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.
How to do a rent review - 02
30/08/2017
At rent review, the starting point obviously is to read the lease. I say ‘obviously’ because … For further reading, please visit LandlordZone
How to do a rent review - 01
03/07/2017
In 1978, I published a pamphlet “The Framework of Rent Review Clauses” which was given free publicity in leading law and property journals. In 1983, I published … For further reading, please visit LandlordZone
Rent review: words versus numbers
26/04/2017
An informed rent review surveyor and an experienced lawyer working as a team on the drafting and approval of the lease documentation is arguably the only way that the client’s interest can reasonably be described as … For further reading, please visit LandlordZone newsletter - click here
Dispute Resolution Procedure at Rent Review
26/02/2016
At rent review, the phrase 'going to arbitration' is often bandied about during negotiations as a means for one party to get its own way. Whether or not the parties can agree the rent without involving the dispute resolution procedure, it is common for a represented or experienced party to invoke as a negotiating ploy. For whatever reason, it is important to understand what you are letting yourself in before taking the step or allowing the procedure to run its course. For further reading, please visit LandlordZone: click here
Negotiating Rent Review with your Tenant
07/07/2015
It is not compulsory to instruct a surveyor to deal with the rent review and many landlords prefer to have a go at negotiating rent reviews direct with their tenants, particularly local traders and small businesses. For further reading, please visit LandlordZone.
Boot on the other foot
26/02/2015
Whether residential or commercial property, there is a considerable amount of money to be made by playing your cards right. It’s not only investors that can play the property game, so too can banks. For further reading, please visit LandlordZone
Rent Review Increase
09/10/2014
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. For further reading, please visit LandlordZone.
(Please note: this article is an abbreviated version of "Open Market Rent Review".)
(Please note: this article is an abbreviated version of "Open Market Rent Review".)
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!
"Upward only" rent review
12/05/2014
Contrary to popular belief, ‘upward-only’ rent review does not mean the rent must increase. For further reading, please visit LandlordZone
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.
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.
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
Rent Review - Time of the Essence
01/03/2009
Acting for a trustee of a restaurant property in East London, I was instructed to advise and take over negotiations for a rent review where the landlord's previous surveyor had failed to serve a valid notice and the tenant's surveyor had questioned the effective date of the review. The trustee's solicitors had sought to remedy the situation by serving a fresh notice but overdid it by including wording that strayed from the lease; the tenant's surveyor was also questioning the validity of the second notice.
According to the lease, the landlord has the right, on giving the tenant at least one month’s notice, to review the yearly rent, the revised rent to be payable from the review date. If the rent had not been reviewed at a date of review then the landlord shall at any time thereafter have the right to review the rent, upon giving not less than one month’s notice in writing, and from the date specified in that notice (not earlier than one month from the date of service of the notice) the yearly rent shall be increased at the date specified in that notice.
The timing of the landlord’s notice in the first instance was not of the essence, but it could be reasoned the subsequent procedure for giving notice renders that first instance of the essence. Only the landlord had the right to start the review procedure, but business tenancy law provides a means for the tenant to force the landlord to start or lose the right. Also, there was a similarity with the situation in H Turner & Son Ltd v Confederation Insurance Co (UK) Ltd and another [2002]. In Turner, it was held that the provision for service of a late rent review notice after the end of the period of the ‘main’ rent review notice made time of the essence in relation to the ‘main’ notice.
It would have been possible for the draftsman of the lease to avoid time of the essence simply by using different wording. To have two separate procedures struck me as cumbersome. My own view is the subsequent procedure, apart from overcoming the situation had the first procedure not been followed, may have been intended to benefit the landlord to time the implementation of the review to the state of the market then prevailing and, since that would be to the detriment of the tenant, the benefit for the tenant in agreeing is that the increased rent would not be back-dated to the first instance review date. However, that would pre-suppose the valuation date would also be the date specified in the subsequent notice. Assuming the time of the first instance notice is of the essence, the right to review the rent at the express review date would be lost if notice were not given in time.
Rather than get embroiled in the legalities and the risk to the landlord of losing the right to review entirely, I persuaded the tenant's surveyor to drop the challenge of validity in exchange for the later review date.
According to the lease, the landlord has the right, on giving the tenant at least one month’s notice, to review the yearly rent, the revised rent to be payable from the review date. If the rent had not been reviewed at a date of review then the landlord shall at any time thereafter have the right to review the rent, upon giving not less than one month’s notice in writing, and from the date specified in that notice (not earlier than one month from the date of service of the notice) the yearly rent shall be increased at the date specified in that notice.
The timing of the landlord’s notice in the first instance was not of the essence, but it could be reasoned the subsequent procedure for giving notice renders that first instance of the essence. Only the landlord had the right to start the review procedure, but business tenancy law provides a means for the tenant to force the landlord to start or lose the right. Also, there was a similarity with the situation in H Turner & Son Ltd v Confederation Insurance Co (UK) Ltd and another [2002]. In Turner, it was held that the provision for service of a late rent review notice after the end of the period of the ‘main’ rent review notice made time of the essence in relation to the ‘main’ notice.
It would have been possible for the draftsman of the lease to avoid time of the essence simply by using different wording. To have two separate procedures struck me as cumbersome. My own view is the subsequent procedure, apart from overcoming the situation had the first procedure not been followed, may have been intended to benefit the landlord to time the implementation of the review to the state of the market then prevailing and, since that would be to the detriment of the tenant, the benefit for the tenant in agreeing is that the increased rent would not be back-dated to the first instance review date. However, that would pre-suppose the valuation date would also be the date specified in the subsequent notice. Assuming the time of the first instance notice is of the essence, the right to review the rent at the express review date would be lost if notice were not given in time.
Rather than get embroiled in the legalities and the risk to the landlord of losing the right to review entirely, I persuaded the tenant's surveyor to drop the challenge of validity in exchange for the later review date.
Reducing Property Costs
01/06/1999
Socially, “win-win” as a means of avoiding or diffusing argument is useful as a catalyst but, at rent review, I regard it as inappropriate, because the intention is pre-determined as the open market rent: ie, what other retailers would pay for the premises. Whilst landlords would like all tenants to conform to the property system’s logical expectations, a tenant not actually in competition for the premises gains nothing from paying the going rate.
Even so, many tenants lose out because “win-win” has become institutionalised amongst surveyors so that, instead of concentrating on reduction, the emphasis is on agreeing market rent. Whilst the guidelines are geared towards that objective, the interests of landlord and tenant are opposed so, assuming an upward-only review, rather than reducing the proposal, I focus on passing rent. Clients also benefit indirectly in that their premises become more marketable, because when I release information for comparable evidence, landlord and surveyor opponents elsewhere invariably discount the devaluation. For example, I concluded a March 1999 review in Cornmarket, Oxford at under £180 Zone-A when Gap, almost next door, paid over £204 headline Zone-A in July 1998 and Birthdays nearby agreed 15% more on review in September 1998. Similarly, in North End, Croydon, I negotiated a March 1998 renewal at £125 Zone-A when, almost next door, an independent expert determined Zone-A £140 at the same date.
I am often instructed as a trouble-shooter and, in such cases, am fascinated by what the parties have taken for granted. If my experience reflects the market as a whole, then scope for further reducing property costs could be enormous. For example, many surveyors have difficulty in carrying out their instructions because of conflict between truth and bluff. To compensate, they can throw their weight around but, to retain peace of mind, sabotage the result. For example, I was embroiled with a surveyor whose stance was ‘take-it-or-leave-it’. He insisted that I should agree his floor areas because they were agreed on earlier occasions with chartered surveyors. On my calculations, verified afterwards by another surveyor not previously involved, the landlord’s surveyor’s area was wrong and the rent ,£4000 a year too low. In another matter, a landlord has been asserting the right to review after 3 years delay and, legally, was right. However, I resisted so, after a year or so getting nowhere with me, the landlord instructed a surveyor who told me that, whilst he agreed with my contention that the right had been lost, it would be a gesture to pay more - because that would be “fair”.
Apart from finding angles, I am good at reading between the lines and listening to what is not said. Concerned about the effect on the investment, landlords can be human although, in prime positions, resemblance is unusual, so one must be careful not to be emotional or mention their desire to recoup losses from pension mis-selling. Some landlords need cash flow, others scared of voids, and many surveyors have fee targets so agreement takes priority over doing their best for clients. Also, I have no duty to protect retailers for whom I am not acting, so it may be possible to achieve a good deal for my Client that would support an increase on rent for a neighbouring retailer and, if in competition with my Client, then even better!
Reading between the lines is easier now that the standard of literacy amongst surveyors has fallen. I regard anyone who spells its as it’s, in the context of its, as a sitting duck for a referral by written submission. But, because I dislike spending Client’s money, I prefer to serve by using technical skills and psychology constructively. In short, if you would like to pay less than the going rate, then I look forward to helping you in some way. Thank you.
Even so, many tenants lose out because “win-win” has become institutionalised amongst surveyors so that, instead of concentrating on reduction, the emphasis is on agreeing market rent. Whilst the guidelines are geared towards that objective, the interests of landlord and tenant are opposed so, assuming an upward-only review, rather than reducing the proposal, I focus on passing rent. Clients also benefit indirectly in that their premises become more marketable, because when I release information for comparable evidence, landlord and surveyor opponents elsewhere invariably discount the devaluation. For example, I concluded a March 1999 review in Cornmarket, Oxford at under £180 Zone-A when Gap, almost next door, paid over £204 headline Zone-A in July 1998 and Birthdays nearby agreed 15% more on review in September 1998. Similarly, in North End, Croydon, I negotiated a March 1998 renewal at £125 Zone-A when, almost next door, an independent expert determined Zone-A £140 at the same date.
I am often instructed as a trouble-shooter and, in such cases, am fascinated by what the parties have taken for granted. If my experience reflects the market as a whole, then scope for further reducing property costs could be enormous. For example, many surveyors have difficulty in carrying out their instructions because of conflict between truth and bluff. To compensate, they can throw their weight around but, to retain peace of mind, sabotage the result. For example, I was embroiled with a surveyor whose stance was ‘take-it-or-leave-it’. He insisted that I should agree his floor areas because they were agreed on earlier occasions with chartered surveyors. On my calculations, verified afterwards by another surveyor not previously involved, the landlord’s surveyor’s area was wrong and the rent ,£4000 a year too low. In another matter, a landlord has been asserting the right to review after 3 years delay and, legally, was right. However, I resisted so, after a year or so getting nowhere with me, the landlord instructed a surveyor who told me that, whilst he agreed with my contention that the right had been lost, it would be a gesture to pay more - because that would be “fair”.
Apart from finding angles, I am good at reading between the lines and listening to what is not said. Concerned about the effect on the investment, landlords can be human although, in prime positions, resemblance is unusual, so one must be careful not to be emotional or mention their desire to recoup losses from pension mis-selling. Some landlords need cash flow, others scared of voids, and many surveyors have fee targets so agreement takes priority over doing their best for clients. Also, I have no duty to protect retailers for whom I am not acting, so it may be possible to achieve a good deal for my Client that would support an increase on rent for a neighbouring retailer and, if in competition with my Client, then even better!
Reading between the lines is easier now that the standard of literacy amongst surveyors has fallen. I regard anyone who spells its as it’s, in the context of its, as a sitting duck for a referral by written submission. But, because I dislike spending Client’s money, I prefer to serve by using technical skills and psychology constructively. In short, if you would like to pay less than the going rate, then I look forward to helping you in some way. Thank you.
Yield and Pricing
01/06/1985
The current trend for private investors in the retail market to be more concerned with short term gain than long term income is worrying.
Participants seem to have overlooked the fact that the essence in capital gain to date owes more to previous levels of inflation than to design. And even if high inflation does return, the retailing revolution will stultify any likelihood of a repeat boom.
Many new investors believe that rental value reflects expected investment yield, based upon the price they have paid. In fact, investment value is calculated by reference to the level of rent and not vice versa. However, high prices paid for some investments can only reflect a very optimistic view of rental value. With the exception of property formerly owned by notedly cautious landlords, the idea that the previous owner must have agreed too low a rent, especially if set during the period 1981-1983, is too simplistic. By having always to aim for the top rental on review, to cover purchasing expectations, any failure to achieve the objective rubs off on the relationship with the valuer whose advice is dismissed as 'negative.'
The tenant becomes saddled with a difficult landlord and often with a rental commitment far above the economics of his business. In the open market, cyclical change is inevitable, but in the quest for short term gain, while the loss of one particular tenant may not matter, it is the collective effect of the pressure for high rents which radically affects long term stability, since there cannot be capital gain without security of income.
In the past, their owners' low inflation investment values have had a useful way of adjusting to mistakes, but with changes in the pattern of retailing, and high interest rates, the margin for error now is very small.
The investor who overpays, through ignorance or greed, only to find that the resultant yield, following review, is well below comfortable resale price will have to fund the shortfall somehow. While it is churlish to insist upon strict consideration of investment criteria, since the pressure to use substantial borrowing facilities dominates the market, the problem is unlikely to grow.
Participants seem to have overlooked the fact that the essence in capital gain to date owes more to previous levels of inflation than to design. And even if high inflation does return, the retailing revolution will stultify any likelihood of a repeat boom.
Many new investors believe that rental value reflects expected investment yield, based upon the price they have paid. In fact, investment value is calculated by reference to the level of rent and not vice versa. However, high prices paid for some investments can only reflect a very optimistic view of rental value. With the exception of property formerly owned by notedly cautious landlords, the idea that the previous owner must have agreed too low a rent, especially if set during the period 1981-1983, is too simplistic. By having always to aim for the top rental on review, to cover purchasing expectations, any failure to achieve the objective rubs off on the relationship with the valuer whose advice is dismissed as 'negative.'
The tenant becomes saddled with a difficult landlord and often with a rental commitment far above the economics of his business. In the open market, cyclical change is inevitable, but in the quest for short term gain, while the loss of one particular tenant may not matter, it is the collective effect of the pressure for high rents which radically affects long term stability, since there cannot be capital gain without security of income.
In the past, their owners' low inflation investment values have had a useful way of adjusting to mistakes, but with changes in the pattern of retailing, and high interest rates, the margin for error now is very small.
The investor who overpays, through ignorance or greed, only to find that the resultant yield, following review, is well below comfortable resale price will have to fund the shortfall somehow. While it is churlish to insist upon strict consideration of investment criteria, since the pressure to use substantial borrowing facilities dominates the market, the problem is unlikely to grow.