyor to determine the market rent.
Though para 6 itself does not expressly say so, in my opinion one must
inevitably infer in the para a provision that this right shall be exercised, if
at all, within the two-month period referred to in para 7 (that is two months
from the date of service of the tenants’ counternotice); and the opening words
of para 9, which refer to an application by the landlords ‘for the appointment
of a surveyor in accordance with paragraph 6’, must likewise be read as
referring to an application made within that time. This is the only way of reconciling
paras 6 and 9 with para 7.
The tenant’s
counternotice was served on or about December 4 1980. The landlord’s
application for the appointment of a surveyor was made on June 4 1981. It
follows that such application was made well beyond the expiration of the two
months’ period implicitly provided for by para 6. But this, of course, does not
conclude the matter against the landlords. Unless there is a contra-indication
in the lease sufficient to evince a contrary intention, time cannot be treated
as being of the essence for the purpose of any exercise of the landlords’
rights under para 6, or indeed of any exercise of the tenant’s rights to serve
a counternotice under para 3.
The learned
judge considered there was no such sufficient contra-indication. The ratio of
his decision is to be found in the following passage of his judgment:
Paras 3 to 8
set out a number of steps which are required to be taken only if one or other
of the parties so elects. After the landlords have served a review notice, the
tenant has the right to serve a counter-notice. If he does not, the rent
specified in the landlords’ review notice stands. If the tenant serves a
counter-notice then, after a period of negotiation, the landlords can have the
market rent ascertained by an independent surveyor. If they do not, the rent
specified in the counter-notice stands. At each stage, if one party fails to
take a step within the period allowed, the other party can serve notice
requiring him to take that step, if at all, within a limited and reasonable
period.
If paras 3 to
8 had done nothing but set out steps which were required to be taken only if
one or other of the parties so elected, I would have unhesitatingly agreed with
the judge’s conclusion and his reasoning. However, these paragraphs (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. Thus, in particular, para 4 provides that if the tenant has
not served its counternotice within the relevant one month period ‘the amount
stated in the relevant review notice shall be deemed to be the market rent’.
Para 7
provides that, if on the expiration of two months from the date of service of
the counternotice, the parties shall not have agreed the market rent, and the
landlords shall not have applied for the appointment of a surveyor in
accordance with para 6, ‘the amount stated in such counternotice shall be
deemed to be the market rent’.
An elaborate
definition of ‘market rent’ is to be found in para 1(f) of the Third Schedule,
but paras 4 and 7, where applicable, are clearly intended to override that
definition. In my opinion the only meaning which can be attached to the phrase
‘shall be deemed to be the market rent’ in the context of those two paragraphs
is ‘shall be conclusively presumed to be the market rent’. And the phrase in
each of these two paragraphs is of critical importance in the construction of
the lease.
By February 4
1980 (taking December 4 1980 as the date of service of the tenant’s
counternotice) the two contingencies mentioned in para 7 had undeniably occurred.
Accordingly, on that date the clear effect of para 7 of the lease was to cause
the amount stated in the counternotice (£8,000 per annum) to become
conclusively presumed to be the market rent, unless the principle of the United
Scientific case, or some other principle of equity, entitles the court
either to reject the paragraph altogether or partially to rewrite it by a
process of construction.
The rent
review provisions which fell to be considered by this court in Lewis v Barnett
(1982) 264 EG 1079, [1982] 2 EGLR 127 have already been set out in the judgment
of the Master of the Rolls. In that case the county court judge had said this
in regard to para 6 of the rent review clause there under consideration, which
was, in at least some respects, similar to para 7 in the present case:
In view of
the recent House of Lords’ finding in United Scientific v Burnley
Council I feel that in the absence of an express term in paras 2 and 3 of
the third schedule stating that time shall be of the essence and in the absence
of any common law notice, clause 6 must be of no effect.
The Court of
Appeal categorically rejected this view. Stephenson LJ said this at p 1080:
With all
respect for the learned judge it seems to me that, in posing the question ‘are
there any express terms in the lease which make time of the essence?’, he was
not asking the right question; nor was he right to look in consequence at paras
2 and 3 for an express term there stating that time shall be of the essence.
What he had to do was to construe the lease as a whole and to direct his mind
to the question what the effect of para 6 was, read with all the other
provisions of the lease, including, in particular, paras 2 and 3 to which it
expressly refers.
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.
The conclusion
in that case was that para 6 meant what it said and therefore rendered the
landlord’s trigger notice void.
This decision,
which was not cited to Vinelott J, presented a problem for Mr de la Piquerie in
his argument on behalf of the tenant in this court. It was not possible for him
to argue (and he has not sought to argue) that para 7 of the Third Schedule
should be rejected altogether. He accepted that effect must be given to it if
it can be given. He submitted, however, that it should not be treated as
meaning exactly what it says. In his submission, one should instead read into
the paragraph an implicit proviso that, even if the landlords have not applied
for the appointment of a surveyor after the
therein contained shall still not take effect until the tenant has served a
notice on the landlords requiring them to apply for the appointment of a
surveyor (if they wish so to apply) within a reasonable time after service of such
notice. In this context he placed some reliance on Davstone (Holdings) Ltd
v Al-Rifai (1976) 32 P & CR 18, on the particular facts of which
Goulding J held that a tenant was not precluded from objecting to an increase
of rent by a ‘deeming’ provision in a rent review clause.
The latter
decision, however, was given in the context of a clause of a much less
comprehensive and stringent nature than that under consideration in the present
case. Furthermore, it was given before the House of Lords had spoken in the United
Scientific case, and at a time when the authorities appeared to support
principles of construction in the construction of rent review clauses very
different from those which have now been declared to represent the law. I
therefore think that the landlords can derive little support from the Davstone
case for present purposes.
The
construction, so benevolent to the landlords, which Mr de la Piquerie seeks to
place on para 7, involves the submission that if the two-month period expires
before the landlords have applied for the appointment of a surveyor to
determine the market rent, the process of its ascertainment is to remain in a
state of total suspense until the tenant stimulates the landlords into activity
by serving a notice making time of the essence, and a ‘reasonable time’ expires
thereafter. The ‘deeming’ provisions in para 4 must, I think, inevitably stand
on the same footing. Accordingly, the landlords’ submission, in my opinion,
likewise involves the proposition that if the one-month period referred to in
para 4 expires before the tenant has served its counternotice, the whole
process of ascertainment of the market rent is to be frozen until the landlords
have stimulated the tenant into activity by serving a notice making time of the
essence for the purpose of para 4.
Despite its
attractive presentation, I find myself wholly unable to accept Mr de la
Piquerie’s argument on these points in the context of the present lease. I
think that the ‘deeming’ provisions of para 4 of this particular rent review
clause are quite inconsistent with the survival of any right of the tenant to
serve a counternotice after the expiration of the one-month period designated
in that paragraph. Likewise, I think that the deeming provisions of para 7 are
quite inconsistent with the survival of any right in the landlords to apply for
the appointment of a surveyor after the expiration of the two-month period
therein specified. While in other contexts ‘deeming’ provisions may not
necessarily connote finality, they do so in the context of this lease.
As will be
observed from the definition of the ‘variation date’ contained in para 1(i) of
the Third Schedule, a period of at very least six months must elapse between
the service of the landlords’ trigger notice and the arrival of the ‘variation
date’. The provisions of the rent review clause are very carefully drafted so
as to ensure that, save in one exceptional contingency, the ‘market rent’, and
thus the ‘revised rent’, must in any event be ascertained before the ‘variation
date’ arrives. There was a very good reason for the draftsman’s care in this
respect. Para 8 provides that, save in the one exceptional contingency, ‘on and
from the variation date the revised rent shall be substituted for the current
rent and the provisions of this Lease as to payment of rent shall apply to the
revised rent’. The application of the mandatory provisions of para 8 would have
been obviously likely to present difficulties if there was a possibility of the
‘variation date’ arriving before the market rent had been ascertained. The
draftsman was rightly concerned to avoid such difficulties. The one exceptional
contingency to which I have referred is the case where the landlords have duly
applied for the appointment of a surveyor in accordance with para 6, but the
surveyor has not yet made his determination before the variation date arrives;
in this contingency the interim provisions of para 9 will apply. However, the
draftsman plainly did not contemplate that the interim provisions of para 9
would have any application where the tenant had omitted to serve a
counternotice or the landlords had omitted to apply for the appointment of a
surveyor within the respective specified time-limits. These two contingencies
had already been covered by the deeming provisions of paras 4 and 7
respectively.
The structure
of the Third Schedule is thus one under which the respective parties are given
carefully defined rights exercisable within carefully defined time-limits and
in which the consequences of any failure to exercise such rights within those
limits are no less carefully defined. The interrelation of the various paras of
the rent review clause is, in my opinion, quite inconsistent with any necessity
for the tenant to serve on the landlords a ‘time of the essence’ notice of the
nature suggested, before he can rely on the provisions of para 7 according to
their terms. This para, when read with the other paras of the schedule, is, in
my opinion, too explicit a ‘contra-indication’ within the relevant principles
to allow the ordinary presumption against time being of the essence to operate
in the landlords’ favour; it serves clearly to rebut the presumption. As the
decision in Lewis v Barnett well illustrates, one cannot invoke
the United Scientific principles for the purpose of rejecting or
modifying a provision which clearly indicates the parties’ intention that time
is to be of the essence for the purpose of a rent review clause. There is
nothing to prevent the parties from contracting on this basis if they so choose
and, if they do so choose, to entitle the court to rewrite the contract which
they have made.
I suspect that
if the decision in Lewis v Barnett, which was at that time still
unreported, had been brought to the learned judge’s attention, he might well
have reached a different conclusion. For the reasons which I have given, I
agree that this appeal should be allowed.
The appeal
was allowed with costs in the Court of Appeal and below. Leave to appeal to the
House of Lords was refused.
