Historic rent reviews: A warning for tenants

Leases often contain rent review clauses that allow for the rent to be adjusted after a certain period of time – for example, a 15-year lease may have a rent review every 3 years. In cases where rent reviews have not previously been exercised, landlords may wish to do so. The question from both parties is often then, can they do this?

Time of the Essence?

The starting point is to determine whether time is of the essence.

The presumption is that time is not of the essence in rent review clauses, unless the lease sufficiently indicates otherwise (United Scientific Holdings v Burnley Borough Council [1978] AC 904). This means that the right to review the rent continues indefinitely until it is invoked, abandoned, 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; in fact, most expressly provide the opposite. This is because landlords do not want to lose their right to implement a review by narrowly missing a review date. Further, 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.

Since the ability to review the rent payable will generally stay alive for as long as the lease is in existence, any period of holding over under the 1954 Act is included. Once the lease, and therefore the contractual relationship, comes to an end, the general view is that the landlord will lose the right to initiate any rent reviews.

Caselaw on tenants

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

This is a very unlikely scenario in practice– it is more often the case that the landlord simply remains silent on the issue and does nothing to trigger the review. In turn, whilst the tenant will want some security, it is likely that they will also generally take no action, as they will not wish to inadvertently trigger an increase in the rent they pay.

The Courts have further confirmed this. In Idealview Limited v Bello [2010] 04 EG 118 the Judge 108 confirmed that a delay of 13 years alone was insufficient grounds for a defence of estoppel, waiver, acquiescence or abandonment. There must be additional relevant circumstances to result in a representation to the contrary.

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.

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 fell due.

Implications

The exercise of a late rent review by a landlord may result in an expensive surprise for a tenant who takes their landlord’s silence to mean they do not intend to exercise a review.

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

Prudent tenants should further consider making financial provision for any increase in rent; 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 unprepared 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:

• 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 and, if present, such a provision should be deleted; and
• 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, at which point the buyer takes over.

However, the SCPCs 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 tenant buyer of the lease should ensure that a provision is included in the Sale Contract whereby the seller takes responsibility for an apportioned share of any uplifted rent.

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

If you would like to discuss any of the points raised in this article further, please contact our Commercial Property Solicitors.