Presumption of reality in construing rent review clauses

 

The end of reality?

A flurry of cases in recent months has led some commentators to question whether the courts are moving away from the presumption of reality in construing rent review clauses. Is that in fact the case, or are reports of its demise greatly exaggerated?

“…the purpose of a rent review clause is to ensure that the rent payable during the term of a long lease reflects changes in the value of money and of the property let”

To reflect that commercial purpose, the courts have, since the mid 1980s, increasingly used the presumption of reality in construing ambiguous rent review clauses. The presumption holds that, absent express words or a clear indication to the contrary, the hypothetical lease is to be:

“on the same terms … as those still subsisting between the parties in the actual existing lease. The parties are to be taken as having so intended, because that would accord with… the… intention underlying the [insertion] …of a rent review clause into [the] lease”

Accordingly, the presumption of reality suggests that the premises to be valued in the hypothetical lease are the actual premises as they exist at the review date. The court has looked at ‘premises’ to be valued on review in two cases earlier this year where the presumption was rebutted, but a closer examination of the wording of the ambiguous clauses suggests that far from ignoring the presumption of reality, the courts have felt compelled to rebut it only in the face of clear wording to the contrary.

In March, the Court of Appeal looked at a rent review clause in Coor Holdings which provided for the reviewed rent to be the higher of the passing rent or “the open market rental value of the demised premises at the review date”. The lease defined “open market rental value” as the annual rental value of the “site comprised within the demised premises”. The actual premises consisted of land on which a public house had been built, but the tenant argued that, on review, the premises should be the site alone without the building, and the court agreed. Lord Justice Lloyd, delivering the main judgement, focussed on the “specific non-standard and clear words at the heart of the definition in the rent review clause”. Those words “the site comprised in the demised premises” were a clear indication of a contrary intention rebutting the presumption of reality (ie that the premises should be valued as they were on the review date ie including the building) and accordingly the premises to be valued excluded the building. Both courts considered other parts of the rent review provisions, which referred to certain disregards and assumptions which presupposed the existence of a building, as standard provisions inserted without realisation of the possible need for modification to meet the demands of this particular lease.

The following month, the Chancery division looked another dispute as to the definition of premises in a rent review clause in the St Martin’s Property case. Again, the actual premises conflicted with the ‘premises’ for rent review purposes. The premises were a specialist computer centre on a business park near Swindon, but the lease contained the assumption that, for rent review purposes, the premises would “comprise High Class Professional or Commercial Offices with a net internal floor area of 124,019 square feet”. The landlord maintained that on review the premises should be a hypothetical building comprising high class offices on the site, built to a specification in line with other office buildings in the business park. The tenant maintained that they should consist of the actual premises on site, as if they had been converted to high class offices.

Although the tenant’s argument was closer to reality, ie the actual premises should form the starting point for valuation (and indeed a reasonable proportion of the premises was already used as offices), the court held that it was clear that the clause intended the valuation of the premises without regard to the actual buildings on site. The court’s view was that the tenant’s interpretation of the clause was simply not consistent with the use of the word “comprise”. The court also considered that, in view of the practical difficulties with the tenant’s approach (it was not clear how the existing premises could be converted), the parties must have intended something “much simpler, more definite and workable” such as comparison with the high class offices already within the business park.

In both cases, the courts seem to have laid great stress on the use of the word ‘comprise’ within each rent review ‘premises’ clause to turn away from the presumption of reality in favour of hypothetical premises, in spite of other provisions within both leases that sit uneasily with such interpretation.

In Escada , however, the court came down firmly on the side of the presumption of reality, arguably, at the expense of commercial sense. The premises consisted of two shop units together with a first floor office, with its own staircase, which the tenant had been obliged to convert into a combined unit with two new staircases to the offices and to the basement.

Rent review was on the basis that the tenant’s works were to be disregarded, with the exception of the installation of the new staircases. On review, Escada argued that the premises should be valued as two separate units with both the old and the new staircases. Cadogan argued that such an interpretation was nonsensical, and that a common-sense approach should be adopted in construing the clause to mean a single combined unit with only one new staircase.

Whilst accepting that where there is ambiguity it is proper to look at the commercial purpose of the clause to determine the correct interpretation, the court held that the wording in this case was clear,

“…The wording … may not be commercially realistic but it seems clear… There is no competition between rival constructions from which I am to make a commercially sensible choice… The clause is neither ambiguous nor incapable of implementation..”

and agreed with Escada.

In these cases, the courts held that the disputed clauses were clear and unambiguous, leaving no option but to construe them as they stood. The court cannot simply use the presumption of reality to overcome clear wording, to do otherwise would “involve elevating the presumption to a mechanistic rule, rather than a presumption” . The presumption of reality is still very much with us, and these cases simply demonstrate that the presumption is just that; an aid to construction in cases of ambiguity, not a rule of construction and always rebuttable in the face of clear wording to the contrary.

Sarah Thompson-Copsey

1. British Airways plc v Heathrow Airport plc [1992] 19 EG 157 ChD, per Mummery J
2. Basingstoke and Deane BC v Host Group [1988] 1WLR 348, per Nicholls LJ
3. Coors Holdings Ltd v Dow Properties Ltd [2007] EWCA Civ 255
4. Ibid, para 30
5. St Martin’s Property Investments Limited v Cable & Wireless UK PLC [2007] EWHC 582 (Ch)
6. Earl Cadogan & Cadogan Estates v Escada [2006] EWHC 78 (Ch)
7. Canary Wharf Investments (Three) v Telegraph Group Ltd [2993] EWHC 1575 (Ch), per Neuberger J