January 2011 Property Department Bulletin

Rent Review Clauses: A Reminder of Some Basic Points


On the grant of a lease or tenancy agreement for more than a few years, it is normal for there to be a provision by which the rent can be reviewed. Traditionally this is seen as the only appropriate means by which a landlord would agree, for the benefit perhaps of both parties, to grant anything other than a short lease: without a rent review provision, landlords would be unlikely to agree to a term exceeding a few years, unless the rent was set initially at an artificially high level to compensate for the effects of inflation, a position no tenant would be likely to accept.

The presently depressed state of the commercial property market, following the events in recent years within the national, and world, economy, means that both landlord and tenants need to think particularly carefully how they should approach any rent review provision in a lease which affects them.

Most rent review provisions set out the date, or dates, from which the rent may be reviewed. Typically this will be, for example, on every fifth anniversary of the start of the lease. Normally a procedure is set out, to invoke the rent review provision and lead to a new rent being set. Normally the procedure is invoked by the landlord giving an appropriate notice to the tenant, or perhaps either party may be entitled to give notice to the other.
But why would a tenant want to give notice to the landlord to invoke a rent review procedure? After all, on a rent review the rent usually goes up, or stays the same; it very rarely goes down.

You might think that, if you enter into a contract (such as a lease or tenancy) which contains provisions setting out deadline dates by which things must be done, those dates are crucial and must not be missed. But that is not necessarily the case.

In law, a deadline date prescribed by a contract is crucial only if, for the purposes of the contract, “time is of the essence”. Put simply, deadline dates are crucial only if the parties intend them to be crucial. And there must be clear evidence of that intention.

The starting position for a notice triggering a rent review clause in a lease is that time is not of the essence. So, if the deadline date for service of a notice passes, without any notice being served, the landlord can still give that notice at any later time. And the review date will remain as set out in the lease. So, the later the landlord gives the notice, the greater the extent to which the new rent will be backdated.

If the date by which a landlord is to give notice invoking a rent review provision happens to coincide with a period when the commercial letting market is depressed, then (depending how the new rent is to be assessed) it may well be in the landlord’s interests to postpone giving that notice for as long as possible, until the property market revives. At that point, late notice can be given, with the new rent still backdated to the original review date. Depending on the mechanism set out in the rent review clause by which the new rent is to be calculated, invoking the mechanism at that later date may well result in a higher rent for the review period. And, if that is the case, then, conversely, it may well be in the tenant’s interests to invoke the procedure at the time set out in the lease, rather than allowing the landlord to postpone it.

So: can time ever be of the essence for a rent review provision in a lease? The answer is “yes”. The leading authority on this point is a House of Lords decision from 1978 . There, the Court confirmed that time is not of the essence in a rent review timetable, unless there is a sufficient indication to the contrary. A sufficient contra-indication could be found in one or more of:

1. the express words used in the lease. For example, the lease might contain a general clause providing that, for the purpose of all time limits referred to for anything in the lease, time is of the essence.

2. the wording of the rent review clause itself. So, again, the rent review clause might itself state that time is to be of the essence.

3. the inter-relation between the rent review provision, and any other clauses in the lease. For example, if the lease contained a break clause , which had to be exercised by the date on which the rent review was to be triggered, that would clearly imply that time was of the essence for the purpose of the rent review - because the tenant would be entitled to know what new rent he was being asked to pay, before deciding whether to invoke the break clause.

4. the surrounding circumstances. Intriguingly, there have been no reported cases on this issue since 1978.

So, even if there is nothing in the lease itself which expressly states that time is of the essence for the purpose of the rent review clause, it is still possible that time may be of the essence. That is very important for a landlord because, if time is of the essence for the purposes of the rent review clause, then if the landlord misses the deadline date the rent cannot be reviewed until the next rent review date – usually a number of years later.

If a rent review clause can only be invoked by notice given by the landlord, not by either party, then how can a tenant protect himself if a landlord deliberately omits to give notice, hoping to wait until the letting market improves?

Usually, in any contract (not just a lease or tenancy) where the time for something to be done under the contract is not of the essence, it can be made of the essence where the other party serves notice, giving a reasonable period of time after which time is to be of the essence.

For example, if I enter into a contract with you by which, in return for your payment to me, I am to supply you with a product, then, if the contract does not say when I should do so, it will be implied that I should do so within a reasonable time, and time will not be of the essence. But, if you think I am taking too long, then you may give me notice making time of the essence and imposing a reasonable deadline by which I am to supply. If I then miss that deadline, I am in breach of contract.

Applying the same principle, therefore, a tenant in these circumstances may, once the deadline for service of the landlord’s notice has expired, give notice to the landlord imposing a reasonable time limit after which time is to be of the essence for the purpose of the rent review provision. When that deadline has passed, time will be of the essence. And, if the landlord has not served his triggering notice by then, he will have lost his opportunity to do so and the rent cannot then be reviewed until next time round.

Bear in mind that the principles described here would not normally apply to notices to trigger a break clause, or to exercise an option (for example to enter into a new lease, or to acquire the freehold); there, the default position is normally that time is of the essence.

For both landlord and tenant, a lot can turn on how they deal with the rent review provision in their lease – particularly in these uncertain times. As ever, it pays to take legal advice early.



This bulletin is not intended to be comprehensive or to provide specific legal advice. It should not be relied upon in the absence of specific advice given in relation to particular circumstances.


For further information on this or any related topic please contact David Thorp, Susannah Taylor, Mary Thompson or Rachel Phillips


South Cheshire's leading Law Society accredited law firm
South Cheshire House, Manor Road, Nantwich, CW5 5LX
Tel: 01270 611106 Fax: 01270 610515 or 610085
www.bowcockcuerden.co.uk


Bowcock Cuerden LLP …. taking care of your business

©Bowcock Cuerden 2011