Court of Appeal in Northern Ireland Decisions

CARC2862 20 October 1999

IN HER MAJESTY'S COURT OF APPEAL IN NORTHERN IRELAND

_____

BETWEEN

GALVANO ENTERPRISES LIMITED

(Respondent) Appellant

and

ORIONVINK BV

(Applicant) Respondent

_____ JUDGMENT OF McCOLLUM LJ

JUDGMENT OF CARSWELL LCJ

This appeal is brought by way of case stated against a decision of the Lands Tribunal for Northern Ireland sitting as arbitrator. The issue is the correct interpretation of a rent review clause in a lease of commercial premises and the assumptions which an arbitrator should make in fixing the rent to be payable by the tenant following the review. Although it turns on a relatively net point of construction, the appeal raises issues which have frequently been the subject of debate and decision about the approach which should be adopted in the interpretation of such clauses.

The appellant is the tenant of premises known as Unit 37 in Bloomfield Shopping Centre, a large shopping complex on the outskirts of Bangor, Co Down. The premises were demised to the appellant by the then landlord, Lochinver Limited, the developer of the complex, by a lease dated 5 March 1993 for the term of 25 years from 17 September 1992 at the initial rent of £70,000 per annum. By a covenant restrictive of user, to which I shall refer in more detail later, the tenant was confined to using the premises as a restaurant. The landlord's interest was assigned to another company, which was respondent in the proceedings before the Tribunal, and is now vested in the respondent Orionvink BV, who was substituted as respondent in this appeal.

When the parties were unable to reach agreement on the rent to be fixed on the review which fell to be carried out on 17 September 1997, they referred the matter to the arbitration of the Lands Tribunal. By agreement they submitted to the Tribunal for decision as a preliminary issue the basis on which the reviewed rent should be determined. The Tribunal received submissions from the parties on 23 and 25 September 1998 and gave a written decision dated 28 October 1998, in which it accepted that the landlord's contention was correct, that in accordance with the terms of the rent review provisions in the lease the rent should be determined on the basis that the hypothetical tenant was free to use the premises for any retail purposes, notwithstanding the restrictions on user contained in the lease by which the actual tenant was bound. At the request of the appellant the Tribunal stated a case for the opinion of this court on the following questions:

"1. On the true construction of the Lease dated the 5th March, 1993 for Unit 37 Bloomfield Shopping Centre, and the rent review provisions thereunder, was the Arbitrator correct in law in deciding that the rent to be determined in respect of the Premises included both restaurant and retail use?

2. On the true construction of the Lease and the rent review provisions thereunder was the Arbitrator correct in law not taking into account that any retail use of the Premises would necessarily involve breaches of covenants 5.6 and in particular 5.6.2 and 5.6.3 and covenants 5.11 and in particular 5.11.1 and 5.11.2?"

The provisions of the lease which are material to the present case were the following:

(a) The demised premises were an L-shaped area of some 6000 square feet situate near the middle of the shopping arcade.

(b) The term was 25 years from 17 September 1992, the initial rent payable being £70,000 per annum, payable as from 1 February 1993, subject to review as hereinafter set out.

(c) By clause 1.11 there were twelve types of prohibited user, the permitted user, by virtue of clause 1.10 and paragraph 4.1 of the 5^th Schedule, being that of a restaurant. By paragraph 4.3 of the 5^th Schedule the tenant covenanted not to use the premises for any purpose other than the permitted user.

(d) By clause 5.6.2 the tenant covenanted not to do anything by reason of which the landlord might incur any penalty etc under any enactment, and by clause 5.6.3 to comply in all respects with statutory and other obligations.

(e) By clause 5.11.1 the tenant covenanted to comply with the provisions and requirements of the "Planning Acts" and to indemnify the landlord against liability for any contravention, and by clause 5.11.2 to obtain all necessary planning permissions.

(f) Clause 10.8 contained an exclusion of use warranty in the following terms:

"10.8 Nothing in this Lease or in any consent granted by the Landlord under this Lease shall imply or warrant that the Premises may be used for the purpose herein authorised (or any purpose subsequently authorised) under the Planning Acts."

(g) The provisions governing rent review were set out in the 4^th Schedule to the lease. As is commonly found, they specified a number of matters which were to be disregarded in assessing the rent which the hypothetical tenant would pay from the review date. Paragraph 1.3 set out a number of assumptions to be made:

"1.3 `the Assumptions' mean the following as assumptions at the relevant Review Date:

(a) that the Premises are fit for, and fitted out and equipped for, immediate occupation and use by a willing tenant, and that no work has been carried out on the Premises by the Tenant or its predecessors in title during the Term which has diminished the rental value of the Premises, and if the Premises and/or the Centre have been destroyed or damaged they have been fully restored,

(b) that the Premises are available to let by a willing landlord to a willing tenant as a whole, without a fine or premium, but with vacant possession, and subject to the provisions of this Lease (other than the amount of the Rent but including the provisions for rent review), for a term equal to, whichever is the greater of, the period of 15 years or the remainder of the Term, and that the said letting would be renewed at the expiration of the term thereof under the provisions of the 1964 Act, and

(c) that the covenants contained in this Lease on the part of the Tenant have been fully performed and observed;

(d) that the Premises may be used for any use permitted by Class 1 and Class 2 of the Planning (Use Classes) Order (Northern Ireland) 1989."

Class 1 and Class 2 of the use classes set out in the Schedule to the 1989 Order are defined as follows:

"Class 1: Shops

Use for all or any of the following purposes -

(a) for the retail sale of goods other than hot food,

(b) as a post office,

(c) for the sale of tickets or as a travel agency,

(d) for hairdressing,

(e) for the display of goods for retail sale,

(f) for the hiring out of domestic or personal goods or articles,

(g) for the reception of goods including clothes or fabrics to be washed, cleaned or repaired either on or off the premises

where the sale, display or service is to visiting members of the public.

Class 2: Financial, professional and other services

Use for the provision of services which it is appropriate to provide in a shopping area, where the services are provided principally to visiting members of the public including -

(a) financial services, or

(b) professional services."

Under Article 2(5)(h) of the 1989 Order no class specified in the Schedule includes use for the sale of food or drink for consumption on the premises, and accordingly the permitted restaurant user does not fall within Class 1 or Class 2.

Before the Tribunal and on appeal to this court Mr Horner QC on behalf of the appellant argued that when one had regard to the provisions of the lease as a whole the assumption contained in paragraph 1.3.(d) of the 4^th Schedule could not be taken at face value and that the valuer must assume that the prohibition on user other than as a restaurant remained in effect. He also pointed to the fact that the landlord could not give permission for the use of the premises for retail purposes if it wished, since the space which could be devoted to retail sales in the complex was limited by the terms of the planning permission, and to add the area of the premises to that would be in breach of planning control. The Tribunal, in a fully and carefully reasoned award, declined to accept the appellant's argument and held that the meaning of the assumption was clear and that the valuer must give effect to it, notwithstanding the factors upon which the appellant relied.

It is clearly established that one must read a document such as a lease as a whole. Where there is ambiguity in the interpretation of a disputed clause, one should choose the construction which seems more likely to give effect to the commercial purpose of the document. In cases such as Norwich Union Life Insurance Society v. Trustee Savings Banks Central Board [1986] 1 EGLR 167 and Lynnthorpe Enterprises Ltd v Sidney Smith (Chelsea) Ltd [1990] 1 EGLR 148 the courts have described this as a presumption in favour of reality. I do not understand it to be a departure from the recognised principles of construction, and would regard it as no more than a shift in emphasis towards accepting that the ascertainment of the intention of the parties may require one to look outside the wording of the disputed provision. The issue for the court in a case such as the present is to determine whether the language of the provision clearly compels the valuer to make an assumption which is artificial and based on hypothetical facts which do not accord with the real situation, or whether it can and should move away from that interpretation to one which appears to be more in accordance with the actual facts and the commercial purpose of the parties.

The Tribunal examined a number of cases in which the courts decided such issues, and it is unnecessary for me in this judgment to multiply examples. I need refer to only one passage, from the judgment of Hoffmann J in MFI Properties Ltd v BICC Group Pension Trust Ltd [1986] 1 All ER 974 at pages 975-6, where he stated:

"The terms on which such hypothetical letting must be assumed to take place will naturally depend in each case on the particular language of the rent review clause. In general, the purpose of such clauses would point to a prima facie assumption that the parties intended the hypothetical letter to be for the residue of the actual lease held by the tenant on the same terms and in the circumstances which actually exist at the relevant date. Thereby, the tenant would be required to pay on the assumption that he was being granted the interest which he actually held on the rent review date. But the language of the clause may show clearly that a departure from reality was intended. In some cases it will be easy, even for an outsider who was not privy to the negotiations between the parties, to see why such an assumption should have been made. For example, fairness to the landlord might explain an assumption that the tenant has complied with his repairing covenants even if he has not in fact done so. Similarly, fairness to the tenant will explain an assumption which excludes from consideration any improvements which the tenant has made at his own expense or his acquisition of a goodwill which he would pay a higher rent to protect. But there will also be cases in which the language used by the parties shows beyond doubt that they intended an assumption for which, to a third party who knows nothing of the negotiations, no commercial purpose can be discerned. In such circumstances the court has no option but to assume that it was a quid pro quo for some other concession in the course of negotiations. The court cannot reject it as absurd merely because it is counterfactual and has no outward commercial justification. On the other hand, if the language is capable of more than one meaning, I think the court is entitled to select the meaning which accords with the apparent commercial purpose of the clause rather than one which appears commercially irrational."

An example of a rent review assumption which the court regarded as overriding an actual provision contained the lease may be found in Sheerness Steel Co plc v Medway Ports Authority [1992] 1 EGLR 133. In that case the assumption in the rent review clause was that the notional lessee should be regarded as being entitled to carry out all alterations necessary or appropriate to convert the premises for an industrial use of his own choice, whereas there was a covenant in the actual lease by the tenant not to carry out alterations or improvements save in connection with the use of the premises for steel-making. The Court of Appeal held that the words of the assumption provision were clear enough to show an intention that the assumption should prevail over the restrictive covenant in the actual lease. Another example, apposite to the present case, is in PosTel Properties Ltd v Greenwell [1992] 2 EGLR 130. The assumption in the rent review clause was that the rent was to be that "at which, having regard to the terms hereof ¼ the demised premises might reasonably be expected to be let for retail purposes ¼" Under the terms of the actual lease the user was restricted to the retail of chinaware, crystal-ware, enamel-ware and pottery. The High Court held that the assumption, although inconsistent with the terms of the actual lease, must prevail.

Mr Horner on behalf of the appellant pointed to the phrase in paragraph 1.3(b) of the 4^th Schedule to the lease, that the premises are available to let "subject to the provisions of the Lease" and to the covenants restrictive of user contained in the 5^th Schedule. He argued that as this is inconsistent with the assumption in paragraph 1.3(d), that assumption cannot be given full effect if one is to observe the principle of reading the document as a whole. He also took issue with the opinion set out at page 12 of the Tribunal's award that the commercial purpose of the assumption was to provide a yardstick by which a valuer could value the premises, since there would be no other restaurant in the complex and so no readily ascertainable comparison. He submitted that the rationale of rent review clauses is to take account of inflation in a reasonable manner, not to give a substantial windfall to a landlord.

Before I consider these arguments, I turn to the wording of the disputed assumption in paragraph 1.3(d) of the 4^th Schedule, to see whether it is to be regarded as clear or ambiguous. Mr Horner did not at first attempt to argue that the wording was ambiguous – rather that the provisions of the lease taken together created an inconsistency and so an ambiguity – but suggestions were put forward in the course of argument that the paragraph itself is capable of more than one meaning.

It was suggested that since the paragraph did not say by whom the premises were to be used in the assumption made that left an ambiguity. I do not find it possible to accept this. It seems to me entirely clear that the meaning is that they are to be assumed as being available for the tenant to use in any of the specified ways, and I do not consider that any other possibility is open.

The other suggestion was that the word "may" in paragraph 1.3(d) is not intended to mean that the premises definitely can be used for the purposes specified in it; if they cannot in fact be so used because of other restrictions in the lease or planning restrictions then it is to be taken that they may not be used for those purposes. Again I cannot agree with this construction. It would deprive the paragraph of any real effect, and it could readily be omitted altogether if the appellant's argument is correct, whereas it should be given a proper meaning and effect. It seems to me inescapable that the paragraph is intended to instruct the valuer to make an assumption when fixing the rent under the hypothetical tenancy that the tenant is entitled to use the premises for the purposes specified, and that the word "may" is quite apposite for this.

I accordingly consider that paragraph 1.3(d) of the 4^th Schedule is clear in its terms, and the valuer in assessing the rent under the hypothetical tenancy is required to assume, contrary to the terms of the lease and the planning restrictions, that the tenant may use the premises for retail or professional purposes. This does not reflect the situation which pertains under the actual lease, but, as is demonstrated by the examples to which I have referred, such an artificial assumption may have to be accepted if that is the clear intention of the parties.

I am not myself convinced that the Tribunal's assessment of the commercial purpose behind the inclusion of the assumption is correct. I should have thought that it was possible to obtain a means of finding valid comparisons for a restaurant in this location without having to resort for that reason to valuing the premises as if they were available for letting for retail purposes. It would seem a more plausible suggestion that in order to obtain a lease of an area in which to operate a restaurant in this prime location the tenant had to bid against retail shops, and the rent review provision reflects this commercial necessity. But I think that to attempt to ascertain the commercial purpose behind the assumption would be somewhat speculative, and I can only suppose, as Hoffmann J suggested in the MFI case, that the parties had some commercial purpose which does not appear clearly from the facts known to us.

I am of opinion accordingly that the assumption contained in paragraph 1.3(d) is unambiguous and must prevail over the terms of the restrictive covenant in the lease and the planning restrictions. I consider that the Tribunal was correct in its conclusion concerning the basis on which the rent should be assessed on the rent review and would dismiss the appeal. I would answer the first question in the affirmative. I do not find it necessary to answer the second question.

IN HER MAJESTY'S COURT OF APPEAL IN NORTHERN IRELAND

_____

BETWEEN

GALVANO ENTERPRISES LIMITED

(Respondent) Appellant

and

ORIONVINK BV

(Applicant) Respondent

_____ JUDGMENT OF CARSWELL LCJ _____

McCE2886

IN HER MAJESTY'S COURT OF APPEAL IN NORTHERN IRELAND

------------

BETWEEN:

GALVANO ENTERPRISES LIMITED

Appellant

and

ORIONVINK BV

Respondents

------------

McCOLLUM LJ

This is an appeal by way of case stated by the Lands Tribunal acting as Arbitrator in respect of its adjudication on the construction of a Lease dated 5 March 1993 and in particular the rent review provisions contained in that Lease.

The case is admirably succinct and is set out as follows:

"1. On the 5th February, 1993 the appellant entered into a Lease of the premises of Unit 37, Bloomfield Shopping Centre, Bangor ("the Premises") with the Respondent's present predecessor in title.

2. The term of the Lease was for a period of twenty-five years at initial rent of £70,000.00 per annum.

3. The date fixed for review of the rent under the Lease was the 17th September, 1997.

4. The appellants covenants were contained at paragraph 5 of the Lease and in particular 5.6, 5.11 and 5.23.

5. The respondent's covenants were contained in paragraph 6 and in particular paragraph 6.2 prevented the respondent from giving permission to any other person apart from the appellant to use its premises as a restaurant or cafe outlet in that area of the premises outlined in brown.

6. At paragraph 10.8 there was an exclusion of use warranty.

7. The shop covenants were contained in Schedule Five and those relating to the user contained in paragraph 4 of Schedule Five.

8. The rent review provisions were contained in Schedule Four and the ones of particular relevance were paragraphs 1.2, 1.3, 1.4 and 2.4.

9. The planning permission which is attached to the Shopping Centre was subject to various conditions including condition 4 which restricted the amount of retail space available.

10. A change of user of Unit 37 on the 17th September, 1997 from restaurant to retail use would have involved a breach of the planning permission granted in respect of the Shopping Centre.

11. If was contended by the appellant that:

(a) the premises could not be used for retail purposes under the planning permission granted for a Shopping Centre, the rent review provisions were not so clear that the appellant should be obliged to pay for more than what it enjoyed under the Lease, and the respondent entitled consequently to a windfall and, in any event, even if the permitted use was for retail purposes no appellant would use the premises for such use because to do so would involve a breach of the covenants at 5.6 and 5.11 and lead to potential forfeiture of the premises.

(b) it was contended by the respondent that the rent should be assessed on the hypothesis that the unit might be let as a restaurant or as a shop, whether or not that would be permitted under the actual existing Lease against the factual background of the real world as the provisions of the rent review were clear and unambiguous.

I was referred to the following cases:

Plinth Prop. Invest. Ltd -v- Mott Hay and Anderson (1979) 38 P & CR 361.

MFI Properties Limited -v- BICC (1986) 1 All ER 974.

Basingstoke and Deane Borough Council -v- Host Group Plc (1988) 1 All ER 824 in which the Court of Appeal considered.

British Gas Corp. -v- Universities Superannuation Scheme Ltd (1986) 1 All ER 978.

Equity and Law Life Assurance Society Plc -v- Bodfield Ltd (1987) 1 EGLR 124.

Ponsford -v- HMS Aerosols Ltd (1978) 2 All ER 837, (1979) AC 63.

Pearl Assurance Plc -v- Shaw (1985) 274 EG 490.

Norwich Union Life Insurance Society -v- Trustee Savings Bank (1986) 1 EGLR 136.

Lynnthorpe Enterprises Limited -v- Sidney Smith (Chelsea) Limited (1990) 1 EGLR 148 (see also on Appeal (1990) 2 EGLR 131).

Sheerness Steel Company Plc -v- Medway Ports Authority (1992) 1 EGLR 133.

Postel Properties Ltd & Another -v- Greenwell & Another (1992) 2 EGLR 130.

12. I was of the opinion that there was a reasonably plain express intention set out in the rent review provisions which took precedence over everything else, including the actual existing Lease and other circumstances. I found that the retail use assumption, in the context of the rent review provisions, was plain and that there was no vacuum of ambiguity. Accordingly I determined that the rent for the Premises under the rent review provisions should include both restaurant and retail uses.

QUESTIONS

1. On the true construction of the Lease dated the 5th March, 1993 for Unit 37 Bloomfield Shopping Centre, and the rent review provisions thereunder, was the Arbitrator correct in law in deciding that the rent to be determined in respect of the Premises included both restaurant and retail use?

2. On the true construction of the Lease and the rent review provisions thereunder was the Arbitrator correct in law not taking into account that any retail use of the Premises would necessarily involve breaches of covenants 5.6 and in particular 5.6.2 and 5.6.3 and covenants 5.11 and in particular 5.11.1 and 5.11.2?"

For the purposes of explaining my view of the matter I find it helpful to expand paragraph 9 by reference to the text of the ruling made by the Member as follows:

"A planning condition restricted the area of retail space at the centre as a whole to a ceiling of 80,000 square feet and for the purpose of this preliminary point it was accepted that at the rent review date the actual net retail space was 76,615 square feet leaving 385 square feet available (it appears to me that the figure of 76,615 should probably read 79,615 in view of the remainder quoted by the tribunal). Clearly that retail space ceiling would be far exceeded if the subject premises which were of the order of 6000 square feet were changed to retail use and the whole centre would be in breach of the condition."

I also think it appropriate to set out in full the relevant rent review provisions of the Lease which are set out in the Fourth Schedule:

"1.1 The terms defined in this paragraph shall for all purposes of this Schedule have the meanings specified.

1.2 `Review Period' means the period between any Review Date and the day prior to the next Review Date (inclusive) or between the last Review Date and the expiry of the Term;

1.3 `the Assumptions' mean the following as assumptions at the relevant Review Date:

(a) that the Premises are fit for, and fitted out and equipped for, immediate occupation and use by a willing tenant, and that no work has been carried out on the Premises by the Tenant or its predecessors in title during the Term which has diminished the rental value of the Premises, and if the Premises and/or the Centre have been destroyed or damaged they have been fully restored,

(b) that the Premises are available to let by a willing landlord to a willing tenant as a whole, without a fine or premium, but with vacant possession, and subject to the provisions of this Lease (other than the amount of the Rent but including the provisions for rent review), for a term equal to, whichever is the greater of, the period of 15 years or the remainder of the Term, and that the said letting would be renewed at the expiration of the term thereof under the provisions of the 1964 Act, and

(c) that the covenants contained in this Lease on the part of the Tenant have been fully performed and observed;

(d) that the Premises may be used for any use permitted by Class 1 and Class 2 of the Planning (Use Classes) Order (Northern Ireland) 1989

1.4 `the Disregarded Matters' mean:

(a) any effect on rent of the fact that the Tenant or its predecessors in title have been in occupation of the Premises,

(b) any goodwill attached to the Premises by reason of the carrying on at the Premises of the business of the Tenant or its predecessors in title in their respective businesses,

(c) any increase in rental value of the Premises attributable to the existence at the relevant Review Date of any improvement to the Premises and carried out with consent where required otherwise than in pursuance of an obligation to the Landlord or its predecessors in title either:

(i) by the Tenant or its respective predecessors in title during the Term, or during any period of occupation prior thereto arising out of an agreement to grant such term, or

(ii) by any tenant of the Premises before the commencement of the Term, so long as the Landlord or its predecessors in title have not since the improvement was carried out had vacant possession of the relevant part of the Premises.

(d) any disadvantage (if any) to the Tenant by reason of the Premises being registered for, or the exemption having been waived for, Value Added Tax or any similar tax thereon.

(e) any effect on the rental value of comparable premises arising from any rent free period or other inducement granted at the commencement of such lease.

(f) any effect on rent of any rent free period and other rent concessions granted to the Tenant at the commencement of the Term or of any customary rent free period or other customary rent concessions allowed to incoming tenants at any Review Date for fitting out and

(g) any obligation on the part of the Tenant to reinstate the Premises at the end or sooner determination of the term or at any other time in pursuance of any obligation to the Landlord whether under this Lease or any other deed or document executed after the date of this Lease.

1.5 `the Chairman' means the Chairman for the time being of the Northern Ireland Branch of the Royal Institution of Chartered Surveyors, the duly appointed deputy of the Chairman, or any person authorised by the Chairman to make appointments on his behalf.

1.6 `the Arbitrator' means a person appointed by agreement between the parties, or in default of agreement within fourteen days of one party giving notice to the other of its nomination or nominations, a person nominated by the Chairman on the application of either party made not earlier than three months before the relevant Review Date or at any time thereafter.

2. The Rent shall be:

(a) until the first Review Date the Initial Rent, and

(b) during each successive Review Period, a rent equal to the Rent previously payable under this Lease or such revised rent as may be ascertained in accordance with this Schedule, whichever shall be the greater.

3. Such revised rent for any Review Period may be agreed in writing at any time between the parties or (in the absence of agreement) determined by the Arbitrator.

4. The revised rent to be determined by the Arbitrator shall be such as he shall decide should be the rent at the relevant Review Date for the Premises making the Assumptions but disregarding the Disregarded Matters and having regard to open market rental values current at the relevant Review Date.

5. The arbitration shall be conducted in accordance with the Arbitration Act (Northern Ireland) 1937.

6. When the Rent shall have been ascertained in accordance with this Schedule, memoranda thereof shall be signed by, or on behalf of, the parties and annexed to this Lease and its counterpart and the parties shall bear their own costs in respect of this."

The consideration given by the Tribunal to the case and its review of the relevant authorities is most impressive and shows a clear appreciation of the inequity of the consequence of the decision for the appellant, but the Tribunal felt itself bound by its interpretation of Clause (d) to decide that the appropriate rent payable following the date of the rent review should be on the basis of retail use of the premises.

Rent review provisions have given rise to a considerable amount of litigation and often pose difficult questions of construction.

As in any field of construction a number of principles have been enunciated, but when applied to the circumstances of any particular case these may seem to lead to conflicting conclusions.

It is useful in such circumstances to return to first principles and to consider the significance of the different elements which contribute in every case to the fixing of rent.

The amount of rent to be paid for any premises is influenced by a number of factors. Primarily the rent will be assessed on the actual demise granted, as expressed, or implied, in the Lease, having regard to the length of tenure, the area leased and the usage permitted or prohibited by the Landlord which for present purposes I shall describe as the intrinsic elements.

There are also other important factors which I shall describe as extrinsic and which could also be described as the background to the fixing of the rent. Examples of these are current economic trends or developments, the presence or absence of demand for the use of the premises and the presence or absence of other businesses in the vicinity which may compete for custom or form an attraction to bring customers to the premises.

The Lease records the agreement of the parties as to the intrinsic elements in the letting. There must be a clear presumption that they do not intend to alter those terms during the course of the Lease; otherwise the terms of the Lease would be qualified to so provide. However, the extrinsic or background factors may alter considerably in the course of the term of the Lease and the purpose of the rent review assumptions is to preserve the Landlord's economic position against changes which have occurred between the date of the Lease and the relevant renewal date.

The assumptions made in the rent review provisions will therefore be directed primarily to maintaining the hypothetical existence of the extrinsic factors favourable to the Landlord at the time of negotiation of the original rent.

There is, of course, no rule of law which prevents the parties agreeing to rent review provisions which assume facts which radically alter the nature of the intrinsic elements in the Lease, but such provisions would require to be clearly set out and clearly directed to that end.

In the present case there is no expression in the rent review provisions which suggest that they are to be applied to alter the terms of the Lease.

Clause (b) is to the contrary where the terms of the Lease are incorporated into the assumption.

Clause (d) makes no reference to the lease or to the landlord or the tenant. To ascribe to it the meaning attributed by the Tribunal and by my lords in the majority of the court requires by implication one of a variety of alterations or additions.

It is helpful to review some of the cases referred to in argument and to observe the importance which has been attributed to the maintenance of the terms agreed in the Lease. I refer in paragraph to a passage from the judgment of Vinelott J in Pearl Assurance v Shaw (Estates Gazette May 4 1985):

"First, it must be assumed that when the lease was negotiated the rent was negotiated in the light of, among other things, the use which the tenant would be entitled to make of the demised premises. The purpose of a rent-review clause in general is to enable a landlord to bring the rent originally negotiated up to date and to substitute for it the rent that the parties might have been expected to agree if the rent had been negotiated on the same basis as before, but in the light of market conditions prevailing at the time of the review and, of course, for the shorter term then unexpired.

Looked at in that light I think the court should lean against a construction which requires the rent fixed on revision to be ascertained without regard to the use which under the lease, the tenant is to be entitled to make of the demised premises, unless, of course, that intention is spelled out in reasonably clear terms. Otherwise, the effect of the review might be to impose on a tenant an obligation to pay a rent appropriate to a very profitable use, but one very obnoxious to the landlord, and one which he had been careful to forbid in the strongest possible terms - the effect, that is, of making the tenant pay for something which he not only has not got, but which he cannot require the landlord to give him."

See also extract from Basingstoke and Deane Borough Council v Host Group Ltd AER Vol 1 p83:

"We approach the construction of para (vii), therefore, on the footing that, unless the paragraph otherwise requires, expressly or by necessary implication, or there is some context indicating otherwise, the parties are to be taken to have intended that the notional letting assumed for the purposes of the rent review assessment was to be on the same terms (other than as to quantum of rent) as those still subsisting under the actual, existing lease. In approaching the construction of para (vii) in this way we have to part company from the judge. This was an approach he declined to adopt, although in fairness to him it should be noted that we had the benefit of the citation of some decisions not available to him, such as the British Gas case."

An earlier passage in the same judgment is as follows:

"The means by which rent review clauses afford landlords relief in respect of increases in property values or falls in the value of money is by providing, normally, for a valuer, in default of agreement, to assess the up-to-date rent for the demised premises at successive review dates. In making the assessment the valuer will be achieving the intended purpose of keeping the rent in line with current property values having regard to the current value of money if, but only if, he assesses the up-to-date rent on the same terms (other than as to quantum of rent) as the terms still subsisting between the parties under the actual, existing lease. If he departs from these terms, and assesses the up-to-date rent on the footing of terms materially less onerous to the tenant than those in the actual, existing lease, the rental at which he arrives will reflect, in addition to the rental increased attributable to a rise in property values or a fall in the value of money; an additional element, viz the increased rental attributable to the fact that he is calculating the rent of a lease on terms more favourable to the tenant that the terms in the actual, existing lease. Conversely, if he assesses the up-to-date rent on the basis of terms materially more onerous to the tenant than those in the actual existing lease, the rental figure at which the valuer arrives will not fully reflect the rise in property values or the fall in the value of money since the lease was granted or the rent was last fixed.

Of course rent review clauses may, and often do, require a valuer to make his valuation on a basis which departs in one or more respects from the subsisting terms of the actual existing lease. But if and in so far as a rent review clause does not so require, either expressly or by necessary implication, it seems to us that in general, and subject to a special context indicating otherwise in a particular case, the parties are to be taken as having intended that the notional letting postulated by their rent review clause is to be a letting on the same terms (other than as to quantum of rent) as those still subsisting between the parties in the actual existing lease. The parties are to be taken as having so intended, because that would accord with, and give effect to, the general intention underlying the incorporation by them of a rent review clause into their lease."

In the present case the Tribunal, following the ruling currently appealed, placed a rental value on the premises of £176,500 which may be contrasted with the rent agreed at the date of the Lease of £70,000. The result of the Tribunal's finding has been that the rent is assessed on an entirely different and much more expensive basis than that on which the terms of the original Lease had been agreed, the new rent being approximately two and half times that of the rent agreed 4 years earlier.

Such a result is clearly inequitable and it may fairly be doubted whether the paries really intended it. It can be explained in one of three ways:

1. It was the parties' true intention as recorded in the document;
2. It has been arrived at by some error in drafting; or
3. The Tribunal has been guilty of error in its construction of the document.

I reject the first possible explanation on the basis that had the parties wished to change the basis on which rent was to be paid, that intention would have been expressed in simpler and clearer language than that used in Clause (d).

An example of a clause basing a rent on the use of premises by reference to a planning class can be found in the case of Wolff v London Borough of Enfield (Court of Appeal):

"The said fair market rent shall be the amount which shall be agreed between the Landlord and the Tenant to be the best annual rent for the time being obtainable as between a willing landlord and a willing tenant in respect of the demised premises on a letting thereof as a whole with vacant possession for use for any purpose within Class III of the Town and Country Planning (Use Classes) Order 1972 or any other class or classes of the said Order within which falls the use or uses of the demised premises permitted by the planning authority from time to time ..."

One can imagine many other simple and direct phrases that could have conveyed with clarity and certainty the intention to make a radical change in the basis on which rent was to be paid under the Lease.

It could be expected that the parties advisers would have had in mind the words of Sir Nicolas Browne-Wilkinson VC (as he then was) in British Gas Corp v Universities Superannuation Scheme Ltd [1986] 1 AER at 979:

"There is really no dispute that the general purpose of a provision for rent review is to enable the landlord to obtain from time to time the market rental which the premises would command if let on the same terms on the open market at the review dates. The purpose is to reflect the changes in the value of money and real increases in the value of the property during a long term. Such being the purpose, in the absence of special circumstances it would in my judgment be wayward to impute to the parties an intention that the landlord should get a rent which was additionally inflated by a factor which has no reference either to changes in the value of money or in the value of the property but is referable to a factor which has no existence as between the actual landlord and the actual tenant, ie the additional rent which could be obtained if there were no provisions for rent review. Of course, the lease may be expressed in words so clear that there is no room for giving effect to such underlying purpose. Again, there may be special surrounding circumstances which indicate that the parties did intend to reach such an unusual bargain. But in the absence of such clear words or surrounding circumstances, in my judgment the lease should be construed so as to give effect to the basic purpose of the rent review clause and not so as to confer on the landlord a windfall benefit which he could never obtain on the market if he were actually letting the premises at the review date, viz a letting on terms which contain provisions for rent review at a rent appropriate to a letting which did not contain such a provision."

Clause 1.3(b) contains a clear and unequivocal incorporation of the provisions of the Lease, the only exception being "other than the amount of the rent but including the provisions for rent review".

Precedents do exist whereby the actual user first agreed upon can be assumed to be varied for the purpose of rent review and such a clause can be found in Bovis Group Pension Fund Ltd v G C Flooring (1984) 269 EG 1252 in which rental value was defined as "the rent at which having regard to the terms hereof (other than as to rent and user) the demised premises might reasonably be expected to be let for office purposes".

The second possibility would require the view that the Lease had been badly drafted, but I observe no indication to suggest this and in fact the Lease appears to me to be skilfully prepared.

To consider the third possibility the significance of the assumptions must be considered. These assumptions must not be considered to be additions to or substitution for the provisions of the Lease except where clearly stated to be so. They form a background of hypothetical facts "the extrinsic matters" against which the value of the rent for the estate actually demised by the Lease can be assessed.

The words of paragraph 1.3(d) of the Lease are indeed perfectly simple and clear. However, the issue arises as to whether they are intended to add to or vary the terms of the original Lease in relation to user or whether they are intended to alter the background of fact existing at the time of negotiation of the new rent. In considering this matter it is helpful to look at the factual situation and its potential effect on negotiations for a new rent.

The Landlord, if prudent, when negotiating the letting of the various units available to him in the centre, would have tried to find a use for the approximately 5615 square feet of space which was surplus to the extent of his planning permission before completing lettings of all the other units.

In the course of such negotiations the prospective tenant could not argue that the particular unit had limitations on its use which would have reduced its potential rental value. The Landlord therefore would have been in the position of negotiating as a free agent who could potentially let that unit for retail purposes but has chosen to let it for restaurant purposes.

However, at the date of rent review that position was radically altered because his quota of retail letting space was then occupied by the other tenants of the Centre. This would clearly enable the tenant to argue that only a limited market of prospective tenants existed. That factor would have a depressing effect on the rent negotiable and it appears to me that this circumstance fully explains the inclusion of the clause.

The error made by the Tribunal is illustrated by the expression used at page 10 of the decision in which Clause (d) is described as being a term of "a hypothetical letting".

The clause has therefore been taken out of its context and treated as though it were an additional term to be imported into the Lease instead of being treated as part of the background of hypothetical circumstances relevant to the assessment of the appropriate new rent.

In its decision the Tribunal dealt with the significance of the word `may' in Clause (d) as:

"The parties accepted the Tribunal's proposition that the word `may' in the retail use assumption was permissive so on either view the actual restaurant use was not excluded from consideration and if it was effective the retail use assumption added to rather than replaced the restaurant user."

This illustrates the fact that the tribunal was regarding Clause (d) as providing a notional added term to the Lease. Clause (d) is not intended as an enabling or empowering clause but is intended to state a hypothetical fact. In that context it is not directed towards any particular recipient of the permitted use.

The Tribunal regarded the meaning of `may' to be permissive or enabling.

However that would only be so if some person could be identified as being invested with the power, and none is so identified.

When referring to an assumed state of facts `may' connotes possibility rather than certainty.

If `shall' were substituted for `may', or the words `by the tenant' added after `may' then it could be concluded that the assumption operated to add to or alter the terms of the Lease. However, in my view when a logical and relevant meaning can be attributed to the words without altering them or implying the existence of some additional word or words then the expression should be so construed.

The clause says no more than that it is possible for the premises to be used for the stated permitted uses.

The assumption therefore has the result of altering the true background position at the date of renewal of the Lease. At that time the permissible retail area of the shopping centre has been practically occupied for retail use thereby limiting the potential use of the unit.

The function of Clause (d) is simply to preserve the landlord's original situation and it does not have the effect of radically altering the expressed terms and conditions of the original demise, but simply of assuming a state of affairs which is more favourable to the Landlord's negotiating position than the reality.

It must be remembered that the intrinsic elements in rent are not based on the extent of the Landlord's title or the uses which planning law permits for the premises. They are based on what is demised by the Landlord to the tenant. Obviously many premises have other potential uses. A willing landlord with other options is in a stronger position to negotiate rent but if the tenant is to be a willing tenant he will be prepared to negotiate only a rent which is commensurate with the use which is permitted in the demise.

In Bovis Group Pension Fund Ltd v G C Flooring and Furnishing (1984) 269 EG 1252 CA Avery LJ remarked:

"The fact that the property can be let with a permitted purpose that requires planning permission does not to my mind show it is being let as such premises; it is a different case."

It is clear that a tenant does not pay rent for the possible or conceivable purposes for which the premises may be used under planning legislation. He will normally negotiate and pay a rent based on the use to which he is permitted to put the premises.

Counsel for the respondent relied strongly in the case of Postel Properties Ltd & Another v Greenwell & Another (1992) 2 EGLR 130.

In that case the permitted user of the premises demised was as a retail shop for the retail sale of high quality chinaware and crystalware and as ancillary thereto high quality enamelware and pottery.

The rent review clause define the current market rent as:

"The rent at which having regard to the terms hereof ..., the demise premises might reasonably be expected to be let for retail purposes."

In that case Mr Timothy Lloyd QC in the course of his judgment referred to part of the remarks of Nicholls LJ (as he then was) in Basingstoke and Deane Borough Council v Host Group Ltd [1988] 1 WLR 348 which I have already quoted and went on say:

"That is accepted as a general guide for the interpretation of rent review clauses by Mr Newburger QC for the landlord. However Mr Newburger says that this is a case in which the parties have made an express provision which is inconsistent with that because he says the provision that the demised premises are to be treated as let "for retail purposes" is inconsistent with a hypothetical Lease being on the terms of the actual Lease as to user."

He went on say:

"It seems to me the submissions that were made by way of commercial background are not of sufficient cogency or force to lead me to a different conclusion from the one to which I have come on the examination of the words of Clause 1(c)."

It is noteworthy that in the Postel case it would have been quite unnecessary to insert a clause in the rent review provisions that "the premises may be used for any use permitted by Class 1 of the planning use classes order". That situation existed quite apart from any agreement between the parties.

However, it was thought necessary by the Landlord to have current market rent defined as the rent at which the demised premises might reasonably be expected to be let for retail purposes.

Moreover, it is likely that when rent was first negotiated it was against the background of a potential letting market which included all permissible retail uses so that the tenant had to compete with other potential retail users to secure the premises. The position would therefore have altered to the Landlord's disadvantage at the time of rent review if it was to be regarded that the tenant had to compete only with prospective tenants carrying on exactly the same kind of business. The assumed alteration in that case was therefore to an extrinsic rather than an intrinsic factor.

I would also refer to the remarks in the speech of Lord Pearson in Trollope and Colls Ltd v North West Metropolitan Hospital Board (1973) 2 All ER 260 at 267:

"The court will not even improve the contract which the parties have made for themselves, however desirable the improvement might be. The courts function is to interpret and apply the contracts which the parties have made for themselves. If the expressed terms are perfectly clear and free from ambiguity there is no choice to be made between different possible meanings: the clear terms must be applied even if the court thinks some other terms would have been more suitable. An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract: it is not enough for the court to find such a term would have been adapted by the parties as reasonable men if it had been suggested to them: it must have been a term that went without saying a term necessary to give business efficacy to the contract, a term which although tacit form part of the contract which the parties made for themselves."

The error which the Tribunal has made in this case is that it has by implication added words to Clause (d) and has effectively changed the character of the clause from one bearing on the extrinsic factors affecting the potential rent to being one effectively altering the terms of the Lease. In effect the Tribunal has imported into the clause words which incorporate the clause into the terms of the Lease.

However, in my view that is unnecessary and contrary to principle since a logical and relevant meaning can be attributed to the words without altering them or implying the existence of some additional word or words.

I regret that my views lead me to a different conclusion to that reached by my Lords in this court and by the Tribunal and particularly so because I regard the consequences as inequitable for the tenant in this case.

I would answer question one of the case stated `No', and allow the appeal.

I would find it unnecessary to answer the second question and would remit the case to the Lands Tribunal with a direction that the rent should be determined on the basis that the premises are available to let by a willing Landlord to a willing tenant solely for restaurant use but without taking into account the fact that the planning restriction placed on the property effectively means that the Landlord cannot now let the premises for retail purposes.

McCE2886

IN HER MAJESTY'S COURT OF APPEAL IN NORTHERN IRELAND

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BETWEEN:

GALVANO ENTERPRISES LIMITED

Appellant

and

ORIONVINK BV

Respondents

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JUDGMENT OF McCOLLUM LJ

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