Rent Reviews

The Starmark case involved a lease granted in 1982. The rent review provision stated that, if the tenant failed to serve a counter-notice within one month of receiving notice from the landlord specifying a new rent figure, the tenant would be deemed to have agreed to pay the amount specified by the landlord (the 'deeming provision').

The landlord served its notice on 30 March 1999 specifying a figure of £84,000 per annum. The tenant served a counter-notice suggesting that an appropriate figure would be £52,725 per annum. However, the counter-notice was not served until 16 June 1999 — well outside the one month period allowed.

The tenant argued that its counter-notice was effective because United Scientific Holdings Ltd v Burnley Borough Council had established that time was not to be regarded as of the essence.

There were two conflicting authorities in relation to deeming provisions, Henry Smith's Charity Trustees v AWADA Trading & Promotion Services Ltd which decided that a deeming provision did make time of the essence for the service of the counter-notice and Mecca Leisure Ltd v Renown Investments (Holdings) Ltd that held that time was not of the essence.

Unfortunately for the tenant in the Starmark case, the Court of Appeal decided that time is of the essence. So the tenant's failure to serve its counter-notice within one month was costly.

Happily, deeming provisions are relatively rare in modern leases. However, many provisions of this type persist in existing leases and need to be looked out for.

Is there no escape?
Where a lease provides for rent to be determined by an arbitrator, the court has a discretion to give an extension of time for the service of a counter-notice. So, is there potential relief for the tenant under the Arbitration Act 1996 here?

Unfortunately, not. One of the objectives of the Act was to restrict the circumstances in which the Court could extend time for serving a counter-notice, and a 1997 case (Fox & Widley v Guram) decided it was inappropriate for the Court to allow the tenant more time to serve the counter-notice.

What if the landlord's rise is outrageous?
The court in Fox & Widley decided that there was no implied term that the landlord must specify a genuine pre-estimate of the market rental value. If a landlord puts forward a preposterous figure for rent, the court said, the tenant can always serve a counter-notice.

The facts in Fox & Widley illustrate vividly the trap for tenants. Having received the notice, the tenant replied asking for an explanation of how the rental figure had been calculated.

The landlord's agents sent a holding letter in reply saying that the person dealing with the review was away from the office and 'the letter would be put before him on his return'.

This was sufficient to allow the period for service of the counter-notice to expire. Immediately after the end of the period, they wrote pointing out that in the absence of a counter-notice, the rental figure specified in their notice would be the new rental. It is difficult to imagine circumstances better deserving of an extension of time.

So is the landlord in the same position?
In the Starmark case, the lease required the landlord to trigger the review by serving a notice in the six-month period before the review date.

Would the landlord in Starmark would have lost its right to a review if it had not served its notice within the six-month period? Once again, the answer is no.

Even where the lease specifies a period for the landlord to serve a notice to trigger the review, time is not of the essence. If the landlord fails to serve the notice within the specified period, it does not lose the right to review.

Ending on a note of caution
Deeming provisions are often justified by the argument that they are needed to ensure that the tenant gets on with the review process. However, it is rarely suggested that the landlord should be similarly incentivised to make a sensible suggestion for the reviewed rental figure.

Deeming provisions do not really help with the recalcitrant tenant anyway. If the tenant wants to delay the review, it simply serves a counter-notice immediately. The deeming provision merely catches the administratively lax tenant.

So, tenants should be very cautious before agreeing a rent review clause which includes a deeming provision. If taking on an existing lease with a deeming provision, keep a careful note of dates for serving counter-notices.