| The basis of review P.385 | Assume that both the premises and lease are being let Assume that there is a market (i.e. that the market is not dead) e.g. of dead market: where premises are outdated or exceptional, the current T is the only T and it is trying to dispose of the lease. In dead market, LL is in a bad position to increase rent, thus LL’s only protection is an “upwards only” clause for rent review) willing LL and a willing T means the market is not dead (English Electric) willing T will be assumed so T can’t argue market is ‘dead’ |
| Examining an OMR clause See | Can’t avoid ‘upwards only’ clause, but explain what it means Ensure the hypothetical letting is reviewed on a fixed date so LL cannot take advantage of market conditions Bad for T to use “best rent” – use “open market rent” instead. Otherwise valuer could consider the presence of a special bidder willing to pay more. T doesn’t want to pay anomalously more. Bad for T “whole or in part” it allows the LL to deal with the land. Bad for T “rent and rent review” it excludes any future reviews. e.g. of a bad OMR clause : “The Open Market” means the best rent at which the premises could be expected to be let in whole or in part on the open market by a willing landlord to a willing tenant subject to the provisions of this lease (excluding the provisions relation to rent and rent review) for a term of 10 years commencing on the Review Date) |
| Terms of the Hypothetical Letting (HL) | Valuer will look at all the proposed terms The more onerous the clause & terms, the less attractive & the lower the value of the Property If a clause is silent, then assume it is by the existing T’s terms A party may – by disregard/assumptions – exclude a term that is onerous, too narrow or wide Value as whole (not units, which would give greater income) | Consideration P.385 | Assumption that there’s none during the HL | Include a provision of “No rent-free period” to be granted to T, thus allowing LL to keep ‘headline rent’, but in real market, no-rent periods are offered P.386 | Account to be taken of ‘effective rent’ (rent-free period fitting-out periods) as inducements. This will mean lower annual rent | | Possession P.386 | Assumes vacant possession during the HL | Disregard low-value sub-letting that will not add value to rent & would prefer to value premises as whole. But would regard high-value sub-letting as good. Assume premises are kitted out so there’s no ‘rent-free’ period | Not to take valuable sub-letting into account. Assume T has removed all fixtures and fittings so new T would need to install its own | | Alienation covenant P.387 alienation = exclusion of certain types of tenants | As in actual lease | Exclude excessive restrictions on alienation (for example, only the named T can occupy) from terms of hypothetical letting to get higher rent | Include them to keep rent lower | | User covenant | As in actual lease | 〃 | 〃 | | Rent review clause P.388 | Upon terms of lease, “other than the amount of rent” | Have this disregarded. Long leases w/out review clauses attract higher rent | Include them. Leases w/ rent review clauses are cheaper b/c less risky 4 LL | | Length of term P.389 | | Take into account possibility of renewal under the LTA 1954: rent would be higher if good prospect of renewal | Depends. Some like short-term (businesses) for flexibility. Some like longer for stability. | |
| Arbitrator or Expert? the 3rd Party P.394 | Arbitrator Quasi-judicial bound by Arbitration Act 1996 and can call witnesses Appeals to HC on points of law possible Arbitrators cannot be sued in negligence Preferred for complex reviews Expert Not subject to external controls; uses own judgment and skill Decision is final and binding Can be sued in negligence Quicker and cheaper |
| Late review P.394 | The following provisions should be in the lease: Old rent continued until new rent is determined When new rent is agreed, it is backdated to rent review date Must record the review T and LL must pay/pay-back the amount outstanding/overpaid plus interest Interest mustn’t be a penalty, but 1% above base rate T wants to get the review done quickly to avoid owing a large sum MEMORANDA it is good practice to attach a memorandum of the rent review to the lease. |
SUMMARY
• Rent review is most likely to apply to leases of commercial property for a term of longer than five years.
• Rent reviews usually take place every three to five years. A tenant should resist a penultimate day review.
• Although there are different types of rent review, the most common type is the upward only open market revaluation review OMRV. With this type of review, the rent can go up or stay the same, but it can never go down.
• In an OMRV, the valuer is instructed by the rent review clause in the lease to value a hypothetical interest in the premises demised by the lease as at the rent review date.
• Assumptions and disregards are instructions to the valuer as how to conduct this hypothetical valuation in a way that will produce a result that is as close to the real open market value of the premises as possible. Assumptions and disregards that
artificially inflate the rent in favour of one or other of the parties should be avoided.
• In terms of the procedure for rent review, time is not usually of the...
