10 years, there have been very radical differences in the way in which rent review clauses are drafted. Their interpretation has had a very dramatic effect on the value of rent that can be achieved under the terms of a lease.
The definition of market value
Landlords have often thought that the phrase 'best rent' will lead to a higher rent on review. Traditionally, tenants have resisted this phrase, although there is little evidence that it may lead to higher rental values. Another common example of a phrase used in rent review clauses is 'the rent at which the premises might reasonably be expected to be let' – again, this is unlikely to change the rent that is payable.
The rent review clause does contemplate the rental achieved on a hypothetical letting. The implication here is that there is a market in which the hypothetical transaction takes place and that landlords and their tenants are willing to enter into the transaction and assess the rent review. Special considerations affecting them will be disregarded, for example their individual financial positions.
If the parties intend the valuation on review to be a valuation of part only of the premises let to the tenant, then clear and unambiguous wording will be required before a court could agree to value part only of the premises.
Where – due to the size of a building or its particular needs – a hypothetical building is referred to in a lease for the purpose of review, extreme care must be taken to define upon what basis the rent should be reviewed.
In the case of Dukeminster (Ebbgate House One) Limited v Somerfield Properties Co Limited (1997), the Court of Appeal was faced with the rent review of a 23,225 sq m (250,000 sq ft) retail distribution warehouse in Ross-on-Wye. The parties had agreed that the rent would be reviewed to an open market yearly rent, or at the landlord's election to a rent geared to notional premises, described as a 4,645 sq m (50,000 sq ft) warehouse unit within 35 miles of Ross-on-Wye. The landlord contended that, as it was entitled to make the election, it could choose the precise location of the notional warehouse. The Court of Appeal held that the location should be comparable to the location of the actual premises.
Rent-free periods & inducements
It is critical for a landlord that there is at least an assumption that the property is fitted out and that all of the tenant’s fitting-out works have been completed
A particularly contentious area of rent review valuation is the basis upon which rent-free periods are treated on review.
A landlord will want to make absolutely clear, in his assumptions on rent review, that a tenant cannot take advantage of a rent review period granted on commencement of a lease on review.
It is critical to a landlord that there is at least an assumption that the property is fitted out and that all of the tenant's fitting-out works have been completed, or that a tenant is assumed to have had the benefit of a rent-free period.
The assumption of a rent-free period may be contentious, with a tenant likely to argue that the existence or not of a rent-free period on review is a relevant factor in assessing the level of market rent on review.
In a series of cases four years ago, it was established that only on very explicit and unambiguous wording could a landlord achieve a headline rent, expressly depriving a hypothetical tenant of its right to have had the benefit of a rent-free period, by way of adjustment to the market rental as at review.
The generally accepted compromise on rent frees and other inducements on review is that there should be an assumption that any rent-free periods or other inducements, which may have been granted to a tenant for the purpose of enabling the tenant to fit out, have been granted.
Logically, on this basis, the rental that is agreed should be close to a 'market rent'.
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