The presumption of reality applies to rent review valuations. Therefore, where lease terms are onerous, a valuer will normally discount the reviewed rent to reflect the rent that a hypothetical tenant might agree to pay for a hypothetical lease of the premises. Consequently, landlords often include additional provisions in rent review clauses to ensure that onerous lease terms are disregarded on rent review. So, to what extent does the presumption of reality have a part to play in such cases?
In Nissim v Ablethird Ltd [2009] EWHC 585 (Ch); [2009] PLSCS 106, the High Court was asked to consider the effect of a rent review provision in a lease of an amusement arcade. The landlord and tenant had agreed that the reviewed rent should be assessed on the assumption that the premises were let for use as a shop. However, the parties clearly believed that the rent payable for an amusement arcade was higher than that rent payable for a retail shop because the lease included additional provisions that required the valuer to apply a 25% uplift to the shop rent.
The lease also contained a provision directing the valuer to disregard these additional provisions and any increase in rent made, or (importantly) to be made, as a result. The tenant argued that the uplift provisions were none the less onerous and would adversely affect the rent. It argued that the lease required the valuer to disregard the fact that, as between the actual parties, the reviewed rent was liable to an uplift of 25%, but claimed that the disregard did not operate in respect of the parties to the hypothetical lease.
The tenant based its argument upon the presumption of reality; the reality was that the actual tenant would pay a 25% uplift. Consequently, the starting point must be that the hypothetical tenant would pay a similar uplift. The tenant claimed that the disregard had the effect of overriding reality to a limited extent, but not completely.
The High Court, however, preferred the landlord’s arguments. The judge decided that the tenant’s interpretation would produce a result that the parties were unlikely to have wanted to achieve. The valuer would have to assess a conventional shop rent, discount it to reflect the onerous rent review clause and then apply the 25% uplift to the discounted figure. This was a convolution too far, and did not appear to make any commercial sense.
The judge regarded the presumption of reality as being of limited assistance in this case because (i) the lease included provisions that contradicted reality in respect of the current (and any future) rent reviews; and (ii) any other interpretation would distort, rather than reflect, the parties’ intentions.
The decision illustrates that clearly worded rent review provisions can displace the presumption of reality, even if this has the effect of inflating the rent payable on rent review. In such cases, a tenant will not be entitled to a discount to reflect onerous provisions in its lease.
Allyson Colby is a property law consultant
