Dockside Holdings Pty Ltd v Rakio Pty Ltd
[2001] SASC 78
•5 April 2001
DOCKSIDE HOLDINGS PTY LTD v RAKIO PTY LTD
[2001] SASC 78
Full Court: Olsson, Duggan and Williams JJ
1................ OLSSON J....... I agree with the reasons expressed by Williams J and that the appeal should be allowed, the refusal of the learned trial judge be set aside and a declaration made in the terms proposed by Williams J.
2................ DUGGAN J...... I agree that the appeal should be allowed for the reasons given by Williams J.
I also agree with the orders proposed by Williams J.
4................ WILLIAMS J.. This is an appeal against the decision of a single Judge of this Court as to the construction of a lease.
The appellant (which is the plaintiff in the action) is the lessee of shop premises within the Elizabeth Shopping Centre and has brought these proceedings against its landlord seeking declaratory relief in order to resolve a dispute arising under the lease as to the meaning of the rent review clause. The defendant relies upon a literal reading of the document; the plaintiff argues that the consequences of a literal reading are so ridiculous as to point to a drafting error.
There is no claim for rectification but the plaintiff contends that the document should be read as if its language were different from that appearing on the face of the lease. The Court is required to decide what part (if any) the current rent is intended to play as a factor in the rent review process.
A fresh point of law on appeal
The argument presented for the plaintiff upon this appeal was different from that upon which the plaintiff relied at first instance. The plaintiff now concedes (contrary to its previous submission) that if a literal reading be given to the lease, the construction placed on the document by the Judge at first instance is correct. However, the plaintiff now contends that the imposition of a literal meaning upon this commercial agreement would create such absurdity as to influence the Court to adopt the construction for which the plaintiff has always argued. The plaintiff is entitled to advance this fresh point of law but the Court does not have the benefit of the views thereon of the Judge at first instance.
The fresh argument of the plaintiff recognises that “mere unreasonableness” in the result is not enough for its argument to succeed. However, the plaintiff contends that a combination of factors in this case will lead to the literal interpretation being treated as “absurd” - in light of recent developments in the law of Australia. See Westpac Banking Corporation v Tanzone Pty Ltd & Ors [2000] NSWCA 25 applying Investigator Compensation Scheme Ltd v West Bromwich Building Society (“ICS”) [1998] 1 WLR 896.
The factors which arguably provide support for the appellant’s argument are:
(a).... that the rent fixing formula upon which the landlord relies includes an element which is so arbitrary and capricious in its operation as to “flout business commonsense”.
(b)that this formula requires a valuer to make a comparison between notional leases under such extraordinary circumstances as to suggest that the exercise is a “nonsense” leading to a “ridiculous commercial result”.
(The expressions which I have quoted are taken from the speech of Lord Hoffmann in the ICS case).
The lease in summary
In s 6 of these reasons I have recited in full the relevant extracts from the lease and in s 7 I have summarised the routine for rent fixation which is apparent therefrom. It is important to have an appreciation of that routine as the problem which arises in Year 5 also must be faced in other years. If the lessee is correct in its analysis of the effect of a literal reading of the lease, its problem will become aggravated in later years unless some alternative interpretation of the document be adopted.
The question at issue concerns the rent payable for the fifth year of the lease commencing on 1 August 1997. For the first year the rent is fixed by the agreement at $92,400 and it then automatically increases by nominated percentages to reach (upon my calculations) $100,716 in the second year, $109,780 in the third year and $114,171 in the fourth year. (It is possible that this lastmentioned figure could be higher when CPI is brought to account but that possibility can be ignored for the purposes of the argument). In the event of disagreement as to the rent for the fifth year, the lease provides for a valuer (independently appointed) to make a determination.
The critical expression (in cl 13.2.3 of the lease) provides (in case of dispute) that the new rent for the fifth year (and also for the eighth year) should be “the annual rent payable at the time of the review varied in accordance with any variation in the market rental for the Demised Premises since the commencement date or the last review of rental (as applicable).” In the table which I have set out in s 7 of these reasons, I have reached the conclusion that the principle applicable to Years 5 and 8 will apply also in Years 11, 15 and 18 upon renewal of the lease.
As the parties are in dispute, the plaintiff as lessee, seeks a declaration that the rental payable for the fifth year is to be the best open market rental of the premises as at 1 August 1997 as fixed by a valuer. The defendant landlord on the other hand contends that the rental is $114,171 (the rent payable as at the commencement of the fifth year), but subject to an adjustment by adding (or subtracting) the variation between market rental (as assessed by a valuer) at two different times - the beginning of the fourth and fifth lease years.
It is not in dispute that as an interim measure, the rental of $114,171 must continue to be paid until the valuer has assessed the new rent whereupon an appropriate adjustment retrospective to 1 August 1997 must be made. Although this aspect of the matter is itself not contentious, I mention it because the drafting associated with this provision lies at the heart of the problem.
The lease (dated 15 June 1995) is for a term of ten years commencing on 1 August 1993 with a right of renewal for a further ten years upon notice given by the lessee during the period of three to six months before the expiration of the original term. Except for the right of renewal, the further term is generally to be upon the same basis as the original term. It is apparent that the parties intended to put in place a process of annual rent adjustments throughout the original term and its renewal based sometimes upon an automatic escalation in accordance with a mathematical formula and at other specific times (including 1 August 1997) involving the application of a valuer’s opinion in the event that the parties are unable to agree an appropriate rental. The formula for this arrangement is spelt out in some detail for each year of the first term of ten years but its application in the renewed term has been incompletely addressed. For the sake of completeness and to gain a better understanding of the document, this shortcoming is addressed in the table to be found in section 7 of these reasons. During the course of argument counsel had the opportunity to address a draft of that table but no-one took issue with the approach which is there summarised.
The opposing contentions and the case at first instance
The appellant lessee contends that the rental for the fifth year is fixed by the adoption of the current market rental as established by the valuer’s opinion and without regard to any historical considerations. The respondent landlord argues (as reflected in His Honour’s decision) that the process is more complicated and involves an exercise based upon the rental previously payable.
The landlord’s contention as set out in its solicitor’s correspondence before action is as follows:
“The clause does in fact provide that the rental payable from 1 August 1997 will be the rental payable immediately preceding that date varied in accordance with any variation in the market rental since 1 August 1996. Accordingly, the clause is quite specific in that the rental is not to be varied to the then current rental but is to be varied only in accordance with any variation in the market rental since the last review. Accordingly, the clause will provide that the rental payable immediately prior to 1 August 1997 can be increased or decreased only by the percentage variation in the market rental between 1 August 1996 and 1 August 1997.”
The landlord submits that the rental (which has been automatically escalated by annual percentages in Years 2, 3 and 4 in a way which may have little relation to the market) is then to be further adjusted by a percentage which brings to account the movement in market rentals between nominated dates. The identification of these dates was itself in issue at first instance.
While the defendant (in terms of the above letter) seeks to make the comparison and establish the movement in the market between dates only one year apart, that letter inadequately recites the terms of the lease. The letter refers to “any variation in the market rental since the last review” whereas the lease itself refers to “any variation in the market rental for the Demised Premises since the commencement date or the last review of rental (as applicable).” As the Trial Judge pointed out, the words “commencement date” have no work to do unless they are applied in this particular instance.
His Honour rejected the defendant’s argument to the extent that he held that the adjustment required a comparison between market value at the commencement of the lease and 1 August 1997. His Honour otherwise accepted the defendant’s argument and in his reasons for judgment dated 30 March 2000 said:
“The commercial reality or otherwise of each interpretation must be considered. The plaintiff’s case for adjusting the rental at 1 August 1997 and 2000 to bring it into line with the market rental at those dates has some appeal. However, the opposing view is not so lacking in commercial sense that it should, for that reason, be rejected.
The ordinary and natural meaning of the words must prevail. In my opinion the proper construction is that the parties intended that at 1 August 1997 the percentage variation in the market rental between the commencement date of the lease and 1 August 1997 would be determined and the current annual rental payable would be varied up or down by the same percentage.”
His Honour therefore refused the plaintiff’s application for declaratory relief.
Identification of a capricious element in the rent fixing formula
In a generally rising market (if it be the case), the rent (which has been automatically “ratcheted up” from $92,400 for four years by a total of $21,771 (or 23.6 per cent) without reference to the market, will then be subject (upon a literal reading of the lease) to a further increase for Year 5 which is equal to the overall movement in market rental which has occurred over the four year period from the commencement of Year 1 to the commencement of Year 5. One does not need much commercial knowledge to appreciate how far away from the market this calculation is likely to be. To introduce into the formula for future application a factor which takes account of the movement in rent over the past four years (to be superimposed upon the automatic escalation), involves an obvious exercise in double counting. Even if (as suggested in argument by way of example) the current market rent as at 1 August 1997 is only about (say) $100,000, the difference between $92,400 and the market rent (say $7600 or 8 per cent) will see the rent of $114,171 in Year 5 increased to about $123,000 - or about 23 per cent above the market. The use of the Year 4 rent (perhaps already inflated above the market) as a base for the Year 5 adjustment means that the application of the formula as identified by the single Judge will almost inevitably result in a new rent which is significantly above a market rent as at August 1997. If this process of adjustment is carried forward to the Year 8 review, the divergence between the rental and the market will become even greater. This may explain why the defendant (apparently contrary to its own interests) argues for an adjustment based on variation over only twelve months. Under the market conditions which I have assumed, this construction - if it were available - would ameliorate to some extent the impact upon the lessee of the double counting.
I doubt whether I would describe this unreasonable result as “absurd” merely because the Year 5 rental (derived from a literal reading of the lease) is likely to be so excessive. However, having regard to the capricious nature of the calculation and the extraordinary results which the rent fixing formula produces, the procedure and its outcome may be treated as lacking in commercial common sense.
The definition of “market rent” and its significance
Apart from the sheer size of the likely rent increase for Year 5 and the capricious way in which the formula operates (as discussed in the previous paragraph), there is another factor which bears upon the question as to whether a literal construction of cl 13.2.3 is appropriate or whether some other construction might be preferred. The point emerges upon an examination of the meaning of “market rent” (quoted below and contained in interpretation clause 1.1). This definition must be considered in relation to the task which is imposed upon a valuer when making the determination required by cl 13.2.3.
The definition of market rent requires the ascertainment of an annual rent for the Demised Premises for “the residue of the current lease term at the review date”. In the present case the review date is 1 August 1997 and the residue of the current lease term is a period of five years commencing on 1 August 1997 and expiring on 31 July 2003. For the purposes of this judgment I will call this period “the notional term”.
When read literally, cl 13.2.3 of the lease requires that an assessment be made of the market value of the notional term on “the commencement date” namely 1 August 1993, and also again on 1 August 1997, for the purpose of establishing the difference between the market rent for such a lease at these two dates. Thus, the valuer would be required to establish what rental a person would be prepared to pay in 1993 for a lease of five years to commence in 1997 for premises at Elizabeth Shopping Centre to be used as a pawnbroking and secondhand shop (being the permitted use mentioned in the lease).
Not uncommonly, valuers are called upon to perform artificial theoretical exercises, but it seems to me to be ludicrous to ask a valuer to estimate the market rent which would be payable in 1993 for a lease of these particular premises to commence in 1997 so such rent can be compared with the rent which would be payable for the same premises when the lease actually commences five years later. In my opinion to undertake that exercise would be bizarre. What utility is there in making such a comparison? It would only be in special circumstances that anyone would be interested in entering into a lease to take effect five years into the future. How could a comparison between that situation and the more normal situation of a lease taking immediate effect be relevant to the rent review now in question? The comparison is silly.
A literal interpretation of cl 13.2.3 and the interpretation clause would require a similar exercise (to that required for Year 5) to be undertaken at the beginning of Years 8, 11, 15 and 18 (see table to section seven of these reasons). On each occasion when the valuation exercise is undertaken, the subject matter of the valuation will be different - namely a lease for the then residue of the current lease term. Therefore, in Year 8 the residue will be three years whilst in Year 11 the residue will be ten years. In all cases it will also be necessary to assess the amount which a lessee might have been prepared to pay for each of these terms if the arrangement had been made some years earlier. A lease (or its renewal) with a residue of five, three or ten years to run may be subject to different market forces. The Court can take note of the fact that the length of a term of a lease may be relevant to market rent - at least for the purposes of this general overview. To assess market rent for a proposed lease with a term of five years would itself be a normal commercial rent fixing exercise. However, it is the commercial irrelevancy of the requisite comparison which suggests a drafting mistake. These observations confirm the view which I have already expressed as to the oddity of the rent review arrangements.
In my opinion, it is most unlikely that the parties would have intended to rely upon such a commercially unrealistic approach to the settlement of their differences.
Courts are accustomed to the task of construing badly drafted documents but the well-known rules of construction may then require the document to be given other than a literal reading. In the present instance, the case for a strict application of the literal meaning of the language breaks down when its implications are studied. It seems that some sort of a mistake must have occurred. In section 9 of these reasons I have identified what appears to have gone wrong.
Extracts from the lease
The relevant provisions of the lease read as follows:
“1.1. “Market Rent” means the best annual rent that can reasonably be obtained in the open market by a willing but not anxious Lessor for the whole of the Demised Premises with or without vacant possession on the basis of a lease thereof for the residue of the current lease term at the review date on such terms and conditions as is considered can procure for the Lessor acting reasonably both in the granting of the term and in fixing the covenants and conditions upon which the term is to be held and on the basis that the Lessee has complied with all the obligations imposed on the Lessee as to repair and maintenance (but without prejudice to any rights or remedies of the Lessor in regard thereto) and disregarding (as far as is legally permissible) restrictions relating to rent or to security or tenure contained in any statute or orders rules or regulations thereunder and any directions thereby given relating to any method of determination of rent such lease being on the same terms and conditions in all other respects as this present demise (save in respect of any restriction herein on the use of the Demised Premises and save in the case of determination of the Market Rent consequent upon the exercise by the Lessee of a covenant for renewal that covenant for renewal) without the payment of any fine or premium and taking into account any increase in the value of the Demised Premises including but without being limited to any increase in value arising from any permanent improvements which were erected or installed at the Lessee’s expense.”
““Term” means the term describing in Item 6 of the Reference Schedule hereto commencing on and including the date set out in item 6 of the Reference Schedule hereto and any extension or renewal thereof and any period during which the Lessee shall hold over or be or remain in occupation of the Demised Premises.”
“13.1 Renewal That on the written request of the Lessee made not less than three nor more than six months before the expiration of the said term AND PROVIDED THAT there shall not at the time of such request be any existing breach or non-observance of any of the covenants and conditions herein contained and on the Lessee’s part to be observed and performed the Lessor will at the expense of the Lessee grant to the Lessee an extension of this Lease of the Demised Premises for a further term as set out in Item 6 of the Reference Schedule subject to and upon the same terms and conditions as are herein contained save for the exclusion of this clause giving the Lessee a right of renewal...
“13.2 Rent Review
......... Notwithstanding anything herein appearing to the contrary the annual rental hereby reserved shall be reviewed during the term or any renewed term (as applicable) as at the date and in the years specified in Schedule VIII hereto whereon the annual rental to be paid for the next following Review Period shall be:
13.2.1....... for the years specified in Part A of Schedule VIII hereto the new annual rental payable shall be the annual rental payable at the time of the review increased by nine percent (9%) per annum;
13.2.2for the years specified in Part B of Schedule VIII hereto the new annual rental payable shall be the annual rental payable at the time of review increased by the higher of (a) the proportion (if any) by which the figure in the All Groups Index for South Australia of the last edition of the Consumer Price Index published by any agency bureau or department of the Commonwealth Government (“the Index”) prior to the review increased over the figure shown in the edition of the Index last published prior to the commencement of the preceding Lease Year of the annual rental payable at the time of review increased by the sum equivalent to four per centum (4%) of the said annual rental and;
13.2.3....... for the years specified in Part C of Schedule VIII hereto the new annual rental shall be the rental fixed by mutual agreement of the Lessor and the Lessee and in the event of any disagreement between the Lessor and the Lessee on the subject the new annual rental shall be the annual rental payable at the time of the review varied in accordance with any variation in the market rental for the Demised Premises since the commencement date or the last review of rental (as applicable). The market rental for the Demised Premises shall be fixed in the event of any disagreement between the Lessor and the Lessee on the subject by a licensed valuer appointed by the parties or in the event of any disagreement on the appointment of a valuer by a valuer appointed by the President from time to time of the Australian Institute of Valuers and Land Economists (South Australia Division) whose decision shall be final and binding on the parties and the expense of any reference to a valuer shall be borne equally by the Lessee or the Lessor;
PROVIDED FURTHER THAT the stipulation relating to the time method and manner of payment of rent hereinbefore set forth shall (mutatis mutandis) apply to the annual rental so agreed or determined AND PROVIDED ALWAYS that the rent reviews pursuant to this Clause shall be carried out as at and from the date or respective dates (as the case may be) stipulated in Item VIII of the Schedule hereto and rent instalments varied from such date or dates (as the case may be) and any adjustment necessary in respect of any underpayment of any instalment paid after any such date or dates at the rate previously applicable shall be paid by the Lessee to the Lessor forthwith upon the reviewed annual rent being agreed or determined (as the case may be) the Lessee paying the current instalments of rent due in the manner hereinbefore appointed pending determination of the new rent as herein provided.”
“SCHEDULE VIII
(Clause 13.2)
PART A
1st August 1994 and 1995
PART B
1st August 1996, 1998, 1999, 2001 and 2002
PART C
1st August 1997 and 2000”
Comment upon the terms of the lease
The rent for the first year is fixed at $92400 per annum. It is apparent from the definition of “market rent” that the parties contemplate a valuer’s assessment in Year 11 if rent is not agreed. Schedule VIII is divided into three subsections or “parts”; it establishes by its “parts” three regimes (A, B and C) which will be applied in accordance with the undermentioned table in successive years (assuming that the lessee elects to renew the ten year term). Regime A involves an automatic 9 per cent increase. Regime B involves either 4 per cent increase or a percentage based on CPI. Regime C is the subject of the present dispute. The system throughout its twenty year potential operation (commencing with year one in 1993) is set as follows:
| Original Term (Years 1-10) | Renewed Term (Years 11-20) | ||||||||||
| Year No | Commencing 1 August | Method of Adjustment | Year No | Commencing 1 August | Method of Adjustment | ||||||
| 1 | 1993 | X-$92,400 | 11 | 2003 | C | ||||||
| 2 | 1994 | A | 12 | 2004 | A | ||||||
| 3 | 1995 | A | 13 | 2005 | A | ||||||
| 4 | 1996 | B | 14 | 2006 | B | ||||||
| 5 | 1997 | C | 15 | 2007 | C | ||||||
| 6 | 1998 | B | 16 | 2008 | B | ||||||
| 7 | 1999 | B | 17 | 2009 | B | ||||||
| 8 | 2000 | C | 18 | 2010 | C | ||||||
| 9 | 2001 | B | 19 | 2011 | B | ||||||
| 10 | 2002 | B | 20 | 2012 | B | ||||||
I observe that in the years marked A and B, the rent will be “ratcheted up” arithmetically by reference to a base figure based on the rental fixed for an earlier year. In the years marked C (years 5, 8, 11, 15 and 18) a valuer is to be employed if the parties cannot agree a new rental. This procedure requires the application of the formula in terms of lease clause 13.2.3 which is now at issue.
In cl 1.1 the lease refers to the review date and in cl 13.2.3 there are corresponding references to the “term of the review” and the “last review of rental”. In my opinion all these expressions are directed to the reviews which are to be carried out as required by Part C of Schedule VIII. The process of escalations in rent as provided in Part A and B of that schedule is not, as now relevant, “a review”.
I note and apply the remarks of Brooking J on behalf of the Full Victorian Supreme Court in Pasen & Anor v Buy-Rite Discounts Pty Ltd (1992) V ConvR 54-431 - p65087 at 65091:
“In my view, a lease which fixes the rent for the whole of the term by enabling the rent throughout the term to be ascertained from within the four corners of the lease does not, according to the ordinary use of language, provide for a review of the rent if it provides for an increase or increases or decrease or decreases in the rent in the course of the term, whether by way of simply stating the new amount or amounts or by way of requiring a calculation to arrive at the new amount or amounts. The rent is fixed by the lease itself throughout the term and the lease in fixing different amounts is not providing for a review of the rent: it is simply fixing a rent which is not uniform throughout the term.”
Legal principle
In Westpac Banking Corp v Tanzone Pty Ltd (“Tanzone”) [2000] NSWCA 25, the New South Wales Court of Appeal was faced with a factual situation having much in common with the present. A lease provided a formula for biennial rent adjustments using a formula which employed CPI increases as its base. The literal reading of the lease required the entire CPI increase since the commencement of the term to be added at each review date to a figure which itself already included the entire increase in CPI which had previously occurred. As the Court observed (par 26) “This meant that the lessor, throughout a twenty year lease, got at least a multiple inflation effect increase at every rent review after the first.” Upon a literal construction there were regular massive increases in rental. In the result, the Court read the document by altering the formula in its application to the first review date and then in its different application (as the Court decided) to subsequent review dates.
In the original lease, a factor “Y” in the rent fixing formula was defined as follows:
“...Y is the Consumer Price Index Weighted Average Sydney All Groups Number for the last quarter preceding the Date of Commencement of the term of this Lease.”
The Court was of the opinion that the clause should be read “as if” it said:
“...Y is, for the first Review Date, the Consumer Price Index Weighted Average Sydney All Groups Number for the last quarter preceding the Date of Commencement of the term of this Lease, and for each subsequent Review Date, that Number for the last quarter preceding the immediately preceding Review Date.”
The extent to which the Court (without rectification) was prepared notionally to redraft the clause for construction purposes has provided me with guidance.
The Court considered that reading the document in accordance with this modification avoided “the absurdity of the Rent Review Clause and properly reflects the intention of the parties to be gathered objectively from the whole context of the lease.” The case was treated as one of obvious mistake made by the draftsperson. Although the words of the lease were described by Windeyer J at first instance as “perfectly clear”, his decision was reversed upon appeal. However, the Court of Appeal expressed the view that “mere unreasonableness is not of itself enough to justify the application of the absurdity rule”. It is noteworthy that the Court of Appeal was prepared to interfere notwithstanding that the document upon its face was quite effective; moreover the Court was prepared (for the purpose of construction) to substitute its own extensive drafting. In refusing special leave to appeal from that decision, the High Court of Australia observed that the application of the principle of absurdity involves “questions of degree”.
In reaching its conclusion, the Court of Appeal cited the following: Fitzgerald v Masters (1956) 95 CLR 420; Watson v Phipps (1985) 60 ALJR 1; Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation(Cth) (1981) 147 CLR 297; Mannai Investments Co Pty Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 and Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, particularly per Lord Hoffmann in each of the two lastmentioned case.
The present case is not one in which an obvious verbal slip can be identified. An example of such a case would be Watson v Phipps where the Privy Council was able to construe “offer to purchase” as “option to purchase”. Likewise in Fitzgerald v Masters, although a set of conditions were incorporated so far as they were “inconsistent” with the agreement, the High Court was able to read this as “consistent”.
Without the assistance of the decision in Tanzone (which was not referred to in argument in the present case at first instance) I would have faced difficulty in accepting that (for construction purposes) the Court may so substantially notionally re-write the document to the extent which the Court of Appeal was prepared to embrace.
In Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912-913 Lord Hoffmann (with whom Lord Goff, Lord Hope and Lord Clyde concurred) said:
“...I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381, 1384-1386 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of “legal” interpretation has been discarded. The principles may be summarised as follows.
(1)... Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2)The background was famously referred to by Lord Wilberforce as the “matrix of fact,” but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(3)... The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(4)The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749.
(5)... The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 201:
.................. “if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.”
If one applies these principles, it seems to me that the judge must be right and, as we are dealing with one badly drafted clause which is happily no longer in use, there is little advantage in my repeating his reasons at greater length. The only remark of his which I would respectfully question is when he said that he was “doing violence” to the natural meaning of the words. This is an over-energetic way to describe the process of interpretation. Many people, including politicians, celebrities and Mrs Malaprop, mangle meanings and syntax but nevertheless communicate tolerably clearly what they are using the words to mean. If anyone is doing violence to natural meanings, it is they rather than their listeners.”
And at 914
“...I must make some comments upon the judgment of the Court of Appeal. Leggatt LJ said that his construction was “the natural and ordinary meaning of the words used.” I do not think that the concept of natural and ordinary meaning is very helpful when, on any view, the words have not been used in a natural and ordinary way. In a case like this, the court is inevitably engaged in chosing between competing unnatural meanings. Secondly, Leggatt LJ said that the judge’s construction was not an “available meaning” of the words. If this means that judges cannot, short of rectification, decide that the parties must have made mistakes of meaning or syntax, I respectfully think he was wrong. The proposition is not, I would suggest, borne out by his citation from Through the Looking-Glass. Alice and Humpty-Dumpty were agreed that the word “glory” did not mean “a nice knock-down argument.” Anyone with a dictionary could see that. Humpty-Dumpty’s point was that “a nice knock-down argument” was what he meant by using the word “glory.” He very fairly acknowledged that Alice, as a reasonable young woman, could not have realised this until he told her, but once he had told her, or if, without being expressly told, she could have inferred it from the background, she would have had no difficulty in understanding what he meant.”
There will be many instances where the drafting of an agreement appears to have gone awry although effect can be given to the document upon its literal meaning. The difficulty in the present case is that words have not been used in a natural and ordinary way. Market rent has been given a special meaning. The drafter of the document (like Lord Hoffmann’s example of Humpty-Dumpty) has included a definition clause which is difficult to reconcile with cl 13.2.3 of the lease. Whereas the lease cl 13.2.3 (without reference to cl 1.1) envisages a constant or immutable subject matter for valuation, the interpretation clause shows this not to be so. The rent upon a lease to take effect some years in the future (for a notional term commencing at the review date) is to be compared with the rent which the market will pay for the same lease at the review date. (This of course is not the orthodox approach of valuing premises at two different dates; such an exercise would typically require a comparison of identical transactions in respect of the same subject matter undertaken on different dates; the present case involves the comparison of two different subject matters - a lease giving present possession and one giving possession four years hence).
In my view the drafter of the document has managed to muddle up the syntax. The phrase “a rental to accord with (current) market rent” suggests itself to me as appropriate in place of the clumsy phrase, a rental “varied in accordance with any variation since the commencement date”. The mistake is in the reference to “the rental payable at the time of review” as the starting point for the calculation. As I see it, the drafter has tried in one expression to achieve two purposes, namely, (a) to keep the existing rent in place as an interim measure pending resolution of the dispute and (b) to establish a new market rent to replace that originally negotiated.
Unfortunately the two aims appear to have been run together so as to produce a nonsense. I will discuss this further in section 9 of these reasons.
The construction to be placed upon this lease
As regards Year 5 of the lease, cl 13.2.3 (in the absence of agreement) literally requires the rental payable to be that applicable in Year 4 but subject to alteration. In the meantime, pending the fixing of a new rent, the existing rent is payable subject to any subsequent “adjustment necessary”. (This phrase is taken from the second proviso to the clause). There is utility in providing (as the lease appears to have done) for the Year 4 rent to continue as an interim measure in order to ensure a continuing flow of rent to the landlord until the issue of the new rental is resolved.
The variation in rent for Year 5 which is required is expressed to be a modification or alteration whereby the continuing Year 4 rental is “varied in accordance with any variation in market rental for the Demised Premises since the commencement date:..” It may be assumed that the rental in place on the commencement date (and negotiated between strangers at arms length) is itself a “market rent”. As I see it, the draftsperson has tried to leave the old rent (with its escalations) in place as an interim measure for Year 5 until it has been overtaken by either a new agreement or independent assessment. This has been achieved in the final proviso to cl 13.2.3. It is the need to vary the old rent “in accordance with any variation” which causes the problem if the document is read literally.
If the draftsperson (in referring to the proposed rental variation and new rent) had used the phrase “to accord with current market rent” then the problem disappears. I consider that such an expression will reflect the drafter’s intention.
To deal with the matter more comprehensively (so as to cover the interim period pending the review) I would read cl 13.2.3 (as relevant) as if it said:
“in the event of any disagreement between the lessor and the lessee the annual rental payable at time of the review shall continue until a new annual rental is fixed which shall accord with (current) market rent.”
In construing the document (without an order for rectification) “as if it said” something different, I am following the course adopted by the New South Wales Court of Appeal in Tanzone. The present case (like Tanzone) involves an extreme set of facts upon which it is evident that something must have gone wrong in the drafting (cf per Lord Hoffmann in ICS at 912). The literal approach for which the landlord contends produces a ridiculous commercial result based upon a review process which flouts commonsense. The nature of the mistake and what was intended is sufficiently clear as to justify the Court in reading the document “as if” the appropriate language had been used to reflect the intentions of the parties.
Upon this basis the appellant is entitled to a declaration in the following terms:
A declaration that upon the true construction of the lease and in the absence of further agreement between the parties the rent payable for Year 5 commencing on 1 August 1997 is the market rental of the Demised Premises as at 1 August 1997 as determined by a valuer in accordance with clause 13.2.3 of the lease.
Pending that determination the plaintiff is required to continue to pay rental at the rate applicable in respect of Year 4 of the lease.
18
4
0