England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
(MR DAVID OLIVER QC, Sitting as a Deputy High Court Judge)

		Royal Courts of Justice Strand London WC2 Friday, 18th January 2002

Friday, 18th January 2002

1. LORD JUSTICE SCHIEMANN: Lord Justice Chadwick will deliver the first judgment.
2. LORD JUSTICE CHADWICK: This is an appeal against an order made on 29th March 2001 by Mr David Oliver QC sitting as a Deputy Judge of the High Court in Chancery Division on an appeal from Master Bowman in proceedings brought by the appellant, BJ Aviation Limited, against the respondent, Pool Aviation Limited, to recover possession of land and buildings known as Mid Wales Airport and situated near Welshpool in Powys. The appeal raises a short question of construction as to the effect in a clause giving an option to renew for a further seven years the agreement under which the respondent was appointed to operate the airport of the words "subject to the re-negotiation of the rent payable".
3. The underlying facts may be stated shortly. The appellant is the owner of the airport premises. By an agreement dated 20th December 1991 the appellant appointed the respondent "to be the manager of the airport"; and the respondent agreed to comply with the obligations on the part of the Operator therein contained. For convenience I will adopt the definitions in the agreement and refer to the parties as "the Owner" and "the Operator".
4. Clause 4 of the agreement was in these terms:

"This Agreement shall operate for a period of seven years from the date hereof and if during the six months prior to the expiration of the said term the Operator shall serve written notice upon the Owner requesting the renewal of the Agreement for a further period of seven years then subject to the re-negotiation of the rent payable in no less a sum than that which shall be payable under the terms of this Agreement at that date the Owner shall grant to the Operator a fresh agreement in the same terms hereof save and except for this clause for a further period of seven years."

5. The effect of that clause was that the agreement came to an end on 20th December 1998; but (subject to the question in issue in this appeal) the Operator could, by serving a notice on the Owner within the last six months of that term, require the Owner to grant a new operating agreement, commencing from that date, upon the same terms (save as to the option to renew) for a further seven years.
6. The reference in clause 4 of the agreement to the rent payable on a renewal of the operating agreement being "in no less a sum than that which shall be payable under the terms of this Agreement at that date" requires some explanation. The explanation is found in clauses 5 and 6 of the agreement. Clause 5 provides for the rent payable under the agreement to be £7,000 per annum (plus VAT) "increasing annually in accordance with the terms of the immediately following clause". Clause 6 provides for an annual uplift determined by reference to the retail prices index. The clause is in these terms:

"The yearly rent payable under this Agreement shall be reviewed annually and the new rent payable for each year shall come into effect on the anniversary of the commencement of this Agreement and the rent for each year shall be the rent payable for the previous year of this Agreement multiplied by one plus the percentage increase in the index of retail prices maintained by the Department of Employment for the twelve months ending on the 1st day of July immediately preceding the end of each period of one year and shall form the base rent for the calculation of the following year."

7. On 9th October 1998 - that is to say, within the relevant six-month period - the Operator gave written notice of its request for a new agreement. Negotiations as to the initial rent that would be payable under a new operating agreement, if granted, were inconclusive. By a letter dated 22nd October 1999 the Owner required the operator to vacate the airport. The Operator refused to do so, relying on its right, as alleged, to have a new operator's agreement.
8. It was in those circumstances that these proceedings were commenced by the issue by the Owner of a claim form on 6th January 2000. The relief sought was an order that the Operator vacate the airport premises in consequence of the termination of the operating agreement on 21st December 1998(sic); and damages for use and occupation from 22nd December 1998 until possession was given up. It is not clear why it was thought that the operating agreement terminated on 21st December 1998 - rather than on 20th December 1998 as clause 4 of the agreement provides - but nothing turns on that.
9. By way of anticipatory response to the expected claim that the Operator was entitled to a new operating agreement it was alleged, in paragraph 8.2 of the particulars of claim, that the provisions of clause 4 of the agreement as to renewal were void and of no legal effect because they did not specify the rent payable under the renewed agreement. It was alleged further, also by way of anticipatory response, that the Operator was at the date of the notice to renew and on 21st December 1998 in breach of the obligation under clause 10 of the agreement to maintain the lighting system to the runway.
10. The Operator served a defence and counterclaim. The first point taken by way of defence was that the agreement of 20th December 1991 took effect as a lease; that the tenancy thereby created was within Part II of the Landlord & Tenant Act 1954; and that the tenancy had not been terminated in accordance with the provisions of that Act. Subject to that, the Operator addressed the contention that the renewal provisions in clause 4 were void for uncertainty.
11. First, it was said that, on the true construction of the clause the rent payable on the grant of a new operating agreement was either (a) the rent of the previous year or, (b) the rent of the previous year increased by the index linked uplift for which clause 6 of the agreement provides, or (c) a fair rent. In the alternative, again as a matter of construction, it was said that the mechanism for the re-negotiation of the rent payable for the renewed term was either (a) that given in clauses 5 and 6 - that is to say the previous rent with an index linked uplift; or (b) a fair rent. Although those may be conceptual alternatives, the effect, as it seems to me, is the same. Second, it was said that the Owner had agreed (expressly or by implication) to a renewal of the operating agreement and to a mechanism for the determination of the rent by an independent person or by arbitration; or had waived any defect in clause 4; or was estopped from objecting to a renewal of the agreement or to the validity of the clause on what is described as the technical point taken in the particulars of claim.
12. By counterclaim the Operator sought a declaration that it had a lease which was within Part II of the 1954 Act; in the alternative, a declaration that it had exercised the right to renew contained in clause 4 of the agreement and a declaration that the rent payable under the renewed agreement was the existing rent, alternatively the existing rent with an index-linked uplift, and (in the further alternative) an order that a person be appointed to determine the rent from 21st December 1998 or that there be an inquiry to fix such rent.
13. The Owner's response was to apply for summary judgment under CPR Part 24. That application came before Master Bowman on 1st August 2000. He rejected the Operator's contention that the agreement took effect as a lease. He accepted the Owner's contention that the provision for renewal in clause 4 of the agreement was of no legal effect. Accordingly, he made an order that the Operator vacate the airport by 30th September 2000, and directed an inquiry as to the compensation payable by the Operator for use and occupation since 22nd December 1998 until possession was given up. He made an order for an interim payment in the sum of £35,000 or thereabouts. He refused permission to appeal.
14. The Operator sought and obtained permission to appeal from the Master's order. When granting permission to appeal Rimer J stayed the order for possession. The appeal came before Mr Oliver QC at the end of January 2001. He delivered an oral judgment on 29th March 2001. He, too, rejected the contention that the agreement took effect as a lease; but he held that the Operator had a good case that the provisions of clause 4 were valid and of legal effect, which, as he said, provided a defence and was sufficient to dispose of the matter. He held, also, that the allegations of breach of the Operator's obligation under the agreement would need to be examined on evidence at a trial; and that that, of itself, made the case unsuitable for summary judgment. He recorded that the points taken in respect of waiver and estoppel had not been seriously pursued before him; and that, in any event, there were, in relation to those points, insuperable difficulties for the Operator on the correspondence.
15. By an order made on 29th March 2001 the judge allowed the appeal and set aside the order for possession. At the invitation of the parties he went on to declare that clause 4 of the agreement was valid and enforceable against the Owner; and that upon the true construction of that clause a term was to be implied that the rent payable by the Operator to the Owner on and after the renewal was to be a fair rent not being less than that payable at the date of the notice served on 9th October 1998. He gave directions for the trial of the outstanding issue as to breach of the Operator's obligations.
16. The judge's order, being itself an order made on appeal from the Master's order, could not be the subject of an appeal to this Court without the permission of this Court - see section 55(1) of the Access to Justice Act 1999 and CPR 52.13. Permission was granted on paper by Mummery LJ on 24th May 2001. He was satisfied that the skeleton argument filed on behalf of the Owner disclosed compelling reasons for this Court to hear the appeal.
17. The only issue before this Court is whether the judge was correct to take the view that the provisions as to renewal, contained in clause 4 of the agreement, were of legal effect. The judge expressed his reasons for the conclusion which he had reached in a passage at pages 6 and 7 of his judgment. After referring to the well-known decisions in Milnes v Gery (1807) 14 Ves Jun 400, May & Butcher v The King (1929), reported some years later as a note to Foley v Classique Coaches Limited [1934] 2 KB 17, Hillas & Co Ltd v Arcos Ltd (1932) 147 Law Times 503, and Foley v Classique Coaches Limited itself, [1934] 2 KB 1, and to two more recent decisions in this Court, Beer v Bowden (1976) reported as a note at [1981] 1 WLR 522 and Corson v Rhuddlan Borough Council [1990] EGLR 255, the judge said this:

"There is no doubt in my mind that clause 4 was intended by the parties to have legal effect. The agreement was formally drawn, and there is no dispute that, apart from clause 4, it had legal effect, whether as a licence or as a lease, and I can see no good reason for the supposition that clause 4 was not intended to have legal effect equally with the rest of the agreement. Moreover, it is clear that in cases where a clause such as clause 4 is intended to have legal effect, the predisposition of the court is to try to give effect to such a clause.

In Corson v Rhuddlan Borough Council, the Court of Appeal, in connection with an option to renew a lease of a golf club which provided for a rental to be agreed but subject to a maximum of the amount payable under the original lease, held that the validity of a rent determination provision did not depend on whether it was included in a continuing lease or an option to renew, and felt able to conclude that the provision in that option for a maximum amount in relation to the renewal was sufficient to enable the implication of a term for the payment of a fair rent.

In my judgment a similar analysis can properly be conducted in relation to clause 4, bearing in mind that there is a provision for what is in effect a minimum rent. The result is that, in my judgment, the defendant has a good case that the provisions of clause 4 are valid, which, subject to the question of breach, provides them with a defence to this action."

18. The problems which arise in law in a case where parties have entered into an arrangement which, although it has the appearance of a bargain, leaves something to be agreed, are the subject of numerous authoritative decisions. The cases are, if I may respectfully say so, helpfully and comprehensively reviewed in the judgment of Rix LJ in Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD, neutral citation [2001] EWCA Civ 406, reported at [2001] 2 Lloyd's Rep 76. The principles to be derived from those cases are set out at paragraph 69 of that judgment - see page 89 in the Lloyd's Reports.
19. It is unnecessary, and would be superfluous, to review those authorities again in this judgment. It is I think sufficient to identify five propositions which, as it seems to me, are not capable of dispute.
20. First, each case must be decided on its own facts and on the construction of the words used in the particular agreement. Decisions on other words, in other agreements, construed against the background of other facts, are not determinative and may not be of any real assistance.
21. Second, if on the true construction of the words which they have used in the circumstances in which they have used them, the parties must be taken to have intended to leave some essential matter, such as price or rent, to be agreed between them in the future - on the basis that either will remain free to agree or disagree about that matter - there is no bargain which the courts can enforce.
22. Third, in such a case, there is no obligation on the parties to negotiate in good faith about the matter which remains to be agreed between them - see Walford v Miles [1992] AC 128, at page 138G.
23. Fourth, where the court is satisfied that the parties intended that their bargain should be enforceable, it will strive to give effect to that intention by construing the words which they have used in a way which does not leave the matter to be agreed in the future incapable of being determined in the absence of future agreement. In order to achieve that result the court may feel able to imply a term in the original bargain that the price or rent, or other matter to be agreed, shall be a "fair" price, or a "market" price, or a "reasonable" price; or by quantifying whatever matter it is that has to be agreed by some equivalent epithet. In a contract for sale of goods such a term may be implied by section 8 of the Sale of Goods Act 1979. But the court cannot imply a term which is inconsistent with what the parties have actually agreed. So if, on the true construction of the words which they have used, the court is driven to the conclusion that they must be taken to have intended that the matter should be left to their future agreement on the basis that either is to remain free to agree or disagree about that matter as his own perceived interest dictates there is no place for an implied term that, in the absence of agreement, the matter shall be determined by some objective criteria of fairness or reasonableness.
24. Fifth, if the court concludes that the true intention of the parties was that the matter to be agreed in the future is capable of being determined, in the absence of future agreement, by some objective criteria of fairness or reasonableness, then the bargain does not fail because the parties have provided no machinery for such determination, or because the machinery which they have provided breaks down. In those circumstances the court will provide its own machinery for determining what needs to be determined - where appropriate by ordering an inquiry (see Sudbrook Trading Estate Ltd v Eggleton [1983] AC 444).
25. I turn, therefore, to the words which the parties have used in clause 4 of the agreement into which they entered in 1991. The relevant provision is in four parts, and it is, I think helpful, for the purposes of of analysis, to identify each of those parts. First, there is a need for a request within a defined period of time - "if during the six months prior to the expiration of the said term the Operator shall serve written notice upon the Owner requesting the renewal of the Agreement for a further period of seven years". Second, there is what, in terms, is framed as a condition precedent - "subject to the re-negotiation of the rent payable in no less a sum than that which shall be payable under the terms of this Agreement at that date". Third, there is the obligation - "the Owner shall grant to the Operator a fresh agreement". Fourth, there are provisions relating to the terms upon which the fresh agreement is to be granted - "in the same terms hereof save and except for this clause for a further period of seven years."
26. The four part structure of clause 4 treats re-negotiation of the rent - or, more precisely, re-negotiation of the rent at a figure which is not less than the sum already payable under the agreement - as a condition precedent to the obligation to grant a fresh agreement. In that respect the provision is indistinguishable from that which this Court considered in Little v Courage Limited (1994) 70 P & CR 469 - see the terms of clause 26 set out at page 471 of that report. The question in that case was whether a condition precedent - that the lessee should have agreed with the company a further business plan - needed to be satisfied before the obligation to renew the lease could be enforced. On the facts of that case there had been no agreement as to a further business plan. Millett LJ pointed out, at page 474, that, in such a case, the only questions which fall to be answered are (i) whether on a true construction the condition precedent has been satisfied, and if not, (ii) whether it needed to be satisfied. In the present case it is plain that - if re-negotiation of the rent is a condition precedent to the obligation on the Owner to grant a fresh agreement - that condition had not been satisfied before 21st December 1998. Indeed, it has still not been satisfied.
27. The question then arises: was it necessary for that condition to be satisfied before 21st December 1998? Is it possible, as the operator contends, for the obligation to grant a new Operator's agreement to arise before the condition has been satisfied; on the basis that the rent can be negotiated or determined after the obligation has arisen. I take the view that that question must be answered in the negative. To my mind it is clear, from the structure of clause 4, that the parties did intend that the rent to be paid under any fresh agreement should be renegotiated and fixed before the obligation to grant the fresh agreement arose. There is, as it seems to me, an obvious reason for that. The parties must have intended that by 21st December 1998 each would know whether or not there was to be a fresh operating agreement under which the Operator would remain in occupation or possession managing the airport. They cannot have contemplated that that question would be unresolved as at 21st December 1998. If, then, this provision in clause 4 is to be treated as a condition precedent it had to be satisfied, if at all, before the 21st December 1998.
28. The next question that arises is whether either party could have contemplated that, between the service of the renewal notice and the termination of the agreement on 20th December 1998 (and in the absence of agreement), the rent be determined by reference to objective criteria. In other words what was to happen if the parties had not agreed the new rent before 21st December 1998?
29. In that context it is important to keep in mind that there is no minimum period before which the operator is required to give a notice requesting renewal. The Operator must serve its notice within the period of six months prior to the expiration of the term; but it may, under the provisions of clause 4, serve the notice on the last day of the six months. The Operator could, in this case, have served a notice as late as 20th December. In those circumstances there would be no opportunity to satisfy the condition precedent by reference to objective criteria if the parties had not been able to agree the new rent. The parties must therefore have intended that, if this provision were to take effect as a condition precedent, it would take effect according to its terms. That is to say, the condition would be satisfied if, and only if, the new rent payable had been renegotiated. There is no room for the implication into that condition precedent of any objective criteria such as fairness and reasonableness. An implication requiring that the new rent be determined by reference to objective criteria could not be expected to produce a result in time.
30. It follows, in my view, that if this condition as to re-negotiation is to be treated as a condition precedent clause 4 of the agreement is indeed an agreement to agree and is unenforceable for that reason.
31. The Operator seeks to avoid that conclusion by inviting the court, in effect, to redraw the provisions which the parties have incorporated in their agreement. Counsel for the Operator does not shrink from the proposition that, to achieve the result for which he contends, clause 4 has to be read as if the requirement as to re-negotiation of the rent is not to be treated as a separate, and second, part of the provision - and so a condition precedent - but is to be treated as within the fourth part of the condition. It is to be treated as a term of the agreement to be agreed in the future after the obligation to grant a new agreement has crystalised. So read, the provision would be this: "... (1) if during the six months prior to the expiration of the said term the Operator shall serve written notice upon the Owner requesting the renewal of the agreement for a further period of seven years... (3) the Owner shall grant to the operator a fresh agreement (4) on the same terms hereof save and except for this clause for a further period of seven years... (2) "at a rent to be renegotiated".
32. If the provision were in that form I could see force in the argument that a term could be implied that the rent, if not renegotiated or agreed, was to be a fair rent. The position would be similar to that in Corson v Rhuddlan Borough Council [1995] EGLR 255. But in order to reach that conclusion it is necessary to reorder the structure of clause 4. The agreement has plainly been drawn by professional advisers; and it must be assumed that the clause takes the form that it does as a result of some thought. The clause has been drawn in the way it has, as it seems to me, in order to make it clear that re-negotiation of the rent is intended to be a condition precedent. It is not for the court to redraw the clause so as to make for the parties a bargain which they have not themselves made.
33. For those reasons I would allow this appeal.
34. SIR MURRAY STUART-SMITH: I agree
35. LORD JUSTICE SCHIEMANN: I also agree.
(Appeal allowed; the judgment of the court below and of the Master be set aside, and be replaced as indicated; the Respondent do pay the costs of the Appellant; application for permission to appeal to the House of Lords refused).