With a significant lack of Grade A office accommodation currently available in Belfast it’s not surprising that we are seeing upward pressure on rents.
The grade A headline rental “tone” is now established at or around £18 sq ft and incentives, typically in the form of rent free periods and capital contributions, have been decreasing over the last year or so.
Both landlords and tenants are therefore keen to instigate rent reviews as early as possible — landlords to ensure they are maximising rental income and tenants so they can budget for increases in a rising market and avoid paying interest on back-dated rent.
It is important to appoint a surveyor with in-depth, local property market knowledge to drill down to reveal the full picture and true deal agreed.
There are some key considerations for both investors and occupiers about to embark on a commercial property rent review:
● Read your lease to confirm the extent of leased area and the current rent and consider the impact of other lease obligations such as repairing duty or a user clause.
● Check deadlines, can the rent review only be operated at a particular time and do any formal/counter notices need to be served? This is known as ‘time is of the essence’, meaning strict timescales need to be adhered. Lengthy negotiations usually mean landlords can charge back rent plus interest.
● Some modern leases have an upwards or downwards rent review. It’s crucial to check, particularly for commercial property tenants, to potentially secure a reduced rent at review. Usually the minimum new rent will be the current passing rent.
● Surveyors are forced to make standard assumptions when negotiating a rent review, such as the property is in full state of repair and on the market available to let. It’s also standard to disregard goodwill or tenants’ improvements from negotiations. If the lease states something unusual, this can impact on the rent levels negotiated.
● If a rent review cannot be agreed it can be referred to a third party, who, depending on your lease, will act as an arbitrator or independent expert and make a decision upon the rent. A specialist surveyor is required at this stage to prepare an expert witness report for the third party to consider when making their decision.
● Before referral to a third party, either party may be able to make a Calderbank offer. This is a “best offer” to settle which can be a tactical way of drawing negotiations to a close. If this is not accepted and the third party awards a rent which is close to a particular party’s offer, the other side could be liable for the referral costs, which can be substantial.
It’s important to remember that rent review negotiations can usually be resolved amicably and can be a good opportunity for both parties to extract some value from the lease, for example, with a term extension, removing a forthcoming break clause or agreeing to some form of concession.
For an occupier this can mean benefiting from a rent-free period by extending the lease term and for a landlord re-gearing a lease can have a significant impact upon the capital value of the asset.
Julie McClelland is associate director at CBRE and a member of RICS (Royal Institution of Chartered Surveyors)