Landlord and tenant — Lease for term of 21 years containing option for lessee to renew for a further term of 21 years — New Lease to be ‘at the then prevailing market rent’, to be determined by arbitration in default of agreement, the new lease to be subject in all other respects to the same covenants, provisos and conditions as the original lease — Question whether arbitrator had power to determine a rent which was subject to periodic review — Appeal from decision of judge who held that arbitrator was entitled to do so — Held by Court of Appeal that the judge’s construction of the option was wrong — The arbitrator had no power to introduce a provision for periodic review — The option clause referred to the prevailing rent, not to the prevailing use and practice of the market at the date of renewal — The arbitrator had to determine a single rent payable throughout the term of the new lease — Alternative suggestion that the arbitrator might fix a differential or progressive rent also rejected — Fawke v Viscount Chelsea distinguished as being a decision on the court’s statutory power under Part II of the Landlord and Tenant Act 1954 — Appeal allowed.
This was an
appeal by lessees, BSC Footwear Ltd, defendants in proceedings by originating
summons brought by the plaintiff lessors, National Westminster Bank Ltd, in the
Chancery Division to determine a question as to the true construction of an
option to renew clause in a lease of premises at 254 High Street, Orpington,
Kent. The judge, Judge Finlay, sitting as a judge of the Chancery Division,
decided in favour of the plaintiff lessor that an arbitrator appointed under
the provisions of the clause was entitled to determine a rent which would be
subject to periodic review during the term of the new lease.
Mark Myers QC
and J R Cherryman (instructed by Titmuss, Sainer & Webb) appeared on behalf
of the appellant lessees; M Essayan and V R Chapman (instructed by Linklaters
& Paines) represented the respondent lessors.
Giving the
first judgment at the invitation of Lawton LJ, TEMPLEMAN LJ said: This is an
appeal against a decision of His Honour Judge Finlay, sitting as a judge of the
Chancery Division, and given on December 3 1979. The question is whether power
to determine a rent includes power to direct that the rent shall be
periodically reviewed. In my judgment, that question only permits of a negative
answer.
By a lease
dated June 5 1957, a shop and maisonnette were demised for a term of 21 years
from March 25 1957. In due course, the plaintiffs, the National Westminster
Bank Ltd, became the landlords; the defendants, BSC Footwear Ltd, became the
tenants. Pursuant to the provisions of the lease, the tenants served notice
requiring a renewal of the lease. The rent reserved by the lease was a
peppercorn for two months ‘and thereafter the clear net rent of £1,250 per
annum . . . payable in arrear’. The lease contained covenants to pay ‘the said
rents’, meaning the annual rent I have indicated and the further or additional insurance
rent for which the lease provided. There were also the usual full repairing
covenants and user and other covenants extending to some 20 in all.
Clause 4(2)
contained the relevant power of renewal, which is in a not unfamiliar form and
reads as follows:
If the lessee
shall be desirous of taking a further lease of the demised permises for a
further term of 21 years from the expiration of the term hereby created and
shall on or before 25 March 1977 give to the lessor a notice in writing of such
its desire and shall pay the rents hereby reserved and subject to there being
no substantial breach of the covenants on the part of the lessee and conditions
herein contained which is incapable of remedy then the lessor will subject to
the lessee having remedied any breach of covenant notice whereof shall have
been given to the lessee grant a new lease to the lessee for a further term of
21 years from 25 March 1978 at the then prevailing market rent (to be
determined in default of agreement by a single arbitrator pursuant to the
Arbitration Act 1950 or any subsisting modification or re-enactment thereof)
and subject in all other respects to the same covenants provisoes and
conditions as are herein contained except this subclause for renewal.
As a matter of
first and last impression, that provision seems to me to empower the arbitrator
to perform one task, and one task only, namely, to determine the annual rent
which is to be paid throughout the 21 years of the renewed term, in lieu of the
annual rent of £1,250 which was fixed by the original lease.
The tenants
duly gave notice, the landlords and tenants failed to reach agreement and they
are now in process of applying to the arbitrator to fix the rent. The salient
words are the requirements that the landlords, if the tenants wish, must grant
a 21-year lease from March 25 1978 ‘at the then prevailing market rent’
(namely, in 1978), to be determined by the arbitrator, and the lease must be
subject, in all other respects, to the same covenants, provisos and conditions as
are contained in the original lease, excluding the proviso for renewal. In my
judgment, the arbitrator has no power to introduce any variations between the
original lease and the renewed lease. The arbitrator must determine the rent
and only the rent, and for this purpose he must determine the prevailing market
rent.
It was argued,
and the learned judge declared in his order, that upon the true construction of
the clause which I have read, the arbitrator is entitled, if he thinks fit,
having regard to the evidence adduced before him, to determine a rent which is
to be subject to periodic rent reviews during the term of the new lease. The
result of that declaration is to confer on the arbitrator a discretion to
decline to determine the rent payable under the renewed lease for 21 years, but
only to determine the rent for a period of three or five years, or some other
period which he is free to choose, having heard indeterminate evidence; and
then he has power to direct that subsequent rent for subsequent parts of the
term of 21 years shall be determined by such persons, at such intervals and by
such machinery, as the arbitrator may think fit to draft and award.
Alternatively, Mr Essayan, for the landlords, submitted, if the arbitrator does
not see fit to lay down any machinery, then, instead of the arbitrator
determining the rent for the whole of the term, he is allowed to determine the
rent for the initial period which seems to him to be proper, say three or five
years, and then (if you please) to leave it to the judges of the Chancery
Division to do the arbitrator’s work for him and to say what the rent ought to
be for subsequent periods.
In deciding
whether to redraft the 1957 lease, the arbitrator is apparently to be assisted
by evidence, but we do not know on what
redrafted, except, I understand, that he must look and see how most leases are
drafted in present times and what kind of rent review clauses was popular in
the year 1978.
It is common
ground that a rent review clause may take many forms. All rent review clauses
enable the rent to be increased; some enable the rent to be reduced; some
enable the tenant to surrender the lease if the rent review provides an amount
of rent which his business cannot afford; come oblige the tenant, whether he
likes the new rent or not, to keep the lease and pay up, so that he is at the
mercy of galloping inflation instead of being, as the lessee of this 1957 lease
was, and as we must assume he bargained to be, in receipt of the comfort of
having a certain rent for a long period.
In my
judgment, this lease, including clause 4(2), is, in effect, a 42-year lease
with one rent review after 21 years; and what the landlords are seeking to do
now, for perfectly understandable reasons in the light of history, is to
redraft so that, instead of having one rent review after 21 years, they will
secure for themselves rent reviews after 26, 31, or whatever other years the
arbitrator thinks fit.
I fail to find
in clause 4(2) anything which confers on the arbitrator the wide and
discretionary powers which are claimed by the landlords. Nor, in my judgment,
does the clause enable the arbitrator to decline to perform his duty, namely,
to fix a rent for 21 years. He cannot say: ‘I can see my way clear for five
years, but I am going to throw up my hands in horror and say it is quite
impossible for me to fix the rent for the remaining 16 years’. No one has
suggested that in practice any arbitrator worth his salt will be inclined to
throw up his hands. What is said is that, if the arbitrator fixes the rent at
the beginning of 21 years for the whole period, then the landlord is in danger
of not getting the fruits of inflation which he might otherwise get if there
were rent review clauses. But what the landlords’ predecessors in title gave
away these landlords cannot now take back.
The learned
judge conjured the power to insert a rent review clause which he ascribed to
the arbitrator out of the word ‘prevailing’. He said in his judgment that the
word ‘prevailing’ meant ‘that which is in general use or practice’, but he
omitted from that definition the fact that what has to be prevailing is the
rent; it is the rent which is to be in general use or practice. It may be
general use or practice to provide a rent review clause, but that is a
different matter from the prevailing rent.
The learned
judge appears himself to have recognised that if the arbitrator is authorised
to order periodic reviews of rent, then the original lease, on this hypothesis,
gave the arbitrator the power to redraft the new lease so that it does not
correspond with the old lease. In his judgment the learned judge said:
I think the
right view of clause 4(2) is that there is implied in the words ‘at the then
prevailing market rent’ that the arbitrator is to determine the terms as to
rent having regard to the prevailing market conditions, and if those market
conditions involve a provision for review of the rent at stated intervals, then
his task is to determine what, according to the practice and usage of the
market at the relevant time, is the appropriate kind of review formula.
Thus the
learned judge opined that the task of the arbitrator is to determine a review
formula, but in my judgment it is quite impossible to read that into clause
4(2). All that the arbitrator is empowered to determine, and is bound to
determine, is rent. He is not empowered to impose any formula and redraft the
lease by virtue of his award. The arbitrator is concerned with an amount and
not with a formula.
The
alternative argument was put forward by Mr Essayan, for the landlords. He
relied, in his persuasive speech in support of the rent review clause which the
learned judge had been persuaded to introduce, on what he said would be an
unrealistic result. In 1978 no landlord, he said — and there was evidence for
this — would dream of letting premises for 21 years at a fixed rent. Every
landlord would insist on having a rent review clause, and, therefore, when the
arbitrator sets out to find the prevailing market rent for a 21-year lease — a
fixed rent — he will find there is nothing prevailing and that there is no
market. It is common ground that that does not make the task of the arbitrator
impossible. Arbitrators are often faced with property which is of a peculiar
nature and has, in practice, no market comparable, and yet they do not have the
slightest difficulty in fulfilling the requirement that they shall fix the
market rent then prevailing. In fact, although landlords may not let properties
these days, voluntarily, for 21 years without rent review clauses, there is in
the evidence example upon example of landlords who, like the present landlords,
as a matter of history, are caught with obligations which they, or their precedessors
in title, have entered into, and there are leases which require rent reviews
after 10 years from now, 14 years from now, 21 years from now. The fact that a
modern landlord, free from any obligations, would not enter into a lease of
this nature is nihil ad rem. The fact is the tenants’ predecessors in
title were prudent and wise enough to extract in 1957 a lease which did permit
and require them to stay there for 21 years and then permitted them to stay
there for another 21 years if they wished to do so, at a rent which was to be
fixed for that second period of 21 years by an arbitrator during the year
before the first lease expired.
This landlord
agreed to do that which Mr Essayan vigorously urged no landlord in 1978 would
do. The answer is, this is not a 1978 lease, it is a 1957 lease. But the
hypothesis which the arbitrator has to make is that this lease, with a 21-year
term at a fixed rent, is on offer and he must decide the market price for a
rent as between landlord and tenant if that lease came on to the market. I
really think, with all respect to Mr Essayan, that was the strength of his
submission, namely, that in 1978 landlords who are free from obligations would
not enter into a lease of the sort which is envisaged. That does not affect the
true construction of the lease made in 1957. It does not produce a terribly
unrealistic result at all. It does not even produce a difficult result. What it
does produce is a result which the landlords never realised might be
disadvantageous, namely, the result that, whether inflation goes up or down
within the next 21 years, both the landlords and the tenants will have to put
up with the rent which is fixed by the arbitrator in 1978 at the beginning of
the term.
As an
alternative, Mr Essayan argued that, if the arbitrator cannot incorporate a
rent review clause, he can at least introduce a differential rent. He could,
for example, provide that the rent shall be £2,000 for the first three years,
£3,000 for the next three years, and so on, as his fancy dictates.
Alternatively, said Mr Essayan, if he formed the view that annual inflation was
inevitable at 10 per cent compound, then he could provide a rent of (say)
£2,000 in the first year increased every subsequent year by 10 per cent, and so
on.
For that
submission, he relied principally on the authority of the case of Fawke
v Viscount Chelsea [1980] 1 QB 441 and, in particular on the judgment of
Goff LJ, who came to the conclusion that section 34(1) of the Landlord and
Tenant Act 1954 authorised the court, in fixing the rent payable under a
business lease, to fix a rent which, so far as the decision went, was a rent
which could be kept at a lower figure until the premises had been put in repair
and could then be increased, and, as far as obiter dicta is concerned,
supported the view that, in any event, a judge, determining a rent for the
purposes of the Landlord and Tenant Act 1954, could provide for a differential
rent possibly similar to that which Mr Essayan has urged.
To turn Mr
Essayan’s own argument against him, it will be a remarkable lease, even for the
year 1980, which contained any differential rents of the type which he prayed
in aid. Whether the evidence as regards the market would support him in that
regard, I doubt. In Fawke v Viscount Chelsea, the courts were
concerned with statute and with a tenant who had no right to a lease of any
particular term. The court had power to grant to a tenant a lease of such
period, not exceeding 14 years, as the court thought fit. In those
circumstances, it seems to me that the court was faced with a different task.
It could balance, on the one hand, the virtues of giving a long lease with
differential rents against the alternative of giving a short lease so that the
landlord could then come along and obtain the benefit of inflation, and I am
not surprised that differential rents are possible under that statute. But we
are dealing here with a perfectly common form lease which deliberately set out,
for the first 21 years, to have all the advantages and disadvantages of a
fixed rent of £1,250 per annum — a certainty which has its benefit for the
landlord, in that he knows he is going to get that sum for 21 years, and which
has benefits for the tenant in that he knows exactly what his obligations will
be.
Against that
background, when we find that the lease itself provides for a renewal and the
renewal is to be on exactly the same terms as the old lease, except that there
is to be substituted the prevailing market rent at the date of the beginning of
the new lease, it seems to me that, on the true construction of that clause in
that lease, what the arbitrator has to do is to reconsider the figure ‘£1,250’
in the original lease and to insert the figure which he thinks proper, having
regard to 1978 prevailing market rents. Then what the landlord has to do is to
engross the new lease in exactly the same terms as the old lease, but instead
of the figure ‘£1,250’ there will appear the figure which the arbitrator thinks
proper, payable from March 25 1978. The two months peppercorn rent does not
apply.
In my
judgment, the appeal should be allowed and there should be substituted the
declaration for which the tenants ask, namely, that the arbitrator is bound to
determine a single rent which is to be payable throughout the term of the new lease.
I would leave it at that and not go on and say that he is not to be entitled to
determine a rent which is subject to review, because that necessarily follows.
His task is to determine the rent which is to be payable annually throughout
the term of the new lease.
O’CONNOR LJ
agreed. Also agreeing, LAWTON LJ said: In 1957 the plaintiffs’ predecessors in
title let some shop premises in an outer suburb of London to the defendants’
predecessors in title, who were a very-well-known and responsible retail trading
company–Freeman Hardy & Willis. What we have to do in this case is to find
out what the intention of the parties was in 1957. The learned judge took the
view that the surrounding circumstances of that time, other perhaps than the
fact that there was a letting of shop premises, had little bearing upon the
problem of the construction of the lease.
It is manifest
from the terms of the lease that the lessors were willing to give security of
tenure for a longish term. That no doubt is what the lessees wanted. In 1957
there was a small cloud on the horizon. It was the small cloud of inflation.
Few people in 1957 contemplated that inflation would be anything of the problem
it is today. By clause 4(2) the lessors clearly were willing to grant a new
lease for 21 years on the same terms as before, save that instead of having
£1,250 as the anual rent there was to be another figure inserted. That figure
was to be that which was the prevailing market rent.
In my
judgment, part of the difficulty which has arisen in this case is reflected in
the final words of Mr Essayan’s submission to us, namely, as I took them down,
‘The arbitrator was directed to look at the prevailing practices in the
market’. He was not directed to do anything of the sort. He was directed to find
out what in the market was the prevailing market rent. The learned judge was
beguiled by the same fallacy. As Templeman LJ has pointed out, when he came to
construe the word ‘prevailing’ he said that it meant (and I quote) ‘that which
is in general use or practice’. What he was required to do was to construe the
word ‘prevailing’ as an adjective qualifying ‘market rent’ and nothing more.
In my
judgment, it is because there was introduced into this case evidence about what
were the practices of the market in 1978 that the learned judge misdirected
himself in construing a lease which had to be construed according to the
intention of the parties at the time it was made, which was in 1957.
I agree with
the order suggested by Lord Justice Templeman.
The appeal was
allowed with costs in the Court of Appeal and below. Leave to appeal to the
House of Lords was refused.
