Hemingway Realty Ltd v Clothworkers' Company

This Part 8 Claim raises two related issues of construction in respect of a rent review clause in a lease. The Claimant and the Defendants are respectively the tenant and landlords of commercial premises at 3 Copthall Avenue, London EC2 (“the Premises”) which were demised to the Claimant’s predecessors in title, Corbett & Newsom Limited, by a lease dated 20^th March 1953. That lease was granted for a term of 30 years from 24^th June 1952 at a fixed rent of £1,500 per annum, payable quarterly in arrear throughout the term.

It is common ground that in 1972 the then tenant, Phoenix Assurance Company Limited, wished to reconstruct and modernise the Premises and that the landlords agreed to this being done at the tenant’s expense, subject to a variation of the terms of the 1953 lease.

On 23^rd May 1972 the parties entered into a deed of variation (“the Deed”) which operated as a surrender and re-grant of the existing tenancy, although as a matter of drafting the Deed incorporated the terms of the 1953 lease, subject to the variations which it made. By Clause 2 of the Operative Provisions of the Deed the tenant was granted a new lease of the Premises for an extended term until 25^th March 2033 in consideration of what is referred to as “the yearly rent”, which continued to be payable quarterly in arrear up to and including 24^th June 1982 (the end of the term of the 1953 lease) but then became payable quarterly in advance for the duration of the extended term, the first payment in advance being due on 24^th June 1982.

Clause 3(6) of the Deed provided that the tenant was entitled prior to 23^rd June 1982, at its own cost, to formulate, carry out and complete a scheme of modernisation for the Premises. If the works of modernisation had not been completed prior to 24^th June 1982, the landlords were given the right to determine the lease on six months’ notice.

The other principal change in the terms of the lease effected by the Deed was in respect of the rent. The term of the lease was divided into two periods either side of 24^th June 1982. Until that date the “yearly rent” as defined was to be the aggregate of £1,500 plus one of two alternative sums, depending on whether the works of modernisation had been carried out. If and so long as the works had not been carried out and completed, the additional sum was £3,500. But once the works had been completed, then the tenant also became liable to pay a sum equal to one-half of what is described in the Deed as the Super Rent for the period remaining up to 24^th June 1982. The Super Rent is defined as the balance remaining after deducting an amalgam of the open market rack rental value of the Premises in an non-modernised state on 15^th December 1972 plus an annual interest charge and a sinking fund charge from the open market rack rental value of the Premises in a modernised state on 25^th December 1972 or the date of completion of the works (if later), subject to that date not being later than the end date of 24^th June 1982 prescribed by Clause 3(6) of the lease. This produced a rent of £101,500.

Although the landlords therefore became entitled to share in the enhanced rental value of the modernised Premises in the period up to 24^th June 1982, the yearly rent for that period only changed on the completion of the works. It was not subject to any form of periodic review. However, in relation to the period from 24^th June 1982 (when, according to the provisions of the Deed I have mentioned, the works would be complete) the yearly rent did become liable to review at seven-yearly intervals. It is these provisions which have led to the present dispute.

The “yearly rent” for the term from 24^th June 1982 is defined as meaning:

“THE APPROPRIATE PERCENTAGE to the expiration of the term reserved out of the demised premises and payable pursuant to the provisions of this Deed.”

The meaning of this term depends upon two further definitions as follows:

“ “the appropriate percentage” means in relation to the yearly rent SIXTY PER CENTUM of the open market rack rental value of the demised premises on the Twenty fourth June One thousand nine hundred and eighty two (subject to that rental value being reviewed as provided in Clause 5(3))

“the open market rack rental value” has the meaning ascribed to that expression in Clause 5 sub-clauses (3)(iii) and (iv) and under which the same is to be ascertained”

Clause 5(3) contains the rent review provisions themselves and, in view of the arguments addressed to me on construction, it is necessary to set out most of this clause. It provides as follows:

“ (3) (i) The Lessor shall have the right to review the yearly rent as at the Twenty fourth June in each ofthe years One thousand nine hundred and eighty two One thousand nine hundred and eighty nine One thousand nine hundred and ninety six Two thousand and three Two thousand and ten Two thousand and seventeen Two thousand and twenty four and Two thousand and thirty one in manner set out below (that date in each ofsuch years being in this sub-clause (3) referred to as "the date of review”) at any time prior to the expiration oftwelve months following the Twenty fourth June in each ofsuch years

(ii)

From and after the date of review this Deed shall be read and construed and shall take effect in all respects as if the yearly rent had been from the date of review sixty per centum ofthe openmarket rack rental value ofthe demised premises immediately after such date ofreview but without prejudice to any ofthe other terms and conditions contained in this Deed and so that in no event shall the yearly rent payable by the Tenant to the Landlord in respect ofthe demised premises

(A)

for each of the dates of review specified in (i) of this sub-clause (3) (other than the Twenty fourth June One thousand nine hundred and eighty two) be less than the yearly rent for the year immediately following the Twenty fourth June One thousand nine hundred and eighty two and

(B)

for the date of review on Twenty fourth June One thousand nine hundred and eighty two be less than the rent paid for the year immediately preceding that date

(iii)

Subject to (iv) of this Sub-clause the open market rack rental value of the demised premises shall be the amount which shall be agreed between the Landlord and the Tenant (or in default of agreement shall be determined by an expert as provided in (iv)) to be the rent at which the demised premises might reasonably be expected to be let as a whole in the open market by a willing landlord on the assumption that the Tenant has complied with its obligations hereunder regard being had (so far as it is relevant) to any occupation of the demised premises at the date of review by a tenant who were his tenancy to be determinedvalidly on that date or should his tenancy then have expired would be in a position to require the Landlord to grant to him a new Lease by virtue of the provisions of the Landlord and Tenant Acts for a term of years not exceeding the residue of the term when the valuation is made reserving a rental subject to upwards only review every successive seven years and on the assumption that the demised premises are free from all rent charges and every other incumbrance and taking no account of any goodwill attached to the demised premises by reason of the business carried on therein by the occupier but otherwise subject to covenants conditions and provisions (other than the yearly rent and other than Clause 3(6) and (7)) similar to those contained in this Deed.

(iv)

In the event of the Landlord and the Tenant failing to agree as to the open market rack rental value of the demised premises at the date of review prior to the expiration of three months following the exercise by the Landlord of the right given to it by (i) of this sub-clause then and in any such case the matter shall as soon as practicable be referred to the decision of a competent person to be agreed upon by the Landlord and the Tenant or (if they do not reach agreement on the selection of the competent person within one month) to be nominated by the President for the time being of the Royal Institution of Chartered Surveyors at the instigation of either party and the competent person agreed upon or nominated as aforesaid shall be deemed to be an expert and not an arbitrator and his decision (including his decision (if any) as to costs) shall be binding on both the Landlord and the Tenant

(v)

Until such time as the yearly rent shall have been decided in the manner specified the Tenant shall continue to pay the rent as theretofore

(vi)

Any arrears of any increase in yearly rent due to the Landlord by reason of an increase in the yearly rent under this sub-clause (3) shall be paid in one sum to the Landlord on the quarter day next following the date of decision referred to in (iv).”

There is a considerable measure of agreement between the parties as to how these provisions are intended to operate. It is common ground that, because of the defined meaning of the appropriate percentage and the provisions of sub-clause 5(3)(ii), the yearly rent for the period from 24^th June 1982 can never be less than 60% of the open market rack rental value of the Premises at that date. It is also agreed that the review, once implemented at any review date, will be an open and not an upwards only review, subject only to the floor provided by the provisions of Clause 5(3)(ii). It must therefore have been clear to both parties and their advisers in 1972 that even if one assumed no more than a modest annual increase in rental values, then by at least the second or third review date the implementation of the rent review would be capable of producing either an increase or a decrease in the passing rent.

The review procedure has in fact been operated only twice since it came into effect. The first occasion was for the period from 24^th June 1982, when the rent was increased from £101,500 to £229,200 per annum. The second review took place with effect from 24^th June 1989, when the rent was further increased to £375,000 per annum. Since then, however, the Defendant landlords have chosen not to implement any further rent reviews, and the Claimant and its predecessors in title have continued to pay the rent of £375,000 per annum produced by the 1989 review.

The Defendants’ position is that they are content with the passing rent of £375,000 per annum and do not wish to initiate a review. It is implicit in that decision (as Mr Dowding confirmed at the hearing) that a review as of the last review date of 24^th June 2003 might lead to a decrease in the yearly rent. For the same reason the Claimant tenant is anxious that the rent review should take place with effect from 24^th June 2003, and on 18^th July 2003 its solicitors wrote to the Defendants requiring such a review to be implemented. The Defendants’ response was and remains that the right to review the yearly rent contained in Clause 5(3) of the Deed is exercisable by the landlords alone and that the Defendants may therefore maintain the passing rent by declining to initiate a review. The Claimant’s response is that this would (if correct) run contrary to the purpose of a rent review clause and would allow the landlords to convert what is in terms an open review clause into an upwards only rent review, simply by refusing to allow the rent review to take place. The Claimant now also contends in the alternative that if no rent review is initiated from any of the dates of review mentioned in Clause 5(3)(i), then the definition of “the appropriate percentage” has the effect of reducing the passing rent to 60% of the open market rack rental value of the Premises on 24^th June 1982, which we know was £229,200.

Although the two issues of construction have to be considered separately, they are of course related, and Mr Fancourt QC on behalf of the Claimant accepted that his argument that the rent review machinery could be implemented by either party and not by the landlords alone became much more difficult if he was right about the effect of the definition of the appropriate percentage. It seems to me that it would be impossible to contend that the tenant had lost the benefit of an open review, if the effect of not implementing any particular review was to reduce the rent to its 1982 level. That would produce a more than effective counter to the landlords’ right of veto in respect of the rent review. Given that the rent can never be less than the appropriate percentage, unrevised as at 24^th June 1982, the landlords would almost always be worse off if they failed to initiate a review. It is therefore, I think, convenient to turn first to Mr Fancourt’s alternative submission before considering the principal argument about the construction of Clause 5(3)(i).

The effect of this additional argument is that the passing rent produced as a result of a rent review under Clause 5(3) will revert automatically to the appropriate percentage, as defined, at the end of each seven-year period, unless replaced by a revised rent following a rent review. The usual effect of a rent review is to alter the passing rent for the remainder of the term or until a further review takes place. This is because the rent, once reviewed, becomes the rent reserved by and payable under the lease, and it can only be altered in amount by an express provision to that effect. So in the present case Clause 2 of the Operative Provisions of the Deed contains the demise for the extended term “in consideration of the yearly rent” and the reddendum also makes express reference to “the yearly rent”. As already indicated, this is a defined term which means the appropriate percentage from 24^th June 1982 “to the expiration of the term”.

The critical provision for this part of the Claimant’s argument is the definition of the appropriate percentage quoted in paragraph 7 above. This refers to the open market rack rental value of the Premises on 24^th June 1982, determined in accordance with the formula contained in sub-clauses 5(3)(iii) and (iv), but “subject to that rental value being reviewed as provided in Clause 5(3)”. The definition of the appropriate percentage therefore expressly contemplates that the 1982 rental value may be increased by review, in which case it is that figure which becomes the appropriate percentage and in consequence the yearly rent. This is to be contrasted with Clause 5(3)(ii), which imposes a minimum rent on any review from and including 24^th June 1989 by express reference to the yearly rent on 24^th June 1982 and not by reference to the appropriate percentage.

The Claimant’s argument is that the words “subject to that rental value being reviewed as provided in Clause 5(3)” in the definition of the appropriate percentage means no more than that the rent is to remain at the 1982 level except insofar as it is reviewed for any review period, after which it is to revert to the 1982 figure. They have to accept (and do) that the plain words of the definition contemplate an adjustment of the 1982 rental value by review, but any such adjustment is on their argument limited to the seven-year period following the date of review.

Mr Fancourt, I think, accepts that a limitation of that kind cannot be found in the definition of the appropriate percentage, which is entirely general in respect of the effect of a review, and his argument therefore depends upon the nature of the operation of the rent review provisions contained in Clause 5(3). The seven-year limitation contended for must be found in these provisions. Mr Fancourt relies upon Clause 5(3)(v) for this purpose. He submits that the effect of this sub-clause is to reinstate the 1982 rent unless the landlords initiate a new review for the subsequent review period. The reference to the yearly rent being decided in the manner specified is a reference to a review being initiated by the landlords. It is only in those circumstances, he submits, that the passing rent of £375,000 per annum continues to be payable “as theretofore”. If no review is implemented, then the landlords lose the benefit of this provision and the rent reverts to its 1982 level.

The problem with this argument is that it fails, in my judgment, to give sufficient weight to the provisions of Clause 5(3)(ii) of the Deed. Once the rent is reviewed in accordance with Clause 5(3), it becomes the yearly rent with effect from the date of review, and the Deed is to be construed and to take effect “in all respects as if the yearly rent had been from the date of review sixty per centum ofthe openmarket rack rental value ofthe demised premises immediately after such date ofreview”. This must mean (as one would expect) that the revised rent becomes the “yearly rent” reserved under Clause 2 of the Operative Provisions for the remainder of the term, as is confirmed by the definition of the appropriate percentage. I regard Clause 5(3)(v) as internal to the review process. Once a review is commenced, it is intended to give the tenant the benefit of continuing to pay the existing rent until the review is determined. Any arrears which then arise as a result of an increase in the rent from the last review date become recoverable under Clause 5(3)(vi). I agree with Mr Fancourt that it has no application if there is no rent review. But what it does not do is to reduce the rent (by implication) to its 1982 level, if there is no review. That is made clear, as I have indicated, by Clause 5(3)(ii). If no further reviews take place, the yearly rent, in my judgment, will remain £375,000 until the end of the term.

I therefore approach the construction of Clause 5(3)(i) on the footing that if the right to review the rent is exclusive to the landlords, they will be able to avoid a downwards review of the rent simply by refusing to implement the review machinery. The Claimant will therefore be held to a rent which could throughout the remainder of the term exceed the open market rental value of the Premises, as defined in accordance with Clause 5(3) of the Deed.

Mr Fancourt began his submissions on this point with the proposition that the presumption underlying all review clauses is that they are intended to vary the rent payable according to changes from time to time in the value of money and property. That approach was, he said, reinforced in the instant case by the fact that the rent review clause provided for an upwards or downwards review. The obvious purpose of this clause would be defeated if the landlords alone could control the operation of the review.

In support of this argument Mr Fancourt relied on the decision of the Court of Appeal in Basingstoke and Deane Borough Council v. Host Group Limited [1988] 1 WLR 348. In that case a lease of various buildings including a public house required the rent review to be carried out on the premise that the demise consisted of a bare site. The issue was whether the terms of the hypothetical letting and the valuation formula were to be the same as in the lease itself or whether they should be those which the valuer regarded as reasonable for a lease of a bare site. The Court of Appeal held that unless the rent review clause required some other test to be applied, the presumption was that the notional letting was to be on the same terms as the existing lease.

The reasons for this are not difficult to discern. If the purpose of the rent review is to allow the rent to keep pace with market values, then the review needs to be conducted by reference to the current rental value of the premises as let. Anything else will result in either the tenant paying or the landlord receiving a revised rent which bears no relation to the actual terms on which the tenant occupies the premises. Sometimes the language of the rent review clause will require some other assumption to be made, and the present lease is no exception. Although Clause 5(3) does not provide for an upwards only rent review, Clause 5(3)(iii) requires the valuer to assume that the hypothetical letting will do so. To that extent the lease expressly requires a departure from reality.

This is not a case where the dispute concerns the rent review formula itself, and the decision in the Basingstoke case is relied upon chiefly for the references in the judgment of Nicholls LJ to the purpose of a rent review clause. At page 353D he said this:

“ The question raised on this appeal is one of construction of a rent review clause in a lease. In answering that question it is axiomatic that what the court is seeking to identify and declare is the intention of the parties to the lease expressed in that clause. Thus, like all points of construction, the meaning of this rent review clause depends on the particular language used interpreted having regard to the context provided by the whole document and the matrix of the material surrounding circumstances. We recognise, therefore, that the particular language used will always be of paramount importance. Nonetheless it is proper and only sensible, when construing a rent review clause, to have in mind what normally is the commercial purpose of such a clause.

That purpose has been referred to in several recent cases, and is not in doubt. Sir Nicolas Browne-Wilkinson V-C expressed it in these terms in British Gas Corp v Universities Superannuation Scheme Ltd[1986] 1 All ER 978 at 980–981, [1986] 1 WLR 398 at 401:

“There is really no dispute that the general purpose of a provision for rent review 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 dates. The purpose is to reflect the changes in the value of money and real increases in the value of the property during a long term.”

To the same effect Dillon LJ said in Equity and Law Life Assurance Society plc v Bodfield Ltd [1987] 1 EGLR 124 at 125:

“There is no doubt that the general object of a rent review clause, which provides that the rent cannot be reduced on a review, is to provide the landlord with some measure of relief where, by increases in property values or falls in the real value of money in an inflationary period, a fixed rent has become out of date and unduly favourable to the tenant. The exact measure of relief depends on the true construction of the particular rent review clause.”

The means by which rent review clauses afford landlords relief in respect of increases in property values or falls in the value of money is by providing, normally, for a valuer, in default of agreement, to assess the up-to-date rent for the demised premises at successive review dates. In making that assessment the valuer will be achieving the intended purpose of keeping the rent in line with current property values having regard to the current value of money if, but only if, he assesses the up-to-date rent on the same terms (other than as to quantum of rent) as the terms still subsisting between the parties under the actual, existing lease. If he departs from those terms, and assesses the up-to-date rent on the footing of terms materially less onerous to the tenant than those in the actual, existing lease, the rental at which he arrives will reflect, in addition to the rental increases attributable to a rise in property values or a fall in the value of money, an additional element, viz., the increased rental attributable to the fact that he is calculating the rent of a lease on terms more favourable to the tenant than the terms in the actual, existing lease. Conversely, if he assesses the up-to-date rent on the basis of terms materially more onerous to the tenant than those in the actual existing lease, the rental figure at which the valuer arrives will not fully reflect the rise in property values or the fall in the value of money since the lease was granted or the rent was last fixed.

Of course rent review clauses may, and often do, require a valuer to make his valuation on a basis which departs in one or more respects from the subsisting terms of the actual existing lease. But if and in so far as a rent review clause does not so require, either expressly or by necessary implication, it seems to us that in general, and subject to a special context indicating otherwise in a particular case, the parties are to be taken as having intended that the notional letting postulated by their rent review clause is to be a letting on the same terms (other than as to quantum of rent) as those still subsisting between the parties in the actual existing lease. The parties are to be taken as having so intended, because that would accord with, and give effect to, the general intention underlying the incorporation by them of a rent review clause into their lease.”

The Claimant’s argument in this case, however, goes far beyond the proposition and the assumptions set out in the passage I have just quoted. The Court of Appeal was concerned only with the question whether, on any rent review, the valuation process should (absent clear indications to the contrary) be carried out by reference to the terms of the existing lease. The presumption identified by Nicholls LJ in his judgment is little more than a recognition of the obvious proposition that unless the premises are valued on the basis of the existing lease, the valuation will not produce the open market rental value for the premises let under that lease. It also accepts that the parties are generally to be presumed to have intended to achieve that result. But the Court of Appeal was not asked to consider, and certainly did not decide, that the insertion of a rent review clause into a lease carries with it a presumption that the machinery has to be operated at each review date or must be capable of being operated by both parties to the lease.

It is, I think, worth noting that both Nicholls LJ and the Vice-Chancellor in the passage quoted from the British Gas Corporation judgment recognised that the general purpose of a rent review clause was to allow the landlord rather than the tenant to obtain a market rent. That is obviously based on the assumption that over the life of most long leases there will be an increase in rental values, even though at times those values may temporarily recede. The possibility of a fluctuating market has long been recognised by the insertion into commercial leases of upwards only rent reviews. Recent suggestions that such clauses should be prohibited by legislation merely serve to confirm how common they have become. It is also clear from the terms of Clause 5(3)(iii) of the Deed that they were a feature of commercial leases by 1972. Mr Fancourt of course accepts that the express insertion into a lease of an upwards only review does have the effect of protecting the landlord against falls in rental values which coincide with a particular review. But he submits that, in the absence of such a provision, the parties must be taken to have intended that the rent reviews should take place at the intervals stated in the lease and, to that end, that the machinery should be accessible to both landlord and tenant.

As the Court of Appeal recognised in Basingstoke and Deane, presumptions about the commercial purpose of a particular type of provision such as a rent review clause are a useful means of resolving ambiguities in a lease and of achieving what the Court considers the parties are likely to have intended. But as Nicholls LJ said in the passage quoted earlier, any presumption that the parties adopted the normal approach to these matters has to yield to a clear indication in the agreement itself that something else was intended. One has therefore to begin by looking at the language which is used.

Clause 5(3)(i) begins with the words: “The Lessor shall have the right to review the yearly rent” on the various specified dates of review. This is repeated in sub-clause 5(3)(iv), which refers back to the exercise by the landlord of “the right given to it by (i) of this sub-clause” in contrast to the nomination of the expert valuer by the President of the RICS “at the instigation of either party”. The opening words of Clause 5(3)(i) have a clear meaning and indicate that the right to review the rent is exercisable by the landlord and not by the tenant. The ambiguity relied on by Mr Fancourt is the alleged inconsistency between the open nature of the rent review clause and the apparent limitation to the landlord of the right to initiate the review. He also drew my attention to the fact that the review dates mentioned in Clause 5(3)(i) include 24^th June 1982, which is the date on which the yearly rent increased to the appropriate percentage as defined. Both, he submits, are indications that the right to review must have been intended to be mutual. In these circumstances the correct approach is to give effect to the purpose of the rent review machinery by treating it as available to both parties.

As authority to support his argument Mr Fancourt relied on the decision of Jacob J in Addin v. Secretary of State for the Environment [1997] 1 EGLR 99. In that case the lease provided for seven-yearly rent reviews, and the reddendum was in these terms:

“PAYING THEREFOR until the end of the seventh year of the said term the exclusive yearly rent of £148,500 such rent to be paid by equal quarterly instalments on the twenty-fifth day of March the twenty-fourth day of June the twenty-ninth day of September and the twenty-fifth day of December in every year to run from the eighteenth day of July 1974 the first payment (being a proportionate sum) to be made having become due on the eighteenth day of July 1974 PROVIDED ALWAYS AND IT IS HEREBY AGREED that the yearly rent payable by the Minister during the next and each succeeding period of seven years of the said term shall be the higher of the sum of £148,500 aforesaid or such sum as shall be assessed as the current open market rent of the demised premises for the appropriate period such assessment being made in the following manner, that is to say

Either
   (a) such assessment as shall be specified in writing and in a notice by the lessors to the Minister given not more than twelve and not less than six months before the review date (which expression means the expiration of the seventh fourteenth twenty-first twenty-eighth or thirty-fifth years of the said terms as the context requires)

(b)

as shall be agreed between the parties hereto in writing within three months after such notice or

(c)

in the event of the parties hereto failing to reach agreement as aforesaid on or before the date appointed (in respect of which time is to be deemed to be of the essence) then the current open market rent of the demised premises ready for use as office premises for the next seven years of the said terms shall be fixed or assessed by an independent surveyor appointed for that purpose by the parties hereto or failing agreement as to such appointment three months before the review date (time in this respect also to be deemed to be of the essence) then by an independent surveyor appointed for that purpose by the President for the time being of the Royal Institution of Chartered Surveyors . . .

……….

The assessment fixed by the independent surveyor shall be communicated to the parties hereto in writing and immediately upon such communication the rent so assessed as the current open market rent for the next seven years of the said term or £148,000 whichever shall be the higher shall be the rent payable during that period under the terms hereof and the fees payable to the independent surveyor hereinbefore mentioned in respect of the assessment to be made herein shall be borne by the parties hereto in equal shares

(d)

until the revised rent has been agreed or determined as aforesaid the Minister shall continue to pay the rent payable during the previous rent period PROVIDED THAT when such rent has been agreed or determined for such new rent period it shall become payable on the first quarter day after such agreement or determination and on such quarter day the Minister shall pay in addition to the quarter’s rent then due a sum equal to the difference between the sum or sums in fact paid from the beginning of such period and the sum or sums which would in fact have been paid had the new rent been fixed before the beginning of the new rent period.”

The landlord’s argument was that the provision in sub-clause (a) for the lessors to serve a notice should be construed as giving the landlord an option to serve a trigger notice to implement the review. If he chose not to do so, then no review would take place. The tenant contended that the opening words of the reddendum provided for a review every seven years and that sub- clauses (a)-(d) were merely machinery. If the review was compulsory, then the Court could supply the machinery by implying whatever term was necessary to enable the review to take place. Jacob J accepted this argument. At page 100K he said this:

“Mr Berry also took me to the recent case of the Royal Bank of Scotland plc v Jennings in the Court of Appeal [1996] EGCS 168. It was held that the reddendum concerned did provide for a rent review. In the words of Sir Richard Scott, V-C that “there will be a rent review for each of the review periods”. The express machinery for such review could only be initiated by the landlord, but refusing to initiate a review the landlord was frustrating the provisions of the contract that there should be a rent review. Accordingly, the Court of Appeal held that the court could substitute its own machinery following the decision of the House of Lords in Sudbrook Trading EstateLtd v Eggleton[1983] 1 AC 444.

Mr Berry said that the present case was distinguishable because on the true construction of the present reddendum there is no provision that there will be a rent review. The true construction here is that there is a rent review only if the landlord decides he wants one. If he decides he does not want one the agreement is perfectly complete in itself because it provides that the old rent shall continue to be payable pursuant to the provisions of para (d).

I do not agree. I think the correct way to approach the present case is to recognise that the key commercial provision is contained in the opening words. I think provisions (a) to (d) are essentially machinery. In the neat phrase used by Evans-Lombe J in Royal Bank of Scotland plc v Jennings at first instance [1995] 2 EGLR 87, at p89, they are “administrative and accounting provisions”.

I think the way to read the agreement is that the parties, assumed to be men of commercial substance and alive to the ways of landlords and tenants, contracted that the rent was to be the higher of £148,500 and the current market rent. It is true that they use the expression “assessed current market rent” and the agreement goes on to deal with how there should be assessment, but the substance of the agreement is that the higher of the current market rent and the £148,500 is to be paid. I think that is the most likely construction. It accords with my view of how commercial men behave and it accords with the principles which I have stated from the Basingstoke case and others.”

The reference at the end of this passage to the learned judge’s view of how commercial men behave is a reference to an earlier passage (at page 100F):

“The general background is that landlords and tenants expect to receive and pay respectively the market rents. One can normally expect that that is what either side would want and expect from the other party, and I bear that in mind in construing this document, although of course the question of paramount importance is the language used here.”

At a high level of generality I accept this, but, as the learned judge himself observed, the most important question is how the parties have in fact agreed to deal with the process of review.

The rent review provisions considered in Addin are of course very different in terms from those contained in Clause 5(3) of the Deed, but the decision in Addin is useful and relevant to the present case because of the learned judge’s approach to the construction of the rent review clause. He adopted a familiar distinction between what he described as the key commercial provisions and the machinery designed to give effect to them. Implicit in that is his acceptance that, had sub-clause (a) of the reddendum been part of the key provisions of the clause, then the reservation to the landlord of the right to initiate the review could not have been expanded by a resort to implied terms or a liberal construction of the words used. There is certainly no indication in Jacob J’s judgment, or in the Court of Appeal’s decision in Basingstoke to which he refers, that the commercial purpose of a rent review clause can justify the Court in overriding a right of review vested exclusively in the landlord, if that is what the lease clearly provides.

This distinction between operative provisions and machinery has echoes of an earlier controversy concerning the operation of rent review clauses. In United Scientific Holdings Limited v. Burnley Borough Council [1978] AC 904 the House of Lords considered the by then vexed question of whether time was of the essence in relation to the operation of rent review clauses. They held that (absent express provision to the contrary) the presumption was that time was not of the essence for the operation of the rent review machinery. The majority considered that this reasoning applied not only to subsequent steps in the review process, such as the appointment of an expert valuer or arbitrator, but also to the initiation of the rent review, where the lease provided for the review to take place at the option of the landlord by the service of what is commonly referred to as a trigger notice. In so doing they rejected earlier decisions in which the courts had drawn a distinction between the exercise of such an option and the operation of the machinery which followed. Viscount Dilhorne dissented on this issue and expressed the view that when the lease provided for the review to be initiated by the landlord by the service of a notice by a certain date, then time was to be of the essence for the service of that notice. At page 939C-G he said this:

“ The Cheapside appeal is more complicated. There the lease provided that if there was to be a rent review, it had to be initiated by the lessors. They had to serve a notice on the lessees stating the proposed rent ‘not more than twelve months not less than six months prior to the review date’, those dates being 8 April 1975 and 8 April 1982.

I do not consider it to be an incorrect use of the English language to say that under this lease the lessors had an option. But it was an option of a very different character from an option to purchase property. It was an option to initiate machinery not to secure or to extend an interest in land, but merely to secure a variation of a term of the lease. For the reasons given by my noble and learned friend, Lord Simon of Glaisdale, it should not be equated with an option to purchase.

In this appeal the lessor gave a notice in accordance with the requirements of the lease and so in this appeal no question arises as to whether time was of the essence in relation to the giving of the lessors’ notice. Until that notice was given, the lessees would not know that there was to be a rent review. Until then they need not concern themselves about the current market rent nor need they incur expense in obtaining advice with regard thereto. If the parties when they entered into the lease had been asked whether they thought it essential that the lessors’ notice should be given within the stipulated period, I think that they would have answered in the affirmative. I recognise of course that this would mean that if the notice was served a day late, the consequences to the lessors would be serious but it lay entirely within the lessors’ power to serve the notice within that period whereas it does not lie within their power to secure that a valuation made by a valuer was made within the time stipulated.

While, as I have said, the question whether time was of the essence in relation to the lessor’s notice does not have to be decided in this appeal, I differ from my colleagues in that I think that where a rent review has to be initiated by a lessor and is not automatic, then time is of the essence when it is provided that that notice initiating the review has to be given by a certain date.”

For present purposes the speeches in United Scientific are interesting not for what they say about time being of the essence, but because of their acceptance that there is nothing inconsistent or particularly unusual in a rent review clause being operable only by the landlord. Lord Fraser makes this clear in his speech at page 961C, where he says this:

“The landlord’s right to operate the trigger and his right to apply to the President are both unilateral rights. The former might be described as an option. The latter would not I think normally be so described but, in my opinion, it is for the present purpose indistinguishable from the former in that both are unilateral rights which the landlord is under no obligation to exercise.”

The same is true of the decision of the Court of Appeal in Royal Bank of Scotland v. Jennings [1997] 1 EGLR 101, which was followed by Jacob J in Addin. There the lease expressly provided for reviews to take place during the term in accordance with the provisions of the Fourth Schedule. This provided for the parties to attempt to agree the new rent and, failing agreement, for the rent to be determined by a valuer to be appointed by the President of the RICS on the application of the landlord. The landlord contended that he was not obliged to make this application and so could determine whether or not a review took place. Both Evans-Lombe J and the Court of Appeal rejected this, holding that the proper construction of the lease was that the reviews were mandatory and that the Fourth Schedule contained only machinery. In giving the judgment of the Court of Appeal Sir Richard Scott V-C said (at page 103D-F and 103J):

“It is the landlord’s contention, put very cogently by Mr Kim Lewison QC on their behalf, that on its true construction para 1 of the fourth schedule places the question of whether there will or will not be a rent review for any particular review period at the option of the landlord. It is a fairly common feature of rent review provisions in leases that the landlord is given the option whether or not to invoke the rent review machinery. This is commonly done by providing that the rent review machinery may be invoked by a notice in writing served by the landlord not later than some specified date. Clauses of that character have given rise to a number of cases and gave rise, in particular, to the leading case, United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904, in which the House of Lords ruled that the time limitations in rent review clauses were normally not to be treated as of the essence of the agreement so that a failure by the landlord to comply with the requisite time-limits did not necessarily preclude the service out of time of an effective notice invoking the rent review machinery. But in those cases the lessor had expressly been given the option whether or not to serve a notice invoking the rent review machinery. The present lease contains no such express option. Indeed, in my view, the implication to be gained from the lease as a whole, in particular the reddendum which I have read and paras 1 and 2 of the fourth schedule, is that there will be a rent review for each of the rental periods.

……….

In my judgment, the issue depends upon whether construing the lease as a whole, the conclusion is justified that the landlord was intended to have that option. If the landlord was intended to have that option, the landlord was entitled to exercise it and to decide whether or not there should not be a rent review. But if the judge below was right in concluding that the provision in question was no more than mere machinery for the carrying out of rent reviews which were intended to happen in any event, then, on authority, there is no reason why the landlord’s failure to make the application should be allowed to frustrate the contractual intention discerned from the lease as a whole. The court will in that event if necessary supply machinery to prevent that frustrating refusal from achieving its purpose.”

In my judgment these authorities are destructive of Mr Fancourt’s arguments about the construction of Clause 5(3)(i) of the Deed. They support the argument of Mr Dowding on behalf of the Defendant landlords that there is no presumption that a rent review clause (even one incorporating an open review) ought to be exercisable by both parties to the lease. Everything depends upon the form of review which the parties have chosen to incorporate. This can vary from a right to review exercisable by the landlord alone to a review which is mandatory on each of the review dates. The choice between these alternatives depends upon what the parties have agreed. There are no presumptions either way.

This point was made very clearly by the Court of Appeal of New Zealand in Australian Mutual Provident Society v. National Mutual Life Association of Australasia Limited [1995] 1 NZLR 581. The issue for the Court was identical to the one which I have to consider: i.e. whether a rent review clause which provided for an open review was inconsistent with the rent review being operable by the lessor alone. The lease did not contain a ratchet clause, which is equivalent to an upwards only review clause. The judge held that to construe the clause as operable only by the landlord was inconsistent with the absence of a ratchet clause and held that the words in the lease that the landlord “may” give notice requiring the rent to be reviewed had to be read as mandatory. The Court of Appeal reversed his decision. Hardie Boys J, giving the judgment of the Court of Appeal (at page 584), said this:

“With respect, we cannot agree with Barker J that the deciding factors in the construction of the document are the wording of the demise clause and the absence of a ratchet clause. In determining the construction to adopt, the Court must look at the document as a whole, rather than give emphasis to any particular part. And it must endeavour to ascertain the intention of the parties by reference to the commercial purpose, and to the practicalities, for the parties obviously intended that what they provided for should work in a sensible and realistic way. Those principles are not easy to apply in this case, for all there is is the sublease. There is no evidence of surrounding circumstances that may have provided some assistance in judging what the parties intended by the words they used. Nor is it suggested that the words used did not correctly record their agreement; there is no application for rectification or for a remedy under the Contractual Mistakes Act 1977. The case turns entirely on the sublease itself, and any inferences that may properly be drawn from it. But these are very limited. It is understandable that the sublessor may have desired rent reviews to be optional. It is equally understandable that the sublessee may have desired them to be obligatory. There are valid reasons for both alternatives. The same may be said of the short period during which the commencing rent is expressed to be payable, and of the unusual term of the lease. There are doubtless several possible explanations for both. Even if, as Barker J held, it is a reasonable inference that the omission of an express ratchet provision from cl 3.06(a) was deliberate, it does not necessarily follow that the parties must have intended that the sublessor was required to give a notice under cl 3.06(a), whether it wished to do so or not. It is quite possible that what they intended was that, while the sublessor would not be required to invoke cl 3.06(a) at each review date, if it elected to do so it would accept the risk that despite its expectations the result would be that the rent was fixed at less than the rent previously applicable. That approach may well accord with commercial reality.”

This decision was followed by the New Zealand Court of Appeal in the later case of Board of Trustees of the National Provident Fund v. Shortland Securities Limited [1996] 1 NZLR 45. Gault J dealt with the alleged inconsistency as follows:

“The fact that as a consequence the parties agreed upon assignment of a lease that would not contain a ratchet clause but would provide for rent review at the lessor’s discretion is not such an absurdity as justifies departing from the plain meaning of the words used.

It is clear that the ability of the lessor to elect not to have the rent reviewed effectively negates the benefit of the exclusion of the ratchet clause. It will be a rare case in which a lessor initiates review without being confident that the rent will increase as a result, but that does not make the provisions inconsistent. The provisions are clear in their terms and are capable of being read and of operating together in that the prospect of rent reduction is preserved in the event of a review. That is what the parties agreed to, albeit because they did not advert to that consequence.”

The case went on appeal to the Privy Council. The opinion of the Board (given by Lord Hoffmann) is reported at [1997] 1 NZLR 1. At page 5 Lord Hoffmann said this:

“The expression “ratchet clause” is well understood in New Zealand to mean a particular type of clause, namely a provision such as cl 3.5(c)(i) which prevents the reviewed rent from being lower than the previous rent. This is not the same as a clause giving the landlord an option to initiate review proceedings, even if in practice the economic effect is likely in most (though not necessarily all) cases, to be the same. McGechan J said:

“[Brierley’s] agreement to provide a lease without a ratchet clause did not require provision of a lease with a mandatory review clause. The two were different and were not spoken of as the same”.

The Court of Appeal agreed. In view of these concurrent opinions as to the meaning of what is in effect a term of art in New Zealand commercial property transactions, Their Lordships would be very reluctant to take a different view.”

I regard these decisions of the Court of Appeal of New Zealand as consistent with the approach of the English Court of Appeal in RBS v. Jennings and I am content to adopt the reasoning as my own. It seems to me obvious that the form and operation of any rent review clause will be a matter for the parties to agree. When (as in this case) the lease provides in clear terms for the right to review the rent to be exercisable by the landlord alone, I do not accept that the absence of an upwards only review formula is sufficient to require or permit the Court to construe the clause as requiring either a mandatory review or one which is exercisable by both landlord and tenant. It seems to me that the opening words of Clause 5(3)(i) have a plain and obvious meaning which must be given effect to. The reference to a review date of 24^th June 1982 is not sufficient to alter that conclusion. Unlike the leases considered in RBS v. Jennings and in Addin, this is clearly a lease which gives the landlord the exclusive right to operate the rent review provisions, and the Defendants are entitled to take advantage of that.

The action will therefore be dismissed. I will make the declarations sought by the Defendants. In the absence of agreement I will hear Counsel on the form of the order and on any further issues about costs.