Landlord and tenant — Rent review — Whether landlord lost right to review rent by reason of not having obtained a certificate of an independent valuer timeously
company is the owner of a shop and adjoining display case in Victoria Street,
London SW1 — The defendants are the original lessee and the present lessee by
assignment under two leases granted in 1982, one for the shop and one for the
display case — The two defendants are members of the same group of companies —
The leases provide for two rent reviews one of which was to take effect on
March 25 1990 — In accordance with the provisions for review the ‘date of
increase’ was March 25 1990 and the ‘review date’ meant December 25 1989 — The
rent review clause in issue provided that immediately after December 25 1989
the rack-rental value of the premises on that date ‘shall be ascertained by
agreement in writing signed by or on behalf of the lessors and the lessee or in
default of such agreement before [25th March 1990] (time in this respect being
of the essence of the contract) shall be estimated and certified by an
independent valuer’ — The plaintiffs contended that the words ‘before 25th
March 1990’ related to ‘in default of agreement’ and accordingly in the events
which had happened they had not lost the right to the review — The defendants
contended that the words ‘before 25th March 1990’ refer forwards to the
estimation and certification of the rack-rental value by the independent valuer
and that unless the independent valuer had estimated and certified that value
before March 25 1990, the landlord had lost its right to the rent review
The clause in the lease, which provides for the rent to be paid in advance on
the usual quarter days, contains a proviso which clearly contemplated the
possibility that an increased rent flowing from the rent review procedure might
not be known until after the relevant date of increase — The landlord’s
interpretation of the lease was preferred for the following reasons — (1) On a
reasonably careful, but not overly meticulous, first reading of the clause in
issue, the strong first impression which it created was that the phrase ‘before
the date of expiration . . .’ went with ‘in default of such agreement’ — (2)
The landlord’s interpretation fitted better into the context of the lease as a
whole having regard to the following points: (i) that the complete procedure
for the appointment of an independent valuer by the president of the Royal
Institution of Chartered Surveyors might obviously take some considerable time
and the relevant clause did not contemplate the whole process must be over
within three months; (ii) the draftsman must have had in mind that in many
cases the rent review machinery would still be going on through the procedure
after the relevant date of increase had passed; (iii) if there was a default of
agreement, on the landlord’s interpretation of the clause the right to initiate
the independent valuer procedure arose on or after March 25 1990, whereas on
the tenant’s interpretation there was no clear answer to the question; (iv) the
clause in issue contained a possibility of the parties agreeing a late date —
(3) The commercial reality did not support the tenant’s construction having
regard to the steps which had to be taken within the three months if the
landlord were to obtain a rent review from a tenant who was not prepared to
agree to the landlord’s figures — (4) The grammatical and linguistic reading of
the clause fitted better the landlord’s interpretation — (5) The ‘time of the
essence’ provision did not refer forward to the time-limit for the decision of the
independent valuer
The following
cases are referred to in this report.
Art &
Sound Ltd v West End Litho Ltd [1992] 1 EGLR
138; [1992] 14 EG 110
Bradley
(C) & Sons Ltd v Telefusion Ltd (1981)
259 EG 337, [1981] 2 EGLR 94
Kings
(Estate Agents) Ltd v Anderson [1992] 1 EGLR
121; [1992] 05 EG 166
Wrenbridge
Ltd v Harries (Southern) Properties Ltd
(1981) 260 EG 1195, [1981] 2 EGLR 5
This was an
application by way of an originating summons by the plaintiff, Shuwa Ashdown
Corporation, as to the proper construction of leases relating to a shop and
display case in Victoria Street, London SW1, of which the first and second
defendants, Grayrigg Properties Ltd and C & J Clark International Ltd, were
the original lessee and present lessee by assignment.
Paul Morgan QC
(instructed by Berwin Leighton) appeared for the plaintiff; Benjamin Levy
(instructed by the solicitor to C & J Clark International Ltd, of Street,
Somerset) represented the defendants.
Giving
judgment, MR ANDREW PARK QC said: This case raises a question of law
about two identical rent review clauses in two leases. The plaintiff company is
the present landlord. The defendants are the original lessee and the present
lessee by assignment. The two defendants are both members of the same group of
companies and nothing turns on the difference between them or on the assignment
from the one to the other.
The first
lease relates to a shop in Victoria Street, London SW1, and the second lease
relates to a display case adjoining the shop. The rent for the shop is substantial
whereas the rent for the display case is quite small. Any differences between
the two leases are immaterial to the point in dispute in the present case and
in this judgment I shall almost entirely confine myself to the lease of the
shop. The lease was originally granted in 1982 and runs to a date in 1997. It
contains provisions for two rent reviews, one taking effect on March 25 1983
and the other taking effect on March 25 1990. This case is about the rent
review which was to take effect on March 25 1990. The basic question I have to
determine is whether the landlord has lost its right to review the rent by
reason of not having obtained a certificate of an independent valuer by March
25 1990. The landlord says that it has not lost its right to the rent review.
The tenant says that it has. I agree with the landlord and in this judgment I
will endeavour to explain why. I begin by explaining in more detail how the
point arises.
Clause 2(1) of
the lease provides for a ‘Basic Rent’, which is a specified amount, stepped up
at three dates. At the time with which I am concerned the basic rent was
£21,000 pa.
Clause 2(2)
reads as follows:
‘Date of
Increase’ means each of the seventh and fourteenth anniversaries of the 25th
day of March One Thousand Nine Hundred and Seventy-Six.
For the purpose
of this case the date of increase can be taken to mean March 25 1990.
Clause 2(3)
reads as follows:
‘Review Date’
means the respective dates of commencement of the periods of three calendar
months immediately preceding each Date of Increase.
On the same
principle, for the purposes of this case, the review date can be taken to mean
December 25 1989.
Clause 2(4)
contains a definition of ‘Rack Rental Value’ in fairly conventional terms on
the detail of which nothing turns. The definition rests essentially on the
concept of the rent which could be
and a willing tenant.
Clause 3(a)
contains the crucial rent review provision. I will first set out the subclause
in full, before analysing and attempting to simplify it so as to bring out the
critical point for the purposes of this case. In setting out the clause in full
I will, however, underline the particular words which are of critical
importance.
The critical
part of the subclause is the early part. In my judgment it is helpful to
reformulate it substituting actual dates for references to a review date. It is
also helpful to eliminate the words ‘or before such later date as may from time
to time be agreed in writing between the Lessors and the Lessee’, since there
never was any such date agreed in writing. On that basis, I believe that the
crucial contents of the subclause can be expressed in simplified terms as
follows:
Immediately
after [25th December 1989] the Rack Rental Value of the demised premises on
that date shall be ascertained by agreement in writing signed by or on behalf
of the Lessors and the Lessee or in default of such agreement before [25th
March 1990] (time in this respect being of the essence of the contract)
shall be estimated and certified by an independent valuer . . .
I have
emphasised the words ‘before 25th March 1990’, because the point in dispute in
the case is to identify what it is to which those words relate.
Do they relate
to ‘in default of agreement’, which is what the landlord says and what appears
to me to be correct? On that
interpretation, if, by March 25 1990, there is a default of agreement about the
rack-rental value of the premises on the previous December 25, then the
procedure for having the rack-rental value estimated and certified by an
independent valuer can be put into effect.
Alternatively,
do the words ‘before 25th March 1990’ refer forwards to the estimation and
certification of the rack-rental value by the independent valuer? This is what the tenants say, and, if it is
right, it means that, unless the independent valuer has estimated and certified
the rack-rental value before March 25 1990, the landlord has lost its right to
the rent review.
Having
identified the crucial point in dispute, I will refer to the other relevant
clauses of the lease before coming back to clause 3(a).
Clause 4
provides for how the rent review is to take effect. As from each ‘date of
increase’ — that is in this case as from March 25 1990 — the lessee is to pay
the basic rent plus the excess of the reviewed rack-rental value above the
basic rent. In the case of the main lease of the shop, clause 4 is so worded
that the rent review can operate in an upwards direction only. That is not the
case for the lease of the showcase, but no one suggests that this difference
between the two leases can result in different answers to the questions in
dispute.
Clause 5(1)
provides for the rent to be paid in advance on the usual quarter day, and
continues with the following significant proviso:
The basic
rent and such additional yearly rents as aforesaid shall be paid by equal
quarterly payments in advance on the usual quarter days in each year without
any deduction whatsoever provided always that if the amount of the additional
rent payable under Clause 4 hereof as from any Date of Increase is not
ascertained until after that Date of Increase the Lessee shall continue to pay
(in addition to the Basic Rent) an additional yearly rent of the same amount as
was payable under Clause 4 hereof in respect of the year immediately preceding
that Date of Increase and upon ascertainment of the amount of the additional
sum (if any) due in respect of the period from that Date of Increase until the
quarter day next following the date of such ascertainment shall be paid by the
Lessee to the Lessors forthwith.
The proviso
clearly contemplates the possibility that an increased rent flowing from the
rent review procedure may not be known until after the relevant date of
increase as from which it is payable. None of the other provisions of the lease
are relevant to the point in dispute.
I return,
therefore, to the critical point on the construction of clause 3(a). In my
simplified restatement of the first part of the subclause the question is
whether the words ‘before 25th March 1990’ relate to default of agreement as to
the rack-rental value on the previous December 25, or whether they relate to
the time when the independent valuer has to estimate and certify the
rack-rental value if his estimate and certificate is to take effect. The former
interpretation is that advanced by the landlord. I have already indicated that
I agree with it. I can state my reasons under five headings.
1. First impression.
On a
reasonably careful, but not overly meticulous, first reading of the subclause,
the strong first impression which it created in my mind is that the phrase
‘before the date of expiration . . .’ etc, which I have reproduced as ‘before
25th March 1990’, went with ‘in default of such agreement’. First impressions
are not always right, but they are certainly pointers. This is, I acknowledge,
a matter of subjective impression, but the natural way that the clause strikes
me is in accordance with the landlord’s interpretation. Indeed, I had to read
it several times before I could persuade myself that it might just be capable
of also bearing the tenant’s interpretation. I am suspicious of an
interpretation which, on a first reading, did not strike me as right and which,
even after several readings, strikes me as strained and unnatural.
2. The context of the lease
as a whole.
In my
judgment, the landlord’s interpretation fits better into the context of the
lease as a whole. There are four separate points which I make in this
connection.
(i) The later part of clause 3(a) (that is the
part coming after the initial provisions of it which I have sought to
paraphrase in simplified terms earlier in this judgment) goes into considerable
detail about the procedure for obtaining an estimate and certificate of the
rack-rental value from an independent valuer. At least two third parties are
likely to be involved. One is the president of the Royal Institution of
Chartered Surveyors and the other is the independent valuer whom he appoints.
The clause, moreover, contemplates the possibility of various things going
wrong in the course of the procedure. For example, the president of the RICS
may not be available, and the clause governs what is to happen in that case.
Further, the valuer appointed by the president or his substitute may relinquish
the appointment or die or for some other reason be unable to complete ‘his
duties hereunder’. All of this can only start after the landlord and the tenant
have failed to agree upon the rack-rental value. The complete procedure might
obviously take some considerable time, and it seems to me that clause 3(a)
taken as a whole does not contemplate that the whole process must be over
within three months.
(ii) I have previously, in this judgment, set out
the proviso to clause 5(1) which clearly visualises a case where the date of
increase will come and go before the new reviewed rent is known. It is just
possible to reconcile this with the tenant’s interpretation by saying that it
covers only a case where landlord and tenant agree to an extension of time for
the process of attempting to negotiate and agree a new rent. I find it very
hard to believe that the proviso is covering only that case. I believe that it
is a clear indication that the draftsmen had in mind that in many cases the
rent review machinery would still be going through the procedure after the
relevant date of increase had passed.
(iii) Clause 3(a) visualises two alternative ways
in which a new rent may be established. The first is by agreement between
landlord and tenant. The second is, in default of agreement, by an independent
valuer. Obviously the clause assumes that the independent valuer procedure is
to be initiated only if the parties have failed to reach agreement. So much,
indeed, is clearly implied by the words ‘in default of agreement’. That raises
this question: when can either party — almost certainly in practice the
landlord — exercise its right to initiate the independent valuer procedure by
applying to the president of the RICS to appoint a valuer? On the landlord’s interpretation there is a
clear answer to the question: on or after March 25 1990. On the tenant’s
interpretation there is no clear answer to the question. Perhaps the tenant’s
case is that if the landlord, immediately after December 25 1989, proposes a
new rack-rental value and the tenant does not immediately agree to it, then the
landlord can instantly apply to the president of the RICS to appoint a valuer.
That seems to me, however, to be a very unsatisfactory position. In the context
of the lease as a whole, I believe the period between December 25 and the
following March 25 is seen as a period of negotiation with a view to reaching
agreement, and that the power of the landlord to initiate the independent
valuer procedure arises on March 25 if no agreement has by then been reached.
(iv) Although in my simplified verslon of clause
3(a) the crucial words are expressed simply as ‘before 25th March 1990’, the
actual clause refers also to the possibility of a later date being adopted by
agreement. The actual words are:
before the
date [25th March 1990] of expiration of the period of three months next
following such Review Date or before such later date as may from time to time
be agreed in writing between the Lessors and the Lessee . . .
The
possibilities of the parties agreeing a later date seems to me to make
virtually no sense on the tenant’s construction of the clause. Ignoring the
provision for an extension of the time-limit for the moment, the tenant’s basic
proposition is that, if the independent valuer does not estimate and certify
the rack-rental value by March 25 1990, the landlord has lost its rent review.
If that is right why would
It should be remembered that, at least in the case of the shop, the rent
review is an upwards-only review. It seems to me that this is a powerful
indication that what, in the draftsman’s contemplation, had to happen by March
25, unless the parties agreed to a later date, was the reaching of agreement
between landlord and tenant on the new rent, not the estimate and certificate
of the independent valuer.
3. Commercial reality.
The commercial
effect if the tenant is correct is very strange, and most unlikely to be agreed
to by any competently advised landlord.
According to
the tenant at least the following steps must happen within three months if the
landlord is to obtain a rent review from a tenant who is not prepared to agree
to the landlord’s figures: first, there must be a failure by landlord and
tenant to agree a rack-rental value; second, one of them — presumably the
landlord — must invite the president of the RICS to appoint an independent
valuer; third, the president must identify an independent valuer and offer the
appointment to him; fourth, the independent valuer must accept appointment
(which could take some time, bearing in mind that questions of fees and costs
have to be covered and are not provided for in the lease); fifth, the
independent valuer must carry out the research and other work which the
exercise requires; sixth, the independent valuer must prepare and produce his
estimate and certificate.
That is a very
tight timetable to be squeezed within three months. If anything goes wrong and
the estimate and certificate is not produced within three months, then,
according to the tenant, the landlord has lost its rent review. It will be
apparent that many of the things which could go wrong are things over which the
landlord would have no control at all. In my judgment, it is unlikely in the
extreme that any landlord would intend the clause to have such an effect. It is
not a satisfactory answer to the point to say that the landlord might have some
sort of right of action against the independent valuer if the certificate is
produced too late.
In this
connection I should mention that a somewhat similar argument advanced on behalf
of the landlord was unsuccessful in C Bradley & Sons Ltd v Telefusion
Ltd (1981) 259 EG 337, [1981] 2 EGLR 94. However, in that case the
independent third party was to be an arbitrator and the Arbitration Act 1950
was to apply. That Act contained a provision for a statutory extension of the
time for an arbitration. This enabled Walton J to say that the ‘tight
timetable’ argument on the part of the landlord was not wholly convincing. But
the tight timetable argument on the part of the landlord in this case seems to
me to be thoroughly convincing. The independent valuer in the case of this
lease is to act as an expert and not as an arbitrator. Thus the Arbitration Act
will not apply. If the tenant’s construction of the subclause is correct and
the independent valuer, for whatever reason, does not produce his estimates and
certificate within three months, the landlord loses its rent review, and there
is no possibility of an extension of time being obtained either from the
Arbitration Act or from any other Act.
4. The grammatical and
linguistic reading of the clause.
In my
judgment, the landlord’s interpretation of the clause is not just better on
first impression (point 1 above); it also stands up much better to a close
linguistic analysis. One point stands out. It is that the phrase in the clause
which imports the time-limit comes before, not after, the crucial word ‘shall’
in the phrase ‘shall be estimated and certified by an independent valuer’.
Expressing the
subclause in my simplified wording it reads as follows:
The Rack
Rental Value . . . in default of agreement before [25th March 1990] (time in
this respect being of the essence of the contract) shall be estimated and
certified by an independent valuer . . .
If the clause
was to have the meaning which the tenant seeks to ascribe to it, it would linguistically
have been worded as follows:
The Rack
Rental Value . . . in default of agreement shall before 25th March 1990 (time
in this respect being of the essence of the contract) be estimated and
certified by an independent valuer . . .
Counsel for
the tenant agrees that that form of wording would have made the position clear,
but says that the actual structure of the subclause is grammatically consistent
with his interpretation. I would go with him to the extent of accepting that
his interpretation is not grammatically impossible, but I certainly consider
that as a matter of language the structure of the clause strongly favours the
landlord’s construction.
5. The
‘time of the essence’ provision does not change my conclusion.
This is not so
much a positive reason for the landlord’s construction as saying that I am not
deflected from that construction by arguments advanced to me and based around
the words in the subclause ‘(time in this respect being of the essence of the
contract)’.
I accept that,
on the interpretation which I believe to be correct, those words probably add
nothing. If, by March 25 1990, agreement had not been reached by landlord and
tenant, then the landlord could initiate the independent valuer procedure even
if the ‘time to be of the essence’ provision was not included in the clause. I
nevertheless think that the reason why it was included was to head off any
possibility of a tenant arguing that a landlord could not initiate the
independent valuer procedure on that date if, as matters had turned out, the
process of seeking to reach agreement between landlord and tenant had not yet
got to the stage of breakdown. I appreciate that any such argument on the part
of a tenant would have been a bad argument anyway, but I nevertheless think
that the draftsmen had nothing more in mind than what I have suggested.
If the ‘time
to be of the essence’ provision was not in the subclause at all I believe that
the arguments in favour of the landlord’s interpretation and against the
tenant’s interpretation would be overwhelming. I am not persuaded that the
insertion of the provision, and the circumstances that on the landlord’s
interpretation it does not on a careful analysis achieve anything, should lead
me to depart from what would otherwise have been my interpretation of the
subclause, and to treat the time-limit as attaching, not to the default of
agreement between landlord and tenant, but to the making of an estimate and
certificate by the independent valuer.
In this
connection I was referred to several cases in which rent review clauses having
some similarity to that before me contained a ‘time to be of the essence’
provision. In two of them the judges regarded the provision as an indication
that the time-limit was to relate to the independent valuer’s certificate, not
to the default of agreement: see Walton J in C Bradley & Sons Ltd v Telefusion
Ltd, and Ferris J in Art & Sound Ltd v West End Litho Ltd
[1992] 14 EG 110*. In at least two other cases the ‘time to be of the essence’
provision was regarded as no more than a confirmation that, if the deadline for
reaching agreement has arrived and there is no agreement, then the right of the
landlord to initiate the independent valuer procedure is not to be delayed
while further attempts to reach agreement take place: see Lloyd J in Wrenbridge
Ltd v Harries (Southern Properties) Ltd (1981) 260 EG 1195, [1981] 2
EGLR 5, and Mervyn Davies J in Kings (Estate Agents) Ltd v Anderson
[1992] 05 EG 166 [1992] 1 EGLR 121† . At the end of his judgment in the latter
case Mervyn Davies J (in a passage which I accept was obiter) referred
to Walton J’s decision in the Bradley case and said [ at p 123F]:
I have great
difficulty in agreeing with Walton J. It seems to me that the words ‘time to be
of the essence . . .’ relate back to the word ‘agreement’ and have the force of
indicating that if an agreement is not reached by the relevant date then there
is to be no more time allowed so that the landlord can apply for arbitration.
*Editor’s
note: Also reported at [1992] 1 EGLR 138.
† Editor’s
note: Also reported at [1992] 1 EGLR 121.
If it was
necessary for me to line up with one school of judicial thought rather than the
other, I suspect that I would respectfully agree with Mervyn Davies J.
However, I do
not think that I do need to resolve this dilemma, because there is, as it seems
to me, a crucial distinction between the structure of the rent review clauses
considered in the other cases and the structure of the clause in this case. It
arises in this way. All the clauses can be analysed into three stages, as
follows. They begin (i) by providing for the possibility of the new rent being
agreed between landlord and tenant, then (ii) if there is no agreement they
proceed (iii) to provide for some form of determination by an independent
expert or arbitrator. The ‘time to be the of the essence’ wording is typically
found somewhere between (ii) and (iii), and the question is whether it is a
reference back to (ii) or a reference forward to (iii). But in all cases except
this one there are two dates which specify time-limits. One appears in (i) and
the other in (iii). They may be the same date or different dates, but two
time-limit dates appear. In this case, by way of contrast, there is only one
time-limit date, and it appears in (ii).
present case:
The Rack
Rental Value . . . shall be ascertained by agreement or in default of agreement
before [25th March 1990] (time in this respect being of the essence of the
contract) shall be estimated and certified by an independent valuer . . .
For the clause
to be truly comparable with, for example, that construed by Walton J in the Bradley
case, it would have had to be structured in this way:
The Rack
Rental Value . . . shall be ascertained by agreement before [25th March 1990]
or in default of agreement (time in this respect being of the essence of the
contract) shall be estimated and certified by an independent valuer before
[25th March 1990] . . .
The difference
is that, in the actual subclause, the ‘time to be of the essence’ provision
follows immediately after the single cut-off date, whereas in the other
provisions it is significantly separated from both of the cut-off dates. It
seems to me that the other clauses far more readily lend themselves to the
‘time to be of the essence’ provision being read as referring forward to the
time-limit for the decision of the independent expert or arbitrator.
I have
therefore concluded that neither the ‘time to be of the essence’ provision nor
the other cases on similar but nevertheless significantly different clauses to
which I have been helpfully referred should govern or affect my conclusion in
this case.
My conclusion
is that the landlord’s construction of the lease is correct. The landlord did
not lose its right to its rent review when March 25 1990 passed without an
independent valuer having estimated and certified the rack-rental value. In the
case of the lease of the shop a valuer was after that date appointed by the
president of the RICS. In my judgment he was validly appointed. In the case of
the lease of the showcase a valuer has not been appointed, but the landlord is
entitled to apply to the president for an appointment. I will make declarations
accordingly.
Declarations
accordingly.
