Structure and Content of a Lease (Rent Review) Flashcards
What should the rent covenant of a lease include and specify?
1) Lease will reserve an annual rent and include T’s covenant to pay it
2) Lease should specify:
- When rent is paid - Usual quarter days are 25 March, 24 June, 29 September and 25 December
- Whether it is payable in advance or in arrears – if lease silent, rent is deemed to be paid in arrears; Lease usually specifies in advance, so LL gets rental income sooner
- How the first payment is apportioned - For when T enters in between one of the payment dates up to the next specified one (apportioned for 2 months instead of 3 for instance); Apportionment is usually done on a daily basis
- How rent is to be paid – direct debit or bank transfer etc
- If VAT is payable and who will pay it – LL might opt to tax on top of agreed rent
- Rent review - Cannot change the rent unless there are express provisions to do so
What types of rent review clauses are there?
- Fixed increase – expressly states what the rent will raise to and at what date
- Index-linked – rent linked to external index, but they don’t track the property market specifically, so might not reflect actual rental values
- Tenant’s receipts – rent increases in line with T’s turnover; not good if T’s business falters
- Open market rent review – rent adjusted at regular intervals (every 3-5 years usually) by reference to the open market rental value of the premises at time of review (most common RR clause)
- Upward only market rent review - ensures the LL gets the better of their current rent or the current open market rent if greater, not if lower
What is the basis on which valuation of the open market rent review is conducted?
Assesses what a hypothetical T would pay for a hypothetical lease of the property at the rent review date
Two key elements to consider; the hypothetical assessment should reflect the reality of these as much as possible
- Physical property
- Terms of the lease
RR clauses often make certain assumptions + disregards to deal with valuation issues when this hypothetical assessment is made
What assumptions are made about the property’s availability to let in the open market in a rent review clause?
‘By a willing LL and willing T’
‘With vacant possession’
‘On the terms of this lease other than as to the amount of annual rent but including the provisions for review of the annual rent’
- Hypothetical lease will have the same terms, but still allow for RR later
‘For a term of X years’
- Term of hypothetical lease should be specified; Might be good to have the term be the unexpired residue of the actual term, with a minimum term in case it is reviewed close to the expiry date
‘On the assumption that T has fully complied with their lease obligations’
- Ensures T cannot profit from a failure to repair
‘On the assumption that if the property has been destroyed or damaged, it has been fully restored’
What disregards are made in a rent review clause in relation to the property’s availability to let in the open market?
‘Any effect on rent of the fact that the tenant has been in occupation of the property’
- Prevents LL saying T would pay more to avoid relocation costs
‘Any goodwill attached to the property by reason of any business carried out there by T’
‘Any effect on rent attributable to any physical improvement to the property carried
out by T with all necessary consents and not pursuant to an obligation to LL’
- Ensures annual rent is not increased or reduced by any voluntary improvements by T
Having looked at the basis for valuation, what is the actual process for reviewing the annual rent?
1) The hypothetical lease + assumptions and disregards are a set of instructions, allowing the parties to make a determination as to the level of rent on review
2) The actual lease needs to set out a process for how each RR should happen, including:
- Level of rent – LL will only want it to increase, so will state that annual rent will be the greater of the annual rent being paid immediately before the RR date and the open market rent on the RR date
- Frequency of review – usually every 3-5 years
- Instigating the review – parties usually negotiate through specialist valuers and reach agreement in due course
- Independent determination – if parties fail to agree, lease should allow an independent 3rd party to decide
