Over the past few weeks I have been studying the contents of a lease and how to make the provisions more favourable to both a tenant and a landlord. This week I learnt how to analyse the rent review provisions in a lease from both a landlord’s and a tenant’s perspective.
Rent review is only applicable to institutional leases, which is a lease typically held by tenants for terms anywhere between 5 and 35 years and has no capital value to the tenants. The purpose of rent review is to keep the rent in line with the local market for similar premises, by adjusting it regularly. Rent reviews usually take place every five years and involve a periodic revaluation of the rent of the premises based on what the rent would be if the premises were re-let afresh at the date of review. Ideally, the revised rent should be the rent at which the premises might reasonably be expected to be let in the open market on the review date by a ‘willing landlord’ to a ‘willing tenant’.
In order to arrive at the revised rent, the rent review provisions in the lease comprise a set of instructions to the valuer of the things they need to consider when reviewing the rent. Where leasehold premises are concerned, the rental value is determined not just by the size, location and quality of the premises, it is also affected by the terms of the lease itself. For that reason, the rent review will be carried out on the basis of a hypothetical lease, which is a fictitious lease used solely for the purposes of the rent review. The hypothetical lease is based on the terms of the actual lease, subject to some amendments to ‘iron out’ any inconsistencies and injustices which are created by the “actual” position. The terms of the hypothetical lease are contained in a series of assumptions and disregards which are set out in the actual lease.
An example of an assumption that would be contained in a lease is an assumption that ‘the covenant contained in this Lease on the part of the Tenant have been complied with’. This is an assumption that the Tenant has performed all of their obligations under the lease. This assumption is included as it creates a fair result for the landlord because the valuer would assume that the premises are, for example, in a good condition even if they are not (perhaps the tenant has failed to comply with its obligations to decorate the premises). Not to do this would mean that the tenant would benefit from a lower rent on rent review due to them breaching the lease by not fulfilling their obligations.
An example of a disregard that would be contained in a lease is a disregard of ‘any increase in rental value of the premises attributable at the relevant review date to any improvements to the premises carried out by the Tenant’. The purpose of this disregard is that it prevents the unfairness of the valuer considering any voluntary improvements made to the premises, and paid for, by the Tenant as otherwise the Tenant would in effect be paying twice for these – both for the improvements themselves and then again by way of an increased rent. It is clear from these examples that the terms of the hypothetical lease should be carefully reviewed before the parties enter into the lease.
A final note for tenants to consider is the Stamp Duty Land Tax (‘SDLT’) consequences on rent review. For leases which were subject to Stamp Duty as opposed to SDLT (i.e. leases granted before 1 December 2003) there are no further SDLT consequences on rent review.
For leases which were, or are, subject to SDLT, further SDLT will be payable in connection with any rent review scheduled to take place within the first five years of the term. However, for any rent review which takes place on the fifth anniversary (which also generally coincides with a rent review) or thereafter, further SDLT will be payable only if there is an abnormal increase in rent. This is defined as being the case where the rent is increased by more than 20%. In such cases where there will be a further charge to SDLT, and this will be calculated on the net amount of the increase in the rent over the remainder of the lease term.
Author Brandon Silver is a paralegal in the construction department at Silver Shemmings Ash LLP. He is currently undertaking LPC at BPP Holborn as well, having just completed undergraduate Law degree at Durham University. The modules Brandon is currently studying for the LPC include Business Law and Practice, Civil and Criminal Litigation and Property Law. His blog posts will discuss what he has covered during the seminars he has attended and any particular areas that have stood out in relation to the topic.