Landlord and tenant — Insured risk — Rent suspension clause — Premises unfit for occupation on occurrence of insured risk — Whether rent suspension applies to insurance and service charges reserved as rent
The plaintiff landlord was the owner of a building
in Manchester damaged by a bomb in 1996. By a lease dated 7 March 1988 the
defendant tenant held from the landlord a 25-year term of office premises and
car parking spaces within the building at a rent, subject to review. Under the
lease the tenant also paid a contribution to the insurance premium and service
charges, both reserved by the reddendum as rent. Clause 6 of the lease
provided that where the premises were destroyed or damaged by any insured risk
so as to make them unfit for occupation or use, then the rent reserved, or a
fair proportion thereof, according to the nature of the damage, was to be
suspended until the premises were rendered fit for occupation or use by the
tenant. The bomb damage was an insured risk, and the premises were unfit for
occupation from 15 June 1996 until at least 23
plaintiff contended that the rent suspension clause did not apply to the
additional rents in respect of insurance and service charges.
suspension clause did not apply to the additional rents payable in respect of
insurance and service charges. There was an inconsistency of language in the
lease that suggested that the draftsman did not have a clear and consistent
policy in his references to ‘rent’ and ‘rents’. Accordingly, the construction
of clause 6 had to be judged according to well-established principles. The
lease was intended to be a commercial agreement between two substantial bodies
and had to be construed as such; the construction should not be approached as a
dry academic exercise. The landlord’s construction was more consistent with the
language of the lease in relation to ‘rent’ and ‘additional rents’. It was also
commercially fairer and easier to implement than the tenant’s construction.
No cases are referred to
in this report.
This was the hearing of a summons under RSC Ord
14A to determine the construction of a lease in proceedings commenced by
P&O Property Holdings Ltd to which International Computers Ltd is the
defendant.
Michael Driscoll QC and Timothy Harry (instructed
by Hammond Suddards, of Manchester) appeared for the plaintiff; Paul Morgan QC
(instructed by Masons) represented the defendant.
Giving judgment, NEUBERGER J said: On 15 June 1996 many parts of the
Arndale Centre in Manchester were destroyed or severely damaged by a bomb. Part
of the centre included a multi-storey office building called Arndale House. The
10th and the 12th to 19th floors of Arndale House, together with 200 car
parking spaces (the demised premises), were let by the predecessor in title of
the plaintiff to the defendant under an underlease (the lease) dated 7 March
1988 for a term of 25 years from 25 March 1980. The initial rent under the
lease was £324,500 pa, rising to £339,000 pa (plus a further rent in respect of
170 car parking spaces) subject to review every five years, plus an insurance
rent and service charge rent. The initial rent of £339,000 pa, plus the initial
rent in respect of the 170 car park spaces, was reviewed to £930,000 pa, and I
shall refer to this as ‘the rack rent’.
Clause 6 of the lease provides:
If during the said term the demised premises or
any part thereof shall be destroyed or damaged by any insured risk so as to be
unfit for occupation or use and the policy or policies of insurance effected by
the landlord shall not have been vitiated or payment of the policies money
withheld or refused in whole or in part in consequence of any act, neglect or
default of the tenant, its servants, agents or licensees…
— then come the words that are of central importance
to this case —
the rent hereby reserved or a fair proportion
thereof according to the nature and extent of the damage sustained shall be
suspended until the demised premises have been again rendered fit for
occupation or use by the tenant.
While there is an issue as to whether, and if so
when, the demised premises have become fit for occupation and use, there is no
dispute as to: (1) the fact that the bomb damage was an insured risk; and (2)
the whole of the demised premises were thereby rendered unfit for occupation
and use from 15 June 1996 until at least 23
call ‘the damage period’.
The issue between the parties today is raised in a
summons pursuant to RSC Order 14A issued by the plaintiff on 19 October 1998.
This summons seeks:
an order determining whether the expression ‘the
rent’ where it appears in clause 6 of the lease… includes or does not include
the amounts payable by the tenant from time to time under the lease as
additional rents in respect of the insurance, service charge, repairs or
otherwise.
The plaintiff’s case is that it does not include
those amounts, whereas the defendant’s case is that it does. That is a question
of construction and therefore involves consideration of the terms of the lease
considered as a whole. Before turning to the provision of the lease, I should
mention two matters.
The first is that the point at issue has been
identified as a potential area of dispute of principle so far as the drafting
of leases is concerned. There is relevant discussion in volume 22(1) of the Encyclopaedia
of Forms and Precedents, 5th ed, 1996 pre-issue. As Mr Paul Morgan QC, who
appears on behalf of the defendant, points out, under the heading of
‘Suspension of Rent’ at para 316, one finds the following:
The payments to be covered. Landlords inevitably
seek to provide that only the rent is suspended. Any other payments due to the
landlord under the lease such as service charge payments and contribution to
the insurance premium therefore continue to be payable. If there has been total
destruction of the entire
absence of a property, there would be no services or insurance. It will be
important, however, where, for example, a fire renders unfit for use several
suites of offices in an office building or one or two units in a shopping
centre, while life carries on as usual in the remainder of the premises. The
landlord will then be providing much the same services and effecting the same insurance
as he would have done if all the units had been in use, and in fact the
landlord may incur greater expenditure under both of these heads until the
damaged parts have been reinstated. Nevertheless, it is equally hard for the
tenant to pay for services from which he derives no benefit, and he should
therefore argue for the suspension of rent proviso to apply to all sums due
from the tenant under the lease.
Second, it is right to explain briefly the
background to the present issue, at least so far as the plaintiff landlord sees
it. In this connection, I refer to the affidavit of Mr Geoffrey Green, a
financial controller with the plaintiff with day to day responsibility for
running Arndale House. Having accepted that the plaintiff is not entitled to
the rack-rent for the period of damage, he goes on to say as follows:
However… the plaintiff does seek payment by way
of service charge and insurance contribution for that period… During that
period no account is taken in the service charge of the cost of providing
services such as security known as basic costs. They would not have benefited
the defendant who was not in occupation. However, the overall level of service
charge sought to be recovered from the defendant for this period actually
increased, due to the incurrance of exceptional charges such as the cost of
refurbishment of the air conditioning system known as exceptional costs. The
defendant was notified in 1992 that exceptional costs were to be incurred over
the following five year period and on 2nd October 1992 a letter was sent to the
defendant to provide more details of the proposed exceptional works.
He exhibits a copy of the schedule and letter,
which show that over a period of five years from 1993 to 1997 inclusive
substantial sums were to be charged each year to the defendant in respect of
services varying between £400,000 and £450,000 pa. Most of those costs were
attributed to the costs of carrying out substantial work to the
air-conditioning system in Arndale House.
I turn to the terms of the lease. Clause 1 is an
interpretation clause, and includes the statement:
unless there is something in the context
inconsistent therewith… the singular includes the plural…
The reddendum is the final and most
substantial part of clause 2, and is in these terms so far as relevant:
yielding and
paying therefor unto the landlord yearly during the
said term and so in proportion for any less period than a year the exclusive
yearly rents follow.
There are then set out in subclauses (a) to (c)
the sums rising, as I have mentioned, from £324,500 pa (plus a sum for each of
the 170 car parking spaces) to £339,000 pa (plus £450 for each of the 170 car
parking spaces). Para (c) contains this final figure, which is payable with
effect from 25 December 1986, and continues:
Together being the first reviewed rent in
accordance with clause 3 hereof…
Subclause (d) of the reddendum provides for
such rent as may be payable in accordance with clause 3, the rent review
clause.
These rents are to be payable ‘by equal quarterly
payments in advance on’ the usual quarter days. The reddendum continues
with these centrally important words:
And paying also as additional rents the amounts
payable by the tenant from time to time under this underlease… in respect of
insurance, service charge, repairs or otherwise, such additional rent to be
payable at the time and in manner hereinafter specified and to be recoverable
by and subject to all remedies of the landlord for recovery rent.
Clause 3 contains provision for review of the
rent. The rent is to be reviewed on an upwards-only basis with effect from
every fifth year of the term to the current market rent as there defined.
Clause 3(2) provides that the initial rents or other rents payable by the
tenant hereunder:
shall be subject to increase to the current
market rent of the demised premises at each review date in accordance with the
provisions of this clause…
subject to the proviso that:
in no circumstances shall the rent payable
hereunder be less than the yearly rent payable by the tenant immediately prior
to such a review date.
Clause 4 contains the tenant’s covenants. Clause
4(1) is a covenant:
to pay the reserved yearly rent or rents …
without any deduction or abatement whatsoever.
Clause 4(2) is a covenant:
to pay to the landlord from time to time on
demand by way of additional rent such sum as shall from time to time be
certified by the landlord’s surveyor to be the premium … or the fair proportion
thereof applicable to the demised premises expended by the landlord in
effecting or procuring to be effected insurances against any of the insured
risks.
The ‘insured risks’ are defined in clause 1 as
including various forms of damage, but also ‘three years’ loss of rent in
respect of the demised premises’.
Clause 4(6) is a covenant to pay service charges
in accordance with the provisions of the third schedule ‘whenever required by
the landlord’. The third schedule is divided into three parts. The first part
sets out the various items to which the tenant is obliged to contribute. Part 2
of the third schedule contains the following:
The amount from time to time to be paid by the
tenant pursuant to clause 4(6) hereof shall be assessed and paid on demand therefor
by the landlord…
and there is then set out an alternative procedure
whereby the landlord can send an estimate in advance of the relevant year for
the likely service charge expenditure in that year (which the tenant has to pay
by four instalments quarterly in advance), and there is provision for payment
of the balance after the accounts for the service charge year have been
prepared. That balance is to be payable by the tenant together with the rent
due on the next following quarter day.
Clause 4(12) is a provision whereby the landlord
can inspect the demised premises and identify wants of repair, and, in the
event of the tenant not repairing, the landlord is entitled to repair and the
cost thereof is recoverable ‘as a debt immediately payable by the tenant to the
landlord on demand with interest at 3 per cent per annum above’ a specified
rate of interest.
Clause 4(15) is a covenant by the tenant to pay:
(a) the costs incurred in connection with proceedings by the landlord under
section 146 of the Law of Property Act 1925; and (b) any costs in connection
with an application for planning permission by the tenant.
Clause 4(20)(a) is a covenant against alterations
without consent; it provides for the tenant to pay the landlord’s costs in
connection with the obtaining of any such consent. A similar provision, in
relation to paying the landlord’s costs of registering alienations, is to be
found in clause 4(29).
Clause 5 contains the landlord’s covenants, which
include, in subclause (1), a covenant for quiet enjoyment. Clause 5(2) is a
covenant by the landlord to insure the demised premises against the insured
risks, subject to reimbursement of the appropriate insurance premium, as
provided by clause 4(2).
I have already referred to clause 6, which is the
suspension of rent provision that is centrally relevant for the purposes of the
present application. Clause 7 is a proviso for re-entry exercisable if, under
subclause (1)(a), the rent or any part thereof is unpaid, and, under subclause
(1)(b), if any covenant on the tenant’s part is not observed.
It is also right to say that, in clause 8 of the
lease, there is a provision for arbitration:
if any dispute or difference shall arise between
the landlord and the tenant touching any clause, matter or thing whatsoever
herein contained or the operation or construction thereof, or any matter or
thing in any way connected with this underlease.
I return then to the issue between the parties as
it is helpfully summarised in the summons. The defendant tenant’s argument is
ultimately very simple. The reference in clause 6 of the lease is a reference
to ‘the rent hereby reserved’. That takes one back to the reddendum, and
it is clear from the reddendum that ‘the rent hereby reserved’ extends
not merely to the rack-rent but also to all other amounts payable by the
tenant, and, in particular, the insurance and service charge. There is no
question of ambiguity. Therefore, any payment of the insurance premium under
clause 4(2) or the service charge under clause 4(6) of the lease, which would
otherwise fall to be paid during the damage period, would be suspended
permanently and in full.
In my judgment, the reference in clause 6 to ‘the
rent hereby reserved’ is not unambiguous, as is suggested on behalf of the
defendant. First, it is by no means clear that it refers to the various
components of rent and additional rents referred to in the reddendum.
One notes that in the reddendum itself the draftsman has distinguished
between ‘rent’ and ‘rents’ (meaning the rack-rent not including insurance or
service charges) on the one hand, and ‘additional rents’ (which do extend to
such charges) on the other hand: within a comparatively short passage the
payments other than the rack-rent are referred to twice as ‘additional rents’.
Second, one notes that in the reddendum itself
there is reference to the additional rents being ‘recoverable by and subject to
all remedies of the landlord for recovery of rent’. It seems to me that those
words suggest, at least in the draftsman’s mind, that he may not have been
treating the sums that he has described as additional rents as rent for all
purposes of the lease at any rate. In other words, looking at the reddendum,
to which one is directed, on Mr Morgan’s argument, by clause 6, one can see
a distinction between ‘rents’ and ‘rent’ on the one hand, and ‘additional
rents’ on the other hand.
Some assistance is also to be found elsewhere in
the lease, although it is fair to say that it does not appear that the
draftsman has had a consistent approach. Turning to clause 3, it seems to me
fairly clear that, where, for instance in clause 3(2), the draftsman refers to
‘rents payable hereunder’, ‘rent payable hereunder’ or ‘yearly rent payable by
the tenant’, he is intending to refer only to the rack-rent. On the other hand,
within that subclause it is notable that he uses slightly different expressions
on three occasions, each of which mean the same thing. In clause 6, on the
other hand, he refers to ‘the rent hereby reserved’. In clause 4(1) he refers
to ‘the yearly rent or rents’. Such inconsistency in language suggests that
there has not been a clear and consistent policy. Further, in part 2 of the
third schedule, as Mr Michael Driscoll QC, who appears with Mr Timothy Harry
for the plaintiff landlord, points out, there is the reference to the service
charge being payable together with the rent due on the next following quarter
day, and ‘rent’ must be treated in that passage as restricted to the rack-rent.
It seems to me, therefore, that it is by no means
clear from the lease, read as a whole, that a reference, as in clause 6, to
‘the rent hereby reserved’ must mean all components of the rent as referred to
in the reddendum; that is the rack-rent and all those sums referred to
as additional rent. The question of construction of clause 6 must be judged
according to well-established principles. The lease is intended to be a
commercial agreement between two substantial bodies, Town & City Properties
Ltd (the original landlord) and International Computers Ltd (the original and
present tenant), and one has to construe it as such; the question of
construction should not be approached as a dry academic exercise.
Based on this approach, I have reached the
conclusion that the plaintiff landlord’s construction is to be preferred.
First, the features of the lease that persuade me that the defendant’s
construction is not clearly correct go further: they indicate to me that the
plaintiff’s construction is more consistent with the language of the lease in
relation to ‘rent’ and ‘additional rents’.
Second, it appears to me that the plaintiff’s
construction results in a system that is commercially fairer and easier to
implement than that of the defendant. Thus, it is common ground between the
parties that clause 6 is to be construed in the following way. If the whole of
the demised premises is destroyed or damaged, then the whole of ‘the rent
hereby reserved’ is permanently irrecoverable in respect of the damage period,
and that if a part of the demised premises is so damaged, then ‘a fair
proportion’ ‘of the rent hereby reserved’, ‘according to the nature and extent
of the damage sustained’, is to be permanently irrecoverable in respect of the
damage period.
So far as the rack-rent is concerned, that seems
to me to be a logical and workable process. But I am not by any means persuaded
that that is so true in relation to the insurance or service charge. So far as
the insurance is concerned, it is clear that during the damage period the
landlord is obliged to keep the demised premises fully insured pursuant to
clause 5(2). It would seem to me that, concomitant with this, one would have
expected that the tenant would be obliged to reimburse the landlord the cost of
that insurance. On the defendant’s argument, that is not so. It is fair to say
that Mr Morgan argued that it might be that the landlord could recover the
insurance rent in respect of the period on the basis that he would be insuring
a damaged building, but it seems to me that reading clause 6 in the simple way
for which both he and Mr
As to the service charges, it would be a little
odd, somewhat adventitious as I see it, if the tenant were able to avoid
liability for service charge of the sort contemplated here (namely payments in
respect of works undoubtedly within the service charge provisions and which
will inure to the benefit of the tenant for a long period, probably the
duration of the lease) simply because it happens that the dates on which he
would otherwise have been liable to pay such charges fall during the damage
period.
There is no question, on either party’s case, of
an apportionment of the liability for the service charge payments on such items
if the defendant’s argument is correct. For instance, if the air-conditioning
was estimated to last for 15 years and the damage period was one year, both
parties agree that, if the defendant is right, clause 6 cannot be interpreted
so as to excuse the defendant for one-fifteenth of his contribution in respect
of the cost of that work. It seems to me that that agreement is right. The
proportion that clause 6 envisages being reduced is according to the nature and
extent of the damage sustained, not in respect of any temporal aspect; the
temporal aspect is dealt with in the last part of the clause.
This highlights another point made by Mr Driscoll,
which is that, in the case of partial damage to the demised premises, it is
perfectly logical and workable, particularly in the case of offices, for a fair
proportion of the rent to be abated ‘according to the nature and extent of the
damage sustained’, whereas it is by no means quite so obvious that that is an
appropriate means by which to reduce the insurance payment or the service charges
in a case of partial destruction or damage.
On the other hand, it can fairly be said that, if
the defendant has to go on paying for services during the damage period, then
it would seem unjust that he should have to pay in full for recurring services
such as the provision of security, electricity, gas and so on, in respect of a
period when he is excluded from the demised premises or part thereof. While
there is force in that argument on the face of it, I consider that it is
substantially answered by para 2 of part 3 to the third schedule to the lease,
which provides as follows:
Where it is shown to the reasonable satisfaction
of the landlord’s surveyor that in respect of any specified service, amenity or
facility, neither the tenant nor the demised premises nor the occupiers or
users derive any benefit or advantage directly or indirectly from the provision
of such service, amenity or facility by the landlord, or such benefit or
advantage to the demised premises produces a manifestly inequitable charge, such
adjustment shall be made and the proportion of the service costs attributable
to the demised premises as the landlord’s surveyor shall consider to be just
and equitable.
It seems to me that, in a case where the tenant is
excluded completely from the whole or part of the demised premises for, say, a
year, then, even if the tenant would otherwise be liable for the cost of
electricity or gas for heating or air-conditioning or for the cost of
supervision of the centre as a whole, the tenant simply gets no benefit
from such services or a very much reduced benefit from them, whereupon the
provisions of para 9 of schedule 3 could come into play.
Mr Morgan argues, first, that this paragraph was
not included for this purpose, and second, that it is not a satisfactory
provision because, in the event of dispute under clause 6, the dispute is
referred to arbitration under clause 8, whereas para 2 envisages determination
by one party’s agent, namely the landlord’s surveyor.
So far as the first point is concerned, it may
well be that para 2 was not included with this purpose in mind. However, it
seems to cover this situation and to mitigate to a significant extent, although
possibly by no means completely, the point that the defendant can otherwise
make in relation to the plaintiff’s construction of clause 6, and recurring
services. As to the second point, it is for the parties to decide how an issue
such as that raised by para 2 is to be determined; they no doubt assumed that a
reference to the landlord’s surveyor would be a quick, expeditious way of
dealing with the matter; presumably, the tenant was prepared to assume that the
landlord would employ a reputable and honest and experienced surveyor.
There is another point that assists the
plaintiff’s case. The insurance payment under clause 4(2) is payable ‘on
demand’, and, subject to the landlord exercising his rights to have quarterly
payments in advance, the balancing service charge is also payable ‘on demand’.
It seems to me that the defendant’s construction of clause 6 envisages the
possibility of either a degree of manipulation on the part of a landlord or an
extra degree of fortuitousness in relation to whether or not the tenant avoids
liability for service charge payments and insurance payments during the damage
period. For instance, a landlord who has to pay an insurance premium in
accordance with clause 5(2) of the lease during the damage period may decide to
wait until the damage period ends before he demands the insurance payment
pursuant to clause 4(2).
I accept, as Mr Morgan says, that there may well
come a point where the landlord would be held not entitled to recover if he
waited for a very substantial time, but, even so, it does appear to me that, if
the landlord were to wait a short time, or to put off insuring or paying the
insurance premium for a short time, to enable the whole of the insurance
premium to be demanded from the tenant once the damage period had ended, the
tenant would normally have no ground for avoiding payment. The adventitious
aspect does not apply to the rack-rent, but it seems to me that very different
results could occur depending on whether the fire or other insured risk took
place just before or just after a day on which payment in respect of insurance
or service charges fell due.
A further point is made by Mr Driscoll in light of
the fact that not merely the insurance and service charges but also all other
amounts payable by the tenant are within ‘the rent hereby reserved’ in clause 6
if the defendant’s argument is correct. The result of that would be that sums
payable under clauses to which I have referred, such as clause 4(12), clause
4(15), clause 4(20) and clause 4(29), would all be irrecoverable if they happen
to fall due during a damage period. It is not fanciful to imagine that the
parties could have envisaged when entering into this lease that any of these
sums could become payable during a damage period. Under clause 4(12) one would
have to imagine the landlord carrying out work in default shortly before the
damage occurs by an insured risk, resulting in the landlord then either putting
off his demand for payment, if he is entitled to do so, or foregoing it. Even
if he had made his demand for payment, there is the further subtle point that
interest at 3% pa would not run during the damage period on the defendant’s
construction.
It is by no means inconceivable that sums would
become due in accordance with clause 4(15) in relation to forfeiture
proceedings during the damage period. Nor is it improbable that the tenant
would want to carry out alterations, taking advantage of the damage having been
caused by the insured risk. If the defendant’s argument is correct, the
landlord could not recover that which the parties intended him to recover,
namely his proper costs in dealing with the application to carry out
alterations under clause 4(20). Equally, it is not inconceivable that the
tenant would wish to assign the premises during the time that he is shut out
from them; yet the registration fee for such assignment under clause 4(20)
could not be recovered by the landlord if the defendant’s argument is correct.
It can be said that these are small points not
necessarily in the forefront of the parties’ minds when they entered into the
lease, and I see the force of that. However, while one must be careful about
descending into what has been referred to in a number of cases as a ‘detailed
and syntactical analysis’ of a contract, it seems to me that one can, indeed
should, consider the practical implications of one argument as against the
other on an issue of construction of a commercial contract.
Standing back, and not by any means with entire
confidence, I have come to the conclusion, for the reasons I have sought to
give, that the plaintiff’s argument is correct, and that ‘the rent hereby
reserved’, where it appears in clause 6 of the lease, does not include the
amount payable by the tenant from time to time under the lease as additional
rents in respect of insurance, service charge, repairs or otherwise, and I
propose so to order.
I would like to end
by expressing my appreciation to both parties. The case has been succinctly and
clearly argued both in skeleton argument form and orally.
