rent reviews and lease renewals

What is a Rent Review?

Commercial leases typically provide for the rent to be increased periodically to allow for inflation.  This allows landlords to grant leases for the length that many tenants require without having to restrict rent to the initial sum agreed.

Reviews are normally to ‘market value’ and ‘upwards only’ every three, four or five years.  There are other forms of review based upon business turnover and pedestrian footfall.

How is the Revised Rent Assessed?

Most reviews are to ‘market rent’ although the lease often defines hypothetical circumstances including vacant possession, good repair, full lease term etc.

A property is compared with others which are similar and have been let on the open market recently.  In practice, no two properties are identical.  Adjustments have to be made for location, size, layout of accommodation, condition, use, rent review pattern, tenants improvements and many other variables.

Negotiations

The landlord and tenant most commonly appoint valuers to value the premises taking into account all of the variables and market information.  The valuers negotiate the market rent by analysing and testing each others evidence and assumptions.

The Rent Review Procedure

The procedure is laid down in the lease but most leases provide for the landlord to serve notice prior to the review date with a suggested revised rent based upon the valuation.

The tenant appoints a valuer who advises on rental values and makes a counter proposal to commence negotiations.

Failing a negotiated agreement, the rent is decided by an independent valuer or arbitrator.

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The Lease Renewal Procedure

Business tenants have a right to renew leases under the Landlord and Tenant Act 1954 (unless they have specifically contracted out).

Typically the landlord will serve notice on the tenant terminating the lease and stating whether or not it will oppose a new lease.  Both parties appoint valuers who negotiate the terms of the new lease including the rent.

Failing agreement, the tenant may apply to the court for a new lease.  There are strict time limits for formal notices which should be served by solicitors.

Arbitration/Independent Valuation

Should the review or the renewal be referred to a third party, the valuers make submissions as to rental value followed by counter submissions with arguments against the other party’s submission.

The arbitrator/independent valuer inspects the property, requests any further information required and determines the level of rent.  In complex cases, there may be a formal hearing.

An arbitrator makes a judgement based upon the submissions.  An independent valuer may, additionally, use his or her own professional knowledge.

What should I do next?

It is important to appoint a valuer as early in the process as possible and before initial notices have been served.

The valuer needs to carry out thorough preparation and research.  Correct measurement of floor areas in accordance with the Code of Measurement Practice is essential. Tenants’ improvements have to be identified and the lease read in detail to ascertain any restrictions which may reduce the value.

The review/lease renewal procedure has to be carefully considered to formulate a strategy.  Knowledge of the local letting market is essential and comparable transactions have to be researched in detail.

Schedules of Dilapidations

The landlord often serves a Schedule of Dilapidations at the end of the lease detailing outstanding repairs that are required of the tenant.  A monetary claim is included.

Such schedules are sometimes served during the rent review process to add pressure to the negotiations.  They are sometimes used to gain possession of the premises on the ground that the lease terms have not been adhered to.

James Flynn Chartered Surveyors?

We are an independent firm of chartered surveyors and have been advising clients on all aspects of property value and condition since 1980 from our offices in London, Surrey, Hampshire, Sussex and Kent.  We mainly cover the London and South East region but travel further afield when this is requested.

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