Content of a lease III: Rent Review, Alienation & Landlord Licences-
Part 1: Rent Review-
Leases can be classified into two types:
‘Full Repairing and Insuring’ (FRI)/ ‘Institutional’ leases; and
‘Long’ leases.
(very short term residential tenancies (such as assured shorthold tenancies) and “industry specific”
tenancies (such as agricultural tenancies), are beyond the scope of this module)
FRI Leases-
Commercial leases, between 5 – 35 years
have no ‘capital value’ to the tenants
o As T has to pay a market rent for privilege of occupying the premises for purpose of its
business + costs of insurance & repair
FRI leases with a term of 10 years or more to contain a rent review clause. The landlord will want to
ensure that it always receives the maximum possible rent for the premises
-
Long Leases-
Max 999 years - ‘long residential leases’
Have a capital value
o A premium for the lease (rep the value of the premises) paid on the grant of the lease &
only a nominal ‘ground rent’ will be payable each year going forward.
Do not usually contain rent review provisions for the calculation of a market rent.
-
Purpose of rent review-
To keep rent in line with the local market for similar premises
The period after which rent is reviewed is known as a “pattern” (e.g. a “five-year pattern”,
Rent can be reviewed in various ways
Stepped rent review
o LL & T agree to increase the rent by fixed amounts periodically
Turnover rent
o annual rent is calculated as a % of the tenant’s turnover at the property for that year
Index linked rent review
o annual rent is increased by reference to an agreed measure of annual inflation
Open market rent review
, o reviewed by reference to the market rent for leases of comparable properties in the
same locality as the premises at the time of review.
o
Open market rent review-
LL will hope to receive the maximum achievable rent & T will wish to keep rent as low as possible.
Involves a periodic revaluation of the rent of the premises based on what the rent would be if
the premises were re-let afresh at the date of review.
The new rental figure is based on rents in the local market for leases of comparable premises
(‘comparables’) at the date of review.
It is usual for rent reviews to be ’upwards only’ which means that rent can go up or stay the same but
will never go down
tenant is in an extremely strong position at the beginning of the lease, it is unlikely to succeed
during negotiations in asking for an upwards/downwards rent review.
-
Relevant provisions in the Code for Leasing Business Premises-
The Code recommends that landlords offer alternatives such as an upwards/downwards rent review.
However, the tenant would need to have an extremely strong position opposite the landlord to
successfully negotiate an upwards/downwards rent review.
Further, as this would put the risk of a downward movement of rent on the landlord, tenants would
have to pay a higher initial rent for having the benefit of this type of rent review if they successfully
negotiated this provision.
An increase in rent on rent review might be one of the reasons that a tenant might wish to dispose of its
lease. There are several ways of doing this.
-
Mechanics of open market rent review-
Intervals-
Usually every 5 years
Precise dates should be agreed – normally on the anniversaries of the term commencement
date
o Where the term and rent commencement dates are different to the date of completion
of the lease, it is normally in the tenant’s favour for the rent review date to be the fifth
anniversary of the date of completion of the lease (since this normally post-dates the
rent and term commencement dates).
business leases normally have security of tenure. Until 2004, LL often wanted a rent review on the
penultimate day of the term. This was so that, if the lease continued after its contractual termination
, date, the landlord would be able to instigate a rent review on the same terms as the previous rent
reviews and the tenant would continue to pay market rent until their tenancy was terminated in
accordance with the provisions of the 1954 Act. The alternative was for the landlord to apply to the
court for an ‘interim rent’ which was always set below market level.
However, the procedures relating to lease renewal were amended in 2004 (see Chapter 6). Now
interim rent is usually set by the court at market rate so a penultimate day rent review is not
required (although it is occasionally still seen in practice).
-
Who is involved-
LL & T
Sometimes a valuer who will be a surveyor acting in his capacity as a commercial property estate
agent with knowledge of local market rents
o Lease will provide that either party can call
o The valuer will either be jointly nominated by the landlord and tenant, or if they cannot
agree, by the President of the Royal Institution of Chartered Surveyors (‘RICS’) or his
nominee. The rent review clause will state whether the valuer is to act as an arbitrator
or an expert.
Expert = will be able to research the area and rely on their skill and judgement
to decide the level of rent. An expert’s decision is binding unless it can be shown
that the expert failed to perform the assigned task. Unlike an arbitrator, an
expert can be sued in negligence.
What happens pending the rent review agreement?-
T carries on paying the rent at the old rate
If an increase is agreed, then the tenant is normally obliged immediately to pay the difference
between the old rent and the new rent plus interest at the rate set out in the lease. If the
valuation shows a reduction in the market rent, then the rent review will be agreed at nil
increase.
acting for a tenant, you should seek to resist the payment of interest on any back payment of underpaid
rent at a rate higher than the ‘base rate’ of interest prevailing at the time. This is not a situation where
the tenant is paying interest because of a default on their part (e.g. because they have failed to make
their service charge payments on time), it has arisen because neither party knows what the reviewed
rent should be until it has agreed or determined. Whilst the landlord should not “lose out” by virtue of
not having the benefit of the revised rent from the relevant review date he should not “profit” from it
either.
Once the review has been agreed or determined, the new rent is documented in a document
known as a rent review memorandum which is signed by all parties (including any guarantors)
and, usually, annexed to the lease for safekeeping and ease of reference.
-
Part 1: Rent Review-
Leases can be classified into two types:
‘Full Repairing and Insuring’ (FRI)/ ‘Institutional’ leases; and
‘Long’ leases.
(very short term residential tenancies (such as assured shorthold tenancies) and “industry specific”
tenancies (such as agricultural tenancies), are beyond the scope of this module)
FRI Leases-
Commercial leases, between 5 – 35 years
have no ‘capital value’ to the tenants
o As T has to pay a market rent for privilege of occupying the premises for purpose of its
business + costs of insurance & repair
FRI leases with a term of 10 years or more to contain a rent review clause. The landlord will want to
ensure that it always receives the maximum possible rent for the premises
-
Long Leases-
Max 999 years - ‘long residential leases’
Have a capital value
o A premium for the lease (rep the value of the premises) paid on the grant of the lease &
only a nominal ‘ground rent’ will be payable each year going forward.
Do not usually contain rent review provisions for the calculation of a market rent.
-
Purpose of rent review-
To keep rent in line with the local market for similar premises
The period after which rent is reviewed is known as a “pattern” (e.g. a “five-year pattern”,
Rent can be reviewed in various ways
Stepped rent review
o LL & T agree to increase the rent by fixed amounts periodically
Turnover rent
o annual rent is calculated as a % of the tenant’s turnover at the property for that year
Index linked rent review
o annual rent is increased by reference to an agreed measure of annual inflation
Open market rent review
, o reviewed by reference to the market rent for leases of comparable properties in the
same locality as the premises at the time of review.
o
Open market rent review-
LL will hope to receive the maximum achievable rent & T will wish to keep rent as low as possible.
Involves a periodic revaluation of the rent of the premises based on what the rent would be if
the premises were re-let afresh at the date of review.
The new rental figure is based on rents in the local market for leases of comparable premises
(‘comparables’) at the date of review.
It is usual for rent reviews to be ’upwards only’ which means that rent can go up or stay the same but
will never go down
tenant is in an extremely strong position at the beginning of the lease, it is unlikely to succeed
during negotiations in asking for an upwards/downwards rent review.
-
Relevant provisions in the Code for Leasing Business Premises-
The Code recommends that landlords offer alternatives such as an upwards/downwards rent review.
However, the tenant would need to have an extremely strong position opposite the landlord to
successfully negotiate an upwards/downwards rent review.
Further, as this would put the risk of a downward movement of rent on the landlord, tenants would
have to pay a higher initial rent for having the benefit of this type of rent review if they successfully
negotiated this provision.
An increase in rent on rent review might be one of the reasons that a tenant might wish to dispose of its
lease. There are several ways of doing this.
-
Mechanics of open market rent review-
Intervals-
Usually every 5 years
Precise dates should be agreed – normally on the anniversaries of the term commencement
date
o Where the term and rent commencement dates are different to the date of completion
of the lease, it is normally in the tenant’s favour for the rent review date to be the fifth
anniversary of the date of completion of the lease (since this normally post-dates the
rent and term commencement dates).
business leases normally have security of tenure. Until 2004, LL often wanted a rent review on the
penultimate day of the term. This was so that, if the lease continued after its contractual termination
, date, the landlord would be able to instigate a rent review on the same terms as the previous rent
reviews and the tenant would continue to pay market rent until their tenancy was terminated in
accordance with the provisions of the 1954 Act. The alternative was for the landlord to apply to the
court for an ‘interim rent’ which was always set below market level.
However, the procedures relating to lease renewal were amended in 2004 (see Chapter 6). Now
interim rent is usually set by the court at market rate so a penultimate day rent review is not
required (although it is occasionally still seen in practice).
-
Who is involved-
LL & T
Sometimes a valuer who will be a surveyor acting in his capacity as a commercial property estate
agent with knowledge of local market rents
o Lease will provide that either party can call
o The valuer will either be jointly nominated by the landlord and tenant, or if they cannot
agree, by the President of the Royal Institution of Chartered Surveyors (‘RICS’) or his
nominee. The rent review clause will state whether the valuer is to act as an arbitrator
or an expert.
Expert = will be able to research the area and rely on their skill and judgement
to decide the level of rent. An expert’s decision is binding unless it can be shown
that the expert failed to perform the assigned task. Unlike an arbitrator, an
expert can be sued in negligence.
What happens pending the rent review agreement?-
T carries on paying the rent at the old rate
If an increase is agreed, then the tenant is normally obliged immediately to pay the difference
between the old rent and the new rent plus interest at the rate set out in the lease. If the
valuation shows a reduction in the market rent, then the rent review will be agreed at nil
increase.
acting for a tenant, you should seek to resist the payment of interest on any back payment of underpaid
rent at a rate higher than the ‘base rate’ of interest prevailing at the time. This is not a situation where
the tenant is paying interest because of a default on their part (e.g. because they have failed to make
their service charge payments on time), it has arisen because neither party knows what the reviewed
rent should be until it has agreed or determined. Whilst the landlord should not “lose out” by virtue of
not having the benefit of the revised rent from the relevant review date he should not “profit” from it
either.
Once the review has been agreed or determined, the new rent is documented in a document
known as a rent review memorandum which is signed by all parties (including any guarantors)
and, usually, annexed to the lease for safekeeping and ease of reference.
-
