England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE No CHANF 95/0300/B

Royal Courts of Justice

Strand

London WC2

Monday, 20th January 1997

B e f o r e:

LORD JUSTICE McCOWAN

LORD JUSTICE MILLETT

LORD JUSTICE AULD

ASHWORTH FRAZER LTD

Plaintiff/Respondent

- v -

GLOUCESTER CITY COUNCIL

Defendant/Appellant

(Computer Aided Transcript of the Palantype Notes of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

MR NIGEL DAVIS QC and MR STEPHEN BATE (Instructed by Sharpe Pritchard of London (the London Agents for Gloucester City Council) appeared on behalf of the Appellant

MR PAUL MORGAN QC and MR PHILLIP RAINEY (Instructed by Rowe & Maw of London) appeared on behalf of the Respondent

J U D G M E N T

(As Approved by the Court )

(Crown Copyright)

LORD JUSTICE McCOWAN: I will ask Lord Justice Millett to give the first judgment.

LORD JUSTICE MILLETT: This is an appeal by Gloucester City Council from the judgment of His Honour Judge Roger Cooke sitting as a judge of the High Court on 3rd February 1996. It raises a short but not altogether easy question of construction of a few words in a badly drafted rent review provision in a lease. The clause requires the rent to be calculated by reference to "the rack rents receivable by the lessee in respect of the demised premises". No express provision is made for voids or other cases where for any reason all or part of the demised premises is not sub-let at a rack rent. In the events which have happened part of the premises is in occupation of the respondent as lessee. The question is whether "the rack rents receivable by the lessee" means, as the respondent contends and the judge found, "the rents which the lessee is entitled to receive from actual sub-tenants" or, as the appellant lessor contends, "the rents which the lessee would be entitled to receive if the premises were fully sub-let at full open market rents".

The lease is dated 28th April 1969. It is a development lease made between (1) the appellant as lessor and (2) MacKenzie Hill Ltd ("the developer") as lessee. By the lease the developer was granted a lease of the site of the old cattle market in Gloucester for a term of 114 years from 25th December 1969. The site covered 14½ acres. No premium was payable on the grant of the lease and no rent was payable for the first 12 months of the term. The developer covenanted to develop the site in accordance with agreed plans and specifications for light industrial use and so as to be fit for immediate occupation. It was evidently contemplated that the developer would sub-let the completed development to a variety of industrial sub-tenants and would then dispose of the leasehold reversion, probably to an institution.

The reddendum reserved a peppercorn rent until the 28th April 1970, followed by a yearly rent of £9,425 from 28th April 1970 to 25th December 1989. Thereafter, the reddendum provided as follows:

"and thereafter such sum as may be agreed or determined as the fair market rent in accordance with the provisions of Clause 4 hereof ..... "

Clause 4 of the lease reads as follows:

"It is mutually agreed that at the Twenty Fifth day of December One Thousand Nine Hundred and Eighty Nine and thereafter at the end of every Twenty-One year period (hereinafter called ´the relevant renewal date') the yearly rent payable by the Lessee shall be reviewed in manner following:

(a) the yearly rent payable by the Lessee in respect of the said periods of Twenty One years and the last Nine years of the said term shall be either the sum of Nine Thousand Four Hundred and Twenty Five Pounds aforesaid or the rent payable during the previous rent period or such sum as shall be equivalent to Eight per cent of the rack rents receivable by the Lessees in respect of the demised premises on the relevant renewal date such figure of Eight per cent to be certified by the Lessee's accountants whichever figure shall be the higher."

I have read clause 4 (a) as the parties agree it should be read. In fact, the word "on" in the expression "on the relevant renewal date" towards the end of the clause appears as "or". But it is plain that that is a typographical error.

Thus the council's reward for contributing the undeveloped site was to consist not of a premium or ground rent (except during an initial period), but a share, fixed at 8%, of "the rack rents receivable by the lessee" ascertained at 21 year intervals.

The lease contained a covenant on the part of the lessee against assigning the whole or any part of the premises without the lessor's consent, such consent not to be unreasonably withheld. It contained no prohibition on sub-letting the whole or any part of the demised premises without the lessor's consent. More surprisingly (if the construction placed on clause 4 by the judge is correct) it contained no covenant by the lessee to use its best endeavours to sub-let the various parts of the premises at the best rents reasonably obtainable without taking a premium and with appropriate provisions for rent review. The lease contained a full arbitration clause.

As expected, the developer completed the development of the site and disposed of the premises in parcels to various industrial occupiers. It did not do so, however, by sub-letting but by successive assignments each made with the consent of the appellant. There have altogether been six severances of the lease, and the entirety of the demised premises is now let to a variety of tenants each holding directly from the appellant under the terms of the lease, the rent having been apportioned. The respondent is the successor in title to Kentron Plastics Ltd, which took an assignment of part of the demised premises from the developer in September 1973. The rent payable in respect of the part of the premises thereby assigned for the period to 25th December 1989 was apportioned by the assignment at £702, and it was agreed that the covenants and conditions in the lease were to be severed as if the lease had contained a demise at apportioned rent of the land comprised in the assignment. The assignment was at a premium of £21,600, which shows that even as early as 1973 the apportioned rent of £702 was already well below the open market rent for the part of the demised premises assigned to Kentron Ltd.

At the dates of the most recent rent review, the whole of the premises let to the respondent was occupied by the respondent for the purposes of its own business. No part thereof being sub-let, the judge held that there were no "rack rents receivable by [the respondent] in respect of the demised premises", and so nothing to which the 8% figure mentioned in clause 4 could attach. Accordingly, this being an upwards only rent review clause, he held that the yearly rent payable by the respondent during the current period was the current passing rent of £702. The appellant submits that the judge's construction of the lease was wrong; alternatively it contends for an implied term which would have the effect of substituting the current open market value of the premises for the passing rent; in the further alternative, it submits that the machinery for determining the open market rent of the property having broken down, the court should substitute other machinery.

Preliminary

Before dealing with the detailed arguments on the proper construction of the lease, it is convenient to dispose of some preliminary matters. In the first place, it is common ground that the wording of the assignment to Kentron Plastics Ltd does not affect the question now in dispute, and that accordingly that question must be determined by construing the lease as at the date in 1969 when it was entered into and without reference to the later severances. The manner in which the premises demised by the lease were in fact disposed of is unlikely to have been foreseen and - while the parties ought perhaps to have foreseen the possibility of voids, for example, occurring at the review date - the possibility of the entirety of the premises being void, so that there would be no rents receivable from sub-tenants, could reasonably have been dismissed as too remote. Indeed, there is no suggestion that this has happened or that, if the judge's decision in the instant case is upheld, the appellant will be confined to the total passing yearly rent of £9,425.

The appellant places great stress on what it claims is the commercial purpose of a rent review clause. This, it rightly observes, is to protect the landlord from the devaluation of the rent in real terms by reason of inflation or a rise in rental values since the date on which the lease was granted. As Dillon LJ said in Equity & Law Life Assurance Society plc v Bodfield Ltd [1987] 1 EGLR 124, 125:

"There is no doubt that the general object of the rent review clause which provides for rent cannot be reduced on review is to provide the landlord with some measure of relief whereby increases in property value records (?) the real value of money in an inflationary period a fixed rent has become out of date and unduly favourable to the tenants. The exact measure of relief depends on the true construction of the particular rent review clause."

There are, however, several different techniques for achieving this. The most common is to provide for a periodic revision of the rent by reference to an expert revaluation in order to ascertain the open market rent or the fair rent of the demised premises (these concepts are not the same, and the expression "fair market rent" is a confused amalgam of two contradictory ideas). But this is not the only technique available. It may be reviewed by reference to the Retail Price Index, or to the tenant's turnover, or to the sub-rents which the tenant is entitled to receive from sub-tenants. Ordinarily, it is obvious which technique has been adopted, and if there is any difficulty it arises in connection with the application of the chosen technique to the facts of the particular case. Unusually, the question in the present case is whether, as the reddendum indicates, the technique which was adopted was that of an expert valuation of "the fair market rent" or, as clause 4 indicates, that of a mathematical computation based on the aggregate of the underlying sub-rents.

The appellant stresses the commercial purpose of a rent review clause as the foundation for its contention that this is frustrated by the construction placed upon the clause by the judge. The result, it is submitted, is surprising and not one likely to have been intended by the parties. Unless compelled to do so by clear and unambiguous language, the court should not adopt a construction which would have this result.

The respondent counters this argument by submitting that clause 4 is not a rent review clause at all, but a rent-sharing clause. I cannot accept this as a complete description of the effect of the clause, even on the construction for which the respondent contends. A true rent-sharing clause would require continuous, or at least annual, adjustment, certainly not adjustment at 21 year intervals. And the concept of rent-sharing does not sit entirely comfortably with upwards only revision. At the same time, it is quite clear that the appellant was not to receive the full rental value of the premises, however ascertained, but only 8% thereof. On any view, it seems to me, the lease combines elements of both rent review and rent-sharing. The question is whether, as the appellant contends, the parties are to share "the fair market rent" (whatever that means) ascertained by an expert or, as the judge found and the respondent contends, the actual sub-rents, if any, certified by the lessee's accountants.

The reddendum

There is an issue between the parties as to the true relationship between the reddendum and clause 4. The appellant submits that the reddendum is the controlling provision. It reserves "the fair market rent", and directs attention to clause 4 only for the purpose of enabling "the fair market rent" to be determined in default of agreement. Clause 4 should, if at all possible, be construed so as to give effect to this direction.

Like the judge, I have no doubt that, taken in isolation, this is the more natural way to read the reddendum. The reader is given to expect that Clause 4 will contain appropriate provisions for the assessment by an expert valuer of the full "fair market" rental value (whatever that may mean) of the demised premises and that the rent reserved by the reddendum is the amount so determined. But on any footing the reddendum is inaccurately drafted, and not just because of the use of the expression "fair market rent". Even on the construction of clause 4 contended for by the appellant, the lease does not entitle the lessor to the "fair market rent" of the demised premises as the reddendum indicates, but only to 8% thereof.

The reddendum reserves, not "the fair market rent" simpliciter but "the fair market rent in accordance with the provisions of clause 4 hereof". Moreover, on any view, clause 4 does not provide machinery for determining "the fair market rent", but a definition of the rent reserved. When, in addition, it is found that the figure of 8% appears in clause 4 only and not in the reddendum, I find it impossible to accept the appellant's submission that the reddendum is the controlling provision. In my opinion, the reddendum must be read with clause 4 and the two provisions reconciled if possible. But it does not control the meaning of clause 4, and if the result of performing the exercise directed by clause 4 does not produce 8% of what could properly be described as either a fair or a market rent, then in my judgment, the parties must be taken to have made their own dictionary when using the expression "fair market rent" in the reddendum. If they used that expression, as the respondent contends, to mean 8% of the rents receivable from such tenants, that is not an inappropriate description of what the parties had agreed to be a fair rent as between the lessee, on the one hand, and the lessor, on the other, in respect of the demised premises.

Clause 4

If the reddendum leads a reader to expect that clause 4 will contain machinery for the ascertainment by an expert valuer of either the fair or market rental value of the demised premises, he will be disappointed. The clause contains no reference to the rental value of the premises and no provision for its determination by expert valuation. Moreover, as I have already pointed out, it does not provide machinery for the determination of the rent but a self-contained definition of the rent payable in each rental period.

Rents receivable

The appellant submits that the expression "rents receivable" is ambiguous. It could mean either (i) the rents which the lessee is entitled to receive from sub-tenants under existing sub-leases or (ii) the rents which the lessee would be entitled to receive from sub-tenants if the demised premises were fully sub-let. I agree that, given an appropriate context, the words could bear either meaning; the use of the word "receivable" rather than "received" denotes an intention to avoid the need to satisfy some unexpressed contingency. But I have no doubt that the former meaning is the ordinary and natural meaning of the words, and that it would require a special context to give them the meaning for which the appellant contends. Rent due from a tenant but not paid is a receivable of the landlord; rent which the landlord could obtain only by letting unlet property is not. The contingency to which the word "receivable" is ordinarily directed to avoid is non-receipt, not non-entitlement.

At various times in the argument, the appellant submitted that "receivable" means capable of being received. That may be so. But that expression itself involves the same ambiguity. It may mean rents which the lessor is capable of receiving under existing sub-leases or rent which he is capable of receiving by sub-letting unlet premises.

The appellant has placed much reliance on the decision of the court in R A Millett Ltd v Leon Allen International Fashions Ltd [1989 1 EGLR 138, but in my judgment that case does not help it. The rent review clause there provided that -

"the rent payable by the Lessee shall be 78/85ths of the rent payable by the Lessor ..... as fixed in manner provided by the said Superior Lease ..... "

The superior lease referred to was surrendered by the lessor and replaced by a new head lease. The trial judge held that the under lessor was still entitled to a rent review, but, the machinery for the ascertainment of the new rent having broken down, the court could substitute new machinery, adopting the approach of the House of Lords in Sudbrook Trading Estates v Eggleton [1983] 1 AC 444. His decision was upheld by a majority of this court. Counsel for the underlessor conceded that he could not succeed by relying on the Sudbrook decision unless he could show that the rent review clause, on its true construction, required the underlessee to pay the appropriate portion of a fair market rent as determined in accordance with the original head lease; but that, the majority held, was exactly what the rent review clause provided.

The appellant submits that the court must implicitly have held that the words "payable by the lessor" in the clause there under consideration meant "which would have been payable under the head lease if it had not been surrendered"; and that it follows that the words "receivable by the lessee" are capable of meaning "which would have been receivable if the premises were sub-let". I do not agree. Once the conclusion was reached that the words in dispute merely had the effect of incorporating the rent review clause in the head lease by reference, it necessarily followed that the continued subsistence of the head lease was not required. The words "payable by the lessor" did not, therefore, mean "which the lessor was still contractually liable to pay under the head lease" but "expressed to be payable by the lessor" or "reserved by the head lease". I am not myself convinced that in these circumstances it was necessary to invoke the doctrine enunciated in Sudbrook Trading Estates v Eggleton for I cannot see that the machinery for ascertaining the rent had broken down at all.

Rack rents

The appellant, however, places its strongest reliance on the words "rack rents". The term "rack rent" is defined in Blackstone's Commentaries (4th Ed.) Vol 2 p43 as "a rent of the full value of the tenement or near it". In Compton Group Ltd v Estates Gazettes Ltd [1977] P&CR 148 the court had to decide whether the words "rack rent" meant the rent which represents the full annual value of the holding or the maximum rent which is permitted by law. Sir John Pennycuick said, after referring to the definition of Blackstone's Commentaries, (page 154):

" ..... in a judgment of Holmes LJ in Ex parte Connolly to Sheridan and Russell , it is defined thus: ´a rack rent in legal language means a rent that represents the full annual value of the holding.'

Sargent J [in Re C R Sawyer and Withal, Solicitors] in terms approved of Holmes LJ's definition.

However, the latter meaning has been adopted by the courts, including the Court of Appeal, in certain recent cases where the premises were subject to statutory control; see in particular Rawlence v Croydon Corporation [1952] 2 QB 803 ..... "

Sir John Pennycuick went on to hold that the word "payable" could mean either "reserved" or "recoverable". The case is of limited assistance to the appellant, since, as Browne LJ pointed out (at page 159), the expression "rack rent" is not a phrase which has a precise meaning which it always bears, but rather a meaning which varies according to the context. In the present case the respondent submits that it is used to exclude insurance rents and service charges reserved as rent. I agree that this is a possible meaning, though not the primary meaning.

Method of ascertainment

If the clause had ended with the words "on the relevant renewal date" it would, I think, have been a nice question whether it required a professional valuation of the open market or rack rent of the demised premises or merely an arithmetical calculation of the aggregate rents at which they were sub-let. The reddendum and the use of the words "rack rents", as well as the absence of any provision for voids or own-occupation, would have pointed in one direction; the words "receivable by the lessee", the absence of any provision for valuation or of any directions to the valuer as to the basis of valuation (e.g. should the rental value of the demised premises as a whole be taken, or the aggregate of the rental values of the separate parts?), and the fact that the lessor is to receive only 8% of the resultant figure (which may provide a reason for seeking to avoid the expense of a professional valuation) in the other.

But in my judgment the matter is put beyond doubt by the concluding words of the clause. The figure of 8% is to be certified by the

lessee's accountants. On the construction contended for by the

respondent, this makes good sense. The accountant's function is to examine the books and records of the lessee and ascertain what rents are currently receivable from sub-tenants. They then certify the figure which represents 8% of the total. Their intervention is necessary to protect the lessor from the suppression by the lessee of a recent sub-lease or increase in sub-rent. On the construction of the clause contended for by the appellant, however, they serve

no useful function. They cannot certify that any rent due from a sub-tenant represents the full rental value of the premises, unless perhaps the sub-lease is recent or the lessor is demanding an increase in the sub-rent at a pending rent review. The appellant's construction of clause 4 makes a professional valuation, for which the clause does not in terms provide, essential, and limits the function of the accountants, for which the clause makes express provision, to confirming the correctness of a simple arithmetical calculation.

In my judgment, the judge was right to hold that clause 4 requires the rent to be ascertained by a simple process of aggregating the actual rents receivable by the lessor from sub-tenants, subject to the confirmation of the accountants' certificate, and does not require any process of professional valuation. It follows that the use of the words "fair market rent" in the reddendum may not be an altogether accurate description of the result of the process required by clause 4, but rather a shorthand label chosen by the parties and sufficient for their purposes of what was provided in detail by clause 4.

The appellant submits that this result is clearly uncommercial and cannot have been what the parties intended; and that this fact alone requires the court to re-examine its decision. I do not agree. If the position is analysed, it can be seen that the lessor will fail to recover 8% of the full open market rent of a part of the demised premises in four situations; (1) where there is a void; (2) where the relevant part of the demised premises is occupied by the lessee itself; (3) where the sub-lease was granted at a premium so that the passing rent is not a rack rent; and (4) where the sub-lease was granted at a rack rent, but changes in property values since mean that the passing rent is below (or even above) the current market rent.

Taking these four cases in reverse order, it is in my judgment past belief that the parties would have contemplated substituting the market rent for the passing sub-rents in case (4). Quite apart from the fact that the lessor insisted on an upwards only rent review, there is no reason why the lessor should have been prepared to accept the substitution of a rent lower than that which the lessor was entitled to receive (and probably actually receiving). But what goes for changes in market value in one direction applies equally to changes in the other. There is no reason why the lessee should accept a liability to pay the lessor a sum greater than 8% for rents which it was in a position to receive. I agree that case (3) produces a nonsense, but what has gone wrong is not the rent review provisions but the provisions with regard to sub-letting. Once the parties opted for rent reviews based on sub-rents, it was necessary to place the lessor under a positive obligation to use its best endeavours to sub-let the premises at the best rents reasonably obtainable without taking a premium. This was not done. It would be quite wrong, in my opinion, to distort the meaning of clause 4 to provide a remedy for any failure in the drafting elsewhere. Case (2) (which is the case which has occurred) cannot have been in the reasonable contemplation of the parties. The developer plainly had no use itself for the premises. What actually happened was clearly not foreseen. Case (1) - and Case (2) if foreseen - should no doubt have been provided for, but there were several ways of dealing with the problem. Given that the lessor's interest is only 8%, it may well have been thought inappropriate to incur the expense of a professional valuation merely to deal with a void in one of several parts of the premises. The problem could have been adequately dealt with, for example, by averaging.

This analysis shows, in my opinion, that the lease is defective, but that what has gone wrong is only partly due to a casus omissus in the rent review provisions. It does not throw doubt on the construction of clause 4 for which the respondents contend, that is to say, that the review is to be conducted by aggregating the sub-rents and not by valuing the premises.

Implied term

If clause 4 of the lease is not to be construed in the manner contended for by the appellant, then the appellant submits that an appropriate term should be implied. There is, it submits, a gap which it is necessary to fill in order to give commercial efficacy to the lease.

The appellant's first choice is for a term to be implied which would have the effect of substituting "the fair market rent" of the demised premises for the aggregate of the sub-rents provided for by clause 4. This is plainly impossible. Where the relevant part of the demised premises is sub-let at the review date, that is to say, in cases (3) and (4), there is no gap to be filled, and the suggested implied term would be inconsistent with the express terms of the lease. And in case (4), as I have already indicated, it is most unlikely that the parties would have agreed to the substitution of the basis of assessment which is proposed.

With somewhat greater realism, the appellant contends in the alternative for the implication of a term which would require the "fair market rent" to be adopted in any case where there was no existing subtenancy at the review date, that is to say, cases (1) and (2). A persuasive case for this can be made out, but in the end I am not persuaded. The lessee was entitled to retain 92% of any sub-rents, and this was a sufficient incentive to deter it from deliberately creating any voids. It is not at all obvious that it would have agreed to bear the whole (as distinct from 92%) of the loss due to difficulty in finding a tenant. There is more force in the submission that a reasonable lessee would have agreed that the rent should take account of any part of the premises in its own occupation. The difficulty here, however, is that it is not at all clear what provision they would have agreed. It is far from obvious that they would have agreed to incur the expense of a professional valuation in order to provide the lessor with 8% of the assessed value.

It is not enough to show that, had the parties foreseen the eventuality which in fact occurred, they would have wished to make provision for it, unless it can also be shown either that there was only one contractual solution or that one of several solutions would without doubt have been preferred; see Philips Electronique v British Sky Broadcasting [1995] EMLR 472, 482 per Sir Thomas Bingham MR. In my judgment, even the more limited implied term contended for by the appellant fails this test.

Substitution of new machinery

All else failing, the appellant invokes the doctrine enunciated in Sudbrook Trading Estate v Eggleton . On the construction of clause 4 which I consider to be correct, clause 4 is not subordinate machinery for the determination of "the fair market rent" of the property, but the essential definition of the rent reserved by the lease. The only part of clause 4 which could properly be described as subordinate machinery is the provision for the figure to be confirmed by an accountants' certificate. If they refused to co-operate, the court could substitute an alternative means of ascertaining the amount of the sub-rents receivable by the lessee at the review date, for example, by ordering an inquiry. But the rest of clause 4 is essential; the court could not provide a substitute without re-writing the bargain.

But in any case the machinery established by clause 4 has not broken down. The fact that it yields a result which is unsatisfactory to one party does not mean that it has broken down, but only that it was ill-chosen.

Conclusion

I would dismiss the appeal.

LORD JUSTICE AULD: I differ from Lord Justice Millett. I do so with great diffidence, particularly in a matter such as this.

The point is one of construction of a rent review clause in a development lease of 114 years entered into in 1969. The lease clearly contemplated that the lessee would, after developing the demised property, sub-lease it. It provided for an upwards only review of the rent at 21 yearly intervals, upwards, that is, only in a rising property market by reference to the return on any sub-lease or sub-leases. I say "the return". The issue before the court is whether, in a rising property market, the rent is to be calculated at the review date by reference to the potential return or to the actual return, if any, at that date. 8% of whichever is the appropriate figure is the rent payable. It is thus a rent review mechanism designed to achieve a constant income sharing ratio between the lessor and lessee, albeit at lengthy review intervals.

As my lord, Lord Justice Millett, has indicated, clauses 1 and 4 are not well drawn. However, in my view, their intent and effect, when read together and with other relevant provisions of the lease, are plain. No implication of a term is necessary to give effect to that meaning. It is that the review rent is to be the fair market (ground) rent calculated by reference to a percentage of the rack rent, namely the full annual rental value, but that for a notional sub-lease of the property as developed. Clause 1 provides expressly, and by reference to clause 4, that the rent is to be reviewed and that it is to be "the fair market rent" as agreed or determined in accordance with that clause. The scheme in clause 1 allows for some tinkering with the normal meaning of fair market rent because it permits of its agreement or, in the absence of agreement, subjects it to determination in accordance with whatever constraints clause 4 may impose. Nevertheless, the clause has at its core a familiar notion, that of the fair market rent, a notion which has no function if all that was intended was a reference to rent, if any, actually due and payable under a sub-lease or sub-leases at each review date.

Equally, I would not expect there to be a reference in the reddendum to "agreement" or "determination" of the review rent if all that is required is an identification of sub-lease rents, if any, actually due and receivable at each review date.

Turning to clause 4, it identifies, without specifying the machinery for its agreement or determination, "the fair market rent" referred to in clause 1. It does so in the third alternative circumstance by reference to another fair market rent, "the rack rents receivable by the lessee ..... at the renewal date". In my view, there is no reason to give any other meaning to the term "rack rent" in this context than that which it has ordinarily, namely a rent representing the full annual valuation of the holding. See Compton Group Limited v Estates Gazette Limited (1977) 36 P&CR 145, CA, per Sir John Pennycuick, at 154. In particular, I see no basis for treating the use of the word "rack" as a means for distinguishing the reference to rent receivable under the sub-lease from a ground rent, since the contemplated sub-lease or sub-leases were of developed property, or from an insurance or service charge. Nor can I see any basis for treating it as a reference to rent, if any, actually due and receivable under a sub-lease at the renewal date. If the latter had been intended there would be no reason to use the word "rack" at all in the provision. It would have been sufficient to refer only to rents due and receivable by the lessee at the review date.

It seems to me that the scheme of clauses 1 and 4, when read together, is to identify for the purpose of rent review a fair ground market rent for the lease calculated by reference to 8% of a fair market rent of developed property if sub-leased. The use of the word "receivable" in the sense of "capable of being received if sub-let" is consistent with that conclusion, though not determinative of it. It is plain that words such as "payable" and "receivable" in leasehold documents and the like may mean "due to be paid and received" or "capable of being paid and received" according to their context. See, for example, Compton Group Limited v Estates Gazette Limited per Sir John Pennycuick at 154 and per Browne LJ at 160; and R A Millett (Shops) Limited v Lean Allen International Fashions Limited (1989) 1 EGLR 138, CA.

As to clause 4's lack of provision of machinery for agreement or determination or other valuation of the rack rent of a notional sub-lease, if there is agreement no machinery is necessary. If there is no agreement clause 5 (c) provides, in its general provision for arbitration, a means of determination.

As to the provision in clause 4 for the certification by the lessee's accountant of the 8% of the rack rents receivable by the lessee, on which the judge relied so heavily in favour of the lessee, it is not, in my view, a significant pointer either way. Whether viewed as an ascertainment of the rents due under any existing sub-leases and the calculation of 8% of them (the lessee's contention) or the calculation of 8% of agreed or determined rack or fair market rents (the lessor's contention), the exercise is essentially a mechanical one. On neither interpretation is it the accountant's function to certify the correctness of the rack rent for the sub-lease. His certification can only be of the 8% following agreement or determination of that rack rent as provided for in clauses 1 and 4.

For those reasons, I am of the view that the review rent under the lease is to be determined by reference, where it produces the highest figure, to the rack or fair market rent which could be obtained under a sub-lease. In the unlikely event of the property market not having risen significantly over the previous 21 year renewal period, the actual rent or rents payable may equal or be an acceptable indicator for agreement by the parties, or for determination in an arbitration, of the rack rent. But history has shown that that would not ordinarily be the case. The fact that the property is not in fact sub-let is irrelevant, save possibly as an indicator of its marketability if the lessor has attempted to sub-let it.

I add that, even by the standard of drafting of this lease, it could not sensibly have been intended or contemplated by the parties to it that, with such long rent review intervals and in the event of a rising property market, the lessor would be confined to a rent calculable by reference to what had been paid in the previous rent review period or to the rental for the first 20 years, if, for whatever reason, the lessee sub-let the property at well below the market rate or, as here, the property was not sub-let at all at the review date.

Such a construction would, in my view, defeat the whole purpose of an upwards only rent review clause which is to protect the lessor from property inflation, enabling him, subject to the length of the rent review periods, to recover the same rent in real terms throughout. See Basingstoke Borough Council v Host Group [1989] 1 WLR 348, CA, per Nicholls LJ (as he then was) at 353D-356C. As the deputy judge observed in his judgment in this case, and Mr Paul Morgan QC on behalf of the lessee effectively acknowledged in his submission to this court, the interpretation for which the lessee contended was unfair to the lessor. Its clear lack of commercial good sense reinforces me in my construction in favour of the lessor. See Prenn v Simmonds [1971] 1 WLR 1381, HL; and Reardon Smith Line Limited v Hansen Tangen [1976] 1 WLR 989, HL, re Lord Wilberforce at 995G-997E. The interpretation for which the lessor contends, on the other hand, does accord with the clear commercial purpose of the rent review provisions in clauses 1 and 4.

Accordingly, I would allow the appeal.

LORD JUSTICE McCOWAN: The judge himself recognised in his judgment that his decision would not do substantive justice between the parties. Mr Morgan accepted before this court that it was "a bad bargain for the appellants". Whether in fact it is a bad bargain for the appellants depends on the construction of the lease.

Additional to not doing justice, it seems to me that the judge's construction is not in accordance with the commercial purpose of a rent review clause. Mr Morgan's answer to that was to say that it is not actually a rent review clause at all, but a rent sharing agreement. I cannot accept that. The words of clause 4 are themselves against this.

In my judgment, Mr Davies is clearly right in saying that the judge gave insufficient attention to the words of clause 1 and in particular to the words "the fair market rent". This is shown by his dismissive reference at page 10C of his judgment to those words as mere protestations. I noted that Mr Morgan separated himself from the judge on that description.

Again at page 7G the judge said:

"It is hard to see how a draughtsman could have both incorporated the closing words of clause 1 and the words of clause 4 in the same document."

Mr Morgan did not seek to support this view of the judge. Mr Morgan said that the two clauses are perfectly reconcilable. Clause 4, he said, is the measure of clause 1.

As to the words "rack rents", the judge largely ignored them and treated them as superfluous. Mr Morgan, on the other hand, candidly said that his case would be more "straightforward" if it were not for the presence of the word "rack". Calling a spade a spade, I would say that he was profoundly embarrassed by it, because "rack rent" means the full annual value of the holding.

In my judgment, the commercial purpose of a rent review provision (viewed objectively) is to enable the landlord to obtain from time to time the market rental which the premises would command if let on the open market on the same terms as at the review date. That object can be achieved in this case by interpreting "receivable" as "capable of being received" which I consider a wholly appropriate interpretation in the circumstances of the case.

By that means it is possible, failing agreement, to determine the yearly rent payable by the lessee pursuant to clause 4. In the event of a dispute there is in clause 5 a provision for arbitration.

I cannot, therefore, accept the judge's construction of the agreement and I would allow the appeal.

Order: Appeal allowed with counsel to agree a minute of order.