Business premises — Lease — Rent review clause — Concept of rent-free period and headline rent — Upwards only review — Construction of rent review provision — High Court holding that wording clear — In fixing reviewed rent no reduction or allowance to be made of account of rent-free period — Judgment for the landlord
By a lease dated March 1 1988, two units on an industrial estate near Rochester, Kent, were demised to the tenant, a member of the Taylor Woodrow group of companies. The term of the lease was 25 years from September 29 1987 at an initial rent of £82,000 a year. The lease provided for upwards-only rent reviews every five years. The first review date was September 29 1992.
A dispute arose as to how the rent review provision was to be operated as at that date. Para 3.03(iv) provided “no reduction or allowance is to be made on account of any rent free period or other rent concession which in a new letting might be granted to the incoming tenant …”. A question arose whether that assumption had the effect that if a rent-free period or other rent concession would be given on a new letting of the premises, the reviewed rent was to be (i) fixed by reference to the rent which would thereby be achieved in such circumstances, without reduction or allowance on account of such rent-free period or other rent concession (as the landlord contended); or (ii) assessed by reference to the fact that the hypothetical letting postulated by the rent review provisions would not include the grant of any rent-free period or other rent concession to the hypothetical tenant (as the tenant contended).
That question arose because in the present market conditions it was often necessary for a landlord to conclude a substantial rent-free period at the beginning of the term with a better rent being achieved for the remainder of the term (the post rent-free period rent being known as a headline rent).
Held Judgment was given in favour of the landlord.
1. It was the presence of a rent-free period that occasioned the fixing of a headline rent, ie a rent that might be higher than would be fixed for a rent running from day 1.
2. Para (iv) seemed to mean that a headline rent, if determined, was not to be reduced and was to be payable from day 1.
3. The purpose of a rent review clause was to afford the landlord relief when there was a change in the value of money. It followed that a tenant was entitled to be critical of a rent review clause that not only had that effect, but also had the effect of conferring a benefit on the landlord beyond what should be allowed by a change in the value of money.
4. The words of para (iv) read in the context of the lease were clear. If the valuer, in determining the review rent, in his professional judgment regarded it as right to fix a headline rent then there could by the words of para (iv) be no reduction in that rent and the rent would be payable from day 1.
5. The wording of the lease did not confine para (iv) to a reduction by reason of a rent-free fitting-out period. The words were also apt to take in a rent-free period that was to be regarded as an inducement period.
Simon Berry QC (instructed by Lovell White Durrant) appeared for the landlord; Paul Morgan QC (instructed by the solicitor to Taylor Woodrow) appeared for the tenant.
