Supreme Court clarifies "upwards only" rent review provisions for Bewley's
Matheson represented Ickendel Limited, the landlord of Bewley’s Oriental Café on Grafton Street, Dublin (Bewley's Café), in a successful Supreme Court appeal regarding the meaning of rent review provisions in the lease of Bewley’s Café. The judgment of the Supreme Court on 1 July 2014, confirmed that the particular rent review clause is “upwards only”.
The judgment provides welcome clarity on the effect of rent review provisions that were once the market standard and which still apply to many premises occupied under older forms of leases.
Background
Legislation enacted in 2009 prohibits “upwards only” rent review provisions in commercial leases entered into after 28 February 2010. As the prohibition is not retrospective, many tenants have been closely scrutinising their pre-March 2010 leases, with a view to reducing their rent by other means.
This case concerned the interpretation of the rent review provisions in the lease of Bewley’s Café, which was granted in 1987 subject to an initial yearly rent equivalent to circa €213,000. The lease provided for a review of the rent every five years, and on the review that occurred in 2007 the rent was fixed at €1,463,964 per annum. When the rent became due for review again in 2012 market rents had dropped considerably and the tenant, Bewley’s, sought to have the rent reviewed downward to market levels.
The lease provides 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, Ickendel Limited, claimed that the rent review provisions required the rent to step up, or to remain at the level payable in the preceding period of five years, on each review date. Such clauses are commonly referred to as “upwards only” rent review provisions, although this is somewhat a misnomer as the rent can remain unchanged following review.
Bewley’s claimed that the rent review provisions were ambiguous, and that in the context of the entire lease the rent review provisions operated as a “threshold clause”. Bewley’s submitted that on each review the rent should be fixed at the market rent, even if this resulted in a decrease in rent, provided that the rent could not be reduced below the “base line” of the “initial rent” in 1987.
High Court Decision
In his judgment in the High Court, Judge Charleton held he was not entitled to rewrite what the parties had agreed, either in the guise of sympathy for either party’s financial position or to advance public policy. He considered the meaning of the word “preceding”, noting that: “It means what ordinary speech takes it to mean; that which goes before and often it means what goes immediately before”. But he suggested that in order to be used unambiguously to mean an event that was proximately before, a qualification should be inserted to avoid misunderstanding and, in the absence of such qualification, the term “the preceding period” could be interpreted to support either view. Judge Charleton decided that, in the context of this lease, the “preceding period” referred to the period from the date of grant of the lease in 1987 to the first review date, with the effect that the 1987 initial rent was the base line below which any future rent could not fall. He noted in the alternative 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.
Supreme Court Decision
The Supreme Court today overturned the High Court decision, endorsing the landlord’s interpretation of the rent review provisions as providing an upwards only mechanism for review of rent. The judgment, delivered by the Honourable Ms Justice Mary Laffoy, notes that “…the Court here is concerned with construing rent review provisions in a commercial lease which, broadly speaking, are articulated in conventional terms.” The court concluded that the preceding period that the lease referred to “was intended by the parties to the Lease to mean the period which terminated on the day before the relevant "Review Date". Consequently, the construction of that expression advocated by the Landlord is correct.”
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””. In such circumstances the Supreme Court confirmed that there was no requirement to apply a commercial construction to the lease.
Comment
The decision of the High Court in this case surprised informed commentators as it was contrary to the long-held understanding of the meaning of rent review clauses drafted in this way. While the decision turned on the wording of the provisions of this lease, as the Supreme Court acknowledged, the rent review provisions were “broadly speaking, articulated in conventional terms”. Thus the High Court judgment had created uncertainty for landlords, tenants and potential investors in the market seeking to understand the effect of certain rent review provisions. The Supreme Court judgment has eliminated this uncertainty and has reinstated the conventional wisdom that this type of wording is indicative of an “upwards only” clause.