England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION)

		Royal Courts of Justice, Strand, London WC2A 2LL.
		20th February 2009.

MR JUSTICE MORGAN:

1. This case concerns the interpretation of the rent review provisions in a lease dated 4^th July 1991 in respect of premises at 74 The Broadway, London UB1 1QD. Those premises are used as an amusement arcade. The Claimants are the current landlords under the lease, and the Defendants are the current tenants. The Claimants are represented by Mr Loveday of counsel, and the Defendant is represented by Mr Rosenthal of counsel.
2. The matter comes before the court under Section 45 of the Arbitration Act 1996. The claim form identifies the relief which is sought in these terms:

'The Claimant's claim is for an order pursuant to Section 45 Arbitration Act 1996 determining whether on the true construction of clause 6.3 of the lease dated 4^th July 1991 the open market yearly rent to be determined is to have regard to or to disregard the proviso to clause 6.3.'

The claim form spells out the circumstances in which this matter has been raised by way of that claim form. It is stated that the question identified has arisen in the course of an arbitration. It states that the question substantially affects the rights of the parties and that the arbitrator in the arbitration has given permission for this application to be made. It is then pointed out that the determination of the question is likely to produce substantial savings in costs and that the application has been made without delay.

3. Under Section 45 of the Arbitration Act 1996, unless it is otherwise agreed by the parties, the court may on an application such as this determine a question of law arising in the course of the arbitral proceedings. The court may do that where the court is satisfied that the question substantially affects the rights of one or more of the parties. Section 45(2) states that an application under this Section should not be considered unless certain matters are provided for, and they have been provided for in this case. Both parties before the court wish the court to determine the question. It seems to me that it is appropriate, having regard to the terms of Section 45(1) that I should do so, and I will therefore proceed to determine the question which has been raised.
4. I can go from there to the terms of the lease and then more particularly to the rent review provisions. As I have indicated, the lease was entered into on 4^th July 1991. It demised the premises which I have described for a term of 20 years from 4^th December 1989. Clause 1 of the lease contained a number of definitions to which it is relevant to refer. Clause 1.4.6 defined the Permitted User to mean an amusement arcade. Clause 1.4.12 defined the Reserved Yearly Rent to mean any increased rent payable for any review period pursuant to the rent review clause contained in clause 6 of the lease. The demise was in clause 2 of the lease, demising the premises for the term which I have described. Clause 2.1 reserved an initial yearly rent of £15,000 subject to later review. The tenants' covenants were contained in clause 3 of the lease. They were of a fairly conventional kind. By clause 3.14.1 the tenant covenanted to use and occupy the demised premises for the Permitted User and no other purpose, viz., the premises were to be used only as an amusement arcade.
5. The rent review provisions are contained in clause 6 of the lease. The provisions are detailed. They extend to some seven or eight pages of text. They appear to have been professionally drawn and carefully considered. It is not necessary for present purposes to read the entirety of the rent review clause. I will attempt to identify and then read the more relevant provisions. Clause 6.1 provides that the amount of the rent reserved by the lease is to be reviewed at the end of each four years of the term, and indeed on the last day of the term. The clause defines Review Period in an obvious way which I need not recite. For the review periods, the rent is to be varied in an upwards direction only so that it becomes the Reserved Yearly Rent at the commencement of the relevant review period. Clause 6.2 identifies the way in which the relevant amount is to be determined. Clause 6.2 begins with the three words: 'Every such Assessment'. Although the word 'assessment' appears with a capital A, that word is not defined, and indeed clause 6.1 did not itself refer to a process of assessment but referred to a process of calculation. However, because the phrase is 'such assessment' it is accepted by the parties that this must be a reference back to the process of calculation of the Reserved Yearly Rent. By that means one arrives at the conclusion that the calculation of the Reserved Yearly Rent is to be done in accordance with clause 6.2 in particular of the lease.
6. What clause 6.2 provides for is either agreement or determination by an arbitrator of something called 'the open market yearly rent.' That phrase is itself defined in considerable detail in clause 6.3 of the lease. The expression is defined for the purpose of clause 6 and for all of the purposes of clause 6. Many parts of the definition are of a conventional character. I will not read into this judgment all of the parts of the definition, which are of a kind that one expects to find in a well-drawn definition of that kind. What is required by the more conventional parts of the definition is that one assesses the rent at which the demised premises might reasonably be expected to be let in the open market by a willing lessor to a willing lessee without taking a fine or a premium; in other words, one assumes a hypothetical letting in the open market at the relevant rent review date.
7. The definition goes on to make express provision in a way which is material for today's purposes. First of all, it states that the hypothetical lease is on the terms and conditions of the actual lease. Secondly, it states that the terms and conditions of the actual lease include the provisions for rent review contained in the actual lease. Thirdly, it states that the terms and conditions of the lease do not extend to what is described as 'the amount of the rent.' The duration of the hypothetical lease is for a term equal to the term unexpired of the actual lease or a period of 10 years, whichever is the longer. Clause 6.3 then continues by referring to a number of matters to be disregarded. They are in clauses 6.3.1 to 6.3.10 inclusive. The clause then continues by directing a number of matters which are to be assumed. The matters to be assumed are in clauses 6.3.11 and 6.3.16. Following 6.3.16 there is a proviso which I will in due course read, which is the all-important proviso for the purposes of this dispute.
8. Reverting to the matters to be disregarded, many of those are of a conventional kind and I need not refer to them. Clause 6.3.9 is central to the outcome of this dispute and is in these terms. I will read it with the introductory words as follows:

'But disregarding the proviso contained at the end of clause 6.3 hereof and any increase in rent made or to be made pursuant thereto.'

Clause 6.3.10 directs the disregard of any increase in value attributable to the Permitted User specified in the lease, and the clause goes on to provide that an arbitrator when considering the rental levels of premises submitted to him for the purposes of comparison should specifically disregard amusement arcade premises or comparables having an amusement arcade content. It can be seen that that provision is very much a one-off provision which has the appearance of being tailor-made for some specific purpose which the parties must have had in mind. Part of that purpose is explained by the first assumption at clause 6.3.11. That in summary directs the assumption that the premises may lawfully be used as a retail shop. The assumption is in terms which indicate that the lawful user extends not only to the user clause in the hypothetical lease but also to the position under Town and Country Planning. The assumption also states that one proceeds on the basis that no capital is required to be expended upon the premises to enable them to be used as a retail shop.

9. I can move from there to the proviso which appears after clause 6.3.16. The proviso is in these terms:

'Provided always it is hereby agreed that once the open market yearly rent has been agreed or determined as provided in this clause there shall then be added to it a further sum which represents 25% thereof so that the Reserved Yearly Rent then payable for the relevant review period shall be 125% of the open market yearly rent agreed or determined as hereinbefore provided (subject to the provisions contained in clause 6.1 and 6.5.1 hereof) e.g. if the open market yearly rent for the review period commencing 4^th December 1993 be determined at £20,000 then once such figure is determined a further 25% (i.e. £5,000) shall be added to such figure and accordingly the Reserved Yearly Rent payable for the relevant review period shall be £25,000.'

I do not need to read the remainder of clause 6 save to explain that the cross-reference in the proviso to clause 6.5.1 is a cross-reference to a provision which provides for the rent review process to operate in an upward direction only.

10. Those being the rent review provisions, it is next convenient to describe the positions taken up by the parties in relation to the current dispute. The current dispute relates to the amount of the rent payable with effect from the rent review date of 4^th December 2005. Accordingly, I will refer to that date for the purpose of illustrating the positions of the parties, although the positions of the parties will of course apply to every review at whatever date it arises under the lease. The landlord's position can be summarised as follows: the review date is 4^th December 2005; on that date one assumes the premises are available to be let and are let in the open market; they are let on a term for 10 years from the review date; they are let for retail use, i.e. they are let as a shop; shop user is permitted under the hypothetical lease, is permitted under the law as to Town and Country Planning, and the physical condition of the premises is not such as to be incompatible with such use. The hypothetical lease for 10 years itself contains provisions for rent review. The rent review dates under the hypothetical lease include 4^th December 2009 and 4^th December 2013. The landlord submits that the rent review provisions in the hypothetical lease do not have the proviso which appears in the actual lease referring to an uplift to 25%. Accordingly, at the valuation stage one simply finds – based no doubt on comparable transactions – the open market rental value of shop premises at this address on those lease terms. The resulting figure, let us say, is £x per annum. Following the ascertainment of £x per annum, the proviso provides for a further calculation – the rent payable by the actual tenant under the actual lease will be 125% of £x. That is the landlord's position.
11. The tenant goes part of the way with the landlord but importantly diverts from the landlord's position in certain respects. The tenant accepts that there is a hypothetical lease for 10 years from the rent review date 4^th December 2005 and the hypothetical lease has rent review provisions providing for review on 4^th December 2009 and 4^th December 2013. The tenant however submits that the rent review provisions in the hypothetical lease repeat and do not delete the proviso from the actual lease. That is the package of financial terms which is on offer to the hypothetical tenant at the review date of 4^th December 2005 and one assesses a market rent for that package. When one has assessed the market rent, of course the actual tenant pays 125% of it. Reverting to the process of ascertaining the market rent, the reason the tenant contends for the appearance of the proviso in the hypothetical rent review clause is that the tenant would wish to point out to the arbitrator in this case that such a rent review clause is an unusual rent review clause not to be found (no doubt) in the comparable transactions; the rent review clause in that form is an onerous clause and the presence of an onerous clause in the hypothetical lease must inevitably have an adverse effect on the amount of the initial rent. So that if the amount of the initial rent contended for by the landlord on its basis was £x, the tenant will say that £x must be reduced – probably by the process of applying a percentage – so that the rent on the tenant's basis will be, say, 80% or 90% or some other percentage of £x. When that figure is calculated, the actual tenant pays 25% more under the proviso which undoubtedly operates between the actual parties.
12. The case has been well argued both in writing and orally. I can summarise the landlord's arguments briefly. The landlord relies on the operation of the express term contained in clause 6.3.9 of the rent review clause to which I have referred. The landlord draws attention to the fact that that clause has two parts. Clause 6.3.9 directs one to disregard the proviso in question. If one disregards the proviso, one part of the disregard means that one assumes the hypothetical lease on offer to the hypothetical tenant does not contain a similar proviso. If that is not right, the landlord relies on the second part of clause 6.3.9. That requires one to disregard any increase in rent made or to be made pursuant to the proviso. Accordingly, although the proviso might be in the hypothetical lease which is on offer to the hypothetical tenant, and although that rent review clause might on future occasions result in a geared increase in the rent payable, that is all disregarded for the purpose of the assessment of the rent in this case at December 2005. The landlord stresses that one disregards not only an increase in rent made but an increase in rent to be made. The language to be made is language of the future. It applies no doubt to the making of an increase at 4^th December 2005 but naturally also applies to the making of an increase in 2009 and 2013 under the rent review clause in the hypothetical lease.
13. The tenant joins issue with that approach and that conclusion. The tenant stresses that if one wants to know the terms of the rent review clause in the hypothetical lease one finds the answer by following the express and clear direction in clause 6.3 that the hypothetical lease has the same terms for rent review as does the actual lease. That, the tenant says, precludes one from deleting the proviso from the hypothetical lease. The tenant next submits that the disregard in clause 6.3.9 does achieve something important. It means that when one is assessing the £x as at 4^th December 2005, one disregards the fact – a real fact between the actual parties – that the £x will be uplifted by 25%. That operates between the actual parties but the tenant accepts does not operate between the hypothetical parties. That is said to be the effect, but the only effect, of clause 6.3.9 of the lease. Building on that submission, the tenant contends that clause 6.3.9 so construed does not change the terms of the hypothetical lease and does not lead to a deletion of the proviso from the terms of the hypothetical lease.
14. The tenant then has a point on the detailed language and structure of the clause. It will be remembered from my recital of the relevant terms that clause 6.1 refers to the Reserved Yearly Rent and clause 6.2 refers to the 'open market yearly rent.' The link between those two phrases is not explained until one gets to the proviso and there it is explained. If one deletes the proviso from the terms of the hypothetical lease, one is left with an absence of explanation as to how one moves from the open market yearly rent to the Reserved Yearly Rent. In other words, the tenant submits, it is not possible simply to delete the proviso and to leave the remainder of the clause as a clause capable of operating. I will deal with that specific point at this stage before standing back and considering the overall operation of the provisions.
15. The tenant has on the language a point to some extent of this kind. However, in my judgment, it does not go very far. There may be a minor difficulty but it is a minor difficulty that would readily be overcome if one was asked to construe a hypothetical lease which had deleted from it the proviso but left all of the other language wholly unchanged. If one was construing such a draft hypothetical lease, one would simply say that the Reserved Yearly Rent referred to in clause 6.1, which is the rent to be paid from a review date, is to be assessed (using the language of clause 6.2) by agreeing or determining the open market yearly rent. It would be obvious to my mind that when one had reached the agreement or determination of the open market yearly rent one had assessed the very thing one needed, which is the Reserved Yearly Rent.
16. Continuing with the tenant's submissions on this dispute, the tenant submits that one should apply the well-known presumption of reality. The reality is that the actual tenant on subsequent reviews will pay an uplift of 25%. Therefore the starting point must be that the hypothetical tenant should be expected to pay the same uplift. True it is that clause 6.3.9 overrides reality, but it should be construed so as to override reality to a limited extent and not to a greater extent. At any rate, the tenant submits, it should only be allowed to override reality to a greater extent where the words are very clear and it is submitted these words are not adequately clear.
17. Finally, the tenant submits that the court has no real material with which to determine the commercial purpose of this provision. It is not open to the court to speculate in any useful way as to what the parties were attempting to achieve. Better by far to give the words a limited meaning, controlled by the presumption of reality, rather than take the course urged by the landlord.
18. Having set out the rival contentions, I can express my conclusion, which is that I prefer the submissions for the landlord. In explaining that conclusion, it will be helpful to describe how I see the terms of the rent review clause operating in their literal sense. One starts with a hypothetical letting as at 4^th December 2005. The hypothetical lease is for a term of 10 years from that date. It has rent reviews every four years during the term. In general, the terms of the lease are the same as the actual lease. In general, the terms of the rent review clause are the same as the terms of the actual rent review clause. Some changes necessarily have to be made. For example, the premises are being let as a retail shop, so that they are not subject to a restriction on use to use as an amusement arcade. Turning to the provisions more particularly in dispute, my reaction to the words used in clause 6.3.9 is that when one disregards the proviso contained at the end of clause 6.3, one disregards the proviso not only for the purpose of disregarding the effect of it in 2005 but also disregarding the proviso, for example, as a term appearing in the hypothetical lease. If one disregards the proviso for that purpose, one surely proceeds on the basis that the hypothetical lease does not repeat the proviso from the actual lease. If that is the right interpretation then that is the answer to the present dispute. I have already explained that I see no difficulty in a simple excision of the proviso from the hypothetical lease leaving a workable document in other respects.
19. However, the matter does not stop there. Clause 6.3.9 directs one to disregard any increase in rent made or to be made pursuant to the proviso. That, to paraphrase, is dealing with a disregard of the operation of the proviso. The dispute between the parties then narrows considerably to this. Is the three-word phrase 'to be made' confined to the increase being made in 2005 immediately following the assessment of open market yearly rent, or are the words capable of extending to the increase which might be made in 2009 and 2013? My reaction to the wording is that there is no warrant for confining the words to one occasion only, namely, the occasion of the current review. The words naturally apply also to the future occasions, which may be more than one, when an increase may fall to be made. That is my reaction to the language used.
20. I stand back from that reaction and ask myself which of the interpretations makes better commercial sense. I do this as a cross-check in case the result I produce by reading the words literally offends commercial common sense. In my judgment, the interpretation at which I have arrived does not come close to offending commercial common sense but appears to me to advance the commercial common sense of the matter. I can put the point two ways. The first way is that I regard the tenant's result as being the kind of result which it is unlikely the parties would want to achieve. One assesses a rent, say £x, which is a conventional retail rent. One then reduces the rent of £x by, say, 10% or 20% because of the onerous rent review clause, and one then operates the uplift of 25% to the earlier reduced figure. That is a convolution which it is not obvious why the parties would have wanted to achieve. Secondly, one of the important things done by this rent review clause is to direct a valuation of something different from the actual position between the parties. One does not value an amusement arcade; one values a retail shop, and then increases the resulting valuation for the purpose of assessing the rent payable. The language of clause 6.3.10 which I have read shows that the parties considered it was at least possible that an amusement arcade was more valuable than a retail shop. The construction at which I would arrive as to the operation of clause 6.3.9 means that the way in which the possibility of an increased value for amusement arcade is arrived at is one does a wholly conventional evaluation of a retail shop and adds 25% to reflect the possibility of the increased value for an amusement arcade. The idea that one reduces the rent for a retail shop because of an onerous rent review provision and then adds back 25% does not appear to me to make commercial sense in that context.
21. Finally, I remind myself of the presumption of reality. The tenant says that this is a case where the hypothetical lease is going to have terms different from the actual lease. I regard the presumption of reality in the present context as being of limited assistance. First, the parties have contradicted reality in a most important respect in that they have directed the valuation of a retail shop when the actual premises cannot be used as a retail shop. Secondly, clause 6.3.9 admittedly even on the tenant's argument is designed to override the real position between the actual parties. Whilst it is true that one sometimes looks at counterfactual provisions and scrutinises them so as sometimes to limit their effect rather than give them wide literal effect, my reaction to the language and the commercial background here is that that would be to distort the parties' intentions rather than give effect to them. For all those reasons I conclude that this clause is to be interpreted in accordance with the approach adopted by the landlord and contrary to the approach adopted by the tenant and there should be a declaration which gives effect to this judgment.
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