Landlord and tenant — Rent review clause in subunderlease — Construction — Unusual clause providing for initial rent of 14-year reversionary term to be increased retrospectively as
The following
cases are referred to in this report.
London
& Manchester Assurance Co Ltd v G A Dunn
& Co [1982] EGD 228; (1981) 262 EG 143, [1982] 1 EGLR 117; [1983] EGD
86; (1982) 265 EG 39 & 131, CA
Touche
Ross & Co v Secretary of State for the
Environment (1982) 46 P&CR 187; 265 EG 982, [1983] 1 EGLR 123, CA
Webber
v Halifax Building Society [1985] 1 EGLR 58;
(1984) 273 EG 297
This was an
originating summons by which the landlords, the Prudential Assurance Co Ltd,
sought a declaration as to the true construction of the review clause in a
subunderlease of the first floor and part of the podium floor of Gillett House,
55 Basinghall Street, London EC2. The subunderlease was vested in the defendant
tenants, the partners of Dixon Wilson, chartered accountants.
John Hicks QC
and H Jonathan Barnes (instructed by Martyn C Gilbey, Solicitor to the
Prudential Assurance Co Ltd) appeared on behalf of the plaintiff landlords; Jonathan
Gaunt (instructed by Cameron Markby) represented the defendant tenants.
Giving
judgment, MR D RATTEE QC said: This is an originating summons seeking
determination of a short and important point of construction of a lease. The
lease concerned is a reversionary subunderlease which was granted on April 22
1968. I will immediately read the relevant provisions in the lease, starting
with the parties, but I will first point out that the parties to this
litigation are in fact successors in title to the respective parties to the
reversionary subunderlease. The reversionary subunderlease was made between a
company called Gillett House Ltd (the landlord) and Sidney Kingsley Tubbs,
Charles Edgar Mathewes Hardie and James Douglas Spooner (the tenants). Clause 1
reads as follows:
In
consideration of the rents hereby reserved and of the covenants on the part of
the Tenants hereinafter contained the Landlord HEREBY GRANTS AND DEMISES unto
the Tenants ALL THOSE premises with the rights specified in the said first schedule
(all of which are hereafter referred to as ‘the demised premises’) EXCEPTING
AND RESERVING unto the Landlord and Superior Landlord and their respective
lessees and tenants and the owners lessees tenants and occupiers of the
neighbouring adjoining and adjacent property the respective rights specified in
the Second Schedule hereto and subject so far as the same affect the demised
premises and are still subsisting and capable of being enforced to the
restrictive covenants (if any) specified in the Third Schedule hereto to hold
the same except and reserved and subject as aforesaid unto the Tenants from the
Twenty fourth day of June One Thousand nine hundred and eighty-six to the
Twenty fourth day of June Two Thousand YIELDING AND PAYING therefor unto the Landlord
(a) yearly during the said term and so in proportion for any less period than a
year the clear rent of Twenty Five Thousand Seven hundred pounds (hereinafter
referred to as ‘the initial rent’) and (b) yearly during the said term such
increased rent as may be payable in accordance with the provisions of Clause 2
hereof all such rents to be paid by equal quarterly payments in advance on the
Twenty fifth day of March the Twenty fourth day of June the Twenty ninth day of
September and the Twenty fifth day of December in every year the first of such
payments (in respect of the period commencing on the Twenty fourth day of June
One thousand nine hundred and eighty-six and ending on the Twenty eighth day of
September One thousand nine hundred and eighty-six) to be made on the Twenty
fourth day of June One thousand nine hundred and eighty-six.
Clause 2:
The initial
rent payable by the Tenants on the grant of this Lease shall be subject to
increase in manner following namely:–
(a) The
Landlord shall be entitled by notice in writing given to the tenants at any
time within one year after the commencement of the term hereby granted to call
for a review of the yearly rent payable under this subunderlease and if upon
such review it shall be found that the commercial yearly rent (as hereinafter
defined) of the demised premises is greater than the initial rent then with
effect from the commencement of the term hereby granted the initial rent shall
be increased to the commercial yearly rent and any such increase shall become
payable and be recoverable as from the commencement of the term provided that
in no circumstances shall the rent payable hereunder following such review be
less than the initial rent:
(b) For the purpose of this clause the expression
‘commercial yearly rent’ shall mean the yearly rent at which the demised
premises might reasonably be expected at the date of review to be let in the
open market by a willing landlord for a term of fourteen years under a lease on
the same terms and conditions in all other respects as this present lease there
being disregarded:
(i) any effect on rent of the fact that the
Tenants have been in occupation of the demised premises
(ii) any goodwill attached to the demised premises
or any part thereof by reason of the carrying thereon of any business by the
Tenants
(iii) any effect on rent of any improvement of the
demised premises or any part thereof carried out by the tenants otherwise than
in pursuance of any obligation by this lease or any previous lease of the
demised premises.
(c) Such revision as aforesaid shall in the first
instance be made by the Landlord and the Tenants or their respective surveyors
in collaboration but if no agreement as to the amount of the increase (if any)
to be made in the yearly rent shall have been reached between the parties
hereto or their surveyors within three months after the date of the Landlords
notice calling for such revision the question as to the commercial yearly rent
of the demised premises at the appropriate date and as to whether there shall
be any increase in the yearly rent payable and if so what the amount of the
increased yearly rent shall be if the Landlord shall so require by notice in
writing given to the Tenants within three months thereafter but not otherwise
be referred to the decision of a sole arbitrator to be appointed in default of
agreement between the parties by the President for the time being of the Royal
Institution of Chartered Surveyors in accordance with the Arbitration Act 1950.
(d) If upon such review as aforesaid it shall be
agreed or determined that the initial rent payable hereunder shall be increased
the Landlord and the Tenants shall forthwith thereafter at the expense of the
Tenants enter into a Deed supplemental hereto specifying and confirming the
increased rent thenceforth payable and containing a covenant on the part of the
Tenant punctually to pay the yearly rent as so varied.
The only other
provision of the lease which I need read is clause 6(b), which is one of three
provisos contained in clause 6 and is in these terms:
If the terms
of years created by the subunderlease of the demised premises of even date
herewith and made between Coal Industry (Nominees) Limited of the one part and
the Tenants of the other part shall be determined under the provisos for
re-entry therein contained then this Reversionary Sub-Underlease shall become
absolutely void.
I read that
because it was referred to at the hearing as some indication (and it is indeed
plain from it) that there were previous leases by virtue of which the tenants
were in occupation of the demised premises before the commencement of the term
granted by this particular lease.
The demised
premises are defined in the first schedule as in summary as the first floor and
part podium floor of Gillett House, 55 Basinghall Street, EC2 in the City of
London.
It is apparent
from that citation of clause 2 that it contains a provision to protect the
landlord (now the plaintiff) against the risk of the rent for a term of 14 years
from June 24 1986 fixed at the date of the lease in 1968 proving to be below a
current market rent at or about the time the underlease should take effect in
possession. The revised rent when fixed, if it be fixed, in accordance with
clause 2, is payable for the whole of the 14-year term and is not subject to
subsequent review.
No notice has
as yet been served by the plaintiff under clause 2(a) of the lease. A dispute
has arisen between the landlord and the present tenants as to the effect of
clause 2(b) of the lease if and when the plaintiff does serve notice under
clause 2(a). Although the provisions of clause 2(a) do not fit happily with the
provisions of the reddendum
clause 2(a), assuming that the plaintiff serves notices as it intends to do, is
to substitute for the initial rent referred to in clause 1 such new increased
rent as may be determined in accordance with clause 2. Such increased rent will
be payable retrospectively as from the commencement of the term on June 24 1986
notwithstanding that it may not be determined until nearly 18 months
thereafter. The issue is as to the proper construction of the words ‘at the
date of review’ in clause 2(b). Whatever their proper construction, these words
define the date as at which the new rent, being the commercial yearly rent as
defined in clause 2(b), falls to be determined either by agreement or
arbitration.
The rival
contentions can be shortly stated.
Mr Hicks, on
behalf of the plaintiff, submits as his primary contention that ‘the date of
review’ means the date on which the new rent is actually determined either by
agreement or by arbitration in accordance with the machinery laid down by
clause 2(c). As a secondary alternative contention Mr Hicks says ‘the date of
review’ means the date of the landlord’s notice starting the review machinery
pursuant to clause 2(a).
Mr Gaunt on
behalf of the defendant tenants submits that ‘the date of review’ means June 24
1986, being the date of commencement of the term as from which, as I have said,
the new rent becomes payable when determined.
The difference
in money terms between these possible constructions may well be of significant
importance in days of increasing market rentals.
In essence Mr
Hicks supports his primary contention by the following reasoning. First, the
words ‘the date of review’ must be given their ordinary meaning unless the
context shows they are intended to have a different meaning. Second, the
ordinary meaning of the words ‘the date of review’ is the date when the review
takes place, and this is the date when the new rent is actually determined.
Third, the context, far from pointing to a non-ordinary meaning, supports the
ordinary meaning for which Mr Hicks contends.
In support of
that latter submission Mr Hicks made the following points in particular:
(a) in clause 2(a), the provision that the
landlord may by notice given after the commencement of the term ‘call for a
review of the yearly rent’ makes clear that the review contemplated is after
the date of the commencement of the term. Prima facie, then, the date of review
is a date after the commencement of the term.
(b) the words in clause 2(a) ‘if upon such review
it shall be found that the commercial yearly rent (as hereinafter defined) of
the demised premises is greater than the initial rent . . .’ show that the
review referred to is the actual determination of the commercial yearly rent as
defined in clause 2(b) because not until that is complete can it be found how the
commercial yearly rent compares with the initial rent.
(c) the words of clause 2(d) ‘If upon such review
as aforesaid it shall be agreed or determined that the initial rent payable
hereunder . . .’ similarly show that what is referred to as ‘the review’ or
‘such review’ is the actual determination of the commercial yearly rent.
(d) Then when one comes to clause 2(b) the words
‘at the date of review’ must be referring to the date of the same review as is
referred to in the provisions of clause 2(a) and clause 2(d) and therefore mean
the date of the determination of the commercial yearly rent.
(e) Thus the hypothetical letting to be assumed
for the definition of the commercial yearly rent in clause 2(b) is a letting on
the very date on which the determination of the rent so defined is made,
whether by agreement or by arbitration.
(f) As additional contextual arguments against
the defendants’ contention that ‘the date of review’ at which such hypothetical
letting is to be assumed is the commencement of the term, that is June 24 1986,
Mr Hicks says: First, that in clause 2(b) the reference to the ‘yearly rent at
which the demised premises might reasonably be expected at the date of review
to be let . . .’ show by the use of the conditional and not the conditional
perfect tense that the date of the hypothetical letting is not before the date
on which the commercial yearly rent is actually determined. Second, that even
for the draftsman of this lease it is inconceivable that he would have resorted
to describing June 24 1986 or the commencement of the term as ‘the date of
review’ when he had used the words ‘the commencement of the term’ to refer to
June 24 1986 three times in the immediately preceding subclause 2(a).
When faced
with the objection to his construction that:
(a) it produces what may be dubious commercial
justice, since it requires the tenants to pay as from the commencement of the
term a rental fixed by reference to market rents current at some date up to 18
months (and possibly even more if time is not of the essence of the provision
of clause 2) into the term actually enjoyed, and
(b) it may produce considerable practical
inconvenience in that the determination of the commercial rent may be by
arbitration not finally determined until some time after the evidence of
current rental values is made available and yet must, on Mr Hicks’ contention,
be made by reference to market rents as on the very day of determination,
Mr Hicks
points to the two cases of London & Manchester Assurance Co Ltd
v G A Dunn & Co (1981) 262 EG 143, [1982] 1 EGLR 117 and (1982) 265
EG 39, 131 and Touche Ross & Co v Secretary of State for the
Environment (1982) 265 EG 982 as examples of the rent review clauses as to
which the same objections could be made but which did have the effect that a
new rent determined by reference to market rentals at one date was applied
retrospectively from an earlier date.
I accept these
cases as such examples, but although there does appear to have been some
argument on the date as at which the valuation had to be made in the London
& Manchester case at first instance, there appears to have been no such
argument in the Court of Appeal in either case, both parties accepting that on
the construction of the leases in those cases the new rent had to be determined
according to market rents current at the date of the determination.
Mr Gaunt, for
the defendants, on the other hand, accepts that I should give the words ‘at the
date of review’ their natural and ordinary meaning, but submits that such
meaning is the date from which the new rent fixed as a result of the review is
to take effect (or the effective date of review), which in this case is the
commencement of the term on June 24 1986.
Mr Gaunt says
the natural ordinary meaning in a lease of the words ‘review date’ is the date
as from which the new rent is payable, and he supports this by reference to two
standard forms of rent review provisions to which he referred — one produced by
the Royal Institution of Chartered Surveyors and one by the Incorporated
Society of Valuers and Auctioneers. Both use the term ‘review date’ but
expressly define it as a specified date which is also the date as from which
the new rent is to be payable.
Mr Gaunt goes
on to submit that ‘the date of review’ means the same as ‘review date’. When
faced with the question why the draftsman of the lease with which I am
concerned used in two consecutive subclauses two such differing phrases as ‘the
commencement of the term hereby granted’ and ‘the date of review’ to refer to
one and the same date — June 24 1986 — Mr Gaunt submitted that in the present
lease the draftsman has shown scant regard to consistency of usage in other
respects and therefore one should not necessarily expect consistency in the
present respect. In support of this Mr Gaunt points to the inconsistency
between the reddendum in clause 1, which provides for two rents to be payable
after review — the initial rent and ‘such increased rent as may be payable in
accordance with . . . clause 2 hereof’ — on the one hand and clause 2(a), which
provides for the substitution of one rent for the other after review, on the
other. He points also to the fact that in clause 2(c) the draftsman uses the
word ‘revision’ to refer to the same thing as he has in clause 2(c) called
‘review’ and uses the phrase ‘at the appropriate date’ when he must mean the
same thing as he means by the words I have to construe, namely ‘at the date of
review’.
By way of
contextual support for his construction Mr Gaunt refers to the fact that the
term of the hypothetical letting required by clause 2(b) is the full term of 14
years, and not so much of that term as is unexpired at the date of review,
which one would expect, says Mr Gaunt, if the date of review were after the
commencement of the actual term of this lease. He points to the fact that in Webber
v Halifax Building Society (1984) 273 EG 297 His Honour Judge Paul
Baker, sitting as a deputy judge of the High Court, regarded a similar
provision in the lease before him as strongly indicative of an intention that
the date of the hypothetical letting was to be no later than the commencement
of the actual term as from which the revised rent when revised was to be paid.
Mr Gaunt then
submitted that his construction is also more productive of commercial good sense
than that of the plaintiff, and in particular he argued that the latter
construction would produce commercial unfairness in that:
(a) the tenants would be saddled with a rent
payable as from the commencement of the term at a rate above the market rent at
such
(b) that the landlord could exacerbate this
unfairness by delaying his notice calling for review until the last possible
date for such a notice; (c) that the landlord could have reaped the benefit in
rental terms for improvements made by it after the actual commencement of the
term; and
(d) that the result to the tenant would be wholly
unforeseeable when the lease was entered into in 1968.
Mr Gaunt
argued that a construction producing such results should not be accepted unless
forced upon the court by clear words.
The words used
are at least ambiguous, says Mr Gaunt, and therefore I should prefer a
construction producing the commercially more sensible result.
Finally, as a
last resort, Mr Gaunt submits that if the ambiguity cannot be resolved, I
should apply the contra proferentem rule, so as to adopt the
construction urged upon me by the tenants.
I have no
hesitation in preferring the construction put forward on the plaintiff’s
primary contention. I accept the substance of such of Mr Hicks’ submissions as
I have summarised. I accept that in other contexts ‘the date of review’ might
mean the date from which the reviewed rent takes effect. I do not accept Mr
Gaunt’s submission that such is the natural meaning of the words in their present
context. I derive no help in construing the words ‘the date of review’ from
precedents giving a specific definition to the words ‘review date’.
In my
judgment, in the context of clause 2 of the lease in the present case as a
whole, the natural and ordinary meaning of the words ‘the date of review’ is
that they refer to the date of the review which has been referred to in clause
2(a) and is referred to in clause 2(d), namely, the date of the determination
of the commercial yearly rent. I have not overlooked the factor relied upon by
Mr Gaunt as a strong contextual pointer in the direction of the construction
for which he urged, namely that the hypothetical term to be valued under clause
2(b) is a term of 14 years commencing not with the date of determination of the
commercial yearly rent but with the commencement of the actual term granted by
clause 1 of the actual lease. Had I otherwise been left by the context in a
state of uncertainty about the true construction of the words in issue I might
have been persuaded by this factor. In my judgment, it carries no significant
weight when set against the other factors pointing plainly in the opposite
direction. I do not derive any real assistance from the fact that in Webber
v Halifax Building Society Judge Baker attached weight to a similar
factor in the case he was considering. In that case the learned judge found
that other contextual conclusions pointed in the same direction. In particular
he construed another provision in the lease as expressly providing for the date
as at which the valuation had to be made to be same as the date from which the
new rent when fixed was to be payable.
It is all too
plain that the draftsman of this lease is guilty of other inconsistencies in
the use of language, but in the context of the other provisions of clause 2 I
cannot ascribe to him such capriciousness as to use the words ‘the date of
review’ to refer to what he has in the same clause referred to several times as
‘the commencement of the term hereby granted’.
I accept that
the construction I have adopted produces results capable of giving rise to
practical, though, as Mr Gaunt accepts, not insoluble, difficulties in the
review process, and commercial consequences surprisingly favourable to the
landlord, but in my judgment the meaning of the words used is too clear to be
affected by such considerations. Therefore I shall make a declaration in the
sense of para (a) of the originating summons, but I would just like to consider
the actual words in that paragraph:
The date on
which under clause 2(c) of the lease the revised rent is in fact agreed between
the parties surveyors or as the case may be determined by an arbitrator.
After
discussion with counsel the judge granted a declaration that revised rent was
to be determined by agreement between the parties or, as the case might be, by
arbitration; plaintiffs to have the costs of the summons.
