Rent review update

Citation

Dowden, M. (2006), "Rent review update", Journal of Property Investment & Finance, Vol. 24 No. 3. https://doi.org/10.1108/jpif.2006.11224cab.001

Rent review update

Rent review update

It’s that time again …

The principle is easy enough to state: in the absence of sufficient contra-indications in the express words of the lease or in surrounding circumstances, time is not of the essence for rent review provisions. Inevitably, though, where two parties have diametrically opposed interests and where a significant sum of money is at stake, there remains plenty of room for dispute. What will amount to a “sufficient contra-indication” to rebut the presumption that time is not of the essence?

For a number of years practitioners had to bear in mind a direct clash of authorities on the question of time limits set by means of deeming provisions in the rent review process. Then, in Starmark Enterprises Ltd v. CPL Enterprises Ltd [2001] EWCA civ 1252 the Court of Appeal finally resolved the conflict between its previous decisions in Henry Smith’s Charity Trustees v. AWADA Trading & Promotion Services Ltd [1984] P&CR 607 and Mecca Leisure Ltd v. Renown Investments (Holdings) Ltd [1984] P&CR 12. Relying on the AWADA case, the Court of Appeal found time to be of the essence where the parties had not only set out a timetable for the service of notices and counternotices but had also set out the consequences of failing to comply with that timetable. Such a provision was considered to rebut the presumption, derived from United Scientific Holdings Ltd v. Burnley Borough Council [1978] AC 904, that time is not of the essence in rent review clauses. While Starmark was an extremely important decision it has certainly not exhausted situations in which rent review disputes turn on the question of whether time is of the essence.

2005 saw two significant cases on the question of rent review time limits. The more recent, Wilderbrook Limited v. Olwu [2005] EWCA Civ 1361, concerned a rent review triggered by notice given by the landlord and specifying the new rent proposed by the landlord. Under the review provisions the tenant was required to respond within one month after receipt of the landlord’s notice with a counter-notice calling upon the landlord to negotiate the revised rent. If the tenant failed to serve a counter-notice within one month after receipt of the notice, then “he shall be deemed to have agreed” to pay the rent specified in the landlord’s notice.

Clearly, “inertia clauses” such as this represent a major trap for tenant: miss the time limit and be bound by the landlord’s figure for the new rent. Indeed, since Starmark established the somewhat stricter test applied in AWADA as the correct approach, the trap represented by unequivocal deeming provisions has probably become even more dangerous.

Yet in Wilderbrook the tenant succeeded both in the High Court and Court of Appeal with its argument that time was not of the essence and that the landlord’s notice (which would have resulted in an uplift from £16,000 to £40,000 a year) remained open to challenge. True, the rent review schedule set out a rigorous schedule and (in line with Starmark) set out the consequences of missing the deadline. However, the clarity of the schedule was undermined by a truly baffling paragraph:

As respects all periods of time referred to in this Schedule time shall be deemed to be of the essence of the contract PROVIDED ALWAYS that the Landlord or the Tenant may notwithstanding anything in this Schedule require the appointment of the Surveyor or any substitute Surveyor to determine the question of the new rent payable at any time after the commencement of each relevant period of years and any delay by the Landlord or the Tenant in this respect shall not deprive the Landlord or Tenant of their respective right to have a New Rent determined by the Surveyor as set out herein

The whole case turned on this paragraph. Pill LJ observed that its meaning was obscure, and hoped that “it is not likely to appear again in this context in a lease”. Carnwath LJ also found difficulty with the “head-on collision” between its two parts. The opening words would ordinarily be regarded as a clear indication that time was to be of the essence. The proviso was an equally clear and unambiguous indication that “notwithstanding anything in this schedule”, each party retained its ability to refer the matter to a third party.

Both Pill LJ and Carnwath LJ inclined to the view that to confer any benefit on the tenant, the proviso must override the strict timetable. However, in the final analysis the tenant was saved by the lack of clarity arising from the internally contradictory paragraph. The presumption that time is not of the essence may be rebutted – but only by a clear and unambiguous contra-indication. If the contra-indication leaves room for doubt, then that doubt will be resolved against the person seeking to assert that time is now of the essence. At root, this is a straightforward application of the contra proferentem principle – and a very narrow escape for the tenant.

Much earlier in 2005 a differently constituted Court of Appeal exhibited the curious blend of punctiliousness and lenity that is often required to produce commercially sensible results from messy drafting. In Lancecrest Limited v. Asiwaju [2005] EWCA Civ 117 the landlord was required to trigger the rent review by serving notice “no more than 12 months before” the relevant review date. The tenant then had two months (with time expressly of the essence) to serve a counter-notice “informing the landlord that the tenant does not accept the annual amount proposed”.

The landlord served its notice (seeking an uplift from £6,500 to £30,000 a year) 54 weeks after the review date. The tenant wrote back, claiming that the notice was invalid and refusing to take any part in the review. The landlord then referred the matter to third party determination, resulting in a rent of £28,000.

The landlord’s notice was held to be valid. This was despite the Court of Appeal ruling on similar wording in First Property Growth Partnership LP v. Royal Sun Alliance Property Services Ltd [2002] EWCA Civ 1687 that a landlord had lost its chance to trigger the review. In that case, Rimer J considered that there must be a cut-off date for the landlord’s right to operate the review, and that the cut-off must be the review date itself. By contrast, in Iceland Foods PLC v. Dangoor and others [2002] EWHC 107 (Ch) Neuberger J (as he then was) held that a similarly (but not identically) structured provision remained operable by the landlord. Similarly in Lancecrest, Neuberger LJ concluded that there was nothing sufficient to make time of the essence for service of the landlord’s notice. If the tenant wanted to make time of the essence, then he would have do so explicity.

Having decided that the landlord’s notice was valid, and that the review process had been triggered, the Court then had to consider the tenant’s counter-notice. Brook LJ took a very strict line. The tenant’s counter-notice was required to inform the landlord that the tenant did not accept the proposed annual rent. In fact, the tenant’s letter did no such thing. It merely asserted that the landlord’s notice was invalid.

Neuberger LJ frankly admitted that he had changed his mind on the counter-notice so that the tenant succeeded, rather than failing by 2:1. He considered that the tenant’s letter could not be construed as an acceptance of the landlord’s proposed figure, and that would be sufficient to allow the letter to be construed as a rejection as required by the lease. Clarke LJ found further support in the fact that the respondent had treated the letter as a counter-notice. However, the other members of the court were firmly of the opinion that the attitude of the actual (as opposed to a reasonable) recipient was irrelevant.

So – another narrow escape for the tenant.

Presumptions and express provisions – an art or mystery?

Hemingway Realty Ltd v. Master Wardens and Commonalty of Freemen of the Art or Mystery of Clothworkers of the City of London [2005] EWHC 299 (Ch) serves as a reminder that cases on rent review involve the construction of a particular provision in its particular context. The result will turn on the wording of each individual lease and that express provisions will trump general presumptions.

The lease in Hemingway (as varied in the early 1970s) allowed the landlord to trigger a review of the rent. However, the review provisions contained no upwards-only formula and so the landlord had declined to implement reviews in 1996 and 2003 (almost certainly on the grounds that the premises were over-rented). The tenant, seeking a reduction in its liability, claimed that the review could be triggered not only by the landlord but also by the tenant. The tenant’s first argument was that, on its true construction, the rent review clause provided that, if any of the post-1982 reviews did not take place, the annual rent should revert to the 1982 figure. If upheld, this view would have effectively forced the defendants to trigger the review. The Court found nothing to support this somewhat hopeful interpretation. The claimant’s second contention was that there was a conflict within the clause, in that it clearly contemplated an upwards or downwards review, but as only the landlord could trigger it there was no actual prospect of a downwards review. The tenant argued that the court should treat the machinery of review as being available to both sides.

In support of this contention, the claimant referred, first, to the underlying presumption that rent review clauses should be construed so as to achieve their basic purpose of enabling the rent to be varied so as to reflect changes in the value of money and property. It also cited Royal Bank of Scotland plc v. Jennings [1997] 19 EG 152 and Addin v. Secretary of State for the Environment [1997] 14 EG 132 in which the courts decided that, in leases allowing for upwards or downwards review, the court would, if necessary, impose its own machinery for review if the landlord refused to co-operate with the process.

Patten J took a different view. The cases in which the court had been prepared to compel the review to take place involved leases that had been construed as requiring, rather than merely allowing for, a rent review. In Hemingway, the rent review clause explicitly and unambiguously conferred on the defendants a right to review the rent. It did not oblige them to do so. Presumptions apply only where the rent review clause is unclear and they must give way where, as here, the parties have made their intentions clear:

… there is no presumption that a rent review clause (even one incorporating an open review) ought to be exercisable by both parties to the lease. Everything depends upon the form of review which the parties have chosen to incorporate. This can vary from a right to review exercisable by the landlord alone to a review which is mandatory on each of the review dates. The choice between these alternatives depends on what the parties have agreed. There are no presumptions either way.

So what will 2006 bring? I wouldn’t presume to guess.

Malcolm DowdenCharles Russell Solicitors