Landlord and tenant–Rent review clause in lease of shop–Whether a letter from tenants in response to landlords’ trigger-notice constituted a valid counternotice under rent review clause–Whether failure by tenants to state a counter-proposal in regard to the rent was a fatal defect–Whether tenants’ letter was defective because it did not call upon landlords to negotiate–Appeal from assistant recorder allowed in part
question in this case was for a term of 20 years with five-year reviews–The
machinery for review was of a broadly familiar kind–It provided for a rent
notice by the landlords specifying an increase payable from the relevant review
date–Then followed a provision that the tenants may, within 28 days after the
receipt of a rent notice, serve on the landlords a notice specifying the rent
which the tenants were willing to pay and calling on the landlords to negotiate
the amount–It went on to provide that if the tenants failed to serve a counternotice
within the 28 days they were to be deemed to have agreed to pay the increased
rent specified in the landlords’ rent notice–If the tenants did serve a
counternotice then the landlords and tenants were required to consult and try
to agree the amount of rent, but failing agreement within 56 days (or an agreed
extension) after the service of the counternotice the question as to the rent
was to be referred to arbitration
concerned the correct interpretation to be placed on letters between the
parties–The first letter was from the landlords specifying a rent of £14,250 pa
(the previous rent was £7,850)–The tenants’ response was to say that they could
not meet a rent of that amount and to ask for it to be reconsidered–The
landlords replied that they would look into the matter and hoped to write again
shortly–However, what followed was a letter from estate agents some five months
later complaining that the tenants were in default in not paying the rent of
£14,250–The landlords then distrained for the rent, as a result of which the
tenants were unable to conduct their business for two days
brought proceedings in the county court which, in addition to claiming damages
for illegal distress, sought declarations that their letter in response to the
landlords’ trigger notice was a valid counternotice; that the landlords had
accepted it as such; and that the landlords had failed to comply with the
review procedure and had thus lost the right to the rent review, with the
result that the rent remained at £7,850–The assistant recorder allowed a modest
sum for the claim on account of distress–He decided that the tenants’ letter
was a valid counternotice and came to the conclusion that it placed the
landlords under an obligation to negotiate–As they did not negotiate, he held
that they had lost the right to have the rent reviewed for the period in
question–The landlords appealed
on appeal submitted that the judge was wrong in holding that the tenants’
counternotice was valid, as it failed to specify the rent proposed by the
tenants–Even if it were valid, however, it was submitted that it did not have
the effects attributed to it–In support of the contention that the
counternotice was invalid the landlords cited Commission for the New Towns v R Levy & Co
Ltd, where it was held that the failure of a landlord to specify rent in a
trigger notice was a fatal defect–Woolf LJ, after giving a warning against the
danger of trying to apply reported decisions on particular rent review clauses
to other cases, held that there was no mandatory requirement in the present
case to specify a rent in the counternotice–The Commission for the New Towns
decision had no application to the present case and Woolf LJ declined an
invitation to comment on the correctness of that decision–The tenants’ letter,
which indicated that they were not prepared to accept the rent proposed by the
landlord, constituted a valid counternotice–The landlords’ reply showed that
they then accepted the tenants’ letter as appropriate–The suggestion that the
letter was fatally flawed because it did not in terms call upon the landlords
to negotiate was unsustainable–On the other hand, the Court of Appeal did not
agree with the assistant recorder’s view that, by failing to negotiate, the landlords
lost the right to have the rent reviewed–It was not possible to argue
successfully that if the landlords did not negotiate they lost their rights to
an arbitration
interpretation of the review clause was as follows–There was to be a counternotice–After
such a notice there was to be a limited period for negotiation before either
party could resort to arbitration–Once that period had elapsed the parties were
entitled to proceed to arbitration–There was no time specified for the actual
appointment of an arbitrator–In this case the tenants had served a proper
counternotice–After the specified period there was a right to arbitrate–No
arbitration had yet taken place, so that it was still open to the parties to
arbitrate on the rent–The appeal was allowed to the extent that the assistant
recorder had granted a declaration indicating that the landlords had lost their
right to review–Directions given as to the other declarations
The following case is referred to in this
report.
Commission for the New Towns v R Levy & Co Ltd
[1990] 2 EGLR 121; [1990] 28 EG 119
This was an appeal by the landlords,
Earlspring Properties Ltd, from a decision of Mr Assistant Recorder
Morris-Coole, at Wandsworth County Court, giving judgment in favour of the
tenants, Assesh Rameshbhai Patel and Rameshbhai Rambhai Patel, in regard to the
rent review clause in the lease of a shop at 19 and 21 Balham Hill, London SW
12.
David Neuberger QC and Basil Yoxall
(instructed by Stafford Young Jones) appeared on behalf of the appellants;
Norman J Joss (instructed by Laurie Moran) represented the respondents.
Giving the first judgment at the
invitation of Lord Donaldson MR, WOOLF LJ said: This is an appeal from a
decision of Mr Assistant Recorder Morris-Coole sitting in the Wandsworth County
Court where he gave judgment for the plaintiffs on November 23 1989.
The appeal raises a question as to the
proper interpretation and application of a rent review clause contained in a
lease between the plaintiffs and the defendants. The defendants are the
landlords of the premises concerned and the plaintiffs are the present tenants
by assignment of the lease. The premises are a shop, together with some
accommodation, at 19 and 21 Balham Hill, London SW 12. The lease is for a term
of 20 years with five-yearly reviews. The particular review which gave rise to
the issue between the parties was the review which was to take place on June 24
1988.
The lease requires that the review shall
be to whichever is the greater of the rent payable immediately before the
relevant review date or the open market rental value. The lease contains an
extended definition as to what is meant by open market rental value. The
machinery for the review contained in the lease is in clause 5(c) of the lease,
which provides:
The landlord may at any time (without
being under obligation so to do) within the period of twelve months before or
after any of the review dates serve on the Tenants a notice in writing
(hereinafter called ‘a Rent Notice’) specifying an increase of the rent payable
hereunder from the relevant review date to an amount specified in a Rent Notice
and thereupon the following provisions shall have effect: . . .
Then there are set out three provisions
which are to ‘have effect’. They provide:
(i)
The Tenants within twenty-eight days after the receipt of a Rent Notice
may serve on the Landlord a counternotice specifying the rent which the Tenant
is willing to pay from the relevant review date and calling upon the Landlord
to negotiate with the Tenants the amount of rent to be paid hereunder as from
the relevant review date.
(ii)
if the Tenants shall fail to serve a counternotice within the said
twenty-eight days he shall be deemed to have agreed to pay the increased rent
specified in the Rent Notice as from the relevant review date.
(iii)
if the Tenants shall serve a counternotice then the Landlord and the
Tenants shall forthwith consult together and use their best endeavours to reach
agreement as to the amount of the rent to be paid hereunder as from the
relevant review date but failing agreement within fifty-six days after the
service of such counternotice (or within such extended period as the Landlord
and the Tenants shall mutually agree) the question of whether any and if so
what increased rent should be payable hereunder shall be referred to the
arbitration of a single arbitrator in the manner hereinafter mentioned.
The manner in which the matter is to be
referred to arbitration is contained in clause 5(e) which provides:
The said arbitrator (whose costs shall be
borne in equal shares by the Landlord and the Tenants) who (failing agreement
between the Landlord and the Tenants) shall be nominated on the joint
application of the Landlord and the Tenants (or if either of them shall neglect
forthwith to concur in such application on the sole application of the other of
them) by the President for the time being of the Royal Institution of Chartered
Surveyors . . .
Then the clause goes on to provide that
there are certain matters which should thereafter be carried out by the
landlords and tenants.
It is relevant also to refer to clause
4(d) because that provides:
If the Landlord omits or elects not to
serve a Rent Notice the question of whether any and if so what increased rent
should be payable hereunder shall be referred to the arbitration of a single
arbitrator in the manner hereinafter mentioned.
So it is contemplated by that clause that
the landlord need not serve a rent notice but, if he does not do so, there can
still be a reference to arbitration under clause 4(d).
The only other provision in the clause to
which reference needs to be made is clause 4(h) which provides:
As respects all periods of time referred
to in this clause time shall be deemed to be of the essence of the contract.
What happened in this case with regard to
the review date in question can be ascertained by referring to four letters
which passed between the landlords and the tenants or the landlords’ advisers
and the tenants.
The first letter is a letter of May 17
1988 from the landlords’ agents to the tenants. The letter among other things
states:
You will know that we are instructed by
your freeholder to settle with you the rent to be paid as from a forthcoming
review date. Please be advised now that, having considered carefully the size
and location of the subject property, and the terms of the lease made
originally on January 8 1980, as extended on September 15 1980, that we
determine the open market rental value at the review date to be in the sum of
£14,250 per annum exclusive and that this is the rental which we call upon you
to confirm for payment from June 24 for the third period of the term.
It was not in issue between the parties
as to whether that letter amounted to an appropriate rent notice for the
purposes of the clause in the lease to which I have just made reference, and so
I do not need to consider that letter further, but I point out that it nowhere
makes any reference to the machinery which is contained in clause 4.
The response to that letter is a
handwritten letter from the tenants which is dated June 9 1988. That letter,
addressed to the landlords’ agent, says:
Thank you for your letter dated May 17
1988. Regarding the rent, you have mentioned £14,250 per annum. We have
recently bought the business and the present turnover is not substantial to
meet the rent of £14,250. Therefore we shall be grateful if you kindly
reconsider the rent figure. Please acknowledge this letter and let us know your
view.
As requested in the letter, the landlords
did acknowledge the letter and they did so by their agents in these terms in a
letter of June 13 1988. The letter is a short one:
Thank you for your letter of the June 6
last. We will look into the matter and hope to write to you again shortly.
Whether the landlords’ agents looked into
the matter as indicated in that letter was not clear on the evidence before the
learned assistant recorder, but what is clear is that they did not write as
they had indicated in that letter within a short time.
Instead, what happened was that a letter
was written by a firm of estate agents on November 22 1988 to the tenants, complaining
to the effect that they were not paying the rent specified in the rent notice
and suggesting that the tenants were in breach of their obligations. In due
course, action was taken by the landlords whereby they distrained for the rent
and the tenants were unable to conduct their business at those premises for a
period of two days.
In consequence of the action which was
taken by the landlords the tenants brought these proceedings in the local
county court seeking, first of all, declarations that their letter of June 6
1988 constituted a valid counternotice in accordance with the review procedure
contained in the lease and, second, that the defendants accepted the letter as
a valid counternotice and that the defendants had failed to comply with the review
procedure and thereby lost the right to the rent review from June 24 1988. As a
result the rent remained what it had previously been, namely £7,850. They also
claimed damages for illegal distress and wrongful interference with goods
limited to £5,000.
So far as the claim for distress is
concerned, a modest award was made by the learned assistant recorder of the
equivalent to two days’ rent at the current rent and there is no issue as to
that award which it is necessary to consider for the purposes of this appeal,
the amount being merely £21.50 per day. However, with regard to the issues of
substance which were before him, the assistant recorder, in a careful judgment
which cites a number of the authorities to which the assistant recorder was
referred, goes on to find in favour of the tenants. The judge comes to the
conclusion that the letter which was written by the tenants on June 9 1988 was
a valid counternotice. He also came to the conclusion that there was an
obligation upon the landlords to negotiate in consequence of that counternotice
being served upon them. But they did not negotiate and, that being so, they
lost the right to have the rent reviewed for this particular review period.
Before this court Mr David Neuberger QC,
on behalf of the landlords (who did not appear in the court below), submits
that the judge was wrong. First of all, he submits that there was no valid
counternotice and, second, he submits that, if there were a valid
counternotice, it did not have the effect that the judge held. It did not mean
that, if the landlords did not negotiate, they were deprived of their right to
an arbitration in accordance with the terms contained in the lease in the event
of a failure to agree what should be the new rent by the tenants and the landlords.
The answer to this appeal, in my view,
depends on the interpretation of the letters to which reference has been made
in the light of the proper construction of the clause of the lease which I have
set out earlier in this judgment. There is, as Mr Neuberger pointed out in the
course of argument, a very considerable number of authorities which are now
reported in a variety of reports dealing with review clauses of this sort.
However, if I may say so, to try to apply one authority given in relation to a different
rent review clause in different circumstances to another situation is always a
dangerous course to adopt, and in the normal event it is more appropriate for
issues of this sort to be determined by looking at the facts of the particular
case and applying those facts to the particular rent review clause which is
under consideration. Although the learned judge here dealt very well with the
arguments which were before him, in my view he was distracted from the right
result in consequence of the authorities to which he was referred. Clauses of
this sort are meant to be applied sensibly by landlords and tenants for dealing
with the rental arrangements between them. Particularly when they refer to
commercial premises, they are commercial covenants intended to deal with a
commercial situation and, in my view, they should always be approached with a
sensible degree of common sense.
If one approaches the particular clause
involved here having regard to the letters which were written, the following
appears to be the clear position. When the landlords received the letter from
the tenants inviting them to kindly reconsider the rental figure, they were
accepting that as a request to review the figure which had previously been put
forward by the landlords of £14,250. The letter in response saying ‘We will
look into the matter and hope to write to you again shortly’, in my view,
indicates that the earlier letter was so understood by the landlords’ agents
and that they were responding to that request. When that is borne in mind,
notwithstanding the elegance with which Mr Neuberger advanced his submissions,
I have no difficulty in rejecting both of them.
The first submission that he made was
that the counternotice was invalid because it did not specify the particular
rent which the tenants thought was the appropriate rent. He submits that that
is a
valid counternotice and so the tenants are here landed with the rent which the
landlords specified.
In support of that argument he referred
us to a decision of His Honour Judge Paul Baker QC in the case of Commission
for the New Towns v R Levy & Co Ltd [1990] 2 EGLR 121. In his
judgment in that case Judge Paul Baker, sitting as a deputy judge of the High Court,
held that a failure by a landlord to specify a rent in a rent notice was fatal.
In doing so, the learned judge distinguished another case. Mr Neuberger invited
us either to follow Judge Paul Baker and apply that case to the facts of this
case or to indicate that Judge Paul Baker’s decision was wrong.
I do not propose to accept that
invitation in the course of this judgment. That case does not appear to me to
be in any way relevant to the facts of this case. What is required to be in a
rent notice which starts the machinery running is not necessarily the same
thing which is required in a counternotice. I do not regard the judgment of
Judge Paul Baker as applying to the facts of this case and, that being so, I do
not regard it as appropriate to make any comment either one way or the other as
to the correctness of the decision in that case.
What I am satisfied is that, if one looks
at the provisions of the clause with which we are concerned here, there is no
mandatory requirement to specify the counter rent. What was done by the tenants
was clearly sufficient to indicate that they were not prepared to accept the
rent proposed by the landlords and, in my view, having done that, the letter
they wrote is not defective as a counternotice because it does not specify the
rent which they would propose in lieu of the rent specified by the landlords.
It is to be remembered that the clause in the lease indicates that the rent
after review shall be either the existing rent or a new rent, but that, if the
open market rent is not higher than the existing rent, the existing rent
continues. By writing the letter that they did it is clearly indicated by the
tenants that they are not accepting that there should be an increase in the
rent, certainly to the extent indicated by the landlords.
The landlords themselves, by responding
in the way they did, were clearly accepting the letter as being an appropriate
letter to require them to look into the matter further and that is what they
said they were going to do.
That brings me to the second argument Mr
Neuberger advanced, which is that the letter of June 9 was fatally flawed
because it did not call upon the landlords to negotiate. It called upon them to
reconsider the rent figure and, in my view, that is certainly sufficient to
meet the requirement of the covenant in the lease. But, even if it did not
amount to a fulfilment of that requirement, so long as the tenants have
indicated they are not accepting the rent proposed by the landlords, in my view
they have done sufficient to operate the machinery of the clause.
So far as the argument of the tenants as
to the failure of the landlords to negotiate is concerned, I, with respect,
disagree with the view of the learned assistant recorder and I also disagree
with the submissions which were advanced on behalf of the tenants.
When one examines the terms of the clause
one sees what is intended to happen. There is to be a counternotice. After that
counternotice has been served there is to be a limited period for negotiation
before either the landlords or the tenants can take the next step which is
contemplated by the machinery, which is resorting to arbitration. The parties
to the lease cannot proceed to arbitration until the specified period has
elapsed, but the way in which the machinery works is that, once that period has
elapsed, they are entitled to proceed to arbitration. There is no specified
time laid down by the clause in which the actual step of appointing an
arbitrator has to take place, but there is a machinery set out in the clause
which enables an arbitrator to be appointed, either by agreement or by nomination.
In my view, it is not possible successfully to contend in this case that, if
the landlords do not negotiate, they lose their right to arbitration. Such a
result would be really absurd. It could be a situation where the landlords were
absolutely satisfied that the rent they proposed was at least the rent which
was payable under the lease. The idea that they then should go through a
charade of negotiation so as to fulfil the clause of the lease before they
could go to arbitration appears to me not to be a sensible one.
I therefore come to a different
conclusion to that of the learned judge in relation to the need for negotiation
to take place. I have come to the conclusion that the consequence of what
happened in this case is that the tenants had served a proper counternotice.
After the specified period there was then a right to arbitrate. No arbitration
had yet taken place. Accordingly, it is appropriate and open to the parties to
arbitrate as to what rent is payable from this specific rent review date.
I would therefore allow this appeal to
the extent that the learned assistant recorder granted a declaration indicating
that the landlords have lost their right to review. It seems to me that the
first declaration sought by the tenants is still appropriately granted, but the
second declaration which is sought is not appropriately granted or, as Lord
Donaldson MR reminds me, the third declaration which was granted.
LORD DONALDSON of LYMINGTON MR agreed and did not add
anything.
The appeal was allowed to the extent
indicated in the judgment. No order for costs.
