Landlord and tenant — Rent review clause — Construction — Difference as to the length of the hypothetical lease to be assumed for the purpose of determining the reviewed rent — Warehouse premises were the subject of two underleases granted on the same date, June 15 1973, to the same tenant — The first was for a term of 16 years expiring on March 25 1989 and the second was for a reversionary term of 34 years commencing on March 25 1989 — In effect, although not in form, the tenant obtained a term of 50 years — The trial judge and the Court of Appeal accepted that the probable reason for this arrangement was to save stamp duty amounting to £3,400 — The rent for the first five years was £85,000 per annum
rent took place in 1978 and 1983, the rent being increased in 1983 to £335,000
— A review was due in 1988 when only one year remained of the original term of
16 years — At this point the problem raised by the two leases became very clear
— The definition of ‘open market value’ in the first lease laid it down that
the hypothetical lease for review purposes was to be a ‘term of years certain
equivalent in length to the residue unexpired at the review date of the term of
years hereby granted’ — At March 25 1988 the unexpired residue of the 16-year
term granted by that lease was one year only — The review clause also provided
that there should be disregarded all restrictions relating to security of
tenure contained in any statute — On the basis of these provisions the tenant
(plaintiff below and respondent on appeal) submitted that what had to be valued
was a notional one-year lease under which the hypothetical tenant would have no
security of tenure under Part II of the Landlord and Tenant Act 1954 — Knox J
accepted this submission, without enthusiasm, and made a declaration
accordingly
was contended on behalf of the landlord that the critical words defining the
term of the hypothetical lease as one for ‘the residue unexpired of the term of
years hereby granted’ should be interpreted to include the term of the second
lease, thereby producing a notional lease of 35 years — The Court of Appeal
agreed with the substance of this contention but had to consider how to frame a
satisfactory formulation — They even asked, by way of rhetorical question, ‘Is
this a case in which the court of construction must wring its hands in impotent
despair and leave the failure in expression to be remedied, if at all, by
rectification?’ They decided, however,
that the context entitled them to imply words which would avoid ‘an absurd and
irrational result’ and they drew attention to no less than six convincing
features which justified the implication — The additional words to be implied
were: after ‘the term of years hereby granted’ (quoted above), the words ‘plus
the term granted by the supplemental lease of even date’ — This is the answer
which the parties would have given if approached by the proverbially officious
(but obviously highly intelligent) bystander — On this issue the court held the
judge to have been wrong — On the subsidiary point, about the effect of the
requirement to disregard restrictions relating to security of tenure, the court
agreed with the judge that the effect was to leave out of account Part II of
the Landlord and Tenant Act 1954 in particular — Appeal allowed on the main
issue
No cases are
referred to in this report.
This was an
appeal by Provident Mutual Life Assurance Association, by substitution the
present underlessors of warehouse premises in Fleming Way, Crawley, West
Sussex, from the decision of Knox J given on October 31 1988 in favour of the
declaration sought by the underlessees, Toyota (GB) Ltd, in regard to the
construction of the rent review clause in the first of two underleases of the
premises.
David
Neuberger QC and Kim Lewison (instructed by Braby & Waller) appeared on
behalf of the appellants; Derek Wood QC and John Male (instructed by Clifford
Chance) represented the respondents.
Giving
judgment, NICHOLLS LJ said: This appeal concerns the true construction of a
rent review clause. The property comprises the national distribution centre for
spare parts for Toyota cars. It consists of nearly 5 acres of land, with a
warehouse and other buildings, at Fleming Way, Crawley, Sussex. On June 15 1973
Toyota (GB) Ltd was granted two underleases of this property by the then
lessor, John Matthews Properties Ltd. The first lease was for a term of 16
years from March 25 1973. The second lease was for a term of 34 years, starting
from March 25 1989, which was the date on which the first lease was due to
expire. Thus the combined effect of the two leases was to grant to Toyota a
term of 50 years in the property.
Subject to
what I shall say, the two leases contained identical covenants and conditions.
That being so, the first question which naturally springs to mind is, what was
the purpose of Toyota and John Matthews entering into two leases on the same
day in this way rather then entering into one lease for a single term of 50
years? We have been given no explanation
of this. Knox J thought that the probability was that the transaction was
carved into two leases for stamp duty reasons. As the law stood in June 1973, a
lease for a term exceeding seven years but not exceeding 35 years attracted
stamp duty at the rate of 1% of the amount of the yearly rent. If the lease was
for a term in excess of 35 years but less than 100 years, the rate rose to 6%.
The initial rent payable here was £85,000 per year. So a single lease for a
term of 50 years would have attracted payment of £5,100 for stamp duty. As it
was, stamp duty of £850 was payable and was paid on each lease. Having two
documents therefore, instead of one,
payment of stamp duty was the tenant’s responsibility. For my part, in the
absence of any other explanation, I, too, think that it is reasonable to draw
the inference that the transaction took the form of two leases rather than one
in order to obtain this saving in stamp duty.
The rent
provisions are set out in the fourth schedule to each lease. In the case of the
first lease, so far as is material for present purposes, they read as follows:
A. Rent for
the first five years of the said term shall be £85,000 exclusive of rates and
all other outgoings.
B. For each
succeeding period of five years of the said term either the maximum yearly rent
reserved in the preceding period or the open market rental value of the demised
premises at the review date whichever is the higher and in either case the same
shall remain constant during each such period of five years . . .
PROVIDED that for the purposes of
sub-clause B hereof it is hereby agreed that the following definitions and
provisions shall apply namely:–
(1) The expression ‘open market rental value’
means the annual rental value of the demised premises in the open market which
might reasonably be obtained by a willing landlord from a willing lessee on a
lease for a term of years certain equivalent in length to the residue unexpired
at the review date of the term of years hereby granted with vacant possession
at the commencement of the term but . . . there being disregarded (so far as
may be permitted by law) all restrictions whatsoever relating to rent or to
security of tenure contained in any statute or orders rules or regulations
thereunder and any directions thereby given relating to any method of
determination of rent such lease being on the same terms and conditions (other
than as to amount of rent and length of term) as this present demise without
the payment of any fine or premium.
(2) The expression ‘review date’ means the
Twenty-fifth day of March One thousand nine hundred and seventy-eight and the
Twenty-fifth day of March in each year at five yearly intervals thereafter
during the said term.
There then followed two further clauses
which were concerned with the method of ascertaining the open market rental
value and with the payment of an interim rent pending the determination of the
new rental.
The dispute
which has now arisen is this. These rent review provisions stipulate that there
is to be a review at every fifth Lady Day. Reviews took place in 1978 and 1983.
Under the 1983 review the rent was increased to £335,000. A further review was
due at Lady Day 1988. At that date only one year remained of the term of 16
years granted by the first lease. The definition of ‘open market rental value’
in proviso (1) postulates that the hypothetical lease shall be for a ‘term of
years certain equivalent in length to the residue unexpired at the review date
of the term of years hereby granted’. At March 25 1988 the unexpired residue of
the 16-year term granted by the first lease was just one year.
The contention
of the tenant, Toyota, is that what has to be valued is a notional one-year
lease under which, moreover, the notional tenant would have no security of
tenure under Part II of the Landlord and Tenant Act 1954. This latter
conclusion, it is said, derives from the provision in the words I have read
that there shall be disregarded all restrictions relating to security of tenure
contained in any statute.
Knox J made a
declaration to this effect on October 31 1988. Before us is an appeal by the
present lessor, Provident Mutual Life Assurance Association. Its contention is,
in effect, that the crucial words defining the term of the notional lease as
one for ‘the residue unexpired . . . of the term of years hereby granted’
include the term of the second lease. Thus the review at March 25 1988 should
take place on the basis that the notional lease would last for a term of 35
years. Clearly it is to be expected that the two different formulae concerning
the length of the notional lease will throw up substantially different rental
figures.
The problem is
not confined in its effect to the rent payable for the 16th year of the term
created by the first lease. The effects carry forward into and throughout the
first four years of the term created by the second lease. The second lease is
expressed to be supplemental to the first lease. Para A in the fourth schedule
to the second lease reads:
A. Rent for the
first four years of the said term shall be £85,000 exclusive of rates and all
other outgoings or such a yearly sum exclusive as aforesaid as shall have been
payable as the rental of the demised premises during the year commencing on the
Twenty-fifth day of March One thousand nine hundred and eighty-eight under the
provisions of the Fourth Schedule to the Lease in possession (whichever shall
be the greater).
The reference to ‘the Lease in
possession’ is a reference to what I have described as the first lease. Para B
is in terms which, so far as are material for present purposes, are identical
to the corresponding para B in the fourth schedule to the first lease. Thus, if
Toyota’s contention is correct, for the first four years of the 34-year term of
the second lease, it will pay a rent assessed on the footing of having only a
one-year lease unprotected by the business tenancies legislation.
The judge
reached his conclusion in favour of Toyota without enthusiasm. He accepted that
the literal construction of the crucial words was likely to produce a
capricious result. He felt driven to conclude that the words used were simply
not capable of meaning what the lessor submitted. I agree with him that the
phrase ‘the term of years hereby granted’ in proviso (1) to para B of the
fourth schedule to the first lease leaves no room for doubt as to its meaning.
‘Hereby’ means ‘by this lease’. Thus the term of years referred to in this
phrase is the 16-year term which was granted by the first lease. I am unable to
accept Mr Neuberger’s submission that ‘hereby’ means ‘by this transaction’,
which it was submitted would embrace both leases. Mr Neuberger pointed out that
the precise expression, ‘the term of years hereby granted’, appears only once
in the first lease, that is, in the crucial expression. But scattered
throughout the first lease are similar expressions, such as ‘the said term’ and
‘the term hereby granted’. These phrases, familiar indeed to conveyancers, are
substantially indistinguishable in their meaning one from the other, and they
are all, as it seems to me, references to the 16-year term of the first lease.
So I am unable to accept Mr Neuberger’s primary submission.
However, like
the judge, I think that thus construed the first lease indeed produces a
capricious result. I am in no doubt that this result was not intended by the
parties. There has been here a slip in the drafting. The draftsman failed to
realise that the five-year rent review provisions, in identical terms in the
two leases, needed adaptation if they were to work as intended in the case, in
particular, of the rent review falling due one year before the end of the term
granted by the first lease.
This brings me
to what seems to me to be the nub of this appeal. Is the difficulty posed by a
literal construction of the crucial words one which can be resolved by implying
words in accordance with ordinary canons of construction? Or is this a case in which the court of
construction must wring its hands in impotent despair and leave the failure in
expression to be remedied, if at all, by rectification? I am conscious of the force of Mr Wood’s
argument. I have in mind that the rent review provisions contain a detailed and
elaborate statement regarding the characteristics of the notional lease to be
used in the valuation process. But, in my view, there is here a context which
points irresistibly to the conclusion that some words must be implied in the
crucial passage in the fourth schedule to the first lease. Without such an
implication, the crucial passage would produce an absurd and irrational result.
It is not a question of admitting evidence of the intention of the original
parties to the two leases in a way that would be appropriate only on a
rectification claim. The context in which the first lease is set, and which is
admissible when construing the lease, includes the following features.
First, the two
leases were executed as part of a single transaction, and their linkage is
underlined by the provision in the second lease that the demise thereby made was
subject to the first lease not having been forfeited. This is not to say that
the two leases can be treated simply as if they were one. The distinction
between the two leases is in law a real one. For example, the covenants under
the two leases relate to different periods of time. A breach of covenant by the
tenant leading to a right to forfeit the first lease would not necessarily be a
breach of covenant by the tenant of a covenant in the second lease.
Furthermore, although the two documents were executed at the same time, the
question ultimately is what is the true construction of the language appearing
in the individual document. Nevertheless, it is proper to have some regard to
both documents when construing each of them as individual deeds.
Second, under
the two leases there was to be a rent review provision every five years
throughout the terms, which are consecutive and which, in aggregate, total 50
years.
Third, the
only apparent purpose of there being two leases instead of one was to save
stamp duty, as I have mentioned. The grant of two separate terms, one following
immediately after the other, in two separate deeds was not intended to disturb
the operation of the rent review provisions. The reviews were to be at regular
five-year intervals for 50 years, the initial rent payable under the second
lease was the rent payable for the last year of the first lease, and the first
review under the second lease was to be four years after that lease took effect
in possession.
Fourth,
likewise the grant of two separate leases was not intended to affect the
substantial operation of other covenants. That this is so is confirmed by the
express provision in the leases designed to secure that the common form
tenant’s obligation to repair and decorate externally every third year and in
the last year of the term did not result in any additional burden being imposed
on the tenant because there are two leases rather than one.
Fifth, it
would be ironical if a course designed to assist the tenant by effecting a
comparatively modest saving in the amount of stamp duty payable by it were to
result in the lessor’s being penalised by distorting in the tenant’s favour the
amount of rent payable for the five-year period spanning the end of the first
term and the beginning of the next. In practical terms, the tenant’s argument
may well mean that the 1983 rent would be payable for 10 years.
Sixth, the
rent review machinery here was intended to produce an up-to-date open market
rental. The notional lease provisions were framed to that end. Without the
implication of appropriate words, the crucial passage would result in the rent
review machinery producing a sum which, viewing the matter commercially, would
not fairly represent such a rental under the two leases entered into by the same
parties as part of one transaction. Toyota, on March 25 1988, did not have the
benefit only of a non-renewable fag-end of one year. Likewise, in respect of
the rent payable for each year in the first four years of the second lease.
Taking into
account these background facts, in my view there are to be implied into the
crucial passage in the first lease after the phrase ‘the term of years hereby
granted’ the words ‘plus the term granted by the supplemental lease of even
date’ or words to the like effect. Had the officious bystander asked Toyota and
the original lessor when the leases were granted, ‘Do you intend that, at the
end of the 15th year, rent for the 16th year and for the first four years of
the second lease will be assessed as though the tenant only had the benefit of
a lease for one year?’ he would indeed
have been answered with a testy ‘No’ from both parties. They would both have
said that the five-year reviews were to operate throughout the 50 years by reference
to the currently unexpired residue of that period.
I do not
consider that such an implication gives rise to any problem concerning third
parties who might be prejudiced if such an implication were made in that they
might consider the first lease without being aware of the existence and terms
of the second lease. It may be questionable whether it is likely that the two
leases would ever get into separate hands, given that the forfeiture of the
first lease would bring down also the second lease. Be that as it may, the
point now under consideration will not affect future rent reviews because the
first lease expires in 1989. So the point now being considered will not have
any continuing operation for the future.
The
implication, therefore, that should be made in this case is of an assumption, not
expressly stated, which is to be brought into account as a feature of the
notional lease. That implication would, of course, apply as much to the earlier
reviews in 1978 and 1983 as to the 1988 review. But I do not regard this as
negativing the implication. I do not doubt that the parties, if approached by
the officious bystander, would have given the same answer in respect of the two
earlier reviews as they would have given in respect of the 1988 review.
Mr Wood
submitted that the direction to disregard all statutory provisions relating to
security of tenure accords ill with the implication I have mentioned. It
accords ill because, if the notional lease were to extend to 2023, there could
be no point in including such a disregard in the provisions of the first lease.
I do not find this consideration of weight when set against the matters I have
mentioned.
For my part,
therefore, I would hold that on the true construction of the first lease words
to the effect that I have mentioned are to be implied. On this footing, the
subsidiary question raised by this appeal is of little, if any, present
importance. Nevertheless, I think it is right to deal with the point. The
question concerns the meaning of the phrase ‘there being disregarded all
restrictions whatsoever relating to . . . security of tenure contained in any
statute’.
The judge held
that the effect of these words was that one left out of account the provisions
of Part II of the Landlord and Tenant Act 1954 in particular. I agree with him.
Mr Neuberger submitted that the words were apt to exclude, in the case of a
business tenancy such as this, the statutory grounds on which a lessor may
oppose the grant of a new tenancy. He submitted that the words were not apt to
exclude the statutory provisions under which tenants have security of tenure.
On this point the judge said:
. . . the phrase is ‘restrictions
relating to security of tenure’, which is just as capable of meaning
‘restrictions conferring security of tenure’ as it is of meaning ‘restrictions
on security of tenure’. Once one reaches that conclusion, it seems to me that
the general context evinces an intention to have regard to the rights at common
law of the hypothetical tenant without regard to statutory intervention
concerning rent or security of tenure . . .
I agree with that reasoning and
conclusion.
For these
reasons I would allow this appeal to the extent that I have indicated.
Agreeing,
BINGHAM LJ said: The object of a rent review clause broadly is to ensure that
the tenant pays the full market value of what he is getting during the term of
a lease. Under the present leases the tenant may pay more than the market value
of what he is getting if there is a downward trend in rents, because there is
no provision for revision of the rent downwards, but the clear intention of the
lease is that he should not pay less than the market value of what he is
getting.
On the judge’s
ruling and on the facts here the tenant will pay less. The rent review as of
March 1988 would be on the basis of a one-year term when in fact the tenant had
35 years to look forward to. So an artificially deflated rent would be payable
for that year, and since that rent continued for the first four years of the
second lease, the landlord would receive an artificially deflated rent for that
period also. The learned judge recognised these anomalies, but found it
impossible on a process of construction strictly so called to read the language
which the parties had used so as to avoid the anomalies. I agree.
Nicholls LJ
has referred to several of the relevant provisions. The crucial provision is,
however, to be found in proviso (1) to para B of the fourth schedule of the
first lease in the words ‘the term of years hereby granted’. In my judgment,
read strictly, that can only mean the term of 16 years granted by that
instrument. That reading is consistent with the rest of the document. I
accordingly agree with the learned judge’s conclusion based on a strict process
of construction.
But Mr
Neuberger had a further argument, that a term should be implied to give effect
to what he says must have been the intention of the parties. He put his case on
implication, first on the basis of necessity or business efficacy, and
alternatively on the officious bystander basis, that the term for which he contends
represents a provision to which the parties would have agreed without question
had the point been expressly raised at the time of contract.
The learned
judge rejected the argument based on implication. He said at p 9 A-E of the
transcript of his judgment:
It is this latter consideration which
seems to me to be fatal to Mr Neuberger’s second argument, namely, that
assuming that the term literally referred to in the 4th Schedule of the First
Underlease is the 16 year term granted by it, nevertheless, a further provision
should be implied by inserting after the words ‘the term of years hereby
granted’, words to the effect of
‘such lessee taking at the same time a reversionary
lease for 34 years on the same terms as the Underlease of even date granted
between the parties hereto and made supplemental hereto’.
That
implication, if made in relation to Lady Day 1988, has also to be made in
relation to Lady Day 1978 and Lady Day 1983. It does not seem to me possible to
say in relation to either of the latter two that such an implication is so
obvious that the officious bystander would say ‘of course’ to the implication,
nor does it seem to me necessary to give business efficacy. I accept that it
would be a reasonable implication to insert, more especially as regards Lady
Day 1988, but that is not enough (see Liverpool City Council v Irwin
[1977] AC 239).
Like the
judge, I am not attracted by the proposed implied term as formulated, and like
him I do not think it necessary to give business efficacy to the contract. I
am, however, of opinion that the words interpolated by Nicholls LJ in proviso
B(1) of the fourth schedule do represent a term that the parties would at the
time of agreement have agreed as so obvious as to go without saying. The
landlord would, I feel sure, have wished rent to be assessed on a commercial
and rational basis throughout the terms of both leases. No reason has been
suggested why the tenant would, or reasonably could, have objected to a term
such as is proposed. In other words, there is no rational or commercial basis
which has been suggested for correcting what the landlords criticise as a
manifest anomaly. I am therefore of opinion that the limited term proposed by
Nicholls LJ is one which may properly be implied. It is, of course, true that
where, as here, there is a detailed and apparently comprehensive document
before the court, the court is slow to imply a term into it. But the ultimate
object of any process of construction is to give effect to the intentions of
the parties as derived from the document or documents to be construed, and here
the construction to which the judge felt himself
of these parties. The implication is therefore, in my judgment, a correct one
to make.
On the
subsidiary point concerning restrictions on rent and security of tenure, I
agree with what Nicholls LJ has said, and have nothing to add.
I also would
allow the appeal to the extent indicated.
FARQUHARSON LJ
also agreed and did not add anything.
The appeal was allowed in part; form of
order to be agreed between parties; liberty to apply; appellants awarded
three-quarters of their costs below and all their costs in the Court of Appeal.
