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Construction

This page contains two cases dealing with various construction points:
  • Date from which rent increase is take effect.
  • Operation of rent review clause by the tenant.
See also the pages on "time of the essence" and "presumption of reality" - see contents on left.

There is a third case, which deals with the construction of rent review clauses, in the light of Arnold v Britton.

Date from which increase to take effect

Riverside Housing Association Ltd v White
[2007] UKHL 20.

Introduction

It is much more common to find rent review disputes in a commercial context. This claim related to an assured tenancy granted by a housing association. The agreement allowed the landlord to increase the rent in June each year. Notwithstanding the provisions of the agreements the landlord decided to increase the rent in April each year. The tenants claimed that four annual notices of rent increases were invalid and that the rent payable should be that which was payable in 1999. The case concerned one tenancy agreement but there were many other tenants who could be affected by the outcome. A decision in favour of the tenants would have been a disaster for this, and no doubt many other social landlords, who rely on the rent received for most of their income. The Housing Corporation intervened in the case in support of the landlord.

The tenancy agreement

The key provisions of the tenancy agreement stated as follows:
    "Riverside may increase the rent by giving the tenant four (4) weeks notice in writing as set out in accordance with the provisions of this Agreement...

    The rent payable will be increased annually with effect from the first Monday of June each year. (This is known as the 'Rent Variation Date')"
The arguments

The claim was for possession based on arrears for rent. The tenants however claimed that the alleged arrears of rent were not lawfully due because the landlord had not duly implemented the contractual procedures for rent increases in that the rent variation date in each of the notices from 2001 onwards did not conform with the contractual rent variation date. The landlord's main argument was that time was not of the essence. The second argument was that on a proper construction of the tenancy agreement the landlord could recover the rent on a later date than the first Monday in June so long as the requisite notice was given.

Decision

The landlords first argument was rejected. The presumption that time is not of the essence only applies to the machinery for fixing a rent on a rent review. It does not apply to the date from which the increase is to take effect. Lord Neuberger (who gave the only speech on behalf of the whole house) at paras 24 and 25:
    "... on the assumption that the tenancy agreement does identify the first Monday in June as the date on which payment of the reviewed rent must start, it seems to me that Riverside's argument that time is not of the essence of that date is misconceived. If the tenancy agreement does indeed provide, as a matter of construction, that the only date on which the rent can be increased is the first Monday in June of each year, then it appears to me to be quite impermissible to contend that, simply because of the principle that equity does not normally regard time limits as being essential, one can, indeed one must, interpret the rent review provisions so as to enable Riverside to review the rent on some different date. In this connection, the case upon which Mr Andrew Arden QC, who appeared for Riverside, relied, United Scientific Holdings Limited v Burnley Borough Council [1978] AC 904 is simply inapplicable. Although the decision in the United Scientific Holdings case did involve a development, in what some regarded as a controversial way, of the equitable principle that time limits should not normally be regarded as being of the essence, neither the decision nor the reasoning give any support to the proposition that the court can rewrite a tenancy agreement, which provides for an increase in rent from a specified date, so as to enable the rent to be increased from a different date. As Sir Peter Gibson put it in paragraph 40 in his judgment in the Court of Appeal:
      'All that [clause 2 (7)] has done is to identify the rent variation date. It contains no obligation on Riverside to do something by a particular time and there is therefore no failure against which equity would relieve on the basis that the time provision was non-essential.'."
So far so good. However, Lord Neuberger went on to hold that as a matter of construction of the relevant clauses of the tenancy agreement the landlord was not precluded from implementing the rent increase at a date later than the first Monday in June. In what some may consider to be a rather strained interpretation of the relevant clauses, Lord Neuberger held that Riverside could only increase the rent once a year but that it could exercise the right to do so on any date from and including the first Monday in June, provided it gave 28 days' prior notice. See para 26; and para 35 where he stated:
    "On a fair reading, I consider that the combined effect of the centrally relevant clauses 2(6) and 2(7) amounts to this. Riverside is entitled to increase the rent once a year on 28 days notice, which notice can take effect any time on or after the first Monday in June. In this connection, it seems to me that clause 2(6) imposes one condition, namely that Riverside must give the tenant four weeks notice before the reviewed rent becomes payable, and that clause 2(7) imposes another condition, in that it provides that the reviewed rent cannot become payable earlier than the first Monday in June. It is true that the words 'with effect from' could be taken as meaning 'with immediate effect from' but they can mean 'on or at any time after' As usual, it all depends on context. If I were to say to a friend that I would be arriving for dinner 'with effect from' 8 o'clock, the natural meaning would be not that I would be arriving at 8 pm precisely, but that I would be arriving at or some time after 8 pm (albeit that, because I was coming for dinner, there would presumably be an implied term that I would be arriving before, say, 9.30 pm at the latest)."
Comment

There are three particular points to note:
  • The statement, that time is presumed not to be of the essence is irrelevant to the date from which the reviewed rent is actually paid, is applicable to commercial as well as residential tenancies.
  • In reaching his conclusion on the construction of the particular clauses in this case, Lord Neuberger highlighted a number of differences between the commercial and residential context (see paragraphs 28 to 33). Thus, no assistance can be derived from this part of the decision in interpreting rent review clauses in commercial leases.
  • Lord Neuberger has a rather odd way of telling his friends that he will be late for dinner.

Operation by tenant?

Hemingway Realty Limited v The Clothworkers Company
[2005] EWHC 299 (Ch)

A lease with a complicated rent review clause, which had an element providing for an open market value of the premises; ie not upwards only. The tenant wanted to operate the rent review clause because there was evidence that it might lead to a reduction in the rent. It argued that where there the lease provides for an open market rent there is a presumption that either the landlord or the tenant cannot operate the rent review clause.

Held: The argument was rejected. Upon its proper construction the lease clearly provided that only the landlord could initiate the rent review process. Patten J at para 34:
    [T]here is no presumption that a rent review clause (even one incorporating an open review) ought to be exercisable by both parties to the lease. Everything depends upon the form of review which the parties have chosen to incorporate. This can vary from a right to review exercisable by the landlord alone to a review which is mandatory on each of the review dates. The choice between these alternatives depends upon what the parties have agreed. There are no presumptions either way.

Construction in the light of Arnold v Britton

Interpretation and reality – natural and ordinary meaning

Trillium (Prime) Property GP Ltd v Elmfield Road Ltd
[2018] EWCA Civ 1556

Summary

The Court of Appeal held that the clear wording of the rent review clause fell to be interpreted in accordance with the ‘natural and ordinary meaning’ of the words used rather than in the light of its commercial purpose.

Facts

The tenant had a lease of commercial premises dated 23 June 1986. The term of the lease was 25 years from 25 March 1985 and provision was made for rent reviews every five years. The annual rent in September 2005 was £965,000. In December 2005, the parties executed a new lease, which was to commence on 25 March 2010 (on the expiry of the initial lease) and expire on 31 March 2022. The new lease contained a rent review clause in the following terms:
    "The annual Rent for any Review Period is to be determined at the relevant Review Date by multiplying the Initial Rent by the Index for the month preceding the relevant Review Date and dividing the result by the Base Figure".
  • The Base Figure was specified as 193.1 and the Index was the "index figure of the Index of Retail Prices".
  • The "Initial Rent" was defined as being the highest of three figures or calculations and in July 2010, the parties signed a memorandum stating that the Initial Rent was to be £1.2 million a year from 25 March 2010.
On that basis, the landlord said, the reviewed rent was therefore £1.6m.

The tenant disagreed, arguing that the rent review clause contained an obvious error: instead of saying "the Initial Rent", it should say "the rent payable under the Initial Lease immediately prior to expiry", i.e. £965,000; that accorded with commercial common sense and would give a reviewed rent of £1.3m.

Issues

The court had to decide whether this indexed rent review clause should be interpreted as it stood or interpreted in the light of the commercial purpose.

First instance

The trial judge held that the whilst the rent review provisions were unusual and provided for a greater increase in rent than standard indexation would have produced, it was not possible to say with any certainty that it was irrational or an obvious mistake considering the other terms of the transaction. Therefore, the court held that the strict terms of the review provision should apply.

The judge applied the test laid down in Arnold v Britton [2015] UKSC 36 which set out a five-stage process of interpretation. This process includes looking at the overall purpose of the clause and the lease, and commercial common sense. However, the Supreme Court clearly stated in that case, that commercial common sense and surrounding circumstances should not undervalue the importance of the language used and the clearer the natural meaning the more difficult it is to justify departing from it.

Decision on appeal

The Court of Appeal agreed and dismissed the tenant’s appeal.

A rent review clause is inserted into a lease to reflect the uplift in rent since the last date the rent was set, but not to enable a landlord to obtain more than the current open market rent. Sir Nicholas Browne VC commented in his judgment in British Gas Corp v Universities Superannuation Scheme [1986] 1 All ER 978 that
    “...in the absence of special circumstances it would in my judgment be wayward to impute to the parties an intention that the landlord should get a rent which was additionally inflated by a factor that has no reference either to changes in the value of money or in the value of property but is referable to a factor which has no existence as between the actual landlord and the actual tenant...”
However, if the intention of the parties as evidenced by the drafting is clear, the Court will follow the wording of the lease. So, for example, in Earl Cadogan & Cadogan Estates v Escada AG [2006] EWHC 78 Ch the rent review provisions failed to disregard the tenant’s extensive fitting out works. This was disastrous for the tenant who had paid for the cost of completing the works and was then required to pay an increased rent because of them, but equally (on the facts) disastrous for the landlord who was faced with valuing the premises as two units rather than a combined flagship store. Nonetheless, the court declined to interfere. It decided that the wording of the clause was so clear, albeit commercially unrealistic, that it could not construe the contract to have anything other than its literal meaning and that it should therefore be assumed that the premises did comprise two separate units, particularly when dealing with “a carefully negotiated Lease involving expert professionals” and it further rejected an application for rectification on the grounds of mistake.

Lewison LJ giving the judgment of the Court of Appeal in this case dismissed the tenant’s appeal. Applying the principles laid down by the Supreme Court in Arnold v Britton [2015] UKSC 36 and Wood v Capita [2017] UKSC 24, the court said that in order for the court to have the jurisdiction to interpret the clause, it was necessary for the clause to be ambiguous, but “The meaning of the defined term "Initial Rent" is clear.”

As to the role of commercial common sense, the court added:
    “What is necessary to bring this principle into play is (a) that it should be clear that something has gone wrong with the language and (b) that it is clear what a reasonable person would have understood the parties to have meant… The first problem with this argument is that if anything has gone wrong with the rent review provisions, as [the tenant] suggests, it is a failure to think through the consequences of what the parties agreed, rather than any deficiencies in drafting. A failure of that kind cannot be solved by the process of interpretation” (para 15)
He added the reminder that “The fact that a contract term was an imprudent one for a party to have agreed or that it has worked out badly or even disastrously is no warrant for departing from the clear language of the contract, especially when that contract has been professionally drafted: Arnold v Britton at [19] and [20]; Wood v Capita at [10] and [13].” (para 18)


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