In negotiating a lease, the terms of a rent review can, unsurprisingly, be one of the most disputed clauses. The landlord and tenant will be trying to achieve very different outcomes; the former will be looking to ensure the reviewed rent is as high as possible, whereas the latter will be looking to limit the size of any such increase.
There are various ways in which increased rent can be calculated (including indexation-based review, stepped rent increase and turnover rent), however, one of the most common methods is by assessing the open market value.
Typically, the open market value is calculated by valuing the rent that would be payable under a hypothetical lease for the property, whilst making various assumptions and disregards about the property.
On the face of it, this method of calculating the rent attempts to strike a fair balance between the landlord and tenant’s competing interests. It also tries to anticipate the issues that may be disputed on rent review and provides an opportunity for the parties to agree at the negotiation stage, how they should be dealt with.
These issues include:
- Where the Landlord has failed to comply with its obligations under the lease, should this be considered on rent review or disregarded?
Many rent review clauses include an assumption that both the Landlord and the Tenant have complied with the covenants within the lease. The Tenant may be reluctant to accept this. If the Landlord is in breach of the covenants in the lease, then this should be considered when calculating the revised rent, as it may be interfering with the tenant’s use and enjoyment.
However, a landlord may be unwilling to accept this, because they may take the view that the Tenant has other options available to enforce the covenants and rectify the issue. It is therefore unjust that the tenant should be able to benefit from a reduced rent, due to a breach which could be quickly rectified.
- What length should the hypothetical lease be?
The length of the hypothetical lease can have a significant effect on the rent payable following the review. There will be circumstances where a long lease provides the tenant with security and so is beneficial to a tenant and may warrant a higher rent. Similarly, there may be circumstances where a shorter lease, gives the tenant flexibility and this may also warrant a higher rent.
Whether a long lease or a short lease is beneficial to the tenant will depend on the nature of the premises, its use, the market and the potential tenants. With this in mind, the advice of a surveyor is always recommended to avoid an inflated rent being paid due to the length of the hypothetical term.
What personal concessions given to the Tenant should be considered when assessing the open market value of the rent?
A landlord will often give the tenant incentives and concessions. These may be documented by way of a side letter. An example of such an incentive and concession includes the ability to pay rent monthly. Clearly, such a concession will be beneficial to the tenant and may justify a higher rent being paid.
However, the tenant will argue that this is personal to them and therefore it should not be considered. If it was taken into account, any assignee of the lease would not benefit from the monthly rents but would still be left paying an inflated rent. Accordingly, the tenant may find it difficult to assign their interest in the lease.
These are just a small number of points which arise during the negotiation of the rent review provisions within a lease. Both landlords and tenants should seek professional advice from both solicitors and surveyors to understand the implications of rent review clauses and to protect their position.
For advice on rent reviews or tenant or landlord issues please contact Kate Pritchard at kate.pritchard@dtmlegal.com
