Rent review clauses–Important House of Lords decision–Some previous decisions overruled–Position where time-table for review procedure is not complied with–Presumption in contracts with reciprocal obligations that time is not of the essence–Options to purchase or renew a lease and "break clauses" distinguished–Court of Appeal’s decisions reversed–Landlords entitled to review despite failure to keep strictly to time-table
These were two
appeals by landlords from decisions of the Court of Appeal, who had held in
favour of tenants that time was of the essence in taking the procedural steps
required under rent review clauses, and that landlords who had not complied
strictly with the time-limits were deprived of the right to have rents
reviewed. The appellants (landlords) in the first appeal were Burnley Borough
Council and the respondents (tenants) United Scientific Holdings Ltd. In the
second appeal the appellants (landlords) were Cheapside Land Development Co Ltd
and the respondents (tenants) Messels Service Co (an unlimited company).
In the first
appeal H E Francis QC and B C Maddocks (instructed by Turner Peacock) appeared
for the appellants, and A J Balcombe QC and B K Levy (instructed by Fremont
& Co) represented the respondents.
In the second
appeal N C H Browne-Wilkinson QC, Michael Essayan QC and Nigel Hague
(instructed by Stephenson Harwood & Tatham) appeared for the appellants,
and A J Balcombe QC and E G Nugee (instructed by Travers Smith, Braithwaite
& Co) represented the respondents.
In his speech,
LORD DIPLOCK said: During the last two decades since inflation, particularly in
the property market, has been rife, it has been usual to include in leases for
a term of years, except when the term is very short, a clause providing for the
annual rent to be reviewed at fixed intervals during the term and for the
market rent current at each review date, if it be higher, to be substituted for
the rent previously payable. The wording of such clauses varies; there are
several different ones now included in the books of precedents; but a feature
common to nearly all of them is that not only do they specify a procedure for
the determination of the revised rent by agreement between the parties or,
failing that, by an independent valuer or arbitrator, but they also set out a
time-table for taking some or all of the steps in that procedure which, if
followed, would enable the revised rent to be settled not later than the review
date. The question in both of these appeals, which have been heard together, is
whether a failure to keep strictly to the time-table laid down in the review
clause deprives the landlord of his right to have the rent reviewed, and
consequently of his right to receive an increased rent during the period that
will elapse until the next review date.
On a number of
occasions during the last five years the question whether time was of the
essence in a whole variety of rent review clauses has come before the High
Court and the Court of Appeal. Until the judgments of the Court of Appeal in
the instant cases the answers given seem to turn upon fine distinctions between
the wording of particular clauses so as to classify them, either on the one
hand as conferring upon the landlord a unilateral "option" for the
exercise of which time was of the essence, or on the other as merely laying
down the machinery for the performance of mutual "obligations" by the
tenant as well as by the landlord, in which case time was not of the essence.
The suggested dichotomy between the so-called "option" clauses and
"obligation" or "machinery" clauses was discarded in each
of the instant appeals by Courts of Appeal of different composition. In the
first appeal, United Scientific Holdings v Burnley BC [1976] 1 Ch
128, Buckley, Roskill and Browne LJJ in separate judgments held that the
commercial character of the contract contained in a lease incorporating a rent
review clause raised the presumption that the parties intended time to be of
the essence of the contract in respect of each step required to be taken by the
landlord in order to obtain a determination of any increased rent under a rent
review clause. In the second appeal, Stamp, Scarman and Goff LJJ joined in a
single judgment in which they also held that prima facie time was of the
essence in a rent review clause, but they preferred to do so not upon the
ground of the presumed intentions of the parties, but upon the ground that in
its legal nature a rent review clause is a grant of a unilateral right to the
landlord and that equity would not have granted relief to the grantee of such a
right for failure to perform any of the conditions of the grant timeously. It
is not disputed that the parties to a lease may provide expressly that time is
or time is not of the essence of the contract in respect of all or any of the
steps required to be taken by the landlord to obtain the determination of an
increased rent, and that if they do so the court will give effect to their
expressed intention. But many rent review cases that are now maturing do not
contain express provision in these terms. What the Court of Appeal have decided
is that the commercial nature of the contract and/or the legal nature of the
right granted to the landlord by a rent review clause raises a presumption that
time specified in such a clause for anything that needs to be done by him is of
the essence; and that this presumption will prevail unless there are strong
contra-indications in the actual wording of the clause. They found no
sufficient contra-indications in the rent review clauses which are in question
in the instant appeals. The reason why these two appeals have been heard
together in the House, although the two rent review clauses that are in
question differ widely in their wording, is to obtain a ruling whether the
presumption as to the construction and effect of rent review clauses is as the
Court of Appeal held it to be, or whether it is the contrary presumption, viz,
that time is not of the essence. I propose accordingly to deal first with that
question as a matter of legal principle before turning to
I shall have
to examine rather more closely what are the legal consequences of "time
being of the essence" and time not being of the essence; but I do not
think that the question of principle involved in these appeals can be solved by
classifying the contract of tenancy as being of a commercial character. In some
stipulations in commercial contracts as to the time when something must be done
by one of the parties or some event must occur, time is of the essence; in
others it is not. In commercial contracts for the sale of goods prima facie
a stipulated time of delivery is of the essence, but prima facie a
stipulated time of payment is not (Sale of Goods Act 1893 section 10(1)); in a
charter-party a stipulated time of payment of hire is of the essence. Moreover
a contract of tenancy of business premises would not appear to be more of a
commercial character than a contract for sale of those premises. Nevertheless,
the latter provides a classic example of a contract in which stipulations as to
the time when the various steps to complete the purchase are to be taken are
not regarded as of the essence of the contract. In the arguments developed
before this House the commercial character of the contract of tenancy has
played a relatively minor role. Counsel for all the parties have sought to
concentrate your Lordships’ attention upon the "rules of equity" and,
in particular, upon the auxiliary jurisdiction formerly exercised by the court
of chancery to grant relief against the strict enforcement in a court of law of
a contractual stipulation as to time.
If by
"rules of equity" is meant that body of substantive and adjectival
law that, prior to 1875, was administered by the court of chancery but not by
courts of common law, to speak of the rules of equity as being part of the law
of England in 1977 is about as meaningful as to speak similarly of the Statutes
of Uses or of Quia Emptores. Historically all three have in their time played
an important part in the development of the corpus juris into what it is
today; but to perpetuate a dichotomy between rules of equity and rules of
common law which it was a major purpose of the Judicature Act 1873 to do away
with is, in my view, conducive to erroneous conclusions as to the ways in which
the law of England has developed in the last hundred years. Your Lordships have
been referred to the vivid phrase traceable to the first edition of Ashburner’s
Principles of Equity where, in speaking in 1902 of the effect of the
Judicature Act, he says "the two streams of jurisdiction" (sc law and
equity)–"though they run in the same channel, run side by side and do not
mingle their waters." By 1977 this
metaphor has in my view become both mischievous and deceptive. The innate
conservatism of English lawyers may have made them slow to recognise that by
the Judicature Act 1873 the two systems of substantive and adjectival law
formerly administered by courts of law and courts of chancery (as well as those
administered by courts of admiralty, probate and matrimonial causes), were
fused. As at the confluence of the Rhone and Saone, it may be possible for a
short distance to discern the source from which each part of the combined
stream came, but there comes a point at which this ceases to be possible. If
Professor Ashburner’s fluvial metaphor is to be retained at all, the waters of
the confluent streams of law and equity have surely mingled now.
Section 25 of
the Supreme Court of Judicature Act 1873 took occasion of the union of the
several courts whose jurisdiction was thereby transferred to the High Court of
Justice, to amend and declare the law to be thereafter administered in England
as to several matters. Ten matters were particularly mentioned in subsections
(1) to (10). Among them subsection (7) was as follows:
Stipulations
in contracts, as to time or otherwise, which would not before the passing of
this Act have been deemed to be or to have become of the essence of such
contracts in a Court of Equity, shall receive in all courts the same
construction and effect as they would have heretofore received in equity.
Subsection
(11) contained the final provision:
Generally in
all matters not hereinbefore particularly mentioned, in which there is any
conflict or variance between the Rules of Equity and the Rules of the Common
Law with reference to the same matter, the Rules of Equity shall prevail.
The first
thing to be observed about each of these subsections is that they are concerned
with matters in which before the unifying Act came into force there had been a
variance between the ways in which they were dealt with in courts of law and
courts of equity respectively. Outside the field of mortgages and contracts for
the sale of land, there were other kinds of contracts in which by 1875 some
stipulations as to time were not treated in courts of law as being "conditions
precedent"–which was then the common lawyer’s way of saying that the
particular stipulation as to time was not of the essence of the contract. For
instance, that the time of payment in a contract, for the sale of goods, is not
of the essence of the contract unless it is made so by express agreement was
well established in the court of law 30 years before the Judicature Act 1873
and 50 years before the Sale of Goods Act 1893: Martindale v Smith
(1841) 1 QB 388. This was symptomatic of the growing tendency in the courts of
common law to adopt a more rational classification of contractual stipulations
and the consequences of their non-performance than that into which the rules of
pleading peculiar to the old forms of action had led them. With the effect that
courts of law gave to those stipulations as to time that they did not regard as
being of the essence of the contract, courts of equity before 1873 had no
occasion to interfere by way of equitable relief. Such stipulations were
unaffected by section 25 of the Judicature Act 1873. Nor did the coming into
force of that Act bring to a sudden halt the whole process of development of
the substantive law of England that had been so notable an achievement of the
preceding decades. Yet that is what it would have done as respects the law of
contract if thereafter whenever the effect of a contractual stipulation as to
time or otherwise was in question it were necessary to inquire whether or not a
court of equity would have granted relief against its treatment as a
"condition precedent" in a court of law before 1875. The contention
on behalf of the respondents that this is what your Lordships ought to do,
placed great reliance upon some observations of Lord Parker of Waddington in Stickney
v Keeble [1915] AC 386 at p 417 where in an action by a purchaser of
land for the return of his deposit Lord Parker said:
If since the
Judicature Acts the court is asked to disregard a stipulation as to time in an
action for common law relief, and it be established that equity would not under
the then existing circumstances have prior to the Act granted specific
performance or restrained the action, the section can, in my opinion, have no
application, otherwise the stipulation in question would not, as provided in
the section, receive the same effect as it would prior to the Act have received
in equity.
Lord Parker’s
observations were made in relation to a contract for the sale of land of which
the purchaser alleged, successfully in the result, that the time by which the
vendor had to make title had become of the essence as the result of a notice
served by the purchaser. He claimed from the vendor the return of his deposit.
The vendor resisted this upon the ground that the time for completion specified
in the purchaser’s notice was unreasonably short and accordingly had not become
of the essence of the contract. This meant that he was claiming to be still
entitled to insist upon the purchaser’s completing the purchase. Shortly after
action brought, however, he had sold the property to a third party and so
disabled himself by the time of the hearing from completing the contract with
the purchaser. This would have disqualified him from relief in the Court of
Chancery before 1873 against the purchaser’s claim for the return of his deposit.
What Lord
section 25(7) was to require the court to look only to the position at the date
of the issue of the writ in the action and to ignore anything that had happened
afterwards. He was not dealing with the general question of what stipulations
as to time are to be regarded as being of the essence of the contract.
In 1925
section 25(7) of the Judicature Act 1873 was replaced by section 41 of the Law
of Property Act 1925. The wording differs slightly:
Stipulations
in a contract, as to time or otherwise, which according to rules of equity are
not deemed to be or to have become of the essence of the contract, are also
construed and have effect at law in accordance with the same rules.
The Law of
Property Act 1925 was a consolidation Act. It restates the law as it had been
declared in 1873 but substitutes a reference to "rules of equity" for
the reference to a court of equity which had been abolished as a separate court
more than 50 years before. I have already commented upon the danger of treating
the use of this expression today as anything more than an indication of the
source to which a current rule of the substantive or adjectival law of England
can be traced. The change in wording in the substituted section does not in my
view make any difference to its substance. It makes it clear that there should
continue to be, as there had been since 1875, only one set of rules for judges
to apply in determining whether a particular stipulation as to time or
otherwise was of the essence of a contract. It places no ban upon further
development of the rules by judicial decision.
The rules of
equity, to the extent that the court of chancery had developed them up to 1873
as a system distinct from rules of common law, did not regard stipulations in
contracts as to the time by which various steps should be taken by the parties
as being of the essence of the contract, unless the express words of the
contract, the nature of its subject-matter or the surrounding circumstances
made it inequitable not to treat the failure of one party to comply exactly
with the stipulation as relieving the other party from the duty to perform his
obligations under the contract. The Court of Chancery had reached this position
in relation to contracts for the sale of land by the extension by Lord Eldon of
the earlier doctrine that a stipulation as to the time of repayment by the
mortgagor under a legal mortgage was not of the essence of the contract so as
to entitle the mortgagee to refuse to reconvey the property if payment with
interest was tendered after the stipulated date was passed: Seton v Slade
(1802) 7 Ves Jun 265. Contemporaneously with this development of the rules of
equity by the Court of Chancery, the courts of common law were in process of
developing for themselves a not dissimilar rule in relation to stipulations as
to time in other contracts, but were reaching their solution by a different
route. They did so by a growing recognition of exceptions to the rule which had
been fostered in the early part of the 18th century by the necessity for the
plaintiff under the then current rules of pleading to aver performance or
willingness or ability to perform all stipulations on his part in the precise
words in which they were expressed in the contract. This rule treated all
promises by each party to a contract as "conditions precedent" to all
promises of the other, with the result that any departure from the promised
manner of performance, however slight that departure might have been,
discharged the other party from the obligation to continue to perform any of
his own promises. The history of the development by common law courts of
exceptions to this rule is traced in the judgments of the Court of Appeal in Hong
Kong Fir Shipping Co v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 from
its origin in Boone v Eyre 1 Hy B1 273 in 1779 to the judgment of Bramwell B in
Jackson v Union Marine Insurance Co Ltd (1874) 10 CP 125 at p 147
on the eve of the coming into force of the Judicature Act 1873.
I will not
take up time in repeating here what I myself said in the Hong Kong Fir
case, except to point out that by 1873:
(1) Stipulations as to the time at which a party
was to perform a promise on his part were among the contractual stipulations
which were not regarded as "conditions precedent" if his failure to
perform that promise punctually did not deprive the other party of
substantially the whole benefit which it was intended that he should obtain
from the contract.
(2) When the delay by one party in performing a
particular promise punctually had become so prolonged as to deprive the other
party of substantially the whole benefit which it was intended that he should
obtain from the contract it did discharge that other party from the obligation
to continue to perform any of his own promises which as yet were unperformed.
(3) Similar principles were applicable to
determine whether the parties’ duties to one another to continue to perform
their mutual obligations were discharged by frustration of the adventure that
was the object of the contract. A party’s ability to perform his promise might
depend upon the prior occurrence of an event which neither he nor the other
party had promised would occur. The question whether a stipulation as to the
time at which the event should occur was of the essence of the contract
depended upon whether even a brief postponement of it would deprive one or
other of the parties of substantially the whole benefit that it was intended
that he should obtain from the contract.
In one respect
the Court of Chancery had introduced a refinement in the way it dealt with
stipulations as to time in contracts for the sale of land, which had no close
counterpart in the rules that had by 1873 been adopted in the courts of common
law. Once the time had elapsed that was specified for the performance of an act
in a stipulation as to time which was not of the essence of the contract, the
party entitled to performance could give to the other party notice calling for
performance within a specified period: and provided that the period was
considered by the court to be reasonable, the notice had the effect of making
it of the essence of the contract that performance should take place within
that period. Hence the reference in the statutory provisions that I have cited
to time being deemed to "have become" of the essence of the contract.
Both in the
Court of Chancery and in the courts of common law the rules that have been
developed about particular stipulations not being of the essence of the
contract or not being "conditions precedent" applied to synallagmatic
contracts only. They did not apply to unilateral or "if contracts,"
of which the example most germane to the instant appeals is an option. As
pointed out by Lord Denning MR in United Dominions Trust (Commercial)
Ltd v Eagle Aircraft Services Ltd [1968] 1 WLR 74 at p 81 where
speaking of options to purchase real or personal property or to renew a lease,
he said: "In point of legal analysis, the grant of an option in such cases
is an irrevocable offer (being supported by consideration so that it cannot be
revoked). In order to be turned into a binding contract the offer must be
accepted in exact compliance with its terms. The acceptance must correspond
with the offer." Exact compliance
with the terms of the offer in an "if contract" had been required in
courts of equity as well as in courts of common law: see Weston v Collins
(1865) 12 LT 4; Finch v Underwood (1876) 2 Ch D 310. A rationale
of the distinction which was drawn between the two kinds of contracts in courts
of equity is that equity was concerned with the performance of contracts into
which parties had already entered. It did not force any person to enter into a
contract with another. Again I will refrain from repeating the more elaborate
juristic analysis of the distinction between the two types of contract that I
attempted in the United Dominions Trust case (ubi supra at pp
83-4). A more practical
acquire an interest in property should be exercised by the grantee must be
punctually observed is that the grantor, so long as the option remains open,
thereby submits to being disabled from disposing of his proprietary interest to
anyone other than the grantee, and this without any guarantee that it will be disposed
of to the grantee. In accepting such a fetter upon his powers of disposition of
his property, the grantor needs to know with certainty the moment when it has
come to an end. Although a lease is a synallagmatic contract it may also
contain a clause granting to the tenant an option to obtain a renewal of the
lease upon the expiration of the term thereby granted. Such a clause provides a
classic instance of an option to acquire a leasehold interest in futuro,
and it is well established that a stipulation as to the time at which notice to
exercise the option must be given is of the essence of the option to renew.
Although your Lordships have not been referred to any direct authority upon the
converse case of a "break clause" granting to the tenant an option to
determine his interest in the property and his contractual relationship with
the landlord prematurely at the end of a stated period of the full term of
years granted by the lease, there is a practical business reason for treating
time as of the essence of such a clause, which is similar to that applicable to
an option to acquire property. The exercise of this option by the tenant will
have the effect of depriving the landlord of the existing source of income from
his property and the evident purpose of the stipulation as to notice is to
leave him free thereafter to enter into a contract with a new tenant for a
tenancy commencing at the date of surrender provided for in the break clause.
The rent
review clauses that have given rise to the two instant appeals, as well as
nearly all those which have been considered in the reported cases, if they
result in any alteration of the rent previously payable can only have the
effect of providing for the payment of a higher rent than would be payable by
the tenant if the review clause had not been brought into operation. So the
only party who can benefit from a review of rent under these clauses is the
landlord. It is accordingly unlikely that the tenant would take the initiative
in obtaining a review of the rent, even where the clause contains provision for
his doing so–as it does in the first of the instant appeals. More usually the
clause provides for the initiative to be taken by the landlord only–as it does
in the second of the instant appeals. It was this concentration of initiative
and benefit in the landlord that led the Court of Appeal in the second appeal
to regard the rent review clause as conferring upon the landlord a unilateral
right to bring into existence a new contractual relationship between the parties.
This they regarded as sufficiently analogous to an option, to make time of the
essence of the occurrence of each one of the events in the time-table laid down
in a review clause for the determination of the new rent. For my part, I
consider the analogy to be misleading. The determination of the new rent under
the procedure stipulated in the rent review clause neither brings into
existence a fresh contract between the landlord and the tenant nor does it put
an end to one that had existed previously. It is an event upon the occurrence
of which the tenant has in his existing contract already accepted an obligation
to pay to the landlord the rent so determined for the period to which the rent
review relates. The tenant’s acceptance of that obligation was an inseverable
part of the whole consideration of the landlord’s grant of a term of years of
the length agreed. Without it, in a period during which inflation was
anticipated, the landlord would either have been unwilling to grant a lease for
a longer period than up to the first review date or would have demanded a
higher rent to be paid throughout the term than that payable before the first
review date. By the time of each review of rent the tenant will have already
received a substantial part of the whole benefit which it was intended that he
should obtain in return for his acceptance of the obligation to pay the higher
rent for the succeeding period. I see no relevant difference between the
obligation undertaken by a tenant under a rent review clause in a lease and any
other obligation in a synallagmatic contract that is expressed to arise upon
the occurrence of a described event, where a postponement of that event beyond
the time stipulated in the contract is not so prolonged as to deprive the
obligor of substantially the whole benefit that it was intended he should
obtain by accepting the obligation. So upon the question of principle which
these two appeals were brought to settle, I would hold that in the absence of
any contra-indications in the express words of the lease or in the
inter-relation of the rent review clause itself and other clauses or in the
surrounding circumstances the presumption is that the time-table 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.
I turn then to
the rent review clauses in the instant appeals:
(1) United Scientific Holdings Ltd v Burnley
Borough Council.
The lease was
a building lease for the term of 99 years from August 31 1962. By the reddendum
the tenant undertook to pay during the first 10 years of the term and
thereafter
during the residue of the said term the yearly rent of One thousand pounds plus
any additional rent payable under the provisions contained in the Schedule
hereto.
The schedule
was as follows:
During the
year immediately preceding the period of the second ten years of the said term
and during the year immediately preceding each subsequent ten year period of
the said term and during the year immediately preceding the last nine year
period of the said term (each of such periods being hereinafter referred to as
a "relevant period") the Corporation and the Lessee shall agree or
failing agreement shall determine by arbitration the sum total of the then
current rack rent (which expression "rack rent" shall for the
purposes of this Schedule be deemed to mean the full annual value of the
Property and of all buildings and erections thereon and appurtenances thereto
and including all improvements carried out to the same calculated on the basis
of all rates taxes repairs and other outgoings being borne wholly by the
occupier thereof) reasonably to be expected on the open market for leases of
the Property and all buildings and erections thereon and one quarter of the sum
total so ascertained or One thousand pounds (whichever is the greater) shall be
the rate of rent reserved by this Lease in respect of the then next succeeding
relevant period. All arbitrations under or by virtue of this schedule shall be
referred to the decision of a single arbitrator to be agreed by the parties
hereto or failing their agreement thereon shall be referred to the decision of
a person to be nominated by the President for the time being of the Royal
Institution of Chartered Surveyors and such reference shall be deemed to be a
submission to arbitration within the meaning of the Arbitration Act 1950 or any
statutory modification or re-enactment thereof for the time being in force.
The only
stipulation as to time is that the rent for each successive period of 10 years
of the term commencing on August 25 is to be determined (by agreement or
failing agreement by arbitration) "during the year immediately
preceding" the 10-year period to which that rent will relate. If the new
rent has not been determined by the stipulated date, what is the benefit that
it was intended the tenant should obtain from the contract but of which he will
have been deprived by its not being determined until later? The Court of Appeal took the view that it was
a detriment to the tenant not to know what his new rent was going to be in
advance of the date when it started to accrue, as he might not be able to
afford the additional rent and might feel compelled to assign the residue of the
term to someone else. For my part, I find this unrealistic, if only because
under this particular clause the tenant can initiate the review procedure
himself and unless there is some unforeseen delay on the part of the
arbitrator,
stipulated date. Apart from this, delay in the determination of the new rent
until after the first rent day following the stipulated date works to the
economic benefit of the tenant, since until the higher rent has been determined
he has the use of the money representing the difference between the former rent
and the new rent which he would otherwise have been compelled to pay. The
absence of any serious detriment to the tenant if the determination of the new
rent is postponed until some time after the commencement of the 10-year period
to which it will relate is to be contrasted with the detriment to the landlord
if strict adherence to the date specified in the review clause is to be treated
as of the essence of the contract. If it were determined even slightly late the
landlord would lose his right to the additional rent for the whole period of 10
years until the next review date.
So far from
finding any contra-indications to displace the presumption that strict
adherence to the time-table specified in this rent review clause is not of the
essence of the contract, the considerations that I have mentioned appear to me
to reinforce the presumption. In these circumstances I do not find it necessary
to say more about the facts of the case. It is not disputed that if time was
not of the essence of the stipulations in the review clause the appellant
landlord is entitled to a declaration that upon the true construction of the
lease and in the events that have happened the annual rent reserved for the
10-year period starting on August 31 1972 should be a rent determined in
accordance with the review clause.
I would
accordingly allow this appeal and so declare.
(2) The Cheapside Land Development Co Ltd and
Others v Messels Service Co
This was a
lease for a term of 21 years from April 8 1968. For the first period of seven
years the rent was £117,340 per annum payable in arrear on the usual quarter
days. For the second and third periods of seven years the respective rents were
to be determined in accordance with the provisions of the second schedule to
the lease. The schedule contained a definition of "the market rent"
and defined the "review date" as meaning in respect of the second
period April 8 1975. The provisions relating to the determination of the yearly
rent in respect of the second period were as follows:
2. In respect
of (i) the second period of the said term the yearly rent shall be the sum of
One hundred and seventeen thousand three hundred and forty pounds (£117,340) or
a sum equal to the market rent (if duly determined in the manner hereinafter
set out) whichever shall be the higher.
3. The market
rent may be determined and notified to the Lessees in the manner following:
(a) the proposed rent shall be specified in a
notice in writing ("the Lessors’ notice") served by the Lessors or
their Surveyor on the Lessees not more than twelve months nor less than six
months prior to the review date.
(b) the Lessees may within one month after
service of the Lessors’ notice of the proposed rent serve on the Lessors a
counternotice ("the Lessees’ notice") either agreeing the proposed
rent or specifying the amount of rent which the Lessees consider to be the
market rent for the period in question.
(c) in default of service of the Lessees’ notice
or in default of agreement as to the market rent to be payable for the period
in question the rent shall be valued by a Fellow of the Royal Institution of
Chartered Surveyors agreed between the Lessors and the Lessees or in default of
agreement to be appointed not earlier than two months after service of the
Lessors’ notice on the application of the Lessors by the President for the time
being of the said Institution whose valuation shall be made as an expert and
not as an arbitrator and shall be final and binding upon the Lessors and the
Lessees and shall be given in writing to the Lessors and the Lessees not less
than fourteen days before the review date.
These
provisions contain an elaborate time-table as to what is to be done in various
eventualities, not only by the landlord and tenant but also by persons over
whom neither has any control–the president of the Royal Institution of
Chartered Surveyors and whatever fellow of the institution may be appointed as
valuer.
The procedure
for determining the market rent has to be initiated by the landlord: by a
"lessor’s notice" specifying the rent which he proposes. This must be
served between twelve and six months before the review date and constitutes an
offer, irrevocable for one month during which the tenant may accept the
landlord’s proposal or make a counter-offer. At least two months are to be
allowed after service of the lessor’s notice for negotiating an agreement as to
the rent or upon a FRICS to be appointed to determine the rent as an expert
valuer. If these negotiations fail the landlord after the two months have
elapsed may apply to the president of the RICS to appoint a valuer and the
valuer must notify both landlord and tenant of his valuation not less than 14 days
before the review date. In two respects under the terms of the review clause
the progress of the procedure for determining the new rent is, or may become,
within the exclusive control of the landlord. He alone can initiate the
procedure; and he alone can apply to the president of the RICS if negotiations
with the tenant do not result in an agreement as to the rent or upon the person
who is to value it. The tenant’s position under this clause thus differs from
that of the tenant under the rent review clause that is the subject of the
first appeal inasmuch as he has no right under his contract to initiate the
procedure or to apply for the appointment of a valuer if the landlord himself
fails to do so within the stipulated times. But this difference has not in my
view any significant practical consequences so far as concerns any detriment to
the tenant from the landlord’s failure to do either of these things within the
stipulated times. If the tenant reckons that the advantage of knowing before
the review date exactly how much higher his new rent will be outweighs the
economic benefit of having the use of the money representing the difference
until the new rent has been determined, he has the remedy in his own hands.
Quite apart from the fact that he can get a pretty good idea of what the market
rent is from his own surveyor or can himself offer to enter into negotiations
with the landlord before the stipulated time for serving a lessor’s notice has
expired, so soon as that time has elapsed he can give to the landlord notice
specifying a period within which he requires the landlord to serve a lessor’s
notice if he intends the market rent to be determined and payable instead of
the former rent for the ensuing seven years. The period so specified, provided
that it is reasonable, will become of the essence of the contract. The fact
that the tenant had previously pressed the landlord to start negotiations
before the end of the period specified in the rent review clause for service of
a lessor’s notice or that the determination of the rent before the review date
was specially important to him would be relevant in determining whether the
period specified by the tenant was reasonable. (Stickney v Keeble (ubi
sup) per Lord Parker of Waddington at pp 418-9); and in view of the ease
with which the landlord could comply with the requirement a notice fixing a
very short period would no doubt suffice to make time become of the essence. So
here again I find nothing to displace the presumption that strict adherence to
the time-table specified in the rent review clause is not of the essence of the
contract.
In fact, the
landlords did give a lessor’s notice in respect of the period starting on April
8 1975 within the times specified in the contract. Negotiations between the
parties followed; but no agreement was reached either as to the new rent or
upon a valuer to determine it. The only delay that occurred was in the
landlord’s application to the president of the RICS to appoint a valuer. He did
not apply until June 25 1975. In view of the previous decisions of the courts
as to time being of the essence in rent review clauses, the
ruling by the court that it was a valid and effective application for the
purposes of paragraph 3(c) of the relevant rent review clause. On June 27 1975
the landlords issued an originating summons claiming a declaration to this
effect and a declaration that the valuation of a fellow of the RICS appointed
pursuant to the application would be valid and binding on the tenant
notwithstanding that it would not be given until after March 27 1975, ie 14
days before the review date.
Graham J made
declarations accordingly. He held, as I think wrongly, that the time for
service of a lessor’s notice was of the essence of the contract, but this
stipulation had been complied with. The time for applying to the president of
the RICS for the appointment of a valuer he held, as I think rightly, was not
of the essence.
Date from
which new rent payable
The landlords
also sought a declaration that the market rent as determined by the valuer, if
higher than £117,340 per annum, would be recoverable with effect from April 8
1975, ie retrospectively to the review date. Graham J following the decision of
the Court of Appeal in C H Bailey Ltd v Memorial Enterprises Ltd
[1974] 1 WLR 728 held that the rent would be payable retrospectively. That case
had overruled a decision to the contrary given by Sir John Pennycuick V-C in Essoldo
Ltd v Elcresta Ltd (1971) 23 P & CR 1 upon the ground that the
legal nature of rent required that it should be certain at the time when it
accrued due, so that a payment for the use of land that was fixed
retrospectively could not be "rent."
The medieval concept of rent as a service rendered by the tenant to the
landlord has been displaced by the modern concept of a payment which a tenant
is bound by his contract to pay to the landlord for the use of his land. The
medieval concept has, however, left as its only surviving relic the ancient
remedy of distress. To attract the remedy of distress rent must be certain at
the time that it falls due: Re Knight, Ex parte Voisey (1882) 21
Ch D 442 was a case about the validity of a distress for a fluctuating rent and
what was said there about the necessity for certainty in the amount payable was
in relation to what may be conveniently referred to as "distrainable
rent" in order to distinguish it from any other part of the rent (in its
modern sense) that the tenant has agreed to pay the landlord for the use of his
land, but for which the remedy of distress is not available. In the famous case
of Walsh v Lonsdale reported in the same volume of the Law
Reports (at p 9) there were two elements in the rent, one part was fixed in
advance and was certain at the time that it accrued, the other part was
fluctuating and could not be ascertained until the end of the period in respect
of which it was payable. The actual decision of the Court of Appeal was that
the fixed part or minimum rent could be distrained for, but that the
fluctuating part could not. It was taken for granted that the fluctuating
amount could be sued for once it had been ascertained. Under the rent review
clause in the instant case the market rent as determined in accordance with the
provisions of the clause if higher than £117,340 per annum is expressed to be
payable "in respect of the second period," viz the seven years
starting on April 8 1975. Until the market rent has been ascertained the
landlords can only recover rent at the rate of £117,340 per annum, which
corresponds to the minimum rent in Walsh v Lonsdale. It is only
when the market rent has been determined and turns out to be higher than
£117,340 that the landowner can recover on the rent day following such
determination the balance that has been accruing since April 8 1975. Therein
lies the economic advantage to the tenant of delay in the determination of the
market rent to which I have previously referred.
The Court of
Appeal reversed the order made by Graham J. For the reasons I have given I
would restore his order and allow this appeal too.
The
Previous Cases
It may be
convenient to conclude by referring briefly to the more important of the
previous decisions which should be regarded as overruled or as approved by your
Lordships’ decision in the two instant appeals.
Samuel
Properties Ltd v Hayek [1972] 1 WLR 1269 may
be regarded as the origin of the dichotomy between "option" on the
one hand and "obligation" or "machinery" on the other: the
word option having been used in the lease itself to describe the landlord’s
right to require the rent to be reviewed. It should be treated as overruled.
There was a complication in that the rent review clause was associated with a
break clause which gave to the tenant the right to surrender the residue of the
term on any rent review day by giving prior notice. The timetable in the rent
review clause for the determination of the new rent was obviously correlated
with the time by which the tenant had to give notice of his intention to
surrender, so as to enable him to make his decision whether or not to exercise
that right in the knowledge of what the new rent would be if he continued in
possession after review date. Had that been all, as it had been in the previous
and rightly decided case of C Richards & Son Ltd v Karenita Ltd
(1971) 221 EG 25, it would, I think, have been sufficient by necessary
implication to make time of the essence of the rent review clause because of
its interrelation with the time by which notice was to be given under the break
clause–a time which, for reasons I have given earlier, I consider to be of the
essence of the contract. In Samuel Properties Ltd v Hayek,
however, the break itself contained a provision under which the period during
which the tenant could exercise his right to surrender would be extended in the
event of the reviewed rent not having been ascertained within the time
stipulated in the rent review clause. So the implication that would otherwise
have arisen from the association of the rent review clause with a break clause
was negatived.
Kenilworth
Industrial Sites Ltd v Little & Co Ltd
[1975] 1 WLR 143 is an example of a rent review clause which was treated as
falling on the obligation or machinery side of the supposed dichotomy so time
was held not to be of the essence. The decision itself was right. A similar
decision was reached in Accuba Ltd v Allied Shoe Repairs Ltd
[1975] 1 WLR 1559 by classifying the stipulations as to time as "mere
machinery." Again the decision was
right, though the actual reasoning in both these cases in so far as it was
based on the supposed dichotomy should no longer be considered as correct. The
remaining cases to which this House was referred in which time has been held to
be of the essence of a rent review clause which was not associated with a break
clause should be regarded as overruled.
I would
express the hope that your Lordships’ decisions in these appeals will reduce
the number of occasions on which it will be necessary to have recourse to the
courts in order to ascertain whether delay has deprived the landlord of his
right to have the rent reviewed under particular rent review clauses. Delays
are prone to occur when such clauses provide, as most of them sensibly do, for
negotiations to take place between the parties before recourse to independent
arbitration or valuation. However, the best way of eliminating all uncertainty
in future rent review clauses is to state expressly whether or not stipulations
as to the time by which any step provided for by the clause is to be taken,
shall be treated as being of the essence.
Agreeing that
the appeals should be allowed, VISCOUNT DILHORNE said that there was, however,
one point (which did not have to be decided on the appeals) on which he
differed from his colleagues. He thought that where a rent review had to be
initiated by a lessor and was not automatic, then time was of the essence if it
was provided that the lessor’s notice initiating the review had to be given by
a certain date.
Also agreeing,
LORD SIMON OF GLAISDALE said that the law did not purport to bring parties into
a relationship of contractual obligation which they themselves had failed to
create. This was the true ground of decision in those cases where a stipulation
as to time was contained in an option. An option was a type of unilateral
contract. When, as was usual, it was supported by consideration it constituted
an irrevocable offer which turned into a bilateral contract by an acceptance in
strict compliance with its terms: see Lord Denning MR in United Dominions
Trust (Commercial) Ltd v Eagle Aircraft Services Ltd
[1968] 1 WLR 74, 81C. It was apt to be misleading to say that time was of the
essence of an option, since that might give the impression of a bilateral
contractual term. The legal reality was that this type of unilateral contract
never matured into a bilateral contract at all unless the option was exercised
in time. But, as Diplock LJ pointed out in the United Dominions Trust
case (p 84G) it was quite possible to have this sort of unilateral obligation
in an otherwise bilateral contract. An option in a lease to terminate or to
renew the tenancy or to purchase the reversion would be such a term. In each
such case the parties, on the exercise of the option, were brought into a new
legal relationship. It was argued on behalf of the tenants in the instant
appeals that the rent review clauses were also such unilateral terms. He (Lord
Simon) could not agree. The operation of the rent review clauses did not at all
change the relationship of the parties, which remained that of landlord and
tenant throughout the currency of the lease whether or not the machinery of the
rent review clauses was operated. It was envisaged from the outset that the
rent would be reviewed during the currency of the leases: the clauses merely provided
machinery for determination of the new rent, which in more stable conditions
might have been stipulated in advance. Moreover, the clauses went to the very
basis of the consideration moving from the landlords: in a period of inflation
the latter would not have granted leases for such long terms without inclusion
of rent review clauses–and certainly the initial rent would in each case have
been much higher without those clauses. To put it the other way round, the rent
review clauses were integral parts of the consideration moving from the
tenants, whereby they acquired a long term of years at an initial rent lower
than it would otherwise have been. Rent review clauses could not be considered
as severable terms of unilateral obligation. However, where a rent review
clause was associated with a true option (a "break" clause, for
example), it was a strong indication that time was intended to be of the
essence of the rent review clause–if not absolutely, at least to the extent
that the tenant would reasonably expect to know what new rent he would have to
pay before the time came for him to elect whether to terminate or renew the
tenancy (cf Samuel Properties Ltd v Hayek [1972] 1 WLR 1296).
That situation stood in significant contrast with those in the instant appeals.
Also,
agreeing, LORD SALMON said that the two appeals raised important questions as
to what principle should be applied in deciding whether provisions as to time
in rent revision clauses should or should not be construed as being of the
essence of the contract. Such clauses could easily be drafted so that they
stated expressly whether time was or was not to be treated as of the essence.
So drafted they would present no difficulty. Unfortunately they rarely were.
They should be, for if they were, a great deal of expensive litigation would be
avoided. If, eg the parties to the present appeals had expressly stated whether
or not they intended the provisos as to time in the rent revision clauses to be
of the essence, there would have been no litigation between them let alone
litigation fought up to their Lordships’ House for the purpose of deciding what
the rent revision clauses mean.
In a period of
acute inflation, such as had been experienced for the last 20 years or so, and
might well be experienced for many years to come, what was a fair market rent
at the date when a lease was granted would probably become wholly uneconomic
within a few years. Tenants who were anxious for security of tenure required a
term of reasonable duration, often 21 years or more. Landlords, on the other
hand, were unwilling to grant such leases unless they contained rent revision
clauses which would enable the rent to be raised at regular intervals to what
was then the fair market rent of the property demised. Accordingly, it had
become the practice for all long leases to contain a rent revision clause
providing for a revision of the rent every so many years. Leases used to
provide for such revision to be made every 10 years. Now the period was
normally every seven and not infrequently every five years. It was totally
unrealistic to regard such clauses as conferring a privilege upon the landlord
or as imposing a burden upon the tenant. Both the landlord and the tenant
recognised the obvious, viz, that such clauses were fair and reasonable for
each of them. He (his Lordship) did not agree with what has been said in some
of the authorities, namely, that a rent revision clause was for the benefit of
the landlord alone and not at all for the benefit of the tenant. It was plainly
for the benefit of both of them. It was for the benefit of the tenant because
without such a clause he would never get the long lease which he required; and
under modern conditions, it would be grossly unfair that he should. It was for
the benefit of the landlord because it ensured that for the duration of the
lease he would receive a fair rent instead of a rent far below the market value
of the property which he demised. Accordingly the landlord and the tenant by
agreement in their lease provided that at stated intervals during the term, the
rent should be brought up to what was then the fair market rent. The revision
clause itself laid down the administrative procedure or machinery by which the
fair market rent should be ascertained. Sometimes this procedure or machinery
was quite simple as in the Burnley Corporation appeal. Sometimes it was
somewhat complicated as in the Cheapside Development Company Ltd appeal.
Buckley LJ in
the Burnley Corporation appeal had relied on his (Lord Salmon’s)
judgment in the Court of Appeal in Stylo Shoes Ltd v Wetherall Bond
Street W1 Ltd (1974) 237 EG 343, [1976] 1 EGLR 86. In that case the rent
revision clause required the landlords, in the event of the revised rent not
being agreed with the tenants, to apply not less than three months before the
review date to the president of the Royal Institution of Chartered Surveyors to
nominate an arbitrator to determine the revised rent. It did not appear from
the report for how long the landlords delayed in making the application nor whether
or to what extent the delay prejudiced the tenants. This was a case in which
the landlords alone were to initiate the procedure for revising the rent and
was perhaps more akin to the second than to the first appeal. However that
might be, unless the facts in that case did reveal some unreasonably long delay
which caused prejudice to the tenants then it was wrongly decided. He (his
Lordship) certainly did not think that any member of the court was purporting
to lay down any principle to the effect that provisions as to time in rent
revision clauses were generally to be considered as of the essence of the
contract. If the Stylo Shoes case was to be regarded as a so-called
option case then the court was bound by its own decision in Samuel
Properties Ltd v Hayek with which he (his Lordship) did not agree
and considered should be overruled.
Also agreeing
LORD FRASER OF TULLYBELTON said that the right to initiate a rent review, even
if it was described as an option, was in his opinion materially different from
a true option, whether granted by one clause in a larger contract or by a
separate offer. Options to purchase property or to renew a lease were both true
options and their important characteristic for the present purpose was that, if
they were exercised, they created a new contract between the parties. But when
a rent review clause was operated it merely varied
agreed from the beginning to be variable and the review clause merely provided
the machinery for effecting the variation. Review clauses were also different
in this respect from a tenant’s option to break a lease; that, if exercised,
would put an end to the contract and release both parties from their
contractual obligations. There was a good reason why time limits should be
strictly enforced in relation to an option to purchase or to renew a lease,
because so long as it remained open the grantor was not free to dispose of his
property elsewhere, although the grantee was under no obligation to him.
Similarly where a tenant had an option to break his lease, he could break it or
not as he chose, but the landlord was not free to let his property to anyone
else until the time for exercising the tenant’s option had expired. It was fair
and reasonable, and in accordance with what he (his Lordship) would take to be
the intention of the parties, that the time limit of the restriction on the
grantor should be strictly enforced. That however did not apply in relation to
a rent review clause in a continuing lease.
For these
reasons he (his Lordship) was of opinion that the equitable rule against
treating time as of the essence of a contract was applicable to rent review
clauses unless there was some special reason for excluding its application to a
particular clause. The rule would of course be excluded if the review clause
expressly stated that time was to be of the essence. It would also be excluded
if the context clearly indicated that that was the intention of the parties–as
for instance where the tenant had a right to break the lease by notice given by
a specified date which was later than the last date for serving the landlord’s
trigger notice. The tenant’s notice to terminate the contract would be one
where the time limit was mandatory, and the necessary implication was that the
time limit for giving the landlord’s notice of review must also be mandatory.
An example of such interlocked provisions was to be found in C Richards
& Son Ltd v Karenita (1971) 221 EG 25 where the decision that
time was of the essence of the landlord’s notice could be supported on this
ground, although not on the ground on which it was actually rested. The case of
Samuel Properties v Hayek was not in this class because, although
there was a tenant’s break clause, the time allowed to the tenant for giving
notice was automatically extended until one month after the notification of the
reviewed rent to the lessee.
Referring to
three other cases which had been mentioned, Lord Fraser said that Stylo
Shoes Ltd v Wetherall Bond Street W1 Ltd (1974) 237 EG 343 should
perhaps be regarded as a decision on its own facts, but in so far as it
proceeded on the basis of the review clause giving an option to the landlord he
, [1976] 1 EGLR 86(Lord Fraser) could not agree with it. The decision in Mount
Charlotte Investments Ltd v Westbourne Building Society [1976] 1 All
ER 890 should be treated as erroneous. The decision in Kenilworth Industrial
Sites Ltd v Little & Co Ltd [1975] 1 WLR 143 was obviously
right, but the case was probably the origin of the unfortunate dichotomy
between review clauses which conferred an option and those which merely
provided machinery.
Both appeals
were allowed.
