Bad bargain
1 May 2025May 2025 – Currently, I am acting for the landlord of a property whose upward-only review is to the greater of the market rent and uncapped index-linked. The dispute procedure is an independent expert. My client is not the original landlord, he bought the property at auction, but the tenant is the original tenant.
The tenant cannot afford the increase. His reasoning is that when the lease was granted, about 5 years ago, inflation had been low and no one could’ve predicted it would increase substantially. He asserts the index-linking was a fair and typical method for the rent review. He is adamant, if the landlord won’t agree to a lower rent in line with what the tenant can afford, then an IE would be sympathetic and reduce the rent. And if need be, the tenant would go to court.
My client isn’t interested in agreeing a lower rent, he isn’t obliged to. I have told the tenant that index-linking is commonly used where open market evidence is difficult to find or is unsupportive, and the landlord wants an increase regardless. The tenant wasn’t under duress, he could have sought a capped index-linked or not taken the lease if the landlord had refused.
I have informed the tenant that an IE doesn’t have the authority to determine a lower rent, although under the lease the IE’s authority includes determining an alternative mechanism – which I take to mean a different index. I’d be amazed if an IE would prejudice impartiality and reduce the rent out of sympathy.
Uncapped index-review are not uncommon. Plenty of tenants have been caught out by the increase in inflation. I also have tenant clients concerned.
Understandably, the Tenant’s reasoning is subjective.
A business tenancy is a commercial contract, the parties are deemed to know what they are doing. A doctrine, “freedom to contract”, means that the parties can agree to whatever like provided it is not illegal. Despite the presumption of reality and business common sense, the courts will not re-write a bad bargain.
For case law, I have found 9 rulings, all in favour of the landlord. For example, in Rainy Sky SA and others v Kookmin Bank 2011, “The role of the construct, the reasonable person, is to ascertain objectively, and with the benefit of the relevant background knowledge, the meaning of the words which the parties used. The construct is not there to re-write the parties’ agreement because it was unwise to gamble on future economic circumstances in a long-term contract or because subsequent events have shown that the natural meaning of the words has produced a bad bargain for one side. The question for the court is not whether a reasonably and properly informed tenant would enter into such an undertaking. That would involve the possibility of re-writing the parties’ bargain in the name of commercial good sense”.
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