Monday, 28 March 2011

Is It Ever Too Late For Your Landlord To Trigger A Rent Review? Don’t Bury Your Head In The Sand!

If you are a business tenant, can it ever be too late for your landlord to review the rent payable under your business lease?

The issue has recently come to light in a commercial context in East London, as this report in the Estates Gazette shows.

When a landlord seeks to implement a rent review long after the last review date has been and gone, this can be a nasty surprise for any business tenant.

Your business will have become used to paying rent at a certain rate and the fact that your landlord seems to have ignored the last review date may lead you to believe either that it has been overlooked or that the landlord has chosen to forego a review.

However, unless there is an express term in your lease making “time of the essence” on rent reviews, your landlord will not necessarily lose its right to trigger a rent review from the distant past – and take you back to the future (albeit without the stainless steel sports car from Belfast).

Where the lease makes time “of the essence”

If time is made “of the essence” in a contract, it means that if the contract says that something must be done by a particular time and you do not do it by that time, then you lose the right to do it.

So if your lease does make time of the essence on rent reviews (which is possible, but would be unusual) then your landlord will have lost its right to implement a review where the deadline has passed.

Where the lease does not make time “of the essence”

Common law presumes that time is not “of the essence” in rent review clauses. Time will only be “of the essence” therefore if the lease says it is.

It is unusual nowadays for open market rent review clauses to make time of the essence. That is because landlords do not want to lose their right to implement a review by narrowly missing a review date.

But it also means that potentially the ability to review the rent stays alive for a long time.

A late review, where time was not of the essence in the lease, went to court just over a year ago in Bello v Ideal View [2009] EWHC 2808 (QB). It concerned a residential lease, but the wording was similar to the wording found in most commercial leases where there is an open market rent review.

In that case, the lease provided for a rent of £60 per annum to be reviewed in 1994. Mr Bello purchased the lease in 2005. When the freehold was purchased by Ideal in 2006, no review had taken place. Ideal sought to implement the 1994 review and invoked the arbitration provisions in the lease to settle the rent.

Mr Bello did not respond constructively to any communications on the review and did not get involved in the arbitration. The arbitrator increased the rent to £1,700 per annum. The lease provided, as is usually the case, that on the next rent day not only would the rent now be payable at the new higher rate, but that the tenant also had to pay an amount equal to the difference between the old rent and the new rent for the period since the review date, in this case 1994.

That’s a big expense to be landed with.

Commercial leases also usually provide for the difference between the old rent and the new rent to be paid following a review. Usually they even go a step further and require interest to be paid on that money as well (at base rate but sometimes higher).

The court in Bello v Ideal View  decided that the simple fact of the landlord’s delay, without more, did not mean the landlord had lost its right to review the rent.

But that does not necessarily mean all is lost if you are a tenant in this position.

To succeed as a tenant you have to be able to show that your landlord has either done something to waive the review or that is has done something, which you rely on, which means it is “estopped” or prevented from reviewing the rent.

To be able to prove that, you would need to have evidence of some kind of representation or conduct by your landlord, and that you had relied upon it as meaning the rent review would not be implemented.

And to be able to argue anything, it’s a good idea to turn up to the arbitration and get involved constructively. What appears to have been fatal to Mr Bello’s case is that he didn’t participate in the arbitration and hoped the problem would just go away.

It is common for commercial leases to provide for rent to be settled on review, in the absence of agreement, either by arbitration or by an expert.

What Bello v Ideal View demonstrates is that if you are faced with a late rent review, you must look for evidence of waver or estoppel if you can. In any case you should get involved, with your advisors, in the arbitration process to argue your case.

If determination of the rent is by an expert rather than by arbitration, you must use any powers given to you in the lease to make your representations to the expert.

Your landlord might still succeed in implementing the late review if you cannot produce any evidence that helps you, but it’s worth a try.

If you bury your head in the sand and hope the nightmare just goes away, it won’t. It will just get a lot worse and could be very expensive.

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