#4866 - Rent Review - Property Law and Practice

Rent review 1) What type of rent review is it? 1) A fixed (stepped) rent The rent increases at a fixed amount (or by reference to annual inflation) each year by an amount agreed at the grant of the lease 2) A turnover rent Rent is assessed based upon the tenant's turnover at the property 3) Open market rent review (OMRR) At a fixed point (e.g. every 5 years) / points in the lease there is a periodic revaluation of the rent of the property based on what the rent would be if the property were re-let afresh at this date Open market rent review 2) What impact will the OMRR have on the rent? 1) Inspect the wording of the OMRR clause 2) What is the likely impact on rent of the OMRR clause? 3) How do the parties agree on the new amount of rent? The price goes upwards or stays the same This may happen if the rents in the local market have increased The price goes downwards Even if the rent in the local market have decreased, it is unlikely the rent will go down as most of rent review clauses are drafted (although check the clause at 1.) so they only go up and are therefore referred to as 'upwards only rent reviews' a) Inspect the wording of the OMRR clause, it may state who will be appointed for rent review disputes and whether they are an arbitrator or expert Expert - Will be able to research the area and rely on their own skill and judgement to decide the level of rent. The decision, unless negligent, will be binding 1) The landlord and the tenant should try to agree the new rent themselves 2) If they can't agree, a 'valuer', normally a surveyor, will normally be appointed Arbitrator - Opinion will not be binding, simply mediates between the landlord and tenant b) If the lease does not state, the valuer will normally be jointly nominated by the landlord and tenant, or if they cannot agree, by the President of the RICS 4) How is the market rent calculated by the valuer? 1) The property itself Size, location and quality of the property compared to comparable properties. 2) The terms of the lease as they actually are Lease that would attract higher rent would: a) Be flexible as to use b) Be flexible as to alterations (with or without consent) c) Be generally more tenant friendly Lease that would attract lower rent would: a) Be inflexible as to use b) Be inflexible as to alterations (with or without consent) c) Be generally more landlord-friendly 3) The terms of the lease after the assumptions and disregards are factored in ("a hypothetical letting") Common Assumptions a) The lease by which the property will be let (the hypothetical lease) contains the same terms except for the amount of initial rent and except as varied by the Assumptions and Disregards. b) The tenant has performed all of its obligations * This is important as otherwise the tenant would benefit from lower rent as a result of the lower rent the property would get due to the tenant breaching his covenant to decorate the property 5) What is paid while waiting for the valuer's decision and how is the decision recorded? Common disregards a) Any improvements to the property made by the tenant * This is important as otherwise the tenant would be double paying for the improvements - from the improvements themselves and from the increase in rent. Should create a fair lease The assumptions and disregards should create a fair lease. If you disregard the harsher terms of a landlord-friendly lease, the rent will continue to go up and therefore be unfair. Both solicitors should be wary of this. 1) Inspect the wording of the OMRR clause 2) What is the OMRR clause likely to say for interim rent? 3) The new rent is documented in a 'rent review memorandum' and signed by both parties The tenant should: a) Pay rent at the old rent b) When the new amount is agreed, if there is an increase, pay the difference between the old amount and the new amount plus interest