The manner in which rent is reviewed under existing leases has become a matter of acute concern for landlords and tenants alike, because of the unprecedented falls in rental levels over the past five years. The key question is whether existing provisions commonly thought to be “upwards only” can in fact be read to permit a drop in rent to the open market level.
The High Court has recently delivered an important and somewhat surprising decision on this question1. The case concerned a 35-year lease from 1987 of the iconic Bewley’s Café on Dublin’s Grafton Street. Under the terms of the Lease, the rent payable was to be reviewed every five years. The most recent of these reviews took place in 2007, when an annual rent of c. €1.2 million was fixed.
At the 2012 rent review, the Tenant argued that the rent review provided for in its Lease was not “upward only” as this term is normally understood. Instead, the Tenant argued that the arbitrator was entitled to set a rent in line with the current open market level, even if this reduced the rent payable by the Tenant from its 2007 level. Provided the new rent was greater than the original 1987 rent payable, the Tenant argued that this could and should be the result.
The Court noted that the meaning of a lease was to be reached by interpreting the language actually used by the parties involved. It stressed that, in a commercial lease, the Court would not read the rights of either party restrictively and that the Court had no right to rewrite the bargain which the parties had actually made, however badly that bargain had turned out for one or other party. The Court examined the wording of the Lease in detail, focusing on the following points:
- the rent review clause, provided that the rent to be assessed as at the Review Date was the open market rent;
- the Lease contained a provision that the reviewed rent could never fall below the rent payable in the “preceding period”, a phrase which was also used, elsewhere in the Lease, to refer to the original rent payable in the Court’s view;
- The Lease provided for an upward only review of rent, where there was an assignment of the Lease by the Tenant, in terms the Court found to be very clear. The Court noted that no similar clause was included in the rent review provisions and concluded that this was important.
The Court noted that the argument was finely balanced and both sides had powerful points to make. Ultimately however, the Court considered it crucial that the rent to be assessed on a review was that which would be payable on the open market. The Court concluded that if the parties had intended to provide that the rent under the Lease could never decrease, they would have used clear language to say so and this view was re-enforced by the reference to open market rent on review.
This case was decided following detailed consideration of the particular wording used in the lease in question. The Court was careful to stress that if the parties had made clear an intention that the rent should never decrease, the Court would give effect to that agreement. Nevertheless, further arguments concerning other wording common in leases of this kind is likely and this case may itself be appealed to the Supreme Court.
In the near future, the decision will likely give rise to some uncertainty about the rights of landlords and tenants, under existing rent review clauses long thought to be “upward only”. Given the extent to which rents have fallen in the past five years, both landlords and their tenants would be well advised to clarify their rights well in advance of any impending rent review.
More generally, this decision emphasises the importance of careful and detailed drafting in leases, which are essentially long term contracts, if the parties are to be protected against future uncertainty. We would note that recent legislation requires “upwards downwards” review in newer leases.