Landlord and tenant — Rent-review clause in lease — Lease containing both rent-review clause and provisions for tenants to determine lease before expiration of term — Landlords claimed to be entitled to refer a demand for increased rent to an independent surveyor under provisions in the lease after the date specified for such referral — Whether time was of the essence for this purpose — Whether rent review machinery and tenants’ option to determine lease were interlinked so as to displace the prima facie rule laid down in United Scientific Holdings v Burnley Borough Council that time was not of the essence — Decision in Coventry City Council v J Hepworth & Sons Ltd followed — Tenant should be able to know whether the landlord is in a position to obtain an increase of rent before he (the tenant) is out of time for exercising his option to determine the lease — Held that time was of the essence in the present case and the landlords were debarred from referring the rent to the independent surveyor for determination
The
plaintiffs, William Hill (Southern) Ltd, were the landlords, and the
defendants, Govier & Govier, a firm of solicitors, were the tenants. The
action was brought by the plaintiffs for a decision on the construction of the
provisions of a lease (in fact a subunderlease) of office premises.
Joseph C
Harper (instructed by Titmuss, Sainer & Webb) appeared on behalf of the
plaintiffs; G W Jaques (instructed by Govier & Govier) represented the
defendants.
Giving
judgment, MR EVANS-LOMBE QC said: In this case the question for the court’s
decision is the true construction of a lease dated January 19 1981 made between
the plaintiffs William Hill (Southern) Ltd who are the landlords and the
defendants H D Govier and S C G Govier who are a firm of solicitors and who are
the tenants. The lease is in fact a subunderlease but I will refer to it in
this judgment as ‘the lease’. I will refer to the plaintiffs and the defendants
as ‘the landlords’ and ‘the tenants’ respectively.
By the lease
the landlords let to the tenants two second-floor offices and one first-floor
office with entrance hall for a term of 14
which is headed ‘Rent and Rent Review’. The material provisions of this clause
are as follows:
4. Rent and Rent Review
(1) The yearly rent is £325 per annum from the
29th day of September 1977 to the 3rd day of November 1978 and thereafter the
yearly rent is £800 per annum (subject to the provision for review mentioned
below) . . .
(2) The rent shall be reviewed at the 25th
December 1982 and at the 25th December 1987 each of which such review dates are
hereinafter called ‘the Review Date’ and from each such review date the yearly
rent shall be the greater of:¾
(a) the rent hereinbefore reserved
(b) the rent payable following any previous
review
(c) the best rack rent of the demised premises
obtainable in the open market. . . .
If the
landlord and the tenant shall fail to agree such rent 9 months before the
review date then either party may within a further period of one month refer
the question of the amount of rent to be determined on the foregoing basis to a
chartered surveyor nominated in default of agreement between the landlord and
the tenant by the President for the time being of the Royal Institution of
Chartered Surveyors on the application of the landlord . . . and in the
meantime the tenant shall continue to pay rent at the same rate as before the
review date and any increased rent following the review date shall be paid in
one sum on the quarter day next following its determination in respect of the
period from the review date until such quarter day. . . .
(3) If the tenant shall be desirous of
determining this present lease at the end either of the fifth or tenth year as
the case may be of the term hereby granted and of such desire shall give to the
landlord at least 3 months previous notice in writing in that behalf to expire
on the 25th day of December either in the year 1982 or 1987 and if the said
rent for the time being reserved hereunder shall have been paid then at the end
of each fifth or tenth year as the case may be the said term hereby granted
shall cease but without prejudice to the rights and remedies of either party. .
. .
It is to be
observed that notwithstanding the heading of the clause, clause 4 deals with
three subjects: the rent payable at the commencement of the term, the machinery
for reviewing that rent and the machinery for the tenant determining the lease
before the expiry of the term. The juxtaposition of dates by which the various
steps comprised in this machinery were to be taken is of importance. The rent
from November 3 1978 onwards is to be £800 unless reviewed. The review provisions
provide for an ‘upwards only’ review. The first line of subclause (2) is
expressed so as to make a review of the rent on December 25 1982 and December
25 1987 mandatory. It uses the words ‘the rent shall be reviewed’ on those
dates. Those dates are also the dates upon which the tenant’s notices to
determine the term in its fifth or 10th year must expire, the time of notice
being a minimum of three months. The machinery for solving what the new rent
shall be in default of agreement between the parties is that, in default of
such agreement, by nine months before the review date, either party may within
the next month refer the question of the new rent to an arbitrator (that
expression not being used in its strict legal sense). Subclause (2) clearly
envisages that the process of arbitration may not be complete by the review
date and accordingly provides for backdating of the new rent from the date when
it is determined to the review date and payment in arrear by the tenant.
Looking at the
provisions of clause 4 as a whole and without applying to those provisions any
special rules of construction which may arise from the authorities, the clause
provides a machinery that the parties should have either agreed a new rent or
put in motion the machinery for resolving their disagreement five months before
the last date upon which the tenant could serve notice to determine the lease
early. It is clear that the clause does not provide that the tenant shall know
the new rent positively before he has to take the decision whether to determine
or not. He ought to know, however, that the landlord is insisting on an
increased rent and that the question of the amount has been sent to an
arbitrator. It is highly likely that he will know the parameters of the dispute
between him and the landlord as to future rent.
I will now
summarise briefly what has happened and which events give rise to the dispute
in this case. Prior to the first review date no steps were taken by either side
to attempt to agree a new rent and there was no reference by either side. The
first indication that the landlords were looking for an increase of rent came
in a letter dated January 27 1983. The tenants’ response to that letter was
that it was by then too late to review the rent before the next review date on
December 25 1987. The reason why the tenants say that it is now too late to
review the rent is that, there being no agreement between the parties as to a
new rent, the time for referring that dispute for solution to an ‘arbitrator’ is
now passed. The landlords contend that, properly construed, time is not of the
essence of the provisions of clause 4 of the lease and, the tenants not having
taken any steps to make time of the essence, it is open to them (the landlords)
to put the machinery for review into operation. The tenants contend that,
properly construed, time is of the essence of the provisions of clause 4 and
there can be no relaxation of the dates contained in it.
In Coventry
City Council v J Hepworth & Sons Ltd (1981) 261 ESTATES GAZETTE
566, Warner J was confronted with a very similar problem. At p 568 in the
left-hand column he summarises the effect of provisions of the lease which he
had under consideration as follows:
So that
clause laid down an elaborate and precise time-table. On or before December 31
1973 the corporation might give to the tenants notice of its desire to increase
the rent in respect of the period from April 1 1975 until the expiration of the
term created by the lease, that is, roughly speaking in respect of the second
21 years of it. I shall call that a ‘rent review notice’. If the corporation
gave such a notice and no agreement had been reached by February 28 1974 (that
is within two months) there was to be a reference to arbitration. Clearly, what
was envisaged was that, in the two months before December 31 1973 and February
28 1974 there would be negotiations between the parties which would either
produce agreement on a new rent or be abortive. Then if the negotiations proved
to be abortive, the parties were given one month in which to agree upon a
single arbitrator. If they failed to do so, each must appoint an arbitrator.
The last day for doing that was April 30 1974. The provisions of sections 7 and
8 of the Arbitration Act 1950 would then apply. On or before September 30 1974
the tenants might give notice of their intention to determine the lease as from
March 31 1975, that is the day before any increase of rent might take effect.
At that time, that is on September 30 1974 assuming that the corporation then
served a rent review notice, the tenants might not know precisely what the new
rent was going to be. Clause 4(3)(c) expressly envisaged that the new rent to
be determined by arbitration might not be known before April 1 1975.
Nonetheless, obviously, the tenants would, in the contemplation of clause 4(3),
be in a good position to know, by September 30 1974, at least roughly what the
new rent was likely to be. They would have been parties to the negotiations
envisaged by the clause and parties also to any subsequent arbitration. By
September 30 1974 any such arbitration would be well under way. So the tenants
would be aware of the upper and lower figures envisaged in negotiations and in
the subsequent arbitration.
Warner J was
therefore considering a lease the scheme of which was substantially similar to
the lease which I have to consider. Later in his judgment Warner J says:
The general
principle laid down by the House of Lords in the Cheapside case was
stated by Lord Diplock in these terms at p 930: ‘so upon the question of
principle which these two appeals were brought to settle I would hold that in
the absence of any contrary indications in the express words of the lease or in
the interrelation of the rent review clause itself and other clauses or in the
surrounding circumstances the presumption is that the timetable specified in a
rent review clause for completion of the various steps for determining the rent
payable in respect to the period following the review date is not of the
essence of the contract’.
The important
words there for the purposes of this case are: ‘in the absence of any contrary
indications in the interrelation of the rent review clause itself and other
clauses’.
Warner J then
goes on to quote extensively from the judgments from the House of Lords in United
Scientific Holdings Ltd v Burnley Borough Council and Cheapside
Land Development Co Ltd v Messels Service Co, both cases reported at
[1978] AC 904. I will not repeat his quotations in this judgment but they are
all relevant here. Finally at p 569 in the second column he deals with the
landlords’ arguments in this way:
Mr Cripps
submitted that it was not in every case where a rent review clause was
associated with a tenant’s option to break that time was of the essence of the
rent review clause. That is manifestly right, as the House of Lords treatment
of the Hayek case illustrates. I do not think, however, that the
features of the present case to which Mr Cripps pointed are sufficient to
negative the presumption that, where a rent review clause is linked to a
tenant’s option to break, time is of the essence of the rent review clause. The
length of the term and the fact that the lease provided for only one break in
21 years are, I think, sufficiently explained by the circumstance that it was
granted in 1953, at a time when inflation was at a much lower rate than now.
The fact that substantial sublettings by Hepworth was envisaged seems to me
neutral. The period of 9 months between December 31 1973 and September 30 1974
was, I think, intended, not to give the tenant an opportunity to serve a notice
making time of the essence, but to enable any necessary arbitration to have
been completed by September 30 1974 or at least to be sufficiently advanced by
that date to give the tenant a good idea of what the revised rent was likely to
be. Lastly I do not think that it matters that there could be no
that date.
I gratefully
adopt the approach of Warner J in my approach to this case. Earlier decisions
on the construction of other documents cannot bind a court construing a
document save where its terms are virtually the same. However, where the
documents in question present substantially the same pattern the earlier
decision can be of the greatest persuasive force to the court of construction
in the later case. Warner J’s decision in the Coventry case was affirmed
in the Court of Appeal [at (1982) 265 EG 608, [1983] 1 EGLR 119].
In the present
case, as in the case before Warner J, provisions for rent review and
determination of the lease by the tenant appear closely associated in the
lease. As I have said, the dates present a pattern which seems to indicate that
the provisions are linked. It is now clearly established by authority that the
court would almost always construe time being of the essence of provisions for
the early determination of leases. As Warner J and the Court of Appeal have
held, where such provisions are linked with provisions for rent review, prima
facie the court will construe the provisions to make time of the essence of
those relating to the review.
The question
therefore is, is there in the lease in the present case, by contrast with the
lease in the Coventry case, any feature which, notwithstanding their appearance
in the same clause, may indicate that the provisions for review and
determination are not linked? And,
secondly, are there features of the case which, notwithstanding linkage, leads
the court to a conclusion contrary to Warner J’s prima facie rule?
The main
thrust of Mr Harper’s argument for the landlords is to contend that there was
no link between the review provisions and those for determination of the lease.
He pointed to a distinction between the provisions for review in the present
case and those in the Coventry case, namely that in the present case the
provisions of subclause (2) made the review mandatory. It therefore takes
effect without any requirement of a ‘trigger-notice’ on the landlord’s part.
The tenant’s decision whether or not to determine the lease early will not be
affected in any way by the operation of the review provision. There will be no
room for doubt as to whether a review is to take place or not. The only
question that he will need to know before deciding whether to give notice to
determine is the amount of increase, if any. Even if strictly operated in
accordance with the time schedule the tenant has no guarantee that he will know
what the new rent is to be before the time for the service of the notice is
upon him and the lease expressly acknowledges this.
Mr Jaques for
the tenants contended this was no valid distinction. He drew my attention to
the fact that, albeit mandatory, the review provisions contain a time schedule.
In particular, a fixed date is provided for the time by which the parties must
refer any dispute as to rent to arbitration. He said that although the
provisions for review were mandatory the rent did not review itself. If the
parties did not agree as to the rent and they let the time for referring their
dispute to arbitration go by, the old rent stood.
It seems to me
that where one finds, as in the present case and as in the Coventry
case, provisions for review and determination by the tenant in the same clause
with a time schedule which seems to indicate an intention by the parties that
the tenant shall know whether the landlord is seeking an increase of rent, it
is not conclusive of the question, whether time is of the essence of the review
provisions, that these provisions are automatically activated by mandatory
words in the lease or are optionally activated by provisions giving the
landlord an option whether by a certain date to serve a trigger-notice.
Obviously where a lease contains provision for a mandatory review as at a
certain date, and nothing else, time will not be of the essence of that
provision. Where a lease provides for a mandatory review and then sets up a
machinery for concluding that review which seems to be geared to providing the
tenant, either with the answer as to what the future rent shall be or with a
shrewd idea of what it should be, or at least with the knowledge whether or not
the landlord is going to ask for an increase, before he has to take a decision
whether to give notice to terminate, time is of the essence of the provisions
for review. I do not therefore see any general basis for the distinction which
Mr Harper put forward.
Mr Harper
further contended that the provisions as to time in the review machinery were
too imprecise to make time of the essence. In particular he pointed out that
the vital words in subclause (2) are ‘if the landlord and the tenant shall fail
to agree such rent 9 months before the review date then either party may within
a further period of one month refer the question . . .’ The permissive nature of the provision, he
said, militated against the court finding time of the essence. When I put to Mr
Harper that use of the word ‘may’ might be argued to indicate that the parties
were not contemplating the arbitration machinery as the only way of solving any
dispute as to future rent and that the court might retain a residuary
jurisdiction itself to determine the appropriate ‘rack rent’ he conceded that
on the authorities that argument was not open to him. It seems to me that once
that concession is made the use of the word ‘may’ ceases to be of importance.
In default of agreement the parties have the option to put in train an
arbitration within a fixed period of one month from a certain date. If they do
not take that opportunity, then the only avenue for solving the dispute
contemplated by the lease is lost and the old rent must stand. It seems to me,
in the present case, that the lease gives to the tenant the right to sit back
and watch whether or not the landlord will in the time specified refer the
question of future rent to arbitration. It matters not that there has or has
not been anything in the nature of negotiations leading up to such a reference.
Once, however, the time for referral is gone by, the tenant can decide whether
or not to terminate the lease knowing whether the landlord is in a position to
seek an increase of rent or not.
It follows
from the above that in my judgment the provisions for review of the rent and
premature termination of the lease at the instance of the tenant are in this
lease linked. I have not had placed before me any special circumstance which
may, none the less, drive me to conclude that Warner J’s prima facie
rule does not here apply. Accordingly, in my judgment, time is of the essence
of the provision requiring reference to arbitration in default of agreement of
the amount of the new rent within the month succeeding the commencement of the
ninth month before the review date. It follows that the landlords, not having
referred the question within that time, are not, in my judgment, now able to
reopen the question of what is the proper rent payable between December 25 1982
and December 25 1987 when the rent payable can again be reviewed.
