4-5 Bonhill Street, EC1

Key issues:

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

The Case

• 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 Outcome

• 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