How to avoid paying more than you bargained for in indexed rent reviews

A rent review provision in a commercial lease can be complicated — and getting it wrong can prove expensive.

This point is well illustrated when we consider the Trillium (Prime) Property GP Limited v Elmfield Road Limited case where the difference between the landlord and tenant’s view of the rent due was a significant £300,000.

Let’s take a look at the case.

The details

A landlord, Elmfield, and tenant, Trillium, agreed to reduce the rent payable under a lease from £1.16 million to £965,000 per annum during the last five years of the term. At the same time, they implemented a new lease which would start at the end of the existing term.

Commercial property leases can run for a few years, so for the lease to be commercially viable, there should be some provision for the rent to be increased when the time is right.

As such, the new lease included a formula for the calculation of the initial rent, which was to be the higher of certain figures, one of which was £1.2 million.

The new lease also included a rent review provision where the initial rent was to be assessed at the end of year five, based on the uplift between a base figure and the retail price index (RPI), a measure of inflation, the month before the rent review.

When the new lease began, both agreed the initial rent payable was £1.2 million.

Dispute

At the end of year five, a dispute arose regarding the interpretation of the rent review provision.

One of the important issues that arose was the base figure used for the RPI calculation was the RPI figure when the rent was agreed under the previous lease or, in other words, the RPI figure from five years before the new lease began.

This meant rent was increased in line with a ten year uplift in RPI rather than five — the five year uplift would have been the RPI increase between the date of entry under the new lease and the rent review date.

Tenant’s argument

The tenant said the lease was ambiguous, did not reflect the intention of the parties, and as of the review date it should have been the £965,000 that was increased in line with the uplift in RPI rather than £1.2million. The latter having already been increased in the line with RPI.

In other words, the tenant saw this as double accounting, with a difference of around £300,000 between both parties’ points of view.

Court’s decision

The court did not agree with the tenant, and held the wording was clear especially as it had been professionally drafted. It was noted the basis of the indexation was not standard, but it was not the court’s job to look at the commercial aspects of the transaction and rescue a party who may have not struck the best deal.

Lessons learnt

What can tenants and landlords take away from this case?

In short, rent reviews are complex and call for careful consideration and negotiation.

It is essential to carry out a detailed check of review provisions, test calculations should be carried out, and the rent review clause in the lease could even contain a sample calculation showing what the rent payable at review would be, based on an estimated figure.

In the Elmfield case, assuming at the first rent review date the RPI figure for the month before was 256.7, then we could calculate the revised rent like this —

£1,200,000 x (256.7/193.1, the latter being base figure) = £1,595,235.63.

If this had been done, parties should have immediately realised whether or not this was what they had agreed, presenting an early opportunity to resolve the issue.

John Mitchell

John is a partner in the firm’s commercial property department and has acted for international energy companies, healthcare services, police forces and property developers on a range of matters, including purchases, sales, construction agreements and acquisitions of development sites.

Posted, 08 February 2019 by John Mitchell
Categories: Commercial property | Corporate

Nicola Reid

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