The Rent Review Specialist
Important - Take Notice
01/12/2013
Amongst the many aspects of my work I love is lease analysis. Possibly it’s the same reason many people enter the legal profession, but for me the prospect of being able to pour over every word and phrase and get bogged down in detail is stimulating. Perhaps because investment is mostly about finance and business about numbers, there is a tendency amongst landlords and tenants to focus on the figures, but as I say on my website, “to arrive at the right figure, the words must add up”
For the most part, rent review, break-clause, and lease expiry involves some form of notice. A notice is an integral part of the procedure, not a stage that can be skipped. Many people don’t seem able to word a notice correctly, even though prescribed forms and, sometimes, as at rent review, the lease will make it clear what must be said. I prefer to serve the notice to ensure wording is correct, but where I am asked to take over negotiations started, increasingly I am finding that no thought has been given to the validity of the notice. Checking the correct name of the parties comes under the category of ‘from, to and upon whom’ the notice is sent, addressed and served. It may be necessary to require proof of title, when the landlord on the notice differs from the tenant’s knowledge. The same applies in reverse, sometimes more so. Years ago, when the previous Labour Government dangled a carrot of 10% corporation tax in front of un-incorporated businesses in exchange for incorporation, many tenants took the opportunity to incorporate, but did not apply or did not realise they needed to also apply to their landlord for assignment of the tenancy. Especially when rent is paid by standing order, a landlord should be careful to check the payee is the same as the tenant, otherwise it could be reasoned successfully the landlord has deemed to waive requirement to assign. Where landlord’s inexperience or ignorance of the facts is exploited by an individual tenant that has become incorporated the position is harder to regularise where that individual refuses to be guarantor. And, in a matter I am dealing with, the position is even more complicated where the tenant has died, a successor takes over the business, pays the rent and the first the landlord hears about it is when a rent review memorandum in required in the name of the successor’s company. For some landlords, it makes no difference who the tenant is as long the rent is paid, but letting a tenant off the hook of a direct covenant can cause problems.
Notices concerning a break-clause must be worded and served correctly. The place of service may sometimes be at a different address to the lease: Claire’s Accessories UK Ltd v Kensington High Street Associates PLC [2001]. The name of the tenant must be correct: Procter & Gamble Technical Centres Ltd v Brixton plc [2002] Acknowledgement may be important: Orchard (Developments) Holdings Plc v Reuters Ltd [2009] Compliance with the prescribed manner in the lease is vital: per The Hotgroup Ltd v The Royal Bank of Scotland PLC [2010], “no notice will be deemed to be validly served unless... ” was enough to invalidate. Unlike at rent review and break-clause where an invalid notice could mean the landlord losing the right to review or break, or the tenant losing the right to object to the proposal or break, the consequences of an invalid notice at lease expiry may not be so dire.
Unless critical to end the tenancy on the contractual expiry, it is a question of whether landlord or tenant should get in first, since only one notice can be served. The only requirement is not less than 6 months or more than 12 months notice must be given to end the tenancy. On expiry of a tenancy, it is not necessary for the end-date in the notice to be the same as expiry of the term, provided the notice end-date is no sooner. However, with a s26 notice, the tenant can request the new tenancy to start up to 12 months from that date of notice. So, it is not only the date of the notice that matters but also the end date, and those dates can only be determined by the tenant’s intentions, and informed opinion regarding the market. One mistake is for the end date to be earlier than expiry of the contractual term. Whether the mistake should be pointed out sooner or later, or taken advantage of with a s26 notice, depends on tenant’s intention and market rent. With a s25 or s26 notice, the proposals for the new tenancy, assuming no opposition to renewal, must be set out in full, with details of any material changes to the tenancy. A common mistake is that the proposals for the new tenancy do not spell out in detail the extent of the demise, even though the wording in the Act is clear and mandatory: under Section 25(8) of the 1954 Act (as updated by the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003) a landlord’s friendly notice “shall not have effect unless it sets out the landlord’s proposals as to: (a) the property to be comprised in the new tenancy (being either the whole or part of the property comprised in the current tenancy)... ”.
It is, in the absence of case law to date, a moot point whether the extent of a demise has to be spelt out in detail if the property in the new tenancy is the same as the existing tenancy. But where the property to be comprised in the new tenancy is not set out in detail, there is ground for successfully challenging validity of the notice. When validity is challenged, I am often referred to Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997], the House of Lords stating that “if a notice unambiguously conveys a decision to determine, the court may nowadays ignore immaterial errors which would not have misled a reasonable recipient. ” However, that may be so in the case of a time-limit or wording in a unilateral tenancy contract, but per Burman v Mount Cook Land Ltd [2001] it was held that a landlord’s statutory notice was invalid because it did not comply with the statutory requirements.
Where the extent of the premises is not detailed and where the application date has been extended by deferment, and even though that merely changes the end date in the notice, not the procedures, it could be reasoned the tenant has lost the right to challenge validity of the notice through part performance. The only case, of which I am aware, is Keepers & Governors of the Possessions Revenues & Goods of the Free Grammar School of John Lyon v Mayhew [1997], where the tenant’s counter-notice assumed validity and by carrying out LTA54 procedure, the tenant represented that s25 notice was a good notice. That decision predated the 2003 Order so, arguably, there is nothing to prevent a tenant from successfully challenging validity at any time before it is necessary to apply to the court; although leaving it to the last minute would be risky, since it is unclear whether there is efficacy in a ‘without prejudice’ claim — which would be necessary to protect the tenant’s interest in the event challenge were unsuccessful. The proposals for the new tenancy must be set out in detail but the rent can only be a rough guide because it is not possible to value for the future. So, whilst I do not think a tenant or landlord could be admonished for proposing a rent at a level were the tenancy to start from the date of the notice, I think a tenant or landlord would be open to undermined-credibility for proposals that would be unrealistic now. I think that because the court is likely to take an active role in preliminary proceedings, the actual figures of which the court would be aware at the case management conference and so on should be as close to the market rent, as defined by s34 and s35 LTA54.
For the most part, rent review, break-clause, and lease expiry involves some form of notice. A notice is an integral part of the procedure, not a stage that can be skipped. Many people don’t seem able to word a notice correctly, even though prescribed forms and, sometimes, as at rent review, the lease will make it clear what must be said. I prefer to serve the notice to ensure wording is correct, but where I am asked to take over negotiations started, increasingly I am finding that no thought has been given to the validity of the notice. Checking the correct name of the parties comes under the category of ‘from, to and upon whom’ the notice is sent, addressed and served. It may be necessary to require proof of title, when the landlord on the notice differs from the tenant’s knowledge. The same applies in reverse, sometimes more so. Years ago, when the previous Labour Government dangled a carrot of 10% corporation tax in front of un-incorporated businesses in exchange for incorporation, many tenants took the opportunity to incorporate, but did not apply or did not realise they needed to also apply to their landlord for assignment of the tenancy. Especially when rent is paid by standing order, a landlord should be careful to check the payee is the same as the tenant, otherwise it could be reasoned successfully the landlord has deemed to waive requirement to assign. Where landlord’s inexperience or ignorance of the facts is exploited by an individual tenant that has become incorporated the position is harder to regularise where that individual refuses to be guarantor. And, in a matter I am dealing with, the position is even more complicated where the tenant has died, a successor takes over the business, pays the rent and the first the landlord hears about it is when a rent review memorandum in required in the name of the successor’s company. For some landlords, it makes no difference who the tenant is as long the rent is paid, but letting a tenant off the hook of a direct covenant can cause problems.
Notices concerning a break-clause must be worded and served correctly. The place of service may sometimes be at a different address to the lease: Claire’s Accessories UK Ltd v Kensington High Street Associates PLC [2001]. The name of the tenant must be correct: Procter & Gamble Technical Centres Ltd v Brixton plc [2002] Acknowledgement may be important: Orchard (Developments) Holdings Plc v Reuters Ltd [2009] Compliance with the prescribed manner in the lease is vital: per The Hotgroup Ltd v The Royal Bank of Scotland PLC [2010], “no notice will be deemed to be validly served unless... ” was enough to invalidate. Unlike at rent review and break-clause where an invalid notice could mean the landlord losing the right to review or break, or the tenant losing the right to object to the proposal or break, the consequences of an invalid notice at lease expiry may not be so dire.
Unless critical to end the tenancy on the contractual expiry, it is a question of whether landlord or tenant should get in first, since only one notice can be served. The only requirement is not less than 6 months or more than 12 months notice must be given to end the tenancy. On expiry of a tenancy, it is not necessary for the end-date in the notice to be the same as expiry of the term, provided the notice end-date is no sooner. However, with a s26 notice, the tenant can request the new tenancy to start up to 12 months from that date of notice. So, it is not only the date of the notice that matters but also the end date, and those dates can only be determined by the tenant’s intentions, and informed opinion regarding the market. One mistake is for the end date to be earlier than expiry of the contractual term. Whether the mistake should be pointed out sooner or later, or taken advantage of with a s26 notice, depends on tenant’s intention and market rent. With a s25 or s26 notice, the proposals for the new tenancy, assuming no opposition to renewal, must be set out in full, with details of any material changes to the tenancy. A common mistake is that the proposals for the new tenancy do not spell out in detail the extent of the demise, even though the wording in the Act is clear and mandatory: under Section 25(8) of the 1954 Act (as updated by the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003) a landlord’s friendly notice “shall not have effect unless it sets out the landlord’s proposals as to: (a) the property to be comprised in the new tenancy (being either the whole or part of the property comprised in the current tenancy)... ”.
It is, in the absence of case law to date, a moot point whether the extent of a demise has to be spelt out in detail if the property in the new tenancy is the same as the existing tenancy. But where the property to be comprised in the new tenancy is not set out in detail, there is ground for successfully challenging validity of the notice. When validity is challenged, I am often referred to Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997], the House of Lords stating that “if a notice unambiguously conveys a decision to determine, the court may nowadays ignore immaterial errors which would not have misled a reasonable recipient. ” However, that may be so in the case of a time-limit or wording in a unilateral tenancy contract, but per Burman v Mount Cook Land Ltd [2001] it was held that a landlord’s statutory notice was invalid because it did not comply with the statutory requirements.
Where the extent of the premises is not detailed and where the application date has been extended by deferment, and even though that merely changes the end date in the notice, not the procedures, it could be reasoned the tenant has lost the right to challenge validity of the notice through part performance. The only case, of which I am aware, is Keepers & Governors of the Possessions Revenues & Goods of the Free Grammar School of John Lyon v Mayhew [1997], where the tenant’s counter-notice assumed validity and by carrying out LTA54 procedure, the tenant represented that s25 notice was a good notice. That decision predated the 2003 Order so, arguably, there is nothing to prevent a tenant from successfully challenging validity at any time before it is necessary to apply to the court; although leaving it to the last minute would be risky, since it is unclear whether there is efficacy in a ‘without prejudice’ claim — which would be necessary to protect the tenant’s interest in the event challenge were unsuccessful. The proposals for the new tenancy must be set out in detail but the rent can only be a rough guide because it is not possible to value for the future. So, whilst I do not think a tenant or landlord could be admonished for proposing a rent at a level were the tenancy to start from the date of the notice, I think a tenant or landlord would be open to undermined-credibility for proposals that would be unrealistic now. I think that because the court is likely to take an active role in preliminary proceedings, the actual figures of which the court would be aware at the case management conference and so on should be as close to the market rent, as defined by s34 and s35 LTA54.
Negotiation - restoring the balance of power
01/12/2013
Notwithstanding Reed Personnel Services plc v American Express Ltd [1996] wherein the court said it is “not good for the tenant to say what is good for the landlord” many tenants are fond of negotiating as if they were the landlord. Although technically cutting no ice, it’s an approach that can succeed when for the landlord to be ‘accommodating’ would be sensible under the circumstances. In this context, accommodating means allowing some slack in compliance with the tenancy. I see no point in incurring time and expense in having a lease and then not sticking to it, but I do realise it is the landlord’s prerogative whether to enforce it to the letter. The landlord and tenant relationship is on-going for the duration of the term and beyond. For routine matters there may be no disagreement, but, otherwise, beyond the law, and valuation, negotiation is about psychology.
Psychology is a science, an academic and applied discipline that involves the scientific study of human or animal mental functions and behaviours. At a down-to-earth level, and in the context of a business tenancy, what psychology does is to interfere with the strictures of the commercial contract by injecting a human element. In 1988, in my booklet, “The Psychology of Rent Review Negotiation” I said the relationship between landlord and tenant should ideally be a partnership, sharing the ups-and-downs together. In practice, the interests of landlord and tenant remain diametrically opposed: the landlord wants more, the tenant wants less. During downturns, the cushioning upward-only review brought about by landlord wanting and the tenant offering to maintain rental income throughout the term does the job intended by both parties. So why should a campaign to abolish upward-only reviews want to alter a mutually accepted perfectly good system? Frankly, I think the answer is self-interest. Instead of rising to the challenge of organic growth - improving upon what exists already in pursuit of excellence - such tenants grow by expansion: they become addicted to momentum and, over-indebted and overstretched, end up disconnected from reality and losing their way. Although in theory expansion makes sense, inorganic growth is never the way to develop a long-term consistently profitable business because too much gets taken for granted. Tenants urging politicians to do something about their business tenancy arrangements when having entered voluntarily into a commercial contract such tenants find that what they signed is not what they had in mind is not the sort of behaviour one would expect of companies surrounded by advisers. Not to be outdone, and despite a muted response from government, many companies and the surveyors that act for them, have got it into their heads that such tenants should be thought of as doing the landlord a favour in wanting to lease the premises.
Asserting the landlord should care whether a tenant can afford the rent is a crafty way for the tenant to get what it wants; it also makes it harder for that particular landlord to enforce the terms and conditions of the tenancy. By removing from business tenancy law and rental valuation the impersonality that is the hallmark of the market, rent review and tenancy expiry/renewal has taken on a new guise. No longer a relatively straightforward application of business tenancy law and rental valuation, now it strongly features subjectivity whereby tenants promote the “wider consequences” for their business in the event that landlord is not accommodating. For example, a recent public display was Thorntons, the chocolatier, telling landlords wanting to increase its rents that Thorntons would close the shops and trade on the Internet instead. I think it fascinating a public company has to stoop so low to get what it wants - that doesn’t speak well for its products. And hardly impressive of a plc to tell shareholders that it would maximise returns and pay dividends to trade on the Internet rather continue to drain profits by maintaining a ‘high street’ presence. Be that as it may, in effect, landlords are being asked to subsidise a retailer’s desire to have it both ways, even though others would pay more rent.
For landlords, a dilemma of recession is whether tenants should be helped to survive the error of (their) ways. I emphasise ‘their’ because something tenants are good at is making pronouncements about the market as a whole as if their experience should be considered the only barometer of consumer behaviour. Often, the facts are found amongst suppliers: for example, Hornby plc (toys) results in June 2010 said “it is now clear that our larger retail customers recognise that they failed to fulfil their sales potential in 2009. ”
Life has ups-and-downs, and a business plan is rarely straightforward, but we are not supposed to come unstuck in times of change. One factor to ponder is whether it should be reasonably assumed inherent, depending on the calibre of tenant, for the tenant to be expected to have what it takes to anticipate downturns in its market and prepare accordingly. That does not seem to be how the victim tenant thinks: for them, the business sector ought to be considered a special case: a sort of level playing field for all, regardless of the ups-and-downs of the economy. Landlords too have self-interest. The most important factor is whether a landlord can afford to be accommodating. How much rent and what terms can be varied very much depends upon when the property was bought, how much was paid, and how much was borrowed. It also depends on whether the tenant has a guarantor, because any material alteration to the terms of a contract which might potentially prejudice the guarantor will release him unless he specially consents to the variation, West Horndon Industrial Park v Phoenix Timber [1995] Although business tenancy law and rental valuation are not concerned with the wider consequences for the parties, psychology steps in to ask about the consequence for the landlord in the event of existing tenant default, such as whether the property would let in a fairly short time to a tenant of at least the same calibre, and at least the same rent; and whether on expiry the tenant in difficulties would renew for at least the same term as before. For a tenant, one reason for taking the route of insolvency, administration or CVA, is a consequence of alienation criteria that a landlord can include in a tenancy to reflect privity of contract: a tenant must consider the likelihood of finding a financially sound assignee. The number of tenants with the where-with-all to cope with slow trading is in short supply. An authorised guarantee agreement to sign, the tenant cannot afford the risk of a defaulting assignee.
The landlord should be mindful of changes to capital value that can be caused by tenant assignment and under-letting. The number of tenants whose covenant enhances value has been diminishing for years. Although a landlord may serve notice on a tenant for the purpose of protecting investment value, the timing of the notice is critical and the procedure little used. Generally, commercial property for investment is a depreciating asset, because the price paid rarely reflects the market value of the property alone, but includes the calibre of the tenant. Often, growth is illusory: although capital value is estimated by valuing on a date, investment performance should allow for inflation, loss of interest on equity, and holding and management costs, interest, tax on rent and any gain. Strip out those figures and whatever’s left is the real growth. Nowadays, maintaining investment value is just as challenging as increasing value. For example, an investment for 15 years with 5 yearly rent reviews will only maintain its capital value if at each review the rent goes up by enough to offset fluctuations in investment yields and what might happen on expiry. Where a landlord has been accommodating, at subsequent rent review and on tenancy renewal, the likelihood of a rent increase diminishes, because in personalising the landlord and tenant relationship, by focussing on the business for which the tenant chooses to use the premises, the landlord can get stuck with a dud tenant and the investment under-perform for the wrong reasons. Many tenants would have landlords believe that the property system should be changed to reflect the changes in the market, but equally many landlords think tenants should change their modus operandi to synchronise with the market. The property system is more flexible than many tenants would like to think, if only because landlords can be accommodating. The underlying difficulty for those tenants, and surveyors that have prospered on the success of those tenants - and whose loyalty is to those tenants - is that really the problem their clients face is not caused by any intransigence amongst landlords, but that the mass-market has entered decline and fall. It is the Age of Individuality. Alongside the dominance of supermarkets for convenience and free-parking, and a few clothing companies for garments, it is the specialist retailers that are thriving, along with the giants of the internet.
At rent review, a tenant has no control of the psychology because the tenancy remains vested in that tenant so the review guidelines, which are emotionally detached, are paramount but, on expiry, the tenant does not have to renew. A choice whether to renew only puts the tenant in a stronger position if the tenant could afford to relocate or close the business at the particular premises. Multiple retailers and big companies are in a stronger position to dictate terms on renewal because rarely is the performance of their business overall dependent on any one branch. For smaller businesses, flexibility is limited. Often the value or saleability of the business as a going concern is inextricably bound up with the premises and a secure term of tenancy. Ever since investment value strayed from property fundamentals to become dependent upon covenant of tenant, that dependency has been exploited. The banks have done a stirling job using sale-and-leasebacks to maximise capital proceeds, only to serve up branch closures for the next course. What price the building without its original occupier? An investor is buying the building, not the tenant and no structured rent review, such as index-linking, pre-fixed increases and compounding is going to make up for the fact the more the rent payable exceeds the market rent, the riskier the investment. In the shop property market, whilst the primary market that multiple retailers inhabit may not be providing much growth, the same cannot be said of the secondary market where there is often keen demand. The secondary market is not just about trading position, but also locality. Many secondary towns are more stable than primaries nearby, often because the Zone A rate is economical. In Ledbury, for example, the market town where I am based, and whose population is just under 10,000, demand for shops is buoyant and rents have gone up in the last couple of years. Another factor that those that think the world owes them a living would do well to remember is that commercial property often lends itself to redevelopment and reconfiguration, or simply disposal with vacant possession. One thing tenants should be careful of when testing the loyalty to the tenant’s cause is that the landlord might be thinking of using the opportunity to do something different with the building. In the balance of power, one principle remains steadfast: the property belongs to the landlord, so how the tenant extracts itself from the tenancy commitment must be honourable otherwise the course of action will back-fire on the tenant.
Psychology is a science, an academic and applied discipline that involves the scientific study of human or animal mental functions and behaviours. At a down-to-earth level, and in the context of a business tenancy, what psychology does is to interfere with the strictures of the commercial contract by injecting a human element. In 1988, in my booklet, “The Psychology of Rent Review Negotiation” I said the relationship between landlord and tenant should ideally be a partnership, sharing the ups-and-downs together. In practice, the interests of landlord and tenant remain diametrically opposed: the landlord wants more, the tenant wants less. During downturns, the cushioning upward-only review brought about by landlord wanting and the tenant offering to maintain rental income throughout the term does the job intended by both parties. So why should a campaign to abolish upward-only reviews want to alter a mutually accepted perfectly good system? Frankly, I think the answer is self-interest. Instead of rising to the challenge of organic growth - improving upon what exists already in pursuit of excellence - such tenants grow by expansion: they become addicted to momentum and, over-indebted and overstretched, end up disconnected from reality and losing their way. Although in theory expansion makes sense, inorganic growth is never the way to develop a long-term consistently profitable business because too much gets taken for granted. Tenants urging politicians to do something about their business tenancy arrangements when having entered voluntarily into a commercial contract such tenants find that what they signed is not what they had in mind is not the sort of behaviour one would expect of companies surrounded by advisers. Not to be outdone, and despite a muted response from government, many companies and the surveyors that act for them, have got it into their heads that such tenants should be thought of as doing the landlord a favour in wanting to lease the premises.
Asserting the landlord should care whether a tenant can afford the rent is a crafty way for the tenant to get what it wants; it also makes it harder for that particular landlord to enforce the terms and conditions of the tenancy. By removing from business tenancy law and rental valuation the impersonality that is the hallmark of the market, rent review and tenancy expiry/renewal has taken on a new guise. No longer a relatively straightforward application of business tenancy law and rental valuation, now it strongly features subjectivity whereby tenants promote the “wider consequences” for their business in the event that landlord is not accommodating. For example, a recent public display was Thorntons, the chocolatier, telling landlords wanting to increase its rents that Thorntons would close the shops and trade on the Internet instead. I think it fascinating a public company has to stoop so low to get what it wants - that doesn’t speak well for its products. And hardly impressive of a plc to tell shareholders that it would maximise returns and pay dividends to trade on the Internet rather continue to drain profits by maintaining a ‘high street’ presence. Be that as it may, in effect, landlords are being asked to subsidise a retailer’s desire to have it both ways, even though others would pay more rent.
For landlords, a dilemma of recession is whether tenants should be helped to survive the error of (their) ways. I emphasise ‘their’ because something tenants are good at is making pronouncements about the market as a whole as if their experience should be considered the only barometer of consumer behaviour. Often, the facts are found amongst suppliers: for example, Hornby plc (toys) results in June 2010 said “it is now clear that our larger retail customers recognise that they failed to fulfil their sales potential in 2009. ”
Life has ups-and-downs, and a business plan is rarely straightforward, but we are not supposed to come unstuck in times of change. One factor to ponder is whether it should be reasonably assumed inherent, depending on the calibre of tenant, for the tenant to be expected to have what it takes to anticipate downturns in its market and prepare accordingly. That does not seem to be how the victim tenant thinks: for them, the business sector ought to be considered a special case: a sort of level playing field for all, regardless of the ups-and-downs of the economy. Landlords too have self-interest. The most important factor is whether a landlord can afford to be accommodating. How much rent and what terms can be varied very much depends upon when the property was bought, how much was paid, and how much was borrowed. It also depends on whether the tenant has a guarantor, because any material alteration to the terms of a contract which might potentially prejudice the guarantor will release him unless he specially consents to the variation, West Horndon Industrial Park v Phoenix Timber [1995] Although business tenancy law and rental valuation are not concerned with the wider consequences for the parties, psychology steps in to ask about the consequence for the landlord in the event of existing tenant default, such as whether the property would let in a fairly short time to a tenant of at least the same calibre, and at least the same rent; and whether on expiry the tenant in difficulties would renew for at least the same term as before. For a tenant, one reason for taking the route of insolvency, administration or CVA, is a consequence of alienation criteria that a landlord can include in a tenancy to reflect privity of contract: a tenant must consider the likelihood of finding a financially sound assignee. The number of tenants with the where-with-all to cope with slow trading is in short supply. An authorised guarantee agreement to sign, the tenant cannot afford the risk of a defaulting assignee.
The landlord should be mindful of changes to capital value that can be caused by tenant assignment and under-letting. The number of tenants whose covenant enhances value has been diminishing for years. Although a landlord may serve notice on a tenant for the purpose of protecting investment value, the timing of the notice is critical and the procedure little used. Generally, commercial property for investment is a depreciating asset, because the price paid rarely reflects the market value of the property alone, but includes the calibre of the tenant. Often, growth is illusory: although capital value is estimated by valuing on a date, investment performance should allow for inflation, loss of interest on equity, and holding and management costs, interest, tax on rent and any gain. Strip out those figures and whatever’s left is the real growth. Nowadays, maintaining investment value is just as challenging as increasing value. For example, an investment for 15 years with 5 yearly rent reviews will only maintain its capital value if at each review the rent goes up by enough to offset fluctuations in investment yields and what might happen on expiry. Where a landlord has been accommodating, at subsequent rent review and on tenancy renewal, the likelihood of a rent increase diminishes, because in personalising the landlord and tenant relationship, by focussing on the business for which the tenant chooses to use the premises, the landlord can get stuck with a dud tenant and the investment under-perform for the wrong reasons. Many tenants would have landlords believe that the property system should be changed to reflect the changes in the market, but equally many landlords think tenants should change their modus operandi to synchronise with the market. The property system is more flexible than many tenants would like to think, if only because landlords can be accommodating. The underlying difficulty for those tenants, and surveyors that have prospered on the success of those tenants - and whose loyalty is to those tenants - is that really the problem their clients face is not caused by any intransigence amongst landlords, but that the mass-market has entered decline and fall. It is the Age of Individuality. Alongside the dominance of supermarkets for convenience and free-parking, and a few clothing companies for garments, it is the specialist retailers that are thriving, along with the giants of the internet.
At rent review, a tenant has no control of the psychology because the tenancy remains vested in that tenant so the review guidelines, which are emotionally detached, are paramount but, on expiry, the tenant does not have to renew. A choice whether to renew only puts the tenant in a stronger position if the tenant could afford to relocate or close the business at the particular premises. Multiple retailers and big companies are in a stronger position to dictate terms on renewal because rarely is the performance of their business overall dependent on any one branch. For smaller businesses, flexibility is limited. Often the value or saleability of the business as a going concern is inextricably bound up with the premises and a secure term of tenancy. Ever since investment value strayed from property fundamentals to become dependent upon covenant of tenant, that dependency has been exploited. The banks have done a stirling job using sale-and-leasebacks to maximise capital proceeds, only to serve up branch closures for the next course. What price the building without its original occupier? An investor is buying the building, not the tenant and no structured rent review, such as index-linking, pre-fixed increases and compounding is going to make up for the fact the more the rent payable exceeds the market rent, the riskier the investment. In the shop property market, whilst the primary market that multiple retailers inhabit may not be providing much growth, the same cannot be said of the secondary market where there is often keen demand. The secondary market is not just about trading position, but also locality. Many secondary towns are more stable than primaries nearby, often because the Zone A rate is economical. In Ledbury, for example, the market town where I am based, and whose population is just under 10,000, demand for shops is buoyant and rents have gone up in the last couple of years. Another factor that those that think the world owes them a living would do well to remember is that commercial property often lends itself to redevelopment and reconfiguration, or simply disposal with vacant possession. One thing tenants should be careful of when testing the loyalty to the tenant’s cause is that the landlord might be thinking of using the opportunity to do something different with the building. In the balance of power, one principle remains steadfast: the property belongs to the landlord, so how the tenant extracts itself from the tenancy commitment must be honourable otherwise the course of action will back-fire on the tenant.
Tenancy Expiry and renewal - Some Pitfalls
01/12/2013
On expiry of a business tenancy that qualifies for renewal rights per the Landlord and Tenant Act 1954 Part II, (“LTA54”), and where the landlord is not opposing grant of a new tenancy, it is common, when the tenant wants to renew, even if negotiations are not underway, for the tenant to request the landlord’s agreement to defer application to the court before the end date in the notice, so as to minimise costs of procedure. (Whether costs are minimised would depend on how much solicitors and/or surveyors charge for arranging deferment. When I negotiate a renewal, I arrange deferment where appropriate and rarely charge any extra; all part of the service!)
For both parties, and regardless of whether any dispute could be resolved without the court’s intervention, LTA54 procedure involves litigation, so deferment stops the court becoming involved and taking an active interest in the matter. But, whether minimising cost is a good idea in the context of the wider consequences for either or both parties is another matter entirely.
For the landlord, an advantage in refusing deferment is that it forces the tenant’s hand. A snag with having to state in the s25 notice the landlord’s proposals for the new tenancy is that the tenant can consider them in the light of what else is and becomes available in the market and bide its time. Whilst there is nothing to prevent the landlord from making the application to court, so as to accelerate the tenant’s decision, not only would that require the landlord to incur extra costs, (not something landlords are keen on), but also many landlords regard the court application as something the tenant does in the first instance. So, since the tenant is not obliged to communicate its intention whether it intends to renew before the end date in the notice, by allowing the tenant to avoid court procedures, the landlord can lose out if the tenant should for any reason decide to not renew. At least, where a tenant, after applying to court, decides not to pursue the claim, the tenant must serve notice of discontinuance of proceedings, giving at least 3 months notice to end the tenancy, and that enables the landlord to recover costs and fees in connection with the application. When the date for application is deferred, and thereafter the tenant decides to not renew, all the tenant needs do is simply not apply by the extended date; no costs payable.
Interim rent can be affected if the application per s24a were, as if often done, included in the answer to the claim, so a separate application is necessary for the landlord to recover the market rent for the period from the end date in the notice to the giving up of possession. By agreeing to defer, the landlord also loses out on the possibility of being able to capitalise on opportunities that can arise during negotiations in tandem with court proceedings. The phrase ‘going to court’, often a negotiating ploy, is not confined to making of the application or the actual hearing itself, but includes procedures. Non-compliance with case management timetables can make it possible for a tenant to lose renewal rights, despite having made the claim and protected rights by the end date in the notice. (Whether such opportunities have value depends on the market and the landlord’s strategy. In a recent matter where I was acting for the landlord, the tenant, a bank, lost renewal rights through the striking out of proceedings. My Client waived the oversight and renewed inside LTA54.)
For the tenant, deferment can create problems: application or request for further extension(s) to the date might be missed/overlooked, also it might not be possible to take advantage of post-end-date events, particularly when it is agreed that as a condition of the agreement to defer the new tenancy will start on the end date in the notice. Although interim rent could be back-dated to the earliest date the tenancy could have been brought to an end, interim rent only covers the period between expiry of the old tenancy (or date of application per s24a whichever the later) and commencement of the new term.
The commencement dates for both the new rent and term are matters for negotiation. Whereas both often start from expiry of the old tenancy, or the end date in the notice if different, frequently that is valuation convenience and/or reflects inexperience. In practice, there is nothing to prevent either rent and/or term commencement dates starting on completion of the lease. If the matter does go to court then the hearing date becomes the valuation date, and the term and rent commencement dates subject to s64 - at least 3 months after the hearing date.
This is an example of what can happen when the effect on rent and other terms of the tenancy of post-end date events have to be ignored. I was instructed to provide an expert opinion valuation for the measurement of damages arising out of a negligence claim where the tenant’s solicitors had overlooked the further extension date and had not sought further extension or applied to the court to protect the tenant’s renewal rights. It was suggested the date of breach was the last date for application to the court; also loss measured in terms of any increased rental for the duration of the term of the new tenancy, and as a consequence of any rent reviews, any diminution in the value of the lease as a saleable commodity.
In my report, I referred to the leading authority rule in solicitor negligence cases per County Personnel (Employment Agency) Ltd v Alan R Pulver & Co [1986] but, as I understood, the general rule that damages are to be assessed at date of breach is variable if assessment at another date might more accurately reflect the overriding compensatory rule. Per Kennedy v KB Van Emden & Co [1997] “The overriding rule governing the awards of damages is that the party who has been injured should be awarded by the court a sum of money which, in so far as money can do this, will, when it is paid, fairly compensate him for the wrong which the defendant has inflicted upon him. That will often involve looking at what happened or might have happened shortly after the defendant’s breach of duty, what has happened between breach and trial and what is likely to happen in the future. ” Unlike at a rent review where post-review events are irrelevant, because they would not have been known about at the date of review (or valuation date if different per the lease), valuation at lease renewal is not necessarily on a set date, since neither rent nor term has to start on expiry of the existing tenancy, or end date in the notice, if later; as I have said, both rent and term commencement dates are negotiable. The court hearing date is the only time a valuation date is fixed. During my research, I discovered that shortly after the suggested date of breach it had become public knowledge that Sainsbury’s would, a few months later, be opening a new store almost opposite the premises. I considered that new store would have a measurably adverse effect on the tenant’s business. I opined that had renewal rights been protected by application to court with negotiations alongside ensuing procedures, rather than based on the end date in the s25 notice, then post-application negotiations paralleling case management procedure would most probably have allowed for the effect of “Sainsbury’s” and would have resulted in variations in the terms and conditions of the tenancy, and which I considered would have been obtainable either by negotiation or in court by the time of a likely hearing date. As it happened, other than vacating the premises, the tenant had no choice, but agree the landlord’s form of tenancy which, since it was in most respects identical to the old tenancy, contained some terms that had become onerous as a consequence of “Sainsbury’s”.
Even with no conditions attached to the agreement to defer, the tenant is still at risk post-end-date adverse events would be ignored or resisted in negotiations with the landlord, because of an assumption or agreement either or both the renewal term and rent commencement dates would start on expiry of the existing tenancy; also, a request for deferment could be construed as the tenant’s unwillingness to incur costs. Agreement to defer is not something necessarily obtainable by return; the landlord might not be available, or be sufficiently familiar with the procedure without wanting advice on implications. Although it might be thought the landlord would also want to avoid costs, particularly when there has been a dialogue between landlord and tenant during the run-up to the application date and the landlord has given the impression of not wanting to go to court, critical time-limits are not a matter for bluff or complacency. The solicitor will need a few days to ensure application is made in good time; and where tenants are conducting their own negotiations, just because the s25 notice contains proposals for the new tenancy and just because negotiations with the landlord are well-advanced does not mean the tenant’s need to protect renewal rights should be regarded a formality that could be reliably dispensed with. On expiry, there is no automatic security of tenure: it has to be applied for. The procedure for ending and renewal of a tenancy per LTA54 must be treated as completely separate to any negotiations for the renewal terms. As soon as either s25 or s26 notice is served or given, LTA54 procedures apply, regardless of the cost-consequences. In other words, if you can’t afford or don’t want to incur the expense of litigation, then don’t issue s25 or s26 notice. Costs on expiry and renewal can and do mount up, for both parties. When proceedings are stayed, the pressure is eased, but since either party can restore or the court resume, compliance with the procedure is a costly exercise. Wherever possible, I try to avoid incurring extra costs for my client, but sometimes it is necessary to test the depth of the other party’s resistance to a particular point(s) by involving costs of fighting. In principle, a tenant is entitled to renew on the same terms and conditions as are in the existing tenancy, subject to mutually acceptable updating to modern practice. What a landlord is not entitled to do is impose upon the tenant a change that would result in a more onerous burden of risk that could not be adequately compensated by a consequential decrease in rent; O’May v City of London Real Property Co Ltd [1983]
Nothing ventured, nothing gained! For landlords, wider consequences in not being able to change a term or condition include 1) a possible reduction in the capital value and/or marketability of the investment, and 2) the continuation of some wording whose shelf-life was not expected to last indefinitely. For tenants, wider consequences are either unacceptable because the proposed change is obviously more onerous, or considered of no consequence in the scheme of things. It is easy to miss the point by not appreciating long-term implications. A tenancy will often last for years and every word has consequences. For example, in a matter I dealt with recently, the landlord had covenanted to carry out some repairs to the premises and having done so before the tenancy had been assigned to my tenant-client, wanted the covenant excluded in the renewal. I had no objection provided the landlord would pay for a structural survey to confirm the work had been carried out to a standard commensurate with the full repairing covenant insisted upon. The landlord’s surveyor considered the agreed rent was too low and that in itself should allow for other factors. A purist approach ought not suffer overriding cost implications, but I accept the practicality: even so any compromise for expediency is likely to have adverse repercussions somewhere along the line. The fashion for short-term tenancies amongst tenants may be preferable to a longer term with rent reviews, so as to offer some greater flexibility in the market - and demonstrate the lack of confidence the tenant has in its business - but the risk is that the permutations and the extra cost of renewal can benefit the landlord and play havoc with the tenant’s business plan.
For both parties, and regardless of whether any dispute could be resolved without the court’s intervention, LTA54 procedure involves litigation, so deferment stops the court becoming involved and taking an active interest in the matter. But, whether minimising cost is a good idea in the context of the wider consequences for either or both parties is another matter entirely.
For the landlord, an advantage in refusing deferment is that it forces the tenant’s hand. A snag with having to state in the s25 notice the landlord’s proposals for the new tenancy is that the tenant can consider them in the light of what else is and becomes available in the market and bide its time. Whilst there is nothing to prevent the landlord from making the application to court, so as to accelerate the tenant’s decision, not only would that require the landlord to incur extra costs, (not something landlords are keen on), but also many landlords regard the court application as something the tenant does in the first instance. So, since the tenant is not obliged to communicate its intention whether it intends to renew before the end date in the notice, by allowing the tenant to avoid court procedures, the landlord can lose out if the tenant should for any reason decide to not renew. At least, where a tenant, after applying to court, decides not to pursue the claim, the tenant must serve notice of discontinuance of proceedings, giving at least 3 months notice to end the tenancy, and that enables the landlord to recover costs and fees in connection with the application. When the date for application is deferred, and thereafter the tenant decides to not renew, all the tenant needs do is simply not apply by the extended date; no costs payable.
Interim rent can be affected if the application per s24a were, as if often done, included in the answer to the claim, so a separate application is necessary for the landlord to recover the market rent for the period from the end date in the notice to the giving up of possession. By agreeing to defer, the landlord also loses out on the possibility of being able to capitalise on opportunities that can arise during negotiations in tandem with court proceedings. The phrase ‘going to court’, often a negotiating ploy, is not confined to making of the application or the actual hearing itself, but includes procedures. Non-compliance with case management timetables can make it possible for a tenant to lose renewal rights, despite having made the claim and protected rights by the end date in the notice. (Whether such opportunities have value depends on the market and the landlord’s strategy. In a recent matter where I was acting for the landlord, the tenant, a bank, lost renewal rights through the striking out of proceedings. My Client waived the oversight and renewed inside LTA54.)
For the tenant, deferment can create problems: application or request for further extension(s) to the date might be missed/overlooked, also it might not be possible to take advantage of post-end-date events, particularly when it is agreed that as a condition of the agreement to defer the new tenancy will start on the end date in the notice. Although interim rent could be back-dated to the earliest date the tenancy could have been brought to an end, interim rent only covers the period between expiry of the old tenancy (or date of application per s24a whichever the later) and commencement of the new term.
The commencement dates for both the new rent and term are matters for negotiation. Whereas both often start from expiry of the old tenancy, or the end date in the notice if different, frequently that is valuation convenience and/or reflects inexperience. In practice, there is nothing to prevent either rent and/or term commencement dates starting on completion of the lease. If the matter does go to court then the hearing date becomes the valuation date, and the term and rent commencement dates subject to s64 - at least 3 months after the hearing date.
This is an example of what can happen when the effect on rent and other terms of the tenancy of post-end date events have to be ignored. I was instructed to provide an expert opinion valuation for the measurement of damages arising out of a negligence claim where the tenant’s solicitors had overlooked the further extension date and had not sought further extension or applied to the court to protect the tenant’s renewal rights. It was suggested the date of breach was the last date for application to the court; also loss measured in terms of any increased rental for the duration of the term of the new tenancy, and as a consequence of any rent reviews, any diminution in the value of the lease as a saleable commodity.
In my report, I referred to the leading authority rule in solicitor negligence cases per County Personnel (Employment Agency) Ltd v Alan R Pulver & Co [1986] but, as I understood, the general rule that damages are to be assessed at date of breach is variable if assessment at another date might more accurately reflect the overriding compensatory rule. Per Kennedy v KB Van Emden & Co [1997] “The overriding rule governing the awards of damages is that the party who has been injured should be awarded by the court a sum of money which, in so far as money can do this, will, when it is paid, fairly compensate him for the wrong which the defendant has inflicted upon him. That will often involve looking at what happened or might have happened shortly after the defendant’s breach of duty, what has happened between breach and trial and what is likely to happen in the future. ” Unlike at a rent review where post-review events are irrelevant, because they would not have been known about at the date of review (or valuation date if different per the lease), valuation at lease renewal is not necessarily on a set date, since neither rent nor term has to start on expiry of the existing tenancy, or end date in the notice, if later; as I have said, both rent and term commencement dates are negotiable. The court hearing date is the only time a valuation date is fixed. During my research, I discovered that shortly after the suggested date of breach it had become public knowledge that Sainsbury’s would, a few months later, be opening a new store almost opposite the premises. I considered that new store would have a measurably adverse effect on the tenant’s business. I opined that had renewal rights been protected by application to court with negotiations alongside ensuing procedures, rather than based on the end date in the s25 notice, then post-application negotiations paralleling case management procedure would most probably have allowed for the effect of “Sainsbury’s” and would have resulted in variations in the terms and conditions of the tenancy, and which I considered would have been obtainable either by negotiation or in court by the time of a likely hearing date. As it happened, other than vacating the premises, the tenant had no choice, but agree the landlord’s form of tenancy which, since it was in most respects identical to the old tenancy, contained some terms that had become onerous as a consequence of “Sainsbury’s”.
Even with no conditions attached to the agreement to defer, the tenant is still at risk post-end-date adverse events would be ignored or resisted in negotiations with the landlord, because of an assumption or agreement either or both the renewal term and rent commencement dates would start on expiry of the existing tenancy; also, a request for deferment could be construed as the tenant’s unwillingness to incur costs. Agreement to defer is not something necessarily obtainable by return; the landlord might not be available, or be sufficiently familiar with the procedure without wanting advice on implications. Although it might be thought the landlord would also want to avoid costs, particularly when there has been a dialogue between landlord and tenant during the run-up to the application date and the landlord has given the impression of not wanting to go to court, critical time-limits are not a matter for bluff or complacency. The solicitor will need a few days to ensure application is made in good time; and where tenants are conducting their own negotiations, just because the s25 notice contains proposals for the new tenancy and just because negotiations with the landlord are well-advanced does not mean the tenant’s need to protect renewal rights should be regarded a formality that could be reliably dispensed with. On expiry, there is no automatic security of tenure: it has to be applied for. The procedure for ending and renewal of a tenancy per LTA54 must be treated as completely separate to any negotiations for the renewal terms. As soon as either s25 or s26 notice is served or given, LTA54 procedures apply, regardless of the cost-consequences. In other words, if you can’t afford or don’t want to incur the expense of litigation, then don’t issue s25 or s26 notice. Costs on expiry and renewal can and do mount up, for both parties. When proceedings are stayed, the pressure is eased, but since either party can restore or the court resume, compliance with the procedure is a costly exercise. Wherever possible, I try to avoid incurring extra costs for my client, but sometimes it is necessary to test the depth of the other party’s resistance to a particular point(s) by involving costs of fighting. In principle, a tenant is entitled to renew on the same terms and conditions as are in the existing tenancy, subject to mutually acceptable updating to modern practice. What a landlord is not entitled to do is impose upon the tenant a change that would result in a more onerous burden of risk that could not be adequately compensated by a consequential decrease in rent; O’May v City of London Real Property Co Ltd [1983]
Nothing ventured, nothing gained! For landlords, wider consequences in not being able to change a term or condition include 1) a possible reduction in the capital value and/or marketability of the investment, and 2) the continuation of some wording whose shelf-life was not expected to last indefinitely. For tenants, wider consequences are either unacceptable because the proposed change is obviously more onerous, or considered of no consequence in the scheme of things. It is easy to miss the point by not appreciating long-term implications. A tenancy will often last for years and every word has consequences. For example, in a matter I dealt with recently, the landlord had covenanted to carry out some repairs to the premises and having done so before the tenancy had been assigned to my tenant-client, wanted the covenant excluded in the renewal. I had no objection provided the landlord would pay for a structural survey to confirm the work had been carried out to a standard commensurate with the full repairing covenant insisted upon. The landlord’s surveyor considered the agreed rent was too low and that in itself should allow for other factors. A purist approach ought not suffer overriding cost implications, but I accept the practicality: even so any compromise for expediency is likely to have adverse repercussions somewhere along the line. The fashion for short-term tenancies amongst tenants may be preferable to a longer term with rent reviews, so as to offer some greater flexibility in the market - and demonstrate the lack of confidence the tenant has in its business - but the risk is that the permutations and the extra cost of renewal can benefit the landlord and play havoc with the tenant’s business plan.
Business Rates
01/12/2013
The Government has announced that the five-yearly revaluation of all commercial properties in England will be postponed from 2015 to 2017. Every 5 years, commencing April 1990, Rateable Values are revalued, based on rental values at the antecedent valuation date, 2 years previously. For example, 2010 Rateable Values (which came into force 1 April 2010), are based on rents at 1 April 1998.
August 1998 is generally considered (by rent review surveyors) as the turning point for rental downturn so since post-valuation events are disregarded, because they could not have been known about at the time, rents in and around April 1998 do not take into account subsequent changes in the market.
If the 2015 revaluation had gone ahead then there would have been an adjustment in rateable values based on the market as at April 2013. In many parts of the country and for some types of premises the postponement of the revaluation will lead to the continuation of artificially high rateable values until April 2017.
For the moment the postponement applies only to England.
It is reported that some of Britain’s leading retailers have called on the government to freeze business rates next year (2013/2014). I have commented in Retail Week, as follows:
"I think one has to be very careful with the subject of business rates. On one hand, it is understandable for profit-motivated retailers to not want to pay any more (than they have to). On the other, any freeze or indeed any reduction in rates payable will reduce the revenue to central Government for redistribution to county councils, and in turn the provision of council services for the public-at-large. As a tax on non-domestic property, business rates are economical to collect. The rate in the £ (UBR) is centrally fixed, the billing (local) authorities demand and enforce payment, the money handed over to central government for re-distribution to the local authorities. Whether UBR is a fairer system than before 1990 when local authorities set their own rate in the £ may not be so valid now that local authorities are having to cut-back on services to abide by central government dictum, and have to find other sources of revenue for their authority, such as increasing car parking charges in town centres. The irony there of course is that what might've been envisaged a virtuous circle has turned into a vicious circle: the more local authorities play power-games in shopping centres by increasing car parking charges, etc the less the motorist-shopper is inclined to visit the 'high street' to shop. From my limited knowledge of rating, a service I stopped providing some time ago, I think that valuation approach to Rateable Value may be flawed. Strictly, as I understand, the rating valuation should be based on vacant possession, the notional rent that the premises would let at. However, the VOA is 'lazy': instead of assessing each property afresh on its own merits, the rent under an existing lease is used as the starting point. To be fair, there is a tendency to mark down through averaging, and for the tone in many places to be below par, but that I'm told is not necessarily a valuation approach, so much as an ideological or political hint, whereby shops in primary positions in city centres are valued with exactitude, in order to 'subsidise' those in less trading positions. There are also innumerable under-valuations: many occupiers are not paying their fair share of business rates. Many reasons including the VOA using the wrong valuation category - warehouse, not trade counter, for example - or the hereditament has been altered and the VOA not informed - understandable for an owner or occupier to not want to alert the VOA to anything that might result in an increase in rates payable, but why doesn't the VOA simply comb through all the planning applications (information in the public domain) and visit the premises to check (staff shortage, I guess would be the excuse!). Another unfairness is Transitional Relief, where through a quirk of political ideology and history of the occupancy the ratepayer in one property may pay less than the neighbouring occupier: that's not a level playing field for competition. Remove the inefficiencies, scrap TR, and perhaps the proper total revenue from business rates would increase the amount in the Government's coffers and by default enable a freeze."
August 1998 is generally considered (by rent review surveyors) as the turning point for rental downturn so since post-valuation events are disregarded, because they could not have been known about at the time, rents in and around April 1998 do not take into account subsequent changes in the market.
If the 2015 revaluation had gone ahead then there would have been an adjustment in rateable values based on the market as at April 2013. In many parts of the country and for some types of premises the postponement of the revaluation will lead to the continuation of artificially high rateable values until April 2017.
For the moment the postponement applies only to England.
It is reported that some of Britain’s leading retailers have called on the government to freeze business rates next year (2013/2014). I have commented in Retail Week, as follows:
"I think one has to be very careful with the subject of business rates. On one hand, it is understandable for profit-motivated retailers to not want to pay any more (than they have to). On the other, any freeze or indeed any reduction in rates payable will reduce the revenue to central Government for redistribution to county councils, and in turn the provision of council services for the public-at-large. As a tax on non-domestic property, business rates are economical to collect. The rate in the £ (UBR) is centrally fixed, the billing (local) authorities demand and enforce payment, the money handed over to central government for re-distribution to the local authorities. Whether UBR is a fairer system than before 1990 when local authorities set their own rate in the £ may not be so valid now that local authorities are having to cut-back on services to abide by central government dictum, and have to find other sources of revenue for their authority, such as increasing car parking charges in town centres. The irony there of course is that what might've been envisaged a virtuous circle has turned into a vicious circle: the more local authorities play power-games in shopping centres by increasing car parking charges, etc the less the motorist-shopper is inclined to visit the 'high street' to shop. From my limited knowledge of rating, a service I stopped providing some time ago, I think that valuation approach to Rateable Value may be flawed. Strictly, as I understand, the rating valuation should be based on vacant possession, the notional rent that the premises would let at. However, the VOA is 'lazy': instead of assessing each property afresh on its own merits, the rent under an existing lease is used as the starting point. To be fair, there is a tendency to mark down through averaging, and for the tone in many places to be below par, but that I'm told is not necessarily a valuation approach, so much as an ideological or political hint, whereby shops in primary positions in city centres are valued with exactitude, in order to 'subsidise' those in less trading positions. There are also innumerable under-valuations: many occupiers are not paying their fair share of business rates. Many reasons including the VOA using the wrong valuation category - warehouse, not trade counter, for example - or the hereditament has been altered and the VOA not informed - understandable for an owner or occupier to not want to alert the VOA to anything that might result in an increase in rates payable, but why doesn't the VOA simply comb through all the planning applications (information in the public domain) and visit the premises to check (staff shortage, I guess would be the excuse!). Another unfairness is Transitional Relief, where through a quirk of political ideology and history of the occupancy the ratepayer in one property may pay less than the neighbouring occupier: that's not a level playing field for competition. Remove the inefficiencies, scrap TR, and perhaps the proper total revenue from business rates would increase the amount in the Government's coffers and by default enable a freeze."
Guarantor v. Rent Deposit
01/12/2013
Where a tenant is a company and the landlord requires a director as guarantor or a rent deposit, that person is exposed to both the risk of rent and all other terms and conditions of the tenancy, should the company default. But an advantage to the tenant in opting for a guarantor is that the landlord has no control of the guarantor's financial affairs which means the guarantor might not in the event be found to have any assets.
An alternative to a guarantor (or as well as if the landlord is insistent and/or the tenant willing) is a rent deposit, normally between three and twelve months rent. The deposit can only be used for the express purposes per the deed, but the advantage to a landlord is being able to withdraw from the amount rent and other monies payable in default. Interest normally accrues to the principal and may be repayable to the tenant at intervals.
For the landlord, the snag with a deposit is that often it's only a once or twice useable protection and which can be eroded by forgetting to require a top-up of the deposit on a rent review increase. The downside for the tenant, as well as parting with capital and the possibility of never seeing it again, despite the terms of the deposit deed, is that in the market a prospective assignee for the tenancy might not be able to afford or be willing to hand over the same amount.
Five Key Dates
01/12/2013
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
01/12/2013
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.
Purpose of Rent Review
01/12/2013
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
01/12/2013
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.
Asset Strippers
21/11/2013
Investment in shop property is very rewarding provided you know what you are doing. Many private investors, particularly novices, do not understand how to go about it. Instead of formulating and sticking to a clearly defined strategy, most investors have a scatter–gun approach, alighting upon anything that takes the fancy within their price range. For further reading, please visit LandlordZone newsletter issue 18 - click here
Without Prejudice
24/10/2013
Last year someone on LandlordZONE Forum’s commercial property board was asking about breach of warranty of authority, and suggesting the landlord’s surveyor might be pulling a fast one. For further reading, please visit LandlordZone newsletter issue 17 - click here
Changing Market and Varying a Lease
26/09/2013
The definition of ‘lease‘ is "the grant of a right to the exclusive possession of land for a determinate term less than that which the grantor has himself in the land". In practice, a lease is …for further reading, please visit LandlordZone newsletter issue 16 - click here
Inexperience and business tenancies
29/08/2013
Tackling a business tenancy matter is full of pitfalls for the unwary… For further reading, please visit LandlordZone newsletter issue 15 - click here
On-site Parking
31/07/2013
For corporate image there is something to be said for the appeal of former residential dwellings when located in main-road positions. One attraction is the likelihood of off-street parking where the front garden provides a forecourt for on-site car parking. For further reading, please visit LandlordZone newsletter issue 14 - click here
Mixed User Buildings and Service Charges
25/06/2013
When a building comprises ground floor commercial premises let on a business tenancy, and upper part residential flat sold on a long lease, there are two ways for the landlord to recover the costs and expenses incurred by the landlord… for further reading, please visit LandlordZone newsletter issue 13 - click here
Shop Investment
29/05/2013
I have resisted commenting on the Portas review of the ‘High Street’ and ensuing media and industry reports, because …for further reading, please visit LandlordZone newsletter issue 12 - click here
SIPP and Commercial Property
26/03/2013
Growing numbers of retirement savers with self–invested pension plans (SIPP) are building up their pension pots by putting money into commercial property; it is suggested buying your own premises to form part of your pension is probably a good move. But is it really? For further reading, please visit LandlordZone newsletter issue 10 - click here
Danger in leaving drafting to lawyers
21/02/2013
When a lease is granted, the onus is on the landlord to draft the wording and the tenant to approve. When the lease contains a rent review, with the rent to be reviewed to the market rent, as distinct from a formula such as index–linked, the lease will incorporate a ’second’ lease known as the “hypothetical lease”. For further reading, please visit LandlordZone newsletter issue 9 - click here
Letting a Tenant off the Hook
23/01/2013
With a business tenancy, agreeing the documentation is rarely straightforward at the best of times…For further reading, please visit LandlordZone newsletter issue 8 - click here