Generally, rent review clauses in commercial leases are tied to increasing market rental values or to inflation.
Sometimes, however, they may provide for the reviewed rent to be calculated by means of a complicated formula which has unexpected results, or there may be an error or misunderstanding which produces a result the parties did not expect.
Where the tenant finds themselves faced with a rent review clause that is going to result, over the term of the lease, in dramatically increased rents that may be out of all proportion to the value of the property concerned, in what circumstances can they avoid liability? This is particularly relevant in longer leases with repeated rent reviews, including very long leases with ground rents subject to defective review clauses.
A recent example heard by the Court of Appeal, Monsolar IQ Ltd v Woden Park Ltd , concerned an inflation rent review clause geared to the increase in the retail price index. But the detailed wording of the clause provided that on each rent review the rent currently payable would be increased, by the total amount of inflation from the date of the grant of the lease to the date of that rent review, and again on each subsequent rent review, producing an absurd result.
The principles to be applied here were set out in the case of Chartbrook Ltd v Persimmon Homes Ltd . The tenant has to satisfy two tests. Firstly they have to show that there is a clear mistake in the clause either because the words or calculations in it do not make sense, or because it has an absurd and irrational effect on future rents. It is not enough for the tenant to show that he would suffer a commercially unattractive or unreasonable rent - it has to be nonsensical or absurd.
In addition to that, the tenant also has to show that it must be clear what the parties to the lease really intended, so the court can decide how the rent review clause should be interpreted. If it is not possible to say just what the parties really meant to agree on, the court will not intervene and the tenant would be left with his onerous rent review clause, irrational as it may be.
A striking example of this was the case of Arnold v Britton (2015). That was a case concerning a lease provision reviewing service charges rather than rent, but the principle is exactly the same. The offending clause provided that the service charge payable by the tenant would increase by 10% every year of the term of the lease, which provided a result that was absolutely absurd – but the court was not able to interfere because the rent review clause gave no clue as to what was the sensible alterative that the parties could have been said to have intended to agree.
The moral is to make sure that rent review clauses are checked carefully and, in particular, to view any review clause involving complex calculations or unusual presumptions with suspicion.
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