Landlord and tenant — Construction of rent review clause in underleases of commercial premises — This was another case in which the issue was whether the hypothetical lease assumed for the purpose of determining the market rental value at the review date was or was not to include the rent review provisions in the actual tenancy — This depended on the correct construction of the words ‘other than those relating to rent’ — Landlords contended that, on the plain meaning of the words, the rent review clause should be excluded as a term relating to rent — Tenants submitted that such a construction was so contrary to commercial common sense as to require the words to be construed more narrowly — The judge, in some general observations, said that it was not disputed that the particular language of the review clause must be construed in the context of the document as a whole and against the commercial background of the transaction — The purpose of such clauses points to a prima facie presumption that the parties intend the hypothetical letting to be for the residue of the actual lease on the same terms and in the same circumstances as actually exist at the relevant date, although in some cases there is a clearly expressed intention to depart from reality — Where, as here, the language is capable of more than one meaning the court is entitled to select that meaning which serves the apparent commercial purpose of the clause — A literal interpretation, as put forward by the landlords, would exclude from the hypothetical tenancy not only the rent review provisions but other terms relating to rent,
This was a
summons by which the plaintiff tenants, MFI Properties Ltd, sought the
determination of the court as to the true construction of the rent review
clause in an underlease and reversionary underlease of commercial premises
known as Unit A, Norwich City Trading Estate. The defendants were the
landlords, BICC Group Pension Trust Ltd.
Nigel Hague QC
and Nicholas Patten (instructed by Theodore Goddard & Co, agents for Andrew
M Jackson & Co, of Hull) appeared on behalf of the plaintiffs; Nicholas
Dowding (instructed by Stanleys & Simpson North) represented the
defendants.
Giving
judgment, HOFFMANN J said: This summons raises a short question of construction
on two identical rent review clauses in an underlease and reversionary
underlease of commercial premises in Norwich. The initial underlease is for a
term of 15 years from December 3 1974 and the reversionary underlease for a
term of 35 years commencing upon the expiry of the initial underlease. Both
underleases provide for rent reviews at intervals of five years, at which
dates:
the rent hereinbefore
first reserved shall be revised so as to equal the rent at which having regard
to the terms of this sub-underlease (other than those relating to rent) the
demised premises might then reasonably be expected to be let in the open market
by a willing landlord to a willing tenant for a term of twenty years with
vacant possession and on the assumption (if not a fact) that the demised
premises are equipped with all necessary and usual heating, lighting and
fire-fighting equipment for a building of the nature of the demised premises
which if installed shall be regarded as landlord’s fixtures for the purposes
hereof there being disregarded the matters set out in section 34 of the
Landlord and Tenant Act 1954 as amended by section 1 of the Law of Property Act
1969 . . .
The issue in
these proceedings is whether the words in parenthesis ‘other than those
relating to rent’ require an assumption that the hypothetical letting contains
no rent review. The landlord says that upon the plain meaning of the words, the
rent review clause is a term relating to rent. It must therefore be assumed to
be excluded. The tenant says that while this may be the literal meaning, the
consequences of such a construction are so contrary to commercial common sense
that the words should be construed more narrowly. It is argued that in the
context in which they appear, they are capable of meaning and should be held to
mean only those terms concerning rent which the rent review is intended to
revise.
The lease
contains numerous terms which can upon a literal construction be said to relate
to rent. Thus the reddendum deals not only with the amount of the initial
yearly rent but also the manner in which it is to be paid. It includes
provisions for payment by way of ‘further rent’ of a sum equal to the premium
which the landlord has to pay for insurance which elsewhere in the lease he
covenants to provide. The tenant covenants to pay the rents reserved in the
reddendum and to pay ‘by way of further and additional rent’ a proportion of
the cost of various services which elsewhere in the lease the landlord
covenants to provide. There is the usual proviso for re-entry for non-payment
of the rents reserved and a term for suspension of the liability to pay rents
if the premises are destroyed by fire.
It is not
disputed that the language of the parties must be construed in the context of
the document as a whole and against the commercial background to the
transaction. A rent review clause is designed to deal with a particular
commercial problem, namely, that of the tenant who wants security of tenure for
a lengthy term, and a landlord who, in times of inflation or a rapidly changing
property market, does not want to commit himself to a fixed rent for the whole
of that term. The clause therefore permits the rent to be periodically revised
to an amount calculated on the assumption of a fresh letting at the relevant
date.
The terms upon
which such hypothetical letting must be assumed to take place will naturally
depend in each case upon the particular language of the rent review clause. In
general, the purpose of such clauses would point to a prima facie
assumption that the parties intended the hypothetical letting to be for the
residue of the actual lease held by the tenant on the same terms and in circumstances
which actually exist at the relevant date. Thereby, the tenant would be
required to pay on the assumption that he was being granted the interest which
he actually held on the rent review date. But the language of the clause may
show clearly that a departure from reality was intended. In some cases it will
be easy, even for an outsider who was not privy to the negotiations between the
parties, to see why such an assumption should have been made. For example,
fairness to the landlord might explain an assumption that the tenant has
complied with his repairing covenants even if he has not in fact done so.
Similarly, fairness to the tenant will explain an assumption which excludes
from consideration any improvements which the tenant has made at his own expense
or his acquisition of a goodwill which he would pay a higher rent to protect.
But there will also be cases in which the language used by the parties shows
beyond doubt that they intended an assumption for which, to a third party who
knows nothing of the negotiations, no commercial purpose can be discerned. In
such circumstances the court has no option but to assume that it was a quid
pro quo for some other concession in the course of negotiations. The court
cannot reject it as absurd merely because it is counter-factual and has no
outward commercial justification. On the other hand, if the language is capable
of more than one meaning, I think the court is entitled to select the meaning
which accords with the apparent commercial purpose of the clause rather than
one which appears commercially irrational.
The present
clause exhibits assumptions in both the categories I have mentioned. The
assumption of a letting with vacant possession and the disregard of the matters
set out in section 34 of the Landlord and Tenant Act 1954 are easily
explicable. The assumption of a 20-year term and the existence of heating,
lighting and fire-fighting equipment have no explanation readily accessible to
a person who was not privy to the negotiations. It may be that the assumption
of a 20-year term is partly connected with the existence of the reversionary
underlease and partly in order to simplify the task of the valuer. The
reference to the heating, lighting and fire-fighting equipment may be connected
with an obligation assumed by the tenant under some other agreement. All this
is pure speculation, but the assumptions would present a valuer with no
practical difficulty of application and language of the clause leaves the
intention of the parties in no doubt. The question in this case is whether the
same can be said about the words ‘other than those relating to rent’.
I do not think
that these words can be said to be incapable of bearing more than one meaning.
They must take their colour from the context in which they are used. Precisely
the same words are used in section 34 of the Landlord and Tenant Act 1954, and
it seems clear that in that context they have been treated as bearing the
meaning contended for by the tenant rather than the wider meaning suggested by
the landlord. It may be that the statutory context is somewhat different from
that of the clause in this case, but that is not the point. What is, I think,
significant is that one cannot, in my view, treat the generally accepted
meaning of the words in the statute as one which, whatever the context, they
could not reasonably bear.
Given that the
words then are reasonably capable of bearing both the wider and the narrower
meanings, I think that I am entitled in choosing between them to have regard to
the fact that they appear in the context of a rent review clause and to have
regard to the normal purpose of such a clause. It seems to me that a literal
construction must exclude from the hypothetical tenancy not only the provision
for rent review but all the other terms relating to rent which I have
mentioned.
Mr Dowding for
the landlord suggested some refinements upon the literal construction which
might save some of these other provisions from exclusion. The argument seemed
to me to qualify for the description of ‘detailed semantic and syntactical
analysis’ which Lord Diplock in The Antaios [1985] AC 191 at p 210E said
should not be allowed to flout business common sense. In my view these were
arbitrary qualifications propounded to save the literal
purpose. Without these refinements, the literal construction seems to me to
face the valuer with so extraordinary a set of assumptions that I would not
assume the parties to have chosen them unless their language left me with no
alternative. It is not so much that they would favour one side or the other.
This, as I have said, could be the result of concessions in the course of
negotiations. It is that the hypothetical lease would be an animal so different
from anything which ever existed in real life that its valuation would be
outside the experience and expertise of the ordinary valuer. No doubt a valuer
would be able to produce some kind of figure, but what I find wholly improbable
is that the parties intended to make such assumptions specifically for the
purpose of submitting them to the process of valuation.
Even on the
construction suggested by Mr Dowding, the exclusion of the rent review clause
and the covenant to pay rent from the hypothetical lease is an assumption which
has no apparent commercial justification and gives rise to practical problems.
It is common knowledge that landlords do not nowadays grant long leases of
commercial premises at rack rents without rent reviews. In this case the animal
is not so much fabulous as extinct, but the problem is the same. A valuer asked
to determine the rent at which premises could be let in the open market for a
lengthy term without a rent review therefore has no comparables in the real
world to which he can refer. All that he can do is to make some more or less
arbitrary adjustment to the rent which would be commanded on a letting of the
same premises with the conventional provisions for rent review. It seems to me
improbable that the parties intended the rent to be determined in this way.
It seems to
me, therefore, that the only plausible alternative to the literal construction
is the narrower construction advanced by the tenant. This allows the language
to be qualified by the rent review context in which the words appear and
thereby to confine them to those rent provisions which would be affected by the
operation of the rent review. Since I think that the words are capable of
bearing this meaning and that it is in accordance with the context and commercial
purpose of the clause, it is the construction which I prefer.
I have been
referred to a number of cases in which words having some similarity to those of
the present lease have been construed by various judges. Most of them were
considered by Warner J in the recently reported case of Datastream
International Ltd v Oakeep Ltd (1985) 277 EG 66. All of them turned
upon the language of the particular clause, and, having regard to Lord
Diplock’s remarks in The Antaios deprecating a generous citation of
judicial authority on questions of construction, I do not think that it would
be helpful for me to analyse them. I shall therefore say no more than that,
like Warner J, I think that the cases of National Westminster Bank plc v
Arthur Young McClelland Moores & Co (1984) 273 EG 402 and Equity
& Law Life Assurance Society plc v Bodfield Ltd (1985) 276 EG
1157, [1985] 2 EGLR 144 gave less weight than I would have done to the
commercial purpose of the clauses there in question.
The result is
that in my judgment the true construction of the rent review clauses is that
for which the tenants contend and I will so declare.
