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Rent Review
The purpose of a rent review (and where the basis is market rent) is to enable the landlord to obtain the market rent for the premises at the review date (or valuation date if different) and for the tenant to ensure it is not paying any more or less.
The open market is made up of different ‘affordabilities’, so, in linking the review to 'open market rent' ("OMR") ‘open’ means everyone and anyone. [In valuation, the word ‘open’ is superfluous. ]
As comparable evidence, a new letting to an inexperienced first-time tenant at a rent that might amaze is as valid as any hard-driven bargain by a company with dozens of branches. So, since rents in the commercial property market are unregulated, any tenant committing to a review to OMR is exposing its business to all manner of risks beyond its control (a situation that can strain compliance with the Turnbull report on internal control and risk management, to safeguard shareholders’ investment and the company’s assets). Similarly, since, in the open market, different landlords are likely to have different investment strategies, risks also apply to the landlord’s investment. Hence, the only way the actual landlord and actual tenant can have any control over the direction of the rental relationship is by recording their requirements in the lease, per the rent review guidelines.
In the market, rent is a product; it does not occur naturally, as in, ‘this is the rent for the premises’. To value rent, all terms and conditions of the tenancy must be known, stated in advance or defined. But, since the rent on a new letting is often agreed before the lease is drafted and/or approved, it is possible for a completed lease to contain terms and conditions that could produce a different rent to what was agreed. The test of efficacy is whether the rent would be identical if there were a rent review on the same date as the term commencement.
A rent review might be thought of greater benefit to landlords but, essentially, benefit is equal. A review ensures the tenant is not subsidised. Of course, tenants do not necessarily see it like that; and, for many, the only way the business can remain profitable is when costs are below the going rate.
With the gap widening between those that have what customers want and those that do not, tenants not on the receiving end of profitable demand are often fighting to preserve an outmoded business model. The tenant’s reaction to a proposed increase is likely to be emotional, than dispassionate, but a tenant’s failure to adapt its style to changing circumstances cannot possibly be something for which the landlord should be expected to share responsibility. It is not a fault of landlords that rents have become uneconomical for some tenants, but a function of the market, and that includes competition from other businesses, valuation methodology, and tenants straying from review guidelines.
It is pointless for a tenant to agree what it can afford because that could vary over the years: to pay more than necessary when business is booming can mean that rent fixed for the term, regardless. Because terminology is fashionable, guidelines vary from detailed to vague - terms and conditions of a tenancy cannot be changed, except by rectification by the original parties, or mutual agreement - but, whether the intention of the original parties is clear or interpreted, the guidelines are intended to be helpful: to enable the tenant to apply market circumstances at the valuation date to the level of rent.
A rent review is objective: not how much the actual tenant would agree, or the actual landlord would want, but what a hypothetical willing landlord would reasonably expect and a hypothetical willing tenant would pay; such parties may include the actual landlord and actual tenant. So, in addition to procedure for operating the review, time for agreement, method and cost of dispute resolution, and timing of payment and rate of interest on any back rent, the guidelines define the valuation basis for the terms of the tenancy between the hypothetical parties.
There is no such thing as an ‘upward-only rent review’ as such. Upward-only is a cushion for the rent payable and nothing to do with the market rent. So, if the lease contains an “upward-only” review clause, then that does not mean the rent must go up; but that the rent payable after the review cannot be lower than before. Even so, when the landlord expects an increase, that feeling can rub off on the tenant, so the tenant’s first thought is likely to focus on the proposal, rather than how to agree a rent that accords with the guidelines. Landlords can prey on inexperience and unsuspecting - for example, an increase for inflation, or encouraging avoiding the expense of appointing surveyors - so when landlord and tenant communicate directly, it is not unusual for such tenants to settle for a quiet life. But, whereas avoiding confrontation may sometimes be commercially-expedient, it makes no sense, at least to me, for a tenant to ignore the guidelines, by thinking that could upset their landlord, when the guidelines are designed to be helpful.
If you are acting for the tenant and do as the tenant asks, but the landlord is unyielding, then for you and/or the tenant to reckon no real likelihood of a surveyor doing any better should, I suggest, be put to the test. It does not follow just because you and your client are not making any progress that a surveyor's experience would also get nowhere. To a landlord (whether represented overtly by a surveyor), a tenant, when negotiating themselves, or through a solicitor or an accountant, is often regarded a ‘soft touch’. Calling a landlord’s bluff - for example, threatening to instruct a surveyor, or referral to ‘arbitration’ - will only work when the landlord is fearful of the prospect. A landlord will wait to see whom the tenant has instructed, before deciding whether to enter into combat.
Although lowest rent is important, it may be all the more where the lease contains a tenant’s option to buy the freehold for the price valuation formula is based on the rent.
In my opinion, things go wrong in the landlord and tenant relationship when negotiations become subjective, and wider consequences for the actual landlord and tenant dominate. It is not simply a clash of personality or viewpoint. Costs can figure largely, the tenant baulks at the expense of referral, angles are not spotted or explored, so a new rent does not reflect the market at the valuation date, but is a product of the past, based almost solely on other rent review and lease renewal agreements. The cumulative effect can take its toll.
To quote from Wallshire Ltd v Aarons [1988] “second best are rent reviews which are negotiated between valuers, because although their aim is to achieve the same end-result of deciding what the market rent is, their decision is not tested by the market; their decision, their agreement, is based on their conclusions about what the market would decide. Negotiated settlements therefore can be unreliable because of the possibility of error piled on error. They need … an occasional window of reality provided by open market decisions. ”
The difficulty for a solicitor, when acting for a tenant, is their advisory role differs from that of a surveyor. Solicitors act only on client instructions, whereas surveyors can act off their own bat. When the tenant tells you the landlord’s proposal is excessive, or such like, and wants to reply with a counter-offer of what he could afford, how the response is received by the landlord is likely to be construed as an outburst, merely letting off steam. While some landlords do overstate, the proposal may in fact be close to market rent. Generally, particularly when substantial increase is proposed, the tenant’s reaction is anticipated. A emotional plea is unlikely to cut any ice. Since a review is a function of tenancy management, the tenant may forget, or not realise, the process is nothing personal.
It is also important to realise the review process is not only about rent, but also whether the review can be implemented and/or the proposal negotiated. Implementation often requires some notice to be given, the notice must be valid, and time-limits adhered to. Similarly, it may be necessary to serve a counter-notice. It is vital to respect the guidelines. Bellinger v South London Stationers Ltd [1979] 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.
Where many tenants go wrong is not consulting a surveyor. It’s all very well wanting to save on fees by tackling the landlord themselves, or getting their solicitor or accountant to write, but, at rent review, as with anything involving a business tenancy, it’s not simply a matter of the tenant agreeing what it can afford, but what others would agree for the same situation. Anything the tenant agrees by themselves could end up backfiring on them at a later date. Whether through a solicitor or an accountant, a tenant trying to negotiate a rent review without involving a surveyor can leave the tenant with the feeling the cards are stacked in favour of the landlord but, in my experience, how negotiations are handled from the start can make a difference to the outcome.
The open market is made up of different ‘affordabilities’, so, in linking the review to 'open market rent' ("OMR") ‘open’ means everyone and anyone. [In valuation, the word ‘open’ is superfluous. ]
As comparable evidence, a new letting to an inexperienced first-time tenant at a rent that might amaze is as valid as any hard-driven bargain by a company with dozens of branches. So, since rents in the commercial property market are unregulated, any tenant committing to a review to OMR is exposing its business to all manner of risks beyond its control (a situation that can strain compliance with the Turnbull report on internal control and risk management, to safeguard shareholders’ investment and the company’s assets). Similarly, since, in the open market, different landlords are likely to have different investment strategies, risks also apply to the landlord’s investment. Hence, the only way the actual landlord and actual tenant can have any control over the direction of the rental relationship is by recording their requirements in the lease, per the rent review guidelines.
In the market, rent is a product; it does not occur naturally, as in, ‘this is the rent for the premises’. To value rent, all terms and conditions of the tenancy must be known, stated in advance or defined. But, since the rent on a new letting is often agreed before the lease is drafted and/or approved, it is possible for a completed lease to contain terms and conditions that could produce a different rent to what was agreed. The test of efficacy is whether the rent would be identical if there were a rent review on the same date as the term commencement.
A rent review might be thought of greater benefit to landlords but, essentially, benefit is equal. A review ensures the tenant is not subsidised. Of course, tenants do not necessarily see it like that; and, for many, the only way the business can remain profitable is when costs are below the going rate.
With the gap widening between those that have what customers want and those that do not, tenants not on the receiving end of profitable demand are often fighting to preserve an outmoded business model. The tenant’s reaction to a proposed increase is likely to be emotional, than dispassionate, but a tenant’s failure to adapt its style to changing circumstances cannot possibly be something for which the landlord should be expected to share responsibility. It is not a fault of landlords that rents have become uneconomical for some tenants, but a function of the market, and that includes competition from other businesses, valuation methodology, and tenants straying from review guidelines.
It is pointless for a tenant to agree what it can afford because that could vary over the years: to pay more than necessary when business is booming can mean that rent fixed for the term, regardless. Because terminology is fashionable, guidelines vary from detailed to vague - terms and conditions of a tenancy cannot be changed, except by rectification by the original parties, or mutual agreement - but, whether the intention of the original parties is clear or interpreted, the guidelines are intended to be helpful: to enable the tenant to apply market circumstances at the valuation date to the level of rent.
A rent review is objective: not how much the actual tenant would agree, or the actual landlord would want, but what a hypothetical willing landlord would reasonably expect and a hypothetical willing tenant would pay; such parties may include the actual landlord and actual tenant. So, in addition to procedure for operating the review, time for agreement, method and cost of dispute resolution, and timing of payment and rate of interest on any back rent, the guidelines define the valuation basis for the terms of the tenancy between the hypothetical parties.
There is no such thing as an ‘upward-only rent review’ as such. Upward-only is a cushion for the rent payable and nothing to do with the market rent. So, if the lease contains an “upward-only” review clause, then that does not mean the rent must go up; but that the rent payable after the review cannot be lower than before. Even so, when the landlord expects an increase, that feeling can rub off on the tenant, so the tenant’s first thought is likely to focus on the proposal, rather than how to agree a rent that accords with the guidelines. Landlords can prey on inexperience and unsuspecting - for example, an increase for inflation, or encouraging avoiding the expense of appointing surveyors - so when landlord and tenant communicate directly, it is not unusual for such tenants to settle for a quiet life. But, whereas avoiding confrontation may sometimes be commercially-expedient, it makes no sense, at least to me, for a tenant to ignore the guidelines, by thinking that could upset their landlord, when the guidelines are designed to be helpful.
If you are acting for the tenant and do as the tenant asks, but the landlord is unyielding, then for you and/or the tenant to reckon no real likelihood of a surveyor doing any better should, I suggest, be put to the test. It does not follow just because you and your client are not making any progress that a surveyor's experience would also get nowhere. To a landlord (whether represented overtly by a surveyor), a tenant, when negotiating themselves, or through a solicitor or an accountant, is often regarded a ‘soft touch’. Calling a landlord’s bluff - for example, threatening to instruct a surveyor, or referral to ‘arbitration’ - will only work when the landlord is fearful of the prospect. A landlord will wait to see whom the tenant has instructed, before deciding whether to enter into combat.
Although lowest rent is important, it may be all the more where the lease contains a tenant’s option to buy the freehold for the price valuation formula is based on the rent.
In my opinion, things go wrong in the landlord and tenant relationship when negotiations become subjective, and wider consequences for the actual landlord and tenant dominate. It is not simply a clash of personality or viewpoint. Costs can figure largely, the tenant baulks at the expense of referral, angles are not spotted or explored, so a new rent does not reflect the market at the valuation date, but is a product of the past, based almost solely on other rent review and lease renewal agreements. The cumulative effect can take its toll.
To quote from Wallshire Ltd v Aarons [1988] “second best are rent reviews which are negotiated between valuers, because although their aim is to achieve the same end-result of deciding what the market rent is, their decision is not tested by the market; their decision, their agreement, is based on their conclusions about what the market would decide. Negotiated settlements therefore can be unreliable because of the possibility of error piled on error. They need … an occasional window of reality provided by open market decisions. ”
The difficulty for a solicitor, when acting for a tenant, is their advisory role differs from that of a surveyor. Solicitors act only on client instructions, whereas surveyors can act off their own bat. When the tenant tells you the landlord’s proposal is excessive, or such like, and wants to reply with a counter-offer of what he could afford, how the response is received by the landlord is likely to be construed as an outburst, merely letting off steam. While some landlords do overstate, the proposal may in fact be close to market rent. Generally, particularly when substantial increase is proposed, the tenant’s reaction is anticipated. A emotional plea is unlikely to cut any ice. Since a review is a function of tenancy management, the tenant may forget, or not realise, the process is nothing personal.
It is also important to realise the review process is not only about rent, but also whether the review can be implemented and/or the proposal negotiated. Implementation often requires some notice to be given, the notice must be valid, and time-limits adhered to. Similarly, it may be necessary to serve a counter-notice. It is vital to respect the guidelines. Bellinger v South London Stationers Ltd [1979] 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.
Where many tenants go wrong is not consulting a surveyor. It’s all very well wanting to save on fees by tackling the landlord themselves, or getting their solicitor or accountant to write, but, at rent review, as with anything involving a business tenancy, it’s not simply a matter of the tenant agreeing what it can afford, but what others would agree for the same situation. Anything the tenant agrees by themselves could end up backfiring on them at a later date. Whether through a solicitor or an accountant, a tenant trying to negotiate a rent review without involving a surveyor can leave the tenant with the feeling the cards are stacked in favour of the landlord but, in my experience, how negotiations are handled from the start can make a difference to the outcome.
Dilapidations
Dilapidation is another word for disrepair.
Economical Rent
In business tenancy law, the actual tenant’s ability to afford the rent at review is generally considered irrelevant. So, the actual tenant faces a dilemma, because - unless the review goes to ‘arbitration’ - the tenant must decide what rent to agree and no tenant will willingly agree more than they can afford. Since affordability is a big issue, solicitors acting for tenant-retailers can encounter difficulties in obtaining instructions when the client is at a loss to know what to do.
It is vital the tenant understands the review process. When premises are offered to let in the open market, as well as negotiating the best deal it can, a tenant will do one or both of two things. All tenants decide whether, on their projected figures, the rent would be affordable. The second thing, which is not something all tenants do, is to check whether the proposed rent is realistic, compared with what other tenants nearby pay for their premises. Ascertaining what others pay for their premises helps avoid a hike in the rental benchmark, which can happen if the transaction were cited as evidence for nearby reviews. With shop property, for example, the Zone A value could destabilise the cost of the trading position for those retailers whose established presence is one attraction of the position in the first place. Few tenants care about the wider long-term consequences of their business expansion plans and most are single-minded. Some deliberately pay top rents to ingratiate themselves with landlords, whilst others agree what they can afford at the time, expecting future rent reviews also to be based on affordability.
As soon as the lease is completed, affordability and business tenancy law part company. At rent review, it is assumed the actual tenant can afford, pro-rata, the same as everyone else, because the purpose of a review is to enable the landlord to receive the market rent. However, although each new letting reflects that particular tenant’s affordability, the profit margin and rate of stock-turn mean not all tenants can afford the same as everyone else. Furthermore - and this point is frequently overlooked - because rent is payable regardless of the profitability of the business, it is assumed the tenant is of independent means, even though most tenants rely entirely on business cash-flow.
Although retailers in trouble are managing to persuade landlords to accept rents paid monthly, a growing number of retailers that are not in any difficulty are expecting the same treatment.
Some landlords can afford to be accommodating, but many cannot. Landlords that themselves are borrowing money are likely to be paying their interest quarterly, so accepting rents monthly from the tenant will mean the landlord subsidising the tenant.
In any event, such an arrangement, where it is a departure from the terms and conditions of the lease, should only be temporary, and subject to notice to end the arrangement if the landlord should so desire. Landlords should also put the agreement in writing, in a side-letter with the lease, setting out clearly the terms and conditions of the arrangement.
To avoid problems should the landlord want to sell the investment, the arrangement should be personal to the tenant and landlord and non-transferable.
In my opinion, the investment value of a property where the tenant is being allowed to pay monthly could well be lower than where payments are quarterly.
It is vital the tenant understands the review process. When premises are offered to let in the open market, as well as negotiating the best deal it can, a tenant will do one or both of two things. All tenants decide whether, on their projected figures, the rent would be affordable. The second thing, which is not something all tenants do, is to check whether the proposed rent is realistic, compared with what other tenants nearby pay for their premises. Ascertaining what others pay for their premises helps avoid a hike in the rental benchmark, which can happen if the transaction were cited as evidence for nearby reviews. With shop property, for example, the Zone A value could destabilise the cost of the trading position for those retailers whose established presence is one attraction of the position in the first place. Few tenants care about the wider long-term consequences of their business expansion plans and most are single-minded. Some deliberately pay top rents to ingratiate themselves with landlords, whilst others agree what they can afford at the time, expecting future rent reviews also to be based on affordability.
As soon as the lease is completed, affordability and business tenancy law part company. At rent review, it is assumed the actual tenant can afford, pro-rata, the same as everyone else, because the purpose of a review is to enable the landlord to receive the market rent. However, although each new letting reflects that particular tenant’s affordability, the profit margin and rate of stock-turn mean not all tenants can afford the same as everyone else. Furthermore - and this point is frequently overlooked - because rent is payable regardless of the profitability of the business, it is assumed the tenant is of independent means, even though most tenants rely entirely on business cash-flow.
Although retailers in trouble are managing to persuade landlords to accept rents paid monthly, a growing number of retailers that are not in any difficulty are expecting the same treatment.
Some landlords can afford to be accommodating, but many cannot. Landlords that themselves are borrowing money are likely to be paying their interest quarterly, so accepting rents monthly from the tenant will mean the landlord subsidising the tenant.
In any event, such an arrangement, where it is a departure from the terms and conditions of the lease, should only be temporary, and subject to notice to end the arrangement if the landlord should so desire. Landlords should also put the agreement in writing, in a side-letter with the lease, setting out clearly the terms and conditions of the arrangement.
To avoid problems should the landlord want to sell the investment, the arrangement should be personal to the tenant and landlord and non-transferable.
In my opinion, the investment value of a property where the tenant is being allowed to pay monthly could well be lower than where payments are quarterly.
Negotiation
Contrary to popular belief, there is, assuming the review to market rent, no right or wrong way to negotiate a rent review. The tenant may like to assert that the landlord should produce evidence to justify a proposed increase and if none were forthcoming then the rent should not go up, but that stance has no basis in law. On the contrary, a principle of business tenancy law is that a rent review is for the benefit of both parties, so co-operation is called for.
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. ”
A review ensures the tenant is not subsidised. Even so, tenants rarely see it like that; and, for many, the only way the business can remain profitable is when costs are below the going rate. A business plan is rarely straightforward, and with the gap widening between retailers that have what customers want, and those that do not, retailers not on the receiving end of profitable demand are often fighting to preserve an outmoded business model. When the survival of the tenant’s business depends to a large extent upon the landlord not wanting any (hefty) increase, the tenant’s reaction to a proposed increase is much more likely to be emotional, than dispassionate. What might be described as 'woolly-headed liberal thinking' has entered the popular fray but retailing is not an extension of social services. A tenant’s failure to adapt its business style to changing circumstances cannot possibly be something for which the landlord should be expected to share responsibility. It is not a fault of landlords that rents have become uneconomical for some retailers, but a function of the market, which includes competition from other retailers, consumer spending-priorities, rental valuation methodology, and tenants straying from review guidelines.
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. ”
A review ensures the tenant is not subsidised. Even so, tenants rarely see it like that; and, for many, the only way the business can remain profitable is when costs are below the going rate. A business plan is rarely straightforward, and with the gap widening between retailers that have what customers want, and those that do not, retailers not on the receiving end of profitable demand are often fighting to preserve an outmoded business model. When the survival of the tenant’s business depends to a large extent upon the landlord not wanting any (hefty) increase, the tenant’s reaction to a proposed increase is much more likely to be emotional, than dispassionate. What might be described as 'woolly-headed liberal thinking' has entered the popular fray but retailing is not an extension of social services. A tenant’s failure to adapt its business style to changing circumstances cannot possibly be something for which the landlord should be expected to share responsibility. It is not a fault of landlords that rents have become uneconomical for some retailers, but a function of the market, which includes competition from other retailers, consumer spending-priorities, rental valuation methodology, and tenants straying from review guidelines.
Rent
Rent is a system of payment for the temporary use of something owned by someone else; the payments for such use are typically referred to as "rent".
In the open market, rent is a product; it does not occur naturally, as in, ‘this is the rent for the premises’. To value rent, all the terms and conditions of the tenancy must be known, stated in advance or defined. However, because the rent at a new letting is often agreed before the lease is drafted and/or approved, it is possible for a completed lease to contain terms and conditions that could produce a different rent to what was agreed. The test of efficacy is whether the rent would be identical if there were a rent review on the same date as the term commencement.
Whether the parties agree the rent and other outline terms between themselves, or with the help of surveyors, the precise wording and phrasing of the terms and conditions is not generally discussed and agreed before lawyers are instructed.
Sometimes, with a new letting, a draft lease will be available beforehand upon which the tenant’s rental offer would be based. On renewal involving LTA54 a draft lease for uncontentious matters would normally be agreed integral to proceedings, the amount of rent and other contentious items to be agreed thereafter or left blank pending court order. Even so, because there are cost consequences the parties are unlikely to want their lawyers to engage in detailed negotiations for finalising the renewal lease before the main terms are agreed in principle. It is only usually when the matter is actually likely to end up in court that it makes sense for the parties’ surveyors to delay the question of rent and other main terms until a draft lease has been finalised. Either that, or for each agreed item to be incorporated in the draft lease, with the other matters checked to ensure no conflict between what has been agreed previously and each new item.
In the open market, rent is a product; it does not occur naturally, as in, ‘this is the rent for the premises’. To value rent, all the terms and conditions of the tenancy must be known, stated in advance or defined. However, because the rent at a new letting is often agreed before the lease is drafted and/or approved, it is possible for a completed lease to contain terms and conditions that could produce a different rent to what was agreed. The test of efficacy is whether the rent would be identical if there were a rent review on the same date as the term commencement.
Whether the parties agree the rent and other outline terms between themselves, or with the help of surveyors, the precise wording and phrasing of the terms and conditions is not generally discussed and agreed before lawyers are instructed.
Sometimes, with a new letting, a draft lease will be available beforehand upon which the tenant’s rental offer would be based. On renewal involving LTA54 a draft lease for uncontentious matters would normally be agreed integral to proceedings, the amount of rent and other contentious items to be agreed thereafter or left blank pending court order. Even so, because there are cost consequences the parties are unlikely to want their lawyers to engage in detailed negotiations for finalising the renewal lease before the main terms are agreed in principle. It is only usually when the matter is actually likely to end up in court that it makes sense for the parties’ surveyors to delay the question of rent and other main terms until a draft lease has been finalised. Either that, or for each agreed item to be incorporated in the draft lease, with the other matters checked to ensure no conflict between what has been agreed previously and each new item.