Commercial Property Rent Reviews (Part 4)
Avoiding “Headline Rent” reviews : Rent-free periods for fitting out only:
In a falling market, Landlords may offer Tenants ancillary financial inducements to take a Lease in order to maintain the level of rent stated on the face of the Lease.
That higher level of rent, which the Tenant is (only) willing to pay after taking account of the inducement, is a known as a ‘Headline Rent’.
Landlords will often prefer a “Headline Rent” to appear on the face of the Lease because it protects the value of their investment and prevents the creation of unhelpful (to the Landlord) comparable rents.
So, for example, a Landlord may prefer a rent of £30,000 per year for the first five years of the term with a concession to the Tenant of a year-long rent-free period at the start of the term, rather than a rent of £24,000 per year payable throughout those five years, with no rent-free period.
The Lease Code 2020 specifies that Headline Rent review clauses should not be used unless that has been expressly agreed by the parties, typically where the use of them is agreed in return for a financial inducement.
A Headline Rent review clause will direct the valuer to disregard rent-free or reduced rent periods that may be offered in the market at the rent review date.
This is usually achieved by including an assumption that the Tenant has already received the benefit of any rent-free or reduced rent period negotiated in the market, or by directing that the open market rent at review will be the rent payable after the expiry of any such rent-free or reduced rent period.
A typical Headline Rent clause may provide for the open market rent to be that payable after the end of a rent free or reduced rent period of such length as would be negotiated in the open market between a willing Landlord and a willing Tenant.
A well-advised Tenant may not accept this, because it may deprive the Tenant of the benefit of any rent-free period or financial inducement that would be available to it in the assumed open market on the rent review date.
However, if the Tenant has received the benefit of a rent-free period solely for the purposes of fitting out on the grant of a Lease, it is generally accepted that they should not also have the benefit of a further rent-free period solely for fitting out on the review date (given that no further fit out will actually be taking place).
So, an acceptable compromise may be for the Lease wording to provide for the open market rent to be that payable after the end of a rent free or reduced rent period (if any) of such a length as would be negotiated in the open market, between the willing landlord and the willing tenant, at the review date, in respect only of fitting out works which would be carried out by a willing Tenant.
(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