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Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> ASHTEAD PLANT HIRE COMPANY LTD AGAINST GRANTON CENTRAL DEVELOPMENTS LTD [2020] ScotCS CSIH_2 (21 January 2020)
URL: http://www.bailii.org/scot/cases/ScotCS/2020/2020_CSIH_2.html
Cite as: 2020 SCLR 805, [2020] ScotCS CSIH_2, 2020 SC 244, [2020] CSIH 2, 2020 GWD 6-93, 2020 SLT 575
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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
[2020] CSIH 2
CA40/18
Lord Menzies
Lord Drummond Young
Lord Glennie
OPINION OF THE COURT
delivered by LORD DRUMMOND YOUNG
in the cause
by
ASHTEAD PLANT HIRE COMPANY LIMITED
Pursuer and respondent
against
GRANTON CENTRAL DEVELOPMENTS LIMITED
Defender and reclaimer
Act: MacColl QC; Anderson Strathern LLP
Alt: D M Thomson, QC; Turcan Connell
21 January 2020
[1] The defender is the proprietor of a commercial property at 50 West Harbour Road,
Granton. The subjects are let to the pursuer, the defender being the landlord under the
lease. A rent review is currently under negotiation between the parties- agents. The review
is based on the open market rent of the subjects as at 28 May 2017, but the parties are unable
to agree on the manner in which rent is to be calculated, having regard to specific provisions
in the parties- lease agreement. In short, the pursuer claims that the calculation of open
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2
market rent should disregard all of the buildings and other constructions erected on and
improvements carried out to the leased subjects. The defender, by contrast, contends that
buildings and other constructions and improvements should only be disregarded to the
extent that the relevant works have been carried out at the expense of the pursuer or its
predecessors as tenant. To the extent that such buildings, constructions and improvements
have been carried out at the expense of the defender or its predecessors as landlord, the
defender contends that they should be taken into account in calculating the open market
rent.
[2] The parties- lease is contained in a number of documents extending over the period
from February 1988 to March 1997. The original lease document is a Minute of Lease
between the Forth Ports Authority and EBH Services dated 2 and 25 February 1988 and
recorded in the General Register of Sasines for Midlothian on 6 April 1988. The original
term of the lease was from Candlemas (2 February) 1988 to Whitsunday (15 May) 2012. The
Minute of Lease of 1988 has been varied by Minutes of Agreement between the landlords
and tenants for the time being concluded in 1988, 1990 and 1994 and a Minute of Variation of
Lease concluded in 1997. For present purposes the most important of these is the second, a
Minute of Agreement concluded on 21 December 1989 and 20 April 1990.
[3] The leased subjects are described in clause FIRST (a) of the original Minute of Lease
in the following terms:
-ALL and WHOLE that land extending to one acre and thirty-four decimal or one
hundredth parts of an acre or thereby with buildings and structures thereon at West
Harbour Road, Granton, Edinburgh (hereinafter called -the leased subjects-) all as
delineated and outlined in red on the plan annexed and executed as relative hereto-.
Clause THIRD stated the original rent of the subjects, £7,370 per annum, and made
provision for rent reviews on 15 May in every third year. The rent as so reviewed was to be
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3
the greater of the existing annual rent and the -Open Market Rent- at the review date; that
expression was defined in terms discussed below. Clause TWELFTH of the original Minute
of Lease provided that the tenants should not be entitled to carry out any alterations or
additions or erect new buildings on the leased subjects without first obtaining the written
consent of the Forth Ports Authority. Clause TWENTY-FIRST (a) provided that on the
termination of the lease the tenants should vacate the leased subjects and, if required by the
Authority to do so, should be bound to remove all buildings or erections placed thereon by
the tenants and to make good all damage caused to the property by such removal. The term
of the lease was originally slightly more than 24 years, from Candlemas 1988 to
Whitsunday 2012, but the last Minute of Variation of lease, concluded between Forth Ports
PLC as landlords and the present pursuer and an associated company as tenant on 7 and
14 March 1997, extended the term of the lease to 28 May 2096. At the same time the rent was
increased to £13,400 per annum, and rent reviews were to take place on 28 May 2002 and at
five-yearly intervals thereafter. Following a rent review, the rent payable was to be the
greater of that imposed in the year immediately before the review date in question and such
sum as should represent the Open Market Rent, as defined in clause THIRD of the lease.
[4] The expression -Open Market Rent- is fundamental to the present dispute. It is
defined in clause THIRD (c)(ii) of the original Minute of Lease, but that provision was
amended by the Minute of Agreement concluded on 21 December 1989 and 20 April 1990
between the landlord and tenant at that time, those being the Forth Ports Authority as
landlord and EBH Services and their assignee, PSP Ltd as tenant. So far as material clause
THIRD (c)(ii) in its amended form was in the following terms; the amendment introduced
in 1990 is underlined:
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4
--Open Market Rent- shall mean the best yearly rent for which the leased subjects if
vacant might be expected to be let, without fine or premium, as one entity by a
willing landlord to a willing tenant on the open market at and from the review date
in question for a period, running from the review date in question, equal in length to
the original duration of this lease on terms similar in all respects to those contained
or referred to in this Lease (save as to the amount of rent-) and on the assumption
(if not a fact) that the Tenants have complied in all respects with all the obligations
imposed on them under this Lease and, in the event of the leased subjects or any part
thereof having been destroyed or damaged and not having been fully restored at the
review date in question, on the further assumption that the destruction or damage
had not occurred, there being disregarded however (1) any goodwill attached to the
leased subjects by reason of the carrying on thereat of the business of the Tenants,
(2) any work carried out in or to the leased subjects which has diminished the rental
value of the same and (3) the effect on rent of all improvements carried out, with the
prior approval of the Authority [the landlord], by the Tenants at their own cost after
the date of entry hereunder provided such improvements are not in pursuance of an
obligation to the Authority on the part of the Tenants, (4) the effect on any rent of the
value of any buildings or other constructions erected on and any improvements
carried out to the subjects of lease-.
[5] The subjects of let extend to approximately 1.34 acres, in a location adjacent to
Granton Harbour. The pursuer uses them for the purposes of its business, which consists
of the storage, hire and sale of heavy plant and machinery for use in the construction
industry. It was a matter of agreement that the subjects contain some buildings which
existed at the time when the original lease was granted in 1988. Since that date no tenant
has replaced those buildings or built any new structures. It was a matter of agreement
before the commercial judge that offices and other buildings on the premises occupy
approximately 20% of the gross area of the subjects of let. The remainder of the premises is
used for the storage of plant and machinery.
The parties- dispute and the Lord Ordinary-s decision
[6] Under the provisions of the Minute of Lease as amended, a rent review falls to be
carried out as at 28 May 2017. It became clear in discussions between the parties-
representatives that there was a fundamental disagreement as to the basis on which the
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5
review should be carried out, and in particular as to the scope of disregard (4) added by the
Minute of Agreement concluded in 1990. The pursuer, the current tenant, accordingly
raised an action against the defender, the current landlord, for declarator that
-the -open Market Rent- (as that term is defined in clause THIRD (c)(ii) of the
Lease) is to be calculated, inter alia, on the basis that disregard (4) within clause
THIRD (c)(ii) of the Lease directs that the calculation is to disregard the buildings
or other constructions erected on and improvements carried out to the Leased
Subjects-.
The result of that construction would be that all buildings, other constructions and
improvements made to the subjects would be left out of account, even if those had been
provided and paid for by the defenders or their predecessors in title as owners of the
property and landlords under the lease. In advancing this contention the pursuer placed
particular emphasis on the literal meaning of disregard (4), which refers to the value of
-any- buildings or other constructions or improvements carried out to the subjects of lease.
It does not refer to improvements undertaken or buildings constructed by the tenant, but is
quite general in its application to buildings of every sort, regardless of who constructed
them.
[7] The defender disputes that construction. It contends that disregard (4) does not
direct the valuer to disregard the presence of any buildings on the subjects; the Lease is not
a ground lease, and the valuation exercise should not be conducted as if it were a ground
lease. The proper construction of clause THIRD (c)(ii), it is said, is that in the calculation of
the Open Market Rent only improvements undertaken or buildings constructed by the
tenant, or by the landlord after the date of entry, should be disregarded. The buildings that
already existed at the date of entry should be taken into account in the valuation.
Consequently the buildings on the Leased Subjects, which were all constructed by the
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6
defender-s predecessors as proprietors prior to the date of the original Minute of Lease,
should be taken into account in the valuation.
[8] The Lord Ordinary observed that it was a matter of broad agreement that there was
little, if any, relevant background against which the lease and the rent review provision fell
to be construed. The buildings on the premises had been extant when the original lease was
granted, and there was no suggestion that any tenant had replaced these or built new
structures. The Lord Ordinary noted the general principles of contractual interpretation,
and she considered a number of English cases that had been cited dealing with rent review
provisions. She then held that the ordinary and natural meaning of the words of
disregard (4) were to direct the surveyor to disregard the buildings or other constructions
erected on and improvements carried out to the subjects of lease. A degree of tension
existed between disregard (4), which read in isolation would exclude the buildings, and the
definition of -Open Market Rent- found at the beginning of clause THIRD (c)(ii), which
referred to -the best yearly rent for which the leased subjects if vacant might be expected to
be let-. That wording purported to include the whole of the leased subjects. Nevertheless,
the Lord Ordinary thought that disregard (4) was consistent with the opening words of that
clause, and could be explained by the fact that the disregard in question had been added by
a later amendment.
Contractual construction
[9] The general principles of contractual construction are well established. The
important principles are found in a number of recent cases, several of which were cited by
particular at paragraphs 20-21, Grove Investments Ltd v Cape Building Products Ltd, 2014 Hous
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7
HOE International Ltd v Andersen, 2017 SC 313, at paragraphs 18 et seq, and Wood v Capita
Insurance Services Ltd, [2017] AC 1173. The correct approach may be summarized as follows.
[10] In the words of Lord Clarke in Rainy Sky at para [14]:
-the ultimate aim of interpreting a provision in a contract, especially a commercial
contract, is to determine what the parties meant by the language used, which
involves ascertaining what a reasonable person would have understood the parties
to have meant.- [T]he relevant reasonable person is one who has all the
background knowledge which would reasonably have been available to the parties
in the situation in which they were at the time of the contract-.
Two important principles appear from this passage. First, a contract must invariably be
construed contextually. This is an elementary point. Language is inherently ambiguous,
and in no serious field of discussion is it possible to reach an intelligent view on the meaning
of a particular passage without placing that passage in context. We will return subsequently
to the importance of context in a case such as the present. Secondly, the exercise of
construction is objective: the meaning of any particular provision is what a reasonable
person in the position of the parties would have understood it to be. This principle is
inevitable. A contract has two (or sometimes more) parties, and it is obvious that its
meaning cannot be determined by the subjective intention or understanding of one of those
parties. The court must take an objective view.
[11] Two further principles of construction are important. First, in interpreting a
contractual provision the court should adopt a purposive approach. What this means is that
in construing a contract the court should have regard to the fundamental objectives that
reasonable persons in the parties- position would have had in mind. Essentially, the central
provisions of a contract should, in any case of doubt, prevail over the subsidiary clauses.
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8
The substance of the parties- agreement, construed objectively, should prevail over niceties
of wording, and in particular over clauses that have not been well drafted.
[12] Secondly, in construing a contract a court may have regard to what is generally
referred to as commercial (or business) common sense. Reference to commercial common
sense has attracted a certain amount of criticism in recent years. Nevertheless, the
authorities supporting its use are quite clear; they include most of the recent cases where
the approach to contractual interpretation has been discussed. Contractual disputes
frequently involve wording that is capable of having more than one meaning. This may
involve conflict between the most literal meaning of a word or phrase and an alternative
meaning that makes better commercial sense in context and according to the fundamental
purposes of the contract. In relation to such cases, in Rainy Sky Lord Clarke stated at
paras [20]-[21] (a passage expressly approved and followed by Lord Hodge in Arnold v
Britton at para [76]):
-[20] - It is not- necessary to conclude that, unless the most natural meaning of
the word produces a result so extreme as to suggest that it was unintended, the court
must give effect to that meaning.
[21] The language used by the parties will often have more than one potential
meaning. I would accept- that the exercise of construction is essentially one unitary
exercise in which the court must consider the language used and ascertain what a
reasonable person, that is a person who has all the background knowledge which
would reasonably have been available to the parties in the situation in which they
were at the time of the contract, would have understood the parties to have meant.
In doing so, the court must have regard to all the relevant surrounding
circumstances. If there are two possible constructions, the court is entitled to prefer
the construction which is consistent with business common sense and to reject the
other-.
[13] In the same opinion Lord Clarke went on (at paras [29]-[30]) to adopt a statement by
paragraphs 25 and 26:
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9
-[W]hen alternative constructions are available one has to consider which is the more
commercially sensible.- If a clause is capable of two meanings,- it is quite possible
that neither meaning will flout common sense. In such circumstances, it is much
more appropriate to adopt the more, rather than the less, commercial construction-.
Furthermore, such an approach is not subject to additional qualifications, for example that a
literal construction would produce an absurd result:
-[I]f the language is capable of more than one construction, it is not necessary to
conclude that a particular construction would produce an absurd or irrational result
before having regard to the commercial purpose of the agreement.- -But language
is a very flexible instrument and, if it is capable of more than one construction, one
chooses that which seems most likely to give effect to the commercial purpose of the
agreement- (Rainy Sky at paragraph 43, quoting Hoffman LJ in Co-operative Wholesale
Society Ltd v National Westminster Bank PLC, [1995] 1 EGLR 97).-
Thus in any case where a contractual provision is capable of bearing more than one
meaning, the court should adopt the construction that best accords with commercial
common sense. Use of the concept of commercial common sense has been specifically
approved in other recent cases, including Arnold v Britton, supra, at paragraph 15, and HOE
International Ltd v Andersen, supra, at paragraph 22.
[14] The concept has been the subject of criticism in commentaries on the case law, largely
on the ground that it is too uncertain or nebulous to be of practical use. We are nevertheless
of opinion that commercial common sense is an important aid to the construction of
contracts, and indeed commercial dealings of every sort. Common sense at a general level is
frequently used in practical reasoning. In general, it involves a double process: is a
conclusion (a deduction or inference) one that is widely held by those with a knowledge of
the particular field under consideration (-common-)? And does the converse of the
conclusion make sense? If it does not, it is likely that the conclusion is correct (or makes
-sense-). The notion of common sense has been the subject of a considerable amount of
philosophical commentary. For present purposes, it is sufficient to note the writings of
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10
Thomas Reid, notably his Essays on the Intellectual Powers of Man, Essay 1, chapters 2, 7
and 8 (1785). Reid placed particular emphasis on the manner in which conclusions may be
derived from the use of language, properly analyzed). -Commercial- common sense
involves applying these concepts to business transactions or business relationships, but with
the addition of elementary microeconomics; -microeconomics- is merely the branch of
economics that covers the behaviour of individual firms (or individuals or families) in their
commercial dealings with other persons. We would emphasize the word -elementary-. The
court should not embark on anything approaching a full professional economic analysis.
What it must do is rather to consider how a reasonable person in business would be likely to
conduct his or her affairs in a particular situation.
[15] That may involve consideration of the practice that is followed in a particular trade.
For example, in Jacobs v Scott & Co, 1900, 2 F (HL) 70, evidence was led about the
requirements of the Glasgow market for hay (the standard required was higher than that
about the workings of the market for the supply of beer to public houses in London. In such
cases evidence is obviously necessary in the absence of agreement by the parties. The basic
manner in which a business conducts its affairs, however, is a matter that should lie
comfortably within judicial knowledge.
[16] It is perhaps useful to mention three features of general business conduct that will
frequently be relevant; all are of assistance in the present case. First, contracts are based on
the principle of consideration, or exchange. This involves the notion of the quid pro quo; it is
normal to find that the obligations of one party are broadly equivalent to the obligations of
the other party. There may be exceptions, where a bad bargain has been concluded, but
equivalence is the norm, and contracts should generally be construed accordingly.
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Secondly, the principle pacta sunt servanda applies; parties expect to perform their
contractual obligations. For this reason they will normally avoid the risk of unreasonable or
disproportionate burdens. Thirdly, predictability is generally regarded as important. For
that reason the parties to a contract will normally try to avoid obligations or burdens that
operate in an arbitrary manner. Conversely, they do not expect windfalls. Nevertheless,
commercial -predictability- is not achieved by construing contracts with brutal literalism, a
practice that can easily produce arbitrary results; it is rather achieved by the use of a
contextual and purposive construction of the words used, with the application where
appropriate of commercial common sense. The foregoing three features, equivalence,
avoidance of the risk of disproportionate burdens, and predictability, appear to us to be
important aspects of commercial common sense, although we do not suggest that they are
an exhaustive list.
[17] Finally, in relation to commercial common sense, we note that the concept is liable to
overlap with both context and a purposive interpretation of a contract. The overlap with
context applies in particular to the legal context, where the approach that has been taken by
judges in decided cases may give important guidance as to what is commercially sensible in
a particular situation. It also applies to the context that appears from the type of contract in
question; the general type of contract can be regarded as a norm against which the
particular features of the parties- contract can be judged, to assess how that contract might
be expected to operate on a sensible commercial basis. So far as purposive interpretation is
concerned, commercial common sense is frequently an invaluable guide to the fundamental
purposes that a contract is intended to achieve.
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Construction of clause THIRD of the parties- lease
[18] Clause THIRD is a rent review provision, providing for periodic review of the rent
payable by the tenant. Such clauses are standard in long leases, and their commercial
purpose is obvious: to ensure first, that the level of rent keeps pace with inflation, and
secondly, that the rent payable reflects any changes in the subjects of let. In this way a rent
review clause is an attempt to ensure that the consideration provided by each party remains
broadly equivalent. Furthermore, because of the impossibility of foreseeing the future with
certainty, the existence of a rent review clause reduces the risk that unreasonable or
disproportionate burdens may arise; this will typically be the risk to the landlord that it fails
to obtain, through the payment of rent, the true value of the subjects that it owns. A rent
review clause typically includes provisions for valuation by an independent expert. This is
intended to avoid the risk that future rent increases or decreases will operate in an arbitrary
manner, unrelated to the underlying economic reality; the valuer is expected to ensure that
the rent is kept in line with the market rents of comparable properties, and thus to preserve
the fundamental principle of equivalence.
Context
[19] The Lord Ordinary observes that the parties agreed, at a general level, that there was
little if any relevant background against which the lease and the rent review provision could
be construed. It is correct that evidence was not available as to the specific matters that were
thought relevant at the time when the lease was concluded and at the time when the lease
was amended in 1990. Nevertheless, that does not mean that no context is available. We
have already stressed that context is of fundamental importance in construing any text,
contractual or otherwise. In construing a contract, the relevant context includes at least four
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elements. The first of these is the particular dealings that the parties had at the time when
they entered into the contract, or sometimes in their previous dealings with each other. That
form of context depends on evidence. Nevertheless the dealings of the parties are only one
aspect of context, and the absence of evidence about such dealings does not mean that the
contract must be treated as in some way acontextual.
[20] The second form of context is found in the terms of the particular contract concluded
between the parties, construed as a whole - what might be described as -internal- context.
This runs into the purposive nature of the exercise of construction - it is through
consideration of the whole of the contract that its essential purposes are determined. This
may be important if, as often occurs, one of the lesser clauses is poorly drafted; in that event
any ambiguity in the latter should be resolved in such a way that the fundamental purposes
are fulfilled. The third aspect of context is the type of contract that is under consideration.
The great majority of contracts fall into well-established categories such as sale,
employment, agency or, as in the present case, lease. Contracts falling within such a
category have common features. These include common objectives, and also standard types
of clause to deal with particular problems that regularly arise in performing such contracts.
Standard forms of contract may themselves provide an important context, in demonstrating
the types of problem or dispute that frequently occur and how reasonable persons
concluding such contracts will expect such disputes to be resolved. Textbooks dealing with
a particular form of contract may contain valuable discussion of typical problems and
disputes, and may give a good indication of the resolution that would be expected by
reasonable parties to such contracts. This is, we think, of importance in the present case,
where we were referred to works on rent review and the rent review sections of textbooks
on leases.
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14
[21] Fourthly, the legal context is relevant. Contracts are concluded against the
background of the general law and are intended to operate having regard to that
background. Furthermore, the general law provides default rules that will apply if a
contract says nothing about a particular issue. Both the general law and its default rules
indicate the manner in which, in past cases, judges have sought to strike a fair balance
between the competing interests of contractual parties. The views of judges, typically
developed through a series of cases, are likely to represent commercial common sense, and
can serve as a benchmark against which considerations of fairness, reasonableness and
practicality can be measured. If a particular construction of a contractual term differs
radically from the corresponding common law rule or the default rule, that may raise a
doubt as to whether that construction was truly intended by the parties, who are presumed
to act in a commercially sensible manner. This may be less important in construing the
substantive part of the main terms of a contract, because that will usually be the subject of
both specific negotiation and legal advice; consequently any provision that does not appear
commercially sensible may be the result of either trade-offs in negotiation or a bad bargain
for one of the parties. In the case of subsidiary terms, however, or qualifications or
limitations added to terms, the level of negotiation will usually be much less, and legal
advice may be limited. In those cases the common law rules may provide assistance in
deciding what commercially sensible parties are likely to have intended: compare Grove
Investments, supra, at paras [12]-[13].
The terms of the lease as a whole
[22] On the facts of the present case, context is available from the terms of the lease itself.
This is a commercial lease which will remain in existence, following the variation in 1997,
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15
until 28 May 2096. In a lease of that length it is to be expected that provisions will be
inserted to deal with the changes of circumstances that are inevitable over a long period,
notably in the form of inflation and any changes in the subjects of let. The rent review clause
is intended to deal with those possibilities, and it must in our opinion be given proper
commercial effect. The lease is not a ground lease; the Lord Ordinary so held (para [32]),
and in our opinion she was clearly correct in doing so. A ground lease is described in
Rennie on Leases at paragraph 9-13; it is a lease in which the subjects let comprise a vacant
plot of ground with an entitlement or obligation on the tenant to build. In the present case it
was a matter of agreement that the main buildings and structures had all been constructed
before the lease was originally granted; thus the subjects of let included substantial
buildings at the time of the original lease. Furthermore, the definition of the -leased
subjects- includes buildings and structures (see para [3] above). Consequently the rent is
payable not merely for an area of land but for what had been constructed on that land. It
follows that the rent, the consideration for the let, includes buildings and other structures as
well as the land itself. This is important, because the landlord is providing both land and
buildings and the consideration for doing so, the rent, should be generally equivalent in
value to what the landlord has provided.
[23] Apart from the particular provisions of the parties- lease, the context includes the
commercial lease as a specific type of contract: this takes in the objectives of such a contract
and the provisions that are typically encountered in such contracts. We were referred to a
number of cases decided in the English courts and by the Privy Council, and to textbooks on
leases and rent review in both Scotland and England and Wales. These provide useful
context to provisions governing rent review. The construction of rent review clauses is
discussed at length in Reynolds and Fetherstonhaugh, Handbook of Rent Review, in
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16
particular in chapter 2. The case law is discussed at paragraphs 2.4.2 and 2.4.3, with
reference to substantial numbers of authorities. In the first of those paragraphs the general
approach to rent review clauses is expressed in the following terms:
-[W]hen there is any doubt on how to apply a rent review clause to particular facts
one must seek the presumed intention of the parties, from the lease, taken as a whole
and in context. In each case, it is suggested, the intention is that in return for the
right to continue as tenant conferred upon him by the lease, the tenant is to pay and
the landlord is to receive the rent obtainable if the premises were in hand, with
vacant possession, in the state which the tenant ought to have put or kept them. The
tenant gets his security, the landlord gets his market rent - that is the fundamental
equilibrium between the parties. And it is in the context of that equilibrium that rent
review provisions should be considered-.
[24] In Rennie, Leases, at paragraph 27-02 it is stated that care should be taken in
applying English statements of the law in view of the differences between the two systems.
We agree with that general caution, but we consider that the purpose of a rent review
provision is fundamentally similar in both jurisdictions, and is accurately stated by
Reynolds and Fetherstonhaugh in the passage quoted. Rennie describes that purpose in the
same paragraph, 27-02, where it is stated that
-A well-drafted rent review clause allows the landlord to take account of fluctuations
in market value so that the tenant is paying throughout the duration of the lease a
rent which equates in real terms with the market rental value of the subjects-.
That appears to us to be essentially similar to the statements found in Reynolds and
Fetherstonhaugh. The objective of a rent review clause is to secure that the rent payable by
the tenant remains in line with market conditions; that is what is meant by -the rent
obtainable if the premises were in hand, with vacant possession, in the state which the
tenant ought to have put or kept them-. That in our opinion is the fundamental objective of
rent review clauses. For present purposes, we would emphasize that both of the passages
quoted refer to the -premises- or the -subjects-; the rent is obviously intended to relate to
what has actually been let by the landlord to the tenant. The underlying principle in all
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17
cases is equivalence of obligation, or -equilibrium-, the word used by Reynolds and
Fetherstonhaugh. This must be maintained despite changes in the value of money or the
subjects of let: see para [18] above.
[25] The need to identify the premises properly is emphasized by Reynolds and
Fetherstonhaugh at paragraph 4.4, where the logical starting point for valuation under a
typical rent review clause is described as being -to ascertain the physical subject matter of
the valuation-. This, it is stated, will usually be -the premises- specified in the actual lease,
but on occasion a departure from that may be dictated by the rent review clause. It is clear,
however, that the norm is to use the actual premises, and that any departure from the norm
must be clear from the wording of the rent review clause. Rennie, at paragraph 27-08, states
that
-As a first step, it is essential that there is clarity as to what it is that is being let under
the hypothetical letting. This may seem obvious and, in most cases, it is. In such
cases, one must only have regard to the leased subjects as described, along with all
relevant pertinent rights--.
This point appears to us to be a matter of elementary commercial common sense.
[26] Rennie (chapter 27) and Reynolds and Fetherstonhaugh, and also McAllister, Scottish
Law of Leases (chapter 12), make extensive reference to the factors that are relevant in rent
reviews and in the drafting and construction of rent review clauses. We were also referred
to three cases, Ponsford v H M S Aerosols Ltd, [1979] AC 63, per Viscount Dilhorne at 77D-F,
Goh Eng Wah v Yap Phooi Yin, [1988] 2 EGLR 148, at 149H-K,, and Ravenseft Properties Ltd v
Park, [1988] 2 EGLR 164, and 166B-D. By way of example, in Ponsford v H M S Aerosols Ltd,
Viscount Dilhorne stated (at page 77 D-F):
-[T]he task of the surveyor is not to assess what would be a reasonable rent for the
lessees to pay but what is a reasonable rent for the premises.- If the effect on the
rent of the improvements is to be disregarded then in my opinion an express
provision is required to effect that--.
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In Goh Eng Wah v Yap Phooi Yin, Lord Templeman, delivering the opinion of the Privy
Council, stated
-[I]f the parties intended that the rent fixed by an arbitrator should ignore the
buildings on the land, they should and would have given express instructions to the
arbitrator for that purpose. In the absence of any such express instructions in the
lease,- the lease on its true construction does not authorize any deviation from the
usual rule and it follows that the rent must be fixed by reference to the land and the
buildings thereon-.
All of those textbooks and cases emphasize the fundamental point that a rent review
provision will normally take account of the actual premises that are let, including buildings
on the land. Any departure from that requires express provision. That is in our opinion an
important part of the context that governs the present rent review clause.
[27] The third form of context that is relevant to the present case is the legal context,
including provisions that are commonly encountered in rent review clauses in commercial
leases and the default rules that may apply if nothing is said. This has largely been covered
in the last four paragraphs; there is typically an overlap between the purely legal context
and the provisions that are commonly encountered in a particular type of transaction.
Nevertheless, at a purely legal level, a rent review clause is essential if rents are to be kept in
line with inflation. Furthermore, it is of the essence of bilateral contracts of every sort that
there should be a broad equivalence in the consideration provided by each party. In the case
of a rent review, that will not be achieved if a significant part of the let premises is left out of
account in fixing a revised rent.
The terms of clause THIRD
[28] Clause THIRD (a) provides for an annual rent of £7,370 per annum -or such
increased sum as may be substituted therefor as hereinafter specified-. Clause
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THIRD (c) provides for periodic review of the rent, in every third year from 1991 onwards.
That provision has been replaced by clause 3 of the Minute of Variation of 1997 (see para [3]
above), and rent review is now directed to take place in every fifth year from 28 May 2002
until the termination of the lease in 2096. Both the original clause THIRD and the revision
effected by clause 3 of the Minute of Variation specified that rent review could only occur in
an upward direction. Under clause THIRD (c)(i), the criterion for review is to be the -Open
Market Rent (as after defined) at the review date in question-. The reference to Open
Market Rent is repeated in clause 3 of the Minute of Variation.
[29] -Open Market Rent- is defined in clause THIRD (c)(ii), whose terms are quoted
above at para [4] in the form that is now current. The primary definition is
-the best yearly rent for which the leased subjects if vacant might be expected to be
let- as one entity by a willing landlord to a willing tenant on the open market at and
from the review date in question-
for a period and subject to terms similar to those in the lease. This is in accordance with the
passages from the textbooks by Reynolds and Fetherstonhaugh and Rennie that are quoted
above at paras [22] and [23], where reference is made to market rental value. Two
assumptions are then stated. First, it is assumed that the tenants have complied in all
respects with their obligations under the lease. Secondly, if any part of the subjects has been
destroyed or damaged and has not been fully restored by the review date, it is to be
assumed that the destruction or damage had not occurred. The purpose of the first
assumption is clearly to ensure that the amount payable by the tenants is not adversely
affected by the tenants- failure to look after the subjects properly, as they are obliged to do
by clause FIFTH of the lease. The purpose of the second is broadly similar, although it is
expressed in neutral terms and would apply to destruction or damage that has been caused
accidentally, or by the act of a third party. Underlying both of these assumptions is the
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proposition that the rent is payable for the subjects let in the state in which they were
originally let, with all the buildings constructed thereon. This reflects the fact that the lease
is not a ground lease but is a lease of land and buildings.
[30] Clause THIRD (c)(ii) then specifies four matters that are to be disregarded in a rent
review. The first of these is goodwill attached to the leased subjects by reason of the tenants-
carrying on business. The purpose of this provision is to ensure that the goodwill of the
tenants- business belongs to them, and does not result in an increase in rent (such as could
occur if as sometimes occurs that goodwill attaches to the premises). The second disregard
relates to any work carried out to the leased subjects which has diminished the rental value.
This refers to secure the earlier provision that rent review is only to operate in an upward
direction. The third disregard relates to all improvements carried out, with landlords-
approval, by the tenants at their own cost, provided that they are not carried out pursuant to
any obligation by the tenants to the landlords. The purpose of this provision, which is of a
type commonly encountered in rent review clauses, is to ensure that if the tenants improve
the premises they will not require to pay more rent for what they have done at their own
expense. That clearly represents commercial common sense; the principle of equivalence, or
equilibrium, requires that the tenants should pay for what the landlords have provided but
not for anything that they have themselves provided.
[31] If the foregoing provisions had existed without any further disregard, the result
would in our opinion have clearly been that the Open Market Rent was to include not only
the land let by the landlords to the tenant but also the buildings constructed on that land by
the landlords. That is apparent from the basic definition of the Open Market Rent, which
refers to the best yearly rent for which -the leased subjects- might be expected to be let by a
willing landlord to a willing tenant in the open market. The definition of the leased subjects
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found in clause FIRST (a), quoted in para [3] above, expressly includes the -buildings and
structures- on the area of land that is let. Even without that definition, a lease of the land
would invariably include the buildings constructed thereon as a matter of elementary land
law, in the absence of an express exclusion. The assumption that the tenants have complied
with their obligations likewise points towards the proposition that rent is payable for the
buildings, because the primary obligations to which this relates are obligations of
maintenance and repair, found in clause FIFTH of the lease. The assumption that
destruction or damage had not occurred also clearly assumes that the buildings are part of
the subjects of let for which the rent is payable; if that were not so the exclusion would serve
no useful purpose.
[32] Similarly, the second and third of the disregards would be of minimal effect if the
buildings were not included in the subjects for which rent is payable, and which are
therefore to be taken into account in the process of rent review. If the buildings were not
included, any work that diminished their rental value and any improvements to them
carried out by the tenants would be of no moment in a rent review. The effect of the second
and third disregards would therefore be confined to matters such as the deterioration or
resurfacing of the parking areas in the subjects. It would relate to the land only, and not the
buildings.
[33] The fourth disregard, which was introduced in 1990, must be construed as part of
clause THIRD taken as a whole and in accordance with the whole provisions of the lease. If
that disregard is intended to exclude the value of all buildings and other constructions and
all improvements, it contradicts both the basic definition of the leased subjects in clause
FIRST, which expressly includes the buildings, and the earlier provisions of clause THIRD,
which plainly assume that the buildings are to be taken into account in any rent review. In
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our opinion this contradiction is clear on the terms of the lease. Furthermore, it is a
contradiction between the basic definition of the leased subjects, one of the most
fundamental aspects of any lease, and one particular detail relating to the manner in which
rent reviews are to be carried out, which does not have the same fundamental character. In
these circumstances we are of opinion that there is an important ambiguity as to the scope of
the fourth disregard. If it relates to the whole of the buildings, including those constructed
by the landlords before the date of entry under the lease, it is inconsistent with the
remainder of the lease.
[34] In these circumstances it cannot be said that the fourth disregard, objectively
construed in the context of the lease as a whole, is clear in its effect. It must accordingly be
construed in accordance with the fundamental purpose of clause THIRD and, importantly,
with commercial common sense. When that is done, the only sensible conclusion is in our
opinion that the fourth disregard was intended, on an objective basis, to relate only to
improvements undertaken or buildings constructed by the tenant at its cost, or by the
landlord after the date of entry under the lease. Unless it is construed in that way, the rent
review provision in the lease flouts commercial common sense. First, it would contravene
the fundamental commercial principle that the obligations on one side should normally be
broadly equivalent to the obligations on the other side. If the tenants obtain the benefit of
the buildings constructed on the site by the landlords before the original date of entry
without paying rent for them, that is quite contrary to the principle of equivalence.
Secondly, if buildings provided by the landlords are disregarded, that would be on a
commercial basis a disproportionate burden on the landlord, which would remain in
existence until 2096, when the lease is now due to end. Thirdly, if the buildings are excluded
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from the calculation of rent, that is a result that confers a windfall on the tenant of an
essentially arbitrary nature.
[35] Furthermore, the authorities and textbooks cited at paras [23]-[26] above are to the
effect that, if buildings on land are to be disregarded in fixing rent, an express provision to
that effect is normally required. The word -express- means that a particular matter should
be clearly stated; it is not enough if it appears from a strained and non-commercial
construction of a provision that appears to contradict the remainder of the contract. In the
present case, the wording of the fourth disregard, read with the remainder of clause THIRD
and with the definition of the lease in clause FIRST, is anything but clear. In these
circumstances we conclude that the disregard must be restricted in the manner suggested
above.
[36] In our opinion the wording used in the fourth disregard can readily be construed in
this manner. The disregard refers to buildings -erected- on and constructions -carried out-
to the subjects of lease, but both of the quoted expressions can be interpreted as referring
only to the future, not the past. That would accord entirely with the approach based on
contrast, purpose and commercial common sense.
[37] Finally, we should note that the wording of the fourth disregard cannot in our
opinion be construed as a result of striking a bad bargain. The disregard was introduced by
the Minute of Agreement of 1990, which primarily operated as an assignation of the tenants-
interest under the lease. Nothing in that agreement, which is very short, suggests that
anything could have been given in exchange for the exclusion of buildings, or that the
landlords might have miscalculated the benefits and detriments accruing to them as a result
of the assignation. Equally, the introduction of the disregard in that Minute of Agreement
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cannot be characterized as the outcome of negotiations, involving give-and-take by the
parties. It stands on its own in what is otherwise an assignation of the tenants- interest.
Conclusion
[38] For the foregoing reasons we will allow the reclaiming motion and recall the
interlocutors of the Lord Ordinary dated 5 February 2019 except in so far as the first of those
interlocutors is limited to amendment of the pleadings. From this it follows that we will
sustain the second plea in law for the defender and dismiss the action as irrelevant.