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Is your Rent Review Clause Fair?

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The information contained in this article is for information purposes only and is not intended to constitute legal advice. If you require further information our [corporate / commercial] team would be more than happy to assist you. Please contact us at [email protected] or call us on 029 2009 5500 to speak to one of our team.

When looking at the rent review a valuer is often provided with a list of assumptions and disregards that they must take into consideration when considering the new rent figure. Here we take a look at the most frequent list of assumptions and disregards and consider whether these are fair to landlord and tenants.

Disregards:

1) The valuer is often told to to disregard any effect on rent of the tenant’s occupation or subtenants

This prevents distortion in the valuation of the new rent as an actual tenant in occupation may be willing to pay more than an open market bidder in order to secure their existing premises. This is a tenant friendly provision as it prevents the tenant effectively paying a premium purely because they are already in occupation.

2) The valuer is also advised to disregard the effect of any goodwill associated with a property

Again this is a tenant friendly provision however it is standard.  An open market bidder may well be willing to pay more for a property which has established good will however if the tenant in occupation as generated that good will through their own hard work they should not be penalised for this by an increased rent so this is fair to disregard.

3) The valuer is told to disregard the increase in value as a result of tenant improvements

The reasoning behind this disregard is very similar to number 2 in that the landlord benefits from the improvement works to the property and should not benefit again by receiving an increased rent. Similarly the tenant has already paid for the improvement works and should not pay twice by paying an increased rent as a result of those works.

Assumptions:

1)The valuer is often told that if the property has been destroyed or damaged the valuer is to assume that they have been fully restored

First impression is that appears harsh on tenant but this may be acceptable to a tenant provided that in the real lease there are provisions for the suspension of rent payments when premises are unusable and that there are full insurance and reinstatement obligation on the landlord.

2) The valuer is often told to assume that the property is to be let as a whole on the terms of this lease

This is to ensure that the terms of the hypothetical lease and covenants contained in the lease are the same as those contained in the actual lease in order to reflect reality.  If you are a tenant you will need to make sure that your landlord has not tried to exclude from the hypothetical lease any particularly onerous provisions which are contained in the actual lease otherwise you will end up paying a premium for flexibility which you do not actually receive under the lease.

3) The valuer is also told to assume that the covenants on the part of the landlord and tenant have been fully preformed and observed.

If the tenant had not preformed their covenants then this may drive down the rent especially if the lease if of the whole of the property.  If tenant had breached the repair covenant this would make the property less attractive and so this would drive the rent down on the review date however this is unfair to the landlord as the tenant could get away with lower rent essentially benefiting from their breach of covenant so this is a fair assumption.

As for the landlord’s covenants this is a bit more tricky, if a landlord has not complied with the repair covenant the tenant may be at a disadvantage as the rent may be set higher than the condition of the property however the landlord would argue that the rent should not be lowered for a full review period on the basis of a temporary breach.

Despite the unfairness to tenants, commercial leases often assume that landlord has complied with covenants however the assumption may not be of great effect where on the lease of the whole of the property the landlord has relatively few covenants imposed on them anyway.

Checking the few points noted above can ensure that you the rent review is fair towards both parties.