Unit 6 – Rent review

Question 1

Fixed increase

Answer 1

• This clause will provide that at various set dates throughout the term, the rent will increase to a set amount.
• Benefit = certainty / simplicity.
• Disbenefit = difficulties in predicting which rental levels are likely to be at a given point in the future.

Question 2

Index-linked

Answer 2

• Rent is linked to an external index (like the Retail Prices Index). This allows rent to be altered with inflation.
• Note, this does not track the property market specifically so there could be discrepancies between reviewed rent and actual rental values at the time of review.
• May have a ‘cap and collar’ = limiting the percentage increase but also ensuring a minimum increase.

Question 3

Tenant’s receipts (or turnover)

Answer 3

• This clause is linked to the tenant’s ‘receipts’ from its use of the property. Can be linked to tenant’s turnover, but could also be linked to other receipts, like sums it receives from subletting property etc.
• Only increases in line with the turnover of the business.
• Advantage = tracking the tenant’s financial status and ability to pay rent and gives landlord incentive to do all it can to increase T’s trade.
• Disadvantage = Where tenant’s business falters, rent will decrease.

Question 4

Open market rent review

Answer 4

• Rent adjusted at regular intervals (usually every 3-5 years) during the term by reference to the open market rental value of the premises at the time of the review.

Question 5

Common assumptions are that the property is availanle to let in the open market:

Answer 5

• By a willing landlord to a willing tenant – I.e., there is a landlord who wants to grant the lease and a tenant in the market for taking it.
• With vacant possession – i.e., hypothetical tenant would not make on offer on a property unless it was empty.
• On the terms of this lease other than as to the amount of the annual rent but including the provisions for review of the annual rent – Lease should state that the provisions of the hypothetical lease are the same as the real lease, with the exception of the rent payable because the rent figure is likely to change.

 Example = It would be unfair for a rent review to create a hypothetical lease with more generous terms than the actual lease as this would increase the rent artificially.

 It would be unfair to exclude the rent review provisions from the hypothetical lease as without a rent review clause, the rent would be much higher because a tenant would pay more for the certainty of knowing the rent would not go up for the whole of the term and a landlord would charge more at the outset if it knew there was no ability to increase rent during term.

• For a term of X years – Lease should specify term of hypothetical lease.

 Best approach is to provide that the hypothetical lease term is equal to the unexpired residue of the actual term, (sometimes with a minimum term to cover the situation where the actual lease is close to the expiry date).

 Issue as if the review is taking place 10 years into a 15-year term, it may not be fair that the reviewed rent should be assessed as if there were still 15 years left to run on the lease – depending on market conditions, this would have an affect on the level of rent.

• On the assumption that the tenant has fully complied with their obligations in this lease – i.e., the tenant should not profit from its failure to repair the property.
• On the assumption that if the property has been destroyed or damaged, it has been fully restored – Rent review goes ahead on the basis of an undamaged property, but the tenant will not be disadvantaged as liability to pay the increased annual rent will be suspended.

Question 6

Common disregards are (i.e., things not considered in the rent review)

Answer 6

• Any effect of the fact that the tenant has been in occupation of the property – The tenant’s occupation is disregarded to prevent the landlord arguing that the tenant would pay an inflated annual rent in order to avoid the costs of relocation.
• Any goodwill attached to the property by reason of any business carried out there by the tenant – If there is existing goodwill at the property (e.g., a regular flow of customers, a good reputation), then it has been generated by the tenant’s business activities so should not result in T having to pay a higher rent.
• Any effect on rent attributable to any physical improvement to the property carried out by the tenant with all necessary consents and not pursuant to an obligation to the landlord – This covers voluntary improvements made by tenant (so not repair or works done to comply with statute) and ensures that the annual rent will not be increased (if the improvements add value) or reduced (if they detract from value).