Landlord and tenant — Construction of rent review clause — Unusual provisions raising an old problem in a new form — Machinery of review formula was complicated, but the issue was whether time was of the essence in so far as it concerned a requirement that a component part of the review formula should be agreed by a named date — The component part was a figure, essential to the calculation of the reviewed rent, of the total income receivable from the demised premises — It was in the interests of the landlords to contend that time was of the essence for this purpose and that the time-limit had passed without the required agreement having been reached — Judge’s statement of four principles derived from the case law following the decision in United Scientific Holdings Ltd v Burnley Borough Council — Various arguments by landlords in present case in favour of displacing the presumption that time was not of the essence rejected by judge — Main argument was based on the express provision as to what was to happen in case of default, namely, that the figure to be taken for total income was £225,000 — Held that the strength of such a provision as a contra-indication depended on its nature and purpose, there being considerable differences between default clauses in this respect — In the present case it was understandable and necessary that some time-limit should be fixed by which the tenants were to satisfy the landlords as to the true amount of income from the demised premises and that some provision on default should be included — But in all the circumstances this did not imply that time was of the essence — The default provision was entirely consistent with the assumption that time was not of the essence — It was still open to the parties in the present case to agree as to the total income receivable for the premises — Declaration to be framed accordingly — Dictum as to possibility of making time of the essence by serving a notice
The following
case is referred to in this report.
United
Scientific Holdings Ltd v Burnley Borough
Council [1978] AC 904; [1977] 2 WLR 806; [1977] 2 All ER 62; (1977) 33
P&CR 220; [1977] EGD 195; (1977) 243 EG 43 & 127, HL, [1977] 2 EGLR 61
This was an
originating summons by which the plaintiff tenants, Power Securities (Manchester)
Ltd, sought a declaration in regard to provisions in a rent review clause of
the lease of a shopping centre at the Royal Exchange, Manchester, of which the
defendants, Prudential Assurance Co Ltd, were the landlords.
Michael Barnes
QC and Jonathan Brock (instructed by Ellison & Co) appeared on behalf of
the plaintiffs; Derek Wood QC and Edward Cole (instructed by J T Flanagan, of
the legal department of the Prudential Assurance Co) represented the
defendants.
Giving
judgment, MILLETT J said: This case raises a familiar question on the
construction of an unusual form of rent review clause in a lease. The lease in
question is dated August 3 1981 and demises a high-class shopping centre at The
Royal Exchange, Manchester, for a term of 99 years from December 25 1979.
Until December
25 1986 the rent payable under the lease is fixed at £150,000 per annum.
Thereafter the term is divided into 18 successive rental periods of five years
each. During each rental period the rent is to be the greater of the highest rent
previously payable under the lease and such rent as shall be equal to an amount
obtained by multiplying 95% of the fair yearly rent for the demised premises at
the beginning of the relevant rental period by a fraction of which the
numerator is £150,000 and the denominator is the amount of the total income
receivable for the demised premises. The total income receivable for the
demised premises is defined (omitting detailed qualifications not material for
present purposes) as the aggregate of (i) the yearly rents which the lessee was
entitled to receive as at December 25 1981 under the provisions of all
underlettings and agreements for underletting made with the consent of the
landlord, and (ii) the fair yearly rent as at that date for all such parts of the
demised premises as were not then the subject of such underlettings or
agreements for underletting. Forsaking strict accuracy in the interests of
brevity, I shall refer to these as ‘voids’.
There are thus
two components in the formula which require to be ascertained: the fair yearly
rent (both of the demised premises as a whole and of the voids) and the total
income receivable. The lease contains elaborate provisions for the
ascertainment of both. Before I turn to these, however, three features call for
comment.
First, of the
two components in the formula, one (the fair yearly rent for the demised
premises as a whole) is a variable which requires to be ascertained afresh for
each successive rental period of the term, whereas the other (the total income
receivable for the demised premises) is a constant which is to be ascertained
once and for all as at December 25 1981 and is applicable for the determination
of the rent payable under the lease throughout the whole of the residue of the
term after December 25 1986.
Second, the
constant component, the total income receivable for the demised premises as at
December 25 1981, itself has two components: one (the rents receivable from
underlettings) being an actual figure and the other (the fair yearly rent for
the voids) being a notional one.
Third, and
unusually, since the total income receivable constitutes the denominator of the
fraction in the formula, the higher the amount the less is the rent payable
under the lease. The lease provides for a maximum and a minimum figure of
£275,000 and £225,000 respectively for the denominator, so that the proportion
represented by the fraction can vary within a limited range from 54% at
£275,000 to 66 2/3% at £225,000. £225,000 was evidently the figure which the
parties contemplated could be achieved on the first underletting; if the lessee
succeeded in obtaining more, it was evidently to have the added incentive of a
reduction throughout the residue of the term in the proportion of the revised
fair yearly rent which was payable to the landlord.
The machinery
for the ascertainment of the components in the formula may be summarised as
follows: First, the fair yearly rent of the demised premises as a whole.
This may be agreed between the parties at any time. If not agreed, it may be
determined, at the option of the landlord, either by an arbitrator or by an
expert valuer to be appointed by the president for the time being of the Royal
Institution of Chartered Surveyors on the application of the landlord made not
more than two quarters before, or at any time after, the commencement of the
relevant rental period. If by the first day appointed for the payment of rent
for any rental period the landlord has not made an application for the
appointment of an arbitrator or expert, then the lessee may at any time
thereafter serve on the landlord a notice in writing containing a proposal as
to the amount of the fair yearly rent for that rental period. Then, unless the
landlord duly makes an application for the appointment of an expert or
arbitrator within three months after service of such notice, the amount so
proposed is to constitute the fair yearly rent.
Second, the
fair yearly rent for the voids as at December 25 1981 (a component of the total
income receivable). This, too, may be agreed at any
time between the parties. In the absence of agreement, it is expressly provided
that it is to be determined by the same means and upon the same terms (mutatis
mutandis) as are provided for the determination of the fair yearly rent for
the whole of the demised premises. It is common ground that that incorporates
the provision by which the lessee may serve a notice upon the landlord setting
out the lessee’s proposals and the landlord, if it has not already applied for
the amount to be determined, may thereafter within three months make the
application for determination, failing which the amount in the lessee’s notice
is to be taken as binding.
Third, the
actual rents receivable from the underlettings (the other component of the
total income receivable). This is not, in fact,
provided for separately, or at all. Instead, provision is made for the
ascertainment of the total income receivable: that is to say, the figure of
which one component has already been dealt with. Since it is in relation to
this that the question of construction arises, I shall read it in full:
Provided that
the total income receivable for the demised premises shall be agreed between
the landlord and the lessee within six months after the expiration of the
second year of the said term, and if not so agreed shall be the sum of
£225,000. And when the amount of the total income receivable for the demised
premises has been ascertained, memoranda thereof shall thereupon be signed upon
behalf of the landlord and the lessee and annexed to this lease and counterpart
thereof and shall bind the landlord and the lessee including their respective
successors in title and also the guarantors. The lessee shall provide the
landlord with such information and assistance, including an accountant’s certificate,
as the landlord shall reasonably require to enable it to verify the total
income receivable for the demised premises and without prejudice to the
generality of the foregoing permit any person authorised on their behalf by the
landlord to inspect and take copies of the counterparts of any under-leases
agreements for under-leases and duplicate licences affecting the whole or any
part of the demised premises and of the relevant books and accounts of the
lessee and the lessee will afford such explanations thereof as that person or
the landlord may require.
No attempt to
agree the total income receivable was made before June 25 1982 and no agreement
has even now been concluded. In fact, of course, if the strict requirements of
the lease are for the moment laid aside, there is no need for the total income
receivable for the demised premises to be ascertained before December 25 1986
at the earliest, this being the first review date. Until then, the rent is
fixed at £150,000 per annum. The landlords, however, contend that, no agreement
as to the amount of the total income receivable having been concluded by June
25 1982, it must now be taken to be £225,000.
The lessee
accepts that this is indeed the inevitable result of a literal construction of
the lease. It is, however, submitted that this is not the correct result in
law, since time is not of the essence of the requirement that the total income
receivable should be agreed by June 25 1982, nor has time since been made of
the essence of that date by notice served by either party. Accordingly, it is
submitted, it is still open to the parties to agree, if they can, the true
figure and displace the figure of £225,000 which is to apply in default of
agreement.
This alone,
however, is not enough for the lessee. On its behalf it was contended that,
there being no obligation on the part of the landlord to agree any figure,
either within the period stipulated or later, and the default figure being the
most favourable result which the landlord could possibly achieve, some term
must be implied in order to give business efficacy to the contract. Otherwise,
whatever the lessee does, and whatever the true position, the landlord, simply
by refusing to agree a higher figure, could always procure a figure of £225,000
for the total income receivable. This would make the elaborate provisions for
the ascertainment of the fair yearly rent of any voids (a component in the
total income receivable) and for the provision by the lessee of information and
assistance to enable the landlord to verify the total income receivable mere
surplusage.
The lessee
originally submitted (though in his reply Mr Barnes, for the lessee, resiled
from this submission) that the words ‘or otherwise determined’ should be
implied after the words ‘and if not so agreed’ in the proviso, so that it read:
Provided that
the total income receivable for the demised premises shall be agreed between
the landlord and the lessee within six months after the expiration of the
second year of the said term and if not so agreed or otherwise determined shall
be the sum of £225,000 . . .
This, it was
hoped, would avoid altogether the question whether time was of the essence of
the requirement that agreement be reached within the six months’ period, since
that would not apply to the alternative.
I do not agree
that the question can be avoided by this means. The addition, expressly or by
implication, of a second negative contingency in the concluding part of the
sentence requires the implication of a corresponding requirement in the
earlier, so that in full it would read:
Provided that
the total income receivable for the demised premises shall be agreed between
the landlord and the lessee, or be otherwise determined, within six months
after the expiration of the second year of the said term and if not so agreed
or otherwise determined . . .
However, I
would in any case reject the implication of the proposed words. In the context
of this lease, in which elaborate machinery is provided for the resolution of
potential disputes in the ascertainment of each component in the calculation, I
would hesitate long before implying a provision requiring a dispute to be
resolved otherwise than by agreement and yet omitting any machinery for its
determination. Moreover, the suggested term is, in my judgment, repugnant to
the concluding paragraph of the Schedule, which shows that the process by which
the total income receivable is to be determined, and the only process which is
envisaged, is that the lessee is to put forward a figure and support it by such
information and assistance as the landlord may reasonably require in order to
enable it to verify the figure. This is the process which is described as
‘agreement’ and it is this process which must be completed within the six
months’ period.
But there is a
more fundamental reason — which in the end I think Mr Barnes in his reply
accepted — for rejecting the words proposed to be implied: they are not necessary
to give business efficacy to the contract. In my judgment, on the true
construction of this contract, the landlord cannot arbitrarily or unreasonably
withhold its agreement to the proper figure if it is established to the
landlord’s reasonable satisfaction. The process described as ‘agreement’ is not
one of negotiation or bargaining but simply of the acceptance by both parties
of facts capable of being objectively established. In so far as the total
income receivable depends on the fair yearly rent for the voids, it can be
established by obtaining a determination by an arbitrator or expert in
accordance with the procedure prescribed. In so far as it depends on the actual
rent received from underlettings, it can be established by documentary and accountancy
evidence. It is for the lessee to establish that the total exceeds £225,000 and
to provide information and assistance to enable the landlord to verify the
figure. But, in my judgment, the landlord is bound to agree the figure if
established to its reasonable satisfaction within the stipulated period of six
months, and the landlord, to be fair, never contended to the contrary. I should
add that, since one of the elements in the ascertainment of the total income
receivable is the fair yearly rent for any voids, and express provision is made
for this to be determined in case of dispute by an arbitrator or expert, it
necessarily follows, in my judgment, (i) that the landlord cannot be said to be
acting unreasonably if it insists on invoking the procedure prescribed for the
ascertainment of this element of the total income receivable by arbitration or
by expert report, and (ii) that the landlord is bound by any such
determination.
This brings me
to the real question in the case: whether time is of the essence of the
requirement that the total income receivable be agreed, within the meaning of
the clause, within the period of six months. The cases on this topic are not
easy to reconcile, but, in my judgment, the following principles emerge:
(1) The correct approach to a rent review clause
is to begin with a presumption that time is not of the essence of the
time-limits laid down for the various steps to be taken for the determination
of a revised rent or, it may be added, of any component element in its calculation.
(2) This presumption will be displaced if, on a
consideration of the lease as a whole, and in particular of the provisions of
the rent review clause as a whole, it appears that the parties have evinced a
contrary intention.
(3) Where the parties have not only required a
step to be taken within a specified time but have expressly provided for the
consequences in case of default, this provides an indication, of greater or
less strength, that time is to be of the essence, but it is not necessarily decisive.
Whether it is so or not must depend on all the circumstances of the case,
including the context and wording of the provision, the
relevant consideration.
(4) In the end, the matter is one of impression
to be derived from a consideration of the rent review clause as a whole,
together with any other relevant considerations, avoiding fine distinctions,
but giving effect to every provision in the lease.
The landlord’s
first submission was that this was not a case in which the presumption against
time being of the essence applied at all, since the step in question was not a
step in a process towards the determination of a figure (in the present case
not the rent but the total income receivable) but the determination itself. The
date prescribed is the date by which the relevant amount is to be determined in
whatever manner. In my judgment, this cannot exclude the presumption. In United
Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 the
presumption was applied to just such a case, where the only time-limit was that
the rent for each successive rental period was to be determined by agreement
or, failing agreement, by arbitration during the year immediately preceding the
period to which the rent would relate.
The landlord
next submitted that the present case is simply one of contingency. If the total
income receivable is agreed at a higher figure than £225,000 within six months,
then that higher figure is to be taken; if not, the figure to be taken is
£225,000. There is, it was said, no room for the court to rewrite the contract
which the parties have made. It is, it was argued, as if they had expressly
agreed that the figure should be £X if all the shops were to be let by the end
of the period and £Y if they were not. I do not accept the submission or the
appropriateness of the analogy. The distinction, in my judgment, is not between
the final step in the determination of the figure and earlier steps in the
process leading to its determination but between the completion of the process
or of a step in that process, on the one hand, and the happening of an external
event on the other, which, though determinative of the figure, is not itself a
step in its determination.
On the
footing, therefore, that the normal presumption applies, is it displaced in the
present case? To displace it the
landlord relied on the following features:
(i) The rent review clause in the present case is
not of the normal kind found in any of the precedent books or in any of the
cases but clearly represents a special bargain negotiated at length between the
parties.
(ii) The relevant time is not for the completion
of a stage in the determination of the figure but for its final determination.
(iii) The time provision is in stark contrast to
other steps in the timetable which may by express provision be taken at any
time, and
(iv) There is an express provision for what is to
happen in case of default, ie that the figure to be taken for total income
receivable is £225,000.
In my
judgment, there is nothing at all in the first or second of these features. If
anything, the first might be said to tend in the opposite direction. Since 1978
the parties or their legal advisers must be taken to know that, unless they
evince an intention to the contrary, the presumption is that time is not of the
essence of any limit specified in the rent review clause. Failure to negate
that presumption by express words in a specially negotiated clause might well
be thought by some to indicate an intention to accept the presumption; but
whether this be so or not, it certainly cannot be taken to evince an intention
to displace it.
The second, as
I have already pointed out, was a feature of United Scientific Holdings Ltd
v Burnley Borough Council and was not considered by any of their
lordships in that case to constitute a contrary intention which might be held
to displace the presumption. I can see no possible reason why it should.
The third, in
my judgment, is explained by considering the purpose of the time provision in
question. It would be ridiculous to have no time-limit within which the lessee
must satisfy the landlord of the true amount of the total income receivable. It
is essential to have some date after which the landlord can say to the lessee
‘You have had enough time to satisfy me that the figure is in excess of
£225,000 and you have failed to do so — the figure must now be taken to be
£225,000’. But it does not follow that time is necessarily of the essence of
the date specified. If the period is exceeded and time is not of the essence,
the landlord can at any time make time of the essence by the simple expedient
of serving a notice giving the lessee some further but limited time to provide
the landlord with the evidence required.
Mr Wood, on
behalf of the landlord, submitted — in relation, it is true, to the three
months’ period in the machinery for the determination of the fair yearly rent,
but the submission is equally applicable to the point that I am now considering
— that where a party has an express right to do something at any time, the
other can always make time of the essence by serving a notice stipulating a
final date beyond which there should be no further opportunity given and making
time of the essence of that date. I disagree. Neither party is entitled to
abridge the time given by the contract to the other. The most that he can do is
to make time of the essence for the taking of a step for which a time-limit has
been prescribed in the contract and has been exceeded.
It was the
fourth feature which gave rise to most of the argument. In my view, the
strength of the contra-indication which is provided by an express provision for
what is to happen in case of default depends upon a number of considerations,
but primarily upon the nature and purpose of the default provision itself.
There is, in my judgment, a considerable difference between a default clause
which merely expresses what would be implied anyway and a default provision
which provides for an entirely new figure for the rent, or for some component
element in the rent, which would not otherwise be implied. The former can have
little, if any, weight. The latter must have considerably greater force and may
in some circumstances be decisive. Finally, there may be a default clause which
provides that if a notice is not served within the time stipulated it shall be
of no effect or shall be void. It is difficult to see how more clearly parties
could express an intention to make time of the essence of the serving of a
notice in such a case.
The present
clause does not come within any of these categories, although, perhaps, the
nearest that it comes to is the second. But I have already explained its
purpose. It is simply not a case in which it would be sensible or appropriate
to give the lessee an indeterminate length of time in which to satisfy the
landlord of the true figure. It was essential to specify some time-limit within
which that should be done, and it was also essential to provide for what was to
happen in default. It does not follow in the slightest that time was intended
to be of the essence of the date specified.
In my
judgment, neither singly nor cumulatively do any of the considerations to which
I have referred constitute enough to displace the presumption; but in any event
there are three considerations which point in the opposite direction. First,
there was no great urgency about the determination of the total income
receivable within the six months stipulated. There was no need for the total
income receivable to be determined before the first rent review date, and if
the landlord was prepared to give the lessee further time in which to satisfy
it of the amount of the true income receivable right up until the first review
date then that was a matter for it. If for any reason commercial considerations
rendered it convenient or desirable that the landlord should know the value of
its investment and, for that purpose, should know the proportion of the fair
yearly rent of the premises to which it would be entitled throughout the rest
of the term, then there was nothing simpler than to call upon the lessee to
satisfy it as to the true income receivable within some stated time. The true
effect, as it seems to me, of the six months’ provision was to prevent the
landlord from abridging that time, but I see no reason why it should be thought
that the landlord was entitled to require strict compliance without serving a
notice to make time of the essence.
Second, it
must be remembered that the total income receivable consists of two components,
of which one is, or may be, the fair yearly rent for the voids, and that a
means for determining this element in the total has been prescribed. As I have
already pointed out, the landlord could not be said to be acting unreasonably
if it insisted upon that element in the total income receivable being
determined by the prescribed means. Since the existence of any void could not
be known for certain before December 25 1981 the application for the
appointment of an expert or arbitrator could not reasonably be made before that
date. If the landlord should fail to make that application the lessee’s remedy
was at any time thereafter to serve a notice stating what in its view was the
true figure, and the landlord then had a further opportunity to apply for the
appointment of the expert or arbitrator. Only if it failed to do so within
three months would the tenant’s figure become binding. It is clear that, first,
there could be no application for the appointment of the arbitrator or expert
before December 25 1981 and, second, that even if the lessee served a notice on
the next day there could be no certainty that there would be any application
for the appointment of the expert
contemplated at least the possibility — and I would have thought the strong
probability — that if the procedure were invoked, then there would be no
determination of the fair yearly rental for the voids within the six months’
period stipulated for the ascertainment of the total income receivable. This is
a strong indication that time was not intended to be made of the essence of
that six months’ period. Moreover, however swiftly or efficiently the lessee
might act, and however quickly the expert or arbitrator might be appointed, his
determination would be outside the control of the parties. That is a further
indication supporting the presumption that time was not intended to be of the
essence of the time-limit laid down.
Finally, I
take the view that the very nature and purpose of the time provision is in the
end the strongest reason for the view that time was not intended to be of the
essence. I have already explained what I take to be its nature and purpose,
that is to say to provide a time-limit which the lessee was to have to satisfy
the landlord of the true figure; and that it was essential for some time-limit
to be specified but that it did not involve any necessity for making time of
the essence. In my judgment, when it can be seen that some time-limit must be
specified, and that some default provision must also be included, and that this
is entirely consistent with time not being of the essence, it is impossible to
rely on the default clause to exclude the presumption.
I have reached
the conclusion that the six months’ period is not one which has to be strictly
complied with, and that it is still open to the parties to agree, if they can,
by the processes I have described, what is the total income receivable in the
present case.
Declaration
to be drawn up accordingly. The plaintiffs were awarded costs.
