The Supreme Court, in a decision given on 1 July 2014, has
overturned a High Court judgment on the interpretation of the rent
payable under a lease of the well-known Bewley's premises on
Grafton Street in Dublin, in the case of Ickendel Limited v
Bewley's Café Grafton Street Limited ([2014] IESC
41). The judgment is a useful reminder of the established tenets of
contractual interpretation, and in particular the principle that
the existence of an ambiguity in a contract should not be lightly
inferred or perceived by the Court.
The High Court's verdict, delivered by Mr Justice Charleton in
March 2013, generated substantial publicity on its release, such
that the outcome of the Supreme Court appeal has been keenly
anticipated. Before turning to the specifics of the Supreme
Court's findings, it is worth revisiting the judgment under
appeal.
The Argument
The dispute which arose centred on the conflicting
interpretations placed by the landlord and the tenant on the
meaning of the clause in a lease dealing with the rent payable
thereunder. Under the landlord's interpretation, the rent could
never be reduced below the current passing rent at a given rent
review date, whereas the tenants argued that the rent could be
reduced below the current passing rent in favour of a rent set by
reference to the current open market rent.
The tenant contended that an ambiguity arose in respect of the
meaning of the phrase "preceding rent" as it applied to
the rent payable. It was argued that the phrase
"preceding" could potentially refer to the initial rent
set under the lease, or it could refer to the most recent rent set
under the last rent review, as the baseline rent under the
lease.
The landlord countered that the outcome of a rent review could
never result in the rent payable falling below the amount payable
immediately prior to the review taking – the orthodox
understanding of an upwards only rent review. The tenant contended
on the other hand that the rent review mechanism allowed the rent
to revert to the initially agreed rent under the lease (which was
entered into in 1987) or to a rent set by reference to the current
open market rent, whichever was greater.
High Court decision
Mr Justice Charleton emphasised at the outset the fact that the
Court's task was to determine the intentions of the parties
first and foremost by reference to the plain words in the contract
– it was not the Court's function to substitute its own
idea of a fair deal, whether on the basis of sympathy for a party
in financial difficulty or otherwise.
However, if the words in the rent review provisions in the lease
are ambiguous, then the Court was entitled to seek to interpret the
language used by reference to what makes business sense.
The High Court took the view that either of the competing
interpretations was plausible. It concluded that the parties
bargained so as to agree never to fall below the initially agreed
rent, but that apart from that the parties had bargained for a fair
open market rent "that can rise and that can fall".
Mr Justice Charleton also considered this to be in accordance with
business sense.
Supreme Court decision
While the Supreme Court agreed with the High Court on the
applicable principles of contractual interpretation, it
fundamentally disagreed with the application of those principles to
the particular terms of the lease in this instance.
The Supreme Court held that, in interpreting the meaning of
"the preceding period", the crucial factor was that the
phrase was used in the context of the determination of the rent for
"each of the successive periods of five years" after the
initial five year rent period, so that it was to be interpreted by
reference to not just one review period but by reference to
"each of" the six successive review periods of five years
under the lease. It also emphasised that the use of the term
"preceding period" elsewhere in the lease could only
refer to the immediately preceding period in that context, which
supported the landlord's interpretation of the key clause in
question.
In the circumstances, the Supreme Court found that no ambiguity
existed and as such there was no requirement to resort to a
secondary means of interpretation by reference to the commercial
context to give the lease business efficacy. It followed that, on a
plain reading of the lease, the expression "the preceding
period" referred in each instance to the period which
terminated on the day before the commencement of the relevant
review period of five years.
While the decision will not be welcomed by tenants, the reasoning
employed in reaching this conclusion is difficult to fault.
The Supreme Court was also keen to emphasise that its decision was
concerned only with the proper interpretation of a specific clause
in the lease in the specific context in which it was used. The
majority of commercial leases were not, in any event, in the same
precise terms as the applicable lease in this case, but following
the High Court decision tenants operating under the limited number
of leases with similar terms had harboured the hope that the
clauses in their leases dealing with rent bore a meaning that was
unexpectedly beneficial to them.
The Supreme Court has effectively extinguished that prospect.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.