Commercial lease – Rent review – Time limit – Lease providing for review at end of each five-year period – Lessor serving notice on defendant tenant 18 months after review date proposing revised rent – Claimant acquiring freehold and suing defendants for backdated rent from review date – Whether time limit for review to be implied such that landlord’s notice ineffective – Claim allowed
In May 2004, the defendants took an assignment of a lease of commercial premises for a term of 25 years from September 1995. The lease provided for a rent review at the end of each five-year period. No review took place in 2005. In 2006, the claimant contracted to purchase the freehold from the city council, as the original lessor. In June 2007, the lessor gave notice to the defendants, at the claimant’s request, proposing to increase the rent from £55,000 to £75,000 pa, backdated to September 2005. The defendants maintained that the lessor was not entitled to initiate a rent review at that stage, some 20 months after the relevant review date.
The relevant lease provisions stated that, with effect from the expiry of each five-year period, “the annual rent shall be… the greater of the current annual rent… and… the revised rent… which… shall be such an amount as may be agreed” between the parties or determined by an adjudicator. The lease stated that “If the Council shall at any time (not more than six months before the date of review) notify the Lessee in writing of its proposal as to the amount of the revised rent” then, unless the defendants notified the council of their objection within two months thereafter, they would be deemed to agree to the amount proposed (the deeming provision). If the parties could not agree the revised rent “within two calendar months after the date of review”, the matter was to be determined by an arbitrator. The lease also contained a tenant’s break clause entitling the defendants “at each date of review” to determine the lease by giving three months’ notice in writing within one month of the revised rent having been determined.
The claimant brought proceedings to recover rent arrears on the ground that it, having served no notice of objection to its proposal, itwas liable for the increased rent from September 2005. The defendants contended that: (i) any notice proposing a revised rent had to be served by the date of review or, alternatively, within a reasonable time thereafter; and (ii) they had objected orally to the proposal and the claimant was to be taken to have waived the deeming provision and the requirement for an objection in writing.
Held: The claim was allowed.
The lease did not provide that a review would take place only if requested by one or other of the parties or that a review had to be initiated in a particular manner. Instead, its language was mandatory, in particular the repeated use of the word” shall”, such that the review mechanism was automatic and obligatory and was not conditional on an event such as the service of a trigger notice. In principle, either party could initiate negotiations to agree the rent. The process did not have to be initiated by the landlord but, if it did so, it did not have to serve a written notice. Since the first option for calculating a revised rent was for the parties to reach agreement, either of them could open negotiations by any means, including by a telephone call. The deeming provision would come into force only if, as was most likely, the landlord began the process by a written notice proposing a rent. Given that the review process was mandatory, the absence of any express provision limiting the date by which it had to start was unsurprising.
No such limit could be implied from the the lease taken as a whole. The provision for the landlord to serve notice proposing a rent “not more than six months before the date of review” specified only the earliest date at which the notice could be served and could not be construed as limiting the period within which it had to be served: First Property Growth Partnership LP v Royal & Sun Alliance Property Services Ltd [2002] EWCA Civ 1687; [2003] 1 EGLR 39; [2003] 04 EG 156 distinguished. The provision for arbitration if the parties failed to reach agreement after two months did not mean that the process of seeking a review had to have begun before that date. Although “unable” to agree might mean that the parties had tried and failed to agree, in the commercial context of the lease it referred to the situation where they had not reached agreement within the two-month period, including where the matter had not even been mentioned. The strongest argument for implying a time limit arose in respect of the break clause. An obvious commercial purpose of linking the right to break to the operation of the rent review clause was that if the tenant found the result of the review unacceptable, it could terminate the lease and curtail its liability. The tenant could be prejudiced if the review was significantly delayed, since it might be faced with a large bill for backdated additional rent for a period in which it had not had the option to avoid payment by terminating the lease. However, that did not justify the implication of a time limit for the landlord to initiate a rent review because, if the landlord failed to do so, the tenant could start the review process. The same considerations ruled out any implication of a requirement for a review to be begun within a “reasonable time” after the review date. If the tenant had the opportunity at any time to avoid or mitigate the consequences of delay in initiating the process, there was no basis for inferring that the landlord lost the right to do so at some point after the review date.
Since the defendants had not given written notice of their objection to the rent proposed by the council in their 2007 notice, they were deemed to have agreed that rent and were liable for the full amount claimed. The landlord had not waived the deeming provision. Although the defendants might have thought that the landlord did not intend to pursue a review, and had believed when they received the landlord’s notice that their oral objection was sufficient, that was not the impression that the landlord had given by anything said or done. The fact that the council and the claimant had decided, for their own advantage, not to correct that mistaken impression, did not disentitle the claimant from relying on the provisions of the lease.
John de Waal (instructed by Shakespeare Putsman LLP, of Birmingham) appeared for the claimant; Sham Uddin, solicitor-advocate, of Hamstead Law Practice, of Birmingham, appeared for the defendantss.
Sally Dobson, barrister
