Landlord and tenant — Rent review — Whether hypothetical lease contains provisions for rent review — Term of hypothetical lease
underlease dated June 24 1971 the defendant holds a term of 18 James Street,
Harrogate, from the plaintiff until 2067 — The underlease, in providing for
seven-year rent reviews from September 29 1982, did not define the term to be
assumed at each review — The plaintiff contended that the hypothetical term at
review must be the unexpired term of the actual lease and on the assumption
that the hypothetical lease contains no provisions for rent review — The
defendant contended that the hypothetical lease was for a seven-year term,
alternatively, if for any longer period, on terms which provide for seven-year
rent reviews
do not include the rent review provisions of the actual lease — But the term to
be assumed for the hypothetical lease is the term the landlord might reasonably
be expected to grant and the tenant might reasonably be expected to take in
respect of the premises at a fixed rack-rent — The term to be assumed may vary
at each review during the residue of the lease as circumstances may change — In
the absence of agreement, the term must be determined by the arbitrator and, in
so far as it falls within a range, the term to be taken is that which yields
the best rent
The following
cases are referred to in this report.
Basingstoke
and Deane Borough Council v Host Group Ltd
[1988] 1 WLR 348; [1988] 1 All ER 824; (1987) 56 P&CR 31; [1987] 2 EGLR
147: 284 EG 1587, CA
British
Gas Corporation v Universities Superannuation
Scheme Ltd [1986] 1 WLR 398; [1986] 1 All ER 978; (1986) 52 P&CR 111;
[1986] 1 EGLR 120; 277 EG 980
Equity
& Law Life Assurance Society plc v Bodfield
Ltd [1987] 1 EGLR 124; (1987) 281 EG 1448, CA
Lynnthorpe
Enterprises Ltd v Sidney Smith (Chelsea) Ltd
[1990] 2 EGLR 131; [1990] 40 EG 130
MFI
Properties Ltd v BICC Group Pension Trust Ltd
[1986] 1 All ER 974; [1986] 1 EGLR 115; (1986) 277 EG 862
National
Westminster Bank plc v Arthur Young McClelland
Moores & Co [1985] 1 EGLR 61; (1984) 273 EG 402
Philpots
(Woking) Ltd v Surrey Conveyancers Ltd
[1986] 1 EGLR 97; (1985) 277 EG 61
Pugh v Smiths Industries Ltd (1982) 264 EG 823, [1982] 2 EGLR 120
This was an
originating summons issued by the plaintiff, Prudential Assurance Co Ltd,
seeking declarations as to the proper construction of an underlease, held by
the defendant, Salisburys Handbags Ltd, of a property at 18 James Street,
Harrogate.
David Halpern
(instructed by Berwin Leighton) appeared for the plaintiff; and Jonathan Brock
(instructed by Theodore Goddard) represented the defendant.
Giving
judgment, CHADWICK J said: The plaintiff in these proceedings, the
Prudential Assurance Co Ltd, is the person entitled by assignment to the
reversion expectant on the determination of an underlease granted on June 21
1971 of property known as 18 James Street, Harrogate. The defendant, Salisburys
Handbags Ltd, is the lessee under that underlease. The underlease was granted
for a term of almost 97 years, commencing on December 25 1970 and continuing
until November 4 2067, at an initial rent of £4,000 pa, subject to review.
The dispute
between the parties is as to the true construction and effect of the provisions
for rent review. The reddendum in clause 1 of the underlease requires the
lessee to pay to the landlord the yearly rent of £4,000, subject to variation,
as provided in the second schedule, such rent to be paid without any deduction
by equal quarterly payments in advance on the four usual quarter days in every
year. Clause 2(1) contains a covenant to pay rent in the usual terms. The
second schedule to the underlease is in these terms so far as material:
The yearly
rent payable under this underlease at the 29th day of September 1982 and
thereafter on the 29th day of September in each succeeding seventh year of the
said term shall be reviewed in manner hereinafter provided (each of the said
dates being hereinafter referred to as ‘the date of review’) namely:
1. From and
after the date of review these presents shall be read and construed and shall
take effect in all respects as if the yearly rent for time being payable
hereunder had from such date of review been the fair rack rental market value
(as hereinafter determined and defined) of the demised premises immediately
after such date of review but without prejudice to any of the other terms and
conditions contained in this underlease and so that in no event shall the rent
payable by the lessees to the landlords in respect of the demised premises be
less than the rent payable immediately prior to the date of review.
2. For the
purpose of this rent review the fair rack rental market value of the demised
premises shall (subject as hereinafter provided) be the amount which shall be
agreed between the landlords and the lessees (or in default of agreement as
determined by arbitration as hereinafter provided) to be the best rent at which
the demised premises as a whole (there being disregarded only permitted
underletting of part) might reasonably be expected to be let in the open market
by a willing lessor and subject to similar covenants and conditions (other than
the amount of the rent and the provisions of this present clause for reviewing
the rent) to those contained in this underlease . . .
There then
follow certain matters which might affect the property by reason of the
lessee’s existing occupancy under the underlease and which are to be
disregarded in reviewing the rent; provisions for the determination of fair
rack-rental market value by arbitration, if the landlords and lessees should
fail to agree; and a provision relating to the cost of such determination. The
provisions of para 2 of the second schedule are unusual in that they do not define
the term which is to be assumed as at each review date.
I was told by
counsel that the first review, as at September 29 1982, was effected under the
provisions of the second schedule without the point which is now in dispute
having been raised. It is not suggested that any form of estoppel arises from
the determination then reached. The second review date was on September 29
1989. No review as at that date has yet taken place. The dispute which has
arisen is as to the hypotheses which have to be made, first, in respect of the
term of the letting which is to be assumed for the purposes of para 2 of the
second schedule and, second, the provisions for rent review to be included in
the hypothetical lease.
The landlord’s
contentions are that the term of the hypothetical lease, upon which the demised
premises must be assumed to be let as at the review date, is the unexpired
portion of the term of the underlease itself — that is a term ending on
November 4 2067 — and that the rent is to be fixed on review on the basis of a
letting for that term under a hypothetical lease which itself contains no
provisions for rent review.
The tenant
contends that the term of the hypothetical lease is seven years. Alternatively,
it contends that it must be assumed that any letting for a longer period is on
terms which provide for rent reviews at a period of seven years or at some
similar period.
The approach
which the court should adopt to the construction of rent review provisions in a
lease was explained by Sir Nicolas Browne Wilkinson V-C in British Gas
Corporation v Universities Superannuation Scheme Ltd [1986] 1 WLR
398*. At p 403 between A and C he said:
In my
judgment the correct approach is as follows: (a) words in a rent exclusion
provision which require all provisions as to rent to be disregarded produce a
result so manifestly contrary to commercial common sense that they cannot be
given literal effect; (b) other clear words which require the rent review
provision (as opposed to all provisions as to rent) to be disregarded (such as
those in the Pugh case (1982) 264 EG 823, [1982] 2 EGLR 120) must be
given effect to, however wayward the result; (c) subject to (b), in the absence
of special circumstances it is proper to give effect to the underlying
commercial purpose of a rent review clause and to construe the words so as to
give effect to that purpose by requiring future rent reviews to be taken into
account in fixing the open market rental under the hypothetical letting.
*Editor’s
note: Also reported at [1986] 1 EGLR 120.
That approach
has subsequently been approved by the Court of Appeal in Equity & Law
Life Assurance Society plc v Bodfield Ltd [1987] 1 EGLR 124 at p
125: see also Basingstoke and Deane Borough Council v Host Group Ltd
[1988] 1 WLR 348† at pp 353-354 and Lynnthorpe
Enterprises Ltd v Sidney Smith (Chelsea) Ltd [1990] 2 EGLR 131 at p
132H.
† Editor’s
note: Also reported at [1987] 2 EGLR 147.
Nevertheless,
although it is proper, so far as the language of the rent review clause
permits, to have regard to the underlying commercial purpose of a rent review
provision, it must be kept in mind that the primary task for the court is to
ascertain the intention of the parties to the lease by reference to the
particular language they have used having regard to any context provided by the
document as a whole and any relevant circumstances known to both at the time
when the lease was executed: see, for example, Philpots (Woking) Ltd v Surrey
Conveyancers Ltd [1986] 1 EGLR 97 at p 98H.
The hypothesis
which is to be made for the purpose of determining the fair rack-rental market
value of the demised premises at each review date is that it is to be the best
rent at which the demised premises as a whole might reasonably be expected to
be let in the open market by a willing lessor. But, as Walton J pointed out in
an observation in National Westminster Bank plc v Arthur Young
McClelland Moores & Co [1985] 1 EGLR 61 at p 62, an observation which
has not, so far as I am aware, been disapproved:
. . . there
is no such thing as a fair market rent of any premises in the abstract. There
is only a fair market rent upon a set of abstractions which may be actual, may
be hypothetical and in most cases under rent reviews are a mixture of the one
and the other.
So, in the
present case, the open market letting is to be:
. . . subject
to similar covenants and conditions (other than the amount of the rent and the
provisions of this present clause for reviewing the rent) to those contained in
the underlease . . .
At the date of
the first rent review the amount of the rent then reserved by the underlease
will be £4,000. At the date of each subsequent review the amount of the rent
will be the amount of the fair rack-rental market value determined on the
occasion of the previous review. This is the effect of para 1 of the second
schedule. The first hypothesis required by the words in parenthesis in para 2
is that rent is not the rent at which the premises are to be let. This is a
necessary hypothesis if the rent review provisions are to have any effect at
all. It requires that the words ‘. . . covenants and conditions . . .’ which
appear in para 2 immediately before the parenthesis are not to be given a
meaning so narrow that they exclude the reddendum in the underlease.
The second
hypothesis required by the words in parenthesis is that the premises are not
let on covenants and conditions ‘. . . similar to the provisions of this
present clause for reviewing the rent . . .’. It was common ground that in that
context ‘this present clause’ refers not only to para 2 of the second schedule
but to the whole of that schedule — save perhaps for the words ‘Second schedule
before referred to’ and ‘rent review’ at the head of the first page. This must
be so because para 2 does not itself, on a true construction, contain
provisions for reviewing the rent. It contains nothing more than a definition
of the fair rack-rental market value of the demised premises.
It seems to
me, therefore, that the parties to the underlease must be taken to have
intended that the letting which is to be assumed for the purposes of the rent
review will be on terms which do not include the rent review provisions
contained in the second schedule or any similar provisions. In this respect the
language of para 2 of the second schedule to the underlease which I have to
consider is indistinguishable from that in subclause 5(4) in the subunderlease
which was before Goulding J in Pugh v Smiths Industries Ltd
(1982) 264 EG 823 at p 824, [1982] 2 EGLR 120. That decision was treated by Sir
Nicolas Browne-Wilkinson V-C in the British Gas case as correct. He
said, at p 402H:
In the [Pugh
case] the words used in the rent exclusion provision were so clear that imputed
intention could not override them . . .
In the Pugh
case the hypothetical letting to be assumed at the review date was a letting
for the residue of the term granted. The term granted was for 23 years expiring
on June 24 2000. At the relevant review date, June 24 1980, the term had 20
years to run.
It was argued
by Mr Brock, who appeared for the tenant in the related case of FA Welch
Holdings Ltd v Smiths Industries Ltd heard by Goulding J at the same
time and who appears for the tenant before me, that nevertheless the valuer
concerned to establish the rent under the hypothetical lease might assume some
sort of rent review clause to be included. Goulding J dealt with that argument
in these terms at p 827:
Mr Brock had
an alternative argument that, although the valuer was directed to disregard the
rent review clause in the lease he might none the less in looking at his
hypothetical 20 years’ lease assume that some sort of rent review clause of a
kind usual at the time in the market would be included. That seems to me
something that the language of the subclause will not bear. The valuer has to
find that rent which would be obtainable upon a specified day upon a letting with
vacant possession for the residue of the term, in the present case 20 years.
That language is not apt to allow the assumption of some rent review clause.
Again, one asks is it sufficiently certain?
What sort of intervals would you take?
But I do not rest it on that last point of uncertainty, I think the
language simply does not bear the suggested meaning.
I respectfully
adopt that view. It seems to me that, in the present case, the necessary
conclusion is that the parties intended that the letting, which is to be
assumed for the purposes of rent review under this underlease, is a letting on
terms which do not themselves include provisions for rent review. In this
respect, it seems to me, that the language which I have to construe falls
within category (b) of the formulation in the British Gas case.
Nevertheless,
there is an important distinction between the Pugh case and this present
case. In the Pugh case the term of the hypothetical letting was
prescribed; in the present case it is not. The question, therefore, is whether
some term — and, if so, what term — is to be implied.
Prima facie, in a case where the term of the hypothetical lease is not
prescribed by express words, the term to be implied is the unexpired residue of
the actual lease. Hoffmann J, in MFI Properties Ltd v BICC Group
Pension Trust Ltd [1986] 1 EGLR 115 in a passage subsequently described as
giving recognition to the presumption of reality, put it in these words, at p
116 between G and H:
The terms
upon which such hypothetical letting must be assumed to take place will
naturally depend in each case upon the particular language of the rent review
clause. In general, the purpose of such clauses would point to a prima facie
assumption that the parties intended the hypothetical letting to be for the
residue of the actual lease held by the tenant on the same terms and in
circumstances which actually exist at the relevant date. Thereby, the tenant
would be required to pay on the assumption that he was being granted the
interest which he actually held on the rent review date. But the language of
the clause may show clearly that a departure from reality was intended.
To make that prima
facie assumption in the present case, as the landlord suggests, would be to
attribute to the parties an intention (which they have not expressed) that on
the first rent review in 1982 it is necessary to ascertain the rent under a
hypothetical lease having a term of some 85 years without provision for rent
review. A similar exercise would have to be undertaken at seven-year intervals.
So that, for some considerable period under the rent review provisions in this
underlease, rent would be determined by reference to a lease for a lengthy term
with no provisions for rent review. Such a lease was described by Hoffmann J in
MFI Properties as being so far outside the experience and expertise of
an ordinary valuer as to be properly regarded as extinct: see [1986] 1 EGLR 115
at p 117B. He said:
A valuer
asked to determine the rent at which premises could be let in the open market
for a lengthy term without a rent review therefore has no comparables in the
real world to which he can refer. All that he can do is to make some more
or less arbitrary adjustment to the rent which would be commanded on a letting
of the same premises with the conventional provisions for rent review. It seems
to me improbable that the parties intended the rent to be determined in this
way.
For the same
reason it seems to me improbable that the parties to the present underlease
could have intended that the rent provisions should operate on the basis of a
hypothesis — namely that of a long lease without rent reviews — which would be
outside the experience and expertise of an ordinarily experienced and skilful
arbitrator to be nominated by the president of the Royal Institution of
Chartered Surveyors under para 3 of the second schedule. In the absence of
clear words, I decline to imply a term into para 2 of this schedule which attributes
such an intention to these parties.
What
assumption, therefore, should be made as to the term of the hypothetical
lease? In my view, guidance is to be
obtained from the requirement that the rent to be ascertained is the best rent
at which the premises might reasonably be expected to be let in the open market
by a willing lessor. It cannot be right to assume a term for which the premises
might not reasonably be expected to be let on a lease which contains no
provision for rent review. It appears to me that the term to be assumed for the
hypothetical lease is the term which the landlord might reasonably be expected
to grant and the tenant might reasonably be expected to take in respect of a
letting of these premises at a fixed rack-rent, proper regard being had to the
tenant’s desire for reasonable security and to the expectation that such
security would be obtained under the provisions of Part II of the Landlord and
Tenant Act 1954.
The term to be
assumed in respect of this hypothetical lease at each review date is one which
may vary from time to time during the residue of the term of the underlease as
circumstances change between now and the year 2067. Further, the term at which
the premises might reasonably be expected to be let under the conditions which
I have indicated may well fall within a range of terms, any one of which would
be reasonable. The term to be chosen within that range is the one which yields
the best rent.
The term to be
assumed in respect of the hypothetical lease at each review date is a matter
which, as it appears to me, the parties have decided to leave to be agreed
between themselves at the time when the review falls to be made or, in the
absence of agreement, to be determined by the arbitration provisions which they
have included in the second schedule. I have considered whether a bargain of
this nature would be void for uncertainty. I have reminded myself of the
concern expressed by Goulding J in relation to a slightly different point in
the passage that I have read from his judgment in the Pugh case.
When this
concern was raised in the course of argument I was assured by counsel for the
landlord — who is, perhaps, as experienced a landlord as one could find in this
field — that there was unlikely to be any difficulty in practice. A valuer
could reasonably be expected to operate within the guidelines that I have
indicated. Be that as it may, if forced to choose between a bargain which fails
for uncertainty and one of such unreality that it imputes to the parties an
intention that there should be what Hoffmann J described as a more or less
arbitrary determination of rent on review, I should hold that the bargain was
uncertain rather than unreal.
The first
question raised by the originating summons seeks determination whether on the
true construction of para 2 of the second schedule to the lease the arbitrator
is required to assume:
(a) A hypothetical lease which does not contain
any of the provisions of the second schedule.
(b) A hypothetical lease which does contain all
the provisions of the second schedule.
(c) A hypothetical lease containing some other
and, if so, what provisions.
It will be
clear from my judgment that I answer that question in terms of (a), that is to
say a hypothetical lease which does not contain the provisions of the second
schedule.
Para 2 of the
originating summons — which was added by amendment for which I gave leave —
raises a similar question in relation to the term of the hypothetical lease. It
asks whether the arbitrator is to assume:
(a) A hypothetical lease for a term equal to the
unexpired residue of the actual lease at the review date; or
(b) A hypothetical lease for a term of seven
years; or
(c) A hypothetical lease for some other and, if
so, what term.
I answer that
question in the terms of (c). The term to be assumed is that term which the
landlord might reasonably be expected to grant and the tenant might reasonably
be expected to take in respect of a letting of these premises at a fixed
rack-rent. In so far as that term falls within a range, the term to be taken is
that which yields the best rent.
Declaration
accordingly; no order as to costs.
