Legislation has prohibited upward-only rent review clauses in all leases or agreements for lease entered into from 28 February 2010. The prohibition does not apply where a lease is granted on foot of an agreement for lease entered into before 28 February 2010. The application of the prohibition on upwards-only rent reviews to new leases arising on foot of pre-February 2010 agreements was considered in two recent High Court cases. The Court had to decide in both cases whether the pre- February 2010 agreement could be deemed to be an agreement for lease.
In the first case, a guarantee attached to the pre-February 2010 lease, required the guarantors, on the happening of certain circumstances, to accept a new lease at the same rents as were contained in the original lease (including the provision for upward-only rent reviews). On the happening of those specific circumstances, the guarantor did not take a new lease.
In attempting to quantify the landlord’s loss, the Court considered whether the guarantee amounted to an agreement for lease which was entered into prior to February 2010, in which case the prohibition on upward-only rent reviews would not apply. The Court decided that no agreement for lease existed as an agreement for lease involves not only an obligation on the part of the prospective tenant to take the lease but an obligation on the prospective landlord to grant the lease. In this case it was open to the landlord not to require the guarantor to take a new lease. The decision endorsed the approach taken in the Reox case (on which we reported in our September bulletin).
The second case concerned an option agreement entered into prior to February 2010 under which the landlord or tenant could call upon the other to enter into a 20-year lease on the expiration of an initial 5-year lease. The landlord exercised this option after February 2010. The Court considered all of the transaction documents which included a tenant option to acquire shares in the company which owned the property. The Court concluded that from the outset there was a contractual pathway leading to the tenant continuing to possess the property after the 5-year lease. This made it virtually impossible to deny that the option agreement was anything other than an agreement for lease. As the option agreement was entered into prior to February 2010, the prohibition on upwards-only rent review provisions did not apply.
In order to safeguard upward-only rent review provisions, landlords will naturally be keen to construe their pre-2010 agreements as agreements for lease. Courts will examine all transaction documents in connection with the lease closely to determine whether an agreement for lease can be deemed to exist. It would appear, however, that Courts will not construe the standard guarantee lease provisions, requiring a guarantor to take a lease on the occurrence of specified circumstances, as an agreement for lease.
Click here for another article on upward-only rent reviews, the Bewley’s rent review case, in which the Court decided that ‘upward-only’ rent review provisions in the lease allowed the rent to fall to open market value as long as it didn’t fall to below the initial rent agreed.