United Scientific Holdings Ltd v Burnley Borough Council; Cheapside Land Development Co Ltd and Anor v Messels Service Co
[1977] 2 All ER 62(Judgment by: Lord Diplock)
Between: United Scientific Holdings Ltd v Burnley Borough Council; Cheapside Land Development Co Ltd and Anor
And: Messels Service Co
Judges:
Lord DiplockViscount Dilhorne
Lord Simon of Glaisdale
Lord Salmon
Lord Fraser of Tullybelton
Subject References:
LANDLORD AND TENANT
RENT
Review
Failure to comply with time limit
Construction of clause
Presumption that time not of the essence
Rebuttal of presumption
Contra-indications in express words of lease or in interrelation of rent review clause itself and other clauses or in surrounding circumstances
Failure to comply with time limit not precluding landlord from invoking clause unless presumption that time not of the essence rebutted
Retrospective operation
Certainty of rent
Increased rent determined under review clause payable from specified date
Increased rent not determined until after specified date
Whether increased rent payable retrospectively from specified date
Case References:
Accuba Ltd v Allied Shoe Repairs Ltd - [1975] 3 All ER 782; [1975] 1 WLR 1559; 30 P & CR 403; Digest (Cont Vol D) 581, 3952d
Bailey (C H) Ltd v Memorial Enterprises Ltd - [1974] 1 All ER 1003; [1974] 1 WLR 728; 27 P & CR 188, CA; Digest (Cont Vol D) 581, 3952e
Boone v Eyre - (1779) 1 Hy Bl 273 n; 1 Wms Saund 320 c; 2 Wm Bl 1312; 126 ER 160; 12 Digest (Reissue) 524, 3630
Cutter v Powell - (1795) 6 Term Rep 320; 101 ER 573; 12 Digest (Reissue) 146, 844
Essoldo (Bingo) Ltd's Underlease, Re, Essoldo Ltd v Elcresta Ltd - (1972) 23 P & CR 1; 31(1) Digest (Reissue) 480, 3951
Farrell v Alexander - [1976] 2 All ER 721; [1976] AC 59; [1976] 3 WLR 145, HL
Finch v Underwood - (1876) 2 Ch D 310; 45 LJCh 522; 34 LT 779, CA; 31(1) Digest (Reissue) 293, 2394
Greater London Council v Connolly - [1970] 1 All ER 870; [1970] 2 QB 100; [1970] 2 WLR 658; 134 JP 336, CA; Digest (Cont Vol C) 423, 144a
Gregson v Riddle - (1784) cited in 7 Ves at 268; 32 ER 109, LC; 40 Digest (Repl) 118, 916
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd - [1962] 1 All ER 474; [1962] 2 QB 26; [1962] 2 WLR 474, CA; 41 Digest (Repl) 363, 1553
Hughes v Metropolitan Railway Co - (1877) 2 App Cas 439; 46 LJQB 583; 36 LT 932; 42 JP 421, HL; 21 Digest (Repl) 392, 1221
Jackson v Union Marine Insurance Co Ltd - (1874) LR 10 CP 125; [1874-80] All ER Rep 317; 44 LJCP 27; 31 LT 789, Ex Ch; 12 Digest (Reissue) 484, 3435
Kenilworth Industrial Sites Ltd v E C Little & Co Ltd - [1975] 1 All ER 53; [1975] 1 WLR 143; 29 P & CR 141, CA; Digest (Cont Vol D) 580, 3952c
Knight, Re, ex parte Voisey - (1882) 21 Ch D 442; 52 LJCh 121; 47 LT 362, CA; 31(1) Digest (Reissue) 473, 3874
Lennon v Napper - (1802) 2 Sch & Lef 682; 12 Digest (Reissue) 382, 1437
Martindale v Smith - (1841) 1 QB 389; 1 Gal and Dav 1; 10 LJQB 155; 5 Jur 932; 113 ER 1181; 39 Digest (Repl) 744, 2216
Mount Charlotte Investments Ltd v Leek and Westbourne Building Society - [1976] 1 All ER 890
Parkin v Thorold - (1852) 16 Beav 59; 22 LJCh 170; 16 Jur 959; 51 ER 698; 12 Digest (Reissue) 381, 2760
Peeters v Opie - (1671) 2 Wms Saund 346; 85 ER 1144
Pordage v Cole - (1669) 1 Wms Saund 319; 1 Lev 274; 2 Keb 542; T Raym 183; 1 Sid 423; 85 ER 449; 12 Digest (Reissue) 523, 3624
Richards (C) & Son Ltd v Karenita Ltd - (1971) 221 Estates Gazette 25
Samuel Properties (Developments) Ltd v Hayek - [1972] 3 All ER 473; [1972] 1 WLR 1296; 24 P & CR 233, CA; 31(1) Digest (Reissue) 481, 3952
Schuler (L) AG v Wickman Machine Tool Sales Ltd - [1973] 2 All ER 39; [1974] AC 235; [1973] 2 WLR 683, HL; Digest (Cont Vol D) 123, 3613a
Seton v Slade, Hunter v Seton - (1802) 7 Ves 265; [1775-1802] All ER Rep 163; 32 ER 108, LC; 12 Digest (Reissue) 381, 2755
Smith v Hamilton - [1950] 2 All ER 928; [1951] Ch 174; 40 Digest (Repl) 242, 2042
Stickney v Keeble - [1915] AC 386; [1914-15] All ER Rep 73; 84 LJCh 259; 112 LT 664, HL; 40 Digest (Repl) 120, 942
Stylo Shoes Ltd v Wetherall Bond Street W1 Ltd - (1974) 237 Estates Gazette 343, CA
United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd, United Dominions Trust (Commercial) Ltd v Eagle Aviation Ltd - [1968] 1 All ER 104; [1968] 1 WLR 74, CA; Digest (Cont Vol C) 406, 18d
Wallis, Son and Wells v Pratt and Haynes - [1910] 2 KB 1003; 79 LJKB 1013; 103 LT 118, CA; on appeal [1911] AC 394; [1911-13] All ER Rep 989; 80 LJKB 1058; 105 LT 146, HL; 12 Digest (Reissue) 522, 3613
Walsh v Lonsdale - (1882) 21 Ch D 9; 52 LJCh 2; 46 LT 858, CA; 31(1) Digest (Reissue) 487, 4019
Watts and Attorney General for British Columbia v Watts - [1908] AC 573, PC
Weston v Collins - (1865) 5 New Rep 345; 34 LJCh 353; 12 LT 4; 29 JP 409; 11 Jur NS 190, LC; 40 Digest (Repl) 315, 2601
Judgment date: 23 March 1977
Judgment by:
Lord Diplock
My Lords, during the last two decades since inflation, particularly in the property market, has been rife, it has been usual to include in leases for a term of years, except when the term is very short, a clause providing for the annual rent to be reviewed at fixed intervals during the term and for the market rent current at each review date, if it be higher, to be substituted for the rent previously payable. The wording of such clauses varies; there are several different ones now included in the books of precedents; but a feature common to nearly all of them is that not only do they specify a procedure for the determination of the revised rent by agreement between the parties or, failing that, by an independent valuer or arbitrator, but they also set out a timetable for taking some or all of the steps in that procedure which, if followed, would enable the revised rent to be settled not later than the review date.
The question in both of these appeals, which have been heard together, is whether a failure to keep strictly to the timetable laid down in the review clause deprives the landlord of his right to have the rent reviewed and consequently of his right to receive an increased rent during the period that will elapse until the next review date.
On a number of occasions during the last five years the question whether time was of the essence in a whole variety of rent review clauses has come before the High Court and the Court of Appeal. Until the judgments of the Court of Appeal in the instant cases the answers given seem to turn on fine distinctions between the wording of particular clauses so as to classify them, either on the one hand as conferring on the landlord a unilateral 'option' for the exercise of which time was of the essence, or on the other as merely laying down the machinery for the performance of mutual 'obligations' by the tenant as well as by the landlord, in which case time was not of the essence.
The suggested dichotomy between the so-called 'option' clauses and 'obligation' or 'machinery' clauses was discarded in each of the instant appeals by Courts of Appeal of different composition. In the first appeal, United Scientific Holdings Ltd v Burnley Borough Council Buckley, Roskill and Browne LJJ in separate judgments held that the commercial character of the contract contained in a lease incorporating a rent review clause raised the presumption that the parties intended time to be of the essence of the contract in respect of each step required to be taken by the landlord in order to obtain a determination of any increased rent under a rent review clause. In the second appeal, Cheapside Land Development Co Ltd v Messels Service Co, Stamp, Scarman and Goff LJJ joined in a single judgment in which they also held that prima facie time was of the essence in a rent review clause, but they preferred to do so not on the ground of the presumed intentions of the parties, but on the ground that in its legal nature a rent review clause is a grant of a unilateral right to the landlord and that equity would not have granted relief to the grantee of such a right for failure to perform any of the conditions of the grant timeously.
It is not disputed that the parties to a lease may provide expressly that time is or time is not of the essence of the contract in respect of all or any of the steps required to be taken by the landlord to obtain the determination of an increased rent, and that if they do so the court will give effect to their expressed intention. But many rent review cases that are now maturing do not contain express provision in these terms. What the Court of Appeal has decided is that the commercial nature of the contract and/or the legal nature of the right granted to the landlord by a rent review clause raises a presumption that time specified in such a clause for anything that needs to be done by him is of the essence; and that this presumption will prevail unless there are strong contra-indications in the actual wording of the clause. It found no sufficient contra-indications in the rent review clauses which are in question in the instant appeals.
My Lords, the reason why these two appeals have been heard together in the House, although the two rent review clauses that are in question differ widely in their wording, is to obtain a ruling whether the presumption as to the construction and effect of rent review clauses is as the Court of Appeal held it to be, or whether it is the contrary presumption, viz that time is not of the essence. I propose accordingly to deal first with that question as a matter of legal principle before turning to the precise terms of the rent review clauses involved in the two appeals.
I shall have to examine rather more closely what are the legal consequences of 'time being of the essence' and time not being of the essence; but I do not think that the question of principle involved in these appeals can be solved by classifying the contract of tenancy as being of a commercial character. In some stipulations in commercial contracts as to the time when something must be done by one of the parties or some event must occur, time is of the essence; in others it is not. In commercial contracts for the sale of goods prima facie a stipulated time of delivery is of the essence, but prima facie a stipulated time of payment is not (Sale of Goods Act 1893, s 10(1)); in a charterparty a stipulated time of payment of hire is of the essence. Moreover a contract of tenancy of business premises would not appear to be more of a commercial character than a contract for sale of those premises.
Nevertheless, the latter provides a classic example of a contract in which stipulations as to the time when the various steps to complete the purchase are to be taken are not regarded as of the essence of the contract.
In the arguments developed before this House the commercial character of the contract of tenancy has played a relatively minor role. Counsel for all the parties have sought to concentrate your Lordships' attention on the 'rules of equity' and, in particular, on the auxiliary jurisdiction formerly exercised by the Court of Chancery to grant relief against the strict enforcement in a court of law of a contractual stipulation as to time.
My Lords, if by 'rules of equity' is meant that body of substantive and adjectival law that, prior to 1875, was administered by the Court of Chancery but not by courts of common law, to speak of the rules of equity as being part of the law of England in 1977 is about as meaningful as to speak similarly of the statutes of Uses or of Quia Emptores. Historically all three have in their time played an important part in the development of the corpus juris into what it is today; but to perpetuate a dichotomy between rules of equity and rules of common law which it was a major purpose of the Supreme Court of Judicature Act 1873 to do away with, is, in my view, conducive to erroneous conclusions as to the ways in which the law of England has developed in the last 100 years.
Your Lordships have been referred to the vivid phrase traceable to the first edition of Ashburner's Principles of Equity [F1] where, in speaking in 1902 of the effect of the Judicature Act, he says 'the two streams of jurisdiction [sc law and equity], though they run in the same channel, run side by side and do not mingle their waters.' My Lords, by 1977 this metaphor has in my view become both mischievous and deceptive. The innate conservatism of English lawyers may have made them slow to recognise that by the Judicature Act 1873 the two systems of substantive and adjectival law formerly administered by courts of law and courts of chancery (as well as those administered by courts of admiralty, probate and matrimonial causes), were fused. As at the confluence of the Rhone and Soane, it may be possible for a short distance to discern the source from which each part of the combined stream came, but there comes a point at which this ceases to be possible. If Professor Ashburner's fluvial metaphor is to be retained at all, the waters of the confluent streams of law and equity have surely mingled now.
Section 25 of the Supreme Court of Judicature Act 1873 took occasion of the union of the several courts whose jurisdiction was thereby transferred to the High Court of Justice to amend and declare the law to be thereafter administered in England as to several matters. Ten matters were particularly mentioned in sub-ss (1) to (10). Among them sub-s (7) was as follows:
'Stipulations in contracts, as to time or otherwise, which would not before the passing of this Act have been deemed to be or to have become of the essence of such contracts in a Court of Equity, shall receive in all Courts the same construction and effect as they would have heretofore received in equity.'
Subsection (11) contained the final provision:
'Generally in all matters not herein-before particularly mentioned, in which there is any conflict or variance between the Rules of Equity and the Rules of the Common Law with reference to the same matter, the Rules of Equity shall prevail.'
The first thing to be observed about each of these subsections is that they are concerned with matters in which before the unifying Act came into force there had been a variance between the ways in which they were dealt with in courts of law and courts of equity respectively. Outside the field of mortgages and contracts for the sale of land, there were other kinds of contracts in which by 1875 some stipulations as to time were not treated in courts of law as being 'conditions precedent'-which was then the common lawyer's way of saying that the particular stipulation as to time was not of the essence of the contract. For instance, that the time of payment in a contract for the sale of goods is not of the essence of the contract unless it is made so by express agreement, was well established in the court of law 30 years before the Judicature Act 1873 and 50 years before the Sale of Goods Act 1893: Martindale v Smith. This was symptomatic of the growing tendency in the courts of common law to adopt a more rational classification of contractual stipulations and the consequences of their non-performance than that into which the rules of pleading peculiar to the old forms of action had led them. With the effect that courts of law gave to those stipulations as to time that they did not regard as being of the essence of the contract, courts of equity before 1873 had no occasion to interfere by way of equitable relief.
Such stipulations were unaffected by s 25 of the Judicature Act 1873. Nor did the coming into force of that Act bring to a sudden halt the whole process of development of the substantive law of England that had been so notable an achievement of the preceding decades. Yet that is what it would have done as respects the law of contract if thereafter whenever the effect of a contractual stipulation as to time or otherwise was in question it were necessary to enquire whether or not a court of equity would have granted relief against its treatment as a 'condition precedent' in a court of law before 1875.
The contention on behalf of the respondents that this is what your Lordships ought to do placed great reliance on some observations of Lord Parker of Waddington in Stickney v Keeble ( [1915] AC 386 at 417, [1914-15] All ER Rep 73 at 82) where, in an action by a purchaser of land for the return of his deposit, Lord Parker said:
'If since the Judicature Acts the Court is asked to disregard a stipulation as to time in an action for common law relief, and it be established that equity would not under the then existing circumstances have prior to the Act granted specific performance or restrained the action, the section can, in my opinion, have no application, otherwise the stipulation in question would not, as provided in the section, receive the same effect as it would prior to the Act have received in equity.'
Lord Parker's observations were made in relation to a contract for the sale of land of which the purchaser alleged, successfully in the result, that the time by which the vendor had to make title had become of the essence as the result of a notice served by the purchaser. He claimed from the vendor the return of his deposit. The vendor resisted this on the ground that the time for completion specified in the purchaser's notice was unreasonably short and accordingly had not become of the essence of the contract. This meant that he was claiming to be still entitled to insist on the purchaser's completing the purchase. Shortly after action brought, however, he had sold the property to a third party and so disabled himself by the time of the hearing from completing the contract with the purchaser. This would have disqualified him from relief in the Court of Chancery before 1873 against the purchaser's claim for the return of his deposit. What Lord Parker said was in answer to an argument for the vendor that the effect of s 25(7) was to require the court to look only to the position at the date of the issue of the writ in the action and to ignore anything that had happened afterwards. He was not dealing with the general question of what stipulations as to time are to be regarded as being of the essence of the contract.
In 1925, s 25(7) of the Judicature Act 1873 was replaced by s 41 of the Law of Property Act 1925. The wording differs slightly:
'Stipulations in a contract, as to time or otherwise, which according to rules of equity are not deemed to be or to have become of the essence of the contract, are also construed and have effect at law in accordance with the same rules.'
The Law of Property Act 1925 was a consolidation Act. It restates the law as it had been declared in 1873 but substitutes a reference to 'rules of equity' for the reference to a court of equity which had been abolished as a separate court more than 50 years before. I have already commented on the danger of treating the use of this expression today as anything more than an indication of the source to which a current rule of the substantial or adjectival law of England can be traced. The change in wording in the substituted section does not in my view make any difference to its substance. It makes it clear that there should continue to be, as there had been since 1875, only one set of rules for judges to apply in determining whether a particular stipulation as to time or otherwise was of the essence of a contract. It places no ban on further development of the rules by judicial decision.
My Lords, the rules of equity, to the extent that the Court of Chancery had developed them up to 1873 as a system distinct from rules of common law, did not regard stipulations in contracts as to the time by which various steps should be taken by the parties as being of the essence of the contract, unless the express words of the contract, the nature of its subject-matter or the surrounding circumstances made it inequitable not to treat the failure of one party to comply exactly with the stipulation as relieving the other party from the duty to perform his obligations under the contract. The Court of Chancery had reached this position in relation to contracts for the sale of land by the extension by Lord Eldon of the earlier doctrine that a stipulation as to the time of repayment by the mortgagor under a legal mortgage was not of the essence of the contract so as to entitle the mortgagee to refuse to reconvey the property if payment with interest was tendered after the stipulated date was passed: Seton v Slade.
Contemporaneously with this development of the rules of equity by the Court of Chancery, the courts of common law were in process of developing for themselves a not dissimilar rule in relation to stipulations as to time in other contracts, but were reaching their solution by a different route. They did so by a growing recognition of exceptions to the rule which had been fostered in the early part of the 18th century by the necessity for the plaintiff under the then current rules of pleading to aver performance or willingness or ability to perform all stipulations on his part in the precise words in which they were expressed in the contract. This rule treated all promises by each party to a contract as 'conditions precedent' to all promises of the other: with the result that any departure from the promised manner of performance, however slight that departure might have been, discharged the other party from the obligation to continue to perform any of his own promises. The history of the development by common law courts of exceptions to this rule is traced in the judgments of the Court of Appeal in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd from its origin in Boone v Eyre in 1779 to the judgment of Bramwell B in Jackson v Union Marine Insurance Co Ltd ((1874) LR 10 CP 125 at 147, [1874-80] All ER Rep 317 at 324) on the eve of the coming into force of the Judicature Act 1873.
My Lords, I will not take up time in repeating here what I myself said in the Hong Kong Fir case, except to point out that by 1873: (1) stipulations as to the time at which a party was to perform a promise on his part were among the contractual stipulations which were not regarded as 'conditions precedent' if his failure to perform that promise punctually did not deprive the other party of substantially the whole benefit which it was intended that he should obtain from the contract; (2) when the delay by one party in performing a particular promise punctually had become so prolonged as to deprive the other party of substantially the whole benefit which it was intended that he should obtain from the contract it did discharge that other party from the obligation to continue to perform any of his own promises which as yet were unperformed; (3) similar principles were applicable to determine whether the parties' duties to one another to continue to perform their mutual obligations were discharged by frustration of the adventure that was the object of the contract.
A party's ability to perform his promise might depend on the prior occurrence of an event which neither he nor the other party had promised would occur. The question whether a stipulation as to the time at which the event should occur was of the essence of the contract depended on whether even a brief postponement of it would deprive one or other of the parties of substantially the whole benefit that it was intended that he should obtain from the contract.
In one respect the Court of Chancery had introduced a refinement in the way it dealt with stipulations as to time in contracts for the sale of land, which had no close counterpart in the rules that had by 1873 been adopted in the courts of common law. Once the time had elapsed that was specified for the performance of an act in a stipulation as to time which was not of the essence of the contract, the party entitled to performance could give to the other party notice calling for performance within a specified period: and provided that the period was considered by the court to be reasonable, the notice had the effect of making it of the essence of the contract that performance should take place within that period. Hence the reference in the statutory provisions that I cited to time being deemed to 'have become' of the essence of the contract.
Both in the Court of Chancery and in the courts of common law the rules that have been developed about particular stipulations not being of the essence of the contract or not being 'conditions precedent' applied to synallagmatic contracts only. They did not apply to unilateral or 'if contracts', of which the example most germane to the instant appeals is an option. As pointed out by Lord Denning MR in United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd ( [1968] 1 All ER 104 at 107, [1968] 1 WLR 74 at 81) where, speaking of options to purchase real or personal property or to renew a lease, he said:
'In point of legal analysis, the grant of an option in such cases is an irrevocable offer (being supported by consideration so that it cannot be revoked). In order to be turned into a binding contract, the offer must be accepted in exact compliance with its terms. The acceptance must correspond with the offer.'
Exact compliance with the terms of the offer in an 'if contract' had been required in courts of equity as well as in courts of common law: see Weston v Collins; Finch v Underwood. A rationale of the distinction which was drawn between the two kinds of contracts in courts of equity is that equity was concerned with the performance of contracts into which parties had already entered. It did not force any person to enter into a contract with another.
Again I will refrain from repeating the more elaborate juristic analysis of the distinction between the two types of contract that I attempted in the United Dominions Trust case ( [1968] 1 All ER 104 at 109, [1968] 1 WLR 74 at 83, 84). A more practical business explanation why a stipulation as to the time by which an option to acquire an interest in property should be exercised by the grantee must be punctually observed is that the grantor, so long as the option remains open, thereby submits to being disabled from disposing of his proprietary interest to anyone other than the grantee, and this without any guarantee that it will be disposed of to the grantee. In accepting such a fetter on his powers of disposition of his property, the grantor needs to know with certainty the moment when it has come to an end.
My Lords, although a lease is a synallagmatic contract it may also contain a clause granting to the tenant an option to obtain a renewal of the lease on the expiration of the term thereby granted. Such a clause provides a classic instance of an option to acquire a leasehold interest in futuro, and it is well established that a stipulation as to the time at which notice to exercise the option must be given is of the essence of the option to renew. Although your Lordships have not been referred to any direct authority on the converse case of a 'break clause' granting to the tenant an option to determine his interest in the property and his contractual relationship with the landlord prematurely at the end of a stated period of the full term of years granted by the lease, there is a practical business reason for treating time as of the essence of such a clause, which is similar to that applicable to an option to acquire property. The exercise of this option by the tenant will have the effect of depriving the landlord of the existing source of income from his property and the evident purpose of the stipulation as to notice is to leave him free thereafter to enter into a contract with a new tenant for a tenancy commencing at the date of surrender provided for in the break clause.
The rent review clauses that have given rise to the two instant appeals, as well as nearly all those which have been considered in the reported cases, if they result in any alteration of the rent previously payable can only have the effect of providing for the payment of a higher rent than would be payable by the tenant if the review clause had not been brought into operation. So the only party who can benefit from a review of rent under these clauses is the landlord. It is accordingly unlikely that the tenant would take the initiative in obtaining a review of the rent, even where the clause contains provision for his doing so-as it does in the first of the instant appeals. More usually the clause provides for the initiative to be taken by the landlord only-as it does in the second of the instant appeals.
It was this concentration of initiative and benefit in the landlord that led the Court of Appeal in the second appeal to regard the rent review clause as conferring on the landlord a unilateral right to bring into existence a new contractual relationship between the parties. This it regarded as sufficiently analogous to an option, to make time of the essence of the occurrence of each one of the events in the timetable laid down in a review clause for the determination of the new rent. For my part, I consider the analogy to be misleading. The determination of the new rent under the procedure stipulated in the rent review clause neither brings into existence a fresh contract between the landlord and the tenant nor does it put an end to one that had existed previously. It is an event on the occurrence of which the tenant has in his existing contract already accepted an obligation to pay to the landlord the rent so determined for the period to which the rent review relates. The tenant's acceptance of that obligation was an inseverable part of the whole consideration of the landlord's grant of a term of years of the length agreed. Without it, in a period during which inflation was anticipated, the landlord would either have been unwilling to grant a lease for a longer period than up to the first review date or would have demanded a higher rent to be paid throughout the term than that payable before the first review date. By the time of each review of rent the tenant will have already received a substantial part of the whole benefit which it was intended that he could obtain in return for his acceptance of the obligation to pay the higher rent for the succeeding period.
My Lords, I see no relevant difference between the obligation undertaken by a tenant under a rent review clause in a lease and any other obligation in a synallagmatic contract that is expressed to arise on the occurrence of a described event, where a postponement of that event beyond the time stipulated in the contract is not so prolonged as to deprive the obligor of substantially the whole benefit that it was intended he should obtain by accepting the obligation.
So on the question of principle which these two appeals were brought to settle, I would hold that in the absence of any contra-indications in the express words of the lease or in the interrelation of the rent review clause itself and other clauses or in the surrounding circumstances, the presumption is that the timetable specified in a rent review clause for completion of the various steps for determining the rent payable in respect of the period following the review date is not of the essence of the contract. I turn then to the rent review clauses in the instant appeals.
(1) United Scientific Holdings Ltd v Burnley Borough Council
The lease was a building lease for the term of 99 years from 31 August 1962. By the reddendum the tenants undertook to pay during the first ten years of the term a rent of £900 per annum and 'thereafter during the residue of the said term the yearly rent of One thousand pounds plus any additional rent payable under the provisions contained in the Schedule hereto'. The schedule was as follows:
'During the year immediately preceding the period of the second ten years of the said term and during the year immediately preceding each subsequent ten year period of the said term and during the year immediately preceding the last nine year period of the said term (each of such periods being hereinafter referred to as a "relevant period") the [landlords] and the [tenants] shall agree or failing agreement shall determine by arbitration the sum total of the then current rack rent (which expression "rack rent" shall for the purposes of this Schedule be deemed to mean the full annual value of the Property and of all buildings and erections thereon and appurtenances thereto and including all improvements carried out to the same calculated on the basis of all rates taxes repairs and other outgoings being borne wholly by the occupier thereof) reasonably to be expected on the open market for leases of the Property and all buildings and erections thereon and one quarter of the sum total so ascertained or One thousand pounds (whichever is the greater) shall be the rate of rent reserved by this Lease in respect of the then next succeeding relevant period. All arbitrations under or by virtue of this schedule shall be referred to the decision of a single arbitrator to be agreed by the parties hereto or failing their agreement thereon shall be referred to the decision of a person to be nominated by the President for the time being of the Royal Institute [sic] of Chartered Surveyors and such reference shall be deemed to be a submission to arbitration within the meaning of the Arbitration Act 1950 or any statutory modification or re-enactment thereof for the time being in force.'
The only stipulation as to time is that the rent for each successive period of ten years of the term commencing on 25 August is to be determined (by agreement or failing agreement by arbitration) 'during the year immediately preceding' the ten year period to which that rent will relate.
If the new rent has not been determined by the stipulated date, what is the benefit that it was intended the tenant should obtain from the contract but of which he will have been deprived by its not being determined until later? The Court of Appeal took the view that it was a detriment to the tenant not to know what his new rent was going to be in advance of the date when it started to accrue, as he might not be able to afford the additional rent and might feel compelled to assign the residue of the term to someone else. For my part, I find this unrealistic, if only because under this particular clause the tenant can initiate the review procedure himself and unless there is some unforeseen delay on the part of the arbitrator, has it in his power to ensure the new rent is determined before the stipulated date. Apart from this, delay in the determination of the new rent until after the first rent day following the stipulated date works to the economic benefit of the tenant since until the higher rent has been determined the has the use of the money representing the difference between the former rent and the new rent which he would otherwise have been compelled to pay.
The absence of any serious detriment to the tenant if the determination of the new rent is postponed until some time after the commencement of the ten year period to which it will relate is to be contrasted with the detriment to the landlord if strict adherence to the date specified in the review clause is to be treated as of the essence of the contract. If it were determined even slightly late the landlord would lose his right to the additional rent for the whole period of ten years until the next review date.
So far from finding any contra-indications to displace the presumption that strict adherence to timetable specified in this rent review clause is not of the essence of the contract, the considerations that I have mentioned appear to me to reinforce the presumption.
In these circumstances I do not find it necessary to say more about the facts of the case. It is not disputed that if time was not of the essence of the stipulations in the review clause the appellant landlords are entitled to a declaration that on the true construction of the lease and in the events that have happened the annual rent reserved for the ten year period starting on 31 August 1972 should be a rent determined in accordance with the review clause.
I would accordingly allow this appeal and so declare.
(2) The Cheapside Land Development Co Ltd and another v Messels Service Co
This was a lease for a term of 21 years from 8 April 1968. For the first period of seven years the rent was £117,340 per annum payable in arrear on the usual quarter days. For the second and third periods of seven years the respective rents were to be determined in accordance with the provisions of Sch 2 to the lease.
The schedule contained a definition of 'the market rent' and defined the 'review date' as meaning in respect of the second period 8 April 1975. The provisions relating to the determination of the yearly rent in respect of the second period was as follows:
'2. In respect of (i) the second period of the said term the yearly rent shall be the sum of ONE HUNDRED AND SEVENTEEN THOUSAND THREE HUNDRED AND FORTY POUNDS (£117,340) or a sum equal to the market rent (if duly determined in the manner hereinafter set out) whichever shall be the higher ...
'3. The market rent may be determined and notified to the Lessees in the manner following:
- (a)
- the proposed rent shall be specified in a notice in writing ("the Lessors' notice') served by the Lessors or their Surveyor on the Lessees not more than twelve months nor less than six months prior to the review date.
- (b)
- the Lessees may within one month after service of the Lessors' notice of the proposed rent serve on the Lessors a counter-notice ("the Lessees' notice") either agreeing the proposed rent or specifying the amount of rent which the Lessees consider to be the market rent for the period in question.
- (c)
- in default of service of the Lessees' notice or in default of agreement as to the market rent to be payable for the period in question the rent shall be valued by a Fellow of the Royal Institution of Chartered Surveyors agreed between the Lessors and the Lessees or in default of agreement to be appointed not earlier than two months after service of the Lessors' notice on the application of the Lessors by the President for the time being of the said Institution whose valuation shall be made as an expert and not as an arbitrator and shall be final and binding upon the Lessors and the Lessees and shall be given in writing to the Lessors and the Lessees not less than fourteen days before the review date.'
These provisions contain an elaborate timetable as to what is to be done in various eventualities, not only by the landlords and tenants but also by persons over whom neither has any control: the president of the Royal Institution of Chartered Surveyors and whatever fellow of the institution may be appointed as valuer.
The procedure for determining the market rent has to be initiated by the landlords: by a 'Lessor's notice' specifying the rent which they propose.
This must be served between 12 and six months before the review date and constitutes an offer, irrevocable for one month, during which the tenants may accept the landlords' proposal or make a counter-offer. At least two months are to be allowed after service of the lessors' notice for negotiating an agreement as to the rent or on a fellow of the Royal Institution of Chartered Surveyors to be appointed to determine the rent as an expert valuer. If these negotiations fail the landlords after the two months have elapsed may apply to the president of the Royal Institution of Chartered Surveyors to appoint a valuer and the valuer must notify both landlords and tenants of his valuation not less than 14 days before the review date.
In two respects under the terms of the review clause the progress of the procedure for determining the new rent is, or may become, within the exclusive control of the landlords. They alone can initiate the procedure; and they alone can apply to the president of the Royal Institution of Chartered Surveyors if negotiations with the tenants do not result in an agreement as to the rent or on the person who is to value it.
The tenant's position under this clause thus differs from that of the tenants under the rent review clause that is the subject of the first appeal inasmuch as they have no right under their contract to initiate the procedure or to apply for the appointment of a valuer if the landlords themselves fail to do so within the stipulated times. But this difference has not in my view any significant practical consequences so far as concerns any detriment to the tenants from the landlords' failure to do either of these things within the stipulated times. If the tenants reckon that the advantage of knowing before the review date exactly how much higher their new rent will be outweighs the economic benefit of having the use of the money representing the difference until the new rent has been determined, they have the remedy in their own hands. Quite apart from the fact that they can get a pretty good idea of what the market rent is from their own surveyor or can themselves offer to enter into negotiations with the landlords before the stipulated time for serving a lessors' notice has expired, so soon as that time has elapsed they can give to the landlords notice specifying a period within which they require the landlords to serve a lessors' notice if they intend the market rent to be determined and payable instead of the former rent for the ensuing seven years. The period so specified, provided that it is reasonable, will become of the essence of the contract. The fact that the tenants had previously pressed the landlords to start negotiations before the end of the period specified in the rent review clause for service of a lessors' notice or that the determination of the rent before the review date was specially important to them, would be relevant facts in determining whether the period specified by the tenants was reasonable (Stickney v Keeble ( [1915] AC 386 at 418, 419, [1914-15] All ER Rep 73 at 82). per Lord Parker of Waddington); and in view of the ease with which the landlords could comply with the requirement a notice fixing a very short period would no doubt suffice to make time become of the essence. So here again I find nothing to displace the presumption that strict adherence to the timetable specified in the rent review clause is not of the essence of the contract.
In fact, the landlords did give a lessors' notice in respect of the period starting on 8 April 1975 within the times specified in the contract. Negotiations between the parties followed; but no agreement was reached either as to the new rent or on a valuer to determine it. The only delay that occurred was in the landlords' application to the president of the Royal Institution of Chartered Surveyors to appoint a valuer. They did not apply until 25 June 1975. In view of the previous decisions of the courts as to time being of the essence in rent review clauses, the president of the Royal Institution of Chartered Surveyors was unwilling to comply with this request without a ruling by the court that it was a valid and effective application for the purposes of para 3(c) of the relevant rent review clause. On 27 June 1975 the landlords issued an originating summons claiming a declaration to this effect and a declaration that the valuation of a fellow of the Royal Institution of Chartered Surveyors appointed pursuant to the application would be valid and binding on the tenants notwithstanding that it would not be given until after 27 March 1975, ie 14 days before the review date.
Graham J made declarations accordingly. He held, as I think wrongly, that the time for service of a lessors' notice was of the essence of the contract, but this stipulation had been complied with. The time for applying to the president of the Royal Institution of Chartered Surveyors for the appointment of a valuer he held, as I think rightly, was not of the essence.
Date from which new rent payable
The landlords also sought a declaration that the market rent as determined by the valuer, if higher than £117,340 per annum, would be recoverable with effect from 8 April 1975, ie retrospectively to the review date.
Graham J following the decision of the Court of Appeal in C H Bailey Ltd v Memorial Enterprises Ltd, held that the rent would be payable retrospectively. That case had overruled a decision to the contrary given by Pennycuick V-C in Re Essoldo (Bingo) Ltd's Underlease on the ground that the legal nature of rent required that it should be certain at the time when it accrued due, so that a payment for the use of land that was fixed retrospectively could not be 'rent'.
My Lords, the mediaeval concept of rent as a service rendered by the tenant to the landlord had been displaced by the modern concept of a payment which a tenant is bound by his contract to pay to the landlord for the use of his land. The mediaeval concept has, however, left as its only surviving relic the ancient remedy of distress. To attract the remedy of distress rent must be certain at the time that it falls due. Re Knight, ex parte Voisey was a case about the validity of a distress for a fluctuating rent and what was said there about the necessity for certainty in the amount payable was, in relation to what may be conveniently referred to as 'distrainable rent' in order to distinguish if from any other part of the rent (in its modern sense) that the tenant has agreed to pay the landlord for the use of his land, but for which the remedy of distress is not available. In the famous case of Walsh v Lonsdale, reported in the same volume of the Law Reports, there were two elements in the rent, one part was fixed in advance and was certain at the time that it accrued, the other part was fluctuating and could not be ascertained until the end of the period in respect of which it was payable. The actual decision of the Court of Appeal was that the fixed part or minimum rent could be distrained for, but that the fluctuating part could not. It was taken for granted that the fluctuating amount could be sued for once it had been ascertained.
My Lords, under the rent review clause in the instant case the market rent as determined in accordance with the provisions of the clause if higher than £117,340 per annum is expressed to be payable 'in respect of the second period', viz the seven years starting on 8 April 1975. Until the market rent has been ascertained the landlords can only recover rent at the rate of £117,340 per annum, which corresponds to the minimum rent in Walsh v Lonsdale. It is only when the market rent has been determined and turns out to be higher than £117,340 that the landowner can recover on the rent day following such determination the balance that has been accruing since 8 April 1975. Therein lies the economic advantage to the tenant of delay in the determination of the market rent to which I have previously referred.
The Court of Appeal reversed the order made by Graham J. For the reasons I have given, I would restore his order and allow this appeal too.
The previous cases
It may be convenient to conclude by referring briefly to the more important of the previous decisions which should be regarded as overruled or as approved by your Lordships' decision in the two instant appeals. Samuel Properties (Developments) Ltd v Hayek may be regarded as the origin of the dichotomy between 'option' on the one hand and 'obligation' or 'machinery' on the other, the word option having been used in the lease itself to describe the landlord's right to require the rent to be reviewed. It should be treated as overruled. There was a complication in that the rent review clause was associated with a break clause which gave to the tenant the right to surrender the residue of the term on any rent review day by giving prior notice. The timetable in the rent review clause for the determination of the new rent was obviously correlated with the time by which the tenant had to give notice of his intention to surrender, so as to enable him to make his decision whether or not to exercise that right in the knowledge of what the new rent would be if he continued in possession after the review date. Had that been all, as it had been in the previous and rightly decided case of C Richards & Son Ltd v Karenita Ltd, it would, I think have been sufficient by necessary implication to make time of the essence of the rent review clause because of its inter-relation with the time by which notice was to be given under the break clause-a time which, for reasons I have given earlier, I consider to be of the essence of the contract.
In Samuel Properties (Developments) Ltd v Hayek, however, the break clause itself contained a provision under which the period during which the tenant could exercise his right to surrender would be extended in the event of the reviewed rent not having been ascertained within the time stipulated in the rent review clause. So the implication that would otherwise have arisen from the association of the rent review clause with a break clause was negatived.
Kenilworth Industrial Sites Ltd v E C Little & Co Ltd is an example of a rent review clause which was treated as falling on the obligation or machinery side of the supposed dichotomy so time was held not to be of the essence. The decision itself was right. A similar decision was reached in Accuba Ltd v Allied Shoe Repairs Ltd by classifying the stipulations as to time as 'mere machinery'. Again the decision was right though the actual reasoning in both these cases insofar as it was based on the supposed dichotomy should no longer be considered as correct.
The remaining cases to which this House was referred in which time has been held to be of the essence of a rent review clause which was not associated with a break clause should be regarded as overruled.
I would express the hope that your Lordships' decisions in these appeals will reduce the number of occasions on which it will be necessary to have recourse to the courts in order to ascertain whether delay has deprived the landlord of his right to have the rent reviewed under particular rent review clauses. Delays are prone to occur when such clauses provide, as most of them sensibly do, for negotiations to take place between the parties before recourse to independent arbitration or valuation. However, the best way of eliminating all uncertainty in future rent review clauses is to state expressly whether or not stipulations as to the time by which any step provided for the clause is to be taken, shall be treated as being of the essence.