Act: McClelland; Davidson Chalmers LLP

Alt: D Thomson; Brodies LLP

19 February 2013

Introduction

[1] In the course of a commercial action for payment of an increased sum in rent, the defenders, as tenants of the subjects at 64A John Street, Helensburgh, challenged the validity of a rent review, instituted by the pursuers as landlords, which purported to create the increase in terms of the lease between the parties. The lease ran from 1 October 2000 until 31 March 2020. In terms of Clause 25, the rent was subject to review at the instance of the pursuers on 1 October in each of the years 2005, 2010 and 2015, each of those dates being defined in the lease as "the relevant term".

[2] Clause 25(a) provided that:-

"The [pursuers] shall give to the [defenders] three months written notice prior to the relevant term of their intention to exercise their right to require a review of the rent. Such notice shall specify the rent which the [pursuers] propose as the fair market rent at the relevant term... The rent payable from the relevant term shall be such sum as (i) shall have been specified in the said notice or (ii) shall be agreed between the parties within three months of the date of receipt by the [defenders] of the said notice... or (iii) shall be determined (at the election of the [defenders], such election to be made by counter-notice in writing given by the [defenders] to the [pursuers] within three months of the date of receipt of the said notice) by the independent surveyor aftermentioned, subject to the terms aftermentioned".

Clause 25(c) continued:-

"In the event of the [pursuers] having failed to give due notice in terms of [Clause Twenty-fifth (a)] of their intention to exercise their right to require a review of rent at any relevant term or if the rent is not reviewed at the relevant term for any other reason they shall be entitled to require such a review as at the Twenty eighth day of any month following the relevant term by giving to the [defenders] three months written notice prior to such term and the foregoing provisions of this Clause shall mutatis mutandis apply to such review provided (i) that the review of rent in terms of this provision shall have regard to the level of fair market rents current at the relevant term and not at the succeeding term and (ii) any increase in rent resulting from such review shall have effect from the relevant term and not from the succeeding term."

[3] The pursuers issued a letter to the defenders dated 19 July 2010 purporting to be a notice of rent review as follows:-

"Dear Sirs,

Rent Review: 1st November 2010, 64a John Street, Helensburgh

Landlord - R M Prow (Motors) Limited Directors Pension Fund

Tenant - Argyll & Bute Council

I act on the instructions of the Landlord in connection with a rent review originally scheduled under the terms of the lease as at 1^st October 2010 at the above location. The original Landlords were as stated above, now Proven Properties [Scotland] Ltd.

In terms of the lease contract ... between the Landlord R M Prow (Motors) Limited Directors Pension Fund and Tenant Argyll & Bute Council, ... Clause 25^th, there is provision for the annual rent to be reviewed at 1^st October 2010. The lease requires 3 months written notice to be given in advance of the rent review date however no notice was issued at the relevant time. Accordingly, as provided for in terms of said lease, the landlord wishes to have the rent review occur on the 1^st November 2010 and you are hereby notified of the landlords intention to review the rent in accordance with these lease provisions at 1^st November 2010.

You are hereby given notice that the landlord specifies that the fair market rent as at 1^st November 2010 shall be the annual sum of £58,000 exclusive ...

Yours sincerely

Signed as agent for and on behalf of the landlord".

[4] This purported notice contained several errors, notably that: (i) the landlords were "now" Proven Properties [Scotland] Ltd; (ii) the rent review was to occur on 1 November 2010, thereby giving less than the required three months notice; and (iii) the fair market rent was stated as at 1 November 2010 instead of the relevant term (1 October 2010).

[5] Having noticed these errors, the pursuers issued a further letter dated 24 August 2010 in the following terms:-

"Dear Sirs

Rent Review: 28 November 2010, 64a John Street, Helensburgh

Landlord - R. M. Prow (Motors) Limited Directors Pension Fund

Tenant - Argyll and Bute Council

I refer to the Lease between the Trustees for R. M. Prow (Motors) Limited Directors Pension Fund and you, Argyll and Bute Council ... of the subjects 64a John Street, Helensburgh ("the Property").

It has come to my attention that the notice that I sent you on 19 July 2010 in connection with the rent review for the Property under the Lease should have been notice to the 28^th of a month and my notice referred to 1st November.

Accordingly, I hereby give you notice on behalf of the Landlord, that the Landlord requires a review of the rent under the Lease as at 28 November 2010.

As the review has regard to the level of rents at the relevant term (which is 1 October 2010) and any increase in rent resulting from the review has effect from that date, this has no practical impact on the Council, but the notice is given again in order to comply, strictly, with the provisions of the Lease.

The Lease provides that such a notice as this is to specify the rent which the Landlord proposes is the fair market rent at the relevant term in lieu of the current rent. The Landlord proposes a rent of FIFTY EIGHT THOUSAND POUNDS (£58,000) STERLING per annum.

...

Yours sincerely

Agent for the Trustees for R. M. Prow (Motors) Limited Directors Pension Fund".

[6] The second letter thus expressly corrected the previous error as to the date of the rent review and gave notice that a rent review would take place on 28 November 2010. The second letter identified the pursuers as landlords and stated the proposed fair market rent as at the relevant term, even if it did not expressly refer to there having been errors as to these matters in the previous letter.

Proceedings before the commercial judge

[7] Following a debate, the commercial judge held (Opinion [2012] CSOH 77, para 46), that the first letter did not operate as an effective notice of rent review for the purposes of Clause 25(a). If the letter had satisfied the fundamental requirements of the lease, nonetheless it still failed the "reasonable recipient" test (Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749) because of the various errors contained within it (Opinion, para 47). However, the judge also held that the second letter satisfied both the fundamental requirements of a rent review notice in terms of Clause 25(c) and the "reasonable recipient" test. The judge observed (ibid, para 51) that:-

"While ... the first letter forms part of the relevant background in the application of that test, ... the second letter clears up the confusion, ambiguities and misleading information contained in the first letter. It clearly and unambiguously communicated the required message to the defenders. There is no force in the defenders' complaint that the reasonable recipient would be confused by two different three month time periods running for the purpose of service of a tenant's counter notice. ... the provisions of the lease on this matter are quite clear - the defenders have three months from the date of receipt of the second letter within which to serve a counter notice."

[8] Clause 25(a) provided for service of a counter notice, if the defenders wished to have the fair market rent determined by an independent surveyor. The counter notice was to be served within three months of receipt of the rent review notice. The commercial judge held that the time specified in the clause was of the essence because, in the absence of a timeous counter notice, the lease required payment of the new rent notified. This was a deeming or default provision upon which the pursuers were entitled to rely without the need for service of a further or ultimatum notice (ibid, paras 65 - 69; Visionhire v Britel Fund Trustees 1991 SLT 883, Lord President Hope at 889; Charterhouse Square Finance Company v A & J Menswear 1998 SLT 720, Lord Macfadyen at 725). Accordingly, the defenders were obliged to pay the rent specified in the pursuers' notice as no counter notice had been served within the three month limit. Although the commercial judge's determination that time was of the essence was originally challenged in the reclaiming motion, the defenders departed from that argument during the course of the hearing.

Submissions
Defenders and reclaimers
[9] The defenders contended that the commercial judge had erred in holding that the second letter had been a valid notice. The judge had been correct to apply the "reasonable recipient" test but had erred, however, in concluding that the letter had cleared up the confusion caused by the first letter. The test was an objective and demanding one, being: "Is it plain that [the reasonable recipient] cannot be misled by it?" (Mannai Investment Co (supra), Lord Steyn at 772, following Carradine Properties v Aslam [1976] 1 WLR 442, Goulding J at 444). The commercial judge had accepted that, if there were scope for confusion, the test would not be met. It could only be met where that recipient would be left "in no doubt whatever" ([2012] CSOH 77 at para 47 citing Mannai (supra)).

[10] The second letter had failed to address in express terms all of the errors that had been contained in the first letter. The earlier letter formed part of the "relevant objective contextual scene" (Mannai Investment Co (supra), Lord Steyn at 767) for the purposes of construing the terms of the later letter. The commercial judge had taken account of this but had erred in concluding that they would not have confused the recipient in relation to the period within which the defenders had to serve a counter notice. The recipient was faced with two competing or contradictory notices and two overlapping periods for service. Such confusion was sufficient to conclude that the "reasonable recipient" test had not been met (Ethel Austin Properties Holdings Ltd v D & A Factors (Dundee) Ltd, unreported, 21 June 2005, Sheriff Arthurson QC, Kirkcaldy Sheriff Court).

Pursuers and respondents
[11] The pursuers did not seek to challenge the commercial judge's finding of invalidity in respect of the first letter. However, the judge had been correct in holding that the second letter had constituted a valid notice. The test was whether the "reasonable recipient" would have been in any doubt as to how the notice was intended to operate (Mannai Investment Co (supra), Lord Steyn at 768, citing Delta Vale Properties v Mills [1990] 1 WLR 445, Slade LJ at 454). A common sense construction, disregarding any alternative but improbable meanings, was required (Scrabster Harbour Trust v Mowlem 2006 SC 469; Mannai Investment Co (supra), Lord Hoffman at 774, Lord Clyde at 782).

[12] No doubt or confusion could have arisen as a consequence of the issue of the two letters. They were not competing or inconsistent with one another (cf Ethel Austin Properties Holdings (supra)); rather, the second expressly sought to address any difficulty with the first. The "reasonable recipient" was deemed to be familiar with the terms of the lease. It would have been obvious from the terms of the first letter that it failed to comply with the requirements of the lease. The rent was always to be determined as at 1 October 2010, there was no warrant in the lease for a rent review on 1 November 2010 and the review could only proceed on 28 November 2010 in accordance with the terms of the second letter.

[13] The reasonable recipient would conclude that, insofar as the earlier letter was invalid, the later letter superseded it. Accordingly, there was no scope for confusion regarding the operative deadline for service of a counter notice. The later letter, viewed objectively, marked the moment at which the pursuers had given the defenders all the relevant information. The three month period began to run from its receipt. In any event, the deadline for service of a counter notice was fixed by the lease. It did not need to be specified in the pursuers' notice.

Decision

[14] The parties were not in dispute as to the applicable law but differed on its proper application to the facts. The commercial judge correctly identified six fundamental requirements of a valid rent review notice in terms of Clause 25. It required: (1) to be in writing; (2) to be given by the landlords; (3) to be received by the tenants; (4) to be issued at least three months prior to the relevant term; (5) to specify the new rent proposed; and (6) to specify the relevant term at which the rent was to be assessed. The judge properly identified the "reasonable recipient" test as the one to be adopted in respect of the construction of notices which met the stipulated fundamental requirements (Mannai Investment Co (supra) Lord Clyde at 780 as adopted in Batt Cables v Spencer Business Parks 2010 SLT 860, Lord Hodge, paras 24 - 27).

[15] Even if the letter of 19 July 2010 had contained no errors in its terms, it was served out of time and could never have constituted a valid notice of rent review in terms of Clause 25(a). This would have been recognised by the "reasonable recipient". In any event, the pursuers chose thereafter to invoke the terms of Clause 25(c) of the lease, which provided for the service of a distinct notice, requiring a rent review at the twenty eighth day of the month "in the event of the [pursuers] having failed to give due notice ...". In essence, the pursuers did exactly what was provided for in the lease. Accordingly, it is clear that the first invalid notice was superseded by the second notice, which itself complied with the fundamental requirements of Clause 25(c) and, for the reasons given by the commercial judge, satisfied the "reasonable recipient" test. There was no scope for confusion as a consequence of the issue of both notices, assuming that the reasonable recipient applied his common sense (Mannai Investment Co (supra), Lord Clyde, 782).

[16] Ethel Austin Properties Holdings (supra) is distinguishable on the basis that it concerned the effect of two notices, which, although identical in their terms, were received by the tenant on different dates, leading to an ambiguity as to a deadline for payment. In the present case, the notices were served under two different provisions of the lease, namely Clauses 25(a) and (c) respectively. The terms of the notices were different as a consequence of the distinct purposes of those clauses; notably to invoke a 'timeous' rent review at the relevant term and to invoke a 'late' rent review on the twenty eighth day of any subsequent month respectively. They were not competing notices.

[17] For these reasons, the reclaiming motion is refused.