article
Rent Reviews in Lease Renewals – Are Tenants Missing a Trick?
08 February 2009
In the early 1990’s the last recession saw a flurry of cases on
whether, on a business lease renewal, a rent review should be both
upwards and downwards. It is a point which seems to have been
overlooked by tenants’ advisers in recent years and upwards only
reviews have been and remain the norm, especially where the
existing lease has an upwards only review. The current
economic climate (not so much the recession as the atmosphere of
uncertainty) does however raises the question of whether tenants’
advisers should be looking to achieve the benefit of an
upwards/downwards review for their clients.
The reluctance on the part of tenants’ advisers to take this
point may perhaps be down to the statements of leading commentators
on the relevant case law. For example:
“The court has power to order the inclusion of an upwards
only rent review clause. This power is likely to be exercised
where the current tenancy contains such a clause”
(Woodfall).
“If the previous lease included an “upwards only” rent
review provision and that can be shown to be in accordance with
current market practice then it would seem that the new lease
should contain a similar provision” (Hill and Redman).
It is of course the case that the majority of business leases
coming up for renewal (where the term has been of sufficient
length) do contain upwards only reviews and this remains in line
with current market practice for the grant of new leases. But
is this the end of the argument? The statements of the
commentators are not unequivocal and an examination of the cases
suggests that the position is far from settled. Is there
scope for tenants to argue for upwards/downwards reviews on
renewals? The following points are worth considering:
What do the Cases say?
A number of the cases which will have informed the commentators’
views are at County Court level only and therefore do not create
binding precedents. There are however three High Court
decisions:
Stylo Shoes Limited v Manchester Royal Exchange Limited
204EG803, [1967] EGD 743
There had been no rent review in the previous lease. The
tenant wanted an upwards/downwards review to allow for a lower rent
if market conditions determined, which was recognised then as being
very unlikely. The judge held that, although the point was
rather academic, he saw no reason why “sauce for the goose should
not be sauce for the gander” and decided that the review should be
upwards/downwards.
Janes (Gowns) Limited v Harlow Developments Corporation
[1980] 1EGLR52
Again there had been no previous rent review. The judge
followed the Stylo decision, holding that the review should be
upwards/downwards and basing his decision on the evidence before
him that rents may go down as well as up.
Charles Follett Limited v Cabtell Investment Co Limited
[1986] 2EGLR76
Here there had been a previous review which was upwards
only. The judge decided that the rent review in the new lease
should also be upwards only, distinguishing the decision in Janes
on the basis that no evidence had been put before him that rents
might go down and also because the existing lease did have an
upwards only review which the judge stated was a factor. He
made it clear however that he was not prevented by the presence of
this clause from exercising his discretion to allow an
upwards/downwards review because Section 34(3) of the Landlord and
Tenant Act 1954 gave him an unfettered discretion on the point.
What can we deduce from these decisions which together form the
precedent base on the issue of upwards/downwards rent reviews on
renewal?
1 The court has a discretion under Section 34(3) to order
upwards/downwards reviews.
2 The court is unlikely to exercise that discretion unless
there is evidence that rents can go down as well as up.
3 The existence of an upwards only rent review in the
existing lease is a factor but it is not a determining factor.
In 1992 there were three reported County Court decisions.
Boots the Chemists v Pinkland Limited [1992]
2EGLR98
It is not clear whether or not the existing lease had a rent
review as the judge did not comment on this. He considered
the decisions in Stylo and Janes but it would appear that Follett
was not argued before him. He followed those decisions by
giving an upwards/downwards review. Evidence had been
provided that rents could go down as well as up and the judge based
his decision on the reason that “if it be the case that we are now
in the incipient stages of a prolonged bear market then present-day
rents will seem exorbitant later in this decade and in the
beginning of the next century. As a consequence, fixed rents,
or rents which can be only revised upwards, will wreak the same
sort of injustice upon tenants as that which has been suffered by
landlords in previous decades when leases contained no provision
for rent review at all. On the other hand, if the present
period of decline in rental values is merely an aberration in a
continuing bull market, the landlords will in no way be prejudiced
by the inclusion of a provision for the rents to be reviewed
downwards as well as upwards.”
Blythewood Plant Hire Limited v Spiers Limited [1992]
2EGLR103
The existing lease did not have any rent review provision.
Again, the judge did not have the decision in Follett drawn to his
attention but he did, in effect, follow it by distinguishing the
decision in Janes construing the court’s reasoning in that case
more narrowly as being based on evidence that a neighbouring
development might cause rents to go down and holding that, as there
was no such fact applicable here, he did not have to follow
it. Instead, he found that an upwards/downwards review would
make the landlord’s interest more difficult to market and would
therefore have an immediate impact on the value of the landlord’s
interest. It should be noted that the facts of this case were
quite unusual because the landlord was in receivership and it was
the intention of the receiver to sell. Clearly this was in
the mind of the judge in balancing the interests of landlord and
tenant.
Amarjee v Barrowfen Properties Limited [1993]
2EGLR133
Again there was no previous rent review and none of the above
cases was referred to in the judgement. The judge
nevertheless came to the conclusion that there was no reason to
reject the tenant’s proposal of an upwards/downwards rent
review. One of his comments is particularly relevant at the
present time. He said that “now that the unthinkable has
started to occur, and property prices are falling, I see no reason
why upwards/downwards clauses should not be incorporated in
leases. They have the obvious merit of fairness…”
There has been one more reported case on the issues, again at
County Court level, which was decided in 1993:
Forbouys Plc v Newport Borough Council [1994]
1EGLR138
Here there had been a previous rent review in the existing
lease. The judgement contained a fairly full review of the
existing authorities, although strangely, from the landlord’s
standpoint, Follett was again ignored. Instead the landlord
sought to argue for an upwards only review based on the decision in
Blythewood and (without citing the authority in Follett) picking up
on the point that there was no prospect of a downwards review ever
happening because rents were already rock bottom. The
landlords argument would have been stronger if it had also relied
on Follett because of the upwards only review in the existing lease
but, even without it, the landlord seemed at one point in the
judgement to be winning when the judge accepted that the shopping
centre in which the property was situated was at the bottom end of
the market and that “the recession is still bumping along at the
bottom”. The judge then referred to the House of Lords
decision in O’May v City of London Real Property & Co Limited
[1987] 2AC726 and the principle laid down there that the party
proposing a change from the existing lease had to show that it was
fair and reasonable in all the circumstances (more on that later).
After stating that the facts of the case before him could be
distinguished from the cases cited to him, found in favour of the
tenant on the basis that upwards only would be unfair to the tenant
and would not be fair and reasonable in all the
circumstances. On the other hand, a rent review clause
upwards and downwards would not be unfair to the landlord.
Section 34(3) or Section 35?
It seems clear from the 1954 Act that Section 34(3) addresses
rent review and Section 35 deals with the other terms of the
tenancy but this is a point which many practitioners
overlook. The distinction between the two sections is that it
is only Section 35 which requires the court to have regard to the
terms of the current tenancy. The principles in O’May do not
apply to rent review provisions but with one important
caveat. Section 34(3) only applies where the court is asked
to determine the amount of the rent, which wasn’t the case in
Forbouys (hence the judge referring to O’May in his
judgement). Therefore, whenever the court is asked to
determine the rent and aspects of the rent review provisions, the
terms of the current tenancy do not fetter the court which can do
as it thinks fit. Authority for this is found very clearly in
this statement from the judgement in Follett:
“I have an unfettered discretion under subsection (3) of
Section 34 which simply provided that where the rent is determined
by the court, the court may, if it thinks fit, further determine
that the terms of the tenancy should include such provision for
varying the rent as may be specified in the determination. Mr
Neuberger says I must not place any weight on the terms of the
present lease. He points out that under section 35 the court
is directed to have regard to the terms of the current tenancy and
to all relevant circumstances. He says that here I am not so
limited and my approach shall not be that prima facie the terms of
the existing lease should be carried into the new tenancy. I
accept that”.
The Purpose of Section 34
One argument that does not seem to have ever been raised in this
context is the essential purpose of Section 34 to determine “the
rent payable under a tenancy” which is to be “that at which… the
holding might reasonably be expected to be let in the open
market”. Can it not be argued that “tenancy” means the whole
of the tenancy which, if long enough to warrant a review, should
have the protection of an upwards/downwards one so that at no point
during the tenancy does the Tenant find itself paying more than the
open market rent?
Conclusion
At the moment, how many tenants’ advisers are arguing for
upwards/downwards reviews in renewal leases? Anecdotally, it
appears hardly any and it does not seem to be putting it too
strongly to say that this is something that landlords are getting
away with because tenants are doing nothing. But if one looks
at the principles laid down by the High Court cases, the court does
have a wider discretion than many think and, in this area, is not
bound by the terms of the existing lease. Furthermore, in
these very uncertain economic times, can it ever be said that rents
cannot go down as well as up bearing in mind that the review in
question will generally be five years down the line. As the
judge said in Boots, “I do not have a crystal ball”. Yes, the
existence of an upwards only provision in the existing lease is a
factor but it is not a determining one and should not be seen as
being incapable of challenge. In the reported cases, the
scores were 2-1 in the High Court and 3-1 in the County Court in
favour of upwards/downwards reviews. Those cases also contain
a number of judicial statements to the effect that
upwards/downwards reviews are fair and reasonable to both
parties. There is also the unanswered question of whether an
upwards only review is contrary to the spirit and the purpose of
Section 34. Given all this, it is surprising that tenants’
advisers seem so often to accept the status quo and meekly agree
upwards only reviews in renewal leases. They have good
arguments against this and should at least be raising them either
with a view to winning the point or as a bargaining tool in the
negotiation process generally. Failure to do so and to advise
their clients that this is an issue from which they could profit
could well be considered to be negligent, especially if in the
future a tenant is brave enough to take this point to the Court of
Appeal and win.
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