Negotiating your commercial rent reviews – Do you need help?
The devil is in the detail in the hypothetical world of the rent review. Review clauses are not intuitive and need to be read in the context of the case law. Which is why it has evolved as a specialism.
Most rent reviews are settled amicably once the evidence has been unearthed and the legal framework properly understood. Many go some way down the path to 3rd party settlement before settling, and this process can become tactical. Some reviews have to go all the way.
Negotiated settlements are desirable, but not at any cost. Our robust approach to rent review negotiations is backed by our ability to act effectively as expert witness in third party proceedings whether at arbitration or independent expert determination. Without that credible threat of 3rd party action you are negotiating from a position of weakness.
Top Tips for Property Owners: Rent Review Clause
How much time do I need to prepare for a rent review?
Rent reviews typically occur every five years depending on the length of the lease. Don’t leave it to the last minute to consider your rent review strategy. There may be time limits stipulated in the lease’s rent review clause within which the landlord or tenant might have to issue or respond to a rent review notice. Eighteen months before the rent review date should give sufficient time to start checking the lease to ensure it doesn’t specify a time limit and to appoint a rent review surveyor. Missing deadlines can be costly: tenants could have to pay an inflated rent and landlords may lose the right to a rent review entirely.
Does the tenant pay rent while the level of rent is being disputed?
Yes. The tenant must pay rent at the old rate whilst the rent review is being negotiated. Once an agreement is reached the difference (back rent) will have to be paid. If the rent increases, interest often has to be paid on the overdue amount.
What is “Open Market Rent”?
Open Market Rent is the best rent a property might achieve if let on the open market, given a willing landlord and tenant and taking into account the terms of the lease and the state of the local commercial property market.
Why should we appoint a lease consultant for the rent review process?
Rent reviews can be technical and complex and in the current market it is more important than ever to ensure the full potential of the property is realised. Appointing a surveyor is the most effective way of accessing the open market, taking into account local comparables and negotiating allowances on specific points and assumptions. Surveyor’s fees are inexpensive in comparison to overpaying or under claiming rent or for letting the case reach arbitration.
4-5 Bonhill Street, EC1
25,000 sq ft building on a short term lease
Assumed specification – in dispute.
The rent review and repairs clause – poorly drafted.
Rent free assumptions – interpretation turned on one word
- Acting for the landlord, the case concerns the rent review on a 1950/60’s building of 25,000 sq ft located in Bonhill Street; second hand space, with a dated specification and a schedule of condition. A five year term held outside the Act on 25,000 sq ft of dated office space has little market appeal – we were dealing with a set of non-standard criteria here which would have a disruptive effect on occupier demand.
- The schedule of conditioned contained a life expectancy survey for the plant. It did not paint the equipment in a good light – some items were referred to as obsolete which did not help! Not surprisingly the specification/standard of repair to be assumed at review became a major sticking point between the parties and, since the tenant has undertaken significant improvements, we could no longer just value ‘as seen’.
- There were conflicting clauses between the repairs, schedule of condition, yield up provisions and the review clause which caused significant differences of opinion between the parties.
- A drafting error in the review clause regarding the treatment of rent free caused a further area of disagreement, caused by one rogue word, for which we could find no legal precedent.
What We Did
- Following a hard trawl of the market by our agency team we identified evidence on suitably dated space over 10,000 sq ft taken on shorter lease terms. We used this evidence to persuade the tenant that the circumstances were not unique and a rental range emerged from this, getting us over the first valuation ‘hurdle’.
- On the issue of condition, the question to be dealt with was: when do tenant’s improvements become repairs that can be valued?
- The tenant relied upon the obligation to maintain in no better state than the life expectancy table whereas we took the view that the repairing obligation to repair ‘or replace if necessary’ overruled the schedule. By analysing which items were replaced as ‘repairs’ rather than improvement, assisted by an M&E consultant, we were able to value the building to a rather better condition than the client had anticipated from the schedule of condition.
- The treatment of rent free periods – ‘net’ or ‘net net’ rent – was trickier still; a poorly drafted disregard and no legal precedent to reference. We challenged the tenant’s interpretation of a ‘net net’ rent, arguing instead that the clause if read in a wider context purported to be a ‘net’ rent assumption (ie stripping out a market fit out period).
- This question of whether or not to strip out the fit out period became a binary point between the parties with the value of this issue alone equated to a 7% rent variance. Calderbanks were traded but with respective positions still entrenched the parties agreed to refer the point to a legal assessor on a “winner takes all” basis. During this process the tenant served a further calderbank offer which narrowed the variance to 3.5%. The client accepted the offer.
- The rent review was settled at a very satisfactory 75% rental uplift.
- Adding value for a client requires spotting drafting errors or inconsistencies and knowing how to deal with them – our Partner level advice was critical
- A solid local/sub market knowledge was invaluable when dealing with unconventional space