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Rent Review
"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.
Dispute Resolution Costs
01/March/2014
In my opinion, and I'm not alone, the fees required and charged by surveyors appointed by the RICS to act as arbitrators or independent experts are often out of touch with reality and, in many instances, obscene.
For example, I am dealing with two matters at present, for different clients, where the rents are likely to end up at around £14,500 pa. In each case, the independent expert wants to charge around £250-£300 an hour, with a minimum fee of £3500 + disbursements and VAT. Now if the agency side of the firms of which those experts are partners were instructed to let the property then chances are the commission would be 10% of the first year's rent (ignoring any rent-free) subject to a minimum commission of £2000 plus VAT.
In another case, the appointed independent expert's hourly rate is £200 an hour + disbursements and VAT. Okay, maybe that's par for the course (or at least it used to be), but the surveyor has run up a bill of almost £1000 + VAT, etc just on dealing with preliminary communications. Also, at a different office of same company, where another person has been appointed, the charge is (only) £175 an hour which, considering it's the same administrative structure, suggests to me some sort of target approach to revenue.
I don't know where such people think the money comes from to pay their fees but frankly if that's the way they carry on then it's hardly surprising so many surveyors are suffering intense competition.
It's always been the case that where the parties have no choice the adviser will charge as much as they possibly can. You get that with legal costs and surveyor's fees in connection with tenant applications for licences to assign, sub-let, do alterations, and with schedules of dilapidations. I think the same principle is being applied at review referrals. Once appointed, the surveyor has a general duty to proceed and although that can be stopped by agreement what the parties have little or no control over is how much the surveyor will charge.
Personally, and I've said this all along, I think there should be a fixed fee, possibly on a sliding scale according to the level of passing rent, (with adjustment if the passing rent is a ground rent, for example), for independent expert determinations and arbitrator awards at rent review. The old argument it's impossible to know what will be involved doesn't hold water. When I take on a rent review for a client, I don't have the luxury of being able to charge whatever I like: I quote a fee at the start and no matter how long the job takes or what's involved, I stick to what has been agreed and no more.
An open-ended 'blank cheque' approach exposes both landlord and tenant to the risk of having to pay a disproportionate amount to a third party, which let's face it, particularly with an independent expert, expects most of the job done for them.
I should like to set up a low cost referral service where, for example, one would charge in the region of £1000 + VAT for expert determination assuming the matter straightforward and maybe the same for arbitration. I could set up such a service and rely on the provision in many leases where the parties can appoint a surveyor without having to go through the RICS. What you think? Would you like me to?
The advantage of a fixed fee is that you know where you are the start. You can tell the client it would cost 'x' to go to referral and that would it. At present, I can only estimate and having to say that the total costs could be in the region of £3000-£5000 + VAT, etc is a really frightening figure for most people, even if their share would only amount to half of that.
The RICS has set up a low-cost referral service but the parties have to agree to give up certain rights before the procedure can be used. Otherwise, since one function of the RICS is to provide a source of revenue for its members, the RICS won't get involved but I think they'd have to sit up and take notice and do something about it if more and more landlords and tenants were to register their disapproval and clamour for a lower cost system. As it is, I think landlords and tenants are being taken for a ride.
For example, I am dealing with two matters at present, for different clients, where the rents are likely to end up at around £14,500 pa. In each case, the independent expert wants to charge around £250-£300 an hour, with a minimum fee of £3500 + disbursements and VAT. Now if the agency side of the firms of which those experts are partners were instructed to let the property then chances are the commission would be 10% of the first year's rent (ignoring any rent-free) subject to a minimum commission of £2000 plus VAT.
In another case, the appointed independent expert's hourly rate is £200 an hour + disbursements and VAT. Okay, maybe that's par for the course (or at least it used to be), but the surveyor has run up a bill of almost £1000 + VAT, etc just on dealing with preliminary communications. Also, at a different office of same company, where another person has been appointed, the charge is (only) £175 an hour which, considering it's the same administrative structure, suggests to me some sort of target approach to revenue.
I don't know where such people think the money comes from to pay their fees but frankly if that's the way they carry on then it's hardly surprising so many surveyors are suffering intense competition.
It's always been the case that where the parties have no choice the adviser will charge as much as they possibly can. You get that with legal costs and surveyor's fees in connection with tenant applications for licences to assign, sub-let, do alterations, and with schedules of dilapidations. I think the same principle is being applied at review referrals. Once appointed, the surveyor has a general duty to proceed and although that can be stopped by agreement what the parties have little or no control over is how much the surveyor will charge.
Personally, and I've said this all along, I think there should be a fixed fee, possibly on a sliding scale according to the level of passing rent, (with adjustment if the passing rent is a ground rent, for example), for independent expert determinations and arbitrator awards at rent review. The old argument it's impossible to know what will be involved doesn't hold water. When I take on a rent review for a client, I don't have the luxury of being able to charge whatever I like: I quote a fee at the start and no matter how long the job takes or what's involved, I stick to what has been agreed and no more.
An open-ended 'blank cheque' approach exposes both landlord and tenant to the risk of having to pay a disproportionate amount to a third party, which let's face it, particularly with an independent expert, expects most of the job done for them.
I should like to set up a low cost referral service where, for example, one would charge in the region of £1000 + VAT for expert determination assuming the matter straightforward and maybe the same for arbitration. I could set up such a service and rely on the provision in many leases where the parties can appoint a surveyor without having to go through the RICS. What you think? Would you like me to?
The advantage of a fixed fee is that you know where you are the start. You can tell the client it would cost 'x' to go to referral and that would it. At present, I can only estimate and having to say that the total costs could be in the region of £3000-£5000 + VAT, etc is a really frightening figure for most people, even if their share would only amount to half of that.
The RICS has set up a low-cost referral service but the parties have to agree to give up certain rights before the procedure can be used. Otherwise, since one function of the RICS is to provide a source of revenue for its members, the RICS won't get involved but I think they'd have to sit up and take notice and do something about it if more and more landlords and tenants were to register their disapproval and clamour for a lower cost system. As it is, I think landlords and tenants are being taken for a ride.
Five Key Dates
01/December/2013
For purpose of agreeing or determining a rent, there are five key dates:
1) the review date;
2) the valuation date;
3) the earliest date for implementing the dispute resolution procedure
4) the date when the revised rent is payable; and
5) the date when any back rent is payable.
The review date is either specifically stated or calculated for the period from commencement of the term. A lease that does not define or specify the term commencement date creates problems, since it becomes a question of whether from the phrasing in the lease it is intended for the term to start from the commencement or the date of the lease. The date of the lease is the date of the document and even if that date were the same as the term commencement it is preferable for the lease to be clear.
I prefer the actual date(s) for the review(s) to be specified. That avoids convoluted terminology and interpretation of anniversary dates.
It is important to agree the valuation date, since that date does not have to be the same date as when the revised rent is payable.
Normally the revised rent payable would be back-dated to the review date, unless otherwise stated in the lease.
1) the review date;
2) the valuation date;
3) the earliest date for implementing the dispute resolution procedure
4) the date when the revised rent is payable; and
5) the date when any back rent is payable.
The review date is either specifically stated or calculated for the period from commencement of the term. A lease that does not define or specify the term commencement date creates problems, since it becomes a question of whether from the phrasing in the lease it is intended for the term to start from the commencement or the date of the lease. The date of the lease is the date of the document and even if that date were the same as the term commencement it is preferable for the lease to be clear.
I prefer the actual date(s) for the review(s) to be specified. That avoids convoluted terminology and interpretation of anniversary dates.
It is important to agree the valuation date, since that date does not have to be the same date as when the revised rent is payable.
Normally the revised rent payable would be back-dated to the review date, unless otherwise stated in the lease.
Review dates
01/December/2013
For some reason, best known to the world of lawyer-draftsmen, the phrasing in leases is often unbelievably convoluted. Commonly, review dates are not specified, such as 25 December 2006, 25 December 2011, but referred to as intervals such as 5th and 10th anniversaries, which is all very well provided it is clear from the wording of the lease from which each particular anniversary is computed.
Confusion can arise when, in the drafting of a lease, the draftsman uses the word ‘lease’ when referring to commencement dates for purpose of term, rent, and rent reviews. In modern leases, each expression or phrase will usually be defined in the lease so as to leave no scope for different interpretation, but where the draftsman does not, or phrasing or expression definitions are incomplete, and instead refers casually to the date of the lease, an ambiguity can arise where the lease states that rent reviews are at stated intervals during the term but the review dates themselves are calculated from commencement of the lease.
Anniversary dates in leases are often unspecified, referring to a period of time, rather than actual dates, so can cause interpretation problems, and particularly with rent review and/or break clause the wording of the lease may be critical for ensuring the validity of any notices. Judging by the volume of case-law concerning incorrect dates on notices, it is high time the habit of obliging the parties to calculate or interpret the appropriate dates for themselves is scrapped and instead the actual dates specified wherever possible.
Confusion can arise when, in the drafting of a lease, the draftsman uses the word ‘lease’ when referring to commencement dates for purpose of term, rent, and rent reviews. In modern leases, each expression or phrase will usually be defined in the lease so as to leave no scope for different interpretation, but where the draftsman does not, or phrasing or expression definitions are incomplete, and instead refers casually to the date of the lease, an ambiguity can arise where the lease states that rent reviews are at stated intervals during the term but the review dates themselves are calculated from commencement of the lease.
Anniversary dates in leases are often unspecified, referring to a period of time, rather than actual dates, so can cause interpretation problems, and particularly with rent review and/or break clause the wording of the lease may be critical for ensuring the validity of any notices. Judging by the volume of case-law concerning incorrect dates on notices, it is high time the habit of obliging the parties to calculate or interpret the appropriate dates for themselves is scrapped and instead the actual dates specified wherever possible.
Framework of review clause
01/December/2013
The framework of a well-drafted review clause will comprise:
1) The review dates
2) Procedure for operating the review
3) Valuation guidelines
4) Timetable for agreement
5) Dispute resolution procedure
6) Recording the review
7) Payment of the revised rent
1) The review dates
2) Procedure for operating the review
3) Valuation guidelines
4) Timetable for agreement
5) Dispute resolution procedure
6) Recording the review
7) Payment of the revised rent
Types of rent review
01/December/2013
1) Fixed increments at set intervals
2) Formulaic such as index-linked or linked to turnover.
3) Open Market Rent
4) Ground rent - strictly not a type but a valuation basis.
5) Capped review
6) Geared or ratio rent
2) Formulaic such as index-linked or linked to turnover.
3) Open Market Rent
4) Ground rent - strictly not a type but a valuation basis.
5) Capped review
6) Geared or ratio rent
Purpose of Rent Review
01/December/2013
The purpose of rent review is threefold:
1) to enable the landlord to review the rent payable;
2) for the tenant to ensure the rent payable is no more or less than it should be;
3) for both parties to monitor the performance of the location and trading position.
Reviewing the rent payable is all very well for landlords but for tenants ensuring it is no more or less than it should be is not how most tenants would view a rent review. For many tenants, the only way the business can remain profitable is when costs are below the going rate. Even so, despite the tenant's perspective, a rent review is for the benefit of both parties.
In United Scientific Holdings v Burnley Borough Council (1978)*, Lord Salmon said: “To my mind, it is totally unrealistic to regard such clauses (rent review) as conferring a privilege upon the landlord or as imposing a burden upon the tenant. Both the landlord and the tenant recognise the obvious, viz., that such clauses are fair and reasonable for each of them. I do not agree with what has been said in some of the authorities, namely, that a rent revision clause is for the benefit of the landlord alone and not at all for the benefit of the tenant. It is plainly for the benefit of them both. It is for the benefit of the tenant because without such a clause he would never get the long lease which he required; and under modern conditions it would be grossly unfair that he should. It is for the benefit of the landlord because it ensures that for the duration of the lease he will receive a fair rent instead of a rent far below the market value of the property which he demises.”
Tenants do have a point, however, in the context of rent payable. Generally, a rent review is not about the rent payable but about the rent at the review/valuation date. The rent payable is the amount payable after the rent is agreed or ascertained. Therefore, there are, in fact, two rents at rent review: 1) the review rent in accordance with the review clause and 2) the rent payable regardless.
The difference arises because of what is known as 'upward-only' rent review. 'Upward-only' does not mean the review rent necessarily has to go up. The review rent might be more or the same or less than the rent payable. 'Upward-only' refers to the rent payable after the review rent is agreed or ascertained as not usually less than the rent payable before the review. (I say 'usually' because there are circumstances where the rent payable could differ; you can find more about that here. (link awaited).
It might be thought unlikely to be cost-effective for either landlord or tenant to review the rent if the rent payable would be more than the review rent. In some instances, however, it might be beneficial for the landlord or the tenant to review the rent regardless, such as, for example, for monitoring performance.
Location is the underlying driving force for both property performance and tenant-demand. Property performance is the measure of rental and capital growth; both factors are needed to counteract and outpace what would otherwise be a depreciating asset. No increase on review is often symptomatic of a location that is static or in decline.
Property is a depreciating asset whose rate of depreciation can be outpaced by rental and capital growth. Rental growth is a product of demand by tenants according to the supply and availability of premises that would satisfy and fulfil the tenant's business operational requirements.
Tenant-demand is a driver for growth, but a premises-supply-shortage which leads to higher rents will challenge the economical rental for those businesses whose presence in the locality is part of the attraction; there is a cut-off point at which the more successful businesses will baulk at any further increase in rent. Although a rent review might be thought a private matter between actual landlord and actual tenant and of no concern to anyone else, any extra rent will increase the insurance premium cover for loss of rent and affect the Rateable Value (hence business rates payable). Also for the tenant the money has to come from somewhere and when an increase exceeds the tenant's economical rent the tenant will have to make savings elsewhere. (In my opinion, the first sign of a location entering decline is when the tenancy of a shop previously let to a multiple retailer is assigned or the premises re-let to a non-multiple retailer.)
In theory, a rent review should be a straightforward matter of the landlord and tenant agreeing the rent for the review period. In practice, it is not as simple as that. In business tenancy law, the review rent is not about how much the actual tenant could afford or how much the actual landlord wants to get a return on the investment, but the rent others would agree. And the rent that others would agree is arrived at by evaluating the evidence in the light of the terms and conditions of the lease.
Rent does not exist in isolation. Rent is the product of the terms and conditions of the tenancy upon which the premises are let, or to let. Whenever a new lease is granted, the parties and their advisers will agree the terms and conditions for the letting. There is no standard form of lease for all business premises. Consequently, the terms and conditions of each individual lease will affect the review rent.
Usually, a review is to market rent, unless the parties have agreed another basis as specified in the lease. Where rental valuation has regard to evidence, the hierarchy for best evidence is a new letting in the open market but the premises are let already (even if unoccupied) so the market cannot be tested. The alternative, which is the basis of rent review, is to assess the rent objectively: in other words, assuming the premises are available to let on a specified date at the rent that would be agreed between a hypothetical willing landlord and a hypothetical willing tenant, on the terms and conditions in the existing lease.
1) to enable the landlord to review the rent payable;
2) for the tenant to ensure the rent payable is no more or less than it should be;
3) for both parties to monitor the performance of the location and trading position.
Reviewing the rent payable is all very well for landlords but for tenants ensuring it is no more or less than it should be is not how most tenants would view a rent review. For many tenants, the only way the business can remain profitable is when costs are below the going rate. Even so, despite the tenant's perspective, a rent review is for the benefit of both parties.
In United Scientific Holdings v Burnley Borough Council (1978)*, Lord Salmon said: “To my mind, it is totally unrealistic to regard such clauses (rent review) as conferring a privilege upon the landlord or as imposing a burden upon the tenant. Both the landlord and the tenant recognise the obvious, viz., that such clauses are fair and reasonable for each of them. I do not agree with what has been said in some of the authorities, namely, that a rent revision clause is for the benefit of the landlord alone and not at all for the benefit of the tenant. It is plainly for the benefit of them both. It is for the benefit of the tenant because without such a clause he would never get the long lease which he required; and under modern conditions it would be grossly unfair that he should. It is for the benefit of the landlord because it ensures that for the duration of the lease he will receive a fair rent instead of a rent far below the market value of the property which he demises.”
Tenants do have a point, however, in the context of rent payable. Generally, a rent review is not about the rent payable but about the rent at the review/valuation date. The rent payable is the amount payable after the rent is agreed or ascertained. Therefore, there are, in fact, two rents at rent review: 1) the review rent in accordance with the review clause and 2) the rent payable regardless.
The difference arises because of what is known as 'upward-only' rent review. 'Upward-only' does not mean the review rent necessarily has to go up. The review rent might be more or the same or less than the rent payable. 'Upward-only' refers to the rent payable after the review rent is agreed or ascertained as not usually less than the rent payable before the review. (I say 'usually' because there are circumstances where the rent payable could differ; you can find more about that here. (link awaited).
It might be thought unlikely to be cost-effective for either landlord or tenant to review the rent if the rent payable would be more than the review rent. In some instances, however, it might be beneficial for the landlord or the tenant to review the rent regardless, such as, for example, for monitoring performance.
Location is the underlying driving force for both property performance and tenant-demand. Property performance is the measure of rental and capital growth; both factors are needed to counteract and outpace what would otherwise be a depreciating asset. No increase on review is often symptomatic of a location that is static or in decline.
Property is a depreciating asset whose rate of depreciation can be outpaced by rental and capital growth. Rental growth is a product of demand by tenants according to the supply and availability of premises that would satisfy and fulfil the tenant's business operational requirements.
Tenant-demand is a driver for growth, but a premises-supply-shortage which leads to higher rents will challenge the economical rental for those businesses whose presence in the locality is part of the attraction; there is a cut-off point at which the more successful businesses will baulk at any further increase in rent. Although a rent review might be thought a private matter between actual landlord and actual tenant and of no concern to anyone else, any extra rent will increase the insurance premium cover for loss of rent and affect the Rateable Value (hence business rates payable). Also for the tenant the money has to come from somewhere and when an increase exceeds the tenant's economical rent the tenant will have to make savings elsewhere. (In my opinion, the first sign of a location entering decline is when the tenancy of a shop previously let to a multiple retailer is assigned or the premises re-let to a non-multiple retailer.)
In theory, a rent review should be a straightforward matter of the landlord and tenant agreeing the rent for the review period. In practice, it is not as simple as that. In business tenancy law, the review rent is not about how much the actual tenant could afford or how much the actual landlord wants to get a return on the investment, but the rent others would agree. And the rent that others would agree is arrived at by evaluating the evidence in the light of the terms and conditions of the lease.
Rent does not exist in isolation. Rent is the product of the terms and conditions of the tenancy upon which the premises are let, or to let. Whenever a new lease is granted, the parties and their advisers will agree the terms and conditions for the letting. There is no standard form of lease for all business premises. Consequently, the terms and conditions of each individual lease will affect the review rent.
Usually, a review is to market rent, unless the parties have agreed another basis as specified in the lease. Where rental valuation has regard to evidence, the hierarchy for best evidence is a new letting in the open market but the premises are let already (even if unoccupied) so the market cannot be tested. The alternative, which is the basis of rent review, is to assess the rent objectively: in other words, assuming the premises are available to let on a specified date at the rent that would be agreed between a hypothetical willing landlord and a hypothetical willing tenant, on the terms and conditions in the existing lease.
Procedure for review
01/December/2013
The starting point for operation of a rent review is some form of notice.*
The form and phrasing of the notice, the timing of the notice, the mode of service, the identity of the recipient, the address for service, and so on, are all critical factors.
Where a lease requires the tenant to serve a counter-notice for the rent review, the wording of that counter-notice must accord with the wording in the review clause.
'Cutting corners’ and inventing phrasing instead of complying with the requirements in the lease often results in an invalid notice. The snag with straying from the requirements of the lease is that another version may miss the purpose of the counter-notice.
Generally the purpose of a counter-notice is to prevent the content of the notice being enforceable. Where the landlord’s notice specifies the rent, for example, it may not be enough to say that the rent specified is not acceptable.
Bellinger v South London Stationers Ltd [1979] - [1979] 2 EGLR 88 - is an example of what can go wrong: “we would hardly need to add that we do not accept your revised figure” was not considered sufficiently specific to be a counter-notice.
In Shirlcar Properties Ltd v Heinitz & Another [1983] - [1983] 2 EGLR 120 - 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 when the offer is accepted. 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) - [1925] AC 445 - “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 surveyors to head the correspondence 'without prejudice' (and/or) 'subject to contract.' In such cases, the concluded rental will be subject to the surveyor’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 surveyors 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, surveyors must recognise that the law applies as much to the interpretation of rent review covenants as it does to negotiations.
* Since notices can cause problems, there is a trend away from the use of notices in the procedure. Instead, the steps taken to rent review are to go straight to agreement within a reasonable period of time, such as 3 or 6 months, and if in default then for the dispute resolution procedure to be used.
The form and phrasing of the notice, the timing of the notice, the mode of service, the identity of the recipient, the address for service, and so on, are all critical factors.
Where a lease requires the tenant to serve a counter-notice for the rent review, the wording of that counter-notice must accord with the wording in the review clause.
'Cutting corners’ and inventing phrasing instead of complying with the requirements in the lease often results in an invalid notice. The snag with straying from the requirements of the lease is that another version may miss the purpose of the counter-notice.
Generally the purpose of a counter-notice is to prevent the content of the notice being enforceable. Where the landlord’s notice specifies the rent, for example, it may not be enough to say that the rent specified is not acceptable.
Bellinger v South London Stationers Ltd [1979] - [1979] 2 EGLR 88 - is an example of what can go wrong: “we would hardly need to add that we do not accept your revised figure” was not considered sufficiently specific to be a counter-notice.
In Shirlcar Properties Ltd v Heinitz & Another [1983] - [1983] 2 EGLR 120 - 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 when the offer is accepted. 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) - [1925] AC 445 - “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 surveyors to head the correspondence 'without prejudice' (and/or) 'subject to contract.' In such cases, the concluded rental will be subject to the surveyor’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 surveyors 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, surveyors must recognise that the law applies as much to the interpretation of rent review covenants as it does to negotiations.
* Since notices can cause problems, there is a trend away from the use of notices in the procedure. Instead, the steps taken to rent review are to go straight to agreement within a reasonable period of time, such as 3 or 6 months, and if in default then for the dispute resolution procedure to be used.
Rent Review in the Prevailing Climate
22/November/2012
Investment is about becoming financially better off. Investing in commercial property can be rewarding provided you know what you’re doing, otherwise risky. Commercial property is a generic term for all types of business premises; offices, factories, warehouses, shops, supermarkets, retail warehouses, factory outlets, trade counters, pubs, restaurants, and leisure. Essentially, a commercial property is a fixed asset whose investment value requires sufficient appreciation to at least counteract depreciation. Successful investment is about judicious choice and timing: what to buy, how much to pay, how to manage, when and how to sell. Generally, assuming the objective is investment, not development, landlords want both capital value and the rent to least keep pace with inflation. Property has a reputation as a long-term hedge against inflation, but not all properties make good investments. Any potential for capital gain and/or rental growth depends on the variables.
The tenant’s objective for the property is a marketing device for the tenant’s business. The tenant does not care about the landlord’s investment. When costs and overheads overshadow the advantages, the tenant moves on. During the tenancy, tenants want to reduce property costs and minimise liabilities but often at the expense of the landlord. To get landlords to be accommodating, tenants use manipulative tactics, such as claiming business is bad, not being able to afford more, and without concessions the tenant would go broke. Some landlords, especially when mortgaged to the hilt or petrified of voids, are so scared they’ll agree to anything. Many unrepresented landlords fall for tenant ploys. It is easy to be influenced by doom and gloom. Of the economy, hardly a day goes by without news of another business collapse or rationalisation, jobs lost. However, the economy rarely has any bearing on individual businesses. The total market for goods and services comprises sectors and segments. Businesses are not all in the same boat. The world does not owe the tenant a living. In my opinion, most problems are self–inflicted, through failure to address operational short-comings.
For landlords whose commercial property is in dire straits, any suggestion of rent review might seem alien. All property belongs to someone. There is nothing new about commercial property ending up in the wrong place: localities, ‘High Streets’, are not sacrosanct, buildings often out-last their useful shelf-life. Tenants go broke by not anticipating change, investors get it wrong by ignoring warning signs.
In stable and thriving areas of the commercial property market, landlords look forward to rent review. Presented with a plea for clemency, any decision whether to implement the review should be made after the rent is agreed or ascertained. To decide against on the basis of a sob–story invites the question ’how do you know it’s not a negotiating ploy? ’ By agreeing no increase without first exploring all the possibilities the landlord risks missing out on rent increase and capital growth. If the landlord could afford to, a lower rent payable could be accepted.
A rent review that’s ‘upward-only’ does not mean the rent necessarily has to go up, simply that after the market rent is agreed or ascertained the rent payable will not be less than the amount payable beforehand (assuming nothing else to the contrary). Since the market rent could be lower than rent payable, there could be repercussions for the investment value if the property were mortgaged. Many landlords commission surveyor reports on the likely rent at review but I consider such reports a waste of money. During negotiations, evidence can emerge that was not known about before, also psychology enters the fray. For example, most tenants are into commercial expediency so, even if there were no evidence, a nominal increase might be offered to avoid the cost of dispute resolution referral.
With commercial property, there is no standard form of lease. Leases are drafted from scratch, to the parties’ requirements, and often using precedents. [The Law Society has devised a short form of lease, but wording can be altered. ] Rent is the product of the terms and conditions of the tenancy upon which the premises are let. Wording should not always be taken literally: there may be overriding legislation, also words and phrases attract connotations; a different interpretation can often result in substantial increases or savings.
When a lease is granted, the terms and conditions are subjective, but the approach at review (assuming market rent, rather than inflation-adjusted, formulaic, or turnover-linked) is objective. Unlike on expiry where, (assuming the tenancy would qualify for renewal rights) rent is based on s. 34–s. 35 Landlord and Tenant Act 1954, a rent review during the term is based on a hypothetical lease, written in the review clause (and any related documents). Open market rent is not what the actual tenant could afford or how much the actual landlord might want, but what rent the premises would fetch if let in the market between a hypothetical willing landlord and hypothetical willing tenant. ’Hypothetical willing’ is defined in business tenancy law. The hypothetical lease may or may not contain the same terms and conditions as the lease so the outcome of the review might not be as envisaged. For example, if when the premises were let the rent reflected a limitation in use of the premises, then an unrestricted use in the hypothetical lease could result in a greater rent at review, all other factors remaining constant. Conversely, an assumed term without a break clause could result in a lower rent.
Where there is no evidence, the answer is to not value back-to-front. Comparable evidence is back-to front: it implies someone else agreed first and for the subject review to follow, pro-rata. Forward-thinking assesses rent by using either one of the other methodologies, or informed opinion. Informed opinion differs from letting agency ‘real-world’ experience because, unlike the actual market where they may be no demand, in the world of the hypothetical anything is possible.
The tenant’s objective for the property is a marketing device for the tenant’s business. The tenant does not care about the landlord’s investment. When costs and overheads overshadow the advantages, the tenant moves on. During the tenancy, tenants want to reduce property costs and minimise liabilities but often at the expense of the landlord. To get landlords to be accommodating, tenants use manipulative tactics, such as claiming business is bad, not being able to afford more, and without concessions the tenant would go broke. Some landlords, especially when mortgaged to the hilt or petrified of voids, are so scared they’ll agree to anything. Many unrepresented landlords fall for tenant ploys. It is easy to be influenced by doom and gloom. Of the economy, hardly a day goes by without news of another business collapse or rationalisation, jobs lost. However, the economy rarely has any bearing on individual businesses. The total market for goods and services comprises sectors and segments. Businesses are not all in the same boat. The world does not owe the tenant a living. In my opinion, most problems are self–inflicted, through failure to address operational short-comings.
For landlords whose commercial property is in dire straits, any suggestion of rent review might seem alien. All property belongs to someone. There is nothing new about commercial property ending up in the wrong place: localities, ‘High Streets’, are not sacrosanct, buildings often out-last their useful shelf-life. Tenants go broke by not anticipating change, investors get it wrong by ignoring warning signs.
In stable and thriving areas of the commercial property market, landlords look forward to rent review. Presented with a plea for clemency, any decision whether to implement the review should be made after the rent is agreed or ascertained. To decide against on the basis of a sob–story invites the question ’how do you know it’s not a negotiating ploy? ’ By agreeing no increase without first exploring all the possibilities the landlord risks missing out on rent increase and capital growth. If the landlord could afford to, a lower rent payable could be accepted.
A rent review that’s ‘upward-only’ does not mean the rent necessarily has to go up, simply that after the market rent is agreed or ascertained the rent payable will not be less than the amount payable beforehand (assuming nothing else to the contrary). Since the market rent could be lower than rent payable, there could be repercussions for the investment value if the property were mortgaged. Many landlords commission surveyor reports on the likely rent at review but I consider such reports a waste of money. During negotiations, evidence can emerge that was not known about before, also psychology enters the fray. For example, most tenants are into commercial expediency so, even if there were no evidence, a nominal increase might be offered to avoid the cost of dispute resolution referral.
With commercial property, there is no standard form of lease. Leases are drafted from scratch, to the parties’ requirements, and often using precedents. [The Law Society has devised a short form of lease, but wording can be altered. ] Rent is the product of the terms and conditions of the tenancy upon which the premises are let. Wording should not always be taken literally: there may be overriding legislation, also words and phrases attract connotations; a different interpretation can often result in substantial increases or savings.
When a lease is granted, the terms and conditions are subjective, but the approach at review (assuming market rent, rather than inflation-adjusted, formulaic, or turnover-linked) is objective. Unlike on expiry where, (assuming the tenancy would qualify for renewal rights) rent is based on s. 34–s. 35 Landlord and Tenant Act 1954, a rent review during the term is based on a hypothetical lease, written in the review clause (and any related documents). Open market rent is not what the actual tenant could afford or how much the actual landlord might want, but what rent the premises would fetch if let in the market between a hypothetical willing landlord and hypothetical willing tenant. ’Hypothetical willing’ is defined in business tenancy law. The hypothetical lease may or may not contain the same terms and conditions as the lease so the outcome of the review might not be as envisaged. For example, if when the premises were let the rent reflected a limitation in use of the premises, then an unrestricted use in the hypothetical lease could result in a greater rent at review, all other factors remaining constant. Conversely, an assumed term without a break clause could result in a lower rent.
Where there is no evidence, the answer is to not value back-to-front. Comparable evidence is back-to front: it implies someone else agreed first and for the subject review to follow, pro-rata. Forward-thinking assesses rent by using either one of the other methodologies, or informed opinion. Informed opinion differs from letting agency ‘real-world’ experience because, unlike the actual market where they may be no demand, in the world of the hypothetical anything is possible.
Rent Review - Time of the Essence
01/March/2009
Acting for a trustee of a restaurant property in East London, I was instructed to advise and take over negotiations for a rent review where the landlord's previous surveyor had failed to serve a valid notice and the tenant's surveyor had questioned the effective date of the review. The trustee's solicitors had sought to remedy the situation by serving a fresh notice but overdid it by including wording that strayed from the lease; the tenant's surveyor was also questioning the validity of the second notice.
According to the lease, the landlord has the right, on giving the tenant at least one month’s notice, to review the yearly rent, the revised rent to be payable from the review date. If the rent had not been reviewed at a date of review then the landlord shall at any time thereafter have the right to review the rent, upon giving not less than one month’s notice in writing, and from the date specified in that notice (not earlier than one month from the date of service of the notice) the yearly rent shall be increased at the date specified in that notice.
The timing of the landlord’s notice in the first instance was not of the essence, but it could be reasoned the subsequent procedure for giving notice renders that first instance of the essence. Only the landlord had the right to start the review procedure, but business tenancy law provides a means for the tenant to force the landlord to start or lose the right. Also, there was a similarity with the situation in H Turner & Son Ltd v Confederation Insurance Co (UK) Ltd and another [2002]. In Turner, it was held that the provision for service of a late rent review notice after the end of the period of the ‘main’ rent review notice made time of the essence in relation to the ‘main’ notice.
It would have been possible for the draftsman of the lease to avoid time of the essence simply by using different wording. To have two separate procedures struck me as cumbersome. My own view is the subsequent procedure, apart from overcoming the situation had the first procedure not been followed, may have been intended to benefit the landlord to time the implementation of the review to the state of the market then prevailing and, since that would be to the detriment of the tenant, the benefit for the tenant in agreeing is that the increased rent would not be back-dated to the first instance review date. However, that would pre-suppose the valuation date would also be the date specified in the subsequent notice. Assuming the time of the first instance notice is of the essence, the right to review the rent at the express review date would be lost if notice were not given in time.
Rather than get embroiled in the legalities and the risk to the landlord of losing the right to review entirely, I persuaded the tenant's surveyor to drop the challenge of validity in exchange for the later review date.
According to the lease, the landlord has the right, on giving the tenant at least one month’s notice, to review the yearly rent, the revised rent to be payable from the review date. If the rent had not been reviewed at a date of review then the landlord shall at any time thereafter have the right to review the rent, upon giving not less than one month’s notice in writing, and from the date specified in that notice (not earlier than one month from the date of service of the notice) the yearly rent shall be increased at the date specified in that notice.
The timing of the landlord’s notice in the first instance was not of the essence, but it could be reasoned the subsequent procedure for giving notice renders that first instance of the essence. Only the landlord had the right to start the review procedure, but business tenancy law provides a means for the tenant to force the landlord to start or lose the right. Also, there was a similarity with the situation in H Turner & Son Ltd v Confederation Insurance Co (UK) Ltd and another [2002]. In Turner, it was held that the provision for service of a late rent review notice after the end of the period of the ‘main’ rent review notice made time of the essence in relation to the ‘main’ notice.
It would have been possible for the draftsman of the lease to avoid time of the essence simply by using different wording. To have two separate procedures struck me as cumbersome. My own view is the subsequent procedure, apart from overcoming the situation had the first procedure not been followed, may have been intended to benefit the landlord to time the implementation of the review to the state of the market then prevailing and, since that would be to the detriment of the tenant, the benefit for the tenant in agreeing is that the increased rent would not be back-dated to the first instance review date. However, that would pre-suppose the valuation date would also be the date specified in the subsequent notice. Assuming the time of the first instance notice is of the essence, the right to review the rent at the express review date would be lost if notice were not given in time.
Rather than get embroiled in the legalities and the risk to the landlord of losing the right to review entirely, I persuaded the tenant's surveyor to drop the challenge of validity in exchange for the later review date.
Reducing Property Costs
01/June/1999
Socially, “win-win” as a means of avoiding or diffusing argument is useful as a catalyst but, at rent review, I regard it as inappropriate, because the intention is pre-determined as the open market rent: ie, what other retailers would pay for the premises. Whilst landlords would like all tenants to conform to the property system’s logical expectations, a tenant not actually in competition for the premises gains nothing from paying the going rate.
Even so, many tenants lose out because “win-win” has become institutionalised amongst surveyors so that, instead of concentrating on reduction, the emphasis is on agreeing market rent. Whilst the guidelines are geared towards that objective, the interests of landlord and tenant are opposed so, assuming an upward-only review, rather than reducing the proposal, I focus on passing rent. Clients also benefit indirectly in that their premises become more marketable, because when I release information for comparable evidence, landlord and surveyor opponents elsewhere invariably discount the devaluation. For example, I concluded a March 1999 review in Cornmarket, Oxford at under £180 Zone-A when Gap, almost next door, paid over £204 headline Zone-A in July 1998 and Birthdays nearby agreed 15% more on review in September 1998. Similarly, in North End, Croydon, I negotiated a March 1998 renewal at £125 Zone-A when, almost next door, an independent expert determined Zone-A £140 at the same date.
I am often instructed as a trouble-shooter and, in such cases, am fascinated by what the parties have taken for granted. If my experience reflects the market as a whole, then scope for further reducing property costs could be enormous. For example, many surveyors have difficulty in carrying out their instructions because of conflict between truth and bluff. To compensate, they can throw their weight around but, to retain peace of mind, sabotage the result. For example, I was embroiled with a surveyor whose stance was ‘take-it-or-leave-it’. He insisted that I should agree his floor areas because they were agreed on earlier occasions with chartered surveyors. On my calculations, verified afterwards by another surveyor not previously involved, the landlord’s surveyor’s area was wrong and the rent ,£4000 a year too low. In another matter, a landlord has been asserting the right to review after 3 years delay and, legally, was right. However, I resisted so, after a year or so getting nowhere with me, the landlord instructed a surveyor who told me that, whilst he agreed with my contention that the right had been lost, it would be a gesture to pay more - because that would be “fair”.
Apart from finding angles, I am good at reading between the lines and listening to what is not said. Concerned about the effect on the investment, landlords can be human although, in prime positions, resemblance is unusual, so one must be careful not to be emotional or mention their desire to recoup losses from pension mis-selling. Some landlords need cash flow, others scared of voids, and many surveyors have fee targets so agreement takes priority over doing their best for clients. Also, I have no duty to protect retailers for whom I am not acting, so it may be possible to achieve a good deal for my Client that would support an increase on rent for a neighbouring retailer and, if in competition with my Client, then even better!
Reading between the lines is easier now that the standard of literacy amongst surveyors has fallen. I regard anyone who spells its as it’s, in the context of its, as a sitting duck for a referral by written submission. But, because I dislike spending Client’s money, I prefer to serve by using technical skills and psychology constructively. In short, if you would like to pay less than the going rate, then I look forward to helping you in some way. Thank you.
Even so, many tenants lose out because “win-win” has become institutionalised amongst surveyors so that, instead of concentrating on reduction, the emphasis is on agreeing market rent. Whilst the guidelines are geared towards that objective, the interests of landlord and tenant are opposed so, assuming an upward-only review, rather than reducing the proposal, I focus on passing rent. Clients also benefit indirectly in that their premises become more marketable, because when I release information for comparable evidence, landlord and surveyor opponents elsewhere invariably discount the devaluation. For example, I concluded a March 1999 review in Cornmarket, Oxford at under £180 Zone-A when Gap, almost next door, paid over £204 headline Zone-A in July 1998 and Birthdays nearby agreed 15% more on review in September 1998. Similarly, in North End, Croydon, I negotiated a March 1998 renewal at £125 Zone-A when, almost next door, an independent expert determined Zone-A £140 at the same date.
I am often instructed as a trouble-shooter and, in such cases, am fascinated by what the parties have taken for granted. If my experience reflects the market as a whole, then scope for further reducing property costs could be enormous. For example, many surveyors have difficulty in carrying out their instructions because of conflict between truth and bluff. To compensate, they can throw their weight around but, to retain peace of mind, sabotage the result. For example, I was embroiled with a surveyor whose stance was ‘take-it-or-leave-it’. He insisted that I should agree his floor areas because they were agreed on earlier occasions with chartered surveyors. On my calculations, verified afterwards by another surveyor not previously involved, the landlord’s surveyor’s area was wrong and the rent ,£4000 a year too low. In another matter, a landlord has been asserting the right to review after 3 years delay and, legally, was right. However, I resisted so, after a year or so getting nowhere with me, the landlord instructed a surveyor who told me that, whilst he agreed with my contention that the right had been lost, it would be a gesture to pay more - because that would be “fair”.
Apart from finding angles, I am good at reading between the lines and listening to what is not said. Concerned about the effect on the investment, landlords can be human although, in prime positions, resemblance is unusual, so one must be careful not to be emotional or mention their desire to recoup losses from pension mis-selling. Some landlords need cash flow, others scared of voids, and many surveyors have fee targets so agreement takes priority over doing their best for clients. Also, I have no duty to protect retailers for whom I am not acting, so it may be possible to achieve a good deal for my Client that would support an increase on rent for a neighbouring retailer and, if in competition with my Client, then even better!
Reading between the lines is easier now that the standard of literacy amongst surveyors has fallen. I regard anyone who spells its as it’s, in the context of its, as a sitting duck for a referral by written submission. But, because I dislike spending Client’s money, I prefer to serve by using technical skills and psychology constructively. In short, if you would like to pay less than the going rate, then I look forward to helping you in some way. Thank you.
Yield and Pricing
01/June/1985
The current trend for private investors in the retail market to be more concerned with short term gain than long term income is worrying.
Participants seem to have overlooked the fact that the essence in capital gain to date owes more to previous levels of inflation than to design. And even if high inflation does return, the retailing revolution will stultify any likelihood of a repeat boom.
Many new investors believe that rental value reflects expected investment yield, based upon the price they have paid. In fact, investment value is calculated by reference to the level of rent and not vice versa. However, high prices paid for some investments can only reflect a very optimistic view of rental value. With the exception of property formerly owned by notedly cautious landlords, the idea that the previous owner must have agreed too low a rent, especially if set during the period 1981-1983, is too simplistic. By having always to aim for the top rental on review, to cover purchasing expectations, any failure to achieve the objective rubs off on the relationship with the valuer whose advice is dismissed as 'negative.'
The tenant becomes saddled with a difficult landlord and often with a rental commitment far above the economics of his business. In the open market, cyclical change is inevitable, but in the quest for short term gain, while the loss of one particular tenant may not matter, it is the collective effect of the pressure for high rents which radically affects long term stability, since there cannot be capital gain without security of income.
In the past, their owners' low inflation investment values have had a useful way of adjusting to mistakes, but with changes in the pattern of retailing, and high interest rates, the margin for error now is very small.
The investor who overpays, through ignorance or greed, only to find that the resultant yield, following review, is well below comfortable resale price will have to fund the shortfall somehow. While it is churlish to insist upon strict consideration of investment criteria, since the pressure to use substantial borrowing facilities dominates the market, the problem is unlikely to grow.
Participants seem to have overlooked the fact that the essence in capital gain to date owes more to previous levels of inflation than to design. And even if high inflation does return, the retailing revolution will stultify any likelihood of a repeat boom.
Many new investors believe that rental value reflects expected investment yield, based upon the price they have paid. In fact, investment value is calculated by reference to the level of rent and not vice versa. However, high prices paid for some investments can only reflect a very optimistic view of rental value. With the exception of property formerly owned by notedly cautious landlords, the idea that the previous owner must have agreed too low a rent, especially if set during the period 1981-1983, is too simplistic. By having always to aim for the top rental on review, to cover purchasing expectations, any failure to achieve the objective rubs off on the relationship with the valuer whose advice is dismissed as 'negative.'
The tenant becomes saddled with a difficult landlord and often with a rental commitment far above the economics of his business. In the open market, cyclical change is inevitable, but in the quest for short term gain, while the loss of one particular tenant may not matter, it is the collective effect of the pressure for high rents which radically affects long term stability, since there cannot be capital gain without security of income.
In the past, their owners' low inflation investment values have had a useful way of adjusting to mistakes, but with changes in the pattern of retailing, and high interest rates, the margin for error now is very small.
The investor who overpays, through ignorance or greed, only to find that the resultant yield, following review, is well below comfortable resale price will have to fund the shortfall somehow. While it is churlish to insist upon strict consideration of investment criteria, since the pressure to use substantial borrowing facilities dominates the market, the problem is unlikely to grow.