Historic rent reviews: A warning for tenants

We have  been asked whether a landlord is able to operate historic rent reviews.  The lease in question was a lease granted in 1999 for a term of 15 years, expiring at the end of December 2013 and within the protection of the renewal provisions of the Landlord and Tenant Act 1954.  The tenant was still in occupation, holding over under the 1954 Act.

Rent reviews in this case were due on the 25 December 2002, 25 December 2006 and 25 December 2010 and also on the day before the expiry of the contractual term granted by the Lease.  None of the rent reviews had been exercised by the landlord.

The landlord wanted to exercise the historic rent reviews.

Time of the Essence?

The starting point for deciding whether the reviews will be exercisable by the landlord is to determine whether time is of the essence for the purposes of the rent review.

The presumption is that time is not of the essence in rent review clauses unless the lease specifically states otherwise (United Scientific Holdings v Burnley Borough Council [1978] AC 904).

If time is not of the essence, this means that the right to review the rent continues indefinitely until that right is invoked, abandoned or one or other party is “estopped” from invoking it or until the lease comes to an end.

It is very unusual for open market rent review clauses in modern commercial leases to make time of the essence.  This is because landlords do not want to lose their right to implement a review by narrowly missing a review date and also because during a downturn landlords may wish to wait for details of more positive comparable transactions to become available.  Tenants, who will often have upwards only rent reviews, may have no desire to trigger the review.

Where time is not of the essence, the ability to review the rent payable will generally stay alive for as long as the lease is in existence and this includes any period of holding over under the 1954 Act. Once the lease comes to an end, the general view is that the landlord will lose the right to initiate the rent reviews as the contractual relationship between the landlord and tenant has ended.

Caselaw on tenants

There have been a number of cases where the tenant has gone to court to argue that where time is not of the essence of the lease, a late review should not be exercised.  Tenants have been successful in very few of these cases as generally they will need to show that the tenant has altered its position to its detriment in reliance upon the other party’s express or implied unambiguous representational promise that the rent review would not be exercised.

It has been held that delay in itself does not amount to a representation on the part of the landlord that he would not operate the review. There must be additional relevant circumstances to result in a representation to the contrary.

In Idealview Limited v Bello [2010] 04 EG 118 the Judge, relying on the 1983 case of Amherst v James Walker (Goldsmith & Silversmith) Limited [1983] 2 EGLR 108 , confirmed that mere delay was insufficient ground for a defence of estoppel, waiver, acquiescence or abandonment.

In the Amherst case, two of the judges held that they could not see how the right to review can be lost by abandonment unless the circumstances amounted to either some form of estoppel or consensual variation of the agreement or a repudiation accepted by the other party.

A tenant would only be able to raise a successful defence of estoppel if the landlord had represented that it did not intend to trigger the rent review and the tenant had altered its position to its detriment in reliance on that representation.  This is a very unlikely scenario – it is more often the case that the landlord remains silent on the issue and does nothing to trigger the review.  Similarly, the tenant generally takes no action to trigger the review where it is able to do so as it will not wish to trigger an increase in rent.

Is there an argument that the landlord is not permitted to implement more than one historic rent review?

There does not appear to be any evidence that the landlord is not permitted to exercise more than one historic rent review.

Is the tenant assisted by the Limitation Act?

Under Section 19 of the Limitation Act 1980, the limitation period for a landlord to recover rent arrears is six years.

Does this means that the landlord can only exercise a rent review where no more than six years has passed since the rent review date?

Unfortunately for the tenant in Idealview v Bello, the court decided that a balancing payment following a rent review did not become due until it had been agreed or determined by the third party.  This confirms that the six year limitation period does not commence until agreement or determination even if, as in the Bello case, 13 years had passed since the rent review case.

Implications

• The exercise of a late rent review by a landlord may result in a very expensive surprise for a tenant who believes that the landlord does not intend to exercise its review.

• If a tenant wants a rent review to be determined, he should serve notice on the landlord making time of the essence and requiring the landlord to conduct the rent review in a reasonable time.

• Tenants should consider making financial provision for any increase in rent as, even if the delay is not unduly long, a demand to pay the difference between the old rent and the reviewed rent within seven or ten days of determination will be unwelcome to most tenants.

• For new leases, tenants should ensure that they, as well as the landlord, have the right to implement the rent review and to make a referral to a third party for determination if the review is not agreed by an agreed date.
• Parties acquiring a lease from an existing tenant should also specifically check that all past rent reviews under the lease have been exercised.  If they have not:(i)A buyer should check whether the Sale Contract conditions of sale exclude the seller’s liability for any rent arrears above the original rent amount.  Such a provision should be deleted;

  (ii)Condition 5 of the Standard Commercial Property Conditions (3rd Edition- 2018 Revision) (SCPC) regulates the parties’ positions where the seller is either a landlord or a tenant and a rent review has been started before completion of the sale.  It sets out a sensible approach whereby the seller has conduct of the review process until completion and then the buyer takes over;

  However, SCPC do not include any provisions relating to an uplift in rent pursuant to a rent review dated prior to the date of the sale of the lease.  If an historic rent review has not been exercised, any buyer of the lease should ensure that provision is included in the Sale Contract whereby the seller takes responsibility for an apportioned share of any uplifted rent or an arrangement regarding the payment of a share of any uplift is agreed by the seller and its buyer of the lease.

• For landlords buying reversionary interests, they should ask for confirmation from the seller that no communication has been entered into with the tenant which may be construed as a representation that the rent review would not be implemented.