Most rent reviews in commercial leases are based on open market rent reviews. Because of the problems with agreeing on an open market review, however, sometimes the parties opt for indexed rent reviews instead. These are usually by reference to the Retail Prices Index.
Although an index-linked review sounds simple, the recent case of Trillium (Prime) Property GP Ltd v Elmfield Road Ltd illustrates the problems which can arise. In this case, the tenant’s original lease had been extended by granting a second reversionary lease. The rent review clause used the rental figure taken from the start of the tenant’s reversionary lease in 2010 but index-linked it by reference to an RPI figure from 2005.
The rent had been reduced in 2005 (when the reversionary lease was completed) and the tenant argued that this reduced rent (£965,000 per annum) rather than the 2010 rent (£1.2 million) should be used for the purpose of calculating the rent review. The rent review calculation based on a rent of £1.2 million came to nearly £1.6 million per annum on the next review in 2015.
The tenant applied to the court for a ruling on the correct interpretation of the clause. The court rejected the tenant’s argument. They said there was no ambiguity in the wording of the clause which prevented the court from applying the literal meaning. The fact that a contract term worked out badly for one party was no reason to depart from the clear language of the clause.
The court said that, if anything had gone wrong with the rent review provisions, that was a failure to think through the consequences of what the parties had agreed, rather than any deficiency in the drafting. That could not be solved by the court interpreting the clause.
Indexed Rent Reviews – Moral of the Story
An index-linked rent review can be a good idea (particularly where there is a shortage of comparable properties to provide suitable open market rental evidence) but this case and the recent escalating ground rent cases are good examples of how careful the parties need to be with the drafting of such clauses.
To minimise the risk of such clauses before the lease is signed, the parties should:-
a) calculate worked examples of how the clause will apply based on various figures and consider attaching these examples to the lease;
b) agree on a collar and/or cap for the rent increases which can apply at each review; and
c) take proper legal advice.
BHW’s Commercial Property department regularly deals with commercial leases, if you require any advice or assistance please contact Eleanor Rattay on 0116 281 6224 or firstname.lastname@example.org.