Today the Supreme Court confirmed that an upward only rent review clause in a 35 year lease dating from 1987 meant that the lease rent would never reduce, regardless of what happened with market rents. While each such matter of interpretation has to be based on its particular facts, this decision will be warmly welcomed by landlords, investors and their funders. Conversely, tenants and their funders will be very disappointed.
The true meaning of a lease is determined by the courts if the parties cannot reach an agreed position or a settlement of their disagreement. The Supreme Court is Ireland’s final court of appeal and therefore its judgments are particularly important. The case arose out of a dispute between the tenant, the iconic Bewley’s Café on Grafton Street in Dublin and its landlord, Ickendel Limited.
Traditionally, most long term commercial leases in Ireland were for 25 years or 35 years, with full repairing and insuring obligations on the tenant and a rent which was reviewed every five years but on an upward only basis. Real estate values in Ireland had increased substantially in the years leading up to 2009 and then fell precipitously. When the Bewley’s rent was reviewed in 2007 it was set at €1,463,964. By 2012, the market rent was €728,187.50, a reduction of 50.3% on the 2007 rent. The difference between those two rent levels for the 10 years from 2012 to the end of the lease in 2022 is €7.36m, a substantial sum both for the tenant and for the landlord. This calculation assumes that the market rent does not exceed the 2007 lease rent of €1,463,964 by the final review date in 2017.
The case turned on the precise construction of the words used in the rent review clause. Bewley’s argued that the terms of its rent review clause meant that the floor on a rent review was the original 1987 rent. The landlord countered that the correct interpretation was that the floor should be the rent payable before the review. In March 2013 in the High Court, Bewley’s was successful and the result was a rent reset at market levels in 2012 (as the original rent had been €232,410). Ickendel appealed and the Supreme Court issued its unanimous judgment this morning (July 1, 2014).
Judge Mary Laffoy is arguably the leading real estate lawyer in the country. It is noteworthy that she delivered the judgment of the Court. Judge Laffoy noted that the parties were in agreement on the applicable law, but differed as to its application to the particular facts. Judges are obliged to give contracts (including leases) the meaning the parties have indicated through the language the parties have used, rather than substituting a meaning which the parties might have used if they had given the matter more thought or had more foresight as to possible future events.
Upward only or Market?
The High Court judge had concluded that the product of the rent review provisions was a market rent. The Supreme Court decided that this was a misunderstanding of how the rent review provisions operated in practice, so that the lease provided for upward only reviews rather than market reviews. In a previous decision in 1995, the Supreme Court had decided that subsequent factors, such as unexpected economic events, could not influence the Court’s approach to interpretation. At the hearing of the appeal, both sides agreed that if the lease provisions were unambiguous, then these provisions applied regardless of whether these were uncommercial.
Judge Laffoy considered the words at issue in the overall context of the lease and analysed in detail each occasion on which the phrase “the preceding period” was used. In each case, she concluded that the meaning was clear, namely that the preceding period was the period which ended at the review date, not the first rent period. There was no need to use a word such as “immediately” before the phrase for the meaning of the phrase to be clear. While she commented that there were some elements of the lease which were specific to the circumstances, much of the rent review process was “articulated in conventional terms”. The rent was to be reviewed on an upward only basis and this was “what the parties bargained for in plain language.”