Landlord and tenant — Rent review clause in lease of shop premises — Whether a letter sent to tenants by landlords’ agents was an effective ‘trigger’ notice under the review clause resulting, in the absence of further action by either party, in an increase of rent — The letter stated that ‘The rent required as from the review date is £6,000 per annum exclusive, and we look forward to receiving your agreement’ — Underneath the signature the words ‘subject to contract’ appeared in capital letters — The previous rent was £3,000 per annum — Did this letter constitute an operative specification under the review clause or was it an invitation to negotiate? — Held that the letter did not constitute an unequivocal notice bringing the review clause into operation — It appeared to contemplate discussion and the possibility of ultimate
In these
proceedings the plaintiffs, landlords of shop premises at 35 Moscow Road,
London W2, claimed that they were entitled to rent at a rate increased from
£3,000 to £6,000 per annum as from September 29 1981 by virtue of the operation
of the rent review clause in the lease of the premises. The defendants, Thomas
Heinitz and another, the tenants of the premises, counterclaimed that the
notice on which the landlords relied was not effective and that the rent
remained at the previous rate of £3,000 per annum.
Kirk Reynolds
(instructed by Arram, Fairfield & Co) appeared on behalf of the plaintiffs;
R Kirk (instructed by Julius Back & Co) represented the defendants.
Giving
judgment, MICHAEL DAVIES J said: The plaintiffs in this case are the lessors
and the defendants are the lessees of some shop premises at 35 Moscow Road,
London W2. The claim is for rent, but the point in issue in this short cause,
in which it has not been necessary for any oral evidence to be called, is the
construction of a letter, which I shall later read in the course of this
judgment, dated January 20 1981, sent by the plaintiffs’ estate agents to the
defendants and which is relied upon as an effective notice to increase the rent
payable by the defendants.
The lease,
dated on the front December 22 1977, is exhibit P1, and, of course, the demised
property is identified and described, and it is provided that the rent under
this lease, which was for a term of 15 years from September 29 1976, should for
the first five years be the yearly sum of £3,000. Then it is provided — and I
read the exact words:
For the next
five years of the said term either the yearly rent reserved in subclause (a)
hereof
that is £3,000
per annum
or the open
market rental value of the demised premises at the review date whichever is the
higher and in either case the same shall remain constant during the whole
period referred to in this subclause.
Then there is
a similar provision for the third and final five years. Accordingly, this was,
of course, a rent review clause.
Then ‘open
market value’ is defined as follows:
The
expression ‘open market value’ means the annual rent value of the demised
premises in the open market which might reasonably be demanded by a willing
landlord on a lease for a term of years equivalent in length to the residue
unexpired at the review date of the term of years hereby granted with vacant
possession at the commencement of the term,
and so on.
Then the
expression ‘review date’ is defined as meaning the expiration of the fifth year
and the expiration of the 10th year of the term. Accordingly, the first review
date fell five years from September 29 1976, namely on September 29 1981.
Then there
comes the most important part of the lease for the purpose of this case, and it
is clause 3:
The open
market rental value shall be determined in manner following that is to say it
shall be such annual sum as shall be
(a) specified in a notice in writing signed by
or on behalf of the Lessors and posted by recorded delivery post in a prepaid
envelope addressed to the Tenant at the demised premises at any time before the
beginning of a clear period of two quarters of a year (commencing on one of the
usual quarter days hereinbefore mentioned) immediately preceding the review
date (and such notice shall be conclusively deemed to have been received by the
Tenant in due course of post) or
(b) agreed between the parties before the
expiration of three months immediately after the posting by recorded delivery
of such notice as aforesaid in substitution for the said sum or
(c) determined at the election of the Tenant (to
be made by counternotice in writing served by the Tenant upon the Lessors not
later than the expiration of the said three months) by an independent surveyor
appointed for that purpose by the parties jointly in writing or upon their
failure to agree upon such appointment within one month immediately after the
date of service of the said counternotice then by an independent surveyor
appointed for that purpose on the application of either party alone by the
President for the time being of the Royal Institution of Chartered Surveyors and
in either case in accordance with the provisions of the Arbitration Act 1950 as
amended.
Then the only
other clause in the lease I think I need read is this:
All
stipulations as to time in the foregoing sub-clauses
which includes
those which I have read
shall be of
the essence of the Contract and shall not be capable of enlargement save as
agreed in writing by the parties.
Now, clause 3,
which I have read in full, which sets out the means of determination of the
open market rental value, is what I believe is called a specification agreement
determination clause. In simple terms 3(a) means this: the landlord serves a
notice and that notice has to be served at least six months before the
expiration of the five-year period. In that notice he shall specify what the
open market rental value for the purposes of the rent review shall be. That has
been described, and rightly described, as a trigger notice. The tenant, if a
proper notice is so served, may do nothing. If that is so, then the figure
specified by the landlord in a proper notice served at the proper times becomes
the new rent.
The second
possibility, which arises under 3(b), is that, within three months of the
posting of the notice specifying in the manner already dealt with, there may be
agreement between the parties; they may get together and come to an agreement
as to the revised rent figure. If they do that, then that figure as agreed
between the parties becomes the open market rental value and, accordingly, the
new rent.
Thirdly, 3(c),
the tenant may give a counternotice within the three months immediately after
the posting of the notice to him specifying the open market rental value, such
counternotice setting on foot a valuation by an agreed surveyor or, failing
that, a surveyor appointed by the president of the Royal Institution of
Chartered Surveyors on the application of either party.
I have taken
time not only to read the exact words in the lease but to put them into less
formal language. There is no difficulty whatsoever, so it seems to me, in understanding
and construing those provisions. The difficulty that arises here begins when
the notice now relied upon as being a notice under 3(a) is considered. It is
dated January 20 1981; it is addressed to the defendants at the demised
premises, 35 Moscow Road, which was the correct procedure according to the
lease, and then it goes on:
Dear Sirs,
re: 35 Moscow
Road, London W2
We act on
behalf of your Landlord, Shirlcar Properties Ltd, and have been instructed to
deal with the rent review on the above premises due as at September 29 1981.
The rent
required as from the review date is £6,000 per annum exclusive, and we look
forward to receiving your agreement.
Yours
faithfully,
And then,
although it is not on my copy, it is I think agreed there was a signature of
the senders, the estate agents, and then the words underneath the signature in
capital letters and underlined appear, ‘SUBJECT TO CONTRACT‘. A little
lower down, also in capital letters and underlined, the words ‘RECORDED
DELIVERY‘.
No further
action was taken by either party — in the absence of evidence, that must be the
irresistible conclusion — until the rent demands were sent out to the
defendants — I say ‘rent demands’ because there were other premises in Moscow
Road involved as well, and I am told that the present is a test case which
relates to all those properties — claiming rent at the increased figure from
September 29 1981. On October 15 1981 the defendants’ solicitors wrote:
We are
instructed by the lessees of each of the above numbered properties who have
received your recent rent applications in which you purport to suggest that
there has been a rent increase as from September 29 1981.
We have seen
our clients’ leases and have also seen your purported notice of increase of the
rent dated January 20 1981.
We have
advised our clients that in our view that notice does not constitute a proper
notice pursuant to the terms of our clients’ leases. In the circumstances we
have advised our clients to make payment of the rent to which the landlords are
legally entitled and nothing more.
If the
plaintiffs are right, accordingly they are entitled to rent at the figure of
£6,000 per annum. If the defendants are right, the plaintiffs are entitled to
rent only at the rate of £3,000 per annum. In other words, on the defendants’
case there has been no effective notice of increase and therefore no effective
increase.
Returning to
the letter which is alleged to constitute the notice, when I first read it I
thought that it might be argued that the words ‘and we look forward to
receiving your agreement’ could be regarded as mere surplusage. That is not the
plaintiffs’ contention
What Mr Reynolds submits — and the court is indebted to him and to Mr Kirk, on
behalf of the defendants, for their arguments — is that this was a perfectly
good notice under clause 3(a). It specified the annual sum which would be the
open market rental value, and accordingly the revised rent, but it also looked
forward to a discussion, or discussions, around that figure between the
plaintiffs and the defendants or their representatives. As to the words ‘SUBJECT
TO CONTRACT‘, Mr Reynolds submits that on the true construction those words
do not relate to the letter as a whole but mean that any discussion which might
take place following the invitation, which it is submitted is implicit if not
explicit in the last words of the letter, would not be binding until a formal
contract was reached and would be subject until that time to agreement of
course, and also to instructions. Mr Reynolds reminds me of the classical
meaning — and it is not necessary to refer to any cases, as he says, to support
it — of the words ‘SUBJECT TO CONTRACT‘, as follows: Where negotiations
or discussions are expressly or impliedly made subject to contract, then the
parties remain in a state of negotiation unless and until a formal contract is
drawn up and signed. I am not sure how far that definition really assists him
in this case. He submits that the word ‘required’ is consistent with a
unilateral specification and it can be, as it were, severed from the last
phrase in the letter — the last part of that sentence — and the words ‘SUBJECT
TO CONTRACT‘.
I do not think
that counsel disagree as to the test or tests to be applied. Mr Reynolds
submits it is this: could any reasonably minded tenant think that this was a
negotiation prior to the initiation of rent review, rather than the first step,
the trigger letter, in the rent review proceeding? The defendants say that to be effective the
specification in a letter or notice sent, or purported to be sent, under 3(a)
must be clear and unequivocal. It must not be, or look like, an opening shot in
negotiation.
I have been
referred to several cases of which I do not think any are suggested to be, as
one would expect them not to be, precisely on all fours with the present case.
However, there are observations which give some general guidance. The first is
the case of Keith Bailey, Rogers & Co v Cubes Ltd [1976] 31
P&CR 412, a decision of Templeman J, as he then was. The dispute there
concerned a notice under section 25 of the Landlord and Tenant Act 1954, and
the question was whether that notice, which was in the common form of notices
served under that section of the Landlord and Tenant Act, was sufficient to
operate the break clause which existed in the headlease. The learned judge held
that it was. He said at p 415:
In my
judgment, anyone receiving one of the notices, with the accompanying letter,
must have realised at once that the persons serving the notice were clearing
out of the way the lease and underlease by operating the break clause and were
bringing themselves into direct relations with the plaintiffs as occupiers and
were offering to grant them a new lease under the 1954 Act.
Then lower
down on p 415 come these words:
If it is
clear — and I find it is clear — that each of the recipients could be in no
doubt as to what the landlord was up to and what the notice and the letter
meant as far as he was concerned, it does not seem to me that the court is
entitled or bound to be perverse and invent imaginary difficulties which might
have arisen in other cases.
The learned
judge then, in, if I may say so with great respect, a manner typical of him,
was clearly, succinctly and in robust fashion, stating what really is the test
here. Would a recipient be in no doubt as to what the landlord was up to? Both sides here rely on that case as a guide.
Mr Reynolds says the tenant could be in no doubt; Mr Kirk says that the notice
is at least equivocal.
In the last
few words I read from the judgment of Templeman J he was issuing a warning, as
I read his words, against testing a possible construction or constructions of a
document or notice against hypothetical circumstances. That approach did not
entirely commend itself to Goulding J in the case of Bellinger v South
London Stationers Ltd (1979) 252 ESTATES GAZETTE 699. I do not think that I
need go into the facts in that case or really the conclusions of the learned
judge, but he said at p 702:
It seems to
me that the matter can be tested in this way. Supposing that a day or two after
March 31 Mr Levinson, or someone else on behalf of the tenant, had written to
Mr Bellinger and said that the tenant had taken advice and, having regard to
current rentals and to the possible costs of arbitration, was prepared to
accept after all the figure of £5,250. Suppose that had happened, and suppose
that Mr Bellinger, on behalf of the landlord, had then turned round and said,
‘Oh, no; you have by your letter of March 31 required an arbitration, and my
figure of £5,250 was on my own advice a low one, and I would now rather go on
and see what I can get from an arbitrator’, would the landlord have been
entitled to insist on that course? I
cannot believe that the court in those hypothetical circumstances would have
construed the letter of March 31 as a counternotice that opened the door
irrevocably (in the absence of further agreement) to an arbitration. I do not
forget, indeed, that Templeman J, as he then was, in the case which I have
cited
that is the
one that I have also cited — Keith Bailey
seaid not
only that the court should not be perverse and should not be over-obstructive,
but also that the court should not invent imaginary difficulties which might
have arisen in other cases. None the less, on a simple question of
interpretation such as this is, I know of no other method than to test the
meaning of the language in different hypothetical circumstances, and I am
forced to the conclusion . . .
and then the
learned judge stated his conclusion, which was that there was nothing
sufficiently specific to constitute a counternotice under the clause in the
lease in that case.
Mr Kirk says
that if various hypothetical circumstances are used to test this letter as a
notice, then it shows again that it is not a clear and unequivocal
specification. For example — and he gave more than one — it would be open to
the landlords following this notice to enter into discussions, and then if for
some reason before the final date for the giving of a specification notice, as
I say, property values in Moscow Road dramatically increased, to serve a
further specification notice, putting forward a figure higher than that of
£6,000 per annum, and so on and so on. I think that, as Templeman J said, one
must be careful in not allowing perhaps somewhat fanciful circumstances to cause
one to invent ambiguity or obscurity if it does not exist; but at the same
time, I agree with Goulding J that it is a way of testing the document.
It is right to
say that Mr Reynolds submits that these cases, dealing sometimes with tenants’
counternotices — and the final case to which I need briefly refer is another
such — are not necessarily of application to a notice from the landlord, and I
bear that comment in mind. The final case, of which I do not think I need say
much, is Edlingham Ltd v MFI Furniture Centres Ltd (1981) 259
ESTATES GAZETTE 421. That case was tried by McNeill J, and first of all he
cited and applied a passage in a judgment by Templeman LJ, as by then he had
become, in the Amalgamated Estates case*, Templeman LJ said:
It is true that
no magic formula is required, but in my judgment, the tenant must make it clear
to the landlord that he proposes to have the rent decided by arbitration in
accordance with the provision of the lease.
*Amalgamated
Estates Ltd v Joystretch Manufacturing Ltd (1981) 257 EG atp 493
Then later on
McNeill J said this:
I do not
think it is necessary for the purposes of this judgment to express a view as to
whether or not a counternotice to be effective must expressly refer to the
relevant clause of the lease which is in point.
I stop there
to say that certainly it has not been argued here that a notice by a landlord
need refer to the particular clause in the lease.
My
inclination
goes on the
learned judge
would be to
say that that degree of formality is probably unnecessary
but then come
the important words:
But the
notice must identify the form of relief which the tenant is seeking and must do
so unequivocally. If a notice may be read as an invitation to negotiate or as
an election to arbitrate, it seems to me to be a defective notice.
Now, I know
that that is relating to a counternotice, and I have mentioned that it has been
rightly pointed out that care must be used in relying on such cases when
dealing with a notice. The fact is that, although no magic formula is required,
the cases that I have referred to, to which my attention has been drawn, do
make it quite clear, as I think, that all notices of this character must be
unequivocal and indicate what the landlord or tenant, as the case may be, is
doing by that notice. Is he giving a specification, for example, or an
invitation to negotiate? In other words,
coming back to where I started in dealing with the cases, in Templeman J’s
words: ‘Is the notice such as to leave the recipient in no doubt as to what the
landlord was up to?’
There is one
further point taken by the defendants which is not suggested to be a strong
point but is simply a circumstance which is relevant, as I agree it is, and
that is that this notice was served not
have been, and while, of course, the last thing one would want to do is to
criticise anyone for serving notices in good time, that does seem to me, as far
as it goes, rather to tend to support the construction, or the probability of
the construction, which the defendants contend for as the right one.
Turning back
for the last time to the letter, it seems to me that, taken as a whole, it is
rightly subjected to the criticisms put forward on behalf of the defendants. It
is a very simple process indeed, so it seems to me, to specify as provided for
in clause 3(a), but that is not what the plaintiffs’ agents did. True, they
mention the date, but then they look forward to discussion and, as I interpret
the words, ultimate agreement; and then not any particular part of the letter
but the whole letter is made subject to contract. It seems to me that, received
as it was over two months before the date when the specification notice had to
be given, the effect on a reasonable tenant would not be: ‘This is a letter
saying that the rent will be £6,000 a year unless I either serve a
counternotice asking for an independent surveyor or set on foot some
discussions leading to an agreement at another figure.’
The point is
not easy and I have warned myself that the court should not be astute to find
some mere technicality to disqualify the notice. I have tried not to do that,
and Mr Kirk has expressly stressed that he submits this is not a mere
technicality. The question is, I repeat: did this notice make quite clear to
the recipient what the plaintiffs were up to?
I do not think that it did. I do not think it is an unequivocal notice
under clause 3(a). I think it is looking forward, as I have said, to
discussions and agreement, and the whole letter, perhaps most important of all,
is subject to contract. It seems to me it can only mean everything in the
letter is ‘subject to formal agreement between us. Until then, negotiation is
the state which we are in’. That, indeed, is in less felicitous language,
adopting the definition of the words ‘SUBJECT TO CONTRACT‘ which Mr
Reynolds gave.
As I have
said, my construction of the letter accepts the submissions made by the
defendants, and accordingly it seems to me, subject to what counsel may say,
the defendants are entitled to judgment.
Judgment was
given in favour of the defendants with costs on the claim and counterclaim.
