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Rent suspension

In this article John Martin sets out some of the practical points that are relevant to rent suspension clauses.


Introduction

Rent suspension provisions (including provisions for abatement where that is appropriate) generally require careful thought. In the absence of any express provision in the lease to the contrary, rent remains payable even though the buildings comprised within the demised premises cannot be used because of damage by fire or other catastrophe. (The House of Lords decided in National Carriers Limited v Panalpina (Northern) Limited [1981] AC 675 that while the doctrine of frustration can apply to leases, it will “hardly ever” apply. One possible example of where it might, they suggested, was in the case of coastal erosion.)

No term for suspension or abatement of rent will be implied, even where the tenant has re-imbursed the cost of insurance against loss of rent. (See, for instance, Cleveland Shoe Co Limited v Murray’s Book Sales (King’s Cross) Limited (1973) 229 EG 1465.)

It is vital, therefore, from the tenant’s point of view that a rent suspension clause appears in the lease, and that it operates whenever the demised premises become unfit for use in whole or part because they have sustained damage. “Suspension” here means suspension of liability rather than suspension of payment alone.

Uninsured risks

The vexed question for landlords and tenants at the moment is whether rent suspension should apply where the demised premises are damaged by an uninsured risk. (The Code for Leasing Business Premises in England and Wales provides that it should, unless the damage is caused by a deliberate act of the tenant.) Similarly, should any related break right enjoyed by the tenant also apply in such a case? Inevitably, this will continue to be a matter for commercial negotiation.

Landlord

These are points for landlords:
  • Rent abatement should obviously be conditional upon the loss of rent insurance not having been vitiated by some act or omission of the tenant or a subtenant.

  • It is essential that any period of rent suspension cannot exceed the period in respect of which loss of rent is insured. (The Code for Leasing Business Premises in England and Wales provides that if rent suspension is limited to the period for which loss of rent is insured, both landlord and tenant should have the right to determine the term if reinstatement is not completed within that period.)

  • In the event of minor damage that is promptly made good, should there be any rent abatement at all?

  • It may be more attractive for the landlord to redevelop than to re-instate (in which case the landlord will require a right to determine the lease on notice).

Tenant

These are points for tenants:
  • Where an annual rent is payable quarterly in advance, the whole of the quarter’s instalment is due on the rent payment day. Conventional lease wording may not shelter the tenant in respect of the balance of a quarterly payment where the damage or destruction occurs, for example, a few days into the quarter. Express provision needs to be made for repayment by the landlord of an appropriate proportion of the instalment. (The Apportionment Act 1870 does not apply.)

  • Conventional wording again may not protect the tenant where the damage or destruction occurs at the start of the lease during a rent-free period that has been awarded in the lease itself. If all that is suspended is payment of a peppercorn or nominal rent, the tenant may well have lost the true financial benefit of the remainder of the rent-free period.

  • Where the demised premises form part of a larger development, they may go undamaged but damage to the common parts, especially the means of access to the demised premises, may make them unusable. This requires to be covered expressly.

  • Once the premises have been re-instated, will the rent suspension period cover the time it takes for the tenant to fit out again? This is not usually the case. Again, the tenant should argue that once the demised premises have been reinstated, rent should become payable only after the expiry of a further period equal to the any rent free period allowed initially for fitting-out.

  • Will the tenant have any ability to determine the lease by notice to the landlord and, if so, in what circumstances? In the case of a short-term lease this is only reasonable; likewise where the tenant is concerned about the length of a fixed term rent suspension period. (Generally, the Code for Leasing Business Premises in England and Wales states that if the whole of the demised premises are damaged by an uninsured risk so as to prevent occupation, the tenant should be allowed to terminate its lease unless the landlord agrees to rebuild at its own cost.)

Service charges and insurance

Finally, there will always be instances when it will be appropriate for service charges and insurance premiums to be suspended - or at least abated - as well. It is vital to spell out with clarity exactly which payments are to be suspended in the event of damage or destruction by insured risk. This will always need to be a matter for negotiation.

Factors to be taken into account will include (a) the likelihood that the landlord will still have to maintain some level of insurance cover during the re-instatement period and provide some degree of services, particularly in a multi-let property and (b) the extent of loss of rent cover available under the landlord’s insurance policy.

In P & O Property Holdings Limited v International Computers Limited [1999] 18 EG 158 the issue between the parties was whether the words “the rent hereby reserved” in the rent suspension clause meant the rack rent reserved by the lease and nothing more, or whether they extended also to the additional rents payable by the tenant in respect of insurance premiums and service charges. Neuberger J decided the former, but “not without some difficulty”. He contrasted these words with other expressions in the lease such as “the rents hereby reserved” and “additional rents”.


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