Landlord and tenant — Rent review clause — Principles restated by Court of Appeal — Decision of Peter Gibson J reversed — A simple correlation between rent review clause and break clause not by itself a sufficient contra-indication to displace the prima facie rule laid down in United Scientific Holdings v Burnley Borough Council that time was not of the essence — In the present case there was ‘the clearest possible interrelation between the timetable embodied in the rent review clause and that embodied in the break clause’ and Peter Gibson J followed the decision in William Hill (Southern) Ltd v Govier & Govier in holding time was of the essence, although he did ‘not find the simple correlation approach completely satisfying logically’ — After reviewing authorities, the Court of Appeal, in a judgment of the court, formulated some underlying principles — The reason for the prima facie rule stated in the United Scientific case was that it was likely that the detriment to the landlord of losing his review by failure to adhere strictly to the stipulated time-limit would be wholly disproportionate to the disadvantage to the tenant of a delay in the assessment of rent — It was therefore not right, in the absence of sufficient contra-indications, to impute to the parties the intention that time should be of the essence for the purpose of a rent review clause — Where the timetables of a rent review clause and a break clause are closely interlocked, this may constitute a sufficient contra-indication, but everything depends on the structure and wording of the particular lease — Good examples of such a contra-indication were C Richards & Son Ltd v Karenita Ltd and Coventry City Council v J Hepworth & Sons Ltd — These two cases had one most important feature in common, namely, that the event as to which time was held to be of the essence was one in the landlord’s full control (service of his trigger notice) — In the present case, on the other hand, the event as to which time was said to be of the essence was the actual obtaining of the arbitrator’s decision — No matter how diligent the landlord was, there could be many reasons why the arbitrator’s decision might not be obtained until after the material date — In the William Hill case the tenant, no less than the landlord, had the right to refer the matter to the arbitrator, but the Court of Appeal did not express any conclusion on a submission that the case was wrongly decided — Held that in the present case the interrelation between the break clause and the rent review clause was not a sufficient contra-indication to rebut the prima facie rule that time was not of the essence — The two main reasons were (1) that the date of the relevant event, the actual obtaining of the arbitrator’s award, was to a substantial degree outside the landlord’s control, and (2) that any potential hardship to the tenant through the landlord’s delay in initiating the rent review procedure could be eliminated, or substantially mitigated, by the tenant initiating such action itself — Appeal allowed
This was an
appeal by the plaintiff landlord, Metrolands Investments Ltd, from a decision
of Peter Gibson J on the trial of a preliminary issue in the plaintiff’s action
against J H Dewhurst Ltd, the defendant and present respondent. The case
related to the lease of a butcher’s shop at 18 Mercian Way, Ashton-under-Lyne,
Lancashire. The decision of Peter Gibson J was reported at [1985] 1 EGLR 105;
(1985) 274 EG 1388-1396.
Michael Mark
(instructed by Willey Hargrave & Co, of Harrogate) appeared on behalf of
the appellant; J A F Thom (instructed by R A Roberts) represented the
respondent.
Giving
judgment, SLADE LJ said: This is the judgment of the court on an appeal by the
plaintiff in certain landlord and tenant proceedings from an order of Peter
Gibson J made on December 17 1984 on the trial of a preliminary issue in the
action. The appellant landlord is Metrolands Investments Ltd (‘Metrolands’).
The respondent tenant is J H Dewhurst Ltd (‘Dewhurst’). The dispute between the
parties concerns a rent review clause.
The decision
of Peter Gibson J contains a very clear statement of the relevant facts and is
reported at [1985] 3 All ER 206*. The action related to a butcher’s shop which
was let by Metrolands to Dewhurst by a lease dated January 30 1968 for a term
of 21 years from February 19 1968. The reddendum was in this form:
YIELDING AND
PAYING therefor during the first three years of the said term the yearly rent
of [£1,500] during the next eleven years of the said term the yearly rent of
[£1,800] and during the remaining seven years of the said term the yearly rent
at which the demised premises might on [February 19 1982] reasonably be
expected to let without premium in the open market between willing landlord and
willing tenant on terms similar to those contained in this present Lease and
assuming that the Lessee has observed and performed all the covenants and
conditions to be observed and performed hereunder but disregarding any goodwill
attaching to the demised premises by reason of the carrying on thereat of the
Lessees business such yearly rent to be agreed between the Landlord and the
Lessee and failing agreement to be determined by arbitration as hereinafter
provided Provided always that the decision of such arbitrator shall be obtained
before the expiration of the first half of the Fourteenth year of the term
hereby created BUT such yearly rent shall not in any event be less than
[£1,800] . . .
*Editor’s
note: See also [1985] 1 EGLR 105; (1985) 274 EG 1388.
The learned
judge found it convenient to divide the relevant part of the reddendum relating
to the last seven years of the term into four limbs: limb 1 commencing with
‘during the remaining seven years’ and ending with ‘the Lessee’s business’;
limb 2 commencing with ‘such yearly rent’ and ending with ‘as hereinafter
provided’; limb 3 commencing with ‘Provided always’ and ending with ‘term
hereby created’; and limb 4 commencing with ‘but such yearly rent’ and ending
with ‘£1,800’. I will adopt the same convenient division.
There are two
other material provisions of the lease. Clause 4(4) provides:
If any
dispute question difference or controversy shall arise which under the terms of
this Lease is to be referred to arbitration the same shall be referred to a
single arbitrator to be agreed between the parties or failing agreement to two
arbitrators (one to be appointed by each party to the reference) or their
umpire pursuant to and so as with regard to the mode and consequences of any
such reference and in all other respects to be in conformity with the
provisions of the Arbitration Act 1950 or any statutory modification or
re-enactment thereof.
Clause 5 (‘the
break clause’) provides:
PROVIDED
LASTLY AND IT IS HEREBY AGREED AND DECLARED that if the Lessee shall be
desirous of determining this present lease at the end of the fourteenth year of
the term hereby granted and of such its desire shall deliver to the Landlord or
leave for the Landlord or send by registered post to the Landlord at its
registered office within the six months previous to the end of the said
fourteenth year of the said term not less than three months notice in writing
and shall pay all rent and perform and observe all the covenants and conditions
hereinbefore contained and on the part of the Lessee to be performed and
observed up to such determination then and in such case immediately after the
expiration of the said period of fourteen years this present Lease shall cease
and be void without prejudice to any claim by the Landlord against the Lessee
in respect of any antecedent breach of any covenant or condition herein
contained.
The timetable
envisaged by the express provisions of the reddendum and the break clause was
thus as follows:
(1) The date by reference to which the open
market yearly rent payable by Dewhurst for the last seven years of the term was
to be calculated was to be February 19 1982 (being the first day of that
seven-year period).
(2) The open market yearly rent payable by
Dewhurst for this seven-year period was to be fixed according to the formula
set out in the reddendum, either by agreement between the two parties or in
default of agreement by arbitration. If arbitration was necessary the decision
of the arbitrator was to be obtained before August 19 1981.
(3) Dewhurst would be free to operate the break
clause by serving written notice on Metrolands at any time between August 19
1981 and November 18 1981 with the effect of determining the lease on February
18 1982.
Neither
Metrolands nor Dewhurst made any attempt to agree a rent or to go to
arbitration before August 19 1981. Dewhurst did not attempt to operate the
break clause before November 19 1981. On December 2 1981, for the first time,
Metrolands by its surveyors wrote to Dewhurst indicating that it wanted the
rent to be reviewed, although no figure was then suggested. On December 17
1981, Dewhurst replied to the effect that the rent review notice was invalid as
being too late and pointed out that it was by then also too late for it to
serve a notice under the break clause. Dewhurst, however, does not suggest that
Metrolands deliberately delayed serving notice of its intention to have the
rent reviewed.
On October 24
1983 Metrolands issued proceedings against Dewhurst. By para 1 of the prayer
for relief in its statement of claim it claimed a declaration, in effect, that
the rent payable in the last seven years of the term is that set out in the
formula embodied in limb 1 of the reddendum.
The master
made a consent order that the question raised by this para, and the question
whether the amount of the yearly rent was to be determined by the court or by
arbitration or in some other way, should be tried as a preliminary issue, on the
basis of an agreed statement of facts. The learned judge declined to grant any
of the relief sought. He upheld Dewhurst’s contention that time was of the
essence of the rent review procedure embodied in the lease and that Metrolands’
attempt to initiate that procedure in December 1981 onwards was accordingly too
late.
As the learned
judge said, the starting point for any consideration of the question whether
time is of the essence of rent review provisions is the decision of the House
of Lords in United Scientific Holdings Ltd v Burnley Borough Council
[1978] AC 904, where Lord Diplock (at p 930) stated the principle that:
In the
absence of any contra-indications in the express words of the lease or in the
interrelation of the rent review clause itself and other clauses or in the
surrounding circumstances, the presumption is that the timetable specified in a
rent review clause for completion of the various steps for determining the rent
payable in respect of the period following the review date is not of the
essence of the contract.
Neither side
in argument has placed any reliance on the surrounding circumstances as an aid
to the construction of this lease. Mr Thom, however, on behalf of Dewhurst, has
submitted to us, as he submitted to Peter Gibson J, that this particular lease
contains two contra-indications sufficient to rebut the normal presumption that
the timetable specified in a rent review clause is not of the essence of the
contract. The first suggested contra-indication is the express terms of limb 4
of the reddendum. The learned judge (at p 210C-210E) rejected this submission
and Dewhurst challenges this rejection in a respondent’s notice. However, he
accepted the sufficiency and full force of the second contra-indication relied
on by Dewhurst, which was the interrelation between the time-limit in limb 3 of
the reddendum and the break clause. This is the part of his decision (set out
at pp 210C to 214J of the report) which Metrolands seeks to challenge on this
appeal. It has not sought to pursue certain alternative submissions which were
advanced in the court below and are referred to at pp 215A to 215G of the
report. The effect of the learned judge’s decision (see pp 215H to 216A) was
that the lease had made no express provision for the amount of the rent to be
payable for the last seven years of the term if it was not ascertained by
agreement or arbitration within the specified time-limits, that the court
itself had no power to determine a rent if those time-limits were not complied
with, and that, in the event of non-compliance, the annual rent payable for the
last seven years must continue to be the same as that payable for the preceding
period, namely £1,800 (see Weller v Akehurst [1981] 3 All ER
411).
It will be
convenient to begin by dealing with the first of the suggested
contra-indications relied on by Dewhurst, since it raises a short, albeit not
entirely easy, question of construction arising on the reddendum, when read in
isolation.
Mr Thom, on
behalf of Dewhurst, pointed out that the words ‘but such yearly rent shall not
in any event be less than £1,800’ in limb 4 of the reddendum immediately follow
the proviso at the end of limb 3, which provides (in apparently mandatory form,
in view of the use of the word ‘shall’) that ‘the decision of such arbitrator
shall be obtained’ before the stated date. In his submission, the parties to
the lease must have contemplated the possible contingency of a failure to
obtain such a decision by the stated date. The words ‘in any event’, as he put
it, do ‘double duty’ by covering the possible contingency of the arbitrator
fixing an annual rent of less than £1,800 and the possible contingency of the
failure to obtain a timeous decision from the arbitrator. Thus, in his
submission, one of the two purposes of limb 4, when properly construed, is to
specify the rent that is to be payable in default of compliance with the
time-limits laid down in limb 3. The coupling of this ‘in default’ provision
with the final time-limit in limb 3 shows, in his submission, that this
time-limit is intended to be a strict one.
The learned
judge (at p 210D-E) rejected these submissions in these words:
Limb 4
relates to ‘such yearly rent’. That, as counsel for Metrolands pointed out, can
only refer to the yearly rent on the hypothetical basis set out in limb 1 or on
that basis and agreed or determined in limb 2. All that limb 4 does is to put a
minimum figure on the yearly rent on that basis or on that basis and agreed or
determined. It does not refer to the rent not ascertained by reference to limb
1 or limb 2. In my judgment, therefore, limb 4 cannot be construed as a default
clause to operate on the failure to go to arbitration at all or to obtain the
decision in time.
The phrase
‘such yearly rent’ in limb 4 echoes the same phrase which is used in limb 2. In
limb 2 it clearly refers to a rent to be agreed or determined according to the
formula specified in limb 1. Prima facie the phrase must bear the same
meaning in limb 4 as it bears in limb 2. There is, however, a further point
which supports the learned judge’s construction, to which Mr Mark on behalf of
Metrolands drew our attention. If limb 4 were intended to operate as a
provision fixing the rent in default of its being otherwise determined by
agreement or arbitration within the specified time-limits, the words ‘not . . .
less than’ in limb 4 would be quite inappropriate.
For all these
reasons, we conclude that limb 4 cannot properly be read as an ‘in default’
provision. We respectfully agree with the learned judge’s conclusion on this
point, and that the reddendum, read by itself, does not contain any clear
indication that time is to be of the essence of the rent review provisions.
While the phrase ‘in any event’ in limb 4 is not a very clear one, we read it
as meaning ‘whatever may be the arbitrator’s decision’, so as to ensure that on
any footing the rent review will be incapable of resulting in a drop in rent.
We now turn to
the other suggested contra-indication relied on by Dewhurst, based on the
correlation of the rent review clause with the break clause. Let it be said at
once that there is the clearest possible correlation of this nature. Earlier in
this judgment we have set out the timetable envisaged by the express provisions
of the lease. The relevant dates were clearly fixed by the draftsman in the
contemplation that any necessary decision of the arbitrator would be obtained
at the very latest before August 19 1981, which was to be the start of the
three-month period (August 19 1981 — November 18 1981) during which Dewhurst was
to be free, if it thought fit, to serve a notice to determine the lease. The
draftsman manifestly envisaged a timetable by virtue of which the lessee would
know the rent which would be payable for the last seven years of the term by
the time when it came to make its decision whether or not to exercise its right
to determine the lease.
One other
important point is common ground, as it appears to have been before the learned
judge. It is not disputed that time is of the essence for the purpose of
applying the time-limits specified in the break clause itself. The reasoning
sufficiently appears from the
case (at p 929):
. . . there
is a practical business reason for treating time as of the essence of such a
clause, which is similar to that applicable to an option to acquire property.
The exercise of this option by the tenant will have the effect of depriving the
landlord of the existing source of income from his property and the evident purpose
of the stipulation as to notice is to leave him free thereafter to enter into a
contract with a new tenant for a tenancy commencing at the date of surrender
provided for in the break clause.
It seems clear
that, in referring in the United Scientific case to ‘the interrelation
of the rent review clause itself and other clauses’, Lord Diplock himself had
particularly in mind the interrelation of rent review clauses and clauses
giving the tenant the right to determine the lease. In his decision in Coventry
City Council v J Hepworth & Sons Ltd (1981) 261 EG 566 , [1982]
1 EGLR 114(upheld by this court on appeal at (1982) 46 P & CR 170),* Warner
J helpfully identified and cited the following passages from the speeches in
the United Scientific case which concerned this interrelation.
*Editor’s
note: See also (1982) 265 EG 608 for CA decision, [1983] 1 EGLR 119.
Lord Diplock
([1978] AC 904 at pp 935-936) said this:
Samuel
Properties (Developments) Ltd v Hayek [1972]
1 WLR 1296 may be regarded as the origin of the dichotomy between ‘option’ on
the one hand and ‘obligation’ or ‘machinery’ on the other: the word option
having been used in the lease itself to describe the landlord’s right to
require the rent to be reviewed. It should be treated as overruled. There was a
complication in that the rent review clause was associated with a break clause
which gave to the tenant the right to surrender the residue of the term on any
rent review day by giving prior notice. The time-table in the rent review
clause for the determination of the new rent was obviously correlated with the
time by which the tenant had to give notice of his intention to surrender, so
as to enable him to make his decision whether or not to exercise that right in
the knowledge of what the new rent would be if he continued in possession after
the review date. Had that been all, as it had been in the previous and rightly
decided case of C Richards & Son Ltd v Karenita Ltd (1971)
221 EG 25, it would, I think, have been sufficient by necessary implication to
make time of the essence of the rent review clause because of its interrelation
with the time by which notice was to be given under the break clause — a time
which, for reasons I have given earlier, I consider to be of the essence of the
contract.
In Samuel
Properties (Developments) Ltd v Hayek, however, the break clause
itself contained a provision under which the period during which the tenant
could exercise his right to surrender would be extended in the event of the
reviewed rent not having been ascertained within the time stipulated in the
rent review clause. So the implication that would otherwise have arisen from
the association of the rent review clause with a break clause was negatived.
Lord Dilhorne
(at p 940) agreed with what Lord Diplock had said about these cases.
Lord Simon of
Glaisdale (at p 946) said:
However,
where a rent review clause is associated with a true option (a ‘break’ clause,
for example), it is a strong indication that time is intended to be of the
essence of the rent review clause — if not absolutely, at least to the extent
that the tenant will reasonably expect to know what new rent he will have to
pay before the time comes for him to elect whether to terminate or renew the
tenancy (cf Samuel Properties (Developments) Ltd v Hayek [1972] 1
WLR 1296). That situation stands in significant contrast with those in the
instant appeals.
Lord Salmon
(at pp 951-952) said:
In Samuel
Properties (Developments) Ltd v Hayek the rent revision clause which
laid down the procedure for having the open market rent value ascertained at
the end of the seventh and fourteenth years of the term and the rent then being
raised to that level, was dressed up to look like an option. Indeed the word
‘option’ appeared in the clause. But, for the reasons I have already stated, I
do not think that it was a real option in the sense that any option to renew or
determine a lease is an option. The clause required the landlord to give notice
to the tenants six months prior to the expiry of the seventh year if he
required the rent to be raised to the open market rental value. If within one
month of the notice, the parties failed to agree the open market rental value
this figure was to be determined by a valuer appointed by the President of the
Royal Institution of Chartered Surveyors. But the date by which this
determination was to be made was not specified. The landlord gave his notice
about one month late. The Court of Appeal held that time was of the essence and
that the landlord was precluded from putting the rent revision clause into
operation. Clause 5 of the lease so far as relevant gave the tenant a true
option to determine the lease at the end of the seventh year of the term by
giving the landlords at least one quarter’s notice in writing. This break
clause was obviously inserted to protect the tenant should he not wish to pay
the increased rent during the next seven year period of the term.
The proviso
to the break clause strongly suggests however that the time provisions relating
to rent revision were not of the essence of the contract. It reads: ‘Provided
always that if one quarter before the expiration of the first seven . . . years
of the term . . . the reviewed rent . . . shall not have been reviewed then the
right of the lessee to terminate as herein provided shall be extended until the
expiration of one month from the date of the notification of the reviewed rent
to the lessee.’
There is
nothing in the proviso nor in any other part of the lease to suggest that the
new rent may not be determined by the valuer and notification of this rent may
not reach the lessee until after the expiration of the first seven year period.
In my view Samuel Properties (Developments) Ltd v Hayek [1972] 1
WLR 1296 was wrongly decided and should be overruled.
Lastly, Lord
Fraser (at pp 962-963) said:
For these
reasons I am of the opinion that the equitable rule against treating time as of
the essence of a contract is applicable to rent review clauses unless there is
some special reason for excluding its application to a particular clause. The
rule would of course be excluded if the review clause expressly stated that
time was to be of the essence. It would also be excluded if the context clearly
indicated that that was the intention of the parties — as for instance where
the tenant had a right to break the lease by notice given by a specified date
which was later than the last date for serving the landlord’s trigger notice.
The tenant’s notice to terminate the contract would be one where the time-limit
was mandatory, and the necessary implication is that the time-limit for giving
the landlord’s notice of review must also be mandatory. An example of such
interlocked provisions is to be found in C Richards & Son Ltd v Karenita
Ltd (1971) 221 EG 25 where the decision that time was of the essence of the
landlord’s notice could be supported on this ground, although not, as I think,
on the ground on which it was actually tested. The case of Samuel Properties
(Developments) Ltd v Hayek [1972] 1 WLR 1296 is not in this class
because, although there was a tenant’s break clause, the time allowed to the
tenant for giving notice was automatically extended until one month after the
notification of the reviewed rent to the lessee.
The relevant
facts of the Hayek case appear sufficiently from these passages which I
have cited from their lordships’ speeches. The relevant facts of the Richards
case appear sufficiently from this passage from the judgment of Goulding J at
(1971) 221 EG 25:
by an
underlease of June 5 1963, Nobbs (Cleaners) Ltd demised the second floor of 52a
Blackstock Road, London N, to the defendants for a term of 14 years at a yearly
rent of £700. Clause 2(11) provided that ‘if the landlords shall by giving
notice in writing to the tenants at any time during the first three months of
the seventh year of the term hereby created require a review of the rent
payable hereunder, such rent shall be revised with effect from the expiration
of the seventh year . . .’ Clause 4(4) provided
that if the tenants desired to determine the term at the expiration of the
first seven years and gave to the landlords three months’ previous notice in
writing, then immediately on the expiration of the seven years the demise
should cease. The period during which the landlords’ notice might have been
given began on June 6, 1969, and ended on September 5, 1969. No notice under
clause 2(11) was given during that period, but the plaintiffs, who were now
landlords, purported to give such a notice on February 26, 1970, when nearly
nine months of the seventh year had elapsed. The question before the court was
whether that late notice was effective or not.
The Coventry
City Council case (supra) likewise concerned a rent review clause,
coupled with a break clause. The rent review clause itself laid down what
Warner J described as an elaborate and precise timetable. For present purposes
it will suffice to quote the summary of the relevant provisions given in his
judgment ((1981) 261 EG 566 at p 567, [1982] 1 EGLR 114):
On or before
December 31 1973 the corporation might give to the tenants notice of its desire
to increase the rent in respect of the period from April 1 1975 until the
expiration of the term created by the lease, that is, roughly speaking, in respect
of the second 21 years of it. I shall call that a ‘rent review notice’. If the
corporation gave such a notice and no agreement had been reached by February 28
1974 (that is, within two months), there was to be a reference to arbitration.
Clearly, what was envisaged was that, in the two months between December 31
1973 and February 28 1974, there would be negotiations between the parties,
which would either produce agreement on a new rent or be abortive. Then, if the
negotiations proved to be abortive, the parties were given one month in which
to agree upon a single arbitrator. If they failed to do so, each must appoint
an arbitrator. The last day for doing that was April 30 1974. The provisions of
sections 7 and 8 of the Arbitration Act 1950 would then apply. On or before
September 30 1974 the tenants might give notice of their intention to determine
the lease as from March 31 1975, that is the day before any increase of rent
might take effect.
The ultimate
conclusion of Warner J and its ratio decidendi was stated by him as
follows (at p 569):
Mr Cripps
submitted that it was not in every case where a rent review clause was
associated with a tenant’s option to break that time was of the essence of the
rent review clause. That is manifestly right, as the House of Lords’ treatment
of the Hayek case illustrates. I do not think, however, that the
features of the present case to which Mr Cripps pointed are sufficient to
negative the presumption that, where a rent review clause is linked to a
tenant’s option to break, time is of the essence of the rent review clause. The
length of the term and the fact that the lease provided for only one break at
21
granted in 1953, at a time when inflation was at a much lower rate than now.
The fact that substantial subletting by Hepworths was envisaged seems to me
neutral. The period of nine months between December 31 1973 and September 30
1974 was, I think, intended, not to give the tenant an opportunity to serve a
notice making time of the essence, but to enable any necessary arbitration to
have been completed by September 30 1974 or at least to be sufficiently
advanced by that date to give the tenant a good idea of what the revised rent
was likely to be. Lastly, I do not think that it matters that there could be no
certainty that the tenant would know the precise amount of the revised rent by
that date. So far as the report of C Richards & Son Ltd v Karenita
Ltd shows, there was no such certainty in that case either.
The Court of
Appeal affirmed Warner J’s judgment in the Coventry City Council case
(1983) 46 P & CR 170.* Lawton LJ,
referring to the United Scientific decision, said (at page 176):
It comes to
this, that their Lordships . . . were all of the opinion that, where you have a
triggering off of a rent review provision started by the landlord, followed by
an option given to the tenant to break the lease if he so wishes, then time is
to be presumed to be of the essence of the agreement unless there are
contra-indications.
*Editor’s
note: See also (1982) 265 EG 608, [1983] 1 EGLR 119
He added (at p
176) that it made no difference that in the case of a lease which provides for
triggering action followed by a break clause, but also for an interval of time
between the triggering action and the date when a decision has to be made about
breaking the lease, the tenant can always serve upon the landlord a notice
making time of the essence of the agreement. As he observed: ‘No landlord and
tenant, in my judgment, when making a lease of this kind, would have
contemplated such a possibility.’
Griffiths LJ
(as he then was) agreed (at p 176), saying that he found the reasoning of
Warner J so compelling that he did not wish to give any separate reasons of his
own. Fox LJ (at p 176) also agreed without adding any further observations.
The Coventry
City Council decision was followed by Mr Evans-Lombe QC, sitting as a
deputy judge of the Chancery Division in William Hill (Southern) Ltd v Govier
& Govier (1984) 269 EG 1168, [1984] 1 EGLR 121. In that case, by a
subclause beginning ‘the rent shall be reviewed at the 25th December 1982 and
at the 25th December 1987′, the lease provided for rent reviews at the end of
the fifth and tenth years of the term. The wording of the lease thus appeared
to make the reviews mandatory. If the landlord and tenant failed to agree the
best rack rent, obtainable in the open market, nine months before the review
date, then either party might within a further period of one month refer the
question of the amount of rent to a chartered surveyor nominated in default of
agreement by the president of the Royal Institution of Chartered Surveyors.
There was a break clause, which entitled the tenant to determine the lease at
the end of the fifth or tenth year by giving the lessor three months’ written
notice to expire on the relevant review date.
The lessor, in
argument, sought to distinguish the Coventry City Council case,
particularly on the grounds that the provisions for rent review in the lease in
the William Hill case were mandatory and took effect without any
requirement of a ‘trigger notice’ on the lessor’s part. The learned deputy
judge rejected this suggested distinction. He described (at p 1170) Warner J
and the Court of Appeal in the Coventry City Council case as having held
that ‘where such provisions are linked with provisions for rent review, prima
facie the court will construe the provisions to make time of the essence of
those relating to the review’. He could find nothing sufficient to lead him to
a conclusion contrary to ‘Warner J’s prima facie rule’.
In the present
case, Peter Gibson J (at p 214A) said that the main submission put before him
by counsel for Metrolands was that ‘in the United Scientific case itself
the House of Lords had reached the conclusion that time was not of the essence,
inter alia, because the tenant as well as the landlord had it in his
power to initiate the rent review’. However, as he said at p 213F, there was a
major point of similarity between the case before him and the William Hill
case in that ‘the tenant, no less than the landlord, had the right to refer the
matter to the arbitrator’. Nevertheless, in the William Hill case the
deputy judge clearly had considered, but rejected, the suggested distinction
drawn on that account, between a landlord’s ‘trigger notice’ case and a case
such as that before him where the tenant, as well as the landlord, could refer
the matter to an arbitrator. Peter Gibson J, after a very careful analysis of
the William Hill decision, observed (at p 213G):
The decision
in the William Hill case is of a judge, albeit a deputy, of equal
jurisdiction on a point on which there is no other direct authority by way of a
decided case; and whilst it is not binding on me I would not wish to introduce
further uncertainty into this difficult area of the law by a decision
inconsistent with his unless I was convinced that the deputy judge reached the
wrong conclusion.
He summarised
his own ultimate conclusions thus (at p 214H-J):
In other
words, in many landlord’s trigger notice cases it would be open to the tenant
to find out the likely rent, just as much as in a case where he has an express
right to refer to arbitration; and yet that was not treated by Lord Diplock,
Lord Simon and Lord Fraser as relevant. The simple correlation between the rent
review clause and the break clause was enough, save where there was a specific
inconsistent provision such as the proviso in the Samuel Properties case.
Moreover, I think that Lord Diplock in referring, as he did, to the necessary
implication as to time being of the essence where there was an interrelation
between a rent review clause and a break clause, and Lord Simon to the like
effect, were intending to lay down general guidelines. I confess that, for the
reasons so attractively advanced by counsel for Metrolands, I do not find the
simple correlation approach completely satisfying logically. But I am unable to
say that Warner J was wrong to state the applicable presumption in the way that
he did, nor am I able to say that the deputy judge in the William Hill
case was wrong to follow that statement.
Accordingly,
I shall follow the decision in the William Hill case in holding that
here, too, time is of the essence of the reddendum by reason of the correlation
with the break clause.
In the course
of argument in this court, in support of the learned judge’s judgment, Mr Thom
relied strongly on the applicable presumption as stated by Warner J in the Coventry
City Council case. He submitted that the judgments of the Court of Appeal
in that case support the existence of that presumption and that, where it is
applicable, it wholly displaces the presumption ordinarily applicable to the
construction of rent review clauses as stated by Lord Diplock in the United
Scientific case (at p 930). Mr Mark, on the other hand, submitted that in
so far as this court in the Coventry City Council case had supported the
existence of any such presumption as was referred to by Warner J, the judgment
of Lawton LJ makes it clear that the presumption applies only in a case of a
lease which provides for the triggering off of a rent review provision started
by the landlord alone, followed by an option given to the tenant to break the
lease; in the present case the tenant, no less than the landlord, has the right
to initiate any review. He challenged the correctness of the principle which
Peter Gibson J derived from the speeches in the United Scientific case
that ‘the simple correlation between the rent review clause and the break
clause was enough’ to make time of the essence of the rent review clause ‘save
where there was a specific inconsistent provision . . .’.
Throughout
this debate, we think it must be borne in mind that the ultimate object of the
court in construing a rent review clause, like any other contractual provision,
must be to ascertain the parties’ intentions from the particular words which
they have used to express those intentions, read, of course, in the light of any
admissible evidence as to surrounding circumstances — albeit with the
assistance of the guidelines as to construction afforded by earlier
authorities. In many, perhaps most, cases, of which the present is one, the
rent review (if any) can result only in an increase, and thus is only for the
landlord’s benefit. Essentially, therefore, the question to which the court has
to direct its mind is this: Is the proper intention to impute to the parties,
from the words which they have used, the intention that the landlord shall lose
his right to a review if the stipulated timetable is not strictly adhered to in
the relevant respects?
In practice it
is ordinarily likely that ‘the detriment to the landlord of losing his review
altogether by failure to adhere strictly to the stipulated time-limit will be
wholly disproportionate to the disadvantage to the tenant of a delay in the
assessment of the rent’. This, as Dillon LJ pointed out in Touche Ross &
Co v Secretary of State for the Environment (1983) 46 P & CR 187
(at p 190),* appears to have been the reason why the House of Lords in the United
Scientific case concluded that prima facie, and in the absence of
sufficient contra-indications, it is not right to impute to the parties to a
lease the intention that time is to be of the essence for the purpose of a rent
review clause. This, we think, should be the initial starting point on the
consideration of any such clause.
*Editor’s
note: See also (1982) 265 EG 982 at p 983, [1983] 1 EGLR 123.
However, as
their lordships recognised, in a case where a lease contains a break clause as
well as a rent review clause and the timetables of the two clauses are closely
interlocked, the interrelation of the two clauses is likely to suffice
as a contra-indication sufficient to rebut the ordinary presumption — though
everything must depend on the wording of the particular lease. This, we
believe, was the sense
nature.
A good example
of a case where the interrelation of the two clauses did constitute a
contra-indication of this nature is Richards itself. There the latest
date specified for the giving of the landlord’s trigger notice was September 5
1969 and the latest date specified for the giving of the tenant’s notice to
determine was six months later, namely March 5 1970. Lord Diplock, Lord
Dilhorne and Lord Fraser, in approving that decision in the result, did not
find it necessary to spell out in any detail the reasons why they considered
the ordinary presumption to be rebutted, but we infer that their reasoning
could properly be elaborated as follows: The intention of the parties to the
lease in providing for this six-month gap must have been to allow adequate time
for the process of the review of the rent to have been completed, or at least
sufficiently advanced, by the latest date for service of the tenant’s notice to
determine, so as to give the tenant the advantages of knowing before that
latest date (a) that the lessor intended to invoke the rent review procedure,
and (b) what the revised rent was likely to be. The tenant himself must on any
footing be held strictly to the time-limits laid down for the service of any
notice by him to determine the lease. If time was not regarded as being of the
essence for the purpose of the lessor’s trigger notice, these potential
advantages would have been subject to at least erosion and possible elimination
by tardy service of any such notice. In these circumstances, despite the severe
potential loss which the landlord would suffer if that notice was served even
one day late, it could not reasonably be supposed that it was in the
contemplation of the parties that the tenant should be exposed to the loss of
these advantages by tardy action on the part of the landlord in initiating the
rent review procedure.
Precisely the
same reasoning, mutatis mutandis, was applicable in the Coventry City
Council case, where the timetable specified in the lease provided for a
five months’ gap between the latest date for the giving of the landlord’s
trigger notice and the latest date for the giving of the tenant’s notice to
determine. We respectfully agree with that decision, which in any event is
binding on us.
The lease
under consideration in the William Hill case contained a number of
features not present in the lease now before us and, since that decision does
not bind us, we do not find it necessary to embark on any detailed
consideration of it or to express any conclusion on Mr Mark’s submission that
it was wrongly decided. We have doubts as to the usefulness of a minute
comparison of the different provisions of different leases in a case such as
this. However, as Mr Mark’s argument in this court developed, it became
apparent that by far his most important point (at least to our minds) was one
which, though touched on by the learned judge in his judgment (at p 213D-F),
does not appear to have been placed in the forefront of Metrolands’ case in the
court below. There is a basic difference in the provisions of the lease in the
present case from those under consideration in Richards and in Coventry
City Council. In those two cases, the leases had one most important feature
in common, that is to say, the event as to which time was held to be of the
essence was one in the landlord’s full control (namely, service of his
trigger notice). In a case where an event included as part of the timetable in
a rent review clause is one within the landlord’s full control, it is by no
means inconceivable that he should have been willing and should have intended
to commit himself to a rigid adherence to that part of the timetable, even
though the consequence of a failure to do so would be that of losing the entire
benefit of the relevant rent review and even though the lease does not
expressly state that time is to be of the essence.
In contrast,
the lease under consideration in the present case has this special and, we
would think, unusual feature: the event as to which time is said to be of the
essence is the actual obtaining of the arbitrator’s decision. As Mr Mark
pointed out, it was readily conceivable that the landlord might have acted with
irreproachable promptness and diligence in setting in motion the arbitration
machinery provided for by the lease, for the purpose of a rent review, but
that, without any fault whatever on the landlord’s part and due to events
entirely beyond his control, the arbitrator’s decision might still not have
been obtained until after August 19 1981. The arbitrator himself, for example,
might have been ill or unduly dilatory; or the final conclusion of the
arbitration proceedings might have been delayed by the submission of a number
of perfectly legitimate points on the part of the tenant or by other
circumstances quite beyond the lessor’s control. All these are matters to be
taken into account when considering the intention to be imputed to the parties
regarding the significance of the date of the obtaining of the arbitrator’s
decision.
If time was to
be treated as being of the essence in respect of this date, this would have
meant that (subject to any powers of the court to extend time under the
Arbitration Acts — as to which see below) a delay in the obtaining of the
arbitrator’s decision by only one day beyond August 19 1981 would have entirely
deprived the lessor of its right to a review in respect of the last seven years
of this 21-year term and would have left it saddled with a continuing annual
rental as low as £1,800, which had been the rental payable for the preceding 11
years. In these circumstances, we think that the following observations of Lord
Dilhorne in the United Scientific case [1978] AC 904 at pp 938H-939A are
apposite, spoken as they were in relation to a lease which, apart from the
absence of a break clause, bore a marked similarity to that under consideration
in the present case:
It is most
unlikely in these circumstances that the lessors, if they had been asked at the
time the leases were entered into to agree that time should be of the essence,
would ever have agreed to that, and I see no reason for imputing to them an
intention which no reasonable landlord would have had.
In saying
this, we do not overlook the importance to the lessee of knowing before August
19 1981 what the revised rent was likely to be, so as to assist in deciding
whether or not to operate the break clause. Nevertheless, as it is reasonable
to assume, the parties would have been aware at the time when the lease was
executed that the lessee would by no means have been left at the lessor’s mercy
if the lessor did not choose to set the rent review machinery in operation
promptly; for the lessee itself had the same right as the lessor to set the
arbitration procedure in motion. If, therefore, the lessee foresaw a risk of
the arbitrator’s decision not being obtained by August 19 1981 and that risk
caused it concern, an obvious remedy lay in its own hands. For these reasons
there can, in our judgment, be no doubt that the potential detriment to which
the lessor under this particular lease would have exposed itself by agreeing
that time should be of the essence as regards the stipulated date for the
obtaining of the arbitrator’s decision would have far outweighed any potential
detriment to which the lessee would have exposed itself by agreeing that it
should not be.
Mr Thom
referred us to section 27 of the Arbitration Act 1950, which gives the court
power to extend the time for commencing arbitration proceedings, and to section
13 of the Arbitration Act 1950, which gives it power to enlarge the time for
the making of the award. He submitted that, in appropriate circumstances, it
would have been open to the lessor to make an application under those sections
for the purpose of avoiding the rigours of any strict time-limit imposed by the
lease in relation to the obtaining of the arbitrator’s decision. With due
deference to this argument, however, we would find it fanciful to attribute to
the parties the intention that, on the one hand, time should be strictly of the
essence as regards the latest date for the obtaining of the arbitrator’s
decision, but that, on the other hand, such date should be capable of extension
under the Arbitration Act 1950.
This case has
been very well argued on both sides. We hope it will be forgiven if we do not
refer to all the points raised in the course of argument. It will suffice to
summarise our conclusions thus: Though there is the clearest possible
interrelation between the timetable embodied in the rent review clause and that
embodied in the break clause, such interrelation in the context of this
particular lease is not, in our judgment, a ‘contra-indication’ sufficient to
rebut the initial presumption of construction (from which we think it right to
start) that the timetable specified in the rent review clause for the obtaining
of the arbitrator’s decision is not of the essence of the contract. The
principal reasons why it does not suffice for this purpose are two, which must
be considered in conjunction with one another and have not been applicable in
conjunction with any previous case which has been cited to us.
First, the
date of the relevant event, namely the actual obtaining of such decision, is
one which is to a substantial degree outside the lessor’s control. Second, any
potential hardship to the tenant which might otherwise arise through tardy
action by the landlord in initiating the rent review procedure can be
eliminated or, at least, substantially mitigated, by the tenant initiating such
action itself. The ultimate object of the court in construing clauses such as
this, as we have already indicated, must be to ascertain the parties’
intentions from the words which they have used. Weighing in the balance all the
competing considerations that have been urged on us, we have come to the clear
conclusion that the intention properly to be attributed to the parties to this
particular lease is the intention that time should not be of the essence as
regards the obtaining of the arbitrator’s decision.
We therefore
allow this appeal, but would welcome submissions as to the precise form of
relief which should be granted.
The appeal
was allowed with costs in the Court of Appeal and below. The judgment below was
set aside and a declaration made to the effect that the rent was to be
determined, in default of agreement, by arbitration on the footing that time
was not of the essence for the purpose of the material part of the rent review
provisions.
