Landlord and tenant — Rent-review clause in underlease — Tenants’ counternotice, in response to landlords’ ‘trigger’ notice, served out of time — Whether counternotice valid — Whether time of the essence — Whether general presumption, in accordance with United Scientific Holdings Ltd v Burnley Borough Council, that time was not of the essence prevailed — No express provision that time was of the essence, but review clause contained a ‘deeming’ provision to the effect that ‘if the tenant shall fail to serve a counternotice within the period aforesaid it shall be deemed to have agreed to pay the increased rent specified in the rent notice’ — Detailed examination of authorities, particularly Henry Smith’s Charity Trustees v AWADA Trading & Promotion Services Ltd and Mecca Leisure Ltd v Renown Investments (Holdings) Ltd — Conflict between Henry Smith’s case and Mecca (and some internal differences between members of each court) on the effect of a ‘deeming’ provision in the review clause — In Henry Smith’s case there were ‘deeming’ provisions applicable to both landlord and tenant, whereas in Mecca the ‘deeming’ provision was ‘one-way’, applying to the tenant only — In the present case the provision was also ‘one-way’, applying to the tenants only — Held, although with some hesitation, that the reconciliation between Henry Smith’s and Mecca could be found in this difference between the ‘deeming’ provisions, so that, following the Mecca decision, time was not of the essence for the service of the tenants’ counternotice in the present case — Held also that, if the Henry Smith’s and Mecca decisions were really irreconcilable, the same result would be reached by following Mecca as the later decision in time (applying the principle of Colchester Estates (Cardiff) v Carlton Industries plc in the case of conflicts between courts of co-ordinate jurisdiction) — Plaintiff landlords’ claim accordingly failed
The plaintiffs
in this litigation, Taylor Woodrow Property Co Ltd, claimed arrears of rent
alleged to be due to them from the defendants, Lonrho Textiles Ltd, tenants
under an underlease of premises known as Unit A4, 64 Churchill Square,
Brighton. The arrears of rent claimed were alleged to have arisen as a result
of the operation of a rent review clause in the underlease, by which the annual
rent of the premises had been increased from £5,000 to £47,500, the amount
stated in the plaintiff landlords’ ‘trigger’ notice.
Nicholas Wood
(instructed by Hamlin Stowe) appeared on behalf of the plaintiffs; Kim Lewison
(instructed by Cameron Markby) represented the defendants.
Giving
judgment, MR B A HYTNER QC said: On September 6 1973 Myton Ltd entered into an
underlease with Fludes Carpets Ltd in respect of premises known as Unit A4, 64
Churchill Square,
£5,000. As a result of subsequent assignments, the present plaintiffs became
the landlords and the present defendants became the tenants.
The underlease
contained a detailed provision for rent review, and this is to be found in Part
II of the third schedule, which I think ought to be read in full:
Not more than
Twelve months and not less than Six months before the expiration of the
Fourteenth year of the term hereby granted the Landlord may serve on the Tenant
a notice in writing (hereinafter called a ‘Rent Notice’) providing for the
increase of the rent payable hereunder as from the expiration of the year of
the term then current to an amount specified in the Rent Notice based upon the
terms as if referred to an arbitrator as hereinafter mentioned and in such
notice the Landlord shall specify that the Tenant may serve a counter-notice in
accordance with paragraph (a) of this Part and that in default the provisions
of paragraph (b) of this part will operate and thereupon the following
provisions shall have effect —
(a) the Tenant within one month after the
receipt of the Rent Notice may serve on the Landlord a counternotice calling
upon the Landlord to negotiate with the Tenant the amount of rent to be paid
hereunder as from the expiration of the said year
(b) If the Tenant shall fail to serve a
counternotice within the period aforesaid it shall be deemed to have agreed to
pay the increased rent specified in the Rent Notice
(c) If the Tenant shall serve on the Landlord a
counternotice calling upon the Landlord to negotiate with the Tenant as
aforesaid then the Landlord and the Tenant shall forthwith consult together and
use their best endeavours to reach agreement as to the amount of the rent to be
paid hereunder as from the expiration of the said year but failing agreement
within two months after service of such counternotice the question of whether
any and if so what increase ought to be made in the rent payable hereunder as
from the expiration of the said year shall be referred to the arbitration of a
single arbitrator to be agreed between the Landlord and the Tenant or should
there be failure of agreement application shall be made by the Landlord for an
Arbitrator to be appointed by the President for the time being of the Royal
Institution of Chartered Surveyors whose valuation shall be made as an expert
and not as an arbitrator and the decision of such arbitrator shall be final and
binding on the Landlord and the Tenant
(d) The Arbitrator shall determine the question
so referred to him by ascertaining the annual rack rental value of the demised
premises at the date of the Rent Notice that is to say the highest annual rent
at which the demised premises might reasonably be expected to be let without
premium in the open market as between willing landlord and willing tenant with
vacant possession and upon the terms of this Lease (save as regards rent) and for
the purposes for which the demised premises are at the date of rent review
permitted to be used Provided always that in no event shall the rent payable
after each rent review be less than the rent payable immediately before such
rent review
(e) Such increased rent shall be payable by the
Tenant to the Landlord as from the expiration of the year of the term then
current for the residue of the said term
(f) A note of the increased rent payable
pursuant to this Part shall when agreed or determined be endorsed on this
Underlease and on the Counterpart thereof
On July 5
1983, in accordance with Part II of the third schedule, the landlords sent to
the tenants a notice which reads as follows:
In accordance
with the provisions of Part II of the Third Schedule to the Underlease dated
6th September 1973 and made between Myton Limited (1) and Fludes Carpets
Limited (2) now assigned to your company (3) the leasehold reversion expectant
on the terms of years granted whereby is now vested in us, we TAYLOR WOODROW
PROPERTY COMPANY LIMITED of 4 Dunraven Street, London WIY 3FG, as Landlords
HEREBY GIVE NOTICE that we require an increase of the yearly rent payable under
the Underlease as from the expiration of the year of the term now current to
£47,500 (Forty Seven Thousand, Five Hundred Pounds) pa and WE HEREBY GIVE
NOTICE that you may serve a counternotice in accordance with paragraph (a) of
the said Part II to the Third Schedule of the Underlease and that in default
the provisions of paragraph (b) of the said Part II will operate. Please
acknowledge receipt by returning the duplicate Notice herewith receipted.
The rent
specified in the notice, £47,500 pa, had been calculated by Peter Clarke, an
expert valuer in the employ of the landlords, who, being familiar with the
terms of the underlease, had followed the formula specified in para (d) of Part
II of the third schedule as prescribed in the preamble. It is not necessary to
go into detail in respect of the calculation. Mr Clarke was the only witness
called before me and I accept his evidence.
While
following the formula which he would have expected an expert arbitrator to have
followed, he did not anticipate that an arbitrator would have reached the same
figure, and he expected that negotiations would have followed with give and
take on both sides. He said that he would, as a valuer, have recommended
accepting a rent in the order of £45,000 pa, pointing out that protracted
negotiations could incur costs which could be reduced by early settlement.
The notice was
acknowledged by return of the duplicate notice, but no counternotice followed.
Instead, on August 12, several days outside the prescribed period, the tenants
wrote to the landlords a letter as follows:
I refer to
your letter of July 5 1983, concerning the above, of which receipt was
acknowledged by return of the duplicate Notice, and would query whether, in the
light of the very considerable increases proposed, you are endeavouring to
persuade the leaseholders to vacate the property. Should this be the case, we
would be interested in receiving your advice of any consideration that would be
proposed for buying out our lease.
A copy of
your letter and also of this correspondence has been sent to our property
advisers . . .
That letter
might be said to indicate unhappiness with the proposed rent and a
determination to negotiate rather than to pay that rent, but Mr Wood, who
appeared for the landlords, submitted that its primary purpose was to negotiate
a premium for surrendering the underlease. That may very well be so.
On August 16
1983, however, the chartered surveyors acting on behalf of the tenants wrote to
the landlords as follows:
When we have
had the opportunity of giving our consideration to the lease terms, we will
communicate with you again, but we think we should stress that our Client is of
the opinion that your proposals are totally excessive.
This letter
more clearly indicates an intention to negotiate rather than pay the rent set
out in the notice. To neither of these letters did the landlords reply, though
the first certainly appears to have called for an answer. Not until November 22
— over three months after receiving the letter of August 12 — did the landlords
again write to the tenants:
We would refer
to the Rent Notice dated 5th July to your company in respect of the above.
We now write
out of courtesy to advise that in accordance with the provisions of Part II to
the Third Schedule of the Underlease dated 6th September 1983 and in the
absence of your counternotice in accordance with paragraph (a) of that Part II
the provisions of paragraph (b) thereof will operate.
Our Accounts
Department have therefore been instructed to take account of the new rent of
£47,500 pa in the issue to your company of the forthcoming rent demand. The new
rent is in fact payable as from 7th January 1984. Our Legal Department will
submit to you for endorsement the note to be made under paragraph (b) of that
Part II.
On November 25
the tenants wrote again to the landlords claiming that their letter of the 12th
had constituted a counternotice. That letter was not apparently answered or
even acknowledged, and was followed on December 19 by a letter from the tenants
enclosing a formal counternotice in the terms prescribed by para (a) of Part II
to the Third Schedule.
By their reply
on December 22 1983 the landlords challenged the validity of that counternotice
on the ground that it had been served out of time. The tenants thereafter
refused to pay the increased rent, and by this litigation the plaintiffs claim
arrears of rent calculated by means of the difference between £5,000 pa and
£47,500 pa plus interest.
Application
was made to me for amendment of the figures set out in the statement of claim.
Leave was granted in principle, but no final document has yet been put before
me. The defendants deny liability and rely on the counternotice of December 19
1983, and consequently the only issue before me is the validity of that
counternotice. The landlords say that it is out of time and that that is fatal,
since time was of the essence of the contract. The tenants say that the
counternotice was valid, since time was not of the essence. The counterclaim is
not pursued.
Mr Wood
submitted that Part II of the Third Schedule — the rent-review clause — could
not be clearer. The parties had legislated for two means of determining the
rent, a long route and a short route. The long route involved, at the end of
the day, determination by an expert, the short route being a rent fairly
calculated by the method which would be adopted by an expert and accepted by
failure to serve a counternotice within time by the tenants.
Mr Wood
conceded that the starting point for determining whether time for service of
the counternotice was of the essence of the contract was United Scientific
Holdings Ltd v Burnley Borough Council [1978] AC 904 and the
well-known dictum of Lord Diplock at p 930G:
So upon the
question of principle which these two appeals were brought to settle, I would
hold that in the absence of any contra-indications in the express
other clauses or in the surrounding circumstances the presumption is that the
timetable specified in a rent-review clause for completion of the various steps
for determining the rent payable in respect of the period following the review
date is not of the essence of the contract.
Reliance was
also placed on the manner in which this principle was expressed by Lord Salmon,
which is to be found at p 950F:
The time
provision in a rent-revision clause of the present kind, even in a lease
concerning a commercial transaction, is however different in character and I
regard it as not being of the essence of the contract unless it is made so
expressly or by necessary implication
and in the
manner in which the same principle was expressed by Lord Fraser at p 962F:
I am of the
opinion that the equitable rule against treating time as of the essence of a
contract is applicable to rent-review clauses unless there is some special
reason for excluding its application to a particular clause.
Mr Wood then
relied on four matters, to which he later added a fifth:
1 the fact that the rent-review clause
contained a ‘deeming’ provision;
2 that by para (b) of the rent-review clause
there was an obligation placed upon the landlord to put a figure in his notice
based on the method which would be adopted by an arbitrator;
3 that the landlord was required to inform
the tenant in the notice of his right to serve a counternotice;
4 that the landlord was required to draw to
the tenant’s attention in the notice the consequence which would follow his
failure to serve a counternotice;
5 that if time was not of the essence, the
operation of para (e) of the clause could involve substantial savings to the
tenant in the event of a determination by an expert, of a late determination by
an expert, or presumably by protracted negotiations not being finalised until
well into the following year.
All these
factors, submitted Mr Wood, were factors which constituted, in Lord Diplock’s
words, a contra-indication to time not being of the essence of the contract,
or, in Lord Fraser’s words, were special reasons for holding time to be of the
essence, or, in Lord Salmon’s phrase, should cause me to draw the necessary
implication that time was of the essence.
It is
convenient to deal with these matters in reverse order. As to the fifth, Mr
Lewison, who appeared for the tenants, submitted that it was based on a
misreading of para (e): whenever the new rent is determined, it is to be paid
as from January 7 1984. Mr Lewison agreed, however, that a tenant called upon
in, say, July 1984 to pay substantial arrears would save interest, but, taken
as a whole and bearing in mind that a landlord could, if he felt that the
tenant was dragging his feet in relation to the negotiation process, serve a
time notice, I do not regard the provisions of para (e) as an indication that the
parties intended to displace the presumption against time being of the essence.
I will, however, return to this point later.
As to the
second, third and fourth factors, Mr Lewison submitted that a notice which
failed to comply with these requirements would nevertheless have been a valid
notice, relying on the case of Dean and Chapter of the Cathedral Church of
the Holy Trinity in Chichester v Lennards Ltd [1977] 35 P&CR
309* in which it was held that a provision in a rent-review clause requiring
that the landlord’s written notice should state the suggested new rent was not
of the essence of the contract:
Applying
these principles, it seems to me that this notice should not fail because it
does not name the actual figure of suggested new rent. It gives the tenants
perfectly good notice that the landlords desire that the rent should be raised
to correspond with the new market value: and it was courteously suggested that
the surveyors of the parties should decide what the new rent should be. That
was a perfectly proper notice per Lord Denning MR (p 314).
*Editor’s
note: Also reported at (1977) 244 EG 807, [1977] 2 EGLR 78.
On the basis
of that decision it is difficult to sustain an argument that the notice would
have been invalid if the landlord had suggested a figure which was calculated
by a method wholly different from one utilised by an arbitrator. The
stipulation that some figure should be stated in the landlord’s notice was
regarded as ‘a little bit of machinery’ by Lord Denning MR (at p 314) and
accordingly I so regard the method of calculating the figure which was to be
inserted in the instant case.
Mr Lewison
submitted that precisely the same principle should be applied to the
requirement for the counternotice to be referred to in the notice. Here it is
to be observed that the tenant was simply being referred to his own lease.
There was no provision that the consequences of failure had to be spelt out in
simple language to the tenant. As we have seen, that was not done by the
landlords here. The notice simply referred in formal terms to schedules and
parts etc. If the requirement to state the proposed new rent in a notice is
regarded as a little bit of machinery, the requirement to refer in the most formal
manner to some of the terms of the document already held and signed by the
tenants would, in my view, merely constitute a minor cog in that machinery.
I am
consequently driven to the conclusion that requirements in a rent-review clause
which may be flouted with impunity by a landlord cannot have the substance to
lead to a necessary implication that they were intended to displace an
equitable presumption nor to amount to a contra-indication nor a special
reason.
I now turn to
the first of Mr Wood’s submissions, namely that the existence in the
rent-review clause of a ‘deeming’ clause is sufficient in itself to displace
the presumption and render time of the essence of the counternotice. For this
submission he relies on the decision of the Court of Appeal in Trustees of
Henry Smith’s Charity v AWADA Trading & Promotion Services Ltd
(1984) 47 P&CR 607 † In that case
the rent-review clause contained detailed machinery for the determination of a
revised rent. The basic scheme, however, was that in default of a counternotice
by the tenant, the tenant was deemed to have accepted the rent specified in the
landlord’s notice, but that on the service of a counternotice rejecting the
landlord’s figure and specifying the tenant’s proposed rent, in default both of
a negotiated settlement and a failure by the landlord to apply for the
appointment of an expert surveyor to determine the rent, then the landlord was
deemed to have accepted the tenant’s proposal. The Court of Appeal held
unanimously that time was of the essence in respect of the period allowed to
the landlord to apply for the appointment of a surveyor.
† Editor’s
note: Also reported at (1983) 269 EG 729, [1984] 1 EGLR 116.
The court
considered, with apparent approval, an earlier decision of another division of
the Court of Appeal, Lewis v Barnett (1981) 264 EG 1079, [1982] 2
EGLR 127. There the rent-review clause provided different, though not
dissimilar, machinery for rent review and the court held that the parties had
achieved indirectly Lord Diplock’s contra-indication.
Mr Wood
naturally relied strongly on this decision and, faced with a later and
apparently conflicting decision of the Court of Appeal — Mecca Leisure Ltd
v Renown Investments (Holdings) Ltd (1985) 49 P&CR 12‡ — he submitted first that the later case
could be distinguished and that the instant case falls within the principles
set out in the Henry Smith case; alternatively, that Mecca Leisure
was wrongly decided.
‡ Editor’s
note: Also reported at (1984) 271 EG 989, [1984] 2 EGLR 137.
Before I turn
to examine these decisions in detail, it may be convenient to set out the
countersubmissions made by Mr Lewison:
1 There is a presumption of law that time is
not of the essence in procedural steps in rent review.
2 Whether particular steps are described as
‘options’ or ‘obligations’ makes no difference.
He supported
both these submissions by reference to the United Scientific case.
3 If the tenant has a right or option to
call on the landlord to negotiate, that is a subqordinate step in an overall
process of ascertaining the rent.
4 The fact that a ‘deeming’ provision is
added to the clause makes no difference.
5 A subordinate step should not be elevated
into an essential part of the whole contract.
6 It is undesirable that minor distinctions
of language should lead to different results.
7 When determined, the rent will be paid
retrospectively on the expiry of the 14th year of the term.
In relation to
the fourth of those submissions, Mr Lewison submitted that the Mecca
case was readily distinguishable from Henry Smith’s case and that the
instant case falls directly within the principles laid down in Mecca
where, apart from minor distinctions, the rent-review clause was the same as in
the instant case. The difference relates principally to the terms of the
notice, and these I have already considered and rejected as factors of
substance.
Mr Lewison
based his distinction boldly and clearly on one factor, namely that Mecca
decided a case where the rent-review clause contained only a one-way deeming
provision, whereas in the Henry
applying to the landlord, the other to the tenant.
It is now
necessary to review both decisions in some detail. In Henry Smith’s the
court was indeed unanimous, but the three judges were not wholly ad idem
in their reasoning. Sir John Donaldson MR appears to have regarded as decisive
the precise and elaborate machinery provided for:
It is highly
undesirable that decisions of this type of dispute shall turn upon fine
distinctions and I reject the suggestion that there is a difference between a
rent-review scheme which, in the event of default in adhering to the timetable,
avoids the whole process (Lewis v Barnett) and one which
automatically resolves the dispute, albeit in a somewhat draconian way (the
instant appeal). Both make precise and, in the case of the instant appeal,
elaborate provision for exactly what shall happen if one of the parties shall
fail to exercise his rights within the specified period of time. In neither
case would it be possible seriously to write into the clause after each
specified period of time words such as ‘or such longer period as shall elapse
before the expiration of reasonable notice making time of the essence of the
contract’. Accordingly, in my judgment, the parties must be deemed to have
intended that in the case of their lease the general rule should not apply and
that time should be of the essence of the contract (p 614).
In considering
the deeming provisions — and this may be a difficulty for Mr Lewison — he
appears to have accepted that if neither had been included time may not have
been of the essence, but that the inclusion of both excluded ‘elasticity’.
The parties
have not only set out a timetable, but have in terms provided what is to happen
in the absence of strict compliance with that timetable. The presumption of
elasticity would undoubtedly be acceptable if clauses 3 and 6 stood alone with
minor alterations in language to make that possible. But clauses 4 and 7 make
it clear that something quite different is intended (p 614).
It is to be
noted that clauses 4 and 7 were the deeming provisions.
For his part,
Griffiths LJ rejected the interpretation of Lewis v Barnett which
had been advanced, namely that the presence of a deeming provision is itself
sufficient to make time of the essence, and he further rejected that as a
principle of law:
I do not
accept that the mere presence of a ‘deeming’ provision in a rent-review clause
will in all cases be sufficient to make time of the essence of the contract (p
617).
He was,
however, prepared to give some weight to the deeming provision in Henry
Smith’s case, though significantly — and of assistance to Mr Lewison — he
placed particular weight on it because it was a two-way clause:
And, finally,
although, as I have been at pains to point out, not necessarily conclusively,
the express inclusion of the deeming provisions does add some weight to the
view that this schedule should be read as though time is of the essence,
particularly as the deeming provisions apply to both landlord and tenant (p
618).
In his view,
time had been made of the essence by a combination of the two-way deeming
provisions and other factors. One of these ought to be referred to at this
stage. There was a provision in the event of delay in arbitration for the
immediate payment of an interim sum by the tenant. There was a provision for
repayment of such sum as might have been overpaid as a result of the final
determination, but it was pointed out that in such circumstances interest might
be lost. This was regarded by Griffiths LJ as a matter of substance.
In coming to
his conclusion that a deeming provision is not in itself sufficient to make
time of the essence, Griffiths LJ relies on a decision of Goulding J in Davstone
(Holdings) Ltd v Al-Rifai (1976) 32 P&CR 18:
In Davstone
(Holdings) Ltd v Al-Rifai Goulding J held that such a clause did not
make time of the essence. The clause in that case provided, ‘if the lessee
shall raise no objection to the increased rental proposed by the lessor within
28 days of receiving such notice, the lessee shall be deemed to have accepted
and agreed the same’. That case was cited by distinguished counsel for the
appellants and the respondents in their arguments in United Scientific
Holdings Ltd v Burnley Borough Council. Neither of them submitted
that it was wrongly decided and no doubt was cast upon it by any of their
Lordships’ speeches, but it is right to recount that none of their Lordships
referred to it (p 617).
Slade LJ
distinguished Davstone’s case as one where the clause under
consideration was ‘of a much less comprehensive and stringent nature than that
under consideration’ in Henry Smith’s case. It could be argued that the
greater stringency in Henry Smith’s case lay in the two-way deeming
provision, though doubtless Mr Wood would argue that the learned lord justice
was referring to the more detailed and precise machinery for determining the
new rent. However, in a further observation Slade LJ appears to cast doubt on
the validity of Davstone’s case:
The latter
decision [ie Davstone], however, was given in the context of a clause of
a much less comprehensive and stringent nature than that under consideration in
the present case. Furthermore, it was given before the House of Lords had
spoken in United Scientific Holdings Ltd v Burnley Borough Council,
and at a time when the authorities appeared to support principles of construction
in the construction of rent-review clauses very different from those which have
now been declared to represent the law. I therefore think that the landlords
can derive little support from Davstone (Holdings) Ltd v Al-Rifai
for present purposes (pp 622-3).
Since the
effect of the United Scientific case was to change the climate in favour
of the presumption against time being of the essence, it is difficult to
explain this passage as an argument casting doubt on the present validity of Davstone’s
case. Counsel were unable to offer an explanation and, for myself, I cannot
understand why the United Scientific case should of itself invalidate
Goulding J’s judgment. There can, however, be no doubt that the basis of Slade
LJ’s judgment was the existence of the deeming provisions.
While in
other contexts ‘deeming’ provisions may not necessarily connote finality, they
do so in the context of this lease (p 623).
The context
referred to is clearly the machinery provided for rent review:
The structure
of the Third Schedule is thus one under which the respective parties are given
carefully defined rights exercisable within carefully defined time limits and
in which the consequences of any failure to exercise such rights within those
limits are no less carefully defined. The interrelation of the various
paragraphs of the rent-review clause is, in my opinion, quite inconsistent with
any necessity for the tenants to serve on the landlords a ‘time of the essence’
notice of the nature suggested, before he can rely on the provisions of
paragraph 7 according to their terms. This paragraph, when read with the other
paragraphs of the schedule, is, in my opinion, too explicit a
‘contra-indication’ within the relevant principles to allow the ordinary
presumption against time being of the essence to operate in the landlords’
favour; it serves clearly to rebut the presumption (p 624).
On analysis,
therefore, Sir John Donaldson MR appears to have reached his conclusion
basically on the strength of the precise and detailed machinery provided for
the rent review, but including the deeming provisions. Griffiths LJ appears to
have based his conclusions on the two-way deeming provisions in the context of
the machinery provided, and Slade LJ on the existence of deeming provisions (not
necessarily two-way) in the context of the detailed rent-review machinery.
I now turn to
the Mecca Leisure case. There the rent-review clause under consideration
was, with the exception of the requirements in the notice, with which I have
already dealt, materially identical with the rent-review clause in the instant
case. There also there was no certainty that an arbitrator’s decision could be
reached by the due date, yet the new rent was to be payable on that date with
no provision for the payment of interest by the tenant. This was the mirror
situation to that upon which Griffiths LJ placed weight. It does not appear to
have been so regarded by the Court of Appeal in the Mecca case.
In the leading
judgment Eveleigh LJ considered the effect of the Henry Smith’s case.
His view was that that case had been decided on its own facts:
I find no
help at all from the facts of other cases where there is a deeming provision,
as in the present case, but other terms in the review clause and the lease are
different (p 16).
Dealing with
the clause in the Mecca case, Eveleigh LJ said:
It is clear
from the review clause taken as a whole that the parties intended to provide
machinery for the determination of a fair rent. They clearly regarded it as
desirable if that rent could be determined by mutual agreement. They were to
‘use their best endeavours to reach agreement as to the amount of the rent’. It
is ‘within 28 days after service of such counternotice (or within such extended
period as the lessor and the lessee shall mutually agree) . . .’. No time is
laid down for the appointment of the arbitrator, and no time is laid down for
the announcement of his decision (p 16).
It is to be
noted that in the instant case these factors also apply.
He considered
the effect of the deeming provision after citing the relevant passage from the
judgments of Griffiths and Slade LJJ:
I cannot
regard the mere presence of the ‘deeming’ clause as a firm indication that time
is of the essence. I read the clause as a whole and bear in mind that there is
a presumption to be displaced and that the parties are clearly intending to
arrive at a fair rent to be determined amicably if possible. It seems to me
that to hold otherwise would make the clause a trap and the chosen machinery
dangerous. In my opinion, time is not of the essence in this case (p 17).
He added:
My conclusion
does not mean that a ‘deeming’ provision is of no effect. It
effect once the twenty-eighth day has expired. It is a useful part of the
machinery in the hands of the landlords (p 17).
May LJ drew
attention to the differing views expressed by the members of the Court of
Appeal in Henry Smith’s case in relation to the importance of the
deeming provisions and concluded:
The effect,
therefore, of the Henry Smith’s Charity case is, in my opinion, that,
although the fact that a rent-review clause does contain a ‘deeming’ provision
is a contra-indication that may be sufficient to rebut the general principle,
whether it does so or not remains in the end a matter of the proper
construction of the particular clause concerned (p 20).
In construing
the clause as a whole, May LJ adopted the approach of Griffiths LJ in Henry
Smith’s case at p 616 and, in effect, viewed the machinery provided for in
a rent-review clause as aimed in the end at achieving a fair rent, an aim which
would be frustrated if either the landlord or the tenant were forced to accept
an unfair rent by reason of being out of time with a notice. He then continued:
In my
opinion, the potential detriment to the tenant, if time is held to be of the
essence of the material part of the clause, if he serves his notice a day or a
week late and is thus fixed with perhaps a wholly unreasonable rent specified
in the landlord’s trigger notice, far outweighs any potential harm to the
landlord from any tardiness on the tenant’s part. If, having served his
original notice, the landlord receives no timeous counternotice from the
tenant, the remedy is in his own hands: all he need do is to serve a further
short notice on the latter making time of the essence of the procedure. I
respectfully agree with Bristow J [ie the judge at first instance] that in the
circumstances of the instant case, the deeming provision in clause 5(8)(ii) is
not sufficient to uprate it from what he described as a ‘simple nuts-and-bolts
provision’ to one where time is of the essence (p 22).
It is significant,
therefore, that both May LJ and Bristow J were disposed to regard a scheme for
rent review as mere machinery, not far from the description by Lord Denning MR
of the form of a notice as a ‘little bit of machinery’.
In a
dissenting judgment, Browne-Wilkinson LJ, as he then was, considered that, as a
matter of principle, there could be only two answers to the question whether
time for service of a notice provided for in a rent-review clause was of the
essence of the contract. The first, supported, as he said, by justice and
commonsense, was that the notice was to be regarded as part of mere machinery.
The second, supported by logic and precedent, was that a default rent provision
or deeming clause (clearly any deeming provision) ‘necessarily shows that time
is of the essence of the service of the notice’.
Without
stating his own preference (save for having awarded the second answer the
accolade of logic and precedent), Browne-Wilkinson LJ found himself drawn to
follow Henry Smith’s case since, despite the obvious differences in the
two rent-review clauses, he preferred consistency in decisions and, in his
judgment:
the ratio
decidendi of the decision of the majority was that the provisions for a
default rent were a decisive, or virtually decisive, contra-indication
displacing the presumption that time was not of the essence (p 25).
I am, of
course, reminded by Mr Lewison that that view of the ratio of Henry Smith’s
case came in a dissenting judgment and that I should not regard myself as bound
by it.
If, however,
that view of the ratio in Henry Smith’s case is correct, it is indeed
difficult to reconcile these two Court of Appeal decisions, since plainly
Eveleigh and May LJJ did not regard the provision of a default rent as either
decisive or virtually decisive. Faced with two apparently conflicting decisions
of the Court of Appeal, I conceive it to be my primary duty as a judge at first
instance to attempt to reconcile them, and it is this duty alone which impels
me to overcome a natural deference and humility which would otherwise inhibit
me from re-examining any conclusion reached by Browne-Wilkinson LJ.
On analysis,
it would appear that the court as a whole in the Henry Smith’s case,
starting from the standpoint of United Scientific Holdings Ltd v Burnley
Borough Council, regarded both deeming provisions and the detailed nature
of the review machinery as capable of making time of the essence of the service
of a notice. However, the stringency of the machinery was to a large extent
based on the existence of two separate deeming provisions. In so far as there
are dicta suggesting that a deeming provision is virtually decisive, these are
to be read in the context of a case where the deeming provisions were two-way.
The ratio in Mecca Leisure certainly appears to be that the existence of
a deeming provision is not without more to be regarded as sufficient to render
time of the essence.
I am therefore
driven, albeit after much hesitation, to accept Mr Lewison’s submission that
the reconciliation between the two decisions lies in the different deeming
provision, that since in the instant case the deeming provision is one-way it
comes within the ambit of Mecca, and therefore time for service was not
of the essence of the contract. In so far as the facts of this case may be
different from those in Mecca, I should heed the warnings given in both
the Mecca and Henry Smith’s cases against making fine
distinctions. Some, but not, I think, decisive, support for this conclusion may
be found in the decision, never overruled and never disapproved, of Goulding J
in the Davstone case.
I am, however,
not so confident of the correctness of this conclusion as to leave the matter
there. Assuming that I am wrong and that the two decisions are in
irreconcilable conflict, ought I then to accede to Mr Wood’s submission that Mecca
was wrongly decided? That submission is
not immediately attractive. The majority judgment set out correctly and applied
to the particular facts of the case the principles clearly laid down by the
House of Lords in United Scientific v Burnley. In my view, the
correct approach to this problem is to be found in the general rule that where
there are conflicting decisions of courts of co-ordinate jurisdiction the later
decision is to be preferred if it is reached after full consideration of the
earlier decision. (See Minister of Pensions v Higham [1948] 2 KB
153 per Denning J at 155, recently applied by Nourse J, as he then was, in Colchester
Estates (Cardiff) v Carlton Industries plc [1984] 2 All ER
601.) If this conclusion be wrong, it
should be added in fairness to counsel, to both of whom I am indebted, that no
argument was advanced on the point and, Mr Lewison not appearing on the
judgment, I did not think it right to invite argument at that stage.
Consequently,
whether the Henry Smith’s and Mecca cases can or cannot be
successfully reconciled, I reach the same result. Furthermore, any conflict
between the two cases in respect of the weight to be attached to interest lost
or gained on a late determination should be reconciled in the same way, the
later case prevailing, and consequently leading to the conclusion that little
weight is to be given it.
In my
judgment, therefore, time for service of the tenants’ counternotice was not of
the essence of the contract. The counternotice served on December 19 1983 was
valid, and this claim consequently fails.
