England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY

		Manchester Civil Justice Centre, 1 Bridge Street West, Manchester M60 9DJ
		14 February 2014

His Honour Judge Stephen Davies:

Introduction

1. This is a Part 8 claim to determine a point of construction in relation to rent review clauses contained in two 99 year building leases of commercial property in Oswestry town centre. The leases were entered into in the 1960's between Oswestry Town Council, the defendant, as landlord and Woolworths, the claimants' predecessor in title, as tenant. They provide for rent reviews every 25 years, which only the landlord has the right to instigate, and under which the reviewed rent may not fall below the initial reserved rent ("the threshold limit"). On the first occasion, in 1988, the landlord elected to instigate a rent review, and the rent was increased. On the second occasion, in 2013, the landlord elected not to instigate a rent review. The issue between the parties is that the claimants, the current tenants, contend that on a true construction of the rent review clause the effect is that the rent reverts back to the initial reserved rent, whereas the defendant contends that the effect is that the rent remains at the 1988 increased level.
2. The defendant's rationale for not instigating a rent review in 2013 was its concern that the reviewed rent would be less than the 1988 increased rent. Equally, the reason why the claimants contend that in such circumstances the rent should revert back to the initial reserved rent is that they would obtain a substantial reduction in the rent payable, totalling some £1M over the next 25 years, if they are right. Nonetheless the court is not concerned with these matters, only with the proper construction of the leases.

The material terms of the leases

3. I begin by setting out the material terms of the leases.
4. The principal lease is dated 15 May 1963. The reservation of rent was in the following terms:

"Paying therefor yearly during the said term (subject as hereinafter provided with respect to the periodical reviews thereof) the rent of £2,500 …"

5. The rent review clause, as material, appears at clause 5(1)(a) in the following terms:

"On the expiry of each period of 25 years … (… "the date of review") the Landlords shall have the right to review the yearly rent for the time being payable hereunder on giving to the Tenants not more than 24 nor less than 3 months notice in writing prior to each such date of review of their intention so to do and if the Landlords shall give to the Tenants such notice as aforesaid then from and after each such date of review the yearly rent … shall be … the fair ground rental market value of the demised premises … Provided Further that in no event shall the rent payable by the Tenants to the Landlords after each such date of review be less than the rent of £2,500 per annum hereby reserved"

6. The supplemental lease is dated 24 April 1964, and relates to land adjoining the land comprised in the principal lease. The reservation of rent was in the same terms as the principal lease, save that the word "thereof" was omitted from the words in parentheses and that the rent was £1,500.
7. Clause 5(1) was in the following terms:

"The Landlords shall have the right to review the yearly rent for the time being payable hereunder at the same times and upon the same terms and conditions as … the principal lease PROVIDED that in no event shall the rent payable by the Tenants to the Landlords after each date of review in respect of this Lease be less than the rent of £1,500 per annum hereby reserved."

The respective cases, summarised

8. In short, it is the claimants' case that a problem arises because the rent review clauses do not make express provision for the circumstance which arises in this case, where the landlord has invoked the rent review procedure on the first review date, with the result that the rent has been increased, but the landlord elects not to invoke the rent review procedure on the second review date. Mr Wonnacott QC for the claimants submits that, whilst the clauses expressly provide that where the landlord invokes the rent review procedure then with effect from the first review date the increased rent is payable "from and after each such date of review", they do not make express provision as to the rent payable after the second review date in the event that the landlord elects not to invoke the rent review procedure on that occasion. His argument is that the rent payable from the second review date in such circumstances could, logically, be either the initial reserved rent or the subsequent increased rent, and that where one would expect to provide express provision to answer this question, immediately after the words "from and after each such date of review", there is nothing. His argument is that in the absence of express provision the court has to decide which it should be by a process of construction. His essential submission is that in such circumstances, where the rent may be reviewed upwards or downwards (subject to the threshold limit), then it is more consistent with the commercial purpose of such a clause for the rent to default back to the initial reserved rent than to remain at the subsequent increased rent. His submission is that the wording used in the leases, properly analysed, is consistent with his case or, at the very least, not inconsistent with his case.
9. In contrast, the defendant's case is that the wording of clause 5(1)(a), properly analysed, demonstrates quite clearly that in such circumstances it is the subsequent increased rent which continues to apply. Mr Brennan for the defendant submits that in such circumstances it is necessary for the claimants to show that there is a proper basis for implying the words which they seek to read into the leases, and that they have failed to do so. His submission is that the defendant's construction is more consistent with the commercial purpose of the lease.

The relevant legal principles

10. As Mr Wonnacott submitted, there are no special principles applicable to the construction of rent review clauses: CWS v Nat West Bank [1995] 1 EGLR 97, per Hoffman LJ (as he then was) at p.101C-D. The approach to the construction of contracts generally is succinctly summarised by Lord Neuberger in his speech in the recent decision of the Supreme Court in Marley v Rawlings [2014] UKSC 2, at pars 18 and 19:

"18. During the past forty years, the House of Lords and Supreme Court have laid down the correct approach to the interpretation, or construction, of commercial contracts in a number of cases starting with Prenn v Simmonds [1971] 1 WLR 1381 and culminating in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900.

19. When interpreting a contract, the court is concerned to find the intention of the party or parties, and it does this by identifying the meaning of the relevant words, (a) in the light of (i) the natural and ordinary meaning of those words, (ii) the overall purpose of the document, (iii) any other provisions of the document, (iv) the facts known or assumed by the parties at the time that the document was executed, and (v) common sense, but (b) ignoring subjective evidence of any party's intentions. In this connection, see Prenn at 1384-1386 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, per Lord Wilberforce, Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251, para 8, per Lord Bingham, and the survey of more recent authorities in Rainy Sky, per Lord Clarke at paras 21-30."

11. Mr Brennan referred me to the summary given by Nicholls LJ (as he then was) in Basingstoke & Deane Borough Council v Host Group Ltd [1988] 1 WLR 348 at 353D as follows:

"The question raised on this appeal is one of construction of a rent review clause in a lease. In answering that question it is axiomatic that what the court is seeking to identify and declare is the intention of the parties to the lease expressed in that clause. Thus, like all points of construction, the meaning of this rent review clause depends on the particular language used interpreted having regard to the context provided by the whole document and the matrix of the material surrounding circumstances. We recognise, therefore, that the particular language used will always be of paramount importance. Nonetheless it is proper and only sensible, when construing a rent review clause, to have in mind what normally is the commercial purpose of such a clause."

12. Referring to chapter 5 of "The Interpretation of Contracts" by Sir Kim Lewison (5^th edition), Mr Brennan placed particular emphasis on the "golden rule" of construction, that:

"In construing all written instruments, the grammatical and ordinary sense of the words is to be adhered to, unless that would lead to some absurdity, or some repugnance or inconsistence with the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified, so as to avoid that absurdity and inconsistency, but no further."

(see Lord Blackburn in Caledonian Railway Co v North British Railway Co (1881) 6 App Cas 114 at 131, citing Lord Wensleydale in Grey v Pearson at (1857) 6 H.L. Cas 61 at 106).

13. He referred me to what Lord Mustill said in Charter Reinsurance v Fagan [1997] 2 AC 313 at 384C-D:

"Subject to [the use of a specialist vocabulary] the inquiry will start, and usually finish, by asking what is the ordinary meaning of the words used."

14. He also referred me to what Buxton LJ said in Martin v David Wilson Homes Ltd [2004] 3 EGLR 77:

"the first place where one expects to find the meaning of the words and the intention of the draftsman is in the words themselves. If they yield to a fairly clear conclusion … then one has to pause long before concluding that at that point the draftsman has used words with a meaning that do not fit in with the objective that he was seeking to attain."

15. As regards the significance of the commercial background, by reference to what Lord Hope said in Melanesian Mission Trust Board v Australian Mutual Provident Society (1997) 74 P&CR 297 at 300 it seems to me that in normal circumstances at least it will be found only from the terms of the lease itself:

"It is not necessary in this case to say much about the circumstances which provided the background to this contract or the commercial purpose of the transaction. It was of a kind which is familiar to those who engage in the practice of letting commercial property. On the one hand there was the lessor MMT, whose primary interest in the transaction was to obtain a return on the money which it had invested in the construction of the building. On the other there was the lessee AMP, whose interests lay in securing terms for the letting of the property which did not exceed those generally available in the market for similar premises. From the point of view of the investor the most attractive form of lease is one which ensures that the return on the amount invested will be increased if market rentals were to rise but will not diminish if market rentals were to fall. Its purpose is best served by a system of periodic rent reviews together with a provision, commonly referred to as a "ratchet clause" which will ensure that the rent payable after any review will never be less than the rent payable prior to the review date. The lessee's purpose will be best served by provisions which will enable the rent to be adjusted either way at each review date. The balance which requires to be struck between these competing interests is a matter for negotiation in each case. The result of that negotiation is then set out in the formal contract, which supersedes the negotiations and to which one must then turn in order to discover what was agreed."

16. As regards the proces of implying terms to fill lacunae in the express terms of a contract, Mr Brennan referred me to the helpful summary of the position by Lord Clarke MR in Mediterranean Salvage & Towage Ltd v Seamar Trading & Commerce [2009] EWCA Civ 531at paragraph 10:

"Lord Hoffmann [in Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988] made the important point that the question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls. As appears below, that seems to me to be of particular significance here because this is not a case in which each party needs to establish a competing implied term if it is to succeed. Put another way, it is not a two way test. Absent an implied term, the default position is that the owners must bear their own loss."

17. Mr Wonnacott drew my attention to a decision of the Irish High Court given by Charleton J. in the case of Ickendel v Bewley's Café (25 March 2013) in support of his submission that the court should have regard to the commercial purpose of a rent review clause, providing for the revised rent to be the open market rental value of the premises, whether that results in an upwards or downwards movement, when construing a clause where the debate was similar, although not the same, as in the present case. He properly accepted, however, that the actual decision in that case, turning as it did on the wording of a very different clause, cannot assist me in deciding the question which arises in this case.
18. In the same way, without inviting me to consider the actual decision itself, founded as it was on a very different clause, Mr Brennan drew my attention to a decision of Patten J (as he then was) in Hemingway Realty v City of London Clothworkers [2005] 1 EGLR 36 where, at paragraph 13, he said:

"The usual effect of a rent review is to alter the passing rent for the remainder of the term or until a further review takes place. This is because the rent, once reviewed, becomes the rent reserved by, and payable under, the lease, and it can be altered in amount only by an express provision to that effect."

19. Finally, Mr Brennan reminded me that in some cases the proper construction of a legal instrument is, in large part, intuitive, referring me to paragraph 2.12 of Lewison, which cites amongst other authority what Robert Walker LJ (as he then was) said in Welsh v Greenwich LBC (2001) 81 P&CR 12, namely that:

"questions of construction are frequently a matter of impression and are not readily susceptible of precise explanation."

20. Tempting though it is, therefore, to make my finding by reference to my impression and without attempting a precise explanation, I shall at least attempt to explain the process of reasoning by which I have arrived at my decision.

The words used

21. I do not gain much if any assistance from the reservation of rent clause. It makes it clear that the initial rent is subject to review. I do not consider that the word "thereof", which appears in the principal but not the supplemental lease, assists one way or another.
22. It is clear that the crucial clause is clause 5(1)(a) of the principal lease, echoed in all material respects in clause 5(1) of the supplemental lease.
23. In my judgment Mr Brennan is entitled, as Mr Wonnacott fairly acknowledged, to place considerable reliance on the words "the Landlords shall have the right to review the yearly rent for the time being payable hereunder". That is because the reference to "the rent for the time being payable hereunder" is clearly in my judgment to be read as a reference to the initial rent and also to any subsequent increased rent. It also, therefore, indicates very clearly in my judgment that if the landlord does not avail himself of that right then the "rent for the time being payable hereunder" shall continue to be paid, and if that is a subsequent increased rent then it is that will continue to be paid, rather than defaulting to the initial reserved rent.
24. Mr Wonnacott sought to address that difficulty in paragraph 22 of his skeleton argument, by submitting that this could be interpreted either as referring to the rent actually payable on the review date, or to the rent which would otherwise be payable at the commencement of the review period and, if the latter, that was not inconsistent with the claimants' case. Whilst admiring the ingenuity of the argument, I am unable to accept it. In my judgment it can only sensibly be read as a reference to what is actually payable at that time, which in the case under consideration could only be the subsequent increased rent.
25. As to the phrase "from and after each such date of review" counsel were agreed, correctly in my view, that this only applies if the landlord invokes the rent review procedure i.e. it is conditional upon the landlord doing so. It seems to me, therefore, that Mr Wonnacott's strongest point, that this phrase does not expressly address the position as to what happens if one review takes place and the rent is increased upwards but the landlord does not invoke the rent review procedure on the second review, loses much if not all of its force if one accepts, as I do, that the consequence is simply that the "yearly rent for the time being payable hereunder" continues to be payable. In other words, the answer to that question is to be found not at the point where Mr Wonnacott submits that it is not answered but at the earlier point in the clause where it is. It follows in my judgment that there is no lacuna in the express terms of the clause which needs to be filled by a process of construction or implication.
26. If, however, I am wrong about that, then I consider that in any event such earlier provision provides strong support for Mr Brennan's argument that the words "from and after each such date of review", are naturally in the context of this clause to be read, even without further express words, as meaning that the yearly rent thus determined in accordance with this clause should continue to be payable until such time as either a further review takes place or the lease ends. Whilst I acknowledge Mr Wonnacott's submission that this involves implying further words just as much as does his suggested interpretation, in my judgment there is a significant qualitative and quantitative difference between the amount of implication which is required to make good the defendant's case and that which is required to make good the claimants' case. In my judgment Mr Brennan is correct to submit that on a plain and obvious reading of the clause then unless and until something else happens, whether a further review or the termination of the lease, once the rent has been reviewed upwards that passing rent will continue to be paid.
27. I also accept Mr Brennan's submission that the proviso at the end of clause 5(1)(a) provides some, albeit modest, support for the defendant's case. That is because if the claimants were right, then it would be axiomatic that after "each such date of review", unless the landlord invoked the rent review procedure, the rent payable would be the initial rent, and there would be no need to provide for this to be the threshold limit. If the claimants were right then the proviso might more sensibly be worded as only applying if the landlord gives notice and if a fair ground rental market value is agreed or determined as a result.
28. Accordingly, on the basis of my analysis of the words used in clause 5(1)(a), I am satisfied that the defendant's construction is to be preferred.
29. I do not consider that I gain any real assistance from the words used in the remainder of the leases which, in my view, cast no real light either on the meaning of the words used in the rent review clauses or on the commercial purpose of those clauses in relation to the point in issue.
30. Nor, applying the principle stated in the Mediterranean Salvage case, do I consider that there is any basis for implying the construction contended for by the claimants. To be fair, Mr Wonnacott did not seek to advance that argument as a fallback submission if I was against him on his construction argument.

Commercial purpose of the rent review clauses

31. I do not derive any real assistance either way from arguments directed to the overall commercial purpose of the rent review clauses. This, in my judgment, is a case such as contemplated by Lord Hope in the Melanesian Mission case, where the court must look at the provisions of the leases themselves to discern the commercial purpose behind what was agreed.
32. Thus whilst Mr Wonnacott submitted that the defendant's construction offended against common sense because it had the effect of turning a threshold limit rent review clause into an upwards only (or "ratchet") rent review clause, in my judgment that ignores the point that the original tenant, doubtless professionally advised, was prepared to agree to a landlord only rent review clause, so that it must be taken to have known and accepted the risk that the landlord might decide it was in its interests not to revoke the rent review clause, with the result that the tenant would be unable to obtain the benefit of any reduction in open market rental values since the last review date. It does not seem to me that the claimant's analysis, which would revert the passing rent back to the initial rent in such a case, is any more commercially obvious or makes any more common sense that the defendant's analysis. Indeed if anything it seems to me to be more inherently unlikely that a landlord who had successfully negotiated a landlord only rent review would have been prepared to agree to a provision reverting the passing rent back to the initial rent in such circumstances.
33. Nor however do I accept Mr Brennan's submission, fortified by reference to passages in Hill and Redman's Law of Landlord and Tenant, that I should approach the construction of the rent review clauses in this case on the basis that both landlords and tenants would have entered into the leases assuming that any rent review would only ever produce an upwards only review. Apart from anything else, as Mr Wonnacott pointed out it is difficult if not impossible for a court to make any safe assumption about what parties to a lease entered into in the first half of the 1960's may or may not have assumed. Finally, neither do I accept Mr Brennan's submission that the landlord would never have agreed to a clause bearing the claimants' construction because it would have perceived it as creating an obvious trap for it, where if through oversight it failed to serve notice in time the passing rent would default back to the initial rent. That is because, as Mr Wonnacott submitted, that is a risk always inherent in any rent review clause which is not automatic and triggered only by notice, and particularly so where – as here – the landlord reserves to himself the sole right to invoke a review.

Conclusion

34. For the reasons I have given I find for the defendant on the point of construction and, subject to any argument as to the form of order, would propose to make declarations in the terms of paragraphs 1(ii) and 2(ii) of the Claim Form. I will of course also hear any argument on costs at the appropriate time.