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Jennifer Slade. COMMERCIAL LEASES LECTURE 5. Commercial Leases: Lecture 5 Today’s topics. Rent Rent review. Commercial Leases: Lecture 5 Rent. Amount Payment dates Rent suspension/abatement Payments defined as “Rent” Interest. Commercial Leases: Lecture 5 Rent Review. Purpose - PowerPoint PPT Presentation
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Jennifer Slade
Rent
Rent review
AmountPayment datesRent suspension/abatementPayments defined as “Rent” Interest
Purpose Periodic reassessment of rent Valuation exercise – determined by
provisions▪ Open Market Rental Value (OMRV)▪ RPI▪ Turnover rent
Upwards only rent review?
Rising market
Fallingmarket
Rising market
Fallingmarket
Reviewed rent
Reviewed rent(upwards only)
Rent review provisions = directions to valuer Use of “comparables”
“Hypothetical lease” is subject of valuation Based on actual lease Assumptions and Disregards introduced to
▪ Eliminate contingencies of actual letting▪ Create “level playing field”▪ Produce fair valuation?
Hypothetical letting: lease provisions
Hypothetical letting: lease provisions
Take actual clause
Widen (i.e. less restrictive)
Hypothetical letting: lease provisions
Take actual clause
Widen (i.e. less restrictive)
Lease more attractive to hypothetical bidders
More/higher hypothetical rental bids
Hypothetical letting: lease provisions
Take actual clause
Widen (i.e. less restrictive)
Lease more attractive to hypothetical bidders
More/higher hypothetical rental bids
Rent inflated at review(landlords’ objective)
Hypothetical letting: circumstances
Hypothetical letting: circumstances
Take actual circumstances of letting/market
Increase competition for hypothetical letting/adjust
circumstances
Hypothetical letting: circumstances
Take actual circumstances of letting/market
Increase competition for hypothetical letting/adjust
circumstances
More/higher hypothetical rental bids
Rent inflated at review(landlords’ objective)
(a) no works … that have diminished the rental value
(b) if destroyed… Premises rebuilt
(c) L and T covenants have been performed Is this fair to T?
(d) willing landlord and willing tenant… with vacant possession Is VP always realistic?
(e) fully fitted out
(f) Hypothetical Lease contains same terms as [actual] Lease save for Initial Rent…and… any rent-free period [for fitting out]
Rent-free’s and other inducements: Broadgate Square v Lehman Brothers “headline rent” vs “effective rent”
Take a five year lease – “rent” is £100K p.a.
1 2 3 4 5
Take a five year lease – “rent” is £100K p.a.
1 2 3 4 5
Rent-free of 12 months
Take a five year lease – “rent” is £100K p.a.
1 2 3 4 5
Rent-free of 12 months
£0 £100K £100K £100K £100K
Take a five year lease – “rent” is £100K p.a.
1 2 3 4 5
Rent-free of 12 months
£0 £100K £100K £100K £100K
Headline rent = £100K p.a.
BUT
Effective rent = 400/5 = £80K p.a.
(f) (continued)… including provisions for rent review
(g) term of hypothetical lease
(h) (i) 1954 Act renewal / VAT recovery
See s34 LTA 1954
(a) occupation
(b) goodwill
(c) improvements
Experts vs arbitrators
Formalistic reviews
Time of the essence