It is common for commercial leases for a term in excess of 5 years to have a rent review clause incorporated. Usually, the rent review clause will be upward only. This means that the revised rent will be the greater of the rent passing under the lease at the review date or the rent following review (usually based on the open market rent at the review date).
Rent reviews are almost always favourable to the landlord. A common misconception made by tenants/assignees is that if the rent review(s) pass and no action is taken then the rent review has been avoided and cannot be activated.
However, The landlord can reactivate a past rent review (subject to certain exceptions) and claim from the current tenant the additional rent due following a review which results in an increase in the rent. Accordingly, this can be very costly to a tenant or an assignee and payment, plus interest, may be requested to pay on very short notice. If payment cannot be made, the tenant will be in breach of the terms of their lease which could result in the lease being forfeited.
The following points should be considered if you have a commercial lease with a rent review or you are proposing to take possession of such a lease as an assignee:-
1. Is time of the essence for the purposes of the review clause?
- There is a presumption that unless the lease specifically states otherwise, time is not of the essence.
- If time is not of the essence, the right to review will be available indefinitely until that right is invoked, abandoned or one or other party is "estopped" from invoking it or the lease comes to an end.
- If the lease is in a period of "holding over" under the Landlord and Tenant Act 1954 (i.e. still in possession after the lease has expired), the rent review can still be triggered and the uplift recovered from the Tenant.
2. Who is liable to pay the uplift in the rent?
- The liability for a balancing payment to reflect an increase in rent following a review falls on the day the rent is agreed or determined not when either the review period commences or when review process is triggered.
- Consequently, whoever is in possession of the lease at the time the uplift is agreed or determined will be responsible to pay the uplift from the review date stated in the lease which may mean paying for an increase in rent even where the current tenant was not in possession of the lease.
- This principle also applies to a landlord who has acquired the freehold reversion. If the review is determined the day after the landlord acquires the freehold reversion then the new landlord will be paid the uplift when the next rent instalment falls due.
3. How to deal with rent reviews which have passed?
- If the tenant wishes for the rent review to be determined, then notice should be served on the landlord making time of the essence compelling the landlord to conduct the review within a reasonable time.
- When taking an assignment of a lease, it is important to check both the lease and counterpart to see if a memorandum of rent review has been endorsed on either copy. This is evidence that the review has taken place.
- When negotiating the terms of the lease, tenants should secure a right to activate the rent review if the landlord has not done so in a reasonable amount of time.
- Landlords acquiring freehold interests and leases should check that there has been no representation made by former landlords to the tenant that the rent review will not be activated.
- Assignees taking over leases where rent reviews have passed but not been activated should seek written assurance from the Landlord that these reviews will not be activated and make provision in the deed of assignment for the assignor to make up any shortfall for the increase in the rent which is payable for the period they were in possession of the lease.
Clapham and Collinge commercial property solicitors are available to advise either landlords, tenants, assignors or assignees specifically on historical rent reviews and the implications of their particular case or more generally on all commercial property matters. Contact us today on 01603 693500 or email us using the 'Make an enquiry' form. Appointments available at our Norwich, North Walsham, Brooke and Sheringham offices.