WHEN IS TIME OF THE ESSENCE IN A RENT REVIEW?

The vexed question as to when time is of the essence in a rent review clause is certainly live and well and still troubling lawyers and the courts. It remains a difficult question but one of central importance when advising both landlords and tenants.

Much can turn on whether the tenant is deemed to have accepted the rent proposed by the landlord because time was of the essence in a particular step of the rent review process. It is of course common to find provisions in a lease setting out the mechanism for the rent review process and one of the most common of these provisions is where the lease specifies that if the tenant fails to serve a counter notice within a certain period of time after receipt of the landlord’s initial proposed rent, the tenant shall be deemed to have agreed to pay the rent specified in the rent notice.

It is then common to find a further provision specifying that time is to be deemed to be of the essence in the rent review process. At first blush it would therefore appear to be a straightforward matter to determine whether time was of the essence, but that presupposes clarity in the lease and as is so often the case, leases can be open to interpretation, thereby casting doubt on whether the parties actually intended time to be of the essence.

The historic position
The historic position was that unless there were contra indications time was not to be of the essence in rent review time table. In United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904, Lord Diplock stated: “I would hold that in the absence of any contra-indications in the express words of the lease or in the interrelation of the rent review clause itself and other clauses or in the surrounding circumstances the presumption is that the time-table specified in a rent review clause for completion of the various steps for determining the rent payable in respect of the period following the review date is not of the essence of the contract�. Further guidance came from the Court of Appeal in Bickenhall Engineering Co Ltd v Grand Met Restaurants Ltd [1995] 1 EGLR 110. The court held that there is a rebuttable presumption that time is not of the essence in a rent review time table.

This presumption may be rebutted by:
• Any contra indications in the express words of the lease;
• Any contra indications in the inter relation of the rent review clause and other clauses in the lease; or
• The surrounding circumstances.

In that case Neill LJ said that in the light of the previous guidance from the House of Lords the contra indications must be “clear and explicit� in order for time to be held to be of the essence in a rent review clause. Bickenhall was referred to extensively in Starmark Enterprises Limited v CPL Distribution Limited [2001] EWCA Civ 1252, where the Court of Appeal held that the normal presumption that time is not of the essence in rent review cases was displaced by a clear provision deeming that the lessees shall have accepted the increased rent if they fail to serve a counter notice within a specified period. Arden LJ added that “where there is a deeming provision in this type of case and nothing more, the time for service of the counter-notice should normally be taken to be the final one�.

It was hoped that Starmark would provide much needed clarity and parties would be left in no doubt where they stood when there were clear deeming provisions in the lease. That, however, has not proved true, particularly in situations where the rent review provisions have been poorly drafted, as exemplified in two recent cases.

Lancecrest
The Court of Appeal in Lancecrest Limited v Dr Ganiyu Aiwaju [2005] EWCA Civ 117, had to examine the issue as to whether a trigger notice served by a landlord implementing a rent review was valid, notwithstanding the fact that it was served late. The landlord was to give a “review notice� to the tenant no more than 12 months before the review date (which was the end of every fourth year of the lease period).

Lancecrest acquired the reversion to the lease in August 2001 some six months after the first review date. No trigger notice had been served and one was only served in February 2002. It was proposed to raise the rent from £6,500 to £30,000. The tenant claimed that the trigger notice was invalid as it was not served before the review date of 5th February 2001. The Court of Appeal placed great reliance upon the House of Lords’ decision in United Scientific and held that despite being over a year late the trigger notice was valid because time was not of the essence.

The court considered that there was nothing express in the lease making time of the essence in the service of the trigger notice. This was also contrasted against the fact that time was expressed to be of the essence in respect of the service of the counter notice. In order for the tenant to have benefited from the provision ensuring that the landlord shall give notice no more than 12 months before the review date, the tenant must have served a notice making time of the essence before the review date.

That is something the vast majority of tenants would not consider doing. It is therefore clear that in order for a party to seek to make time of the essence in a step of the rent review process; clear contra indications must be present. Such an approach was also adopted by the Court of Appeal in Wilderbrook.

Wilderbrook Wilderbrook Ltd v Oluwu [2005] EWCA Civ 1361 concerned a badly drafted lease particularly the provisions concerning rent review. After service of a trigger notice the tenant had one month after receipt of this notice in order to serve on the landlord a counter notice. The lease said that if the tenant shall not serve a counter notice within the specified period then he was deemed to have accepted the rent proposed by the landlord. The lease went on to state: “As respects all periods of time referred to in this Schedule time shall be deemed to be of the essence of the contract PROVIDED ALWAYS that the Landlord or the Tenant may notwithstanding anything in this Schedule require the appointment of the Surveyor to determine the question of new rent payable…and any delay by the Landlord or Tenant in this respect shall not deprive the Landlord or the Tenant of their respective right to have a New Rent determined by the Surveyor�.

A rent review notice was sent to the tenant on 15th April 2003. The tenant’s surveyor responded on 22nd May 2003 - over one month after service of the trigger notice. The landlord alleged that as this counter notice was out of time the tenant was deemed to have accepted the proposed rent.

The Court held that if the above clause had been present but without the proviso the claim that the tenant was deemed to have accepted the proposed rent would be unanswerable. In that situation there would be a deeming provision and a clear contra indication that time was to be of the essence in this step of the review. The Court placed great emphasis on the “clear and explicit� test and held that the proviso as set out above would apply to the whole rent review process. It would therefore include the part of the process concerning the service of the counter notice by the tenant. In this case the contra indications were not sufficiently “clear and explicit� as the proviso appears to limit the deeming provisions.

Conclusion
It is useful to remember when drafting rent review provisions in a lease that, if time is to be made of the essence in a step of the process it should say so. The greater the clarity in drafting, the less likely it is that there will be problems later on. This is particularly important given high amounts at stake in many rent reviews and with parties continuing to fail to adhere to the express time limits. When advising after a problem has arisen it is certainly worth bearing in mind the need to find “clear and explicit� contra indications, which could make time of the essence. Lancecrest and Wilderbrook are just two recent cases which show how difficult that can be.

GARY BLAKER Selborne Chambers