The Rent Review Specialist
Covid-19 and rent review
02/04/2020
At rent review and lease renewal, the impact of the respiratory disease COVID-19, commonly known as Coronavirus, highlights two factors that are particularly important in negotiation and rental valuation: (1) post-review evidence and (2) post-review event. From case-law, the principles are reasonably straightforward to understand, even if not always appreciated!
(1) Post-review evidence. The principle is that transactions after a review/valuation date are generally admissible in evidence. However, the weight to be given to such evidence is a matter for assessment. The longer the period of time between the valuation date and the post-review date comparable, the less weight the evidence may carry.
(2) Post-review event. A post-review event is inadmissible as evidence, because what happened after the valuation date is not a foreseeable event on the valuation date. The parties are not entitled to take into account subsequent events which showed how possibilities turned out: to do so would introduce knowledge not available at the valuation date.
Clearly one can have regard to events that have actually occurred, or circumstances which actually existed, at any time up to the valuation date. Such are “known knowns” on the valuation date. ‘Known knowns” may include transactions on comparable properties, and other general events which may affect property values.
One can also have regard to “known unknowns” - such expectation of future events as might exist at the valuation date, provided that those would be matters that would be known in the hypothetical market at the valuation date. Expectations of future events often affect property values at a given date: for example, events at a national level, such as changes in interest rates, or changes in property taxation, or anticipated local events.
However, actual future events must be disregarded, except to the extent they were foreseeable and actually foreseen as at the valuation date. Landlord and tenant cannot know for certain as at the valuation date what might happen a few months after they agree a rent. They can only be credited with the degree of optimism or pessimism which existed in the market on the valuation date.
Coronavirus? On 31 December 2019, the disease, now known as Covid-19, outbreak started in Wuhan, China. 31 January 2020: the first Coronavirus cases in UK. Please click here for a time line.
Whether 31 January 2020 will generally be accepted as the effective date in the context of a post-review event, I shall reason accordingly.
(1) Post-review evidence. The principle is that transactions after a review/valuation date are generally admissible in evidence. However, the weight to be given to such evidence is a matter for assessment. The longer the period of time between the valuation date and the post-review date comparable, the less weight the evidence may carry.
(2) Post-review event. A post-review event is inadmissible as evidence, because what happened after the valuation date is not a foreseeable event on the valuation date. The parties are not entitled to take into account subsequent events which showed how possibilities turned out: to do so would introduce knowledge not available at the valuation date.
Clearly one can have regard to events that have actually occurred, or circumstances which actually existed, at any time up to the valuation date. Such are “known knowns” on the valuation date. ‘Known knowns” may include transactions on comparable properties, and other general events which may affect property values.
One can also have regard to “known unknowns” - such expectation of future events as might exist at the valuation date, provided that those would be matters that would be known in the hypothetical market at the valuation date. Expectations of future events often affect property values at a given date: for example, events at a national level, such as changes in interest rates, or changes in property taxation, or anticipated local events.
However, actual future events must be disregarded, except to the extent they were foreseeable and actually foreseen as at the valuation date. Landlord and tenant cannot know for certain as at the valuation date what might happen a few months after they agree a rent. They can only be credited with the degree of optimism or pessimism which existed in the market on the valuation date.
Coronavirus? On 31 December 2019, the disease, now known as Covid-19, outbreak started in Wuhan, China. 31 January 2020: the first Coronavirus cases in UK. Please click here for a time line.
Whether 31 January 2020 will generally be accepted as the effective date in the context of a post-review event, I shall reason accordingly.
Rent review, evidence and GDPR
05/07/2018
Rent Review, Evidence and GDPR
The General Data Protection Regulation (“GDPR”) came into force on 25 May 2018. Law-abiding businesses and organisations are checking whether computerised and manual records data/information and mailing lists are compliant, asking people to confirm opt-in. An opportunity for businesses to prune mailing lists, it is also an opportunity for anyone on a mailing list to decide whether to continue to subscribe.
Privacy is a big issue. For those of us not on Facebook, Twitter, Linked-in, etc, that such social media can and probably knows about us, merely because their users having agreed without a care for the consequences to allow the social media platform access to the users' contacts is not ideal, just something to have to come to terms with.
I have been registered under the Data Protection Act 1998 since November 2000. I respect privacy. In the business world, professional rules and codes of conduct normally require members (including employees and staff) to keep their clients’ affairs confidential. Although doubtless that is observed by lawyers and accountants, for some reason the same cannot be said of surveyors generally.
In the commercial property market, (as in every sector of the property market), all transactions and agreements between landlord and tenant are confidential. Strictly, as I understand, information is disclosable to unconnected persons only with permission of all the ‘parties’ concerned. I emphasise ‘parties’ because it is the parties whose permission is required, not their advisers. It is not permitted for one party to disclose information without first obtaining permission from the other party/parties. It is not permitted for an adviser to unilaterally decide without authority okay to disclose a confidentiality.
The reason that the same attitude towards confidentiality cannot be said of surveyors generally is not that many haven’t got time for all that nonsense, (any more than a certain type of person has any respect for GDPR), but for the consequences for valuation were confidentiality strictures to be enforced.
I daresay that, quite possibly, the commercial property market in its present form would collapse were it not for the free-sharing and unbridled circulation of confidential data/information. We surveyors do not make the market: we simply interpret it for the benefit our clients. Although valuation is not an exact science, the emphasis on the science, rather than the art (in other words, confident but unable to prove it), means that where the tangible evidence is not within the surveyor’s personal knowledge and experience, it must come from somewhere someone else.
What keeps the market in good shape is that between surveyors is an unwritten implied duty to keep shared data/information confidential. That duty applies not only to data/information where the surveyors themselves are or have been involved, but also data/information via usual behind-the-scenes channels, for example, surveyors imparting and sharing data/information, reciprocal interests.
Where the valuation for capital and rental valuation is based upon evidence, commonly known as “comparable evidence” - whether or not it would pass the tests of comparability - the availability of the evidence depends upon someone somewhere authorised to disclose or more commonly and most likely breaching a confidence.
It is not compulsory (except by court order) for landlords and/or tenants and/or their respective surveyors to be helpful to one another. Indeed, many landlords and tenants prefer to mind their own business and not become involved. Tenants especially can be reluctant to disclose information about the tenancy in case the data should end up being used against them. So, although the terminology ‘open market’ means anyone and everyone, in practice it can mean just a few. At rent review (to an extent at lease renewal also), within the meaning of ‘hypothetical willing’ is that the existence of a market is assumed, also it is not necessary to identify who would want the premises only that someone somewhere would. But surveyors and valuers, particularly for capital and mortgage valuations, tend to prefer something more concrete.
Investors likewise: as a ploy to attract offers from the inexperienced, the trend in recent years for particulars of (overpriced?) propositions is to include a list of recent transactions prices and rents as a means of reassurance.
The generality of data, details of premises to let, leases for assignment and sub-let, press releases, industry media and company reports, rating areas, and so on, are useful as rough guides, but at rent review and lease renewal far more detail is needed.
Where rent review is to open market rent and the valuation based upon evidence, unless the landlord and/or the tenant between them own all the properties that are forever the only evidence, inevitably some if not all of the evidence will have to be sourced from others.
The imparting and sharing of information between surveyors respectful of the implied duty of confidentiality enables the data/information to be interpreted for use or not during negotiation; and as evidence to a third party such as an arbitrator, independent expert, or in court.
A difficulty arises when surveyors in receipt of confidential information are obliged or expected to disclose that information to clients, in explanation of how a recommendation has been arrived at and in written reports for rent review and lease renewal.
It is said that a characteristic amongst historians is nosiness. I venture to suggest the same can be said of local traders and small shopkeepers. In my limited experience, one has to have the patience of a saint to listen to all manner of irrelevancies when advising local traders on rent review and business tenancies: wanting to know what everyone else is paying and expecting to be told as a matter of course stretches the bounds of confidentiality.
The difference between being curious and being nosy involves a genuine interest, rather than trying to pry information out, perhaps for gossip or to judge. Nosiness usually involves trying to be privy to something that isn't really any of the enquirer’s business. To whom the information belongs is a moot point. Where the information is obtained to serve a particular client, whether the evidence (presuposing the information useful as evidence) would be forthcoming were its source not wanting to help the particular surveyor and/or indirectly the particular client is I should think unlikely. But where the evidence is obtained by the surveyor for the sake of it, or from other matters nothing to do with the client in question, I see no reason why that client should be able to claim ‘ownership’, let alone expect to be provided with full details.
The keeping of old files after completion of an instruction is a matter of law and thereafter data storage space. What surveyors do with the evidence that arises during negotiation is a matter for the surveyors concerned. For my part, I centralise the information on my database: it might never come in handy but if it were to then at least I wouldn’t have to wade through an old file.
At rent review for determination of the rent by an Independent Expert, the parties or their surveyors will normally preface their respective reports with something along the lines of my “neither the whole or any part of this report or any reference to it may be included in any document or communication in any way other than for the purpose for which it is intended, without my written approval of the form and context in which it may appear.” Whether that is actually respected depends upon the trustworthiness of the persons involved in the matter.
At rent review arbitration, confidentiality is the law. Per Dolling-Baker v Merrett [1990] “as between parties to an arbitration, although the proceedings are consensual and may thus be regarded as wholly voluntary, their very nature is such that there must, in my judgment, be some implied obligation on the parties not to disclose or use for any other purpose any documents prepared for and used in the arbitration, or transcripts of notes of the evidence in the arbitration or the award, save with the consent of the other party, or pursuant to an order of leave of the Court .. .. " " ... the fact that a document is used in an arbitration does not confer on it any confidentiality or privilege which can be availed of in subsequent proceedings ... But that the obligation exists in some form appears to me to be abundantly apparent. It is not a question of immunity or public interest. It is a question of an implied obligation arising out of the nature of arbitration itself.”
At a lease renewal in court, (substantive hearing), it is common for a surveyor expert witness to cite evidence obtained from others. Rules regarding hearsay evidence have been relaxed. Pro-forma evidence provided by surveyors is notoriously unreliable. Whether the evidence is investigated and verified for authenticity depends upon the expert’s conscientiousness. If the evidence presented to the court does not also state the reason to the source of the evidence the reason for wanting the evidence or what it would be used for then in the context of confidentiality it could be reasoned a data breach. Also, assuming the client has the right to see its lawyer’s file, also its surveyor’s file, I should think it necessary for the lawyer and/or surveyor to each inform the client of the need to respect the confidentiality of any evidence. And theoretically if not in practice for the lawyer and/or surveyor to have gotten permission from the source of the evidence to allow others to see the evidence. Generally, in court, anyone present and listening becomes privy to confidential data/information. I have yet to read a law report that mentions that the evidence in court has confidentiality clearance.
Between landlord and tenant, whether either or both parties are represented or not, it is not necessary for the rent review clause to be satisfied during negotiation. Landlord and tenant, between themselves or represented, can agree whatever they like. It is only when the agreement is cited as evidence in connection with another matter that how the agreement was arrived at is scrutinised. No criticism can be levelled at landlords and tenants, represented or not, for the rent they agree. The difficulty for surveyors is in drawing comparison: any bias in assuming the parties would have satisfied the review clause stems from a need to control the direction of the market by steering the evidence in favour of the client.
Where the information has not been released from confidentiality by permission of the parties concerned, it will be interesting to experience whether a breach of GDPR can be used to defeat the admissibility of that evidence.
The General Data Protection Regulation (“GDPR”) came into force on 25 May 2018. Law-abiding businesses and organisations are checking whether computerised and manual records data/information and mailing lists are compliant, asking people to confirm opt-in. An opportunity for businesses to prune mailing lists, it is also an opportunity for anyone on a mailing list to decide whether to continue to subscribe.
Privacy is a big issue. For those of us not on Facebook, Twitter, Linked-in, etc, that such social media can and probably knows about us, merely because their users having agreed without a care for the consequences to allow the social media platform access to the users' contacts is not ideal, just something to have to come to terms with.
I have been registered under the Data Protection Act 1998 since November 2000. I respect privacy. In the business world, professional rules and codes of conduct normally require members (including employees and staff) to keep their clients’ affairs confidential. Although doubtless that is observed by lawyers and accountants, for some reason the same cannot be said of surveyors generally.
In the commercial property market, (as in every sector of the property market), all transactions and agreements between landlord and tenant are confidential. Strictly, as I understand, information is disclosable to unconnected persons only with permission of all the ‘parties’ concerned. I emphasise ‘parties’ because it is the parties whose permission is required, not their advisers. It is not permitted for one party to disclose information without first obtaining permission from the other party/parties. It is not permitted for an adviser to unilaterally decide without authority okay to disclose a confidentiality.
The reason that the same attitude towards confidentiality cannot be said of surveyors generally is not that many haven’t got time for all that nonsense, (any more than a certain type of person has any respect for GDPR), but for the consequences for valuation were confidentiality strictures to be enforced.
I daresay that, quite possibly, the commercial property market in its present form would collapse were it not for the free-sharing and unbridled circulation of confidential data/information. We surveyors do not make the market: we simply interpret it for the benefit our clients. Although valuation is not an exact science, the emphasis on the science, rather than the art (in other words, confident but unable to prove it), means that where the tangible evidence is not within the surveyor’s personal knowledge and experience, it must come from somewhere someone else.
What keeps the market in good shape is that between surveyors is an unwritten implied duty to keep shared data/information confidential. That duty applies not only to data/information where the surveyors themselves are or have been involved, but also data/information via usual behind-the-scenes channels, for example, surveyors imparting and sharing data/information, reciprocal interests.
Where the valuation for capital and rental valuation is based upon evidence, commonly known as “comparable evidence” - whether or not it would pass the tests of comparability - the availability of the evidence depends upon someone somewhere authorised to disclose or more commonly and most likely breaching a confidence.
It is not compulsory (except by court order) for landlords and/or tenants and/or their respective surveyors to be helpful to one another. Indeed, many landlords and tenants prefer to mind their own business and not become involved. Tenants especially can be reluctant to disclose information about the tenancy in case the data should end up being used against them. So, although the terminology ‘open market’ means anyone and everyone, in practice it can mean just a few. At rent review (to an extent at lease renewal also), within the meaning of ‘hypothetical willing’ is that the existence of a market is assumed, also it is not necessary to identify who would want the premises only that someone somewhere would. But surveyors and valuers, particularly for capital and mortgage valuations, tend to prefer something more concrete.
Investors likewise: as a ploy to attract offers from the inexperienced, the trend in recent years for particulars of (overpriced?) propositions is to include a list of recent transactions prices and rents as a means of reassurance.
The generality of data, details of premises to let, leases for assignment and sub-let, press releases, industry media and company reports, rating areas, and so on, are useful as rough guides, but at rent review and lease renewal far more detail is needed.
Where rent review is to open market rent and the valuation based upon evidence, unless the landlord and/or the tenant between them own all the properties that are forever the only evidence, inevitably some if not all of the evidence will have to be sourced from others.
The imparting and sharing of information between surveyors respectful of the implied duty of confidentiality enables the data/information to be interpreted for use or not during negotiation; and as evidence to a third party such as an arbitrator, independent expert, or in court.
A difficulty arises when surveyors in receipt of confidential information are obliged or expected to disclose that information to clients, in explanation of how a recommendation has been arrived at and in written reports for rent review and lease renewal.
It is said that a characteristic amongst historians is nosiness. I venture to suggest the same can be said of local traders and small shopkeepers. In my limited experience, one has to have the patience of a saint to listen to all manner of irrelevancies when advising local traders on rent review and business tenancies: wanting to know what everyone else is paying and expecting to be told as a matter of course stretches the bounds of confidentiality.
The difference between being curious and being nosy involves a genuine interest, rather than trying to pry information out, perhaps for gossip or to judge. Nosiness usually involves trying to be privy to something that isn't really any of the enquirer’s business. To whom the information belongs is a moot point. Where the information is obtained to serve a particular client, whether the evidence (presuposing the information useful as evidence) would be forthcoming were its source not wanting to help the particular surveyor and/or indirectly the particular client is I should think unlikely. But where the evidence is obtained by the surveyor for the sake of it, or from other matters nothing to do with the client in question, I see no reason why that client should be able to claim ‘ownership’, let alone expect to be provided with full details.
The keeping of old files after completion of an instruction is a matter of law and thereafter data storage space. What surveyors do with the evidence that arises during negotiation is a matter for the surveyors concerned. For my part, I centralise the information on my database: it might never come in handy but if it were to then at least I wouldn’t have to wade through an old file.
At rent review for determination of the rent by an Independent Expert, the parties or their surveyors will normally preface their respective reports with something along the lines of my “neither the whole or any part of this report or any reference to it may be included in any document or communication in any way other than for the purpose for which it is intended, without my written approval of the form and context in which it may appear.” Whether that is actually respected depends upon the trustworthiness of the persons involved in the matter.
At rent review arbitration, confidentiality is the law. Per Dolling-Baker v Merrett [1990] “as between parties to an arbitration, although the proceedings are consensual and may thus be regarded as wholly voluntary, their very nature is such that there must, in my judgment, be some implied obligation on the parties not to disclose or use for any other purpose any documents prepared for and used in the arbitration, or transcripts of notes of the evidence in the arbitration or the award, save with the consent of the other party, or pursuant to an order of leave of the Court .. .. " " ... the fact that a document is used in an arbitration does not confer on it any confidentiality or privilege which can be availed of in subsequent proceedings ... But that the obligation exists in some form appears to me to be abundantly apparent. It is not a question of immunity or public interest. It is a question of an implied obligation arising out of the nature of arbitration itself.”
At a lease renewal in court, (substantive hearing), it is common for a surveyor expert witness to cite evidence obtained from others. Rules regarding hearsay evidence have been relaxed. Pro-forma evidence provided by surveyors is notoriously unreliable. Whether the evidence is investigated and verified for authenticity depends upon the expert’s conscientiousness. If the evidence presented to the court does not also state the reason to the source of the evidence the reason for wanting the evidence or what it would be used for then in the context of confidentiality it could be reasoned a data breach. Also, assuming the client has the right to see its lawyer’s file, also its surveyor’s file, I should think it necessary for the lawyer and/or surveyor to each inform the client of the need to respect the confidentiality of any evidence. And theoretically if not in practice for the lawyer and/or surveyor to have gotten permission from the source of the evidence to allow others to see the evidence. Generally, in court, anyone present and listening becomes privy to confidential data/information. I have yet to read a law report that mentions that the evidence in court has confidentiality clearance.
Between landlord and tenant, whether either or both parties are represented or not, it is not necessary for the rent review clause to be satisfied during negotiation. Landlord and tenant, between themselves or represented, can agree whatever they like. It is only when the agreement is cited as evidence in connection with another matter that how the agreement was arrived at is scrutinised. No criticism can be levelled at landlords and tenants, represented or not, for the rent they agree. The difficulty for surveyors is in drawing comparison: any bias in assuming the parties would have satisfied the review clause stems from a need to control the direction of the market by steering the evidence in favour of the client.
Where the information has not been released from confidentiality by permission of the parties concerned, it will be interesting to experience whether a breach of GDPR can be used to defeat the admissibility of that evidence.
The Market v the Evidence
28/09/2016
To consider the property market as a whole or an umbrella term for its sectors and segments depends on the thinking and the nature of the property. Thinking about…For further reading, please visit LandlordZone.
Open market rent review
09/10/2014
A feature of investing in commercial property is the rent review. With residential BTL, rents can be increased but usually only at the end of the term if the existing tenant would pay more or on a new letting if the market is up to it or, as with ground rents, to pre-set incremental increases. With commercial property, rent reviews can occur at regular intervals throughout the term because the duration of a commercial property letting is often for years: 3 to 5 years is not uncommon, 10 is typical, 15-25 years not unusual, and with ground leases 75-125 years or more. At present, I dealing with a ground lease rent review where the contractual term was extended from 80 years to 150 years.
There are various types of rent review: fixed increases, percentage uplifts, formulaic reviews such as inflation-adjusted index-linked, ground rent reviews geared to open market rent, turnover rent review comprising a base figure plus a percentage of the turnover of the tenant's business, and open market reviews where the rent is assessed by reference to the open market. Turnover reviews are common in factory outlet centres and shopping malls that are owned by a single landlord; in isolation turnover reviews are for the private investor harder to administer, let alone finding a tenant who'd agree. (The turnover is before VAT: in case-law, a tenant got clobbered a while back through overlooking the impact of VAT on the wording of the review and was obliged to pay more rent when the VAT rate went up to 20%.) Fixed increases, common during the 1960s/1970s, are rare nowadays because the amount of increase requires a leap of faith at the onset. Formulaic reviews tend to be found with sale-and-leaseback and where investors are offered a certain or easily calculable income stream, akin to an annuity. Ground rent review is where the land is let, the tenant constructing the building in consideration for which the landlord gets a percentage of the rental value of the building.
Open market review is the most common. The principle is that the rent would be adjusted to the market rent assuming (hypothetically) the premises would be available to let in the open market at the review date or valuation date if different. For the hypothesis, there are matters to be assumed and disregarded and whatever is to be taken into account is to be found in the wording of the rent review clause. There are no set guidelines: it all depends upon what was agreed when the lease was granted and any related documentation. The interpretation the guidelines is another matter entirely which is why to assume literally whatever the review clause says can be a mistake.
For open market review, the rental valuation approach is evidence-oriented. There has to be evidence of a higher rent elsewhere for the rent of the premises under review to increase, either that or informed opinion. Informed opinion is not the same as working out what the actual tenant should be able to afford: that the tenant might be able to afford, for example, ten times more doesn't in itself mean that the rent should increase.
On grant of leases, there are two types of landlord. The landlord for whom the property has always been an investment, and the landlord that previously occupied the property for his own business but is selling up and simultaneously granting a new lease of the property to the buyer. Where the lease is being granted in conjunction with the sale of the business, it is common for the initial rent to be set by reference to what the business could afford. Where that rent is higher than the market rent, it is essential for the wording of the rent review to enable an increase, otherwise all that will happen is that the market rent would prevail. That does not matter if the market rent were higher than the initial rent but, all other factors remaining constant, often it's not. In such cases, the rent currently payable could result in over-renting in the context of the open market rent.
Frequently, I am consulted by landlords who, having granted a new lease in conjunction with sale of their business as a going concern, approach the rent review in the same way of thinking as with the initial rent. A well-advised tenant is likely to opposite any increase on that basis.
The landlord for whom the property has always been an investment will usually agree whatever rent the incoming tenant will agree to pay. Since that rent would normally be based on the asking rent, the agreed rent is likely to reflect the open market rent at the time, presupposing the terms and conditions of the lease reflect that rent.
Unlike the new letting where the landlord can bide his time waiting for an acceptable offer, the open market rent on review is at a fixed date, the valuation date which may or may not be the same as the review date depending upon what the lease says. Regardless of the type of landlord and how the initial rent was set, both become subject to the terminology of the open market rent on review, in particular the valuation basis.
In outline, the leases contains two leases: the lease and the hypothetical lease. The hypothetical lease only applies at rent review. The terms and conditions of the hypothetical lease can be the same as the lease or differ, that's a matter of drafting and approval when the lease was granted. Of the three methods of valuation, the contractor's or costs method, the profits test, and the comparable evidence, the latter is the most common. The profits test may not be admissible evidence: the information would have to be in the public domain and limited to the particular property, rather than the tenant's other interests. The contractor's method tends to be used for buildings that are rarely on the market and for which there is no evidence. The evidence method, based on comparable evidence, is the method in widespread use because the opinions that can cloud the contractor's and profits' method do not apply.
Evidence is what another tenant has agreed to pay for their property. The property may belong to the same of a different landlord. The weight that would be given to the evidence for use as comparable is likely to vary according to the facts and circumstances.
What happens if there's no evidence. The short answer is no increase. Does that make sense? Yes and no. Yes if you accept without question the valuation basis for the rent. No if you wonder why you should lose out just because there's no evidence.
Perhaps it has always been thus but in recent years I've noticed a trend towards reliance on evidence regardless. I suspect it's a product of tenant-resistance to increase. Tenants and surveyors are well aware of the need for evidence for justification. It may not be necessary to give reasons but in the event of dispute it is. In dispute, which is the parameter upon which all reviews are based even if referral were not initiated, the tenant's approach is to require the landlord to justify the proposed increase with supporting evidence. To the inexperienced landlord, it is wearing, often frustrating that the tenant will not play ball. Despite the lease stating the parties are to reach agreement, rarely if ever does the lease prescribe how agreement is to be reached. The landlords thinks the tenant can afford more, the tenant thinks why should he offer more. This is unyielding combat, a battle of wits.
Frequently, I am instructed to take over negotiations where the landlord having reached the end of his tether doesn't want to take the next step of referral but wants me to work wonders. To force the pace, the cost of referral is not a step to be taken lightly. One step at a time maybe but the starting price is £369 for referral to the RICS. After that, the minimum fee could be £500/£750 plus anything between £180 and £350 an hour plus VAT and disbursements merely to get the tenant to concede. Lining the pockets of third parties is not how it should be, but is the price of venturing into the property system.
The standard form of rent review clause to open market rent is rarely thought out in the context of the actual property. In my opinion, there is no benefit to a landlord in going to the expense of a rent review clause drafted if there is any possibility the rent might not increase. To assume that merely because there is a rent review and an open market that the two combine to support an increase is a nonsense. At rent review to open market, a landlord is not in a position to insist upon an increase, nor is there is any justification for an increase merely because at the last rent review there was no increase. In a matter I was dealing with earlier this year, where my instructions were withdrawn despite the landlord concurring with my opinion that the rent would not increase, the fact that it takes time to procure an increase when none is justified seemed to be lost on the landlord. as far as the landlord was concerned merely because I advised no increase, but have a go, and the tenant's surveyor concurred with me did not mean the rent should not increase. You may think the landlord off his rocker but the failing is that the rent review clause to open market was drafted on the assumption that there would be evidence in the open market to support an increase.
Psychologically, the implication in 'upward-only' rent review is that the rent must increase and that if the landlord cannot procure what he wants through his own efforts a surveyor ought to be able to do better. Tough, it's not like that. Sometimes the rent that the parties could agree between themselves would be higher than if surveyors are involved. Hardly surprising therefore that landlords are keen on dissuading tenants from involving surveyors!
There are various types of rent review: fixed increases, percentage uplifts, formulaic reviews such as inflation-adjusted index-linked, ground rent reviews geared to open market rent, turnover rent review comprising a base figure plus a percentage of the turnover of the tenant's business, and open market reviews where the rent is assessed by reference to the open market. Turnover reviews are common in factory outlet centres and shopping malls that are owned by a single landlord; in isolation turnover reviews are for the private investor harder to administer, let alone finding a tenant who'd agree. (The turnover is before VAT: in case-law, a tenant got clobbered a while back through overlooking the impact of VAT on the wording of the review and was obliged to pay more rent when the VAT rate went up to 20%.) Fixed increases, common during the 1960s/1970s, are rare nowadays because the amount of increase requires a leap of faith at the onset. Formulaic reviews tend to be found with sale-and-leaseback and where investors are offered a certain or easily calculable income stream, akin to an annuity. Ground rent review is where the land is let, the tenant constructing the building in consideration for which the landlord gets a percentage of the rental value of the building.
Open market review is the most common. The principle is that the rent would be adjusted to the market rent assuming (hypothetically) the premises would be available to let in the open market at the review date or valuation date if different. For the hypothesis, there are matters to be assumed and disregarded and whatever is to be taken into account is to be found in the wording of the rent review clause. There are no set guidelines: it all depends upon what was agreed when the lease was granted and any related documentation. The interpretation the guidelines is another matter entirely which is why to assume literally whatever the review clause says can be a mistake.
For open market review, the rental valuation approach is evidence-oriented. There has to be evidence of a higher rent elsewhere for the rent of the premises under review to increase, either that or informed opinion. Informed opinion is not the same as working out what the actual tenant should be able to afford: that the tenant might be able to afford, for example, ten times more doesn't in itself mean that the rent should increase.
On grant of leases, there are two types of landlord. The landlord for whom the property has always been an investment, and the landlord that previously occupied the property for his own business but is selling up and simultaneously granting a new lease of the property to the buyer. Where the lease is being granted in conjunction with the sale of the business, it is common for the initial rent to be set by reference to what the business could afford. Where that rent is higher than the market rent, it is essential for the wording of the rent review to enable an increase, otherwise all that will happen is that the market rent would prevail. That does not matter if the market rent were higher than the initial rent but, all other factors remaining constant, often it's not. In such cases, the rent currently payable could result in over-renting in the context of the open market rent.
Frequently, I am consulted by landlords who, having granted a new lease in conjunction with sale of their business as a going concern, approach the rent review in the same way of thinking as with the initial rent. A well-advised tenant is likely to opposite any increase on that basis.
The landlord for whom the property has always been an investment will usually agree whatever rent the incoming tenant will agree to pay. Since that rent would normally be based on the asking rent, the agreed rent is likely to reflect the open market rent at the time, presupposing the terms and conditions of the lease reflect that rent.
Unlike the new letting where the landlord can bide his time waiting for an acceptable offer, the open market rent on review is at a fixed date, the valuation date which may or may not be the same as the review date depending upon what the lease says. Regardless of the type of landlord and how the initial rent was set, both become subject to the terminology of the open market rent on review, in particular the valuation basis.
In outline, the leases contains two leases: the lease and the hypothetical lease. The hypothetical lease only applies at rent review. The terms and conditions of the hypothetical lease can be the same as the lease or differ, that's a matter of drafting and approval when the lease was granted. Of the three methods of valuation, the contractor's or costs method, the profits test, and the comparable evidence, the latter is the most common. The profits test may not be admissible evidence: the information would have to be in the public domain and limited to the particular property, rather than the tenant's other interests. The contractor's method tends to be used for buildings that are rarely on the market and for which there is no evidence. The evidence method, based on comparable evidence, is the method in widespread use because the opinions that can cloud the contractor's and profits' method do not apply.
Evidence is what another tenant has agreed to pay for their property. The property may belong to the same of a different landlord. The weight that would be given to the evidence for use as comparable is likely to vary according to the facts and circumstances.
What happens if there's no evidence. The short answer is no increase. Does that make sense? Yes and no. Yes if you accept without question the valuation basis for the rent. No if you wonder why you should lose out just because there's no evidence.
Perhaps it has always been thus but in recent years I've noticed a trend towards reliance on evidence regardless. I suspect it's a product of tenant-resistance to increase. Tenants and surveyors are well aware of the need for evidence for justification. It may not be necessary to give reasons but in the event of dispute it is. In dispute, which is the parameter upon which all reviews are based even if referral were not initiated, the tenant's approach is to require the landlord to justify the proposed increase with supporting evidence. To the inexperienced landlord, it is wearing, often frustrating that the tenant will not play ball. Despite the lease stating the parties are to reach agreement, rarely if ever does the lease prescribe how agreement is to be reached. The landlords thinks the tenant can afford more, the tenant thinks why should he offer more. This is unyielding combat, a battle of wits.
Frequently, I am instructed to take over negotiations where the landlord having reached the end of his tether doesn't want to take the next step of referral but wants me to work wonders. To force the pace, the cost of referral is not a step to be taken lightly. One step at a time maybe but the starting price is £369 for referral to the RICS. After that, the minimum fee could be £500/£750 plus anything between £180 and £350 an hour plus VAT and disbursements merely to get the tenant to concede. Lining the pockets of third parties is not how it should be, but is the price of venturing into the property system.
The standard form of rent review clause to open market rent is rarely thought out in the context of the actual property. In my opinion, there is no benefit to a landlord in going to the expense of a rent review clause drafted if there is any possibility the rent might not increase. To assume that merely because there is a rent review and an open market that the two combine to support an increase is a nonsense. At rent review to open market, a landlord is not in a position to insist upon an increase, nor is there is any justification for an increase merely because at the last rent review there was no increase. In a matter I was dealing with earlier this year, where my instructions were withdrawn despite the landlord concurring with my opinion that the rent would not increase, the fact that it takes time to procure an increase when none is justified seemed to be lost on the landlord. as far as the landlord was concerned merely because I advised no increase, but have a go, and the tenant's surveyor concurred with me did not mean the rent should not increase. You may think the landlord off his rocker but the failing is that the rent review clause to open market was drafted on the assumption that there would be evidence in the open market to support an increase.
Psychologically, the implication in 'upward-only' rent review is that the rent must increase and that if the landlord cannot procure what he wants through his own efforts a surveyor ought to be able to do better. Tough, it's not like that. Sometimes the rent that the parties could agree between themselves would be higher than if surveyors are involved. Hardly surprising therefore that landlords are keen on dissuading tenants from involving surveyors!
Rent Review
01/01/2014
The purpose of a rent review (and where the basis is market rent) is to enable the landlord to obtain the market rent for the premises at the review date (or valuation date if different) and for the tenant to ensure it is not paying any more or less.
The open market is made up of different ‘affordabilities’, so, in linking the review to 'open market rent' ("OMR") ‘open’ means everyone and anyone. [In valuation, the word ‘open’ is superfluous. ]
As comparable evidence, a new letting to an inexperienced first-time tenant at a rent that might amaze is as valid as any hard-driven bargain by a company with dozens of branches. So, since rents in the commercial property market are unregulated, any tenant committing to a review to OMR is exposing its business to all manner of risks beyond its control (a situation that can strain compliance with the Turnbull report on internal control and risk management, to safeguard shareholders’ investment and the company’s assets). Similarly, since, in the open market, different landlords are likely to have different investment strategies, risks also apply to the landlord’s investment. Hence, the only way the actual landlord and actual tenant can have any control over the direction of the rental relationship is by recording their requirements in the lease, per the rent review guidelines.
In the market, rent is a product; it does not occur naturally, as in, ‘this is the rent for the premises’. To value rent, all terms and conditions of the tenancy must be known, stated in advance or defined. But, since the rent on a new letting is often agreed before the lease is drafted and/or approved, it is possible for a completed lease to contain terms and conditions that could produce a different rent to what was agreed. The test of efficacy is whether the rent would be identical if there were a rent review on the same date as the term commencement.
A rent review might be thought of greater benefit to landlords but, essentially, benefit is equal. A review ensures the tenant is not subsidised. Of course, tenants do not necessarily see it like that; and, for many, the only way the business can remain profitable is when costs are below the going rate.
With the gap widening between those that have what customers want and those that do not, tenants not on the receiving end of profitable demand are often fighting to preserve an outmoded business model. The tenant’s reaction to a proposed increase is likely to be emotional, than dispassionate, but a tenant’s failure to adapt its style to changing circumstances cannot possibly be something for which the landlord should be expected to share responsibility. It is not a fault of landlords that rents have become uneconomical for some tenants, but a function of the market, and that includes competition from other businesses, valuation methodology, and tenants straying from review guidelines.
It is pointless for a tenant to agree what it can afford because that could vary over the years: to pay more than necessary when business is booming can mean that rent fixed for the term, regardless. Because terminology is fashionable, guidelines vary from detailed to vague - terms and conditions of a tenancy cannot be changed, except by rectification by the original parties, or mutual agreement - but, whether the intention of the original parties is clear or interpreted, the guidelines are intended to be helpful: to enable the tenant to apply market circumstances at the valuation date to the level of rent.
A rent review is objective: not how much the actual tenant would agree, or the actual landlord would want, but what a hypothetical willing landlord would reasonably expect and a hypothetical willing tenant would pay; such parties may include the actual landlord and actual tenant. So, in addition to procedure for operating the review, time for agreement, method and cost of dispute resolution, and timing of payment and rate of interest on any back rent, the guidelines define the valuation basis for the terms of the tenancy between the hypothetical parties.
There is no such thing as an ‘upward-only rent review’ as such. Upward-only is a cushion for the rent payable and nothing to do with the market rent. So, if the lease contains an “upward-only” review clause, then that does not mean the rent must go up; but that the rent payable after the review cannot be lower than before. Even so, when the landlord expects an increase, that feeling can rub off on the tenant, so the tenant’s first thought is likely to focus on the proposal, rather than how to agree a rent that accords with the guidelines. Landlords can prey on inexperience and unsuspecting - for example, an increase for inflation, or encouraging avoiding the expense of appointing surveyors - so when landlord and tenant communicate directly, it is not unusual for such tenants to settle for a quiet life. But, whereas avoiding confrontation may sometimes be commercially expedient, it makes no sense, at least to me, for a tenant to ignore the guidelines, by thinking that could upset their landlord, when the guidelines are designed to be helpful.
If you are acting for the tenant and do as the tenant asks, but the landlord is unyielding, then for you and/or the tenant to reckon no real likelihood of a surveyor doing any better should, I suggest, be put to the test. It does not follow just because you and your client are not making any progress that a surveyor's experience would also get nowhere. To a landlord (whether represented overtly by a surveyor), a tenant, when negotiating themselves, or through a solicitor or an accountant, is often regarded a ‘soft touch’. Calling a landlord’s bluff - for example, threatening to instruct a surveyor, or referral to ‘arbitration’ - will only work when the landlord is fearful of the prospect. A landlord will wait to see whom the tenant has instructed, before deciding whether to enter into combat.
Although lowest rent is important, it may be all the more where the lease contains a tenant’s option to buy the freehold for the price valuation formula is based on the rent.
In my opinion, things go wrong in the landlord and tenant relationship when negotiations become subjective, and wider consequences for the actual landlord and tenant dominate. It is not simply a clash of personality or viewpoint. Costs can figure largely, the tenant baulks at the expense of referral, angles are not spotted or explored, so a new rent does not reflect the market at the valuation date, but is a product of the past, based almost solely on other rent review and lease renewal agreements. The cumulative effect can take its toll.
To quote from Wallshire Ltd v Aarons [1988] “second best are rent reviews which are negotiated between valuers, because although their aim is to achieve the same end-result of deciding what the market rent is, their decision is not tested by the market; their decision, their agreement, is based on their conclusions about what the market would decide. Negotiated settlements therefore can be unreliable because of the possibility of error piled on error. They need … an occasional window of reality provided by open market decisions. ”
The difficulty for a solicitor, when acting for a tenant, is their advisory role differs from that of a surveyor. Solicitors act only on client instructions, whereas surveyors can act off their own bat. When the tenant tells you the landlord’s proposal is excessive, or such like, and wants to reply with a counter-offer of what he could afford, how the response is received by the landlord is likely to be construed as an outburst, merely letting off steam. While some landlords do overstate, the proposal may in fact be close to market rent. Generally, particularly when substantial increase is proposed, the tenant’s reaction is anticipated. A emotional plea is unlikely to cut any ice. Since a review is a function of tenancy management, the tenant may forget, or not realise, the process is nothing personal.
It is also important to realise the review process is not only about rent, but also whether the review can be implemented and/or the proposal negotiated. Implementation often requires some notice to be given, the notice must be valid, and time-limits adhered to. Similarly, it may be necessary to serve a counter-notice. It is vital to respect the guidelines. Bellinger v South London Stationers Ltd [1979] is an example of what can go wrong: “we would hardly need to add that we do not accept your revised figure” was not considered sufficiently specific to be a counter-notice.
Where many tenants go wrong is not consulting a surveyor. It’s all very well wanting to save on fees by tackling the landlord themselves, or getting their solicitor or accountant to write, but, at rent review, as with anything involving a business tenancy, it’s not simply a matter of the tenant agreeing what it can afford, but what others would agree for the same situation. Anything the tenant agrees by themselves could end up backfiring on them at a later date. Whether through a solicitor or an accountant, a tenant trying to negotiate a rent review without involving a surveyor can leave the tenant with the feeling the cards are stacked in favour of the landlord but, in my experience, how negotiations are handled from the start can make a difference to the outcome.
The open market is made up of different ‘affordabilities’, so, in linking the review to 'open market rent' ("OMR") ‘open’ means everyone and anyone. [In valuation, the word ‘open’ is superfluous. ]
As comparable evidence, a new letting to an inexperienced first-time tenant at a rent that might amaze is as valid as any hard-driven bargain by a company with dozens of branches. So, since rents in the commercial property market are unregulated, any tenant committing to a review to OMR is exposing its business to all manner of risks beyond its control (a situation that can strain compliance with the Turnbull report on internal control and risk management, to safeguard shareholders’ investment and the company’s assets). Similarly, since, in the open market, different landlords are likely to have different investment strategies, risks also apply to the landlord’s investment. Hence, the only way the actual landlord and actual tenant can have any control over the direction of the rental relationship is by recording their requirements in the lease, per the rent review guidelines.
In the market, rent is a product; it does not occur naturally, as in, ‘this is the rent for the premises’. To value rent, all terms and conditions of the tenancy must be known, stated in advance or defined. But, since the rent on a new letting is often agreed before the lease is drafted and/or approved, it is possible for a completed lease to contain terms and conditions that could produce a different rent to what was agreed. The test of efficacy is whether the rent would be identical if there were a rent review on the same date as the term commencement.
A rent review might be thought of greater benefit to landlords but, essentially, benefit is equal. A review ensures the tenant is not subsidised. Of course, tenants do not necessarily see it like that; and, for many, the only way the business can remain profitable is when costs are below the going rate.
With the gap widening between those that have what customers want and those that do not, tenants not on the receiving end of profitable demand are often fighting to preserve an outmoded business model. The tenant’s reaction to a proposed increase is likely to be emotional, than dispassionate, but a tenant’s failure to adapt its style to changing circumstances cannot possibly be something for which the landlord should be expected to share responsibility. It is not a fault of landlords that rents have become uneconomical for some tenants, but a function of the market, and that includes competition from other businesses, valuation methodology, and tenants straying from review guidelines.
It is pointless for a tenant to agree what it can afford because that could vary over the years: to pay more than necessary when business is booming can mean that rent fixed for the term, regardless. Because terminology is fashionable, guidelines vary from detailed to vague - terms and conditions of a tenancy cannot be changed, except by rectification by the original parties, or mutual agreement - but, whether the intention of the original parties is clear or interpreted, the guidelines are intended to be helpful: to enable the tenant to apply market circumstances at the valuation date to the level of rent.
A rent review is objective: not how much the actual tenant would agree, or the actual landlord would want, but what a hypothetical willing landlord would reasonably expect and a hypothetical willing tenant would pay; such parties may include the actual landlord and actual tenant. So, in addition to procedure for operating the review, time for agreement, method and cost of dispute resolution, and timing of payment and rate of interest on any back rent, the guidelines define the valuation basis for the terms of the tenancy between the hypothetical parties.
There is no such thing as an ‘upward-only rent review’ as such. Upward-only is a cushion for the rent payable and nothing to do with the market rent. So, if the lease contains an “upward-only” review clause, then that does not mean the rent must go up; but that the rent payable after the review cannot be lower than before. Even so, when the landlord expects an increase, that feeling can rub off on the tenant, so the tenant’s first thought is likely to focus on the proposal, rather than how to agree a rent that accords with the guidelines. Landlords can prey on inexperience and unsuspecting - for example, an increase for inflation, or encouraging avoiding the expense of appointing surveyors - so when landlord and tenant communicate directly, it is not unusual for such tenants to settle for a quiet life. But, whereas avoiding confrontation may sometimes be commercially expedient, it makes no sense, at least to me, for a tenant to ignore the guidelines, by thinking that could upset their landlord, when the guidelines are designed to be helpful.
If you are acting for the tenant and do as the tenant asks, but the landlord is unyielding, then for you and/or the tenant to reckon no real likelihood of a surveyor doing any better should, I suggest, be put to the test. It does not follow just because you and your client are not making any progress that a surveyor's experience would also get nowhere. To a landlord (whether represented overtly by a surveyor), a tenant, when negotiating themselves, or through a solicitor or an accountant, is often regarded a ‘soft touch’. Calling a landlord’s bluff - for example, threatening to instruct a surveyor, or referral to ‘arbitration’ - will only work when the landlord is fearful of the prospect. A landlord will wait to see whom the tenant has instructed, before deciding whether to enter into combat.
Although lowest rent is important, it may be all the more where the lease contains a tenant’s option to buy the freehold for the price valuation formula is based on the rent.
In my opinion, things go wrong in the landlord and tenant relationship when negotiations become subjective, and wider consequences for the actual landlord and tenant dominate. It is not simply a clash of personality or viewpoint. Costs can figure largely, the tenant baulks at the expense of referral, angles are not spotted or explored, so a new rent does not reflect the market at the valuation date, but is a product of the past, based almost solely on other rent review and lease renewal agreements. The cumulative effect can take its toll.
To quote from Wallshire Ltd v Aarons [1988] “second best are rent reviews which are negotiated between valuers, because although their aim is to achieve the same end-result of deciding what the market rent is, their decision is not tested by the market; their decision, their agreement, is based on their conclusions about what the market would decide. Negotiated settlements therefore can be unreliable because of the possibility of error piled on error. They need … an occasional window of reality provided by open market decisions. ”
The difficulty for a solicitor, when acting for a tenant, is their advisory role differs from that of a surveyor. Solicitors act only on client instructions, whereas surveyors can act off their own bat. When the tenant tells you the landlord’s proposal is excessive, or such like, and wants to reply with a counter-offer of what he could afford, how the response is received by the landlord is likely to be construed as an outburst, merely letting off steam. While some landlords do overstate, the proposal may in fact be close to market rent. Generally, particularly when substantial increase is proposed, the tenant’s reaction is anticipated. A emotional plea is unlikely to cut any ice. Since a review is a function of tenancy management, the tenant may forget, or not realise, the process is nothing personal.
It is also important to realise the review process is not only about rent, but also whether the review can be implemented and/or the proposal negotiated. Implementation often requires some notice to be given, the notice must be valid, and time-limits adhered to. Similarly, it may be necessary to serve a counter-notice. It is vital to respect the guidelines. Bellinger v South London Stationers Ltd [1979] is an example of what can go wrong: “we would hardly need to add that we do not accept your revised figure” was not considered sufficiently specific to be a counter-notice.
Where many tenants go wrong is not consulting a surveyor. It’s all very well wanting to save on fees by tackling the landlord themselves, or getting their solicitor or accountant to write, but, at rent review, as with anything involving a business tenancy, it’s not simply a matter of the tenant agreeing what it can afford, but what others would agree for the same situation. Anything the tenant agrees by themselves could end up backfiring on them at a later date. Whether through a solicitor or an accountant, a tenant trying to negotiate a rent review without involving a surveyor can leave the tenant with the feeling the cards are stacked in favour of the landlord but, in my experience, how negotiations are handled from the start can make a difference to the outcome.
Open Market
01/01/2014
The open market is made up of different ‘afford-abilities’, so, in linking the review to “open market rent” (OMR) ‘open’ means everyone and anyone (A).
As indicative or comparable evidence, a new letting to an inexperienced first-time tenant at a rent that might amaze is as valid as any hard-driven bargain by a multiple retailer with hundreds of branches. So, since rents in the open market are unregulated, any tenant committing to a review to OMR is exposing its business to all manner of risks beyond its control (a situation that can strain compliance with the Turnbull report on internal control and risk management, to safeguard shareholders' investment and the company's assets). That is the nature of the system; and when tenants choose to agree to a rent review to the open market rent it is implicit the tenant is agreeing to the underlying purpose and overriding objective: namely to enable the landlord to obtain the open market rent at the valuation date per terms of the tenancy, not for the tenant to expect to pay any less.
Similarly, since, in the open market, different landlords are likely to have different investment performance strategies, risks also apply to the landlord’s investment. Hence, the only way the actual landlord and actual tenant can have any control over the direction of the rental relationship is by recording their requirements in the lease, per the rent review guidelines.
Hoffmann LJ commented on the concept of the open market in a capital transfer tax case, IRC v Gray [1994] STC 360:
"It cannot be too strongly emphasised that although the sale is hypothetical, there is nothing hypothetical about the open market in which it is supposed to have taken place. The concept of the open market involves assuming that the whole world was free to bid, and then forming a view about what in those circumstances would in real life have been the best price reasonably obtainable …"
As indicative or comparable evidence, a new letting to an inexperienced first-time tenant at a rent that might amaze is as valid as any hard-driven bargain by a multiple retailer with hundreds of branches. So, since rents in the open market are unregulated, any tenant committing to a review to OMR is exposing its business to all manner of risks beyond its control (a situation that can strain compliance with the Turnbull report on internal control and risk management, to safeguard shareholders' investment and the company's assets). That is the nature of the system; and when tenants choose to agree to a rent review to the open market rent it is implicit the tenant is agreeing to the underlying purpose and overriding objective: namely to enable the landlord to obtain the open market rent at the valuation date per terms of the tenancy, not for the tenant to expect to pay any less.
Similarly, since, in the open market, different landlords are likely to have different investment performance strategies, risks also apply to the landlord’s investment. Hence, the only way the actual landlord and actual tenant can have any control over the direction of the rental relationship is by recording their requirements in the lease, per the rent review guidelines.
Hoffmann LJ commented on the concept of the open market in a capital transfer tax case, IRC v Gray [1994] STC 360:
"It cannot be too strongly emphasised that although the sale is hypothetical, there is nothing hypothetical about the open market in which it is supposed to have taken place. The concept of the open market involves assuming that the whole world was free to bid, and then forming a view about what in those circumstances would in real life have been the best price reasonably obtainable …"
Rent Review in the Prevailing Climate
22/11/2012
Investment is about becoming financially better off. Investing in commercial property can be rewarding provided you know what you’re doing, otherwise risky. For further reading, please visit LandlordZone newsletter issue 6 - click here