In Nissim v Ablethird Ltd, the rent review clause in a lease of an amusement arcade provided a mechanism for calculating the open market rent of the premises at the rent review date. This was on the basis that the premises were let on a lease with the same terms as the actual lease, but with a few modifications. One such modification required the valuer to assume that the premises could lawfully be used as a retail shop.

At the end of the rent review clause there was a proviso that the rent payable by the tenant from the review date would be 125% of the open market rent of the premises. For the purposes of assessing the open market rent, this proviso, and any increase in rent made or to be made under it, were to be disregarded.

The landlord argued that this meant that the "hypothetical" lease did not contain the proviso. The valuer should simply find the open market value of the premises on the basis that they could be used as a shop, and then multiply that by 125% to find the rent payable. The landlord further argued that, even if that was not correct, the valuer was required by the lease to disregard any increase in rent made or to be made as a result of the proviso.

The tenant's position was that the proviso should be included in the hypothetical lease, and that the open market rent of the hypothetical lease should be assessed on that basis. Since the hypothetical lease would then contain an onerous clause, the valuer would be required to discount the open market rent for a shop on a lease without any onerous terms, before multiplying by 125%. The tenant submitted that all the valuer was required to do was to disregard, when deciding on the open market rent under the hypothetical lease, the fact that the actual tenant would be subject to a 25% uplift on that figure.

The High Court found in favour of the landlord. It was not impressed by the tenant's submissions that it should apply the "presumption of reality" to the situation. The presumption of reality had already been displaced by the direction that the premises were to be valued as a shop rather than as an amusement arcade.

Things to consider

Rent review clauses are often ripe ground for dispute. In this case the parties had sensibly included a worked example to show how the 125% uplift was designed to operate, but this did not prevent a dispute arising on the application of the proviso.

Clear drafting is essential throughout a lease, but particular care should be taken over assumptions and disregards on rent review where these depart from the reality of the actual situation.