Landlord and tenant — Rent review provisions in underlease — Construction — Whether time of the essence — Tenants’ counternotice in response to landlords’ trigger notice not served within the time-limit laid down in the underlease — Whether presumption that time was not intended to be of the essence, as stated in United Scientific Holdings Ltd v Burnley Borough Council, was rebutted in the present case by forms of expression which clearly ‘evinced the concept of finality’ — Court concluded that the parties intended that time should be of the essence for the rent review provisions
construction summons concerned shop premises let for a term of 26 years from
June 24 1982 with rent reviews taking effect at the end of the 7th, 11th, 16th
and 21st years of the term — The machinery provided for a trigger notice by the
landlords stating their opinion of the rack-rental value at the expiration of
the relevant year of review — If the tenants did not, before the expiration of
two months from the service of the trigger notice, serve on the landlords a
counternotice stating their disagreement with the amount proposed by the
landlords, the rack-rental value of the demised premises ‘shall be conclusively
fixed at the amount stated in the lessor’s notice’ — There were provisions for
the settlement of the rack-rental value by agreement or reference to an
independent expert if the tenants did serve a counternotice within the
stipulated time — The tenants did not serve a counternotice within the time
and, after some correspondence between the parties, and the appearance of
bailiffs to distrain for arrears of rent, the tenants’ solicitors served a
counternotice well outside the time-limit — The tenants took out the present
summons to determine the dispute
was whether, as a matter of construction, time was of the essence for the
purpose of the service of the tenants’ counternotice — The relevant question,
framed in the light of the United Scientific Holdings case and Slade LJ’s
judgment in Trustees of Henry Smith’s Charity v AWADA Trading &
Promotions Services Ltd, was whether the rebuttable presumption that time was
not intended to be of the essence in relation to the timetable set out in the
review clause was in fact rebutted by a ‘form of expression which clearly
evinces the concept of finality’ — Mummery J decided that the parties here had
in fact provided, in language which ‘evinces the concept of finality’, what was
to happen if there had not been strict compliance with the timetable — In
particular, it had been stated in the review clause that if the lessee had not
served a counternotice within the stipulated time the rack-rental value ‘shall
be conclusively fixed at the amount stated in the lessor’s notice’ — This was
so strongly suggestive of finality that the judge was driven to conclude that
the parties intended that time should be of the essence of this rent review
provision — He declared accordingly and dismissed the plaintiff tenants’
summons
The following
cases are referred to in this report.
Henry Smith’s
Charity Trustees v AWADA Trading & Promotion
Services Ltd (1983) 47 P&CR 607; [1984] EGD 103; 269 EG 729, [1984] 1
EGLR 116, CA
Mecca
Leisure Ltd v Renown Investments (Holdings) Ltd
(1984) 49 P&CR 12; [1984] EGD 200; 271 EG 989, [1984] 2 EGLR 137, CA
Taylor
Woodrow Property Co Ltd v Lonrho Textiles Ltd
[1985] 2 EGLR 120; (1985) 275 EG 632
This was a
construction summons issued by the plaintiff tenants, Mammoth Greeting Cards
Ltd, to determine the true construction of the rent review provisions of an
underlease of shop premises at 89 East Street, Southampton. The defendants were
the landlords, Agra Ltd.
Kirk Reynolds
(instructed by White Brooks & Gilman, of Winchester) appeared on behalf of
the plaintiffs; Kim Lewison (instructed by Kanter Jules Grangewoods)
represented the defendants.
Giving
judgment, MUMMERY J said: This is a case on the construction of a rent
review clause contained in an underlease dated November 9 1983 (the lease). The
lessor is Agra Ltd, the defendant to the construction summons, and the lessee
is the plaintiff, Mammoth Greeting Cards Ltd. The lease was of shop premises at
89 East Street, Southampton. The term was for a period of 26 years from June 24
1982 at an initial annual rent of £7,775, subsequently increased to £10,250. Clause
1 of the lease contains a proviso under which the rent reserved may be
increased at the end of the 7th, 11th, 16th and 21st years of the term in the
manner prescribed.
In order to
understand the dispute on construction it is necessary for me to refer to some
of the rent review provisions. First, subclause (a):
the lessor
may not earlier than eighteen months before the expiration of the year of
review serve on the lessee a notice stating the amount which is in the opinion
of the lessor a rack-rental value at the expiration of the relevant year of
review of the demised premises
There then
follow definitions of rack-rental value, which are not material for the
purposes of this dispute.
I go to
subclause (b), which provides:
If on the
expiration of two months from the date of service of the lessor’s notice the
lessee shall not have served on the lessor a counternotice in accordance with
subclause (c) of this proviso, the rack-rental value of the demised premises
shall be conclusively fixed at the amount stated in the lessor’s notice.
Subclause (c)
provides:
If within two
months from the date of service of the lessor’s notice the lessee shall serve
on the lessor a counternotice stating that the lessee does not agree with the
lessor’s opinion as to the amount of the rack-rental value as stated in the
lessor’s notice the lessor and the lessee shall use their best endeavours to
reach agreement as to the rack-rental value, but if by two months before the
expiration of the relevant year of review the lessor and the lessee shall have
failed to agree the rack-rental value, then either party may refer the dispute
in respect of the rack-rental value to an independent surveyor or valuer to be
appointed by the president for the time being of the Royal Institution of
Chartered Surveyors for assessment upon the bases assumed under paragraph (a)
of this proviso as an expert and not by way of arbitration, the assessment of
such independent surveyor or valuer to be final and binding upon the parties hereto
when communicated to them and his fees to be borne as he shall direct.
Clause 1(d)
provides that the yearly rent payable by the lessee from the expiration of the
year of review shall be:
(i) the rack-rental value of the demised premises
as conclusively fixed by the relevant lessor’s notice or as agreed between the
lessor and the lessee or assessed by an independent surveyor or valuer as the
case may be, or (ii) the rent payable immediately before the expiration of the
relevant year of review whichever shall be the greater.
The only other
provision in the lease which I need read is subclause (f), which provides:
If the lessor
shall fail to serve due notice under the provision of subclause (a) of this
proviso in respect of any year of review the lessor shall be entitled to serve
such a notice at any time before the next year of review or before the
expiration of the term as the case may be and thereupon the following
provisions of this proviso shall mutatis mutandis apply provided (i)
that the rack-rental value under this sub-paragraph (f) shall be calculated as
hereinbefore provided as at the expiration of the year of review immediately
preceding the serving of the notice by the lessor under this subclause or in
the event of the notice being served within the period of six months before the
expiration of the year of review, then that year of review, and (ii) any
increase in rent resulting from such review shall have effect only from the
expiration of six months from the date of service of such notice by the lessor.
The dispute as
to the construction of clause 1(b) has arisen in these circumstances. On June
21 1988 the lessor’s agents, Lee Baron, sent, by recorded delivery, to the
lessee a letter referring to the rent review due on June 24 1988 and stating:
We are hereby
giving you formal notice that your landlords Agra Ltd will be seeking a revised
rent of £38,500 per annum exclusive with effect from the review date for the
next five years of your lease.
The letter
concluded that they were looking forward to receiving the lessee’s agreement to
the revised rent.
The lessee did
not respond to that letter and did not serve on the lessor or its agents any
counternotice within the two-month period from the date of the service of the
lessor’s notice as provided in the subclause (b) of clause 1.
The lessor’s
agents sent a further letter to the lessee on October 14 1988 referring to the
matter of the rent review, noting that no counternotice had been served in
accordance with the terms of the underlease and accordingly confirming the
rental of £38,500 per annum standing as the rent from June 24 1988. The letter
concluded that arrangements would be made for the memorandum of rent review
recording the new rent to be forwarded.
There was
still no response from the lessee. The lessor’s agents sent a further letter on
November 3 1988 referring to the earlier events, to the failure to serve a
counternotice, and confirming that the rental of £38,500 was now payable. There
was enclosed with that letter a rent demand and a calculation of the rent due,
which then amounted to £16,687.50. The letter concluded with a warning that,
unless payment of the arrears was received within seven days, there would be no
alternative but to instigate proceedings for recovery of the arrears.
What then
happened elicited a response from solicitors acting for the lessee. It appears
from the affidavit evidence that in November instructions had been issued on
behalf of the lessor to bailiffs to distrain for arrears of rent which were
due. Distress took place after the two rent days had elapsed since the service
by the lessor on the lessee of the notice calling for a review of the rent. The
date of that distress was in about the third week of November 1988.
In a letter of
November 23 1988 the solicitors acting for the lessee stated that it was not
accepted that the rent had been validly fixed at the level of £38,500 and that
they had instructed the bailiffs, who were waiting to distrain on goods, to
withdraw for the time being upon the security of a walking possession agreement
which had been entered into by the lessee. The letter went on to state that it
was not accepted by the lessee that the lessor’s notice of review had been
validly served or at all, or that the rent review procedure under the lease had
been properly concluded. I should say at this stage there is no longer any
dispute on the fact of service of the lessor’s notice.
After further
correspondence, the lessee’s solicitors sent a letter on December 12 1988, that
is well outside the two-month period prescribed in clause 1(b) of the lease,
stating: ‘We hereby give you formal counternotice that the lessee does not
agree with the lessor’s opinion as to the amount of the rack-rental value
stated in the said notice.’ They then
said that there appeared to be some difference of opinion between the parties
about the construction of the underlease and that they would be applying, if
there was no agreement, by a construction summons to determine that dispute.
The construction summons, taken out by the lessee on March 13 1989, is the
matter now before the court.
The dispute
between the parties is whether, as a matter of the construction of the relevant
provisions, time is of the essence for the service of the lessee’s
counternotice. It was contended on behalf of the lessee that, on its true
construction, the lease did not make time of the essence for the service of a
counternotice and that the letter of its solicitors dated December 12 1988 was
a valid and effective counternotice.
On behalf of
the lessee reliance was placed not only on the structure and wording of the
machinery for rent review contained in clause 1 of the lease but also on three
authorities which were all concerned with the effect of ‘deeming’ provisions in
rent review clauses. Those authorities are two decisions of the Court of
Appeal: Trustees of Henry Smith’s Charity v AWADA Trading &
Promotions Services Ltd (1983) 47 P&CR 607* and Mecca Leisure Ltd
v Renown Investments (Holdings) Ltd (1984) 49 P&CR 12† , and a
decision of Mr B A Hytner QC, sitting as a deputy judge in the Queen’s Bench
Division, in Taylor Woodrow Property Co Ltd v Lonrho Textiles Ltd
[1985] 2 EGLR 120, where an attempt was made to achieve a reconciliation
between the two Court of Appeal decisions and where the decision in the result
was to follow the Court of Appeal’s decision in the Mecca Leisure case.
*Editor’s
note: Also reported at (1983) 269 EG 729, [1984] 1 EGLR 116.
† Editor’s
note: Also reported at (1984) 271 EG 989, [1984] 2 EGLR 137.
It was common
ground that the legal principles governing the construction of rent review
clauses, including this clause, are accurately summarised in the judgment of
Slade LJ in the case of the Trustees of Henry Smith’s Charity at p 619.
That summary is such a convenient way of stating the correct approach to this
case that I shall quote it in full. Slade LJ said:
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 the essence of the contract: see United Scientific Holdings v Burnley
Borough Council per Lord Diplock and Amherst v James Walker
Goldsmith & Silversmith Ltd per Oliver LJ and per Lawton LJ. (3)
The presumption is rebuttable by sufficient contraindications 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 United Scientific
Holdings Ltd v Burnley Borough Council 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 United
Scientific Holdings Ltd v Burnley Borough Council per Lord Diplock
and 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 Drebbond Ltd v Horsham District Council and Lewis
v Barnett.
The question
for me is not whether the result of this case is determined by the decision of
the Court of Appeal in the Henry Smith case, where on the true
construction of that lease time was of the essence, or by the decision in the Mecca
Leisure case, where on the true construction of a different lease it was
held by a majority that time was not of the essence. The relevant question is
whether the rebuttable presumption that time is not intended to be of the
essence in relation to the timetable set out in the rent review clause is in
fact rebutted in clause 1 of this lease by a ‘form of expression which clearly
evinces the concept of finality’ attached to the end of the two-month period
prescribed in clause 1(b) for the service of the lessee’s counternotice.
In answering
this question I bear in mind the observations of Sir John Donaldson MR in the Henry
Smith case at p 614 that ‘It is highly undesirable that decisions of this
kind of dispute shall turn upon fine distinctions’. I also bear in mind the
cogent comments of Griffiths LJ on p 616 of the same case on the basis of the
court’s reluctance to conclude that the presumption has been displaced and that
time is of the essence. Griffiths LJ says (at p 616):
When they
enter into a lease such as this the expectation of both landlords and tenants
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 loathe 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 late in observing the timetable set out in the rent review
provisions of the lease.
I mention at
this point that there is a great difference, as appears from the
correspondence, between the opinion of the lessor and the opinion of the lessee
as to what is the rack-market-rental value of this property. In my judgment,
the structure and wording of this rent review clause clearly evince an
intention to make time of the essence, both for the service of the lessor’s
notice, as to which see clause 1(a) and (f), and for the service of the
lessee’s counternotice under subclause (b). The parties have set out a
timetable. They have provided in language, which ‘evinces the concept of
finality’, what is to happen if there has not been strict compliance with that
timetable. Subclause (f) contains provisions expressly laying down what the
lessor is entitled to do if it fails to serve due notice under the provisions
of subclause (a). Subclause (b) expressly provides that the rack-rental value
shall be ‘conclusively fixed’ at the amount stated in the lessor’s notice if at
the expiration of two months from the date of the service of the lessor’s
notice the lessee has not served a counternotice in accordance with those
provisions. In that counternotice it was necessary for the lessee to state that
it did not agree with the lessor’s opinion as to the amount of the rack-rental
value. The expression ‘conclusively fixed’ is, in my judgment, so
absence of a lessee’s counternotice within the two-month period, that I am
driven to conclude that these parties intended that time should be of the
essence of this rent review provision. The effect of the terms of clause 1(b)
is not only to fix the rent at the moment stated in the lessor’s notice but to
fix it ‘conclusively’. The parties have by this part of their agreement in the
lease themselves determined that the amount of rent will be so fixed and that
when fixed it is fixed ‘conclusively’ so that nothing subsequently done (for
example, by the service of a late counternotice) can counter or contradict that
fixed figure. It was fixed once and for all as a final figure on the expiration
of the two-month period from the service of the lessor’s notice.
In view of the
clear language of this particular provision I do not think it is necessary or
even desirable for me to be drawn into a wider controversy, evident from the
authorities as to the extent to which the presence of a ‘deeming’ provision in
a rent review clause is sufficient to make time of the essence. In some
contexts a provision that a sum ‘shall be deemed to be the market rent’ may be
construed to mean the same as ‘shall be conclusively presumed to be the market
rent’: see per Slade LJ in the Henry Smith case at p 621. There
may, however, be other contexts in which the effect of a ‘deeming’ provision is
simply to create a contractual fiction between the parties but without the
essential element of finality required to make time of the essence. It is clear
to me in this case that there is no resort by the parties to any fiction at
all. The words ‘shall be conclusively fixed’ simply state an agreed, clear and
final consequence of a failure on the part of the lessee to serve a
counternotice within the specified time.
In view of the
conclusion I have formed on the construction of the terms of the lease it is
unnecessary for me to deal with an alternative submission made on behalf of the
lessor that, even if the provisions of the lease did not make time of the
essence, the subsequent conduct on the part of the parties has produced that
effect.
For the
reasons which I have mentioned I will therefore dismiss the originating
summons.
The summons
was dismissed with costs.
