Bewley ruling provides some clarity on upwards only rent reviews

July 7, 2014

On the 1 July 2014 the judgement of the Supreme Court was delivered in the case of Ickendl Ltd v Bewleys Café Grafton Street Ltd (the “Bewley case”). Judgement was delivered by Ms Justice Laffoy an acknowledged expert in property law and the author of seminal texts on property related topics to include Irish Conveyancing Precedents.

Thomas O’Malley and Killian O’Reilly look at the ramifications of this test case for landlords and tenants and the Court’s interpretation of upward only rent reviews.

Background
The decision had been eagerly awaited as the High Court decision of Mr Justice Charleton in the Bewley case had given rise to uncertainty for parties who were relying on “upward only” rent review clauses contained in leases which had followed the format of the lease under scrutiny in the Bewley case.

Legislation enacted in 2009, and which became operative on the 28 February 2010, prohibits “upward only” rent review provisions in commercial leases entered into after this date. As the prohibition is not retrospective, many tenants closely scrutinised their pre-March 2010 leases, to establish if they had grounds, on the basis of the construction of the leases, to avoid the imposition of upward only rent reviews.

The lease in respect of Bewleys Café on Grafton Street was granted in 1987 (the Bewley lease”) subject to an initial yearly rent equivalent to circa €232,000. The lease provided for rent reviews every five years and in the review carried out in 2007 the rent was fixed at €1,463,964.00 per annum. The next review carried out in 2012 coincided with the property crash and a fall in market rents. It was in this context that Bewleys sought to have the rent reviewed downwards to the prevailing market rent in 2012.

High court decision

The key clause in the Bewley lease was a provision which provided that the rent after each review date shall be equal to the greater of “the rent payable hereunder during the preceding period” or the market rent.

The landlord, Ickendl Ltd claimed that the rent review provisions required the rent to either increase in line with market rents or to remain at the level payable in the preceding period of five years on each review date. On the basis that such provisions provide that a rent cannot fall below the level paid in the preceding five year period they are commonly referred to as “upward only” rent review provisions. Such provisions are a barrier to the rent falling below the level in the previous five year period rather than a guarantee of an automatic increase and in this context to label them upwards only is a misnomer.

Bewley’s argument was that the rent review provisions were ambiguous and open to an interpretation, in the context of the entire lease, that the provision operated as a “threshold” clause. On this interpretation Bewleys submitted that the rent on review should be fixed at the market rent even if this resulted in a decrease in rent provided that it could not be below the “base line” of the initial rent in 1987. This argument relied heavily on the interpretation of the words preceding and its use in the lease and an argument that would require the landlord (if this argument was to be approved by the Court) to have accepted a proposition that the word immediately should have been inserted before the word preceding to entitle the landlord to the rent payable in the five year period prior to the review date.

In the High Court, Judge Charleton found that there was ambiguity in the interpretation of the lease and that it could be interpreted to support either view. Judge Charleton held, in the context of the Bewley lease, the “preceding period” could be held to refer to the period from the date of grant of the Bewley lease in 1987 to the first review date. On this interpretation the 1987 initial rent was the base line below which any future rent could not fall. In the alternative Judge Charleton suggested that the ambiguity in the clause required a commercial construction, which was supported by reviewing the rent to open market levels on each review date.

Impact of the High Court decision

The impact of the High Court decision is illustrated by the fact that an arbitration was conducted, in accordance with the provisions of the lease, following the order of the High Court, to determine the rent payable on the 2012 review. The award made by the arbitrator resulted in a revised rent of €728,187.50 a reduction of 50.3% on the sum of €1.463,964.00 previously payable. Had the decision of the High Court been upheld the lower rent would have applied going forward and the landlords loss up to the expiry of the lease in 2022 would have been €7.36m (assuming market rent would not exceed €1.463,964.00 in the period.)

Supreme Court Decision

The judgement of the Supreme Court can be distilled to a finding that the preceding period in the Bewley lease “was intended by the parties to the Lease to mean the period which terminated on the day before the relevant “Review Date”. Judge Laffoy analysed where the preceding period appeared in the Bewley lease and concluded the meaning was clear and that there was no necessity to insert the word “immediately”. The Court went on to state “consequently, the construction of that expression advocated by the Landlord is correct”.

The Landlord in the Bewley lease had sought confirmation that on review of the rent for the five years of the term commencing on 1st January 2012, the rent payable should be the greater of:

  1. The rent payable for the period from 1st January, 2007 to the 31st December 2011 (i.e. €1.463,964.00), or
  2. The revised rent for the five years from 1st January, 2012 in accordance with the relevant provisions in the reddendum (i.e. the market rent would apply if it was higher than the sum of €1.463,964.00 payable to 31st December 2011)

The Supreme Court also found “that there is no ambiguity in the provisions of the Lease in relation to the meaning of “the preceding period” and in such circumstances the Supreme Court confirmed that there was no requirement to apply a commercial construction to the Bewley lease.

Comment

Whilst Judge Laffoy pointed out that each case will turn on its own facts she went on to comment that the provisions of the Bewley lease in respect of the rent review process was “articulated in conventional terms”. This decision will be relied on by Landlords and their advisors is assessing rent review provisions and will assist parties in avoiding costly litigation as it lays a marker as to how such provisions are likely to be interpreted by the courts.

While the decision is not a welcome one for tenants it nonetheless removes uncertainty and may help them in avoiding litigation which is costly and time consuming and may bring them to exploring other options in relation to re-negotiating their positions with landlords.

 

For further information on this issue contact Thomas O’Malley (Property Partner) or Killian O’Reilly (Dispute Resolution and Litigation Partner).

Remember that this article is for information purposes only and does not constitute legal advice. Case law is fact specific and readers should understand that similar outcomes cannot be assumed. Specific advice should always be taken in given situations.

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