Whether landlord or tenant, rent review clauses can be daunting and it is important to understand the key point tata may have an impact on the rental value.
The rent review clause in the lease agreement will define how the rent is to be calculated and will reference ‘assumptions’ and ‘disregards’. Both assumptions and disregards are, in the main, similar across most commercial property leases. However, slight variations can have a significant impact on the rent calculation when it comes to review time.
Let’s have a look at these in more detail:
When calculating a revaluation in the open market, certain hypothetical assumptions are made about the lease for the purposes of the valuation. Examples include:
It is important to assume that on rent review the Property itself is marketable or this will adversely affect the potential rent achievable.
Essentially the property is being treated as if there is no Tenant or as if the Property had never been occupied and as if there are no fixtures and fittings at the Property currently. The lack of fixtures and fittings could have a negative impact on the potential value of the property and could have a knock on inference that a tenant should have a free period to allow them to ‘fit out’ the Property.
Some leases specifically stated the hypothetical term for the purposes of rent review. An assumed term that is not in line with current market trend may have an impact on the reviewed rent.
It may diminish the rent if for example, any incentive paid by the Landlord to new tenants was taken into account on rent review or if a capital sum has been paid for the lease by the Tenant
What if the Tenant hasn’t complied with their obligations? It is usually perceived as quite ‘fair’ to include this provision from the Landlord’s perspective as it’s not their fault that the Tenant has not complied.
In addition, certain matters are disregarded, such as:
Goodwill is considered an ‘asset’ and has an actual monetary value in itself. Therefore, if the business is particularly profitable and well thought of then the asset is worth more. In turn the profitability of the business could improve the general area in which the Property is situated. As such, this could increase the possible rent and the Landlord would not want this to be disregarded.
For tenants improvements to be disregarded, it is important that these are undertaken with all necessary consents, approvals and authorisations. Improvements could increase or decrease its value. If it’s a positive improvement and you disregard the improvement to the Property entirely then this is great for the Tenant but perhaps over generous from the Landlord’s perspective.
All too often, our Lease Consultancy and Commercial Agency teams at Copping Joyce Surveyors come across situations where landlords or tenants have been financially disadvantaged as a result of not seeking professional advice in good time when it comes to rent reviews.
For landlords, the benefit of a well-negotiated rent review can result in an uplifted rent which, in addition to improving cash flow realised from a property asset, can have a positive impact on the capital value of the property. For tenants, a poorly negotiated rent review can see increased overheads for the business.
If you are in the process of reviewing your rent, please speak to our Lease Consultancy Team to see how we can be of assistance.