Rent review update 2006

Citation

Dowden, M. (2007), "Rent review update 2006", Journal of Property Investment & Finance, Vol. 25 No. 2. https://doi.org/10.1108/jpif.2007.11225bab.001

Rent review update 2006

Rent review update 2006

Determining whether time is of the essence for a rent review is a question of central importance for both landlords and tenants. Much can turn on whether the tenant is deemed to have accepted the rent proposed by the landlord because time was of the essence and a deadline for part of the rent review process has been missed.

For tenants, the greatest risks stem from provisions that require the landlord to trigger the rent review process by serving a notice specifying the proposed rent. Many of those clauses go on to say that if the tenant fails to serve a counter notice within a certain period after receipt of the landlord’s initial proposed rent, then the tenant is deemed to have agreed to pay the rent specified in the landlord’s rent notice. Faced with such a clause, the tenant must be able to ascertain whether time is in fact of the essence. The question is simply stated. However, lease drafting often lacks clarity. Further, case law can offer only limited assistance in this area. Rent review cases tend to be rulings on the construction of particular provisions in their own “factual matrix”, and so they can lay down no hard and fast rules.

The rebuttable presumption

In United Scientific Holdings Ltd v. Burnley Borough Council [1978] AC 904, Lord Diplock stated:

I would hold that in the absence of any contra-indications in the express words of the lease or in the interrelation of the rent review clause itself and other clauses or in the surrounding circumstances the presumption is that the time-table specified in a rent review clause for completion of the various steps for determining the rent payable in respect of the period following the review date is not of the essence of the contract.

Further guidance came from the Court of Appeal in Bickenhall Engineering Co Ltd v. Grand Met Restaurants Ltd [1995] 1 EGLR 110. The court held that there is a rebuttable presumption that time is not of the essence in a rent review timetable. Neill LJ observed that this presumption could be rebutted only by matters which are sufficiently “clear and explicit”

This presumption may be rebutted by:

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  any contra indications in the express words of the lease;

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  any contra indications in the inter relation of the rent review clause and other clauses in the lease; or

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  the surrounding circumstances.

In Starmark Enterprises Limited v. CPL Distribution Limited [2001] EWCA Civ 1252 the Court of Appeal held that a clear provision deeming that the lessees shall have accepted the increased rent if they fail to serve a counter notice within a specified period would be enough to rebut the presumption. Arden LJ added that “where there is a deeming provision in this type of case and nothing more, the time for service of the counter-notice should normally be taken to be the final one”.

Starmark resolved a conflict between two previous rulings and promised much needed clarity. It was hoped that parties would be left in no doubt where they stood when there were clear deeming provisions in the lease. However, poor lease drafting, as exemplified in two recent cases, can cast the parties back into uncertainty.

In Lancecrest Limited v. Dr Ganiyu Aiwaju [2005] EWCA Civ 117 the Court of Appeal had to consider whether a trigger notice served by a landlord implementing a rent review was valid, notwithstanding the fact that it was served late. The landlord was to give a “review notice” to the tenant no more than 12 months before the review date (which was the end of every fourth year of the lease period).

Lancecrest acquired the reversion to the lease in August 2001- six months after the first review date. No trigger notice had been served and one was only served in February 2002. It was proposed to raise the rent from £6,500 to £30,000. The tenant claimed that the trigger notice was invalid as it was not served before the review date of 5 February 2001. The Court of Appeal placed great reliance upon the House of Lords’ decision in United Scientific and held that despite being over a year late the trigger notice was valid because time was not of the essence.

The court considered that there was nothing express in the lease making time of the essence in the service of the trigger notice. This was also contrasted against the fact that time was expressed to be of the essence in respect of the service of the counter notice. In order for the tenant to have benefited from the provision ensuring that the landlord shall give notice no more than 12 months before the review date, the tenant must have served a notice making time of the essence before the review date. That is something the vast majority of tenants would not consider doing. It is therefore clear that in order for a party to seek to make time of the essence in a step of the rent review process very clear and inescapable contra indications must be present.

In Wilderbrook Ltd v. Oluwu [2005] EWCA Civ 1361 tenant had one month after receipt of the landlord’s trigger notice to serve its counter notice. The lease said that if the tenant did not serve a counter notice within the specified period then he was deemed to have accepted the rent proposed by the landlord. The lease went on to state:

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 to determine the question of new rent payable…and any delay by the Landlord or Tenant in this respect shall not deprive the Landlord or the Tenant of their respective right to have a New Rent determined by the Surveyor.

A rent review notice was sent to the tenant on 15 April 2003. The tenant’s surveyor responded on 22 May 2003 –over one month after service of the trigger notice. The landlord alleged that as this counter notice was out of time the tenant was deemed to have accepted the proposed rent.

The Court held that if the above clause had been present but without the proviso the claim that the tenant was deemed to have accepted the proposed rent would be unanswerable. In that situation there would be a deeming provision and a clear contra indication that time was to be of the essence in this step of the review. The Court placed great emphasis on the “clear and explicit” test and held that the proviso as set out above would apply to the whole rent review process. It would therefore include the part of the process concerning the service of the counter notice by the tenant. In this case the contra indications were not sufficiently “clear and explicit” as the proviso appeared to limit the deeming provisions. In effect, the proviso meant that the tenant was able to escape the consequences of its surveyor’s late response by referring the review to a third party valuer.

It is clear, therefore, that if time is to be made of the essence in a step of the process it should say so. The greater the clarity in drafting, the less likely it is that there will be problems later on. This is particularly important given high amounts at stake in many rent reviews and with parties continuing to fail to adhere to the express time limits.

Receipt and deemed service

It is bad enough for a tenant to be stuck with the landlord’s rent proposal when the tenant has received a trigger notice, but failed to respond in time. How much worse is it for the tenant who never saw the landlord’s notice, but is similarly stuck with the landlord’s figure?

This was the situation in Warborough Investments Ltd v. Central Midlands Estates [2006] EWHC 2622 (Ch). The premises demised in the lease were underlet to a supermarket business. The lease provided for upward only rent reviews every 21 years, and that at any time during a set period the claimant landlord could serve notice providing for a rent review. Such notice had to be served either at the demised premises or at the last known address of the tenant. The tenant would be deemed to have agreed to the new rent if he failed to serve the counter-notice within 28 days of receipt of the notice. The claimant landlord had sought advice as to the rent payable for the premises, had calculated the potential new rent, and had decided to serve a rent review notice. The claimant landlord had instructed process servers to serve the notice. Service was effected by being given to a person on the customer services desk at the demised premises (which doubled as the supermarket’s cigarette kiosk). Perhaps inevitably, the notice went no further than the customer services desk and so the 28-day deadline for counter-notice was missed.

The tenant challenged the validity of the notice, and also argued that the notice had misapplied the formula specified in the lease for determining the revised rent. The challenge failed on both points. On the question of service, the claimant landlord had strictly complied with the lease provisions, which allowed service by leaving the notice at the premises. It did not matter that the premises were occupied by a subtenant rather than the tenant. The landlord had operated the lease mechanism and could not be criticised for that.

Outstanding rent reviews and former tenants

Among the more controversial decisions of 2006 was Scottish & Newcastle v. Raguz [2006] EWHC 821 (Ch). The case reflects the very common situation in which rent reviews remain outstanding or unresolved. Reviews frequently remain unresolved long after the specified review date, leaving landlords to rely on provisions which oblige the tenant to continue to pay rent at the pre-review rate, and then to pay a sum by way of additional rent plus interest once an increased rent is agreed or determined. In effect, any uplift is backdated to the review date.

The complexity of this situation is greatly increased when the current tenant defaults and a landlord finds he has to look to former tenants or their guarantors to pay the uplift. Section 17 of the Landlord and Tenant (Covenants) Act 1995 provides that, in order for a landlord to recover fixed charges from either a former tenant or the guarantor of a former tenant, a notice must be served on that person within six months of the sums becoming due. In Raguz, the key question was when the uplift resulting from a rent review became due?

Within six months from the date upon which the charge becomes due, the landlord must serve on the former tenant a notice informing it that the charge is now due and advising it of the amount that the landlord is intending to recover. Section 17(4) provides that where a landlord has served such a notice, it cannot recover anything in excess of the sum specified unless:

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  that notice informed the tenant of the possibility that the eventual liability might be for a greater sum; and

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  the landlord then serves a second notice specifying the increased sum, within three months of that greater liability being determined.

The notes to the forms prescribed for use in these situations make it clear that they are designed to deal with situations such as outstanding rent review or service charge adjustment.

The claimant in Scottish & Newcastle was the original tenant under two leases of hotel premises granted in 1967 and 1969. It sought to recover large sums of money from its immediate assignee under the statutory indemnity conferred by section 24 of the Land Registration Act 1925, following the default of a subsequent assignee. One of the various points that the defendant made was that he could be liable only under the indemnity for the arrears for which the claimant was liable. He argued that the claimant had not been liable to make the payments that it had made because the landlord had not properly complied with section 17.

The rent default by the then current tenant had started in June 1999. Despite the fact that rent reviews under the leases had been outstanding since 1995 and 1996, the landlord, from November 1999, served a series of section 17 default notices on the claimant for the amount owing, striking out the paragraph warning the recipient that this liability might increase. Once the rent reviews were settled, subsequent default notices were sent out simply stating the additional rent. The landlord’s thought process was that the additional rent could only be calculated once the review had finally been resolved, and so that it must fall due at the point of calculation.

The landlord had therefore taken the view that it could preserve its ability to claim the reviewed rent against a former tenant by serving a section 17 notice within six months of the new rent being ascertained. The defendant argued that where there is an outstanding rent review the correct approach is for the landlord to serve a notice warning the former tenant and/or its guarantor that a further sum might be required once the review has been agreed or determined. In essence, the argument was that the uplift falls due at the same time as the original instalment, even though it cannot be calculated at that point.

Hart J had no doubt that, taking the wording of section 17(2) and 17(4) together, the defendant’s argument had to be right. The practical implication is that in any case involving a delayed review, even those where the current tenant is not in default, a landlord can preserve its right to recover the reviewed rent against a former tenant only if it serves a section 17 notice within six months of the date upon which the reviewed rent first accrues and continues to do so until the review is determined.

Unless the current tenant pays the back rent within three months of that determination date (which may not be the same as the due date for the shortfall), the landlord must serve a further notice on its former tenants and their guarantors, specifying the additional sum due. Clearly, where the current tenant is not in default, the original notice cannot specify an amount that the landlord is claiming from the former tenant (the judge suggested a “nil” or “not at the moment” entry); the function of the notice is merely to warn the former tenant of a potential liability that might increase and so to pave the way for a further notice should that prove necessary.

The surprising but inescapable result is that where the full extent of a liability has not yet been settled, section 17 notices should still be served even where the current tenant is not in default.

Malcolm DowdenCharles Russell LLP, London, UK