Spencer & Anor v Secretary of State for Defence

This case is about the amount of the annual rent payable for the last 12 years under an agricultural tenancy. The dispute originates from two events. The first was a written agreement of 28 February 2000 (the Memorandum) stated to be supplemental to the original tenancy agreement dated 12 May 1987 (the Principal Agreement). The second was an arbitrator’s award, with retrospective effect, pursuant to a statutory rent review under the Agricultural Holdings Act 1986 (the 1986 Act). The review was initiated prior to the Memorandum, which varied the terms of the Principal Agreement. The award was made in 2004.

A connected aspect of this long running litigation has been to the Court of Appeal before, via Neuberger J, as he then was. On that appeal a challenge to the validity of the appointment of the arbitrator failed. Neuberger J and the Court of Appeal recognised that the variations made by the Memorandum had, by operation of law, effected an automatic surrender of the original tenancy and a re-grant of a new tenancy. The application of that legal doctrine was not known to the parties when, while the statutory rent review under the Principal Agreement was still in progress, they agreed to add a small area of land to the holding and to increase the rent pro rata.

It would have been possible in law to avoid the application of the doctrine of implied surrender and re-grant by having a separate tenancy of the additional land, but that course was not taken. I should add that it was made clear in argument that the Memorandum was not by way of a compromise of the rent review. This second appeal turns totally on the construction of the Memorandum, which was silent on rent review, ongoing or otherwise. What impact (if any) does the implied surrender and re-grant have on the meaning and effect of the Memorandum and the amount of rent payable?

The two courts which have considered the matter so far have come up with different answers, as reflected in the order dated 2 February 2012 by which Vos J allowed the appeal of the Secretary of State for Defence (the Landlord) against the order of Mr Recorder Patterson dated 28 June 2011 in the Salisbury County Court.

On the Recorder’s construction of the Memorandum the rent payable was the amount stated in it (£16,333 p.a.) The rent was not affected by the arbitrator’s award. Vos J thought otherwise. On his construction the rent payable was £27,700 p.a. That was the amount of the arbitrator’s award. The arrears of rent claimed are substantial. The Landlord says that the rent review was effective from 29 September 1999 and that the rent was not reduced by the Memorandum, or by the implied surrender and re-grant. The Tenants have not paid the rent increase claimed by the Landlord since 28 February 2000.

On 20 March 2012 Arden LJ granted permission to appeal to the Tenants, Mr Cyril Spencer and Mr David Spencer.

The Tenants are brothers, who farmed the holding known as Choulston Farm, Netheravon in Wiltshire. The Landlord let it to them on an annual agricultural tenancy created by the Principal Agreement under which the initial rent was £12,690 pa. The Principal Agreement contained the usual reservation of rents and covenants to pay the rents reserved.

As at 29 September 1999 the annual rent was £16,250. By serving a notice on the Landlord the Tenants initiated the statutory process under the 1986 Act for the review of the rent as from that date. On 17 November 1999 Mr Stephen Burman was appointed arbitrator.

The review was still in progress when, as evidenced by the Memorandum, the parties agreed that approximately 1.3 acres of land should be added to the approximate 256 acre holding and that the terms of the Principal Agreement should be varied to make a rateable increase in the then passing rent in order to reflect the added acreage. The annual rent of £16,250 was increased by £83 to the total of £16,333. The Memorandum was endorsed on the Principal Agreement and expressed to be supplemental to it. Both Tenants were parties to the agreed variation, although by then one of the brothers, Mr David Spencer, was no longer involved in the farming partnership or in the rent review process. That development does not affect the construction of the Memorandum to which he was a party.

It was expressly agreed that the varied rent should have retrospective effect, so that, as from 29 September 1998, which was the date on which the Tenants entered into possession of the additional land, the yearly rent would be £16,333. Although the rent review in progress potentially affected the level of rent payable as from 29 September 1999, it was not mentioned in the Memorandum. The Memorandum specifically stated that-

“IN ALL OTHER RESPECTS the terms conditions and covenants of the Principal Agreement as varied by the said Memoranda shall remain in force as heretofore unchanged,”

The general tenor of that broadly worded provision is that, subject to the agreed minor variations, the legal regime of the Principal Agreement was unchanged: it would continue after the Memorandum to be the same as before.

The rent review process concluded in 2004 when the arbitrator made his award of a revised rent of £27,700 p.a. as from 29 September 1999. The Tenants disputed their liability to pay that level of rent and have not paid it. The Landlord served a statutory notice to quit on them on the ground of non-payment. The validity of the notice to quit itself went to arbitration. The arbitrator stated a case for the County Court asking whether the Memorandum took effect as an agreement that the revised rent under the Principal Agreement should apply to the rent under the tenancy re-granted on the agreed variation.

The Tenants’ position was and is that, as from 29 September 1998, the amount of annual rent payable was £16,333 i.e. the sum stated in the Memorandum to be the rent as from 29 September 1998. They accept that that sum was liable to revision as from 29 September 1999, but only for the limited period of 5 months down to the date of the Memorandum. For that period they were liable to pay rent pro rata at the reviewed rate of £27,700 p.a. Thereafter the rent payable reverted to the amount expressly stated in the Memorandum (£16,333 p.a.) That amount would not be affected, they contend, by the arbitration award.

According to the Tenants the rent was revised by the arbitrator under the Principal Agreement and only applied as long as the original tenancy created by it continued i.e. for the limited period of 5 months period from 29 September 1999 down to the Memorandum of 28 February 2000. After that there was the new tenancy by re-grant. The revised rent did not apply to the re-granted tenancy. Instead, the annual rent reverted to the smaller sum stated in the Memorandum. In the words of Mr Batstone, who appears for the Tenants, the rent review died with the original tenancy: the rent, as revised by the arbitrator, did not apply, by operation of law, to the new tenancy by re-grant.

The Tenants describe the Landlord’s claim to the revised rent as an attempt to substitute a new agreement by writing 25 additional words into the Memorandum. The words implied by the judge convert the Memorandum into an agreement that the parties did not make, though they might have made it, had they been better advised about the legal effect of the Memorandum.

The Landlord’s case is that the annual rent agreed was to be either £16,333 or such other rent from and after 29 September 1999 as should be determined by the arbitrator under the rent review. If that were not so, the Landlord would lose most of the benefit of the rent review process known to be pending at the time of the Memorandum and the Tenants would gain a substantial windfall.

Vos J accepted the Landlord’s contention that the rent as and from 29 September 1999 and continuing past the date of the Memorandum should be the revised rent awarded by the arbitrator.

He said at [95] of his judgment that the relevant term of the Memorandum should be construed as meaning:

“it is agreed that with effect from 29^th September 1998 the within written clear yearly rent of £16,250 shall in consequence of the above mentioned addition be increased by £83, thereby causing the said rent to be £16,333 or such other rent from and after 29 September 1999 as should be determined by the arbitrator in the rent review under the [original tenancy]” (added words emphasised)”

The words underlined add up to 25. The basis of his conclusion was that

“96 … the reasonable observer, having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, must be endowed with knowledge as to the established legal effect of the Memorandum in this case, even if the parties were themselves not so aware. That follows, as I have explained above, anyway in a case of clear law, from the objective nature of the exercise upon which the court is concerned in interpreting a contract and determining whether any term is to be implied into it.”

Earlier in his judgment at [39] the judge described to the arguments of the parties as having identified three legal issues: (i) what precisely was meant by the intention of the parties or discerning what the parties meant in construing a contract; (ii) when considering the implication of a term, is it permissible to assume that the reasonable observer had knowledge (in this case of the law) that the parties did not in fact have; and (iii) in asking whether it is clear that the parties would have intended to include the proposed implied term, whether the matter should be considered on the basis that the question is posed before they contracted or after they contracted.

The judge reviewed the authorities cited to him on factual matrix, general principles governing the construction of contracts and the implication of terms and then applied them to the three issues. He concluded that (i) the construction exercise being an objective one, it was not aimed at establishing what the parties themselves subjectively intended by the words they used; (ii) when considering the implication of a term, it was permissible to assume that the reasonable observer had knowledge that the parties did not in fact have, certainly if that knowledge is as to established and well known legal principles (e.g. implied surrender and re-grant of tenancy); and (iii) when one is considering the implication of a term one is considering the meaning of the instrument which they actually entered into.

Vos J did not accept the Landlord’s contention that, “by operation of law”[ my underlining], the effect of the re-grant of the new tenancy was that it was on the same terms as the original tenancy, including the outcome of the rent arbitration, so that the rent under the new tenancy was that eventually determined by the arbitrator in 2004.

The Tenants’ written submissions describe the case as one which “bristles with important points of principle” and complain that the approach followed by Vos J was effectively that of a judge sitting at first instance and was not foreshadowed in the grounds of appeal before him.

The case on appeal from Vos J is that he erred in law in holding that the Memorandum should be construed as though it said, or there were implied into it, words to the effect that, the annual rent from 29 September 1999 should be not £16,333, but such other rent as should be determined by the arbitrator in the rent review under the Principal Agreement.

According to more detailed criticisms the judge lost sight of the fact that the aim of construction is not to find what contract a reasonable man would have made, but the meaning which a reasonable man would give to the contract made by the parties. On their ordinary meaning the words of the Memorandum were clear: they simply provided that the annual rent after 29 September 1998 is £16,333. The Memorandum said nothing about a review of that rent.

As for context, that supported the ordinary meaning of the language of the Memorandum. The parties did not know that they were creating a new tenancy by the Memorandum. It was expressed as a variation of the Principal Agreement to which it was supplemental. There was no need for any further terms in the Memorandum, as the parties’ underlying assumption and understanding was that no further term was required about the reviewed rent under the Principal Agreement, because that tenancy itself continued after that date. The fact that their understanding was mistaken in law does not entitle the court construing the Memorandum to rewrite it or to imply a term in order to undo or mitigate that mistake.

The judge also erred in taking the position that the reasonable man, who must be assumed to know the law, would have known the true legal effect of the Memorandum and that approach supported the construction advanced by the Landlord. It is argued that the approach of the judge was wrong for two reasons.

First, even if the reasonable man did know the true legal position about implied surrender, that knowledge was irrelevant. What mattered for the purposes of construction was what the reasonable man knows or believes about the knowledge of the parties. Secondly, as a matter of law, it was wrong to endow the reasonable man with legal knowledge superior to that of the parties.

As for the implied term, it is contended that the judge was wrong to imply a term for two reasons.

First, the parties made assumptions as to the continuance of the 1987 tenancy after 28 February 2000 with the revised rent and that is why the term suggested by the Landlord and implied by the judge was not even a tacit part of the bargain made by the parties and was not therefore a necessary term. Secondly, it was not enough to show that, had the parties foreseen the eventuality that has occurred, they would have wished to make provision for it. It has to be shown that there was only one contractual solution or one of several solutions that would without doubt have been preferred. That was not the case here, where there were several ways of dealing with the situation, such as having a separate tenancy agreement for the additional land.

I agree with Mr Batstone, who now appears for the Tenants, on some of his points. Indeed, Ms Caroline Hutton, who appears for the Landlord, does not dispute that the construction of the Memorandum is an objective process; or that the implied surrender of the original tenancy and the re-grant under the Memorandum occurred automatically by operation of law; or that the court has no power in the present case to relieve the parties of the consequences of what they in fact agreed on the ground that there was an operative mistake in the Memorandum or that the consequences of the agreement were unforeseen or unfair.

In the Tenants’ skeleton argument, which was prepared by different counsel but was adopted by Mr Batstone in his oral submissions, it was contended the construction placed by the judge on the Memorandum was an attempt by him to relieve the Landlord of the unintended consequences of surrender and re-grant. I am unable to agree with that submission for the following reasons.

For two days counsel argued various aspects of the case before Vos J with particular reference to the ignorance of the parties regarding the legal consequences of implied surrender and re-grant, to the implication of terms into the Memorandum and to the knowledge of the law to be imputed to the reasonable man. It was understandable that the judge then ruled on all the issues as presented to him for decision. The way in which counsel argued the case raised a number of contentious issues about the law on implied terms: but it is unnecessary to consider implied terms at all, if the meaning of the express language of the Memorandum, construed in the surrounding circumstances, is clear.

In my judgment, Vos J correctly held that the level of annual rent payable as from 29 September 1999 was £27,700 both down to 28 February 2000, as conceded, and beyond, which is contested. I would approach the question of construction in this way.

There is much common ground. The annual rent payable before 28 February 2000 was originally £16,250. It was liable to revision as from 29 September 1999 as a result of the retrospective effect of the subsequent award of the arbitrator on the rent review then proceeding. But for the disputed impact of the doctrine of implied surrender and re-grant on the Memorandum, the reviewed rent would have been £27,700 p.a. as from 29 September 1999. It has been expressly conceded on behalf of the Tenants that the revised rent of £27,700 p.a. was payable pro rata for the period from 29 September 1999 to 28 February 2000. The dispute is solely about the rent payable after that date.

I turn next to the express terms of the Memorandum itself. They had retrospective effect on the rent by providing that the varied rent of £16,333 p.a. was payable as from 29 September 1998. It is also expressly stated (opening in capital letters) that, “IN ALL OTHER RESPECTS” the terms, conditions and covenants of the Principal Agreement as varied shall remain in force as heretofore unchanged. The level of rent reserved and covenanted to be paid under the Principal Agreement was, at the date of the Memorandum, known by the parties to be liable to retrospective revision by an award under the statutory rent review process then in progress.

The liability to pay the rent, as retrospectively revised, continued, as is conceded, down to 28 February 2000. The Tenants’ case that the liability did not continue past that date hinges solely on the automatic operation of the doctrine of implied surrender and re-grant. The argument is that, as the original tenancy was replaced by a re-granted tenancy, the rent revision process set in motion under the original tenancy died with the original tenancy on 28 February 2000: it did not survive and was not resurrected as a term of the new tenancy.

The difficulty with that submission is that it fails to give full effect to the express agreement of the parties that the terms conditions and covenants of the Principal Agreement continue to apply unchanged post-28 February 2000. The contractual provisions in the Principal Agreement were expressly continued subject only to the varied acreage and the consequent £83 rent increase. The rent reserved and payable under the Principal Agreement was subject to retrospective revision by the arbitrator’s award. The express continuation provision meant that the ongoing rent review process and its ultimate outcome were not robbed of their retrospective effect on the level of rent by the implied surrender and re-grant of the tenancy, or by the fact that the review was triggered by an event occurring before the Memorandum was made.

Looking at the circumstances existing at the time of the Memorandum, it was known to the parties that there was the ongoing statutory rent review process which would potentially affect the rent payable to the Landlord from 29 September 1999. In the belief that the Principal Agreement continued in force, as varied on the points evidenced by the Memorandum, the parties expressly agreed upon a provision for the continuing effect of the pre-Memorandum state of affairs under the Principal Agreement. The rent, as retrospectively revised, did not cease to be payable “by operation of law.” I agree with Vos J that it did not continue to be payable “by operation of law”: it continued to be payable as a result of the express agreement of the parties continuing the provisions of the Principal Agreement, as varied by added land, unchanged.

In brief, the basic flaw in the Tenants’ approach to construction is that it does not give effect to that express term which continues unchanged the provisions of the Principal Agreement, subject only to the agreed minor variations. The Tenants have conceded partial effect of the rent revision down to 28 February 2000, but then seek to cut off its continuing effect from then on by an enthusiastic, but misplaced, reliance on the property law doctrine of implied surrender and re-grant. That doctrine, which was not known to the parties when they made the Memorandum, does not invalidate or eliminate the express agreement of the parties that the existing state of affairs under the Principal Agreement continues unchanged. That unchanged state of affairs includes the retrospective impact of an ongoing rent review. That was known to the parties at the time of the Memorandum.

The result is that the revised rent of £27,700 p.a. applies both before and after the Memorandum. There is no sound reason in law or sensible basis in fact for the Tenants’ submission that the revised rent applied for a limited period of only 5 months and then reverted to an unrevised level from 28 February 2000 onwards.

In a supplemental written submission dated 3 October 2012 and made after the hearing, Mr Batstone contends that the express continuation provision in the Memorandum did not assist the Landlord, as all that remained in force were the terms of the Principal Agreement in “OTHER RESPECTS” than as to acreage and rent.Therefore, the rent of £27,700 payable for the last 5 months of the old tenancy did not continue pursuant to that provision as the rent payable under the new tenancy. That rent is the £16,333 agreed in the Memorandum, unless the agreement can be construed, or a term can be implied into it, to the effect decided by Vos J.

Ms Hutton naturally objected to the late submission. It raises a point that has not been taken before. In my judgment, it is not a good point. The agreed minor variation to the rent was only consequential on the small addition to the acreage. It did not operate to exclude from continuation unchanged every aspect of rent under the Principal Agreement, such as the retrospective effect of the process of rent revision known to have been initiated before the Memorandum.

I would dismiss the appeal. The Recorder’s construction of the Memorandum was not correct. Vos J was right to allow the Landlord’s appeal and to set aside the Recorder’s order that the rent from and after 28 February 2000 is £16,333 per annum. Vos J then correctly declared that the rent from and after that date is £27,700 per annum.

I agree.

I also agree.