Landlord and tenant — Construction of rent review provisions in lease of business premises — Lease for 25 years providing an unusual formula for rent reviews at five-yearly intervals — Rent for first five years consisted of a basic rent and a smaller extra rent which was attributable to expenditure incurred to meet special requirements of the original tenants — Formula for rent reviews comprised the assessment of the fair rack rental market value for the unexpired term together with a proportionately increased extra rent — The fair rack rental market value was to be assessed on the basis of the residue of the term being ‘subject to similar covenants and conditions (other than the amount of the rent)’ as were contained in the lease — Question as to whether one of the covenants to be taken into account on the review was the obligation to pay the extra rent — Literal construction or construction taking account of surrounding circumstances — Difficulties resulting from literal construction — Held that, having regard to the background against which the lease was entered into, the fair rack rental market value should be assessed excluding the provision dealing with the ascertainment of the extra rent — Declaration sought by lessees refused
In this
originating summons for the construction of rent review provisions in a lease
the plaintiffs were Lister Locks Ltd and the defendants T E I Pension Trust
Ltd. The plaintiffs were the assignees of a lease of commercial units at
Ipswich, the lease having been granted for a term of 25 years from December 2
1974. The defendants were the lessors. The plaintiffs sought a declaration that
in applying the rent review provisions account had to be taken, in the
assessment of the ‘fair rack rental market value’, of the reservation of an
‘extra reviewed rent’.
Paul Morgan
(instructed by Wedlake Bell, agents for Turner Martin & Symes, of Ipswich)
appeared on behalf of the plaintiffs; R C Cordara (instructed by Rowe Maw)
represented the defendants.
Giving
judgment, JUDGE WHEELER said: On December 9 1974, the defendants, T E I Pension
Trust Ltd, let two units on a commercial estate, referred to as units 3 and 3a,
at Ipswich, in Suffolk, to Howard Rotavator Company Ltd for a term of 25 years from
December 2 1974. On March 27 1979 the original tenants assigned the residue of
the lease to the plaintiffs, Lister Locks Ltd.
The summons
before me concerns the true construction of the rent review provisions in the
lease.
The yearly
rent is expressed in clause 1 of the lease as follows:
YIELDING AND
PAYING THEREFOR yearly during the first five years of the term hereby granted
the clear rents of Fourteen thousand nine hundred and eighty-two pounds
(£14,982) (‘the Basic Initial Rent’) plus One thousand six hundred and eighty
pounds (£1,680) (‘the Extra Initial Rent’) and after the first five years of
the term hereby granted and every subsequent period of five years throughout
the said term the fair rack rental market value as hereinafter defined together
with the Extra Reviewed Rent as hereinafter defined or the rents previously
payable under the provisions of this Lease whichever shall be the greater
all such rents
were to be paid quarterly in advance.
I should here
add that clause 1 of the lease also provided for other payments, expressed to
be by way of further rent or by way of additional rent in respect of insurance,
interest on arrears of rent, and service charge.
The proviso to
clause 1 reads as follows:
PROVIDED THAT
the fair rack rental market value as hereinbefore mentioned shall be
ascertained in manner following, that is to say:
(i) Not more than twelve months before the end
of five years and every subsequent period of five years (the last date of each
of such periods being hereinafter called ‘the relevant date of review’) from
the commencement of the term hereby granted the Landlord shall give to the
Tenant notice in writing of its intention to review the rent and from and after
the relevant date of review this Lease shall be read and construed and shall
take effect in all respects as if the yearly rent for the time being payable
hereunder shall be a sum equal to the fair rack rental market value as
hereinafter defined of the demised premises but so that in no event shall the
rent payable by the Tenant to the Landlord after the relevant date of review be
less than the rent payable before such date
(ii) The fair rack rental market value of the
demised premises shall subject as hereinafter provided be the amount which
shall be agreed between the Landlord and the Tenant (or in default of agreement
the amount which shall be determined by assessment as hereinafter provided) to
be the best rent at which the premises might reasonably be expected to be let
for a term of years equivalent to the then unexpired residue of the term hereby
granted in the open market by a willing Landlord to a willing Tenant and
subject to similar covenants and conditions (other than the amount of the rent)
to those contained in this Lease there being disregarded any of the matters
which the court is required to disregard under the provisions of Section 34 of
the Landlord and Tenant Act 1954 as amended by Section 1 of the Law of Property
Act 1969
(iii) If the parties hereto shall fail to reach
agreement as to the then current market rent at least three months before the
relevant date of review then the matter shall be referred to an independent
surveyor or valuer to be appointed by the Landlord and Tenant or failing
agreement upon such appointment within one month then to an independent
surveyor or valuer to be appointed by the President for the time being of the
Royal Institution of Chartered Surveyors at the request of either the Landlord
or the Tenant such independent surveyor or valuer acting as an expert and not
as an arbitrator and the assessment of such independent surveyor or valuer
shall be communicated to the Landlord and to the Tenant in writing and shall be
final and binding upon the Landlord and Tenant
(iv) Immediately upon the Landlord and Tenant
reaching agreement as to the said fair rack rental market value or upon receipt
by the Landlord and Tenant of the independent surveyor’s or valuer’s assessment
of the said current market rent the yearly rent hereby reserved shall as from
the relevant date of review be the amount so agreed or certified as aforesaid
together with the said Extra Reviewed Rent or the rents payable prior to such
date whichever shall be the greater and it is expressly agreed that under no
circumstances shall these provisions operate to effect a reduction in the rents
hereby reserved or the rents collected for the preceding period of five years
if applicable
(v) Upon such fair rack rental market value being
agreed or certified as aforesaid the Extra Reviewed Rent for every subsequent
period of five years shall be ascertained in the manner following that is to
say by multiplying the Extra Initial Rent by the said fair rack rental market
value and dividing the result by the Basic Initial Rent
(vi) Upon such fair rack rental market value being
agreed or certified as aforesaid a memorandum of the rents then payable (being
the fair rack rental market value together with the said Extra Reviewed Rent)
shall be endorsed upon this Lease and upon the counterpart thereof and signed
by a duly authorised officer of the Landlord and of the Tenant
I hope I shall
not be thought to be over-critical if I say that there are, on the face of it,
minor defects in the wording of this proviso. It uses the words ‘rent’ and
‘rents’ more or less indiscriminately. It starts by dealing with a proviso for
ascertaining the fair rack rental market value and then proceeds to use at
least once a quite different term — ‘the current market rent,’ and so on, but
basically it will be seen:
(i) that the lease provides for a ‘basic initial
rent’ of £14,982 per annum and an ‘extra initial rent’ of £1,680 per annum for
the first five years;
(ii) that for every subsequent five years the
‘basic initial rent’ is to be replaced by ‘the fair rack rental market value’
and the ‘extra initial rent’ by ‘the extra reviewed rent’, in each case ‘ as
hereinafter defined’;
(iii) The fair rack rental market value is to be
ascertained in accordance with paragraph (ii) of the proviso, part of which I
will read again, namely:
. . . the
best rent at which the premises might reasonably be expected to be let for a
term of years equivalent to the then unexpired residue of the term hereby
granted in the open market by a willing Landlord to a willing Tenant and
and these are
the critical words
subject to
similar covenants and conditions (other than the
amount of the rent) to those contained in this Lease . . .
I should here
add that both sides agree that nothing turns on the use in the proviso to
clause 1 of the term ‘current market rent’ in addition to the expression ‘fair
rack rental market value’;
(iv) It will be seen from paragraph (v) of the
proviso to clause 1 that once the ‘fair rack rental market value’ has been
ascertained for
a straightforward mathematical computation and (in respect of the first rent
review, the one with which I am concerned) is simply the fair rack rental
market value over the ‘basic initial rent’ multiplied by ‘the extra initial
rent‘; in other words, the ‘extra initial rent’ is to increase in the same
proportion as the ‘basic initial rent’.
The question I
have to consider is whether, in ascertaining the fair rack rental market value
in accordance with paragraph (ii) of the proviso, one of the covenants and
conditions which the valuer has to take into account is the obligation to pay
the ‘extra reviewed rent’.
The plaintiffs
say ‘yes’ — it is what the lease says — and the obligation is one of the
covenants and conditions, and I must give effect to the unambiguous words of
paragraph (ii) of the proviso to clause 1.
Not
surprisingly, the defendants say ‘no’. They argue that on a true construction
the words ‘subject to similar covenants and conditions (other than the amount
of the rent) to those contained in this Lease’ do not include the
obligation to pay the ‘extra reviewed rent’.
I should here
emphasise that what I am concerned with in this case is construction and not
rectification. That assumes an added importance because, as we shall see when I
refer briefly to the authorities, if it had been a question of rectification, a
good deal more would have been admissible in the terms of surrounding
circumstances, and so on, than is permissible on a purely construction approach.
The defendants
have three answers to the plaintiffs’ claim for a literal approach. First they
argued — perhaps a little faintly, but they put it first because if it was
accepted it was conclusive — that the words ‘other than the amount of the rent’
exclude the obligation to pay the ‘extra reviewed rent’. Secondly, they say,
approaching the matter on what they call ‘the interpretation route’, that they
achieve a similar object based primarily on the evidence of the surrounding
circumstances as an aid to construction of the words used. Thirdly,
alternatively, on what they call ‘the implied term route’, they say by
necessary implication, in order to give business efficacy to the words actually
used, we must infer some limitation on those words.
They only resort
to the third of these lines if, by the interpretation route, it is not possible
to give a secondary meaning to the actual words of the lease.
As to the
first of their arguments — ie that the matter is decided by the words in
brackets in paragraph (ii) of the proviso, namely the words ‘(other than the
amount of the rent)’ as being sufficient to exclude the obligation to pay the
‘extra reviewed rent’ — I cannot accept this proposition. In my view, the words
quoted are merely conveyancing over-caution. ‘Amount’, in my judgment, means
what it says, ie initially £14,982 (the ‘basic initial rent’) and £1,680 (the
‘extra initial rent’).
I propose to
take the defendants’ second and third points together because they turn, in one
degree or another, on the extent to which I can properly take account of
surrounding circumstances in construing this lease: before going to the facts I
propose to touch briefly on the relevant principles which are sought to be
applied as to which I think both parties are agreed. I start by reminding
myself of the warning which appeared in Norton on Deeds and which was
cited by Lord Simon of Glaisdale in Wickman Machine Tools Ltd v L
Schuler AG [1974] AC 235 at p 263, where he said this:
There is one
general principle of law which is relevant to both questions. This has been
frequently stated, but it is most pungently expressed in Norton on Deeds
(1906), p 43, though it applies to all written instruments:
The quotation
is here:
‘. . . the
question to be answered always is, ‘What is the meaning of what the parties
have said?’ not, ‘What did the parties
mean to say?’ . . . it being a presumption juris et de jure . . . that the
parties intended to say that which they have said’.
With that
warning in mind, I now turn to two House of Lords decisions and to two opinions
of Lord Wilberforce. The first is in Prenn v Simmonds [1971] 1
WLR 1381, and I would emphasise that in the House of Lords this case was
decided exclusively on the question of interpretation and not on rectification,
although rectification had been widely argued in the Court of Appeal and at
first instance, and, as Lord Wilberforce pointed out, that had let in a great
deal of evidence which was not admissible on the construction point, but his
opinion deals with the matter and decides the matter, as did the rest of their
Lordships, purely on the basis of construction. The first passage I want to
cite is from the bottom of p 1383 where Lord Wilberforce said this:
In order for
the agreement of July 6 1960 to be understood, it must be placed in its
context. The time has long passed when agreements, even those under seal, were
isolated from the matrix of facts in which they were set and interpreted purely
on internal linguistic considerations. There is no need to appeal here to any
modern, anti-literal, tendencies, for Lord Blackburn’s well-known judgment in River
Wear Commissioners v Adamson (1877) 2 App Cas 743 at p 763 provides
ample warrant for a liberal approach. We must, as he said, enquire beyond the
language and see what the circumstances were with reference to which the words
were used, and the object, appearing from those circumstances, which the person
using them had in view. Moreover, at any rate since 1859 (Macdonald v Longbottom
1 E & E 977) it has been clear enough that evidence of mutually known facts
may be admitted to identify the meaning of a descriptive term.
I now pass to
the second passage, which is on p 1384, where Lord Wilberforce said this:
On principle,
the matter is worth pursuing a little, because the present case illustrates
very well the disadvantages and danger of departing from established doctrine
and the virtue of the latter.
That, I
intervene to say, is the doctrine of restricting the extent to which
surrounding circumstances can be brought in as an aid to intention. Lord
Wilberforce continues:
There were
prolonged negotiations between solicitors, with exchanges of draft clauses,
ultimately emerging in clause 2 of the agreement. The reason for not admitting
evidence of these exchanges is not a technical one or even mainly one of
convenience (although the attempt to admit it did greatly prolong the case and
add to its expense). It is simply that such evidence is unhelpful. By the
nature of things, where negotiations are difficult, the parties’ positions, with
each passing letter, are changing and until the final agreement, though
converging, still divergent. It is only the final document which records a
consensus. If the previous documents use different expressions, how does
construction of those expressions, itself a doubtful process, help on the
construction of the contractual words?
If the same expressions are used, nothing is gained by looking back;
indeed, something may be lost since the relevant surrounding circumstances may
be different. And at this stage there is no consensus of the parties to appeal
to. It may be said that previous documents may be looked at to explain the aims
of the parties. In a limited sense this is true; the commercial, or business
object, of the transaction, objectively ascertained, may be a surrounding fact.
Cardozo J thought so in the Utica Bank case ((1918) 118 NE 607). And if
it can be shown that one interpretation completely frustrates that object, to
the extent of rendering the contract futile, that may be a strong argument for
an alternative interpretation, if that can reasonably be found. But beyond that
it may be difficult to go.
Before I deal
with the third case I will just say this at this stage: when we look at the
surrounding circumstances in the case before me, this is not, as it seems to
me, a case where such evidence of changing circumstances is unhelpful because
there are continuing negotiations, and because you cannot say at what stage a
consensus was reached. On the one vital point there is an exchange of letters
which seems to me to set out a record in a convenient form of what ultimately
found its way into the lease. I also bear in mind what Lord Wilberforce says
about the commercial or business object of the transaction, because, as will be
seen at the end of the day, one of the main reasons why I have come down in
favour of the defendants in this case is because, as it seems to me, the
plaintiffs’ construction would largely make nonsense of a provision of the
lease.
The third case
to which I want to refer briefly is a passage in another opinion of Lord
Wilberforce in Reardon Smith Line Ltd v Yngvar Hansen-Tangen
[1976] 1 WLR 989. The passage in question, which really re-emphasises what Lord
Wilberforce said in the Prenn case, is at p 995. He says this:
But it does
not follow that, renouncing this evidence,
that was
evidence said to show intention
one must be
confined within the four corners of the document. No contracts are made in a
vacuum: there is always a setting in which they have to be placed. The nature
of what is legitimate to have regard to is usually described as ‘the
surrounding circumstances’ but this phrase is imprecise: it can be illustrated
but hardly defined. In a commercial contract it is certainly right that the
court should know the commercial purpose of the contract and this in turn
pre-supposes knowledge of the genesis of the transaction, the background, the
context, the market in which the parties are operating.
In order to
apply those principles to the case before me, it is necessary to turn briefly
to the facts of what I will still call the surrounding circumstances, though I
accept readily Lord Wilberforce’s statement that it is not a description of
precision.
At the time of
the negotiations in 1974 for the lease in the present case, the commercial
development, of which plots 3 and 3a were to form part, was still in the
planning stage. It followed, therefore, that prospective tenants like Howard
Rotavator were able to have special requirements of their own built into the
basic plan. These included, in particular, additional office space, and the
exchange between the parties which illustrates the background, which resulted
in having a basic rent and an extra rent, is conveniently to be found in three
letters to which I will now briefly refer.
The first is
May 6 1974 from a Mr Oliver, who was a director of the developers, who wrote to
Mr Howard, a director of Howard Rotavator Co Ltd the prospective tenants, and
he said this:
Units 3 and
3a Ipswich
Further to our
telephone conversation of today’s date, I am setting out hereunder the details
in respect of the costings of the extra requirements you need at the above site.
The net extra
footage involved in the construction of the office area amounts to some 838
square feet, in respect of which a further £628 per annum would be payable,
being rent at 75p per foot.
We will see
how that fits in with the general provisions for rent in a moment. The letter
continues:
In addition,
there is a total area extra over-cost in respect of all the works you require
in the building, including the further office content of £10,500, which could
be dealt with either by an increase of 9p per foot on the overall revised
footage, being 19,038 square feet, or alternatively this could be catered for
by payment of a capital sum on completion of the lease.
I pause there
to emphasise that Mr Oliver was offering the prospective tenants two alternatives;
either additional rent or a capital sum, but in either case to cover the cost
of the additional works which were being effected at the express request of the
prospective tenants.
The letter
continues:
Should you
elect to have this sum rentalised at 8p per foot, then there would need to be a
gearing clause in the lease which would state that after the normal rent for
the building had been agreed at each rent review, the extra 9p would then be
added to this rent, having also been reviewed on a pro rata basis to the
increase arrived at in respect of the basic rack rent.
Perhaps you
will be kind enough to advise me as to which course you would wish to adopt,
and meantime I am arranging for Mr Dark to forward you, under separate cover, a
detailed drawing and specification of the extras included in this revised
proposition.
So there is a
very clear alternative put forward for dealing with the cost of the additional
works which Howard Rotavator were requiring to be done.
On May 8 Mr
Howard replies:
Dear Mr Oliver,
Units 3 and
3a:
Thank you
very much for your letter of May 6 confirming information which you gave me
during our telephone conversation of May 5 regarding costings of the extra
requirements which we need for the above site.
We fully
understand the situation and would inform you that we have considered this
matter fully and we would elect to pay the additional rent of 9p per square
foot rather than paying you £10,500 as a capital sum.
We look
forward to receiving from Mr Dark the detailed drawings and specifications of
the extras included in your proposition, and trust that this matter can now go
ahead to a completed conclusion.
That letter is
replied to on May 14 by Mr Dark, who was a colleague of Mr Oliver, and again I
think it would be convenient if I read the whole of this letter.
Re Units 3
and 3a.
I refer to Mr
Oliver’s letter dated May 6 and your reply of May 8 regarding the rent and
additional costs of the above-mentioned building.
An error
occurred in the third paragraph of Mr Oliver’s letter where he stated the
overall revised footage would be 19,038 square feet. The total building area
has now been carefully calculated and your building will have a gross floor
area of 19,977 square feet. This difference means that the extra cost can be
re-calculated and will, in fact, represent an increase of 8 1/2p per foot and
not 9p per foot as previously advised.
For clarity,
I set out below a schedule showing the rental calculations which are now to be
regarded as final:
Original floor
area of building: 19,139 square feet at 75p = £14,354 per annum.
Increased
offices at first floor: 838 square feet at 75p = £628 per annum.
Total layout
floor area: 19,977 square feet at 75p = £14,982 per annum.
Items of extra
cost with a total value of £10,500 at 8 1/2p per square foot produce £1,680 per
annum.
Total rent
for units 3 and 3a Ipswich —
And then there
is a gap.
— per annum.
My regrets
for any previous confusion, but I think you will agree that the above figures
now set out clearly the final position with regard to size of building and
rent. I am writing to our solicitors today informing them of the final figures,
so that all parties have the up-to-date information.
We are
preparing our detailed planning application incorporating the various
amendments which you require, and this will be submitted to the Planning
Authority on or before Monday, May 20. Immediately the drawings are ready to
submit for planning approval, I will add to these a brief specification of
works which I will forward to your good self and our solicitors so that they
may be incorporated in the legal documentation.
I trust the
position is now completely clarified for you.
Thus it will
be seen that the figures in that letter — the rental calculations — are, in
fact, the figures for the ‘basic initial rent’ and the ‘extra initial rent’ as
they ultimately appeared in the lease. Thus, of the ‘extras’, part resulted in
an increase in the rental floor area (838 sq ft) and that was charged with the
basic rent at the same price of 75p per square foot as the original floor area.
The remainder of the expenditure which had been incurred for the special
benefit of Howard Rotavator, amounting to £10,500, was, if I must use the
jargon of the trade, ‘rentalised’ at 8 1/2p per sq ft, producing £1,680 per
annum, and that is the extra rent as it appears in the lease.
Now, the
basis, of course, of the plaintiffs’ case is that literally the provision for
extra rent is one of the terms which have to be taken into account in
ascertaining the fair rack rental market value for the purposes of the rent
review, and it is therefore interesting to see what evidence there is as to
how, if that be the true construction of the lease, it would, in fact, be
implemented by the professional experts who would have, in default of agreement,
to calculate the rent review. Here I have assistance from two Fellows of the
Royal Institution of Chartered Surveyors. The first is Mr J C Collingwood, who
has sworn an affidavit on behalf of the defendants and in paragraph 12 of his
affidavit he says this:
(c) I do not know how the plaintiffs propose to
operate an assessment of the open market rental value which is meant to take
into account the payment of an extra rental figure. It would result in an
arrangement without any logical basis, and, in my opinion, too uncertain to be
capable of assessment by the valuers acting for the parties when the rent is
reviewed,
a view which I
must confess at first blush strikes a sympathetic chord on my part.
On behalf of
the plaintiffs, another Fellow of the Royal Institution of Chartered Surveyors,
Mr Martin Spettigue, says this in paragraph 6 of his affidavit:
I disagree
with Mr Collingwood’s statement in paragraph 12(c) of his affidavit
that is the
passage I have just read
that it would
not be possible to take into account the provision in the lease for the payment
of an extra rental figure in determining the current market rent or the fair
rack rental market value as provided for in the lease. Such an exercise is, in
my opinion, well within the powers of a chartered surveyor experienced in
valuation matters. In this case it is certainly no more difficult to determine
what account should be taken of the terms of the lease providing for an extra
reviewed rent than it is to take account of the terms of the lease which
provide for a rent in respect of insurance, a rent in respect of interest on
rent that is paid late, and rent by the way of service charge in accordance
with Clause 3 of the lease.
Now, I am no
surveyor, and it ill-becomes me to be critical of expert evidence, but I am
bound to say that for my part I find Mr Spettigue’s statement, which I have
just read, quite unconvincing. I simply do not begin to understand how a
valuer, faced with a need to assess the fair market rent, is to take into
account an obligation to pay the extra rent — I am not using the technical term
— unless it be simply a question of subtraction. If there is some simple
explanation of how this would be done, I would have been greatly helped if Mr
Spettigue had said what it was, but on the state of the expert evidence as it
stands, it does seem to me that the plaintiffs’ construction of this lease must
result, either in whole or in part — and, if in part, substantially in part —
in taking away with one hand what is given with the other, because if the rent
review of the basic rent is to take into account the obligation to pay the
extra rent, that presumably must result in a reduction of the figure which
would otherwise be
the rent review of the extra rent requires that figure to be taken into
account, and, as far as I can see, it virtually makes the rent review for the
extra review of rent formula of little use. Certainly, when one sees the
background against which this lease was entered into (which is not the subject
of any doubt) and the purpose of the ‘extra reviewed rent’, it seems to me that
if the fair rack rental value is to be ascertained on the basis of ‘the
covenants and conditions (other than the amount of the rent)’ in this lease, it
is right and proper, and indeed necessary, in order to give business efficacy
to this lease, to add in the words — whether one does it by implying the term
or by deriving it from the surrounding circumstances, in my judgment, matters
not — which will exclude the extra rent review provision from the calculation
of the fair rack rental value.
In my
judgment, therefore, although initially I am bound to say I had some doubts, it
seems to me that the declaration for which the plaintiffs ask, that on the true
construction of the lease the independent surveyor has to take into account the
terms of the above-mentioned lease reserving an extra reviewed rent, is a
declaration which I ought not to make. In my judgment, therefore, the summons
should be answered in that sense.
