Rent review clause–Parties ‘shall agree or failing agreement shall determine by arbitration’ new rent within specified period–Rent neither agreed nor referred to arbitration within that period, landlord not entitled to an increase–Important observations on supposed distinction between ‘option’ and ‘obligation’ types of review clauses–Distinction impractical and illusory–To secure increases, landlords must in general comply with whatever time-limits have been agreed–Care necessary in drafting future revision clauses and administering those now current–References to four Estates Gazette reports–Stylo Shoes Ltd v Wetherall Bond Street W1 Ltd 237 EG 343 extensively quoted and in effect applied–Richards v Karenita 221 EG 25, [1976] 1 EGLR 86 cited for judge’s opinion on issue of principle
This was an
appeal by Burnley Corporation from a judgment of Pennycuick V-C on May 13 1974
in the Chancery Division holding in favour of the respondent lessees, United
Scientific Holdings Ltd, of Burnley, Lancashire, that the appellant lessors had
no right to demand an increase in rent under a review clause in a lease dated
August 31 1962 in respect of the period of 10 years beginning on September 1
1972. The judgment of Pennycuick V-C was reported at (1974) 231 EG 1543.
Mr H E Francis
QC and Mr B C Maddocks (instructed by Turner, Peacock, agents for Smith &
Smith, of Burnley)
by Fremont & Co) represented the respondents.
Giving
judgment, BUCKLEY LJ said: This is an appeal from a decision of Pennycuick V-C
dated May 13 1974 on a rent review clause in a lease. The lease was dated
August 31 1962. It was a building lease for 99 years of some land in Burnley in
Lancashire. The lessors were the appellants, Burnley Corporation, and the
lessee was the plaintiff company, under its then name of E Cooksen (Properties)
Ltd. The habendum and reddendum of the lease are in the following terms:
To hold the
property (except and reserved as aforesaid) unto the lessee from the date
hereof for the term of ninety nine years yielding and paying therefor the rents
mentioned and referred to in the next succeeding clause in the manner and at
the times therein stated. . . . The lessee shall pay to the corporation during
the period from the commencement of this lease until the first day of January
one thousand nine hundred and sixty three a peppercorn (if demanded) and
thereafter until the expiration of a period of ten years from the commencement
of this lease the yearly rent of nine hundred pounds 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
without any deduction whatsoever other than landlord’s property tax on the said
rents each and all of such rents to be paid by equal half yearly instalments on
the thirty first day of March and the thirtieth day of September in each year
during the said term the first payment of the said rents or a proportionate
part thereof as the case may be to be made on the rent day next succeeding the
date whereon the said rents shall first commence to be payable.
The schedule
there referred to is in the following terms:
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.
On September
29 1967 a supplemental lease was entered into between the parties relating to
some adjoining land, and the land comprised in the supplemental lease was
demised for the same term as the land in the main lease. The rent was to be,
from April 1 1966 until the buildings should be erected on the plot of land
comprised in the supplemental lease, a peppercorn, and from the date upon which
the peppercorn rent should cease the rent was to be £1,000 until the expiration
of 10 years from the commencement of the lease, and thereafter and during the
residue of the term the yearly rent of £1,000 plus any additional rent payable
in accordance with the provisions for rent review contained in the schedule to
the lease–that is the original lease–which provisions should equally apply to
the rents reserved by the supplemental lease. So the machinery of the lease of
August 31 1962 was made to apply to the supplemental lease, and the basic rent,
as one might say, in the case of the supplemental lease was £1,000 a year in
the same way in which the £1,000 a year is referred to in the lease of August
31 1962. It will be convenient to deal with the matter with reference to the
lease of August 31 1962, because no separate point arises on the supplemental
lease, but it will be appreciated that the total rent payable under the two
documents in respect of the period after the first 10 years of the term was
£2,000, or £2,000 and such additional rent as might be ascertained by applying
the machinery provided in the schedule to the lease.
On May 10 1972
estate agents acting for the plaintiff company wrote to the borough council a
letter saying that they had been instructed by the plaintiff company to enter
into negotiations to agree the new lease rent for the land comprised in the two
leases. Following that letter, a telephone conversation took place on July 31
between a member of the firm of estate agents and a representative of the
borough council, in which it was arranged that the agents would supply
particulars of the rents reserved by the under-leases of the property. There
were in fact nine underleases of this property subsisting at that time for a
total rental, I think, of £12,515; but particulars of those underleases were
never in fact supplied to the borough council. On August 21 1972 the plaintiff
company’s solicitors wrote a letter to the town clerk of the borough council,
in the course of which they said:
We have
carefully considered the provisions of the lease and supplemental lease and we
are entirely satisfied that the provisions are not susceptible of any legally
enforceable meaning and are void accordingly. In our view therefore the rent as
from September 1 1972 is the sum of £2,000, being the yearly rent of £1,000
payable under the provisions of clause 3 of the lease and the yearly rent of
£1,000 payable under the provisions of the supplemental lease.
The town clerk
did not acknowledge that letter until after August 31 1972, which was the end
of the first 10 years of the term limited by the two leases. He effectively
answered the letter of August 21 1972 on October 12 1972 in a letter in which
he said that the corporation had taken counsel’s opinion on the question of the
enforceability or otherwise of the rent review provisions, and that in the
light of that opinion he was unable to agree that the position was as the
plaintiff company had stated it in their letter and the corporation must insist
upon the rent revision provisions being implemented. That resulted in the
plaintiff company saying that they proposed to take proceedings. The
originating summons was issued on December 4 1972 by the company as plaintiffs,
joining the corporation as defendants. There was some subsequent
correspondence, but for the purposes of this appeal I do not think it is
necessary for me to say anything about that. As I say, for the purposes of this
judgment I propose to ignore the supplemental lease and deal with the matter in
relation to the original lease.
The appellants
(the corporation) assert that time is of the essence of a rent review clause
only where it is in the nature of an option or confers a unilateral right on
one party to secure an alteration of the rent to that party’s advantage. They
say that this is not a lease for 99 years at £1,000 a year with a power for the
landlord to call for an upward review. They contend that this is a lease at
specified rents during the first 10 years and thereafter at a rent to be
ascertained according to a formula, which cannot be less but may be more than
£1,000 a year, with machinery provided for ascertaining the amount according to
the formula set out in the schedule. To such a provision they say time is not
essential. Mr Francis, who appears on their behalf, has
clause with clauses of a kind which have also been described in the authorities
as ‘obligation’ clauses; that is to say, clauses in which the parties either
are contractually obliged to carry out a review or where by the terms of the
lease the review is an automatic operation. Mr Francis draws attention to the
mandatory language in the schedule, which twice uses the verb ‘shall,’ and he
contends that the provisions of the schedule are equally binding upon both
parties, and that this is not a case in which it could be said that either
party has any right in the nature of an option. It is true that an agreement to
agree something cannot create a legally binding obligation to agree, but I
think it is true to say in this case that there is a binding obligation. There
is a binding obligation to submit the matter to arbitration in default of the
parties agreeing. The respondents, on the other hand, say that a review clause
in a lease is a clause of a commercial character and that time-limits contained
in the clause should be strictly adhered to, in the way that time provisions in
commercial clauses are normally regarded as being of the essence of the
contract. They point out that uncertainty about the amount of the rent may
seriously affect the saleability of the tenant’s interest in the land and his
decision whether he can afford to retain the property, or how he should deal
with it, and they point out that a review clause is directed to ensuring that
the landlord shall get a proper return for his investment throughout the life
of the lease. These, they say, are commercial considerations which should
attract the same sort of approach to time-limits as is adopted in other
commercial cases.
This sort of
question has arisen very frequently of late in the courts, no doubt because
economic inflation has greatly increased the appetite of landlords for rent
reviews, with the result that rent review clauses are nowadays probably much
more common than they used to be. We have been referred to about a dozen cases
decided in the High Court, some of which have come to this court, since October
1971 on clauses of this kind. A review of these decisions leads me to the
conclusion that there is a danger of distinctions becoming established between
one kind of clause and another on what appear to me to be narrow and somewhat
artificial grounds, which may be capable of explanation on an intellectual
level but are hard to justify on a practical level. A simple example of one
class of cases might be a lease for 21 years at a yearly rent of £X provided
that if within a period of (say) not more than nine months and not less than
three months before the end of the first seven years of the term the landlord
should give notice to the tenant requiring a rent review, the rent for the
eighth to the fourteenth years should be such as before the end of the seventh
year the parties should agree, or in default of agreement a valuer should
determine to be the open market rent of the property, followed by a similar
provision operative in the fourteenth year; or the clause may be in a more
complex form of the kind to be found in Mount Charlotte Investments Ltd
v Leek, Westbourne & Eastern Counties Building Society, which will
be found reported in vol 237 of the ESTATES GAZETTE at p 339. Clauses of this
kind, though not necessarily strictly option clauses, have been referred to in
some of the cases as ‘option’ clauses because time has been held to be of the
essence of the clauses by analogy to a strict option clause for (say) a
purchase of land or renewal of a lease.
A simple
example of another class of cases might be a lease for 21 years at a rent of £X
a year with an automatic or obligatory review at the end of the seventh year,
providing that for the eighth to the fourteenth years the rent should be such a
yearly sum as in default of agreement a valuer should determine to be the open
market rent of the property, followed by a similar provision operative at the
end of the fourteenth year in respect of the remainder of the term. A more
elaborate example of this type of clause is to be found in Accuba Ltd v Allied
Shoe Repairs Ltd [1975] 1 WLR 1559. Clauses of this kind have been referred
to as ‘obligation’ clauses or ‘machinery’ clauses, and in some of these (of
which the Accuba case was one) time has been held not to be of the
essence on the ground that the time programme laid down relates merely to the
machinery provided for carrying out the obligatory review and is not part of
the essence of the obligation: see, for example, Kenilworth Industrial Sites
Ltd v EC Little & Co Ltd [1974] 1 WLR 1069, per Megarry J at p
1071. This distinction will be found to be discussed and adopted in the
judgment of Goff J in the Accuba case and of Templeman J in the Mount
Charlotte case.
In the present
case, the learned judge disposed of the matter upon the following grounds,
which will be found at page 6 of the typescript of the note of his judgment:
It is well
established that in a contract for sale of land, time is not of the essence
until made so. On the other hand, with regard to the exercise of an option, it
is beyond question that time is of the essence. This appears from a recent case
in which the principle was stated. I refer to the case of Samuel Properties (Developments)
Ltd v Hayek [1972] 1 WLR 1296, more particularly to the judgment of
Russell LJ at page 1301. The ground on which it is held to be of the essence,
of course, in relation to the exercise of an option is that it represents a
unilateral privilege residing in the party who procures it and who must
exercise it, if at all, strictly within the time limited. In the present case
the rent is not expressed as an option in favour of the council. The form in
the lease is expressed to be £1,000 plus that additional rent under the
schedule ascertained either by agreement or by arbitration. So Mr Maddocks
contends that this provision as to rent review represents not a step to create
an obligation but a method to quantify the amount. It seems to me that although
expressed for the quantification of additional rent the rent review is in
substance a unilateral right vested in the council alone, the nature of the
right being to increase the rent payable by the tenant. The tenant is entitled
under the lease to possession for 99 years at a rent of £1,000 unless the
corporation elects to require a review, and his right to remain in the property
is already assured. Therefore, it is for the benefit of the landlord solely. If
the landlord does so require, the rent can only be increased and will not
decrease, and that being the nature of the right it seems to me that the right
is on the same footing as an option and the principle enunciated by Russell LJ
applies to one no less than the other. Time is of the essence of the contract
as it is a unilateral right and must be exercised strictly in the time set down
by the lease. It would not be consistent with the substance of justice to allow
the time to apply for a review to remain open for an indefinite period. The
position here is wholly different from the simple case where goods were sold or
services rendered for a sum to be determined. Here the plaintiffs already have
the right to possession for 99 years. The rent review provides the unilateral
right to increase.
The case of Samuel
Properties (Developments) Ltd v Hayek there referred
to was a case in which land was leased by an underlease for a term of 21 years
from July 7 1964, with a proviso that the rent was subject to increase at the
end of the seventh and fourteenth years of the term in accordance with the
fourth schedule to the underlease. The first paragraph in the schedule referred
to was in the terms, ‘The yearly rent reserved by this underlease shall be
subject to review at the option of the lessors in the seventh and fourteenth
years of the term hereby granted in the manner provided in the following
paragraphs,’ and paragraph 2 read:
If the
lessors shall desire to have the said rent reviewed at the said time by
reference to the open market rental value of the demised premises then
prevailing and shall serve upon the lessee a notice in writing to that effect
not later than two quarters before the expiry of the said seventh and
fourteenth years respectively of the said term then within one month after the
service
valuers shall agree the amount of the said open market rental value of the
demised premises and in default of such agreement within the period of one
month from the service of the said notice the said amount shall be determined
by a valuer (acting as an expert and not an arbitrator) to be appointed by the President
of the Royal Institution of Chartered Surveyors.
Then
paragraphs 3 and 4 of the schedule provided further detailed machinery. Russell
LJ at p 1301 drew attention to the fact that clause 5 gave the lessee the power
to determine the underlease on giving a time-limited notice, and he said that
it was accepted that that clause was intended to and did contain a strict time
requirement. He then went on to draw attention to the fact that clause 1 of the
schedule conferred an option on the lessor. He referred to the arguments which
had been presented to the court, and he said at p 1302, just below letter C:
I am not
myself impressed by these arguments: the right or privilege of exacting an
additional rent was conferred by the bargain between the parties as an express
option which would be effective if a condition precedent was complied with: it
could be equated with an offer by the lessee to pay an increased rent only in
certain circumstances which it lay in the power of the lessor unilaterally to
bring about.
In that case
the rent review clause was expressly described in the underlease as being an
option, and had the true characteristics of an option. Accordingly, the court
held that the time requirements of the clause were not merely directory, but
mandatory; that is to say, they were of the essence of the contract. In C H
Bailey Ltd v Memorial Enterprises Ltd [1974] 1 WLR 728 a rent review
clause provided that ‘if on September 21 1969 the market rental value shall be
found to exceed the rent of £2,375 hereby reserved there shall be substituted
an increased yearly rent equal to the market rental value so ascertained,’ and
there were provisions for the market rental value to be agreed or to be
determined by arbitration. The question arose whether if, as occurred, the new
rent had not been agreed or determined by September 21 1969 the tenant could be
liable for the new and higher rent from that date or only, as Eveleigh J had
held, from the time when it was either agreed or determined. The Court of
Appeal held that since the rent review clause provided for the increased rent
when ascertained to be substituted from September 21 1969, it was payable
retrospectively from that date. In coming to that decision, the Court of Appeal
rejected the tenant’s argument that the landlords had lost their right to
increase the rent at all because it was not in fact ascertained on September 21
1969. But the decision in that case is not, I think, of much assistance to us
in the present case, for it turned upon the construction of the words ‘shall be
found to exceed.’ The review clause
there did not really lay down any time programme for the review operation.
A review
clause which permits of an alteration of the rent only in an upward direction
seems to me to be very much the same in character whether by its terms it
requires the landlord to initiate the review process by serving a notice or
making a request, or whether it purports to make the review obligatory or
automatic. The only person to whose financial advantage the review can operate
is the landlord. The tenant must, of course, have an interest in the outcome of
any review. He may in some circumstances want to have his rent defined even if
this may involve an increase; but the person who in any case in which an
increase is probable will always have an incentive to obtain it is the
landlord. So even where the rent review is obligatory or automatic, it is the
landlord who is likely to take the initiative, and if he fails to do so, the
tenant will probably let the sleeping dog lie. What bearing have these
considerations upon the rules of equity relating to time clauses in
contracts? It is of course notorious
that the Court of Chancery adopted a different approach to time clauses from
that of the common law courts. The common law held the parties to the strict
terms of their bargain. Equity, on the other hand, did not regard stipulations
as to time as being of the essence of the contract–that is, as bound to be
strictly observed–unless this was expressly provided in the contract or the
circumstances and nature of the contract were such that this intention was to
be imputed to the parties. We are not presently concerned with time being
subsequently made essential by notice. Since the fusion of equity and law in
1873, the equitable principles prevail: see now the Law of Property Act 1925,
section 41. We have heard some discussion in this case as to whether the
equitable principles ever extended to contracts other than those in respect of
which some form of equitable relief could have been obtained in the Court of
Chancery. For the purposes of this judgment I am prepared to assume that the
equitable rules about time clauses now apply to all kinds of contract. I think
that the correct test of whether time is originally of the essence of a
contract according to equitable principles is correctly enunciated in Fry on
Specific Performance 6th ed p 502 para 1075:
Time is
originally of the essence of the contract, in the view of a court of equity,
whenever it appears to have been part of the real intention of the parties that
it should be so, and not to have been inserted as a merely formal part of the
contract. As this intention may either be separately expressed, or may be
implied from the nature or structure of the contract, it follows that time may
be originally of the essence of a contract, as to any one or more of its terms,
either by virtue of an express condition in the contract itself making it so,
or by reason of its being implied.
Implication is
dealt with further in para 1079 and 1080, and in para 1081 the learned author
says:
And so,
again, where the object of the contract is a commercial enterprise, the court
is strongly inclined to hold time to be essential, whether the contract be for
the purchase of land for such purposes, or more directly for the prosecution of
trade.
So where the
subject-matter of a contract is the acquisition of a wasting asset or of a
perishable commodity or of something which is likely to change rapidly in
value, an intention that punctual observance of time provisions is intended to
be an essential term of the bargain is to be imputed to the parties. In C H
Bailey Ltd v Memorial Enterprises Ltd, all three members of the
court emphasised the commercial character of rent review clauses: Lord Denning
MR at p 732, Megaw LJ at the top of p 733, and Sir Eric Sachs at p 735 in a
passage which I will read, starting at the beginning of his judgment:
There are
clearly now in current use in leases of business premises a number of variants
of a clause which provides for an increase in the rent of those premises as
from a given date, if their market rental ‘shall be found’ to be higher than
that originally agreed upon the grant of the lease. The interpretation of each
such clause depends, of course, on its own precise terms. Unfortunately,
however, some of these clauses have been clumsily drawn in a way which
unnecessarily opens a path to refined arguments which are bound to cause the
lay parties themselves to throw up their hands in gloom. The objective of the
courts in a case relating to office leases is naturally to determine the
intended commercial effect of the particular agreement reached between the
parties. In this respect a lease is no less a contract relating to the use of
premises than an agreement in relation to the supply of furniture for those
premises is also a contract. It follows, to my mind, that the courts should in
this class of case avoid resort, so far as practicable, to any of the highly
technical points that stem from the intricacies of the ancient law of landlord
and tenant.
The importance
of discovering in good time what the rent of leasehold property is to be after
a date from which the rate of the rent is liable to change is in my opinion
self-evident. The tenant will want to know what his liability will be. He may
want to know whether he can afford to retain his lease. He may want to know
whether and at what price
what the effect of any change in the rent will be on his financial position
generally. The landlord also will want to know what the effect of any change
will be on his financial position; but since I am considering cases in which
any change will be to his advantage, he may be more anxious than the tenant to
have the position clarified as early as possible. These considerations, in my
view, emphasise the commercial importance to the parties of the consequences of
a rent review being known to them at latest by the first rent day in the period
to which the new rent will apply.
In Stylo
Shoes Ltd v Wetherall Bond Street W1 Ltd, reported in vol 237 of the
ESTATES GAZETTE at p 343, this court had to consider a rent revision clause in
a lease for 14 years where the rent for the first three years was reserved at
£2,600 and for the next four years at £2,750 a year. The lease made no express
provision as to what rent should be payable during the last seven years of the
term. Clause 1 (b) of the lease was in the following terms:
The landlords
shall be entitled to require the rent to be revised from the commencement of
the eighth year of the said term being the 29th day of September 1972 and if
the landlords shall so require then the yearly rent payable during the residue
of the said term shall be either the said sum of £2,750 or such amount as may
be agreed in writing between the landlords and the tenants before the
commencement of the eighth year of the said term as represents the full rack
rental value (as hereinafter defined) of the demised premises or (in the
absence of agreement as aforesaid) as shall be determined by arbitration
whichever amount shall be the greater. The arbitrator shall in default of
agreement between the parties hereto be nominated by the President for the time
being of the Royal Institution of Chartered Surveyors on the application of the
landlords made not more that 12 months nor less that three months before
September 29 1972 and the decision of the arbitrator (who shall be deemed to be
acting as an expert) shall be final and binding upon the parties.
Lord Salmon,
who delivered the leading judgment, said:
The clause is
very ill-drafted and not at all easy to construe. It seems to me, however, that
it provides for three things. Firstly, by necessary implication, if the
landlords do nothing to indicate that they require a revision of the rent
before the beginning of the eighth year, the tenants shall go on paying rent
for the residue of the term at £2,750 a year. Secondly, if the landlords
require a revision of the rent, although the clause does not expressly oblige
them to give any notice, it is to be implied that they can show that they
require the rent to be revised only by giving the tenants notice of that fact;
but the date when the notice is to be given is, so far as the express words in
the clause are concerned, not stated. Thirdly, if the landlords require the
rent to be revised, the clause clearly contemplates that the parties may come
to some agreement as to the amount of the true rack rent: if, however, they do
not agree in writing on this point, then it may be settled by arbitration. The
parties may either agree upon an arbitrator between themselves, or
alternatively, if they do not agree upon an arbitrator, then an arbitrator
shall be nominated by the President of the Royal Institution of Chartered Surveyors,
but only on the application of the landlords made ‘not more than 12 months nor
less than three months before September 29 1972.’ It seems to me that that part of clause 1 (b)
which provides what is to happen if deadlock is reached is of critical
importance. The application of the landlords has to be ‘made not . . . less
than three months before September 29 1972.’
I think those words are clearly put in for the protection of the
tenants. They protect the tenants against the risk of having to face an
increased rent at the very last moment before the last seven years start to
run, or indeed at any time during the last seven years.
Then Lord
Salmon goes on to deal with the arguments which were presented, and in the
second column of p 345 he says:
The
construction which I favour makes sense, and preserves for the tenants the
protection which the clause manifestly intended to afford them. It is the
landlords’ clause, and it would not be right to stretch its language in their
favour so as to justify the time-limit for an application for arbitration being
disregarded.
That was, of
course, a case in which the landlords were to initiate any revision of the
rent, and their right to do so may therefore be said to have been in the nature
of an option; but none of the members of the court in terms put his decision on
that ground. They decided the case on the ground that the clause required in a
mandatory way that if an arbitration became necessary, the application for the
appointment of an arbitrator must be made before September 29 1972; and Lord
Salmon clearly took that view because he thought that date was specified for
the protection of the tenants. It seems to me that considerations of the kind
which I have been discussing, concerning the business efficacy of a rent review
clause or at least its commercial convenience to the parties, afford just as
cogent reasons for imputing to the parties an intention that a prescribed
time-table shall be punctually observed in a case where the rent review is
obligatory or automatic as in a case where the review process is dependent on
one party taking the initiative. In my judgment, the court should not be slow
to impute such an intention in either case.
This does not
mean that time should be treated as of the essence in every rent review clause.
The circumstances or the terms of the lease may negative any inference of such
an intention in a particular case. This was so in Kenilworth Industrial
Sites Ltd v E C Little & Co Ltd [1975] 1 WLR 143 in this court.
There, in a lease for 21 years, the rent reserved was limited to the first five
years of the term. Clause 5 of the lease provided how the rent payable during
the remainder of the term should be ascertained. The decision proceeded upon
the basis that if for any reason clause 5 could not be operated, no rent would
be payable. This would in itself clearly be a very strong argument against
adopting a construction of the lease which might result in the rent becoming
unascertainable in consequence of a failure to comply punctually with the
time-table. Moreover, in that case clause 5 contained a proviso which made it
clear that a failure to comply punctually with the time-table was not to
deprive the landlord of his right to have an increased rent determined by
arbitration. For these reasons, I would hold that the suggested dichotomy
between ‘option’ cases and ‘obligation’ or ‘machinery’ cases as producing
different results in respect of time-limits is unsound. In my opinion, the
court should be readily disposed to regard time as of the essence in both
classes of case. In each class of case the circumstances and the nature of the
contractual term should be considered in order to ascertain whether it is
reasonable to impute to the parties an intention that time shall be of the
essence, an important circumstance being the practical operation of the clause
and its impact upon the parties.
With deference
to Graham J, I feel unable to agree with the view which he expressed in Cheapside
Land Development Co Ltd v Messels Service Co, which is reported in The
Times newspaper of February 4 this year, where the learned judge is
reported as having said that the authorities ‘led too readily to the conclusion
that time was prima facie to be regarded as of the essence in respect of
all times in all rent review clauses, with only an occasional exception.’ I think that if parties to a lease agree a
time-table for the purposes of a rent review, much less confusion is likely to
ensue if the consequence is that the parties must normally comply with that time-table.
The time-table will probably be much more comprehensible to a layman, and
possibly even to his legal adviser, than the rather esoteric rules of equity
which sometimes regard time-limits as binding and sometimes do not. The
landlord or the tenant is much less likely, I think, to be unwarily trapped if
he knows he should be careful to comply with the time-table than if he thinks
he may be able to ignore it. For these reasons, which are broader in their
nature than the reasons relied on by Pennycuick V-C, I would dismiss this
appeal. I do not, however, dissent from the narrower grounds on which he
decided the case. In my
for the relevant purpose of determining whether time should be regarded as of
its essence closely analogous to an option. It is, as the Vice-Chancellor
pointed out, a unilateral right in the sense that it is capable of operating
for the benefit of the landlord only, which he alone really has an incentive to
invoke.
Pennycuick V-C
dealt with another point at the end of his judgment, relating to a suggested
waiver by the plaintiffs in correspondence of their right to insist upon the
time-limit. That point has not been pressed in this court, and I see no reason
to differ from the Vice-Chancellor upon it. I would dismiss this appeal.
ROSKILL LJ:
The huge capital investment in property over the last 20 years or more has
naturally led to those making that investment seeking to ensure an adequate
return on their capital. Where that return depended upon the grant of leases,
especially of long leases, it was natural for investors to seek to secure that
adequate return over the duration of those leases by ensuring that its value
was not hopelessly eroded in real terms by the likely diminution in the value
of money. That diminution in the value of money has unhappily accelerated at an
alarming pace in recent years. It is not therefore surprising that landlords
have resorted to rent revision clauses in their leases to minimise the
consequences of inflation upon the value of their investment and have insisted
upon their inclusion in long-term leases. Equally it is not surprising that
lessees and their advisers should have resorted to much ingenuity in an effort
to defeat landlords’ attempts to avoid the consequences of inflation at their
lessees’ expense. The result has been a large number of cases in the last five
years, three of which before the present have reached this court but most of
which have not gone beyond first instance. The rent revision clauses which have
come up for consideration are immensely varied in their terms. Their
draftsmanship has been almost uniformly condemned judicially, not without
justification. The draftsmanship of the relevant clause 3 and the schedule in
the present lease might not unfairly be similarly criticised, though in
fairness to some of the draftsmen it is to be observed that some clauses have
emanated, with or without modification, from well-known precedent books. It is
not, I hope, out of place to suggest that one result of the present appeal may
be to lead to more careful drafting of these rent revision clauses and even to
prompt, and in some cases highly necessary, revision of some of the precedents.
All these rent
revision clauses contain in one form or another stipulations as to time within
which certain acts or matters are required to be done. Inevitably, human nature
being what it is, some acts and some matters have not been timeously done. In
consequence, lessees have strenuously resisted attempts by landlords belatedly
to operate these clauses in their favour and against the interests of the
lessees. Different cases have been decided different ways and, as will later
emerge, not always consistently. But the courts have shown, rather surprisingly
as I think in view of the current trend of statute law governing the
relationship between landlord and tenant, a tendency–at least at first
instance–to construe these clauses as permitting such belated operation
notwithstanding that, if looked at realistically and whatever the detail of
their language, these are clauses for the benefit of the landlords and not of
the lessees. Manfully grappling with the difficulties, judges of first instance
have evolved an approach to the crucial question of construction which appears
to require the court to ask itself whether a particular clause is (to quote one
phrase used) ‘an option to the landlord to obtain a higher rent,’ and if so to
construe the provisions as to time strictly, so that non-compliance with those
time limits will defeat the landlord’s claim; or, to quote another phrase used,
‘creating an obligation on the landlord to take the steps necessary to
determine what the rent is going to be,’ in which case non-compliance with the
true limits will not defeat the landlord’s claim. This reasoning in turn has
led to a suggested dichotomy between two suggested classes of clause, the
‘option clause’ and the ‘obligation clause.’
If a particular clause is given one label, it is to be construed one
way; if it be given another label, it is to be construed another way. In two of
the most recent cases at first instance in this field, Mount Charlotte
Investments Ltd v Leek, Westbourne & Eastern Counties Building
Society, decided by Templeman J on June 20 1975 (237 ESTATES GAZETTE 339)
and Cheapside Land Development Co Ltd v Messels Service Co Ltd,
decided by Graham J as recently as January 29 this year and only so far
reported in The Times on February 4 1976, both learned judges (rightly,
as I think) deplored the state of the authorities but felt obliged to decide
the cases respectively before them upon the footing that this dichotomy should
be adopted. We are told that the second case is under appeal to this court, and
I wish to make clear that what I later say about Graham J’s judgment must not
be taken as in any way directly affecting the actual question to be decided in
that case, with which the present appeal is in no way concerned. I respectfully
and entirely agree with both these criticisms of the authorities, though I
think the evolution of the suggested dichotomy represents a valiant judicial
attempt to bring order out of confusion rather than an enthusiasm for the
adoption of the supposed principle.
Mr Balcombe,
for the respondent lessees, vigorously attacked the suggested dichotomy. He
said that neither principle nor authority, properly understood, supported it,
and he urged us to take the opportunity presented by this appeal to state or
re-state the principles which we thought should be applied to the construction
of rent revision clauses. It is legitimate criticism of the suggested dichotomy
that it involves seeking to give each particular clause a label and then
interpreting it according to the choice of label. This to my mind is not a
proper approach to a question of construction. The right question to ask in
each case is, upon the true construction of the particular clause, did the
parties intend that the particular stipulations as to time must be strictly
adhered to or not; or if, as happens in so many cases, the parties have not
expressly dealt with this question, must there be imputed to the parties an
intention that the particular stipulations as to time must be strictly adhered
to or not? It is, I think, impossible to
state a rule which will prescribe that every such clause must be interpreted so
as to produce the same result in every case, however desirable that might
ideally be, in order to avoid a multiplicity of disputes. So to hold would be
to defy the principle that every document must be properly construed according
to its own terms and not according to the terms of some other document.
Questions of construction of rent revision clauses are not to be resolved by
asking, ‘Is this case like that case?’ They
are to be resolved by asking the question I have just stated, and answering it
by the application to the particular clause of the proper principles of
construction.
I next turn to
consider what those proper principles are. Mr Francis’s argument for the
appellant had the attraction of simplicity. Section 41 of the Law of Property
Act 1925 provides: ‘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
present lease and underlease were contracts to which that section applied, and
no ground was shown for departing from the rule to which the section gives
statutory effect. As is well known, this section, which re-enacted section 25
(7) of the Judicature Act 1873, indeed gives statutory effect to the previous
rules of equity which modified the rigidity of the old common law approach to
the construction of particular classes of stipulation, especially as to
time, in contracts. Mr Balcombe referred us to the history of these rules of
equity, which now have had statutory force for over 100 years, as related in Fry
on Specific Performance 6th ed (1921), and to some of the relevant passages
to which my Lord has already referred. I would add references to paras 1071 to
1073 inclusive. In para 1075, which my Lord read, the learned author says:
Time is
originally of the essence of the contract, in the view of a court of equity,
whenever it appears to have been part of the real intention of the parties that
it should be so, and not to have been inserted as a merely formal part of the
contract.
Thus the rules
of equity were a means of imputing to the parties a more restrictive intention
regarding the interpretation of the language they had used in their
stipulations as to time than the rigid and more literal interpretation of the
common law courts would have accorded to those stipulations. But it was never a
means of according to the language which the parties chose a different meaning
from that which they were to be taken to have clearly intended in any
particular case. The well-known exceptions to the rule of equity will be found
listed in a chapter entitled ‘Specific Performance’ in the present (27th: 1973)
edition of Snell on Equity at pp 595 and 596. These include ‘mercantile
contracts’ and ‘contracts for the sale of leaseholds.’ This shows that the application of the rules
of equity was by no means universal even where the subject-matter of the
contract was land. The point is well made in Halsbury’s Laws of England
4th ed vol 9 para 482 in a sentence which reads: ‘Broadly speaking, time will
be considered of the essence in ‘mercantile’ contracts and in other cases where
the nature of the contract or of the subject-matter or the circumstances of the
case require precise compliance.’ In the
well-known line of cases on mercantile contracts of which Bowes v Shand
(1877) 2 App Cas 455 and Reuter v Sala (1879) 4 CPD 239 are among
the most famous, parties to mercantile contracts have almost always been held
strictly to their stipulations as to time, though even in mercantile contracts
it is possible to conceive of stipulations as to time which would not
necessarily be construed as of the essence.
In the end,
therefore, one returns to the question what intention did these parties to
these leases have, or what intention must be imputed to them, due regard being
paid both to the language which they used and of course to section 41 of the
Law of Property Act 1925. I would refer in this connection to a single passage
in the speech of the first Lord Parker of Waddington in Stickney v Keeble
[1915] AC 386 at 417, though it has to be remembered that this was in the
context of a case involving the sale and purchase of land: ‘The section’–the
section to which Lord Parker was referring was the former section 25 (7) of the
Judicature Act 1873–‘cannot in my opinion mean that the rules as to time laid
down by courts of equity in certain cases, for certain purposes, and under
certain circumstances only, shall be applied generally and without inquiry
whether the particular case, purpose, or circumstances are such that equity
would have applied the rules.’ A
contract–and a lease is a contract which contains mutual obligations as well as
creating an estate in land–does not automatically cease to be a commercial or
mercantile contract because the subject-matter is land and not goods. Commerce
today is not restricted to the buying, selling, financing and insuring of
commodities, however much that may have been largely the case 100 years ago.
This court, in C H Bailey Ltd v Memorial Enterprises Ltd, to
which my Lord has already referred ([1974] 1 WLR 728), stressed the commercial
nature of transactions involving long leases of land. At page 733 Megaw LJ
said: ‘As I understood it, counsel for both the landlords and the tenants in
this court accepted that this is a commercial document between commercial
parties which ought to be construed as far as possible to give effect to
commercial good sense’; and at page 735, in a passage which my Lord has already
read but I venture to repeat, Sir Eric Sachs said: ‘The objective of the courts
in a case relating to office leases is naturally to determine the intended
commercial effect of the particular agreement reached between the parties. In
this respect a lease is no less a contract relating to the use of premises than
an agreement in relation to the supply of furniture for those premises is also
a contract. It follows to my mind that the courts should in this class of case
avoid resort, so far as practicable, to any of the highly technical points that
stem from the intricacies of the ancient law of landlord and tenant.’ In his judgment, the Master of the Rolls had
said at page 732: ‘The time and manner of the payment is to be ascertained
according to the true construction of the contract, and not by reference to
out-dated relics of medieval law.’
Let me suppose
the existence of two companies in a modern group of companies. One deals in
land and the other in commodities. The former as lessor enters into a 21-year
lease with a rent review clause providing for rent review at stated intervals
and containing certain stipulations as to time. The latter as seller enters
into a long-term commodity supply contract with a buyer, with a price review
clause providing for price review at stated intervals in identical terms. When
the time comes for such reviews of rent in the case of one company and of price
in the case of the other, each company fails timeously to comply with those
stipulations as to time. On the authorities, it can hardly be doubted that the
second company would be held strictly to the terms of the bargain as to the
time within which the price review clause must be invoked. Is the first
company’s contract to receive a different construction merely because it is a
lease and not a purchase and sale contract?
Such a result cannot, I think, be correct in principle.
There has been
a good deal of discussion in the cases as to the nature of a rent review
clause, whether it is for the landlord’s benefit or the tenant’s, whether it is
truly an option or not, and the like. I respectfully agree with Templeman J’s
comment in the Mount Charlotte case that ‘the analysis of the option
rent review clauses is a triumph for theory over realism.’ Questions of construction should be
approached with realism and not resolved by over-analysis on a purely
theoretical basis. The reality of such clauses is that the landlord insists on
obtaining an upward review of rent at stated intervals at the lessee’s expense
and that unless the lessee agrees to that before the lease is executed, the
lessee will not obtain the lease. I find it as difficult as did Templeman J to
accept as realistic the concept that the lessee is giving the landlord an
option and thus conferring a benefit on him. True in some cases the clause may
be expressed as an option, as it was in Samuel Properties (Developments) Ltd
v Hayek [1972] 1 WLR 1064 and 1296; and where it is so expressed, that
is a very strong reason for giving the stipulations as to time the literal
meaning which this court and indeed Whitford J did in that case. But that is
not to say that unless the word ‘option’ is used, or the language used in
substance creates an option, the lessor is not to be held strictly to the
strict performance of the stipulations as to time. It must depend in each case
upon what, judging from the language used, the parties intended or must be
presumed to have intended.
There are, as
my Lord has already pointed out, strong commercial reasons in these cases for
presuming that the parties intended that these stipulations should be strictly
adhered to. A lessee faced with the possibility of a large rent increase may
not be able to afford it and may in consequence be obliged to dispose of his
leasehold interest. He cannot do so unless he knows the rent his assignee or
underlessee is going to have to pay. This is especially true since the decision
in C H Bailey Ltd v Memorial Enterprises Ltd that rent increases
under rent review clauses are retrospective in their effect, overruling the
earlier decision of Pennycuick V-C in Re Essoldo (Bingo) Ltd’s Underlease
(1971) 23 P &
interest. He or his advisers cannot properly value that interest unless they
know what return on capital their would-be purchaser would receive by way of
rent. Further, if time-limits are not to be adhered to strictly, by when during
the currency of the period in question must the rent review machinery be put
into operation? It has been
suggested–subject to questions of waiver or estoppel–that it must be within a
reasonable time of the relevant date, and Goff J (as he then was) took this
view in Accuba Ltd v Allied Shoe Repairs Ltd [1975] 1 WLR 1559.
But questions of reasonableness, as that learned judge found in that case, are
never easy to resolve, and doubts must inevitably arise in any given case where
latitude is permissible what is reasonable and what is not.
It seems to
me, therefore, that there are very strong reasons first for approaching the
construction of these rent review clauses as clauses arising under commercial
or mercantile contracts in which the parties are likely to have intended the
stipulations as to time to be strictly adhered to; secondly, unless authority
otherwise requires, for avoiding attaching a particular label to such clauses
and then construing them one way or the other by reference to the chosen label;
and thirdly, for avoiding being too ready to construe these clauses in such a
way as to free a lessor who prima facie has failed to comply with their
terms from the ordinary consequences of failure to comply with the condition
precedent because of some supposed subjective consideration of hard-ship. If,
as I think, the realistic view is that these clauses are in general clearly for
the landlord’s benefit, it follows that in general the stipulations as to time
are for the lessee’s benefit and protection, so that he may know where he is.
This accords with Lord Salmon’s view in Stylo Shoes Ltd v Wetherall
Bond Street W1 Ltd (1974) 237 ESTATES GAZETTE 343 at 345, in the passage
which my Lord, Buckley LJ, has already read and which I will not repeat. In
this respect I venture to differ from one passage in Graham J’s judgment in Cheapside
Land Development Co Ltd v Messels Service Co Ltd, to which I have
already referred. As reported in The Times, the learned judge in the middle of
the column said: ‘The authorities led too readily to the conclusion that time
was prima facie to be regarded as of the essence in respect of all times
in all rent review clauses, with only an occasional exception. That seemed to
result from regularly placing them in the ‘option’ basket.’ If the authorities in future do so lead, I do
not think it wrong that they should, and I respectfully agree with the
criticism of that passage which my Lord made a few moments ago in his judgment.
Thus far I
have approached the question of construction on principle, with no more than a
passing reference to some of the authorities. I now turn to consider whether
authority compels a different approach from that which, as I venture to think,
both principle and reason would suggest. I do not propose to refer to them all.
I begin with C Richards & Son Ltd v Karenita Ltd (1971) 221
ESTATES GAZETTE 25, noting that in that case Goulding J disposed of the
argument that time was not of the essence by saying that ‘he had never heard of
the equitable doctrine, under which time in certain stipulations was not of the
essence, being applied to any clause of this nature or framed in this kind of
way . . . and he could conceive of no stipulation more express to show that the
observance of a time-limit was essential.’
In Samuel Properties (Developments) Ltd v Hayek, in a
judgment affirmed in this court, Whitford J ([1972] I WLR 1064 at 1069) said:
Accepting, as
I do, that there is an equitable doctrine under which it may well be that in
certain circumstances time should not be considered to be of the essence of the
contract, the question in the end must still remain as to whether these
principles have any application to a provision of this kind, and I have come to
the conclusion that they have not.
In that same
case, in this court ([1972] 1 WLR 1296) Russell LJ, with whom Stamp and Edmund
Davies LJJ both agreed, said at page 1301:
One is
familiar with the general approach to a time schedule laid down in a contract
for sale of land, that the time schedule is taken, prima facie, as
intended to establish guide lines rather than imperative requirements: and we
were taken by counsel for the lessor, and I make no complaint of it, through a
review of a number of authorities and he invited us to adopt language quite
plainly limited to cases quite different from the present case as being general
statements of principle applicable to the present case.
Then, after a
reference to Stickney v Keeble, the Lord Justice went on:
Far too
often, in my experience, attempt is made arguendo to apply to a situation words
used in a previous judgment when the situation cannot have been in mind of the
judge and is one to which the words used were never directed.
Later, at page
1302, after setting out the argument for the appellants in that case, Russell
LJ said:
I am not
myself impressed by these arguments: the right or privilege of exacting an
additional rent was conferred by the bargain between the parties as an express
option which would be effective if a condition precedent was complied with: it
could be equated with an offer by the lessee to pay an increased rent only in
certain circumstances which it lay in the power of the lessor unilaterally to
bring about, which offer was not accepted in those terms.
I do not read
the judgment of this court in that case as applicable only to a case where the
lessors’ rights were expressed as an option. The fact that that word was used
was a compelling reason for treating the time limits (again to quote Russell
LJ) as ‘mandatory and inflexible.’ The
lessors lost; the lessees won. Kenilworth Industrial Sites Ltd v E C
Little & Co Ltd [1974] 1 WLR 1069, affirmed in this court [1975] 1 WLR
143, was much relied upon by Mr Francis, for that case was decided in the
lessors’ favour. Language supporting a distinction between ‘option’ and
‘obligation’ was first used by Megarry J at page 1071 of the report at first
instance; but if I may say so, and as indeed my Lord pointed out during the argument,
the phrase in the context in which it was used was entirely correctly used in
connection with the clause which was then before the court. The lease there in
question contained a proviso which, what-ever the position might have been
without it, clearly showed that the time-limits were not mandatory. Moreover,
on the view taken in this court, this was what in argument was called a ‘gap’
case; that is to say, there would have been no rent payable for the period in
question if the time-limits had been strictly adhered to, unless of course an
implication that the earlier rent continued payable was made, an implication
which this court was not prepared to make in that case. Whether any different
view might have been expressed on the question of implication had this court
been referred to the earlier but then unreported decision of another division
of this court in Stylo Shoes Ltd v Wetherall Bond Street W1 Ltd,
to which I have already referred, is not material. In the latter case this
court felt no difficulty in filling the ‘gap’ by implying such a term, but of
course there was there no stipulation akin to the proviso in the Kenilworth
case.
I see nothing
in the three decisions of this court, two decided in the lessees’ favour and
one (on very special wording) in the lessors’, which compels a different result
from that which both principle and reason suggests, or compels the adoption of
the strict dichotomy between ‘option’ and ‘obligation’ in these cases and the
adoption of one label or the other. It is to be observed that Lord Salmon in
the Stylo case uses the phrase ‘option-type.’ I think he, like Russell LJ in the Samuel
Properties case, was referring to option or option-type cases by way of
analogy rather than for the purpose of exhaustive classification. It remains to
consider the decision of Goff J in Accuba Ltd v Allied Shoe Repairs
Ltd [1975] 1 WLR 1559, decided a few weeks before the Mount Charlotte
case but not referred to by Templeman J, though it was referred to by Graham J
in the Cheapside case. Mr Balcombe argued in the latter case, as before
us, that the Accuba v Allied Shoe Repairs case was wrongly
decided. Graham J expressed no view upon that question, but rightly said that a
decision upon the construction of one document did not govern the construction
of another. The main criticism of the decision in Accuba v Allied
Shoe Repairs (and I leave aside certain criticisms of detail made by Mr
Balcombe) was that the learned judge adopted a hard and fast distinction
between ‘option cases’ and ‘obligation cases’ and elevated that phrase of
Megarry J, entirely correct in its context, to a rule of law. With profound
respect to the present Lord Justice, I think this criticism is justified,
though one greatly sympathises with his attempt to rationalise the authorities.
I am inclined to think that unless the decision can be supported on other
grounds, it must be treated as wrongly decided.
Applying the
principles I have endeavoured to state to clause 3 and the schedule in the
present case, which my Lord has read in full and which I will not repeat, I
have reached the clear conclusion that the stipulations as to time were here
(to repeat Russell LJ’s phrase) ‘mandatory and inflexible’ and that section 41
of the Law of Property Act has no application to them. I would therefore
dismiss this appeal. It will be seen that my reasons for so doing are wider
than those of the learned Vice-Chancellor, who decided this case on the
narrower ground that the appellants’ rights were on the same footing as an
option and that therefore Russell LJ’s judgment in Samuel Properties
(Developments) Ltd v Hayek could be directly and immediately
applied. If I were wrong in my conclusion as to the true principles to be
applied to the construction of the clauses in this agreement, I would in any
event, like my Lord, have agreed with the reasoning of the Vice-Chancellor and
would have decided this case against the appellants on the narrower ground upon
which the case was decided by him. Our decision, if correct, involves that in
the future far greater care must be taken over the drafting of these rent
revision clauses than in the past, and that as regards those already agreed,
landlords must ensure that stipulations as to time are timeously complied with.
In future they cannot say that they have not been warned of the likely
consequences in many of these cases if they fail so to do. Further, even if it
is too optimistic to hope that our decision may avoid some of the litigation
which has taken place on this subject in the past, one may at least hope that
in future it will not be necessary for counsel laboriously to traverse an
ever-increasing number of decisions at first instance in order to invite this
court to consider whether ‘this case’ is like ‘that case.’
It only
remains to thank counsel for their careful arguments, as well as for the
unending supply of photostats of all these decisions, and the respondents’
solicitor (if I may say so) for his splendid note of the Vice-Chancellor’s
judgment, which has amply filled the gap left by the failure of those concerned
to see that a shorthand note was taken of the judgment appealed from. I would
dismiss the appeal.
BROWNE LJ: I
agree that this appeal should be dismissed, for the reasons given by my Lords.
I hesitate to add anything, but I think that in deference to Mr Francis’s most
interesting argument I should state my own reasons, even though they are in
substance the same as those of my Lords. If there were no authorities, and no
equitable doctrine about time not being of the essence of contracts, I should
think this a plain case. I need only refer to the main lease of August 31 1962,
the effect of the supplemental lease of September 29 1967 being identical. By
clause 2 of the main lease, the demise was for 99 years from the date thereof.
Clause 3 provides that: ‘The lessee shall pay to the corporation during the
period from the commencement of this lease’–that is, August 31 1962–‘until
January 1 1963 a peppercorn (if demanded) and thereafter until the expiration
of a period of 10 years from the commencement of this lease’–that is, until
August 31 1972–‘the yearly rent of £900 and thereafter during the residue of
the said term the yearly rent of £1,000 plus any additional rent payable under
the provisions contained in the schedule hereto.’ Pausing there, it seems to me clear so far
that if no additional rent becomes payable under the schedule, the rent is
£1,000. I understood Mr Francis to accept that if nothing was done under the
schedule, the rent would be £1,000; but anyhow, I think this is the position.
This is therefore not what was called in the argument a ‘gap’ case; that is, a
case in which no rent at all would be payable in respect of the later part of
the term unless the rent review provisions could be operated. I cannot accept
Mr Francis’s submissions that ‘the decisive clause is the schedule,’ nor that
‘the effect of the schedule is not correctly set out in clause 3.’ The two must of course be read together.
Reading them together, this is in my view still not a ‘gap’ case.
My Lord has read
the schedule, and I need not read it in full again. Read literally, I think it
clearly requires the ‘current rack rent’ from which the actual rent is to be
calculated to be ascertained during the year immediately preceding September 1
1972. It provides that: ‘During the year immediately preceding September 1 1972
. . . the corporation and the lessee shall agree or failing agreement shall
determine by arbitration the . . . then current rack rent’–that is,
during the year preceding September 1 1972–‘ . . . and one quarter of the sum
total so ascertained or £1,000 (whichever is the greater) shall be the rate of
rent reserved by this lease in respect of the then next succeeding
relevant period’; that is, the period beginning September 1 1972. I agree, of
course, that the rack rent during the year preceding September 1 1972 could in
fact be determined after the end of that year, and that the phrase that the
parties ‘shall determine by arbitration’ during that year is not apt, both
because the parties do not determine by arbitration and because the time
when the arbitrator gives his decision is outside their control. But I am
prepared to read ‘shall determine by arbitration’ as meaning ‘shall refer to
arbitration for determination.’ All the
practical and business considerations seem to me to support the view that the
words of the schedule are intended to have what I think is their natural
meaning, namely, that the revised rent is intended to be settled before
the beginning of the second 10-year period in respect of which it is to be in
force. Obviously, the landlord will want to know what his rent is going to be.
Equally, the tenant will want to know. There is no break clause in this
particular lease, but if the tenant found that the rent was more than he could afford
to pay, he might well want to sell the lease, and he obviously could not decide
whether to sell, and neither he nor any prospective purchaser could decide at
what price, until the rent for the second 10 years was known. Further, the
result of the decision of this court in C H Bailey Ltd v Memorial
Enterprises Ltd [1974] 1 WLR 728 might be that if the revised rent could be
determined after September 1 1972, it would relate back to September 1 1972 and
so might retrospectively impose a considerable additional liability on the
tenant.
Mr Francis
accepts that there is some essential time element in these provisions, because
he accepts that the new rent must be determined ‘within a reasonable time’
after the specified time. I think that such a construction would produce
uncertainty and difficulty about what is a ‘reasonable time.’ But Mr Francis submits that there is a
general rule of equity applicable to all contracts, and now applicable also at
law because of section 41 of the Law of Property Act 1925, that time is not of
the essence of any contract unless the case falls within certain recognised
exceptions. I should
but for the purposes of this case I am prepared to assume, without deciding,
that it is right. Even so, in my view, rent revision clauses fall within one of
the recognised exceptions. I agree on this point with what Goulding J said in C
Richards & Son Ltd v Karenita Ltd (1971) 221 ESTATES GAZETTE 25,
and with what Whitford J said in Samuel Properties (Developments)
Ltd v Hayek [1972] 1 WLR 1064 at 1069, in the passage which my Lord,
Roskill LJ, has already quoted. Mr Francis in argument referred us to Halsbury’s
Laws of England 4th ed vol 9, in the title ‘Contracts,’ first to para 481
at p 338, which says this:
The modern
law, in the case of contracts of all types, may be summarised as follows. Time
will not be considered to be of the essence unless . . . (2) the nature of the
subject-matter of the contract or the surrounding circumstances show that time
should be considered to be of the essence.
Then para 482,
part of which Roskill LJ has already quoted, goes on:
Apart from
express agreement or notice making time of the essence, the court will require
precise compliance with stipulations as to time wherever the circumstances of
the case indicate that this would fulfil the intention of the parties.
Then there
follows a sentence which my Lord, Roskill LJ has already quoted. My Lord,
Buckley LJ, has already quoted from Fry on Specific Performance, and
indeed Roskill LJ has too. I will not repeat the quotations, but I refer
particularly to para 1075, with its reference to ‘the real intention of the
parties,’ and to para 1081, which my Lord, Buckley LJ, has quoted. For the reasons
already given, I think that the practical and business circumstances
surrounding a rent review clause will normally show that the intention of the
parties is that time is to be of the essence of the contract, so that the court
will approach such a clause at least with a leaning towards giving it such a
construction. Of course, each case must depend on the construction of the
particular clause in question, so that where (for example) there is a ‘gap,’ as
the court construed the clauses in Kenilworth [1974] I WLR 1069, [1975]
1 WLR 143, and Accuba [1975] 1 WLR 1559, the court may construe the
clause as not making time of the essence. It is not necessary in this case to
consider or try to resolve the possible inconsistency between the decisions of
this court in Stylo Shoes (1974) 237 ESTATES GAZETTE 343 and Kenilworth
[1975] 1 WLR 143 as to the existence of a ‘gap’ in those cases.
As to the
suggested dichotomy between clauses of option and clauses of obligation, I
agree with my Lords that in the present context this is a false dichotomy, for
the reasons they have given. In other contexts it may of course be essential to
decide whether an agreement is an option, giving a right to one party which he
can choose whether or not to exercise, or whether it imposes an obligation on
one or both parties, but I do not think this is an exhaustive test in relation
to rent review clauses. For example, in Imperial Life Assurance Company of
Canada v Derwent Publications (1972) 227 ESTATES GAZETTE 2241, the
clause provided that the rent should be ‘automatically revised.’ In Samuel Properties (Developments)
Ltd v Hayek [1972] 1 WLR 1064 and 1296, to which my Lord has
referred, the clause was expressed as an option, with a condition precedent as
to notice, and this court put its judgment on that basis, which was enough for
the decision of that particular case. In my view, that case does not decide as
a matter of general principle that time cannot be of the essence of a rent
review clause unless the clause is expressly or in substance an option to the
landlord. Nor do I think that the Kenilworth case lays down any such
general principle. Megarry J and this court took the view that on the
construction of the clause in that case there was a ‘gap,’ and it seems to me
that the proviso to that clause in itself made it impossible to say that time
was of the essence. I agree with my Lord, Buckley LJ, that C H Bailey Ltd
v Memorial Enterprises Ltd does not affect the present case. To say that
the test is whether the clause makes time of the essence or whether it is mere
machinery is only to re-state the problem to be solved. I think that the
decision in Accuba can be supported on the ground that it was a ‘gap’
case, but so far as it goes further and relies on the option/obligation
dichotomy, I do not agree with it.
It all comes
back to the construction of the particular clause so as to ascertain ‘the real
intention of the parties.’ In the
present case, on the construction of clause 3 and the schedule in the light of
the surrounding circumstances, time was in my judgment of the essence of this
rent review clause and the decision of the Vice-Chancellor was right. If,
contrary to my view, the option/obligation dichotomy is the right test, I
should, like my Lord, be prepared to hold that the Vice-Chancellor was right in
holding that this case fell by analogy on the ‘option’ side of the line, for
the reasons he gives. As I have said, I would dismiss this appeal.
The appeal
was dismissed with costs. Leave to appeal to the House of Lords was granted.
