Most new leases now expressly provide that a rent review clause is an essential term, however, care should be taken in regard to older leases, particularly long-term leases, as they often will not contain any such stipulation. In such cases, reference to the common law principles of construction will be necessary to determine whether, in fact, time is of the essence.
Generally, it appears to be the Courts opinion that it is the Lessors that are prejudiced more by delay in completing a rent review than Lessees. However, a Lessee may claim hardship or unconscionable conduct on the basis that it may not entirely fair that Lessors should be able to ignore time limits and seek retrospective rent reviews after several years delay.
On this point, Gleeson CJ in GR Mailman and Associates v Wormald (Australia) Pty Limited (1991) 24 NSWLR 80, upon drawing from the analysis of Lord Salmon, set out a detailed examination of the judicial solution to a practical commercial problem which had been achieved in United Scientific:
“The decision in United Scientific Holdings Ltd v Burnley Borough Council was, and was expressed to be, a judicial response to a practical commercial problem relating to the fixing of the rental for leases, and especially long leases, in times of inflation. The expectation of inflation and the probability of variations in the rates at which it will occur, make it commercially impractical in many cases for the parties to a lease to agree upon a single figure which will be an acceptable rent for the whole of the term of the lease. To overcome this difficulty they commonly establish a machinery for rent review at various stages during the term of the lease, the substantial object of the machinery usually being to ascertain the current market rent for the subject premises and to make that the operative rent. The market rent may be established by agreement, or in default of agreement, by some procedure for dispute resolution”.
Generally, it is the Court’s view that a Lessor and Lessee, especially in long term leases, enter into a lease with the intention that the rent will increase during the term having regard to market rent. This view (as stated by Lord Salmon in the case of United Scientific) is “for the benefit of the tenant because without such a clause he would never get the long lease which he requires; and under modern conditions, it would be grossly unfair that he should. It is for the benefit of the landlord because it ensures that for the duration of the lease he will receive a fair rent instead of a rent far below the market value of the property which he demises. Accordingly the landlord and the tenant by agreement in their lease provide that at stated intervals during the term, the rent should be brought up to what is then the fair market rent. The revision clause itself lays down the administrative procedure or machinery by which the fair market rent shall be ascertained”. Further, “The rent revision clauses specify the machinery or guidelines for ascertaining the open market rent. These provisions as to time are not, in my opinion, mandatory or inflexible; they are only directory.”
However, what was omitted from the explanation by Gleeson CJ in the Mailman case but highlighted by MacNamara, DP in Jacques Nominees Pty Limited v National Mutual Trustees Ltd [2001] VCAT 657, was the further statements by Lord Salmon in the United Scientific case which were as follows:
(a) “Nevertheless any unreasonable delay caused by the landlords and which is to the tenants’ prejudice would prevent the rent being revised after the review date.” [1978] AC 904, 951.; and
(b) “I certainly agree that if the lessors had been guilty of unreasonable delay which had caused prejudice or hardship to the lessees they would have forfeited their rights to be paid the market rent from… 1975 and ….1982” [1978] AC 904, 956.
MacNamara in the Jacques Nominees case does however then note conversely that in Amherst v James Walker Goldsmith and Silversmith Limited, Oliver LJ said:
“I know of no ground for saying that mere delay, however lengthy, destroys the contractual right [that is the right to require a rent review]. It may put the other party in a position where, by taking proper steps, he may become entitled to treat himself as discharged from his obligation; but that does not occur automatically and from the mere passage of time. I know of no authority for the proposition that the effect of construing a time stipulation has not been of the essence is to substitute a fresh implied term that the contract shall be performed within a reasonable time and even if such a term is to be substituted the passage of the reasonable time would not automatically abrogate the contract.” [1983] 1 CJ 305, 315.
When constructing the rent review provisions within a lease, it is ‘essential’ to relay the party’s intention on the administration of the mechanism. That is, whether the timing for the mechanism on the part of the Lessor is ‘essential’ or not. If it is not stipulated that the timing for the Lessor to administer the mechanism is not essential, then any delay by the Lessor to administer the rent review mechanism is not a forfeiture of the Lessor’s rights in this regard.
LEONIE BLAZEY
Lawyer
Property and Finance
