Burford UK Properties Ltd & Ors v Forte Hotels (UK) Ltd & Ors

A proviso following a contractual revenue definition may qualify the machinery for calculating rent rather than impose a separate tenant covenant. Its effect depends on the schedule and lease read as a whole. The requirement to use best endeavours to maximise bedroom revenue was a mandatory assumption for calculating Net Bedroom Revenue. The word received therefore included amounts receivable, and the rent-review machinery adjusted the receipts to reflect the contractual hypothesis. The proviso created no independent cause of action for damages or forfeiture. Disputes about the resulting Notional Rental Value could be resolved under the arbitration clause. The appeal was dismissed.

The claimants, the landlords under a 99-year hotel lease, appealed from a declaration made by Mr Simon Berry QC, sitting as a Deputy Judge of the Chancery Division, on 19 November 2001. The lease provided for rent reviews every fourteen years, with reviewed rent calculated by reference to Net Bedroom Revenue and Notional Rental Value.

The dispute concerned proviso (1) to paragraph 1(e) of the third schedule. It required the tenant to use best endeavours to obtain maximum revenue from bedroom accommodation. The issue was whether this was a covenant giving rise to damages, or a qualification to the rent-review formula requiring revenue to be calculated on the hypothesis that the tenant had complied with it. The landlord also argued that it could elect between damages and adjustment of the rent-review figures.

1. Disposition. By a majority, Arden LJ and Auld LJ dismissed the appeal. The claim was dismissed, with the costs of the appeal payable on the standard basis if not agreed.
2. Construction of the proviso. The meaning of proviso (1) had to be determined from the rent-review scheme, the definition of Net Bedroom Revenue and the lease as a whole. The words provided that could introduce a covenant, and shall could be mandatory, but neither was determinative. Here, paragraph 1(e) was in substance a set of directions for computing revenue. Proviso (1) prescribed the basis or hypothesis that the tenant had used best endeavours to maximise bedroom revenue. The word received was therefore capable of meaning receivable. This avoided any breakdown in the rent-review machinery and required automatic adjustment of the relevant receipts. The contextual approach was consistent with the authorities referred to concerning the effect of shall, including Re Courage Group’s Pension Schemes [1987] 1 WLR 495.
3. Remedy and arbitration. Proviso (1) imposed no independent obligation of the kind described in the lease’s covenants, conditions or provisions. It consequently gave no separate claim for damages or forfeiture. Paragraph 3(31) supported that conclusion because it required information for ascertaining or verifying amounts due under the third schedule, rather than unliquidated damages. Paragraph 7 gave the arbitrator wide jurisdiction over disputes concerning Notional Rental Value and the construction or effect of the schedule. Arden LJ further observed that, even if the proviso were treated as an obligation, the rent-review scheme was sufficiently clear to exclude the secondary damages obligation discussed by Lord Diplock in Photo Production Ltd v Securicor Ltd [1980] AC 827.
4. Own-breach argument. The maxim that a contracting party cannot rely on its own breach had no application. The tenant was not relying on its alleged failure to avoid liability, and the landlord could have referred the rent issue to arbitration.
5. Chadwick LJ. Chadwick LJ would have varied the order. He considered proviso (1) a condition precedent to using actual or receivable revenue as the base, with paragraph 7 enabling the arbitrator to determine Notional Rental Value by an analogous notional-revenue methodology. He nevertheless agreed that the landlord could not recover the claimed loss by damages, so the practical result was the same.

• Court of Appeal (Civil Division): In [2003] EWCA Civ 1800, the appeal was dismissed by a majority. The claim was dismissed with costs of the appeal on the standard basis if not agreed.
• High Court of Justice, Chancery Division: Mr Simon Berry QC, sitting as a Deputy Judge, determined the preliminary construction issue and declared that proviso (1) was not a damages covenant but qualified the calculation of Net Bedroom Revenue.