It is commonplace for leases to contain an open market rent review every five years. The rent review can generally be initiated by either the landlord or the tenant with time not being of the essence i.e. if the rent review date has come and gone and no reviewed rent has been agreed or determined the review will not be lost.
For many landlords and occupiers, the immediate focus will be on cash flow and with the media are already reporting large numbers of retailers are withholding or deferring rent to ease cash flow pressures. However, in addition to the traditional quarterly rent payments, it is also very common for leases to provide for rent reviews to take place on a quarter day and, as such, it is likely that there will be many leases where the rent falls to be reviewed on the March or June quarter dates.
In the case of a typical rent review, this means that the rent is to be the that which the property would let with vacant possession in the open market. Given the enormous impact which COVID-19 has had upon the economy and business ability to operate from their premises it is fair to assume that many properties would let for much less than they might have just a few months ago and given that any rent reviews due during this period are likely to determine the rent for the next 5 years of the lease, that is unlikely to be good news for landlords. That said there are tenants who may benefit from a pandemic, such as pharmacies or supermarkets. There are a few points worth bearing in mind:
- In many cases, rent reviews are upwards only and whilst landlords may not see an uplift in rent there will not be a reduction. Given the pressures prevailing in the retail and leisure sectors pre Covid-19, many landlords may not have been anticipating an increase anyway.
- We cannot be certain how long the current crisis will last but as we come out of lockdown this may prove to be temporary, however it could also be the forerunner to a recession. An open market rent review requires an assumption of a willing tenant. It is not unreasonable to think that a tenant may view the current climate as temporary and make a rental bid which reflects the fact that he is seeking to take the property on a longer term basis. In this regard landlords are perhaps in a better position than they might have been in the credit crunch recession of 2008.
- The courts have consistently made clear that the open market rent review requires an assumption of a hypothetical willing tenant and therefore a tenant could not argue that no one in the market would take the property today rendering it worthless.
- Rent reviews clauses generally provide for specific assumptions and disregards. One common assumption is that the premises can lawfully be used for the permitted use. If the lease contains that assumption, then a tenant could not argue that the rent review should reflect the fact that it was unlawful due to Government guidance.
Ultimately many Landlord are deferring the implementation of a rent review until the dust has settled and some degree of certainty has returned to the market, tenants seeking to defer the payment of rent.
Here at Roger Hannah we have recently been busy advising Landlords and Tenants, our dedicated Lease Advisory team has the specialist skills and experience to deal with all commercial Landlord and Tenant matters, advising clients across all sectors of the property market both regionally and nationally.
Our team can help with rent reviews, lease renewals, restructuring/re-gearing or surrender/assignment of leases, and sub-lettings as well as general advice on all lease related matters and Landlord and Tenant issues or disputes.