Landlord and tenant — Rent review — Expert appointment only upon application of landlords — Whether landlords could be compelled to seek appointment and have rent review
By an
underlease dated March 31 1988 the plaintiff tenant holds a term of warehouse
premises at a rent subject to five-year reviews. The rent review provisions
directed that if the parties could not agree the rent at review, the matter
would be referred to an expert to be agreed between the parties and, if not
agreed, to be appointed by the president of the Royal Institution of Chartered
Surveyors upon application of the landlords. The tenant, anticipating that
current rental values would be less than the passing rent, sought to initiate a
rent review; the defendant landlords declined to agree an expert or to apply to
the president to nominate one. In the court below Evans-Lombe J granted the
tenant a declaration that the landlords are bound to apply to the president to
determine the proper rent payable since the rent review date. The landlords
appealed, conceding that the rent was reviewable upwards and downwards.
lease as a whole, and in particular the reddendum and rent review
provisions, is that there will be a rent review for each of the rental periods.
The provision relating to the nomination by the president being made upon the
application of the landlord is a matter of machinery and not of substance. If
that machinery breaks down, the court would supplement it: see Sudbrook
Trading Estate Ltd v Eggleton [1983] 1 EGLR 47
The following
cases are referred to in this report.
Sudbrook
Trading Estate Ltd v Eggleton [1983] 1 AC
444; [1982] 3 WLR 315; [1982] 3 All ER 1; (1982) 44 P&CR 153; [1983] 1 EGLR
47; [1983] EGD 392; 265 EG 215, HL
United
Scientific Holdings Ltd v Burnley Borough
Council [1978] AC 904; [1977] 2 WLR 806; [1977] 2 All ER 62; (1977) 33
P&CR 220; [1977] 2 EGLR 61; [1977] EGD 195; 243 EG 43 & 127, HL
This was an
appeal by the defendant landlords, Francis Edward Jennings, Robert Joseph
Pezaro and Circuitport (Brewery Road) Ltd, against a decision of Evans-Lombe J,
[1995] 2 EGLR 87, who had given judgment to the plaintiff tenant, Royal Bank of
Scotland plc, on its application for declaratory and injunctive relief in
respect of the rent review provisions in a lease it held from the landlords.
Kim Lewison QC
and Janet Bignell (instructed by John Summers & Co) appeared for the
landlords; Robert Powell-Jones (instructed by Stephenson Harwood) represented
the tenant.
Giving
judgment, Sir Richard Scott V-C said: This is yet another appeal concerned with
the true construction of a rent review clause. The rent review clause, with
which we are concerned, is contained in a lease dated March 3 1988. The appeal
is from the judgment of Evans-Lombe J given on December 9 1994*. The judge
decided that on the true construction of the relevant rent review provisions it
was not open to the landlord unilaterally to prevent the operation of the rent
review provisions. I will refer in more detail later to the exact order that
the learned judge made to give effect to his conclusion.
*Editor’s
note: Reported at [1995] 2 EGLR 87
It is
necessary for me to refer to some of the contents of the lease. I describe it
as a lease; it is in fact an underlease but nothing turns on that. The
‘landlord’ under the lease consisted of a Mr Jennings, a Mr Pezaro and a
company, Circuitpoint (Brewery Road) Ltd. They are the appellants before us;
they were defendants below. The tenant, the plaintiff in the action and
respondent before us, is the Royal Bank of Scotland plc. The term granted by
the lease was one of 20 years from December 25 1987. The demised premises
consists of Unit B, 15 Brewery Road, Islington. The initial yearly rent
reserved under the lease was £50,000 pa exclusive. The lease commences with a
number of definitions. Of these the ‘initial rent’ is defined as ‘the sum so
specified in the particulars’ — I have already referred to that. The ‘rent
commencement date’ is defined as March 31 1988. The ‘rent review dates’ are
‘the dates so specified in the particulars’; they are December 25 1992,
December 25 1997 and December 25 2002. The ‘rental period’ is defined as ‘each
period of five years immediately following a rent review date’ and the ‘first
rental period’ is defined as ‘the period from the term commencement date until
the first review date’.
I can now pass
on to the reddendum to the lease under which the demised premises were
demised to the tenant for the specified term:
Yielding and paying
(a) Firstly
the initial yearly rent from [and there then appears a blank] until the 24th
day of December 1992. Thereafter during the remainder of the term the yearly
rent subject to review as hereinafter mentioned such review to be calculated in
accordance with the provisions of the Fourth Schedule such rent to be paid by
equal quarterly payments in advance without any deduction or set off whether
demanded or not on the usual Quarter Days every year …
Subpara (b) I
need not read. That related to additional sums to be paid by way of further
rent on various accounts.
I can now turn
to the fourth schedule which, it will be recalled, contains the details as to
how the reviewed rent is to be calculated. Para 1 of the fourth schedule reads
as follows:
At the commencement
of each Rental Period hereinbefore referred to, the revised rent may be agreed
between the Landlord and the Tenant or in the absence of agreement determined
by a specialist valuer (acting as an expert and not as an Arbitrator) such
valuer to be agreed between the parties or nominated by the President for the
time being of the Royal Institution of Chartered Surveyors upon application of
the Landlord made at any time after the commencement of the relevant rental
period so that in case of such valuation the revised rent to be determined by
the valuer (who shall give written reasons for his decision) shall be as in his
opinion represents the best yearly rent reasonably obtainable for the Demised
Premises and on the supposition (if not a fact) …
And there then
follow five suppositions. I need not refer to them all, but it is perhaps
helpful for me to refer to the second of them which is in these terms:
Of a new
letting of the Demised Premises as a whole or in the permitted parts in the
open market at the commencement of the relevant Rental Period by a willing
Landlord to a willing Tenant without a premium with full vacant possession for
a term equal to the term unexpired or a term of ten years whichever is longer
as at the commencement of the relevant Rental Period and on similar terms to
this lease (other than the rent hereby reserved but including the provisions
for the review of rent herein contained).
There are also
some specified disregards to which I need not refer.
Para 2 of the
fourth schedule is, in my opinion, of considerable relevance for the light it
casts on the contractual intentions of the parties underlying the first
paragraph. Para 2 reads:
If and so
often as any revised rent in respect of any Rental Period has not been
ascertained pursuant to the foregoing provisions before the first day hereby
appointed for payment of rent for the relevant Rental Period, rent shall
continue to be payable during the Rental Period at a rate equal to the highest
rent previously payable hereunder until the first day for payment of rent after
the revised rent has been ascertained or until the expiration of that Rental
Period (whichever shall first happen) and on the first day for payment of rent
after the revised rent has been ascertained there shall be payable by way of
rent (in addition to the amount of the rent otherwise due on that day) the
aggregate of the amounts by which the instalments of rent payable in respect of
that Rental Period fell short of the amounts which would have been payable if
the revised rent had been ascertained before the first day for payment of rent
for the relevant Rental Period and in addition that the tenant shall pay to the
Landlord interest on such sum calculated at the Base Rate from time to time of
National Westminster Bank PLC calculated on a daily basis from the relevant
Review Date until the date of payment.
There are two
comments which I would at this stage make on the contents of para 2. One is
that the drafting is deficient. A minor point is that the reference to interest
to be paid from the relevant review date until the date of payment must be an
error. Interest would need to be paid from the date on which the revised rent
would, if it had been ascertained in time, have been paid until the date of
payment. Bearing in mind that each successive rental period is a period of five
years, and that each year’s rent is paid in quarterly instalments on the usual
quarter days, it could not possibly be right for the revised rent when
ascertained to bear interest from the relevant review date which would be at
the beginning of the five-year period. That is the first respect in which the
contents of this paragraph appear to have been defectively drafted.
The other
respect is in the failure of the paragraph to provide for what should happen if
the revised rent, when ascertained, should turn out to be less than the rent
that had previously been paid. Up until the time the revised rent was
ascertained, the tenant would have been continuing to pay quarterly rent on the
old basis. The amount of the new rent will have been based upon the best yearly
rent reasonably obtainable for the premises as at the commencement of the
relevant rental period and it may be that that will be less than the rent
previously payable. In the heady days when this clause was first drafted, and
perhaps still in 1988 when this lease was granted, it may have occurred to
nobody, or at any rate not to those who were concerned with this property, that
there might come a time when rental values of property such as this would fall.
But it is the case that from, I am told, about 1990 commercial rents, at least
for properties such as the property comprised in this lease, did fall. The
draftsman of these rent review provisions did not take that possibility into
account and, accordingly, there is no provision in para 2 for the repayment by
the landlord to the tenant of the excess amount of rent that will have been
paid if a revised rent is fixed for the review date at a lower figure than the
rent that had previously been paid.
In the course
of the hearing below, junior counsel for the landlord conceded that an
appropriate implied term providing for repayment in the eventuality that I have
described needed to be added to para 2. I have no doubt that that concession
was rightly made.
Mr Lewison
conceded also, and this concession too was, in my judgment, unquestionably
correct, that in the context of the lease construed as a whole, it is clear
that the revised rent may be an upward revision or a downward revision of the
previous rent. It may be that in the euphoria of the 1988 property market
nobody thought the time might come when rent would have to be revised down in
order to accord with best yearly rents at the time; but none the less as a
matter of construction the rent to be fixed for the new rental periods as they
arrive is clearly to be the best yearly rent whatever that may be and whether
above or below the current rent.
Those are the
rent review provisions. But I should refer also to one other clause of this
lease, clause 5. I refer to it because it bears upon some of the arguments that
have been addressed to us regarding the correct construction of the rent review
provisions. Clause 5 of the lease is headed ‘Rent Cesser’ and deals with what
is to happen regarding payment of rent during the period when the premises are
unfit for occupation or use having been destroyed or damaged by some insured
risk. The clause provides that:
… the rents
hereby reserved or a fair proportion thereof according to the nature and extent
of the damage sustained shall be suspended until the Demised Premises shall
have again been rendered fit for occupation or use by the Tenant or until the
expiration of three years from the date of the damage or destruction whichever
shall be earlier and in any dispute shall be referred to
the application of either party to the President for the time being of the
Royal Institution of Chartered Surveyors in accordance with the provisions of
the Arbitration Act 1980 or any statutory modifications thereof.
Attention has
been drawn to the clear difference between this provision in clause 5 and the
rent review provisions. The clause 5 provision contemplates an arbitration in
accordance with the provisions of the Arbitration Act, whereas the rent review
provisions contemplate a specialist valuer acting as an expert not as an
arbitrator in fixing the revised rent of the premises. But, none the less,
there clause 5 provides expressly that the application for the president of the
RICS to appoint an arbitrator may be an application made by either party,
whereas the rent review provisions provide that the appointment by the
president of the RICS of a specialist valuer is to be ‘upon application of the
landlord’.
In the present
case correspondence took place between the tenant and the landlord as to the
ascertaining of a revised rent for the rent period commencing December 25 1992.
It appears from the evidence that the tactic of the landlord was simply to
leave letters on this subject from the tenant unanswered. In her affidavit
sworn on May 25 1994 on behalf of the tenant, Nicola Jane Seagar said that the
chartered surveyors instructed by the plaintiff had put forward the names of
three proposed valuers with a view to a valuer being agreed pursuant to the
provisions of para 1 of the fourth schedule to the underlease.
She went on:
The
defendants have not responded in open correspondence. The valuer has thus not
been agreed. The plaintiff’s surveyors have then requested the defendants to
apply to the President of the Royal Institution of Chartered Surveyors to make
a nomination. There has been no response in open correspondence. The defendants
have not applied to the President to make a nomination.
She then said:
It seems that
the Defendants’ position is that it is a matter for them whether or not to
apply to the President for a nomination, or, in other words, it is a matter for
them whether or not any review takes place.
That indeed is
the crux of the matter. It is the landlord’s contention, put very cogently by
Mr Kim Lewison QC on their behalf, that on its true construction para 1 of the
fourth schedule places the question of whether there will or will not be a rent
review for any particular review period at the option of the landlord. It is a
fairly common feature of rent review provisions in leases that the landlord is
given the option whether or not to invoke the rent review machinery. This is
commonly done by providing that the rent review machinery may be invoked by a
notice in writing served by the landlord not later than some specified date.
Clauses of that character have given rise to a number of cases and gave rise,
in particular, to the leading case, United Scientific Holdings Ltd v Burnley
Borough Council [1978] AC 904, in which the House of Lords ruled that the
time limitations in rent review clauses were normally not to be treated as of
the essence of the agreement so that a failure by the landlord to comply with
the requisite time-limits did not necessarily preclude the service out of time
of an effective notice invoking the rent review machinery. But in those cases
the lessor had expressly been given the option whether or not to serve a notice
invoking the rent review machinery. The present lease contains no such express
option. Indeed, in my view, the implication to be gained from the lease as a
whole, in particular the reddendum which I have read and paras 1 and 2
of the fourth schedule, is that there will be a rent review for each of the
rental periods. It will be recalled that para 2 provides that if the revised
rent in respect of a new rental period has not been ascertained by the first
day for payment of rent during that rental period, rent shall continue to be
paid during that rental period at a rate equal to the highest rent payable
previously ‘until the first day for payment of rent after the revised rent has
been ascertained or until the expiration of that Rental Period (whichever shall
first happen)’. The paragraph then continues:
… and on the
first day for payment of rent after the revised rent has been ascertained there
shall be payment by way of rent [of the additional sums necessary to bring the
previous payments up to the requisite level].
That language,
to my mind, shows that the parties contemplated that for each new rental period
there would be a rent review and a revised rent.
The contention
that the landlord has an option whether or not to invoke the rent review
machinery is based on the provision in para 1 of the fourth schedule that the
nomination by the president of the requisite specialist valuer shall be ‘upon
the application of the landlord’.
Evans-Lombe J
took the view that that part of the rent revision provisions was no more than
machinery and was not intended to vest in the landlord an option as to whether
there should or should not be a rent review. Mr Lewison has argued that that is
wrong and that that provision does enable the landlord, by declining to apply
to the president for the nomination of the specialist valuer, to prevent a rent
review from being carried out.
In my
judgment, the issue depends upon whether construing the lease as a whole, the
conclusion is justified that the landlord was intended to have that option. If
the landlord was intended to have that option, the landlord was entitled to
exercise it and to decide whether or not there should not be a rent review. But
if the judge below was right in concluding that the provision in question was
no more than mere machinery for the carrying out of rent reviews which were intended
to happen in any event, then, on authority, there is no reason why the
landlord’s failure to make the application should be allowed to frustrate the
contractual intention discerned from the lease as a whole. The court will in
that event if necessary supply machinery to prevent that frustrating refusal
from achieving its purpose.
In his
judgment Evans-Lombe J ([1995] 2 EGLR 87, at p89H) concluded that:
… the
provisions of para 1 of the fourth schedule are to be construed as placing an
enforceable requirement on the defendants as landlords to apply to the
president in the event that the plaintiff has sought a review of rent and the
parties have failed to agree the level of such rent or the identity of a valuer
to determine that level in default of agreement.
I am not sure
that I would support that reasoning. I agree with the judge that the provision
relating to the nomination by the president being made upon the application of
the landlord is a matter of machinery and not a matter of substance. But it
does not follow that the provision should be read as placing an enforceable
contractual requirement on the landlord to apply. I would prefer, for my part,
the alternative ground on which Evans-Lombe J placed his conclusion, namely that
if the machinery provided by para 1 should break down the court would
supplement it.
Authority that
that can and should be done is to be found in the judgment of the House of
Lords in Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444*
which indeed was the authority relied upon by the judge. The case did not
involve a rent review clause in a lease. It involved an option to purchase
contained in a lease. The option was exercised by the lessee. The option
provision in the lease provided that the price at which the property would, if
the option were exercised, be sold, would be ‘such a price not being less than
£12,000 as may be agreed upon by two valuers, one to be nominated by the lessor
and the other by the lessee and in default of such agreement by umpire
appointed by the valuers’. The problem in the case was that the lessor had
refused to appoint a valuer and so there were no two valuers either to settle
the price or to appoint the umpire. The House of Lords held that the case was
one in which the agreement was for a sale of the premises at a fair and
reasonable price to be ascertained by the application of the objective
standards that would have been applied by the valuers and that the provisions
relating to the appointment of the valuers was no more than machinery for the
ascertaining of that fair and reasonable price so that if the machinery broke
down for any
and reasonable price to be ascertained.
*Editor’s
note: Also reported at [1983] 1 EGLR 47
Mr Lewison
distinguishes that case on the ground that there, by reason of the exercise of
the option, there was an enforceable contract for sale and purchase. But, on my
construction of the rent review provisions in the present case, there is a
contract between lessor and lessee for a revised rent to be ascertained in
accordance with the best yearly rent formula to be found in para 1 and to be
substituted for the previous rent. The contents of para 1 regarding the
appointment of valuers and the application for the president to nominate a
valuer is, in my view, as much machinery as was the corresponding machinery
referred to in the Sudbrook Trading Estate Ltd v Eggleton case.
In my
judgment, the judge below came to the correct conclusion in regarding the case
as one in which the landlord could not choose to frustrate the rent review
provisions and in which the court would, if necessary, provide the requisite
machinery. Whether, if I had been deciding the case at trial I would have
chosen the route adopted by the judge, namely imposing a mandatory obligation
on the landlord to make the requisite application to the president, I am not
sure. That was the route chosen by the judge and perhaps it followed from his
conclusion that an implied term with mandatory effect could be read into the
rent review provisions. The mandatory order has been complied with by the
landlord. In obedience to the order the landlord has applied to the president
for the appointment of a specialist valuer. The specialist valuer has fixed a
revised rent on the best yearly rent formula. The revised rent is, by some
considerable sum, lower than the previous rent. In the circumstances,
therefore, it is a matter of no materiality whether the judge was correct in
choosing the mandatory obligation route as the appropriate form of relief or
whether he should have devised some form of machinery to be substituted for the
machinery in para 1 of the fourth schedule that the landlord had refused to
operate. It may make a difference when subsequent rent periods arrive. But the
decision in this case that the landlord does not have an option as to whether
the rent review procedure is to be invoked or not will, I imagine, prevent any
silly dispute arising in the future as to what should be done. I think the
judge came to the correct conclusion for the reasons I have given and I would
dismiss this appeal.
Saville and Potter. LJJ agreed and did not add
anything.
Appeal
dismissed.
