The Rent Review Specialist
Business Tenancy
Business Tenancy
The construction or framework of a lease, its content and wording, lays down the contractual responsibilities and obligations that the landlord and tenant have to one another in relation to the premises. The operation, management and enforcement of the terms and provisions of a lease are subject to business tenancy law. A branch of property law, business tenancy law is a dynamic subject.
With business premises, there is no standard form of lease, so the terms and conditions of each and every tenancy will vary depending upon the requirements and experience of the first landlord and first tenant and their respective advisers. Since a tenancy is often granted for a number of years, the terms and conditions, together with the wording and phrasing of those terms and conditions, will remain unchanged for the duration of the contractual term of tenancy, and sometimes beyond. The only ways any of the terms, conditions, the wording and phrasing can be changed at any time during the term is either by rectification of a mistake (if the original parties are still involved) or by mutual agreement.
Although a tenancy can last for years, there are two relationships that can and do change. The first is the relationship between the landlord and tenant: that relationship is changeable because the superior landlord’s interest may be bought and sold or transferred and (subject to the provisions of the tenancy) the same for any intermediate landlord, and (subject to the provisions of the tenancy) the tenant’s interest may be assignable or the premises underlet.
The second is the relationship between the premises and the (open) market: that relationship is continually changing because, whereas the property (the building) is a fixed structure, the relationship between the location and position of the building and its surroundings can be affected by changes in those surroundings, and of which the landlord and/or tenant is likely to have no control.
The reason business tenancy law is a dynamic subject is that the operation and enforcement of the terms and provisions of the tenancy will depend upon the actual wording in the lease and associated documentation, regardless of what might or might not be happening in the open market. The wording and phrasing in leases is also fashionable. So, for example, if the premises were let for 25 years from 1990 with rent reviews at 5 yearly intervals, then the wording and phrasing would have been based on lease-draftsmen thinking in 1990 or before, whereas the effect of that wording and phrasing might have a different consequence at first rent review in 1995, but the consequence could be different again in 2000, and different again in 2005, and 2010. Although words are neutral, positive and negative conniptions can be attached to their meanings and whether a word or phrase should be interpreted literally or by reference to what is known as “presumption in favour of reality” would depend upon the business tenancy law case-precedent and valuation practice at the appropriate time.
Some business tenancy law is legislation, acts of parliament, statutes, orders and regulation, but much is based on case-law: a court decision and interpretation arising out of disputes. You will find more information about dispute resolution procedure in section 2.26 (Disputes). Generally, the courts are loathe to interfere in the wording of a commercial contract, regardless of how unfair the consequences of the agreement, and tend to confine to the interpretation of the wording. A general principle of construction that applies to all documents is that a lease must be construed as a whole and an individual clause in a lease should never be read in isolation from the rest of the lease. The interpretation of construction (wording and phrasing in documents) can be fashionable, but nowadays there is a presumption in favour of reality and commercial common/good sense.
Since the 1970s, the explosive growth of case-law has reflected the monetary effect of different interpretations by surveyors, lawyers and courts on the covenants in the lease. (In one case, the difference in opinion equated to £500,000 a year.) In 1984, in my booklet published then, I said that the variation in business leases was extensive. Then were the old ground leases from the 1880s/1890s for a term of 99 years at a fixed low ground rent, the medium to long-term leases granted during the 1920s to reflect difficulties in attracting tenants at that time, the familiar 21 year term originating in the 1950s/1960s often incorporating pre-fixed rental increases at 7 yearly intervals; and from the 1960s to 1980s, a mixture of 3, 5, 7, 9,10,12,14, 15, 20, 21 and 25 years which, to cover for inflation, incorporate rent reviews at 2, 3, 4 or 5 yearly intervals. Some leases even exist that incorporate a clause enabling the frequency of reviews to be revIewed. In 2012, new lettings in better trading position are commonly 10-15 years with 5 yearly rent reviews, and for local trader positions 2-5 years, often with break-clauses, but the unexpired duration of existing tenancies remains unchanged depending upon when the leases were granted. The consequences of the diversity is relevant when drawing comparison between what a tenant would reasonably expect in the market today compared with terms of the actual tenancy
In principle, there is nothing to prevent the parties to a lease from agreeing whatever they like but any wording or phrasing that would be contrary to law is normally subject to overriding legislation.
Despite a working system for the management of tenancies, the relationship between landlord and tenant often creates hostility, borne of mutual suspicion. Basically, the interests of landlords and tenants are diametrically opposed: invariably, the landlord wants more, the tenants less. The notion that the partIes should work together to achieve profIt, the landlord from rent, the tenant from retailing, is not prevalent In this country, so the parties seem to be at constant odds with one another. Any change in ownership of the landlord’s interest often brings new problems and a purchase during an era of high prices or interest rates adds Its own pressure by fuelling the need for full compliance and maximum rent to enhance capItal value. At rent review, the relationship between personalities is not improved by a principle in business tenancy law whereby neither the specIfIc requirements of the landlord nor the tenant’s ability to afford the market rental are relevant; in recessionary times or when the tenant’s business is not doing as well as the tenant would like, the difference in opinion or interpretation between landlord and tenant as to how a particular term or condition of the tenancy should be applied, or what the market rent should be at rent review or on lease renewal will often lead to conflict and triggering of the dispute resolution procedure.
For both lenders, landlords and investors, the effect of change on the relationship between the property and its surroundings is challenging. A shop let at for example £30,000 a year for 15 years with upward-only rent reviews at 5 yearly intervals for which the investor pays £420,000 on mortgage 65% of purchase price will (all other factors remaining constant) only maintain the same value and same loan-to-value (“LTV”) if £30,000 a year would fetch £420,000 (7% yield) for the entire period of mortgage. Amongst possibilities that could arise are 1) that the market rent could fall at any time even if the rental actually payable were protected by the ‘upward-only’ cushion at rent review, thereby resulting in an over-rented investment and a downward adjustment in capital value; 2) the closer the remaining term of tenancy to its contractual expiry date the investment market might want a higher yield to offset possibility of the tenant not renewing, unwanted vacant possession, and 3) the possibility of a lesser covenant upon reletting in the market. Even if the rent were to increase at one or more reviews, it does not follow that the rent payable would be the market rent for purpose of capital value because the capital value at any point in time has regard to the estimated market rent and how that rent would be arrived at would either be as laid down in the lease (for purpose of rent review) or if the tenancy would qualify for renewal rights then by reference to section 34 and 35 Landlord and Tenant Act 1954 Part II.
Although rental and capital valuation is a matter of opinion, for value (of commercial property) to have efficacy it must have regard to business tenancy law. Business tenancy composes legislation and precedent, but that does not mean that the opinion of value has to agree with either the law or a precedent. A precedent may be useful but does not have to be followed slavishly. Business tenancy law is rarely concerned with wider consequences so in practice things may not work like that, because every lease and every shop property is different. Valuation is not about applying the law or a precedent literally as if the law or a precedent were indisputable, but using the law or precedent in conjunction with the art and science of the opinion. In other words, never mind the theory, a question a valuer would ask is what is the practical effect of that law on this particular set of circumstances. For example, an estimate of market rent could be provided for purpose of forthcoming lease renewal negotiations, but in practice the existing tenant might not want to pay the market rent so only if the tenant would want to renew would the dispute procedure be pursued. Even if the landlord were successful in obtaining the market rent by order of the court, the tenant would not be obliged to proceed, but could give notice to end the tenancy.
With business premises, there is no standard form of lease, so the terms and conditions of each and every tenancy will vary depending upon the requirements and experience of the first landlord and first tenant and their respective advisers. Since a tenancy is often granted for a number of years, the terms and conditions, together with the wording and phrasing of those terms and conditions, will remain unchanged for the duration of the contractual term of tenancy, and sometimes beyond. The only ways any of the terms, conditions, the wording and phrasing can be changed at any time during the term is either by rectification of a mistake (if the original parties are still involved) or by mutual agreement.
Although a tenancy can last for years, there are two relationships that can and do change. The first is the relationship between the landlord and tenant: that relationship is changeable because the superior landlord’s interest may be bought and sold or transferred and (subject to the provisions of the tenancy) the same for any intermediate landlord, and (subject to the provisions of the tenancy) the tenant’s interest may be assignable or the premises underlet.
The second is the relationship between the premises and the (open) market: that relationship is continually changing because, whereas the property (the building) is a fixed structure, the relationship between the location and position of the building and its surroundings can be affected by changes in those surroundings, and of which the landlord and/or tenant is likely to have no control.
The reason business tenancy law is a dynamic subject is that the operation and enforcement of the terms and provisions of the tenancy will depend upon the actual wording in the lease and associated documentation, regardless of what might or might not be happening in the open market. The wording and phrasing in leases is also fashionable. So, for example, if the premises were let for 25 years from 1990 with rent reviews at 5 yearly intervals, then the wording and phrasing would have been based on lease-draftsmen thinking in 1990 or before, whereas the effect of that wording and phrasing might have a different consequence at first rent review in 1995, but the consequence could be different again in 2000, and different again in 2005, and 2010. Although words are neutral, positive and negative conniptions can be attached to their meanings and whether a word or phrase should be interpreted literally or by reference to what is known as “presumption in favour of reality” would depend upon the business tenancy law case-precedent and valuation practice at the appropriate time.
Some business tenancy law is legislation, acts of parliament, statutes, orders and regulation, but much is based on case-law: a court decision and interpretation arising out of disputes. You will find more information about dispute resolution procedure in section 2.26 (Disputes). Generally, the courts are loathe to interfere in the wording of a commercial contract, regardless of how unfair the consequences of the agreement, and tend to confine to the interpretation of the wording. A general principle of construction that applies to all documents is that a lease must be construed as a whole and an individual clause in a lease should never be read in isolation from the rest of the lease. The interpretation of construction (wording and phrasing in documents) can be fashionable, but nowadays there is a presumption in favour of reality and commercial common/good sense.
Since the 1970s, the explosive growth of case-law has reflected the monetary effect of different interpretations by surveyors, lawyers and courts on the covenants in the lease. (In one case, the difference in opinion equated to £500,000 a year.) In 1984, in my booklet published then, I said that the variation in business leases was extensive. Then were the old ground leases from the 1880s/1890s for a term of 99 years at a fixed low ground rent, the medium to long-term leases granted during the 1920s to reflect difficulties in attracting tenants at that time, the familiar 21 year term originating in the 1950s/1960s often incorporating pre-fixed rental increases at 7 yearly intervals; and from the 1960s to 1980s, a mixture of 3, 5, 7, 9,10,12,14, 15, 20, 21 and 25 years which, to cover for inflation, incorporate rent reviews at 2, 3, 4 or 5 yearly intervals. Some leases even exist that incorporate a clause enabling the frequency of reviews to be revIewed. In 2012, new lettings in better trading position are commonly 10-15 years with 5 yearly rent reviews, and for local trader positions 2-5 years, often with break-clauses, but the unexpired duration of existing tenancies remains unchanged depending upon when the leases were granted. The consequences of the diversity is relevant when drawing comparison between what a tenant would reasonably expect in the market today compared with terms of the actual tenancy
In principle, there is nothing to prevent the parties to a lease from agreeing whatever they like but any wording or phrasing that would be contrary to law is normally subject to overriding legislation.
Despite a working system for the management of tenancies, the relationship between landlord and tenant often creates hostility, borne of mutual suspicion. Basically, the interests of landlords and tenants are diametrically opposed: invariably, the landlord wants more, the tenants less. The notion that the partIes should work together to achieve profIt, the landlord from rent, the tenant from retailing, is not prevalent In this country, so the parties seem to be at constant odds with one another. Any change in ownership of the landlord’s interest often brings new problems and a purchase during an era of high prices or interest rates adds Its own pressure by fuelling the need for full compliance and maximum rent to enhance capItal value. At rent review, the relationship between personalities is not improved by a principle in business tenancy law whereby neither the specIfIc requirements of the landlord nor the tenant’s ability to afford the market rental are relevant; in recessionary times or when the tenant’s business is not doing as well as the tenant would like, the difference in opinion or interpretation between landlord and tenant as to how a particular term or condition of the tenancy should be applied, or what the market rent should be at rent review or on lease renewal will often lead to conflict and triggering of the dispute resolution procedure.
For both lenders, landlords and investors, the effect of change on the relationship between the property and its surroundings is challenging. A shop let at for example £30,000 a year for 15 years with upward-only rent reviews at 5 yearly intervals for which the investor pays £420,000 on mortgage 65% of purchase price will (all other factors remaining constant) only maintain the same value and same loan-to-value (“LTV”) if £30,000 a year would fetch £420,000 (7% yield) for the entire period of mortgage. Amongst possibilities that could arise are 1) that the market rent could fall at any time even if the rental actually payable were protected by the ‘upward-only’ cushion at rent review, thereby resulting in an over-rented investment and a downward adjustment in capital value; 2) the closer the remaining term of tenancy to its contractual expiry date the investment market might want a higher yield to offset possibility of the tenant not renewing, unwanted vacant possession, and 3) the possibility of a lesser covenant upon reletting in the market. Even if the rent were to increase at one or more reviews, it does not follow that the rent payable would be the market rent for purpose of capital value because the capital value at any point in time has regard to the estimated market rent and how that rent would be arrived at would either be as laid down in the lease (for purpose of rent review) or if the tenancy would qualify for renewal rights then by reference to section 34 and 35 Landlord and Tenant Act 1954 Part II.
Although rental and capital valuation is a matter of opinion, for value (of commercial property) to have efficacy it must have regard to business tenancy law. Business tenancy composes legislation and precedent, but that does not mean that the opinion of value has to agree with either the law or a precedent. A precedent may be useful but does not have to be followed slavishly. Business tenancy law is rarely concerned with wider consequences so in practice things may not work like that, because every lease and every shop property is different. Valuation is not about applying the law or a precedent literally as if the law or a precedent were indisputable, but using the law or precedent in conjunction with the art and science of the opinion. In other words, never mind the theory, a question a valuer would ask is what is the practical effect of that law on this particular set of circumstances. For example, an estimate of market rent could be provided for purpose of forthcoming lease renewal negotiations, but in practice the existing tenant might not want to pay the market rent so only if the tenant would want to renew would the dispute procedure be pursued. Even if the landlord were successful in obtaining the market rent by order of the court, the tenant would not be obliged to proceed, but could give notice to end the tenancy.