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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Hemingway Realty Ltd v Clothworkers' Company [2005] EWHC 299 (Ch) (08 March 2005) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2005/299.html Cite as: [2005] EWHC 299 (Ch) |
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CHANCERY DIVISION
Strand, London, WC2A 2LL |
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B e f o r e :
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Hemingway Realty Limited |
Claimant |
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- and - |
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The Master Wardens and Commonalty of Freemen of the Art or Mystery of Clothworkers of the City of London (commonly called the Clothworkers' Company) |
Defendants |
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Nicholas Dowding QC, Nicholas Taggart and Charlotte Woodhead (instructed by
Slaughter and May) for the Defendants
Hearing date: 22nd February 2005
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Crown Copyright ©
Mr Justice Patten :
Introduction
The Rent Review Provisions
"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"
" (3) (i) The Lessor shall have the right to review the yearly rent as at the Twenty fourth June in each of the 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 of such years being in this sub-clause (3) referred to as "the date of review") at any time prior to the expiration of twelve months following the Twenty fourth June in each of such 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 of the open market rack rental value of the demised premises immediately after such date of review but without prejudice to any of the 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 of the 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 determined validly 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)."
Construction
" 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."
"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."
"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 Estate Ltd 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 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 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."
"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."
"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."
"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."
"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 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."
Conclusion