Notice and counter notice of rent review

Brief

Carla Candles (“CC”) have been occupying Unit 10 in the shopping centre on a lease since 1998.

As per the tenure, the rentals on the property shall be reviewed at the end of every 5 years by giving a six months notice prior to the review date.

The landlord sent Carla Candles a letter notifying the commencing of the rent review procedure on 21 May 2009 while the actual rent review was due on 24 December 2009. The landlord's surveyor visited CC on 1 June 2009 and suggested an increment of 25% in their prevailing rent. This resulted in the annual rent to rise up to 25,000 per annum.

Carla Candles sent a letter to the landlord after scrutinizing the surveyor's suggestion expressing its disagreement with the new rent and the requesting its landlord to suggest a more realistic figure.

The reply received by Carla Candles from the landlord was on 22 July 2009. However, the reply letter did not seem to show any response to the concern expressed by Carla Candles with regard to the rent review process. Instead, the content of the response was mainly about the shortfall in rent during December, March and June; demanding them to repay the due amount with 10% interest.

Report on:
(1) Whether or not rent at £25,000 pa is now due; and
(2) Assuming that it is not and that the review is still to be conducted, the legal factors that will influence the assessment of the new rent.

Lease issues

(1) Landlords Notice of Rent Review Process

• You need to describe:

• What notice the landlord is required to give the tenant before the review process.
• According to the agreement, the landlord was expected to give the tenant, a notice six months prior to the review process. The landlord has failed to comply with the time limit in this case.
• Weller v Akehurst (1981) 257 EG 1259
• Not only did the landlord failed to provide a serving notice of 6 months, but delayed the process for almost another 6 months to initiate the rent review process. As per the contract, the rent was to be set a reasonable rate compared to the open market rental value. A study of the Economic and Property Market shows that the UK rental market was showing a downward trend since January 2008. It is worth noticing that if the rent review was started on time, an independent surveyor would have determined the rent to be at an all time low (The UK Rental Market recorded an all time low rate of 23.5% in December 2008). It is quite evident that the landlord deliberately delayed the rent review process (by trying to bend the law) to make up for what would have been a huge setback. It is also clear that the landlord waited for the market to recover (which was towards the mid of 2009) to initiate the review.
• The landlord's surveyor came up with a figure which was 25% more than the current rent. Basing the market study on the Assumption that the previous rent review was conducted on time (December 2003) [GVA Grimly, Economic and Property Market Review 2009]; it is visible that the market rental rate has only grown by 10% since the last survey in the month of July 2009. So it may be assumed that even the figure suggested by the landlord's surveyor cannot be taken for word.
• During the Weller v Akehurst issue of 1981, the court made it clear that by missing the deadline, the landlord had lost the right to review and cannot even ask the court to review the rent, as initiating the rent procedures at that point of time would result in the current market level taking over what should have actually been the right rent. Not only had the landlord lost the right to review the rent, but also could not seek an extension of time according to Arbitration ACT 1996 Section 12.


• Wrenbridge v Harries (1981) 260 EG 1195
• The landlord in the current case had taken for granted that the rent “proposed” by the surveyor has automatically replaced the old rent value. This is not acceptable unless and until the tenant agrees in written or some sort of valid document to agree to the landlord's proposal. The response received from the landlord on 22 July 2009 clearly shows that the landlord has ignored the lack of agreement by the tenant to his proposal and is trying to declare the new rent as valid from the rent review due date (24 December 2008).
• The exact timescale of all the notices being issued by each party.
• As per the agreement between Carla Candles and the landlord, if the tenant was not happy with the rent proposed by the landlord; submission of a counter notice requesting for a repeat of the rent review process by an independent surveyor expert appointed by the President of RICS was possible. This notice has to be issued within 2 months of the rent review process. It is necessary that at the end of the review process, the landlord must notify the tenant by written notice of the renewed rent. In this case, initially, the tenant comes to know about the renewed rate from the surveyor himself and not the landlord (on 1 June 2009). Failure to notify the tenant as per the legal stream is a violation of the agreement between the tenant and landlord. There was no response to the disagreement expressed by Carla Candles to the renewed rent until 22 July 2009. As it was on 22nd July 2009 that the tenant received the first formal letter from Carla Candles indicating the renewed rent, this letter must be considered as the first notice indicating the new rent to the tenant. Patel v Earlspring Properties [1991] 2 EGLR 131.

• You must note that the landlords notice didn't state the proposed rent as it was supposed to. It just said that surveyors would be visiting Unit 10 to inspect.

• You must note that the new rent of 25,000 wasn't advised to Carla's until 1st June 2009

• You must point out that the landlord was late issuing his notice and, because no rent amount was mentioned, the notice might not be valid.

(2) Notification of Proposed Rent

• You need to describe that CC acknowledged receipt of the landlord's notice by replying and rejecting the proposed rent.

(3) Tenants Counter Notice

As per the agreement, the tenants are expected to serve a counter notice within a period of two months if they are not happy with the renewed rent. In this case, the response of the landlord is by completely ignoring the objection expressed by Carla Candles. Even under such circumstances, as per section 64 under 1954 Act, the tenants are allowed to continue for three months after the court decision as it is bound to take time. During this period, Carla Candles need to pay only the current rent. Even though under normal circumstances the landlord has the right to order the termination of an existing tenancy, current grounds of an ongoing conflict will result in hindrance to the issue of termination. Anyhow Carla Candles must make sure that they do not violate any other clause specified in the initial agreement.

Under circumstances of rent renewal, the surveyor is expected to suggest an amount which is the rent of a vacant possession in the premise. This rent is then suggested by the willing landlord to the willing tenant. During the rent review process, is also to be taken into consideration that every clause in the original signed agreement is not violated. While it remains a fact that the landlord is trying to exploit some of the poorly drafted clauses, the court must also take in to consideration the poor business state of the tenant, who has managed to sublet only one of the units in the whole of Unit 10; and even that on an offer of rent free 18 months period.

However, if the tenant disputes the proposed rent he must elect “to refer the rent to an independent surveyor acting as an expert and appointed by the President of the RICS, in which case the new rent will be the figure determined by him.”
CC didn't do this, just objecting to the new rent and asking the landlord to reconsider the proposed rent so the CC counter notice might not be valid.

Interest on the shortfall

Trusthouse Forte Albany Hotels Ltd v Daejan Investments Ltd (1980) 256 EG 915
Shield Properties & Investments Ltd v Anglo Overseas Transport Co Ltd (No 2) (1986) 279 EG 1088

The landlord, in his letter posted on 22 July 2009 has demanded a 10% interest on the shortfall in addition to the extra amount. Even though it is considered a standard practice these days to pay the normal interest (which is currently 5.12%), it has not been specified in the agreement. As a result, it is not absolutely necessary for the tenants to pay for the shortfall. While this clause applies, the rate of interest that the landlord demands is absolutely outrageous.

The landlord is quite evidently trying to exploit the relaxed law policies in order to make profit in his own business neglecting the difficult state of Carla Candles. He is forcefully trying to impose the new rent figure (which has been proved to be a very unreasonable figure from the study of the UK rent market) along with a seemingly outrageous rate of interest on the shortfall since the rent review period. The landlord must actually be taxed by declaring the conducted rent review process and the consequences invalid. A delay of almost 6 months after the rent review date was a deliberate effort on the side of the landlord in order to impose a higher rent (by waiting for the market to recover from the credit crunch situation) on Carla's Candles. The landlord must be penalized for this purposeful act by asking him to wait until the next review date and letting the tenants to continue with the current rent.

• The date of the CC letter objecting to the rent is not clear but the next letter from the landlord received by CC on 22 July does make it clear that the tenant replied with the counter notice within the 2 month period required in the lease.

However, if the tenant disputes the proposed rent he must elect “to refer the rent to an independent surveyor acting as an expert and appointed by the President of the RICS, in which case the new rent will be the figure determined by him.”
CC didn't do this, just objecting to the new rent and asking the landlord to reconsider the proposed rent so the CC counter notice might not be valid.

Relevant case law

Lancecrest Ltd v Asiwaju, 11 February 2005 (Court of Appeal)

• You need to closely examine and describe the facts of this case which established that late notices can be valid and how the rent was eventually settled. You should also note that the court applied the principles set out by the House of Lords in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd.

The House of Lord in Mannai ivestment Co Ltd v Eagle Star Life Assurance Co. Ltd [1997] was a case in which the court ruled the late notice as reasonable enough for the tenant to have filed a counter notice inside the validity period. But in the current scenario, it can be seen that the first legal notification provided to the tenant is on 22 July 2009. The previous source of notification regarding the proposed rent to the tenant was the surveyor (even though is a reliable source), which is not valid enough. It is not clear if the surveyor expressed his proposal by word of mouth or in written. In either of the case, the expression is not valid enough because the agreement specifies that the new proposed by the landlord must reach the tenant from the landlord. As the first notification regarding this was on 21st July 2009, this should be considered as the first notice received by the tenant.

Speedwell Estates Ltd v Dalziel, 31 July, 2001 (Court of Appeal)

The court held that it would be incautious to apply the Mannai principles apply to all statutory notices.

Weller v Akehurst (1981) 257 EG 1259

The court held that, by missing the deadline for a rent review notice, the landlord lost the right to review and could not ask the court to review the rent but this decision was based on the fact that there was a the failure of a condition precedent to the rent review clause and that time was of the essence in the condition precedent.

Rent Payable

From Lancecrest Ltd v Asiwaju, 11 February 2005 (Court of Appeal) it seems clear that the notices and counter notices are valid but that the proposed rent of 25,000 is not effective and has to be determined by an independent surveyor.

Until his decision has been made the rent payable remains unchanged and no interest is due.

Legal factors Influencing the Assessment of New Rent

In assessing the new rent payable, the independent surveyor has to look at the provisions in the lease for assessing the rent.

(1) "the best rent reasonably obtainable in the open market for the premises with vacant possession, on a lease for a term equal to the term hereby granted containing the same provisions (save as to rent) as the existing lease, on the assumption that the premises are fitted out and ready for immediate use and occupation but disregarding any improvements made by the tenant".
(i) The number of the units standing empty will influence the “the best rent reasonably obtainable in the open market”.

(ii) If a recent letting was only achieved with an 18 month rent free period this will show that the rents being asked are not realistic.

(2) Any restrictive covenants on the tenant that will have an affect on the “best rent reasonably obtainable”.

• Describe how the restrictive user covenant limiting use to the retail sale of candles and associated products will have an adverse affect on the rent obtainable.

• (ii) Describe why the assignment and subletting clause gives the landlord absolute authority because it doesn't say “which consent shall not unreasonably be withheld”. This means that, if the tenant wants to assign or sublet, not only must any proposed assignee be in the retail candle business but the landlord can absolutely refuse the assignment or sublet, without having to give reasons. This will reduce demand for the unit and make the rent less.

(iii) Because the unit “is now looking rather tired and shabby” the tenant may not have complied with the repairing covenant “to keep in repair the interior of the unit and to re decorate every three years” and the landlord can issue a notice telling the tenant to comply. The surveyor must disregard the tired and shabby appearance and assume that “the premises are fitted out and ready for immediate use and occupation.”

(iv) The tenant's fixtures and fittings and the previous refurbishment work carried out will be ignored by the surveyor.

(v) “Keep open” clause. Case law on “keep open” clauses shows that a right to damages can arise from a breach of a “keep open” clause Co operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd . In uncertain economic circumstances this clause can effect rental levels and make successful assignment or subletting difficult.

Conclusion

(1) The notice and counter notice of rent review and objection are valid.

(2) “CC” should serve a further notice in writing to the landlord electing to refer the rent review to an independent surveyor acting as an expert and appointed by the President of the RICS.

(3) “CC” should be advised that the landlord can issue proceedings for damages for breach of the repairing and redecoration covenant.

(4) “CC” should be reminded of the “keep open” covenant, despite business being difficult.

(5) “CC” should be informed that there are a number of legal factors in the lease terms that, with appropriate professional advice, should mitigate the rent increase to a minimum.

Unit 10

I have now been able to review the correspondence between yourself and your landlord and to look in detail at the terms of your lease.

There are a number of legal issues involved which I can summarise as follows:

(1) Your landlord issued you with a very late notice of the rent review procedure. Despite its lateness the courts have previously held that timing is not a central issue and my conclusion is the notice is valid.

(2) You issued a counter notice to the landlord objecting to the newly proposed rent. You should have specified in your notice that you were electing to have the rent determined by an independent party in accordance with the terms of your lease. Nevertheless, the courts have previously held in similar cases that your notice of objection is also valid.

(3) To continue with the rent review process you will need to issue another notice to the landlord for an independent party to be appointed. We will be pleased to do this for you if you wish.

(4) Until the new rent is assessed you should continue to pay the existing rent.

(5) The landlord's demand for interest on the “arrears” of rent is not valid and you can ignore it. I will advise him of this in writing if you wish.

(6) It appears from correspondence that you may be in breach of your repairing and redecoration covenant in the lease. There is no need to be unduly concerned if this is so but the landlord is able to claim for damages for this breach, if indeed there is one. The courts show great tolerance in these cases and your liability is likely to be correcting the breach by having the work done and paying the landlord's costs.

(7) I note also that your lease also contains a “keep open” clause requiring you to keep open during the normal opening hours of the Centre. Despite the current difficult trading situation you should endeavour to do this because regular failure to do so can give the landlord cause for action for damages.

Yours sincerely,


 

 

[Notice of election to refer the rent to an independent surveyor]

[Name and Address of Landlord]

By Recorded Delivery

[Date]

Dear Sir/Madam,

Carla's Candles, Unit 10, Main Shopping Centre, Large Provincial Town

We act for Carla's Candles and give you notice under Clause [XX] of their lease that they elect to refer the rent to an independent surveyor acting as an expert and appointed by the President of the RICS, in which case the new rent will be the figure determined by him.

Please acknowledge receipt of this notice.

Yours faithfully,

 

[Notice of breach of repairing and redecoration covenant]

Carla's Candles
Unit 10,
Main Shopping Centre,
Large Provincial Town

By Recorded Delivery

[Date]

Dear Sir/Madam

Carla's Candles, Unit 10, Main Shopping Centre, Large Provincial Town

The inspection of your premises by our surveyor on 1st June 2009 revealed breaches of your repairing and redecoration covenant under Clause[xx] of your lease dated [date].

We hereby give you notice of these breaches and require you to remedy these breaches within the next 30 days.

Please advise us when the necessary works have been completed so that we may make a further inspection.

Yours faithfully,

 

[Notice of breach of “keep open” covenant]

Carla's Candles
Unit 10,
Main Shopping Centre,
Large Provincial Town

By Recorded Delivery

[Date]

Dear Sir/Madam

Carla's Candles, Unit 10, Main Shopping Centre, Large Provincial Town

During a recent inspection of the Centre it was observed that your Unit was not open during the normal opening hours of the Centre.

This is in breach of Clause [xx] of your lease.

We hereby give you notice of this breach and advise that repeated breaches of this covenant will lead to action for damages.

Please assure us that this was an isolated incident and will not be repeated.


Yours faithfully,

References

http://www.rtcoopers.com/rent_review.php

http://www.lawofcontract.co.uk/formation/partially executed contract.php

http://property.practicallaw.com/5 200 3773