While the economic outlook might suggest otherwise, lesley webber argues that rent increases are still a possibility
It may appear counter-intuitive in a crisis of the present kind to contemplate reviewing rents under commercial leases, particularly those where reviews are underpinned by an 'upwards only' requirement.
But our experience of previous crises indicates that where rental growth was establishing itself before a crisis, a rent review which results in a rent increase is by no means out of the question.
Rent review date
Key to this is the relevant rent review date by reference to which the valuation is required to be made.
Case law supports the position that post-review date events are not relevant for the purposes of rent review (Segama v Penny Le Roy [1984] 1 kfEGLR 109). This is principally because those events would not have been known about in the market at that time.
By contrast, post-review date evidence – in the form of comparable transactions and the like – may be relevant, although its usefulness is reduced the further behind it has left the review date.
In crises such as the current COVID-19 pandemic, which has required, legally or practically, premises to close or be temporarily mothballed, post-review date evidence faces the further difficulty that it may not be possible to decouple it from the distorting effect of post-review date events.
Factual evidence
The position will become - crucially - one of factual evidence about what was known or anticipated in the market at the rent review date.
During the banking crisis in 2008, lawyers and their commercial property clients found themselves having to prove – in relation to rent review dates of 29 September 2008 for example – at exactly what time (US and UK) on that date certain events and announcements took place.
It is not merely a matter of the timing of the events themselves, but of what was known about them in the relevant markets at the precise rent review date. Landlords may choose to defer their rent reviews until after the review date, and when things may have returned to relative normality. At which point memory and evidence, even of events as dramatic as those of the present emergency, may prove surprisingly elusive and unreliable.
Valuation evidence
In 2009, we acted on one London multi-let office building where rental increases were indeed obtained by the landlord, and at materially different levels depending on whether the relevant review date had been 24 June, 29 September or 25 December 2008, and on the differing evidence of the valuation impact as at each date. Over subsequent years, rental increases were secured in several market sectors depending on levels of business confidence - or otherwise - in the state of the recovery.
Some property commentators have suggested that we can expect greater certainty that the virus will be of temporary duration than in the financial collapse of 2008, so reducing the impact on valuation assessments. But the long-term consequences of the virus will bring with them all the uncertainties of economic disruption as well. It is also likely that buildings will need to be occupied and used very differently for some time to come, possibly indefinitely.
It is therefore important for landlords, tenants and surveyors with rent reviews in 2020, and potentially into 2021 and onwards, to keep information on what they – and the market in which they operate – knew about coronavirus, any estimations as to its implications and how that featured in their decision-making processes at relevant times.
There are already ongoing rent reviews in the market, where these issues are coming to the fore.
Timing
Usually, time is not of the essence of a rent review, and it is notoriously difficult to deprive a landlord of its a right to review by reason of delay only (see for example Amherst v James Walker [1983] 2ALL ER 167). Nonetheless parties may want formally to agree to a deferral of a forthcoming rent review to give room for more immediate priorities.
The easiest route for doing this in relation to a future rent review is for the parties (or the landlord if it has the sole right to trigger) to agree not to take any step in that review until after a specified date or without serving at least a specified amount of notice. Deferral of the review date itself, however. may create unintended problems, ranging from complications with the ongoing lease's rent review pattern to releasing a guarantor.
One timing risk for hard–pressed tenants lies with those clauses which allow the landlord to specify a reviewed rent, in a notice triggering the rent review. This form of clause then requires a counter-notice from the tenant within a specified time of receipt, failing which the landlord's figure will become the reviewed rent. Lack of a timely counter-notice will then conclude the review at the landlord's figure without any dispute resolution mechanism.
Similarly, notices purporting to make 'time of the essence' of any rent review requirement, from either side, must be carefully checked to see whether rights may be lost if the notified time limit is not met.
Dispute resolution
Rent review clauses customarily provide for arbitration or independent expert determination, sometimes leaving the choice to the landlord at the time of the review.
The Arbitration Act 1996 provides a complete code of powers for arbitrators and is well-placed to deal effectively with those rent reviews arbitrations already underway. These include the power to rule on their own jurisdiction or on legal disputes in place of the courts (ss30 and 45) and to take legal advice when doing so (s37). The parties can agree on the procedure and evidence, but otherwise the arbitrator has extensive powers which would accommodate virtual proceedings and court-supported requirements for inspections - subject always to satisfying the Coronavirus Act 2020 and related legislation, and to acting fairly.
Independent experts are entitled to move to a decision without meetings, virtual or otherwise but, lacking statutory powers over the parties, may need more co-operation in respect of their investigations and inspections.