Bentleys Stokes & Loweless v Eagle Major Ltd

This Judgment arises out of an appeal by the Defendants and the cross appeal by the Claimant (both with permission) against the Judgment of Deputy Master Behrens on 2 August 2002.

The Deputy Master dismissed the Defendants’ application to strike out the Particulars of Claim and/or grant them summary Judgment on their Defence, granted the Defendants permission to appeal and the Claimant permission to cross appeal if so advised and ordered the Defendants to pay the Claimants costs assessed at £10,000.00 (Ten Thousand Pounds) plus VAT.

At the previous hearing Mr Wardell QC, who appeared for the Claimant, abandoned the cross appeal, which related to the Deputy Masters finding that the primary limitation period in this case arose when the Claimant entered into the Lease the subject matter of the claim in these proceedings, as opposed to when it became aware of the amount required by the Freeholder in June 2000 to purchase the reversion expectant on the Lease.

The Claimant is the leasehold owner of land at Horton-Cum-Studley, Oxfordshire (“the Land”) on which it constructed the Studley Wood Golf Club, comprising an eighteen hole golf course and club house. The cost incurred in constructing the Golf Club was approximately £1.6m (One point Six Million Pounds).

The Defendants are a firm of Solicitors and at all material times were retained by the Claimant to act for it on its behalf when it acquired the lease of the Land.

The lease of the Land (“the Lease”) was dated 2 February 1994 and is made between Malish Investments AG (1) and the Claimant (2).

This action is brought against the Defendants alleging that they were negligent and in breach of contract in respect of their retainer by the Claimant to act for it in the acquisition of the Lease. The issue relates to the rent review clause contained in the Lease.

The Lease is a lease for a term of one hundred years from the 2^nd February 1994. The initial rent was £15,000.00 (Fifteen Thousand Pounds) per annum for the first two years and thereafter £45,000.00 (Forty-five Thousand Pounds) per annum until the first review date. The first review date was the fifth anniversary of the term i.e. 2 February 1999 and thereafter every five years.

Under clause 5 of the Lease the Claimant covenanted with the Landlord within two years from the date thereof to lay out and construct in accordance with all statutory requirements after the reasonable satisfaction of the Landlord a Club House and a high class Golf Course. As I have said above the expenditure in respect of that was approximately £1.6M (One point Six Million Pounds).

The only other provisions that are relevant are the rent review provisions, to be found in the Third Schedule.

Under schedule 3 paragraph 2 the initial rent is the sum of £45,000.00 (Forty-five Thousand Pounds) and the increase is defined as meaning the amount by which if any the Index exceeds the Base Figure. The Index rent means the aggregate of the initial rent and the sum that bears the same proportion to the initial rent as the increase bears to the Base Figure. The Index means “all items” Index Figure of the Index of the Retail Prices published by the Department of Employment or any successive Ministry or Department (clause 2.13). The Base Figure was the Index for the month of September 1993 namely 141.9.

Under the Third Schedule the rent is to be reviewed five yearly after the initial period in accordance with the changes in the RPI.

However (and this is the area where the claim has arisen) either party under clause 4.3 of the Third Schedule can serve a six month notice prior to a relevant market review date seeking that the rent be determined on a market rent basis being the rent as defined in paragraph 4.1.2 namely the yearly rental value of the premises having regard to the open market rental value as between a willing landlord and a willing tenant for the property at the relevant market review date, let without a premium for the residue of the unexpired term of the lease subject to the terms of the lease other than the amount of rent but including the provision for rent review and subject to various assumptions which I need not set out in this Judgment.

The vital issue concerns the disregards for the purposes of the rent review set out in clause 4.2. Under clause 4.2.3 the following are disregarded;

“Any improvement to the Premises made by the Tenant the Tenant’s sub-tenants or their respective predecessors in title with the consent of the Landlord other than those:

(a)

made in pursuance of an obligation to the Landlord, or

(b)

completed by the Tenant, the Tenant’s sub-tenant and/or their predecessors in title more than 35 years before the relevant Market Review Date. ”

The operation of a review according to the RPI is entirely mechanistic and does not involve consideration of the premises but merely an application of the movement in the Index to the base rent of £45,000.00 (Forty-five Thousand Pounds) per annum.

The alternative market value basis involves an assessment of the market value for the premises at the review date. It would be seen however that under clause 4.2.3(a) any improvements carried out pursuant to an obligation are not disregarded.

This has a significant impact because under clause 5 of the Lease as I have set out above there is an obligation to construct the Golf Course. It follows therefore that on the alternative market rental view basis the Tenant will pay rent on the value of the land as improved by it at its cost. I have already observed that the amount of expenditure was approximately £1.6M (One point Six Million Pounds).

This is a surprising obligation to my mind for a Tenant to take on board. The effect of this is that the Tenant is locked into a hundred year lease at a potential rack rent based on the value of the premises as improved by it on the initial conversion of the Land to a Golf Course. Prior to the construction of the works the premises comprised of agricultural land with a relatively modest rental value.

The Claimant’s case is that this clause was not agreed by it and the inclusion of the clause by the Defendants was negligent, so that they have a lease, which is of substantially less value than otherwise they would have. Its claim for damages is a figure of approximately £750,000.00 (Seven Hundred and Fifty Thousand Pounds). Its case is that it understood it was obtaining a lease where the rent review on the market value basis was only to be adjusted by reference to the undeveloped site value with the benefit of planning permission for the construction of the Golf Course but not on the basis that the rent should be assessed taking into account its works of constructing the Golf Course.

The Defendants deny liability.

There were before the Deputy Master five issues for consideration. Those issues are as follows:-

The section 32 point was disposed of by the Deputy Master on the basis of the House of Lords decision in Cave –v- Robinson Jarvis and Rolf [2002] 2 WLR 1107. The Claimant did not appeal that decision.

The Deputy Master also determined that the prima facie limitation period commenced on 2 February 1994. Although the Claimant sought to appeal that finding it was abandoned as I have set out above.

The only issues before me therefore were as to whether or not the Claimant’s action was sustainable in negligence and breach of contract and if so whether or not it was barred under the Limitation Act 1980 and in that context whether or not the Claimants could rely upon the secondary limitation period provided by section 14A Limitation Act 1980.

The Defendants application is on the basis that the Amended Particulars of Claim should be struck out under CPR rule 3.4(2)(b) (the case is an abuse of the process) or alternatively, pursuant to CPR rule 24.2 that there is no reasonable prospect of the Claim succeeding.

I remind myself that this is not the trial. Nor is there any power even under the CPR regime to conduct a pre-trial trial and no assessment should be made of evidence: see Wenlock –v Maloney [1965] 2 All ER 871 C.A. The Claimant is entitled to take its action to trial if its case is more than fanciful: see Swain –v- Hillman [2001] 1 All ER 91 and Three Rivers DC –v- Bank of England (No. 3) [2001] 2 All ER 513 H.L.

Equally whilst blind acceptance of evidence is not required at this stage, oral evidence should not be rejected unless it is obviously in conflict with clear documentary evidence to the contrary or is otherwise hopelessly unreliable. The Court at this stage should not draw inferences based on documents without having those documents explained by potential witnesses at trial and should not speculate on the way in which documents should be interpreted when there are factual disputes which can only be ventilated at trial which might effect that construction.

The Deputy Master concluded in this case that the position was not sufficiently clear as to deprive the Claimant of its right to take the matter to trial. He further decided that the issue as to knowledge under section 14A was not at this stage sufficiently clear.

Having heard careful submissions from Mr Crawford on behalf of the Defendants and careful submissions on behalf of the Claimant by Mr Wardell QC I have come to the conclusion that the Deputy Master was correct and that the appeal should be dismissed. As this is in advance of trial I will not attempt to assess the prospects of success on the evidence, as it would not be appropriate so to do.

It is necessary however, to go into the evidence put before me to show why I have come to that conclusion.

This involves an examination of the correspondence that passed between the Defendants and the Claimant and various attendance notes made by the Solicitor in question a “Miss Collett” together with the explanations offered at this stage by the Claimant’s directors a Mr and Mrs Percival.

The first correspondence which has a potential for significance in this case is correspondence appertaining to the Claimant’s interest in acquiring a different property site at Bearwood College (“Bearwood”). The Defendants were retained in respect of that matter and the transaction was proceeding virtually contemporaneously with the transaction in respect of the Land.

Bearwood was owned by a charitable trust so any disposition by them would have to be the best price reasonably obtainable whether as to rent or as to sale.At a meeting on 4 May 1993 where both Mr Percival and Miss Collett attended it is clear that the agreement for lease there was a term not less than 99 years with a rental of £50 to £65,000 (Fifty to Six-five Thousand Pounds) subject to upwards variation in accordance with the RPI. The figure of £50 to £65,000.00 (Fifty to Sixty-five Thousand Pounds) Mr Percival says in his witness statement was calculated on the basis of the undeveloped site. This is supported by Miss Collett’s attendance note of 2 August 1993. It seems therefore at this stage that there is evidence to show that in relation to Bearwood the Claimants were not interested in a rental assessed by reference to the value of the site improved by their own expenditure.

At about the same time offers were being made subject to contract to acquire the freehold of the Land. On 13 May 1993 Messrs Murphy Jackson Associates Chartered Surveyors on behalf of the Claimants submitted an offer of £335,000.00 (Three Hundred and Thirty-five Thousand Pounds) interestingly the letter says “having regard to the amount of expenditure that is likely to be involved, my clients are not interested in a lease arrangement”. This seems to me to be an important factor at this stage. The Claimant clearly was not willing to enter into a lease because of its large expenditure. The surprising result however of the Lease is that not only has it entered into a Lease it is paying rent based on its expenditure as I have said.

I accept that at this stage Mr Wardell QC’s submission that that is such an extraordinary change of attitude that it requires investigation at trial. I accept his submission that at this stage a rental assessed on the developed site is inevitably going to be higher than any rent on the site of the land with the benefit of planning permission subject to RPI increase. At this stage I do not see that this can be described as a fanciful submission. I equally accept that at this stage it is most unlikely that the Claimant would have entered into such a change of stance without there being some identifiable reason for it to do so.

In fact as I shall set out in this Judgment the market value basis for rent review was introduced by Miss Collett as a device for lowering the rental on the assumption that inflation might become rampant so that the rent assessed on an RPI basis would be artificially high.

There is evidence to show that when the acquisition of the Land moved to a leasehold basis the lease rent was to be reviewed on a site basis without regard to the value of improvements see Chesterton’s letter of 9 August 1993 sent to Mr Jackson on behalf of the Claimant. It is true that Mr Jackson in his response dated 11 August 1993 refers in paragraph 2 to it being “unreasonable to ask for a full rental attributable to a completed Golf Course, when the Golf Course is not completed and is providing no income”. That does require explanation. Mr Wardell QC suggests it was a lazy use of English. That might be right. It might be supporting the Defendants case. I do not think it is right to take it in isolation from the correspondence and draw a conclusion definitively at this stage in favour of the Claimant. In this context Mr Percival’s evidence is to the effect that the initial rent offers that were made in respect of the Land were also based on a value of the Land with the benefit of planning permission but without taking into account the developed value.

The first draft lease sent by the landlords solicitors Shoosmiths & Harrison, under cover of 3 November 1993 letter has not been provided, but the parties accept that the only rent review provision there was one linked to the RPI.

It clearly apparently included an obligation to build but Miss Collett considered it too vague see note 11 of her letter of 16 November 1993. In note 36 of the same letter she referred to the RPI rent review basis and suggested it be discussed when a meeting took place.

That meeting took place apparently on 23 November 1993. Miss Collett’s note of that meeting is quite short. This led to a letter sent to Shoosmiths by her on 23 November 1993 where she introduced at point to X a change to the basis of the rent review. The letter provided:-

“With regard to the rent review we understand it has been agreed in principle that in addition to the reviews in accordance with the Retail Prices Index there will be a review every 10 years based on the open market rental of the property so the rental is brought back into line if there is any unusual swing in the Retail Price Index. The wording will be needed to cover this ”.

It will be seen that the purpose of the clause was to ameliorate a large distorting rent because of the RPI increase. It is clear that the clause will only be of some use in that respect if the base rent and the reviewed rent are assessed on the same basis. By that I mean that if the base rent plus RPI is assessed on an undeveloped site with planning permission the proposed rent review variation based on market value is not comparing like with like. For present purposes at this stage of the action I am prepared to assume that Mr Wardell QC’s submission is correct. That the effect of the clause if that premise is correct is almost inevitably going to mean that the alternative clause is going to have precisely the opposite effect namely that it is inevitable that rent will increase because the market value of a developed site will be worth more in rental terms than an undeveloped site with planning permission.

If however, the basic rent was fixed by reference to a developed site plus RPI such a distortion does not occur although there would be a risk of greater rent if market rent values exceeded the RPI

Significantly, there is no note of any conversation when Miss Collett suggested this variation. It apparently occurred before the 23 November 1993 but after 16 November 1993. The suggestion appears to have been made at a meeting or over the telephone: see paragraph 27 of Mr Percival’s witness statement. By the time of the letter of 23 November 1993 the matter had already been negotiated between the parties and agreed subject to contract as note X shows.

A major meeting took place on 25 November 1993 between the parties and there respective lawyers when the matter was finalised. There is nothing in Miss Collett’s notes, which deals with the basis for which the original rent was calculated. As regards rent review (item X) her note simply says “X rent review – long discussion – privity of contract”.

It is the Claimant’s case based on the background of Bearwood and the method of calculation that it always was of the belief that the base figure was calculated by reference to the undeveloped rent value with the benefit of planning permission. There is support for this as I have set out above. That suggests to my mind at this stage that it would be unlikely indeed that there is any benefit accruing to them to change the basis for paying the rent, so that they pay rent on their own improvements.

On 6 December 1993 Miss Collett drafted and sent a proposed rent review clause. Item 4.2(c) contained a disregard as regards any improvement carried out with consent otherwise and pursuant to an obligation to the landlord or its predecessors in title. She only sent the rent review clause. I am by no means clear at this stage that it can be said with certainty that the Percivals could be expected to understand the consequence of that clause when one works back to clause 5 of the draft lease. It also seems to me that at this stage it is at least arguable that this burden, which appears to be occurring, ought to have been explained more clearly. I cannot at this stage see why, as I have said, the Claimant would appear willing to assume such a radical change in rent basis.

At this stage a provisional conclusion could be drawn that Miss Collett has misunderstood the original basis for the rent and she is at cross purposes with her client.

Shoosmiths sent their own draft under cover of a letter dated 17 December 1993, but the basic premise of the disregard on a market rent basis was retained in clause 4.2.3(a).

Miss Collett sent this version of the rent review clause to Mr and Mrs Percival on 23 December 1993 to their hotel in San Moritz where they were on holiday. The relevant clause of this vital letter is as follows:-

“The matters to be disregarded in clause 4.2 include improvements made to the premises save for those made in pursuance of obligations to the landlord. This coincides with my wording as otherwise one is not entitled to take into account the actual development of the site when calculating rent which would clearly be unfair. There is also excluded from the disregarded matters (i.e. including items that can be taken into account on the rent review) improvements completed more than 21 years before the relevant market review date. I am not sure this is necessary. The development of the site should clearly be taken into account when that is covered by a sub-clause (a); I do not see why other improvements should be included”

Now Mr Crawford submits with some force to my mind that reading this part of the letter makes it quite clear that the future rent review is to be assessed on the basis of the development. I am not sure (and he was unable to explain) why any other basis would be “unfair” to the landlord. Of course the Percivals did not have, so far as I can see full extract of the Lease and the wording to a lawyer to my mind does seem clear.

Mrs Percival replied with comments on the draft in relation to future developments and confirmed this in a letter she sent on 24 December 1993, see page 3 where she addresses the implications of improvements under 4.2.3(b). Of course this clause operates the other way. New improvements are disregarded; old improvements after a period of time (increased to 35 years) become improvements. She dose not address however, the other part of the letter dealing with the original site.

Mrs Percival in her witness statement (paragraphs 19 and 20) deals with this letter. She says that she did not appreciate that the effect of the rent review clause would be to end up meaning that they would end up paying rent on an entirely different basis than the one that was negotiated. By that she means she was addressing the belief that the rent originally was not assessed on a developed basis. She candidly accepts in paragraph 20 that Miss Collett’s letter does refer to the development being included. She says she did not appreciate this at the time. She was reassured by the fact that the proposal was described as fair.

It seems to me that at this stage it would not be right to draw a definite conclusion against the Claimant. One has to look at the overall picture to my mind and how this rent review clause came into existence. I have already observed that it might well be that Miss Collett could have misunderstood the instructions. I am not deciding that; quite the contrary. There is to my mind no question of me being in a position at this stage to decide any matter, which involves meetings where there are no clear notes. I am however satisfied that there is an arguable case that this clause constituted such a radical departure that the Percivals cannot possible have considered that that was what they were agreeing to.

Sending the matter out in a letter just before Christmas to the Percivals does not necessarily provide the best medium of drawing their attention to this clause. Miss Collett could have said what Mr Crawford described as being the obvious i.e. “you will be paying rent on the value of the improvements that you are going to carry out”. There is no doubt that had that been included (and I accept hindsight is a wonderful thing) that the Percivals would have clearly understood what was going on.

At this stage however, it seems to me based on the decisions of Boyce -v- Rendells [1983] 268 EG 268; County Personnel Ltd. -v- Alan R Pulver & Co. [1987] 1 WLR 916 that the warnings might have not been clearly considered.

Thereafter the parties entered into the Lease.

As I have said above it is now accepted that the primary limitation period began to run on the date of the commencement of the Lease. In 1995 the Claimant was seeking to borrow money and offer the Lease as a security. Part of that exercise involved obtaining a valuation and they obtained a valuation from a firm William Hillary dated 21 July 1995. That report raised a question mark over the rent review clause. Under paragraph 7.3 it said:-

“The rent is reviewed in line with the RPI, but at 10 yearly intervals either party may seek a review to the market rent. In our opinion this would result in the tenant paying rent on the initial development not just a ground rent.

We advise this matter is checked by your solicitor and in any event that his interpretation differs from ours the valuation should be referred back to us for further consideration”.

On the second page of the extract the report says this:-

“7.4

We particularly draw your attention to the rent review clause which favours the landlord. Current rents for Golf Courses are going through a period of rapid change, but it is our opinion in the event that the Course is trading well the annual rent could increase to as much as £100,000.00 at current prices ”.

At that time the rent payable was £15,000.00 (Fifteen Thousand Pounds) but that was accepted to be a discounted rent and the rent under the Lease on 2 February 1996 would go up to £45,000.00 (Forty-five Thousand Pounds). On the basis of this valuation report however, that would represent a substantial discount below the market rent.

The Percivals faxed that extract to Miss Collett on 13 September 1995. Mr Percival in the covering fax saying “It would appear that the value is slightly confused (join the club!) but I welcome your thoughts”.

On 4 October 1995 Miss Collett replied, and in the second paragraph of that letter she said “as you know this lease was not granted at a ground rent which would be a nominal rent and is more usual where a premium has been paid for the grant of the lease which was not the case here”.

She does not go on in that letter formally to draw to her client’s attention the fact that she did not understand the rent to be payable on anything other than a developed basis both at the commencement of the lease and thereafter.

She attached a draft letter to her client, which was to be used for the purposes of being sent to the Bankers. The first page of that letter says (after referring to the first part of the valuation report set out above) as follows:-

“It was never intended that the rent would be anything other than “a market rent”. Although Eagle Major Ltd. has borne the costs of construction of the Golf Course it did not pay a premium for the Lease and negotiations always proceeded on the basis of a commercial rent.

Naturally this will take into account the development which has taken place and for which you have borne the cost but which will hopefully enable you to make substantial profits part of which will be utilised to pay the agreed rent ”.

On the second page she says this:-

“I am surprised by the rather bold statement in paragraph 7.4 of the valuation about the rent review clause; these clauses commonly favour the landlord since they very rarely (if ever) provide for anything other than upwards only reviews. The reasons for the alternative methods of calculating rent in your lease were to give the opportunity to bring the rent into line with the “market” and to ensure the rent didn’t rapidly increase due to galloping inflation. Although the rent cannot come down on service of a market rent notice it might provide that it does not increase for the next 5 years even if there has been an increase in the Retail Price Index. Conversely it might result in rent being higher that it would have been on a simple Retail Price Index increase but we all agreed in those circumstances, if the market warranted a higher rent that would be presumably because Golf Courses were booming in trade and profits would be such as would sustain such an increase”.

All of that makes sense if the base start for the rent was also only developed site basis. It does not make sense for the reasons that I have set out earlier in this Judgment if the base is on an undeveloped site with planning permission.

After a discussion with Mrs Percival which is noted in the attendance note of 5 October 1995 as follows:-

“We then discussed the rent review provisions and the fact that it was always agreed that rent would be payable on the basis of the market rent and that it would therefore only rise if the market which presupposed that golf clubs were doing well. We discussed the terms of normal commercial Leases and rent review clauses and the fact that they were normally weighted in favour of the Landlords since they were inevitably “upwards” ”.

The draft letter was varied to include a final paragraph as follows:-

“From what I have seen, it appears that the valuers may have misapprehended the terms upon which you entered into the lease with the result that undue weight has been given to the rent review provisions without taking into account the full picture which never contemplated that rent would be anything other than a market/commercial rent on the whole development”.

It is by no means clear to my mind that at this stage that the point of the costs of the development was clearly understood again by the Percivals. The attendance note makes no reference for example to that.

Mrs Percival in her witness statement says that she drew comfort from the wording of the letters and was still believing that the original basis for the start rent was open market value with planning permission.

Once again Mr Crawford with force submits that it could not be clearer. The letter he says sets out accurately the basis upon which the rent review was, according to Miss Collett, always to operate. That is contrary to the intentions of the Claimant in this case and it put them clearly on notice that Miss Collett believed that the initial rent was based on a market rent of the developed site. If that was not correct his submission it that the Claimants are clearly put in possession of the necessary material for the purposes of making a claim against the Defendants. Thus he submits they have all requisite knowledge for the purposes of triggering the alternative limitation period under section 14 A of the Limitation Act 1980.

Once again there is force in this but I am reluctant to draw such a definite conclusion at this stage without the parties giving evidence. The overall tenor of the conversation between Mrs Percival and Miss Collett to my mind must be dealt with at trial so that a full picture of the discussions can be considered. The letter of 5 October 1995 suggests that the surveyor’s letter had errors. It is not sufficiently clear in my mind at this stage that it can be said with certainty that the only conclusion that can be drawn from these letters absent evidence is that the Claimant was fully aware of all the material to enable it to bring a claim for negligence against the Defendants.

I am not deciding this one way or the other, as it seems to me once again these are matters, which ought to go to trial.

Mr Crawford submits that in relation to this exchange the position is no different to the exchange that took place in 1995 when the same point was raised. Mr Wardell QC submits the difference is the extent of the reassurance given in 1995 in the discussion between Mrs Percival and Miss Collett, which is absent in 1995. That is a factor, which the Deputy Master relied upon and to my mind at this stage he was right so to do. In the 1999 correspondence the issue is clearly considered in isolation and there are no other possibly confusing matters in relation to a criticism of the surveyors report and in relation to reassurance as regards rent.

I cannot at this stage put out of my mind that it seems to me extraordinary that the Claimants would agree a rent for substantial development based on their own expenditure. I have seen nothing in the case to see why they would ever agree such a clause. There is evidence especially in relation to Bearwood and in relation to their initial offer to purchase the freehold of the Land that they were alert to the fact that they should not have to pay a substantial sum based on their own expenditure. This seems to me to be the most important reason as to why the matter should go to trial.

In the words of CPR 24 this is “some other reason” as to why the matter should go to trial. I do not believe a definite conclusion can be made without a full investigation of the relationship between the parties, the discussions that took place and how the Lease came into being.

For all of those reasons I dismiss the Defendants appeal.