Landlord and tenant — Rent review clause in lease — Appeal from decision of deputy judge on a difficult point of construction — The initial rent was £8,000 a year — Rent review clause provided that the reviewed rent was to be ‘a sum equal to the aggregate of the said sum of £8,000 plus the amount (if any) by which the fair rack rental value . . . at the date of the review shall exceed the sum of £8,000 or the yearly rent fixed at the previous date of review as the case may be’ — There was a proviso that the rent payable after the date of review should not be less than that payable immediately before that date — The deputy judge decided in favour of the landlord’s construction, which gave a normal commercial meaning to the clause, so that the reviewed rent would always be the equivalent of the fair rack rental value at the date of review, or, if higher, the rent payable immediately before the review date — Tenant’s construction meant that the rent payable on first review would be equivalent to the fair rack rental value but that payable on every subsequent review would always fall short of such value (assuming that the latter was always on the increase) — On examination of the wording ‘without any preconceptions’ the Court of Appeal preferred the tenant’s construction, although it led to admittedly unpredictable and perhaps capricious, but not absurd, results — The words ‘as the case may be’ did not mean ‘whichever is the higher’ — The court did not accept the proposition that the parties to a commercial lease invariably intended that the rent should not in real terms fall below the market rent initially agreed upon — ‘It is perfectly possible for them to assume that the fair rack rental value will always increase, but none the less to intend that the rent payable from the second review onwards shall always be less’ — Landlords had failed to persuade the court that the tenant’s construction was absurd — Tenant’s appeal allowed
This was an
appeal by the tenant, Surrey Conveyancers Ltd, and the surety, Jonathan Howard
Roberts, from a decision of Mr Michael Wheeler QC, sitting as a deputy judge of
the Chancery Division, in favour of the landlord, Philpots (Woking) Ltd, the
present respondents, on the construction of the rent review clause of a lease
of office accommodation on the first floor of 1 Guildford Road, Woking, Surrey.
David
Neuberger (instructed by Park Nelson & Doyle Devonshire, agents for Mossops,
of Woking) appeared on behalf of the appellants; Roger H T Smith (instructed by
Jansons, agents for Lester Perring & Co, of Hastings) represented the
respondents.
Giving the
first judgment at the invitation of Ackner LJ, NOURSE LJ said: This is an
appeal from a decision of Mr Michael Wheeler QC, sitting as a deputy judge of
the Chancery Division, given on May 7 1985. It raises what the learned judge
correctly described as a short, but far from easy, question of construction on
a rent review provision in a lease.
The lease is
dated October 20 1981. It was made between Philpots (Woking) Ltd as landlord of
the first part, Surrey Conveyancers Ltd as tenant of the second part and Mr J H
Roberts as surety of the third part. It is a lease of office accommodation on
the first floor of 1 Guildford Road, Woking, Surrey, for a term of 25 years
from June 24 1981 at an initial yearly rent of £8,000.
The reddendum
itself gives no hint of possible variations in the rent. The review provisions
are contained in clause 5 of the lease. Subclause (1)(i) of that clause
provides that the lessor shall have the right to review the yearly rent for the
time being payable at the end of each five years of the term (‘the date of
review’) in manner thereinafter provided. Subclause (1)(ii) provides for the
exercise of the right by notice in writing. Subclause (1)(iii) is in these
terms:
If the Lessor
shall give the Lessee such notice as aforesaid then from and after the date of
review this Lease shall be read and construed and shall take effect in all
respects as if the yearly rent for the time being payable hereunder (instead of
being the sum of Eight thousand pounds) had from the date of review been a sum
equal to the aggregate of the said sum of Eight thousand pounds plus the amount
(if any) by which the fair rack rental value (as hereinafter defined) of the
demised premises at the date of review shall exceed the sum of Eight thousand
pounds or the yearly rent fixed at the previous date of review as the case may
be but without prejudice to any of the other terms and conditions contained in
this Lease and so that in no event shall the rent payable by the Lessee to the
Lessor after the date of review be less than the rent payable by the Lessee to
the Lessor immediately before the date of review.
By subclause
(1)(iv) it is provided, shortly stated, that the fair rack rental value of the
premises shall be the open market rental at the date of review (as agreed
between the parties or determined by arbitration), there being disregarded certain
matters which are usually disregarded in cases such as this.
The difficulty
arises out of the terms of clause 5(1)(iii). In order to explain the rival
constructions, I set out the material words again, with alternative number and
indentations as put in by Mr Neuberger, who appears for the tenant and the
surety.
The landlord
submits that the reviewed rent should be:
A sum equal to
—
(1) The aggregate of the said sum of £8,000 plus
the amount (if any) by which the fair rack rental value . . . at the date of
review shall exceed the sum of £8,000;
or
(2) The yearly rent fixed at the previous date of
review as the case may be . . . and so that in no event shall the rent payable
. . . after the date of review be less than the rent payable by the Lessee to the
Lessor immediately before the date of review.
The tenant and
the surety submit that the reviewed rent should be:
A sum equal to
the aggregate of the said sum of £8,000 plus the amount (if any) by which the
fair rack rental value . . . at the date of review shall exceed the sum of:
(1) £8,000
or
(2) The yearly rent fixed at the previous date of
review as the case may be . . . and so that in no event shall the rent payable
. . . after the date of review be less than the rent payable by the Lessee to
the Lessor immediately before the date of review.
The learned
judge preferred the landlord’s construction and made a declaration accordingly.
Against that decision the tenant and the surety now appeal.
Neither
construction gives rise to any arithmetical uncertainty. If the landlord’s
construction is correct, the reviewed rent will always
is higher, the rent which was payable immediately before that date. If the
tenant’s construction is correct then, assuming that the fair rack rental value
is always on the increase, the rent payable on the first review will be its
equivalent, but that payable on every subsequent review will always fall short
of it. An example was given based on the supposition that the fair rack rental
value was £11,000 at the end of the fifth year and £17,000 at the end of the
10th year. At the end of the fifth year you take the aggregate of £8,000 and
the amount by which the fair rack rental (£11,000) exceeds £8,000 (£3,000) and
find that you are left with £11,000. At the end of the 10th year you take the
aggregate of £8,000 and the amount by which the fair rack rental value
(£17,000) exceeds the yearly rent of £11,000 fixed at the previous date of
review (£6,000) and find that you arrive at £14,000. A second example of the
working of the tenant’s construction was based on the supposition that the fair
rack rental value was £11,000 at the end of the fifth year, but that it had
fallen to £9,000 at the end of the 10th year. In that event the fair rack
rental value at the latter date would not of course exceed the yearly rent
fixed at the former, but the final words of the provision would then take
effect and prolong the previous rent of £11,000.
The primary
argument of Mr Neuberger on behalf of the tenant was to the following effect.
The landlord’s construction involves computing ‘the aggregate of . . . £8,000
plus the amount . . . by which the fair rack rental value . . . shall exceed
the sum of £8,000’. You start with the figure of £8,000. You add to it the
amount by which the fair rack rental value exceeds it. And then you subtract
the same amount. You are left with the fair rack rental value. If that is what
you want to say, why do you have to say it in this inexplicable and
extraordinarily convoluted way? Mr Smith
for the landlord accepted that criticism, but submitted that his construction
does produce an intelligible result and is to be preferred to one which
produces a capricious result.
Then Mr
Neuberger turned to the words ‘as the case may be’. He said that on the
landlord’s construction those words acknowledge that a choice is to be made
between two figures, but give no guidance as to how it is to be made. Indeed,
he went further and said that the landlord’s construction gives no meaning at
all to those words. They could just as well have been omitted. Mr Smith’s
answer was that it is obvious, when the commercial object of the clause is
borne in mind, that the figure chosen is to be the higher of the two. He said
that the words ‘as the case may be’ can be read either as themselves meaning
‘whichever is the higher’ or as meaning that there is a choice to be made, the
choice of the higher figure being required by necessary implication. Mr
Neuberger replied that if the higher figure is to be chosen then the final part
of the provision beginning with the words ‘and so that . . .’ is superfluous.
On the other hand the second example above stated demonstrates that on the
tenant’s construction those words are necessary. Mr Smith rejoined by saying
that that showed that the tenant’s construction treated the words introduced by
‘and so that . . .’ as a proviso, which is something which it is not expressed
to be. On the landlord’s construction they bear their natural meaning, acting
as an explanation, albeit a repetition, of what has gone before.
Such were the
principal arguments of Mr Neuberger and the answers which Mr Smith gave to
them. The principal argument of Mr Smith was more broadly based. He said that
the terms of the lease, which, be it remembered, is a commercial lease between
a commercial landlord and a commercial tenant, indicate that the object of the
rent review provision is the usual one of ensuring that the rent does not in
real terms fall below the market rent initially agreed upon. The parties must
be taken to have had some intelligible commercial object in mind in inserting
those provisions. He said that a steadily rising market would produce no rise
on the second review and the same could, I think, be said of the fourth. Mr
Smith added that if the tenant’s construction is correct, the level at which
rents were fixed after the first review would be a complete lottery, so that
the provisions, although not unworkable, would produce absurd results. The
tenant’s construction should be adopted only if the words point so clearly and
inexorably to it that no other reading is reasonably possible.
The arguments
below were substantially the same as those which have been advanced in this
court. The learned deputy judge, having carefully considered the opposing
arguments, stated his conclusion at pp 9E to 10B-C of the transcript as
follows:
But it seems
to me that I am forced to rely on relatively slight indicia in deciding
between producing a result which seems to me to conform to a rent review clause
in a commercial lease of this kind on the one hand and, on the other hand, a
formula which produces unascertainable and indeed almost capricious results.
I do not
think this is a case where I can simply say: ‘Well there it is, it is quite
plain what the words mean and I must give effect to them.’ This is not such a case in my judgment. I
think this is on analysis a difficult provision to construe; but it seems to me
both on grounds of probability and of construction that the landlord’s
contention is the better of the two with which I am faced, and that there is
nothing in the clause itself which compels me, if I felt minded to do so (and I
do not discount that), to accept the tenant’s formula.
I think it
very probable that, in accepting the landlord’s construction, the learned judge
has correctly assessed what the parties did indeed believe and desire to be the
effect of clause 5(1)(iii) of the lease. But a court of construction can only
hold that they intended it to have that effect if the intention appears from a
fair interpretation of the words which they have used against the factual
background known to them at or before the date of the lease, including its
genesis and objective aim. It is not in this case suggested that there is any
material background beyond the fact that the lease is a commercial lease
between commercial parties.
Inherent in Mr
Smith’s principal argument is the proposition that commercial parties to a
commercial lease invariably intend that the rent should not in real
terms fall below the market rent initially agreed upon. I cannot accept that
proposition. It is perfectly possible for them to assume that the fair rack
rental value will always increase, but none the less to intend that the rent
payable from the second review onwards shall always be less. There is nothing
in the words of the lease to exclude that possibility, unless it be that the
tenant’s construction of them leads to results so absurd that the parties
cannot be credited with an intention to achieve them. I do not think that it
does. The learned judge described the results as unascertainable and almost
capricious. By the first of these he meant that they were unpredictable. So
indeed they are. But that is not, I think, enough. I am not sure whether I
would describe them as capricious. They may be. It is a word which means
different things to different people. But for myself I would not think that
capriciousness was enough. I think that Mr Smith must show that the results are
absurd, and of that he has failed to persuade me.
Once Mr
Smith’s principal argument has been rejected, so that the words of clause
5(1)(iii) can be examined without any preconceptions as to their intent, I find
that the arguments of Mr Neuberger, as I have stated them, must prevail. His
primary argument is a formidable one which speaks for itself. The tenant’s
construction gives full meaning and effect to the words ‘as the case may be’.
Those words do not mean ‘whichever is the higher’ and the rejection of Mr
Smith’s principal argument defeats an implication to that effect. The tenant’s
construction finds employment for the words introduced by ‘and so that . . .’
and prevents them from being a mere repetition of what has gone before. The
only point which is left to sustain the landlord’s construction is the
explanatory, not restrictive, meaning of those words. I have felt the force of
that point, but not strongly enough for it to overgo the points which are
against it.
For these
reasons, although in a full understanding of how the learned deputy judge came
to be of the contrary view, I am of the opinion that the tenant’s construction
is correct. I would therefore allow this appeal.
ACKNER and
MUSTILL LJJ agreed and did not add anything.
The appeal
was allowed with costs in the Court of Appeal and below.
