Rent Reviews & Lease Renewals
The importance of rent reviews and lease renewals of commercial premises should not be underestimated. The tenant will seek to ensure that the rent paid - in many cases the greatest single business overhead - is fair and equitable. On the other hand, the landlord will wish to maximise the rental income, having regard to inflation and the potential return on alternative forms of investment.
This introduction indicates the many factors likely to affect the outcome of rent review or lease renewal negotiations. However, before reading further, you should be aware of the complexities of modern lease and rent negotiations, and that in our view, specialist advice is always essential.
Rent reviews have become a fundamental aspect of nearly every modern lease. Landlords are reluctant to grant leases with the rent fixed for a long period, and tenants, notwithstand-ing their statutory protection, are reluctant to forego their security by accepting short leases.
Rent reviews were introduced to overcome some of these problems. Due to high rates of inflation in past years, the period between reviews was reduced in most modern leases to either three or five years.
The interval between rent reviews, and the content of other leases clauses, are important elements in the assessment of the rent. Their impact on the final outcome will reflect the negotiating position and skill of the parties involved - the advice of a professional can radically affect the final outcome.
The negotiation procedure should be conducted properly, and the end result should be fair and equitable from the point of view of both parties. The process can be quite complex, and time limits are often imposed by the lease.
In many cases, the expiration of a lease can have a similar effect to that of a rent review, in that the tenant may have been paying an out of date rent. The landlord will therefore not be receiving an economic return from the investment.
Upon the expiry of a lease the contractual commitment by both parties terminates, although the tenant usually has security of tenure under the provisions of the Landlord and Tenant Act 1954, supplemented by later legislation, thus the relationship between the landlord and tenant will normally continue. However, the landlord may wish to exercise his statutory right to regain possession of the premises, either for redevelopment, or his own occupation. In such cases, the tenant may be entitled to compensation and a professional valuer should be asked to advise.
When an older type of lease comes to an end, the landlord may wish to vary the terms, to bring the covenants of the new lease up to present-day standards. However, the law does not generally recognise the modernisation of leases in the interest of one party alone. The skill of a professional valuer, in conjunction with your legal adviser, is very important at this stage.
The true floor area of a property is of particular importance in the negotiation of a lease or rent review. With the present high levels of rents commanded by many shop, office and industrial properties, even a minor difference in the calculation of the floor area of the property, or the floor area of comparable properties produced in evidence, can have a major effect.
The basis of measurement is also of importance when establishing comparative rental levels. If, for example, reception areas and space occupied by air-conditioning units or other service plant are included in the measurement of the property under lease, it is necessary to ensure, on a like for like basis, that the areas of such parts are included in the measurement of the comparable properties. Alternatively, if, having regard to the Code of Measuring Practice of the Royal Institution of Chartered Surveyors (R.I.C.S.), such areas are excluded from the comparable properties, then the appropriate adjustments must be made in arriving at the rental value of the property under lease.
The ability to make effective use of unusually onerous or beneficial clauses in a lease, in order to sway negotiations in the interests of either party, is obviously a potential advantage.
The degree of restriction on the disposal and on the use of premises; the extent to which the landlord or the tenant are each responsible for repairs, maintenance, insurance, services and other expenses related to the running of the premises; the rent review cycles themselves, especially those of low frequency; the degree to which a tenant's alteration or improvement works should be disregarded in determining a new rent. the existence in the lease of rebuilding or redevelopment clauses or other options to terminate - these are all factors which the valuer will manipulate to the best advantage of his/her client in negotiating the terms of a new lease or a rent review.
WHY APPOINT A VALUER?
The professional valuer brings many aspects of his or her expertise to rent review and lease renewal negotiations.
The valuer will have a knowledge of the market, including current trends and rent levels, and will also be aware of modern practice in relevant negotiations. More importantly, the valuer will have such information on comparable rental evidence as is available, and will use it to the best advantage of his/her client. A professional valuer will be aware of up to date case law, and know the potential pitfalls.
In addition, the professional valuer will have a knowledge of the statutory rights of both the landlord and the tenant, as contained in the Landlord and Tenant Act 1954 and subsequent amendments. With the benefit of this knowledge, he/she is in a position to assess the impact of legislation and covenants embodied in the lease.
Submissions can be prepared and presented to an Expert on behalf of a client, or the valuer may act as the Independent Expert. Equally the valuer can submit a Proof of Evidence and give oral evidence before an Arbitrator, or act as the Arbitrator.
Of no lesser importance, the valuer will be aware of the numerous technical factors which are involved in rent/lease negotiations, which may radically influence the outcome.
In view of the variety of commercial property types, lease terms and rent review periods, rental valuation can be a complex subject. It is very often difficult to arrive at a precise 'open market rental value', and as a result the rent is usually agreed following a period of negotiation. The knowledge and skill of a professional valuer is of paramount importance during these negotiations. You are therefore advised to seek assistance at an early stage and not leave it until the very end of the lease or rent review period, at which time the other side may then have a tactical advantage. Please contact us for further details.
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