Chancebutton Ltd & Anor v Compass Services UK & Ireland Ltd

In this action the Claimants seek a declaration as to the meaning of a rent review clause in a lease of office premises.

On June 23, 1989 office premises on the second floor of Mulliner House, Flanders Road, Turnham Green, London W4 were demised by P&O Property Holdings Limited to Sutcliffe Catering Group Limited from June 24, 1982 for a term of 25 years less one day. The unexpired residue of the term created by the Lease is now vested in the Defendant while the reversion is now held by the Claimants. The Claimants do not know why there was a gap between the date of the Lease, and the date of commencement of the term, but have put forward evidence suggesting that the original tenant, Sutcliffe Catering Group Ltd, agreed in 1980 to take a lease when the building as completed, and that the building was ready for occupation in 1982.

The term granted under the Lease is defined in clause 2 by the following words:

“TO HOLD the same except and reserved (and subject) as aforesaid unto the Tenant from and including the Twenty-fourth day of June One thousand nine hundred and eighty-two for the term of TWENTY FIVE YEARS less one day”

The rent reserved under the Reddendum was (i) a peppercorn until June 6, 1985 (ii) the Initial Rent of £104,100 until June 24, 1987 and (iii) thereafter the Initial Market Rent or the rent payable immediately prior to the relevant Review Date or such increased rent as might be payable pursuant to the rent review provisions of clause 3, whichever were the greater. The first day for payment of rent and other sums under the Lease was June 7, 1985.

Clause 3(2) of the Lease made provision for rent review to the “Current Market Rent” at each Review Date. “Review Date” is defined in clause 3(1)(a) to provide for reviews at 5 yearly intervals, “the last day of the fifth, tenth, fifteenth and twentieth years respectively of the term hereby granted”, i.e. June 24 in the years 1987, 1992, 1997 and 2002. The last rent review was due to take place with effect from June 24, 2002.

The expression “Current Market Rent” is defined in clause 3(1)(b) of the Lease as follows:

“Current Market Rent shall mean the gross full market rent without any deduction whatsoever at which the demised premises might reasonably be expected to be let at the relevant Review Date in the open market without a fine or premium and with vacant possession by a willing landlord for a term equal to the term originally granted under this lease and under a lease on the same terms and conditions in all other respects as this present lease …”

Clause 3(4) provides for the determination of the Current Market Rent either by agreement between the parties or in default of agreement by a single arbitrator acting as an expert.

An independent expert has been appointed and he has invited the parties to draw up a statement of agreed facts. It has become apparent that there is an issue between the parties as to the duration of the hypothetical term to be assumed under clause 3(1)(b).

The Claimants contend that the hypothetical term is a term from June 24, 1982 for 25 years less one day. The Defendant contends that the hypothetical term is a term of 25 years commencing on the relevant review date, namely June 24, 2002.

The words “a term equal to the term originally granted under this lease” contain two elements: a date from which the term commenced and a duration.

The natural meaning of the expression “for a term equal to the term originally granted under this lease” is a term commencing on June 24, 1982 and having a duration of 25 years less one day.

The term originally granted under the Lease was not a term of 25 years from June 24, 2002. A term of that duration from that date of commencement would not be “equal to” the term originally granted. It would commence on a different day and entitle the tenant to occupy the premises for 20 years beyond the date on which the term originally granted will end.

Had the parties intended the assumption at each review to be a term of 25 years from and including the review date it would have been easy for them to have said so. There would have been no reason for them to use the complex wording used in clause 3(1)(b). They would simply have referred to a letting for “a term of 25 years commencing on the relevant review date”.

There is a presumption that the hypothesis upon which the rent should be fixed on a review should bear as close a resemblance to reality as possible: Basingstoke & Deane Borough Council v Host Group Limited [1988] 1 WLR 348, 353-4; Canary Wharf Investments (Three) v Telegraph Group Ltd [2003] 3 EGLR 31, paras 11-20.

The Claimants’ construction is consistent with reality. The Defendant does indeed enjoy a lease for a term of 25 years commencing on June 24, 1982 and does not have a term of 25 years commencing on the review date. The Defendant’s construction requires a departure from reality which is not justified by the language of clause 3(1)(b).

The Defendant’s construction can only be sustained by ignoring the date of commencement of the term originally granted. To justify that approach as a matter of construction two things would be necessary: (a) great weight would have to be put on the words “at the relevant review date” and (b) a restricted meaning would have to be given to the words “equal to”. As to those:

The Defendant’s contention is at variance with well known authority. The courts have consistently construed rent review clauses requiring that the hypothetical term be “equal to” or “equivalent to” the term of the actual lease as requiring that the rent be determined on the assumption that only the unexpired residue of the original term remains: Ritz Hotel (London) Limited v. Ritz Casino Limited [1989] 2 EGLR 135; Lynnthorpe Enterprises Limited v. Sidney Smith (Chelsea) Limited [1990] 2 EGLR 131 (C.A.); St. Martin's Property Investments Limited v. CIB Properties Limited [1999] L&TR 1 (C.A.). These authorities are consistent with the Claimants’ submission that the "term equal to the term originally granted under this lease" referred to in clause 3(1)(b) is a term of 25 years from and including June 24, 1982. The alternative construction, that the term of 25 years is to commence on the review date produces a result which is at variance with reality in that a tenant who has only 5 years remaining on the lease would be required to pay a rent calculated on the assumption that he had 25 years remaining.

The authorities contain statements of principle as to the role played by the “presumption in favour of reality” in interpreting valuation formulae in rent review provisions.

In Norwich Union v. Trustee Savings Bank [1986] 1 EGLR 136; Ritz Hotel (London) Ltd. v. Ritz Casino Ltd [1989] 2 EGLR 135; Lynnthorpe Enterprises Limited v. Sidney Smith (Chelsea) Limited [1990] 1 EGLR 148; and St. Martin’s Property Investments Ltd v. CIB Properties Ltd [1999] L&TR 1 the presumption of reality was considered to favour an interpretation that the notional term was to be the unexpired residue of the term as at the review date, because that was the reality of what the tenant had as at the time when the reviewed rent was being assessed.

This is not, or is not always, a correct application of the presumption: see Staughton LJ in the Lynnthorpe case at 135B; Canary Wharf v. Telegraph Group Ltd [2003] 3 EGLR 31, 34. The presumption in favour of reality is not to be used as a mechanistic rule of construction requiring, in each case, that words in a rent review formula prescribing the length of the notional term must be construed, if at all possible, as meaning that the notional term is the unexpired residue. Rather it is for the Court to consider, applying ordinary principles of interpretation to the words used, to what extent the presumption indicates that that was their intention.

The words used to describe the notional term require one to consider, in the context of the rent review hypothesis, what was the term which was “originally granted” under the Lease, and then to take, as the notional term, a term which is “equal” to that.

As Neuberger J. pointed out in the Canary Wharf case (at 33G-L) there is a distinction to be drawn between what term is granted and the length of term which may be expressed by way of computation. Whatever contractual obligations there may be between the parties, no actual term of years can be created until the lease has been executed and so the grant has been made: Bradshaw v. Pawley [1980] 1 WLR 10.

The Lease expresses the term to commence on a date earlier than the date of grant; this is not of itself unusual, since it is common to backdate the expressed commencement date, often so as to facilitate computation of the expiry and other key dates during the lease by reference to a usual quarter day. What is unusual is that the term of 25 years (less one day) was expressed to commence on June 24, 1982, whereas the Lease did not take effect as a grant until June 23, 1989, almost 7 years later. By this date the first Review Date (June 24, 1987) had already passed. The date for first payment of rent and other sums due under the Lease (June 6, 1985) had also long passed. Accordingly, the term “granted under” the lease was a term of approximately 18 years from June 23, 1989.

Alternatively, if one asks what was the length of term in respect of which the Initial Rent (subject to review) was intended to be payable, one might start “the term” at June 6, 1985, giving a term of just over 22 years.

The Defendant does not contend that the parties could be taken sensibly to have intended that the term on each review should be 18 years, even though that would seem to be the literal description of what was “originally granted”. Nor does the Defendant contend that it should be just over 22 years, being the period in respect of which a rent was to be payable.

More sensibly and commercially, the parties by referring to “the term of years originally granted under this lease” were referring not to what was actually granted but to what was expressed to be granted. If the presumption of reality is to be applied on the basis that the tenant should be expected to pay a rent for what he actually has, because it is the purpose of rent review to update the original bargain to take account of inflation and changes in rental values, it is necessary to consider carefully exactly what was that original bargain. Here, in a sense, what the tenant had, in fact, was a term of 18 years, yet the agreement as to rent, and in particular the agreement to pay rent and other sums from a date considerably earlier than the date of grant, was based upon an expressed term of 25 years (less one day). That was not what the tenant ever had, yet the parties went out of their way to describe that as being the term which was granted.

If the parties for some unknown reason agreed to express the term granted as being one considerably longer than the 18 years in fact granted, then it would seem logical to conclude that they were content that the rent, on review, should itself be calculated on the basis of that expressed term. The only expressed term was one of 25 years (less one day). That was the term expressed to be granted (although the actual grant was shorter).

It would therefore fulfil the parties’ original bargain, and conform with the presumption in favour of reality, to hold that there is a notional term of the full 25 years (less one day) expressed to be granted, running from the relevant Review Date. Only in that way can one find a “25-year rent” and can one update, by reference to 2002 values, what appears to have been the parties’ original bargain as to rent.

As is frequent in cases of this kind, the parties accept that to refer to authorities on other documents for the purpose of ascertaining the construction of a particular document is in principle to be deplored as a wrong approach and likely to lead to confusion and error (see, e.g. Equity & Law v. Bodfield [1987] 1 EGLR 124 at 125C), but have referred to all of the recent authorities in which a similar question of construction has arisen. This is not surprising given the fact that every year thousands of rents are coming up for review on the basis of clauses which contain similar (but not identical) provisions, and landlords, tenants and valuers need to know what the right basis of valuation is, without recourse to lawyers and the courts: British Gas Corp v Universities Superannuation Scheme Ltd [1986] 1 WLR 398, 403, per Sir Nicolas Browne-Wilkinson V-C. Thus in St. Martin's Property Investments Limited v. CIB Properties Limited [1999] L&TR 1, 11, the Court of Appeal accepted that it was not normally appropriate to construe a clause in a lease by reference to a decision on construction of another lease which was not identical, support was derived from such a decision (Lynnthorpe Enterprises Limited v. Sidney Smith (Chelsea) Limited [1990] 2 EGLR 131) and Aldous LJ said that it would be odd if the clause in the St Martin’s case were construed differently from the clause in the Lynnthorpe case.

The relevant principles are, in my judgment, these: first, the question is one of construction of the language of the document in the light of its context and purpose, and there are no special rules for the construction of a rent review clause; second, it is plainly appropriate to have in mind the commercial purpose of the clause, which is to enable the landlord to obtain from time to time the market rental which the premises would command if let on the same terms on the open market at the review date; third, the trend of the case-law is towards what has been called a presumption of reality, which means that, in the absence of clear contrary words or necessary implication, it is assumed that the hypothetical letting required by the clause is of the premises as they actually were, on the terms of the actual lease and in the circumstances as they actually existed; fourth, the presumption of reality is not a mechanistic rule, but really an example of the principle that a commercial approach to construction is the starting point. See Norwich Union v. Trustee Savings Bank [1986] 1 EGLR 136; Basingstoke & Deane Borough Council v Host Group Limited [1988] 1 WLR 348, 353-4; Ritz Hotel (London) Limited v. Ritz Casino Limited [1989] 2 EGLR 135; Lynnthorpe Enterprises Limited v. Sidney Smith (Chelsea) Limited [1990] 2 EGLR 131; Co-operative Wholesale Society Ltd v National Westminster Bank plc [1995] 1 EGLR 97, 99; St. Martin's Property Investments Limited v. CIB Properties Limited [1999] L&TR 1; Canary Wharf Investments (Three) v Telegraph Group Ltd [2003] 3 EGLR 31, paras 11-20.

In Norwich Union v. Trustee Savings Bank [1986] 1 EGLR 136, 137 Hoffmann J. said:

“There is, I think, a presumption that the hypothesis upon which the rent should be fixed upon a review should bear as close a resemblance to reality as possible. In this case the reality was that at the date of the rent review the tenant’s interest was an unexpired period of 10 years. He had been paying in the earlier part of the term a rent calculated, at any rate for the first five years, according to the market rent for what was then being granted, namely a lease for a period of 22 years. The purpose of the rent review is to enable that rent to be adjusted at a subsequent date in order to take into account the effects of inflation and changes in the market since the original grant. But I think that the landlord would be having it both ways if he was entitled not only to an adjustment for changes in the market and changes in inflation but also to the assumption that what was being granted on the rent review date was a brand new lease rather than what was in fact the case, a lease which by then was 12 years expired.”

There is no doubt that the trend of the decisions strongly favours the Claimants’ construction, and that in all of the cases (except one) the hypothetical term was construed to commence on the same day as the original term: Norwich Union v. Trustee Savings Bank [1986] 1 EGLR 136 (22 year lease, with 10 years unexpired: rent review clause referred to “terms and conditions” of lease: rent review to be on basis of lease with 12 years expired); Ritz Hotel (London) Limited v. Ritz Casino Limited [1989] 2 EGLR 135 (21 year lease from 1977; rent review in 1987 on basis of “a term equivalent to the term hereby granted”: held to mean a term of 21 years from 1977 of which 10 years had expired); Lynnthorpe Enterprises Limited v. Sidney Smith (Chelsea) Limited [1990] 2 EGLR 131 (15 year lease from 1978; rent review on basis of “a term of years equivalent to the said term”: held, term was 15 years from the original date of lease); St. Martin's Property Investments Limited v. CIB Properties Limited [1999] L&TR 1 (35 year lease: rent review on basis of “a term equal in duration to the original term hereby granted”: the hypothetical term commenced on the same date as the original term). The only exception to which I was referred was Canary Wharf Investments (Three) v Telegraph Group Ltd [2003] 3 EGLR 31, where after a full consideration of the cases Neuberger J came to the conclusion that the words “for a term of 25 years” in their context indicated that the term of the hypothetical lease was to be a term of 25 years from the relevant review date.

But irrespective of the authorities, I am satisfied that the Claimants’ construction is the right one for these reasons.

First, I do not consider that it makes any difference to the commercial construction of the clause that (a) the term of 25 years (less one day) was expressed to commence on June 24, 1982, whereas the Lease did not take effect as a grant until June 23, 1989; or (b) by June 23, 1989, the first Review Date (June 24, 1987) had already passed (the rent was retrospectively agreed at the date of the grant of the lease to be £139,500 from the first Review date); or (c) the date for first payment of rent and other sums due under the Lease (June 6, 1985) had also long passed. These are all part of the factual matrix which would be relevant to construction, but I derive no assistance from them. It is very common for leases to take effect from a prior date, and it would be anomalous if similar (but not identical) wording which was common (although not invariable) in leases would bear different meanings depending on whether the lease was granted before or after the tenant took possession.

Second, the natural meaning of the expression “for a term equal to the term originally granted under this lease” is a term commencing on June 24, 1982 and having a duration of 25 years less one day. A term of 25 years from June 24, 2002 would not be “equal to” the term “originally” granted, and the Defendant does not contend that the parties could be taken to have intended that the term on each review should be 18 years (the unexpired term as at the date of the lease). Third, had the parties intended the assumption at each review to be a term of 25 years from and including the review date it would have been easy for them to have said so. I accept the submission that they could simply have referred to a letting for “a term of 25 years commencing on the relevant review date”. Fourth, the Defendant’s construction requires a departure from reality which is not justified by the language of clause 3(1)(b). A tenant who had only 5 years remaining on the lease would be required to pay a rent calculated on the assumption that he had 25 years remaining.

For these reasons, I will grant the declaration sought by the Claimants.