COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MR JUSTICE NEUBERGER
Strand, London, WC2A 2LL
Tuesday 31st July 2001
B e f o r e :
LORD JUSTICE KAY
LADY JUSTICE ARDEN
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LORD JUSTICE KAY:
"It is unfortunate that over 15 years after these cases were decided, the legal effect of a common provision in a rent review clause is still unknown. This is the common law at its least impressive".
"At any time during the period of six months next before the expiration of the 5th, 9th, 13th and 17th years of the term hereby granted [the landlord] may serve on the Lessees a notice in writing, (hereinafter called a "Rent Notice"), providing for the increase of the rent payable hereunder as from the expiration of the relevant year of the term as aforesaid to an amount specified in the Rent Notice and thereupon the following provisions shall have effect:-
(1) The Lessees within one month after receipt of the Rent Notice may serve on [the landlord] a counter-notice calling upon [the landlord] to negotiate with the Lessees the amount of the rent to be paid hereunder as from the expiration of the said year.
(2) If the Lessees shall fail to serve a counter-notice within the period aforesaid they shall be deemed to have agreed to pay the increased rent specified in the Rent Notice.
(3) If the Lessees shall serve on [the landlord] a counter-notice calling upon [the landlord] to negotiate with them as aforesaid, then the parties hereto shall forthwith consult together and use their best endeavours to reach agreement as to the amount of the rent to be paid hereunder as from the expiration of the said year but failing agreement within one month after service of such counter-notice (within such extended period as the parties hereto such mutually agree) the question whether any and if so what increase ought to be made in the rent payable hereunder as from the expiration of the said year shall be referred to the arbitration of a single arbitrator…
(5). The Lessees hereby covenant with the Board that if the rent shall be increased by agreement (actual or deemed) or arbitration in pursuance of this clause the Lessees as from the expiration of the relevant year pay the increased rent at the times and in the manner aforesaid and the rent as so increased shall remain payable until the same shall be further increased pursuant to the provision of this clause or until the expiration of the term hereby granted whichever shall first occur."
"So upon the question of principle which these two appeals were brought to settle, I would hold that in the absence of any contra-indications in the express words of the lease or in the inter-relation of the rent review clause itself and other clauses or in the surrounding circumstances the presumption is that the timetable specified in a rent review clause for completion of the various steps for determining the rent payable in respect of the period following the review date is not of the essence of the contract".
"… 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."
"… in general, in modern English law time is prima facie not of the essence of a contract, and that there is nothing in the two leases the subject of the instant appeals which rebuts that presumption so as to make the stipulations as to time essential to the operation of their rent review clauses."
"The law does not purport to bring parties into a relationship of contractual obligation which they themselves have failed to create."
"It was envisaged from the outset that rent would be reviewed during the currency of the leases: the clauses merely provided machinery for determination of the new rent, which in more stable conditions might have been stipulated in advance."
"The revision clause itself lays down the administrative procedure or machinery by which the fair rent shall be ascertained."
"In my opinion each lease constitutes, amongst other things, an agreement between the parties that, at stated intervals, the rent shall be revised so as to bring them into line with the then open market rent. The rent revision clauses specify the machinery or guidelines for ascertaining the open market rent. These provisions as to time are not, in my opinion, mandatory or inflexible; they are only directory. Nevertheless any unreasonable delay caused by the landlords and which is to the tenants' prejudice would prevent the rent being revised after the review date."
"The appeals were heard together and the primary argument on both sides treated the question as one that was susceptible of a general answer, but it is proper to recall that the application of any general rule may always be excluded if the intention to do so is expressed or clearly implied. Rent review clauses take many forms, and it is not possible, even if it were desirable, to state any rule as to the effect of stipulations as to time that will apply to all such clauses."
"As the substance of a review clause is, in my opinion, to provide machinery for ascertaining the market rent from time to time, at the intervals agreed in the interests of both parties, rather than to confer a benefit on the landlord, it seems to me that stipulations as to time ought not to be strictly enforced unless there is something in a particular clause to indicate that time is of the essence in that case. "
"For these reasons I am of the opinion that the equitable rule against treating time as of the essence of a contract is applicable to rent review clauses unless there is some special reason for excluding its application to a particular clause. The rule would of course be excluded if the review clause expressly stated that time was to be of the essence. It would also be excluded if the context clearly indicated that that was the intention of the parties…"
"It is highly undesirable that decisions of this type of dispute shall turn upon fine distinctions and I reject the suggestion that there is a difference between a rent review scheme which, in the event of default in adhering to the timetable, avoids the whole process…and one which automatically resolves the dispute, albeit in a somewhat draconian way (the instant appeal). Both make precise and, in the case of the instant appeal, elaborate provision for exactly what shall happen if one of the parties shall fail to exercise his rights within the specified period of time. In neither case would it be possible seriously to write into the clause after each specified period of time words such as "or such longer period as shall elapse before the expiration of reasonable notice making time of the essence of the contract". Accordingly, in my judgment the parties must be deemed to have intended that in the case of their lease the general rule should not apply and that time should be of the essence of the contract."
"The general rule established by the House of Lords in United Scientific Holdings Ltd –v- Burnley Borough Council is that time is not of the essence in a rent review clause. This general rule is however displaced if the lease expressly provides that time is to be of the essence, or if it is a necessary implication to be derived from the language of the rent review clauses."
"Suppose in the present case clauses 3 and 4 had been elided to provide that "If the tenant objects to the new rent proposed by the landlord he must serve a notice of objection within one month." Such a clause carries the implication that if the tenant does not serve the counter-notice he accepts the landlord's new rent and it would add nothing to the meaning of the clause to add at the end of it "and if he does not do so he is deemed to accept the new rent." If such a clause including the deeming provision stood alone, I would not, I think, be prepared to hold that it was sufficient to displace the general rule that time was not of the essence of the contract."
"I do not accept that the mere presence of a "deeming" provision in a rent review clause will in all cases be sufficient to make time of the essence of the contract.
But when I consider the rent review provisions of this lease as a whole I have been driven, albeit reluctantly to conclude that in this case they carry the necessary implication that the parties to this lease intended that time should be of the essence of the rent review provisions."
"And, finally, although, as I have been at pains to point out, not necessarily conclusively, the express inclusion of the deeming provisions does add some weight to the view that this schedule should be read as though time is of the essence, particularly as the deeming provisions apply to both landlord and tenant."
"set out in definition, specifically and clearly, what is to happen in default of the exercise of the rights given to the respective parties within the permitted periods of time. Thus, in particular, paragraph 4 provides that if the tenant has not served its counter-notice within the relevant one month period "the amount stated in the relevant review notice shall be deemed to be the market rent"".
"In my opinion the only meaning that can be attached to the phrase "shall be deemed to be the market rent" in the context of these two paragraphs is "shall be conclusively presumed to be the market rent." And the phrase in each of these two paragraphs is of critical importance in the construction of the lease."
"Despite its attractive presentation, I find myself wholly unable to accept [Counsel's] argument on these points in the context of the present lease. I think that the "deeming" provisions of paragraph 4 of this particular rent review clause are quite inconsistent with the survival of any right of the tenant to serve a counter-notice after the expiration of the one-month period designated in that paragraph. Likewise, I think that the deeming provisions of paragraph 7 are quite inconsistent with the survival of any right in the landlords to apply for the appointment of a surveyor after the expiration of the two-month period therein specified. While in other contexts "deeming" provisions may not necessarily connote finality, they do so in the context of this lease."
"…one cannot invoke the principles of United Scientific Holdings Ltd –v – Burnley Borough Council for the purpose of rejecting or modifying a provision which clearly indicates the parties' intention that time is to be of the essence for the purpose of a rent review clause. There is nothing to prevent the parties from contracting on this basis if they so choose, and if they do so choose, to entitle the court to rewrite the contract which they have made."
"The correct approach to the question whether time was of the essence was to start with the presumption that it was not and then, on a consideration of the lease itself and the surrounding circumstances, to determine whether the parties had shown an intention to make it so; that the mere presence of the "deeming" provision in clause 5(8) of the lease was not a firm indication that time was intended to be of the essence; and that, reading clause 5(8) as a whole and bearing in mind that there was a presumption to be displaced and that the parties were clearly intending to arrive at a fair rent to be determined amicably if possible, time was not of the essence of the provision for service of the tenant's counter-notice…"
"I find no help at all from the facts of other cases where there is a deeming provision, as in the present case, but other terms in the review clause and the lease are different."
Later he said (at page 17):
"I cannot regard the mere presence of the "deeming" clause as a firm indication that time is of the essence."
"My conclusion does not mean that a "deeming" provision is of no effect. It entitles the landlords to make time of the essence by giving notice to that effect once the 28th day has expired. It is a useful part of the machinery in the hands of the landlords."
Mr Lewison suggests that this represents a misunderstanding of the position because the landlord can serve such a notice whether or not there is a deeming provision. In effect it is suggested that this rewrites the contract to provide not merely that a single notice is required as agreed in the lease by the parties but instead two notices.
"In his turn, Slade LJ expressed his view that it was the fact that the "deeming" provisions in the rent review were bilateral that was of great importance, if not decisive, in that case."
"In my judgment, there are two possible views as to the correct answers to this question. The first view is that the decision of the House of Lords in United Scientific Holdings Ltd –v- Burnley Borough Council establishes that provisions for rent review are mere machinery for ensuring the payment of a market rent throughout a long term and that, in the absence of contra-indications in the terms of the lease or the surrounding circumstances, failure to serve a notice before the date specified in the lease does not preclude the service of such notice within a reasonable time thereafter. Then, it can be said, a provision in the machinery that, in the event of a failure to serve a notice by the specified date, a rent not necessarily being the proper market rent ("the default rent") shall be payable is not of the essence of the parties' bargain but merely part of the machinery designed to fill the gap unless and until a notice (albeit strictly out of time) is served. Therefore, the existence of a provision for a default rent is not, by itself, a contra-indication sufficient to displace the presumption that time is not of the essence.
The second view is that an express provision for a default rent in the event of a failure to serve a notice within a specified time necessarily shows that time is of the essence of the service of the notice. This view could be reached by two different routes. First, it could be said that the provisions for a default rent is the clearest possible indication of the parties' intention that the service of the notice in time should be of the essence, because the parties have expressly fixed what is to happen if no proper notice is served within that time limit. Secondly (and to my mind more powerfully), it could be said that the whole doctrine of time not being of the essence cannot apply to such a case. Hitherto, the doctrine has only operated so as to allow one party to perform obligations laid down in the contract at a later date; it has never operated so as to alter the substantive terms of the contract entered into between the parties, other than the terms as to time…To hold that time was not of the essence of the tenants counter-notice would involve not simply extending the time limits within which the parties' bargain could be formed but an alteration of the parties' bargain itself."
"It would, in my judgment, be most undesirable if in every case where a notice was served out of time the parties were in doubt as to the legal consequences. In commercial and property law it is, in my judgment, of the highest importance that the parties should know the legal consequences of their acts without having to go to court for them to be determined. Therefore, with regret, I cannot agree that the matter depends in each case on the exact detailed drafting of the rent review clause, the existence of a provision for a default rent being merely one of the factors to be taken into account in deciding whether time is of the essence."
"I can well understand the reluctance of Browne-Wilkinson LJ to attempt to draw a distinction between the relevant clause in the Mecca Leisure case and the clause in the AWADA case. If, however, one assumes, as one must, that the doctrine of time not being of the essence applies to rent review clauses, the principle that provisions for the service of the serving of notices and counter-notices within specified times constitute mere machinery for the ascertainment of the open market rent from time to time requires one to apply the presumption unless the contra-indications are clear. I do not consider that clause 4(8) is a sufficient contra-indication to rebut the presumption. In particular it is to be noted that clause 4(8) contained no specific mention that the time within which a counter-notice had to be served."
"There are, as it seems to me, three ends to which it may be argued that the United Scientific presumption could be put:
1. In the absence of any express terms specifying what is to happen in default of the exercise of the rights given to the respective parties within the permitted periods of time (i.e. in the absence of a deeming provision), the presumption applies: time is not of the essence unless and until it is made so, and in the result a time stipulation cannot be strictly enforced against whoever fails to observe it. (I decline to use the language of default; there is no obligation to observe such a time limit, merely a prospective loss of the benefits of compliance.)
2. In the event of dispute whether or not there is such an express deeming provision, the presumption applies as a rule of construction to assist the resolution of that dispute.
3. Even if there is such an express deeming provision the presumption can nevertheless still apply to defeat both it and the strict enforcement of the separate time stipulation.
In my judgment, the presumption applies in situations 1 and 2, but not in 3. Situation 1 was that arising in United Scientific itself. Situation 2 I believe to be the present case and, as indicated, I would apply the presumption first to construe clause 4(8) as not amounting to a deeming provision, and then of course to clause 4(4) as in situation 1. If, however, contrary to my view on question 1, clause 4(8) is to be construed as a deeming provision, then I would not think it permissible to override it (as well as the prima facie effect of clause 4(4) itself) by application of the presumption. That indeed would involve, as Browne-Wilkinson LJ pointed out in Mecca, "not simply extending the time limits within which the parties' bargain could be performed but an alteration of the parties bargain itself". And that the effect of applying the presumption in situation 3 seems to me to go beyond what United Scientific permits: so far from the court being entitled to rewrite the parties' contract, it is bound to find the presumption displaced by express words of the lease which are inconsistent with it and thus "contra-indications" to it.
Accordingly, I, for my part, would hold that a deeming provision is indeed "a decisive, or virtually decisive, contra-indication displacing the presumption that time was not of the essence". I find myself, in short, with the majority (although not, I think, with Griffiths LJ) in AWADA and with the minority in Mecca."
"I must confess that if I were not guided by authority, I would, by the application of the general principles of the law of contract, have little difficulty in construing the notice requirements… as being of the essence."
"Certainly English dicta suggests that such "deeming provisions" are not conclusive, but as a matter of logic I cannot see how this can be so. Once a contract expressly spells out the consequences of non-compliance with a time-limit I cannot see how it can be argued that the time-limit is non essential."
"I am driven to the same conclusion as the Judges in those cases by holding that the parties intended that time should be of the essence, particularly when dealing with the response of a lessee to whom the contract did not give the same leniency in the matter of notice as to the lessor."
LADY JUSTICE ARDEN:
"… at any time during the period of six months next before the expiration of the fifth, ninth, thirteenth and seventeenth years of the term hereby granted the Board may serve on the Lessees a notice in writing, (hereinafter called a "Rent Notice"), providing for the increase of the rent payable hereunder as from the expiration of the relevant year of the term as aforesaid to an amount specified in the Rent Notice and thereupon the following provisions shall have effect:
(1). The Lessees within one month after receipt of the Rent Notice may serve on the Board a counter-notice calling the Board to negotiate with the Lessees the amount of the rent to be paid hereunder as from the expiration of the said year.
(2). If the Lessees shall fail to serve the counter-notice within the period aforesaid they shall be deemed to have agreed to pay the increased rent specified in the Rent Notice.
(3). If the Lessees shall serve on the Board a counter-notice calling upon the Board to negotiate with them as aforesaid, then the parties hereto shall forthwith consult together and use their best endeavours to reach agreement as to the amount of rent to be paid hereunder for the expiration of the said year but failing agreement within one month after the service of such counter-notice (or within such extended period as the parties hereto such mutually agree) the question whether and if so what increase ought to be made in the rent payable hereunder as from the expiration of the said year shall be referred to the single arbitrator who (failing agreement between the parties hereto) shall be nominated on the joint application of the parties hereto or if either of them shall neglect forthwith to concur in such application then on sole application of the other of them by the President for the time being of the Royal Institution of Chartered Surveyors which said arbitrator shall have power to award to the Board interest on the whole or any part of such increase in the rent hereunder payable for the whole of any part of such period as may elapse between the expiration of the relevant year of the term from which such increase in the rent is payable if in the opinion of the arbitrator the conduct of the Lessees or any delay on their part or any other circumstances so warrant.
(4) The Arbitrator shall determine the question so referred to him by as ascertaining the rent at which the demised premises might reasonably be expected to be let in the open market as between a willing lessor and willing lessee as at the date of the Rent Notice (or if the Rent Notice shall not have been served before the expiration of the relevant year of the term as aforesaid then as at the last day of such relevant year) having regard to the terms of this Lease other than those relating to rent but disregarding:-
any effect on rent of the fact that the Lessees have been in occupation of the demised premises
any goodwill which shall have become attached to the demised premises since the commencement of the term hereby granted by reason of the carrying on thereat of the business of the Lessees and
any effect on rent of any improvement carried out by the Lessees otherwise than in pursuance of an obligation to the Board.
And if the rent so ascertained exceeds the rent payable hereunder the difference shall be the increase in the rent payable hereunder.
(5) The Lessees hereby covenant with the Board that if the rent shall be increased by agreement (actual or deemed) or arbitration in pursuance of this clause the Lessees will as from the expiration of the relevant year pay the increased rent at the times and in the manner aforesaid and the rent as so increased shall remain payable until the same shall be further increased pursuant to the provision of this clause or until the expiration of the term hereby granted whichever shall first occur".
(1) The parties have set out a timetable within which steps must be taken if the rent is to be increased. The process is initiated by the landlord serving a Rent Notice within the last six months of the fifth, ninth, thirteenth and seventeenth year of the term. The Lessees have one month after receipt of that rent notice to serve a counter-notice. The parties must then consult together and use their best endeavours to reach agreement as to the amount of the rent, but if they cannot reach agreement within one month after service of the counter-notice or such longer period as they agree the question of the increase in rent must be referred to arbitration.
(2). The timetable is one which affects both the landlord and the tenant. The tenant must serve his counter-notice within one month of receipt of the rent notice. The landlord must have served his Rent Notice within the relevant six month period.
(3). In proviso (3) there is an express provision for the extension of time by agreement.
(4) The procedure requires rent to be fixed as at the date of the Rent Notice.
(5) The arbitrator is given power to award interest as compensation to the landlord if there is a delay in fixing the new rent.
(6) In the final provision there is a reference to rent being either
"actual or deemed".
"I would hold that in the absence of any contra-indications in the express words of the lease for the interrelation of the rent review clause itself and other clauses or in the surrounding circumstances the presumption is that the timetable specified in a rent review clause for completion of the various steps for determining the rent payable in respect of the period following the review date is not of the essence of the contract."
The other members of the House came to the same conclusion: see per Viscount Dilhorne at page 940 (though this is subject to the qualification at 939G set out by Kay L.J.), per Lord Simon of Glaisdale at the same page, per Lord Salmon at page 951 and per Lord Fraser at 962.
PETER GIBSON L.J.:
"I cannot regard the mere presence of the "deeming" clause as a firm indication that time is of the essence. I read the clause as a whole and bear in mind that there is a presumption to be displaced and that the parties are clearly intending to arrive at a fair rent to be determined amicably if possible. It seems to me that to hold otherwise would make the clause a trap and the chosen machinery dangerous. In my opinion, time is not of the essence in this case.
My conclusion does not mean that a "deeming" provision is of no effect. It entitles the landlords to make time of the essence by giving notice to that effect once the twenty-eighth day has expired.
We were referred to Raineri v. Miles  AC 1050. The fact that a purchaser may sue for damages resulting from delay in completion by the vendor even though time for completion is not of the essence has no relevance to the present case. In that case, there was no issue as to whether or not there was an agreed and binding obligation to complete. We, on the other hand, are concerned to determine whether there is a binding obligation to pay a rent as stated in the landlords' notice. Moreover, the deeming provision forms part of the machinery devised to produce a fair rent and must be viewed in that context. It is not to be seen as an independent clause creating a binding obligation on the happening of a particular event."
" .. The principle [taken from AWADA] is that any form of expression which clearly evinces the concept of finality attached to the end of the period or periods prescribed will suffice to rebut the presumption that time is not of the essence.
 What appeared as a fairly clear and readily applicable principle was thrown into confusion by a subsequent majority decision of the Court of Appeal in which it was held that time was not of the essence in relation to the service by a tenant of a counter-notice even though it was provided that in the absence of such a notice within the time limit specified he was deemed to have agreed to pay the rent specified in the landlord's notice. Not surprisingly, subsequent decisions have shown no clear pattern. It ought to be possible to find a clear principle which states whether or not deeming provisions of the nature under discussion amount to an express provision that time is of the essence. Unfortunately, no such principle has emerged although an ordinary understanding of language suggests that generally such deeming provisions should render time of the essence."
(1) that on the true construction of the lease, the counter-notice purportedly served on 16 June 1999 is void and of no effect, and
(2) that the rent payable by the tenant to the landlord under the lease from 1 August 1999 until the expiry of the lease is deemed to have been agreed by the tenant to be £84,800 per annum.