· Inconsistencies in the definition
of rent in a lease allowed the court to distinguish between rack-rent and other
charges
· The court refused to interpret the
lease in a way that would mean that payment provisions acted capriciously
Where demised
premises are seriously damaged or destroyed, the tenant’s obligation to pay
rent and meet other liabilities under the lease does not cease automatically.
Rather than leave such an important matter to the contractual doctrine of
frustration (the actual application of which remains untested in the context of
leases), well-drawn leases usually deal with such an eventuality by including
express provisions allowing for rent payments to be suspended, coupled with
complementary terms governing insurance cover.
The devastating
bombing of the Arndale Centre in Manchester has provided the dramatic backdrop
to judicial consideration of the efficacy of a rent suspension provision, from
which those drafting leases have plenty to learn.
The litigation in P&O
Property Holdings Ltd v International Computers Ltd [1999]
18
multi-storey office building within the centre, nine floors of which were
leased to the defendant. The lease provided that:
If during the said
term the demised premises or any part thereof shall be destroyed or damaged by
an insured risk so as to be unfit for occupation or use… the rent hereby
reserved or a fair proportion thereof according to the nature and extent of the
damage sustained shall be suspended until the demised premises have been again
rendered fit for occupation and use.
It was accepted
that the bomb damage was an insured risk and, for the purposes of the present
hearing, that the premises had been unfit for occupation and use from 15 June
1996 until at least 23 December 1997. The issue was whether or not the rent
suspension provision covered amounts payable by the tenant under the lease as
additional rents in respect of insurance, service charge, repairs or otherwise.
In particular, the landlord was anxious to establish that it could recover
substantial sums to recover the cost of refurbishing the air-conditioning
system. The tenant had been warned in 1992 that this work was to be undertaken
and that it would be charged as an ‘exceptional cost’ over a period of five
years from 1993 to 1997.
The tenant’s
argument was simple. The rent suspension provision applied to ‘the rent hereby
reserved’; under the reddendum the reserved rent included not only the
initial rent and any reviewed rent but also ‘additional rents’, namely sums
payable by the tenant in respect of insurance, service charge and repairs.
Accordingly, any insurance premium or service charge falling to be paid during
the period of damage would be suspended permanently and in full.
However, Neuberger
J was not convinced. He examined the various provisions in the lease dealing
with rent and concluded that the draftsman had not taken a consistent approach
throughout. In the reddendum there were, for some purposes, distinctions
drawn between the ‘rent’ and ‘additional rent’. In the rent review clause,
references to rent took a number of slightly different forms and, in any event,
clearly only referred to the rack-rent. He was therefore satisfied that the
rent suspension provision was not as unambiguous as suggested by the tenant.
Approaching the
construction of the lease as a business agreement between two substantial
bodies, the judge ruled, ‘not by any means with entire confidence’, in favour
of the landlord, for a range of reasons. He thought that, in the reddendum,
the lease treated ‘rent’ and ‘additional rents’ differently and that this made
commercial sense in the context of rent suspension.
While it seemed
reasonable that, during a period when the tenant could not occupy the property,
it should not pay the rack-rent, it was not necessarily commercially logical
that the same approach should be adopted towards insurance premiums and service
charge payments. The landlord would, for example, have to maintain at least
some level of insurance cover during the damage period, and it could be
expected that the tenant should contribute to this.
It would also seem
a little odd and ‘adventitious’ if, as here, the tenant could avoid paying
charges in respect of work that would ‘inure to the benefit of the tenant for a
long period, probably the duration of the lease’, simply because it happens
that the dates on which it would otherwise have been liable to pay such charges
fall during the damage period.
Although he
accepted that it was unfair in principle that a tenant should have to pay for
recurring services such as the cost of gas, electricity and security, at least
in the present lease there was a provision (although probably not intended to
apply in the present circumstances) under which a charge could be adjusted
where neither the tenant nor the demised premises derived any direct or
indirect benefit. Finally, there were a number of ways in which a variety of
the payment provisions in the lease would operate capriciously, should they be
suspended simply because their due date fell within the damage period.
Opinions will differ as to whether the judge
came to the correct conclusion in the present case. What is abundantly clear is
that the drafting of this lease did not address the question of what was to
happen in respect of service charge and insurance payments in the situation
where the premises were rendered unfit for occupation. As a result, the judge
was left with the unenviable task of deciding one way or another; a compromise
solution was not available. However, the problem could have been avoided. As
Neuberger J pointed out, one of the leading volumes of precedents specifically
identifies this as an issue that needs to be addressed; those drafting leases
need to take heed.
