Landlord and tenant — Rent review clause — Difficulties caused by linkage with retail price index — Position when base figure of index is changed — Denominator in review formula to be altered on change of base — Judge’s formula likely to produce very strange results if a further calculation were required on a fresh change of base — Not possible to produce a sensible result on a literal application of the review formula — Means of escape provided by final part of review clause — A fair and reasonable addition to rent to be determined, if necessary, by arbitration — Appeal from judge allowed
involved the construction of a complicated and imperfectly drawn rent review
clause — The lease in question (in fact an underlease) was for a term of 99
years less 10 days from November 1 1966 — There was a ‘basic rent’ of £3,600
pa, reviewable every 21 years, the additional rent resulting from the reviews
to be calculated by multiplying the basic rent by a variable factor — The
variable factor was to have as denominator the figure of 114.3 and as numerator
the retail price index figure for the appropriate year — The explanation of the
114.3 was that it was the retail price index figure for 1966 — This arrangement
would not have caused too much difficulty if the retail price index had
continued to be published throughout the term of the lease by reference to the
same base date, January 16 1962 — Unfortunately, a revised index with a new
base was introduced in 1974 and again in 1987, although the 1987 change was not
directly relevant to the present case
below, taking account of the new index base, calculated that, instead of the
original denominator of 114.3, there should be substituted a denominator of
59.6 — The judge had argued that when the new index had been introduced in
1974, with its starting base of 100, the figure for the previous year was 191.8
— That was the counterpart for 1974 of the 114.3 figure for 1966 — Therefore,
the judge said, 191.8 became 100 in 1974 and the previous denominator of 114.3
should be multiplied by the fraction 100/191.8, which produced a figure of 59.6
objections to the judge’s formula were that it produced a figure of 59.6
whereas the published base figure was 100 and that it would bring about an
unacceptable result on a second rent review — The only course available to the
court was to invoke the fall-back provision at the end of the rent review clause
and give it a liberal interpretation — This provided that if the retail price
index ceased to be published or if any event should happen which made it
impossible to implement the above provisions for calculating the rent, then the
additional rent should be taken to be the amount by which a fair and reasonable
rent at the appropriate time exceeded £3,600 — In the event of disagreement on
this amount, the matter was to be determined by arbitration — Declaration
accordingly that the rent should be determined on this basis by arbitration —
Appeal allowed
The following case is referred to in this
report.
British Gas Corporation v Universities
Superannuation Scheme Ltd [1986] 1 WLR 398; [1986] 1 All ER 978; (1986) 52
P&CR 111; [1986] 1 EGLR 120; 277 EG 980
This was an appeal by the defendant
tenants, Motorway Tyres & Accessories Ltd, from the decision of Judge Roger
Cooke, at the
review clause of a lease of premises at Craggs Street, Middlesbrough, the
landlords being Wyndham Investments Ltd.
Alan Steinfeld QC and Stephen Moverley
Smith (instructed by Oswald Hickson Collier & Co, agents for Anthony
Collins & Co, of Birmingham) appeared on behalf of the appellants; Nicholas
Dowding (instructed by Ashurst Morris Crisp) represented the respondents.
Giving judgment, DILLON LJ said:
This is an appeal by the defendant in the action, Motorway Tyres &
Accessories Ltd, against a decision of His Honour Judge Roger Cooke made on
June 20 1990 in the Mayor’s and City of London Court. The case is concerned
with the true construction and effect of a rent review clause in a lease and,
as in so many other cases which are concerned with rent review clauses,
everyone is agreed that the clause is ill-drawn and, on its literal
construction, does not reach, in the events which have happened, a sensible
result.
The lease in question is an underlease of
August 1 1967. It was made between Grange Estates (Leicester) Ltd as landlord
and the Kerry Group Ltd as tenant. The present appellant is the assign of the
term; the respondent to the appeal, plaintiff in the action, Wyndham
Investments Ltd, is the assign of the reversion. The premises demised are some
premises at Middlesbrough, the details of which are not relevant. The lease was
granted to the tenant from the first day of November 1966 for a term of 99
years less 10 days. The reddendum provided for payment of the rent at the rate
provided for in clause 2(a) by equal half-yearly instalments in advance on days
which are specified, and also an insurance rent, which is immaterial.
Clause 2, which deals with the yearly
rent payable under the lease, is a complicated clause. It provides in subclause
(a) for the payment during the whole of the term granted of the yearly sum of
£3,600, which is called ‘the basic rent’. The words ‘six hundred’ may represent
an alteration to the lease as originally drawn, which referred to 3,000, but
nothing turns on that. There is a deed of variation which provided for increase
of the basic rent of £3,670, but nothing turns on that. Subclause (b) then
provides for rental periods. It is as follows:
In respect of each of the following
periods respectively of the said term (hereinafter individually called ‘a
rental period’) that is to say:
(i)
the period commencing at the expiration of Twenty one years from the
commencement of the term and ending with the expiration of Forty two years from
the commencement of the term (ii) the period commencing at the expiration of
Forty two years and ending with the expiration of Sixty three years from the
commencement of the term (iii) the period commencing at the expiration of Sixty
three years from the commencement of the term and ending with the expiration of
Eighty four years from the commencement of the term and (iv) the period
commencing at the expiration of Eighty four years from the commencement of the
term and ending with the expiration of this Under-lease an additional rent
equal to the amount by which the basic rent multiplied by the variable factor applicable
to the rental period in respect of which the calculation is made exceeds the
sum of Three thousand Six hundred pounds.
Therefore one sees that there are to be
revisions of the rent to bring in an additional rent every 21 years during the
term and we are concerned with the first review at the expiration of the first
21 years of the term.
The additional rent is to be calculated
by multiplying the basic rent by the variable factor. The variable factor is
defined in subclause (c) of clause 2 as follows:
The variable factor in relation to a
rental period shall be the numerical fraction which shall have as its
denominator the figure of 114.3 and as its numerator the figure which shall
have been officially published by the Ministry of Labour and National Service
(or any other Ministry or Government Department upon whom the duties in
connection with the Index of Retail Prices shall devolve) as the figure
representing the average monthly Index of Retail Prices for the year
[preceding] the year of commencement of that rental period.
The Index of Retail Prices is no longer
published by the Ministry of Labour, but by another department. Nothing turns
on that.
The lease does not explain the figure of
114.3, which is to be the denominator, but it is common ground that that is the
figure which represents the average monthly Index of Retail Prices for the year
1966, which was the year preceding the grant of the lease, according to the
Index of Retail Prices which was in force at the date of the lease, which had
been brought into operation at January 16 1962. That was the base date of that
version of the index.
The provision made by subclauses (a), (b)
and (c) would have been effective throughout the term if the Index of Retail
Prices had continued to be published throughout the term by reference to the
same base date, January 16 1962. However, it was predictable with a lease of
this length that the Index of Retail Prices would from time to time be related
to a fresh date and the draftsman has sought to cover that by subclause (d) of
clause 2 as follows:
If at any time or from time to time
during the said term the figure published as aforesaid as the figure
representing the average monthly Index of Retail Prices for any particular year
shall be related to some commencing date other than the Sixteenth day of
January [1962] (which is the date at which for the purposes of the present
Index of Retail prices the index figure was taken at One hundred) then any new
Index figure which shall be published at that date for the purposes of the said
Index shall for the purposes of the [preceding] sub-clause hereof be
substituted for the figure of 114.3 therein mentioned and the expression ‘basic
rent’ shall for the purpose of sub-clause (b) hereof be construed as meaning
the total of Three thousand Six hundred pounds and the additional rent payable
hereunder immediately before that date.
A new or revised Index of Retail Prices
was introduced as from the base date January 15 1974 and that continued in
force until after the end of 1986, and accordingly provided the numerator for
the calculation of the additional rent at the first review date. We were told
that thereafter there has been a fresh index introduced with January 1987 as the
base date. That may be relevant, if not replaced, on subsequent reviews, but it
is not relevant on the present review because the figure that has to be taken
is the figure for the year preceding the year of commencement of the rental
period.
The difficulty about subclause (d) as it
stands is that it makes provision for a numerator in the variable factor from
the new index and for a denominator to be substituted for the figure of 114.3.
It then defines the basic rent as meaning the £3,600 and the additional rent
payable hereunder immediately before that date, but no additional rent is
payable before the end of the first 21 years of the term, that is to say, for
the first rental period until the first review date, so that the effect of
subclause (d) on the literal construction is that the variable factor under the
new Index of Retail Prices as at the end of the first 21 years has to be
applied merely to the original basic rent of £3,600. That gives the landlord
protection from inflation since the introduction of the new Index of Retail
Prices, but no protection at all against the inflation which took place from
the commencement of the term of the end of 1966 to the base date of the new
Index of Retail Prices.
It is common ground between the parties
in this case that the object of a rent review clause is as set out by the
Vice-Chancellor in the guidelines he gave in British Gas Corporation v Universities
Superannuation Scheme Ltd* [1986] 1 WLR 398 at p 403 and that the intention
of such a clause is to protect landlords against the erosion of rents by
inflation. Those guidelines of the Vice-Chancellor’s have been approved several
times in this court in decisions to which we are referred in the skeleton
arguments for the parties.
*Editor’s note: Also reported at [1986] 1
EGLR 120.
The lease continues, in subclause (e) of
clause 2, to envisage that the review provisions in the earlier subclauses may
not in the event prove operable. Subclause (e) provides:
If HM Government shall cease to publish
any such Index of Retail Prices as aforesaid or if any event shall happen
whereby it becomes impossible to implement the hereinbefore mentioned
provisions for calculating rent for a rental period then and in any such case
the additional rent to be paid for each such rental period shall be the amount
by which the fair and reasonable rent having regard to the then capital value
of the land (for the purpose of its existing user at the date hereof) shall
exceed the sum of Three thousand Six hundred pounds
IN the event of disagreement as to the
amount of such additional rent it shall be determined by arbitration [as there
mentioned].
The question with which we are concerned
primarily concerns the construction of subclause (d). The judge took the view
that any difficulty in the application of subclause (d) could be resolved by
varying the denominator of the variable factor so as to bring it in line with
the change in the successive Indices of Retail Prices. He felt able to do that
as a matter of construction of the lease. The effect of his calculation was
that instead of a denominator of 114.3 he took the rebased equivalent, being
59.6. The respondents say that he was entitled to do that. Alternatively, they
say that the words in subclause (d) ‘which shall be published as at that date’
refer not to the base date of the new index but to January 16 1962, which was
the base date for the original index for the purposes of the lease. As to that
latter submission, I can see no conceivable reason in commercial or
common sense why the parties, having elected in 1967 to fix the denominator by
reference to the state of inflation at the end of 1966, should, in 1987, after
a fresh Index of Retail Prices has been introduced from a new base date, refer
their calculations back to the original base date in 1962. Accordingly, I would
reject that alternative.
We have, however, to consider very
carefully the alternative which the judge upheld. If that should be rejected,
the respondents say finally that the answer lies in the arbitration clause at
subclause (e). The appellants say that subclause (e) is indeed the answer
because the judge’s selection of a new denominator under subclause (d) is not
justified by the wording of subclause (d) and moreover leads into very
considerable difficulties if, as has in fact happened, during the later periods
of the lease there is a second republication of the Index of Retail Prices,
linking it to a new base date.
It had occurred to me, in considering
this clause, that the answer, as a matter of construction, might lie in the
latter part of subclause (d), where the term ‘the basic rent’, which is, for
the application of subclause (d), said to be construed as meaning ‘the total of
£3,600 and the additional rent payable hereunder immediately before that date’,
might have been construed as meaning ‘payable, or which would have been payable
hereunder if the variable factor had been calculated and applied immediately
before the base date of the new index’. But neither party has shown the least
interest in that approach and I put it out of mind for the purposes of this
judgment.
The words at the end of subclause (d)
‘immediately before that date’ must, in my judgment, relate to the commencing
date of the new Index of Retail Prices. The numerator, as I have said, of the
variable factor is to be taken from the new Index of Retail Prices. That the
judge did. The denominator is to be ‘any new Index figure which shall be
published at that date’ — that is to say, the base date of the new index — ‘for
the purposes of the said Index’. The natural reading of that, in my judgment,
is that it is the sum of 100, which was the starting figure in the new index,
which was published to have effect from January 15 1974. The judge seems to
have felt that the reference to the index there was merely to identify the
index and not to take any figure from it. But what is said is any new index
figure which shall be published at that date — publication is important — and
the figure that is published is the figure of 100 and not the figure of 59.6
which the judge has calculated.
The judge’s approach is commendable in
the sense that the formula he was using was designed to give to the landlord
the protection which was clearly the object of the clause. The difficulty to
which our attention has been drawn in applying the judge’s formula is that it
may produce very strange results if there is then a further recalculation of
the Index of Retail Prices from a fresh base date in the course, for instance,
of the rental period which commenced at the end of the first 21 years of the
term and will continue to the end of 42 years of the term.
The mathematics which the judge employed
to arrive at the figure of 59.6 are, as I understand them, as follows. When the
new index was introduced in 1974 with its starting figure of 100, the figure
for the previous year was 191.8. That is the counterpart for 1974 of the 114.3
figure for 1966. Therefore, he said, 191.8 becomes 100 on the commencement in
1974 of the new index, and to adjust the denominator, 114.3 — the previous
denominator — must be multiplied by a fraction of 100 over 191.8. That produced
the 59.6 which he took as the denominator with, as numerator, the figure for
the revised Index of Retail Prices for 1986. Using those as the variable
factor, he applied it to the basic rent of £3,600. But the same calculation
cannot, as I see it, be applied to a second rebasing of the Index of Retail
Prices.
Mr Steinfeld has produced an
illustration, admittedly taken on a somewhat extreme set of facts in that it
assumes no inflation at all between two review dates but also assumes that at
some stage the index was rebased. It produces a figure for new rent of
astronomical height because it is, for the purpose of finding a new denominator,
making use of the figure of 59.6, which was the figure calculated by the judge
on his approach in converting from 114.3 on to the first rebased index, and
also the figure of 385.9. But, though Mr Steinfeld’s instance is on extreme
facts, it appears to me that it illustrates the basic flaw in the calculation
which the judge made. Essentially, what its use would do on a second rent
review is to bring into account yet again the degree of inflation under the
rebased index which took place before the first rent review date and was taken
into account in fixing the rent to be payable from that rent review date, which
becomes the additional rent payable hereunder for the purposes of subclause (d)
if there is a rebasing of the Index of Retail Prices during the second rental
period of the lease after there had been an earlier rebasing in the first
period.
Therefore, mathematically, as I see it,
the judge’s approach cannot give an answer applicable throughout the term and
cannot be the correct formula to apply to make sense of subclause (d).
Moreover, it goes against the wording of subclause (d) as I have indicated, in
that the figure of 59.6 was not published — the figure of 100 was — and in that
the object of subclause (d) is to identify a figure and not merely to identify
an index. It follows that the only alternative available to the court is to
fall back into subclause (e), so that the additional rent for the rental period
from the first review date is to be the fair and reasonable rent assessed by
arbitration as there explained, taking account of the basic rent of £3,600.
Both parties agree that it is not possible, sensibly, to implement the
provisions of subclause (d) by taking them in their literal meaning and
reaching a ridiculous result.
Accordingly I would, for my part, allow
this appeal, set aside the order of the judge and declare instead that the rent
payable under the underlease in respect of the period commencing November 1
1987 falls to be determined by arbitration in accordance with the provisions of
clause 2(e) of the underlease, with such consequential directions as are
necessary.
BUTLER-SLOSS LJ agreed and did not add
anything.
Also agreeing, TAYLOR LJ said: The
learned judge made a valiant attempt to make commercial sense of a badly
drafted clause. There is no doubt that the purpose of the clause was to enable
the rent to be varied so as to take account of inflation. Unhappily, the
learned judge’s solution involved not merely purposive construction but, in
effect, a substantial rewriting of the clause. That rewriting was such as, in
my view, went well beyond the court’s proper function of interpreting the
agreement entered into by the parties. Moreover, I am not convinced that the
learned judge’s radical solution could achieve commercial sense if applied at
the second and subsequent review dates.
Accordingly, I agree that the clause
cannot be implemented so as to achieve its purpose and I agree with the order
proposed by Dillon LJ.
The appeal was allowed with costs in the
Court of Appeal and below; cross-appeal was dismissed and order below set
aside; declaration made that the rent payable under the underlease in respect
of the period commencing November 1 1987 falls to be determined by arbitration
in accordance with the provisions of clause 2(e) of the underlease; application
for leave to appeal to the House of Lords was refused.
