11. Rent review Flashcards
Objectives of LL and T
LL: As high a rent as possible BUT do not want lease to be too unattractive to T
T: As small an increase as possible on RR
FULL REPAIRING AND INSURING LEASES (‘INSTITUTIONAL LEASES’)
Reserves market rent
no premium
no cap value to T
LL has clear rent + predictable rental income
If lease for 10yrs or more - usual to have RR clause (keep rent in line with rental market)
every 5 yrs (on 5th anniversary)
LONG leases (‘ground rent leases’)
usually reserves nominal or no rent
premium
cap value
LL’s investment achieved through initial sale of lease for premium
V RARE to have RR (but might have mechanism for ground rent to raise over time)
Recommendation 4
covers RR
recomends upwards/downwards
VERY rare for T to be able to negotiate this
open market basis RR
Reviewed BY REFERENCE TO THE MARKET RENT for leases of comparable properties in the same locality as the premises at the time of review
periodic re-evaluation of premises based on what rent would be if re-left on date of review
fixed increases (stepped) RR
LL and T agree to increase rent by fixed amounts periodically
NOT common in commercial lease (hard to predict increase that is realistic compared to rental market)
index linked RR
Annual rent is increased by reference to an agreed measure of annual inflation (e.g. retail prices index)
turnover rent RR
Annual rent is calculated as a percentage of the T’s turnover at that property for that year
not suitable for offices usually
negotiating RR (for T)
ONE - check hypothetical letting created by assumptions and disregards
TWO - make sure harsh terms are not disregarded
RR intervals
usually on 5th anniversary of commencement date
Better for T to have RR on anniversary of the date of completion of lease (this will normally post-dates the rent and term commencement date)
Who is involved?
LL and T agree
if can’t agree - valuer called to be surveyor acting in his capacity as commercial property estate agent
valuer nominated by LL, T or President of RICS or his nominee
valuer cannot be sued in negligence if acting as an expert (but can if arbitrator)
pending agreement what happens
T continues to pay old rate
if increase agreed
- T immediatly pay difference
- T may have to pay interest
How is revised rent determined
The demised premises might reasonably be expected to be let in the open market on the review date by a ‘willing landlord’ to a ‘willing tenant’
hypothetical lease - what is it
instructions to valuer on things he must take into account when reviewing rent
rental value determined by
- size, location, quality
- terms of lease itself
= RR based on hypothetical lease
assumption: T complied with covenants
FAIR - rent shouldn’t be reduced just because T failed to comply
