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Negotiation
"Upward only" rent review
12/May/2014
Contrary to popular belief, ‘upward-only’ rent review does not mean the rent must increase.
An ‘upward-only’ review means that the rent payable after the review to open market rental is agreed or ascertained would not be less than the rent payable before the rent review, even if the open market rent were lower.
I think the reason for the misunderstanding stems from not appreciating the difference between rent review and rent payable.
Where the review is to open market rent, as distinct from some formulaic change, such as inflation index-linked or percentage uplift, the rent will be the open market rental at the valuation date. The valuation date is normally the same as the review date unless otherwise stated in the lease.
The rent payable is the amount payable after the review is agreed or ascertained. Therefore, depending upon the market rent at the valuation date, it is possible for that rent to either be less or the same or more than the rent payable before the review.
When the market rent is lower than the rent previously payable, an “upward-only” review could in some circumstances still result in the rent payable after the review is agreed or ascertained being less than rent payable before that review. For example, if at the previous review in say 2009 it was agreed that the increased rent then would be phased over the ensuing period of 5 years, such as £25,000 pa for the first two years, rising to £26,000 at the third year, rising to £30,000 pa at the fourth and fifth years, the average rent over five years is £27,200 per annum. The passing rent immediately before the 2014 review would be £30,000 per annum, but whether the rent payable after the 2014 review is agreed or ascertained would be defined as £30,000 or £27,200 pa would depend upon what was agreed by the parties when the 2009 review was documented.
Rent review dates are normally at pre-set intervals calculated from and including the commencement of the contractual term. The dates do not have to be at logical intervals: it all depends upon what was agreed by the parties when the lease was granted or subsequently varied. Also, the term commencement doesn’t have to be the same date of the lease: the date of lease is simply the date of the document.
It is irrelevant the rent will be fixed for several years, the duration of the revised rent is built into the rent review system, with adjustments or allowances for variations from the norm, the norm itself depends upon the evidence.
Depending upon the state of the market at each review/valuation date, the timing of each subsequent review might coincide with upturns or downturns in the market and/or a different interpretation of the valuation guidelines in the lease; in the event of downturns or static periods resulting in nil increase. Hence, when the review is during a downturn or static period, the rent agreed or ascertained at an earlier review could be greater than the market rent at each subsequent review, with the result that the premises could become overrented. Also, particularly with sale-and-leasebacks and lease restructuring, the initial rent on grant of lease might have been set above the level of market rent at that time, the tenant’s intention that the rent should not increase throughout the term. In fact, in many locations, no evidential justification for any increase at all in rent throughout the term is precisely the fate that befalls many an inexperienced investor. (A lack of evidence may not mean nil increase; there are other ways of procuring an increase, including having a thorough grasp of the finer points of rental valuation and lease analysis.)
It might be thought that over-renting, as a result of an upturn in the market at some stage followed by a downturn, or a deliberate ploy only creates problems for tenants that cannot afford continuing to pay more or want to assign or sub-let, but it can also affect the capital value of the landlord’s investment because the excess rent would only endure for the remainder of the term and during any holding-over period, if any (before statutory procedures are underway). On reversion (expiry of the lease), and assuming the tenant wants to renew, and assuming the Landlord and Tenant 1954 procedures are observed, the rent at the commencement of the renewal term will be the market rent regardless of any previous ‘upward-only’ cushion. Therefore, if the rent payable before expiry of the lease were greater than the market rent on expiry, that lower market rent would be the initial rent on renewal.
It is not just over-renting as a result of higher rent at an earlier rent review date that can lead to a lower rent on expiry/renewal of the lease. Where the rent review basis in the expired lease is index-linked or a percentage uplift, the initial rent on renewal, assuming Landlord and Tenant Act 1954 principles, will be the market rent, regardless. Since index-linked rent review and minimum uplifts can result in the rent payable becoming higher than the market rent, the landlord would be worse off on renewal of the lease and depending on the market rent at the start of the renewal might not recover for years. For example, assuming the initial rent was £50,000 per annum, for a term of 20 years and at each 5-yearly review the rent increased by 5% then after three reviews the rent payable would be £57,881.25. On expiry, the lease is renewed for another 20 years but even though the same percentage arrangement might continue as the basis for reviews in the renewal lease, the initial rent at start of the renewal lease would be the market rent which might be lower, say £45,000 per annum; if so then at the third review of the renewal term the rent would be £52,093.13 per annum.
Erroneously thinking that ‘upward-only’ rent review is a panacea for successful investment is something that commonly befalls inexperienced landlords and can play havoc with expectations.
Generally, minimum percentage uplifts and index-linked reviews are artificial devices ostensibly to enable the tenant to budget for future increases, but primarily designed to trick inexperienced investors into paying more for the investment proposition than the property would otherwise fetch if the rent review(s) were to open market only. Consequently, investments whose rent reviews are index-linked or fixed percentage increase make sense for easy management and rental income cash-flow but don’t be fooled into thinking they are also blue-chip for growth and investment performance. At rent review, the likelihood of encountering tenant resolute resistance to any increase over and above the contractual obligation is almost guaranteed.
An ‘upward-only’ review means that the rent payable after the review to open market rental is agreed or ascertained would not be less than the rent payable before the rent review, even if the open market rent were lower.
I think the reason for the misunderstanding stems from not appreciating the difference between rent review and rent payable.
Where the review is to open market rent, as distinct from some formulaic change, such as inflation index-linked or percentage uplift, the rent will be the open market rental at the valuation date. The valuation date is normally the same as the review date unless otherwise stated in the lease.
The rent payable is the amount payable after the review is agreed or ascertained. Therefore, depending upon the market rent at the valuation date, it is possible for that rent to either be less or the same or more than the rent payable before the review.
When the market rent is lower than the rent previously payable, an “upward-only” review could in some circumstances still result in the rent payable after the review is agreed or ascertained being less than rent payable before that review. For example, if at the previous review in say 2009 it was agreed that the increased rent then would be phased over the ensuing period of 5 years, such as £25,000 pa for the first two years, rising to £26,000 at the third year, rising to £30,000 pa at the fourth and fifth years, the average rent over five years is £27,200 per annum. The passing rent immediately before the 2014 review would be £30,000 per annum, but whether the rent payable after the 2014 review is agreed or ascertained would be defined as £30,000 or £27,200 pa would depend upon what was agreed by the parties when the 2009 review was documented.
Rent review dates are normally at pre-set intervals calculated from and including the commencement of the contractual term. The dates do not have to be at logical intervals: it all depends upon what was agreed by the parties when the lease was granted or subsequently varied. Also, the term commencement doesn’t have to be the same date of the lease: the date of lease is simply the date of the document.
It is irrelevant the rent will be fixed for several years, the duration of the revised rent is built into the rent review system, with adjustments or allowances for variations from the norm, the norm itself depends upon the evidence.
Depending upon the state of the market at each review/valuation date, the timing of each subsequent review might coincide with upturns or downturns in the market and/or a different interpretation of the valuation guidelines in the lease; in the event of downturns or static periods resulting in nil increase. Hence, when the review is during a downturn or static period, the rent agreed or ascertained at an earlier review could be greater than the market rent at each subsequent review, with the result that the premises could become overrented. Also, particularly with sale-and-leasebacks and lease restructuring, the initial rent on grant of lease might have been set above the level of market rent at that time, the tenant’s intention that the rent should not increase throughout the term. In fact, in many locations, no evidential justification for any increase at all in rent throughout the term is precisely the fate that befalls many an inexperienced investor. (A lack of evidence may not mean nil increase; there are other ways of procuring an increase, including having a thorough grasp of the finer points of rental valuation and lease analysis.)
It might be thought that over-renting, as a result of an upturn in the market at some stage followed by a downturn, or a deliberate ploy only creates problems for tenants that cannot afford continuing to pay more or want to assign or sub-let, but it can also affect the capital value of the landlord’s investment because the excess rent would only endure for the remainder of the term and during any holding-over period, if any (before statutory procedures are underway). On reversion (expiry of the lease), and assuming the tenant wants to renew, and assuming the Landlord and Tenant 1954 procedures are observed, the rent at the commencement of the renewal term will be the market rent regardless of any previous ‘upward-only’ cushion. Therefore, if the rent payable before expiry of the lease were greater than the market rent on expiry, that lower market rent would be the initial rent on renewal.
It is not just over-renting as a result of higher rent at an earlier rent review date that can lead to a lower rent on expiry/renewal of the lease. Where the rent review basis in the expired lease is index-linked or a percentage uplift, the initial rent on renewal, assuming Landlord and Tenant Act 1954 principles, will be the market rent, regardless. Since index-linked rent review and minimum uplifts can result in the rent payable becoming higher than the market rent, the landlord would be worse off on renewal of the lease and depending on the market rent at the start of the renewal might not recover for years. For example, assuming the initial rent was £50,000 per annum, for a term of 20 years and at each 5-yearly review the rent increased by 5% then after three reviews the rent payable would be £57,881.25. On expiry, the lease is renewed for another 20 years but even though the same percentage arrangement might continue as the basis for reviews in the renewal lease, the initial rent at start of the renewal lease would be the market rent which might be lower, say £45,000 per annum; if so then at the third review of the renewal term the rent would be £52,093.13 per annum.
Erroneously thinking that ‘upward-only’ rent review is a panacea for successful investment is something that commonly befalls inexperienced landlords and can play havoc with expectations.
Generally, minimum percentage uplifts and index-linked reviews are artificial devices ostensibly to enable the tenant to budget for future increases, but primarily designed to trick inexperienced investors into paying more for the investment proposition than the property would otherwise fetch if the rent review(s) were to open market only. Consequently, investments whose rent reviews are index-linked or fixed percentage increase make sense for easy management and rental income cash-flow but don’t be fooled into thinking they are also blue-chip for growth and investment performance. At rent review, the likelihood of encountering tenant resolute resistance to any increase over and above the contractual obligation is almost guaranteed.
Negotiation - restoring the balance of power
01/December/2013
Notwithstanding Reed Personnel Services plc v American Express Ltd [1996] wherein the court said it is “not good for the tenant to say what is good for the landlord” many tenants are fond of negotiating as if they were the landlord. Although technically cutting no ice, it’s an approach that can succeed when for the landlord to be ‘accommodating’ would be sensible under the circumstances. In this context, accommodating means allowing some slack in compliance with the tenancy. I see no point in incurring time and expense in having a lease and then not sticking to it, but I do realise it is the landlord’s prerogative whether to enforce it to the letter. The landlord and tenant relationship is on-going for the duration of the term and beyond. For routine matters there may be no disagreement, but, otherwise, beyond the law, and valuation, negotiation is about psychology.
Psychology is a science, an academic and applied discipline that involves the scientific study of human or animal mental functions and behaviours. At a down-to-earth level, and in the context of a business tenancy, what psychology does is to interfere with the strictures of the commercial contract by injecting a human element. In 1988, in my booklet, “The Psychology of Rent Review Negotiation” I said the relationship between landlord and tenant should ideally be a partnership, sharing the ups-and-downs together. In practice, the interests of landlord and tenant remain diametrically opposed: the landlord wants more, the tenant wants less. During downturns, the cushioning upward-only review brought about by landlord wanting and the tenant offering to maintain rental income throughout the term does the job intended by both parties. So why should a campaign to abolish upward-only reviews want to alter a mutually accepted perfectly good system? Frankly, I think the answer is self-interest. Instead of rising to the challenge of organic growth - improving upon what exists already in pursuit of excellence - such tenants grow by expansion: they become addicted to momentum and, over-indebted and overstretched, end up disconnected from reality and losing their way. Although in theory expansion makes sense, inorganic growth is never the way to develop a long-term consistently profitable business because too much gets taken for granted. Tenants urging politicians to do something about their business tenancy arrangements when having entered voluntarily into a commercial contract such tenants find that what they signed is not what they had in mind is not the sort of behaviour one would expect of companies surrounded by advisers. Not to be outdone, and despite a muted response from government, many companies and the surveyors that act for them, have got it into their heads that such tenants should be thought of as doing the landlord a favour in wanting to lease the premises.
Asserting the landlord should care whether a tenant can afford the rent is a crafty way for the tenant to get what it wants; it also makes it harder for that particular landlord to enforce the terms and conditions of the tenancy. By removing from business tenancy law and rental valuation the impersonality that is the hallmark of the market, rent review and tenancy expiry/renewal has taken on a new guise. No longer a relatively straightforward application of business tenancy law and rental valuation, now it strongly features subjectivity whereby tenants promote the “wider consequences” for their business in the event that landlord is not accommodating. For example, a recent public display was Thorntons, the chocolatier, telling landlords wanting to increase its rents that Thorntons would close the shops and trade on the Internet instead. I think it fascinating a public company has to stoop so low to get what it wants - that doesn’t speak well for its products. And hardly impressive of a plc to tell shareholders that it would maximise returns and pay dividends to trade on the Internet rather continue to drain profits by maintaining a ‘high street’ presence. Be that as it may, in effect, landlords are being asked to subsidise a retailer’s desire to have it both ways, even though others would pay more rent.
For landlords, a dilemma of recession is whether tenants should be helped to survive the error of (their) ways. I emphasise ‘their’ because something tenants are good at is making pronouncements about the market as a whole as if their experience should be considered the only barometer of consumer behaviour. Often, the facts are found amongst suppliers: for example, Hornby plc (toys) results in June 2010 said “it is now clear that our larger retail customers recognise that they failed to fulfil their sales potential in 2009. ”
Life has ups-and-downs, and a business plan is rarely straightforward, but we are not supposed to come unstuck in times of change. One factor to ponder is whether it should be reasonably assumed inherent, depending on the calibre of tenant, for the tenant to be expected to have what it takes to anticipate downturns in its market and prepare accordingly. That does not seem to be how the victim tenant thinks: for them, the business sector ought to be considered a special case: a sort of level playing field for all, regardless of the ups-and-downs of the economy. Landlords too have self-interest. The most important factor is whether a landlord can afford to be accommodating. How much rent and what terms can be varied very much depends upon when the property was bought, how much was paid, and how much was borrowed. It also depends on whether the tenant has a guarantor, because any material alteration to the terms of a contract which might potentially prejudice the guarantor will release him unless he specially consents to the variation, West Horndon Industrial Park v Phoenix Timber [1995] Although business tenancy law and rental valuation are not concerned with the wider consequences for the parties, psychology steps in to ask about the consequence for the landlord in the event of existing tenant default, such as whether the property would let in a fairly short time to a tenant of at least the same calibre, and at least the same rent; and whether on expiry the tenant in difficulties would renew for at least the same term as before. For a tenant, one reason for taking the route of insolvency, administration or CVA, is a consequence of alienation criteria that a landlord can include in a tenancy to reflect privity of contract: a tenant must consider the likelihood of finding a financially sound assignee. The number of tenants with the where-with-all to cope with slow trading is in short supply. An authorised guarantee agreement to sign, the tenant cannot afford the risk of a defaulting assignee.
The landlord should be mindful of changes to capital value that can be caused by tenant assignment and under-letting. The number of tenants whose covenant enhances value has been diminishing for years. Although a landlord may serve notice on a tenant for the purpose of protecting investment value, the timing of the notice is critical and the procedure little used. Generally, commercial property for investment is a depreciating asset, because the price paid rarely reflects the market value of the property alone, but includes the calibre of the tenant. Often, growth is illusory: although capital value is estimated by valuing on a date, investment performance should allow for inflation, loss of interest on equity, and holding and management costs, interest, tax on rent and any gain. Strip out those figures and whatever’s left is the real growth. Nowadays, maintaining investment value is just as challenging as increasing value. For example, an investment for 15 years with 5 yearly rent reviews will only maintain its capital value if at each review the rent goes up by enough to offset fluctuations in investment yields and what might happen on expiry. Where a landlord has been accommodating, at subsequent rent review and on tenancy renewal, the likelihood of a rent increase diminishes, because in personalising the landlord and tenant relationship, by focussing on the business for which the tenant chooses to use the premises, the landlord can get stuck with a dud tenant and the investment under-perform for the wrong reasons. Many tenants would have landlords believe that the property system should be changed to reflect the changes in the market, but equally many landlords think tenants should change their modus operandi to synchronise with the market. The property system is more flexible than many tenants would like to think, if only because landlords can be accommodating. The underlying difficulty for those tenants, and surveyors that have prospered on the success of those tenants - and whose loyalty is to those tenants - is that really the problem their clients face is not caused by any intransigence amongst landlords, but that the mass-market has entered decline and fall. It is the Age of Individuality. Alongside the dominance of supermarkets for convenience and free-parking, and a few clothing companies for garments, it is the specialist retailers that are thriving, along with the giants of the internet.
At rent review, a tenant has no control of the psychology because the tenancy remains vested in that tenant so the review guidelines, which are emotionally detached, are paramount but, on expiry, the tenant does not have to renew. A choice whether to renew only puts the tenant in a stronger position if the tenant could afford to relocate or close the business at the particular premises. Multiple retailers and big companies are in a stronger position to dictate terms on renewal because rarely is the performance of their business overall dependent on any one branch. For smaller businesses, flexibility is limited. Often the value or saleability of the business as a going concern is inextricably bound up with the premises and a secure term of tenancy. Ever since investment value strayed from property fundamentals to become dependent upon covenant of tenant, that dependency has been exploited. The banks have done a stirling job using sale-and-leasebacks to maximise capital proceeds, only to serve up branch closures for the next course. What price the building without its original occupier? An investor is buying the building, not the tenant and no structured rent review, such as index-linking, pre-fixed increases and compounding is going to make up for the fact the more the rent payable exceeds the market rent, the riskier the investment. In the shop property market, whilst the primary market that multiple retailers inhabit may not be providing much growth, the same cannot be said of the secondary market where there is often keen demand. The secondary market is not just about trading position, but also locality. Many secondary towns are more stable than primaries nearby, often because the Zone A rate is economical. In Ledbury, for example, the market town where I am based, and whose population is just under 10,000, demand for shops is buoyant and rents have gone up in the last couple of years. Another factor that those that think the world owes them a living would do well to remember is that commercial property often lends itself to redevelopment and reconfiguration, or simply disposal with vacant possession. One thing tenants should be careful of when testing the loyalty to the tenant’s cause is that the landlord might be thinking of using the opportunity to do something different with the building. In the balance of power, one principle remains steadfast: the property belongs to the landlord, so how the tenant extracts itself from the tenancy commitment must be honourable otherwise the course of action will back-fire on the tenant.
Psychology is a science, an academic and applied discipline that involves the scientific study of human or animal mental functions and behaviours. At a down-to-earth level, and in the context of a business tenancy, what psychology does is to interfere with the strictures of the commercial contract by injecting a human element. In 1988, in my booklet, “The Psychology of Rent Review Negotiation” I said the relationship between landlord and tenant should ideally be a partnership, sharing the ups-and-downs together. In practice, the interests of landlord and tenant remain diametrically opposed: the landlord wants more, the tenant wants less. During downturns, the cushioning upward-only review brought about by landlord wanting and the tenant offering to maintain rental income throughout the term does the job intended by both parties. So why should a campaign to abolish upward-only reviews want to alter a mutually accepted perfectly good system? Frankly, I think the answer is self-interest. Instead of rising to the challenge of organic growth - improving upon what exists already in pursuit of excellence - such tenants grow by expansion: they become addicted to momentum and, over-indebted and overstretched, end up disconnected from reality and losing their way. Although in theory expansion makes sense, inorganic growth is never the way to develop a long-term consistently profitable business because too much gets taken for granted. Tenants urging politicians to do something about their business tenancy arrangements when having entered voluntarily into a commercial contract such tenants find that what they signed is not what they had in mind is not the sort of behaviour one would expect of companies surrounded by advisers. Not to be outdone, and despite a muted response from government, many companies and the surveyors that act for them, have got it into their heads that such tenants should be thought of as doing the landlord a favour in wanting to lease the premises.
Asserting the landlord should care whether a tenant can afford the rent is a crafty way for the tenant to get what it wants; it also makes it harder for that particular landlord to enforce the terms and conditions of the tenancy. By removing from business tenancy law and rental valuation the impersonality that is the hallmark of the market, rent review and tenancy expiry/renewal has taken on a new guise. No longer a relatively straightforward application of business tenancy law and rental valuation, now it strongly features subjectivity whereby tenants promote the “wider consequences” for their business in the event that landlord is not accommodating. For example, a recent public display was Thorntons, the chocolatier, telling landlords wanting to increase its rents that Thorntons would close the shops and trade on the Internet instead. I think it fascinating a public company has to stoop so low to get what it wants - that doesn’t speak well for its products. And hardly impressive of a plc to tell shareholders that it would maximise returns and pay dividends to trade on the Internet rather continue to drain profits by maintaining a ‘high street’ presence. Be that as it may, in effect, landlords are being asked to subsidise a retailer’s desire to have it both ways, even though others would pay more rent.
For landlords, a dilemma of recession is whether tenants should be helped to survive the error of (their) ways. I emphasise ‘their’ because something tenants are good at is making pronouncements about the market as a whole as if their experience should be considered the only barometer of consumer behaviour. Often, the facts are found amongst suppliers: for example, Hornby plc (toys) results in June 2010 said “it is now clear that our larger retail customers recognise that they failed to fulfil their sales potential in 2009. ”
Life has ups-and-downs, and a business plan is rarely straightforward, but we are not supposed to come unstuck in times of change. One factor to ponder is whether it should be reasonably assumed inherent, depending on the calibre of tenant, for the tenant to be expected to have what it takes to anticipate downturns in its market and prepare accordingly. That does not seem to be how the victim tenant thinks: for them, the business sector ought to be considered a special case: a sort of level playing field for all, regardless of the ups-and-downs of the economy. Landlords too have self-interest. The most important factor is whether a landlord can afford to be accommodating. How much rent and what terms can be varied very much depends upon when the property was bought, how much was paid, and how much was borrowed. It also depends on whether the tenant has a guarantor, because any material alteration to the terms of a contract which might potentially prejudice the guarantor will release him unless he specially consents to the variation, West Horndon Industrial Park v Phoenix Timber [1995] Although business tenancy law and rental valuation are not concerned with the wider consequences for the parties, psychology steps in to ask about the consequence for the landlord in the event of existing tenant default, such as whether the property would let in a fairly short time to a tenant of at least the same calibre, and at least the same rent; and whether on expiry the tenant in difficulties would renew for at least the same term as before. For a tenant, one reason for taking the route of insolvency, administration or CVA, is a consequence of alienation criteria that a landlord can include in a tenancy to reflect privity of contract: a tenant must consider the likelihood of finding a financially sound assignee. The number of tenants with the where-with-all to cope with slow trading is in short supply. An authorised guarantee agreement to sign, the tenant cannot afford the risk of a defaulting assignee.
The landlord should be mindful of changes to capital value that can be caused by tenant assignment and under-letting. The number of tenants whose covenant enhances value has been diminishing for years. Although a landlord may serve notice on a tenant for the purpose of protecting investment value, the timing of the notice is critical and the procedure little used. Generally, commercial property for investment is a depreciating asset, because the price paid rarely reflects the market value of the property alone, but includes the calibre of the tenant. Often, growth is illusory: although capital value is estimated by valuing on a date, investment performance should allow for inflation, loss of interest on equity, and holding and management costs, interest, tax on rent and any gain. Strip out those figures and whatever’s left is the real growth. Nowadays, maintaining investment value is just as challenging as increasing value. For example, an investment for 15 years with 5 yearly rent reviews will only maintain its capital value if at each review the rent goes up by enough to offset fluctuations in investment yields and what might happen on expiry. Where a landlord has been accommodating, at subsequent rent review and on tenancy renewal, the likelihood of a rent increase diminishes, because in personalising the landlord and tenant relationship, by focussing on the business for which the tenant chooses to use the premises, the landlord can get stuck with a dud tenant and the investment under-perform for the wrong reasons. Many tenants would have landlords believe that the property system should be changed to reflect the changes in the market, but equally many landlords think tenants should change their modus operandi to synchronise with the market. The property system is more flexible than many tenants would like to think, if only because landlords can be accommodating. The underlying difficulty for those tenants, and surveyors that have prospered on the success of those tenants - and whose loyalty is to those tenants - is that really the problem their clients face is not caused by any intransigence amongst landlords, but that the mass-market has entered decline and fall. It is the Age of Individuality. Alongside the dominance of supermarkets for convenience and free-parking, and a few clothing companies for garments, it is the specialist retailers that are thriving, along with the giants of the internet.
At rent review, a tenant has no control of the psychology because the tenancy remains vested in that tenant so the review guidelines, which are emotionally detached, are paramount but, on expiry, the tenant does not have to renew. A choice whether to renew only puts the tenant in a stronger position if the tenant could afford to relocate or close the business at the particular premises. Multiple retailers and big companies are in a stronger position to dictate terms on renewal because rarely is the performance of their business overall dependent on any one branch. For smaller businesses, flexibility is limited. Often the value or saleability of the business as a going concern is inextricably bound up with the premises and a secure term of tenancy. Ever since investment value strayed from property fundamentals to become dependent upon covenant of tenant, that dependency has been exploited. The banks have done a stirling job using sale-and-leasebacks to maximise capital proceeds, only to serve up branch closures for the next course. What price the building without its original occupier? An investor is buying the building, not the tenant and no structured rent review, such as index-linking, pre-fixed increases and compounding is going to make up for the fact the more the rent payable exceeds the market rent, the riskier the investment. In the shop property market, whilst the primary market that multiple retailers inhabit may not be providing much growth, the same cannot be said of the secondary market where there is often keen demand. The secondary market is not just about trading position, but also locality. Many secondary towns are more stable than primaries nearby, often because the Zone A rate is economical. In Ledbury, for example, the market town where I am based, and whose population is just under 10,000, demand for shops is buoyant and rents have gone up in the last couple of years. Another factor that those that think the world owes them a living would do well to remember is that commercial property often lends itself to redevelopment and reconfiguration, or simply disposal with vacant possession. One thing tenants should be careful of when testing the loyalty to the tenant’s cause is that the landlord might be thinking of using the opportunity to do something different with the building. In the balance of power, one principle remains steadfast: the property belongs to the landlord, so how the tenant extracts itself from the tenancy commitment must be honourable otherwise the course of action will back-fire on the tenant.
Without Prejudice
24/October/2013
Last year someone on LandlordZONE Forum’s commercial property board was asking about breach of warranty of authority, and suggesting the landlord’s surveyor might be pulling a fast one. The question was brought to my attention by another LZ member who happens to be a client. The questioner’s facts bore a striking resemblance to a rent review I was dealing with so I asked the client to reply – I wasn’t involved with LZ at the time.
A sector of property (real estate) law, business tenancy law is a complex fast-moving subject and it is said that surveyors that deal with rent review and tenancy expiry/renewal have a far greater understanding than most. In theory, the parties ought to be able to agree without delay but, in practice, negotiations invariably take a long time to conclude. It is not the agreement that can take weeks, monthly, sometimes years, but the process of reaching agreement. Perhaps to save money on fees and costs, landlord and/or tenant will have a go at negotiation direct; after all how hard can it be to reach agreement when decision-makers communicate between themselves?
In theory, it should only take a few minutes to reach agreement, provided the first proposal is accepted. If you’re the landlord and pitch the proposal at a figure you would think the tenant could afford, even if the tenant could afford it why should the tenant agree when having regard to the terms and conditions of the tenancy it might be possible to achieve a lower rent? Conversely, if you’re the tenant and think your proposal fair and reasonable why should the landlord agree with your interpretation of fair let alone reasonable?
Rent review negotiation isn’t as straightforward as it might seem. The skill and art of negotiation comes into its own through knowing what to do when something goes wrong. Add rental valuation to business tenancy law and you have a recipe for coming unstuck and/or not knowing what to do for the best.
During negotiations, many aspects are agreed between surveyors without recourse to respective clients for instructions at every step of the way. To an extent that is sensible, most parties are more interested in the end-result than the process and really there is no point in instructing an experienced surveyor if you want a detailed explanation before the surveyor is allowed to say anything to the other side. Of course, it all depends upon the client’s experience of the process and confidence in the surveyor, neither practicality and/or emotion is always obvious no matter how assuring at the onset. Some time ago, I had the misfortune to represent a tenant whose attitude I likened to demonstrating a new car only for them ask you to tell them the name of the person that harvested the latex from the tree that was used to make the rubber for the tyres.
Unless the lease requires a proposal to be specified in a notice, it’s not necessary for the landlord or the tenant to indicate a rent as a basis for the negotiations. Even so, it is common for a proposal at the onset and for ensuing discussions for the reaching of agreement to be ‘without prejudice’.
The expression ‘without prejudice’ means “without prejudice to my right to contend for the full amount to which I assert I am entitled”. In the context of a dispute where terms of settlement are offered, the effect of that will be that, if no agreement is reached and the matter goes to arbitration (or to court), the discussions and any concessions made in the course of them cannot be referred to or relied upon.
The policy of the law is to encourage the compromise of disputes. in general, a statement (whether written or oral) made in an effort to compromise a dispute is taken to have been made on a “without prejudice” basis and is not admissible in evidence unless both the maker and the person to whom it was made consent.
Since ‘without prejudice’ communications are not normally disclosable, one might think that anything can be said without fear of reprisal, but use of ‘without prejudice’ should not be taken for granted. The parties must make it clear at the onset and for the duration of the discussions (if only to be on the safe side) that the negotiations or communications are ‘without prejudice’. Failure to do so, especially where oral communications are involved, could result in a binding agreement which end up causing all manner of difficulties. For example, it has been held that on request by a tenant of the landlord’s consent for licence to assign the terminology used in preliminaries could give rise to consent being granted, and with rent review notices, ‘without prejudice’ positioned in the wrong place can render the notice invalid.
An offer to compromise a dispute is usually inferred as made without prejudice, unless the circumstances negate such an inference. Therefore, whether or not a party actually used the words “without prejudice” on the document is not determinative. Furthermore, terms such as “off the record” and “confidential” have no legal significance.
A ’breach of warranty of authority’ is a rare example of inexperienced use of the terminology ‘without prejudice’ during rent review negotiation. In principle, an offer made ‘without prejudice’ is capable of acceptance, provided the acceptance is otherwise in an open letter or where any condition would be no consequence – the expression ‘subject to contract’ is not always an escape route. When the party upon whose behalf the binding offer is made back-tracks, the agent for that party becomes personally liable and can be sued for damages; hence the breach of warranty of authority. Of course, an agent cannot force the client to agree – agreement is the client’s prerogative – but to make an offer in a form that is capable of acceptance presupposes the client is agreeable to the possibility the offer would be acceptable.
A sector of property (real estate) law, business tenancy law is a complex fast-moving subject and it is said that surveyors that deal with rent review and tenancy expiry/renewal have a far greater understanding than most. In theory, the parties ought to be able to agree without delay but, in practice, negotiations invariably take a long time to conclude. It is not the agreement that can take weeks, monthly, sometimes years, but the process of reaching agreement. Perhaps to save money on fees and costs, landlord and/or tenant will have a go at negotiation direct; after all how hard can it be to reach agreement when decision-makers communicate between themselves?
In theory, it should only take a few minutes to reach agreement, provided the first proposal is accepted. If you’re the landlord and pitch the proposal at a figure you would think the tenant could afford, even if the tenant could afford it why should the tenant agree when having regard to the terms and conditions of the tenancy it might be possible to achieve a lower rent? Conversely, if you’re the tenant and think your proposal fair and reasonable why should the landlord agree with your interpretation of fair let alone reasonable?
Rent review negotiation isn’t as straightforward as it might seem. The skill and art of negotiation comes into its own through knowing what to do when something goes wrong. Add rental valuation to business tenancy law and you have a recipe for coming unstuck and/or not knowing what to do for the best.
During negotiations, many aspects are agreed between surveyors without recourse to respective clients for instructions at every step of the way. To an extent that is sensible, most parties are more interested in the end-result than the process and really there is no point in instructing an experienced surveyor if you want a detailed explanation before the surveyor is allowed to say anything to the other side. Of course, it all depends upon the client’s experience of the process and confidence in the surveyor, neither practicality and/or emotion is always obvious no matter how assuring at the onset. Some time ago, I had the misfortune to represent a tenant whose attitude I likened to demonstrating a new car only for them ask you to tell them the name of the person that harvested the latex from the tree that was used to make the rubber for the tyres.
Unless the lease requires a proposal to be specified in a notice, it’s not necessary for the landlord or the tenant to indicate a rent as a basis for the negotiations. Even so, it is common for a proposal at the onset and for ensuing discussions for the reaching of agreement to be ‘without prejudice’.
The expression ‘without prejudice’ means “without prejudice to my right to contend for the full amount to which I assert I am entitled”. In the context of a dispute where terms of settlement are offered, the effect of that will be that, if no agreement is reached and the matter goes to arbitration (or to court), the discussions and any concessions made in the course of them cannot be referred to or relied upon.
The policy of the law is to encourage the compromise of disputes. in general, a statement (whether written or oral) made in an effort to compromise a dispute is taken to have been made on a “without prejudice” basis and is not admissible in evidence unless both the maker and the person to whom it was made consent.
Since ‘without prejudice’ communications are not normally disclosable, one might think that anything can be said without fear of reprisal, but use of ‘without prejudice’ should not be taken for granted. The parties must make it clear at the onset and for the duration of the discussions (if only to be on the safe side) that the negotiations or communications are ‘without prejudice’. Failure to do so, especially where oral communications are involved, could result in a binding agreement which end up causing all manner of difficulties. For example, it has been held that on request by a tenant of the landlord’s consent for licence to assign the terminology used in preliminaries could give rise to consent being granted, and with rent review notices, ‘without prejudice’ positioned in the wrong place can render the notice invalid.
An offer to compromise a dispute is usually inferred as made without prejudice, unless the circumstances negate such an inference. Therefore, whether or not a party actually used the words “without prejudice” on the document is not determinative. Furthermore, terms such as “off the record” and “confidential” have no legal significance.
A ’breach of warranty of authority’ is a rare example of inexperienced use of the terminology ‘without prejudice’ during rent review negotiation. In principle, an offer made ‘without prejudice’ is capable of acceptance, provided the acceptance is otherwise in an open letter or where any condition would be no consequence – the expression ‘subject to contract’ is not always an escape route. When the party upon whose behalf the binding offer is made back-tracks, the agent for that party becomes personally liable and can be sued for damages; hence the breach of warranty of authority. Of course, an agent cannot force the client to agree – agreement is the client’s prerogative – but to make an offer in a form that is capable of acceptance presupposes the client is agreeable to the possibility the offer would be acceptable.
Point of Law
01/June/1985
In Shirlcar Properties Ltd v Heinitz & Another [1982], the Court stated stated that use of the expression ' subject to contract' did not constitute effective notice to set a rent review procedure in motion when formal notice had to be given. Use of the expression 'without prejudice' is widely misunderstood and so it comes as no real surprise to find that many surveyors are unable to grasp the effect of such wording when concluding rent review negotiations.
An offer made 'without prejudice' is binding if acceptance of the offer is made. By adding the words ' subject to contract,' however, the presumption that the parties intend to create legal relations may be expressly negatived. From Rose & Frank v ] R Crompton Ltd [1923], "the words of the preliminary agreement in other respects may be apt and sufficient to constitute an open contract, but if the parties in so agreeing make it plain that they do not intend to be bound except by some subsequent document, they remain unbound though no further negotiation be contemplated. Either side is free to abandon the agreement and to refuse to assent to any legal obligation .... "
When concluding negotiations, it is common for valuers to head the correspondence 'without prejudice' (and/or) 'subject to contract.' In such cases, the concluded rental will be subject to the valuer's recommendation of acceptance. This reservation in itself is sufficient evidence that no formal agreement has been reached, even if the recommendation refers to the need for 'Board approval' reckoned to be a formality. Until an offer is made without reservation, it is not agreed and some valuers and parties feel that withdrawal from the 'conclusion' is tantamount to unethical or unprofessional behaviour against the spirit of negotiation. Such opinion is, of course, the prerogative of the aggrieved party but it does not affect the legal position and, whereas such practice may conflict with expectations, valuers must recognise that the law applies as much to the interpretation of rent review covenants as it does to negotiations.
An offer made 'without prejudice' is binding if acceptance of the offer is made. By adding the words ' subject to contract,' however, the presumption that the parties intend to create legal relations may be expressly negatived. From Rose & Frank v ] R Crompton Ltd [1923], "the words of the preliminary agreement in other respects may be apt and sufficient to constitute an open contract, but if the parties in so agreeing make it plain that they do not intend to be bound except by some subsequent document, they remain unbound though no further negotiation be contemplated. Either side is free to abandon the agreement and to refuse to assent to any legal obligation .... "
When concluding negotiations, it is common for valuers to head the correspondence 'without prejudice' (and/or) 'subject to contract.' In such cases, the concluded rental will be subject to the valuer's recommendation of acceptance. This reservation in itself is sufficient evidence that no formal agreement has been reached, even if the recommendation refers to the need for 'Board approval' reckoned to be a formality. Until an offer is made without reservation, it is not agreed and some valuers and parties feel that withdrawal from the 'conclusion' is tantamount to unethical or unprofessional behaviour against the spirit of negotiation. Such opinion is, of course, the prerogative of the aggrieved party but it does not affect the legal position and, whereas such practice may conflict with expectations, valuers must recognise that the law applies as much to the interpretation of rent review covenants as it does to negotiations.