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?
- The court has a discretion under Section 34(3) to order upwards/downwards reviews.
- The court is unlikely to exercise that discretion unless there is evidence that rents can go down as well as up.
- 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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.