Ayers & Cruiks
We are all familiar with the cycle of boom and slump in the property market, but the general trend of both rental and capital value is generally upward.
In the case of commercial property it can be quite normal for properties to be let on 3 or 5 year terms, or even longer with the rent being fixed for that period. Therefore, in good times over a period of say 5 years, the rent payable can quickly fall below market value.
Most commercial leases will include a rent review clause, the purpose of which is to allow the landlord to ensure that he can maintain a market rent for his property and protect his investment against the effects of inflation and market forces.
Since the economic crisis in 2008, the commercial market has been fairly depressed and landlords have been happy to keep tenants in place and do deals to ensure that their properties remain let. However, in the last 2-3 years rents have again started to rise and rent reviews are once again becoming an increasing part of a surveyor’s case load.
There is a lot of technical detail that effects the structure of the review and this will be detailed within the lease, but beware, the lease is very rarely simply worded and there are pitfalls that can catch the unwary.
When a rent review is due, it is important that both landlord and tenant take some advice as to what the market rent should be. In times of an increasing market, the market rent will have hopefully risen, but it is quite possible that in times of recession that the rent agreed at the outset of the lease, or the last review, is now less than could be achieved if the property were to be let in the current marketplace.
Most leases will have an Upward Only Clause which will state that if the market rent is lower than the rent passing under the lease, then the rent shall remain at the current level.
It is very important that the review clause is read carefully as some leases will have trigger dates that have to be adhered to, otherwise the review can be voided. The words Time of the Essence should be a warning that there are likely to be trigger dates and whilst there is a general presumption that time is not of the essence, where the leases is silent on the matter, the law is complex and you should seek advice from your solicitor or surveyor.
There are also many regards and disregards that a Valuer must consider when assessing the market rent. For example, the landlord cannot charge rent for tenant’s improvements to the property, unless they have been fitted as an obligation to the landlord. The landlord cannot take into consideration the effect of the tenants business or goodwill on the property.
The lease will instruct that Valuer on how to value the premises, for example it may state that the market rent be assessed on the assumption that the property is available in the open market to be let between a willing landlord and tenant, with vacant possession, assuming that the property is in repair, (even if it isn’t). The Valuer may have to assume that the property will be let on a certain term, i.e. 10 years, or it may state the unexpired term of the lease.
All of the subtle wording can have a big effect on the end value. Other favourites for technical argument will include the structure of the user clause and the alienation clause.
It is important that the whole lease must be read, analysed and understood to ensure that all aspects are covered.
If the landlord and tenant cannot agree on the value there are several recourses open to the parties, again this will be stated in the lease. The most common are the appointment of a third party surveyor who will act as an expert or an arbitrator. An expert can rely on his own findings, but can consider evidence put forward by the landlord and the tenant in support of their case.
An Arbitrator is a more formal appointment and is bound to only consider the evidence that is put forward by the parties.
Like all disputes, appointment of a third party is best avoided if at all possible, as costs can be considerable.
The key to this whole process is taking early advice from your professional team, use a surveyor who has good local knowledge and track record and has access to relevant comparables that can be used to justify your case.