At rent review, the general rule is that, unless the lease clearly states otherwise, premises must be valued as they stand, even if they include improvements that have been paid for by the tenant. The reason for this is simple. The valuer must ascertain the rent at which the premises might reasonably be let in the open market, and not the rent that it would be reasonable to require the tenant to pay for the premises. A third party would pay a reasonable rent for the land, buildings and any improvements effected by the tenant.
Most tenants incorporate specific disregards in rent review provisions to ensure that they are not charged rent for improvements that they have paid for before or during the term of a lease. However, particular care is required where a tenant constructs a building on bare land. The question for the Court of Appeal in Coors Holdings Ltd v Dow Properties Ltd [2007] PLSCS 45 was whether the rent review provisions in a lease required the open market rent to be determined by reference to the land and buildings (which were constructed by the tenant) or by reference to the land alone.
The case turned on the meaning of the expression “open market rental value”, which was defined by the lease as the annual rental value at which “the site comprised in the demised premises” might reasonably be expected to be let in the open market. The landlord argued that the phrase was insufficiently clear to override the general rule that premises must be valued as they stand because it conflicted with other provisions in the lease that presupposed the existence of a building. However, the Court of Appeal ruled that the phrase must have been included for a reason, and attributed greater weight to it, because of its specific, non–standard wording, than to other standard clauses that the parties had included without realising that they needed modification to conform with the terms of their agreement.
An important lesson can be learnt from this case. The lease was granted in pursuance of an agreement for lease in which the tenant agreed to construct a public house on the land. This was not apparent from the lease itself, and the present landlord became aware of the position only after purchasing the freehold reversion. The court ruled that this background fact was not a determinative factor on its own. This case is a helpful reminder that the courts will construe a document by reference to the presumed intentions of the original parties. Successors in title may be unaware of key background facts and should query any obvious ambiguities in a document before investing, in case it becomes necessary to refer to the background facts to clarify the document’s meaning.
Allyson Colby is a property law consultant
