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ASHWORTH FRAZER LTD v. GLOUCESTER CITY COUNCIL  EWCA Civ 806 (20th January, 1997)
THE SUPREME COURT OF JUDICATURE
THE COURT OF APPEAL (CIVIL DIVISION)
APPEAL FROM ORDER OF HIS HONOUR JUDGE ROGER COOKE
Courts of Justice
20th January 1997
e f o r e:
Aided Transcript of the Palantype Notes of
Bernal Reporting Limited, 180 Fleet Street,
0171 831 3183
Shorthand Writers to the Court)
NIGEL DAVIS QC
(Instructed by Sharpe Pritchard of London (the London Agents for Gloucester
City Council) appeared on behalf of the Appellant
PAUL MORGAN QC
(Instructed by Rowe & Maw of London) appeared on behalf of the Respondent
U D G M E N T
Approved by the Court
JUSTICE McCOWAN: I will ask Lord Justice Millett to give the first judgment.
JUSTICE MILLETT: This is an appeal by Gloucester City Council from the
judgment of His Honour Judge Roger Cooke sitting as a judge of the High Court
on 3rd February 1996. It raises a short but not altogether easy question of
construction of a few words in a badly drafted rent review provision in a
lease. The clause requires the rent to be calculated by reference to "the rack
rents receivable by the lessee in respect of the demised premises". No express
provision is made for voids or other cases where for any reason all or part of
the demised premises is not sub-let at a rack rent. In the events which have
happened part of the premises is in occupation of the respondent as lessee.
The question is whether "the rack rents receivable by the lessee" means, as the
respondent contends and the judge found, "the rents which the lessee is
entitled to receive from actual sub-tenants" or, as the appellant lessor
contends, "the rents which the lessee would be entitled to receive if the
premises were fully sub-let at full open market rents".
lease is dated 28th April 1969. It is a development lease made between (1) the
appellant as lessor and (2) MacKenzie Hill Ltd ("the developer") as lessee. By
the lease the developer was granted a lease of the site of the old cattle
market in Gloucester for a term of 114 years from 25th December 1969. The site
covered 14½ acres. No premium was payable on the grant of the lease and
no rent was payable for the first 12 months of the term. The developer
covenanted to develop the site in accordance with agreed plans and
specifications for light industrial use and so as to be fit for immediate
occupation. It was evidently contemplated that the developer would sub-let the
completed development to a variety of industrial sub-tenants and would then
dispose of the leasehold reversion, probably to an institution.
reddendum reserved a peppercorn rent until the 28th April 1970, followed by a
yearly rent of £9,425 from 28th April 1970 to 25th December 1989.
Thereafter, the reddendum provided as follows:
thereafter such sum as may be agreed or determined as the fair market rent in
accordance with the provisions of Clause 4 hereof ..... "
4 of the lease reads as follows:
is mutually agreed that at the Twenty Fifth day of December One Thousand Nine
Hundred and Eighty Nine and thereafter at the end of every Twenty-One year
period (hereinafter called ´the relevant renewal date') the yearly rent
payable by the Lessee shall be reviewed in manner following:
the yearly rent payable by the Lessee in respect of the said periods of Twenty
One years and the last Nine years of the said term shall be either the sum of
Nine Thousand Four Hundred and Twenty Five Pounds aforesaid or the rent payable
during the previous rent period or such sum as shall be equivalent to Eight per
cent of the rack rents receivable by the Lessees in respect of the demised
premises on the relevant renewal date such figure of Eight per cent to be
certified by the Lessee's accountants whichever figure shall be the higher."
have read clause 4 (a) as the parties agree it should be read. In fact, the
word "on" in the expression "on the relevant renewal date" towards the end of
the clause appears as "or". But it is plain that that is a typographical error.
the council's reward for contributing the undeveloped site was to consist not
of a premium or ground rent (except during an initial period), but a share,
fixed at 8%, of "the rack rents receivable by the lessee" ascertained at 21
lease contained a covenant on the part of the lessee against assigning the
whole or any part of the premises without the lessor's consent, such consent
not to be unreasonably withheld. It contained no prohibition on sub-letting
the whole or any part of the demised premises without the lessor's consent.
More surprisingly (if the construction placed on clause 4 by the judge is
correct) it contained no covenant by the lessee to use its best endeavours to
sub-let the various parts of the premises at the best rents reasonably
obtainable without taking a premium and with appropriate provisions for rent
review. The lease contained a full arbitration clause.
expected, the developer completed the development of the site and disposed of
the premises in parcels to various industrial occupiers. It did not do so,
however, by sub-letting but by successive assignments each made with the
consent of the appellant. There have altogether been six severances of the
lease, and the entirety of the demised premises is now let to a variety of
tenants each holding directly from the appellant under the terms of the lease,
the rent having been apportioned. The respondent is the successor in title to
Kentron Plastics Ltd, which took an assignment of part of the demised premises
from the developer in September 1973. The rent payable in respect of the part
of the premises thereby assigned for the period to 25th December 1989 was
apportioned by the assignment at £702, and it was agreed that the
covenants and conditions in the lease were to be severed as if the lease had
contained a demise at apportioned rent of the land comprised in the assignment.
The assignment was at a premium of £21,600, which shows that even as early
as 1973 the apportioned rent of £702 was already well below the open
market rent for the part of the demised premises assigned to Kentron Ltd.
the dates of the most recent rent review, the whole of the premises let to the
respondent was occupied by the respondent for the purposes of its own business.
No part thereof being sub-let, the judge held that there were no "rack rents
receivable by [the respondent] in respect of the demised premises", and so
nothing to which the 8% figure mentioned in clause 4 could attach.
Accordingly, this being an upwards only rent review clause, he held that the
yearly rent payable by the respondent during the current period was the current
passing rent of £702. The appellant submits that the judge's construction
of the lease was wrong; alternatively it contends for an implied term which
would have the effect of substituting the current open market value of the
premises for the passing rent; in the further alternative, it submits that the
machinery for determining the open market rent of the property having broken
down, the court should substitute other machinery.
dealing with the detailed arguments on the proper construction of the lease, it
is convenient to dispose of some preliminary matters. In the first place, it
is common ground that the wording of the assignment to Kentron Plastics Ltd
does not affect the question now in dispute, and that accordingly that question
must be determined by construing the lease as at the date in 1969 when it was
entered into and without reference to the later severances. The manner in
which the premises demised by the lease were in fact disposed of is unlikely to
have been foreseen and - while the parties ought perhaps to have foreseen the
possibility of voids, for example, occurring at the review date - the
possibility of the entirety of the premises being void, so that there would be
no rents receivable from sub-tenants, could reasonably have been dismissed as
too remote. Indeed, there is no suggestion that this has happened or that, if
the judge's decision in the instant case is upheld, the appellant will be
confined to the total passing yearly rent of £9,425.
appellant places great stress on what it claims is the commercial purpose of a
rent review clause. This, it rightly observes, is to protect the landlord from
the devaluation of the rent in real terms by reason of inflation or a rise in
rental values since the date on which the lease was granted. As Dillon LJ said
& Law Life Assurance Society plc v Bodfield Ltd
 1 EGLR 124, 125:
is no doubt that the general object of the rent review clause which provides
for rent cannot be reduced on review is to provide the landlord with some
measure of relief whereby increases in property value records (?) the real
value of money in an inflationary period a fixed rent has become out of date
and unduly favourable to the tenants. The exact measure of relief depends on
the true construction of the particular rent review clause."
are, however, several different techniques for achieving this. The most common
is to provide for a periodic revision of the rent by reference to an expert
revaluation in order to ascertain the open market rent or the fair rent of the
demised premises (these concepts are not the same, and the expression "fair
market rent" is a confused amalgam of two contradictory ideas). But this is
not the only technique available. It may be reviewed by reference to the
Retail Price Index, or to the tenant's turnover, or to the sub-rents which the
tenant is entitled to receive from sub-tenants. Ordinarily, it is obvious
which technique has been adopted, and if there is any difficulty it arises in
connection with the application of the chosen technique to the facts of the
particular case. Unusually, the question in the present case is whether, as
the reddendum indicates, the technique which was adopted was that of an expert
valuation of "the fair market rent" or, as clause 4 indicates, that of a
mathematical computation based on the aggregate of the underlying sub-rents.
appellant stresses the commercial purpose of a rent review clause as the
foundation for its contention that this is frustrated by the construction
placed upon the clause by the judge. The result, it is submitted, is
surprising and not one likely to have been intended by the parties. Unless
compelled to do so by clear and unambiguous language, the court should not
adopt a construction which would have this result.
respondent counters this argument by submitting that clause 4 is not a rent
review clause at all, but a rent-sharing clause. I cannot accept this as a
complete description of the effect of the clause, even on the construction for
which the respondent contends. A true rent-sharing clause would require
continuous, or at least annual, adjustment, certainly not adjustment at 21 year
intervals. And the concept of rent-sharing does not sit entirely comfortably
with upwards only revision. At the same time, it is quite clear that the
appellant was not to receive the full rental value of the premises, however
ascertained, but only 8% thereof. On any view, it seems to me, the lease
combines elements of both rent review and rent-sharing. The question is
whether, as the appellant contends, the parties are to share "the fair market
rent" (whatever that means) ascertained by an expert or, as the judge found and
the respondent contends, the actual sub-rents, if any, certified by the
is an issue between the parties as to the true relationship between the
reddendum and clause 4. The appellant submits that the reddendum is the
controlling provision. It reserves "the fair market rent", and directs
attention to clause 4 only for the purpose of enabling "the fair market rent"
to be determined in default of agreement. Clause 4 should, if at all possible,
be construed so as to give effect to this direction.
the judge, I have no doubt that, taken in isolation, this is the more natural
way to read the reddendum. The reader is given to expect that Clause 4 will
contain appropriate provisions for the assessment by an expert valuer of the
full "fair market" rental value (whatever that may mean) of the demised
premises and that the rent reserved by the reddendum is the amount so
determined. But on any footing the reddendum is inaccurately drafted, and not
just because of the use of the expression "fair market rent". Even on the
construction of clause 4 contended for by the appellant, the lease does not
entitle the lessor to the "fair market rent" of the demised premises as the
reddendum indicates, but only to 8% thereof.
reddendum reserves, not "the fair market rent" simpliciter but "the fair market
rent in accordance with the provisions of clause 4 hereof". Moreover, on any
view, clause 4 does not provide machinery for determining "the fair market
rent", but a definition of the rent reserved. When, in addition, it is found
that the figure of 8% appears in clause 4 only and not in the reddendum, I find
it impossible to accept the appellant's submission that the reddendum is the
controlling provision. In my opinion, the reddendum must be read with clause 4
and the two provisions reconciled if possible. But it does not control the
meaning of clause 4, and if the result of performing the exercise directed by
clause 4 does not produce 8% of what could properly be described as either a
fair or a market rent, then in my judgment, the parties must be taken to have
made their own dictionary when using the expression "fair market rent" in the
reddendum. If they used that expression, as the respondent contends, to mean
8% of the rents receivable from such tenants, that is not an inappropriate
description of what the parties had agreed to be a fair rent as between the
lessee, on the one hand, and the lessor, on the other, in respect of the
the reddendum leads a reader to expect that clause 4 will contain machinery
for the ascertainment by an expert valuer of either the fair or market rental
value of the demised premises, he will be disappointed. The clause contains no
reference to the rental value of the premises and no provision for its
determination by expert valuation. Moreover, as I have already pointed out, it
does not provide machinery for the determination of the rent but a
self-contained definition of the rent payable in each rental period.
appellant submits that the expression "rents receivable" is ambiguous. It
could mean either (i) the rents which the lessee is entitled to receive from
sub-tenants under existing sub-leases or (ii) the rents which the lessee would
be entitled to receive from sub-tenants if the demised premises were fully
sub-let. I agree that, given an appropriate context, the words could bear
either meaning; the use of the word "receivable" rather than "received"
denotes an intention to avoid the need to satisfy some unexpressed contingency.
But I have no doubt that the former meaning is the ordinary and natural meaning
of the words, and that it would require a special context to give them the
meaning for which the appellant contends. Rent due from a tenant but not paid
is a receivable of the landlord; rent which the landlord could obtain only by
letting unlet property is not. The contingency to which the word "receivable"
is ordinarily directed to avoid is non-receipt, not non-entitlement.
various times in the argument, the appellant submitted that "receivable" means
capable of being received. That may be so. But that expression itself
involves the same ambiguity. It may mean rents which the lessor is capable of
receiving under existing sub-leases or rent which he is capable of receiving by
sub-letting unlet premises.
appellant has placed much reliance on the decision of the court in
A Millett Ltd v Leon Allen International Fashions Ltd
[1989 1 EGLR 138, but in my judgment that case does not help it. The rent
review clause there provided that -
rent payable by the Lessee shall be 78/85ths of the rent payable by the Lessor
..... as fixed in manner provided by the said Superior Lease ..... "
superior lease referred to was surrendered by the lessor and replaced by a new
head lease. The trial judge held that the under lessor was still entitled to a
rent review, but, the machinery for the ascertainment of the new rent having
broken down, the court could substitute new machinery, adopting the approach of
the House of Lords in
Trading Estates v Eggleton
 1 AC 444. His decision was upheld by a majority of this court. Counsel
for the underlessor conceded that he could not succeed by relying on the
decision unless he could show that the rent review clause, on its true
construction, required the underlessee to pay the appropriate portion of a fair
market rent as determined in accordance with the original head lease; but
that, the majority held, was exactly what the rent review clause provided.
appellant submits that the court must implicitly have held that the words
"payable by the lessor" in the clause there under consideration meant "which
would have been payable under the head lease if it had not been surrendered";
and that it follows that the words "receivable by the lessee" are capable of
meaning "which would have been receivable if the premises were sub-let". I do
not agree. Once the conclusion was reached that the words in dispute merely
had the effect of incorporating the rent review clause in the head lease by
reference, it necessarily followed that the continued subsistence of the head
lease was not required. The words "payable by the lessor" did not, therefore,
mean "which the lessor was still contractually liable to pay under the head
lease" but "expressed to be payable by the lessor" or "reserved by the head
lease". I am not myself convinced that in these circumstances it was necessary
to invoke the doctrine enunciated in
Trading Estates v Eggleton
for I cannot see that the machinery for ascertaining the rent had broken down
appellant, however, places its strongest reliance on the words "rack rents".
The term "rack rent" is defined in Blackstone's Commentaries (4th Ed.) Vol 2
p43 as "a rent of the full value of the tenement or near it". In
Group Ltd v Estates Gazettes Ltd
 P&CR 148 the court had to decide whether the words "rack rent" meant
the rent which represents the full annual value of the holding or the maximum
rent which is permitted by law. Sir John Pennycuick said, after referring to
the definition of Blackstone's Commentaries, (page 154):
..... in a judgment of Holmes LJ in
parte Connolly to Sheridan and Russell
it is defined thus: ´a rack rent in legal language means a rent that
represents the full annual value of the holding.'
J [in Re C R Sawyer and Withal, Solicitors] in terms approved of Holmes LJ's
the latter meaning has been adopted by the courts, including the Court of
Appeal, in certain recent cases where the premises were subject to statutory
control; see in particular
v Croydon Corporation
 2 QB 803 ..... "
John Pennycuick went on to hold that the word "payable" could mean either
"reserved" or "recoverable". The case is of limited assistance to the
appellant, since, as Browne LJ pointed out (at page 159), the expression "rack
rent" is not a phrase which has a precise meaning which it always bears, but
rather a meaning which varies according to the context. In the present case
the respondent submits that it is used to exclude insurance rents and service
charges reserved as rent. I agree that this is a possible meaning, though not
the primary meaning.
the clause had ended with the words "on the relevant renewal date" it would, I
think, have been a nice question whether it required a professional valuation
of the open market or rack rent of the demised premises or merely an
arithmetical calculation of the aggregate rents at which they were sub-let.
The reddendum and the use of the words "rack rents", as well as the absence of
any provision for voids or own-occupation, would have pointed in one direction;
the words "receivable by the lessee", the absence of any provision for
valuation or of any directions to the valuer as to the basis of valuation (e.g.
should the rental value of the demised premises as a whole be taken, or the
aggregate of the rental values of the separate parts?), and the fact that the
lessor is to receive only 8% of the resultant figure (which may provide a
reason for seeking to avoid the expense of a professional valuation) in the
in my judgment the matter is put beyond doubt by the concluding words of the
clause. The figure of 8% is to be certified by the
accountants. On the construction contended for by the
this makes good sense. The accountant's function is to examine the books and
records of the lessee and ascertain what rents are currently receivable from
sub-tenants. They then certify the figure which represents 8% of the total.
Their intervention is necessary to protect the lessor from the suppression by
the lessee of a recent sub-lease or increase in sub-rent. On the construction
of the clause contended for by the appellant, however, they serve
useful function. They cannot certify that any rent due from a sub-tenant
represents the full rental value of the premises, unless perhaps the sub-lease
is recent or the lessor is demanding an increase in the sub-rent at a pending
rent review. The appellant's construction of clause 4 makes a professional
valuation, for which the clause does not in terms provide, essential, and
limits the function of the accountants, for which the clause makes express
provision, to confirming the correctness of a simple arithmetical calculation.
my judgment, the judge was right to hold that clause 4 requires the rent to be
ascertained by a simple process of aggregating the actual rents receivable by
the lessor from sub-tenants, subject to the confirmation of the accountants'
certificate, and does not require any process of professional valuation. It
follows that the use of the words "fair market rent" in the reddendum may not
be an altogether accurate description of the result of the process required by
clause 4, but rather a shorthand label chosen by the parties and sufficient for
their purposes of what was provided in detail by clause 4.
appellant submits that this result is clearly uncommercial and cannot have been
what the parties intended; and that this fact alone requires the court to
re-examine its decision. I do not agree. If the position is analysed, it can
be seen that the lessor will fail to recover 8% of the full open market rent of
a part of the demised premises in four situations; (1) where there is a void;
(2) where the relevant part of the demised premises is occupied by the lessee
itself; (3) where the sub-lease was granted at a premium so that the passing
rent is not a rack rent; and (4) where the sub-lease was granted at a rack
rent, but changes in property values since mean that the passing rent is below
(or even above) the current market rent.
these four cases in reverse order, it is in my judgment past belief that the
parties would have contemplated substituting the market rent for the passing
sub-rents in case (4). Quite apart from the fact that the lessor insisted on
an upwards only rent review, there is no reason why the lessor should have been
prepared to accept the substitution of a rent lower than that which the lessor
was entitled to receive (and probably actually receiving). But what goes for
changes in market value in one direction applies equally to changes in the
other. There is no reason why the lessee should accept a liability to pay the
lessor a sum greater than 8% for rents which it was in a position to receive.
I agree that case (3) produces a nonsense, but what has gone wrong is not the
rent review provisions but the provisions with regard to sub-letting. Once the
parties opted for rent reviews based on sub-rents, it was necessary to place
the lessor under a positive obligation to use its best endeavours to sub-let
the premises at the best rents reasonably obtainable without taking a premium.
This was not done. It would be quite wrong, in my opinion, to distort the
meaning of clause 4 to provide a remedy for any failure in the drafting
elsewhere. Case (2) (which is the case which has occurred) cannot have been in
the reasonable contemplation of the parties. The developer plainly had no use
itself for the premises. What actually happened was clearly not foreseen.
Case (1) - and Case (2) if foreseen - should no doubt have been provided for,
but there were several ways of dealing with the problem. Given that the
lessor's interest is only 8%, it may well have been thought inappropriate to
incur the expense of a professional valuation merely to deal with a void in one
of several parts of the premises. The problem could have been adequately dealt
with, for example, by averaging.
analysis shows, in my opinion, that the lease is defective, but that what has
gone wrong is only partly due to a casus omissus in the rent review provisions.
It does not throw doubt on the construction of clause 4 for which the
respondents contend, that is to say, that the review is to be conducted by
aggregating the sub-rents and not by valuing the premises.
clause 4 of the lease is not to be construed in the manner contended for by the
appellant, then the appellant submits that an appropriate term should be
implied. There is, it submits, a gap which it is necessary to fill in order to
give commercial efficacy to the lease.
appellant's first choice is for a term to be implied which would have the
effect of substituting "the fair market rent" of the demised premises for the
aggregate of the sub-rents provided for by clause 4. This is plainly
impossible. Where the relevant part of the demised premises is sub-let at the
review date, that is to say, in cases (3) and (4), there is no gap to be
filled, and the suggested implied term would be inconsistent with the express
terms of the lease. And in case (4), as I have already indicated, it is most
unlikely that the parties would have agreed to the substitution of the basis of
assessment which is proposed.
somewhat greater realism, the appellant contends in the alternative for the
implication of a term which would require the "fair market rent" to be adopted
in any case where there was no existing subtenancy at the review date, that is
to say, cases (1) and (2). A persuasive case for this can be made out, but in
the end I am not persuaded. The lessee was entitled to retain 92% of any
sub-rents, and this was a sufficient incentive to deter it from deliberately
creating any voids. It is not at all obvious that it would have agreed to bear
the whole (as distinct from 92%) of the loss due to difficulty in finding a
tenant. There is more force in the submission that a reasonable lessee would
have agreed that the rent should take account of any part of the premises in
its own occupation. The difficulty here, however, is that it is not at all
clear what provision they would have agreed. It is far from obvious that they
would have agreed to incur the expense of a professional valuation in order to
provide the lessor with 8% of the assessed value.
is not enough to show that, had the parties foreseen the eventuality which in
fact occurred, they would have wished to make provision for it, unless it can
also be shown either that there was only one contractual solution or that one
of several solutions would without doubt have been preferred; see
Electronique v British Sky Broadcasting
 EMLR 472, 482 per Sir Thomas Bingham MR. In my judgment, even the more
limited implied term contended for by the appellant fails this test.
of new machinery
else failing, the appellant invokes the doctrine enunciated in
Trading Estate v Eggleton
On the construction of clause 4 which I consider to be correct, clause 4 is
not subordinate machinery for the determination of "the fair market rent" of
the property, but the essential definition of the rent reserved by the lease.
The only part of clause 4 which could properly be described as subordinate
machinery is the provision for the figure to be confirmed by an accountants'
certificate. If they refused to co-operate, the court could substitute an
alternative means of ascertaining the amount of the sub-rents receivable by the
lessee at the review date, for example, by ordering an inquiry. But the rest
of clause 4 is essential; the court could not provide a substitute without
re-writing the bargain.
in any case the machinery established by clause 4 has not broken down. The
fact that it yields a result which is unsatisfactory to one party does not mean
that it has broken down, but only that it was ill-chosen.
would dismiss the appeal.
JUSTICE AULD: I differ from Lord Justice Millett. I do so with great
diffidence, particularly in a matter such as this.
point is one of construction of a rent review clause in a development lease of
114 years entered into in 1969. The lease clearly contemplated that the lessee
would, after developing the demised property, sub-lease it. It provided for an
upwards only review of the rent at 21 yearly intervals, upwards, that is, only
in a rising property market by reference to the return on any sub-lease or
sub-leases. I say "the return". The issue before the court is whether, in a
rising property market, the rent is to be calculated at the review date by
reference to the potential return or to the actual return, if any, at that
date. 8% of whichever is the appropriate figure is the rent payable. It is
thus a rent review mechanism designed to achieve a constant income sharing
ratio between the lessor and lessee, albeit at lengthy review intervals.
my lord, Lord Justice Millett, has indicated, clauses 1 and 4 are not well
drawn. However, in my view, their intent and effect, when read together and
with other relevant provisions of the lease, are plain. No implication of a
term is necessary to give effect to that meaning. It is that the review rent
is to be the fair market (ground) rent calculated by reference to a percentage
of the rack rent, namely the full annual rental value, but that for a notional
sub-lease of the property as developed. Clause 1 provides expressly, and by
reference to clause 4, that the rent is to be reviewed and that it is to be
"the fair market rent" as agreed or determined in accordance with that clause.
The scheme in clause 1 allows for some tinkering with the normal meaning of
fair market rent because it permits of its agreement or, in the absence of
agreement, subjects it to determination in accordance with whatever constraints
clause 4 may impose. Nevertheless, the clause has at its core a familiar
notion, that of the fair market rent, a notion which has no function if all
that was intended was a reference to rent, if any, actually due and payable
under a sub-lease or sub-leases at each review date.
I would not expect there to be a reference in the reddendum to "agreement" or
"determination" of the review rent if all that is required is an identification
of sub-lease rents, if any, actually due and receivable at each review date.
to clause 4, it identifies, without specifying the machinery for its agreement
or determination, "the fair market rent" referred to in clause 1. It does so
in the third alternative circumstance by reference to another fair market rent,
"the rack rents receivable by the lessee ..... at the renewal date". In my
view, there is no reason to give any other meaning to the term "rack rent" in
this context than that which it has ordinarily, namely a rent representing the
full annual valuation of the holding. See
Group Limited v Estates Gazette Limited
(1977) 36 P&CR 145, CA, per Sir John Pennycuick, at 154. In particular, I
see no basis for treating the use of the word "rack" as a means for
distinguishing the reference to rent receivable under the sub-lease from a
ground rent, since the contemplated sub-lease or sub-leases were of developed
property, or from an insurance or service charge. Nor can I see any basis for
treating it as a reference to rent, if any, actually due and receivable under a
sub-lease at the renewal date. If the latter had been intended there would be
no reason to use the word "rack" at all in the provision. It would have been
sufficient to refer only to rents due and receivable by the lessee at the
seems to me that the scheme of clauses 1 and 4, when read together, is to
identify for the purpose of rent review a fair ground market rent for the lease
calculated by reference to 8% of a fair market rent of developed property if
sub-leased. The use of the word "receivable" in the sense of "capable of being
received if sub-let" is consistent with that conclusion, though not
determinative of it. It is plain that words such as "payable" and "receivable"
in leasehold documents and the like may mean "due to be paid and received" or
"capable of being paid and received" according to their context. See, for
Group Limited v Estates Gazette Limited
per Sir John Pennycuick at 154 and per Browne LJ at 160; and
A Millett (Shops) Limited v Lean Allen International Fashions Limited
(1989) 1 EGLR 138, CA.
to clause 4's lack of provision of machinery for agreement or determination or
other valuation of the rack rent of a notional sub-lease, if there is agreement
no machinery is necessary. If there is no agreement clause 5 (c) provides, in
its general provision for arbitration, a means of determination.
to the provision in clause 4 for the certification by the lessee's accountant
of the 8% of the rack rents receivable by the lessee, on which the judge relied
so heavily in favour of the lessee, it is not, in my view, a significant
pointer either way. Whether viewed as an ascertainment of the rents due under
any existing sub-leases and the calculation of 8% of them (the lessee's
contention) or the calculation of 8% of agreed or determined rack or fair
market rents (the lessor's contention), the exercise is essentially a
mechanical one. On neither interpretation is it the accountant's function to
certify the correctness of the rack rent for the sub-lease. His certification
can only be of the 8% following agreement or determination of that rack rent as
provided for in clauses 1 and 4.
those reasons, I am of the view that the review rent under the lease is to be
determined by reference, where it produces the highest figure, to the rack or
fair market rent which could be obtained under a sub-lease. In the unlikely
event of the property market not having risen significantly over the previous
21 year renewal period, the actual rent or rents payable may equal or be an
acceptable indicator for agreement by the parties, or for determination in an
arbitration, of the rack rent. But history has shown that that would not
ordinarily be the case. The fact that the property is not in fact sub-let is
irrelevant, save possibly as an indicator of its marketability if the lessor
has attempted to sub-let it.
add that, even by the standard of drafting of this lease, it could not sensibly
have been intended or contemplated by the parties to it that, with such long
rent review intervals and in the event of a rising property market, the lessor
would be confined to a rent calculable by reference to what had been paid in
the previous rent review period or to the rental for the first 20 years, if,
for whatever reason, the lessee sub-let the property at well below the market
rate or, as here, the property was not sub-let at all at the review date.
a construction would, in my view, defeat the whole purpose of an upwards only
rent review clause which is to protect the lessor from property inflation,
enabling him, subject to the length of the rent review periods, to recover the
same rent in real terms throughout. See
Borough Council v Host Group
 1 WLR 348, CA, per Nicholls LJ (as he then was) at 353D-356C. As the
deputy judge observed in his judgment in this case, and Mr Paul Morgan QC on
behalf of the lessee effectively acknowledged in his submission to this court,
the interpretation for which the lessee contended was unfair to the lessor.
Its clear lack of commercial good sense reinforces me in my construction in
favour of the lessor. See
 1 WLR 1381, HL; and
Smith Line Limited v Hansen Tangen
 1 WLR 989, HL, re Lord Wilberforce at 995G-997E. The interpretation for
which the lessor contends, on the other hand, does accord with the clear
commercial purpose of the rent review provisions in clauses 1 and 4.
I would allow the appeal.
JUSTICE McCOWAN: The judge himself recognised in his judgment that his
decision would not do substantive justice between the parties. Mr Morgan
accepted before this court that it was "a bad bargain for the appellants".
Whether in fact it is a bad bargain for the appellants depends on the
construction of the lease.
to not doing justice, it seems to me that the judge's construction is not in
accordance with the commercial purpose of a rent review clause. Mr Morgan's
answer to that was to say that it is not actually a rent review clause at all,
but a rent sharing agreement. I cannot accept that. The words of clause 4 are
themselves against this.
my judgment, Mr Davies is clearly right in saying that the judge gave
insufficient attention to the words of clause 1 and in particular to the words
"the fair market rent". This is shown by his dismissive reference at page 10C
of his judgment to those words as mere protestations. I noted that Mr Morgan
separated himself from the judge on that description.
at page 7G the judge said:
is hard to see how a draughtsman could have both incorporated the closing words
of clause 1 and the words of clause 4 in the same document."
Morgan did not seek to support this view of the judge. Mr Morgan said that the
two clauses are perfectly reconcilable. Clause 4, he said, is the measure of
to the words "rack rents", the judge largely ignored them and treated them as
superfluous. Mr Morgan, on the other hand, candidly said that his case would
be more "straightforward" if it were not for the presence of the word "rack".
Calling a spade a spade, I would say that he was profoundly embarrassed by it,
because "rack rent" means the full annual value of the holding.
my judgment, the commercial purpose of a rent review provision (viewed
objectively) is to enable the landlord to obtain from time to time the market
rental which the premises would command if let on the open market on the same
terms as at the review date. That object can be achieved in this case by
interpreting "receivable" as "capable of being received" which I consider a
wholly appropriate interpretation in the circumstances of the case.
that means it is possible, failing agreement, to determine the yearly rent
payable by the lessee pursuant to clause 4. In the event of a dispute there is
in clause 5 a provision for arbitration.
cannot, therefore, accept the judge's construction of the agreement and I would
allow the appeal.
Appeal allowed with counsel to agree a minute of
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