Landlord and tenant — Rent review — Expert appointment only upon application of landlords — Whether landlords could be compelled to seek appointment and have rent review — Whether rent at review upwards only
By an
underlease dated March 31 1988 the plaintiff tenant holds a term of warehouse
premises at a rent subject to five-yearly reviews. The rent review provisions
directed that if the parties could not agree the rent at review, the matter
would be referred to an expert to be agreed between the parties and, if not
agreed, to be appointed by the president of the Royal Institution of Chartered
Surveyors upon application of the landlords. The tenant, anticipating that
current rental values would be less than the passing rent, sought to initiate a
rent review; the defendant landlords declined to agree an expert or to apply to
the president to nominate one. The tenant sought a declaration that the
landlords are bound to apply to the president, alternatively that there be an
inquiry to determine the proper rent payable since the rent review date.
at review was not upwards only. There was an enforceable requirement on the
landlords to apply to the president for the appointment of an expert. Alternatively
there was an implied obligation on the landlords to make such application to
give business efficacy to enable the expert to fix a lower rent from the
passing rent. If the rent at review was lower than the existing rent, there was
an implied obligation on the landlords to repay any excess paid since the
review date.
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
Harben
Style Ltd v Rhodes Trust [1995] 1 EGLR 118;
[1995] 17 EG 125; [1994] NPC 99
Sudbrook
Trading Estate Ltd v Eggleton [1983] 1 AC
444; [1982] 3 WLR 315; [1982] 3 All ER 1; (1982) 44 P&CR 153; [1983] 1 EGLR
47; [1983] EGD 392; 265 EG 215, HL
This was an
application by the tenant, Royal Bank of Scotland plc, for declaratory and
injunctive relief in respect of the rent review provisions in a lease it held
from the defendant landlords, Francis Edward Jennings, Robert Joseph Pezaro and
Circuitport (Brewery Road) Ltd.
Robert
Powell-Jones (instructed by Stephenson Harwood) appeared for the tenant; Janet
Bignell (instructed by Eversheds) represented the landlords.
Giving
judgment, EVANS-LOMBE J said: This originating summons concerns
questions of construction of the rent review provisions contained in an
underlease dated March 31 1988 by which the defendants demised to the plaintiff
certain warehouse premises for a term of 20 years from December 25 1987 at an
initial rent of £50,000 pa with successive five-yearly rent reviews, the review
dates falling on the fifth, 10th and 15th anniversaries of the commencement of
the term. The relevant provisions of the lease are as follows. By clause 2(a)
the rent payable was to be:
(a) Firstly
the initial yearly rent from 31st March 1988 until 24th day of December 1992
— defined in
clause 1 to be the sum specified in the lease particulars, namely £50,000
pa
thereafter
during the remainder of the term the yearly rent [not defined] subject to
review as hereinafter mentioned such review to be calculated in accordance with
the provisions of the Fourth Schedule …
By clause 3
the tenant covenanted:
3.1.1 To pay
the reserved rents on the days and in the manner aforesaid.
At clause 5
under the heading ‘Rent Cesser’ the lease provided that in the event that the
premises became unusable a ‘fair proportion’ of the rent payable should be
suspended until the premises had been repaired any dispute being referred
to the award
of a single arbitrator to be appointed in default of agreement upon the
application of either party to the President for the time of the Royal
Institution of Chartered Surveyors …
The review
provisions are contained in the fourth schedule of the lease as follows:
1. At the
commencement of each rental period hereinbefore referred to
— previously
defined as ‘each period of five years immediately following a rent review
date’–
the revised
rent may be agreed between the landlord and the tenant or in the absence of
agreement determined by a specialist valuer (acting as expert and not as an
arbitrator) such valuer to be agreed between the parties or nominated by the
President for the time being of the Royal Institution of Chartered Surveyors
upon application of the landlord made at any time after the commencement of the
relevant rental period so that in case of such valuation the revised rent be
determined by the valuer (who shall give written reasons for his decision)
shall be as in his opinion represents the best yearly rent reasonably
obtainable for the demised premises and on the supposition (if not a fact) …
(b) of a new
letting of the demised premises as a whole …
by a willing landlord to a willing tenant … for a term equal to the term unexpired or the
term of 10 years whichever is longer as at the commencement of the relevant
rental period and on similar terms to this lease (other than the rent hereby
reserved that including the provisions for the review of rent herein contained
… )
2. Interim
Rent.
If and so far
as any revised rent in respect of any rental period has not been ascertained
pursuant to the foregoing provisions before the first day hereby
continue to be payable during the rental period at a rate to the highest rent
previously payable hereunder until the first day for payment of rent after the
revised rent has been ascertained or until the expiration of that rental period
(whichever shall first happen) and on the first day for payment of rent after
the revised rent has been ascertained there shall be payable by way of rent (in
addition to the amount of the rent otherwise due on that day) the aggregate of
the amounts by which the instalments of rent payable in respect of that rental
period fell short of the amount which would have been payable if the revised
rent had been ascertained before the first day for payment of rent for the
relevant rental period and in addition that the tenant shall pay to the
landlord interest on such sum …
The first rent
review date is now passed. The plaintiff who is the tenant, no doubt in
anticipation that in the current market a valuer would be likely to fix the
rent at a figure less than the initial rent, has sought to initiate a rent
review, but the defendants who are the lessors have declined to agree an expert
valuer or apply to the president of the Royal Institution of Chartered
Surveyors to nominate such a valuer pursuant to the provisions of para 1 of the
fourth schedule.
In these
proceedings the plaintiff seeks a declaration that on a true construction of
the underlease the defendants are bound to apply to the president to nominate
such a valuer and a mandatory injunction accordingly. Alternatively they seek
an order that an inquiry be directed to determine what the proper level of rent
payable under the underlease since the review date is in accordance with the
provisions of the fourth schedule. Further the plaintiff seeks a declaration
that the provisions of the fourth schedule do not require an upwards-only
revision and finally a declaration that the plaintiff, in the event that the
valuer or alternatively the inquiry throws up a rental figure less than the
initial rent, is entitled to recover from the defendants the difference between
what the revised rent is and the interim rent which has actually been paid by
the plaintiff since the review date or alternatively to set off such sum
against future rent.
It is the
defendants’ submission that the provision in para 1 of the fourth schedule
allowing only the landlords to apply to the president for the nomination of a
valuer, in default of agreement between the parties, to fix a revised rent, is
a substantive provision of the lease and not mere machinery. It is a provision
which permits the landlords to control whether the rent shall be revised after
a rent review date and so, in effect, ensures that any rent review is upwards
only. The defendants submit that the provisions of para 1 of the fourth
schedule do not require the landlords to apply to the president, but leave it
to the landlords’ discretion. They draw a contrast between the words ‘upon the
application of the landlord’ in para 1 and the earlier words in that paragraph
which indicate that either party may initiate the revision procedure by seeking
agreement, first as to the rent and second as to the identity of the valuer.
They also draw a contrast with the provisions of clause 5 of the lease for rent
payable on cesser to be determined in default of agreement by an arbitrator
appointed on the application of either party to the president.
The defendants
draw attention to the provisions of para 2 of Schedule 4 to show that the
underlease contains provisions which make a rent payable throughout any ‘rental
period’ notwithstanding that a revised rent has not been agreed and the
landlords have declined to set in train the appointment of a valuer. It
follows, so the defendants submit, that the rent review machinery contained in
the underlease has not broken down and accordingly there is no room, on grounds
of business efficacy, to imply a term into the underlease requiring the
landlords to apply for the nomination of a valuer. Accordingly no such
mandatory injunction as is sought by the plaintiff should be granted or inquiry
as to the amount of a reviewed rent directed.
My attention
was drawn to the decision of Judge Rich QC, sitting as a deputy judge of this
division, in the case of Harben Style Ltd v Rhodes Trust decided
on June 29 1994 and which is only reported as a note in [1994] NPC 99*. The
plaintiff accepts that the provisions of the lease in question in the Harben
case, though not in similar terms, are of similar effect to the provisions of
the underlease in this case. The decision of Judge Rich is summarised in the
report in these words:
*Editor’s
note: Reported in full at [1995] 1 EGLR 118.
The issue is
whether the tenant is entitled, the landlord having failed to apply for the
appointment of a valuer, to apply to the Court for an Order that there be an
inquiry as to the yearly rent payable under the terms of the lease in respect
of the review period commencing on 24th June 1993, ie for the Court to
determine the market rent. Such an inquiry was ordered in Sudbrook Trading
Estate Ltd v Eggleton.
The tenants
relied primarily on the speech of Lord Fraser. The principle relied on does not
apply in this case. In my judgment there is no reason to imply an obligation in
the way in which it was implied in Sudbrook that the landlord should be
under a duty to seek the appointment of a valuer. There is no express
obligation that he should do so. There is a rent provided for if he elects not
to do so. That is the distinction between Sudbrook and this case. In my
judgment the machinery has not broken down.
The judge
therefore declined the relief sought by the plaintiff. The reference to the Sudbrook
case in the judgment of Judge Rich is to the decision of the House of Lords in
that case reported at [1983] 1 AC 444*. In that case, pursuant to four leases,
the lessees were granted an option on a certain date to purchase the freehold
reversion of the properties let
*Editor’s
note: Also reported at [1983] 1 EGLR 47.
at such price
not being less than £12,000 as may be agreed upon by two valuers one to be
nominated by the lessor and the other by the lessee and in default of such
agreement by an umpire appointed by the valuers.
The lessees
exercised their options to purchase the reversions, but the lessors refused to
appoint a valuer and so it was impossible to determine a price pursuant to the
option provision. The decision of the House of Lords in allowing the appeal
from the Court of Appeal (Lord Russell dissenting) is summarised in the
headnote in the following terms:
That on its
true construction the agreement was for the sale at a fair and reasonable price
by the application of objective standards and once the options had been
exercised in accordance with the necessary pre-conditions, since the price was
capable of being ascertained it was therefore certain, a complete contract for
the sale and purchase of the freehold reversion was constituted; that as the
price was to be ascertained by machinery which, on the true construction of the
agreement was a subsidiary and non-essential part of the contract, the Court
would if the machinery broke down for any reason, substitute its own machinery
to ascertain a fair and reasonable price; and that accordingly, since the
options had been validly exercised the contracts constituted by their exercise
should be specifically performed, and an inquiry as to the fair valuation of
the reversion and title of the lessors to the freehold should be held and
conveyances made to the lessees, if necessary by the Court.
The relevant
provisions of the option clause were these:
… if the lessees shall desire to purchase the
reversion in fee simple in the premises hereby demised and shall give to the
lessor notice in writing to that effect the lessees shall be the purchasers of
such reversion as from the date of such notice at such price not being less
than £12,000 as maybe be agreed upon by two valuers one to be nominated by the
lessor and the other by the lessees or in default of agreement by an umpire
appointed by the said valuers subject to the conditions following …
Lord Diplock,
in his speech at p477, having pointed out that the giving of the option notice
converted the arrangement into a synallagmatic or bilateral contract,
continued:
The first
obligation upon each of them, once the contract had become synallagmatic, is to
appoint their respective valuers to fix what is the fair and reasonable price
for the reversion. That this is a primary obligation under the contract follows
from the use of the words ‘to be nominated’ but it would, in my view, also be a
necessary implication to give business efficacy to the option clause. The
requirement that the price to be so fixed is one that will be fair and
reasonable as between lessors and lessees, appears to me to be a necessary
implication from the description ‘valuers’ applied to the persons by whom the
price is to be fixed by agreement between them, if possible, and
fixed if the valuers cannot agree … The
obligation of both lessors and lessees upon appointing their respective valuers
is to instruct them to carry out the functions for which the option clause
requires that they should be appointed, viz, to try to reach agreement
with one another upon a price for the reversion that is fair and reasonable as
between the lessors and lessees, and failing such agreement agree upon and
appoint a suitably qualified, impartial person to fix such a price.
In his speech
at p483 Lord Fraser says:
I recognise
the logic of the reasoning which has led to the Courts refusing to substitute
their own machinery for the machinery which has been agreed upon by the
parties. But the result to which it leads is so remote from that which parties
normally intend and expect, it is so inconvenient in practice that there must
in my opinion be some defect in the reasoning. I think the defect lies in
construing the provisions for the mode of ascertaining the value as an
essential part of the agreement. That may have been perfectly true early in the
nineteenth century, when the valuers’ profession and the rules of valuation
were less well established than they are now. But at the present day these
provisions are only subsidiary to the main purpose of the agreement which is
for sale and purchase of the property at a fair or reasonable value. In the
ordinary case parties do not make any substantial distinction between an
agreement to sell at a fair value without specifying the mode of ascertaining
the value, and an agreement to sell at a value to be ascertained by valuers
appointed in the way provided in these leases. The true distinction is between
those cases where the mode of ascertaining the price is an essential term of
the contract and those cases where the mode of ascertaining though indicated in
the contract, is subsidiary and non-essential: … The present case falls in my opinion into the
latter category. Accordingly when the option was exercised there was
constituted a complete contract for sale, and the clause should be construed as
meaning that the price was to be a fair price. On the other hand where an
agreement is made to sell at a price to be fixed by a valuer who is known or by
reason of holding some office such as auditor of a company whose shares are to
be valued, will have special knowledge relevant to the question of value the
prescribed mode may well be regarded as essential … I prefer to rest my decision on the general
principle that, where the machinery is not essential, if it breaks down for any
reason the Court will substitute its own machinery … ‘the appropriate means for the Court to
enforce the present agreement is in my opinion by ordering an inquiry into the
fair value of the reversions’.
In their
outline submissions the plaintiffs submit, and I accept, that the case raises
four issues which they summarise as follows:
A. Whether,
under these rent review provisions, the defendants are under an obligation to
apply to the president of the RICS for the nomination of an expert valuer.
B. If so, as
to the appropriate remedy for the defendants’ breach of that obligation in
particular:
(1) whether
that obligation should be specifically enforced by a mandatory order that the
defendants do so apply for the nomination of an expert valuer, or alternatively
(2) whether
there should be an inquiry as to the amount of the revised rent to be
determined by the court in accordance with the rent review provisions.
C. Whether if
the rent is now to be reviewed by either of the means referred to under B the
review is upwards only or upwards and downwards.
D. In the
event that the rent so reviewed is lower than the initial rent, as to how the
excess rent paid by the plaintiff since the review date should be accounted
for.
It is
convenient to deal first with the issue C. In my judgment, the rent review
provisions are not to be construed as provisions having an upwards-only effect.
I arrive at this conclusion because of the express words used in the direction
to the valuer by clause 1 of the fourth schedule to fix a rent which ‘in his
opinion represents the best yearly rent reasonably obtainable for the demised
premises’ on the suppositions thereafter set out including the supposition ‘of
a new letting’ on similar terms to those contained in the underlease ‘other
than the rent hereby reserved’. Those words plainly do not require an
upwards-only revision. The fact that para 1 provides that in default of
agreement the choice of the valuer shall be given to the president ‘upon the
application of the landlord’ does not alter this view. Had the parties intended
that the review provisions be upwards only it would have been extremely simple
expressly so to provide. Equally, in my judgment, this view is not affected by
the provisions of para 2 of the fourth schedule. In agreement with the
submissions of the plaintiff I regard those as administrative and accounting
provisions. They are designed only to deal with what shall happen during any
period after a rent review has been initiated and before the reviewed rent has
been determined. At most, in my view, the provision that rent shall be paid at
the level previously payable until the revised rent is ascertained ‘or until
the expiration of that rental period (whichever shall first happen)’ is there
so as to define the rent payable for any rental period where, either, the
revised rent has not been ascertained by the time that period expires, or where
no review of rent has been initiated. It is of note that the words ‘yearly
rent’ contained in the second sentence of clause 2(a) of the underlease and
which is made payable after the expiry of the initial period of the lease on
December 24 1992 are not defined. In my judgment, the effect of that sentence
is to make payable from that date ‘the yearly rent subject to review as
hereinafter mentioned’ that is the previous yearly rent during the initial
period, if reviewed, at the level to which it was altered as a result of such
review.
I now turn to
consider issue A. In my judgment, the provisions of para 1 of the fourth
schedule are to be construed as placing an enforceable requirement on the
defendants as landlords to apply to the president in the event that the
plaintiff has sought a review of rent and the parties have failed to agree the
level of such rent or the identity of a valuer to determine that level in
default of agreement. It seems to me, that the pattern of the paragraph
requires its fifth line to be read as if the words ‘to be’ appeared immediately
before the word ‘nominated’. The material words should therefore read ‘such
valuer … to be nominated by the
president for the time being of the Royal Institution of Chartered Surveyors
upon the application of the landlord made at any time after the commencement of
the relevant rental period’. The passage I have quoted from the speech of Lord
Diplock in the Subrook case indicates that if so read the words must be
taken to have mandatory effect.
If I am wrong
in this conclusion then, in my view, following the approach of the House of
Lords in the Sudbrook case an appropriate clause requiring the landlords
to make application to the president is to be implied to give business efficacy
to para 1 of the fourth schedule which I have construed as enabling a valuer to
fix a lower rent from that which pertained during the previous rental period,
it being assumed that if there appeared to be any real possibility that a review
would produce that result the landlords would be reluctant to initiate any
review. In my view, the provisions for fixing a revised rent after a rent
review as opposed to an ‘interim rent’ under para 2 of the fourth schedule have
broken down. Accordingly the court could either put right the machinery by a
process of implication of terms or, following Lord Fraser in the Sudbrook
case impose its own new machinery by directing an inquiry as to the proper
level of revised rent for the demised premises under para 1.
In the course
of argument I was referred to the case of Basingstoke and Deane Borough
Council v Host Group Ltd [1988] 1 WLR 348* and the judgment of
Nicholls LJ at p353 where, in construing a rent review clause, he said:
*Editor’s
note: Also reported at [1987] 2 EGLR 147.
We recognise
therefore that the particular language used will always be of paramount
importance. Nonetheless it is proper and only sensible, when construing a rent
review clause to have in mind what normally is the commercial purpose of such a
clause. That purpose has been referred to in several recent cases and is not in
doubt. Sir Nicolas Browne-Wilkinson V-C expressed it in these terms in British
Gas Corporation v University Superannuation Scheme Ltd …
‘There is
really no dispute that the general purpose of a provision for rent review is to
enable the landlord to obtain from time to time the market rental which the
premises command if let on the same terms on the open market at the review
dates. The purpose is to reflect the changes in the value of money and real
increases in the value of property during a long term.’
To the same
effect Dillon LJ said in Equity and Law Life Assurance Society plc v Bodfield
Ltd …
‘There is no
doubt that the general object of a rent review clause, which provides that the
rent cannot be reduced on a review, is to provide the landlord with some
measure of relief where, by increases in property values or falls in the real
value of money in an inflationary period, a fixed rent has become out of date
and unduly favourable to the tenant. The exact measure of relief depends on the
true construction of the particular rent review clause.’
The means by
which rent review clauses afford landlords relief in respect of increases in
property values or falls in the value of money is by providing, normally, for a
valuer, in default of agreement, to assess the up to date rent for the demised
premises on successive review dates.
In my view,
what Nicholls LJ was saying was that, subject to what may be taken as the
meaning of plain words used in the relevant clause, a rent review clause is to
be interpreted in favour of the landlord so that he receives a true market rent
for his premises at the date of review. What is contended for by the landlords
in this case is that the review clause must be so operated so that the
landlords can prevent that result in circumstances where they believe that the
market rent would be less than the rent currently being charged.
In arriving at
this alternative conclusion I must reluctantly recognise that I seem to have
departed from the approach of Judge Rich in the Harben case although
there may well exist factors in that case of which I am not aware because of
the limited nature of the report.
I now turn to
deal with issue C. In the course of argument it was conceded, on behalf of the
landlords, that the review provisions in para 1 of the fourth schedule of the
underlease could not be a true upwards-only clause because it was possible,
under those provisions that the landlords, believing that the market favoured
an upward revision, might apply to the president for the appointment of a
valuer but be disappointed in the result. After some resistance it was conceded
that the provisions of para 2 of the fourth schedule were deficient in that
they provided for no machinery for the repayment by the landlords to the tenant
of any excess interim rent over the rent actually fixed by the review. It was
conceded that this was an appropriate case for the court to imply a term
placing an obligation on the landlords to repay such excess. I will accordingly
do so.
Turning
finally to issue B and the form of any relief. I will make a declaration in the
terms of para 1 of the originating summons. I accept the submissions of the
plaintiff that this is an appropriate case for the making of a mandatory
injunction in the terms of para 2 of the originating summons. It is entirely
plain from the words used in that paragraph what it is that the court expects
the defendants to do. This course has the additional advantage of making
further court proceedings unnecessary. There need be no such anxiety such as
was voiced by Lord Fraser in the Sudbrook case at p486D that enforcement
of the court’s order, in the event of default, would have to be by committal
proceedings. The letter of application to the president could be signed by the
master in default of the defendants doing so: see section 39(1) of the Supreme
Court Act 1981. Finally, I will make declarations in the terms of para 4 and 5
of the originating summons in the latter case omitting a reference to para 3.
