United Scientific Holdings Ltd v Burnley Borough Council; Cheapside Land Development Co Ltd and Anor v Messels Service Co

[1977] 2 All ER 62

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(Judgment by: Lord Fraser of Tullybelton)

Between: United Scientific Holdings Ltd v Burnley Borough Council; Cheapside Land Development Co Ltd and Anor
And: Messels Service Co

Court:

Judges: Lord Diplock
Viscount 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

Hearing date: 24-27, 31 January 1977, 1 February 1977
Judgment date: 23 March 1977

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Judgment by:
Lord Fraser of Tullybelton

My Lords, these appeals raise the question of what is the legal significance to be attached to stipulations as to time in a rent review clause in a lease. The appeals were heard together and the primary argument on both sides treated the question as one that was susceptible of a general answer, but it is proper to recall that the application of any general rule may always be excluded if the intention to do so is expressed or clearly implied. Rent review clauses take many forms, and it is not possible, even if it were desirable, to state any rule as to the effect of stipulations as to time that will apply to all such clauses.

The Law of Property Act 1925, s 41, provides:

'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.'

That section appears to state that the rules of equity shall apply to stipulations in contracts of all sorts. I say 'appears to' because it was strongly argued on the part of the respondents (the tenants) in both the instant appeals that only the uninstructed would accept the section at its face value, and that it ought to be read in a much more restricted sense, so as to limit its application to the circumstances in which the rules of equity would have applied before the Supreme Court of Judicature Act 1873. In support of that argument reliance was placed on the speech of Lord Parker of Waddington in Stickney v Keeble ( [1915] AC 386 at 417, 418, [1914-15] All ER Rep 73 at 81, 82), referring to s 25(7) of the Judicature Act 1873 which was the predecessor of s 41 of the 1925 Act. But I am satisfied that Lord Parker was not intending in the passage referred to to limit the application of s 25(7) in the way suggested; he was merely explaining his rejection of the argument which he had summarised.

My Lords, I am not qualified to explore the history of the two streams of English jurisdiction, legal and equitable, which formerly flowed in separate channels. But since the Judicature Act 1873 they have at least shared the same channel, and I gratefully adopt the reasons given by my noble and learned friends, Lord Diplock and Lord Simon of Glaisdale, for thinking that they have now merged into a single stream. Consequently rules of equity, so called because they are as a matter of history derived from equity, are now simply part of the corpus of English law and as such they are free to develop like other parts of that law. Neither s 41 of the Law of Property Act 1925 nor s 25(7) of the Judicature Act 1873 contains any negative provision against the development or extension of equitable principles, and the effect of those sections is quite different from the incorporation into the law of a colony of the law of England as it stood at some specified date: see for example Watts and Attorney General for British Columbia v Watts. I consider that s 41 should now be taken to mean what it appears to say and that the law is correctly summarised in the following passage from Halsbury's Laws of England: ^[F11]

The modern law, in the case of contracts of all types, may be summarised as follows. Time will not be considered to be of the essence unless:

(1)

the parties expressly stipulate that conditions as to time must be strictly complied with; or

(2)

the nature of the subject matter of the contract or the surrounding circumstances show that time should be considered to be of the essence; or

(3)

a party who has been subjected to unreasonable delay gives notice to the party in default making time of the essence.'

See also Chitty on Contracts ^[F12] and Fry on Specific Performance. ^[F13]

Clearly neither the first nor the third of these exceptions is applicable to either of the instant appeals. The question is whether the nature of the subject-matter or the surrounding circumstances of rent review clauses as a class show that all or any stipulations as to time in such clauses normally fall within the second exception. Rent review clauses have only become common in comparatively recent years, certainly since the last war, and their main purpose is to protect the revenues of landlords from the effects of inflation. From the landlord's point of view a rent review clause is an important, almost indispensable, term of the contract if he is to agree to a lease for a long period, during which inflation may well continue. The clause is also in a less direct way of benefit to the tenant, because, without it, he would not normally be able to get the security of tenure which is afforded by a long lease, except perhaps by paying a rent which in the early years of the lease would be far above the current market level. The rent review clause has thus become a convenient device to facilitate the granting of long leases in an inflationary age, and its main purpose is the same whatever the exact machinery specified in a particular clause. I note in passing that in the Cheapside appeal the lease was for 21 years and in the Burnley appeal the lease was for 99 years.

It will, I suppose, generally be convenient to both parties to have the amount of the rent which will be due from and after the review date ascertained before that date arrives, but if the rent can be fixed later with retrospective effect to the review date (as I think it can, for reasons to be stated below) then it will not normally be essential to have it ascertained before the review date. The substantial purpose of the clause will be satisfied if the reviewed rent is ascertained reasonably soon after the review date. At a time when rents are fluctuating it may be difficult to assess in advance what the market rent will be at a future date. Indeed, in strict theory such an assessment in advance cannot be more than a forecast. There may be therefore good practical reasons for leaving the ascertainment of the reviewed rent until after the review date.

It was argued on behalf of the respondents in both the instant appeals that tenants would be seriously prejudiced if the new rent were not ascertained before the review date because they would not know the amount of their liability for the future. This argument carried considerable weight with the Court of Appeal in the Burnley case. But I think, with respect, that the prejudice likely to be caused to the tenant by the rent not being ascertained until after the review date has been exaggerated and that the likely prejudice to the landlord has been understated. In time of inflation it is to be expected that the landlord will call for a review on every occasion where he is entitled to do so, especially if (as in both the instant appeals) a review cannot lead to the rent being reduced below the level that would prevail if there were no review. So far as the tenant is concerned, he will of course want to know the amount of his liability but he will normally be able with the aid of skilled advice to arrive at a reasonably close estimate of the current market rent. So far as the landlord is concerned, he may be very seriously prejudiced by delay in ascertaining the reviewed rent if, as is usual, it is higher than the former rent, because he will be unable to collect the reviewed rent until it has been ascertained, and any delay will keep him out of his money representing the difference between it and the former rent. Conversely the tenant will have the use of the money until the reviewed rent has been ascertained. This is strikingly illustrated in the Cheapside appeal where the landlord has claimed an increase of over £480,000 per annum in the rent, and loss of interest on a sum of that order even for a short time is obviously a serious matter.

As the substance of a review clause is, in my opinion, to provide machinery for ascertaining the market rent from time to time, at the intervals agreed in the interests of both parties, rather than to confer a benefit on the landlord, it seems to me that stipulations as to time ought not to be strictly enforced unless there is something in a particular clause to indicate that time is of the essence in that case. Until the decision in the Burnley case the reported cases fell into two classes. One class consisted of those where the review clause was regarded as machinery and where time limits were held to be merely directory. The other class consisted of cases where the clause was in a form which gave the landlord a unilateral right or option to call for a review, and in that class time limits were held to be mandatory and inflexible. This dichotomy created a danger of distinctions being drawn on narrow and somewhat artificial grounds, as Buckley LJ pointed out in the Burnley case ([1976] 2 All ER 220 at 224, [1976] 1 Ch 128 at 138). The review clause in that case might well have been regarded as falling within the former class, but the Court of Appeal rejected any rigid division into two classes, and held that the time limits in the clause ought, in accordance with what they regarded as the probable intention of the parties, to be strictly enforced. The lease there provided that after the end of the first ten year period, which was on 31 August 1972, the yearly rent should be '£1,000 plus any additional rent payable under the provisions contained in the schedule hereto ... '

The schedule does not exactly fit that provision as it does not provide for an additional rent but provides that the rent after the first ten years shall be either £1,000 or another figure whichever is the higher, but no point was made of the difference between the lease and the schedule. The schedule provides that 'during the year immediately preceding' the period of the second ten years, and immediately preceding each subsequent ten year period, the landlord and the tenant 'shall agree or failing agreement shall determine by arbitration the sum total of the then current rack rent ... and' (it being a building lease) 'one quarter of the sum total so ascertained or £1,000 (whichever is the greater) shall be the rate of rent reserved' for the next ten year period. There is provision for the arbitrator to be nominated, failing agreement between the parties, by the president of the Royal Institution of Chartered Surveyors and it is left open to either party to request the president to make a nomination. If the stipulation in the schedule requiring the rack rent to be ascertained 'during the year' is to be strictly enforced the result would be that if, owing to some accident for which the landlord was not responsible or to the illness or dilatoriness of the arbitrator, the rack rent had not been ascertained until a month or even a day after the end of the year, the review would be abortive and the former rent would continue in force for another ten years. That result would seem to be inequitable and I do not believe that the parties can have intended it, yet it would follow from the decision of the Court of Appeal that time was of the essence, and that, because the new rent had neither been agreed nor determined by arbitration (nor even referred to arbitration) by the end of the tenth year, no review could now be made.

For the reasons I have stated I am unable to agree with that decision.

A more difficult question is raised in cases where the clause is in a form giving the landlord the sole right to initiate a review provided he does so by a certain time. Provisions of this sort are conveniently described as 'triggering' provisions. A typical triggering provision is found in the Cheapside case, in para 3(a) of Sch 2 to the lease. The lease was for 21 years from 8 April 1968 and it provided for review dates on 8 April 1975 and 8 April 1982. Paragraph 2 of Sch 2 provides in effect that after each of the review dates 'the market rent (if duly determined in the manner hereinafter set out)' shall be payable. Paragraph 3 of the schedule provides:

'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 lessees' 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 ...'

Failing agreement there was provision for arbitration. The words that I have quoted, read literally, lay down two conditions precedent for the market rent being payable, namely, (1) that the market rent shall have been 'duly determined' in the manner specified in the schedule and (2) that the lessors shall have served the lessors' notice not less than six months before the review date. In fact the lessors (appellants) did serve the lessors' notice in the time so the second condition was satisfied, but the first was not. After the lessors' notice had been served negotiations between the parties followed. No counter-notice was served by the lessees but that was immaterial as the schedule provided that, in default of the service of the lessees' notice or in default of agreement as to the market rent, the market rent was to be valued by a fellow of the Royal Institution of Chartered Surveyors to be appointed by the president 'on the application of the lessors'. No time limit for the application to the president or for the appointment of the valuer was stated, but, as the valuation had to be made not less than 14 days before the review date, it was implied that the application and the appointment must be made in reasonable time to enable that to be done. In fact, the lessors did not apply to the president until more than two months after the review date and the president declined to make the appointment until its validity had been decided by the court. Hence these proceedings.

The landlord's right to operate the trigger and his right to apply to the president are both unilateral rights. The former might be described as an option.

The latter would not I think normally be so described but, in my opinion, it is for the present purpose indistinguishable from the former in that both are unilateral rights which the landlord is under no obligation to exercise. It was argued on behalf of the tenants that the rules of equity have never applied to options, that the landlord's rights were options, and that the stipulations as to time must therefore be strictly applied.

That was the argument which had prevailed in the Court of Appeal in Samuel Properties (Developments) Ltd v Hayer ( [1972] 3 All ER 473 at 478, [1972] 1 WLR 1296 at 1302) where Russell LJ said this:

'The right or privilege of exacting an additional rent was conferred by the bargain between the parties as an express option which would be effective if a condition precedent was complied with; it could be equated with an offer by the lessee to pay an increased rent only in certain circumstances which it lay in the power of the lessor unilaterally to bring about, which offer was not accepted in those terms. It was argued that there was a distinction (as to time limits) between options to determine, or to renew, or to acquire the reversion, and a right such as the present. I do not see why this should be so.'

In that case the word 'option' was used in the lease ('the yearly rent ... shall be subject to review at the option of the lessors in the seventh and fourteenth years ... '). That argument is one which, in my respectful opinion, concentrates too exclusively on the words of the clause and pays insufficient attention to its substantial purpose. The right to initiate a rent review, even if it is described as an option, is in my opinion materially different from a true option, whether granted by one clause in a larger contract or by a separate offer. Options to purchase property or to renew a lease are both true options and their important characteristic for the present purpose is that, if they are exercised, they create a new contract between the parties. But when a rent review clause is operated it merely varies one term in a continuing contract. The term is one which the parties have agreed from the beginning is to be variable and the review clause merely provides the machinery for effecting the variation. Review clauses are also different in this respect from a tenant's option to break a lease; that, if exercised, will put an end to the contract and release both parties from their contractual obligations. There is a good reason why time limits should be strictly enforced in relation to an option to purchase or to renew a lease, because so long as it remains open the grantor is not free to dispose of his property elsewhere, although the grantee is under no obligation to him. Similarly where a tenant has an option to break his lease, he can break it or not as he chooses, but the landlord is not free to let his property to anyone else until the time for exercising the tenant's option has expired. It is fair and reasonable, and in accordance with what I would take to be the intention of the parties, that the time limit of the restriction on the grantor should be strictly enforced. That however does not apply in relation to a rent review clause in a continuing lease.

It was also argued on behalf of the tenants that the lessors in a case such as Cheapside are not under any obligation to initiate a review and that there is therefore no room for applying the equitable rule so as to release them from the consequences of failure to perform an obligation.

But the equitable rule originated in relieving a mortgagor from the consequence of failure to redeem his property by the stipulated date although he had no obligation to do so. The mortgagor, like the landlord here, had a unilateral right which might be described as an option, yet he was able to rely on the equitable rule to relieve him from the consequence of failure to exercise his right in time. There seems no reason in principle why the landlord should not be able to do the same and in my opinion he can. If a tenant felt himself prejudiced by the landlord's delay in serving a triggering notice, it would be open to him, after the time for serving it had expired, to give notice prescribing a further time within which the triggering notice must be served. Provided that the further time was reasonable, he could thus make time of the essence.

For these reasons I am of opinion that the equitable rule against treating time as of the essence of a contract is applicable to rent review clauses unless there is some special reason for excluding its application to a particular clause. The rule would of course be excluded if the review clause expressly stated that time was to be of the essence. It would also be excluded if the context clearly indicated that that was the intention of the parties-as for instance where the tenant had a right to break the lease by notice given by a specified date which was later than the last date for serving the landlord's trigger notice. The tenant's notice to terminate the contract would be one where the time limit was mandatory, and the necessary implication is that the time limit for giving the landlord's notice of review must also be mandatory. An example of such interlocked provisions is to be found in C Richards & Son v Karenita Ltd where the decision that time was of the essence of the landlord's notice could be supported on this ground, although not, as I think, on the ground on which it was actually rested. Samuel Properties (Developments) Ltd v Hayek is not in this class because, although there was a tenant's break clause, the time allowed to the tenant for giving notice was automatically extended until one month after the notification of the reviewed rent to the lessee.

Apart from the cases I have already mentioned there are three other reported cases to which I wish to refer briefly. Stylo Shoes Ltd v Wetherall Bond Street W1 Ltd was a decision on a clause described by Salmon LJ as very ill drafted and it should perhaps be regarded as one limited to its own facts, but insofar as it proceeded on the basis of the review clause giving an option to the landlord I am unable to agree with it. The decision in Mount Charlotte Investments Ltd v Westbourne Building Society was reached with evident reluctance by Templeman J only because he felt bound by authority to hold that time was of the essence and it should in my opinion be treated as erroneous. I agree with the learned judge's observations ( [1976] 1 All ER 890 at 892) that 'The analysis of the option rent review clause is a triumph for theory over realism'. In Kenilworth Industrial Sites Ltd v E C Little & Co Ltd there was an express provision that any failure to give or receive the landlord's notice to agree the rent for the next five year period 'shall not render void the right of the landlord hereunder to require the agreement or determination as aforesaid of a new rent', and that was construed as applying to a failure to give notice within the time limit fixed by the lease. The decision that time was not of the essence seems to me, if I may say so, obviously right. But the case was probably the origin of the dichotomy, which I regard as unfortunate, between review clauses which confer an option and those which merely provide machinery, and I would hope that that dichotomy will now be forgotten.

The result is that in my opinion the landlords in both the instant appeals are entitled to have the rents reviewed notwithstanding that the times for review have expired. If so, the question arises whether the rents fixed by the reviews, assuming that they are higher than the basic rents, will take effect retrospectively from the review dates in the leases, that is from 8 April 1975 in Cheapside and from 31 August 1972 in Burnley, or only from the dates on which the new rents are ascertained.

The main argument against retrospection was based on the proposition that rent must be certain in amount at the time when it is payable, and that a payment which is uncertain because it depends on the result of an arbitration or valuation could not be rent: see Re Essoldo (Bingo) Ltd's Underlease and Greater London Council v Connolly. That proposition applies to rent in the strict sense, that is rent which can be recovered by distraining, but the word 'rent' in modern usage can and often does mean simply a sum of money which the tenant has contracted to pay to the landlords for the use of the premises let: see Foa's General Law of Landlord and Tenant: ^[F14]

'Prima facie rent is the monetary compensation payable by the tenant in consideration for the grant, however it be described or allocated. It is submitted that nevertheless the landlord's common law right to levy distress is confined to rent in its mediaeval or strict sense.'

The question in each case is to determine the sense in which the word is used. If it is used not in the strict sense but in the sense merely of the contractual sum due then it need not be certain at the date on which it becomes payable: C H Bailey Ltd v Memorial Enterprises Ltd. In the present case where the rents are for large commercial premises I see no reason why the prima facie meaning of rent as contractual rent should not prevail as it seems unlikely that the landlord had in view the use of distraint against the tenant. I would therefore hold that the rents fixed by the valuation will be payable retrospectively from the respective review dates.

I would allow both appeals. In Burnley I would answer questions A(ii) and B(i)(a) (See p 65, ante) in the affirmative. In Cheapside I would restore the order of Graham J.

Appeals allowed. Order of Court of Appeal dated 1 March 1976 affirming order of Pennycuick V-C dated 13 May 1974 reversed; cause remitted to the Chancery Division with a declaration that on the true construction of the leases and in the events which had happened the annual rent reserved by each of the leases during the ten years prior to 31 August 1982 should be a rent determined in accordance with the provisions of the schedule to the first of the leases notwithstanding that the period during which the determination ought to have taken place had expired on 31 August 1972.

Order of the Court of Appeal dated 21 May 1976 reversed; judgment of Graham J restored.

Solicitors: Turner Peacock (for the appellants in the first appeal);

Stephenson Harwood & Tatham (for the appellants in the second appeal);

Fremont & Co (for the respondents in the first appeal); Travers Smith,

Braithwaite & Co (for the respondents in the second appeal).