Ashworth Frazer Ltd v Gloucester City Council

A rent review clause must be construed as part of the lease as a whole, having regard to its language and commercial purpose. Where the clause indicates a market-based, upwards-only review, “rack rents receivable by the lessee” may refer to the rent capable of being obtained from a notional sub-letting, rather than sums actually received under existing sub-leases. The absence of an actual sub-tenant therefore does not prevent review by reference to market rental value. Commercial purpose assists construction but cannot replace the words used by the parties.

The Council appealed from the judgment of His Honour Judge Roger Cooke, sitting as a High Court judge on 3 February 1996. The lease of a developed site provided for rent review at 21-year intervals. The rent was to be the higher of the existing rent, the rent for the previous period, or 8 per cent of “the rack rents receivable by the lessee in respect of the demised premises”.

The respondent occupied its part of the premises for its own business and had no sub-tenant at the relevant review date. The judge treated the clause as referring to actual rents receivable from sub-tenants and therefore maintained the passing rent. The central issue was whether the clause required actual sub-rents or the full market rent which could have been obtained by sub-letting the premises.

1. Appeal allowed. Lord Justices Auld and McCowan formed the majority. Lord Justice Millett dissented and would have dismissed the appeal.
2. The majority construed the reddendum and clause 4 together. The references to “the fair market rent” and “rack rents” indicated a market-based review. “Rack rent” ordinarily meant the full annual rental value of the holding. In context, “receivable” meant capable of being received if the developed premises were sub-let, rather than merely due under existing sub-leases.
3. The review rent was therefore to be determined by reference, where it produced the higher figure, to 8 per cent of the rack or fair market rent obtainable under a notional sub-lease. The absence of an actual sub-letting was irrelevant, except potentially as evidence of marketability. Clause 5’s arbitration provision supplied a means of determination where the parties could not agree.
4. The majority treated the commercial purpose of an upwards-only review as reinforcing that construction. Confined to actual passing rents, the clause could leave the lessor without protection against property inflation merely because the property was under-let or self-occupied. Lord Justice Auld relied on [1989] 1 WLR 348, [1971] 1 WLR 1381 and [1976] 1 WLR 989.
5. Lord Justice Millett considered that the ordinary meaning of “rents receivable” was actual rents due from existing sub-tenants. He regarded clause 4 as a self-contained definition based on aggregation of actual sub-rents, certified by the lessee’s accountants. He would not imply a market-rent term or substitute new machinery: the defect produced an unsatisfactory bargain but did not create a breakdown in the machinery.
6. The majority’s construction made it unnecessary to imply a term. Lord Justice Millett also held that implication was unjustified because it was not shown that there was only one contractual solution, or that one of several possible solutions would without doubt have been preferred.

Order: appeal allowed, with counsel to agree a minute of order.

• Court of Appeal (Civil Division): appeal from the judgment of His Honour Judge Roger Cooke, sitting as a High Court judge on 3 February 1996. Appeal allowed by Lord Justices Auld and McCowan; Lord Justice Millett dissented.