The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 64 of 1996

 

Sunflower Services Limited Appellant

v.

Unisys New Zealand Limited Respondent

 

FROM

 

THE COURT OF APPEAL OF NEW ZEALAND

 

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 11th February 1997

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Present at the hearing:-

Lord Browne-Wilkinson

Lord Mustill

Lord Lloyd of Berwick

Lord Steyn

Lord Hutton

  ·[Delivered by Lord Browne-Wilkinson]

 

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This appeal relates to a rent review clause affecting an office building, Unisys House, in central Wellington.  By an Agreement for a Lease dated 30th August 1985 made between Mayfair Limited as lessor and the respondent, Unisys New Zealand (under its then name Burroughs Limited) as Lessee, the Lessor agreed to erect a new building in accordance with the annexed plans and specifications.  The Agreement further provided that the parties would enter into a formal Lease granting to the Lessee a tenancy of six levels of the new building in a form attached to the Agreement.

 

1. Clause 3 of the Deed of Lease provided (so far as relevant) as follows:-

"3.1  Payment of Rent

The Lessee shall pay to the Lessor during the term of this Lease rent (as the base rent) at the rate specified in Item 7 of the First Schedule or where increased in accordance with the provisions of this Lease at the increased rent.

...  3.5  Review of Rent

The rent payable during the term of this Lease may be reviewed in the following manner:-

 

(a)At any time not earlier than three (3) months (in which regard time shall not be of the essence) prior to each of the successive dates identified by application of Item 7 of the First Schedule (each of such dates being called `the review date') the Lessor may give notice in writing to the Lessee setting out the amount which the Lessor considers to be the full current market annual rent of the Premises as at that particular review date.  Unless within two (2) months after the date of service of the said notice the Lessee shall by notice in writing to the Lessor dispute the rent so fixed and set out the amount which the Lessee considers to be the full current market annual rent of the Premises as at the particular review date, the rent so fixed by the Lessor shall be the base rent as from that particular review date in substitution for the amount appearing in Item 7 of the First Schedule or where applicable the base rent determined at any previous review date;

 

(b)If the Lessee gives notice pursuant to Section 3.5(a) disputing the Lessor's assessment and the Lessor and Lessee shall not resolve the dispute by negotiation within fourteen (14) days (or such longer period as the Lessor and the Lessee may agree on) after the date on which the Lessee gives such notice of dispute, the base rent shall be determined by reference to arbitration as provided by Section 16.10;

...

 

(d)Notwithstanding the foregoing no determination of rent pursuant to Section 3.5(a) and (b) shall operate to reduce the base rent payable by the Lessee below the base rent payable immediately prior to the particular review date;

..."

 

2. It is common ground that the first review date mentioned in clause 3.5 was 1st August 1988 and that thereafter the rent could be reviewed triennially i.e. the second review date would be 1st August 1991.

 

3. In 1989 the anticipated lease had not been executed.  The Lessee was occupying the premises under the Agreement for a Lease.  The original Lessor (which was part of the Aurora Group) was under  statutory  management.   The  original  Lessor had given notice requiring the rent to be reviewed as from 1st August 1988 but the new rent had not been agreed or determined.  There were certain other matters in dispute between the parties relating to the 1988 review e.g. as to the precise area of the demised premises and the amount of the annual charge for "naming rights".  The parties' respective valuers were not far apart as to the new rent to be payable as from 1st August 1988.  It was agreed to split the difference, producing a gross rent of $35.44 per square foot.  After this rent had been agreed, the Lessee's negotiator asked that, in relation to the next rent review as at 1st August 1991 (but not in relation to any later review) the original Lessor should waive the "ratchet clause".  This was agreed, provided that such waiver remained confidential between the parties.

 

4. Agreement having been reached on all points, the original Lessor referred the matter to its solicitors to draft the necessary documentation to be contained in two documents, the first covering the agreed rent and various other matters in relation to the 1988 review, the second covering the agreement as to the waiver by the Lessor of the ratchet clause in relation to the 1991 review.  The first of those documents was not to be confidential: the second was.  The Lessor's solicitors having drafted both documents, they were sent to the Lessee who executed them on 30th June 1989.

 

5. The material document is the agreement relating to the waiver of the ratchet clause, which took the form of a document on the headed paper of North Terrace Management Limited as agent for the original Lessor.  It provided as follows:-

"UNISYS HOUSE, THE TERRACE, WELLINGTON

LEASE FROM MAYFAIR LIMITED

 

1.You will be aware that North Terrace Management Limited (Statutory Managers Appointed) (`NTM') has been appointed by Mayfair Limited (Statutory Managers Appointed) (`Mayfair') to act as its Property Managers in respect of Unisys House.

2.Unisys New Zealand Limited (`Unisys') occupies certain premises in Unisys House (`the premises') pursuant to a Memorandum of Agreement (`the Agreement') dated 30 August 1985.  This document was executed by Unisys under its former name of `Burroughs Limited'.

3.Clause 2 of the Agreement obliges Unisys to execute a Deed of Lease in the form attached to the Agreement.  We note that such a Deed of Lease has been prepared, but has yet to be executed.

 

4.It is a further term of the Agreement that Mayfair may review the annual rental with effect from the 1 August 1988, and at three yearly intervals thereafter.  On Mayfair's behalf NTM now makes the following proposals in respect of the rental review which is to be effective from 1 August 1991:

 

(i)That in consideration of the payment by Unisys to Mayfair of the sum of ONE DOLLAR ($1.00), the receipt whereof is hereby acknowledged, Mayfair will waive clause 3.5(d) of the lease in respect of the rent review to be effective from 1 August 1991;

 

(ii)That the foregoing waiver shall apply only to the rental review which is to be effective from 1 August 1991.

 

(iii)That Mayfair will ensure that proposal (i) above will bind any successors in title of Mayfair and/or Unisys House.

 

(iv)That in consideration of these premises Mayfair and Unisys will treat each of the foregoing proposals with the strictest of confidence;

 

(v)That Unisys pay for the preparation of this agreement.

 

(vi)That in all other respects the Agreement (including the obligation of Unisys to complete the Deed of Lease) shall continue and remain in full force and effect.

 

5.Please confirm your acceptance of these proposals by affixing the Common Seal of Unisys, in accordance with your company's Articles of Association, in the space provided below."

 

6. The document ("the Variation Agreement") was signed on behalf of the Lessor and sealed by the Lessee.

 

7. The formal Lease was executed on 6th November 1989.  Since that date the original Lessor has assigned the reversion to the appellant, Sunflower Services Limited ("the Lessor").

 

8. Between 1988 and 1991 the open market rental value of the property declined.  It follows that, if there is a rent review as at 1st  August  1991,  the  rent  payable by the Lessee will be a lower rental than that previously payable since, by virtue of the elimination of the ratchet clause, the lower rent fixed on the review would be payable.  However, if there is no review of the rent as at 1991, the rent payable under the Lease will continue to be at the rate fixed by the 1988 review.  It follows that, if the Lessee is to achieve a lower rent, it is essential that the 1991 review takes place.  However, the Lease contains no mechanism whereby the Lessee can trigger the 1991 review: under clause 3.5(a) of the Lease the rent review can only be activated if the Lessor chooses to serve a notice ("the Lessor may give notice in writing").  The Lessor refused to serve a notice activating a 1991 review despite having been required to do so by the Lessee.  In consequence, the Lessee launched these proceedings claiming that the effect of the Variation Agreement was to impose an obligation on the Lessor to hold the 1991 review and asking for an order that the Lessor do specifically perform that obligation by serving the requisite trigger notice.

 

9. The Lessee's case is that the words in clause 4 of the Variation Agreement ("in respect of the rental review which is to be effective from 1 August 1991" and "the rent review to be effective from 1 August 1991") imposed an obligation on the Lessor to hold a review as at that date.  At first instance, Greig J. held that the words of the Variation Agreement were ambiguous.  He therefore had regard to other evidence, in the light of which he held that the Variation Agreement did impose an obligation to activate the 1991 review.  He accordingly made an order for specific performance against the Lessor requiring the service of a trigger notice under clause 3.5(a) of the Lease.  On appeal, the Court of Appeal by a majority (Gault and Henry JJ.) dismissed the appeal but on different grounds.  They held that the Variation Agreement was not ambiguous but that the use of the plain words "to be effective from" necessarily raised the implication that there would be a 1991 review and that accordingly the Lessor was impliedly bound to produce that result by serving a trigger notice under clause 3.5(a) of the Lease.  McKay J. (dissenting) held that the plain words of the Variation Agreement extended only to a waiver of clause 3.5(d) and that there were no sufficient grounds justifying the implication of an obligation to serve a trigger notice.

 

10. There are three provisions in clause 3 of the Lease which might be relevant to the construction of the Variation Agreement viz.

 

(a)Clause 3.1: The covenant is to pay rent at the rate originally specified or "where increased in accordance with the provisions of this Lease at the increased rent".  At first sight, such  a  covenant  does  not  provide  for the payment of a

decreased rent.  Indeed it has been held that, in the case of a lease which (unlike the present Lease) did not have a ratchet clause, such a covenant does by itself operate so as to prevent the rent payable being decreased by reason of a rent review: Melanesian Mission Trust Board v. Australian Mutual Provident Society (unreported) (Judgment of the Privy Council delivered on 17th December 1996).

 

(b)Clause 3.5(a): This is the provision conferring on the Lessor an option to trigger a rent review by serving notice;

 

(c)Clause 3.5(d): This is the ratchet clause which expressly provides that the rent review shall not operate to reduce the rent below that payable immediately before the review date i.e. the review is to produce an upward revision only.

 

11. On the view which their Lordships take of the case, it is unnecessary to consider clause 3.1 of the Lease at any length.  As will appear, their Lordships consider the Lessor cannot be compelled to serve a trigger notice.  Therefore it is unnecessary to decide whether, in the present Lease, clause 3.1 by itself would operate so as to prevent any reduction in rent following review (or is merely a pre-echo of clause 3.5(d)) and whether, if so, the Variation Agreement impliedly excluded any limit on the amount of rent payable contained in clause 3.1.  For present purposes, clause 3.1 is not relevant.

 

12. Their Lordships therefore turn to the construction of the Variation Agreement.  Does it operate so as to impose an obligation on the Lessor to trigger the 1991 review by serving a notice under clause 3.5(a)?  There can be no doubt that on its literal interpretation it does not.  Paragraphs 1, 2 and 3 of the Variation Agreement are recitals of the existing position.  So is the first sentence of the preamble to paragraph 4 which accurately recites that the Lessor "may" review the rent "with effect from 1 August 1988" and at three yearly interval thereafter.  The second sentence of the preamble to paragraph 4 then makes "the proposals" of the Lessor which are available for acceptance.  The proposals are set out in sub-paragraphs (i) to (vi) none of which expressly refers to any obligation to trigger the 1991 review.  All that they expressly propose is a "waiver" of a specific clause (clause 3.5(d)) of the Lease and provide that in all other respects the Agreement for a Lease (including the Deed of Lease to be executed) "shall continue in full force and effect".

 

13. Therefore, as the Court of Appeal appreciated, the question in the present case is whether an obligation on the Lessor to activate the 1991 review is implicit in, or to be implied into, the Variation Agreement.   The  two  factors relied on to raise such implication

are, first, the three references to the relevant review as being one "which is to be effective from" or "to be effective from" and, second, that unless such implication is made the Variation Agreement becomes virtually pointless since the Lessor can simply avoid a downward adjustment of the rent by refusing to serve a notice triggering the relevant 1991 review.

 

14. Their Lordships consider that, in the context of this Variation Agreement, there is no sufficient warrant for making such an implication.  The words "to be effective from" do not necessarily import an absolute obligation to hold a review which will be effective: they are capable of being treated as words describing the only rent review under consideration i.e. the 1991 review.  They are words of description not of obligation.  That this is their purpose is supported by the accurate recital in the first sentence of paragraph 4 that the review is at the Lessor's option ("Mayfair may review") and of such optional review being the annual rental "with effect from 1 August 1988 and at three yearly intervals thereafter".  It seems most improbable that the draftsman, having accurately recited the optional nature of the review, can have intended to change such an option into a mandatory obligation on the Lessor to have a review without expressly including such a change in the proposals which are put forward for acceptance in sub-paragraphs (i) to (vi) of paragraph 4 of the Variation Agreement.

 

15. As to the contention that, unless a mandatory obligation to trigger the 1991 review is to be implied, the Variation Agreement is pointless, the answer is provided by McKay J. in his judgment.  If in 1991 market conditions had been such that the Lessor considered that the rent might be slightly increased on the review, then if he served a trigger notice there would be a risk that the arbitrator, who in default of agreement has to fix the new rent, might take the view that the new rent should be lower than the existing rent.  So long as the ratchet clause in the Lease (clause 3.5(d)) applied, the Lessor could safely require a review in the certainty that the rent could not go down in any event.  By entering into the Variation Agreement and waiving any right under clause 3.5(d) the Lessor lost that position of "heads I win, tails you lose".  Thereafter, the Lessor could only safely trigger the 1991 review if he was sure that a higher rent would result.  Clause 3.5(d) provided what McKay J. describes as an "insulation layer".  The Variation Agreement does alter the parties' rights in that the Lessor was waiving its right to rely on such insulation layer.

 

16. The Variation Agreement is a professionally drawn document, containing an express waiver of a specific right under the Lease, which  right  is  identified by reference to its clause number: the Agreement otherwise expressly confirms the provisions of the Lease.  It is not legitimate to construe such an agreement as creating not only a waiver of the specific right but also a new mandatory obligation to serve a trigger notice unless the circumstances or the words used compel that conclusion.  For the reasons given (which are substantially the same as those given by McKay J.), their Lordships are of the view that no such compulsion exists in the present case and that the parties are bound by the clear meaning of the words in which they have expressed their agreement.

 

17. Finally, there was discussion in the course of argument as to the extent to which evidence was admissible to aid the construction of the Variation Agreement.  Since the Court of Appeal and the respondents did not rely on any such evidence it is unnecessary for their Lordships to deal with this question of admissibility.  However, their Lordships would point out that a doubt as to the true construction of a document is not by itself an ambiguity of a kind which renders extrinsic evidence of intention admissible.

 

18. Their Lordships will humbly advise Her Majesty that the appeal should be allowed, that the order of Greig J. be set aside and the action dismissed.  The respondent must pay all the appellant's costs of the action both before their Lordships and in the courts below.

 

© CROWN COPYRIGHT as at the date of judgment.