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Emerald Group Publishing Limited
Copyright © 2002, MCB UP Limited
Rent review update 2002
Malcolm DowdenCharles Russell Solicitors
In Starmark Enterprises Ltd v. CPL Enterprises Ltd  EWCA civ 1252 the Court of Appeal clarified the treatment of deeming provisions in rent review clauses. The court resolved the conflict between its previous decisions in Henry Smith's Charity Trustees v. AWADA Trading & Promotion Services Ltd  P&CR 607 and Mecca Leisure Ltd v. Renown Investments (Holdings) Ltd  P&CR 12. Relying on the AWADA case, the Court of Appeal found time to be of the essence where the parties had not only set out a timetable for the service of notices and counternotices but had also set out the consequences of failing to comply with that timetable. Such a provision was considered to rebut the presumption, derived from United Scientific Holdings Ltd v. Burnley Borough Council  AC 904, that time is not of the essence in rent review clauses. While Starmark was an extremely important decision it has certainly not exhausted situations in which rent review disputes turn on the question of whether time is of the essence.
In First Property Growth Partnership LP v. Royal and Sun Alliance Property Services Limited  EWHC 305 (Ch) and in Iceland Foods PLC v. Dangoor and others  EWHC 107 (Ch) tenants argued that their landlords had lost the chance to operate rent review provisions, having failed to comply with time limits for the service of trigger notices. In the first property case Rimer, J. held that time was of the essence and so late service by the landlord deprived the landlord of its review. In the Iceland case, Neuberger, J. held that a similarly (but not identically) structured review clause did not make time of the essence. The contrasting outcomes serve to underline the point that rent review cases turn on the construction and context of the particular clause before the court.
In First Property the review clause indicated that the landlord could serve its trigger notice "at any time not more than 12 months before the expiration of … every fifth year" of the term "but not at any other time". Appearing for the landlord Kim Lewison, QC, argued that the words "but not at any other time" were merely a reference back to, and a re-emphasis of, the date before which the notice could not be given. In his view the clause specified the earliest date on which notice could be given (time being of the essence) but did not prescribe the latest date by which the notice must be given.
For the tenant, Jonathan Brock, QC, argued that the words "but not at any other time" referred to the period during which the landlord's notice must be given. That period commenced 12 months before each review date and ended on the review date itself. So, where the rent could be reviewed as from 7 May 2000, the notice must be served between 7 May 1999 and 6 May 2000.
Rimer, J. acknowledged that Mr Lewison's interpretation accurately reflected the literal meaning of the words used, in that they did not expressly impose an "end date" by which notice must be given. Departing from that literal construction, Rimer, J. cited Mannai Investment Co Limited v. Eagle Star Life Assurance Company Limited  AC 749 at 779H, where Lord Hoffmann observed that "we no longer confuse the meaning of words with the question of what meaning the use of the words was intended to convey". Following Lord Hoffmann's approach, Rimer, J. considered that the parties had intended the landlord's notice to be given during the 12 months leading up to each review date and "at no other time". Time was therefore of the essence.
In the Iceland case Neuberger, J. had to construe a clause that provided for notice to be given "not more than 12 and not less than three months before that one of the rent review dates then next ensuing". If the parties had not agreed the revised rent within three months after service of the landlord's notice then the clause provided for determination of the rent by a surveyor acting as expert.
The landlord's notice should have been served between 25 April 2000 and 25 January 2001. It was not served until 15 May 2001. Predictably enough, the tenants argued that the notice was served out of time and so was of no effect.
The key features of the clause were:
the absence of an express time limit within which the landlord could apply to the president of the RICS for the appointment of a surveyor; and
the provision that put an end to the right of the landlord to a review of the rent if they "neglect" to make such an application.
The tenant's case, presented by Jonathan Gaunt, QC, was that a time limit must be implied if the provision ending the landlord's right to review in case of "neglect" was to make any sense. He argued that any interpretation of a contract which results in a provision, particularly a whole paragraph, having no effect, must be rejected. Consequently, he argued that the time limit that should be implied was the review date itself – namely 25 April 2001. This was because the express trigger dates and time periods were all based on, and led up to, the review date. Mr Gaunt argued that it was sensible that the parties should know by the review date whether there was going to be a review.
Kim Lewison, QC, argued, for the landlord, that the court should be slow to imply such a time limit. A term should be implied only if the court is satisfied that there is only one contractual solution or that one of several possible solutions would without doubt have been preferred. Neuberger, J. considered that the solution offered by Mr Gaunt was one amongst other candidates and that it was not clear that it would have been the preferred option. It would be surprising if the landlord were to lose its right to a review for failing to comply with an unexpressed time limit.
In the judge's view time was not of the essence for service of the initial notice. However, once that notice had been served the sequence of events catered for by the clause would commence. If agreement as to the rent had not been reached within the specified time then it would be open to the landlord to apply for the appointment of a surveyor. If the landlord delayed making that application then it would be open to the tenant to serve a warning notice requiring the landlord to "get on" with the process. If the landlord delayed further then it would be open to the tenant to argue that there had been "neglect", depriving the landlord of its right to a review.
Can the tenant make time of the essence?
Where the lease contains an express timetable for service of the landlord's trigger notice then it is open to the tenant to make time of the essence by serving notice to that effect. However, in Barclays Bank PLC v. Saville Estates Limited  PLSCS 63 the tenant sought to make time of the essence where there was no express time limit but where, by September 2000, the landlord had done nothing to trigger a 1996 rent review. HH Judge Dennis Levy, QC, held that it was meaningless to talk of delay where there was no time limit. The landlord was under no obligation to trigger the rent review within a particular time and so it was not open to the tenant to serve a notice of a kind normally associated with a breach of obligation. The judge also rejected the tenant's argument, made by analogy with sale contracts, that there should be an implied term requiring service of the landlord's notice within a reasonable time after the 1996 review date. Consequently, even though the landlord had not, by September 2000, triggered the 1996 rent review it could still do so by serving notice should it so elect.
On 19 April 2002 the Court of Appeal ruled that the tenant was entitled to make time of the essence. The tenant had been kept in doubt as to the rent review for six years. In the circumstances an implied term allowing the imposition of a time limit was needed, in the absence of agreement between the parties, to give business efficacy to the rent review provision.
Challenging the experts
Where landlords and tenants are unable to agree on the revised figure at rent review commercial leases routinely provide for determination by a chartered surveyor with experience of the letting market for buildings of the appropriate type in the relevant area. The parties to a lease look for swift, cost effective determinations that are final and binding. Unless, that is, they disagree with the outcome. An aggrieved party may well seek to challenge an arbitrator's award or an expert's determination. Two recent cases serve as reminders that that such challenges face formidable difficulties and that, when negotiating rent review provisions, parties must strike a balance between the desire for final and binding determinations and the risk of being bound by an unfavourable result.
In Checkpoint Limited v. Strathclyde Pension Fund  EWHC 432 (Ch) an aggrieved tenant challenged an arbitrator's award that resulted in a 100 per cent increase in the rent payable on premises in Bracknell. Because the third party had acted as arbitrator (and there was no suggestion that it had exceeded its jurisdiction so as to bring section 67 into play) it was necessary to rely on the limited grounds for challenge contained in sections 68 and 69 of the Arbitration Act 1996. The tenant failed on both counts.
Section 68 provides for a challenge on the grounds of "serious irregularity" affecting the tribunal, the proceedings or the award. A "serious irregularity" is one which "has caused or will cause" substantial injustice to the applicant. Park, J. considered that any alleged irregularity under section 68 had to affect the arbitration process rather than the substantive questions in issue. Consequently, section 68 could not be used to complain that the arbitrator had wrongly dealt with the comparable evidence by giving weight to evidence from Winnersh (some six miles from Bracknell) rather than to evidence drawn from Bracknell itself. Nor could section 68 be used to complain that he had referred to matters within his personal knowledge without first giving details of them to the parties. In any event, the judge considered that there had been no misconduct. The arbitrator was required by the lease to have relevant experience in the same region and was therefore entitled to conclude that the Winnersh evidence was more useful and applicable than the more limited comparables available in Bracknell itself.
Park, J. also emphasised that it was for the claimant positively to show injustice, and not merely the possibility of injustice. Section 68 requires that the irregularity complained of "has caused or will cause", and not merely that it "may cause" substantial injustice.
The tenant also failed in its application under section 69 for leave to appeal on a point of law. To succeed under section 69 the claimant has to show that the arbitrator's decision was "obviously wrong". There was no evidence to support such a contention. Where it cannot be shown that the decision was obviously wrong, leave to appeal may be given only where the question is one of general public importance and the decision of the tribunal is "at least open to serious doubt". The tenant did not claim general public importance and so this second limb did not need to be considered.
Park, J. commented that the general policy of the Arbitration Act 1996 went significantly further than its predecessor, the Arbitration Act 1979, in limiting the ability of an unsuccessful party to bring the matter before the High Court. Where a decision was not "obviously wrong" the court would lean against a challenge in order to promote certainty and finality in third party determinations.
Although not a rent review (or indeed a landlord and tenant) case, the recent decision in Invensys v. Automotive Sealing Systems Limited  1 All ER (Comm) 222 underlines the court's reluctance to interfere with the decision of an expert.
The parties' sale and purchase agreement allowed for certain calculations relating to the final consideration payable to be referred to expert. The expert's determination would be "final and binding except in the case of manifest error". The purchasers claimed that there had indeed been a manifest error flowing in part from the expert's alleged failure to understand the purchaser's submissions.
Thomas, J. first had to consider what materials might be examined in order to establish whether there had been a manifest error. The seller argued that the court should have regard only to the expert's determination. The purchaser contended that the court should also look to correspondence and to documents referred to in the expert's determination. On this point the judge agreed with the purchasers. The expert was required by the terms of appointment to give reasons for its determination. Consequently, the parties must have contemplated an examination of the reasoning to see if it disclosed any manifest error. That being so, it was essential to have regard to "the totality of the reasoning", and that meant that all documentation bearing upon the reasoning – including the purchaser's submissions – could be examined.
After a thorough examination of these materials Thomas, J. held that there had been no "manifest error". The interpretation placed on the evidence by the expert differed from that of the purchaser and it may have been that the purchaser's interpretation was preferable. However, Thomas, J. emphasised that the effect of the word "manifest" must not be diluted. As Lord Denning observed in Toepfer v. Continental Grain Co.  1 Lloyds Rep 7, the finality of a certificate is important to the operation of commerce and should not lightly be overturned. Consequently, Thomas, J. considered that it was not enough for the purchaser to show that their interpretation of the agreement was right; they had to show that the expert's interpretation was obviously wrong.
Rent reviews – assumptions and disregards
It is possible that the normal structure of rent review clauses might offer an aggrieved party an alternative route to challenge an expert's determination. Rather than pointing to a "manifest error" in the determination a party might argue that the expert, in reaching that determination, has gone beyond his contractual remit.
In National Grid Co. plc v. M25 Group Limited  1 EGLR 65 the landlord opposed the tenant's application to the court for declarations on the construction of the rent review provisions contained in a lease. At first instance Pumfrey, J. held that questions of construction were matters which the expert had to determine along the way to arriving at the reviewed rent and so the court could not intervene. However, the Court of Appeal held that the question referred to the valuer was whether any, and if so what, increase ought to be made in the rent. Had the lease stopped there, then the court would have had no jurisdiction. However, as is usually the case with rent review provisions, the valuer was required to determine the rent in accordance with contractual directions (the assumptions and disregards) from which he could not depart without going outside his terms of reference. The lease did not confer upon the valuer exclusive power to determine whether he was acting within his contractual powers, and so the court could in that case rule on the construction of the lease – before or after the expert had reached its determination.
The parties to a lease have to balance speed and cost-effectiveness against finality in third party determinations. Of course, as the recent RICS publication Property Solutions (March 2002) pointed out, it is open to parties to opt instead for mediation. Whilst this might prove quicker and less expensive the mediator would have no authority to impose a rent upon either of the parties. Rather than seeking to challenge the outcome, a disgruntled party could merely refuse to accept it. It is likely, therefore, that the most common choice will be between expert and arbitrator.
The Arbitration Act 1996 has done much to close the gap between expert determinations (traditionally regarded as cheaper and speedier) and arbitrators' awards. The Checkpoint and Invensys rulings indicate that arbitrators' awards are in practical terms as difficult to challenge as expert determinations. Moreover, in Checkpoint the arbitrator was required to have local expertise and was therefore (like an expert) entitled to use his personal knowledge of the area in order to assess the comparable evidence. Consequently, its seems that there is little to chose between arbitration and expert determination in the context of rent review.
In high value cases it is likely that the advantages of arbitration will outweigh those of expert determination. This is because of the arbitrator's powers in respect of disclosure and witness summons (including the possibility of calling unwilling witnesses). However, in other cases the relative informality of expert determination may be an attraction. To this may be added the ability of the parties to require as part of the contractual remit that reasons are given for the expert's determination. If reasons are given, and if they reflect an erroneous construction of the lease, then the M25 case might tip the balance in favour of expert determination.
In the aftermath of September 11 2001 the insurance of terrorist risks has come under increasing scrutiny. Much has been written about the risk to tenants. Essentially, a tenant's obligation to repair or reinstate premises is often qualified where damage is caused by an "insured risk". If a risk is not insured then the tenant remains liable. Consequently, the tenant's concern is that a terrorist attack might leave it with an obligation, alone or with other tenants, to rebuild or reinstate a damaged or destroyed building. Equally, "cesser of rent" provisions often provide that the tenant will not have to pay rent when a building is unusable due to the occurrence of "insured risks". If damage is caused by an uninsured risk then rent would still be payable. These concerns inform the Draft Code of Practice on Commercial Leases, which states that landlords should bear the burden of uninsured risks.
Inevitably, this debate has sounded in the world of rent review. Surveyors have increasingly encountered the argument that where a lease leaves tenants with liability for damage caused by uninsured risks then this additional risk ought to be reflected in a discounted rent. Tenants negotiating new leases are increasingly reluctant to accept uninsured risks and so the hypothetical willing tenant would be unwilling to do so without an appropriate adjustment to the rent. The British Property Federation is seeking to persuade the Government to introduce legislation to read into the Reinsurance (Acts of Terrorism) Act 1993 the wider definition of terrorism contained in the Terrorism Act 2000. In making its case the British Property Federation has suggested that a two-tier market will develop between buildings with leases which have been agreed or reviewed prior to 2002 and those which have been reviewed thereafter, and which have to take account of the discount required to compensate for uninsured risks. Whether this two-tier market will in fact emerge remains to be seen.