LT & R Vowles (Parent) Ltd v Aston & Ors

MR JUSTICE PATTEN: This is a Part 8 claim by LT & R Vowles (Parent) Limited, who are the subtenants of premises at Longdon Heath Sawmills, Longdon Heath, Upton-on-Severn, Worcestershire. They seek to declarations in respect of the operation of a rent review of those premises, which has been conducted pursuant to the terms of the head lease of the premises dated 17 April 1975.

The essential question is whether the defendants, who are the landlords of those premises, have validly exercised the right to review the rent contained in the head lease, in relation to the rent review which under the terms of that lease fell due on 1 May 1999.

As I will explain a little later in this judgment, that rent review is relevant to the under lease, because under the terms of the reddendum in the under lease, the rent payable is to be the same as the rent from time-to-time payable under the Head Lease.

It is necessary for me to say something about the transactional background which has led to this dispute. The Head Lease was granted on 17 April 1975, by Mr Sidney Aston to a company called Turner Kennedy Limited, for a term commencing on 1 May 1974 and ending on 31 December 2023. The initial rent reserved by the lease was £1,000 subject to the provisions for review which I have mentioned.

Mr Aston died on 7 May 1979 and the freehold reversion expectant on the Head Lease became vested in the trustees of his Will. On 18 January 1983 Turner Kennedy Limited assigned the Head Lease to Mr George Warburton, who in turn, on 15 March 1983 granted the Under Lease of the premises, which is now vested in the claimant.

On 31 March 1987 the trustees of Mr Aston’s Will executed a conveyance in favour of the defendants, under which the freehold interest in the property, together with the benefit of the Head Lease, was transferred to the defendants as joint tenants, to be held upon trust for sale for themselves as tenants in common in equal one-third shares.

On 14 July 1988 the defendants gave their consent to Mr Warburton to assign the Head Lease to Kenyan Securities Limited. There is some dispute as to whether notice of the same was ever given, but nothing turns on that for the purposes of today.

In May 1994 a rent review took place, as a result of which the rent was increased to the sum of £25,000 per annum.

The next event which is material to these proceedings is that, on 19 October 1998 the agents acting for the defendants purported to serve on Mr Warburton a valid Rent Review Notice in accordance with the rent review provisions contained in clause 2.3(a) of the Head Lease. That notice proposed a new rent of £45,000 per annum. By then, of course, Mr Warburton was no longer the tenant under the lease. Under the provisions of the rent review clause, the last date for service of the notice initiating the rent review, assuming that time is of the essence (which I will come to in a moment) for the service of such notice, was 31 October 1998.

On 23 December the agents served a further notice, in accordance with clause 2.3(a) of the lease, on the then tenant, Kenyan Securities Plc. Subject to the point about timing, it is accepted that that would have been a valid notice.

On 18 February 1999 the defendants executed a Declaration of Trust in relation to the freehold interest in the demised premises, under which they declared that henceforth they held the property as joint tenants upon trust for themselves as joint tenants in both law and equity. The effect of that Declaration of Trust was therefore to convert the tenancy in common created under the terms of the 1987 conveyance into a beneficial joint tenancy in equity.

Against that background I move to the events of 2000 which have given rise to most of the controversy in this case. On 18 October 2000 two deeds were executed. The first is what is described as an Assignment in Release, made between Kenyan Securities Plc (the tenant of the demised premises) and the defendant freehold owners. The deed recites the grant of the Lease and the Under Lease of 17 March 1983. In Recital E it says this:

“The Landlords have for the avoidance of doubt agreed to take a surrender from the Company of such interest (if any) as may still subsist in the Company under the Headlease and to release the Company from any past or present liability thereunder and accordingly THIS DEED RECORDS that:

1.

THE Company transfers to the Landlords such interest (if any) as it may at the present date have in the Premises and in the Headlease (but subject to the Underlease)

2.

THE Landlords release the Company from any liability for payment of rent reserved by the Lease or any documents supplemental thereto and for all or any liability under the Tenants’ covenants or conditions subsisting or accrued at the present date or in the future

3.

THIS last release is personal to the Company and shall not operate to indemnify any other party from liability under the provisions of the Headlease”

On the same day, the second deed (a Declaration of Trust) was also executed between the defendants themselves. That deed recites the assignment which I have just quoted from, and declares in terms:

“1.

The Lease shall not merge with and be extinguished in the freehold of the Property

2.

We hold the Lease for ourselves as joint tenants UPON TRUST for ourselves in equity as tenants in common in equal shares”

If that Declaration of Trust was effective in the sense that the Head Lease survived the Assignment executed prior to the Declaration of Trust, the end result was that whilst the freehold was held by the defendants as joint tenants beneficially, the Head Lease was held by them as tenants in common in equal shares. The issue that I have to decide turns on whether or not the Assignment of 18 October 2000 effected a surrender of the Head Lease and thereby extinguished the term.

Before I come to that issue it is necessary for me to say something about the nature of the dispute which arises under the terms of the rent review clause. Under the Head Lease the tenant agrees to take the term at an initial yearly rent of £1,000 payable by equal quarterly payments in advance, subject to review in accordance with the provisions of clause 2 of the Lease. Clause 2 then provides as follows:

“(1)

THE provisions of this clause shall apply to the determination of the rent to be payable hereunder at the expiry of every fifth year after the expiry of the first ten years of the Term and on the death of the Landlord

(2)

THE following expressions shall have the meanings assigned to them respectively:-

“The Review Date” shall mean the expiry of every fifth year after the expiry of the first ten years of the Term

“The Additional Review Date” shall mean the date of death of the Landlord

“The open market rental value” in relation to the review date shall mean the annual rental value of the Premises in the open market which might be reasonably demanded by a willing landlord and paid by a willing tenant on a Lease for a term of years certain equivalent in length to the residue unexpired at the review date of the Term with vacant possession at the commencement of the Term but on the supposition (if not a fact) that the Tenant has complied with all the obligations as to repair and decoration herein imposed on the Tenant (but without prejudice to any rights or remedies of the Landlord in regard thereto) and there being disregarded (if applicable) those matters set out in paragraphs (a) (b) and (c) of Section 34 of the Landlord and Tenant Act 1954 such lease being on the same terms and conditions (other than as to amount of rent and length of term) as this present demise without the payment of any fine or premium

(3)

IN respect of the Review Date the open market rental value shall be determined in manner following that is to say it shall be such annual sum as:-

(a)

shall be specified in a notice in writing given by the Landlord to the Tenant at the Premises at any time before the beginning of a clear period of six months before the Review date or

(b)

shall be agreed between the parties three months before the review date in substitution for the rent stated in the Landlord’s notice, or if the sum referred to in sub-clause (a) shall not be agreed by the Tenant or the parties are unable to reach agreement under sub-clause (b) then

(c)

as shall be determined at the election of either party (such election to be made by notice in writing to the other not later than three months next preceding the review date) by an independent surveyor appointed for that purpose by the parties jointly in writing or (upon their failure to agree upon such appointment within one month immediately after the date of the said election) then by an independent surveyor appointed for that purpose on the application of either party alone by the President for the time being of the Royal Institute of Chartered Surveyors ad in either case in accordance with the provisions of the Arbitration Act 1950

(d)

the rent payable by the Tenant from and after the review date shall be the open market rental value determined in the manner prescribed by the last preceding sub-clauses or the rent payable hereunder immediately prior to the said review date whichever shall be the greater

(e)

in the event of the determination of such independent surveyor not having been published prior to the review date then in respect of the period of time beginning with the review date and ending on the quarter day immediately following the publication of the said determination the Tenant shall pay to the Landlord rent at the yearly rate payable immediately before the review date Provided That on the quarter day immediately following such publication there shall be due as a debt payable by the Tenant to the Landlord on demand a sum of money equal to the amount whereby the yearly rent determined by such independent surveyor shall exceed the yearly rent at the yearly rate payable before the review date but duly apportioned on a daily basis in respect of the period between the review date and the date of such publication”

Clause 2.5 of the Lease provides as follows:

“ALL stipulations as to time in this clause shall be deemed of the essence of the contract and shall not be capable for enlargement save as agreed in writing by the parties”

Following the service of the notices on 19 October 1998 and 23 December 1998, on 12 February 2003 the claimant was given notice by the defendants of an application under the rent review provisions contained in clause 2 of the Head Lease, to the President of the RICS for the appointment of an arbitrator to conduct the rent review. The arbitrator appointed was Mr TJ Corns FRICS. He was presented initially with an argument as to whether or not the rent review machinery had been validly exercised. In particular, the claimant submitted that under the provisions of clause 2 of the Head Lease, time was of the essence in respect of each of the possible means of implementing and arriving at a reviewed rent contained in sub clause 2.3 (that is to say, (a), (b) and (c)).

For there to be a valid and effective rent review the landlords had either to serve the requisite notice before the beginning of a clear period of six months prior to the review date, or there had to be agreement between the parties three months before the review date for the rent in substitution for the amount stated in the landlords’ notice, or in the event that there was no such agreement as to the amount of rent as specified in the notice, then there had to be a determination by an independent surveyor appointed following the service of a notice of election by either party not later than three months next preceding the review date.

The arbitrator, having heard the parties’ submissions, seems to have accepted that the initial notice served under sub clause 2.3(a) was out of time, but he interpreted the word “or” where it appears in sub clauses 2.3(a) and (b), as meaning “either/or”, so that even if the notice was served out of time, it remained open to the parties to proceed to an appointment absent agreement on an independent surveyor unfettered by the provisions making time of the essence. It seems to me that that is a wrong construction of the Lease, and one that is not in accordance with the provisions of sub clause 2.5, which in terms states, as I have already indicated, that all stipulations as to time shall be deemed to be of the essence of the contract. Therefore, insofar as it is necessary for me to decide the matter, I am clearly of the view that the arbitrator’s decision was wrong in law. I should say that Mr Horne, who appears today on behalf of the defendants, did not suggest otherwise.

The Part 8 claim therefore, in its original form, sought permission to appeal against that decision, under either Section 67 or Section 69 of the Arbitration Act 1996. The landlords’ response was that regardless of the correctness of the arbitrator’s decision, the claimant was not a party to the arbitration proceedings within the meaning of the Arbitration Act and was therefore not entitled to exercise what is a statutory right of appeal.

A party to arbitration proceedings is not a defined term as such under the Arbitration Act. It must, in my judgement, mean someone who has properly been made a party to the arbitration, ie somebody who is a party to the arbitration agreement. It is clear that the claimant is not such a party, notwithstanding that it was invited to participate in the arbitration, because both the arbitrator and (I think it is fair to say) the landlords were concerned that following the assignment of the Head Lease to them in 2000, they had become, on their own view of the effect of that assignment, both landlord and tenant. That is not, however, in my judgement, enough to have rendered the claimant a party to the arbitration proceedings within the meaning of the statute, and it is that meaning which determines whether or not the claimant has a statutory right of appeal.

Therefore, when this matter came before me on the first occasion last year, I offered to the claimant the opportunity to amend the Part 8 Claim Form. That opportunity has now been taken, as a result of which there is now added to the Part 8 Claim Form an additional paragraph which alleges in terms that the assignment in October 2000 had the effect of determining the lease by surrender.

It seems to me that that logically is the first issue to which I must now turn. Miss Selway, on behalf of the claimant, says that the assignment of 18 October 2000 operated as an express surrender of the Head Lease, thereby bringing that lease to an end for all purposes and determining any further right on the part of the landlords to implement the review. She referred me to paragraph 526 in Volume 27 of Halsbury’s Laws of England, dealing with landlord and tenant, in which the editors say this in relation to an express surrender:

“The use of the word ‘surrender’ is not necessary. Any form of words which shows the intention of the parties to effect a surrender will be sufficient; and the words will be construed so as to give effect to that intention. It is, however, always necessary to ascertain the true nature of the document and not just its ostensible form, so that a forfeiture in the guise of a surrender remains a forfeiture.”

Miss Selway relies in particular on Recital E, which I have already read out, and to the words in that recital that, for the avoidance of doubt the landlords have agreed to take a surrender from the company of such interest, if any, as may still subsist in the company under the Head Lease. She also refers to the fact that at the end of that recital the draftsmen uses the word “accordingly” to introduce the operative provisions which follow.

In relation to the Declaration of Trust, Miss Selway accepts that, if the provisions comprising the declaration, its merger and the provisions for the beneficial interest to be held for the defendants as tenants in common, had been included in the assignment itself absent Recital E, that would probably have been effective to have preserved the Head Lease following the assignment. But, she says, the Declaration of Trust can only, according to its terms, take effect following the assignment, and it was the assignment which was effective to bring the lease to an end. That being so, the declaration against merger and the trust provisions I have referred to in the Declaration of Trust cannot have been effective to have preserved the Head Lease for the future.

A number of principles are not in doubt. In Woodfall on Landlord and Tenant, in paragraphs 17.039 and 17.040, the following statements of principle appear, which I am content to adopt as part of my judgment. In paragraph 17.039 the editors say:

“As between landlord and tenant, the effect of the surrender is to determine the term as from the date of the surrender. This means that the landlord obtains a right of recovery of the land. The estate formerly held by the tenant thus vests in the landlord. Where the surrender is made by an assignee of the lease, the liability of the original tenant is extinguished on the surrender, and the landlord cannot reserve his rights against him.”

In 17.040 there is a reference to a case where the lease contains a rent review clause and before the surrender the landlord has set in motion the procedure for review:

“… he has an accrued right to have the rent reviewed, and that right is preserved on surrender.”

Subject, however, to that, a surrender releases the tenant from liability for future rent. It does not, of course, release a tenant without more from any accrued liabilities for rent from liability for any other breaches of covenant under the lease.

The other point that requires to be mentioned is that although the text books refer to surrender and merger as the converse of each other (merger being apt to describe the situation where the tenant acquires the reversion and the reversion is thereby merged into the lease), nonetheless many of the principles which have been applied in true cases of merger seem also to have been given equal expression in relation to the effect of surrenders at common law.

A good example of this and an illustration of the principle that equity always leans against a merger, is the case of Chambers v Kingham 1877 C.251, a decision of Fry J, where the learned judge had to consider a case where an administrator granted an under lease for a term of years of land held by him as administrator, and afterwards accepted an assignment back from the under lessee for the residue of the term. Fry J held that there was no merger of the term in equity. At page 746 in his judgment he said:

“It appears to me that in the absence of special circumstances as are not shown to exist here, a term held by a person in his own right does not merge in the reversion held by the same person as an administrator.”

That is therefore authority for the proposition that if the provisions of the Declaration of Trust are operative, they would be effective to preserve the Head Lease in the hands of the defendant freeholders. The difficulty, however, is that the parties chose to enter into two separate deeds on 18 October 2000, and the issue arises as to whether or not, and indeed whether and to what extent, it is permissible for me to have regard to the Declaration of Trust and to seek to give effect to that when construing the earlier assignment.

I do not accept that it is possible for me to treat the Declaration of Trust as forming part of the factual matrix relevant to the construction of the Assignment. Although the two parts of the transaction are closely connected, they do not involve the same parties. In particular, the tenant (Kenyan Securities Plc) was not privy to the Declaration of Trust, nor is there any evidence that it was even aware of its contents at the time when it entered into the earlier Assignment.

One is therefore left to construe the Assignment by reference to its internal provisions and to what other material there is which, on an objective basis, can be inferred in relation to the background to the transaction.

It has to be accepted (and Mr Horne does accept) that at first blush Recital E of the Assignment does appear to expressly contemplate an intention on the part of the freeholders to accept what they describe as a surrender of the lease. But that provision, like any other provision in a deed, has to be construed in the context of the document as a whole. He submits that I ought to give equal, if not greater, weight, both to the description of the document as an assignment and in particular to the operative provisions contained in clauses 2 and 3 of the deed, which he submits are inconsistent with this being a surrender.

The reason why that submission is made is that under clause 2 of the deed the landlords released Kenyan Securities Plc not merely from a liability for the future payment of rent, which would be the automatic consequence of surrender, but rather from any liability for the payment of rent and for all or any liability under the tenants’ covenants or conditions existing at that time. That release is therefore general in effect and goes way beyond what would have been the normal consequences of a surrender.

Equally, clause 3, contrary to what the position would be under a surrender properly so-called, provides that the release contained in clause 2 is personal to the tenant by assignment to Kenyan Securities and is not intended to operate to indemnify any other party from liability under provisions of the Head Lease. That looks as if it was intended to, and certainly capable of, preserving any then subsisting liabilities on the part of the original tenant, which again is inconsistent with this deed operating as a surrender of the term.

If one takes those points into consideration, it is submitted that it becomes possible to read the word “surrender” where it appears in Recital E as little more than a shorthand description for what clauses 2 and 3 intend to achieve. In other words, it is simply an attempt by the draftsmen to describe the operation of the deed in relation to that one party rather than generally, and therefore the use of the word “surrender”, looked at in its context, is ambiguous. It is capable of two possible meanings: one the technical meaning for which Miss Selway contends; that is, that the surrender property so-called, the other of a surrender, in a loose and informal sense, of the obligation of Kenyan Securities Plc.

Miss Selway says that this is an attempt, in effect, to rectify the Assignment rather than to construe it, but in my judgement that criticism is unfair. The duty of the court nowadays is to ensure that it reads even legal documents in the round and it is a perfectly permissible method of construction to give words which are ambiguous, whatever meaning best fits the commercial purpose of the transaction, so far as that is evident from the admissible background facts. Sometimes that method of construction enables the court to go so far as to give words a meaning which it is not easy to find even in the dictionary. Those principles were explained by Lord Hoffmann in Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896, at page 913 where he said this:

“(4)

The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co. Ltd. v. Eagle Star Life Assurance Co. Ltd. [1997] A.C. 749.

(5)

The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera S.A. v. Salen Rederierna A.B. [1985] A.C. 191, 201:

"if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense."”

It seems to me that it is not necessary in this case to go that far. For the reasons which I have already explained, I take the view that looked at in the context of the deed as a whole, the use of the word “surrender” in Recital E is ambiguous and that the meaning of that word in its context, which Mr Horne has submitted it should bear, is one of the possible meanings of that term. In those circumstances it seems to me that my task is to choose whether the parties should be taken to have intended to give it that meaning or the more strict and technical meaning for which Miss Selway contends.

At this point in the argument it becomes relevant to have regard to the wider background. Although, as I have already indicated, it is not permissible to take into account the Declaration of Trust of the same date itself, it seems to me obvious that the landlords must be taken to have appreciated that if the Head Lease was surrendered, then, on the true construction of the Under Lease, it might not be possible to review the rent for a period of over 20 years. It makes no commercial sense for the landlords and tenant, against that background, to have intended that there should be a surrender as such of the Head Lease, rather than merely the release of Kenyan Securities Plc’s obligations on a personal basis. The latter is what, in terms, clauses 2 and 3 do. In my judgement that resolves the ambiguity in the meaning of the word “surrender” in favour of the construction which Mr Horne advances.

The consequence is that the defendants are entitled to continue to operate the provisions for rent review in the Head Lease for the remainder of its term. They have, however, for the reasons I have already given, failed to do that in relation to the 1999 lease. The arbitrator’s decision, as I have already indicated, is wrong. It is said in Mr Bettinson’s witness statement that even if time was of the essence for the operation of the rent review provisions, the strict time limits imposed by clause 2.5 of the Lease have been waived. In paragraph 5 of that statement he puts the point in these terms:

“The Defendants’ second objection is that they were entitled to waive, and did waive, any defect which there might have been in the rent review procedure.”

I am afraid to say that I regard that as a wholly inadequate attempt to set up acceptable evidence of a waiver. It makes no reference as to how that waiver came about or whether it involved the execution of document or some oral agreement. Nor does it even give a time or date on which the waiver is alleged to have taken place. I am not prepared, on the basis of that evidence, to find that there has been any waiver of the time limits in relation to the 1999 rent review.

It may be that the result of this will be that further attempts will be made to waive the time limits, so to speak, retrospectively, in relation to that review. That is likely to lead to arguments as to whether or not it is open to the landlords to do that, having regard to the fact that they are both landlord and tenant. There may well be an argument for implied term in the Under Lease that the rent review provisions, which have the effect of triggering an increase in the rent under the Under Lease, ought to be operated according to their terms.

I prefer to express no view about the merits of those arguments today, those are matters for the future. Hopefully they may be matters on which a measure of agreement can be reached between the parties. It is enough for me today to make suitable declarations to the effect that the Head Lease was not surrendered on 18 October 2000 but that there has so far been no effective operation of the rent review machinery in relation to the 1999 date of review.

The defendants should have the costs of the proceedings up to the date of amendment, when they were still in terms in appeal from the arbitrator. If not agreed, those costs are to be subject to a detailed assessment. In relation to the costs after the date of amendment, including the costs of today, I am going to make no order.