Date 14 February 2011
A glance at almost any newspaper will reveal that businesses continue to struggle in what is a very competitive market. Retailers in particular have been hit hard, as consumer spending plummets whilst market rents, in many cases set in better times, remain a millstone around their necks.
Retailers have had to be ruthless in cutting costs, but even in this age of internet shopping, there will always be a need for business premises. One of the tasks of a good retail lawyer is to ensure that the overheads resulting from that expense are as low as possible.
One of the more common aspects of a medium to long term business lease is the presence of a rent review clause, which allows the rent to be varied throughout the course of the term, usually at three- or five-yearly intervals. Such clauses are almost invariably of an “upwards-only” nature, that is to say, the rent cannot be decreased but only increased or, at best, kept the same. This can leave a tenant saddled with a rent that may have been bearable in a buoyant market, but which is unsustainable in tougher economic times.
Most business leases benefit from the protection of the Landlord and Tenant Act 1954, which sets out a framework governing, amongst other things, the way in which a lease is renewed at the end of the contractual term. If the landlord and tenant cannot agree between themselves the terms of the new lease, such as rent, the length of term and other provisions, then they can refer these to the Court and a judge will rule on these points, including on the rent review provisions.
It is common for the new lease to be based on the existing lease and indeed, the House of Lords decision in O’May v City of London [1982] laid down the principle that the party proposing a change from the existing lease has to show that it is fair and reasonable in all the circumstances. O’May applies to most aspects of the new lease, which are governed by section 35 of the 1954 Act. It does not, however, apply to rent, which is governed by section 34, and (if rent is in dispute) the rent review clause, which is governed by section 34(3).
This is a crucial distinction but unfortunately, one that is often overlooked and in practice, upwards-downwards rent review clauses are rarely requested by a tenant in the renewal process. However, very occasionally, such a request does end up being litigated and, based on the relevant case law, the following pattern has emerged:
- The Court has jurisdiction to order an upwards-downwards rent review clause;
- The Court will take into account the type of clause in the existing lease, but this is not the deciding factor;
- The tenant must be able to show that there is a possibility that rents may go down.
The latter point is important, because in Charles Follett v Cabtell [1986], the Court rejected a tenant’s request for an upwards-downwards clause, on the basis that there was no evidence to show that the rent could feasibly go down. The message there is to not leave anything to chance, but rather to ensure that the Court has all of the information needed to make what is, from a tenant’s perspective, the most fair decision.
At the end of the day, it must be kept in mind that even with an upwards-downwards rent review clause, the rent that will be set on review will be the market rent, as determined on the basis of the available evidence and taking into account the assumptions and disregards in the lease. An upwards-downwards rent review clause will simply grant the tenant a better chance of getting a fair market rent.
If you would like more information or advice relating to a specific matter, please do not hesitate to contact David Linklater on 01727 798097 or by email at david.linklater@salaw.com or any member of the Commercial Dispute Resolution team.
© SA LAW 2011
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