Scottish High Court of Justiciary Decisons

UNILODGE SERVICES LTD v. UNIVERSITY OF DUNDEE [2001] ScotHC 102 (10th September, 2001)

10 September 2001

Introduction

[1] In 1987 Peaston & Co. (Dundee) Limited let to the defenders for a period of just less than twenty years subjects forming part of Tay Works, Dundee, for use as student accommodation. The lease, which was dated 6 March and 2 November 1987 and was registered in the Books of Council and Session on 14 June 1996, is No. 6/1 of process. The lease has been twice varied, first by Deed of Variation dated 11 October 1994 and 25 January 1996 and registered on 24 June 1996 ("the first variation"), and secondly by Minute of Variation dated 8 and 12 July 1996 and registered on 29 August 1996 ("the second variation"). The first and second variations are respectively Nos. 6/2 and 6/3 of process.

[2] In this action the first conclusion is for declarator that the pursuers are in right of the landlord's interest under the lease, and that the defenders are in right of the tenant's interest thereunder. The defenders do not dispute that that is so. In those circumstances it was common ground between counsel when the case came before me for debate that there was no need for declarator to be pronounced in terms of the first conclusion.

[3] The lease contains a rent review clause (clause THIRD (b)) which makes reference to the "average percentage increase in rental levied in the year of review by the other Universities in Scotland for student ... accommodation". The parties are in dispute as to the meaning in that clause of the phrase "the other Universities in Scotland". The pursuers' position is formulated in the second conclusion of the summons, which is:

The defenders maintain, on the other hand, that the expression in question refers only to those institutions in Scotland that held the status of university at the date of commencement of the lease. The only issue debated before me was which of those constructions of the rent review clause is correct.

[4] The third and fourth conclusions of the summons are consequential upon the second. The third is for declarator that in the review at October 1999 the applicable percentage increase in the rent was 5.36. The fourth conclusion is for payment of £6436.27, being the additional rent payable if the pursuers' contention as to the proper construction of the lease is upheld. Counsel were, however, agreed in inviting me to deal only with the second conclusion, and in suggesting that if the case were then put out By Order, agreement could be reached on the practical consequences of that decision.

[5] There is no controversy about the facts which underlie the dispute. There are presently thirteen universities in Scotland, including the defenders. Of these, four - St. Andrews, Glasgow, Aberdeen and Edinburgh - are of ancient origin, having been founded at various dates between 1411 and 1582. Four more - Strathclyde, Heriot-Watt, Dundee and Stirling - came into existence between 1964 and 1967. Accordingly, as at the date of the lease, there were eight universities in Scotland including the defenders. Subsequently and prior to the relevant review date five further universities came into existence in Scotland, namely Napier, Paisley, Robert Gordon, Glasgow Caledonian and Abertay.

[6] Clause FIFTH of the lease provided that the leased subjects were let for the purpose of residential accommodation for occupation by (1) persons who were pursuing or intended to pursue a course of study provided by an educational institution specified under section 2(1)(c) of the Rent (Scotland) Act 1984 and their spouses and children, and (2) such persons as the defenders might deem appropriate. The use was thus to be for residential accommodation for students.

[7] In terms of clause SECOND of the lease, its duration was to be for a period of nineteen years, ten months and four days from 26 September 1986 to 30 June 2006. By clause 1 of the first variation the duration was altered to twenty four years, eleven months and twenty four days from 26 September 1986 to 22 September 2011. By clause (One) of the second variation it was confirmed that the lease would terminate on 22 September 2011 and that with effect from 21 October 1994 clause SECOND of the lease would read: "The duration of the Lease shall be from [26 September 1994] to [22 September 2011]". I was informed that the reason for that aspect of the second variation was that it was realised that the first variation had contravened the prohibition on residential use of the subjects of a lease of more than twenty years duration (Land Tenure Reform (Scotland) Act 1974, section 8).

[8] Clause THIRD (b) of the lease was, as I have already mentioned, a rent review clause. Since it is the subject of the dispute it is appropriate to set out its terms in full.

By the second variation, the review date was changed from 26 September to 1 October each year. The clause as a whole is not well expressed, and there is scope for dispute about its meaning in respects other than that focused in this case. For present purposes, however, the only issue is the construction of the phrase "the other Universities in Scotland".

[9] Mr Lake for the pursuers submitted that the proper approach to the construction of the rent review clause was to examine the words used in order to determine objectively the intention of the parties at the time of entering into the lease. He acknowledged the need to bear in mind the surrounding circumstances known to the parties at that time, but suggested that in the circumstances of the present case the proper construction could be ascertained by reference to the purpose and language of the clause, with the surrounding circumstances affording a cross check. He referred to City of Aberdeen Council v Clark 1999 SLT 613 in which the purpose of a rent review clause was discussed. In that case the rent review clause provided for the determination of the reviewed rent by an arbiter, but did not specify the basis on which the arbiter was to fix the reviewed rent. The tenants maintained that the clause was void from uncertainty, but that submission was rejected. In the Opinion of the Court it was recorded (at 616F-I):

At 618B the Court concluded:

[10] From the general approach to the construction of a rent review clause, Mr Lake then turned to the particular phrase in issue in the present case. He reminded me of the decision of the House of Lords in The Carnegie Trustees for the Universities of Scotland v The University of St Andrews 1968 SC (HL) 27. In that case the truster left funds the income of which was to be applied inter alia to the improvement and expansion of "the Universities of Scotland". When the trust was created in 1901 only the four ancient universities existed. When Strathclyde and Heriot-Watt Universities came into existence they claimed to be entitled to participate in the benefit of the trust. The House of Lords held that the truster's primary purpose was to benefit the youth of Scotland by assistance in paying fees in any institution in which they were receiving higher education and by assistance to those institutions in improving opportunities for study and research, and that therefore the expression "the Universities of Scotland" included all the universities in Scotland at any particular time. At 40, Lord Reid said:

Later (at 41) his Lordship said:

At 42, Lord Guest said:

Lord Upjohn, at 43, expressed a similar view:

[11] Mr Lake also sought to draw support for his construction of the rent review clause from a case concerned with the date at which a class of testamentary beneficiaries was to be determined, Commercial Bank of Scotland v Nicoll 1956 SLT 199. In that case the testatrix left the income of one quarter of the residue of her estate as an alimentary provision for her niece until her (the niece's) youngest child should attain the age of 21 years or her earlier death. The testatrix further provided that, if the niece survived the twenty first birthday of her youngest child, the one quarter share of residue was then to be divided equally between her and such of her children as might then be alive. The settlement was executed at a time when the niece was divorced. She subsequently remarried. On the youngest child of her first marriage attaining the age of twenty one, no children having by then been born of the second marriage, she and her children sought immediate payment of the one quarter share of residue. It was held that the gift was a class gift to the niece's children, and included children yet to be born as well as children in existence at the date of the testatrix's death.

[12] Mr Lake submitted that the purpose of the rent review clause was to provide a criterion by which the rent passing under the lease might from time to time be increased in order to protect the landlord against the effect of change in the value of money over the duration of the lease. The mechanism which the parties had chosen to adopt was the percentage increase in rents charged for occupation of student accommodation. The "other Universities in Scotland" were identified as the class of institution charging such rent. In that context there was no good reason why the class of institution making up the relevant market should be restricted to the universities in existence in 1987 rather than the universities which made up the relevant market from time to time when review was undertaken. Moreover, as matters stood in 1987, the universities in Scotland included both the four ancient universities and the four universities created in the 1960s. It was therefore within the reasonable contemplation of the parties that the number of universities might be further increased within the duration of the lease. In all these circumstances, the phrase in the rent review clause should be construed as encompassing all the other universities in Scotland at the relevant review date.

[13] Mr Lake also drew my attention to the fact that in light of clause (One) of the second variation, the date of entry under the lease was now to be taken to be 1994, by which date the number of universities in Scotland had risen to the present total of thirteen. If that was to be taken as the date of commencement of the lease as it now stood, the phrase "the other Universities in Scotland" meant the same thing at the date of commencement of the lease as it did at the relevant date of review.

[14] Mr Gale for the defenders began his submission by referring to the fact that at the date of execution of the lease the Universities in Scotland were the four ancient universities and the four universities (including the defenders) created in the 1960s. There was nothing in the terms of the lease to suggest that the parties had in contemplation the eventuality that further new universities might be created. The mere fact that the lease was for approximately twenty years gave no ground for supposing that the parties had such an eventuality in mind.

[15] Secondly, Mr Gale submitted that either construction gave the formula a meaning that was effective to achieve the broad purpose of a rent review clause. Whether the reference was to the other universities in existence in 1987 or to the other universities in existence at the review date, the provision would provide an average increase in the rent charged for the occupation of student accommodation. It therefore could not be said that either construction could be rejected on the ground that it yielded an absurd result or one that did not make commercial sense.

[16] Mr Gale submitted that it was appropriate to take as the starting point for the task of construction of the rent review clause the observations of Nicholls LJ in Basingstoke and Deane Borough Council at 353D-H:

[17] Mr Gale also cited Philpots (Woking) Ltd v Surrey Conveyancers Ltd [1986] 1 EGLR 97 per Nourse LJ at 98H:

In this lease, Mr Gale submitted, the objective aim was to provide the University with premises which it could let as student accommodation. The objective aim of the rent review clause was to protect the defenders against diminution in the value of money, and that by providing that the rent should rise in accordance with increases in the rent charged, not by similar landlords of similar tenants, but by similar tenants of their subtenants. That was the specific market by reference to which the rent review clause sought to protect the landlords.

[18] Turning to the language of the rent review clause, Mr Gale submitted that it was to be noted that, while the drafter had qualified other aspects of the formula by reference to the year of review, that qualification had not been applied to the phrase "the other Universities in Scotland". The clause referred to the "average percentage increase in rental levied in the year of the review", and to "student single room self catering accommodation in the year of review". It was not clear what that second reference to "the year of review" added to the meaning of the clause, but it was noteworthy that no such qualification was applied to "the other Universities in Scotland". In effect, Mr Gale submitted, the pursuers sought to insert into the clause after the reference to "the other Universities in Scotland" the phrase "holding that status at the relevant review date". The defenders' construction called for no such insertion of additional words. Given the qualification applied to the other phrases, the absence of qualification in the reference to the other Universities militated against construing that reference as if such a qualification were express. Nothing in the language of the clause suggested that the drafter had in mind as "the other Universities in Scotland" anything other than the other universities which were in existence at the date of the lease. Moreover, weight ought to be given to the use of the definite article "the other Universities". That suggested that the reference was to a class the membership of which was ascertainable at the date of the lease. Although a different view was expressed by Lord Upjohn in The Carnegie Trustees at 43, the whole approach of the House of Lords in that case was dictated by the type of deed that was under consideration, a deed conferring a widely expressed bounty.

[19] Commenting more generally on The Carnegie Trustees Mr Gale submitted that an important consideration supporting the decision was that the deed under construction was a long term trust providing for the utilisation of the income only of the trust funds, which favoured the construction of "the Universities of Scotland" as meaning those in existence from time to time. Moreover, two members of the committee, while not dissenting, doubted the soundness of the result. The majority who positively supported the decision did so by reference to the context of a general benevolent deed. The whole approach was coloured by the fact that the deed under construction set up a charitable trust with an identifiable general charitable intention. The context of the lease in the present case was very different.

[20] Turning to the factual matrix against which the lease was executed, Mr Gale submitted that there was nothing in the surrounding circumstances to suggest that the parties anticipated the emergence of additional institutions with university status. It was important that, so far as possible, a rent review clause should provide certainty, not only as to the machinery for review but also as to the applicable formula for review. Certainty was to be attained by regarding the class of "other Universities in Scotland" as closed at the date of execution of the lease. The parties could be taken to have been aware, at that date, of the location of the other universities, of the self catering accommodation for students which they provided, and its location, age and quality. The existing universities thus provided a clear point of reference for the application of the review formula, which would not be provided if the clause were construed as opening up reference to future institutions of which nothing could be known at the date of the lease.

[21] The parties are in dispute as to the proper construction of clause THIRD (b) of the lease, but they are not in dispute as to the proper approach to the task of construction. The principles to be applied are well settled, and I am content to adopt the formulation of them in their application to rent review clauses put forward by Nicholls LJ in Basingstoke and Deans Borough Council at 353D-E:

(See also Philpots (Woking) Ltd v Surrey Conveyancers Ltd, per Nourse LJ at 98H.) That approach is, in my opinion, in accordance with the more general dicta to be found in Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657 and in the cases there discussed.

[22] It is also, in my view, clear that the broad purpose of rent review clauses is well recognised. Of the various formulations cited to me, I find most helpful the dictum of Dillon LJ in Equity & Law Life Assurance Society plc v Bodfield Ltd at 125:

(See also British Gas Corporation v Universities Superannuation Scheme Ltd, per Sir Nicolas Browne Wilkinson VC at 401; Basingstoke and Deane Borough Council, per Nicholls LJ at 353F; City of Aberdeen Council v Clark at 618B.) The last sentence of the passage which I have quoted from the judgment of Dillon LJ is in my opinion of particular importance in the present case, because the rent review clause in this lease is in a somewhat unusual form. It does not, as most rent review clauses do, seek to protect the landlord by providing a machinery by which the rent may from time to time be brought into line with the "the market rental which the premises would command if let on the same terms on the open market at the review dates" (British Gas Corporation at 401). Instead, it seeks to protect the landlord by providing for annual increases measured, not by reference to increases in the "wholesale" rental value of premises let by commercial landlords to educational institutions for use as student accommodation, but rather by reference to increases in the "retail" rents charged by such institutions in letting individual units of accommodation to students. The broad objective of protecting the landlord against stagnation of his rental income over the duration of a long lease remains, in my view, the same, but the chosen machinery is unusual.

[23] The issue therefore comes to be the proper construction of the reference to the average percentage increase in rent levied by "the other Universities in Scotland". In the context that the number of universities in Scotland has increased since the date of the lease, there are obviously two possible constructions of the phrase used in the rent review clause. On the one hand, it may mean those other universities that were in existence in 1987. On the other hand, it may mean such other universities as happen to be in existence in the relevant year of review. The application of the formula provided in the rent review clause will normally produce a different result according to which construction is adopted.

[24] In my opinion, Mr Gale was correct in submitting that neither construction yields a result that is absurd, or inconsistent with attainment of the purpose of the rent review clause. Either construction will yield a degree of increase, thus providing to that degree the protection for the landlord that is the broad purpose of the clause.

[25] Although at first sight it might appear that the task of construing the phrase "the other Universities in Scotland" would be greatly assisted by the existence of House of Lords authority on the meaning of the very similar phrase "the Universities of Scotland", I am of opinion that the decision in The Carnegie Trustees is not decisive of the present case. It seems to me to be clear that the result in that case was heavily influenced by the context in which the phrase was used in the trust deed, and by the nature and broad purpose of the charitable trust thereby constituted. Moreover, in so far as their Lordships expressed views that can be regarded as of general application, they were not wholly in agreement. Lord Reid (at 40) said that the phrase, taken by itself, could equally well bear either meaning. Lord Guest (at 42) expressed the view that the phrase was of a general character and, in the absence of any indication to the contrary, would mean the universities of Scotland from time to time. In expressing a similar view, Lord Upjohn (at 43) tied his expression of opinion to the meaning of the phrase in question "in such a deed", i.e. in a deed constituting a charitable trust making a long term bequest of income. It therefore seems to me that The Carnegie Trustees cannot be regarded as decisive of the present case.

[26] I do not find much assistance for the purposes of the present case in Commercial Bank of Scotland v Nicoll. The circumstances of that case are, in my view, too dissimilar to those of the present case to yield any reliable analogy.

[27] Attention must therefore, in my opinion, be concentrated on the language used in the rent review clause, in the context of its general purpose, and in the matrix of fact known to the parties at the time of execution of the lease. On the one hand, I accept Mr Gale's submission that there is nothing in the language of the lease to suggest that at the time when it was entered into the parties to it had in specific contemplation the likelihood of the creation of additional universities in Scotland during the term of the lease. On the other hand, however, it is in my view legitimate to take into account, as part of the matrix of fact, that as at 1987 the number of universities in Scotland had doubled from four to eight in the preceding quarter century. The parties to the lease were therefore not in the position in which the House of Lords held that Mr Andrew Carnegie had been in 1901: it could not be said of them that if they had thought about it they would have thought the creation of new universities in Scotland most improbable (see per Lord Reid at 40 and Lord Upjohn at 46). On the contrary, it seems to me that looking forward over the intended duration of the lease, they would have recognised at least the possibility that further new universities might be created.

[28] I do not find persuasive Mr Gale's submission that the presence of phrases tying other aspects of the clause to "the year of review" and the absence of such a phrase applied to "the other Universities in Scotland" points to an intention that the class should be regarded as closed at the date of the lease. On the contrary, it seems to me that the nature of the clause as a provision that required to be applied annually over a period of twenty years would tend to militate against giving the reference to the other Universities in Scotland a meaning fixed at the date of the lease rather than variable from time to time.

[29] It seems to me, however, that the most telling consideration is to be found in the purpose for which reference was made to the other universities. That purpose was to provide a formula for rent increases. The formula referred to "average percentage increases", albeit in the "retail" rather than the "wholesale" rents. The market thus identified was the retail market for student accommodation let by the relevant institutions. The purpose was to ensure that the rents received by the landlords kept pace with that market as a whole. The formula was to be applied annually. In that context, I can see no good reason for construing the formula in such a way as to require that in the events which have happened it is applied by reference to part only of the relevant market. The market has expanded since 1987 through the creation of additional universities. It seems to me to make much better sense to apply the formula by reference to the whole of the market as it exists in the relevant year of review, rather than by reference to that part only of the market that happened to be in existence at the date of the lease. Mr Gale sought to contrast the uncertainty that such a construction would introduce with the clear point of reference provided by the known circumstances as they existed at the time of the lease. I do not, however, consider that that is a point of significance. While the narrow construction of the clause would confine attention to accommodation let by the universities that existed in 1987, it would not confine attention to the accommodation that existed then. The existing universities might make radical changes in the location, age and quality of their accommodation stock over the duration of the lease. The certainty referred to by Mr Gale is therefore in my opinion illusory.

[30] In my opinion the formula contained in the rent review clause was designed to measure the increases in rent recoverable by the landlord by reference to an average rate of increase derived from the "retail" market in student accommodation provided by the other Universities in Scotland. In my view it makes better commercial sense to hold that the parties had in mind reference to the average of the whole of that market as it might exist from time to time during the term of the lease, rather than reference to an arbitrary part of that market fixed for all time at the date of commencement of the lease.

[31] In my opinion, therefore, on a sound construction of clause THIRD (b) of the lease the expression "the other Universities in Scotland" occurring therein means all the other Universities in Scotland at the time of the relevant review. I shall therefore sustain the pursuers' second plea-in-law, repel the defenders' second plea-in-law so far as relating to the second conclusion, and grant decree of declarator in terms of the second conclusion of the summons. Thereafter I shall put the case out By Order for discussion of the disposal of the third and fourth conclusions. I shall reserve the question of the expenses of the debate.