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||Neutral Citation Number:  EWCA Civ 117
||Case No: B2/2004/1412/CCRTF
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM BOW COUNTY COURT
(Mr Recorder Hooper QC)
||Royal Courts of Justice
Strand, London, WC2A 2LL
||11th February 2005
B e f o r e :
LORD JUSTICE BROOKE
(Vice-President of the Court of Appeal, Civil Division)
LORD JUSTICE CLARKE
LORD JUSTICE NEUBERGER
|| LANCECREST LIMITED
||- and -
||DR GANIYU ASIWAJU
(Transcript of the Handed Down Judgment of
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
David Giles Esq (instructed by Suriya & Co, London E1) for the Appellant
Tom Weekes Esq (instructed by Messrs Mishcon de Reya) for the Respondent
HTML VERSION OF JUDGMENT
Crown Copyright ©
Lord Justice Neuberger:
- This is an appeal from a decision of Mr Recorder Hooper QC given at Bow County Court on 25th February 2004, in connection with a rent review clause.
- The issues before the judge were:
i) whether a notice served by a landlord (a "trigger notice") purportedly implementing a rent review was valid, notwithstanding the fact that it was served late;
ii) if the landlord's trigger notice was valid, whether the tenant had served a valid counter-notice challenging the rent specified in the trigger notice.
- By a lease ("the lease") dated 5th February 1997, Renhall Limited (therein "the Landlords") let 239/243 Grantham Road, London E8 ("the property") to Dr Ganiyu Asiwaju (therein "the Tenant"). The lease was for a term of 12 years from 5th February 1997 at a rent of £6,500 per annum, which was defined as "the basic rent", plus an "insurance rent", being the cost of insuring the property against loss or damage by fire or other specified risks.
- The lease contained various covenants by the Tenant with the Landlords, which were of a fairly standard nature for a lease of retail premises. By clause 3.35 of the lease, the Tenant was permitted to sublet each of the four units comprised in the property, albeit subject to the consent of the Landlords.
- Clause 5.1 of the lease contained provisions for rent review. Clause 5.1(a) to (d) provided as follows:
"5.1(a) If the Landlords so require the basic rent shall be reviewed with effect from the end of every fourth year of the lease period (in each case 'review date')
(b) To exercise the option to review the basic rent the Landlord shall give notice ('review notice') to the Tenant no more than 12 months before the review date stating what annual amount the Landlords propose as the basis rent from the review date ('new basic rent')
(c) If the Tenant [does] not give Notice (Counter-Notice) to the Landlords within two months after the review notice is given (in respect of which counter-notice time is of the essence) informing the Landlords that the Tenant [does] not accept the annual amount proposed by the Landlords the new basic rent shall apply from the review date and the remaining sub clauses of this clause 5.1 shall not apply in respect of that review date.
(d) If the amount of the basis rent payable from the review date ('new basic rent') is not agreed within three months after the review notice was given it may be referred to arbitration by either the Landlords or the Tenant
- Clause 5.1(d) and (e) went on to provide that, despite reference to "arbitration", the person who should determine the rent was to be an "independent expert", who "shall
not be an arbitrator". Clause 5.1(e) required the independent expert to take into account submissions which the parties may make to him, and to notify the parties in writing "of the sum he shall fix as the new basic rent from the review date".
- The remainder of Clause 5.1 was in these terms, so far as relevant:
"(f) The new basic rent is the higher of either the basic rent payable immediately before the review date or the market rent.
(g) In this clause 'the market rent' means the rent likely to be paid for the Property
let in its entirety
by a willing tenant to a willing landlord on the assumption
the Property is let on the review date for a period equal to the lease period
(h) Until the new basic rent is agreed or decided the Tenants must continue to pay the basic rent at the rate applicable immediately before the review date ('former basic rent')
(i) Any balance of the new basic rent over the former basic rent for the period from the review date must be paid with interest at [2% above Barclays Bank plc base rate] on the first day for payment of rent after the new basic rent is agreed or decided."
- The reversion to the lease was acquired in early August 2001 by Lancecrest Limited ("Lancecrest"). This was, of course, some six months after the first review date, 5th February 2001, but, at the time Lancecrest acquired the reversion, no trigger notice had been served. On 19th February 2002, some 54 weeks after the first review date, Lancecrest's agents wrote to Dr Asiwaju, informing him that Lancecrest had acquired the reversion to the lease, referring to the fact that the lease reserved a rent of £6,500 subject to the provisions of Clause 5, and stating:
"We now write to give you notice that the annual amount the landlord proposes as the basic rent from the review date of 5th February 2001 is £30,000 per annum."
- Dr Asiwaju replied on 5th March 2002 in a letter headed "Rent Increase!". He referred to the letter of 19th February "which demanded and or notify [sic] of the rent increase from 05-02-2001 at £30,000 per annum". Dr Asiwaju's letter ("the Letter") continued:
"Your notice or demand is invalid. The terms of the lease is very clear. It requires one year notice of any rent review. Until you serve me with a valid one-year notice about future rent review. I will not enter into any arbitration
- Lancecrest's agents answered stating that the rent review provisions in the lease had been properly implemented because, in effect, clause 5.1(b) contained no time limit by which a trigger notice had to be served. Dr Asiwaju maintained his position in a reply dated 30th April 2002. Lancecrest's agents adhered to their stance in a letter dated 23rd April 2002, but nonetheless asked for Dr Asiwaju's confirmation that he was "willing to open discussions for the rent review and that you will not be persisting with your complete disregard of the terms of the lease in this regard".
- Dr Asiwaju maintained his refusal to accept that Lancecrest were entitled to implement the rent review on 5th February 2001, and Lancecrest accordingly applied for the appointment of an independent surveyor at the end of June 2002. Mr A G D Mason FRICS was appointed to act as independent surveyor on 1st August 2002. He wrote to Lancecrest and Dr Asiwaju seeking their written submissions as to the rental value of the property as at 5th February 2001. Having received submissions only from Lancecrest, he pressed Dr Asiwaju for his submissions on 15th November 2002. Despite this, Dr Asiwaju made no submissions. Accordingly, on 6th December 2002, Mr Mason issued a "rent review determination", under which he determined "the New Basic Rent as defined in the Lease with effect from 5th February 2001 to be £28,000
- In these circumstances, two questions fell to be considered by the judge, and now fall to be considered by this court. The first question is whether the Landlords have lost the right to review the rent as a consequence of failing to serve a trigger notice on or before 5th February 2001. In this connection, contrary to their stated position in correspondence, Lancecrest now accept that, on a true construction of clause 5.1(b), the trigger notice should have been served on or before 5th February 2001 (a concession which follows from the reasoning of this court in First Growth Property Partnership LP -v- Royal & Sun Alliance Property Services Limited  1 EGLR 39). Accordingly, the question is whether the service of a trigger notice some 54 weeks later than the cut-off date envisaged by clause 5.1(b) can nonetheless be effective. If Dr Asiwaju establishes that no such trigger notice can be served, then the rent remains at £6,500 per annum.
- If Dr Asiwaju fails on this first issue, as he did before the judge, then it is necessary to consider the second issue. That issue is whether the Letter operated as a valid counter-notice under clause 5.1(c). If it did not so operate, as the judge found, then Dr Asiwaju is effectively fixed with the rent specified in the trigger notice, namely £30,000 per annum. On the other hand, if the Letter is a valid counter-notice, then the rent is that fixed by the independent surveyor, namely £28,000.
Is time of the essence for service of the trigger notice?
- The argument accepted by the judge was that it was open to Lancecrest to serve a trigger notice after, indeed well after, the final date specified in clause 5.1(b), namely the rent review date itself, because time was not of the essence of that date. In reaching that conclusion, he was following and applying the reasoning of the House of Lords in United Scientific Holdings Limited -v- Burnley Borough Council  AC 904. The kernel of that decision is to be found at 930F-G in the speech of Lord Diplock where he said:
"So upon 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 inter-relation of the rent review clause itself and other clauses or in the surrounding circumstances the presumption is that the time-table 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."
- The reasoning which led Lord Diplock to this conclusion appears, at least at first reading, to be characteristically incisive and numinous. However, it has not been without its critics. In the introduction to the second edition of Meagher Gummer & Lehane's Equity: Doctrines and Remedies, (fourth edition at page xv) the authors describe the reasoning of Lord Diplock as "the low water-mark of modern English jurisprudence".
- In his judicial capacity, Meagher JA returned to the attack in G R Mailman & Associates Pty -v- Wormald (Australia) Pty Limited (1991) 24 NSWLR 80 at 99D-E, where he referred to Lord Diplock's "remarkable view" that the Judicature Act 1873 "effected a 'fusion' of law and equity so that equity as a distinct jurisprudence disappeared from English law". He continued "That view is so obviously erroneous as to be risible" and went on to give examples of "[t]he absurdities to which it gives rise". However, at 100A even Meagher JA was "prepared to accept" that Lord Diplock's conclusion at 930F-G (quoted above) "accurately states the law".
- However susceptible to criticism some of the reasoning of Lord Diplock may be, it is clear that his conclusion, which was shared by at least three of the other four members of the House of Lords in United Scientific, is binding on us, and has been applied in a large number of subsequent decisions relating to time limits in rent review clauses. The principle upon which Lord Diplock's conclusion was based is one of equity now enshrined in s41 of the Law of Property Act 1925 which is to this effect:
"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."
- In practical terms, this does not mean that a time limit for the taking of a step in a rent review clause, or any other contractual provision, has no effect. In the first place, the circumstances may be such that the late implementation of the right is barred by estoppel or waiver (albeit that this would require fairly exceptional facts: see Amherst -v- James Walker Goldsmith & Silversmith Limited (No 2)  Ch 305). Secondly, and more importantly for present purposes, as Lord Diplock explained in United Scientific at 933G - 934A:
"If the tenant reckons that the advantage of knowing before the review date exactly how much higher his 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, he has the remedy in his own hands. Quite apart from the fact that he can get a pretty good idea of what the market rent is from his own surveyor or can himself offer to enter into negotiations with the landlord before the stipulated time for serving a lessor's notice has expired, so soon as that time has elapsed he can give to the landlord notice specifying a period within which he requires the landlord to serve a lessor's notice if he intends 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."
- It is fair to say that there would be few landlords or tenants reading a rent review clause, such as that in the instant lease, who would appreciate that the law implied provisions for yet further notices over and above those expressly contemplated by the clause. Indeed, this was a point which plainly struck Lawton LJ in London & Manchester Assurance Co Limited -v- G A Dunn & Co (1983) 1 EGLR 111 at 113B-C. Nonetheless, it is plainly the law, as was recognised by Slade LJ in the same case - see at 116G-H.
- In the instant case, despite the attractively advanced arguments of Mr Giles, on behalf of Dr Asiwaju, to the contrary, I am quite satisfied that the judge reached the right conclusion in holding that, despite the fact that the trigger notice in the instant case was served over a year late, it was nonetheless valid, because time was not of the essence of the time limit contained in clause 5.1(b) of the lease. Apart from the fact that there is nothing in that sub clause expressly stating or even implying that time is to be of the essence, there is the fairly telling point that, by contrast, there is the express provision that time is to be of the essence in respect of the counter-notice prescribed by the following provision, clause 5.1(c). Such a contrast existed in the rent review clause in London & Manchester, and I respectfully prefer the view of Slade LJ (who - at 116F - thought that the contrast, between the absence of a provision stating time was of the essence for the landlord's notice and the inclusion of such a provision in relation to the tenant's counter-notice, was significant) to that of Lawton (who - at 112L - did not think that it was of much significance).
- Mr Giles relies on the following points to support his contention that time must be treated as being of the essence of the time limit contained in clause 5.1(b) of the lease:
i) the right to review the rent is actually expressed in clause 5.1(b) as being an "option" in favour of the landlord and the reddendum works perfectly well without a need for review;
ii) this is not a case where the reviewed rent will necessarily be the market rent, because the landlord might specify a wholly excessive rent in his trigger notice, and if, as here, the tenant fails to serve a counter-notice, that excessive rent would become the rent payable under the lease;
iii) it is commercially unrealistic to think that the parties intended the landlord to have such a long period for serving his trigger notice without time being of the essence, while giving the tenant such a relatively short period to serve a counter-notice, in respect of which time was of the essence;
iv) given the tenant's right to sub-let in clause 3.35, the parties must have intended that he should know the level of reviewed rent promptly;
v) the provision in clause 5.1(h) and (i) for payment not merely of "back rent" to the review date, but also of interest on the increased rent notionally due from the review date was a strong indicator that time should be treated as being of the essence.
- The fact that the parties have described the rent review as an "option" for the landlord does not mean that it is to be treated as an option in the legal sense, with the consequence that time is of the essence of any stipulation as to its implementation. In United Scientific, Lord Diplock dismissed the argument that time limits in a rent review clause were to be treated like those in an option at 929E-930F. Furthermore, when discussing earlier cases, he expressed the view that Samuel Properties (Developments) Limited -v- Hayek  1 WLR 1296 "should be treated as over-ruled" (see at 936A), which meant that he concluded that time was not of the essence of the steps required by the clause in the lease in that case. It is clear from the speech of Lord Salmon, who took the same view (see at 951G) that the rent review clause in Samuel was specifically described as an "option". The fact that the reddendum provides for a rent even if the rent is not reviewed is irrelevant, in my view, so far as the application of the principle laid down by Lord Diplock is concerned.
- The point that the reviewed rent might not be the market rent, but a much higher rent, namely that specified in the trigger notice, is the argument most strongly emphasised by Mr Giles. In this connection, he refers to the passage which I have mentioned in the speech of Lord Diplock at 929-930, which can be said to be the commercial foundation for his conclusion that time limits in rent review clauses are not normally of the essence. It is that, in times of inflation, landlords will only grant a lease whose duration gives a business tenant a substantial degree of security, if they can increase the rent from time to time so as to keep pace with market increases. In the instant case, Mr Giles points out, if the tenant fails to serve a counter-notice, he may well find himself paying a substantially higher rent than that which can actually be justified by market levels, because the landlord may well have specified a very high rent in his trigger notice.
- In light of the wording of the rent review clause in the instant case, I am prepared to accept that it may well be right that the landlords could specify a rent which was substantially in excess even of his honest view of the market rent (particularly as, if the tenant serves no counter-notice, the closing words of clause 5.1(c) disapply the ensuing provisions of clause 5.1, including the reference to the market rent in clause 5.1(f)). However, I do not consider that this argument justifies the conclusion that time must therefore be of the essence of the time limit contained in clause 5.1(b). The purpose of this rent review clause, if properly operated, was to enable the rent to be increased to market levels, either by agreement or by independent determination. It is only if the landlord fails to serve a trigger notice (after the tenant has made time of the essence) or if the tenant fails to serve a counter-notice (in respect of which time is to be of the essence) that that result may not obtain. In these circumstances, I do not see why the possibility that the tenant may fail to serve a counter-notice should lead to the conclusion that time must be of the essence of the date by which the trigger notice is to be given.
- Further, if time was not expressed to be of the essence in clause 5.1(c), the fact that the tenant might lose the right to challenge the rent specified in the trigger notice because he failed to serve a counter-notice after the landlord had made time of the essence, would not thereby lead to the conclusion that time was of the essence in relation to the service of the trigger notice under clause 5.1(b). Accordingly, the fact that time is made expressly of the essence for the service of the counter-notice cannot, to my mind, actually support the proposition that time is to be impliedly of the essence for the service of the landlord's trigger notice. The fact that there is a long period within which the landlords can give such a trigger notice appears to me to be of little relevance to the issue, and, insofar as it may be in point, I consider it cuts both ways.
- It seems to me that all the points made by Mr Giles are effectively answered by the fact that, the day after the review date, the tenant can make time of the essence for the service of a trigger notice. Accordingly, while it might seem a commercially unrealistic solution to many people, and not what the parties to the lease envisaged, the tenant's right to make time of the essence for the service of a trigger notice means that he need suffer very little delay beyond the time limit contemplated by clause 5.1(b), if time is not in fact initially of the essence for the service of a trigger notice. On any view, the tenant could have no complaint if the trigger notice was served the day before the review date (with the consequent possible delay in assessing the reviewed rent until some time after the review date). By very promptly making time of the essence, he could, in practice, ensure that the trigger notice is served, say, one month, or even possibly two or three weeks, after the review date, failing which the landlord will have lost the right to review the rent.
Was the Letter a valid counter-notice?
- Having concluded that Lancecrest are indeed entitled to a review of the rent with effect from 5th February 2001, the next question is whether the Letter constituted a valid counter-notice under clause 5.1(c). It is fair to say that the determination of this issue will not be of such great financial significance to the parties, as the determination of the first issue. If, as he contends, Dr Asiwaju has served a valid counter-notice, the rent is that fixed by Mr Mason, namely £28,000, whereas if, as Lancecrest contend, no counter-notice has been served, the rent is that specified in the trigger notice, namely £30,000 per annum.
- The judge appears to have had little difficulty in concluding that the Letter was not a valid counter-notice, on the basis that it constituted a challenge, not to "the annual amount proposed by the Landlords", but to the landlord's right to review the rent at all.
- To my mind, the question whether the Letter constituted a valid counter-notice under clause 5.1(c) is to be determined by reference to the test laid down by Sir Nicolas Browne-Wilkinson, V-C in Nunes -v- Davies Laing & Dick Limited (1985) 51 P&CR 310 at 314:
"namely that the counter-notice should be in terms which are sufficiently clear to bring home to the ordinary landlord that the tenant is purporting to exercise his right under paragraph (c)."
- In addition to being consistent with an earlier decision of the Court of Appeal, Amalgamated Estates Limited -v- Joystretch Manufacturing Limited (1981) 257 EG 489, it appears to me that the approach is also consistent with the later decision of the House of Lords, albeit in relation a tenant's contractual break notices under two leases, namely Mannai Investment Co Limited -v- Eagle Star Life Assurance Co Limited  AC 749.
- In that case, when concluding that the break notices were valid notwithstanding their having identified the wrong date on which they took effect, Lord Steyn set out at 767E-769A four steps in his reasoning which led him to conclude that the notices were effective:
"(1) This is not a case of a contractual right to determine which prescribes as an indispensable condition for its effective exercise that the notice must contain specific information.
(2) The question is not how the landlord understood the notices. The construction of the notices must be approached objectively. The issue is how a reasonable recipient would have understood the notices. And in considering this question the notices must be construed taking into account the relevant objective contextual scene.
[T]he inquiry is objective: the question is what reasonable persons, circumstanced as the actual parties were, would have had in mind. It follows that one cannot ignore that a reasonable recipient of the notices would have had in the forefront of his mind the terms of the leases. Given that the reasonable recipient must be credited with knowledge of the critical date and the terms of [the break] clause the question is simply how the reasonable recipient would have understood such a notice.
(3) It is important not to lose sight of the purpose of a notice under the break clause. It serves one purpose only: to inform the landlord that the tenant has decided to determine the lease in accordance with the right reserved.
(4) There is no justification for placing notices under a break clause in leases in a unique category. Making due allowance for contextual differences, such notices belong to the general class of unilateral notices served under contractual rights reserved,
. Even if such notices under contractual rights reserved contain errors they may be valid if they are 'sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when they are intended to operate': [Delta Vale Properties Limited -v- Mills  1 WLR 445] at p. 454E-G, per Slade LJ."
The reasoning in the speeches of Lord Hoffmann and Lord Clyde was to much the same effect.
- The decision in Mannai represents an authoritative and, if I may say so, refreshingly practical attitude to the validity of notices and other unilateral documents to be served under contractual arrangements. It is a decision which calls into question the reliability of a number of earlier decisions which had manifested a rather more technical attitude to the construction of such documents (perhaps most notably Hankey -v- Clavering  2 KB 326, a longstanding decision of the Court of Appeal which was expressly overruled in Mannai).
- This is not to say that a slipshod approach to the drafting of such notices has thereby been sanctioned by the House of Lords. In addition to the test posed by Slade LJ, as approved by Lord Steyn in his paragraph (4), there is the test of Goulding J in Carradine Properties Limited -v- Aslam  1 WLR 442 at 444, referred to by Lord Hoffmann in Mannai at 780D in these terms:
"Goulding J. said that the test for the validity of a notice was: 'Is the notice quite clear to a reasonable tenant reading it? Is it plain that he cannot be misled by it?' and he went on to say that the reasonable tenant must be taken to know the terms of the lease. [A]s will be apparent from what I have already said, I think that it was the right test to adopt."
- It initially appeared to me that, applying the test in Nunes and Mannai, the Letter in the present case was not a valid counter-notice under clause 5.1(c) of the lease. This initial view was based on the proposition that the Letter was challenging the right of Lancecrest to implement the review, and not the amount of the rent which Lancecrest were seeking if entitled to implement the review. It is true that the effect of the Letter was to make it clear that Dr Asiwaju did "not accept" that he was obliged to pay rent at £30,000 per annum, ie rent at the rate specified in the trigger notice. However, it could be said that he was not challenging the "amount of the rent" specified in the trigger notice: for instance, it is by no means fanciful to imagine that a reasonable recipient of the Letter could have concluded that, while Dr Asiwaju was plainly of the view that the right to review the rent had been lost, he may well have accepted that, if, contrary that view, there was a right to review the rent, he could not realistically challenge the amount of £30,000 per annum proposed. (In this connection, the fact that Mr Mason fixed a rent well within 10% of the that figure can be said to reinforce the reality of such a possibility).
- In Patel -v- Earlspring Properties Limited  2 EGLR 131, this court held that a tenant had served a valid counter-notice. The clause required him to "specify
the rent which [he] is willing to pay
and [to] call
upon the landlord to negotiate", and the tenant's letter concerned merely stated that the tenant's turnover was not substantial enough to meet the landlord's proposed rent, and invited the landlord "kindly [to] reconsider the rent figure" it proposed. Woolf LJ said that the provisions of the clause with regard to the counter-notice contained "no mandatory requirement to specify the counter-rent", and he went on to say that the letter in that case "was clearly sufficient to indicate that [the tenants] were not prepared to accept the rent proposed by the landlords" (see at 133B). However, it could be said that in that case the tenant was not challenging the landlord's right to review the rent, and made it clear that he was unhappy with the amount of the new rent proposed, whereas in the present case, the Letter did not challenge the proposed new rent if the landlord was entitled to a review: it challenged the landlord's right to review the rent at all.
- As I have said, my initial view was that the Letter in the present case did not constitute a valid counter-notice in light of the terms of the Lease, and that view is reinforced by the trenchantly expressed reasons of Brooke LJ whose draft judgment I have seen. However, I have ultimately arrived at the conclusion, after having read the draft judgment of Clarke LJ, that my initial view involves too technical an approach to, and analysis of, the Letter in light of the provisions of clause 5.1(c) of the Lease. After all, s41 of the Law of Property Act 1925, which can be said to have come to the aid of Lancecrest in light of the lateness of the trigger notice, applies not merely to "stipulations
as to time" but also to "other
stipulations" - see in this connection Dean & Chapter of Chichester Cathedral -v- Lennards Limited  2 EGLR 78.
- It is unnecessary, and indeed it would be inappropriate, for me to set out my reasons, because, subject to one exception and one qualification, to which I turn, I am content to adopt Clarke LJ's reasoning, not least because it has persuaded me of the correctness of his conclusion.
- The one point which he makes with which I am inclined to disagree, is that, when deciding whether a particular notice is valid, it is permissible to place some weight on the reaction of the actual recipient. As Lord Steyn emphasised in Mannai, the question is not how the actual recipient landlord understood the Letter, but how a reasonable person in his position would have understood it. I see the attraction of the argument that the reaction of the actual landlord may, in some circumstances, have evidential value as to how a reasonable recipient would react and that that can be said to be consistent with what was said in Patel and not inconsistent with the analysis of Lord Steyn.
- However, it appears to me, when deciding on the validity of a notice, to rely in any way on the reaction of the actual recipient is unsound in principle, and could well lead to inconsistency and unfairness. It is well established that, when interpreting a contract, it is not permissible to rely on the subsequent conduct of the parties as an aid to construction. The proper approach to the interpretation of notices is the same as that of contracts see per Lord Hoffmann in Mannei at 779H. Accordingly, it appears to me that the same principle must apply to interpretation of notices.
- The question whether a particular document is a valid notice must, of course, depend on the contractual provisions under which it is said to have been served, and the precise terms of the document and the matrix of facts in which it is received. However, it is obviously desirable that the courts adopt a consistent approach to the construction of alleged notices as a matter of principle. If the reaction of the recipient of an alleged notice is to impinge on its validity, then this would almost inevitably lead to additional uncertainty in an area which (judging by the number of cases on the topic) is already bedevilled by uncertainty, and where certainty is highly desirable.
- Further, if the fact that the recipient treats the document as a valid notice is a factor in favour of it being a valid notice, then the corollary must be that the recipient who treats the document as ineffective is entitled to rely upon that fact in order to support his contention that it is not a valid notice. In my view, that would be unfair on the sender of the document. Furthermore, it appears to me that to take into account the reaction of the recipient would actually benefit an ill-advised recipient as opposed to one who is well advised. A well-advised recipient of a document which is almost certainly not a valid counter-notice might protect himself by treating the document as a valid counter-notice, in case he turns out to be mistaken, would thereby be improving the chances of the document being held to be a valid counter-notice.
- It is true that Woolf LJ in Patel could be said to have relied on the fact that the landlord appears to have treated the letter in question as a valid counter-notice, but it was little more than a throwaway line. In any event the decision in Patel pre-dated by some years, the more detailed and principled analysis of the House of Lords in Mannai.
- This case demonstrates how unsafe it can be to rely on how the actual parties react to notices. The way in which both parties appear to have acted at every stage, namely contrary to their respective interests, is remarkable. Accordingly, it would be dangerous to assume that a landlord or a tenant was correctly informed about his legal rights and obligations, or indeed, was reasonable.
- The qualification I would make to the reasoning of Clarke LJ is that much will inevitably depend on the terms of the particular rent review clause. Nunes and Amalgamated Estates were but two of a surprisingly large number of cases where the court has had to decide whether a document served by a tenant was a valid counter-notice under a rent review clause. So far as I can discover, all the reported cases (with the exception of Patel) on this topic were concerned with provisions which required the tenant to serve a counter-notice electing to have the reviewed rent determined by an expert or an arbitrator. Accordingly, unless the document described itself as a counter-notice or could in some way be construed in some way as calling for determination by an expert or an arbitrator, there were obvious difficulties in the way the tenant seeking to establish that he had indeed served a counter-notice.
- However, where the counter-notice required of the tenant has to do no more than challenge the rent proposed by the landlord in his trigger notice (as in Patel, as interpreted by this court, and as in the present case) it appears to me that it is much easier to spell out of any reply by the tenant to the landlord's trigger notice, the fact that he objects to, or does "not accept", the amount of the rent proposed by the landlord. After all, the only real commercial issue, as Clarke LJ points out, is the level of rent which is to be payable over the relevant review period, and, in particular, whether the tenant accepts that he should be obliged to pay for that period rent at the rate proposed in the landlord's trigger notice.
- The proper approach to the question of whether or not a document constitutes a valid counter-notice under a rent review clause may also depend upon the consequences to the recipient landlord, under the terms of the particular rent review clause, of a counter notice. The point is well illustrated by reverting to Patel. In that case, the tenant was held to have served a valid counter-notice even though, under the terms of the rent review clause, he was required to specify an alternative rent to that proposed in the landlord's trigger notice, and failed to do so. If the effect of the counter-notice could have resulted in the rent specified by the tenant constituting the ultimate reviewed rent (eg because the landlord was required, within a specified period, in respect of which time was to be treated as being of the essence, to apply for the appointment of an expert or arbitrator) then, as I see it, the court could well have reached a different conclusion: the rent review machinery would be in danger of not working if the alleged counter-notice contained no proposed rent. However, because any rent specified in the counter-notice in that case would not have had such an effect, the Court of Appeal (effectively consistently with the approach in Lennards) was prepared to conclude that the stipulation that the counter-notice specified a rent was directory rather than mandatory.
- Finally, I should add this. Although we raised the possibility that Dr Asiwaju might be able to raise an argument based on election or waiver in light of Lancecrest having pursued a determination apparently pursuant clause 5.1(d) and (e) of the lease, Mr Giles disclaimed any reliance on such a contention. In light of that, and in light of the absence of the issue having been explored below in evidence or argument, I would say no more about it.
- In these circumstances, I conclude:
i) the landlords, Lancecrest, validly implemented the rent review by their agent's letter of 19th February 2002;
ii) the tenant, Dr Asiwaju, served a valid counter-notice in the letter of 5th March 2002;
iii) the rent under the lease with effect from 5th February 2001 was therefore £28,000 per annum.
- The appeal should accordingly be dismissed on point (i) and allowed on point (ii).
Lord Justice Clarke
- Neuberger LJ has set out both the terms of the lease and the facts underlying the two issues which arise for decision in this appeal. I will not therefore repeat them, except to underline one or two aspects of the case which seem to me to be of significance.
- As to the first issue, I agree with Neuberger LJ that we are bound by the decision of the House of Lords in United Scientific Holdings Limited v Burnley Borough Council  AC 904 to hold that time was not of the essence of clause 5.1(b) of the lease. I share his view (expressed in paragraph 9) that few tenants reading such a rent review clause would appreciate that the law implied provisions for yet further notices over and above those expressly contemplated in the lease. It is not therefore surprising that it did not occur to the tenant that, before he could rely upon clause 5.1(b) and hold the landlord to the basic rent, it was necessary for the tenant to serve a notice making time of the essence. Nevertheless, we are bound by the United Scientific Holdings case to hold that, in order for the tenant to rely upon the express words of clause 5.1(b) that "to exercise the option to review the basic rent the landlord shall give notice no more than 12 months before the review date
", the tenant must serve a notice making time of the essence before the review date. It follows that, while it may not be surprising that this tenant was not one of the few tenants who appreciated the true position as expounded by the House of Lords, I agree that his appeal must fail on the first issue.
- The second issue depends upon whether the tenant gave a notice, that is a counter-notice, which satisfied clause 5.1(c). Although Neuberger LJ has set it out, its terms are crucial to the determination of the second issue and I should I think quote it again, in so far as it is relevant to this issue:
"If the Tenant [does] not give Notice (Counter-Notice) to the Landlords within two months after the review notice is given
informing the Landlords that the Tenant [does] not accept the annual amount proposed by the Landlords the new basic rent shall apply from the review date and the remaining sub clauses of this clause 5.1 shall not apply in respect of that review date."
- The letter dated 5 March 2002 written by the tenant to the landlord is relied upon as amounting to a counter-notice within clause 5.1(c). It is not suggested by the landlord that the letter is not such a counter-notice on the ground that it is not called a counter-notice. The question is therefore whether the terms of the letter are sufficient to comply with the clause.
- I agree with Neuberger LJ that the question whether the letter constituted a valid counter-notice is to be determined by the test laid down by Sir Nicholas Browne-Wilkinson V-C in Nunes v Davies Laing v Dick (1985) 51 PC&R 310 at 314:
"namely that the counter-notice should be in terms which are sufficiently clear to bring home to the ordinary landlord that the tenant is purporting to exercise his right under paragraph (c) "
- As I see it, that test should however be applied subject to two points. The first is that the test should not be applied in a legalistic way. The way that it is phrased in the above quote might suggest that the counter-notice must in some way state that the tenant is exercising his right under the clause. Each case of course depends upon the construction of the particular lease. Here the clause simply states that, unless the tenant gives the landlord particular information, the new basic rent stated in the landlord's notice will apply. As I see it, the question is whether the letter of 5 March gave the landlord the particular information identified in the clause.
- If the letter did not give the landlord that information, the new basic rent applied and the remaining provisions of clause 5.1 did not. On the other hand, if the letter gave the information, the remaining sub-clauses of clause 5.1 referred to by Neuberger LJ in paragraphs 5 and 6, applied. Those sub-clauses provided a means whereby the new rent would be determined. By clause 5.1(f)
"the new basic rent is the higher of: either the basic rent payable immediately before the review date or the market rent."
In the absence of agreement, the new basic rent was to be fixed by an independent expert as explained by Neuberger LJ.
- In these circumstances, it appears to me that, applying the test set out above, the question is simply whether the letter informed the landlord that the tenant did not accept the annual amount [of rent] proposed by the landlord.
- The second point may not be very different from the first. It derives from the approach and decision of this court in Patel v Earlspring Properties Ltd  2 ELGR 131, where (as it happens) Neuberger LJ was counsel for the landlord. It is that it is wrong to adopt too strict an approach to counter-notices of this kind. That can I think be seen from the decision in that case.
- In Patel the lease provided that after a review date the rent was to be whichever was the greater "of the rent payable immediately before the review date or the open market rental value". The lease provided for service by the landlord of a notice specifying an increase in the rent from the relevant review date. The landlord served such a notice. The lease gave the tenant an express right to serve a counter-notice
"specifying the rent which the Tenant is willing to pay from the rent review date and calling upon the Landlord to negotiate with the Tenants the amount of rent to be paid hereunder as from the relevant review date".
- In the landlord's notice, which was sent by its agents, the agents said that they had determined the open market rental value to be £14,250 per annum and they called upon the tenant to pay that amount from the next review date. The tenant replied:
"Thank you for your letter dated May 17 1988. Regarding the rent, you have mentioned £14,250 per annum. We have recently bought the business and the present turnover is not substantial to meet the rent of £14,250. Therefore we shall be grateful if you would kindly reconsider the rent figure. Please acknowledge this letter and let us know your view."
The agents did acknowledge the letter, saying that they would look into the matter and that they hoped to write again shortly. In the event they did not write shortly and the landlord subsequently distrained for the new rent.
- The question whether the counter-notice complied with the clause in the lease quoted above came before this court, in which Woolf LJ gave a reasoned judgment, with which Lord Donaldson MR agreed. I am conscious that Woolf LJ said (at p 132) that it was always a dangerous course to try to apply an authority on one rent review clause in relation to a different rent review clause in different circumstances to another situation. However he added this:
"Clauses of this sort are meant to be applied sensibly by landlords and tenants for dealing with rental arrangements between them. Particularly when they refer to commercial premises, they are commercial covenants intended to deal with a commercial situation and, in my view, they should always be approached with a sensible degree of common sense."
- Approaching the matter in that way, Woolf LJ said that the tenant's letter was requesting the landlord to review the figure and that in the agents' reply they said that they would. Two points were advanced on behalf of the landlord in support of the submission that the letter did not satisfy the lease. The first was that the letter did not specify the rent that the tenant was willing to pay and the second was that the letter did not call upon the landlord to negotiate. Although a literal reading of the lease and the letter might suggest that those were powerful points (especially the first), they were both rejected.
- In rejecting the first, Woolf LJ declined to apply the approach adopted in another case in which the court was considering a landlord's notice. He said (at page 133) that what was required in a rent notice which starts the machinery running is not necessarily the same as what is required in a counter-notice. Woolf LJ then put his conclusions on both points in this way:
"What I am satisfied is that, if one looks at the provisions of the clause with which we are concerned here, there is no mandatory requirement to specify the counter rent. What was done by the tenants was clearly sufficient to indicate that they were not prepared to accept the rent proposed by the landlords and, in my view, having done that, the letter they wrote is not defective as a counternotice because it does not specify the rent which they would propose in lieu of the rent specified by the landlords. It is to be remembered that the clause in the lease indicates that the rent after review shall be either the existing rent or a new rent, but that, if the open market rent is not higher than the existing rent, the existing rent continues. By writing the letter that they did it is clearly indicated by the tenants that they are not accepting that there should be a increase in the rent, certainly to the extent indicated by the landlords.
The landlords themselves, by responding in the way they did, were clearly accepting the letter as being an appropriate letter to require them to look into the matter further and that is what they said they were going to do.
That brings me to the second argument Mr Neuberger advanced, which is that the letter of June 9 was fatally flawed because it did not call upon the landlords to negotiate. It called upon them to reconsider the rent figure and, in my view, that is certainly sufficient to meet the requirement of the covenant in the lease. But, even if it did not amount to a fulfilment of that requirement, so long as the tenants have indicated they are not accepting the rent proposed by the landlords, in my view they have done sufficient to operate the machinery of the clause."
- I draw two conclusions from that reasoning which seem to me to be to be directly relevant to the question for decision in this part of the appeal in the instant case. The first is that it is not appropriate to apply too literal an approach to the construction of a counter-notice of this kind. Rather, the court should approach it with what Woolf LJ called a sensible degree of common sense.
- The second conclusion to be drawn from the reasoning is that it is legitimate to have regard, at any rate for some purposes, to the reaction of the landlord or its agents to the letter or other document said to satisfy the provisions of the lease with regard to the counter-notice. That conclusion must, however, be seen in the light of the principles stated by Lord Steyn in Mannai Investment Co Limited v Eagle Star Life Assurance Co Limited  AC 749, which are quoted by Neuberger LJ in paragraph 31. In that case the House of Lords was considering, not a counter-notice, but a break notice, the purpose of which (as Lord Steyn said at step (3)) is to inform the landlord that the tenant has decided to determine the lease in accordance with the right reserved in the lease.
- The correct approach to the construction of a counter-notice is certainly no more technical than the approach adopted by Lord Steyn. In step (2) Lord Steyn emphasised the fact that the question is an objective one. He said:
"(2) The question is not how the landlord understood the notices. The construction of the notices must be approached objectively. The issue is how a reasonable recipient would have understood the notices. And in considering this question the notices must be construed taking into account the relevant objective contextual scene.
[T]he inquiry is objective: the question is what reasonable persons, circumstanced as the actual parties were, would have had in mind. It follows that one cannot ignore that a reasonable recipient of the notices would have had in the forefront of his mind the terms of the leases. Given that the reasonable recipient must be credited with knowledge of the critical date and the terms of [the break] clause the question is simply how the reasonable recipient would have understood such a notice
- Can that statement be reconciled with the approach of this court to the reaction of the landlord's agents in Patel and, if so, how? In my opinion the answer is that it can be reconciled in this way. The question is how the reasonable landlord in this case, and having regard to the particular circumstances of this case, would understand the letter. The court is not of course comprised of landlords but of judges. I can see no reason why the court should not have regard to the actual reaction of the landlord in deciding what the reaction of the reasonable landlord in the position of this landlord would be.
- I turn to the facts. On 19 February 2002 the landlord's managing agent Aprirose Limited ("Aprirose") wrote to the tenant proposing a new basic rent of £30,000 per annum from the review date of 5 February 2001. All parties were of course aware that the existing rent was £6,500 per annum, so that the proposed new basic rent was a very considerable increase, which the tenant, Dr Asiwaju, was being asked to pay retrospectively from 5 February 2001. He replied by letter dated 5 March, which was within the two months referred to in clause 5.1(c). I set out the letter in full because it is the crucial document in this part of the case:
"Re 239/243 Graham Road, London E8 1PP
I hereby write to acknowledge the receipt of yours dated 19 February 2002, which demanded and or notify me of a rent increase from 05-02-2001 at thirty thousand pounds per annum.
Your notice or demand is invalid. The terms of the lease is very clear. It requires one year notice of any rent review.
Until you serve me with a valid one year notice about a future rent review I will not enter into any arbitration.
Finally, I have noted all your tactics and implicit plans and 'am well prepared. I will not hesitate to seek for an immediate legal redress through my solicitors for any consequential loss. Note this caveat."
- Neuberger LJ has set out in paragraphs 10 and 11 the events which happened after the landlord's managing agent received the tenant's letter. They included the fact that, in its letter of 23 April, Aprirose, while (as Neuberger LJ observes) adhering to its stance, said this:
"In reply to the fourth paragraph of your letter under reply, I am glad to see that you are finally willing to discuss the rent review itself.
Please confirm, within the next seven days, that you are willing to open discussions for the rent review and that you will not be persisting with your complete disregard of the terms of the lease in this regard."
The events thereafter are set out in paragraph 11 of Neuberger LJ's judgment. In short, the landlord operated the remaining sub-clauses of clause 5.1 of the lease and on 6 December 2002 the independent expert issued a "rent review determination" in which he issued a "rent review determination", under which he determined "the New Basic Rent as defined in the lease with effect from 5th February" to be £28,000 per annum. The tenant took no part in that process.
- The question is whether by his letter of 5 March 2002 the tenant informed the landlord that he did not accept the annual amount of the rent proposed by the landlord as the new basic rent. Although I entirely understand that in the letter the tenant was strongly making the point that the landlord was not entitled to a review of the rent because it had not served the notice in time, that is not to my mind the question. The question is whether he was objecting to the amount of the rent. In my opinion he plainly was.
- The principal concern of every, or almost every, tenant is the amount of the rent he will have to pay to his landlord. In this case, when he received the letter of 19 February from Aprirose, the tenant was paying £6,500 per annum. The effect of the notice was to give notice of the landlord's proposal of a new basic rent of £30,000, back-dated to February 2001. If the tenant had been willing to accept the amount of the "new basic rent" as proposed on behalf of the landlord, he would not have written the letter of 5 March at all. He would certainly not have written a letter which was headed "Rent Increase!". It is thus clear that he was not accepting the proposed rent. The purpose of the letter was to dispute the rent increase or, put another way, the amount of the rent.
- If one asks whether, in the light of the letter of 5 March, there was a dispute about the amount of the rent, say for the purposes of an arbitration clause, there can I think be no doubt that the answer is yes. If one asks whether the tenant was accepting the amount of the rent in the letter of 5 March, the answer can in my opinion only be no. It seems to me to follow that in the letter the tenant was indeed informing the landlord that he did not accept the amount of the rent. If one asks the question posed by Lord Steyn, namely whether a reasonable landlord receiving the letter would understand that the tenant was not accepting the amount of the rent, the answer is yes. The tenant was plainly not accepting the rent; otherwise he would have said so.
- I have reached that conclusion by trying to approach the problem in the common sense way adopted by this court in Patel and by an application of the principles stated by Lord Steyn in Mannai. It seems to me that the same can be said here as was said by Woolf LJ in Patel, save only that this seems to me to be a stronger case than that:
"By writing the letter that they did it is clearly indicated by the tenants that they are not accepting that there should be a increase in the rent, certainly to the extent indicated by the landlords."
- I should add that I have reached that conclusion without regard to the fact that the landlord operated the contractual machinery to fix the new basic rent. However, the fact that it did so seems to me to give support to the view that a reasonable landlord would have understood the letter as saying that the tenant did not accept the annual amount of the rent.
- I recognise that the tenant was complaining about the validity of the notice, that he did not propose an alternative rent and, indeed, that a market rent might prove to be something close to £30,000 per annum. However, to my mind none of those considerations answers the question. The sole question is whether the tenant was accepting the amount of the rent. The clause did not require him to say why he was not accepting the amount of the rent, let alone what rent he would accept. It merely required him to inform the landlord of the fact that he was not accepting the rent. It was, in my opinion clear from the letter that he was not, as a matter of fact, accepting the rent. As the heading shows, he was complaining about the rent increase, hence the exclamation mark. The fact that he gave a bad reason for not accepting the rent does not assist in answering the question whether he informed that landlord that he was not accepting the amount of the rent.
- In all the circumstances I would hold that the landlord served a valid notice under clause 5.1(b) and that the tenant served a valid counter-notice under clause 5.1(c). I would therefore dismiss the appeal on the first issue and allow it on the second issue.
Lord Justice Brooke
- On the first issue that arises on this appeal, I have nothing to add to the judgment of Neuberger LJ, with which I agree.
- On the second issue I agree with the judge, whose judgment is admirably clear, that Dr Asiwaju did not serve a counter-notice within the meaning of Clause 5.1(c) of the lease. As a result the basic rent proposed by the landlords in their letter dated 19th February 2002 would be the new basic rent within the meaning of Clause 5.1(d).
- My reasons are as follows.
- The lease provided a consensual scheme whereby the rent proposed by the landlords would be the new basic rent with effect from the review date unless the tenant gave a counter-notice within the prescribed two-month period informing them that he did not accept the annual rent they proposed as the new basic rent.
- If he did give such a counter-notice, and if the new basic rent was not agreed within three months after the landlords' original review notice was given, the question of the new basic rent might be referred by either party to arbitration in accordance with the provisions of Clause 5.1(d)-(i).
- If the legal validity of a counter-notice is in question, then as the law now stands, two tests have been suggested to us for determining that question:
i) Is the tenant's notice in terms which are sufficiently clear to bring home to the ordinary landlord that the tenant is purporting to exercise his right under Clause 5.1(c)? (Nunes)
ii) How would a reasonable recipient have understood the tenant's notice? (Mannai)
- It is in my judgment important in a matter like this that the higher courts lay down tests that are easy for landlords and their advisers to understand without the need for expensive legal research, let alone litigation. We are not concerned in this case with a battle between commercial giants whose skilled advisers have drafted a contract for their particular needs, and to whom such trifles as lawyers' bills do not matter very much in the general scheme of things. We are concerned with interpreting a clause of a lease of a type that will be familiar in solicitors' officers up and down the country, and most solicitors will wish to be able to give reliable advice to their clients on a matter as potentially straightforward as this without having to present them with a substantial bill at best or the prospect of a lawsuit at worst.
- Despite the heroic efforts of the Law Commission, our law of landlord and tenant is still unnecessarily complicated, and complicated law provides lawyers and judges with expensive working tools. In my judgment this court would be doing nobody any service by making the law still more complicated just because Dr Asiwaju did not seek advice from a lawyer on the meaning of a simple lease before he responded to his landlords' notice. It is trite to say that hard cases make bad law, but according to my philosophy of the proper role of an appellate court we simply cannot afford to make bad law in a context like this.
- I have read and re-read the words Dr Asiwaju used:
"Your notice or demand is invalid
Until you serve me with a valid one-year notice about future rent review[,] I will not enter into any arbitration."
- Like the judge, I find it impossible to interpret this as a notice informing the landlords that Dr Asiwaju did not accept the annual rent they proposed as the new basic rent. He simply did not regard their notice as having any legal validity at all, and he told them so. It is hardly surprising that he also told them that he would not have anything to do with any arbitration: his notice simply was not drafted with a view to participating in the Clause 5(1) scheme at all.
- His uncompromising message could only reasonably have been understood by the landlords as one that told them that they had to begin all over again. It was not one that could have indicated to them that it was now open to them to move smoothly towards an arbitration as to the level of the new basic rent in accordance with the scheme in the lease.
- I agree with Neuberger LJ, for the reasons he gives, that the landlords' actual reaction plays no part in the legal test that has to be applied. I do not, however, agree with him that by any stretch of the imagination can Dr Asiwaju's letter be interpreted as one that complied with the requirements of Clause 5(1)(c).
- I derived no assistance from the decision of a two-judge division of this court in Patel. The rent review scheme was different, and the facts were different, and Woolf LJ did not seek to set out any new principle of law. He merely said that clauses of this sort should always be approached with a sensible degree of common sense, a sentiment with which I would find it impossible to disagree.
- For these reasons I would dismiss this appeal on both issues.
ORDER: Appellant's appeal against the decision that the rent review trigger notice was validly served is dismissed, but appellant's appeal against the decision that the counternotice was invalid is allowed; paragraph 1 of the order of Mr Recorder Hooper QC dated 27th February 2004 is set aside; an agreed order for the payment of the costs of the appeal; appellant's application for permission to appeal to the House of Lords refused.
(Order does not form part of approved judgment)
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