Legal: rent reviews
THE LIE OF THE LAND
If you rent your salon it's likely your rent will be up for review at some point. But what options are open to tenants and what rights do you have? Philippa Aldrich reports
Your two biggest - and fixed - costs are staff and premises. To an extent, you can control staffing costs, but there may well be times when your landlord appears to act against you. Most commercial leases these days contain a mechanism for the rent to be reviewed at regular intervals, usually three or five years. But what should you do if hit with a request by a landlord for a significant rent increase?
WHAT TYPE OF RENT REVIEW HAVE I GOT?
First, tenants should have a look at the lease to identify the type of rent review being invoked. Some leases include clauses that provide for set increases in rent. The lease might, for example, provide that the annual rent will increase after three years. It is unlikely in this case that the tenant will be able to oppose an increase in year three as he has effectively agreed to it in advance.
Alternatively, the lease may contain an 'escalation' type of rent review where an index, such as the retail price index, is used as a basis for calculating the rent rise. Again, provided the right index has been used and the maths is correct, there will be little opportunity for the tenant to object.
Other rents are linked to turn-over, whereby the landlord will take a set percentage of the income. It is worth checking the landlord's calculations.
READ ON FOR MORE ADVICE...
A major problem for tenants is a 'headline rent' clause. This is rent that is paid under a lease after the end of any rent-free periods or any period of reduced rent. It creates an artificially inflated rent by ignoring the rent-free period, period of reduced rent, or any other concessions the landlord may have given the tenant in return for a higher headline rate.
You also need to be aware of Upwards Only Rent Reviews (UORR). Open market rent reviews are upwards only, that is, the rent can stay the same or be increased but it cannot go down. UORRs are a major source of controversy in today's property market. In a falling market, a tenant may end up paying a rent that no longer reflects the market value of the property, and, depending on the date of the rent review, be paying the higher rent for a number of years.
ARE THERE SET PROCEDURES FOR RENT REVIEWS?
Having established what sort of rent review is being implemented, the next step is to work out what procedure needs to be followed.
Some leases have long, detailed requirements, such as obligations to serve notices triggering the review and counter-notices in response from the other party. Both sorts of notice may be subject to strict time limits. The content of notices may be prescribed in the lease. Complicated procedures such as these can be problematical. At worst, a tenant who fails to deliver a counter-notice in the right way may lose their right to challenge the revised rent proposed by the landlord, however high. Sometimes, a landlord failing properly to serve a trigger notice may lose the right to review the rent.
WE CANNOT AGREE ON THE RENT -- WHAT NEXT?
But what happens if the landlord and tenant cannot agree? The rent review provisions will normally state that, if no agreement is reached, the parties may refer the dispute to a third party for resolution. An expert is usually a surveyor who is appointed as an 'expert' in property, and local property in particular. An arbitrator is bound by the Arbitration Act and is more like a judge.
In each case, 'comparable' rent reviews of similar properties will be considered to ascertain market value. Rent reviews are therefore essentially backward looking, which means that where rents are likely to fall in the future, landlords will be keen to expedite the agreement of rent reviews so they can use as comparables rents agreed before the rental market began to dip. Equally, it may pay tenants to wait.
Once the new rent has been agreed, it will generally be backdated to the date of the review and the tenant will need to pay the landlord the arrears together with interest.
CAN I VIEW THE REVIEW AS AN OPPORTUNITY?
Rent reviews can be used as opportunities to renegotiate with the landlord, particularly where the tenant has the benefit of a right to break the lease. In a falling property market where the landlord is keen to keep the tenant, the threat to break the lease might persuade the landlord to agree a lower rent.
If there is no break clause, but the proposed rent will make continuing with the business difficult, a landlord might be prepared to negotiate to avoid being left with an empty building.
However, landlords are always concerned with headline rates - they can use these as comparables to agree rent reviews on their other properties and they are also key measures for valuing the property for investment purposes. Sometimes landlords, while insisting on a full market rent, might give the tenant other concessions, such as a rent holiday.
Tenants receiving a landlord's rental proposals should not panic but nor should they delay. It is essential to first work out the nature of the rent review and then, if necessary, seek out expert advice.
