Don’t Let Your Rent Review Clause Drag Your Rent Down. Draft with Care

The opportunity to review your investment’s rental income happens, at most, only every 5 years.  But how good that opportunity is for the landlord is set at the start of the lease, by the legal wording contained in the rent review clause, drafted by a solicitor.

So your chickens really do come home to roost at rent review time.  The value you get from your rent review clause, and therefore your long term investment in a building, depends on what was drafted at the start.

So make sure you get it right during the drafting stage of the initial lease.

Do you understand the ‘small print’?

Thinking of the rent review clause as ‘the small print’ can be helpful.  If you don’t understand the small print, you may not get the long-term performance you were expecting – this applies as much to rent review clause in a lease as it does to the small print T&Cs attached to any product.

This is because the assumptions contained in the rent review clause can over-ride the principle provisions of the lease. The consequences can be punishing for an investor if these assumptions are wrong, resulting in no or limited rental uplift and consequential loss of value.

We should know – we’re the people to whom investors turn when they want us to negotiate their rent review. Not an easy task when the long-term implications of the wording of a rent review clause were not properly considered or understood at the outset.

Are you using the right experts?

To ensure what’s written in a rent review clause is written in your favour, you need the services of a rent review surveyor as well as a solicitor at the drafting stage, both working together.

While a solicitor will be aware of legal issues affecting rent reviews, a rent review surveyor will understand the bearing the legal wording will have on the market value. He can advise on what the clause needs to achieve in rental terms – namely the creation of a favourable negotiating position for the landlord at future rent reviews.  In fact it goes further than that, it can also affect the renewal lease on expiry where the rent review clause is generally imported from the old lease.

Market context is everything

A rent review surveyor will focus on the precise legal wording contained in the review clause in the context of the property in question. He understands the extent to which the property’s size, age, its location etc. has a bearing on marketability, and so can ensure that the legal wording reflects these factors to suit the landlord’s case.

For example, he can consider whether the length of ‘assumed term’ is consistent with the normal market letting terms for a particular type of property or location. If it isn’t, an investor can run the risk of giving the tenant ammunition to discount the rent at review time.

It is the rent review surveyor’s job to keep on top of normal market leasing conditions, as this is not in the solicitor’s line of work.  Solicitors can’t be relied upon to have this expertise or this refined understanding of optimum market terms in relation to the various property sectors, its size, location etc. so they can’t be expected to determine the appropriate assumptions such as the right length of term.  Often they can be (mis)guided by what’s gone into previous rent reviews rather than current market norms.

It’s our job to know the dynamics of the various market sectors and the acceptable market terms for future rent review assumptions. And it’s our job to make sure these are accounted for in the solicitor’s draft.

Future-proof your investment

Given it’s not always possible to second-guess what’s going to happen in the property market, the rent review clause’s wording also needs to be flexible enough to accommodate any unforeseen circumstances affecting values.

For instance, in an ideal world, to protect our client’s interests we’d always like to include an assumed length of term as ‘that which would ordinarily be granted on similar premises in the market place at the date of the rent review’.

Although this isn’t always possible, the principle remains: surveyors can protect investor’s interests where they are brought in to assist on the right wording in the rent review clause.

Don’t focus on today’s rent alone

So, even if your initial lease negotiation brings in a peak rental income, if the assumptions are wrong in the rent review clause, your rent may be prevented from growing in line with market values.

The time to pay attention to your rent review clause is during the drafting of the initial lease. The lease and the rent review clause need to work together to ensure uplifts at every rent review.  Don’t let the ‘small print’ drag your rent down.  Instructing a specialist review surveyor to work together with your appointed solicitor will achieve this. .

James Acock
Partner, Lease Consultancy

James is a Partner in Allsop’s Lease Consultancy Team and focuses primarily on the City of London and Holborn markets. James is a specialist in lease renewals, rent reviews, arbitrations, lease extension/restructure and dilapidations.

Lease interpretation is central to the service he provides to clients and to colleagues within the firm.

You can contact James for advice at  james.acock@allsop.co.uk or call him on +44(0)20 7543 6786

The posts on this blog are provided ‘as is’ with no warranties and confer no rights. The opinions expressed are the author’s own and do not necessarily represent those of their employer