Commercial Property Rent Reviews (Part 11)

Assumptions:

Rent Review provisions will typically include assumptions:

A. Vacant possession; This is a “standard” assumption in an upwards only rent review clause. It means that the following factors will not affect the market rent on rent review:

• the Tenant’s occupation of the premises
• any underleases in place at the rent review date
• any lawful or unlawful occupation of the premises by any other third party

The aim is to reflect the position at the time of the grant of the original Lease.

B. If the premises have been damaged or destroyed, they have been reinstated.

The hypothetical Lease rent is valued as at the relevant rent review date. On that date, the premises (or other land over which the Lease grants rights to the Tenant) may have been damaged or destroyed by an insured risk, or an uninsured risk. Rent review clauses usually assume that, if there is any such damage, it has been reinstated.

Tenants will ordinarily be able to agree to this because the Lease should contain suitable rent suspension provisions and/or provisions for termination in these circumstances.

Any increased rent should therefore only be payable as and when the Tenant can occupy and use the premises, or when it has a right to terminate the Lease. The Landlord should not be penalised by a reduced rent attributable to damage which is reinstated before the next rent review date.

C. Compliance with Lease covenants.

Tenants will usually argue that there should be no assumption that the Landlord has complied with the Landlord’s obligations if, in fact, the Landlord has failed to comply with them because, otherwise, the Landlord would benefit from it’s own breach.

However, the Landlord may argue that:

• it is open to the Tenant to take action against the Landlord for it’s breach, and
• it is not appropriate for the Tenant to seek a discount on rent review for the next (say) five years for a breach which could be remedied within, say, one month

A potential compromise may be that the assumption does not apply if the Landlord is in material, or persistent breach, or if the Landlord fails to remedy the breach after receiving notice to do so from the Tenant.

D. Rent free periods and ‘fitting out’.

Landlords generally want to ensure that, on review, no reduction is made to the rental value to reflect any inducement, rent-free period or rent concession normally granted to an incoming Tenant for it’s fitting-out works. This is because, in reality, the Tenant has already received this benefit on the grant of the Lease.

Frequently, this is dealt with by an assumption that the Tenant has had the benefit of any inducement, rent-free period or rent concession normally granted to an incoming Tenant for it’s fitting-out works.

Alternatively, the parties may try to address this point by including an assumption that the premises have been fitted out. However, an assumption that the premises are fitted out should address all the issues that it raises, including:

• whether the property is fitted out for the actual or hypothetical Tenant
• what the fit out comprises, and
• who has paid for the fit out.

Tenants should make sure that they are not paying an increased rent as a result of an assumed fit out that has not been carried out, or that the Tenant has paid for.

In addition, the parties should consider the interaction with any other assumption relating to the Tenant’s fit out or improvement works. An assumption that the premises are ‘fit for immediate occupation and use’ will not direct the valuer to assume that the premises are fitted out.

(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