The immediate focus for many of our landlord clients over the last month has been the widespread non-payment of rent for the March quarter. We are now seeing clients begin to consider the impact of Covid-19 on lease events more broadly including rent reviews.
Rent review dates that fall over the next few weeks and months will create uncertainty, but there are steps that can be taken to best position yourself. Our Real Estate Disputes team has put together the below points to consider, including practical points for landlords.
- Previous economic downturns have produced a high number of rent reviews cases, with parties reacting to the percieved unfairness of the next typically 5 years' rent being impacted by what may (or may not) be a short-term crisis.
- Different types and geographical locations of property will be impacted in different ways. For example, Grade A City offices are currently in short supply and anecdotally there are still deals being done at pre-COVID-19 levels, albeit with longer rent-free periods. This is likely to be in stark contrast to retail space where there may not have been the inbuilt growth in rental levels over the last 5 years to justify an increase regardless of COVID-19.
- In the current climate where the market itself may not support an uplift in some areas, careful consideration should be given to the drafting of individual rent review provisions e.g. how are improvements and inducements dealt with?
- There may be pragmatic outcomes that benefit both landlords and tenants e.g. agreeing rental deferments or holidays for the tenant in return for agreeing rent reviews at a level (or possibly RPI basis) that help landlords' capital values in the longer term.
- Rent valuations are obviously relevant to other landlord and tenant processes. The setting of new rent levels under renewal leases is not subject to the same upwards only mechanism that applies to the majority of rent reviews. Landlords and tenants have more control over the valuation date when the new rent will be set. If leases are not contracted out of the 1954 Act, landlords should take advice on whether it best serves their interests to serve notices extending current tenancies for as long as possible to try to push the rent valuation date out of uncertain times.
PRACTICAL POINTS FOR LANDLORDS
- Consider pushing back starting rent review processes where possible. Although the rent review has a fixed valuation date, looking back on a date in some months' time when we are on the other side of this may give a more optimistic perspective.
- With upwards only reviews, the landlord has little to lose in taking them forward other than potential costs. On some reviews it may be worth starting third party processes as some tenants may decide to settle at a small uplift in order to avoid arbitration risks.
- The drafting of rent review provisions should be reviewed carefully to see if there are departures from reality in the drafting that will help in the current situation. For example, although it is rare to see headline rent clauses in modern leases, in previous downturns headline rent provisions have been used to argue for higher rents than would otherwise be achievable in a market where rent-frees are being pushed out.
- It is usual for tenant's improvements to be disregarded on review but is the drafting in the rent review provision such that only tenant's works that have been consented to are disregarded? Has the tenant in fact asked for consent to all works in the premises that are the subject of the review?
- Landlords with large portfolios likely already hedge their risk exposure by ensuring that rent review dates are spread out. Often even if a tenant takes a whole building it might do that on separate leases with reviews spread out across the 5 year window to safeguard from all reviews falling at the peak or trough of a market. This is certainly something to think about if not.