Rent reviews – may or shall…

by | Sep 20, 2010 | General property Law, Leasing

Can a lessor be made to review the rent? 

Under the modern standard form leases, yes they can.  From the ADLS 4th edition (2002) lease onwards, the standard ADLS deed of lease allows either party to initiate a rent review.  Those standard leases also include a soft ratchet, i.e. on a rent review the rent cannot go any lower than the rent at the commencement date of the then current lease term.  So in a slowing market, it will usually be in the lessee’s interest to initiate a rent review and the lessor cannot prevent this.

The older ADLS standard deeds of lease are different.  The 3rd edition (1993) lease provides that "the landlord may review the rent as follows…".  The clause then goes on to set out how the review should proceed.  There is a full ratchet i.e. on a rent review the rent cannot go any lower than the rent in the preceding 12 months.  It is clear from case-law that "may" means what it says in this lease, the lessor is not obliged to review the rent and the lessor has a choice.  The lessee has no right to initiate a rent review themselves.  Good news for lessors, some of whom still insist on the 1993 form of lease being used today as it is more lessor-friendly.

More interesting though is whether "shall" means "may".  The standard BOMA office lease reads "The Lessor shall notify the Lessee in writing of the Lessor’s assessment of the current market rent…".  It has a full ratchet.  

Our Court of Appeal has said that "shall" means the lessor is obligated to commence a rent review.  However, the Privy Council held differently when looking at a New Zealand lease.  The use of the word "shall" in the clause in question did not oblige the lessor to commence a rent review.  Instead, it set down the process that must be followed if a rent review was to be commenced.  So we can take from that "shall" means "may" in the BOMA lease.

Interpreting rent review clauses is all about the wording of the particular clause.  If a standard form lease has been amended or a bespoke form of lease used, then those clauses must be looked at carefully.  In fact the lease the Privy Council considered had a de facto ratchet clause (i.e. used the word "increase") rather than an express ratchet clause.  The lease also contained no provision enabling the lessee to initiate a rent review.  These factors were relevant.  

It’s also not clear whether the Supreme Court would follow the Privy Council decision now.  In other areas when looking at contract interpretation "must" has been held to mean "must" e.g. Mana Property Trustee Ltd v James Developments Ltd  which we discussed last month.

By <a href="" target="_self">Denise Marsden</a>

By Denise Marsden