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Negotiation
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.
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.
Subject to Contract
In England and Wales, any outline terms that are agreed in principle or “heads of terms” are “subject to contract”. It is important to state that all the terms are “subject to contract” - that is not implied by default.
“Subject to contract” results in one of three possibilities: 1) the parties are immediately bound to the transaction, but they intend to restate the deal in a formalised contract that will not have a different effect; or 2) the parties have completely agreed the terms, but have made the execution of some terms in the contract conditional on the creation of a formalised contract; or 3) it is simply an agreement to agree and the transaction will not be concluded until the formalised contract has been drawn up, approved and completed.
Agreement may also be reached to subject to any other condition, such as subject to survey. or subject to mortgage, but unless the agreement is also made subject to contract, it may not be possible for either one or both parties to withdraw from the agreement after the condition is satisfied, without having to pay damages for breach.
Generally, in commercial property transactions, the conveyancing for buying and selling is “subject to contract” and any other conditions specified alongside. Under the Law of Property Act 1925 (as amended per Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989), contracts for the sale or disposal of real estate have to be in writing to be enforceable, and in some instances by deed.
Since a lease is the document, it follows a lease will automatically be in writing. A tenancy, however, may be in writing or verbal/oral. The advantage of a tenancy in writing is the existence of a documentary record of the agreement between the parties. Even when the wording of the agreement is ambiguous, the construction of the contract open to differing interpretations, it is nevertheless generally easier for the parties and others to grasp what has been agreed when the matter is in writing, rather than have to rely on memory or one party’s word over the other, as is the situation with a verbal or oral tenancy.
'Subject to contract' is generally taken to mean that an offer or transaction would not become binding until formally completed. However, it all depends on the circumstances. A binding agreement can be reached even if the negotiations leading to the agreement were conducted subject to contract.
At rent review, whether or not to use the expression 'subject to contract' depends upon the purpose of the communication.
All leases state the basis upon which the procedure is to be operated but some are very vague and others exact. It pays, in the interests of prudence, to follow the wording or guidelines in the particular lease, especially when the procedure is quite clear and, in fact, if there is a formal approach, then failure to comply with the set procedure can result in the review not being operative or the opportunity to operate it lost.
Notice, in the form of a written informal or formal letter, should be served on the tenant (or any party authorised to accept service of the notice), usually at the property or last known address, by recorded delivery in a pre-paid envelope and, depending upon the requirements of the lease, may either draw attention to the rent review provision (to be followed later by the proposal) or quote a figure.
If a figure is mentioned, it should be protected in case the tenant accepts it without query, thus giving rise to the possibility and suspicion that it may have been too low, or so as to a void it becoming binding on the landlord if circumstances change. This protection is achieved by marking the top of the letter ' subject to contract' and if the lease does not provide for a specific figure to be quoted, then it should also be marked 'without prejudice.' Marking a notice 'subject to contract' is, in itself, an invitation to negotiate.
Technically, a notice marked 'without prejudice' and/or 'subject to contract' cannot be construed as a formal notice if the lease so requires one to be issued, because the sole object of these expressions is to enable the proposer or parties to withdraw correspondence in the event of a dispute. In practice and after the proposal has been issued, all subsequent negotiations should be conducted on a 'without prejudice' basis so as to avoid commitment, prior to formal agreement.
The use of the expression 'without prejudice' is, in fact, abused because it is over-used, but it does no harm to be on the safe side and inexperienced negotiators are well advised to employ it. The date for service of the notice will also vary from lease to lease. Some indicate up to 12 months, others can be the day before the review date. In the majority of leases, once the proposal has been issued, the parties are free to negotiate. Although there is often a timetable to follow, such as a period of two or three months from issue, prior to referring the matter to 'arbitration,' it has been shown that, in most cases, it is not essential to observe these time limits.
However, there are four words which do crop up in some leases, often anywhere in the actual document - that is not necessarily in the actual review clause - which can alter this informal pattern and for the unwary, the pitfalls are substantial. The expression 'time of the essence' conjures up a degree of fear for many valuers because it means (in the majority of cases) that a) the notice must be served by a set date, failing which the right to review the re~will be lost, or b) that application for a third party determination ('arbitration') must be made by a set time, or c) that the tenant must serve a counter-notice or elect to go to 'arbitration' by a set date; otherwise the proposal will be binding. Unfortunately, life in leases is not often straightforward and there are occasions when the timing of the landlord's notice to operate the review triggers off the operation of another clause in the lease, such as an option to break, which the tenant can only enjoy if that notice is given. In such leases, the interaction between various clauses makes 'time of the essence.' The only sound advice one can issue, of a general nature, is to check a) the next review date and b) the last date for issuing the notice. If a prudent approach is adopted, both in timing and wording, then little is likely to go wrong.
Where the review procedure requires a notice or counter-notice and such notice/counter-notice is integral to the procedure, the expression 'subject to contract' should not be used in case it would invalidate the notice and procedure.
Where the procedure does not require a notice/counter-notice but is merely given as a courtesy then “Subject to contract” negotiations may be referred to in arbitration or litigation unless they are also “without prejudice.” Some negotiators habitually put both on their correspondence. It must be said that in many cases the use of such labels is inappropriate, and in such circumstances the court can disregard the labels: see for example Royal Life Insurance v Phillips (1990) .
In Maurice Investments v Lincoln Insurance Services (2006) , the judge held that a purported rent review notification labelled “Subject to Contract Without Prejudice” was not so clear that the recipient could be sure that it was a proper notice.
“Subject to contract” results in one of three possibilities: 1) the parties are immediately bound to the transaction, but they intend to restate the deal in a formalised contract that will not have a different effect; or 2) the parties have completely agreed the terms, but have made the execution of some terms in the contract conditional on the creation of a formalised contract; or 3) it is simply an agreement to agree and the transaction will not be concluded until the formalised contract has been drawn up, approved and completed.
Agreement may also be reached to subject to any other condition, such as subject to survey. or subject to mortgage, but unless the agreement is also made subject to contract, it may not be possible for either one or both parties to withdraw from the agreement after the condition is satisfied, without having to pay damages for breach.
Generally, in commercial property transactions, the conveyancing for buying and selling is “subject to contract” and any other conditions specified alongside. Under the Law of Property Act 1925 (as amended per Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989), contracts for the sale or disposal of real estate have to be in writing to be enforceable, and in some instances by deed.
Since a lease is the document, it follows a lease will automatically be in writing. A tenancy, however, may be in writing or verbal/oral. The advantage of a tenancy in writing is the existence of a documentary record of the agreement between the parties. Even when the wording of the agreement is ambiguous, the construction of the contract open to differing interpretations, it is nevertheless generally easier for the parties and others to grasp what has been agreed when the matter is in writing, rather than have to rely on memory or one party’s word over the other, as is the situation with a verbal or oral tenancy.
'Subject to contract' is generally taken to mean that an offer or transaction would not become binding until formally completed. However, it all depends on the circumstances. A binding agreement can be reached even if the negotiations leading to the agreement were conducted subject to contract.
At rent review, whether or not to use the expression 'subject to contract' depends upon the purpose of the communication.
All leases state the basis upon which the procedure is to be operated but some are very vague and others exact. It pays, in the interests of prudence, to follow the wording or guidelines in the particular lease, especially when the procedure is quite clear and, in fact, if there is a formal approach, then failure to comply with the set procedure can result in the review not being operative or the opportunity to operate it lost.
Notice, in the form of a written informal or formal letter, should be served on the tenant (or any party authorised to accept service of the notice), usually at the property or last known address, by recorded delivery in a pre-paid envelope and, depending upon the requirements of the lease, may either draw attention to the rent review provision (to be followed later by the proposal) or quote a figure.
If a figure is mentioned, it should be protected in case the tenant accepts it without query, thus giving rise to the possibility and suspicion that it may have been too low, or so as to a void it becoming binding on the landlord if circumstances change. This protection is achieved by marking the top of the letter ' subject to contract' and if the lease does not provide for a specific figure to be quoted, then it should also be marked 'without prejudice.' Marking a notice 'subject to contract' is, in itself, an invitation to negotiate.
Technically, a notice marked 'without prejudice' and/or 'subject to contract' cannot be construed as a formal notice if the lease so requires one to be issued, because the sole object of these expressions is to enable the proposer or parties to withdraw correspondence in the event of a dispute. In practice and after the proposal has been issued, all subsequent negotiations should be conducted on a 'without prejudice' basis so as to avoid commitment, prior to formal agreement.
The use of the expression 'without prejudice' is, in fact, abused because it is over-used, but it does no harm to be on the safe side and inexperienced negotiators are well advised to employ it. The date for service of the notice will also vary from lease to lease. Some indicate up to 12 months, others can be the day before the review date. In the majority of leases, once the proposal has been issued, the parties are free to negotiate. Although there is often a timetable to follow, such as a period of two or three months from issue, prior to referring the matter to 'arbitration,' it has been shown that, in most cases, it is not essential to observe these time limits.
However, there are four words which do crop up in some leases, often anywhere in the actual document - that is not necessarily in the actual review clause - which can alter this informal pattern and for the unwary, the pitfalls are substantial. The expression 'time of the essence' conjures up a degree of fear for many valuers because it means (in the majority of cases) that a) the notice must be served by a set date, failing which the right to review the re~will be lost, or b) that application for a third party determination ('arbitration') must be made by a set time, or c) that the tenant must serve a counter-notice or elect to go to 'arbitration' by a set date; otherwise the proposal will be binding. Unfortunately, life in leases is not often straightforward and there are occasions when the timing of the landlord's notice to operate the review triggers off the operation of another clause in the lease, such as an option to break, which the tenant can only enjoy if that notice is given. In such leases, the interaction between various clauses makes 'time of the essence.' The only sound advice one can issue, of a general nature, is to check a) the next review date and b) the last date for issuing the notice. If a prudent approach is adopted, both in timing and wording, then little is likely to go wrong.
Where the review procedure requires a notice or counter-notice and such notice/counter-notice is integral to the procedure, the expression 'subject to contract' should not be used in case it would invalidate the notice and procedure.
Where the procedure does not require a notice/counter-notice but is merely given as a courtesy then “Subject to contract” negotiations may be referred to in arbitration or litigation unless they are also “without prejudice.” Some negotiators habitually put both on their correspondence. It must be said that in many cases the use of such labels is inappropriate, and in such circumstances the court can disregard the labels: see for example Royal Life Insurance v Phillips (1990) .
In Maurice Investments v Lincoln Insurance Services (2006) , the judge held that a purported rent review notification labelled “Subject to Contract Without Prejudice” was not so clear that the recipient could be sure that it was a proper notice.