It is probably fair to say that the prospect of a forthcoming Rent Review is unwelcome from a tenant’s perspective unless they happen to be one of the small minority whose lease has upward and downward review provisions. From a Landlord’s point of view it provides an opportunity of ensuring their investment is producing the best return available in the market.
Like it or not, most tenants accept they have to pay a rent that reflects the value of their premises at the review date. The problem comes in trying to establish what that rent might be, particularly if the market has been quiet and there have been few new lettings to give a clear guide.
When assessing the rent, it is important to have regard to the specific provisions in the rent review clause. This may include certain assumptions that can affect the rental value. Currently most new lettings are on a short term basis but some older leases assume that the property is to be valued on the basis that it is available to let for a number of years equivalent to the original term e.g. 20 or 25 years.
Depending on the type of property, few tenants will want to commit themselves for such a long term. Other considerations may include restrictions on the permitted use of the premises, the ability to sub-let part of the premises as distinct to the whole and also the repairing obligations.
Most tenants are responsible directly or indirectly for the repair of the entire building but others may be only responsible for maintaining the interior. As such it would be expected that they pay a slightly higher rent to compensate for the reduced liability. There has also been a trend to include Break Clauses which give tenants some flexibility to re-locate without having to find another tenant to take over their lease. All of these factors can have an effect on the rental value. As the rent on review is usually based on comparable transactions it is therefore essential to ensure that not only are the physical characteristics of the properties similar, but also that the terns of the lease are truly comparable.
On the basis that the security of tenure provisions have not been excluded from the lease, the tenant usually has the right to request a new lease from the Landlord. There are, however, limited grounds on which the Landlord may be able to oppose renewal. Assuming these do not apply the tenant can normally request a new lease on substantially the same terms as before, apart from having to pay a revised rent. From a tenant’s point of view, a lease renewal can provide an opportunity to renegotiate a number of terms. The principal advantage is that the rent can go down as well as up, depending on the market – unlike upward only rent reviews. Effectively the existing tenant is able to stand in the shoes of a new tenant and secure the same terms as would be on a new lease in the open market.
As payment of rent represents one of the largest operating costs for a company it is essential that a tenant takes early advice if they have an impending rent review or lease renewal. Similarly a Landlord will need to take action in good time in order to ensure that the rental value of their premises can be accurately assessed and negotiations commenced in good time to obtain the benefit of any increased rent at the earliest opportunity.
The partners of McNeill Lowe & Palmer have many years of experience in handling rent review and lease renewal negotiations on a wide range of commercial property. If you need advice or assistance please make contact with Owen Flack for a preliminary no obligation discussion.
Tags commercial rent reviews