By Elizabeth Fox, Partner, Business Law Firm, Fox Williams
Question: I have just acquired a lease of a shop recently vacated by a retailer who had gone into liquidation. My landlord has served a notice on me advising that my rent is to increase by £10,000 per annum effective from March 2008. Am I really responsible for the increased amount from that date?
Answer: Unfortunately the quick answer is yes.
It is often assumed that if the rent review provisions in the lease have not been triggered within a reasonable period following the rent review date set out in the lease the landlord will have lost its right to review the rent. Unless there are very specific provisions to this effect in the lease this is not the case; a landlord can trigger a review of the rent at any time after the rent review date.
Whilst the limitation period for a landlord to recover arrears of rent is six years (s.19 of the Limitation Act 1990), as regards the recovery of any additional rent due following a rent review that period of six years does not start until such time as the new rent has been determined or agreed.
Generally speaking, it can be many months or even years after the actual review date before rent reviews are agreed between the parties to the lease or, if they cannot agree, are determined by an independent expert or arbitrator. It is for this reason that most leases will provide a clear mechanism for collection of any excess rent after the review has been completed for the period from the review date until the revised rent is actually determined or agreed. Most leases will also provide for interest on these balancing payments.
Determination of rent reviews is often delayed not only whilst the parties negotiate but also because a landlord will await the emergence of evidence of rents agreed on comparable premises before serving a notice rather than shoot himself in the foot by specifying what may be a lower than market rent. In these difficult economic times landlords are more likely to wait until favourable evidence comes to light. Tenants on the other hand are likely to want to sit tight and wait for a landlord’s notice of review rather than trigger a rent review which may result in an increase in rent. In taking the latter approach however, a tenant with a pending rent review would be well advised to make provision for an increase in liability dating back to the date of the rent review specified in the lease.
Fortunately, the instances of a notice of such a shocking nature landing on the doormat of an ingoing tenant are relatively rare largely due to ingoing tenants and their lawyers carrying out suitable due diligence prior to taking on responsibility of a lease.
But, what other steps can be taken to avoid costly surprises?
- as mentioned above adequate due diligence on an acquisition of an existing leasehold interest by way of very specific enquiry of the outgoing tenant and/or landlord where the outgoing tenant is unable or reluctant to provide sufficient information is essential;
- provision for a potential balancing charge and interest in the purchase contract by way of a reduction in the premium payable or a retention to cover potential liability;
- an indemnity from the seller for a potential liability for a balancing charge and interest backed by a guarantee and or security where possible;
- adequate advice from a valuer as to the potential for a balancing charge and interest and an increased rent liability.
Whilst an outgoing tenant may be very clear that a nil increase was agreed by the landlord, in the absence of a memorandum to that effect it is open to an unscrupulous landlord to approach the ingoing tenant many months after a review date to pursue an outstanding review. Indeed whilst a tenant may have a good relationship with its landlord and be comfortable that there has been a nil increase, in the absence of a memorandum to this effect if the landlord should then assign its interest, the new landlord, with no or limited knowledge of what has gone before, may seize the opportunity of implementing the review.
The answer is to insist upon a memorandum of a nil increase to avoid any possible issues.
In some circumstances, such as the sale by liquidator for a failing tenant, as in your case, it can be very difficult to extract information on outstanding reviews as the liquidator may have very little background knowledge. In those circumstances it is important to assess the situation and consider approaching the landlord for more details. Whilst it may be a reminder to a landlord that there is an opportunity to review the rent, it may be that information elicited from that enquiry is preferable to the uncertainty.
For the purposes of a new lease, where possible the tenant should try to agree a longstop date for the triggering of a rent review provision in order to limit the uncertainty.
Elizabeth Ruff is a Partner in the Real Estate department at Fox Williams LLP. Elizabeth can be contacted at email@example.com or 020 7614 2514.
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