Rent review: 2007 update

Journal of Property Investment & Finance

ISSN: 1463-578X

Article publication date: 7 March 2008

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Citation

Dowden, M. (2008), "Rent review: 2007 update", Journal of Property Investment & Finance, Vol. 26 No. 2. https://doi.org/10.1108/jpif.2008.11226bab.002

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Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited


Rent review: 2007 update

Rent review: 2007 update

The world of rent review continues to turn on the perennial questions – how rigidly must the mechanisms of rent review be applied, and how far must rent review clauses be made to bend to reflect the presumption in favour of reality?

It was not until 2002 that the Court of Appeal resolved a conflict of authorities that had previously complicated the question of when time would be of the essence for the purposes of a rent review clause. The landmark ruling in United Scientific Holdings Limited v. Burnley BC [1978] AC 904 established that time is generally not of the essence for rent reviews, but that this rule could be displaced if there were “sufficient contra-indications” in the lease. The question that remained was – what would constitute a “sufficient contra-indication”?

The Court of Appeal ruling in Starmark Enterprises Ltd v. CPL Distribution Limited [2001] EWCA Civ 1252 was that time would be of the essence where a clause set a timetable for certain steps to be taken, and went on to spell out in clear terms the effects of failing to meet that timetable. Most commonly, clauses of this kind would allow the landlord to serve notice on the tenant specifying the revised rent. The tenant would then have a fixed period to object, failing which the landlord’s figure would stand as the rent until the next review date.

The approach set out in Starmark continues to guide the courts’ approach to construing rent review clauses. A recent case in point is Secretary of State for Communities and Local Government v. Standard Securities Limited [2007] EWHC 1808 (Ch). In that case the secretary of state was the tenant of premises owned by the defendant company, Standard. A schedule to the lease provided that the rent was to be reviewed every seventh year. The new rent was to be the greater of either the current amount of yearly rent or the amount of the current market value on the review date. The amount of the current market value of the rent was to be agreed between the parties or, if no agreement had been reached, determined by an independent surveyor on the written request of Standard. The schedule further provided that, if no such agreement had been reached or written request made by the review date, the rent for the next seven years, until the next review date, should continue to be that currently paid. In accordance with the lease, the rent had fallen to be reviewed in March 2006. No current market value had been agreed prior to that date, and Standard had made no written request to an independent surveyor until June 2006 – that is, after the relevant review date. The Secretary of State maintained that the rent payable for the next seven years was the same yearly rent as had been payable in March 2006, and sought a declaration to that effect. The secretary of state contended that the wording of the lease gave a sufficient contra-indication to rebut the presumption that time was not of the essence in rent review clauses. The court agreed with the Secretary of State’s contention. It was clear that the proviso in the schedule stipulated the consequences of a failure to serve a written request in time. That was sufficient to rebut the presumption. The effect of failure had been made explicit, in that the rent would remain the same.

Like Starmark, the decision in Standard Securities is to be welcomed as a practical and commercially sound approach. If the parties to a lease devised and spelled out a mechanism for arriving at the revised rent, then the court should so far as possible give effect to that mechanism, even if one of the parties does not like the result. The court did point out that where a clause is ambiguous, the presumption that time is not of the essence will prevail. However, it is not part of the court’s role or duty to search for an ambiguity and so if the natural meaning of the words used to describe the procedure is clear enough then those words will be given full effect.

The other key presumption in rent review clauses is the presumption in favour of reality. That presumption has been applied to determine the length of the hypothetical lease (which will generally be the residue of the actual lease) or the nature of the premises to be valued (which will generally be the premises as they stand, and as they are used, at the relevant review date).

During 2007 the court has looked at “premises” to be valued on review in two cases in which the presumption was held to have been rebutted. In each case, far from ignoring the presumption of reality, the courts have felt compelled to rebut it only in the face of very clear wording to the contrary.

In Coors Holdings Ltd v. Dow Properties Ltd [2007] EWCA Civ 255 the Court of Appeal looked at a rent review clause which provided for the reviewed rent to be the higher of the passing rent or “the open market rental value of the demised premises at the review date”. The lease defined “open market rental value” as the annual rental value of the “site comprised within the demised premises”. The actual premises consisted of land on which a public house had been built, but the tenant argued that, on review, the premises should be the site alone without the building, and the court agreed.

Lord Justice Lloyd, delivering the main judgement, focussed on the “specific non-standard and clear words at the heart of the definition in the rent review clause”. Those words “the site comprised in the demised premises” were a clear indication of a contrary intention rebutting the presumption of reality (i.e. that the premises should be valued as they were on the review date, i.e. including the building) and accordingly the premises to be valued excluded the building.

Approximately a month later the Chancery division looked another dispute as to the definition of premises in a rent review clause in St Martins Property Investments Limited v. Cable & Wireless UK PLC (LTL 13/4/2007, unreported elsewhere). Again, the actual premises conflicted with the “premises” for rent review purposes. The premises were a specialist computer centre on a business park near Swindon, but the lease contained the assumption that, for rent review purposes, the premises would “comprise High Class Professional or Commercial Offices with a net internal floor area of 124,019 square feet”. The landlord maintained that on review the premises should be a hypothetical building comprising high-class offices on the site, built to a specification in line with other office buildings in the business park. The tenant maintained that they should consist of the actual premises on site, as if they had been converted to high-class offices.

Although the tenant’s argument was closer to reality, i.e. the actual premises should form the starting point for valuation (and indeed a reasonable proportion of the premises was already used as offices), the court held that it was clear that the clause intended the valuation of the premises without regard to the actual buildings on site. The court’s view was that the tenant’s interpretation of the clause was simply not consistent with the use of the word “comprise”. The court also considered that, in view of the practical difficulties with the tenant’s approach (it was not clear how the existing premises could be converted), the parties must have intended something “much simpler, more definite and workable” such as comparison with the high class offices already within the business park.

In both cases, the courts seem to have laid great stress on the use of the word “comprise” within each rent review “premises” clause to turn away from the presumption of reality in favour of hypothetical premises, in spite of other provisions within both leases that sit uneasily with such interpretation.

However, it must always be borne in mind that rent review cases turn on the construction of particular documents in their specific context. The result is that while case law can provide guidance, it does not and cannot set out immutable rules that can be mechanistically applied to every lease that contains similar provisions. To illustrate this point, it is only necessary to look to the ruling in Earl Cadogan and Cadogan Estates v. Escada [2006] EWHC 78 (Ch). In that case the court came down firmly on the side of the presumption of reality, arguably, at the expense of commercial sense. The premises consisted of two shop units together with a first floor office, with its own staircase, which the tenant had been obliged to convert into a combined unit with two new staircases to the offices and to the basement.

Rent review was on the basis that the tenant’s works were to be disregarded, with the exception of the installation of the new staircases. On review, Escada argued that the premises should be valued as two separate units with both the old and the new staircases. Cadogan argued that such an interpretation was nonsensical, and that a common-sense approach should be adopted in construing the clause to mean a single combined unit with only one new staircase.

Whilst accepting that where there is ambiguity it is proper to look at the commercial purpose of the clause to determine the correct interpretation, the court held that the wording in this case “may not be commercially realistic but it seems clear … There is no competition between rival constructions from which I am to make a commercially sensible choice … The clause is neither ambiguous nor incapable of implementation … ”. On this basis, the court agreed with Escada’s contention.

As with the presumption that time will not be of the essence, the presumption in favour of reality can be rebutted. In each case, rebuttal is the result of drafting that includes clear provision to the contrary. In each case, the court will look to the words chosen by the parties, and the context in which those words were used. The courts will not look for ambiguity, and wherever possible will give effect to the parties’ stated intention – even if the result is commercially odd.

Malcolm Dowden