Landlord and tenant — Rent review clause — Construction — Meaning of ‘proportion’ — Whether a part or a comparative relation — Numerator larger than denominator
contest arose from an agreement which originally contemplated the grant of one
lease for 42 years by the defendant landlords to the plaintiff tenants — This
plan was superseded by the grant of two leases, the first being a lease for
seven years at an annual rent of £49,000 and the second being a reversionary
lease for 35 years, also at a rent of £49,000 but subject to review — Both
leases were dated July 1 1966, the reversionary lease commencing from July 1
1973 —
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 — The reviewed
rent was 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 will be seen that the original rent of £49,000
was in fact 109.13% of the initial rent as defined
submitted that a percentage or fraction in excess of 1 could not be a
‘proportion’ of the fair rack-rental market value — They accordingly claimed
that the rent must remain at £49,000 during the rest of the term — The
landlords argued 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 — They made an alternative
suggestion that the rent from the review date was simply a sum equal to the fair
rack-rental market value
pointed out that the original agreement was for one lease for 42 years but the
revised agreement provided for two leases of the same aggregate length of 42
years with one rent review after 21 years — It was not therefore surprising
that the original rent exceeded the initial rent or that after 21 years the
reviewed rent should exceed the fair rack-rental market value — He did not
accept the submission that the parties must have contemplated that the initial
rent would exceed the sum of £49,000 or that it was commercially absurd that
the reviewed rent should exceed the fair rack-rental market value at the
relevant date — The Shorter Oxford English Dictionary gave two meanings to the
word ‘proportion’ — One was a part or share; the other was: ‘The relation
existing between things or magnitudes as to size, quantity, number etc;
comparative relation, ratio’
context of the present case ‘proportion’ was used in that sense, comparative
relation or ratio — Such relation was arithmetically expressed by a fraction of
which 49,000 was the numerator and 44,900 (the figure of the initial rent) the
denominator — Declaration accordingly
No cases are
referred to in this report.
This was an
originating summons by which the plaintiff tenants, Stylo Barratt Properties
Ltd, sought a declaration as to the true construction of rent review provisions
in the lease of a property in Market Street, Cambridge. The defendant
landlords, Legal & General Assurance Society Ltd, counterclaimed for a declaration
placing an opposing construction on the provisions in question.
Derek Wood QC
and Jonathan Brock (instructed by Chethams) appeared on behalf of the
plaintiffs; Gavin Lightman QC and Kim Lewison (instructed by Lawrence Graham)
represented the defendants.
Giving
judgment, MORRITT J said: This originating summons raises a question of
construction on the interpretation of a rent review clause contained in a lease
dated July 1 1966, granted by the defendant, Legal & General Assurance
Society Ltd, to the plaintiff, Stylo Barratt Properties Ltd.
The background
is as follows. In 1964 Stylo Barratt entered into various agreements for the
sale, development and leaseback of a property in Market Street, Cambridge. The
original agreements were with a company called Spinstoke Ltd, whose rights and
obligations were assumed by novation by Legal & General. This agreement
required Legal & General to contribute to the cost of development the sum
calculated at £725,000 less the costs of acquiring the two sites. At the conclusion
of the development Legal & General were to grant Stylo Barratt a 42-year
lease.
During the
course of the development Stylo Barratt were to pay Legal & General 7% on
the sums paid by Legal & General from time to time for the sites and the
contribution to the costs, with a ceiling of £49,000. And the annual rent
payable under the lease was to be the same amount with the same ceiling. The
aggregate sum paid by Legal & General was £725,000, of which 7% is £50,750.
This agreement
was subsequently varied in that instead of Legal & General granting Stylo
Barratt one lease for 42 years, Legal & General granted two leases. The
first, dated July 1 1966, was for seven years from July 1 1966 at an annual
rent of £49,000. The second, also dated July 1 1966, was a reversionary lease
for 35 years from July 1 1973. The rent payable under this lease was also
£49,000, but subject to review. Clause 6 of the reversionary lease provided for
one rent review as at July 30 1987, exercisable by Legal & General on notice.
Subclause (3) provides:
If the Lessors shall give to the Lessee
such notice as aforesaid then from and after the date of review this Lease
shall be read and construed and shall take effect in all respects as if the
yearly rent for the time being payable hereunder (instead of being the sum of
Forty Nine Thousand Pounds) had from such date of review been that proportion
of the fair rack rental market value (as hereinafter defined) of the premises
immediately after the date of review which the said rent of Forty Nine Thousand
Pounds bears to the initial rent of the premises (as hereinafter defined) but
without prejudice to any of the other terms and conditions contained in this
Lease and so that in no event shall the rent payable by the Lessee to the
Lessors after the date of review be less than the rent payable by the Lessee to
the Lessors immediately before the date of review.
Subclause (4)
deals with the ascertainment of the fair rack-rental market value by agreement
or arbitration as:
the best rent at which the premises might
reasonably be expected to be let in the open market by a willing lessor to a
willing tenant or tenants whether as a whole or in parts for a term of years
not exceeding twenty one years and subject to similar covenants and conditions
(other than the amount of the rent and the provisions of this present Clause
for reviewing the rent) to those contained in this Lease there being
disregarded
— and certain immaterial matters are set
out.
Subclause (5)
provides for the initial rent to be ascertained by agreement or arbitration as:
the best rent at which at the date hereof
as opposed to the date of the commencement of the term hereby granted the
premises might reasonably be expected to be let in the open market by a willing
lessor to a willing tenant or tenants whether as a whole or in parts for a term
not exceeding twenty one years and subject to similar covenants and conditions
(other than the amount of the rent) and the provisions of this present clause
for reviewing the rent to those contained in the Lease.
In August 1966
the parties agreed the initial rent at July 1 1966 as the sum of £44,900. Thus
the original rent payable was 109.13% of the initial rent. Stylo Barratt claim
that a percentage or fraction in excess of 1 cannot be a proportion of the fair
rack-rental market value. By their originating summons they claim a declaration
that ‘the rent reserved by the above mentioned lease will remain for the
residue of the term in the sum of £49,000, notwithstanding the terms of clause
6 thereof’. Then a claim is made for costs.
Legal &
General disagree and counterclaim for:
(1) A declaration that upon the true construction
of the above-mentioned Lease and in the events which have happened, the rent
payable by the Plaintiff to the Defendant with effect from 30 June 1987 is a
sum equivalent to the fair rack rental market value (as defined by the said
Lease) multiplied by the fraction of which the numerator is 49,000 and the
denominator is 44,900; alternatively
(2) A declaration that upon the true construction
of the above-mentioned Lease and in the events which have happened, the rent
payable by the Plaintiff to the Defendant with effect from 30 June 1987 is a
sum equal to the fair rack rental market value (as defined by the said Lease).
Stylo Barratt
claim that the lessee was evidently intended to sublet the various offices,
shops and residential accommodation comprised in the development. Thus they
would be responsible for the management of the development as a whole and would
have to carry the normal commercial losses. If, it was argued, the proportion
could be in excess of 1, and because of the definition of ‘fair rack-rental
market value’ the lessee would have to pay a rent equal to or in excess of the
gross rental value of the development. It was argued that this commercial
consideration supported the normal meaning, as alleged, of the word
‘proportion’ as being a part of something else — in this case, the fair
rack-rental market value — thus excluding a figure equal to or greater than the
whole.
The
surrounding circumstances show that the original rent of £49,000 was calculated
not by reference to the rental value of the development but as a rate of
interest on the sums spent by Legal & General. This is confirmed by clause
6(5), which envisages that the initial rent will be a different figure.
The original
agreement was for one lease for 42 years. The revised agreement provided for
two leases of the same aggregate length of 42 years with one rent review after
21 years. It would not therefore be surprising if the original rent exceeded
the initial rent or that after 21 years the review rent should exceed the fair
rack-rental market value. The review rent would compensate for underrental in
the first 21 years but leave the lessee with the benefit of any underrental for
any part of the second 21 years. Thus I do not accept the submission that the
parties must have contemplated that the initial rent would exceed the sum of
£49,000 or that it is commercially absurd that the review rent should exceed
the fair rack-rental market value at that date.
The Shorter
Oxford English Dictionary gives as the meaning of the word ‘proportion’ two
relevant meanings:
1. A portion
or part in its relation to the whole; a comparative part, a share; occas, a
portion, division, part.
2. The
relation existing between things or magnitudes as to size, quantity, number
etc; comparative relation, ratio.
Clause 6(3)
uses the words ‘that proportion’. ‘That’ refers to the proportion which £49,000
bears to the initial rent. In that context it is used in the sense of
comparative relation or ratio; that is to say, the second meaning given in the Shorter
Oxford English Dictionary. Such relation is arithmetically expressed by a
fraction of which 49,000 is the numerator and the initial rent the denominator.
In my judgment, that is the proportion which has to be applied to the fair
rack-rental market value and can properly be described as a proportion of it.
On this basis,
the clause can be applied in accordance with its terms and ordinary English
usage. The alternatives for which Stylo Barratt and Legal & General contend
involve finding that the rent review provision cannot be operated in accordance
with its terms. Stylo Barratt’s argument amounts to saying, as was recognised,
that the clause cannot be operated at all in the events which have happened,
notwithstanding that those events were virtually contemporaneous with the grant
of the lease. Legal & General’s alternative and avowedly subsidiary
argument involves a substantial rewriting of clause 6(3). Neither of those
alternatives — and I can see no others — is acceptable.
Accordingly, I
will make a declaration in the terms of para (1) of the counterclaim of Legal
& General, the plaintiff to pay the defendant’s costs.
