Wednesday, 18 April 2012

When the Music Stops – How Late Rent Reviews Can Strike a Note of Discord

When your landlord seeks to implement a rent review long after the last review date has been and gone, it can come as a nasty surprise for you as a business tenant.

If you’re a tenant that’s become used to paying rent at a certain rate, the fact that your landlord seems to have ignored the last review date might well have lulled you into a false sense of security.

During a recession or, more euphemistically, a downturn landlords will want to wait for more favourable comparable rents before triggering a review.

Where the lease provides for open market “upwards only” rent reviews, the flexible nature of the vast majority of  those rent review clauses allows landlords to delay the review until it suits them – they are only prevented from doing so if the clause makes time “of the essence”, which is rare these days.

Commercial leases also usually provide for the difference between the old rent and the new rent (the “uplift”) to be paid when the review takes place, and backdated to the review date specified in the lease.

Most leases also go a step further and require interest to be paid on the uplift as well (usually at base rate but sometimes higher).

If the parties are unable to agree on a new rent, the lease will normally provide for the rent to be settled either by arbitration or by an expert.

Horgan Lovells have recently produced a useful summary of the more detailed consequences of late review and I also looked at a case last year in Don’t Bury Your Head in the Sand and at rent reviews generally in The Only Way is Up.

One feature of late review to bear in mind is that liability to pay the whole of the uplift comes at the point at which the new rent is either agreed between the parties, or determined by an expert or arbitrator.

So, to borrow Horgan Lovells’ analogy, settlement of a rent review is comparable to the music stopping in a game of pass the parcel – the tenant left holding the tenancy is liable to pay the whole uplift backdated to the review date, which could be a long time ago and might even be before you acquired the lease (if you took an assignment of the lease from a previous tenant).

It doesn’t matter how long you have held the lease.

Meanwhile, the landlord who holds the reversion of your lease when the rent is agreed or determined receives the whole uplift, even if it has only recently acquired the reversion (although in reality a well advised seller of the reversion would usually make sure it’s entitled to receive its share of the uplift in the contract for sale).

The principle is likely to apply in reverse if there were a downwards rent review (so as current tenant you would be entitled to the whole credit and the current landlord would be obliged to pay it) – but “upwards or downwards” rent reviews are still rare, despite it being an option suggested in the Commercial Lease Code.

What practical steps can you take as a tenant?

·         If you’re negotiating a new lease, try to include a long stop date in the rent review clause, such as the next rent review date, or earlier.

·         If you’re taking an assignment of an existing lease and there’s an outstanding rent review, try to get a retention and indemnity from the outgoing tenant to protect you against any uplift if the review is subsequently triggered by the landlord.

·         If you’re unlucky enough to be faced with a late rent review, look for evidence that the landlord has waived the review or is “estopped” from triggering it (see the Horgan Lovells article and my post last year for more about these technical points).

·         If the review is being settled by arbitration, make sure you get involved, along with your advisors, in the arbitration process to argue your case.

·         If the review is being determined by an expert, use any powers given to you in the lease to make your representations to the expert.

This list isn’t exhaustive; what’s important is that when your landlord tells you it’s going to implement the review, you contact your rent review advisors straight away.

Don’t bury your head in the sand.

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