Landlord and tenant — Rent review clause in lease of factory premises — Lease granted in pursuance of option contained in previous lease — Lease for 14 years subject to review of rent at the end of the fifth and the tenth year — Review clause provided for the rents for the review periods to be such as shall have been agreed between the parties, with no provision for arbitration in default of agreement — Landlords claimed rectification of the lease — Held by Court of Appeal, affirming the deputy judge on this point, that the conditions required for rectification were present — The landlords erroneously believed that the review clause contained a provision for arbitration in default of agreement; the tenants were aware of the omission of such a provision and that this was due to a mistake; the tenants omitted to draw the mistake to the notice of the landlords; and the mistake was to the disadvantage of the landlords — The clause should be rectified by the insertion of a provision that in default of agreement the rent should be fixed by an arbitrator — Held further, differing in this respect from the deputy judge, that the standard to be applied by the arbitrator should be, not the market rent, but the rent that it would have been reasonable for the landlords and tenants to have agreed under the lease, having regard to all the circumstances relevant to any negotiations between them of a new rent from the review date.
This was an
appeal by the defendant lessees, Wyndham’s (Lingerie) Ltd, from a decision of
Michael Wheeler QC, sitting as a deputy High Court judge, ordering in favour of
the plaintiff landlords, Thomas Bates & Son Ltd, the rectification of a
lease of factory premises at Church Road, Harold Wood, Essex.
E G Nugee QC
and J C Harper (instructed by Chethams) appeared on behalf of the appellants;
Robert Wakefield (instructed by Tolhurst & Fisher, of Southend-on-Sea)
represented the respondents.
Giving
judgment, BUCKLEY LJ said: This is an appeal from a decision of Michael Wheeler
QC, sitting as a deputy judge in the Chancery Division on June 6 1979.
The issues in
the case relate to a rent review clause contained in a lease dated December 17
1970 and made between the plaintiffs, Thomas Bates & Son Ltd as lessors and
the defendants, Wyndham’s (Lingerie) Ltd, as lessees. The subject-matter was
some factory premises at Hornchurch in Essex. In order to understand the issues
it is necessary to go back in history a little while.
In the year
1956, by a lease dated August 20 1956 the plaintiffs (whom I will call ‘the
landlords’) let to predecessors of the defendants (and I will call the
defendants ‘the tenants’) the factory premises in question for a term of seven
years from September 1 1956 at a yearly rent of £650. That lease contained, in
clause 5, an option provision in the following terms:
That the
lessor will on the written request of the lessee made six months before the end
of the term hereby created and if at the time of such request there shall not
be any existing breach or non-observance of any of the covenants on the part of
the lessee hereinbefore contained at the expense of the lessee grant to the
lessee a lease of the demised premises for a further term of seven or fourteen
years from the expiration of the said term at a rent to be agreed between the
lessor and the lessee but in default of such agreement at a rent to be fixed by
a single arbitrator appointed by the President for the time being of the Royal
Institution of Chartered Surveyors and containing the like covenants and
provisos as are herein contained.
The term under
that lease was in due course assigned to the tenants, and when the time for the
exercise of the option drew near, Mr Bates, the managing director of the
landlords, wrote a letter to the tenants, for the attention of a Mr Avon, who
was the director of the tenants who at all times has handled matters relating
to this leasehold property on behalf of the tenants, a letter drawing attention
to the fact that the time had come to consider a renewal of the
addition of £125 per annum, bringing the rent up to £775 per annum for the
seven years from the expiration of the then current lease.
Stimulated by
that communication, Mr Avon, on behalf of the tenants, gave a formal notice
exercising the option on February 19 1963, requesting the landlords to grant to
the tenants a renewed lease of the premises for the further term of 14 years
from the expiration of the current term, ‘at a rent to be agreed between us’ —
quoting from the notice — ‘but in default of such an agreement, at a rent to be
fixed by a single arbitrator appointed by the President of the Royal
Institution.’
In response to
that, Mr Bates wrote in reply saying that in fact the landlords would require
rather more rent than he had stated in his earlier letter, £850 a year; in
consequence of which there were some oral communications, and on March 11 1963
Mr Bates wrote to Mr Avon confirming offers which he had made orally for a
further seven-year term at £800 a year and proposing that the landlords should
construct certain additional buildings on the property, in consideration of
which there would be a further rent of another £800 a year during the ensuing
seven-year period.
Those terms
were accepted by the tenants, and on November 29 1963 the parties entered into
a new lease for a term of seven years from November 15 1963 at a yearly rental
of £1,600; and that lease contained an option clause in precisely the same
terms as the option clause in the 1956 lease, save that it granted an option
for only a further seven years and not for seven or 14 years as had been the
case in the 1956 lease. Time went by and the year 1970 arrived, when the time
was approaching for the exercise of the option in the 1963 lease, and we find
that on April 14 1970 the landlords wrote a letter to the tenants drawing their
attention to this fact, in consequence of which Mr Avon, on May 4 signed and
sent to the landlords a formal notice exercising the option contained in the
1963 lease, and by that notice he requested the landlords to grant a renewed
lease of the premises for a further term of seven years from the expiration of
the then current term ‘at a rent to be agreed between us, but in default of such
agreement at a rent to be fixed by a single arbitrator appointed by the
President for the time being of the Royal Institution,’ and so on. The language
of that notice followed the language of the option clause contained in the 1963
lease. As has been pointed out in argument, the effect of that notice was to
change the legal relationship between the parties and to bring into existence a
contract for the grant of a further term of seven years at a rent to be agreed
or, in default of agreement, to be fixed by an arbitrator.
The landlords
wrote back to the tenants on May 7 indicating that the rent they would require
would be £2,600 per annum for the first three years of the new term of seven
years, the rental thereafter to be reviewed and agreed for the remainder of the
term. Those words are taken from the letter of May 7 1970. So being then under
a contractual obligation to grant a new lease for seven years at a rent to be
agreed or in default of agreement to be fixed by an arbitrator, they proposed
agreeing the rent for part of that term only, leaving the remainder of the term
the subject of a further review and agreement at a later date.
On August 3 —
that is to say, rather later than the letter I have just referred to of May 7 —
there having been some oral communications in the meantime and Mr Avon having
paid a visit to the landlords’ offices to discuss the matter, the landlords
wrote saying that they were prepared to grant a lease for a further period of
14 years from the expiration of the then current term, with a clause for rent
reviews at the end of the fifth and 10th years of the term, the rental for the
first period of five years to be £2,350 per annum exclusive of rates.
To that letter
Mr Avon replied on August 17 1970 that the tenants were reluctantly prepared to
accept the figure of £2,350, but he said that they were not in agreement with
rent reviews after five and 10 years but were willing to accept a clause for a
rent review at the end of the seventh year. That was, in effect, a
counter-offer to the offer which had been put forward in the letter of August 3
1970.
The landlords
replied on August 18 insisting upon rent reviews after five- and 10-year
intervals, and on August 20, following some telephonic communication, they
again wrote insisting upon the rent reviews, and that letter has a postscript:
‘Whilst your present lease provides for a further seven years’ renewal, the
question of the rent review period is something quite separate and distinct.’
It seems to me
that the landlords there are saying: we recognise your right under the exercise
of the option; you are entitled to a term of seven years at a rent to be agreed
or in default of agreement to be fixed by an arbitrator, but we are not at the
moment prepared to agree any rent beyond the first five years.
On September
22 the tenants’ solicitors, Nabarro Nathanson, wrote indicating that the
tenants, subject to formal exchange of the lease, accepted the offer of a new
lease for a term of 14 years from November 15 1970 at the exclusive rent of £2,350
per annum, subject to review at the expiration of the fifth and 10th years of
the new term. It seems to me that it is implicit in that that the rent, at any
rate in respect of the two years next following the initial five years of the
term under the new lease, would be fixed by agreement or, in default of
agreement, by an arbitrator appointed under the provisions to that effect in
the option clause.
The lease and
counterpart were then executed and exchanged. The lease had not been prepared
by the landlords’ legal advisers; it was prepared under the instructions of Mr
Bates and was typed by Mr Bates’ secretary, Miss Cannon. The lease so prepared
and executed, demised the property to the tanants for a term of 14 years from
November 15 1970, and now I quote from the document itself:
Yielding and
paying therefor during the first five years of the said term unto the lessor
the yearly rent of two thousand three hundred and fifty pounds and for the next
period of five years of the said term and the final period of four years of the
said term such rents as shall have been agreed between the lessor and the
lessee such rents to be paid clear of all deductions by equal monthly payments
on the First day of each month in advance,
and then there
is a provision that the tenants should also pay the costs of insurance, but we
are not concerned with that.
The lease
contains an option clause in, I think, the same terms as the option clause
which was contained in the 1963 lease, except that any further lease to be granted
under the option in the 1970 lease was not to be required to contain an option
clause. It will be observed that in the reddendum there is no reference to
arbitration in default of agreement.
At a later
stage, when the time for fixing the rent from the end of the first five years
of the term onwards became imminent, the landlords became aware of this and
wrote a letter, signed by Mr Foley who was the property manager for the
landlords, to the tenants as follows:
As you will
be aware under the terms of your lease the rent of this property is due to be
reviewed, effective from November 15 1975, and this letter is intended to be a
formal notice advising you of our intention to review the rent. The lease has
no specific note how the rent may be settled should your company and ourselves
fail to agree upon a figure and I suggest that the matter be settled by an
independent arbitrator. I therefore enclose an agreement in duplicate and shall
be obliged if you will sign the top copy and return it to me.
As a result of
that, and a hastener written on May 2 1975, a telephone conversation took place
on May 6 1975 in the course of which Mr Avon said he was not prepared to sign
any such agreement. Mr Foley then got into contact with the landlords’ own
solicitors, who advised him that because the rent review clause did not contain
some means of definitely settling the new rent, eg by arbitration following
appointment by the President of the RICS, should the parties to the lease not
agree, the review clause would be unenforceable at law and the rent could
remain the same until the lease expired.
Nothing
further seems to have taken place immediately with regard to that, but there
was later a telephone conversation between Mr Avon and Mr Foley, to which I
shall have to refer again later, in which Mr Avon said — or is said by Mr Foley
to have said — that he had been aware of the implications of the clause from
the day the lease was signed; that he might be prepared to pay a slightly
higher rent, but not nearly so high a rent as the landlords were in fact then
proposing.
It seems to me
clear that the omission of any reference to arbitration in default of agreement
in the reddendum of the lease of 1970 must have been due to a mistake on the
part of Mr Bates, under whose instructions, as I have said, that lease was
prepared. The omission was one which was clearly contrary to the landlords’
interests. The only possible legal consequences which have been suggested in
the course of arguments are: first, that no rents having been agreed in respect
of any period after the first five years of the 14-year term, no rent would be
payable after the end of that five-year period. Mr Nugee, appearing for the
tenants, although he did not in the course of his argument altogether abandon
the idea that that might be the legal consequence of the omission, frankly and
very properly admitted that it could not have been in the contemplation of the
parties that there would be any period during the term of this lease when no
rent would be payable at all, and it is inconceivable that that could have been
the parties’ real intention.
Secondly, it
has been suggested that as no rent other than the rent of £2,350 per annum
would have been agreed, that rent should continue in force until some other
rent should be agreed by the parties. It seems to me that such a proposition is
absolutely contrary to the clear intention of the rent review provision. The
rent review provision was clearly a provision insisted upon by the landlords
because they wanted the matter reviewed at the end of five years and wanted a
new rent to be then arrived at. If merely by withholding consent or agreement
to a new rent the tenants could stultify the revision clause and ensure that
the original rent of £2,350 should continue to be payable, the whole purpose of
the rent revision clause would be destroyed or frustrated. I cannot believe
that it could have been Mr Bates’ intention that the lease in the form in which
he framed it should have had that effect.
Thirdly, it
has been suggested that in respect of the period after the first five years,
and in default of agreement between the parties, the rent would have to be
fixed by a process of litigation involving implication of the parties’
intentions, and it has been suggested that by implication the rent ought either
to be the market rent, that is to say the rent for which this property would be
let in the open market, or such rent as this particular landlord and this
particular tenant would agree having regard to all the matters which would affect
them in arriving mutually at a rent which the one was content to accept and the
other was content to pay, which would very possibly be markedly different from
a market rent, and it seems to me inconceivable that a landlord would have been
content to rely on fixing a rent by a process of implication in that way
without it being at all clear in what way the court would view the matter and
how the rent to be so ascertained should be assessed.
The only other
possible legal consequence of the omission that has been suggested at all,
either in the course of argument or in the course of the evidence given before
the learned trial judge, was that the clause was entirely inoperative because
of the omission and because either it amounted to no more than an agreement to
agree, or it amounted to a provision which contained such defective machinery
that it could not be carried into practical effect. It will be seen that advice
on those lines was what was received by Mr Foley. It seems also to have been
the advice received by Mr Avon.
Mr Foley gave
evidence before the learned judge, but Mr Avon did not. The learned judge was
somewhat critical of Mr Avon for not giving evidence. That was, no doubt, a
matter which rested not so much in Mr Avon’s discretion as in the discretion of
those who were conducting the case on the part of the tenants. The learned
judge, in the course of his judgment:
In evidence
before me Mr Foley amplified this note — he is referring to a note written on
the letter of September 23 to which I have already referred — I think it
probable that in his oral evidence Mr Foley may to some extent have telescoped
two telephone conversations with Mr Avon into one. His evidence–which was given
with care and which I accept without hesitation — was to the following effect.
He said that he quoted a new rent to Mr Avon of (he thought) about £5,000 per
annum; that Mr Avon seemed amused and, when asked what he thought, said he
might pay £100 or £200 more. Mr Foley said he realised that Mr Avon’s figure
bore no relation to the market value but he felt that he (Foley) was in a
slightly ticklish position and said he would refer the position to Bates’
solicitors; that Mr Avon then said that he (Foley) must be aware as he (Avon)
was that the rent revision clause as drawn was inoperative and that he (Avon)
had been aware of this at the time the lease was entered into because it had
been brought to his notice by Wyndham’s solicitors.
The learned
judge, in the course of his judgment, spoke critically of Mr Avon in that
respect and said that, in his judgment, Mr Avon’s conduct amounted to sharp
practice. As the learned judge had not heard any evidence from Mr Avon we
cannot tell in what circumstances Mr Avon acted as he did, or under what advice
he acted as he did. It is clear that he was at that time in contact with and
receiving advice from the tenants’ solicitors, and for my part I do not feel it
necessary to associate myself with that stricture on the part of the learned
judge upon Mr Avon’s conduct. Nevertheless, the fact emerges that when the
tenants executed the 1970 lease they did so realising the omission of any
reference to arbitration in default of agreement in the review clause and
without drawing the attention of the landlords to that omission in any way.
The only reasonable
conclusion, it appears to me, that can be drawn from the documents is that the
lease was executed in the form in which it was with regard to the terms of the
review clause as a consequence of a mistake on Mr Bates’ part, for at the time
when the lease was prepared and put forward the tenants had a contractual right
to have the rent, at any rate in respect of the sixth and seventh years of the
term, agreed or, in default of agreement, determined by an arbitrator appointed
by the president of the Royal Institution of Chartered Surveyors. No doubt the
grant of the lease displaced the contract which had arisen as a result of the
exercise of the option, but the terms of that contract relating to fixing the
rent in respect of the first seven years of the term which was granted by the
1970 lease remained in force up to the execution of the lease and that, in my
judgment, affords a strong indication that until, at any rate, Mr Avon realised
the omission of any reference to arbitration, it was the mutual intention of
both parties that the rent to be paid under the lease after the first five
years should be a rent which was agreed between the parties or, in default of
agreement, ascertained by arbitration.
Mr Bates did
not give evidence because, unhappily, he had died in January 1973. That was a
date a considerable number of months after the issue of the writ but before the
trial. No written statement of Mr Bates made during his lifetime was adduced in
evidence under the Civil Evidence Act. We are told by counsel, but we have got
no other evidence of the fact, that Mr Bates did not make any written
statement. So there was no evidence of any kind emanating from him.
But there was
the evidence of Miss Cannon. Miss Cannon’s evidence, in my view, in no way
negatives the possibility or probability that the omission of a reference to
arbitration was due to a mistake on Mr Bates’ part. Her evidence, taking it
quite shortly and generally, is to the effect that she typed the lease; that
she did it in accordance with instructions which she received from Mr Bates;
but there is nothing in her evidence which establishes one way or the other
whether Mr Bates, in giving his instructions, was himself labouring under a
mistake. If, as Mr Avon thought was the position, the clause in the way in
which it was drawn was an inoperative clause, it seems to me to be absolutely
manifest that it must have been so framed as the result of a mistake, for one
cannot believe that any landlord would put into a lease a clause which he
intended to be inoperative.
Mr Nugee has
said that there is no evidence as to what Mr Bates’ intention was, and he
stressed that in cases of rectification a high standard of proof is required by
the court. Indeed, in some cases the standard has been equated with the criminal
standard of proof, ‘beyond all reasonable doubt’. I think that the use of a
variety of formulations used to express the degree of certainty with which a
particular fact must be established in civil proceedings is not very helpful
and may, indeed, be confusing. The requisite degree of cogency of proof will
vary with the nature of the facts to be established and the circumstances of
the case. I would say that in civil proceedings a fact must be proved with that
degree of certainty which justice requires in the circumstances of the
particular case. In every case the balance of probability must be discharged,
but in some cases that balance may be more easily tipped than in others.
In Hornal
v Neuberger Products Ltd [1975] 1 QB 247 Denning LJ
higher the degree of probability that is required: but it need not, in a civil
case, reach the very high standards required by the criminal law.’ That, in my judgment, encapsulates the law
about the standard of proof required in civil proceedings applicable to all
civil proceedings, and as applicable to cases of rectification as to any other
kind of civil action.
The landlords
claim rectification in the present case on the basis of a principle enunciated
by Pennycuick J in A Roberts & Co Ltd v Leicestershire County
Council [1961] Ch 555 where the learned judge said, at p 570:
The second
ground rests upon the principle that a party is entitled to rectification of a
contract upon proof that he believed a particular term to be included in the
contract, and that the other party concluded the contract with the omission or
a variation of that term, in the knowledge that the first party believed the
term to be included.
He says a
little lower down the same page:
The principle
is stated in Snell on Equity, 25th ed (1960) p 569, as follows: ‘By what
appears to be a species of equitable estoppel, if one party to a transaction
knows that the instrument contains a mistake in his favour but does nothing to
correct it, he (and those claiming under him) will be precluded from resisting
rectification on the ground that the mistake is unilateral and not common.’
Of course, if
a document is executed in circumstances in which one party realises that in
some respect it does not accurately reflect what down to that moment had been
the common intention of the parties, it cannot be said that the document is
executed under a common mistake, because the party who has realised the mistake
is no longer labouring under the mistake. There may be cases in which the
principle enunciated by Pennycuick J applies although there is no prior common
intention, but we are not, I think, concerned with such a case here, for it
seems to me, upon the facts that I have travelled through, that it is
established that the parties had a common intention down to the time when Mr
Avon realised the mistake in the terms of the lease, a common intention that
the rent in respect of any period after the first five years should be agreed
or, in default of agreement, fixed by an arbitrator.
The principle
so enunciated by Pennycuick J was referred to, with approval, in this court in Riverlate
Properties Limited v Paul [1975] Ch 133, where Russell LJ (as he
then was) reading the judgment of the court said, at p 140:
It may be
that the original conception of reformation of an instrument by rectification
was based solely upon common mistake: but certainly in these days rectification
may be based upon such knowledge on the part of the lessee: see, for example, A
Roberts & Co Ltd v Leicestershire County Council [1961] Ch 555.
Whether there was in any particular case knowledge of the intention and mistake
of the other party must be a question of fact to be decided upon the evidence.
Basically it appears to me that it must be such as to involve the lessee in a
degree of sharp practice.
In that case
the lessee against whom the lessor sought to rectify a lease was held to have
had no such knowledge as would have brought the doctrine into play. The
reference to ‘sharp practice’ may thus be said to have been an obiter dictum.
Undoubtedly, I think in any such case the conduct of the defendant must be such
as to make it inequitable that he should be allowed to object to the
rectification of the document. If this necessarily implies ‘some measure’ of
sharp practice, so be it; but for my part I think that the doctrine is one
which depends more upon the equity of the position. The graver the character of
the conduct involved, no doubt the heavier the burden of proof may be; but, in
my view, the conduct must be such as to affect the conscience of the party who
has suppressed the fact that he has recognised the presence of a mistake.
For this
doctrine — that is to say the doctrine of A Roberts & Co Ltd v Leicestershire
County Council — to apply, I think it must be shown: first, that one party
(A) erroneously believed that the document sought to be rectified contained a
particular term or provision, or possibly did not contain a particular term or
provision which, mistakenly, it did contain; secondly, that the other party (B)
was aware of the omission or the inclusion and that it was due to a mistake on
the part of (A); thirdly, that (B) has omitted to draw the mistake to the
notice of (A). And I think there must be a fourth element involved, namely that
the mistake must be one calculated to benefit (B). If these requirements are
satisfied, the court may regard it as inequitable to allow (B) to resist
rectification to give effect to (A)’s intention on the ground that the mistake
was not, at the time of execution of the document, a mutual mistake.
Mr Nugee has
drawn attention to a number of other departures in the language of the 1970
lease from the language of the corresponding clauses of the 1963 lease, and he
says that this lease was not, or should not be regarded as having been, granted
in pursuance of the exercise of the option, but as a newly negotiated lease,
the negotiations no doubt being prompted by the exercise of the option, but the
new lease not flowing from the exercise of the option. I, with respect to Mr
Nugee’s argument, do not find very much force in that contention. The parties
were, of course, at liberty to modify the terms of their lease in any way they
mutually agreed and none of these variations to which I am now referring has
any bearing upon the review clause or the language employed in it. It seems to
me, as I have already said, that the omission from the review clause of any
reference to arbitration was one which was clearly contrary to the landlords’
interests, one which must have occurred as a result of a mistake, and one which
Mr Avon, on his own evidence, recognised, and must I think be taken to have
recognised, as having been the result of a mistake on the part of Mr Bates.
The learned
judge disposed of the matter on this aspect in a passage in three numbered
paragraphs:
(i) that I cannot regard Miss Cannon’s evidence
as proving that Mr Bates was not making a mistake in omitting a longstop
provision for arbitration of some sort; (ii) that although Miss Cannon said
that she thought there had been other Bates’ leases which contained the same
type of rent review provision as the 1970 lease, none was produced, and I
cannot accept that any reasonable businessmen would deliberately have adopted
such a potentially defective provision; and (iii) that the provision for an
option to renew the 1970 lease in clause 5 (which was in similar terms to the
options in Wyndham’s earlier leases) showed perfectly clearly that the parties
recognised the necessity for a longstop for rent fixing purposes and that it is
reasonable to suppose that it was a provision in these terms which Bates
mistakenly omitted and which Wyndham’s (through Mr Avon) deliberately allowed
to go uncorrected.
I have already
dealt with Miss Cannon’s evidence.
With regard to
the learned judge’s second numbered paragraph, I agree that it is highly
improbable that Mr Bates would have purposely adopted a form of clause which
was so disadvantageous as the review clause is with the omission of any
reference to arbitration.
With regard to
the third paragraph, I would myself prefer to relate this point not to clause 5
of the 1970 lease but to the exercise of the option under the 1963 lease and
the contract which arose from its exercise. The point is, I think, precisely
the same point. It is that the parties must have had present to their minds the
desirability, and indeed the obligation of the landlords in relation at any
rate to the first seven years of the new term, to arrive at a rent which was
not necessarily a rent which had to be at the same rate throughout the term,
but they had to arrive at a rent which was agreed between them or, in default
of agreement, was one determined by arbitration.
There was no
precedent for a review clause contained in the 1963 lease, for the 1963 lease
did not provide for any rent review; and it is not difficult to believe that a
layman like Mr Bates, in preparing the 1970 lease, failed to detect the
shortcoming of the review clause as he had framed it, and failed to apply his
mind to the difficulties which would arise if no provision was made for
arbitration.
On these
findings to which I have just referred, the learned judge rectified the lease.
The form of the order provides as follows:
This court
doth declare that upon the true construction of the lease dated December 17
1970 and made between the plaintiffs and the defendants comprising factory
premises at Church Road Harold Wood in the London Borough of Havering the rents
during the period of five years from November 15 1975 and the period of four
years from November 15 1980 should be the market rent for the said premises.
And this court doth order
words ‘such rents as shall have been agreed between the lessor and the lessee’
there shall be inserted the words ‘or shall in default of such agreement be
determined by a single arbitrator to be appointed by the President for the time
being of the Royal Institution of Chartered Surveyors’.
So far as
rectification is concerned, the language which the learned judge has adopted
follows the language used in the option clauses in this case, except that he
used the word ‘determined’ instead of ‘fixed’, and perhaps it would have been
better if the word had been ‘fixed’.
If the lease
is so rectified the question arises: by what measure is an arbitrator to fix
the rent if the parties do not agree? Mr
Wakefield, for the landlords, initially contended that the arbitrator so-called
would act not as an arbitrator but as a valuer. He based that argument upon the
use of the words ‘shall have agreed’ and the word ‘fixed’ in the review clause.
On that basis he submitted that the rent should be the market rent for the
property, on the authority of a decision of the House of Lords in Ponsford
v HMS Aerosols Ltd [1979] AC 63). Subsequently he conceded that the
clause must be read as an agreement to arbitrate and not as an agreement to
abide by a valuation. Upon that footing he agreed that, upon the true
construction of the clause, the rent should be such as it would have been
reasonable for this landlord and this tenant to have agreed under the lease. It
would consequently be proper for the arbitrator to take into account all
considerations which would affect the mind of either party in connection with
the negotiation of such a rent, as, for example, past expenditure by the tenant
on improvements.
In my
judgment, Mr Wakefield was right to make that concession and to have accepted
that the present case falls within the reasoning of the minority of the House
of Lords in Ponsford v HMS Aerosols Ltd and not within the
reasoning of the majority in that case. The review clause which was there under
consideration was a review clause in a lease which provided for a yearly rent
of £9,000, ‘during the first seven years of the said term and during the second
and third seven years of the term the sum of £9,000 aforesaid or such sum,
whichever be the higher, as shall be assessed as a reasonable rent for the
demised premises for the appropriate period. Such assessment to be made in the
following manner, that is to say: (a) such assessment as shall be agreed
between the parties hereto in writing’ — and there were certain provisions as
to the date by which that agreement should be reached — ‘(b) in the event of the
parties hereto failing to reach such agreement as aforesaid on or before the
date appointed, then the reasonable rent for the second and third period shall
be fixed or assessed by an independent surveyor’. That form of clause, as it
seems to me, focuses attention upon what is there described as ‘a reasonable
rent for the demised premises’ for the appropriate period, and that expression
is first used without any reference to agreement between the parties to the
lease at all. It then goes on to provide that such assessment — that is to say,
the fixing of the amount of the rent so to be charged — shall be either agreed
or, in default of agreement, arrived at by valuation by an independent
surveyor. That form of wording, in my judgment, certainly affected the views of
the majority in the House of Lords in that case. Lord Dilhorne at p 77 said:
‘The rent payable by the lessees will of course be rent for the demised
premises but as I see it, the task of the surveyor is not to assess what would
be a reasonable rent for the lessees to pay but what is a reasonable rent for
the premises’. Lord Fraser, at p 83, said: ‘In my opinion the words point
unambiguously to the result contended for by the landlords . . . and they mean
the reasonable rent assessed on an objective basis, without reference to the
particular landlord or the particular tenant or to the history of how the
premises came to be built or paid for’. Lord Keith, at p 86: ‘In my opinion the
words’ a reasonable rent for the demised premises’ simply mean the rent at
which the demised premises might reasonably be expected to let’. The other two
learned Lords, Lord Wilberforce and Lord Salmon, took a contrary view. They
thought that what had to be ascertained was what would be reasonable between
the particular parties to the transaction. However, they were in the minority
upon the construction of that particular rent review clause. But it appears to
me that the terms of the clause there under consideration were noticeably
different in important respects from the clause which we have, which refers to
nothing other than such rent as the parties shall have agreed. Consequently, I
think that Mr Wakefield was well advised in making the concession which he
made.
Mr Nugee, on
the other hand, who had argued in the earlier stages of the appeal that in
default of agreement the rent should continue after the review date at the
original rate of £2,350 per annum, conceded that in the light of a decision of
this court in Beer v Bowden which has not yet been reported but
is contained in Court of Appeal transcript no 156 for 1976* — he could no
longer support that argument. That again was a concession which I think he was
constrained to make. The decision in Beer v Bowden was only
brought to the attention of counsel and, through counsel, to the attention of
the court late in the course of the argument.
*Briefly
reported at (1976) 237 EG 141.
So the parties
are now at one, that on the true construction of the clause as rectified the
rent is to be fixed by the arbitrator at such amount as it would be reasonable
for the parties to agree having regard to all such considerations as I have
mentioned. This was not the construction adopted by the judge, who, as appears
from the terms of his order, implied a term that the rent to be agreed should
be the market rent. His attention had not, of course, been drawn to the
decision of this court in Beer v Bowden. As I understand the
position, neither party now contends that the learned judge’s view in that
respect is right, and I myself am satisfied that the market rent would not
provide a proper standard to adopt in the present case. In my judgment, in
default of agreement between the parties, the arbitrator would have to assess
what rent it would have been reasonable for these landlords and these tenants
to have agreed under this lease having regard to all the circumstances relevant
to any negotiations between them of a new rent from the review date.
If I were
wrong on the point of rectification, then, on construction and by a process of
implication, the rent to be ascertained in default of agreement must, I think,
be a fair rent as between the landlords and the tenants. It would be most
unjust that the landlords should receive no rent because of failure of the
parties to agree. The landlords have granted a 14-year term and the court must
endeavour to fill any gap in the terms of the lease by means of a fair and
reasonable implication as to what the parties must have intended their bargain
to be. See in this connection the decision of this court in the case of F
& G Sykes (Wessex) Ltd v Fine Fare Ltd [1967] 1 Lloyd’s Rep 53,
which was a case very different on its facts from the present, but in which the
court explained the function of any court of construction where parties have
embarked upon any commercial relationship but under terms that are not
altogether adequate to cover the eventualities. The court would ascertain by
inquiry what rent the landlord and the tenant, as willing negotiators anxious to
reach agreement, would arrive at for each of the two rent review periods. In
short, the standard would be the same, as I see it, as would have to be adopted
by an arbitrator under the clause if it is rectified in the way in which I
consider that it should be rectified.
For these
reasons I think that the learned judge, while he came to the wrong conclusion
on the matter of market rent, reached the right conclusion on the matter
relating to rectification. I would accordingly uphold that part of his order which
directed rectification, though I would substitute the word ‘fixed’ for
‘determined’, purely as a matter of pedantry, I think. It is for consideration
whether, in those circumstances, any declaration is really required to be
included in the order at all. That is a matter upon which, perhaps, we can hear
submissions at a later stage. I would dispose of the matter in that way.
Agreeing
EVELEIGH LJ said: The correspondence beginning with May 4 1970 contained
references to rent reviews. The first reference specifically was ‘at a rent to
be agreed between us, but in default of such agreement, at a rent to be fixed
by a single arbitrator appointed by the president for the time being of the
Royal Institution of Chartered Surveyors’. The letter of May 7 from the
defendants’ solicitors accepting the proposed lease for 14 years said merely
‘at the exclusive rent of £2,350 per annum, subject to review at the expiration
of five and ten years of the new term’. Quite clearly that letter was written
upon the basis that the nature
confirm an agreement and ask for a draft lease which would, of course, reflect
that agreement, as they in fact did, if such an important matter had not been
resolved. The word ‘review’ was clearly shorthand. I take the letter of May 7
from the plaintiffs to the defendants in the same way. The phrase there used is
‘thereafter to be reviewed and agreed for the remainder of the term’. If anyone
had asked the parties at that time how the review would take place, I am quite
convinced that the answer would have been that the machinery contemplated had
already been put forward by Mr Avon in his letter of May 4 to which the letter
of May 7 was a reply.
I see nothing
in the words of the other letters written in the course of negotiations between
the parties to indicate that the review machinery first referred to was being
abandoned in favour of something else. I find it particularly difficult to
conclude, as the appellants contend, that it was being replaced by a vague
gentlemen’s agreement. The fact that the parties ultimately agreed upon a lease
of different duration from that originally agreed, and containing other terms
not in the lease of 1963, in no way alters my conclusion. Certain important
changes were specifically discussed. The machinery for rent review as opposed
to the length of the period was treated without further discussion. The only
reasonable conclusion, in my opinion must be that the parties were negotiating
upon the basis that rent review in default of agreement was to be as indicated
in the letter of May 4. I therefore think that there was a common intention
that the rent should be fixed by a single arbitrator in default of agreement.
I also think
that the evidence established that Mr Avon knew that the lease did not contain
the appropriate clause, and knew that Mr Bates intended that it should. Where a
party is aware that the instrument does not give effect to the common intention
of the parties as communicated each to the other, there may be an inference of
sharp practice or unfair dealing. In my opinion, this will not always be so. I
do not think that it is always necessary to show sharp practice. In a case like
the present if one party alone knows that the instrument does not give effect
to the common intention and changes his mind without telling the other party,
then he will be estopped from alleging that the common intention did not
continue right up to the moment of the execution of the clause. There is no need
to decide whether his conduct amounted to sharp practice. I think he might at
that time have had no intention of taking advantage of the mistake of the other
party. I do not think that it is necessary to show that the mistake would
benefit the party who is aware of it. It is enough that the inaccuracy of the
instrument as drafted would be detrimental to the other party, and this may not
always mean that it is beneficial to the one who knew of the mistake.
I agree that
the lease should be rectified in the way indicated by my Lord and I agree with
the order which he proposes. I should just add that I, too, regard this case as
different from the case of Ponsford v HM Aerosols Ltd [1979] AC
63. There the reference was specifically to the demised premises and that is an
important difference. At p 85 Lord Keith said:
At first
impression the words ‘reasonable rent for the demised premises’ suggest that
what has to be ascertained is simply the rent which is reasonable for the
premises as such in their actual state, the situation being viewed entirely
objectively. The ‘demised premises’ must mean the demised premises as improved
by virtue both of the ordinary law and the passage I have quoted from the
licence agreement. So upon this view any contribution the improvements might
have made to rental value would have to enter into the assessment,
and he also
clearly attached importance to the words ‘demised premises’ in the passage
which my Lord has just read.
For those
reasons I agree that the lease should be rectified in the terms stated, and I
further agree with the interpretation of ‘reasonable rent’ that my Lord has
given.
Also agreeing,
BRIGHTMAN LJ said: I wish to say a few words only on two points. First as
regards the standard of proof. The standard of proof required in an action of
rectification to establish the common intention of the parties is, in my view,
the civil standard of balance of probability. But as the alleged common
intention ex hypothesi contradicts the written instrument, convincing
proof is required in order to counteract the cogent evidence of the parties’
intention displayed by the instrument itself. It is not, I think, the standard
of proof which is high, so differing from the normal civil standard, but the
evidential requirement needed to counteract the inherent probability that the
written instrument truly represents the parties’ intention because it is a
document signed by the parties.
The standard
of proof is no different in a case of so-called unilateral mistake such as the
present. The mistake in the instant case was unilateral and not mutual only
because the defendants became aware of the implications of the review clause on
the eve of the execution of the new lease. That consideration, as it seems to
me, leads to no different conclusion in relation to the standard of proof
required in a rectification action.
The other
point I want to touch on briefly is this. In his judgment the learned judge
said this: ‘. . . the parties recognised the necessity for a longstop for rent
fixing puproses and . . . it is reasonable to suppose that it was a provision
in these terms which Bates mistakenly omitted and which Wyndham’s (through Mr
Avon) deliberately allowed to go uncorrected. In my judgment this was sharp
practice . . .’ I would not be prepared
to assume, on the evidence, that Mr Avon was consciously guilty of sharp
practice. Nor is such an assumption necessary for the plaintiffs’ case. As I
indicated, I take the view that there was a common intention on both sides to
extend to the new lease the rent assessment arrangements contained in the
covenant for renewal in the expiring lease. The discrepancy between the formula
in the expiring lease and the formula in the engrossment of the new lease was
not observed by Mr Avon until it was pointed out by his solicitor. I am not
willing to assume that the reputable firm of solicitors acting for him would
have allowed him to execute the lease in any circumstances which they saw to be
dishonest. If the judgment is intended to contain a finding of sharp practice
on the part of Mr Avon, I would respectfully wish to disagree with the learned
judge on such a finding. I do not think this would be justified.
As I have
said, I agree that the learned judge’s order should, with the slight variation
mentioned, stand.
The court
upheld the judge’s order for rectification, substitution of word ‘fixed’ for
‘determined’, but directed that the rent to be fixed by an arbitrator in
default of agreement should be, not the market rent, but the rent that it would
have been reasonable for these landlords and these tenants to have agreed under
this lease, having regard to all the circumstances relevant to any negotiations
between them of a new rent from the review date.
