Kaley Ltd. v. The Hong Kong Land Property Co. Ltd.

HCMP001953/1989

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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Coram: The Hon. Mayo, J. in Chambers

Date of Hearing: 1 & 2 March 1990

Date of Delivery of Judgment: 12 March 1990

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JUDGMENT

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1. The Plaintiff is the tenant and the Defendant the landlord of office premises at Swire House in Central.

2. The premises were let to the Plaintiff by a lease for 6 years from 1st June 1986. Under the terms of the lease there is provision for the rent to be reviewed for periods from 1st June 1989 to 30th April 1990 and from the 1st June 1990 to 31st may 1992.

3. Unfortunately, the drafting of the rent review provisions is not very satisfactory. A dispute has arisen between the parties upon the basis for assessing the rent to be payable for the premises during the review periods I have referred to.

4. Attempts to agree the amount of rent payable have not met with success and I was referred to corrrespondence exchanged between the parties on this subject.

5. The parties have, however, been able to agree the issues which lie to be determined by me. They are conveniently set out in paragraph 10 of the most helpful skeleton argument which was supplied to me by Mr. Denis Chang who represents to the Plaintiffs.

"The issues which fall for direction from the court are: -

6. It is probably convenient for me to set out here in this judgment the relevant provisions contained in clause 2 of Part I of the Third Schedule to the lease which provides the guidelines for the Review.

7. The first point which occurred to me on reading these provisions is that it is not clear whether they apply to just one review or the two periods contemplated in other parts of the lease. I understand though that both parties are prepared to proceed upon the assumption that there should be only one review.

8. The next problem which arises is that the draftsman of the provisions has not used as a model any precedent contained in Butterwortns' Encyclopaedia of Forms and Precedents. The relevant Edition would have been the 1966 Edition.

9. The difficulty which arises from this is that most of the cases which were referred to did involve disputes which were referable to clauses which had been drawn from the Encyclopaedia. I am satisfied that Mr. Chang was correct in his submission to me that paragraph 1-0703/7 of Woodfall, Landlord and Tenant accurately states the law that this is essentially a matter of construction. As the clauses I have to interpret are not based on Butterworths I consider that very little assistance is to be derived from most of the case law on the Subject.

10. That is not to suggest that the drafting of the clauses in the 4th Edition of Butterworths is beyond criticism. Quite the reverse.

11. As a consequence of Judicial criticism the format of the clauses has been completely revised in the 1986 Edition.

12. The main criticism which is made of the 1966 Edition is that if the clauses are adopted without modification they are unduly favourable to a landlord.

13. They enable him to postpone seeking a rent review almost indefinitely and this may be disadvantageous to the tenant as the clauses include a provision for the retroactive adjustment of rent which may require a tenant to make substantial payments in respect or arrears of rent long after the period it relates to.

14. One reason for this was that as the clause was drafted only the landlord was aisle to initiate the rent review machinery.

15. At this stage it may be of assistance to consider the clause in the Butterworths 1966 Edition which reads as follows:-

"3. The reviewed rent (payable by the tenant during the review period as hereinbefore provided) shall be determined in manner following that is to say it shall be whichever sigh we the higher of the first reserved rent and the open market rental value of the demised premises for the review period PROVIDED that and it is hereby agreed as follows:

16. It will also be noted brat the advantage to the landlord is compounded by the provision to the effect that whatever the market value of the rent may be, the rent payable will not be less than the rent payable under the lease prior to the review period.

17. I have come to the conclusion that the 1966 Butterworths precedent is so radically different from the one adopted in the present case that I am able to derive virtually no assistance from the cases which have adopted these clauses.

18. Mr. Denis Chang placed great emphasis on the fact under tire present rent review clause, the surveyor was not being required to determine the open market rent of the demised premises at a particular date. What he was being required to do was to undertake a hypothetical exercise and determine the rent for a term equal to the whole of the said term and that he should do it as if the premises were being let for such a term.

19. As no particular date was provided for the valuation, I should deal with the Problem as a matter of construction. Mr. Denis Chang Grew my attention to a passage appearing at p. 277 of 'Land options' by D.G. Barnsley 1978 Edition:-

"What is the appropriate date for assessing the market rental value - the review date, the date of actual agreement or determination, or some other date? Clearly this is an important question for both parties, yet review clauses do not always deal with this point satisfactorily, e.g. 11 EEP, Form 4:25, p. 256, supra; Kelly 393, Form 13. When the clause offers no guidance on the relevant date, the rent should be assessed in accordance with values prevailing at the time of the parties' agreement or the independent surveyor's decision."

20. No authority is cited 3y Mr. Barnsley for this proposition. It is also pertinent to observe that this view was expressed in 1978 which was prior to Prudential Assurance Co. Ltd. v. Gray 1987 2 EGLR 134 and Glofield Properties Ltd. v, Morley TLR 1st May 1989.

21. Mr. Denis Chang also placed reliance upon passages from the speeches of Lord Dilnorne and Lord Salmon in Ponsford v. HMS Aerosols 1979 AC 63 which indicated that the time for assessing the rent was the time when the assessment was made.

22. With respect I find myself in agreement with Mr. Merry for the Defendants that these passages were only obiter dicta and I am by no means convinced that either Lord Dilhorne or Lord Salmon directed their minds to the full implications which arise in a case such as the present one.

23. The third authority which Mr. Denis Chang placed particular reliance upon was Chase Manhattan v. Claret Land Co. Ltd. being Land Tribunal case no. 71 of 1982 (unreported).

24. I do not consider this case to be of much assistance. In particular I note that the amendment to S. 115(1) of Cap. which was effected by Ordinance No. 29/83 which reversed the effect of the decision appears to have been enacted as a result of the Chase Manhattan case.

25. I regret that 1 have come to the conclusion that there is no convincing reason why I should choose the date of the assessment as the date for determining the market value of the premises.

26. I will now consider the arguments advanced by Mr. Merry for choosing the 1st June 1989 as the date.

27. Para. 1-0703/1 of woodfall sets out what a well drawn rent review clause should contain. It should

"2. Define the formula for ascertaining what rent is to be payable in each review period: by reference (usually) to whichever is the greater : the yearly rent payable for the demised premises immediately before the beginning of the review period or the yearly rent reasonably payable therefore in the open market as at the beginning of that period.

28. The authority given for the last dart of this quotation is Glofield Properties Ltd, v. Morley (2) TLR 1st May 1989. As I have indicated earlier in this judgment the rent review clause in Glofield adopted tare 1966 Butterworths precedent which clearly states that the time for the valuation was when it took place.

29. Notwithstanding this, the Court of Appeal was prepared to hold that the appropriate time for the valuation was the value as at the beginning of the review period. It may be helpful to extract the passage from Nourse LJ's judgment which shows his reasoning for coming to this conclusion:-

"The question depended oh what was meant by the words "at the time of such determination" in clause 5(1).

It was held by the Court of Appeal in London & Manchester Assurance Co Ltd v G.A. Dunn & Co ((1983) 20 EG 39), on the wording of a rent review provision taken from the same book of precedents, that the words "at any time not earlier than 12 months prior to the commencement of the review period" in clause 5(2)(a) enabled the lessor to give an initiating notice at any time before the end of the review period to which it related.

That holding, having been made in relation to a rent review provision which was in all material respects identical to that which was now before the court, was binding on the court.

If the plaintiff's argument on the further question which was now before the court was correct, it would, on the facts of the case, have produced a result whereby the rents payable during the second and third five years of the term would be determined by reference to the open market rental values of the premises prevailing about seven and two years respectively, after the commencement of those periods.

It was that result which the judge, with every justification, strove to avoid but found himself unable to do so. He said that, in reaching his conclusion, he had been very much influenced by, inter alia, the London & Manchester case.

It being clear that the judge applied the correct test, the question was whether he was also correct in deciding that the parties had clearly and unequivocally expressed an intention in the sense for which the plaintiff contended.

30. If the Court of Appeal was prepared to come to such a conclusion even were it was specifically provided that the time of the valuation should be when it took place I am sure that where as in this case the clause is silent it is right that a similar approach should be adopted.

31. I also derived assistance from other submissions made by Mr. Merry. I agree with him that where reference is made to a hypothetical term of years it must have a starting point. Also it is only logical that the rent which should be payable should be the market value at the commencement of the term. There is a satisfactory degree of certainty if such an approach is adopted.

32. I am satisfied that my answer to the first question posed is yes and the relevant date is the lst June 1989.

33. On the second question, there does not appear to be a great deal of difference between the parties.

34. To start with, the court should be reluctant to make any attempt to substitute its expertise or lack of it for the skill of the valuer who is an expert in this field. Perhaps the most helpful approach is tae passage at p. 326 of the judgment of Staughton J. in Segama NV v. Penny Le Roy Ltd. 1984 269 EG 322:-

"If rent of comparable premises had been agreed on the day after the relevant date. 1 cannot see that: such art agreement would be of no relevance whatever to what the market rent ids at the relevant date itself. If the lapse of time before the agreement for comparable premises becomes greater then, as the arbitrator said, the evidence will become progressively unreliable as evidence of rental values at the relevant date. The same is no doubt true of rents agreed some time before the relevant date; but nobody suggested to me that those should be excluded. So, too political or economic events may have caused a change in market rents, either before or after the relevant date. All those factors must be considered by the arbitrator in assessing the weight to be attached to a rent agreed for similar premises, whether before or after the relevant date."

35. I do not think that I can do better than this in answering the second question posed. That is the yardstick which should be adopted by Mr. Brown when he undertakes the valuation of the premises.

36. I have how answered both questions posed.

37. I will hear the parties as to costs.

Representation:

Mr. Denis Chang, Q.C. & Mr. Benjamin Yu (Kao, Lee & Yip) for Plaintiff.

Mr. Malcolm Merry (Deacons) for Defendant.