Upward Only Rent Reviews: Supreme Court Decision in the Bewley’s Case

04-07-2014

Author: Colin Monaghan and Jennifer Slowey



The Supreme Court has delivered its judgment in the Bewley’s upward only rent review appeal. The five-judge Court unanimously allowed the landlord’s appeal against last year’s High Court ruling which found that the rent review provisions contained in the Bewley’s lease allowed the rent payable to fall as well as rise, provided it never fell below the original rent reserved by the lease in 1987. Following the ruling, Bewley’s yearly rent was reduced in accordance with market rate, from €1.46 million to €728,000, a reduction of some 50.3%.

The Bewley’s case is regarded as a test case in the contentious area of upward only rent reviews and the decision will have implications for landlords and tenants alike.

BACKGROUND IN BRIEF

The lease in question was entered into in 1987 between Ickendel Ltd, as landlord, and Bewley’s Café Grafton Street Ltd, as tenant, in respect of the well-known Bewley’s Oriental Café on Grafton Street in Dublin. The lease was for a term of 35 years. The initial yearly rent reserved by the lease for the period from 6 August 1987 to 31 December 1991 was €213,000 (IR£168,000). Thereafter, under the terms of the lease, the rent was to be reviewed every five years, on 1 January 1992, 2002, 2007, 2012 and 2017. On each of the successive periods of five years, the tenant was to pay a yearly rent which was equal to the greater of (a) the rent payable during the preceding period; or (b) the revised rent ascertained in accordance with the rent review clause (i.e. the open market rent).

The most recent rent review took place on 1 January 2007, at the height of Ireland’s property boom, and fixed a rent of €1,463,964. By 1 January 2012, the next review date, rents on Grafton Street had fallen by as much as 52% in some cases and the tenant raised the issue of a possible downwards revision of the rent.

HIGH COURT DECISION

In the High Court, Charleton J emphasised that what was made clear in the lease was that the rent when revised could never drop below the rent payable for “the preceding period”. However, he held that the term “the preceding period” must be construed as meaning the first rent reserved by the lease in 1987. On this basis, the Court held that the yearly rent payable for the period from 1 January 2012 to 31 December 2016 was the greater of (a) the rent payable in 1987 (i.e. €213,000) or (b) the open market rent.

Charleton J stated that:

The parties bargained so as to agree never to allow the rent on revision to fall below the initially agreed rent and I cannot see that they bargained thereafter for anything other than a fair open market rent. That can rise and that can fall.”

Following this decision, an arbitrator set the yearly rent payable as and from 1 January 2012 at €728,187.50, which represented a 50.3% reduction on the rent payable up to 31 December 2011.

SUPREME COURT APPEAL

The landlord appealed the decision of Charleton J to the Supreme Court and on 1 July 2014, the Supreme Court delivered its judgment allowing the landlord’s appeal. The Court examined Charleton J’s interpretation of the phrase “the preceding period” and unanimously held that the only sensible construction of the expression “the preceding period” was the period which immediately preceded the relevant review date. Accordingly, where the relevant review date was 1 January 2012, the preceding period was the five-year period commencing on 1 January 2007 and ending on 31 December 2011. The Supreme Court held that the phrase could not be construed as referring to the period prior to the first review date, that is, from the commencement of the lease in 1987 to 31 December 1991.

Laffoy J, who delivered the judgment of the Supreme Court, regarded it as crucial that the term “the preceding period” was used in the context of the determination of the rent for “each of the successive periods of five years” after 31 December 1991, i.e. it was to be interpreted by reference to not just one review period, but by reference to each of the six successive review periods of five years. Accordingly, the term had to mean the period which would terminate on the day before the commencement of the relevant review period of five years. The judge noted that the dictionary definitions of “preceding” (e.g. coming immediately before; occurring just before; immediately anterior) readily accommodated this construction.

In the High Court, Charleton J had found that the use of the word “preceding” on its own was somewhat ambiguous. He took the view that had the parties intended to refer to the period immediately prior to the relevant review date, they would have used the word “immediately” or a cognate qualifying word before “preceding period”. However, Laffoy J held that the absence of the word “immediately” did not mean that the clause could not be construed as the immediately preceding period. She stated that:

To suggest that, in construing the Lease to determine the revised rent for what is the fifth consecutive period of five years, one should interpret the phrase “the rent payable . . . during the preceding period” as meaning the rent payable in the period from the commencement of the term to the 31st December, 1991 does not make sense and cannot reflect the intention of the parties almost twenty five years earlier in entering into a commercial lease for a term spanning a period of thirty five years. Such suggestion is not correct on a plain reading of the reddendum on its own, nor is it correct when the reddendum is read in the context of the Lease as a whole. In reality, to suggest that construction is inviting the Court to is to re-write the Lease, which both sides acknowledge the Court is not entitled to do.

Accordingly, the Court held that the yearly rent of €1,463,964 payable for the period from 1 January 2007 to 31 December 2011 continued to be payable by the tenant in respect of the five years from 1 January 2012.

POTENTIAL IMPACT

In delivering the judgment, Laffoy J was careful to emphasise that the issue of construction which had arisen in the case was not an issue of general application to rent review clauses. Rather, the Supreme Court was concerned only with a specific clause in the lease and the specific context in which it was used. Nevertheless, the judgment will be of interest to landlords and tenants of commercial leases entered into on or before 28 February 2010. Commercial leases entered into after that date are subject to the ban on upward only rent review clauses set out in the Land and Conveyancing Law Reform Act 2009.

The judgment also highlights the importance of ensuring careful and detailed drafting in leases which clearly sets out the rights of the parties and leaves no room for uncertainty in the future.

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