Real Estate Law UK Essay

UBLMCG-15-M09024425Real Estate Law:Do UK Rent Reviews represent an advantage for Landlords?AbstractRent reviews have developed to become an essential provision in many leaseagreements. Designed to protect landlords’ interests against inflation, rent reviews are now a fiercely contested subject within property law. Upward only rent reviews are a particularly litigious area, and are standard in most UK rent review clauses but have been met with strong opposition from some tenants who feel these offer unfair advantage to landlords. This situation has fuelled lobbying for legislation to restrict their use in UK leases and the government todevelop codes of practice intended to raise awareness of alternative lease options. This discursive essay sets out to provide a brief overview of the development of rent reviews in the UK and the relevant case law. It will focus on three key areas, namely the procedures for serving rent review notices, thereview valuation process and the upward only basis of most UK rent reviews. These will be evaluated individually to assess whether they favour the landlord and whether UK rent reviews as a whole represent an advantage for landlords. On first inspection UK rent reviews appear preferential to the Landlord. However on further analysis they offer equal opportunity to both parties, particularly when you consider both parties are ultimately free to negotiate the terms of the lease and the vast majority of cases the courts will uphold this.Keywords: rent, review, landlord, tenant, advantageHistorically the law of England and Wales has largely left parties free to negotiate the initial form of a commercial lease (Wilson & Long, 2011, p2). The Landlord and Tenant Act 1954 which bestows a statutory right of renewal on commercial tenants has been the key intervention although the Act does not provide any regulation in terms of rent. As the concept of land ownership has developed through history so too have the leases that facilitate it. Generally older leases did not consider the effect ofinflation and were often agreed at rents fixed for very long durations as Landlords sought security of income. Due to the increasing level of inflation in Britain lease structures developed in the 1970s to satisfy the requirements of pension funds and insurance companies investing in property (Garner & Frith,2013, p71-72). The ‘Institutional lease’ as it is referred to was typically held ona full FRI basis for a term of 25 years without a break option and with 5 yearly upward only rent reviews.Rent review clauses have always been a highly contentious issue particularly with regards to the upwards only basis of most commercial UK leases. The 1

UBLMCG-15-M09024425significant variety of rent review provisions has prompted litigation over the interpretation of rent review clauses despite an extensive volume of existing case law on the subject (Gatty, 2005). The recent structural shift towards shorter leases has seen a decrease in the occurrence of rent reviews (BPF/IPD, 2007, p3). However, Loveday et al. report there is no evidence of an accompanying decrease in the number of disputes (2008, p11). Disputes principally centre on the pattern of the review, the review valuation process and the serving of notices.A Rent review clause is a clause inserted into lease agreements to “allow the periodical adjustment of commercial rents to the market level current at the date of review” (RICS, 2014). In the UK rent review clauses vary considerably and although no specific wording is required they tend to place certain obligations on the parties concerned, such as requiring a rent review at statedintervals. The new rent payable after the review is stipulated as that which thelandlord might reasonably expect to obtain on the open market if he were to re-let the premises on the review date. They are typically not geared to an index and specify that the rent may be reviewed upwards only (Wilson & Long, 2014, p2). A well-drafted rent review clause will clearly specify the dates on which the rent shall be reviewed, the machinery for the review, the basis of the revised rental valuation, the process to trigger the review as well as the resolution procedure if the landlord and tenant fail to negotiate independently (RICS, 2014). Although the basic form for the contract is relatively simple, differencesof interpretation due to inconsistent drafting have resulted in a sizable body of landlord and tenant case law (Baum & Crosby, 1995, 112). The purpose of a rent review is to give the landlord protection against inflationwhen property values increase by raising the rent in line with market rental figures (Card et al., 2003). Most rent reviews in UK leases are on an upwards only basis that also protects the landlord against falls in property prices by retaining the previous rental value. Upward only rent reviews require that if theopen market rental figure is in excess of the passing rent at the time of the review, this will become the new rent payable for the following period (Loveday et al., 2008, p63). Machinery that allows the landlord to trigger the rent review exclusively may have the same effect as an upward only rent review, as a suitably informed landlord will not trigger the review if the market rent is less than the passing rent. The case of Hemingway Realty v Clothworkers Guild [2005] EWHC 299 concerned a tenant contending the right to review the rent with the landlord refusing to review the rent as the market rent was less than the rent payable. Royal Insurance Property Services v Cliffway [1996] also involved a tenant seeking to initiate a rent review, this time on the basis that a memorandum postdating the lease provides for upward and downward rent reviews. The judgment of Rattee J in dismissing the case reinforced the importance of the wording of leases. The majority of UK leases have rent review clauses exercisable by the landlord only, existing case law seems to further strengthen this position to the detriment of the tenant.2

UBLMCG-15-M09024425 Property prices plummeted in the 1990s following a boom period in the 1980s. The outcome was a situation where many commercial tenants were paying rents far higher than the market value. This led the Government at the time to consider regulation restricting upward only rent reviews. The question is whether the Parliament considered banning upwards only rent reviews was because they are innately advantageous to landlords or whether it was a reaction to a culture of tenant naivety in relation to lease terms, a situation exacerbated by the economic backdrop? While the Government felt it would be inappropriate to legislate against upward only rent reviews the resulting consultation led to the development of the 1995 Code of Practice. The purpose of which was to ensure tenants were better informed about their rights and obligations, and to promote transparency in lease negotiations (Wilson & Long, 2011, p2). The impact of 1995 code was limited although some of the changes, such as shorter lease terms, increased flexibility and an increase in repairing obligations on the landlord, had materialised, these were not attributed to the code. Upwards-only rent reviews remained almost universal (Wilson & Long, 2011, p3). The lack of interest in offering alternatives despite government guidelines to do so suggests that landlords benefit disproportionately from upwards only rent reviews. In 2002 the government, unsatisfied by the reaction to 1995 code again considered legislation and once again opted to introduce a voluntary code of practice. The 2002 code of practice had more impact than its predecessor in that landlords began to offer alternatives however research indicated no evidence of substantial change and upwards-only rent reviews remained “virtually universal” (Reading University, 2004). This undermines the argument that UK rent reviews are advantageous to landlords as tenants are clearly more than willing to engage in them. This is because upward only rent reviews offer financial benefits to tenants (Loveday et al., 2008, p63). Thevalue of a lease containing an upwards only rent review provision will generally reflect the tenants loss of protection in a falling market therefore the initial rent on a lease containing a upwards only rent review is less than an otherwise identical lease (French et al., 1997, p448). Nevertheless upwards only rent reviews remain unpopular among many in the industry.The fallout from the 2002 code of practice was the Government identifying theneed to target small businesses specifically in raising awareness of lease terms and promoting transparency in negotiations. The result was the 2007 code of practice for leasing business premises. Like the previous codes, the 2007 code failed to achieve widespread integration. Despite many organisations responsible for corporate tenants and larger landlords fully endorsing the code, the majority of transactions take place in complete ignorance of the code’s existence (Wilson & Long, 2011, p13). The prevalence of upward only rent reviews remains an issue for the government describing the broad-brush solution of upwards only rent reviews as often “crippling factor in determining whether or not the business can survive” (Portas, 2011). This indicates the existence of upwards only rent reviews is disadvantageous to a tenant, however this view comes under 3

UBLMCG-15-M09024425scrutiny when the findings of an earlier report by the British Property Foundation are considered. In their report “A BPF response to the ODPM’s consultative paper on: Commercial Leases” they noted statistics from the Insolvency Service showed rent reviews ranked 11 out of 14 measures cited as a cause of business failure (BPF, 2004, p1) In addition to this they refuted the claim which is regularly raised by detractors, that upwards only rent reviews are inflationary highlighting the underlying trend from 1975-2004 was actually a fall of 0.5% (BPF, 2004, p1). The alternatives to upward only rent reviews must be compared in order to reach an informed decision on the best method. The machinery of a rent review can take many forms, from upwards and downwards rent reviews, threshold rent reviews, turnover rents, stepped rents and indexation. The latter is widespread across continental Europe and considered by many to be a better option than upward only rent reviews. Indexation involves gearing the rent to an index such as the Retail Prices Index, although in the case of British Railways board v Mobil Oil Company ltd. [1992] the rent was geared to an index of the rents payable for other properties. Indexation commonly incorporates rent reviews more frequently than the typical 5 year pattern, a feature emphasised by proponents as an advantage over existing upwards-only rent review patterns, as this ensures tenants are more likely to pay a rentin keeping with the market rental figure (Loveday et al., 2008, p65). However, the British Property Foundation champion the use of upward only rent reviewsas a strength of the UK market. The protection they offer landlords against market volatility allows access to cheaper capital; this then benefits the tenantby being reflected in a cheaper initial rent and also encourages further landlord investment (BPF, 2004, p1). Ultimately, the argument that upwards only rent reviews are advantageous to landlords is flawed. Upward only rent reviews are reflected in the initial rent and as such they offer financial advantages to both the landlord and tenant.Aside from the basis of the rent review, the review valuation itself is heavily contested in case law, particularly with regards to the gathering of legal evidence. In the UK the standard nature of a rent review is that at specified intervals where a current open market rental value for the premises exceeds the passing rent, the new figure is substituted for the following period (Card et al., 2003, p540). With regards to valuing rent reviews it should noted that the intention of the parties is primarily ascertained through analysis of the wordingin the lease. This point is reinforced in the judgment in Cadogan v Escada [2006]. The case centred on the landlord’s argument that the wording of the lease might not be ‘commercially realistic’. Ruling in favour of the tenant, the judge recognised his view, although dismissed the case, as ‘that does not mean however that the court can rewrite the words that the parties have used in order to make the contract conform to business common-sense’. However, In the event of ambiguous wording in the lease, the courts may adopt the most commercially realistic meaning (Loveday et al., 2008, p20). Aside from the usual rules applicable to all contracts, the courts apply the rule of ‘presumption of reality’ to the construction of rent review clauses. The aim of which is to stress the commercial purpose of the review procedure rather 4

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Table of Contents
TASK 1............................................................................................................................................3
What is the purpose of the Resource Management Act 1991?...................................................3
What are the three main principles of the Act?...........................................................................3
Six elements of the environment?...............................................................................................3
Task 2: District plans.......................................................................................................................4
a. A house with a maximum height of 7.5 metres, and a net site coverage of
33% in the Hill Residential Activity Area.................................................................................4
b. A service station in the Central Commercial Activity Area...................................................4
c. A kōhanga reo (Māori language preschool) for up to 10 children in the
General Residential Activity Area.............................................................................................4
d. A boarding kennel on a 2-hectare site in the Rural Residential Activity Area.......................4
e. A 15-metre-high office complex in the General Business Activity Area...............................4
Task 3: Building law........................................................................................................................4
Explain the main differences between a
building consent and a code compliance certificate...................................................................4
Write a brief email to Cory and Krystal and explain..................................................................5
Options they have in its absence and the steps they could now
take, with a view to getting a possible offer from Balvinder and Nalini...................................5
Draft an email to Nelesh explaining the building consent process from
application to final completion of the work...............................................................................5
REFERENCES................................................................................................................................7