Landlord and tenant–Rent review clause in underlease of premises which included the Strand Palace Hotel–Question as to basis on which certain areas comprised in the underlease were to be valued–Material clause in underlease provided that defined areas which were in fact used as part of the hotel and were physically adapted for that purpose were to be valued ‘on the basis that those areas are actually let for or are available for letting for shopping and retail purposes’–Whether this meant that they were to be valued in their existing state or as if in a state reasonably appropriate for shopping and retail use–Held that they were to be valued in their physical state and condition as existing at the relevant date–Held also that business efficacy did not require a term
This was an originating
summons raising a question of construction on part of the rent review clause
contained in an underlease of premises consisting of 366-375 Strand, London,
and the Strand Palace Hotel. The premises, originally demised to J Lyons &
Co Ltd for 75 years from July 5 1963, became vested for the residue of the term
in the present plaintiffs, Trust House Forte Albany Hotels Ltd, in 1977. The
reversion on the underlease was vested in the defendants, Daejan Investments
Ltd. The material parts of the underlease are set out in the judgment of Fox J.
Derek Wood QC
and C J Lockhart-Mummery (instructed by Paisner & Co) appeared on behalf of
the plaintiffs, Trust House Forte Albany Hotels Ltd; Donald Nicholls QC and
Gavin Lightman QC (instructed by Herbert Smith & Co) represented the
defendants, Daejan Investments Ltd.
Giving
judgment FOX J said: This summons raises a question of construction on a rent
review clause contained in an underlease of June 16 1972 of premises in the
Strand, consisting of 366-375 Strand, and the Strand Palace Hotel. By the
underlease the premises were demised by the defendant to J Lyons & Co Ltd
for 75 years from July 5 1963. The term became vested in the plaintiffs in
1977.
The initial
rent reserved by the underlease was £550,000 per annum. Clause 1(i) of the
underlease contained provisions for the review of the rental as from July 6
1979 and at the end of seven-year periods thereafter. The material provisions
are as follows:
(i) that as from the Fifth day of July 1979 and
at the expiration of each successive period of seven years calculated from such
date (such date and the date of each such expiration being hereinafter referred
to as ‘the relevant date’) the rent shall be the aggregate of (a) the excess of
the rental value on the relevant date above Two hundred and Fifty thousand
pounds of those areas being parts of the ground floor and the basement of the
demised premises as shown edged red on the plans annexed hereto and marked C
and D (on the basis that those areas are actually let for or are available for
letting for shopping and retail purposes) such excess to be multiplied by
1.8125 (b) the initial rent of Five hundred and Fifty thousand pounds herein
provided and (c) a sum equal to any increase of rent currently payable in
accordance with the provisions of Clause 1 of the Head Lease;
and (ii)
further sums which I need not specify.
The underlease
further provided that
If the Lessor
and Lessee shall be unable to agree on the amount of rental payable on the
relevant date as aforesaid within three calendar months immediately preceding
the relevant date the same shall be decided by a single surveyor to be agreed
by the Landlord and Tenant or in the event of failure so to agree by a surveyor
to be named by the President for the time being of the Royal Institution of
Chartered Surveyors any such surveyor to act as an expert and not as an
arbitrator. . . . Provided it is agreed that in no event shall the rent payable
after the relevant date be less than the rent payable by the Tenant immediately
prior thereto.
The areas
edged red on the plans annexed to the underlease consist of part–the greater
part–which is, and was on July 5 1979, used as part of the Strand Palace Hotel.
This part is physically adapted to the purposes of the hotel. As to the
remainder of the premises, which are, and were on July 5 1979, used for
shopping and bank purposes, the latter part is physically adapted for the
shopping and bank purposes. If the part used for the purpose of the hotel is to
be used for shopping and retail purposes, it would have to be subjected to
substantial building and other works of conversion and adaptation. These works
would be costly and would take a substantial time to carry out.
The summons
asks for a declaration that the provisions of the rent review clause are void
for uncertainty; alternatively, a declaration that in effect the areas edged
red on plans C and D ought to be valued in their existing physical state and
condition. The contention that the rent review clause is void for uncertainty played
little part in the argument before me. Mr Wood, for the plaintiffs, accepted on
the authorities that the plaintiffs have a heavy burden to discharge if they
are to establish uncertainty.
In the end the
matter has resolved itself into a choice between two rival constructions:
first, that of the plaintiffs, which is that set out in paragraph 2 of the
summons, to which I have briefly referred, and, secondly, that of the
defendants, who seek a declaration in substantially the following terms, that
upon the true construction of the provisions of the underlease the rental
valuation required to be made under clause 1(i) thereof, so far as it relates
to those parts of the relevant area not actually let for shopping and retail
purposes at the relevant date, is to be made on the footing of those parts
being treated as being at the relevant date in a state reasonably appropriate
for such use.
The issues, I
think, may be summarised thus: is the valuation to be made on the basis of the
premises in their actual physical state, or is it to be made on the basis that
such part of the premises as is not now let as shops is (as is said in the
defendants’ formulation) to be treated as being in a state reasonably
appropriate for such use? The dispute is
limited to those parts of the premises not already in use as shops. It is
agreed that the latter must be valued in their actual physical state.
I come then to
the construction of the clause. Omitting immaterial words, the clause provides
that ‘the rent shall be the aggregate of (a) the excess of the rental value on
the relevant date . . . of those areas . . . on the basis that those areas are
actually let for or are available for letting for shopping and retail
purposes.’ I should mention that it is
common ground that the expression ‘rental value’ gives rise to no difficulty of
interpretation. It seems to me that, as a matter of the ordinary usage of the
English language, the clause merely requires that the premises are to be valued
at the relevant date. There is no requirement or supposition as to the state of
the premises at all. The clause simply deals with ‘areas’ and requires that the
rental value of those areas at a particular date be ascertained. In my
judgment, the ordinary meaning of the language of the clause is that the areas
are to be valued in their actual condition at the relevant date.
The
defendants’ construction involves the insertion of words requiring that the
premises be treated as being at the relevant date in a state reasonably
appropriate for the specified use. No such language forms part of the clause,
and it would, it seems to me, be improper to insert it unless there are
circumstances which compel me so to do.
It is pointed
out by way of preliminary on behalf of the defendants that the clause does
require certain suppositions to be made if sensible effect is to be given to
it; for example, that any necessary planning permission to enable user for
shopping or retail purposes has been given, and that any provisions in the
underlease which might prevent such user or alteration of the premises for such
user have been suitably varied or waived or appropriate consents given. These
considerations do not, I think, advance the defendants’ contentions. The clause
requires one to assume that the areas in question, which are now used for hotel
purposes, should be available for letting for shopping and retail purposes. Any
question of contravention of planning control or of the provisions of the
underlease goes directly to availability. I do not think that the premises are
‘available’ for a purpose if there are in existence lawful prohibitions,
whether statutory or contractual, against the user of the premises for such
purpose. But it seems to me that premises can be available for shopping and
retail purposes irrespective of their physical condition. Availability, I
think, does no more than assume that the premises are on offer with vacant
possession and that they can be used for the specified general purpose
without illegality or breach of covenant. The supposed new lessee may or may
not need physical alterations of the premises to carry out the shopping or
retail user which he contemplates, but the premises are available for shopping
and retail purposes, and it is a matter for the lessee how he utilises that
availability. The degree of alteration which is appropriate will vary widely
according to the precise nature of the user.
The defendants
go on to contend, however, that the purpose of the clause is to protect the
landlord against inflation, and that the purpose will be frustrated if every
seven years the expert, in fixing the rent in respect of any part of the
premises which are not, on the relevant date, used for shopping or retail
purposes, will have to take into account the fact that a tenant would or might
have to expend large sums on the premises to make them suitable for the
shopping and retail purposes which he has in mind. I do not, however, think
that that is a consideration which compels me to read words into this clause
which are not there. No doubt the construction for which the tenant contends is
financially less favourable to the landlord than the landlord’s own construction,
but it seems to me to be the ordinary meaning of the clause, and it can be
given effect to without difficulty and without altering the language at all.
As to the
protection of the landlord against inflation, I accept that such is the purpose
of the clause, but what is it that is being protected against inflation? In the absence of clear language to the
contrary, I would assume that it is the rental value of the landlord’s premises
in their actual condition for the time being. The rent review clause, on the
plaintiffs’ construction, achieves exactly that, it seems to me.
I cannot see
any satisfactory basis upon which I should read in words to give the landlord
the rental benefit of physical premises other than those actually contained in
the underlease. You protect the landlord against inflation by reassessing every
seven years the rent of the actual premises which he owns and not of other
premises. I do not see why the landlord should get the benefit of assumed
alterations which the landlord has not made. In the circumstances, I see no
reason to construe the clause in the manner contended for by the defendants.
As regards
relief, the contention upon which paragraph 1 of the summons is based, namely
that the rent review clause is void for uncertainty, is, in my view,
misconceived, The clause, in my view, has an ascertainable and certain meaning.
As to
paragraph 2 of the summons, I am prepared to make a declaration that the
relevant areas are to be valued in their existing state. It is, I think,
necessary that the valuer should be clear as to the subject-matter of the
valuation (see Compton Group Ltd v Estates Gazette Ltd (1978) 36
P&CR 148, at p 152; (1977) 244 EG 799 at p 801, [1977] 2 EGLR 73, per Sir
John Pennycuick). It does not seem necessary to go beyond that, and indeed Mr
Wood, as I understand, does not now ask for it.
His
Lordship gave a further judgment on July 25 1980 on the question whether
interest was payable on the revised rent as from the relevant date.
Giving
judgment on this point, Fox J said: I have already set out in my earlier
judgment the terms of the rent review clause which have given rise to the
present litigation. The remaining question which I have to determine relates to
interest. Under the terms of the underlease, the revised rent takes effect from
July 5 1979. Because of disputes between the parties as to the interpretation
of the clause, the revised rent has not yet been determined by the surveyor.
The underlease contains no provision for payment of interest on the revised rent
in respect of the period between July 5 1979 or the other relevant date and the
date when the revised rent is finally determined.
The defendants
claim that an obligation on the part of the tenant to pay such interest at a
rate to be determined by the court must be implied. Mr Nicholls, in opening the
matter, said that while at first sight such a contention might seem
unattractive, when the facts of the case are considered in the light of the
relevant principles, it in fact has substance. Mr Nicholls submits that in
order to imply an agreement to pay interest, three things must be established:
first, that the implied term must itself be a reasonable term; secondly, that
the implied term is necessary to give business efficacy to the terms of the
contract, in this case the underlease; and, thirdly, it must not be
inconsistent with the other provisions of the underlease.
As to the
first of those matters, that it would be commercially reasonable for the
parties to a lease containing a rent review clause to include some sort of
provision for payment of interest on the increased rental in respect of the
period from the date when the increased rental becomes payable until the
determination of the amount of the increase, I would accept; indeed, Mr Wood
has produced to me a precedent of August 1978, together with other precedents
which he says are in use, which contain such provisions, though in different
forms. The precedent in the Conveyancer in effect provides that the
question of whether interest should be payable and, if so, what interest, is a
matter which is to be determined by the surveyor when he fixes the revised
rental. The notes to the Conveyancer precedent suggest that there was no
settled practice among conveyancers on the matter.
I will assume,
therefore, that the first requirement is satisfied; and it is not, I think, in
dispute that the third requirement is also satisfied, in that the implication
of such a provision would not be inconsistent with other expressed terms of the
lease.
I come then to
the second requirement, namely, that the implication must be necessary for
business efficacy. It is not enough that the term would be a reasonable term to
include if the parties had thought about the matter, or that it would have made
the lease a better or a fairer one. (See, for example, Liverpool City
Council v Irwin [1977] AC 239 at p 257 per Lord Cross, and p 262 per
Lord Salmon.) It must be a term which is
necessary to give business efficacy to the contract. I quote:
It must be
such a necessary term that both parties must have intended that it should be a
term of the contract, and have only not expressed it because its necessity was
so obvious that it was taken for granted.
(See the
passage from the judgment of Scrutton LJ in Re Comptoir Commercial Anversois
v Power Son & Co [1920] 1 KB 868 at p 899, which is cited by Lord
Salmon in his speech in the Liverpool City Council case at p 262.)
Is is said
that an agreement to pay interest must be implied in the present case, because
otherwise an obstructive tenant may hold matters up to his own advantage for
substantial periods. As to that, I make two observations: first, it is not the
case of an obstructive tenant; secondly, it seems to me that the parties must
have contemplated the possibility of, at any rate, some delay. The precise
construction of the clause may perhaps be open to doubt, but I would agree with
Mr Nicholls that what the surveyor is required to do is to determine the rent
on the relevant date, and that he cannot satisfactorily determine the rent before
the relevant date. If that is right, then it seems almost inevitable that, if
the parties are unable to agree, there will be some delay before the surveyor
determines the matter, and that his determination is likely to be after the
relevant date. It is possible, I suppose, that he might determine it actually
on the relevant date, though the likelihood, I think, is otherwise and that he
would determine it after the relevant date, with the result that there would be
delay in achieving a final determination of the revised rent. And in general it
seems to me that, as the parties have in effect allowed themselves a period of
only three months in which to agree the matter, the chances that if they
disagree there will be a period of delay after the relevant date before the
surveyor actually determines the matter are quite high. There-
the parties must have had in their minds the possibility of the existence of a
delay before the revised rental was in fact determined.
Against that
background, it seems to me perfectly possible that the landlord might have
expected that some delay might inevitably take place, but that it would
probably not be very long, and that it was not necessary to make specific
provision for it at all. A delay of, say, three or four months might well have
been perfectly acceptable against the background of the negotiation of this
substantial transaction, and I think the landlord might have been prepared to
accept the risk of any longer delay occurring. I observe that the original
lessee was an old-established and highly-reputable company and that the lease
contains provisions prohibiting assignment without consent in the usual way.
Be that as it
may, I see no reason for saying that the implication of this term is necessary
to give business efficacy to the contract which the parties have reached. The
revised rent will have to be paid in due course. All that happens is that the
landlord is kept out of his money in the interim period. That, of course, is a
disadvantage to the landlord, but it seems to me that it is no more than that.
It is not even a case of the possible withholding of the whole rent, since the
review clause provides that in no event shall the revised rent be less than the
rent as it was at the relevant date.
To say that
the parties must inevitably have accepted the introduction of an interest
provision to give sensible business effect to their dealing is, in my view,
going altogether too far in the context of this case. The tenant, it seems to
me, might well have said to the landlord: ‘You can have your rent review
clause, and I will pay you what the surveyor decides when he decides it, but I
will not pay you any more. If there is some delay, it is something, against the
background of this case and the rent which I am paying, that you must put up
with.’ The landlord could have
stipulated for an interest provision as a term of entering into the transaction
(at, I may say, a rate of interest which I could do no more than guess at,
since there are many possibilities which would have been open to the parties).
The landlord did not do so, and I can see no reason why the court should now
improve upon the landlord’s bargain. In my judgment, there is no ground for the
implication of the provision contended for by the landlord.
No order was
made as to costs.
