by Delyth Williams
Since the last update on the recent developments in the rent review field appeared in Estates Gazette [9] 10 EG 20 at least 15 cases have been reported on the subject. The pace of litigation in this area appears to have decreased, but some significant developments have occurred. This article summarises these developments.
Time, notices and counternotices
The question of whether a landlord’s trigger notice was valid was considered by the Court of Appeal in Durham City Estates Ltd v Felicetti [0] 03 EG 71 where the tenants held a 20-year lease from November 1 1972 with provision for rent reviews at the expiration of the sixth and 13th years. At the second rent review, the landlords’ solicitors sent a letter, purporting to be a rent review notice, specifying a rent of £8,750 “as from 1st November next”. On the next day, the landlords’ solicitors sent a letter to the tenants specifying a rent of “£8,850” whereas the rent specified in words was £100 less, namely “Eight thousand seven hundred and fifty pounds”. The tenants argued that this discrepancy meant that the notice was not sufficient to commence the rent review procedure. The Court of Appeal held that the correct test was whether the notice specified the amount of rent with sufficient clarity to prevent its recipients (or, in some circumstances, their professional advisers) from being misled.
In Glofield Properties Ltd v Morley (No 2) [9] 2 EGLR 118; [1989] 33 EG 49 the rent review clauses in question provided for the rent of a 15-year lease to be reviewed, in respect of the second and third reviews at five-year intervals, with a fixed rent for the first five-year period. The “open market rental value” for the purpose of the review was the sum which was, under clause 5(1), “at the time of such determination, the annual rental value of the demised premises in the open market” on a lease for a term equivalent to the residue of the actual lease at that date. The main question was whether the independent surveyor was required to determine the rental value as at the date when he actually made his determination (as the landlords contended) or as at the commencement of the relevant review period (as the tenants contended).
The Court of Appeal held that the landlords’ construction was contrary to the whole purpose of a rent review provision where the reviewed rent is to be determined by reference to values prevailing at a date significantly later than the commencement of the period in respect of which it was payable. Further, the words in clause 5(1) confirmed the effect of the reddendum, namely that which was to be ascertained was the open market rental value for the particular review period. The Court of Appeal was of the opinion that, while the natural meaning of the words in clause 5(1) was that contended for by the landlords, the words were also capable of having a different meaning, namely “at the time for such determination” or “at the time to which such determination relates”. As the intention of the parties was not clearly and unequivocally expressed, a construction would be adopted that produced a more sensible and realistic commercial result. In the circumstances, the time for the determination of the revised rent was the commencement of the review period to which it related.
The question of whether the landlord’s trigger notice had been served in time was the issue before Mr Michael Wheeler QC (sitting as a deputy judge) in Finger Lickin Chicken Ltd v Ganton House Investments Ltd [9] EGCS 99. In this case, the plaintiffs held a headlease of the demised premises for a term of 21 years from August 31 1972 with provisions for rent review at the end of the seventh and 14th years. From March 1 1974, the plaintiffs granted the defendants an underlease for the unexpired term of the headlease less three days. The underlease contained provisions for reviewing the rent at the end of the seventh and 14th years of “the said term”. The plaintiffs served a trigger notice to commence the rent review in the underlease as from March 1 1988, but the defendants contended that the words “the said term” in the underlease referred to the term of the headlease because (i) the habendum in the underlease referred to the “residue of the term of 21 years”; (ii) the reddendum continued with the provisions for the rent to be paid “during the said term”. The end result was that the defendants contended that the 14th year of the underlease expired on August 31 1987 so that the trigger notice was out of time. The learned deputy judge held that the trigger notice was served in time as the habendum was clear and there were no other provisions in the underlease referring to the headlease.
Questions as to the effectiveness of a landlord’s trigger notice, whether time was of the essence and the method of service of the trigger notice were all raised in Stephenson & Son v Orca Properties Ltd [9] 2 EGLR 129; [1989] 44 EG 81 where the lease of the subject offices was for a term of 21 years from January 1 1979 and the lease allowed either party to give six months’ notice in writing expiring at the end of the seventh or 14th year requiring a revised rent. The same clause also contained a break clause in favour of the tenants which was exercisable at the expiration of the seventh or 14th year on giving six months’ previous notice in writing. On June 28 1985 the landlords sent a letter by recorded delivery to the tenants requiring a rent review, but the letter was not delivered until Monday July 1 1985 as there was no one at the tenants’ offices on the morning of Saturday June 29 to sign the receipt for the recorded delivery. It was common ground that the rent review notice should have been served before Sunday June 30. It was argued that, although the notice was not actually delivered until July 1, the operation of section 196(4) of the Law of Property Act 1925 (and the Recorded Delivery Service Act 1962) meant that it was deemed to be given on June 29. Scott J held that delivery in the ordinary course of post required, in the case of recorded delivery service letters, an available recipient (of which there was none on June 29) so that the notice was out of time. On the issue of whether time was of the essence, the learned judge referred to two Court of Appeal cases which were binding on him. Al Saloom v Shirley James Travel Service Ltd (1983) 269 EG 40 required him to hold that, in the instant case, time was of the essence and that the landlords’ notice was out of time. He also referred to the Court of Appeal decision in Metrolands Investments Ltd v J H Dewburst Ltd [1986] 1 EGLR 125 where time was held not to be impliedly of the essence. The learned judge, although preferring the reasoning in Metrolands, was of the opinion that that case was distinguishable from the instant facts.
User and rent review
The effect of the user provisions in the actual lease or the hypothetical lease at rent review is often a perplexing question for practitioners and this is even more so where the user clause in question involves matters of construction as between the Town and Country Planning (Use Classes) Order 1972 and the 1987 order. In Brewers’ Co v Viewplan plc [9] 2 EGLR 133; [1989] 45 EG 153, a 20-years lease from 1983 of a technology centre provided that:
… the Planning Acts are deemed to include the Town and Country Planning Acts 1971 to 1981 and references to the Planning Acts or to any Act of Parliament whether general or specific are deemed to include any statutory modification or re-enactment thereof for the time being in force and also to include any statutory instruments orders rules or regulations for the time being in force thereunder.
The user covenant in the lease provided for use for the lessees’ business:
… or with the consent of the landlord such consent not to be unreasonably withheld any other use within Class III of the Use Classes Order 1972 and in particular not to allow the demised premises or any part of it to be used for residential purposes.
The landlords contended that the reference to Class III in the covenant should be taken to refer to Class B1 of the 1987 order. It is to be noted that Class III of the 1972 order was “use as a light industrial building for any purpose” but the 1987 order provisions are to the effect of:
Use for all or any of the following purposes:
(a) as an office other than a use within Class A2 (financial and professional services),
(b) for research and development of products or processes, or
(c) for any industrial process,
being a use which can be carried out in any residential area without detriment to the amenity of that area by reason of noise, vibration, smell, fumes, smoke, soot, ash, dust or grit.
Morritt J held that the recital that references to the Planning Acts were to include any statutory modifications showed that the parties were aware of the need to make an intention clear where it was intended but there was no presumption either way; yet, the user clause did not refer to the Planning Acts or to any substitute formula but only to Class III of the 1972 order. This pointed to the conclusion that the reference in the user clause was to the 1972 order only. The learned judge could find nothing irrational or uncommercial in such a construction.
Questions of construction
Several matters of construction arose in the complex case of Trusthouse Forte Albany Hotels Ltd v Daejan Investments Ltd (No 2) [9] 2 EGLR 113; [1989] 30 EG 87 where the plaintiff held an underlease of premises for a term of 75 years from July 5 1963. The initial rent was £550,000 pa and the underlease contained provisions for rent review at July 5 1979 and at the end of seven-year periods thereafter. The review clause provided that the revised rent was to be the aggregate of three items, including:
the excess of the rental value on the relevant date above Two hundred and Fifty thousand pounds of those areas being parts of the ground floor and the basement of the demised premises as shown edged red on the plans annexed hereto and marked C and D (on the basis that those areas are actually let or are available for letting for shopping and retail purposes).
Of the areas delineated by reference to the clause, the greater part was used as part of the Strand Palace Hotel and the other areas used for shopping and banking. The parties to the proceedings raised several matters of construction including, inter alia, whether the areas were available for letting separately or in aggregate; to the extent that they were sublet, whether they were to be assumed as available with vacant possession or otherwise; whether the areas were available for shopping and retail purposes only or for purposes permitted by the lease; and what terms were to be assumed in such hypothetical lettings.
At first instance [9] 1 EGLR 133; [1989] 03 EG 78, Mr Michael Wheeler QC (sitting as a deputy judge) held that the decision in Basingstoke and Deane Borough Council v Host Group Ltd [1987] 2 EGLR 147 provided assistance as to the proper approach in construing rent review provisions. Although regard must be had to the language used by the parties in the lease, it is proper and sensible to have in mind what normally is the commercial purpose of a rent review clause. Unless the lease “otherwise requires, expressly or by necessary implication, or there is some context indicating otherwise, the parties are to be taken to have intended that the notional letting assumed for the purposes of the rent review assessment was to be on the same terms … as those still subsisting under the actual, existing lease”. The user clause in the lease itself was permissive to the extent that it referred to certain uses of the demised premises, but the reference to shopping and retail purposes in the rent review clause was an instruction to the surveyor and impliedly recognised that, for rent review purposes, the use of the areas was for shopping and retail purposes only.
Further, as there were four separate areas identified for shopping and retail purposes, each area must be regarded as let separately and the rental value was the aggregate of the values of the individual areas. Any area sublet at the relevant date was to be treated as being available for letting subject to any sublease. Finally, the provisions of the hypothetical lettings were to be derived from the terms of the existing lease: the term in each case was to be the same as the unexpired residue of the existing lease with the rent reviews at the same intervals and all other terms as contained in the lease so far as necessary for the purposes of the assumed lettings.
On appeal, only two of Mr Michael Wheeler’s declarations were challenged, namely (i) for the purpose of assessing the rental value of the areas edged red on plans C and D, it should be assumed that each area was being separately let so that the rental value was the aggregate of the values of the individual areas and (ii) that the words “on the basis that those areas are … available for letting for shopping and retail purposes” meant that they were to be taken to be available for letting for those purposes only. The Court of Appeal disagreed with the first declaration but agreed with the second and held that the natural construction of the language used (namely, “rental value” as opposed to the “rental values” or “aggregate rental values”) indicated a single hypothetical letting of the whole of the areas shown edged red. Further, the Court of Appeal was of the opinion that the words “on the basis that those areas are … available for letting for shopping and retail purposes” meant that the areas in question were to be valued on the basis that they were available for shopping and retail purposes only and not for these and other purposes.
In Stylo Barratt Properties Ltd v Legal & General Assurance Society Ltd [9] 2 EGLR 116; [1989] 31 EG 56 two leases were granted, one being a lease for seven years at an annual rent of £49,000 but subject to review. Both leases were dated July 1 1966, the reversionary lease commencing from July 1 1973 and the figure of £49,000 was based not on an assessment of rental value but on a rate of interest on sums spent by the landlords on development. The rent review clause provided for one rent review as at July 30 1987 with the reviewed rent to be “that proportion of the fair rack-rental market value … of the premises” which the rent of £49,000 bore to the “initial rent” thereof. The initial rent, which was based on an open-market assessment, had been agreed by the parties at £44,900. (It can be seen that the original rent of £49,000 was, in fact, 109.13% of the initial rent as defined.)
The tenants submitted that a percentage or fraction in excess of one could not be a “proportion” of the fair rack-rental market value and, accordingly, claimed that the rent must remain at £49,000 during the remainder of the term, while the landlords contended that the plain meaning was that the rent was a sum equivalent to the fair rack-rental market value multiplied by the fraction of which the numerator was £49,000 and the denominator £44,900. Morritt J was of the opinion that, as the original agreement was for one lease for 42 years but the revised agreement was for two leases of the same aggregate length with one rent review, it was not surprising that the original rent exceeded the initial rent or that, after the 21-year period, the reviewed rent should exceed the fair rack-rental market value. The learned judge held that, in the context of the case, the word “proportion” was used in the sense that it was a comparative relation or ratio and such relation was arithmetically expressed by a fraction of which £49,000 was the numerator and £44,900 (which was the figure of the initial rent) the denominator.
The construction of the length of the hypothetical term and various other questions of construction were considered in Ritz Hotel (London) Ltd v Ritz Casino Ltd [9] 2 EGLR 135; [1989] 46 EG 95 which concerned an application under section 2 of the Arbitration Act 1979 for leave to appeal. The lease in question, which was originally granted for a term of 21 years from July 1977 and was held at the present time by the assignee tenant, was of hotel premises with a casino licensed under the Gaming Acts. The five-yearly rent reviews were to be upwards only and based upon:
the market rent of the demised premises taking no account [of] (i) any effect on the rent of the fact that the Tenant or any company within the same Group … or its or their predecessors in title has been in occupation of the demised premises … (iii) any goodwill attached to the demised premises by reason of the business carried on thereat at the review date and it is expressly agreed that in assessing the market rent no account shall be taken of the turnover or profits of the business carried on by the Tenant in the demised premises … But having regard insofar as possible to the rental values then current for similar properties let on similar terms with vacant possession for a term equivalent to the term hereby granted … on the basis that at the time when the market rent falls to be agreed or determined the Tenant does not hold but will immediately obtain a licence under the Gaming Act 1968 …
Vinelott J held, inter alia:
(a) the hypothetical term at the review date would be equal to the then unexpired residue of the actual term;
(b) it was open to the parties’ valuers to submit valuations by reference to profits in addition to evidence of rental values, the task of the arbitrator being to evaluate the evidence put before him in accordance with the principles of valuation;
(c) the arbitrator could not exclude evidence as to the turnover or profits of other companies in the same group as, or associated with, the lessees but, having regard to a specific prohibition in the lease, the arbitrator was under a duty to put out of his mind anything he had learnt from such evidence as to the profits or turnover of the lessees themselves;
(d) no account was to be taken of goodwill, as this had a consequence on values that an arbitrator must consider;
(e) the effect of the assumption that the tenant does not hold, but will immediately be able to obtain, a gaming licence is notionally to take away the licence actually held and to provide that the market rent should be determined on the footing that any person minded to take an interest in the premises would be able to make his offer in the knowledge that he would be granted a licence contemporaneously with the grant of the lease;
(f) the range of prospective tenants is necessarily limited to those who, having notionally been awarded a licence, will be likely to obtain a renewal and in whose hands it will not be liable to cancellation or revocation.
In R & A Millett (Shops) Ltd v Leon Allan International Fashions Ltd [9] 1 EGLR 138; [1989] 18 EG 107, the underlease provided that the rent payable by the underlessee should, from the material date, be 78/85 of the rent payable by the underlessor in respect of the principal premises as fixed in the manner provided by the superior lease or the rent of £7,800 pa, whichever shall be the greater. However, the rent review clause in the underlease contained no reference to a fair market rent but the clause in the original headlease indicated that the object was to reach a fair market rack-rent of the premises. The complicating facts of the case were occasioned by the fact that the predecessors in title of the underlessors had surrendered the superior lease and had taken a leaseback which was expressly stated to be subject to, and with the benefit of, the underlease. The main question was whether the plaintiffs were still entitled to a rent review in accordance with the clause in the underlease.
The majority of the Court of Appeal (Lloyd LJ and Sir George Waller) held that, under the clause in the underlease, the defendants were required to pay 78/85 of the fair market rack-rental of the whole premises as determined in accordance with the original headlease. The majority were of the opinion that, following the decision in Sudbrook Trading Estate Ltd v Eggleton [2] EGD 392; (1982) 265 EG 215 the words “as fixed in the manner provided by the … superior lease” were proof that the parties had in mind both the machinery provided and the fair market rack-rent referred to in that lease as the objective standard. Balcombe LJ, dissenting, was of the opinion that that construction involved an unjustifiable complete rewriting of the lease.
The question as to the terms of the hypothetical lease in a complex case involving two underleases granted to the same tenant was one of the main issues in Toyota (GB) Ltd v Legal & General (Pensions Management) Ltd [9] 2 EGLR 123; [1989] 42 EG 104. In this case, the defendant was the landlord of warehouse premises the subject of two underleases granted in June 1973. These underleases were granted on the same day to the same tenant. The first underlease was for a term of 16 years expiring at Lady Day 1989 and the second was an underlease of the expectant reversion commencing at Lady Day 1989 for a term of 34 years. The second lease was on the same terms as the first and subject to the first not having been forfeited. The two underleases thus gave, in effect, terms amounting in aggregate to 50 years. The five-year rent review provisions in the first underlease required the rent to be determined on the assumption of a lease for a term of years equivalent in length to the “residue unexpired” at each rent review date and that all restrictions relating to security of tenure should be disregarded.
The plaintiff contended that, at the 1988 rent review, it should be assumed that the hypothetical lease was for one year, as this was the same as that unexpired under the 16-year term of the first underlease. For the landlord, it was submitted that the unexpired term must include the 34-year term of the reversionary underlease that was to follow the current underlease.
Knox J held that, in construing the first underlease, it was legitimate to have regard to the contemporaneous execution of the reversionary underlease and to treat the two as forming two parts of one overall transaction. However, the references in the first underlease to the “term” must, as a matter of grammar, be references to the term granted by the first underlease alone so that the hypothetical term for the purposes of the 1988 rent review was a letting for one year only. The terms of the underleases were too explicit to let in the general principle that rent review clauses must be construed so as to require the tenant to pay for what he actually gets, as was held in the case of Basingstoke and Deane Borough Council v Host Group Ltd. Further, the requirement in the rent review provisions that there should be disregarded all restrictions whatsoever relating to security of tenure contained in any statute or order, rules or regulations thereunder had a meaning in the context evincing an intention to have regard to the rights at common law of the hypothetical tenant without regard to statutory intervention concerning security of tenure.
In the Court of Appeal, the landlord contended that the words which defined the term of the hypothetical lease as being for “the residue of the unexpired term of years hereby granted” should be construed to include the term of the second lease which would thereby produce a notional lease of 35 years. The Court of Appeal held that the factual matrix allowed them to imply words which would allow the court to avoid what Nicholls LJ stated would be “an absurd and irrational result”. The result of the implied term would be that the clause would be as follows:
…the residue unexpired of the term of years hereby granted plus the term granted by the supplemental lease of even date.
The Court of Appeal, however, agreed with the decision of Knox J that the effect of the provisions relating to security of tenure was to leave out of account the provisions of the Landlord and Tenant Act 1954, Part II in particular.
The question of the hypothetical letting for the purposes of rent review was one of the questions at issue in Lynnthorpe Enterprises Ltd v Sidney Smith (Chelsea) Ltd [9] EGCS 63 where the underlease contained provisions for seven rent reviews with the last two reviews being in August 1987 and 1990 on the terms of “the fair market rent for the demised premises at the commencement …” of each rent review period on the assumption of a letting on the same terms as the actual lease. The plaintiffs were the assignee-underlessees and the underlease contained provisions, inter alia, restricting the use to use as a wine and snack bar and prohibiting competing uses or uses prohibited by the superior lease.
The underlease was subject to two deeds of variation: one in 1981 that related to an assignment, increased the rent and varied the user clause; and the second in 1986 that concerned the assignment to the present plaintiffs, permitted the restaurant use proposed by the plaintiffs (but otherwise omitted any reference to the already amended user clause) and contained covenants by the assignee not to use the demised premises otherwise than as permitted. In accordance with the terms on the rent review clause, an independent surveyor was appointed to determine the rent for the review period that commenced in August 1987.
Warner J held that there was a presumption in favour of reality which required the terms of the hypothetical lease to reflect the variations that had been made to the terms of the actual lease and that, in this context, the decision in S I Pension Trustees Ltd v Ministerio de Marina de la Republica Peruana [8] 1 EGLR 119; [1988] 13 EG 48 would be distinguished. However, the contention of the lessors that the terms of the 1986 deed as to the use of the premises for restaurant purposes were personal to the plaintiffs would be rejected owing to the operation of section 79 of the Law of Property Act 1925. The 1986 deed was binding on successors in title and its restrictive provisions were to be taken into account in the hypothetical lease. Further, the hypothetical term was for the unexpired residue of a term of 15 years from August 1978.
In Stedman v Midland Bank plc the lease of the demised premises was for a term of 71 years from March 1963 and the reddendum provided:
to hold the same unto the tenants from the twenty-fifth day of March One thousand nine hundred and sixty three until the twenty-fifth day of March Two thousand and thirty four but determinable as hereinafter provided and subject to and with the benefit of the Lease thereof set out in the schedule hereto paying therefore during the first year of the said term the yearly rent of eight hundred pounds rising by annual increases of Ten pounds each to eight hundred and forty pounds in the fifth year and thereafter at a rent to be agreed or in default of agreement to be fixed by an Arbitrator to be appointed by the parties hereto … thereafter at a rent to be agreed or in default of agreement to be fixed by an Arbitrator…
After paying the increases of £10 pa up to the amount of £840 specified in the fifth year, the tenant bank continued to pay increases of £10 in each of the next three years and then the rent was increased to a figure of £1,400. No further increase was sought by the then landlord for the remaining 13 years of his life but both parties to the present proceedings agreed that no inferences could be drawn from these events. The current landlord contended that the lease provisions provided for an annual review of the rent after the fifth year, but the tenants argued that the lease provided for one agreement as to the revised rent after the fifth year with such rent remaining for the 66 years unexpired of the term. The Court of Appeal held that the first five years of the term were subject not to reviews but to fixed increments of rent so that the only review provided for, on a true construction of the reddendum, was at the end of the five years. The phraseology of the reddendum pointed to the idea of a rent to endure for the remainder of the term.
