Articles from the Silver Shemmings Ash Team on contractual matters, recent case law changes and items of interest in the construction and property world
May 27, 2020 | Silver Shemmings
What is it?
One of the most complex provisions in a commercial lease is that of the rent review provisions. The landlord will want to charge as much rent as possible as time goes by with the tenant wanting the opposite. It’s not unusual to see rent reviews to take place every five years under a commercial lease or even every three years in some instances.
What are the different mechanisms of a rent review?
Rent review provisions can take many different forms. Some leases contain pre-determined increases at particular intervals throughout the term of the lease. Others are linked to the tenant’s turnover so the more money the tenant makes from its business, the more rent it will pay to the landlord. Rent increases can also be linked to the Retail Price Index. The most common of all however is the open market rent review.
Open Market Rent Review
If a rent review is carried out under an open market rent review, then theoretically the rent is determined in accordance with the market conditions at the time of the review. One would think that the tenant would simply pay what their property is worth and not pay over the odds. However, that is often a rarity as almost all open market rent review clauses state that they are upwards only. So if the market rises, so will the rent but if the market falls, then the rent will stay the same.
Procedure for determining an Open Market Rent Review
Once the rent review date is due, the landlord will serve a notice on the tenant stating what they believe the new ‘market rent’ should be. Usually from this stage, negotiations will commence. The landlord will determine the new market rent based on other similar properties in the locality. If the landlord and tenant eventually agree on a new rent, then they will sign a Memorandum of Rent Review to record it.
What if the landlord and tenant cannot agree?
If an agreement cannot be reached, the lease would normally provide for an independent surveyor to be appointed. The surveyor will look at the lease, market conditions and inspect the property. Based on the surveyor’s finding and expertise, they will take a view as to what an ordinary tenant would be willing to pay if property was presently on the market.
Assumptions And Disregards
The rent review clauses will usually have a list of assumptions and disregards that the surveyor will need to take into account. The two main examples are below as follows;
• The tenant under a commercial lease has consistently failed to comply with its repairing obligations and the property is now in a poor state of repair. This would usually lead to a lower in rent if such a property was on the market. So not only has the existing tenant failed to comply with repairing covenants but it would appear that they are set to benefit from a reduced rent! This clearly is not sensible so the review clause will stipulate that the assumption should be that the tenant has complied with its obligations under the lease, even if it hasn’t.
• Looking at the reverse situation, a better tenant may have carried out some work to improve the premises such as new lighting, windows etc. If this property were on the market, it would naturally attract a higher rent. This would be unfair from the existing tenant’s perspective, as essentially they would be paying twice – once for the improvements and now by way of higher rent because of these improvements. The rent review clause will therefore stipulate that the improvements should be disregarded.
Other assumptions and disregards include:
The property is vacant: In assessing what a hypothetical tenant will pay, it should be assumed that the existing tenant has moved out.
The property has been rebuilt and reinstated following damage or destruction: If during the rent review, the property has been damaged then the rent review clause will stipulate that the surveyor ignore the damage. This is because the lease would certainly deal with who should have incurred the property and who should carry out the repairs to bring the property back up to good repair.
Goodwill is to be disregarded: If the tenant operates a successful and popular business such as a take away or restaurant, then a new owner for that business would be expected to offer a higher rent to take occupation of the property. The goodwill of a business however will be disregarded as it’s considered unfair to penalise an existing tenant with higher rent as a result of their successful business.
Author Mohammed Kalam has been working as a fee-earning Paralegal for the last five years acting for housing associations, charities, developers and high net-worth individuals
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