Time traps in a rent review

Even in a static or falling market, rent review provisions in commercial leases can still provide a trap for the unwary tenant, as three partners who owned a lease of a former nightclub in Birmingham found out in the case of Regal (West Point) Ltd v Rouf  (Birmingham County Court, judgment 10/1/11).

The property was owned by Birmingham City Council and was in a city centre area that was being redeveloped. They occupied under a 25 year lease from 29th September 1995 with 5 year upward only rent reviews.  Relevantly the lease included the following deeming provision:

“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 Lessee within two months after receipt of the Council’s notification notifies the Council in writing of its objection to the said proposal (time to be of the essence in this respect) the amount so proposed shall be deemed to have been agreed as the revised rent of the demised premises at the date of review.”

In early 2007, at which time the 2005 review had not taken place, the passing rent was £55,000. The Council agreed to sell the property to a developer Regal who planned to gain possession of the property and redevelop it. As part of the plan Regal asked the Council to initiate the 2005 rent review in the hope that if the rent increased the tenants could be persuaded to leave. Therefore on 5th June 2007 the Council notified the tenants that they proposed to increase the rent to £75,000 p.a.

Generally speaking, time is not of the essence of a rent review clause unless the clause expressly so provides – United Scientific Holdings v Burnley B.C. [1978] AC 904, HL. The effect of such a clause such as the deeming provision in this lease is very disadvantageous to the tenant because whilst it allows the landlord to serve the trigger notice at any time but makes time of the essence for serving the ‘counter-notice’.

Two decisions of the Court of Appeal are relevant – Lancecrest v Asiwaju [2005] EWCA Civ 117 which is authority for the proposition that where time is expressly made of the essence in relation to some steps but the clause is silent on other steps, the fact that some steps only have strict time limits is an indication that the remaining time limits were not intended to be strict; and Starmark Enterprises Ltd v CPL Distribution Ltd [2001] EWCA Civ 1252; [2002] Ch. 306 which confirms that failure by a tenant to give a counter-notice in time means that the landlord’s proposal will stand.

The tenants, though unaware of it, were in a ‘time trap’. They asked to discuss the rent review proposal with the Council who sent their agent to what was described as ‘listening meeting’ with the tenants who were unrepresented. He promised to pass on their concerns to the Council but was under strict instructions not to warn them of the time trap. Not surprisingly  the judge (HHJ David Cooke) described the behaviour of the Council and Regal as “unattractive”.

Needless to say the tenants did not serve a counter-notice and were eventually sued for the reviewed rent (by the time the case came on for trial of course the developer’s plans were on hold and it was more interested in receiving the rent).  The tenants defended on various grounds including the suggestion that there was an implied term that the trigger notice be served in a reasonable time and that the Council were estopped from relying on the trigger notice because of what was said at the meeting. These defences failed. Other ingenious defences such as the suggestion that when reporting back in writing to his principal the Council’s agent was acting also as the tenants’ agent and giving written notification of their objection also failed.

Although it does not create a binding precedent the judgment (which comes from a judge who regularly sits in the Chancery Division) contains an interesting analysis of the law in relation to the question of when a term that a trigger notice can be served within a reasonable time be implied into a lease. The judge referred to the decision in Million Pigs Ltd v Parry [1983] 2 EGLR 124 and Goulding J’s distinction between “silent” and “express” clauses. A silent clause is one where no type of time limit is expressed whereas an express clause is one where (without making time of the essence) the provisions of the lease lay down a time limit for taking steps – in the latter case there is an obligation at law to take the step within a reasonable time. In this case he found that the rent review clause was a silent clause and accepted the landlord’s submission that the 2005 rent review could be triggered at any point up until the end of the term in 2020.