Commercial Property Rent Reviews (Part 3)
Rent review : Considerations at “Heads of Terms” stage:
“Heads of Terms” (i.e. a brief outline of the principal terms of the Lease) often do not contain much detail other than the frequency and type of review (e.g. open market or index linked).
Including the frequency and type of review in Heads of Terms is a mandatory requirement for members of the Royal Institution of Chartered Surveyors (RICS) under the Lease Code 2020. The parties may also want to specify the hypothetical Lease term (see below) and the treatment of any break options on rent review so that these matters are dealt with “up front”, as they too can have a significant effect on valuation.
The parties also need to be aware of transaction-specific matters in the Heads of Terms, as they may highlight the need for specific adjustments to rent review clauses, including for example in connection with assumptions and disregards.
In each case the parties should agree how the relevant item should be treated. Relevant transaction-specific matters may include, but are not limited to:
- the Landlord is building or refurbishing the premises: here the parties may agree that, at rent review, the property will be assumed to be in the (usually anticipated finished) state and condition set out in an agreed specification to be attached to the Lease.
- the Tenant is to carry out works or incur expenditure other than a typical fit out; here the parties should consider who is paying for these works and whether the works should be disregarded on review.
- the Lease may contain potentially onerous provisions such as a ‘keep open’ obligation (where the Tenant is obliged to continue to trade from the property, even if it would mean doing so at a trading loss) or ‘offer back’ clauses (where the Tenant agrees to offer a right of first refusal to the Landlord if the Tenant wishes to assign or underlet).
- the Tenant is offered a personal concession either in the Lease or in a side letter (e.g. the ability to pay rent monthly, rather than quarterly).
- the Parties have agreed a minimum (and/or maximum) floor area by reference to which to calculate the rent (e.g. in circumstances in which the Landlord is constructing premises under an Agreement for Lease).
There is no single answer to the question of how something of this nature should be treated. It will depend on the premises and the terms agreed. The rent review provisions should be a fair reflection of the terms agreed by the parties.
The Tenant will not want to pay twice for anything (e.g. both through obligations in the Lease and through an increased rent). This usually means that:
- if a Tenant pays for improvements to the property, it would not expect to have to pay an increased rent arising from the increased rental value attributable to those improvements
- if a Tenant accepts onerous Lease provisions, the hypothetical Lease used to calculate the rent payable on review should also reflect the same onerous provisions, so that the Tenant is not paying for a hypothetical degree of flexibility that it does not in practice actually have.
The parties should always remember that Solicitors are not valuers. A rent review surveyor should be asked to appraise any provisions which are unusual, or which (for example) require the parties need to make significant choices (such as the length of the hypothetical term or the date of a hypothetical break option).
(This article is not intended to be comprehensive or to provide specific legal advice. It should not be relied upon in the absence of specific advice given in relation to particular circumstances.)
For further information, please contact: Natalie Linehan, Andrew Williamson or David Thorp