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Lease Interpretation Rent Review, Vat And Break Clauses Notes

LPC Law Notes > Advanced Property Law and Practice Notes

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ADVANCED PROPERTY LAW AND PRACTICE WORKSHOP 9 Revision Notes: Lease Interpretation: Rent Review, VAT + Break Clauses

2 Analysis!
!"Does the [document] say what the clientLevelneeds/wants it to say? If no, what amendments would you recommend?"
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delete/amend existing clauses

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* add new clauses

* be able to justify your proposed amendments

* react to the other sides amendments

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RENT REVIEW
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Often a fixed rent will not be appropriate for the entire term of a lease (due to inflation, changes in the rental market etc.) and so rent review provisions allows the parties to asses the rent on particular specified dates/events and that new rent shall replace the current annual rent. This is a key area of conflict between a landlord and tenant when negotiating a lease.

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Conflicting Interests Landlord's Interests

Tenant's Interests

* wants rental income to reflect any rises on leasehold market during the term of the lease and NOT any downturns --- upwards only

* wants rent to reflect the reality of the leasehold market during the term of the ease --- either-way/
upwards-downwards rent review

* want to enhance its investment by having a predictable yield

* wants certainty about rent so that outgoings/expenses associated with the business are predictable

* favourable rent review provisions so that the best rent possible is achieved

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* favourable rent review provisions so that the least rent possible is paid

* this also makes the let property more valuable to any possible purchasers of the freehold

The Dates for Review Most leases over 5 years will have rent review provisions: How Often?

usually every 5 years, for shorter leases it may be every 3 years

The Dates

--- linked to the commencement date (i.e. anniversaries)
--- check that the commencement date is not before the date of the lease, if it is then the initial rent figure will not be enjoyed for as long as the term will have been backdated

Penultimate Day Rent Review

this gives the possibility of the landlord increasing rent during any period of holding over under the security of tenure provisions in Landlord and Tenant Act 1954 tenant's solicitors usually now opt for this to be deleted in favour of the interim rent provision under s24A LTA 1954 as rent can be increased or decreased thorough that

The Mechanism for Determining Rent

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Most leases over 5 years will have rent review provisions. Time of the Essence?

where 'trigger notices' are used for rent review as opposed to an informal negotiation process time is presumed not to be of the essence in replying to notices, contrary to express provision if time is of the essence a tenant can be stuck with a landlord's rent suggestion if they reply late

Appointment of Valuer

this should be stated to be a joint decision between landlord and tenant, not just landlord if parties are unable to agree it is customary to provide for the present of the Royal Institute of Chartered Surveyors is to decide, upon application by either party

Capacity of the Valuer

arbitrator or expert?
where there is something unorthodox about the premises or a great deal of money is involved an arbitrator should be used as this is a quasi-judical process allowing for a full argued case to be out forward Types of Rent Review Clause

Fixed Increases

At the review date the rent will increase by a fixed agreed amount.

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These are rare as the parties would be hoping that the increases would be realistic.

Index-linked Clauses

This increase/decrease the rent in line with an index (often the RPI) that reflects inflation.

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These are simple and more appropriate for lower-value property or shorter leases or where the property is very unusual and there is little evidence with which to compare the open market rent.

Turnover Rents

The rent will reflect the tenants turnover so both parties are encouraged to ensure the success of the business, but when business is bad the landlord suffers:

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* Base rent = 70-80% of Open market rate

* Top up rent = typically 7-15% of tenant's trading turnover

Appropriate for retail outlets but not for offices or warehouses. Underletting is often prohibited in these types as the reputation of the tenant is crucial.

Open Market Rent Review

Here, the parties agree to seek what a hypothetical tenant would be prepared to pay for the lease if the premises were currently available on the open market by...

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* informal negotiated process between parties, or

* service of notices

The clause should provide for a valuer to determine rent if the parties cannot agree.

'upwards only' Here, the rent will be the higher of the rent currently paid or the OMR valuation, so it can go up, stay the same, but can never decrease.

'upwards/downwards rent review

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The tenant risks paying over the odds if the market price falls but these types of rent review are generally insisted upon and accepted by tenants. 2007 Code for Leasing Business Premises suggests landlords should always consider alternatives to this. Here, the revised rent will be the OMR which could have decreased since the start of the lease/last review due to the property market climate.

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Sometimes a landlord will provide that rent cannot fall below a specific figure.

Working Out the Open Market Rent (OMR)

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Parties have to assume that a hypothetical letting of the premises is taking place on the review date and that a hypothetical market exists in which such a letting can take place:

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Considerations

!Definition of OMR
! 'might reasonably be excepted to be let in an open market' --- follows s34 LTA 1954
'the best rent at which the premise may be let' --- allows for a special bidder
!Comparables/instructions
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The parties/valuer will look at what rents similar premises in the area are fetching at the review date...and follow any agreed: Assumptions

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Disregards

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Typical Assumptions
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It is usually good practice to seek the advice of a rent review surveyor on the impact of on the valuation of any assumptions before the lease is agreed.
!This list is by no means exhaustive.
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Premises are available to let 'in the open market by a willing lessor to a wiling lessee'

* this creates a hypothetical market in which to let by assuming there is at least 2 people willing to party to the lease

* this prevents the tenant from arguing the market is dead and thus that the OMR of the premises is 0

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Premises are available to let 'as a whole or in parts (whichever shall produce the higher rental'

* here the valuer will be directed to calculate rent as if:
- letting premises as whole
- letting premises in parts

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!Tenant: allow this if lease allows tenant to sub-let in parts by which it could itself achieve more rental income if it so wished e.g. floor by floor
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* if the market is that smaller areas are worth more, selling in part and the aggregating the OMR could mean the premise would be more valuable

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3 Premises are available to let 'with vacant possession'

* this assumes the tenant has left the premises, otherwise the tenant could argue that the hypothetical tenant would not pay very much as there would still be someone in occupation:

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