Burford UK Properties Ltd & Ors v Forte Hotels (UK) Ltd & Ors

This is an appeal by the claimants in this action (which I will call “Burford”) with the permission of the judge against the order of Mr Simon Berry QC sitting as a Deputy Judge of the High Court of Justice, Chancery Division dated 19 November 2001 on the trial of a preliminary issue in this action. The preliminary issue concerned the interpretation of the rent review provisions in a lease. The preliminary issue directed to be tried was whether upon the true construction of paragraph 1 of the third schedule to a lease dated 20 June 1972 (“the lease”) the proviso at subparagraph 1 to that paragraph contained a covenant by the tenant, breach of which gave rise to a cause of action for damages, or whether it constituted a proviso to the formula by reference to which the Net Bedroom Revenue (“NBR”) was to be calculated on the hypothesis if not the fact that the tenant had used his best endeavours to obtain the maximum revenue from the use of the bedrooms as sleeping accommodation. In answer to this preliminary issue, the judge made a declaration that upon its true construction the relevant proviso:-

By the lease, Combined Petroleum Companies Pensions Ltd let to the first defendant land occupied by the Post House Hotel at Dringhouses, York for a term of ninety-nine years from 23 November 1971. The present landlord is Burford and the defendants are the original tenant, the surety under the lease and the current tenant respectively. Schedule 3 contains provisions for rent reviews every fourteen years. As already indicated the dispute concerns the true interpretation of paragraph 1(e) of schedule 3 to the lease. The question at issue is important because the reviewed rent is fixed by reference to NBR (see paragraph 6 of the third schedule set out below) and because the parties have reached agreement as to the rent for the fourteen year period commencing 23 November 1999 without taking into account any failure by the tenant to maximise rent as required by proviso (1) to that subparagraph.

The critical provision in the lease then for the purposes of this appeal is paragraph (1)(e) of the third schedule. This contains a definition of NBR but is in reality a series of directions as to how as a matter of accounting NBR is to be ascertained:-

Clause 3 of the lease contains a series of covenants on the part of the tenant, including covenants to do works required by a public authority (clause 3(3)), to repair the premises (clause 3(7)), to paint the premises (clause 3(8)), to maintain the hotel premises (clause 3(10)), to clean gutters and so on (clause 3(11)) and as to user (clause 3(21)). Subclauses (31) and (32) of clause 3 are important, as are clauses 4 to 6:

The judge ruled that paragraph (1)(e) took effect as a qualification on the definition of NBR:-

The judge’s reasons for his interpretation of proviso (1) of the lease may be summarised as follows:-

On this appeal, Mr Paul Morgan QC, for Burford, puts forward a primary case and an alternative case. His primary case is that proviso (1) creates an obligation remediable in damages. His alternative case is that proviso (1) creates an obligation but that if there is non-compliance the landlord has a choice whether to seek damages or to ask the arbitrator to fix the rent on review on the basis of what the receipts ought to have been rather than what they actually were. The tenant cannot take advantage of his own wrong: Cheall v APEX [1983] 2 AC 180. Mr Morgan submits that the respondents’ case involves readjustment of the figures taken into account in computing NBR, but that the necessary words for achieving this adjustment are not there. This is because the lease requires NBR to be calculated by reference to revenue actually received just as it provides for the deduction of taxes actually incurred under proviso (2). The judge rightly did not imply a term. If proviso (1) imposes an obligation as the appellants contend it would not be necessary to spell out the consequences as non-performance of proviso (1) is a breach of the lease, giving rise as a matter of law to a secondary obligation on the tenant to pay damages: see Photo Production Ltd v Securicor Ltd [1980] AC 827 at 848-50 per Lord Diplock. He accepts that this secondary obligation can be excluded by agreement but submits that this can be done only by clear wording, which is not present. Accordingly, on his submission, proviso (1) must be construed as imposing an obligation.

Mr Morgan further submits that the words “provided that” are apt to introduce a covenant. In support of this he cites Norton on Deeds, Brookes v Drysdale (1877) 3 CPD 52, 57-58 and Westacott v Hahn [1918] 1 KB 495. The court must construe proviso (1) without any pre-disposition as to whether it is a covenant or not.

Mr Morgan also relies on the word “shall”. Mr Morgan submits that the natural meaning of the word “shall” is imperative and that, therefore, the natural meaning of proviso (1) is to create a covenant.

Mr Morgan submits that the application of the rule that a document should be construed as a whole does not lead to a result inconsistent with his interpretation. Mr Morgan submits that the position of paragraph 1(e) in the third schedule to the lease as opposed to the body of the lease is of little significance because it is natural that proviso (1) should appear immediately after the definition of NBR. In effect it states that, while NBR is determined by reference to actual revenue, the tenant nevertheless has an obligation to maximise revenue. By contrast, clause 3(31) does not affect the amount of the reviewed rent but merely provides the means of establishing it. The reasons which make it natural for proviso (1) to appear after the definition of NBR do not apply to clause 3 (31).

Mr Morgan submits that there are other provisions in the lease which bear on the way in which rent is to be calculated and which create obligations. For example, clause 3(7) contains a repairing covenant. Failure to repair the property can have an effect on receipts and thus on the amount of the reviewed rent. Breach of the obligation in proviso (1) to paragraph 1(e) of the third schedule is not unique in that respect. Accordingly for this reason also, the court should not treat the position of proviso (1) in the lease as an indication against Burford’s construction.

Mr Morgan also relies on the provision for arbitration in paragraph 7 of the third schedule. This provides:-

Mr Morgan submits that it is not appropriate for a surveyor to look at notional receipts and that the parties would have intended to preserve the option of court proceedings if the landlord alleged that the tenant had breached proviso (1). Furthermore, even if proviso (1) is not a covenant, it is a “condition”, “stipulation”, “agreement” or “provision” for the purposes of clause 3(32) and clauses 4, 5 and 6 of the lease. This supports the view that proviso (1) imposes an obligation on the tenant, breach of which gives rise to a claim in damages.

For the respondents, Mr Christopher Nugee QC seeks to uphold the judge’s judgment. He submits that, while a proviso can be construed as imposing a covenant, the classic use of a proviso is as a qualification or condition on a grant or a covenant, limiting its operation. Accordingly, the question is whether the proviso can clearly be seen as imposing a covenant.

Although the word “shall” if taken in isolation may look like an obligation, this is too simple an approach in this case. A provision in a deed that a party shall do something does not always impose an obligation: see Re Courage Group’s Pension Schemes, above.

Mr Nugee relies on a number of textual points which he submits supports his construction. First, proviso (1) is to be found in schedule 3 which deals with rent review. It should, therefore, be construed with the purpose of the rent review provision in mind, namely that of protecting the landlord’s rental stream. Second, proviso (1) is a proviso to the definition of NBR. It would be very unusual to find a covenant in a definition. Third, the covenants in the lease are contained in clause 3 and they even include a covenant which relates to the rent review process: see clause 3(31). The court should, therefore, be slow to conclude that the draftsman intended to include a further covenant tucked away in schedule 3. Fourth, proviso (2) is clearly a qualification on the definition of NBR. Fifth, the construction of proviso (1) as a modification on the definition of NBR makes perfectly good linguistic sense. The use of “provided that” as a condition or assumption is an entirely normal use of words.

Mr Nugee further submits that the result contended for by Burford makes no sense. The landlord would receive the entirety of his shortfall in one lump sum rather than spread over the next period of fourteen years. That sum may be very substantial. Furthermore, if there were a breach of the proviso, the lease would be liable to forfeiture for non-payment. Mr Nugee submits that it is difficult to believe that the parties intended these consequences. It is much more likely that they intended the amount of the reviewed rent to be augmented if there was non-compliance with proviso (1).

Mr Nugee submits that the respondents’ construction is also supported by the provision for arbitration by a surveyor. On the respondents’ construction, the whole of the issue of what rent is payable from the next review date will be dealt with by this surveyor in the arbitration whereas under Burford’s construction the issue of whether the tenant failed to use his best endeavours would need to be decided by the court.

The relevant provision, paragraph 1(e) of the third schedule, is set out above. In my judgment, the judge’s conclusion on the interpretation of proviso (1) was correct. It is important to consider proviso (1) in its context. The meaning of proviso (1) is to be found by examining the proviso in the context of the scheme of the third schedule, the features of the definition of NBR and the lease as a whole.

The third schedule contains the agreed provisions for rent reviews and the calculation of rent at each rent review date. Paragraphs 2 and 3 of the third schedule provide:-

Paragraph 5 deals with the ascertainment of the reviewed rent at the first rent review, and I need not set it out. Paragraph 6 deals with the ascertainment of the reviewed rent at subsequent reviews. It provides:-

Thus NBR plays a crucial role in fixing the reviewed rent. The formula in paragraph 6 leads back to the definition of NBR in paragraph 1(e) which I have set out above with its two provisos. Paragraph 7, set out above, contains a provision for arbitration.

The definition of NBR, subject to the provisos, is in essence gross receipts of the relevant category less certain specified deductions. The provisos both qualify this definition. Proviso (2) is uncontroversial and so I will take it first. Proviso (2) introduces a further deduction from a gross revenue if a new tax becomes payable on occupation which is not otherwise recouped by the tenant. It is expressly stated at the end of the proviso that this deduction is “for the purpose of calculating Notional Rental Value”, which confirms the view I have expressed about the function of the provisos. I next turn to proviso (1). In my judgment, proviso (1) plays a similar role to that played by proviso (2), but it can only qualify the first element in the computation of NBR, namely the gross amount received. As I see it, it states the basis on which the relevant receipts are to be calculated. The basis for calculating those receipts is that the tenant has used best endeavours to maximise the use of bedrooms as sleeping accommodation and otherwise complied with proviso (1). This is the basis or hypothesis on which net receipts from bedroom accommodation are to be calculated.

On this approach there is no need to insert words to produce a machinery for adjusting the word “gross amount received” in proviso (1). This is because the definition must be read as a whole with its two provisos and proviso (1) makes it clear that the word “received” in paragraph 1(e) of the third schedule must bear an extended meaning of “receivable”. This conclusion receives support from the fact that the deductions to be made include “charges”, which may or may not have been paid, for non-bedroom use and sums “payable” in respect of commission, whether or not paid: see the tailpiece of paragraph 1(e) immediately preceding the provisos. The extended meaning of “received” is also supported by the use of the word “payable” in proviso (2). As a commercial matter, the tenant may well have calculated his turnover on the basis of receivables rather than cash receipts. It is also of some significance that paragraph 1(e) contains no provision indicating how accommodation charges which have been billed but which have not been paid within the period in question are to be treated. To exclude such receipts would be unfavourable to the landlord. If the word “received” bears the meaning I have indicated, it is the date when the right to the receipt accrued that is material and the landlord would not be prejudiced by the fact that the tenant has not collected debts due to it.

My interpretation takes into account the use of the words “provided that” immediately before provisos (1) and (2). One of the normal meanings of the words “provided that” is “on condition that” or “on the assumption or footing that”. I accept that the words “provided that” can introduce a covenant but, in my judgment, they do not do so here. Although framed as a definition of NBR, paragraph 1(e) is in reality a set of directions for computing NBR and thus it is perfectly natural for proviso (1) to set out an assumption on which the amount of the receipts is to be ascertained.

My interpretation is also consistent with the use of the word “shall” in proviso (1). As I see it, the word “shall” is used in the third schedule to denote the mandatory nature of the direction with respect to the computation of gross receipts. Proviso (1) states the mandatory nature of the basis or hypothesis on which gross receipts are to be calculated. Given its function in the definition of NBR, and in the context of the lease as a whole, proviso (1) does not create some independent obligation.

Accordingly, in my judgment, the machinery in the lease for computing NBR does not, as Mr Morgan submits, break down simply because of the tenant’s failure to maximise NBR. Such an event was obviously foreseen because proviso (1) states a non-optional assumption that the tenant has maximised NBR. Receipts must automatically be adjusted and no words have to be written in to achieve this.

Mr Morgan submits that the arbitration clause in paragraph 7 of the third schedule supports his interpretation. However, the parties clearly anticipated that the surveyor would have very wide jurisdiction since he is empowered to deal not only with NBR but also with the construction and effect of the third schedule. Moreover, it may in practice not be unusual for surveyors to look at occupancy rates of hotels: we simply do not know. Further, it is perfectly possible that the parties chose arbitration in order to ensure that confidential financial information as to occupancy rates was kept private.

Clause 3 of the lease begins “The Tenant hereby covenants …” and indisputably creates covenants. If the content of proviso (1) was intended to be an obligation, the logical course would have been to put it into clause 3 as well.

Various provisions in the body of the lease use the words “condition” “agreement”, “provision” and “stipulation”, for instance, clause 3(32) and clauses 4 to 6 set out above. However, in my judgment, proviso (1) is not within these words as it imposes no obligation. If, contrary to my view, proviso (1) imposes an obligation on the tenant, as opposed to a mandatory direction to both parties as to how NBR is to be calculated, the obligation is remediable otherwise than in damages, and in my judgment it is clearly not an obligation of the kind referred to in the clauses which I have mentioned.

The conclusion which I have reached is also supported by clause 3(31). This is an important clause because it enables the landlord to obtain information relevant to the calculation of NBR. The information is only with respect to the verification or ascertainment of “amounts due or payable under the provisions of the third schedule”. This terminology is not apt to include liabilities for unliquidated sums in damages. If proviso (1) imposed an obligation remediable in damages, one would expect the information clause to be wider.

Mr Morgan submits that there are provisions in the lease which bear on the way rent is calculated and create obligations, such as clause 3(7) (covenant to repair). The judge dealt with this point at page 12 of his judgment:

I agree with the judge on this point. Breaches of the obligation to repair are not matters which directly bear on the computation of NBR. They merely give rise to a claim for damages. Accordingly, the analogy which Mr Morgan seeks to draw between clause 3(7) and proviso (1) is not one which can animate the interpretation of proviso (1).

Finally, as the judge noted, the result of his (and my) interpretation makes better commercial sense of the lease. If there is a separate claim for damages for breach of proviso (1) it could at most be for the diminution of the value of the rent. It would be uncommercial and cumbersome for the landlord to have to enforce or to be able to enforce such a claim through a separate claim for damages rather than contend the rent should be adjusted to take account of the tenant’s failure to maximise bedroom use. This would be so even if the landlord can require the liability to be ascertained by arbitration under paragraph 7 of the third schedule. Indeed, it would be a curious result if the arbitrator had to make two awards, one of rent and one of damages. That curious result also lends support to my preferred interpretation that proviso (1) is not an obligation at all.

Mr Morgan submits that in order for any remedy in damages to be excluded for breach of an obligation, very clear language would have to be used. As I have said, in my judgment, proviso (1) does not create an obligation. If proviso (1) creates an obligation, the third schedule provides a scheme to deal with the consequences of non-compliance through the computation of NBR. This is, in my judgment, sufficiently clear in its terms to oust the secondary obligation to pay damages referred to by Lord Diplock in the Photo Production case. Express words removing the secondary obligation are not necessary for two reasons. First, what the landlord obtains through the third schedule to compensate him for a breach of proviso (1) (if it creates an obligation) is exactly what he would obtain through a claim for damages save as regards the timing of receipt. Second, the resolution of that claim through adjustment of gross receipts is more in keeping with the transaction of lease. These last two factors are relevant to the degree of clarity required to oust the secondary obligation to pay damages.

For the above reasons, I would reject Mr Morgan’s primary submission. I would also reject his alternative submission. I start from my conclusion as to the consequences of a breach of proviso (1) (if it creates an obligation) given above. The maxim that a contracting party cannot rely on his own breach of contract has no role to play in the present circumstances. The tenant is not relying on his own breach to avoid liability under the lease. It has not sought to prevent the landlord from requiring notional receipts to be taken into account in the calculation of NBR. Nor has the tenant asserted that the machinery of the third schedule does not permit notional receipts to be taken into account. Accordingly, I would reject Mr Morgan’s alternative submission also.

In the circumstances, I would dismiss the appeal.

I have taken a different view as to the answer which should be given to the question raised by way of preliminary issue. Although the consequences which would follow if that view were correct are likely to be much the same as those which will follow if this appeal is dismissed, I think it appropriate to set out the reasons which have led me to differ from the other members of the Court.

The premises known as the Post House, Dringhouses, York, are held for a term of 99 years from 23 November 1971 under a lease dated 20 June 1972. The rent payable under the lease is subject to periodic upwards-only review at fourteen year intervals. The rent review provisions are set out in the third schedule to the lease. Those provisions require there to be ascertained as at each successive review date an amount defined as the “Notional Rental Value”. The rent payable during the fourteen year period following each review date (“the Final Rent”) is whichever is the greater of (i) the Final Rent payable during the preceding fourteen year period and (ii) the Notional Rental Value ascertained as at that review date

The premise underlying the escalating rental scheme for which the lease provides is that it will be possible to ascertain the amount of the Notional Rental Value as at each successive review date. The rent review provisions include (at paragraph 5 of the third schedule) a formula by which that amount is to be ascertained at the first review date; and (at paragraph 6 of that schedule) a less complex formula by which that amount is to be ascertained at each successive review date after the first review date. Paragraph 7 of the third schedule is in these terms, so far as material:

The formula set out in paragraph 6 of the third schedule equates the Notional Rental Value as at each review date (“the Review Date”) after the first review date to the Final Rent (R) payable during the fourteen year period immediately preceding the Review Date multiplied by the factor Y/X; where X is the “Net Bedroom Revenue” during the year ending with the last preceding review date and Y is the Net Bedroom Revenue during the year ending with the Review Date. The effect is that, where the formula is applicable, the rent will be increased on review if the factor Y/X is greater than one.

The formula assumes that both X and Y can be ascertained; that is to say, that it will be possible to ascertain the amount of the Net Bedroom Revenue both (i) during the year ending with the last preceding review date and (ii) during the year ending with the Review Date. But whether or not that assumption is well founded as at any given review date turns on the true effect of the defined expression Net Bedroom Revenue when applied to the facts. The expression is defined in paragraph 1(e) of the third schedule to the lease:

That definition includes no reference to any specified period of time. But there is reference, in the last two lines of proviso (2) to the definition, to “each year which is relevant for the purpose of calculating the Notional Rental Value”. That points to the relevant temporal link; which is provided in paragraph 5 or 6 of the third schedule (as the case may be). Seen in the context of those paragraphs, Net Bedroom Revenue during a relevant year is the amount received in respect of bedroom accommodation during that year after deducting commissions payable to third parties (for example, tour operators and booking agents). And, for that purpose, the amount received in respect of charges for bedroom accommodation excludes sums received for ancillary services (for example, room service), for the use of bedrooms for purposes other than sleeping accommodation, or by way of service charge.

The purpose of proviso (2) to the definition of Net Bedroom Revenue is made explicit by the last five lines of the proviso itself. But it would, I think, be obvious in any event. If the factor (Y/X) by which Final Rent (R) payable during the fourteen year period immediately preceding the Review Date is to be multiplied for the purpose of calculating Notional Rental Value as at the Review Date is to have any intrinsic commercial validity it is necessary that both Y and X are ascertained on the same basis. If, for example, the amount received in respect of charges for bedroom accommodation in one relevant year (but not in the other relevant year) included an element attributable to, say, a ‘tourist tax’, the factor Y/X would be distorted. The formula would not produce a fair result. So, in such a case, proviso (2) to the definition of Net Bedroom Revenue requires an adjustment to the exclusions or deductions from the gross amount received in respect of charges for bedroom accommodation.

It is, I think, clear that proviso (1) to the definition of Net Bedroom Revenue is intended to serve a similar purpose. It is intended to ensure the intrinsic commercial validity of the factor Y/X by requiring that both Y and X are ascertained on the same basis. To state the obvious: if the gross amount received in respect of charges for bedroom accommodation in one relevant year reflected the tenant’s best endeavours to maximise revenue from the use of bedrooms during that year while, in respect of another relevant year, the tenant had made little or no effort to maximise bedroom revenue, the factor Y/X would be distorted and the formula would not produce a fair result.

On any view proviso (1) achieves that purpose – at least in a negative sense – by limiting the cases in which Net Bedroom Revenue is to be ascertained by deduction from the gross amount actually received in respect of charges for bedroom accommodation to those cases in which the tenant has used its best endeavours to obtain the maximum revenue from the use of bedrooms as sleeping accommodation during the relevant year. It is, I think, clear that the effect of proviso (1) to the definition is that, in a case where the tenant has not used its best endeavours to maximise revenue during a relevant year, the gross amount actually received in respect of bedroom charges during that year is not the base from which Net Bedroom Revenue is to be ascertained. The definition in paragraph 1(e) of the third schedule is structured in the form: [A] Net Bedroom Revenue means [B] gross amount received in respect of bedroom charges less commission payable provided that [C] the tenant has used its best endeavours to maximise that amount. The proviso [C] is a condition precedent. If not [C], then [A] does not mean [B].

The second review date under the lease was 23 November 1999. It is alleged by the landlord that the tenant failed to use its best endeavours, at all material times prior to and including that review date, to obtain the maximum revenue from the use of bedrooms at the hotel as sleeping accommodation – see paragraph 13 of the re-re-amended particulars of claim dated 25 September 2002. In fairness to the tenant it should be said that that allegation is denied. But, for the purposes of this appeal it must be assumed that the allegation could be established. On that basis, the facts raise the question how, if at all, do the rent review provisions in the lease take effect if proviso (1) to the definition of Net Bedroom Revenue is not satisfied. The question which the parties invited the judge to determine as a preliminary issue was not put in that form. The judge was asked to decide whether, upon its true construction, proviso (1) to the definition of Net Bedroom Revenue “contains a covenant by the Tenant, breach of which gives rise to a cause of action for damages”, or whether “it constitutes a proviso to the formula by reference to which the Net Bedroom Revenue is to calculated on the hypothesis if not the fact that the Tenant has used its best endeavours to obtain the maximum revenue from the use of the bedrooms as sleeping accommodation”. To my mind, the question in that form tends to obscure the real issue between the parties.

The real issue, as I have said, is how (if at all) the rent review provisions in the lease take effect if proviso (1) to the definition of Net Bedroom Revenue is not satisfied. The judge reached the conclusion that, construing paragraph 1 of the third schedule to the lease as a whole,

The judge’s view – that the qualification to which he held the definition of Net Bedroom Revenue subject can be found in the words of proviso (1) itself, read in the context of the lease as a whole – is endorsed by the other members of this Court. It is with diffidence, therefore, that I have reached the conclusion that that view cannot be supported. I accept, of course, that “received” is properly to be construed in the sense of “receivable”; so that monies receivable in respect of charges for bedroom accommodation during the relevant year are brought into the computation of the gross amount whether or not they have actually been received before the year end. But I am not persuaded that the meaning of “received” can be extended, by that means, to include monies which were never receivable in respect of charges for bedroom accommodation; in particular, to include monies in respect of charges which were not (and could not have been) made because the accommodation was not, in fact, occupied. To construe “received” to include monies which the tenant was never entitled to receive – on the ground that, if the tenant had used its best endeavours to obtain the maximum revenue from the use of bedrooms as sleeping accommodation, it would have received, or would have been entitled to receive, more than it did – seems to me to go well beyond any meaning which that word can properly bear in the context of the definition of Net Bedroom Revenue.

In my view it is unnecessary to give to the word “received” a meaning which (as I think) it cannot properly bear. The plain effect of the definition of Net Bedroom Revenue, read with the proviso, (as I have said) is that in a case where the tenant has not, at the material times, used its best endeavours to obtain maximum revenue from the use of bedrooms the gross amount actually received (or receivable) in respect of bedroom charges during that year is not the base from which Net Bedroom Revenue is to be ascertained. The parties have provided no other base from which Net Bedroom Revenue can be ascertained in such a case. But it is important to keep in mind that the quantification of Net Bedroom Revenue is not an end in itself. It is no more than a means towards the quantification of Notional Rental Value. And it is plain that the parties could not have intended that the quantification of Notional Rental Value should be rendered impossible by the failure of the tenant to use its best endeavours to obtain the maximum revenue for the use of bedrooms as sleeping accommodation. To hold otherwise would, indeed, risk allowing the tenant to gain an advantage from his own wrong. The solution, I think, is found in the provision, made by the parties themselves in paragraph 7 of the third schedule to the lease. They have agreed that “any . . . question whatsoever . . . with respect to the amount of the Notional Rental Value” is to be referred to arbitration. The quantification of Notional Rental Value is not rendered impossible by the inability – by reason of the failure of the tenant to use its best endeavours to maximise revenue – to apply the formula in paragraph 6 of the third schedule. In such a case the amount of the Notional Rental Value is such amount as the arbitrator may determine.

I should make it clear that nothing that I have said in this judgment should be taken to suggest that it would not be open to an arbitrator, if asked to determine the amount of the Notional Rental Value, to proceed by applying methodology analogous to that for which the formula in paragraph 6 of the third schedule provides. It seems to me that an arbitrator could not be criticised if he were to take the view that a fair and appropriate way to determine the amount of the Notional Rental Value was to multiply the Final Rent payable in the period immediately preceding the Review Date by a factor in which both numerator and denominator were a quantification of what net bedroom revenue was or would have been on the hypothesis that the tenant had used its best endeavours to obtain maximum revenue from the use of bedrooms as sleeping accommodation during the relevant years. Indeed, it is not easy to see what other methodology he could adopt. It follows that I would expect the outcome, if the determination of the amount of the Notional Rental Value were referred to an arbitrator, to be much the same as that which would result from construing Net Bedroom Revenue in the manner which has found favour with the judge and the other members of this Court. But, as I think, that outcome would be achieved by allowing the rent review provisions to have effect in accordance with the words which the parties have used; rather than by giving to the word “received” a meaning which I do not think it can properly bear in that context.

It follows from what I have said that I do not take the view that the failure by the tenant to use its best endeavours to obtain maximum revenue from the use of bedrooms as sleeping accommodation will (or need) lead to the result either (i) that the Notional Rental Value as at the Review Date will be ascertained by adopting, in the application of the paragraph 6 formula, a factor (Y/X) which is distorted or (ii) that it will be impossible to ascertain the Notional Rental Value as at the Review Date in a way for which the rent review provisions in the third schedule to the lease (including, in those provisions, paragraph 7) provide. In those circumstances, a claim for damages in the form of that advanced in paragraph 15 of the re-re-amended particulars of claim is misconceived. It is not the failure of the tenant to use its best endeavours to obtain the maximum revenue from the use of bedrooms as sleeping accommodation that is the cause of loss of an increased rent with effect from the Review Date. The lease provides for an effective review of rent despite that failure. The landlord’s loss in the present case, as it seems to me, flows from the fact that it did not refer the amount of the Notional Rental Value to arbitration, as it might have done. Rather, the landlord chose to agree the amount of the Final Rent for the period following the Review Date, at an amount which it now regrets, and it has now discontinued its claim to re-open that agreement.

The judge held that proviso (1) to the definition of Net Bedroom Revenue did not constitute a covenant by the tenant, the breach of which gives rise to a cause of action for damages. For the reasons which I have given, I think he was correct to hold that, as matters now stand in the present case, the tenant’s failure to use its best endeavours to maximise revenue from bedroom accommodation (if established) is not the cause of the loss in respect of which the landlord claims. But I am unwilling to hold that the tenant is under no obligation to use its best endeavours to maximise revenue. It seems to me reasonably clear that the parties to the lease agreed the provisions for rent review which they did on the basis that the tenant would do what was necessary in order to enable the formulae in paragraphs 5 and 6 of the third schedule to have effect. They must have appreciated that an arbitration to determine Notional Rental Value - based on notional receipts - would be likely to involve expense which would not be incurred if Net Bedroom Revenue could be ascertained from actual receipts. I can see no reason why that additional expense should not fall on the party whose conduct has given rise to the need for arbitration. The point does not arise in this case, because the landlord did not choose to proceed to arbitration. But, in principle, I would hold that the tenant would be in breach of obligation if it failed to use its best endeavours to obtain the maximum revenue from the use of bedrooms as sleeping accommodation during a relevant year.

I would have allowed this appeal so as to vary the order which the judge made. But, as I have said, the practical result of that variation would have been much the same as that which follows from an order dismissing the appeal. The claimant landlord cannot recover the loss of rent by an action for damages.

In my view, the appeal should be dismissed for the reasons given by Arden LJ. However, as Chadwick LJ disagrees, I set out in short form my own understanding of the issue and formulation of the answer to it. In doing so, I start by identifying the issue of construction, as I see it, and by looking at the structure of the lease as a whole, rather than by an immediate focus on the provisions and function of schedule 3.

The issue of construction may be stated at various levels of particularity. At its broadest, as Chadwick LJ has said, the issue is how, if at all, the rent review provisions in the lease take effect if proviso 1 to the definitions in paragraph 1 of the third schedule, including “Notional Rental Value” and “Net Bedroom Revenue”, is not satisfied. But so to state it, does not identify the point of difference between the parties, which is whether any failure by the lessee to use its best endeavours to maximise the bedroom rental revenue could put it in breach of the lease thereby exposing it to a claim in respect of that breach, or whether it would simply trigger a machinery, for which the lease provides in schedule 3, for determining the rent at the first and successive review dates. The same question, put more precisely, is whether any such failure could put the lessee in breach of covenant or condition or provision of the lease, thereby exposing it to forfeiture and/or damages in the courts or to enforcement through the arbitration procedure provided in paragraph 7 of the third schedule, or whether it simply triggered the machinery provided by the lease, including, if necessary, such arbitration, for determining the rent payable at the review dates. To that extent, I agree with Chadwick LJ that the question posed for the Judge below, which he answered in the negative, may have been too narrow, namely whether the proviso “contain[ed] a covenant by the tenant, breach of which gives rise to a cause of action for damages”.

The starting point in the lease is the covenant to pay the rent in clause 3(1), namely “to pay the said rents at the times and in the manner aforesaid”. Those rents are defined in clause 1, comprising “the Initial Rent (para. (v)), “the Supplemental Rents” (para. (vi)) and “the Final Rent” (para. (vii), namely:

Clause 2 sets out as part of the consideration for the demise the rental obligations of the lessee “subject to increase in accordance with the provisions contained in the Third Schedule”. And clause 3, which sets out all the lessee’s covenants, requires it, in clause 3(31), in support of the covenant in clause 3(1) to pay the rent:

Clause 4 contains the landlord’s covenant to permit the tenant peaceable enjoyment of the premises, the tenant “paying the rent … and performing and observing the covenants conditions and agreements herein contained”. And clause 6 contains the landlord’s right of re-entry and to any other “right of action or remedy” in the event of failure or neglect by the tenant “to perform or observe any of the covenants conditions or provisions herein contained”.

Thus, the lease in conventional form sets out the obligations of the parties, those of the tenant variously described as covenants, conditions, provisions or agreements. One of the covenants is the payment of rent as defined in clauses 1 and 2 subject to its revision at the review dates as calculated in the third schedule. And, to facilitate the accurate calculation and determination of any increase in the rent at the review dates, the tenant, in clause 3(31), specifically bound itself by covenant to make full disclosure to the lessor of all material information. Before I turn to schedule 3, I acknowledge, as Arden and Chadwick LJJ have done, that there is no particular magic in the use in the lease of the word “covenant” as against that of “condition”, “provision,” “agreement” or “proviso,” and that a proviso, whether in the body of a lease or in a schedule to it, may, depending on its form and the context, have the same force and effect as a covenant.

As I have indicated, the schedule is more than just a list of definitions by reference to which the rent reviews provided for in the main body of the lease are to be conducted. Certainly, in paragraph 1, it contains definitions. These include those of “Notional Rental Value” and “Net Bedroom Revenue”, the latter’s definition being “the gross amount … received in respect of charges for bedroom charges” [my emphasis], but excluding certain specified sums and subject to the two provisos. The clear purpose of those provisos is to provide a mechanism by which the “Notional Rental Value” should be defined by reference to the “Net Bedroom Revenue” received or which should have been received if the lessee had “at all times used his best endeavours to obtain the maximum” bedroom rental revenue. Paragraphs 2 - 6, when read in conjunction with the covenant in clause 3(31) and the arbitration provision in paragraph 7 of the schedule, show how that was to be achieved, whether or not there is an issue as to tenant’s use of its best endeavours. For convenience, I reproduce here the material part of the arbitration provision in paragraph 7:

If there had been a reference to such arbitration, and if the lessor’s case in it had been that the lessee had not used its best endeavours to maximise bedroom rental revenue, then, as Chadwick LJ has said, the arbitrator would have had to resolve that issue on such material as the parties might have put before him and, in the light of his finding, to determine the Notional Rental Value in accordance with the formula in paragraph 6 of the schedule.

As I have indicated, clause 3(31) imposed, by way of covenant, an obligation on the lessee to make full disclosure of all information necessary for the purpose of ascertainment or verification of the Notional Rental Value in accordance with the machinery provided by the third schedule. And paragraph 7, in its wide provision for arbitration on such issue, necessarily had as its premise that the lessee would comply with his obligation of disclosure under clause 3(31). I say “necessarily” so, because it cannot have been intended that the lessor could, by way of an allegation of breach of that covenant, resort to arbitration to enforce compliance with it in order to enable the arbitrator to resolve any issue as to the amount of the Notional Rental Value or, failing compliance, to make a determination regardless or award damages in lieu.

In short, the lessee’s covenant under clause 3(31) to disclose to the lessor all information bearing on such an exercise was the means by which the Notional Rental Value, when in dispute, whether on a best endeavours issue or otherwise, could be determined within the machinery of the lease rather than by the exercise of a right of re-entry or a claim for damages under clause 6 for breach of it. Breach of the covenant in clause 3(31), which is not alleged, would have rendered the lessee vulnerable to exercise by the lessor of its power of re-entry or right to claim damages in clause 6, but could not have been the basis of a claim for damages by way of arbitration under paragraph 7 to schedule 3.

However, if notwithstanding full disclosure by the lessee, there remains an issue as to what bedroom rentals could, with best endeavours, have been achieved, the arbitration procedure set out in paragraph 7 of schedule 3 provides the means for its resolution as part of the machinery of the contract, not as a vehicle for establishing damages for its breach or, if sought, of exercising a power of re-entry under clause 6. An arbitration clause in a lease for the determination of the amount of rent under it would be a strange vehicle for the award of unliquidated damages for breach of an obligation in the lease to pay the rent properly due under it. And, as the Judge and Arden LJ have commented, it would make no commercial sense to impose on the tenant a separate liability to pay damages for breach of such obligation, since the damages would only be the diminution in the amount attributable to the rent properly calculated accorded in accordance with the proviso.

Accordingly, I respectfully agree with Arden LJ, in particular for the reasons that she has given in paragraph 23 and the first two sentences of paragraph 24 of her judgment, that, in the definition in paragraph 1(e) of schedule 3 of “Net Bedroom Revenue, the word “received” should be read as “receivable”. Such an interpretation, in my view, flows necessarily from the scheme of the lease and of schedule 3 read as a whole, and of the 1^st proviso in its immediate context which is there to prevent an impermissible notionality creeping into the definition “Net Bedroom Revenue”, namely one that the lessee’s actual rental revenue is not what it could have achieved if, in accordance with the intention of the parties expressed by the proviso, it had used its best endeavours to maximise it. As Chadwick LJ has put it, in paragraph 8 of his judgment, the purpose of the proviso is “intended to ensure the intrinsic commercial validity of the factor Y/X” for the purpose of calculating the Notional Rental Value under paragraph 6 of the third schedule. Accordingly, I agree with the Judge and Arden LJ that the proviso does not constitute a covenant (or I would add, any other form of obligation under the lease) breach of which gives rise to a cause of action for damages or to “enforcement” by means of arbitration under paragraph 7 of the third schedule. It is a qualification to the formula by reference to which the Net Bedroom Revenue and hence the Notional Rental Value is to be calculated.

For those reasons, I would dismiss the appeal.