Rent Reviews
Commercial Rent Reviews can work in favour for the landlord and / or the tenant – yet often businesses will leave it to the last minute to negotiate, and sometimes without any advice.
So what do you need to know? I have put together some top tips for you to give you the basics.
Please feel free to call me 0208 941 7799 to discuss your options.
How often are rent reviews?
Each rent review is different; however they commonly take place every five years. The interval can be negotiated and agreed at the start of the contract and will be stated in the leasehold document under “Rent Review Clause”
Who starts the rent review?
For the Rent Review to take place, the lease clause will state when a rent notice can be served by either the landlord or the tenant. Often tenants are unaware that they can also serve notice and be proactive about the rent review.
The clause will also outline the timings of the notice and response – in most cases, the lease will state that the notice must be given in writing for it to be enforced. The timetables of the notices can be quite strict – for some it can be a matter of weeks so it is important you are prepared and have the resources for negotiations and decision making.
It is also important to note here that if either the landlord or tenant does not respond within the time limits or deadlines they are in breach of the contract and could suffer consequences.
How is the rent calculated?
In most instances the rent is calculated by comparing against similar properties within the area, in order to establish the “Market Rent”. It is often that both the landlord and tenant appoint a chartered surveyor to advise them and the two surveyors to negotiate a fair rent for both parties.
When does the new rent come into force?
The tenant continues to pay the existing rent until a new rate is agreed. However, the new amount can be back dated. This means that the tenant may have to pay extra in a lump sum to make up the difference.
What happens if you don’t agree with the market rent?
If you are trying to negotiate your rent review yourself, it would be advisable to get a firm of professional qualified surveyors to help you. It is important to be able to have the right evidence to support your desired market rate and to fully understand the lease and clauses you have signed up to.
Failing successful negotiation, you are able to go through a dispute resolution process where a third party will be appointed and decide on the market rent for both the landlord and tenant.
In summary, failing to act on time can cost your business money. By acting early, tenants not only have more time to prepare a thorough market evaluation, they can foresee any potential cash-flow problems and act accordingly.
Lease Renewal
The Landlord and Tenant Act 1954 (or the ‘1954 Act’) is relevant to all commercial leases.
The 1954 Act gives the right for commercial Tenants to remain in occupation of the property even when the contractual term of their lease comes to an end, and the right to apply to court for the grant of a new lease. This only applies to commercial premises occupied for business purposes, where the Tenant is in occupation and there is some form of tenancy.
Contracting out of the Landlord and Tenant Act
Where Landlords do not want their Tenants to have these renewal rights, parties are able to ‘contract out’ of the provisions in the Landlord and Tenant Act by following a required procedure before the parties contractually commit to the lease.
The mains reasons why a Landlord may want to contract out of the rights provided in the Landlord and Tenant Act are; the property may be only part of a building and other parts are under different leases, the Landlord may develop the property in the future, or it is only a short-term lease. In these circumstances I would always advise taking legal advice.
To contract out of the Landlord and Tenant Act, a strict prescribed procedure must be followed. This includes serving a formal notice on the Tenant, the Tenant making a declaration to the effect that they understand what rights they are giving up, and the appropriate wording being entered into the lease.
When a ‘contracted out’ lease comes to the end of term, there is no right for the Tenant to remain in the premises or renew the lease. If either party wishes to renew the lease, then they can approach the other party and negotiate with them, with no statutory timeframe to restrict them. In these circumstances, the Tenant has no specific right to a renewal and therefore it is really in the Landlord’s control.
The procedure when the 1954 Landlord and Tenant Act Applies
If the lease has not contracted out of the provisions of the Landlord and Tenant Act, then the lease will not automatically end. The Tenant has a right to a new lease, unless the Landlord serves a notice on the Tenant and can prove one of the grounds for regaining possession.
The main grounds are:
- The Tenant has an obligation to repair the property and they have failed to do so.
- The Tenant has persistently delayed paying rent.
- The Tenant has substantially breached other obligations under the lease.
- The Landlord can offer suitable and reasonable alternative accommodation.
- Where the lease is only of part of the property, and the objection comes from the Landlord of the whole of the property on the basis they can obtain significantly more rent by letting out the whole of the property as one.
- The Landlord intends to demolish or reconstruct the property and has to remove the Tenant to do so.
- The Landlord intends to occupy the property himself for carrying on a business or his residence.
The Tenant is in a strong position if they want to renew the lease as some of the grounds listed above are difficult to prove.
If at the end of a lease that the Landlord and Tenant Act applies to, the Landlord would like the tenancy to continue, or they object to a tenancy renewal, then they can serve what is called a ‘Section 25 notice’ on the Tenant. This notice must either state that the Landlord will not oppose a new lease, and the date on which the existing lease comes to an end, or if the Landlord objects to the renewal then it must state which of the grounds their objection is based on. There are strict timescales to be adhered to, including: the notice must be served between 12 and 6 months before the end of the leases’ contractual term, and cannot be served after the Tenant has served a ‘section 26 notice’. Therefore, it is always important to take legal advice well in advance of the end of the term.
If the Tenant would like the lease to continue, then they can serve a ‘section 26 notice’ on the Landlord (before any ‘section 25 notice’ is received by them). This notice must set out the Tenant’s proposed terms for a new lease, and be served within 12 to 6 months before the end of the current lease. Or, if the Tenant is happy for the lease to end on the contractual term, then they can serve a ‘section 27 notice’ on the Landlord, at least three months before the end of the current lease, or ensure they leave on or before the contractual expiry date.
Once a section 25 or 26 notice has been served then the renewal negotiations begin, subject to adhering to the prescribed timescales, either party has the right to apply to court for the grant of a new tenancy. This can be a great advantage to either party as if they cannot agree the terms of the new lease (including the length and rent payable) between themselves, then the court can decide for them.
The provisions of the Landlord and Tenant Act 1954 are very technical, and I would always recommend that you seek legal advice and guidance on these matters, particularly on serving a notice and whether to contract out, and on the terms and conditions which are to be included within a Section 25.
If you would like any further advice, please get in touch with David Sweeting on 0208 941 7799.