Landlord and tenant — Construction of rent review clause in lease — Appeal from a decision of Judge Finlay QC, sitting as a High Court judge, in favour of tenant (Secretary of State for the Environment) — Review clause provided that if the landlords and tenant had been unable to agree upon a fair market rack rental within two months after the service of the
This was an
appeal from a decision of Judge Finlay QC refusing the landlords, Touche Ross
& Co, a declaration upholding their rights to operate a rent review clause
in a lease of Brook House, Tottenham Court Road, London W1, under which the
tenant was the Secretary of State for the Environment.
Michael Barnes
QC and Miss Anne Williams (instructed by Stones, Porter & Co) appeared on
behalf of the appellant landlords; A W H Charles (instructed by the Treasury
Solicitor) represented the respondent Secretary of State.
Giving the
first judgment at the invitation of Lawton LJ, DILLON LJ said: This is an
appeal from a decision of His Honour Judge John Finlay QC, sitting as a judge
of the Chancery Division. The decision was given on July 19 1982 and it is
concerned with a very short point, namely, whether time is of the essence of a
particular provision in a rent review clause in a lease. The lease is actually
a subunderlease. It is dated October 3 1973 and it demises certain premises in
nos 191 to 194 Tottenham Court Road and in Torrington Place, London W1, to the
defendant, the Secretary of State for the Environment, for a term commencing on
November 1 1977 and expiring on September 29 1986, at an initial rent of
£87,000 a year. The lease does not contain any break clause and it is
sufficient to refer to the rent review clause, which is in the form of a
proviso to the reddendum in the lease. It is divided into subclauses (a) to
(e).
Subclause (a)
reads as follows:
if the Lessor
shall desire to review the rent hereinbefore reserved on the first day of
November 1981 and of such desire shall give to the Lessee not less than five
calendar months previous notice in writing then on the first day of November
1981 for the residue of the term hereby granted the rent shall be revised and
shall be such an annual sum as may be agreed between the Lessor and the Lessee
or as may be determined as provided by the following subclauses of this present
clause to be the fair market rack rental of the demised premises Provided that
in no circumstances shall the rent payable hereunder following such review be
less than the rent payable by the Lessee at the date of the Lessor’s notice
calling for the review.
In fact the
lessor duly gave a notice under subclause (a) on May 22 1981, which was in due
time.
Subclause (b),
which is the most important subclause for present purposes, reads as follows:
if within two
calendar months after the service by the Lessor of the notice referred to in
subclause (a) of this present clause the Lessor and the Lessee have been unable
to agree upon a fair market rack rental (as defined by subclause (c) of this
present clause) then the question of what is a fair market rack rental of the
demised premises shall as soon as practicable and in any event not later than
three months after the service of the said notice be referred for decision to a
Surveyor to be mutually agreed between the Lessor and the Lessee or in default
of agreement to be nominated on the application of either party by the
President for the time being of the Royal Institution of Chartered Surveyors.
It is then
provided that the surveyor is to act as an expert and his decision is to be
binding. The subclause ends by saying:
The fair
market rack rental as so agreed or determined shall subject to the proviso
contained in subclause (a) of this present clause be the annual rent payable
hereunder for the residue of the term in lieu of the rent payable immediately
before the said review.
What happened
is that no reference was made to any surveyor within the three months’
time-limit referred to in that subclause. The question is whether time is of
the essence of that time-limit. The learned judge held that it was of the
essence, and that the landlords (the plaintiffs) had lost their rent review by
the failure to comply with that time-limit. It is against that decision that
the landlords appeal.
Subclause (c)
of the rent review clause provides:
The
expression ‘fair market rack rental’ shall for the purposes of this clause mean
the amount which would be the annual amount obtainable at the date of agreement
or determination as aforesaid as between a willing landlord and a willing
tenant in respect of the demised premises on a letting thereof as a whole with
vacant possession for a term equivalent to the unexpired residue of the term
hereby granted at such date
— that is to
say, at the date of agreement or determination —
and subject
to similar covenants and conditions as those contained in this Subunderlease
but ignoring any goodwill value attaching to the Lessee’s business and ignoring
the provisions of this present clause for revision of the rent but subject to
the proviso contained in subclause (a) of this present clause.
Subclause (d)
of the rent review clause does not matter.
Subclause (e)
provides:
if the amount
of the rent payable by the Lessee after such review as aforesaid shall not have
been ascertained on the date on which the same shall become payable then the
Lessee shall pay to the Lessor rent equal to the amount payable immediately
prior to such date and upon the revised rent being determined any necessary
adjustment shall be made forthwith by payment to the Lessor by the Lessee.
It is
therefore apparent that when the revised rent is fixed it relates back to
November 1 1981 even though it may not actually have been fixed until later,
but it is to be determined, if there is a reference to a surveyor, as at the
date of the determination and not, with the benefit of hindsight, as at
November 1 1981.
In the
well-known case of United Scientific Holdings Ltd v Burnley Borough
Council [1978] AC 904 the House of Lords laid down in emphatic terms:
that in the
absence of any contra-indications in the express words of the lease or in the
interrelation of the rent review clause itself and 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.
See per Lord
Diplock at p 930. Lord Fraser at p 960 took into account in relation to one of
the particular cases before their Lordships’ House there, as a factor tending
against time being of the essence of the rent review clause, that steps fell to
be taken which were not under the control of the parties. There was there a
provision that the valuation had to be completed by a certain date and that
would not be in the hands of either of the parties.
The reason why
the House of Lords reached the conclusion that prima facie time is not
of the essence under a rent review clause was that the detriment to the
landlord of losing his review altogether by failure to adhere strictly to a
time-limit was wholly disproportionate to the disadvantage to the tenant of a
delay in the assessment of the rent. However, the House of Lords recognised
that it was competent to the parties to a lease to agree that time should be of
the essence either of the whole timetable or of any particular stage or step
under the timetable. Mr Charles, for the Secretary of State, has pointed out
correctly that there is no magical formula which alone achieves the result of
making time of the essence of a contract and he has said, again I think
correctly, that what is necessary is something which shows that the time-limit
is obligatory and means what it says.
In the present
case the relevant words in subclause (b) are that
the question
of what is a fair market rack rental of the demised premises shall as soon as
practicable and in any event not later than three months after the service of
the said notice be referred for decision to a Surveyor to be mutually agreed
between the Lessor and the Lessee or in default of agreement to be nominated on
the application of either party by the President for the time being of the
Royal Institution of Chartered Surveyors.
If the clause
had simply said that ‘the question shall as soon as practicable be referred for
decision to a Surveyor’ there would be no
Scientific Holdings case, if the clause had simply said that ‘the question
shall within three months after the service of the landlord’s notice be
referred’ time would not have been of the essence. Prima facie,
therefore, it seems to me somewhat hard to deduce, from the running together of
those two alternatives into the composite phrase ‘shall as soon as practicable
and in any event not later than three months after service of the notice be
referred’, that time is to be of the essence and that the parties are concerned
to show that this is not just ordinary use of language to indicate a desire
that the matter should not be unduly protracted; they are concerned to show
that the time-limit is obligatory and really means what it says, unlike any
mere time-limit in a rent review clause.
As against any
conclusion that the time-limit is obligatory, there is the factor that what has
to be done is a reference to a surveyor — not the service of a notice on the
president but a reference to a surveyor to be mutually agreed between the
lessor and lessee or nominated by the president. If the surveyor is mutually
agreed he is an identified person from the moment of agreement and the
reference is then to be to him after there has been agreement that he is to be
the surveyor to decide the question. If there is to be reference to a surveyor
to be nominated by the president then the president has to name a surveyor and
there can be no reference to that surveyor until he has been named. This means
that matters pass, on a fairly tight timetable, out of the hands of the
parties, because, apart from any question that the president may not be
immediately available to act on the parties’ request to him to nominate a
surveyor, he has to find a surveyor who will be willing to undertake the task.
That of itself may take a certain amount of time and is wholly outside the
control of the parties.
It has been
submitted that in the present case the detriment to the lessee, if time is held
not to be of the essence and there can be a late reference to a surveyor, is
greater than it could have been in either of the cases which the House of Lords
had to decide in the United Scientific Holdings case, because under the
definition of ‘fair market rack rental’ in subclause (c) of the rent review
clause the rent is to be fixed at the date of determination. If, therefore,
there is delay in a period of inflation the surveyor will fix a higher rent
than would have been fixed if the reference to him had been at an earlier date
before the latest assumed advance in inflation. But that is partly, at any
rate, mitigated by the fact that the reference to the surveyor can be made by
the lessee alone if the lessor is not prompt to act, at any rate where, as
here, the lessor has instituted the rent review procedure by serving a notice
under subclause (a). It is a factor to be taken into account that there may be
detriment to the lessee from a delay in invoking the clause but it is only one
factor. Taking the clause as a whole, I conclude that the wording of the clause
is by no means enough to make time of the essence of this step in the
procedure. Therefore, with all respect to the learned judge, I think he reached
a wrong conclusion on the construction and effect of this clause.
We were
referred in the course of argument to two authorities in addition to the United
Scientific Holdings case. One was the case of Harold Wood Brick Co Ltd
v Ferris (1935) 153 LT 241 — a decision of this court. Judge Finlay in
the present case accepted that that decision did not really govern the present
case at all, though he had derived a measure of comfort from it. For my part, I
do not find any help in it at all. It was a decision in the field of vendor and
purchaser on a somewhat complicated and very different form of contract. In
that contract there had been three dates: firstly, an early option date for the
purchaser to complete at a reduced price; secondly, the normal contractual
completion date; and then, thirdly, a final date for completion when completion
was to take place in any event. It was, as it seems to me, inevitable, given
that form of contract, that the words relating to that final date should be
construed as making time of the essence.
The other case
to which we were referred was the decision of the present Vice-Chancellor in Drebbond
Ltd v Horsham District Council decided in 1979 and reported in
(1979) 37 P & CR 237*. That is a case that was concerned with the
interpretation of a rent review clause after the decision in the United
Scientific Holdings case. The clause in question provided that the landlord
should be entitled by notice in writing given to the tenant within the last six
months before the expiration of the 7th and 14th year respectively of the term,
to call for a review of the yearly rent payable under the lease and there was
provision as to what was to happen if upon any such review it should be found
that the commercial rent was greater than the initial rent. The clause went on
to provide that the review should, in the first instance, be made by the
landlord and the tenant, or their respective surveyors, in collaboration, but
if no agreement as to the adjustment (if any) which should be made in the
yearly rent should have been reached between the parties or the surveyors
within three months after the date of the landlord’s notice calling for such
revision, the question as to the commercial yearly rent of the demised
premises, and certain other questions, should ‘if the landlord shall so require
by notice in writing given to the tenant within three months thereafter but not
otherwise be referred to the decision of a sole arbitrator to be appointed, in
default of agreement between the parties, by the president for the time being
of the Royal Institution of Chartered Surveyors’. The learned Vice-Chancellor
held that the words ‘if the landlord shall so require by notice in writing
given to the tenant within three months thereafter but not otherwise’ had the
effect of making time of the essence for taking that step and as the landlord
failed to give the notice within the three months’ time-limit the landlord had
lost his rent review.
*Editor’s
note: Reported also at (1978) 246 EG 1013, [1978] 1 EGLR 96.
Naturally Mr
Charles, appearing for the Secretary of State, submits that there is not really
very much difference between a phrase ‘if the landlord shall require within a
certain time but not otherwise’ and a phrase that ‘there is to be a reference
in any event by the expiration of a certain time’. However, there are
considerable differences in the schemes of the clauses in these two cases. In
particular it was the landlord who had to give the notice in the Drebbond
case and the tenant could do nothing about it. The notice which the landlord
had to give within the time-limit was merely a notice to the tenant which did
not expose the landlord to losing his review because of factors outside his own
control and the limits of the timetable were more relaxed than in the present
case. Obviously it is undesirable that questions of whether time is of the
essence of a rent review clause should depend on minute differences of
language. Since there is no magical formula it is possible that small
differences of language will lead in some cases to opposite conclusions. I do
not need to express any view either way on whether the Drebbond case was
rightly decided on the terms of the lease which the court had to consider in
that case. I merely say that I find nothing in the Drebbond case to lead
me to the conclusion that the time-limit in the present case in subclause (b)
is obligatory and of the essence of the contract.
I would allow
this appeal.
LAWTON LJ and
GRIFFITHS LJ agreed and did not deliver separate judgments.
The appeal
was allowed with costs in the Court of Appeal and below. The appellants were
granted the declaration they asked for in the originating summons.
