Landlord and tenant — Construction of imperfectly drafted rent-review clause in lease of office premises — Premises let to defendant society adjoined premises owned by them — The lease contained a provision that at the end of the term (of 42 years) the society would reinstate interior walls dividing the demised premises from the society’s adjoining premises — The rent-review clause provided for the open market rental value to be ascertained on the basis of a lease for seven years (consisting of the review period) of the original premises as a ‘developer’s shell’ — The review clause, although partly taken from a form in the Encyclopaedia of Forms and Precedents omitted a number of usual provisions — There were two points of construction before the court — The first was whether the rent payable with effect from the start of each review period should be calculated by reference to the market value at the date of the actual determination of the reviewed rent — The landlord contended that this was the true construction; the tenants submitted that the correct valuation date was the beginning of the review period — The judge decided this point in favour of the tenants, distinguishing the cases of London & Manchester Assurance Co Ltd v G A Dunn & Co and Touche Ross & Co v Secretary of State for the Environment — The second point was whether the rent should
The plaintiff
in this case, which raised preliminary issues on the construction of a lease,
was the landlord, Charles Vernon Webber, the defendants being the tenants, the
Halifax Building Society. The subject premises were at 61-63 Oxford Street,
Weston-super-Mare, in the County of Avon.
David
Neuberger (instructed by Macdonald Stacey) appeared on behalf of the plaintiff;
G J S Hill (instructed by Allen & Overy) represented the defendants.
Giving
judgment, JUDGE PAUL BAKER QC said: When I commenced the hearing of this
preliminary issue there were three points of construction arising on a lease,
but happily one of those has been disposed of by agreement during the course of
the hearing, so that leaves two for me to deal with. They arise on the
rent-review provisions in a lease dated May 7 1971 of which the subject
premises were 61-63 Oxford Street, Weston-super-Mare, in the County of Avon. At
the time of the lease they were, or had been, the offices of some estate
agents. They were old premises. I think the word ‘Dickensian’ was used by one
of the witnesses before me, and indeed, there is some colour for that in the
photographs that I have before me. At all events it was a century old and when
first erected it was used as a house. Next door at that time — 1971 — was the
Halifax Building Society, the tenants in this case, and they took the lease of
this with a view to extending their premises into these premises, and in fact
they have made one unified set of offices of the two premises, as is shown in
one of the photographs.
I am concerned
in this case with the original parties to the lease to which I now turn, the
landlord being a Mr Charles Vernon Webber and the tenant being the Halifax
Building Society. There are some provisions which I must refer to in this
lease. The premises, which I need not further describe or particularise, are
defined in clause 1(3) and a schedule and are shown on a plan and the photographs
which I have mentioned. Coming to clause 2 we come to the demise:
I m Landlord
HEREBY DEMISES unto the Society the demised premises to hold the same unto the
Society from the twenty-fifth day of March One thousand nine hundred and
seventy one for a term of Forty-two years yielding and paying therefor unto the
Landlord during the said term the yearly rent hereinafter mentioned such rent
to be paid without any deduction by equal quarterly payments in advance on the
usual quarter days in every year the first of such payments to be due and
payable on the twenty-ninth day of September One thousand nine hundred and
seventy two as hereinafter provided.
Then one goes
on to clause 3(i):
The YEARLY
rent payable hereunder shall be as follows:- (a) In respect of the period of
the term hereby created ending on the twenty-ninth day of September One
thousand nine hundred and seventy two the sum of One Pound (it demanded).
So that was a
rent-free period and of course links in with September 29 1972 in the previous
clause.
To anticipate
a little, the rent for the period after September 29 1972 was £1,500 and
therefore the rent-free period, assuming that the rent had been estimated at
that throughout, was £2,250 in cash terms.
Clause
3(i)(b):
In respect of
the period of the term hereby created from the twenty-ninth day of September
One thousand nine hundred and seventy two to the twenty-fifth day of March One
thousand nine hundred and seventy eight the sum of One thousand Five hundred
Pounds
and then (c)
(and this is important):
For the
residue of the said term at a rent to be determined and when determined to be
payable at the expiration of each seven years of the term hereby created
(hereinafter called ‘the Review Periods’) calculated from the twenty-fifth day
of March One thousand nine hundred and seventy-one and in accordance with the
provisions hereinafter contained in Clause 4 hereof.
I shall come
back to that later.
Moving on for
the moment to clause 4, which is the review provision, the preliminary part
says this:
THE reviewed
rent
that is not an
expression, I think, that has been defined anywhere in the lease
(payable by
the Society during the Review Periods as hereinbefore provided) shall be
determined in manner following that is to say it shall be whichever shall be
the higher of the first reserved rent of One Thousand Five Hundred Pounds and
the open market rental value of the demised premises for the review period.
So that
preliminary part deals with what is a very common sort of provision — that the
reviewed rent shall only take effect if greater than the subsisting rent.
It then goes
on:
provided that
and it is hereby agreed as follows:- (i)
and this again
is an important provision for the purposes of these issues
The
expression the open market rental value as aforesaid means the sum in relation
to the review period determined in manner hereinafter provided as being at the
time of such determination the annual rental value of the demised premises in
the open market on a Lease for a term of Seven Years certain (consisting of the
review period) with vacant possession at the commencement of the term but
calculated on the basis of the rental value of the original premises as shown
on the said plan and in the said photographs annexed hereto as if such building
was a ‘developers shell’ meaning to say that a tenant would be required to
provide his own shop front and interior fixtures and fittings but at the same
time having regard to the fact that the Landlord has contributed a sum of Two
Thousand Two Hundred and Fifty Pounds by way of rent abatement for repairs to
the demised premises at the commencement of this Lease And Also upon the
supposition (if not a fact) that the Society has complied with the obligations
as to repair and decoration herein imposed on the Society.
Well that
concludes what there is of the review provisions. Then the lease goes on to
clause 5 (or I should say the first of the clauses numbered 5 in the lease),
which contains the tenants’ covenants. These are in fairly standard form and
there is not much of it which I need refer to. I should notice perhaps that in
clause 5(vi) there is a proviso. It was obviously contemplated that the society
would expand in the manner I have described, but there was a proviso that at
the end of the term the society would reinstate the interior walls dividing the
demised premises from the society’s adjoining premises at 59 Oxford Street.
The next
clause I should notice in this connection is subclause (viii) of clause 5. That
was the usual clause against alterations:
Not without
the written consent of the Landlord first obtained such consent not to be
unreasonably withheld (and then only in accordance with plans previously
approved by the Landlord): (a) to build or place at any time on the demised
premises any buildings structure or erection (b) to make or suffer to be made
to any buildings structure or erection forming part of the demised premises any
alterations or additions either internally or externally or to cut or injure
any of the outside or inside walls floors or joists or to carry out or suffer.
. . .
I do not think
I need read any further into that clause, which goes on to planning matters.
I think the
only other clause I need notice (and then only in passing) is that subclause
(xii) restricts the use of the premises to offices. There is the usual
provision about illegal or immoral purposes, which is not material.
On the face of
it the drafting of that lease leaves much to be desired. I do not think it
would be too strong an expression to say that the drafting was slipshod: one
sees that for a start in the actual numbering of the clauses. As I have already
mentioned, there are two clause 5s; in both clauses 3 and 4 there are
subclauses (i) but no subclauses (ii), and matters of that sort. Clause 4 comes
from a standard form (what there is of it) of rent-review clauses in the
well-known publication The Encyclopaedia of Forms and Precedents, 4th
ed, in the standard form for office lettings. The material provision is at p
841, para 1, and it is quite plain that much of that wording, although not all
of it, comes from that standard form. Para 2 (and we do not have this in the
lease at all) deals with the manner of making a review, dealing with such
points as the initiation of it and the times at which various steps are to be
done and who is to do the valuation and matters of that sort. They are very
common matters. Obviously none of that, it being omitted from the lease that I
have got here, can be introduced as a matter of construction, and no one has
suggested that it should be.
I think before
parting with the standard form I should notice that in the standard form
reddendum (which is 10 pages earlier in the form) there is a clause simply ‘To
pay during the term the reserved rents and the further or additional rents hereinafter
mentioned at the times and in the manner herein provided.’ There is nothing in
that clause, contrary to what we have in this lease which I have to consider,
about determination of the rents. It is merely that they are to be paid at the
times and in the manner hereinafter provided.
With that
introduction I can come to the first issue, which is formulated in this way:
IT IS ORDERED
that the following issue be determined by the court, whether upon the true
construction of the lease the rent payable thereunder with effect from the
start of each review period as therein defined is to be calculated — and then I
pass over the first issue which has been agreed now — (b) By reference to the
market value of the premises and other comparable premises as at the date of
the determination of the reviewed rent and not at any other date.
I should say at
once that the review has not yet taken place for the 1978 review — the period
of seven years beginning at 1978.
The landlord’s
position is that, as and when that valuation is made, that is the date by
reference to which the lease for the term of seven years referred to in clause
4(i) is to be valued. So it is to be valued at current rates. The defendants’
position is that, on the true construction of this lease, the review date is to
be at the beginning of the review period. This struck me at first as a
difficult and obscure point, but I have heard some excellent argument from both
counsel in this case and the result of that has enabled me to come to a clear
conclusion in the matter, and perhaps I should say at once that I am with the
defendants (tenants) on this matter.
I approach it
in this way. Going back to clause 3(i) we have this (I have read the clause
out, but I must refer to it again): it does provide for the determination to
some extent. It says: ‘For the residue of the said term at a rent to be
determined and when determined to be payable at the expiration.’ By ordinary
grammatical construction, ‘at the expiration’ refers to the rent to be payable.
It is not entirely apt for that because the rent is not payable at the
expiration; it is payable as from the expiration and it is paid throughout the
whole period quarter by quarter as it falls due. But it is apt, as I see it
(although not wholly practicable), as a matter of grammar and logic that it
could refer to the determination of the rent, which is a once-and-for-all
operation at that date, that is to say, at the expiration of the preceding
seven-year period. The fact that it deals with both the determination and the
payment of the rent is, I think, underlined by the concluding words of the
paragraph — ‘and in accordance with the provisions hereinafter contained’. That
obviously refers not to the payment but to the determination of the rent (that
is what clause 4 is partially concerned with) and the fact that it is the word
‘and’ means that ‘to be determined’ is qualified in at least two ways. It is
qualified ‘to be determined . . . at the expiration . . . and in accordance
with . . .’. So basically on that ground I find that that is a clear guidance
in this clause to the date of the expiration of the preceding period as being
the date of the termination of the rent for the succeeding period.
As I say, it
is not wholly practicable to require the determination to be done on that
precise date, but it might be, and I also notice as regards this that there is
nothing about the manner of the determination provided there or anywhere else.
The parties have agreed, in default of any other machinery provided in the
lease, that the court has to be appealed to to make the determination, but that
is as a last resort. The lease does not expressly mention, nor in my judgment
can it be contemplated, that the court should be appealed to as the first
resort, and the manner of determination could be either direct agreement (a
very common provision) or some indirect agreement such as reference to a
surveyor to work it out, or an arbitrator, or, as a last resort, the court, but
only faute de mieux. That is on clause 3(i).
Now I must
move to clause 4 and see what that can tell us about the matter. The linchpin
of the landlord’s position in this issue is the words: ‘at the time of such
determination’ in 4(i) as indicating that the expression ‘open market rental’
means the sum ‘determined in manner hereinafter provided as being at the time
of such determination the annual rental value’. The purpose of this clause is
not prima facie to lay down when the determination is to take place: it
is concerned to define the subject-matter of the determination — what it is
that has to be determined. The timing and manner is to be provided elsewhere.
‘Manner
hereinafter provided as being at the time of such determination’ refers to the
determination provisions which are to be found elsewhere. As we have seen, the
lease is defective and they are not ‘hereinafter provided’, but I am satisfied
that the provisions are to be found elsewhere in the lease, namely in clause 3.
Dealing with
the various supporting arguments put forward on both sides in relation to this
clause, it was said that one of the difficulties is that what has to be valued
is a lease for seven years certain consisting of the review period. That to my
mind points very strongly in favour of the tenant’s position in this matter —
that that seven years is fixed at the beginning of the relevant review period.
It is not a lease for seven years at the time of determination, but is a lease
for a particular seven years fitted into there. As it happens, the seven years
is almost up, and it was said: ‘Well, it can still be valued at the present
date, one year away from the next review period. It will only be one year to
value, but of course it will be valued, not as a one-year lease, but as a
one-year lease with the 1954 Act protection. That will not diminish it very
much and, as for its being seven years, well, it is quite common to have a
back-dated lease from the time it takes effect’, and indeed, of course, we have
it in this very case, where the term starts in March and the lease is dated the
following May. But that to my mind is not a proper way of looking at this, if
only because it further contemplates not just a lease for seven years certain
but a lease with vacant possession at the commencement of the term; that the
lease to be valued is valued as if it was then in possession and the rent is to
start running as from that date. It is contemplated that as from that date
there will be a lease with a rent right from the time, and that to my mind, far
from indicating that the date of determination is when the determining body
(whether it be a surveyor or whether it be an official referee or a judge) gets
around to it, points in exactly the opposite direction.
It was said
then that there will be difficulties in ex post facto valuation. That of
course is true. It is much easier to value at a current date with comparables,
but there is nothing impossible about it. It is frequently done and there is
some authority to indicate how that should be accommodated. Then it is said:
‘Well, the lessee can initiate the procedure here,’ and in some of the cases
that is produced as an argument in favour of a later valuation, but there
again, having regard to what I see as the clear words of the matter, that does
not seem to me an argument of great substance.
So for those
reasons I am clearly of the opinion that the determination is to be measured,
and the valuation to be done, as from the beginning of each review period as it
comes along.
My attention
was rawn to a number of authorities, to most of which I shall make some brief
reference, but of course, as was rightly said, these are of very limited value
on points of construction and in none of them, I think it is right to say, was
the present issue the matter for decision. The highest was that the date of
determination was a matter of assumption against which the judges made their
decision.
The first case
was Accuba Ltd v Allied Shoe Repairs Ltd [1975] 1 WLR 1559, but I
do not propose to take up time with that case, because, as it happens, the
assumption made there was perfectly consistent with the finding that I have
made here. More important, in the present connection, is the case of London
& Manchester Assurance Co Ltd v G A Dunn & Co which was
reported both before Peter Gibson J in (1981) 262 ESTATES GAZETTE 143, and also
on appeal in (1982) 265 ESTATES GAZETTE, starting on p 39 and continuing on p
131, the Court of Appeal consisting of Lawton, Oliver and Slade LJJ. There were
a number of points for decision. It was plain on the construction of the
relevant review provision that there was an opening date for an initiating
notice in that case. It was doubtful whether there was a closing date (that was
one of the issues), and, if there was a closing date, time was of the essence,
that closing date having been missed. Then there were issues of estoppel. That
bare recital of the issues shows that there was considerable opportunity for
differences of view, and, if I may say so with all due deference, the lords
justices took very full advantage of those opportunities, but the point I am on
at the moment is that the time of determination in that case was assumed to
mean the time at which the determination was in fact made. All the judges
assumed it, but I think it appears most clearly from Slade LJ’s judgment at p
132 in the middle of the second column:
It has, I
think, been common ground throughout the argument in both courts that, in view
of the wording of clause 5(1), there is no question of the surveyor, if and
when appointed, being required to make an ex post facto determination of
the rent as at the commencement of the relevant review period. He is
required to determine it in accordance with the clause 5(1) formula, but
otherwise in the light of market conditions prevailing when he makes his
determination.
There are
passages in the other judgments which bear that out. So that was a matter of
common ground: it certainly was not a matter of decision.
Going back to
Peter Gibson J’s judgment, where the clause is set out in full, one sees that
the corresponding part is almost in identical wording and has evidently been
taken from the same precedent as the one that I have referred to earlier, but
of course it has the very elaborate provisions in it which are omitted from the
lease before me. But what is more to the point for this purpose is that in the
reddendum there is nothing at all comparable to clause 3(i), giving some
indication of the time for determination that we have here. The relevant
provision is this: ‘Yielding and paying’ and so forth ‘during the next five years
of the term commencing on December 25 1977 (hereinafter called ‘the first
review period’) the rent payable by the lessee shall be whichever is the higher
— £18,000 per annum and the open market rental of the demised premises for the
review period’. Then, ‘Such reviewed rents to be determined in accordance with
the provisions in that behalf.’
So there is
nothing there comparable to a determination at a particular date or anything of
that nature.
Touche Ross
& Co v Secretary of State for the
Environment (1982) 265 EG 982, [1983] 1 EGLR 123 is another case which I
think I should notice. Again it is a decision of the Court of Appeal; in this
case comprising Lawton, Griffiths and Dillon LJJ, and it proceeded on the same
basis, that the time of determination was when actually the determining
surveyor or arbitrator got round to determining it. What had happened was that
there was a late reference to the surveyor (late in the sense that it was
outside the time for reference to the surveyor that the clause had provided)
and the issue was whether time was of the essence, which His Honour Judge
Finlay, sitting in this court, I think, had said it was, but on which the Court
of Appeal (in this instance unanimously) took a different view. As I say, the
whole matter is one of assumption only (there is certainly no decision on the
point), but we have here a different type of clause. What I note about it is
that in the definition of market rack rental for the purposes of this clause it
means the annual amount obtainable, at the date of agreement or determination
as aforesaid, as between a willing landlord and a willing tenant. There seems
to be a very strong context in that case for the assumption made, but here the
context, there being clause 4(i) referring to provisions elsewhere for the
determination and linking them in, is that one is compelled to look elsewhere
for it. Then one comes, as I have indicated already, to clause 3. I think that
deals with the authorities.
Now I must go
to the second point. I am asked to rule on whether the rent is to be calculated
on the basis
that the hypothetical lease whereunder the rent is to be determined is assumed
to be subject to the same terms and conditions (save as to rent) as the terms
and conditions of the lease.
That general
question in fact boiled down during the course of the hearing to a very narrow
point. It is common ground that one approaches a rent-review clause of this
sort, which talks of a hypothetical lease (the lease for seven years but which
does not mention terms) which is on the same terms as the existing lease, save
as to rent, and of course save as to any provision which is necessarily
excluded by the hypothesis and by the matters referred to in the review
provision. That seems to emerge from the decision of the House of Lords in Ponsford
v HMS Aerosols Ltd [1979] AC 63, but I do not think I need refer to it
in any particularity because, as I have said, it is common ground between
counsel in this case that that is the proper approach to the matter.
The argument
has turned again on a point of construction. I think this is the way it is put:
the terms of the review provision (clause 4(i)) leads one to the proposition
that the covenant against alterations (which I have read out already) should be
modified so as to prohibit absolutely amalgamation with the adjoining premises.
It is said: ‘Well, the relevance of that is that, if you could have that
amalgamation, then the next-door people might pay a special rent, and that is
what the valuers have to disregard.’ With the covenant as it is, of course it
prohibits alterations, but it is qualified not to be unreasonably withheld and
there is authority that that does not prevent an amalgamation with adjoining
premises as a matter of principle; it may on the particular facts of the case,
but not automatically as a matter of general principle. The landlord is
normally protected in those circumstances by a covenant as we have here to
reinstate and separate out the premises at the end of the term.
I think the
argument was this. Mr Hill for the tenants argued this and he put it this way.
It is clear from clause 4 that the parties, by importing a developer’s shell,
which I mentioned, intended the premises to be valued as a separate unit. I can
accept that part of the submission, but then at (e) he submitted that ‘it was
wrong to import into the terms of the lease any provision which destroys its
separateness’. So that what one fastens on to is the fact that it has to be
valued as a developer’s shell, the argument, as I understand it, meaning that
therefore it has to be valued as a developer’s shell ignoring any possibility
of amalgamation, and that must be prohibited. I am quite unable to accept that
view of the matter. As it seems to me, the purpose of the developer’s shell,
and the £2,250 with which it is linked, is simply that the valuers are not to
value any improvements carried out by the tenants, save in so far as the
landlord has contributed to them. I am putting it very broadly and I am not
concerned to determine exactly how it operates, but that is what it is for and
it is limited to that. When they value it as a shell they value it without the
fixtures and fittings which the tenant has put in there at his expense. They
ignore all that, except in so far as the landlord has enabled that to be done
by waiving his rent for a period, and that sort of thing. They value that, but
of course they value it on the terms of the lease — that, having got the shell,
it is then open to the tenant obviously to fit it out in one way or another,
and fit it out in a manner which is consistent with the covenants in the lease.
It certainly does not mean that it is to remain as a shell throughout the
period; nor can I see any ground for saying that it is to remain as a separate
but fitted premises, and therefore on that point I am in favour of the landlord
and I will declare accordingly on that issue.
