The Rent Review Specialist
Lease
Lease
The terms and conditions of a tenancy are embodied in a document, known as a 'lease'. Although the terms and conditions of the completed agreement are commonly referred to as the lease, in fact the lease is simply the document itself. The document is a written record of the terms and conditions that comprise the agreement between landlord and tenant for the premises.
A type of occupancy known as a licence can cause problems and is generally to be avoided. A licence is a personal privilege that makes lawful that which would be unlawful otherwise. Although strictly a lease is a document, in popular parlance a lease and tenancy are interchangeable. With a licence, calling a document a licence does not make it one, so whilst the intention may be licence, in practice, the arrangement may constitute a tenancy. Amongst the tests to determine whether the occupancy is a licence or tenancy is whether the occupier has exclusive possession of the premises but, per business law, exclusive possession does not necessarily negate a licence.
The relationship between landlord and tenant hinges upon the terms and conditions of the tenancy. A tenancy (or ‘lease’) is a contract for a certain term and has a date of document, a tenancy contractual term start date and contractual term expiry (end date). When a tenancy is for a business purpose, the lease is a commercial contract which means the parties are in law deemed to know what they are doing.
Generally, the onus is on the landlord’s side to draft the documentation, and for the tenant’s side to approve. Although early leases were not unsophisticated, the trend over the years has been the widespread use of precedents and a general tightening of the “small print” so as to minimise management expenses with more control for the landlord of the relationship between landlord and tenant.
Basically a lease contains terms and conditions for the operation, management and enforcement of the tenancy. The landlord and tenant, known as the parties, can agree whatever terms and conditions they like for the tenancy, but some requirements are governed by overriding legislation.
Because different landlords and different tenants have different requirements and shops, in common with all commercial properties, are different, there is no standard form of lease in use generally. Whilst many landlords and tenants have their own standard wording for the documentation, also the Law Society, for example, has a standard document for use by landlords and tenants, one cannot buy a ready-made document and simply fill in the blanks and reasonably expect the tenant to sign without question, or at least not without changing some wording. Normally, what happens is that after outline terms have been agreed between the parties and 'heads of terms' agreed, the lawyers for the respective parties, sometimes with the help of respective surveyors, draft and approve the documentation from scratch.
Because tenancies often last for years, and the wording of terms and conditions can be fashionable, the content of leases varies considerably. Also, although the terms and wording of a lease cannot be changed after completion, except by rectification or mutual agreement, leases are assets that can be bought, sold, transferred and mortgaged. During the life of a lease it is common for related agreements to be entered into by the parties and their successors. Such agreements include deeds of variation, rent deposit deeds, licences to alter, change the use, assign, underlet, rent review memoranda, and side-letters.
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.
For some reason, best known to the world of lawyer-draftsmen, the wording and phrasing in leases, especially in the realm of rent review, is often unbelievably convoluted. Commonly, rent 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 clear from the wording of the lease from which each particular anniversary is computed.
Generally, any and all other documents related to the lease may be loosely included in the definition of lease. Usually, other documents, such as licences to alter, vary the user, deed of variation, deed of rent deposit, memoranda, and side-letters, are likely to mention the lease itself, so the wording and content of associated and related documents could affect the rental and/or capital value.
A type of occupancy known as a licence can cause problems and is generally to be avoided. A licence is a personal privilege that makes lawful that which would be unlawful otherwise. Although strictly a lease is a document, in popular parlance a lease and tenancy are interchangeable. With a licence, calling a document a licence does not make it one, so whilst the intention may be licence, in practice, the arrangement may constitute a tenancy. Amongst the tests to determine whether the occupancy is a licence or tenancy is whether the occupier has exclusive possession of the premises but, per business law, exclusive possession does not necessarily negate a licence.
The relationship between landlord and tenant hinges upon the terms and conditions of the tenancy. A tenancy (or ‘lease’) is a contract for a certain term and has a date of document, a tenancy contractual term start date and contractual term expiry (end date). When a tenancy is for a business purpose, the lease is a commercial contract which means the parties are in law deemed to know what they are doing.
Generally, the onus is on the landlord’s side to draft the documentation, and for the tenant’s side to approve. Although early leases were not unsophisticated, the trend over the years has been the widespread use of precedents and a general tightening of the “small print” so as to minimise management expenses with more control for the landlord of the relationship between landlord and tenant.
Basically a lease contains terms and conditions for the operation, management and enforcement of the tenancy. The landlord and tenant, known as the parties, can agree whatever terms and conditions they like for the tenancy, but some requirements are governed by overriding legislation.
Because different landlords and different tenants have different requirements and shops, in common with all commercial properties, are different, there is no standard form of lease in use generally. Whilst many landlords and tenants have their own standard wording for the documentation, also the Law Society, for example, has a standard document for use by landlords and tenants, one cannot buy a ready-made document and simply fill in the blanks and reasonably expect the tenant to sign without question, or at least not without changing some wording. Normally, what happens is that after outline terms have been agreed between the parties and 'heads of terms' agreed, the lawyers for the respective parties, sometimes with the help of respective surveyors, draft and approve the documentation from scratch.
Because tenancies often last for years, and the wording of terms and conditions can be fashionable, the content of leases varies considerably. Also, although the terms and wording of a lease cannot be changed after completion, except by rectification or mutual agreement, leases are assets that can be bought, sold, transferred and mortgaged. During the life of a lease it is common for related agreements to be entered into by the parties and their successors. Such agreements include deeds of variation, rent deposit deeds, licences to alter, change the use, assign, underlet, rent review memoranda, and side-letters.
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.
For some reason, best known to the world of lawyer-draftsmen, the wording and phrasing in leases, especially in the realm of rent review, is often unbelievably convoluted. Commonly, rent 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 clear from the wording of the lease from which each particular anniversary is computed.
Generally, any and all other documents related to the lease may be loosely included in the definition of lease. Usually, other documents, such as licences to alter, vary the user, deed of variation, deed of rent deposit, memoranda, and side-letters, are likely to mention the lease itself, so the wording and content of associated and related documents could affect the rental and/or capital value.
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.
Framework of review clause
The framework of a well-drafted review clause will comprise:
1) The review dates
2) Procedure for operating the review
3) Valuation guidelines
4) Timetable for agreement
5) Dispute resolution procedure
6) Recording the review
7) Payment of the revised rent
1) The review dates
2) Procedure for operating the review
3) Valuation guidelines
4) Timetable for agreement
5) Dispute resolution procedure
6) Recording the review
7) Payment of the revised rent
Framework of a lease
The framework or construction of a lease, its content and wording, lays down the contractual responsibilities and obligations that the landlord and tenant have with 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 and/or conditions, the wording and/or 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 and on expiry 2015. 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. 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 2013, 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.
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 law composes legislation and case-law 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.
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 and/or conditions, the wording and/or 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 and on expiry 2015. 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. 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 2013, 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.
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 law composes legislation and case-law 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.
Changing Market and Varying a Lease
The definition of ‘lease‘ is "the grant of a right to the exclusive possession of land for a determinate term less than that which the grantor has himself in the land". In practice, a lease is …for further reading, please visit LandlordZone newsletter issue 16 - click here