HM Insights

Rent reviews: have you removed your recourse to court in the event of a dispute?

Rent reviews often trigger a squabble between tenants who are seeking the smallest of rises and landlords looking to maximise investment returns. When that squabble cannot be resolved by direct negotiation the contractual rent review mechanism will kick in.

That usually involves referring the matter to an independent surveyor for determination; but what happens when parties are dissatisfied with the outcome of that process?

It might be possible to challenge it, for example on the grounds of an error in interpreting the lease provisions, but not if the court's authority has been ousted. Two recent decisions from the Court of Session give guidance on the circumstances in which an expert surveyor's decision is the end of the road and on when the ordinary rules of valuation are displaced by the lease provisions.

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Cine-UK Limited v Union Square Developments Limited

In this case, five-yearly rent reviews fell to be determined by an independent surveyor if agreement could not be reached between the parties. The lease stated that the determination of the independent surveyor was to be “final and binding on the parties hereto both on fact and law”.

Notwithstanding this "finality provision", Cine-UK sought to challenge the surveyor’s determination on the basis that she had erred in law in determining the open market rent at £755,375 per annum (the tenant had contended for a revised rent of £563,750 whereas the landlord had contended for a revised rent of £834,000). Cine-UK argued that the parties had not ousted the court's jurisdiction by the finality provision and that the court could competently review the surveyor's decision in the event of an error in law.

The ousting clause

The judge held that it is competent for contracting parties to confer exclusive jurisdiction upon an expert to determine issues of both fact and law and as such to oust the court's jurisdiction. Whether or not the parties have in fact done so is a question of contractual construction.

In this case the judge did not hesitate to find that there was no ambiguity in the finality provision. Parties clearly intended to confer jurisdiction on the expert for all matters of fact and law. The judge pointed out that the rationale underlying such provisions conferring finality on decisions of experts include the benefits of speed, certainty and finality. In the circumstances of this case, the tenant had also failed to demonstrate an error of law on the face of the reasons given by the surveyor therefore even if the case had not been incompetent, it would likely have failed.

Ashtead Plant Hire Company Limited v Granton Central Developments Limited

A decision in this case in November 2018 related to a similar question as the Cine-UK case above – whether or not the expert surveyor had exclusive jurisdiction in respect of matters of law, including on matters of contractual interpretation. In the circumstance of this case, the expert did not have exclusive jurisdiction in respect of interpretation of contract therefore the case proceeded for consideration by the court as to the correct approach to rent reviews on a proper legal interpretation of the lease terms.

In the lease, the definition of Open Market Rent for the purpose of calculating the appropriate rent review included a number of "disregards" i.e. factors that should not be considered as impacting upon the value of the premises. Disregard (4) was in dispute in this case. It provided that the assessment of the best yearly rent should disregard "the effect on any rent of the value of any buildings or other constructions erected on and any improvements carried out to the subjects of lease."

Submissions

Counsel for the tenant submitted that, on the correct interpretation of this clause, “Open Market Rent” fell to be calculated on a hypothetical basis and that the presence of any buildings, other constructions or improvements was to be disregarded, even though in this case there were buildings on the leased premises. He accepted that the normal rule is for valuation of the Open Market Rent to include any buildings as well as the land but argued that this rule can be displaced by specific provisions.

Counsel for the landlord argued that the rent review calculation should not disregard the existing buildings, only any new buildings constructed by the tenant after the commencement of the lease. He argued that disregards (2), (3) and (4) in the lease clause should be read as a whole and that the general intent and effect of the disregards was to prevent rentalisation of improvements carried out by the tenant. This would avoid the scenario whereby the tenant both paid for the improvements and then became liable to pay rent for those improvements.

Decision

Lady Wolffe held that the correct approach to interpretation is to consider what the parties to the lease meant by the language that they have used, read in the context of the lease as a whole and against the background knowledge available to the parties at the time that the lease was entered into.

In the judge's view, the ordinary and natural meaning of the words used in disregard (4) was to direct the surveyor to disregard all buildings or other constructions erected on the subjects of lease. The tenant was therefore successful in arguing that the rent review calculation should be undertaken on a hypothetical basis, ignoring the existence of the buildings and displacing the ordinary rule on rent reviews which is to include the buildings as well as the land.

Comment

The decision on whether or not to oust the court's jurisdiction in the rent review process will depend on the preferred balance between speed and finality of an expert's determination as weighed against the risk of being stuck with a questionable decision.

Careful drafting of the rent review mechanism and valuation provisions is critical to achieving the parties' intentions and also to avoiding ambiguity in the interpretation of the lease by the expert tasked with applying its conditions. Our team will talk you through the pros and cons and ensure that your lease reflects the agreed position on recourse to the court and on the relevant valuation criteria.

For advice on the drafting or interpretation of lease clauses or to discuss issues arising out of the rent review process please contact a member of our team.