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SHOPPING FOR BETTER VALUE …

RENT REVIEW

Dunnes Stores is the latest commercial tenant to gain savings on a court interpretation of a rent review clause which its landlord claimed to have been “upwards only”.  On Tuesday, 14th May last, the Circuit Court granted the retail giant a 32% reduction in rent to be paid for the occupation of retail floor space on Georges Street, Dublin 2 and a 50% reduction of rent to be paid for the occupation of basement storage and office and ancillary space at the same location.

Readers may be familiar with a judgment of the High Court handed down in March of this year which had the effect of reducing the rent Bewleys Café was paying for occupying its retail outlet on Grafton Street for the five year period beginning January 2012.  In that case, the landlord, Ickendel Limited, also claimed that a rent review clause in the lease with Bewleys Café (which was dated 22nd September 1987) was “upwards only”.

The judgment in the Bewleys case is valuable to both commercial tenants and landlords as it offers an insight into a court’s approach to the interpretation of a rent review clause in a commercial lease where there is a dispute between the parties.

It is noteworthy that the judgment in the Bewleys case recognised established jurisprudence which declines to rewrite the terms of a lease simply because they are unfair to a party e.g. a tenant who is unable to pay the rent because of the economic downturn or because the tenant might go out of business as a result of rent being or becoming payable at an amount higher than market value.

The Bewleys decision also reflects the fact that the parties to a commercial lease have negotiated and agreed same at arms length, often with the benefit of legal advice and that therefore they should be bound by the terms of the lease which records that agreement. In addition, the Court emphasised that certainty is essential to the successful operation of commercial agreements and that parties to an agreement should be confident not only that the terms of a commercial agreement will withstand judicial scrutiny but also that such terms will not be rewritten by a court.

In the Bewleys case, the previous rent review which took place in 2007 fixed an annual rent of €1,463,964.   A dispute arose when the rent was being reviewed in 2012.

The rent review clause in the lease provided that the new rent on a review should be the higher of either the rent payable during the “preceding period” or the current market rent.  The question for the Court was – what period was the “preceding period”? Was it the:-

immediately preceding period i.e. the period from 2007 to 2012 in which circumstances the new rent for the period 2012 to 2017 would have remained at €1,463,964 per annum due to deflation in property prices;

or

the period beginning on the date of the lease in 1987, in which circumstances the rent for the period 2012 to 2017 would be the greater of the 1987 rent or current market rent?

The rent in 1987 was €218,000 per annum and it was submitted by counsel for Bewleys during the hearing that current market rent would be less than half the rent fixed in 2007.

Thankfully for Bewleys’ coffee consumers the Court’s answer was based on paragraph 2 above.  The Judge did not however fix the amount of the new rent and left this to be dealt with by the parties.

It must be emphasised that whilst this case has set an important precedent, it was decided on its own facts and cannot be considered as a general rule.   The outcome of every case will depend on the wording of the particular rent review clause. It is anticipated however that many leases contain rent review clauses with similar wording to that in the Bewleys case hence the importance of that decision.  The case is currently under appeal to the Supreme Court and a final decision is awaited with great interest.

Quite apart from the dramatic effect of the decision on the commercial property market, it highlights the necessity for attention to detail when drafting commercial leases so to avoid uncertainty with consequent legal and other professional costs.

 

Update

Last Wednesday, 15th May 2013, the High Court found that a rent review clause in a lease made between Tanat Limited as landlord and the Medical Council as tenant was in fact an “upwards only” rent review clause.   In that case the High Court held that the clause in question should be interpreted to mean that the rent payable under the lease did not fall below the rent payable for the preceding period which rent was €820,000 per annum.  It was noted that the market rent payable under the lease was €374,100 per. annum.  This case demonstrates the importance of the actual wording of the clause and acts as a reminder that all cases will be decided on their own facts.  In cases where the wording is clear the Courts will enforce an “upwards only” rent review clause notwithstanding the hardship this may cause to a tenant.

 

NB:  Since the commencement of section 132 of the Land and Conveyancing Reform Act 2009 (“the 2009 Act”) on 28 February 2010, “upwards only” rent review clauses in leases created afterthat date are to be construed as meaning that rent payable following such review may be fixed at an amount which is less than, equal to or greater than the amount of rent payable immediately prior to the date on which the rent falls to be renewed.

That section means that in the post 2009 Act era, even if a rent review clause is drafted in terms similar to those contained in the Tanat/ Medical Council case, the rent may nevertheless be reduced, remain unchanged or increased.  It is not possible for the parties to contract out of the application of this section.

Food for thought, and fodder for lawyers!

Deirdre Farrell, Solicitor and AITI Chartered Tax Consultant, Amorys Solicitors, Suite 10, The Mall, Beacon Court, Sandyford, Dublin 18. Tel: 01-213 59 40