Landlord and tenant — Construction of rent-review clause in lease of business premises — The rent-review clause included a provision that the hypothetical lease envisaged by it was to be on the basis that the tenant had complied with all repairing and decorating obligations ‘and in all other respects on the terms and conditions of this lease, including the provisions of this clause’ — The lease also contained an option for the landlord to terminate it for certain purposes ‘after the expiration of the first 12 years of the term hereby granted’ — It was submitted by the tenant that ‘the term hereby granted’ meant literally the term granted by the actual lease; that the option to determine was exercisable after the end of the first 12 years of that term only; and that there was nothing to require a departure from this plain meaning in construing the rent-review clause — On the other hand, it was submitted by the landlords that the 12-year period must be deemed to commence again for the purpose of the rent review each time that a review took place, ‘the term hereby granted’ being construed on this interpretation as the term to which the revised rent was to apply, namely, the residue of the original unexpired term — Held that the construction proposed by the tenant was to be preferred — It was in accordance with the plain meaning of the option clause; was more in harmony with a sensible commercial result; and avoided the artificial consequence of the landlords’ interpretation, which required the revised rent to be fixed on the basis of a notional lease differing materially from the legal position which would continue to bind the parties under the actual lease — Declaration accordingly in the terms of the tenant’s summons
This was a
summons taken out by the plaintiff, R & A Millett (Shops) Ltd, tenant under
a lease of business premises at 62-64 Fargate, Sheffield, of which the
landlords were the defendants, the Legal & General Assurance Society Ltd.
The summons sought a declaration as to the construction of the lease, which was
for 35 years commencing on February 27 1972, with provision for rent reviews at
six-yearly intervals.
Romie Tager
(instructed by Philip Hodges & Co) appeared on behalf of the plaintiff;
Michael Barnes QC and J C Harper (instructed by Lawrence Graham & Co)
represented the defendants.
Giving
judgment, MR MICHAEL WHEELER QC said: I have before me a summons in which the
tenant under a lease of business premises in Sheffield seeks the assistance of
the court on a short question of construction of the lease. The lease was dated
November 10 1972 and the defendant to this summons, the Legal & General
Assurance Society Ltd, were the landlords, the lessee being a company called
Joan Barrie Ltd.
The plaintiff
on the present summons, R & A Millett (Shops) Ltd, became the tenant under
the lease by an assignment dated February 21 1983. The lease was for a term of
just under 35 years commencing on February 27 1972 and expiring on December 31
2006 and was subject to determination as therein provided: in particular, there
were somewhat special provisions in clause 5 (4) of the lease under which the
landlords had a right in certain circumstances to terminate the lease on six
months’ notice. The lease also contained a review clause providing for the rent
to be reviewed every six years.
I must read
certain parts of the lease, although I shall in general assume that anybody who
reads this judgment will have familiarised himself with the full terms of the
lease. First of all, clause 3, which is the rent-review clause. It reads as
follows under the heading ‘Rent Review’:
Provided
always, and it is hereby agreed, that after the expiration of the sixth, twelfth,
eighteenth, twenty-fourth and thirtieth years the time in each case being
computed from the 1st day of January 1972 and the date of expiration of each
such period being hereinafter referred to as ‘the relevant date of review’, the
yearly rent for the time being payable hereunder shall be reviewed, and from
and after each date of review the yearly rent payable in respect of the demised
premises shall be such sum as shall be agreed between the landlord and the
tenant as representing the fair rack rental market value of the demised
premises for a term of years equivalent to the then unexpired residue of the
term hereby granted commencing on the relevant date of review as between a
willing landlord and a willing tenant with vacant possession and taking no account
— and here I
abbreviate — of two things: First any goodwill attributable to trade carried on
on the premises by the tenants, and second any improvements to the demised
premises as there more specifically mentioned.
The clause
continues:
But upon the supposition,
if not a fact, that the tenant has complied with all the obligations as to
repair and decoration herein imposed on the tenant and in all other respects on
the terms and conditions of this lease, including the provisions of this
clause:
As will appear
later in this judgment, these last six words are at the basis of the dispute
between the two sides.
I now turn to
clause 5 (4), which is the somewhat special clause to which I referred earlier.
I say ‘special’ in that it seems to me almost certainly to have arisen as a
result of specific negotiation between the parties. It reads as follows (it has
no particular heading):
Notwithstanding
anything herein contained, if the landlord shall, after the expiration of the
first 12 years of the term hereby granted
and those few
words have also been the subject of much debate
desire to
demolish or reconstruct or rebuild the whole or part of the demised premises or
the building or if the landlord is called upon by the local or other authority
to rebuild, support or reconstruct the whole or any part of the demised
premises or the building, the landlord shall be entitled, on giving to the
tenant not less than six months previous notice in writing or such other
shorter notice that the landlord may himself receive from such local or other
authority, to determine the term hereby granted.
There are two
aspects to the question of construction before me. The first arises on clause 3
and really turns on what is the meaning to be given to the provision that the
lease which has been referred to in argument as the notional lease upon which
the rent review is to be based is, subject as there provided, to be ‘in all
other respects on the terms and conditions of this lease, including the
provisions of this clause’. The second aspect arises on clause 5 (4), as to
what is meant by the words ‘the expiration of the first 12 years of the term
hereby granted’.
Before I turn
to the arguments which have been deployed before me, I want briefly to mention
three cases to which I was very helpfully referred, two in the House of Lords
and one before Goulding J. The first of these is United Scientific Holdings
Ltd v Burnley Borough Council reported in [1978] AC 904. I cite it
for the well-known passage (at p 948) from the speech of Lord Salmon as to the
purpose of rent-review clauses:
In a period
of acute inflation, such as we have experienced for the last 20 years or so,
and may well continue to experience for many years to come, what is a fair
market rent at the date when a lease is granted will probably become wholly
uneconomic within a few years. Tenants who are anxious for security of tenure
require a term of reasonable duration, often 21 years or more. Landlords, on
the other hand, are unwilling to grant such leases unless they contain
rent-revision clauses which will enable the rent to be raised at regular
intervals to what is then the fair market rent of the property demised.
Accordingly, it has become the practice for all long leases to contain a
rent-revision clause providing for a revision of the rent every so many years.
Leases used to provide for such a revision to be made every 10 years. Now the
period is normally every seven and not infrequently every five years. To my
mind, it is totally unrealistic to regard such clauses as conferring a
privilege upon the landlord or as imposing a burden upon the tenant. Both the
landlord and the tenant recognise the obvious, namely, that such clauses are
fair and
the authorities, namely, that a rent revision clause is for the benefit of the
landlord alone and not at all for the benefit of the tenant. It is plainly for
the benefit of both of them. It is for the benefit of the tenant because
without such a clause he would never get the long lease which he requires; and
under modern conditions, it would be grossly unfair that he should. It is for
the benefit of the landlord because it ensures that for the duration of the
lease he will receive a fair rent instead of a rent far below the market value
of the property which he demises. Accordingly the landlord and the tenant by
agreement in their lease provide that at stated intervals during the term, the
rent should be brought up to what is then the fair market rent. The revision
clause itself lays down the administrative procedure or machinery by which the
fair market rent shall be ascertained,
and I might add
there that that is precisely what the rent-review clause in the present case
does.
The second
authority is L Schuler AG v Wickman Machine Tool Sales Ltd [1974]
AC 235, again in the House of Lords, and the passage which I want to extract is
at p 251 in the speech of Lord Reid:
The fact that
a particular construction leads to a very unreasonable result must be a
relevant consideration. The more unreasonable the result the more unlikely it
is that the parties can have intended it, and if they do intend it the more
necessary it is that they should make that intention abundantly clear.
Of course it
is only right that I should recognise, as Lord Reid recognised, that if the
parties do make the position abundantly clear, and the position represents the
true bargain which they have made, the court must give effect to it; and in
that context I was very helpfully referred to a recent decision of Goulding J
in Pugh v Smiths Industries Ltd and Others reported in (1982) 264
Estates Gazette 823. There the rent-review provisions defined the full-yearly
open market rent as follows:
The
full-yearly open market rent of the property for the purposes of this clause
that is the
rent-review clause
is that rent
(exclusive of rates and other payments (if any) to be made by the lessee by
virtue of this subunderlease) which would be obtainable upon the day three
months before the relevant material date if this subunderlease was not then
subsisting upon a letting with vacant possession of the property for the
residue of the term hereby granted and on the basis that the lessee would be
obliged to perform and observe the covenants and conditions on the part of the
lessee contained herein
and here are
the material words which underline the salient difference, as I think, between
that case and the one before me
but excluding
therefrom the provisions of this clause,
that is
excluding the rent-review clause.
Put shortly,
Goulding J, after hearing full argument, came to the conclusion that the clause
expressed the bargain which the parties had made, and that, although in some
sense it produced a slightly startling result which might in other
circumstances be thought to have been unfair to the tenant, nevertheless that
being the clear and unmistakable bargain which the parties had made the court
must give effect to it.
That in effect
is what Mr Tager, who appeared for the tenant in the present case, argues. He
says that clause 5 (4), where it refers to the landlords having the right ‘to
determine the term hereby granted’, means what it says, no more, no less; and
‘the term hereby granted’ is the term granted by the original lease, and the
first 12 years of that term is the period ending on February 27 1984; and
thereafter, says Mr Tager, that provision was a spent force. To reinforce this,
he says that, unlike Pugh’s case, there is nothing which requires or
entitles me to construe anything in clause 3 of the lease before me as
departing from the plain and unambiguous terms of clause 5 (4) construed in the
sense that I have just mentioned. In other words, once the 12-year period is
up, there is nothing in clause 3 to substitute some new 12-year period. At
most, the lease is to be treated as terminable on six months’ notice in the
circumstances contemplated by clause 5 (4).
Mr Barnes, who
appeared for the landlord, contended that clause 3 required the expert who was
going to fix the new rent to assume a notional lease for the purpose of
reviewing and revising the rent, the notional lease to be for the residue of
the original term at, of course, a revised rent, but otherwise on the identical
terms of the actual lease. The notional lease therefore, Mr Barnes contends,
contains clause 5 (4) verbatim, with the result that on this construction the
12-year period referred to there so to speak commences again for the purpose of
the rent review every time there is a review; that is to say the notional lease
is to be assumed to impose on the landlord a restriction (it is expressed
negatively, but the result is positive) that he may only determine the lease under
clause 5(4) ‘after the expiration of the first 12 years of the term hereby
granted’; and ‘the term hereby granted’ in this notional lease must mean, on Mr
Barnes’ argument, the term to which the revised rent is to apply, namely the
residue of the original unexpired term.
Notwithstanding
this, although that is to be the basis on which the revised rent is to be
calculated with this added 12-year restriction imposed on the landlord, Mr
Barnes very rightly in my view accepts that the legal rights and obligations of
the parties inter se continue to be governed by the terms of the
original lease. So we have this curious situation that the new rent is to be
ascertained on one basis by the implication of clause 5 (4), whereas the
parties are to be governed by the clause as it appeared, and still appears of
course, in the original lease, namely a situation where the landlord, 12 years
having expired by February 27 1984, has a right at any time on six months’
notice to invoke that provision. This, says Mr Barnes, relying on Pugh,
is what the parties have agreed, so that no question of unfairness is relevant.
He also accepts I think that under every rent review the tenant’s legal
obligations will on his construction differ from what are his assumed
obligations under the notional lease. The dates are different because the
review periods start from January 1 instead of February 27. That, he claims, is
what the parties have agreed.
Mr Tager, for
the tenant, pointed out a number of oddities which seem to flow from this construction,
and in particular the effect of clause 5 (4) in the notional lease which might
be relevant in, say, the last review period in 2002. By January 1 2002 there
will be only five years of the lease left. So what, he asks rhetorically, is
the point of implying the 12-year period specified in clause 5 (4)? He also
pointed out a number of instances in the actual lease where it would be quite
impossible to read all its terms literally into the notional lease. For example
(I take just one or two of the instances he gave me), on p 2 of the lease there
is a provision for the payment of rent except the first payment ‘which shall be
made on the execution thereon in respect of the period beginning on the 27th
February 1972 and ending on the 31st March 1972’. Of course, that is all water
over the dam. Secondly, he says what about the redecoration covenant in clause
2 (4) where — I will not go into it in detail — the internal work has to be
repainted in every seventh year of the said term, and of course when the time
comes for the final rent review there are only five years left, so you have got
to rewrite that?
Then, rather
with his tongue in his cheek I fancy, he referred me to the provision in clause
2 (25), which is the covenant by the tenant to pay the costs of the solicitors
for the landlord in the preparation of the lease. Of course, that is absolute
nonsense in relation to a notional lease. First of all, the costs of the
original lease have long since gone by the board, and second no notional lease
will be prepared or completed at all.
Therefore in
order to make sense of clause 3 some measure of mutatis mutandis must, I
think, be implied. There must, as Mr Tager put it, be minor adjustments. In
construing the effect of the rent-review clause and the impact on it of clause
5 (4), it is in my view fair to bear in mind that the object of the exercise
expressed between the parties on that rent review is to find out what rent will
represent the fair rack rental value of the premises for a term of years
equivalent to the unexpired residue of the term hereby granted as between a
willing landlord and a willing tenant with vacant possession, and so on. That,
as it seems to me, shows quite clearly that what the parties are seeking to
attain by the implementation of the provisions which they are agreeing is a
sensible and businesslike commercial result, and the revised rent is to be a
fair rent.
These
considerations, coupled with what seem to me to be the unambiguous and clear
words of clause 5 (4), lead me to the conclusion that the tenant’s construction
of the lease is to be preferred. Mr Barnes’ construction, on the other hand,
appears to require the expert to fix the revised rent on the basis of a
notional lease which differs quite materially from the legal position which he
accepts still continues to bind the parties under the original lease and, of
course, the assignment. I find this a very artificial conclusion which, in my
view, is not one to which I am driven by the language of the lease, because it
is not one which in my judgment the parties can be said to have agreed.
I therefore
propose to make a declaration in the terms of the summons.
