Upwards Only Rent Reviews: Supreme Court Appeal in the Bewley’s Decision – Watch This Space!

13-06-2014

Author: Colin Monaghan and Jennifer Slowey



An important decision of the Supreme Court on the interpretation of an upwards only rent review clause in the lease of Bewley’s Oriental Café in Dublin is expected shortly.  This Briefing provides some background on the use of rent review clauses in Ireland and it discusses the High Court decision in the Bewley’s case.

Introduction

An important decision of the Supreme Court relating to the interpretation of an upwards only rent review clause in the lease of Bewley’s Oriental Café in Dublin is expected shortly. Last year, the High Court ruled that the rent being paid annually by Bewley’s under its lease must now fall to market rate. This decision was appealed to the Supreme Court in what is regarded as the test case in the currently contentious area of upward only rent reviews. The decision of the Supreme Court is expected to have far-reaching implications for landlords and tenants alike. This Briefing provides some background on the use of rent review clauses in Ireland and the current legislative regime governing same. It also outlines the High Court decision in the Bewley’s case and looks forward to the impending decision in the Supreme Court appeal.

Background

Rent Review Clauses

Most standard commercial leases in Ireland contain a rent review clause which enables the adjustment of the rent payable under the lease to the current market level at a review date. Typically this review date is every five years under the lease. An upward only rent review clause means that the rent payable after a rent revision cannot be less than either the rent payable at the start of the lease or before the revision. The use of upward only rent review clauses has been a long-standing feature of commercial leases in Ireland. However, in the last number of years the sometimes harsh effects of these clauses has generated significant debate with many groups from the business, retail and commercial sectors demanding action by the Government to end the legacy issue of upward only rent reviews in Ireland.

Legislative Reform

The first step towards reform came in the form of Section 132 of the Land and Conveyancing Law Reform Act 2009 (the “2009 Act”) which introduced a ban on upward only rent review clauses in all new leases entered into on or after 28 February 2010. The 2009 Act provides that the level of rent payable following a rent review may be fixed at an amount that is less than, greater than or the same as the amount already being paid, thereby ensuring that the trajectory of rent can be downward and not just upward only.

The 2009 Act applies to all commercial leases on a prospective basis and does not apply to leases entered into before 28 February 2010. This has led to the creation of a two-tier rental market with new tenants entering leases after 28 February 2010 in a much more competitive position than those who are tied into existing leases which contain upwards only rent review clauses for the remainder of the lease term.

In the absence of legislation retrospectively banning upward only rent reviews, the Courts have been faced with questions of interpretation surrounding rent review clauses in existing commercial leases. A key case in this regard is Ickendel Limited v Bewley’s Café Grafton Street Limited, a decision of Mr Justice Peter Charleton in the High Court, delivered on 25 March 2013 (the “Bewley’s Case”).

The Bewley’s Case

Facts of the Case

The Bewley’s Case concerned the interpretation of a rent review clause in a 35 year lease entered into between Bewley’s, the tenant, and Ickendel, the landlord, for the well-known Bewley’s Oriental Café on Grafton Street in Dublin. The parties entered into the lease in 1987 for an initial rent of £168,000 (€213,000). Under the terms of the lease, a rent review took place every five years, with the most recent review taking place in 2007, at the height of the property boom and fixing a rent of €1,463,964. When it came to the 2012 rent review, Ickendel claimed that the structure of the rent review clause in the lease meant that the rent must be ratcheted up step by step for each review and could not be reviewed downwards below the rent last fixed in 2007. Bewley’s claimed that the rent review clause should be construed in the context of the entire lease as being a threshold clause; whereby the first rent in 1987 was the base line below which the rent could not go, but that each rent fixed subsequently should reflect the open market rent, whether that be upwards or downwards.

Construction of the Lease

In reviewing the relevant provisions of the lease, Charleton J. in the High Court stated that the meaning of the agreement was to be gleaned from the plain words of the lease. He emphasised that the Supreme Court has made it clear that “no rewriting of what the parties have agreed could possibly be permitted either in the guise of sympathy for any party stuck in a financial quagmire or pursuant to any notion of the courts construing public policy in aid of a result”. Charleton J. also accepted that he could not take language that is plain and disregard it as a linguistic mistake. He noted that the rent fixed for the premises in 2007 would not have been obtained for the premises on the open market in 2012. He also heard evidence that there had been a marked decrease in rents obtainable for retail premises and food outlets between 2007 and 2012, with some rents on Grafton Street falling as much as 52%. However, Charleton J. stressed that he was not entitled to take into account the fact that between 2007 and 2012 rentals for retail and restaurant premises have dropped markedly. He stated that it was the bargain of the parties in 1987 which mattered and the rent review clause must be construed in that factual matrix.

The rent review clause in the lease provided that Bewley’s would pay Ickendel for the first 5 years “yearly rent of £168,000 and thereafter during each of the successive periods of five years of which the first shall begin on 1 January 1992 a rent (hereinafter called “the first revised rent”) equal to the greater of (A) the rent payable during the preceding period or (B) such revised rent as may from time to time be ascertained in accordance with the provisions in that behalf contained in clause 6 hereof”. Clause 6 of the lease provided that the reviewed rent was to be the “full open market yearly rent for the interior building let as a whole without fine or premium…”. Charleton J. carefully examined the wording of the rent review clause and in particular the word “preceding”. He found that the use of the word “preceding” was ambiguous and it did not necessarily mean that which went immediately before the rent review. He added that where the word “preceding” is to be unambiguously used to mean an event that was proximately before, a qualification should be put on the use of the word to ensure that there is no misunderstanding. That did not happen in this case.

Charleton J. noted that many leases contain an express clause making it clear that on review of the rent the sum payable is never to drop. Such a clause did not exist here. 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 found that “the preceding period” was in fact the first rent reserved by the lease in 1987 (£168,000). Further, he stated that the lease made it abundantly clear that on revision the setting of the rent was to be paid in accordance with “the full open market yearly rent”. He emphasised that this allowed for complete freedom as to the revised rent with the exception that the base line fixed by the initial rent could not be undermined through a lesser sum for rent being fixed. More fundamentally, he stated that a market rent is what is prescribed as the outcome of the rent reviews.

In summary Charleton J. stated “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.”

Comment

It is important to note that the decision of Charleton J. in the Bewley’s Case was made with regard to the interpretation of the particular wording of the rent review clause in the case. The Court was careful to stress that if parties make clear their intention that the rent should never decrease, the Courts will not interfere with the express agreement of the parties. The Bewley’s decision 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.

The Current Position

Supreme Court Appeal

A five judge Supreme Court heard Ickendel’s appeal from the decision of Charleton J. on 31 March 2014 and its decision is awaited with great interest. The decision is expected to hinge on whether the Court agrees with Charleton J’s construction of the Bewley’s rent review clause and in particular his interpretation of the word “preceding”. The decision of the Supreme Court is expected shortly. We will update you further when this decision is available.

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