When rental values fall, a variety of approaches can be adopted if a tenant, locked into a lease at a rental which is above the current market rental, wishes to sublet all or part of the let premises.
One method is to pay a ‘reverse premium’ to the subtenant to make good the ‘excess rent’ the subtenant will pay. A simpler method is just to accept a lower rent coming in. In a recent case, the latter approach was adopted, with the tenant inserting a clause that the subtenant’s rent would be periodically uplifted if rental rates rose over time. This arrangement was set to last until December 2010, after which the contract was worded in such a way that the subtenant was required to pay the greater of either the rent payable by the tenant at the inception of its lease (which was £1.2 million) or the then market rent.
In the intervening period, the market rents had risen substantially, then dipped. By December 2010, the rent payable by the tenant under its lease with its landlord, which contained a standard ‘upward only’ rent review clause, was in excess of £1.4 million.
The issue arose because it was uncertain exactly what should happen after December 2010. The market rent by this time was a little in excess of £1 million. The subtenant argued that it was liable to pay the greater of the market rent or £1.2 million. The tenant claimed that a rent of £1.4 million was due.
The court considered the various possible scenarios that could have existed as regards market rents during the period of the subtenancy and construed the contract to mean that the rent of £1.4 million applied, being the highest rent that would apply at any of the rent review dates. There was no reason to believe that the subtenant should be protected from an ‘upward only’ rent review and no commercial reason for applying a subsidy to the subtenant after December 2010, from which time it would be liable to pay the full amount of the rent payable by the tenant to its landlord.
It is always important in such cases for thought to be given to the likely range of possible events that could occur during the period of the lease, so that the documentation takes account of all eventualities.
Contact Clare Magill on 01752 292354 for assistance with all base negotiations and documentation.